KANSAS CITY SOUTHERN The discussion below, as well as other portions of this Form 10-Q, contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended and the Private Securities Litigation Reform Act of 1995. In addition, management may make forward-looking statements orally or in other writing, including, but not limited to, in press releases, quarterly earnings calls, executive presentations, in the annual report to stockholders and in other filings with theSecurities and Exchange Commission . Readers can usually identify these forward-looking statements by the use of such words as "may," "will," "should," "likely," "plans," "projects," "expects," "anticipates," "believes" or similar words. These statements involve a number of risks and uncertainties. Actual results could materially differ from those anticipated by such forward-looking statements. Such differences could be caused by a number of factors or combination of factors including, but not limited to, the factors identified below and those discussed under the captions "Part II - Item 1A - Risk Factors" herein and Item 1A, "Risk Factors", of the Company's Annual Report on Form 10-K for the year endedDecember 31, 2019 (the "Annual Report"). Readers are strongly encouraged to consider these factors and the following factors when evaluating any forward-looking statements concerning the Company: public health threats or outbreaks of communicable diseases, such as the ongoing COVID-19 pandemic and its impact on KCS's business, suppliers, consumers, customers, employees and supply chains; rail accidents or other incidents or accidents on KCS's rail network or at KCS's facilities or customer facilities involving the release of hazardous materials, including toxic inhalation hazards; legislative and regulatory developments and disputes, including environmental regulations; loss of the rail concession ofKansas City Southern's subsidiary,Kansas City Southern de México,S.A. de C.V. ; domestic and international economic, political and social conditions; disruptions to the Company's technology infrastructure, including its computer systems; increased demand and traffic congestion; the level of trade betweenthe United States andAsia or Mexico; fluctuations in the peso-dollar exchange rate; natural events such as severe weather, hurricanes and floods; the outcome of claims and litigation involving the Company or its subsidiaries; competition and consolidation within the transportation industry; the business environment in industries that produce and use items shipped by rail; the termination of, or failure to renew, agreements with customers, other railroads and third parties; fluctuation in prices or availability of key materials, in particular diesel fuel; access to capital; climate change and the market and regulatory responses to climate change; dependency on certain key suppliers of core rail equipment; changes in securities and capital markets; unavailability of qualified personnel; labor difficulties, including strikes and work stoppages; acts of terrorism or risk of terrorist activities, war or other acts of violence; and other factors affecting the operation of the business. For more discussion about each risk factor, see "Part II - Item 1A - Risk Factors" herein and Part I, Item 1A - "Risk Factors" in the Company's Annual Report and "Management's Discussion and Analysis of Financial Condition and Results of Operations" herein and in the Company's Annual Report, in each case as updated by the Company's periodic filings with theSecurities and Exchange Commission (the "SEC"). Forward-looking statements reflect the information only as of the date on which they are made. The Company does not undertake any obligation to update any forward-looking statements to reflect future events, developments, or other information. If KCS does update one or more forward-looking statements, no inference should be drawn that additional updates will be made regarding that statement or any other forward-looking statements. This discussion is intended to clarify and focus on KCS's results of operations, certain changes in its financial position, liquidity, capital structure and business developments for the periods covered by the consolidated financial statements included under Item 1 of this Quarterly Report on Form 10-Q for the quarter endedJune 30, 2020 . This discussion should be read in conjunction with those consolidated financial statements and the related notes and is qualified by reference to them. Critical Accounting Policies and Estimates The Company's discussion and analysis of its financial position and results of operations is based upon its consolidated financial statements. The preparation of these consolidated financial statements requires estimation and judgment that affect the reported amounts of revenue, expenses, assets and liabilities. The Company bases its estimates on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the accounting for assets and liabilities that are not readily apparent from other sources. If the estimates differ materially from actual results, the impact on the consolidated financial statements may be material. The Company's critical accounting policies are disclosed in its 2019 Annual Report. Overview The Company is engaged primarily in the freight rail transportation business, operating a single coordinated rail network under one reportable business segment. The primary operating subsidiaries of the Company consist of the following:The Kansas City Southern Railway Company ("KCSR"),Kansas City Southern de México,S.A. de C.V. ("KCSM"),Meridian Speedway, LLC ("MSLLC"), and TheTexas Mexican Railway Company ("TexMex"). The Company generates revenues and cash flows by providing customers with freight delivery services both within its regions and throughoutNorth America through connections with other Class I rail carriers. KCS's customers conduct business in a number of different industries, including chemical and petroleum, industrial and 18
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consumer products, agriculture and minerals, energy, automotive, and intermodal
transportation. Appropriate eliminations and reclassifications have been
recorded in preparing the consolidated financial statements.
COVID-19 Update
With the global outbreak of the Coronavirus Disease 2019 ("COVID-19") and the
declaration of a pandemic by the World Health Organization on March 11, 2020 ,
the U.S. and Mexico governments have deemed rail transportation as "critical
infrastructure" providing essential services during this global emergency. As a
provider of critical infrastructure, Kansas City Southern has an obligation to
keep employees working and freight moving. KCS remains focused on protecting the
health and wellbeing of its employees and the communities in which it operates
while assuring the continuity of its business operations.
KCS created a dedicated crisis team that proactively implemented its business
continuity plans to ensure the ongoing availability of its transportation
services, while taking a variety of health and safety measures, including
separating dispatching and crew operations, implementing enhanced cleaning and
hygiene protocols in its facilities and locomotives, implementing remote work
policies, where possible, performing temperature checks and requiring facial
coverings. As a result, to date, the Company has not experienced disruptions in
its railroad operations.
The Company began to experience the impacts of COVID-19 on customer demand in
late March of 2020. Revenues for the three months ended June 30, 2020 decreased
by 23% as compared to the second quarter of 2019, primarily due to a decline in
demand as a result of COVID-19, unfavorable foreign currency impacts and lower
fuel surcharge due to lower fuel prices. As revenues declined, the Company
responded quickly and implemented a variety of cost-saving measures and
accelerated Precision Scheduled Railroading ("PSR") initiatives by further
consolidating trains, which increased train length and reduced crew costs.
Operating expenses decreased by 27% during the second quarter of 2020 compared
to the same period in 2019, due to decreased restructuring charges, fuel
consumption and price, headcount and hours worked, and savings related to PSR
initiatives. By the end of June 2020 , daily volumes had increased by
approximately 40% since the low point in May, nearly returning to pre-COVID-19
levels. See Strategic Initiatives for further discussion of PSR savings.
In the second quarter of 2020, the Company offered a voluntary separation
program, which resulted in a restructuring charge of $9.2 million for the three
months ended June 30, 2020 , consisting of severance and benefit costs that will
be paid out in either lump-sum payments or over a six to twelve-month period.
Approximately 6% of management employees were irrevocably accepted into the
voluntary separation program. Management expects the voluntary separation
program reductions to result in annualized savings of approximately $11.0
million .
COVID-19 costs increased total expense in the second quarter of 2020 by
approximately $4.0 million primarily due to wages paid to certain high-risk
employees that were allowed to stay home pursuant to a Mexican presidential
decree, expenses related to cleaning and decontamination of locomotives and
other workspaces, and costs of protective gear for employees. By the end of the
second quarter of 2020, almost half of the high-risk employees allowed to stay
home per the Mexican presidential degree returned to work. Management expects
COVID-19 costs to decrease in the third and fourth quarters of 2020.
KCS believes it has a strong liquidity position to continue business operations
and service its debt obligations. As disclosed in the Liquidity and Capital
Resources section, the Company has total available liquidity of $1,220.1 million
as of June 30, 2020 , consisting of cash on hand and a revolving credit facility.
Total liquidity increased during the quarter as a result of the issuance of
$550.0 million of 3.50% Senior Notes on April 22, 2020 . Furthermore, the Company
does not have any debt maturities until 2023. During the second quarter of 2020,
KCS did not significantly alter the terms of its freight agreements with
customers. Cash flows from operations remain strong; however, growth-related
capital expenditures were reduced by $75.0 million to approximately $425.0
million . If the Company experienced another significant reduction in revenues,
the Company would have additional alternatives to maintain liquidity, including
further decreases in capital expenditures and cost reductions as well as
adjustments to its capital allocation policy. To date, the Company has not
reduced or suspended its share repurchase program or dividend payments. See
Liquidity and Capital Resources section for additional information.
KCS continues to monitor the rapidly evolving situation and guidance from
international and domestic authorities, including federal, state, and local
public health authorities and may take additional actions based on their
recommendations. In these circumstances, there may be developments outside KCS'
control requiring adjustments to operating plans. As such, given the dynamic
nature of this situation, KCS cannot reasonably estimate with any degree of
certainty the future impact COVID-19 may have on the Company's results of
operations, financial position, and liquidity. See Part II, Item 1A - "Risk
Factors" - "Public health threats or outbreaks of communicable diseases,
including the ongoing COVID-19 pandemic, could have a material adverse effect on
the Company's operations and financial results."
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Strategic Initiatives During 2019, KCS began implementing principles of PSR, focusing on operational excellence and driving the following improvements: • Customer service - improve and sustain consistency and reliability of
service and create a more resilient and dependable network;
• Facilitating growth - additional capacity for new opportunities;
• Improving asset utilization - meet growing or changing demand with the
same or fewer assets; and,
• Improving the cost profile of the Company - increased profitability
driven by volume and revenue growth and improved productivity and asset
utilization.
As a result of the PSR initiatives in 2019, management approved four separate
restructuring plans that totaled $168.8 million , including a $51.0 million
restructuring plan in the second quarter of 2019. The PSR plans included asset
impairments, workforce reductions, and contract restructuring, which resulted in
2019 operating expense savings of approximately $58.0 million .
The Company established the following key metrics and goals to measure PSR
progress and performance:
Three Months Ended Six Months Ended
June 30, Improvement/ June 30, Improvement/ FY 2020
2020 2019 (Deterioration) 2020 2019 (Deterioration) Goal
Gross velocity (mph)
(i) 17.1 12.5 37% 16.4 12.5 31% 17.0
Terminal dwell (hours)
(ii) 20.3 21.2 4% 20.0 21.5 7% 18.0
Train length (feet)
(iii) 6,921 5,999 15% 6,349 5,879 8% 6,350
Car miles per day (iv) 118.6 104.6 13% 119.8 102.8 17% 135.0
Fuel efficiency
(gallons per 1,000
GTM's) (v) 1.21 1.31 8% 1.24 1.33 7% 1.24
(i) Gross velocity is the average train speed between origin and destination in
miles per hour calculated as the sum of the miles traveled divided by the sum of
total transit hours. Transit hours are measured as the difference between a
train's origin departure and destination arrival date and times broken down by
segment across the train route (includes all time spent including crew changes,
terminal dwell, delays, and incidents).
(ii) Terminal dwell is the average amount of time in hours between car arrival to
and departure from the yard (excludes cars that move through a terminal on a
run-through train, stored, bad ordered, and maintenance-of-way cars). Calculated
by dividing the total number of hours cars spent in terminals by the total count
of car dwell events.
(iii) Train length is the average length of a train across its reporting stations,
including the origin and intermediate stations. Length of a train is the sum of
car and locomotive lengths measured in feet.
(iv) Car miles per day is the miles a car travels divided by total transit days.
Transit days are measured from opening event to closing event (includes all time
spent in terminals and on trains).
(v) Fuel efficiency is calculated by taking locomotive fuel consumed in gallons
divided by thousand gross ton miles ("GTM's") net of detours with no associated
fuel gallons. GTM's are the movement of one ton of train weight over one mile
calculated by multiplying total train weight by distance the train moved. GTM's
exclude locomotive gross ton miles.
As revenues declined rapidly in the second quarter of 2020 due to COVID-19,
management accelerated PSR initiatives by rightsizing resources to volumes and
further reduced costs. Train service plans were quickly adjusted as volumes
began to decline and trains were consolidated, resulting in longer, more
efficient trains. Record average train length reduced the number of train starts
and crew costs, leading to operating efficiencies across the organization and
record fuel efficiency. By the end of June 2020 , daily volumes had increased by
approximately 40% since the low point in May.
At the beginning of 2020, the Company estimated incremental annual operating
savings of approximately $61.0 million . Due to acceleration of PSR initiatives
in the second quarter of 2020, the Company is estimating incremental annual
operating savings of approximately $95.0 million .
The Company remains focused on executing the strategic initiatives and achieving
the operational metric targets noted above, which will deliver improved customer
service, facilitate growth, and drive better asset utilization while improving
the cost profile of the Company.
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Second Quarter Highlights Revenues decreased 23% for the three months endedJune 30, 2020 , as compared to the same period in 2019, due to a 21% decrease in carloads/unit volumes and a 4% decrease in revenue per carload/unit. Revenues decreased primarily due to lower volumes as a result of lower demand caused by COVID-19, unfavorable foreign currency impacts, and lower fuel surcharge due to lower fuel prices. As revenues declined, the Company responded quickly by implementing cost-saving measures and accelerating PSR initiatives. Operating expenses decreased 27% during the three months endedJune 30, 2020 , as compared to the same period in 2019, primarily due to a decrease in restructuring charges, fuel consumption and price, headcount and hours worked, and savings related to PSR initiatives. Operating expenses as a percentage of revenues was 67.1% for the three months endedJune 30, 2020 , compared to 70.9% for the same period in 2019. The Company reported quarterly earnings of$1.16 per diluted share on consolidated net income of$109.7 million for the three months endedJune 30, 2020 , compared to earnings of$1.28 per diluted share on consolidated net income of$128.7 million for the same period in 2019, due to lower operating income and an increase in interest expense due to the issuance of senior notes in the fourth quarter of 2019 and the second quarter of 2020. These decreases were partially offset by increases due to share repurchases and reduced income tax expense as a result of lower pre-tax income and a lower effective tax rate. Results of Operations The following summarizes KCS's consolidated statement of income components (in millions): Three Months Ended June 30, 2020 2019 Change Revenues$ 547.9 $ 714.0 $ (166.1 ) Operating expenses 367.5 506.0 (138.5 ) Operating income 180.4 208.0 (27.6 ) Equity in net earnings (losses) of affiliates 0.2 (0.2 ) 0.4 Interest expense (38.1 ) (28.0 ) (10.1 ) Foreign exchange gain 7.8 8.3 (0.5 ) Other income, net 0.8 0.1 0.7 Income before income taxes 151.1 188.2 (37.1 ) Income tax expense 40.8 59.1 (18.3 ) Net income 110.3 129.1 (18.8 ) Less: Net income attributable to noncontrolling interest 0.6 0.4 0.2 Net income attributable toKansas City Southern and subsidiaries$ 109.7 $ 128.7 $ (19.0 ) Six Months Ended June 30, 2020 2019 Change Revenues$ 1,279.6 $ 1,388.8 $ (109.2 ) Operating expenses 810.4 1,020.5 (210.1 ) Operating income 469.2 368.3 100.9 Equity in net earnings of affiliates 1.2 1.5 (0.3 ) Interest expense (72.3 ) (56.2 ) (16.1 ) Debt retirement costs - (0.6 ) 0.6 Foreign exchange gain (loss) (51.7 ) 12.9 (64.6 ) Other income, net 2.2 0.2 2.0 Income before income taxes 348.6 326.1 22.5 Income tax expense 86.0 93.8 (7.8 ) Net income 262.6 232.3 30.3 Less: Net income attributable to noncontrolling interest 1.1 0.8
0.3
Net income attributable toKansas City Southern and subsidiaries$ 261.5 $ 231.5 $ 30.0 21
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Revenues
The following summarizes revenues (in millions), carload/unit statistics (in
thousands) and revenue per carload/unit:
Revenues Carloads and Units Revenue per Carload/Unit
Three Months Ended Three Months Ended Three Months Ended
June 30, June 30, June 30,
2020 2019 % Change 2020 2019 % Change 2020 2019 % Change
Chemical and
petroleum $ 158.5 $ 188.3 (16 %) 75.6 86.9 (13 %) $ 2,097 $ 2,167 (3 %)
Industrial and
consumer
products 120.6 150.3 (20 %) 68.0 79.2 (14 %) 1,774 1,898 (7 %)
Agriculture and
minerals 114.4 122.4 (7 %) 57.7 61.8 (7 %) 1,983 1,981 -
Energy 39.3 53.9 (27 %) 44.1 54.7 (19 %) 891 985 (10 %)
Intermodal 63.5 92.6 (31 %) 191.0 244.6 (22 %) 332 379 (12 %)
Automotive 15.6 70.9 (78 %) 11.6 42.7 (73 %) 1,345 1,660 (19 %)
Carload
revenues,
carloads and
units 511.9 678.4 (25 %) 448.0 569.9 (21 %) $ 1,143 $ 1,190 (4 %)
Other revenue 36.0 35.6 1 %
Total revenues
(i) $ 547.9 $ 714.0 (23 %)
(i) Included in
revenues:
Fuel surcharge $ 37.6 $ 74.9
Revenues Carloads and Units Revenue per Carload/Unit
Six Months Ended Six Months Ended Six Months Ended
June 30, June 30, June 30,
2020 2019 % Change 2020 2019 % Change 2020 2019 % Change
Chemical and
petroleum $ 357.1 $ 356.9 - 166.5
166.3 -
1,886 (2 %)
Agriculture and
minerals 248.9 245.3 1 % 120.8 123.8 (2 %) 2,060 1,981 4 %
Energy 95.6 118.5 (19 %) 101.7 115.5 (12 %) 940 1,026 (8 %)
Intermodal 152.2 172.5 (12 %) 424.6 465.5 (9 %) 358 371 (4 %)
Automotive 69.5 128.5 (46 %) 43.8 79.3 (45 %) 1,587 1,620 (2 %)
Carload revenues,
carloads and
units 1,202.9 1,321.8 (9 %) 1,008.8
1,109.5 (9 %)
$ 1,279.6 $ 1,388.8 (8 %) (i) Included in revenues: Fuel surcharge$ 115.2 $ 137.3 Revenues include both revenue for transportation services and fuel surcharges. For the three months endedJune 30, 2020 , revenues and carload/unit volumes decreased 23% and 21%, respectively, compared to the same period in 2019. For the six months endedJune 30, 2020 , revenues and carload/unit volumes decreased 8% and 9%, respectively, compared to the same period in 2019. Revenues decreased primarily due to lower volumes as a result of COVID-19, unfavorable foreign currency impacts, and lower fuel surcharge due to lower fuel prices. The volume declines were primarily in the automotive business unit due to plant shutdowns and lower production volumes. Intermodal volumes were also affected by overall decline in demand due to COVID-19 and significant declines in auto part shipments. Chemical and petroleum and industrial and consumer business units were impacted by lower demand due to stay-at-home orders. In addition, volumes decreased as a result of reductions in crude and frac sand volumes due to the decline in oil prices. For the three months endedJune 30, 2020 , revenue per carload/unit decreased by 4%, compared to the same period in 2019, due to the weakening of the Mexican peso against theU.S. dollar, shorter average length of haul, and lower fuel surcharge, partially offset by positive pricing impacts. For the six months endedJune 30, 2020 , revenue per carload/unit remained flat, compared to the same period in 2019 as positive pricing impacts were offset by the weakening of the Mexican peso against theU.S. dollar. The average exchange rate of Mexican pesos perU.S. dollar was Ps.23.4, for the three months endedJune 30, 2020 , compared to Ps.19.1 for the same period in 2019, which resulted in a decrease in revenue of approximately$17.0 million . The average exchange rate of Mexican 22
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pesos perU.S. dollar was Ps.21.6 for the six months endedJune 30, 2020 , compared to Ps.19.2 for the same period in 2019, which resulted in a decrease to revenues of approximately$17.0 million . KCS's fuel surcharges are a mechanism to adjust revenue based upon changes in fuel prices above fuel price thresholds set in KCS's tariffs or contracts. Fuel surcharge revenue is calculated using a fuel price from a prior time period that can be up to 60 days earlier. In a period of volatile fuel prices or changing customer business mix, changes in fuel expense and fuel surcharge revenue may differ. For the three and six months endedJune 30, 2020 , fuel surcharge revenue decreased$37.3 million and$22.1 million , respectively, compared to the same periods in 2019, primarily due to lower volumes and fuel prices. The following discussion provides an analysis of revenues by commodity group: Revenues by commodity group for the three months endedJune 30, 2020 Chemical and petroleum. Revenues decreased$29.8 million for the three months endedJune 30, 2020 , compared to the same period in 2019, due to a 13% decrease in carload/unit volumes caused by lower market demand as a result of COVID-19 and a 3% decrease in revenue per carload/unit due to shorter than average length of haul, the weakening of the Mexican peso against theU.S. dollar, and lower fuel surcharge, partially offset by positive pricing impacts and mix. Revenues and volumes remained flat for the [[Image Removed: chemandpetroq22020revgraph.jpg]] six months endedJune 30, 2020 , compared to the same period in 2019 as volume increases from refined fuel products and liquid petroleum gas shipments to Mexico in the first quarter were offset by lower market demand as a result of COVID-19 in the second quarter. Revenue per carload/unit remained flat as positive pricing impacts, mix, and higher fuel surcharge, were offset by shorter average length of haul and the weakening of the Mexican peso against theU.S. dollar. Industrial and consumer products. Revenues decreased$29.7 million for the three months endedJune 30, 2020 , compared to the same period in 2019, due to a 14% decrease in carload/unit volumes and a 7% decrease in revenue per carload/unit. For the six months endedJune 30, 2020 , revenues decreased$20.5 million , compared to the same period in 2019, [[Image Removed: indandconq22020revgrapha01.jpg]] due to a 5% decrease in carload/unit volumes and a 2% decrease in revenue per carload/unit. Volumes decreased primarily due to lower market demand as a result of COVID-19. Revenue per carload/unit decreased due to the weakening of the Mexican peso against theU.S. dollar and mix, partially offset by positive pricing impacts. 23
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Revenues by commodity group
for the three months ended
June 30, 2020
Agriculture and minerals. Revenues decreased
$8.0 million for the three months ended June
30, 2020 , compared to the same period in
2019, due to a 7% decrease in carload/unit
volumes, driven by the acceleration of
shipments into the first quarter and impacts
from non-essential business shutdowns as a
result of COVID-19.
Revenues increased $3.6 million for the six [[Image Removed: agandminq22020revgraph.jpg]]
months ended June 30, 2020 , compared to the
same period in 2019, due to a 4% increase in
revenue per carload/unit primarily driven by
mix, longer average length of haul, and
positive pricing impacts. This increase was
partially offset by a 2% decrease in
carload/unit volumes driven by the shutdown
of non-essential business due to COVID-19.
Energy. Revenues decreased $14.6 million for
the three months ended June 30, 2020 ,
compared to the same period in 2019, due to a
19% decrease in carload/unit volumes and a
10% decrease in revenue per carload/unit.
Revenues decreased $22.9 million for the six
months ended June 30, 2020 , compared to the
same period in 2019, due to a 12% decrease in
carload/unit volumes and an 8% decrease in [[Image Removed: energyq22020revgraph.jpg]]
revenue per carload/unit. Frac sand and crude
oil volumes decreased due to the declines in
oil prices. Utility coal volumes decreased as
a result of low natural gas prices and warm
weather. Revenue per carload/unit decreased
due to mix, lower fuel surcharge, and the
weakening of the Mexican peso against the
U.S. dollar, partially offset by positive
pricing impacts.
Intermodal. Revenues decreased $29.1 million for the three months ended June 30,
2020 , compared to the same period in 2019, due to a 22% decrease in carload/unit
volumes and a 12% decrease in revenue per carload/unit. Revenues decreased $20.3
million for the six months ended June 30, 2020 , compared to the same period in
2019, due to a 9% decrease in carload/unit volumes, and a 4% decrease in revenue
per carload/unit. Volumes decreased primarily due to COVID-19, auto plant
shutdowns impacting cross-border traffic and increased truck capacity. Revenue
per carload/unit decreased due to mix, shorter average length of haul, lower
fuel surcharge and the weakening of the Mexican peso against the U.S. dollar.
Automotive. Revenues decreased $55.3 million for the three months ended June 30,
2020 , compared to the same period in 2019, due to a 73% decrease in carload/unit
volumes caused by auto plant shutdowns and lower overall automotive production
in Mexico as a result of COVID-19, and a 19% decrease in revenue per
carload/unit due to mix, the weakening of the Mexican peso against the U.S.
dollar, shorter average length of haul, and lower fuel surcharge, partially
offset by positive pricing impacts.
Revenues decreased $59.0 million for the six months ended June 30, 2020 ,
compared to the same period in 2019, due to a 45% decrease in carload/unit
volumes, and a 2% decrease in revenue per carload/unit. Volumes decreased due to
auto plant shutdowns and lower overall automotive production in Mexico as a
result of COVID-19. Revenue per carload/unit decreased due to mix, the weakening
of the Mexican peso against the U.S. dollar, and shorter average length of haul,
partially offset by higher fuel surcharge and positive pricing impacts.
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Operating Expenses Operating expenses, as shown below (in millions), decreased$138.5 million and$210.1 million for the three and six months endedJune 30, 2020 , respectively, compared to the same periods in 2019, primarily due to a decrease in restructuring charges, fuel consumption and price, headcount and hours worked, and savings related to PSR initiatives. The weakening of the Mexican peso against theU.S. dollar during the three and six months endedJune 30, 2020 , resulted in reduced expense of approximately$14.0 million and$18.0 million , respectively, compared to the same periods in 2019, for expense transactions denominated in Mexican pesos. The average exchange rate of Mexican pesos perU.S. dollar was Ps.23.4 and Ps.21.6 for the three and six months endedJune 30, 2020 , respectively, compared to Ps.19.1 and Ps.19.2 for the same periods in 2019. Three Months Ended June 30, Change 2020 2019 Dollars Percent Compensation and benefits$ 103.8 $ 128.3 $ (24.5 ) (19 %) Purchased services 44.6 56.7 (12.1 ) (21 %) Fuel 39.5 87.7 (48.2 ) (55 %) Equipment costs 18.1 26.3 (8.2 ) (31 %) Depreciation and amortization 89.3 87.7 1.6 2 % Materials and other 61.7 68.3 (6.6 ) (10 %) Restructuring charges 10.5 51.0 (40.5 ) (79 %) Total operating expenses$ 367.5 $ 506.0 $ (138.5 ) (27 %) Six Months Ended June 30, Change 2020 2019 Dollars Percent Compensation and benefits$ 237.2 $ 257.2 $ (20.0 ) (8 %) Purchased services 97.9 109.5 (11.6 ) (11 %) Fuel 114.4 170.7 (56.3 ) (33 %) Equipment costs 40.0 56.7 (16.7 ) (29 %) Depreciation and amortization 178.7 176.2 2.5 1 % Materials and other 125.7 131.7 (6.0 ) (5 %) Restructuring charges 16.5 118.5 (102.0 ) (86 %) Total operating expenses$ 810.4 $ 1,020.5 $ (210.1 ) (21 %) Compensation and benefits. Compensation and benefits decreased$24.5 million for the three months endedJune 30, 2020 , compared to the same period in 2019, due to a decrease in headcount and work hours of approximately$19.0 million caused by volume declines as a result of COVID-19 and the continued application of PSR initiatives, the weakening of the Mexican peso against theU.S dollar of approximately$6.0 million and a decrease in incentive compensation of approximately$6.0 million , partially offset by wage inflation of approximately$4.0 million and approximately$2.0 million of mandated wages related to COVID-19. Mandated wages were primarily due to high-risk employees that were allowed to stay home per the Mexican presidential degree. Compensation and benefits decreased$20.0 million for the six months endedJune 30, 2020 , compared to the same period in 2019, due to a decrease in headcount and work hours of approximately$25.0 million caused by volume declines as a result of COVID-19 and the continued application of PSR initiatives, and the weakening of the Mexican peso against theU.S dollar of approximately$7.0 million , partially offset by wage inflation and incentive compensation of approximately$9.0 million and$3.0 million , respectively. Purchased services. Purchased services expense decreased$12.1 million and$11.6 million for the three and six months endedJune 30, 2020 , respectively, compared to the same period in 2019, due to decreases in repairs and maintenance and detour expense caused by COVID-19 related volume declines and the continued application of PSR initiatives, and the weakening of the Mexican peso against theU.S. dollar. 25
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Fuel. Fuel decreased$48.2 million for the three months endedJune 30, 2020 , compared to the same period in 2019, due to lower consumption of approximately$15.0 million and$5.0 million inMexico and theU.S. , respectively, caused by volume declines as a result of COVID-19, lower diesel fuel prices of approximately$12.0 million and$8.0 million in theU.S. and Mexico, respectively, the weakening of the Mexican peso against theU.S. dollar of approximately$4.0 million and increased efficiency of approximately$4.0 million . Fuel decreased$56.3 million for the six months endedJune 30, 2020 , compared to the same period in 2019, due to lower diesel fuel prices of approximately$15.0 million and$12.0 million in theU.S. and Mexico, respectively, lower consumption of approximately$12.0 million and$4.0 million inMexico and theU.S. , respectively, caused by volume declines as a result of COVID-19, increased efficiency of approximately$8.0 million and the weakening of the Mexican peso against theU.S. dollar of approximately$5.0 million . The average price per gallon was$1.65 and$2.04 for the three and six months endedJune 30, 2020 , compared to$2.70 and$2.62 , respectively, for the same periods in 2019. Equipment costs. Equipment costs decreased$8.2 million for the three months endedJune 30, 2020 , compared to the same period in 2019, due to lower car hire expense of approximately$4.0 million primarily as a result of lower volumes caused by COVID-19 and reduced cycle times due to PSR initiatives, and lower lease expense of approximately$4.0 million due to the termination of a locomotive lease during the first quarter of 2020. Equipment costs decreased$16.7 million for the six months endedJune 30, 2020 , compared to the same period in 2019, due to lower lease expense of approximately$9.0 million due to the termination of locomotive leases during the second quarter of 2019 and the first quarter of 2020 and lower car hire expense of approximately$8.0 million primarily as a result of lower volumes caused by COVID-19 and reduced cycle times due to PSR initiatives. Depreciation and amortization. Depreciation and amortization expense increased$1.6 million and$2.5 million for the three and six months endedJune 30, 2020 , compared to the same periods in 2019, due to a larger asset base, partially offset by lower depreciation as a result of PSR initiatives implemented during 2019. Materials and other. Materials and other expense decreased$6.6 million for the three months endedJune 30, 2020 , compared to the same period in 2019, primarily due to lower employee expenses of approximately$5.0 million , lower materials and supplies expense of approximately$3.0 million and the weakening of the Mexican peso against theU.S. dollar of approximately$2.0 million , partially offset by an increase in personal injury expense of approximately$4.0 million . Materials and other expense decreased$6.0 million for the six months endedJune 30, 2020 , compared to the same period in 2019, primarily due to lower materials and supplies expense of approximately$5.0 million , lower employee expenses of approximately$5.0 million the weakening of the Mexican peso against theU.S. dollar of approximately$3.0 million , partially offset by an increase in personal injury expense of approximately$5.0 million . Restructuring charges. During the three and six months endedJune 30, 2020 , the Company recognized$10.5 million and$16.5 million , respectively, of restructuring charges primarily related to the voluntary separation program of$9.2 million and the buyout of leased locomotives. For the three and six months endedJune 30, 2019 , the Company recognized$51.0 million and$118.5 million , respectively, of restructuring charges related to the implementation of PSR initiatives, which included the impairment of certain locomotives and rail cars, planned activities for workforce reduction, and contract restructuring activities. Refer to Note 2, Restructuring Charges for more information. Non-Operating Income and Expenses Equity in net earnings (losses) of affiliates. For the three months endedJune 30, 2020 , equity in net earnings of affiliates increased$0.4 million , compared to the same period in 2019, primarily due to an increase in equity in net earnings from the operations of Ferrocarril y Terminal delValle de Mexico , S.Ade C.V. ("FTVM") as a result of higher expenses recognized in the second quarter of 2019 related to the cancellation ofMexico City's new international airport, partially offset by a decrease in net earnings from the operations ofPanama Canal Railway Company ("PCRC") due to lower container volumes due to a bridge strike in lateJune 2020 that has shutdown the railroad for an estimated 90 days. For the six months endedJune 30, 2020 , equity in net earnings of affiliates decreased$0.3 million , compared to the same period in 2019, primarily due to a decrease in net earnings from the operations of TFCM, S. de R.L de C.V. ("TCM") due to increased tax expense and foreign exchange losses in the first quarter of 2020, partially offset by an increase in equity in net earnings from the operations of FTVM as a result of higher expenses recognized in the first half of 2019 related to the cancellation ofMexico City's new international airport. 26
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Interest expense. For the three and six months endedJune 30, 2020 , interest expense increased$10.1 million and$16.1 million , respectively, compared to the same periods in 2019, due to higher average debt balances, partially offset by lower average interest rates. During the three and six months endedJune 30, 2020 , the average debt balances (including commercial paper) were$3,818.6 million and$3,546.9 million , respectively, compared to$2,709.3 million and$2,710.6 million for the same periods in 2019. The average interest rates during the three and six months endedJune 30, 2020 were 4.0% and 4.1%, respectively, compared to 4.1% and 4.2% for the same periods in 2019. Debt retirement costs. The Company did not incur debt retirement costs during 2020, or the second quarter of 2019. Debt retirement costs were$0.6 million for the six months endedJune 30, 2019 , related to the write-off of previously capitalized debt issuance costs associated with the establishment of the new revolving credit facility in the first quarter of 2019. Foreign exchange gain (loss). For the three and six months endedJune 30, 2020 , foreign exchange gain was$7.8 million and a loss of$51.7 million , respectively, compared to a foreign exchange gain of$8.3 million and$12.9 million for the same periods in 2019. Foreign exchange gain (loss) includes the re-measurement and settlement of net monetary assets denominated in Mexican pesos and the gain (loss) on foreign currency derivative contracts. The significant fluctuation in foreign exchange gain (loss) is a result of depreciation in the Mexican peso against theU.S. dollar partially resulting from the increased market volatility driven by the global COVID-19 pandemic. For the three and six months endedJune 30, 2020 , the re-measurement and settlement of monetary assets and liabilities denominated in Mexican pesos resulted in a foreign exchange gain and loss of$1.4 million and$24.4 million , respectively, compared to a gain of$1.0 million and$2.0 million for the same periods in 2019. The Company enters into foreign currency derivative contracts to hedge its net exposure to fluctuations in the Mexican cash tax obligation due to changes in the value of the Mexican peso against theU.S. dollar. For the three and six months endedJune 30, 2020 , the Company incurred a foreign exchange gain and loss on foreign currency derivative contracts of$6.4 million and$27.3 million , respectively, compared to a gain of$7.3 million and$10.9 million for the same periods in 2019. Other income, net. Other income, net increased$0.7 million and$2.0 million for the three and six months endedJune 30, 2020 , compared to the same periods in 2019, due to an increase in miscellaneous income. Income tax expense. Income tax expense decreased$18.3 million for the three months endedJune 30, 2020 , compared to the same period in 2019, due to lower pre-tax income and a lower effective tax rate. The decrease in the effective tax rate was primarily due to fluctuations in the foreign exchange rate. See the tax rates reconciliation below. Income tax expense decreased$7.8 million for the six months endedJune 30, 2020 , compared to the same period in 2019, due to a lower effective tax rate. The decrease in the effective tax rate was primarily due to fluctuations in the foreign exchange rate. See the tax rates reconciliation below.The Treasury Department issued proposed regulations inJune 2019 that provide for a high-tax exception to the GILTI tax. Specifically, if foreign earnings are subject to a foreign tax rate of at least 90% of theU.S. tax rate, an election can be made to not treat the high-taxed earnings as GILTI income. The regulations as proposed should render the GILTI tax immaterial to the consolidated financial statements if and when they become effective. 27
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The components of the effective tax rates for the three and six months ended
Three Months Ended Six Months Ended
June 30, June 30,
2020 2019 2020 2019
Statutory rate in effect 21.0 % 21.0 % 21.0 % 21.0 %
Tax effect of:
Difference between U.S. and foreign tax rate 4.9 % 6.2 % 5.3 % 6.0 %
Global intangible low-taxed income ("GILTI") tax, net 1.3 % 0.1 % 1.2 % 0.5 %
Mexican fuel excise tax credit, net (i) - 1.0 % - (1.5 %)
State and local income tax provision, net 1.5 % 0.9 % 1.4 % 1.0 %
Foreign exchange (ii) (1.8 %) 2.2 % (3.5 %) 1.8 %
Other, net 0.1 % - (0.7 %) -
Effective tax rate 27.0 % 31.4 % 24.7 % 28.8 %
(i) See discussion of the inclusion of the Mexican fuel excise tax credit, net
within the effective tax rate in the Mexico Tax Reform section below.
(ii) Mexican income taxes are paid in Mexican pesos, and as a result, the
effective income tax rate reflects fluctuations in the value of the
Mexican peso against the
rate. The foreign exchange impact on income taxes includes the gain or
loss from the revaluation of net
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
the Mexican cash tax obligation and the effective income tax rate, and a
weakening of the Mexican peso against the
period will generally decrease the Mexican cash tax obligation and the
effective tax rate. To hedge its exposure to this cash tax risk, the
Company enters into foreign currency derivative contracts, which are
measured at fair value each period and any change in fair value is
recognized in foreign exchange gain (loss) within the consolidated
statements of income as described above. Refer to Note 7, Derivative
Instruments for more information.
Mexico Tax Reform
In December 2019 , the Mexican government enacted changes in the tax law
effective January 1, 2020 ("Mexico 2020 Tax Reform"). Mexico 2020 Tax Reform
excluded railroads from eligibility for the Mexican fuel excise tax credit.
Mexico 2020 Tax Reform also included permanent changes to the Value Added Tax
("VAT") Law, Income Tax Law and Federal Fiscal Code which, among other things,
requires certain VAT withholding, limits the deduction of interest expense and
certain payments to related parties in preferential tax regimes, adopts a
general anti-avoidance rule, requires mandatory disclosure of reportable
transactions beginning in 2021, and permanently eliminates universal
compensation, which allowed Mexican taxpayers to offset recoverable tax balances
against balances due for other federal taxes. The elimination of universal
compensation, which was instituted at the beginning of 2019 and then made
permanent beginning in 2020, resulted in favorable VAT balances of $65.0 million
as of June 30, 2020 . The Company believes it has strong arguments in its favor
and it is more likely than not the favorable VAT balance will be refunded by the
Mexican government. Inability to obtain the VAT refund would have a material
adverse effect on the Company's consolidated financial statements. Mexico 2020
Tax Reform did not have a material impact to the consolidated financial
statements for the three and six months ended June 30, 2020 .
Liquidity and Capital Resources
Overview
On November 12, 2019 , the Company announced its new capital allocation policy
(the "Policy") that was approved by the Company's Board of Directors (the
"Board"). Pursuant to that Policy, the Company intends to deploy available cash
in the following manner:
• Approximately 40-50% to capital projects and strategic investments; and
• Approximately 50-60% to share repurchases and dividends.
In connection with the new Policy, the Board also approved the following
actions:
• An increase in the quarterly dividend on KCS's common stock from
• A new
December 31, 2022 . 28
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During the six months endedJune 30, 2020 , the Company invested$186.5 million in capital expenditures. See the Capital Expenditures section for further details. During the second quarter of 2020, the Company repurchased 699,123 shares of common stock for$100.0 million at an average price of$143.05 per share under the 2019 Program. During the six months endedJune 30, 2020 , KCS repurchased 1,990,758 shares of common stock for$294.2 million under the 2019 Program, which includes shares delivered to settle the Company's accelerated share repurchase ("ASR") agreements entered into inNovember 2019 . Since inception of the 2019 Program, KCS has repurchased 5,013,518 shares of common stock for$761.7 million at an average price of$151.94 per share. Management's assessment of market conditions, available liquidity and other factors will determine the timing and volume of any future repurchases. Refer to Note 10, Share Repurchases, for additional information on the Company's common share repurchase program and ASR agreements. During the first and second quarters of 2020, the Company's Board of Directors declared a quarterly cash dividend on its common stock of$0.40 per share (total of$76.0 million ). Subject to the discretion of the Board of Directors, capital availability and a determination that cash dividends continue to be in the best interest of its stockholders, the Company intends to pay a quarterly dividend on an ongoing basis. OnApril 22, 2020 , the Company issued$550.0 million principal amount of senior unsecured notes dueMay 1, 2050 , which bear interest semiannually at a fixed annual rate of 3.50% (the "3.50% Notes"). The Company intends to use the net proceeds from the offering for general corporate purposes, including to repurchase shares of the Company's common stock. However, given the uncertainties of the impacts of COVID-19, the Company currently retains the net proceeds from the offering as cash. AtJune 30, 2020 , the Company had$444.7 million principal amount outstanding of 3.00% senior notes that matureMay 15, 2023 (the "3.00% Notes"). The Company has the intention and ability to refinance the 3.00% Notes into a new long-term debt instrument prior to maturity. The Company has executed treasury lock agreements to hedge theU.S. Treasury benchmark interest rate associated with any future interest payments related to the anticipated refinancing of the 3.00% Notes. See Note 7, Derivative Instruments for further discussion of the treasury lock agreements. The Company's current financing instruments contain restrictive covenants that limit or preclude certain actions; however, the covenants are structured such that the Company expects to have sufficient flexibility to conduct its operations. The Company has been, and expects to continue to be, in compliance with all of its debt covenants. For additional discussion of the agreements representing the indebtedness of KCS, see Note 13, Short-Term Borrowings and Note 14, Long-Term Debt in the "Notes to the Consolidated Financial Statements" section of the Company's Annual Report on Form 10-K for the year endedDecember 31, 2019 . OnJune 30, 2020 , total available liquidity (the cash balance plus revolving credit facility availability) was$1,220.1 million , compared to availability atDecember 31, 2019 of$748.8 million . This increase was due to higher cash balances as a result of the issuance of the 3.50% Notes, partially offset by share repurchases during the first half of 2020. As ofJune 30, 2020 , the total cash and cash equivalents held outside of theU.S. in foreign subsidiaries was$28.4 million , after repatriating approximately$66.0 million during 2020. The Company expects that this cash will be available to fund operations without incurring significant additional income taxes. Mexico 2020 Tax Reform permanently eliminated universal compensation that allowed Mexican taxpayers to offset recoverable tax balances against balances due for other federal taxes. The elimination of universal compensation could negatively impact the timing of KCSM's cash flow by up to$50.0 million in 2020 while awaiting refunds of value added tax from the Mexican government. 29
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Cash Flow Information
Summary cash flow data follows (in millions):
Six Months Ended
June 30,
2020 2019
Cash flows provided by (used for):
Operating activities $ 525.5 $ 541.2
Investing activities (299.2 ) (374.1 )
Financing activities 250.1 (220.0 )
Effect of exchange rate changes on cash (5.1 ) -
Net increase (decrease) in cash and cash equivalents 471.3 (52.9 ) Cash and cash equivalents beginning of year
148.8 100.5
Cash and cash equivalents end of period $ 620.1 $ 47.6
Cash flows from operating activities decreased $15.7 million for the six months
ended June 30, 2020 , compared to the same period in 2019, primarily due to
increased cash paid to settle foreign currency derivative instruments partially
offset by increased net income.
Net cash used for investing activities decreased $74.9 million for the six
months ended June 30, 2020 , compared to the same period in 2019, due to a
decrease in capital expenditures of $155.7 million , partially offset by an
increase in the purchase or replacement of assets under existing operating
leases of $77.3 million .
Net cash provided by financing activities increased $470.1 million for the six
months ended June 30, 2020 , compared to the same period in 2019, primarily due
to net proceeds from the issuance of long-term debt of $545.6 million during the
first half of 2020, partially offset by an increase in shares repurchased of
$69.0 million .
Capital Expenditures KCS has funded, and expects to continue to fund capital expenditures with operating cash flows and short and long-term debt. The following table summarizes capital expenditures by type (in millions):
Six Months Ended
June 30,
2020 2019
Roadway capital program $ 116.2 $ 122.5
Locomotives and freight cars 20.7 165.0
Capacity 20.1 39.9
Information technology 21.0 15.1
Positive train control 6.7 7.9
Other 1.8 4.5
Total capital expenditures (accrual basis) 186.5 354.9
Change in capital accruals 8.2 (4.5 ) Total cash capital expenditures$ 194.7
Purchase or replacement of assets under operating leases (accrual basis)
$ 78.2 $ 0.9 Change in capital accruals -
-
Total cash purchase or replacement of assets under operating leases
$ 78.2
Generally, the Company's capital program consists of capital replacement and equipment. For 2020, internally generated cash flows are expected to fund cash capital expenditures, which are currently estimated to be approximately$425.0 million or below, depending on market conditions. In addition, the Company periodically reviews its equipment and property under operating leases. Any additional purchase or replacement of equipment and property under operating leases during 2020 is expected to be funded with internally generated cash flows and/or debt. 30
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Other Matters
Collective Bargaining
KCSR participates in industry-wide multi-employer bargaining as a member of the
National Carriers' Conference Committee ("NCCC"), as well as local bargaining
for agreements that are limited to KCSR's property. Over 70% of KCSR employees
are covered by collective bargaining agreements. Long-term agreements were
reached voluntarily or through the arbitration process during 2017 and 2018
covering all of the participating unions. The terms of these agreements will
remain in effect until new agreements are reached in the next bargaining round.
In November 2019 , KCSR and its unions commenced negotiations in connection with
the 2020 bargaining round.
KCSM Servicios, S.A. de C.V. ("KCSM Servicios"), a wholly owned subsidiary of
KCS, provides employee services to KCSM, and KCSM pays KCSM Servicios
market-based rates for these services. KCSM Servicios union employees are
covered by one labor agreement, which was signed on April 16, 2012 , between KCSM
Servicios and the Sindicato de Trabajadores Ferrocarrileros de la República
Mexicana ("Mexican Railroad Union "), and which remains in effect during the
period of the Concession, for the purpose of regulating the relationship between
the parties. Over 75% of KCSM Servicios employees are covered by this labor
agreement. The compensation terms under this labor agreement are subject to
renegotiation on an annual basis and all other benefits are subject to
negotiation every two years. The parties are currently negotiating compensation
terms and benefits that will apply from July 1, 2019 to June 30, 2020 , along
with other terms. The finalization of the compensation terms is not expected to
have a significant effect on the consolidated financial statements.
Union labor negotiations have not historically resulted in any strike, boycott,
or other disruption in the Company's business operations.
Supplemental Guarantor Financial Information
The following is a description of the terms and conditions of the guarantees
with respect to senior notes for which KCS is an issuer or provides full and
unconditional guarantee.
Note Guarantees
As of June 30, 2020 , KCS had outstanding $3,736.2 million principal amount of
senior notes due through 2069. The Kansas City Southern Railway Company ("KCSR")
had outstanding $2.7 million principal amount of senior notes due through 2045
(together, the "Senior Notes"). The senior notes for which KCS is the issuer are
unconditionally guaranteed, jointly and severally, on an unsecured senior basis,
by each of KCS's current and future domestic consolidated subsidiaries that from
time to time guarantees certain of KCS's credit agreements, or any other debt of
KCS, or any of KCS's significant subsidiaries that is a guarantor (each, a
"Guarantor Subsidiary," and collectively, the "Guarantor Subsidiaries"). In
addition, the senior notes for which KCSR is the issuer are unconditionally
guaranteed, jointly and severally, on an unsecured senior basis, by KCS and each
of its current and future domestic consolidated subsidiaries that from time to
time guarantees KCSR's credit agreement, or any other debt of KCSR or any of
KCSR's significant subsidiaries that is a Guarantor Subsidiary. The obligations
of each Guarantor Subsidiary under its note guarantee are limited as necessary
to prevent such note guarantee from constituting a fraudulent conveyance under
applicable law. A guarantee of the Senior Notes by KCS or a Guarantor Subsidiary
is subject to release in the following circumstances: (i) the sale, disposition,
exchange or other transfer (including through merger, consolidation,
amalgamation or otherwise) of the capital stock of the Guarantor Subsidiary made
in a manner not in violation of the indenture; (ii) the designation of the
subsidiary as an "Unrestricted Subsidiary" under the indenture; (iii) the legal
defeasance or covenant defeasance of the Senior Notes in accordance with the
terms of the indenture; or (iv) the Guarantor Subsidiary ceasing to be KCS's
subsidiary as a result of any foreclosure of any pledge or security interest
securing KCS's Revolving Credit Facility or other exercise of remedies in
respect thereof.
KCSM and any other foreign subsidiaries of KCS do not and will not guarantee the
Senior Notes ("Non-Guarantor Subsidiaries").
The following tables present summarized financial information for KCS and the
Guarantor Subsidiaries on a combined basis after intercompany transactions have
been eliminated, including adjustments to remove the receivable and payable
balances, investment in, and equity in earnings from the Non-Guarantor
Subsidiaries.
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Summarized Financial Information
Income Statements KCS and Guarantor Subsidiaries
Six Months Ended Twelve Months Ended
June 30, 2020 December 31, 2019
Revenues $ 673.6 $ 1,472.0
Operating expenses 423.8 1,068.5
Operating income 249.8 403.5
Income before income taxes 180.6 291.7
Net income 156.7 235.0
Balance Sheets KCS and Guarantor Subsidiaries
June 30, 2020 December 31, 2019
Assets:
Current assets $ 764.9 $ 332.9
Property and equipment (including concession
assets), net 4,725.3 4,596.3
Other non-current assets 88.5 156.9
Liabilities and equity:
Current liabilities $ 300.8 $ 313.5
Non-current liabilities 4,800.6 4,267.7
Noncontrolling interest 324.5 323.4
Excluded from current assets in the table above are $187.0 million and $95.2
million of current intercompany receivables due to KCS and the Guarantor
Subsidiaries from the Non-Guarantor Subsidiaries as of June 30, 2020 and
December 31, 2019 , respectively. Excluded from current liabilities in the table
above are $162.0 million and $55.0 million of current intercompany payables due
to the Non-Guarantor Subsidiaries from KCS and the Guarantor Subsidiaries as of
June 30, 2020 and December 31, 2019 , respectively.
The Senior Notes are structurally subordinated to the indebtedness and other
liabilities of the Non-Guarantor Subsidiaries. The Non-Guarantor Subsidiaries
are separate and distinct legal entities and have no obligation, contingent or
otherwise, to pay any amounts due pursuant to the Senior Notes or the
indentures, or to make any funds available therefor, whether by dividends,
loans, distributions or other payments. Any right that KCS or the Guarantor
Subsidiaries have to receive any assets of any of the Non-Guarantor Subsidiaries
upon the liquidation or reorganization of any Non-Guarantor Subsidiary, and the
consequent rights of holders of Senior Notes to realize proceeds from the sale
of any of a Non-Guarantor Subsidiary's assets, would be effectively subordinated
to the claims of such Non-Guarantor Subsidiary's creditors, including trade
creditors and holders of preferred equity interests, if any, of such
Non-Guarantor Subsidiary. Accordingly, in the event of a bankruptcy, liquidation
or reorganization of any of the Non-Guarantor Subsidiaries, the Non-Guarantor
Subsidiaries will pay the holders of their debts, holders of preferred equity
interests, if any, and their trade creditors before they will be able to
distribute any of their assets to KCS or any Guarantor Subsidiary.
If a Guarantor Subsidiary were to become a debtor in a case under the U.S.
Bankruptcy Code or encounter other financial difficulty, under federal or state
fraudulent transfer or conveyance law, a court may avoid, subordinate or
otherwise decline to enforce its guarantee of the Senior Notes. A court might do
so if it is found that when such Guarantor Subsidiary entered into its guarantee
of the Senior Notes, or in some states when payments became due under the Senior
Notes, such Guarantor Subsidiary received less than reasonably equivalent value
or fair consideration and either:
• was insolvent or rendered insolvent by reason of such incurrence;
• was left with unreasonably small or otherwise inadequate capital to conduct
its business; or
• believed or reasonably should have believed that it would incur debts beyond
its ability to pay.
The court might also avoid the guarantee of the Senior Notes without regard to
the above factors, if the court found that a Guarantor Subsidiary entered into
its guarantee with actual intent to hinder, delay or defraud its creditors.
A court would likely find that a Guarantor Subsidiary did not receive reasonably
equivalent value or fair consideration for its guarantee of the Senior Notes, if
such Guarantor Subsidiary did not substantially benefit directly or indirectly
from the funding made available by the issuance of the Senior Notes. If a court
were to avoid a guarantee of the Senior Notes provided by a Guarantor
Subsidiary, holders of the Senior Notes would no longer have any claim against
such Guarantor Subsidiary. The measures of
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insolvency for purposes of these fraudulent transfer or conveyance laws will vary depending upon the law applied in any proceeding to determine whether a fraudulent transfer or conveyance has occurred, such that the Company cannot predict what standards a court would use to determine whether or not a Guarantor Subsidiary was solvent at the relevant time or, regardless of the standard that a court uses, that the guarantee of a Guarantor Subsidiary would not be subordinated to such Guarantor Subsidiary's other debt. As noted above, each guarantee provided by a Guarantor Subsidiary includes a provision intended to limit the Guarantor Subsidiary's liability to the maximum amount that it could incur without causing the incurrence of obligations under its guarantee to be a fraudulent transfer or conveyance. This provision may not be effective to protect those guarantees from being avoided under fraudulent transfer or conveyance law, or it may reduce that Guarantor Subsidiary's obligation to an amount that effectively makes its guarantee worthless, and the Company cannot predict whether a court will ultimately find it to be effective. On the basis of historical financial information, operating history and other factors, the Company believes that each of the Guarantor Subsidiaries, after giving effect to the issuance of its guarantee of the Senior Notes when such guarantee was issued, was not insolvent, did not have unreasonably small capital for the business in which it engaged and did not and has not incurred debts beyond its ability to pay such debts as they mature. The Company cannot predict, however, as to what standard a court would apply in making these determinations or that a court would agree with the Company's conclusions in this regard.
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