KCS 10Q 06.30.2013
Table of Contents


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended June 30, 2013
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from              to        
Commission File Number 1-4717
KANSAS CITY SOUTHERN
(Exact name of registrant as specified in its charter)
Delaware
 
 
44-0663509
(State or other jurisdiction of
incorporation or organization)
 
 
(I.R.S. Employer
Identification No.)
 
427 West 12th Street,
Kansas City, Missouri
 
 
 
64105
(Address of principal executive offices)
 
 
(Zip Code)
816.983.1303
(Registrant’s telephone number, including area code)
No Change
(Former name, former address and former fiscal year, if changed since last report.)
____________________________________________________ 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer  ý    Accelerated filer  ¨    Non-accelerated filer  ¨    Smaller reporting company  ¨
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class
 
July 12, 2013
Common Stock, $0.01 per share par value
 
110,220,241 Shares
 



Table of Contents


Kansas City Southern
Form 10-Q
June 30, 2013
Index
 
 
Page
PART I — FINANCIAL INFORMATION
 
Item 1.
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
PART II — OTHER INFORMATION
 
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
 


2
Table of Contents


Kansas City Southern
Form 10-Q
June 30, 2013
PART I — FINANCIAL INFORMATION

Item 1.
Financial Statements
Introductory Comments
The unaudited Consolidated Financial Statements included herein have been prepared by Kansas City Southern pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). As used herein, “KCS” or the “Company” may refer to Kansas City Southern or, as the context requires, to one or more subsidiaries of Kansas City Southern. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) have been condensed or omitted pursuant to such rules and regulations. The Company believes that the disclosures are adequate to enable a reasonable understanding of the information presented. The Consolidated Financial Statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in this Form 10-Q should be read in conjunction with the consolidated financial statements and the related notes, as well as Management’s Discussion and Analysis of Financial Condition and Results of Operations, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012. Results for the three and six months ended June 30, 2013, are not necessarily indicative of the results expected for the full year ending December 31, 2013.


3
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Kansas City Southern
Consolidated Statements of Income
 
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2013
 
2012
 
2013
 
2012
 
(In millions, except share and per share amounts)
(Unaudited)
Revenues
$
579.3

 
$
545.3

 
$
1,132.1

 
$
1,092.8

Operating expenses:
 
 
 
 
 
 
 
Compensation and benefits
110.1

 
105.8

 
217.0

 
215.1

Purchased services
50.9

 
60.3

 
103.2

 
114.7

Fuel
93.0

 
86.9

 
183.9

 
175.2

Equipment costs
38.6

 
41.1

 
80.5

 
81.4

Depreciation and amortization
54.7

 
48.7

 
107.8

 
97.1

Materials and other
52.7

 
41.7

 
97.5

 
90.7

Elimination of deferred statutory profit sharing liability, net
—

 
(43.0
)
 
—

 
(43.0
)
Total operating expenses
400.0

 
341.5

 
789.9

 
731.2

Operating income
179.3

 
203.8

 
342.2

 
361.6

Equity in net earnings of unconsolidated affiliates
3.5

 
4.9

 
9.0

 
10.7

Interest expense
(19.2
)
 
(25.3
)
 
(42.9
)
 
(52.5
)
Debt retirement costs
(111.4
)
 
(5.1
)
 
(111.4
)
 
(18.0
)
Foreign exchange gain (loss)
(22.2
)
 
(3.5
)
 
(8.7
)
 
0.4

Other income (expense), net
(0.1
)
 
(0.8
)
 
0.2

 
(0.7
)
Income before income taxes
29.9

 
174.0

 
188.4

 
301.5

Income tax expense
14.2

 
53.1

 
68.5

 
105.3

Net income
15.7

 
120.9

 
119.9

 
196.2

Less: Net income attributable to noncontrolling interest
0.3

 
0.5

 
0.7

 
0.8

Net income attributable to Kansas City Southern and subsidiaries
15.4

 
120.4

 
119.2

 
195.4

Preferred stock dividends
—

 
—

 
0.1

 
0.1

Net income available to common stockholders
$
15.4

 
$
120.4

 
$
119.1

 
$
195.3

 
 
 
 
 
 
 
 
Earnings per share:
 
 
 
 
 
 
 
Basic earnings per share
$
0.14

 
$
1.10

 
$
1.08

 
$
1.78

Diluted earnings per share
$
0.14

 
$
1.09

 
$
1.08

 
$
1.77

 
 
 
 
 
 
 
 
Average shares outstanding (in thousands):
 
 
 
 
 
 
 
Basic
109,968

 
109,689

 
109,936

 
109,657

Potentially dilutive common shares
355

 
367

 
356

 
371

Diluted
110,323

 
110,056

 
110,292

 
110,028

See accompanying notes to consolidated financial statements.


4
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Kansas City Southern
Consolidated Statements of Comprehensive Income

 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2013
 
2012
 
2013
 
2012
 
(In millions)
(Unaudited)
Net income
$
15.7

 
$
120.9

 
$
119.9

 
$
196.2

Other comprehensive income (loss):
 
 
 
 
 
 
 
Unrealized loss on cash flow hedges arising during the period, net of tax of less than $(0.1) million, $(0.2) million, less than $(0.1) million and $(0.4) million, respectively
(0.1
)
 
(0.3
)
 
(0.1
)
 
(0.6
)
Reclassification adjustment from cash flow hedges included in net income, net of tax of $0.2 million, $0.1 million, $0.2 million, and $0.1 million, respectively
0.3

 
0.2

 
0.5

 
0.2

Amortization of prior service credit, net of tax of less than $(0.1) million
(0.1
)
 
(0.1
)
 
(0.1
)
 
(0.1
)
Foreign currency translation adjustments, net of tax of $(0.2) million, $(0.3) million and less than $0.1 million, respectively
(0.4
)
 
(0.4
)
 
—

 
0.2

Other comprehensive income (loss)
(0.3
)
 
(0.6
)
 
0.3

 
(0.3
)
Comprehensive income
15.4

 
120.3

 
120.2

 
195.9

Less: Comprehensive income attributable to noncontrolling interest
0.3

 
0.5

 
0.7

 
0.8

Comprehensive income attributable to Kansas City Southern and subsidiaries
$
15.1

 
$
119.8

 
$
119.5

 
$
195.1

See accompanying notes to consolidated financial statements.


5
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Kansas City Southern
Consolidated Balance Sheets

 
June 30, 2013
 
December 31, 2012
 
(In millions, except share and per share amounts)
 
(Unaudited)
 
 
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
30.0

 
$
72.6

Accounts receivable, net
199.6

 
183.6

Materials and supplies
139.1

 
125.6

Deferred income taxes
89.1

 
92.1

Other current assets
85.9

 
48.4

Total current assets
543.7

 
522.3

Investments
38.0

 
51.5

Restricted funds
11.9

 
14.2

Property and equipment (including concession assets), net
6,063.5

 
5,684.8

Other assets
72.8

 
123.1

Total assets
$
6,729.9

 
$
6,395.9

LIABILITIES AND EQUITY
 
 
 
Current liabilities:
 
 
 
Debt due within one year
$
48.3

 
$
60.2

Accounts payable and accrued liabilities
356.3

 
364.6

Total current liabilities
404.6

 
424.8

Long-term debt
1,765.7

 
1,547.6

Deferred income taxes
944.3

 
894.2

Other noncurrent liabilities and deferred credits
132.0

 
128.6

Total liabilities
3,246.6

 
2,995.2

Commitments and contingencies
—

 
—

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; 110,200,949 and 110,131,353 shares outstanding at June 30, 2013 and December 31, 2012, respectively
1.1

 
1.1

Paid-in capital
935.2

 
925.3

Retained earnings
2,238.2

 
2,166.5

Accumulated other comprehensive loss
(2.1
)
 
(2.4
)
Total stockholders’ equity
3,178.5

 
3,096.6

Noncontrolling interest
304.8

 
304.1

Total equity
3,483.3

 
3,400.7

Total liabilities and equity
$
6,729.9

 
$
6,395.9

See accompanying notes to consolidated financial statements.


6
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Kansas City Southern
Consolidated Statements of Cash Flows

 
Six Months Ended
 
June 30,
 
2013
 
2012
 
(In millions)
(Unaudited)
Operating activities:
 
 
 
Net income
$
119.9

 
$
196.2

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
107.8

 
97.1

Deferred income taxes
53.4

 
81.5

Equity in net earnings of unconsolidated affiliates
(9.0
)
 
(10.7
)
Share-based compensation
8.3

 
5.7

Excess tax benefit from share-based compensation
(3.3
)
 
(14.1
)
Deferred compensation
—

 
7.3

Elimination of deferred statutory profit sharing liability
—

 
(47.8
)
Distributions from unconsolidated affiliates
6.5

 
7.3

Debt retirement costs
111.4

 
18.0

Changes in working capital items:
 
 
 
Accounts receivable
(14.0
)
 
(20.5
)
Materials and supplies
(12.0
)
 
(6.6
)
Other current assets
(27.0
)
 
6.3

Accounts payable and accrued liabilities
(26.9
)
 
(1.2
)
Other, net
11.3

 
(8.4
)
Net cash provided by operating activities
326.4

 
310.1

 
 
 
 
Investing activities:
 
 
 
Capital expenditures
(265.9
)
 
(195.2
)
Acquisition of equipment under operating leases
(155.1
)
 
(19.6
)
Property investments in MSLLC
(22.6
)
 
(26.6
)
Proceeds from disposal of property
4.3

 
6.4

Other, net
(4.9
)
 
3.7

Net cash used for investing activities
(444.2
)
 
(231.3
)
 
 
 
 
Financing activities:
 
 
 
Proceeds from issuance of long-term debt
1,403.7

 
329.6

Repayment of long-term debt
(1,203.2
)
 
(349.4
)
Debt costs
(105.7
)
 
(19.3
)
Excess tax benefit from share-based compensation
3.3

 
14.1

Proceeds from employee stock plans
0.9

 
0.9

Dividends paid
(23.8
)
 
(21.6
)
Net cash provided by (used for) financing activities
75.2

 
(45.7
)
Cash and cash equivalents:
 
 
 
Net increase (decrease) during each period
(42.6
)
 
33.1

At beginning of year
72.6

 
72.4

At end of period
$
30.0

 
$
105.5

See accompanying notes to consolidated financial statements.

7
Table of Contents


Kansas City Southern
Notes to Consolidated Financial Statements
1. Accounting Policies, Interim Financial Statements and Basis of Presentation
In the opinion of the management of KCS, the accompanying unaudited consolidated financial statements contain all adjustments necessary for a fair presentation of the results for interim periods. All adjustments made were of a normal and recurring nature. Certain information and note disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. These consolidated financial statements should be read in conjunction with the consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012. The results of operations for the three and six months ended June 30, 2013, are not necessarily indicative of the results to be expected for the full year ending December 31, 2013. Certain prior year amounts have been reclassified to conform to the current year presentation.

2. Earnings Per Share Data
Basic earnings per common share is computed by dividing net income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted earnings per share adjusts basic earnings per common share for the effects of potentially dilutive common shares, if the effect is not anti-dilutive. Potentially dilutive common shares include the dilutive effects of shares issuable under the Stock Option and Performance Award Plans.
The following table reconciles the basic earnings per share computation to the diluted earnings per share computation (in millions, except share and per share amounts):
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2013
 
2012
 
2013
 
2012
Net income available to common stockholders for purposes of computing basic and diluted earnings per share
$
15.4

 
$
120.4

 
$
119.1

 
$
195.3

Weighted-average number of shares outstanding (in thousands):
 
 
 
 
 
 
 
Basic shares
109,968

 
109,689

 
109,936

 
109,657

Effect of dilution
355

 
367

 
356

 
371

Diluted shares
110,323

 
110,056

 
110,292

 
110,028

Earnings per share:
 
 
 
 
 
 
 
Basic earnings per share
$
0.14

 
$
1.10

 
$
1.08

 
$
1.78

Diluted earnings per share
$
0.14

 
$
1.09

 
$
1.08

 
$
1.77

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

 
69

 
57

 
69


3. Elimination of Deferred Statutory Profit Sharing Liability, Net
During the second quarter of 2012, the Company completed an organizational restructuring whereby employees of Kansas City Southern de México, S.A. de C.V. (“KCSM”) became employees of KCSM Servicios, S.A. de C.V. (“KCSM Servicios”), a wholly-owned subsidiary of the Company. KCSM Servicios provides employee services to KCSM, and KCSM pays KCSM Servicios market-based rates for these services. The effective date of this organizational restructuring was May 1, 2012.
Mexican employees are entitled to receive Mexican statutory profit sharing. The related cash payment to employees is based on an employer’s net profit determined under accounting principles prescribed in Mexican law, rather than its net profit determined under U.S. GAAP. U.S. GAAP requires the recording of deferred liabilities or assets for financial reporting purposes on the differences between the amounts determined under the two different accounting principles.
As a result of the organizational restructuring, KCSM’s obligation to pay Mexican statutory profit sharing terminated on the effective date. Accordingly, in the second quarter of 2012, KCSM recognized a $43.0 million net reduction to operating expense. This reduction includes the elimination of $47.8 million of the deferred Mexican statutory profit sharing liability, net of $4.8 million of

8
Table of Contents

Kansas City Southern
Notes to Consolidated Financial Statements—(Continued)

transaction costs. KCSM Servicios became obligated to pay Mexican statutory profit sharing to its employees beginning on the effective date of the organizational restructuring.

4. Property and Equipment (including Concession Assets)
Property and equipment, including concession assets, and related accumulated depreciation and amortization are summarized below (in millions):
 
June 30, 2013
 
December 31, 2012
Land
$
209.2

 
$
208.9

Concession land rights
141.2

 
141.2

Road property
5,773.9

 
5,664.4

Equipment
1,237.0

 
962.6

Technology and other
147.4

 
148.1

Construction in progress
178.0

 
156.2

Total property
7,686.7

 
7,281.4

Accumulated depreciation and amortization
1,623.2

 
1,596.6

Property and equipment (including concession assets), net
$
6,063.5

 
$
5,684.8

Concession assets, net of accumulated amortization of $437.3 million and $413.3 million, totaled $1,942.8 million and $1,916.5 million at June 30, 2013 and December 31, 2012, respectively.

5. Fair Value Measurements
Assets and liabilities recognized at fair value are required to be classified into a three-level hierarchy. In general, 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 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.
The Company’s derivative financial instruments are measured at fair value on a recurring basis and consist of interest rate swap agreements and foreign currency forward contract agreements, which are classified as Level 2 instruments. 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, where applicable, forward interest rate curves and market currency exchange rates. The fair value of interest rate swap liabilities was $0.3 million and $0.9 million as of June 30, 2013 and December 31, 2012, respectively, and the fair value of the foreign currency forward contract liabilities was $5.0 million as of June 30, 2013.
The Company’s short-term financial instruments include cash and cash equivalents, accounts receivable, and accounts payable. 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 $1,743.9 million and $1,719.9 million at June 30, 2013 and December 31, 2012, respectively. The carrying value was $1,814.0 million and $1,607.8 million at June 30, 2013 and December 31, 2012, 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.


9
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Kansas City Southern
Notes to Consolidated Financial Statements—(Continued)

6. Derivative Instruments
In general, 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 June 30, 2013, the Company did not expect any losses as a result of default of its counterparties.
Interest Rate Swaps. In the first quarter of 2012, The Kansas City Southern Railway Company (“KCSR”), a wholly-owned subsidiary of KCS, entered into four amortizing interest rate swaps with an aggregate notional amount of $320.0 million, which were designated as cash flow hedges. The interest rate swaps effectively converted interest payments from variable rates to fixed rates on a portion of KCSR’s outstanding term loan credit facility (the “Term Loan Facility”) and additional Term Loan A advances (the “Term Loan A-2”). The swaps are highly effective and therefore results in minimal earnings impact associated with the ineffectiveness of these hedges.
During the second quarter of 2013, KCSR repaid the outstanding balance on the Term Loan Facility and terminated the associated interest rate swaps with an aggregate notional amount of $140.8 million. As a result of the termination, the Company recognized a loss of $0.4 million, which is included in debt retirement costs within the consolidated statements of income. As of June 30, 2013, the remaining hedging instruments associated with the Term Loan A-2 had an aggregate notional amount of $157.5 million at a fixed rate of 0.4942%. Settlements are indexed to the one-month London Interbank Offered Rate (“LIBOR”) and will occur monthly through March 31, 2014.
Foreign Currency Forward Contracts. The Company’s Mexican subsidiaries have net U.S. dollar-denominated liabilities (primarily debt) which, for Mexican income tax purposes, are subject to periodic revaluation based on changes in the value of the U.S. dollar against the Mexican peso. This revaluation creates fluctuations in the Company’s Mexican income tax expense and the amount of income taxes paid in Mexico. During the first half of 2013, the Company entered into foreign currency forward contracts with an aggregate notional amount of $325.0 million, to hedge its exposure to this risk. These contracts mature on December 31, 2013 and obligate the Company to purchase a total of Ps.4,202.3 million at a weighted average exchange rate of Ps.12.93 to each U.S. dollar. The Company has not designated these forward contracts as hedging instruments for accounting purposes. The foreign currency forward contracts 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.
The following table presents the fair value of derivative instruments included in the consolidated balance sheets (in millions):
 
Derivative Liabilities
 
Balance Sheet Location
 
June 30, 2013
 
December 31, 2012
Derivatives designated as hedging instruments:
 
 
 
 
 
Interest rate swaps
Accounts payable and accrued liabilities
 
$
0.3

 
$
—

Interest rate swaps
Other noncurrent liabilities and deferred credits
 
—

 
0.9

Total derivatives designated as hedging instruments

 
0.3

 
0.9

 
 
 
 
 
 
Derivatives not designated as hedging instruments:
 
 
 
 
 
Foreign currency forward contracts
Accounts payable and accrued liabilities
 
5.0

 
—

Total derivatives not designated as hedging instruments
 
 
5.0

 
—

Total derivative liabilities
 
 
$
5.3

 
$
0.9


10
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Kansas City Southern
Notes to Consolidated Financial Statements—(Continued)

The following table presents the amounts affecting the consolidated statements of income for the three months ended June 30 (in millions):
Derivatives in Cash Flow
Hedging Relationships
 
Amount of
Gain/(Loss)
Recognized in OCI
on Derivative
(Effective Portion)
 
Location of Gain/(Loss) Reclassified from Accumulated 
OCI into Income 
(Effective Portion)
 
Amount of Gain/(Loss) Reclassified 
from Accumulated 
OCI into Income (Effective Portion)
 
 
2013
 
2012
 
 
 
2013
 
2012
Interest rate swaps
 
$
(0.1
)
 
$
(0.5
)
 
Interest expense
 
$
(0.1
)
 
$
(0.3
)
 
 
 
 
 
 
Debt retirement costs
 
(0.4
)
 
—

Total
 
$
(0.1
)
 
$
(0.5
)
 
 
 
$
(0.5
)
 
$
(0.3
)
 
 
 
 
 
 
 
 
 
 
 
Derivatives Not Designated as Hedging Instruments
 
Location of Gain/(Loss) Recognized in Income on Derivative
 
Amount of Gain/(Loss) Recognized in Income on Derivative
 
 
 
 
 
 
 
 
2013
 
2012
Foreign currency forward contracts
 
Foreign exchange gain (loss)
 
$
(14.1
)
 
$
—

Total
 
 
 
 
 
 
 
$
(14.1
)
 
$
—

The following table presents the amounts affecting the consolidated statements of income for the six months ended June 30 (in millions):
Derivatives in Cash Flow
Hedging Relationships
 
Amount of
Gain/(Loss)
Recognized in OCI
on Derivative
(Effective Portion)
 
Location of Gain/(Loss) Reclassified from Accumulated 
OCI into Income 
(Effective Portion)
 
Amount of Gain/(Loss) Reclassified 
from Accumulated 
OCI into Income (Effective Portion)
 
 
2013
 
2012
 
 
 
2013
 
2012
Interest rate swaps
 
$
(0.1
)
 
$
(1.0
)
 
Interest expense
 
$
(0.3
)
 
$
(0.3
)
 
 
 
 
 
 
Debt retirement costs
 
(0.4
)
 
—

Total
 
$
(0.1
)
 
$
(1.0
)
 
 
 
$
(0.7
)
 
$
(0.3
)
 
 
 
 
 
 
 
 
 
 
 
Derivatives Not Designated as Hedging Instruments
 
Location of Gain/(Loss) Recognized in Income on Derivative
 
Amount of Gain/(Loss) Recognized in Income on Derivative
 
 
 
 
 
 
 
 
2013
 
2012
Foreign currency forward contracts
 
Foreign exchange gain (loss)
 
$
(5.0
)
 
$
—

Total
 
 
 
 
 
 
 
$
(5.0
)
 
$
—

For the three and six months ended June 30, 2013 and 2012, there was no ineffectiveness recognized related to cash flow hedges. As of June 30, 2013, the Company expects that approximately $0.3 million of net losses will be reclassified from accumulated other comprehensive loss into interest expense over the next 12 months.

7. Long-Term Debt
KCSM 121/2% Senior Notes. On April 1, 2013, the Company redeemed all of the remaining $98.1 million aggregate principal amount of the KCSM 121/2% senior unsecured notes due April 1, 2016 (the “121/2% Senior Notes”) at a redemption price equal to 106.250% of the principal amount. The Company redeemed the 121/2% Senior Notes using $65.0 million of borrowings under KCSM’s revolving credit facility and cash on hand.
KCSM 8.0% Senior Notes, 65/8% Senior Notes and 61/8% Senior Notes. On April 10, 2013, KCSM commenced a cash tender offer for the 8.0% senior unsecured notes due February 1, 2018 (the “8.0% Senior Notes”), the 65/8% senior unsecured notes due December 15, 2020 (the “65/8% Senior Notes”), and the 61/8% senior unsecured notes due June 15, 2021 (the “61/8% Senior Notes”). In addition, KCSM concurrently commenced consent solicitations to amend the indentures governing the 8.0% Senior Notes and 65/8%

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Kansas City Southern
Notes to Consolidated Financial Statements—(Continued)

Senior Notes to eliminate substantially all of the restrictive covenants and certain events of default contained therein, which became operative on May 3, 2013.
Through May 8, 2013, KCSM purchased $237.2 million principal amount of the tendered 8.0% Senior Notes, $181.0 million principal amount of the tendered 65/8% Senior Notes and $149.7 million principal amount of the tendered 61/8% Senior Notes (collectively, the “KCSM Senior Notes Tendered”), in accordance with the terms and conditions of the tender offer using a portion of the proceeds received from the issuance of $275.0 million principal amount of 2.35% senior unsecured notes due May 15, 2020 (the “2.35% Senior Notes”) and $450.0 million principal amount of 3.0% senior unsecured notes due May 15, 2023 (the “3.0% Senior Notes”).
Subsequent to the expiration of the cash tender offer, through June 26, 2013, KCSM purchased an additional $7.9 million principal amount of the 61/8% Senior Notes and redeemed the remaining $4.0 million outstanding principal amount of the 65/8% Senior Notes. On July 2, 2013, KCSM purchased an additional $1.0 million principal amount of the 61/8% Senior Notes.
KCSM 2.35% Senior Notes. On May 3, 2013, KCSM issued $275.0 million principal amount of 2.35% Senior Notes, which bear interest semiannually at a fixed annual rate of 2.35%. The 2.35% Senior Notes were issued at a discount to par value, resulting in a $0.3 million discount and a yield to maturity of 2.368%. KCSM used the net proceeds from the issuance of the 2.35% Senior Notes and the 3.0% Senior Notes to purchase the KCSM Senior Notes Tendered, pay all fees and expenses incurred in connection with the 2.35% Senior Notes and 3.0% Senior Notes offerings and the tender offers, to finance the purchase of certain leased equipment and for other general corporate purposes. The 2.35% Senior Notes are redeemable at KCSM’s option, in whole or in part, prior to April 15, 2020, by paying the greater of either (i) 100% of the principal amount of the 2.35% Senior Notes to be redeemed or (ii) the sum of the present values of the remaining scheduled payments of principal and interest (exclusive of interest accrued to the date of redemption) discounted to the date of redemption on a semiannual basis (assuming a 360-day year consisting of twelve 30-day months) at the then-current U.S. Treasury rate plus 20 basis points, plus accrued interest and any additional amounts to but excluding the redemption date. On or after April 15, 2020, the 2.35% Senior Notes may be redeemed at KCSM’s option, in whole or in part at any time at a redemption price equal to 100% of the principal amount plus any accrued and unpaid interest. In addition, the notes are redeemable, in whole but not in part, at KCSM’s option at their principal amount, plus any accrued unpaid interest in the event of certain changes in the Mexican withholding tax rate.
KCSM 3.0% Senior Notes. On May 3, 2013, KCSM issued $450.0 million principal amount of the 3.0% Senior Notes, which bear interest semiannually at a fixed annual rate of 3.0%. The 3.0% Senior Notes were issued at a discount to par value, resulting in a $1.9 million discount and a yield to maturity of 3.048%. KCSM used the net proceeds from the issuance of the 3.0% Senior Notes and the 2.35% Senior Notes to purchase the KCSM Senior Notes Tendered, pay all fees and expenses incurred in connection with the 2.35% Senior Notes and 3.0% Senior Notes offerings and the tender offers, to finance the purchase of certain leased equipment and for other general corporate purposes. The 3.0% Senior Notes are redeemable at KCSM’s option, in whole or in part, prior to February 15, 2023, by paying the greater of either (i) 100% of the principal amount of the 3.0% Senior Notes to be redeemed or (ii) the sum of the present values of the remaining scheduled payments of principal and interest (exclusive of interest accrued to the date of redemption) discounted to the date of redemption on a semiannual basis (assuming a 360-day year consisting of twelve 30-day months) at the then-current U.S. Treasury rate plus 20 basis points, plus accrued interest and any additional amounts to but excluding the redemption date. On or after February 15, 2023, the 3.0% Senior Notes may be redeemed at KCSM’s option, in whole or in part at any time at a redemption price equal to 100% of the principal amount plus any accrued and unpaid interest. In addition, the notes are redeemable, in whole but not in part, at KCSM’s option at their principal amount, plus any accrued unpaid interest in the event of certain changes in the Mexican withholding tax rate.
The 2.35% Senior Notes and 3.0% 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. In addition, the senior notes include certain covenants which are customary for these types of debt instruments issued by borrowers with similar credit ratings.
KCSM Revolving Credit Facility. During the second quarter of 2013, KCSM borrowed $65.0 million against the KCSM revolving credit facility, for the redemption of the 121/2% Senior Notes. As of June 30, 2013, the outstanding amount under the KCSM revolving credit facility was $10.0 million. As of December 31, 2012, there was no amount outstanding under the KCSM revolving credit facility.
KCSR 4.30% Senior Notes. On April 29, 2013, KCSR issued $450.0 million principal amount of senior unsecured notes due May 15, 2043, which bear interest semiannually at a fixed annual rate of 4.30% (the “4.30% Senior Notes”). The 4.30% Senior Notes were issued at a discount to par value, resulting in a $4.1 million discount and a yield to maturity of 4.355%. The net proceeds from

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Kansas City Southern
Notes to Consolidated Financial Statements—(Continued)

the offering were used to fund the prepayment of the Term Loan Facility under the KCSR credit agreement, to finance the purchase of certain leased equipment and for other general corporate purposes. The 4.30% Senior Notes are redeemable at KCSR’s option, in whole or in part, prior to November 15, 2042, by paying the greater of either (i) 100% of the principal amount of the 4.30% Senior Notes to be redeemed or (ii) the sum of the present values of the remaining scheduled payments of principal and interest (exclusive of interest accrued to the date of redemption) discounted to the date of redemption on a semiannual basis (assuming a 360-day year consisting of twelve 30-day months) at then-current U.S. Treasury rate plus 25 basis points, plus accrued interest to but excluding the redemption date. On or after November 15, 2042, the 4.30% Senior Notes may be redeemed at KCSR’s option, in whole or in part at any time and from time to time at a redemption price equal to 100% of the principal amount plus any accrued and unpaid interest.
The 4.30% Senior Notes are unconditionally guaranteed, jointly and severally, on an unsecured senior basis, by KCS and certain domestic subsidiaries of KCS that guarantee the KCSR credit agreement (the “Note Guarantors”). The 4.30% 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. In addition, the 4.30% Senior Notes include certain covenants which are customary for these types of debt instruments issued by borrowers with similar credit ratings.
KCSR Term Loan Facility. On April 29, 2013, KCSR repaid the outstanding $277.5 million principal amount of the Term Loan Facility issued under the KCSR credit agreement using a portion of the net proceeds from the issuance of the 4.30% Senior Notes.
Debt Retirement Costs. The Company recognized debt retirement costs of $111.4 million during the second quarter of 2013 related to the tender and call premiums as well as the write-off of unamortized debt issuance costs and the original issue discounts as a result of the refinancing activities described above.

8. Equity
The following tables summarize the changes in equity (in millions):
 
Three Months Ended June 30, 2013
 
Three Months Ended June 30, 2012
 
Kansas City
Southern
Stockholders’
Equity
 
Noncontrolling
Interest
 
Total
Equity
 
Kansas City
Southern
Stockholders’
Equity
 
Noncontrolling
Interest
 
Total
Equity
Beginning balance
$
3,182.6

 
$
304.5

 
$
3,487.1

 
$
2,835.7

 
$
294.5

 
$
3,130.2

Net income
15.4

 
0.3

 
15.7

 
120.4

 
0.5

 
120.9

Other comprehensive loss
(0.3
)
 
—

 
(0.3
)
 
(0.6
)
 
—

 
(0.6
)
Dividends on common stock
(23.8
)
 
—

 
(23.8
)
 
(21.5
)
 
—

 
(21.5
)
Options exercised and stock subscribed, net of shares withheld for employee taxes
0.5

 
—

 
0.5

 
—

 
—

 
—

Tax benefit from share-based compensation
0.4

 
—

 
0.4

 
0.9

 
—

 
0.9

Share-based compensation
3.7

 
—

 
3.7

 
2.5

 
—

 
2.5

Ending balance
$
3,178.5

 
$
304.8

 
$
3,483.3

 
$
2,937.4

 
$
295.0

 
$
3,232.4


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Kansas City Southern
Notes to Consolidated Financial Statements—(Continued)

 
Six Months Ended June 30, 2013
 
Six Months Ended June 30, 2012
 
Kansas City
Southern
Stockholders’
Equity
 
Noncontrolling
Interest
 
Total
Equity
 
Kansas City
Southern
Stockholders’
Equity
 
Noncontrolling
Interest
 
Total
Equity
Beginning balance
$
3,096.6

 
$
304.1

 
$
3,400.7

 
$
2,764.5

 
$
294.2

 
$
3,058.7

Net income
119.2

 
0.7

 
119.9

 
195.4

 
0.8

 
196.2

Other comprehensive income (loss)
0.3

 
—

 
0.3

 
(0.3
)
 
—

 
(0.3
)
Dividends on common stock
(47.4
)
 
—

 
(47.4
)
 
(42.9
)
 
—

 
(42.9
)
Dividends on $25 par preferred stock
(0.1
)
 
—

 
(0.1
)
 
(0.1
)
 
—

 
(0.1
)
Options exercised and stock subscribed, net of shares withheld for employee taxes
(1.7
)
 
—

 
(1.7
)
 
1.0

 
—

 
1.0

Tax benefit from share-based compensation
3.3

 
—

 
3.3

 
14.1

 
—

 
14.1

Share-based compensation
8.3

 
—

 
8.3

 
5.7

 
—

 
5.7

Ending balance
$
3,178.5

 
$
304.8

 
$
3,483.3

 
$
2,937.4

 
$
295.0

 
$
3,232.4

Cash Dividends on Common Stock
On May 1, 2013, the Company’s Board of Directors declared a cash dividend of $0.215 per share payable on July 3, 2013, to common stockholders of record as of June 10, 2013. The aggregate amount of dividends declared for the three and six months ended June 30, 2013 was $23.8 million and $47.4 million, respectively.
The following table presents the amount of cash dividends declared per common share by the Company’s Board of Directors:
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2013
 
2012
 
2013
 
2012
Cash dividends declared per common share
$
0.215

 
$
0.195

 
$
0.430

 
$
0.390


9. Commitments and Contingencies
Concession Duty. Under KCSM’s 50-year railroad concession from the Mexican government (the “Concession”), KCSM paid concession duty expense of 0.5% of gross revenues for the first 15 years of the Concession period and, on June 24, 2012, KCSM began paying 1.25% of gross revenues, which is effective for the remaining years of the Concession. For the three and six months ended June 30, 2013, the concession duty expense, which is recorded within materials and other in operating expenses, was $3.4 million and $6.8 million, respectively, compared to $1.4 million and $2.7 million for the same periods in 2012.
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.
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.

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Kansas City Southern
Notes to Consolidated Financial Statements—(Continued)

The Company’s Mexico operations are subject to Mexican federal and state laws and regulations relating to the protection of the environment through the establishment of standards for water discharge, water supply, emissions, noise pollution, hazardous substances and transportation and handling of hazardous and solid waste. The Mexican government may bring administrative and criminal proceedings, impose economic sanctions against companies that violate environmental laws, and temporarily or even permanently close non-complying facilities.
The risk of incurring environmental liability is inherent in the railroad industry. As part of serving the petroleum and chemicals industry, the Company transports hazardous materials and has a professional team available to respond to and handle environmental issues that might occur in the transport of such materials.
The Company performs ongoing reviews and evaluations of the various environmental programs and issues within the Company’s operations, and, as necessary, takes actions intended to limit the Company’s exposure to potential liability. Although these costs cannot be predicted with certainty, management believes that the ultimate outcome of identified matters will not have a material adverse effect on the Company’s consolidated financial statements.
Personal Injury. The Company’s personal injury liability is based on semi-annual actuarial studies performed on an undiscounted basis by an independent third party actuarial firm and reviewed by management. This liability is based on personal injury claims filed and an estimate of claims incurred but not yet reported. Actual results may vary from estimates due to the number, type and severity of the injury, costs of medical treatments and uncertainties in litigation. Adjustments to the liability are reflected within operating expenses in the period in which changes to estimates are known. Personal injury claims in excess of self-insurance levels are insured up to certain coverage amounts, depending on the type of claim and year of occurrence. The personal injury liability as of June 30, 2013, was based on an updated actuarial study of personal injury claims through May 31, 2013, and review of June 2013 experience.
The personal injury liability activity was as follows (in millions):
 
Six Months Ended June 30,
 
2013
 
2012
Balance at beginning of year
$
34.4

 
$
40.1

Accruals
4.4

 
5.0

Change in estimate
4.1

 
(3.6
)
Payments
(5.6
)
 
(2.5
)
Balance at end of period
$
37.3

 
$
39.0

Certain Disputes with Ferromex. KCSM and Ferrocarril Mexicano, S.A. de C.V. (“Ferromex”) use certain trackage rights, haulage rights and interline services (the “Services”) provided by each other. The rates to be charged after January 1, 2009, were agreed to pursuant to the Trackage Rights Agreement, dated February 9, 2010 (the “Trackage Rights Agreement”), between KCSM and Ferromex. The rates payable for these Services for the period beginning in 1998 through December 31, 2008, are still not resolved. KCSM is currently involved in discussions with Ferromex regarding the amounts payable to each other for the Services for this period. If KCSM cannot reach an agreement with Ferromex for rates applicable for Services which were provided prior to January 1, 2009, which are not subject to the Trackage Rights Agreement, the Mexican Secretaría de Comunicaciones y Transportes (“Secretary of Communications and Transportation” or “SCT”) is entitled to set the rates in accordance with Mexican law and regulations. KCSM and Ferromex both initiated administrative proceedings seeking a determination by the SCT of the rates that KCSM and Ferromex should pay each other in connection with the Services. The SCT issued rulings in 2002 and 2008 setting the rates for the Services and both KCSM and Ferromex challenged these rulings. Although KCSM and Ferromex have challenged these matters based on different grounds and these cases continue to evolve, management believes the amounts recorded related to these matters are adequate.
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.
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.

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Kansas City Southern
Notes to Consolidated Financial Statements—(Continued)

Credit Risk. The Company continually monitors risks related to economic changes and certain customer receivables concentrations. Significant changes in customer concentration or payment terms, deterioration of customer creditworthiness or further weakening in economic trends could have a significant impact on the collectability of the Company’s receivables and its operating results. If the financial condition of the Company’s customers were to deteriorate and result in an impairment of their ability to make payments, additional allowances may be required. The Company has recorded provisions for uncollectability based on its best estimate at June 30, 2013.
Income Tax. Tax returns filed in the U.S. for periods after 2008 and in Mexico for periods after 2006 remain open to examination by the taxing authorities. KCSM’s 2007 tax return is currently under examination by the Servicio de Administracion Tributaria (the “SAT”), the Mexican equivalent of the IRS. The Company received audit assessments for KCSM for the year ended December 31, 2005, and NAFTA Rail S.A. de C.V. (“NAFTA”) for the year ended December 31, 2009, from the SAT. The Company initiated administrative proceedings with the SAT for both audits and in June 2013, settled the NAFTA assessment for an immaterial amount. If a settlement is not reached on the KCSM assessment, the matter will be litigated. The Company believes it has strong legal arguments in its favor and more likely than not will prevail in any challenges of the KCSM assessment. The Company believes that an adequate provision has been made for any adjustment (taxes and interest) that will be due for all open years. However, an unexpected adverse resolution could have a material effect on the consolidated financial statements in a particular quarter or fiscal year.
Panama Canal Railway Company (“PCRC”) Guarantees and Indemnities. At June 30, 2013, the Company had issued and outstanding $5.3 million under a standby letter of credit to fulfill its obligation to fund fifty percent of the debt service 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.

10. Geographic Information
The Company strategically manages its rail operations as one reportable business segment over a single coordinated rail network that extends from the midwest and southeast portions of the United States south into Mexico and connects with other Class I railroads. Financial information reported at this level, such as revenues, operating income and cash flows from operations, is used by corporate management, including the Company’s chief operating decision-maker, in evaluating overall financial and operational performance, market strategies, as well as the decisions to allocate capital resources.
The Company’s strategic initiatives, which drive its operational direction, are developed and managed at the Company’s headquarters and targets are communicated to its various activity centers. The activity centers are responsible for executing the overall corporate strategy and operating plan established by corporate management as a coordinated system. The role of each region is to manage the operational activities and monitor and control costs over the coordinated rail network.
The following tables provide information by geographic area (in millions):
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
Revenues
2013
 
2012
 
2013
 
2012
U.S.
$
312.6

 
$
297.1

 
$
610.1

 
$
599.3

Mexico
266.7

 
248.2

 
522.0

 
493.5

Total revenues
$
579.3

 
$
545.3

 
$
1,132.1

 
$
1,092.8

 
 
 
 
 
 
 
 
Property and equipment (including concession assets), net
 
 
 
 
June 30, 2013
 
December 31, 2012
U.S.
 
 
 
 
$
3,409.6

 
$
3,126.2

Mexico
 
 
 
 
2,653.9

 
2,558.6

Total property and equipment (including concession assets), net
 
 
 
 
$
6,063.5

 
$
5,684.8


11. Condensed Consolidating Financial Information
KCSR has outstanding $450.0 million principal amount of 4.30% Senior Notes due May 15, 2043, which 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. The Company intends to file a registration statement on Form S-4 with the Securities and Exchange Commission (“SEC”) for the 4.30% Senior Notes and as a result, is providing the accompanying condensed

16
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Kansas City Southern
Notes to Consolidated Financial Statements—(Continued)

consolidating financial information (in millions) pursuant to SEC Regulation S-X Rule 3-10 “Financial statements of guarantors and issuers of guaranteed securities registered or being registered.”
CONDENSED CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
 
Three Months Ended June 30, 2013
 
Parent
 
KCSR
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Consolidating
Adjustments
 
Consolidated
KCS
Revenues
$
—

 
$
275.7

 
$
11.5

 
$
302.8

 
$
(10.7
)
 
$
579.3

Operating expenses
1.7

 
203.3

 
9.3

 
197.0

 
(11.3
)
 
400.0

Operating income (loss)
(1.7
)
 
72.4

 
2.2

 
105.8

 
0.6

 
179.3

Equity in net earnings of unconsolidated affiliates
8.1

 
0.8

 
0.9

 
2.9

 
(9.2
)
 
3.5

Interest expense
—

 
(16.9
)
 
—

 
(14.1
)
 
11.8

 
(19.2
)
Debt retirement costs
—

 
(1.5
)
 
—

 
(109.9
)
 
—

 
(111.4
)
Foreign exchange loss
—

 
(1.6
)
 
—

 
(20.6
)
 
—

 
(22.2
)
Other income (expense), net
11.1

 
1.5

 
(0.1
)
 
(0.2
)
 
(12.4
)
 
(0.1
)
Income (loss) before income taxes
17.5

 
54.7

 
3.0

 
(36.1
)
 
(9.2
)
 
29.9

Income tax expense (benefit)
2.1

 
20.8

 
1.1

 
(9.8
)
 
—

 
14.2

Net income (loss)
15.4

 
33.9

 
1.9

 
(26.3
)
 
(9.2
)
 
15.7

Less: Net income attributable to noncontrolling interest
—

 
—

 
0.3

 
—

 
—

 
0.3

Net income (loss) attributable to Kansas City Southern and subsidiaries
15.4

 
33.9

 
1.6

 
(26.3
)
 
(9.2
)
 
15.4

Other comprehensive income (loss)
(0.3
)
 
0.3

 
—

 
(0.7
)
 
0.4

 
(0.3
)
Comprehensive income (loss) attributable to Kansas City Southern and subsidiaries
$
15.1

 
$
34.2

 
$
1.6

 
$
(27.0
)
 
$
(8.8
)
 
$
15.1


17
Table of Contents

Kansas City Southern
Notes to Consolidated Financial Statements—(Continued)

CONDENSED CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME (LOSS) – (Continued)
 
Three Months Ended June 30, 2012
 
Parent
 
KCSR
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Consolidating
Adjustments
 
Consolidated
KCS
Revenues
$
—

 
$
263.2

 
$
6.3

 
$
284.6

 
$
(8.8
)
 
$
545.3

Operating expenses
1.2

 
196.9

 
8.7

 
144.1

 
(9.4
)
 
341.5

Operating income (loss)
(1.2
)
 
66.3

 
(2.4
)
 
140.5

 
0.6

 
203.8

Equity in net earnings of unconsolidated affiliates
104.4

 
—

 
2.0

 
3.9

 
(105.4
)
 
4.9

Interest expense
—

 
(16.6
)
 
—

 
(22.2
)
 
13.5

 
(25.3
)
Debt retirement costs
—

 
(5.1
)
 
—

 
—

 
—

 
(5.1
)
Foreign exchange loss
—

 
—

 
—

 
(3.5
)
 
—

 
(3.5
)
Other income (expense), net
11.7

 
1.8

 
—

 
(0.1
)
 
(14.2
)
 
(0.8
)
Income (loss) before income taxes
114.9

 
46.4

 
(0.4
)
 
118.6

 
(105.5
)
 
174.0

Income tax expense (benefit)
(5.5
)
 
17.9

 
—

 
40.7

 
—

 
53.1

Net income (loss)
120.4

 
28.5

 
(0.4
)
 
77.9

 
(105.5
)
 
120.9

Less: Net income attributable to noncontrolling interest
—

 
—

 
0.5

 
—

 
—

 
0.5

Net income (loss) attributable to Kansas City Southern and subsidiaries
120.4

 
28.5

 
(0.9
)
 
77.9

 
(105.5
)
 
120.4

Other comprehensive loss
(0.6
)
 
(0.1
)
 
—

 
(0.7
)
 
0.8

 
(0.6
)
Comprehensive income (loss) attributable to Kansas City Southern and subsidiaries
$
119.8

 
$
28.4

 
$
(0.9
)
 
$
77.2

 
$
(104.7
)
 
$
119.8

 
Six Months Ended June 30, 2013
 
Parent
 
KCSR
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Consolidating
Adjustments
 
Consolidated
KCS
Revenues
$
—

 
$
540.2

 
$
20.2

 
$
591.5

 
$
(19.8
)
 
$
1,132.1

Operating expenses
2.6

 
405.5

 
18.6

 
384.2

 
(21.0
)
 
789.9

Operating income (loss)
(2.6
)
 
134.7

 
1.6

 
207.3

 
1.2

 
342.2

Equity in net earnings of unconsolidated affiliates
107.9

 
1.2

 
2.2

 
6.9

 
(109.2
)
 
9.0

Interest expense
—

 
(31.6
)
 
—

 
(35.1
)
 
23.8

 
(42.9
)
Debt retirement costs
—

 
(1.5
)
 
—

 
(109.9
)
 
—

 
(111.4
)
Foreign exchange loss
—

 
(1.6
)
 
—

 
(7.1
)
 
—

 
(8.7
)
Other income (expense), net
22.4

 
3.2

 
(0.1
)
 
(0.2
)
 
(25.1
)
 
0.2

Income before income taxes
127.7

 
104.4

 
3.7

 
61.9

 
(109.3
)
 
188.4

Income tax expense
8.5

 
38.2

 
1.4

 
20.4

 
—

 
68.5

Net income
119.2

 
66.2

 
2.3

 
41.5

 
(109.3
)
 
119.9

Less: Net income attributable to noncontrolling interest
—

 
—

 
0.7

 
—

 
—

 
0.7

Net income attributable to Kansas City Southern and subsidiaries
119.2

 
66.2

 
1.6

 
41.5

 
(109.3
)
 
119.2

Other comprehensive income
0.3

 
0.4

 
—

 
—

 
(0.4
)
 
0.3

Comprehensive income attributable to Kansas City Southern and subsidiaries
$
119.5

 
$
66.6

 
$
1.6

 
$
41.5

 
$
(109.7
)
 
$
119.5


18
Table of Contents

Kansas City Southern
Notes to Consolidated Financial Statements—(Continued)

CONDENSED CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME (LOSS) – (Continued)
 
Six Months Ended June 30, 2012
 
Parent
 
KCSR
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Consolidating
Adjustments
 
Consolidated
KCS
Revenues
$
—

 
$
533.4

 
$
11.7

 
$
565.1

 
$
(17.4
)
 
$
1,092.8

Operating expenses
2.3

 
400.9

 
15.8

 
330.9

 
(18.7
)
 
731.2

Operating income (loss)
(2.3
)
 
132.5

 
(4.1
)
 
234.2

 
1.3

 
361.6

Equity in net earnings (losses) of unconsolidated affiliates
174.4

 
(0.1
)
 
2.9

 
8.9

 
(175.4
)
 
10.7

Interest expense
—

 
(35.1
)
 
—

 
(44.6
)
 
27.2

 
(52.5
)
Debt retirement costs
—

 
(18.0
)
 
—

 
—

 
—

 
(18.0
)
Foreign exchange gain
—

 
—

 
—

 
0.4

 
—

 
0.4

Other income (expense), net
23.6

 
8.0

 
—

 
(3.8
)
 
(28.5
)
 
(0.7
)
Income (loss) before income taxes
195.7

 
87.3

 
(1.2
)
 
195.1

 
(175.4
)
 
301.5

Income tax expense (benefit)
0.3

 
33.9

 
(0.3
)
 
71.4

 
—

 
105.3

Net income (loss)
195.4

 
53.4

 
(0.9
)
 
123.7

 
(175.4
)
 
196.2

Less: Net income attributable to noncontrolling interest
—

 
—

 
0.8

 
—

 
—

 
0.8

Net income (loss) attributable to Kansas City Southern and subsidiaries
195.4

 
53.4

 
(1.7
)
 
123.7

 
(175.4
)
 
195.4

Other comprehensive income (loss)
(0.3
)
 
(0.4
)
 
—

 
0.3

 
0.1

 
(0.3
)
Comprehensive income (loss) attributable to Kansas City Southern and subsidiaries
$
195.1

 
$
53.0

 
$
(1.7
)
 
$
124.0

 
$
(175.3
)
 
$
195.1

CONDENSED CONSOLIDATING BALANCE SHEETS
 
June 30, 2013
 
Parent
 
KCSR
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Consolidating
Adjustments
 
Consolidated
KCS
Assets:
 
 
 
 
 
 
 
 
 
 
 
Current assets
$
3.3

 
$
227.1

 
$
6.4

 
$
344.7

 
$
(37.8
)
 
$
543.7

Investments
—

 
9.5

 
—

 
28.5

 
—

 
38.0

Investments in consolidated subsidiaries
2,345.8

 
(1.0
)
 
457.4

 
—

 
(2,802.2
)
 
—

Restricted funds
—

 
—

 
—

 
11.9

 
—

 
11.9

Property and equipment (including concession assets), net
—

 
2,536.2

 
201.7

 
3,325.6

 
—

 
6,063.5

Other assets
1.4

 
141.5

 
—

 
41.9

 
(112.0
)
 
72.8

Total assets
$
2,350.5

 
$
2,913.3

 
$
665.5

 
$
3,752.6

 
$
(2,952.0
)
 
$
6,729.9

Liabilities and equity:
 
 
 
 
 
 
 
 
 
 
 
Current liabilities
$
(868.2
)
 
$
995.5

 
$
128.5

 
$
186.6

 
$
(37.8
)
 
$
404.6

Long-term debt
0.2

 
737.7

 
0.2

 
1,132.2

 
(104.6
)
 
1,765.7

Deferred income taxes
12.7

 
606.8

 
131.1

 
193.7

 
—

 
944.3

Other liabilities
6.7

 
101.4

 
0.4

 
30.9

 
(7.4
)
 
132.0

Stockholders’ equity
3,199.1

 
471.9

 
100.5

 
2,209.2

 
(2,802.2
)
 
3,178.5

Noncontrolling interest
—

 
—

 
304.8

 
—

 
—

 
304.8

Total liabilities and equity
$
2,350.5

 
$
2,913.3

 
$
665.5

 
$
3,752.6

 
$
(2,952.0
)
 
$
6,729.9


19
Table of Contents

Kansas City Southern
Notes to Consolidated Financial Statements—(Continued)

CONDENSED CONSOLIDATING BALANCE SHEETS – (Continued)
 
December 31, 2012
 
Parent
 
KCSR
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Consolidating
Adjustments
 
Consolidated
KCS
Assets:
 
 
 
 
 
 
 
 
 
 
 
Current assets
$
2.4

 
$
236.4

 
$
5.4

 
$
318.6

 
$
(40.5
)
 
$
522.3

Investments
—

 
23.9

 
—

 
27.6

 
—

 
51.5

Investments in consolidated subsidiaries
2,242.0

 
(0.2
)
 
454.8

 
—

 
(2,696.6
)
 
—

Restricted funds
—

 
—

 
—

 
14.2

 
—

 
14.2

Property and equipment (including concession assets), net
—

 
2,275.0

 
204.3

 
3,205.5

 
—

 
5,684.8

Other assets
1.3

 
190.6

 
—

 
67.7

 
(136.5
)
 
123.1

Total assets
$
2,245.7

 
$
2,725.7

 
$
664.5

 
$
3,633.6

 
$
(2,873.6
)
 
$
6,395.9

Liabilities and equity:
 
 
 
 
 
 
 
 
 
 
 
Current liabilities
$
(881.1
)
 
$
1,058.9

 
$
131.4

 
$
156.1

 
$
(40.5
)
 
$
424.8

Long-term debt
0.2

 
569.6

 
0.3

 
1,090.3

 
(112.8
)
 
1,547.6

Deferred income taxes
2.7

 
575.5

 
130.0

 
186.0

 
—

 
894.2

Other liabilities
6.7

 
116.4

 
0.4

 
28.8

 
(23.7
)
 
128.6

Stockholders’ equity
3,117.2

 
405.3

 
98.3

 
2,172.4

 
(2,696.6
)
 
3,096.6

Noncontrolling interest
—

 
—

 
304.1

 
—

 
—