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 March 31, 2019
For the quarterly period ended March 31, 2020
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 
kcslineslogo2016a18.jpg
 44-0663509
(State or other jurisdiction of
incorporation or organization)
  
(I.R.S. Employer
Identification No.)
427 West 12th Street
Kansas City, Missouri
   
Kansas City,Missouri64105
(Address of principal executive offices)  (Zip Code)
816.983.1303816.983.1303
(Registrant’s telephone number, including area code)
No Change
(Former name, former address and former fiscal year, if changed since last report.)

Securities registered pursuant to Section 12(b) of the Act:
Title of Each ClassTrading Symbol(s)Name of Each Exchange on Which Registered
Preferred Stock, Par Value $25 Per Share, 4%, NoncumulativeKSUNew York Stock Exchange
Common Stock, $.01 Per Share Par ValueKSUNew York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨☐
Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ý    No  ¨☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer  Accelerated Filer  ýAccelerated filer  ¨ ☐ Non-accelerated filer  ¨☐ Smaller reporting company  ¨☐
Emerging growth company  ¨☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨☐     No  ý
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class April 10, 20192020
Common Stock, $0.01 per share par value 100,586,99995,020,228 Shares
 


Table of Contents




Kansas City Southern and Subsidiaries
Form 10-Q
March 31, 20192020
Index
 
 Page
PART I — FINANCIAL INFORMATION 
Item 1.
Financial Statements (unaudited)
3
 
Consolidated Statements of Income — Three months ended March 31, 20192020 and 20182019
3
 
Consolidated Statements of Comprehensive Income — Three months ended March 31, 20192020 and 20182019
4
 
Consolidated Balance Sheets — March 31, 20192020 and December 31, 20182019
5
 
Consolidated Statements of Cash Flows — Three months ended March 31, 20192020 and 20182019
6
 
Consolidated Statements of Changes in Equity — Three months ended March 31, 2020, December 31, 2019, September 30, 2019, June 30, 2019 and 2018March 31, 2019
7
 
Notes to the Unaudited Consolidated Financial Statements
8
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
2417
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
3430
Item 4.
Controls and Procedures
3430
PART II — OTHER INFORMATION 
Item 1.
Legal Proceedings
3531
Item 1A.
Risk Factors
3531
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
3532
Item 3.
Defaults Upon Senior Securities
3532
Item 4.
Mine Safety Disclosures
3532
Item 5.
Other Information
3532
Item 6.
Exhibits
3633
 
SIGNATURES
3734




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PART I — FINANCIAL INFORMATION


Item 1.Financial Statements (unaudited)


Kansas City Southern and Subsidiaries
Consolidated Statements of Income
 
Three Months EndedThree Months Ended
March 31,March 31,
2019 20182020 2019
(In millions, except share and per share amounts)
(Unaudited)
(In millions, except share and per share amounts)
(Unaudited)
Revenues$674.8
 $638.6
$731.7
 $674.8
Operating expenses:      
Compensation and benefits128.9
 121.6
133.4
 128.9
Purchased services52.8
 47.1
53.3
 52.8
Fuel83.0
 81.3
74.9
 83.0
Mexican fuel excise tax credit—
 (9.2)
Equipment costs30.4
 32.2
21.9
 30.4
Depreciation and amortization88.5
 83.3
89.4
 88.5
Materials and other63.4
 63.6
64.0
 63.4
Restructuring charges67.5
 —
6.0
 67.5
Total operating expenses514.5
 419.9
442.9
 514.5
Operating income160.3
 218.7
288.8
 160.3
Equity in net earnings of affiliates1.7
 1.0
1.0
 1.7
Interest expense(28.2) (25.5)(34.2) (28.2)
Debt retirement costs(0.6) —
—
 (0.6)
Foreign exchange gain4.6
 27.8
Other income (expense), net0.1
 (0.3)
Foreign exchange gain (loss)(59.5) 4.6
Other income, net1.4
 0.1
Income before income taxes137.9
 221.7
197.5
 137.9
Income tax expense34.7
 76.8
45.2
 34.7
Net income103.2
 144.9
152.3
 103.2
Less: Net income attributable to noncontrolling interest0.4
 0.4
0.5
 0.4
Net income attributable to Kansas City Southern and subsidiaries102.8
 144.5
151.8
 102.8
Preferred stock dividends0.1
 0.1
0.1
 0.1
Net income available to common stockholders$102.7
 $144.4
$151.7
 $102.7
      
Earnings per share:      
Basic earnings per share$1.02
 $1.41
$1.59
 $1.02
Diluted earnings per share$1.02
 $1.40
$1.58
 $1.02
      
Average shares outstanding (in thousands):
      
Basic100,500
 102,574
95,662
 100,500
Potentially dilutive common shares415
 402
509
 415
Diluted100,915
 102,976
96,171
 100,915
See accompanying notes to the unaudited consolidated financial statements.




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Kansas City Southern and Subsidiaries
Consolidated Statements of Comprehensive Income


Three Months EndedThree Months Ended
March 31,March 31,
2019 20182020 2019
(In millions)
(Unaudited)		(In millions)
(Unaudited)
Net income$103.2
 $144.9
$152.3
 $103.2
Other comprehensive income (loss):      
Unrealized gain (loss) on interest rate derivative instruments during the period, net of tax of $(1.7) million and $1.6 million, respectively(5.1) 4.5
Unrealized gain (loss) on interest rate derivative instruments, net of tax of $1.2 million and $(1.7) million, respectively4.8
 (5.1)
Reclassification adjustment from cash flow hedges included in net income, net of tax of $0.1 million0.5
 —
Foreign currency translation adjustments0.2
 1.2
(1.7) 0.2
Other comprehensive income (loss)(4.9) 5.7
3.6
 (4.9)
Comprehensive income98.3
 150.6
155.9
 98.3
Less: Comprehensive income attributable to noncontrolling interest0.4
 0.4
0.5
 0.4
Comprehensive income attributable to Kansas City Southern and subsidiaries$97.9
 $150.2
$155.4
 $97.9
See accompanying notes to the unaudited consolidated financial statements.




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Kansas City Southern and Subsidiaries
Consolidated Balance Sheets
 
March 31,
2019		 December 31,
2018		March 31,
2020		 December 31,
2019
(In millions, except share and per share amounts)(In millions, except share and per share amounts)
(Unaudited)  (Unaudited)  
ASSETS      
Current assets:      
Cash and cash equivalents$92.7
 $100.5
$91.0
 $148.8
Accounts receivable, net277.9
 301.2
269.8
 274.2
Materials and supplies166.2
 160.3
143.6
 150.6
Other current assets117.6
 73.4
117.5
 155.0
Total current assets654.4
 635.4
621.9
 728.6
Operating lease right-of-use assets199.1
 —
81.4
 158.4
Investments47.8
 44.9
45.9
 47.6
Property and equipment (including concession assets), net8,694.3
 8,691.1
8,924.0
 8,806.3
Other assets42.1
 98.4
92.5
 45.9
Total assets$9,637.7
 $9,469.8
$9,765.7
 $9,786.8
LIABILITIES AND EQUITY      
Current liabilities:      
Long-term debt due within one year$9.7
 $10.1
$17.1
 $18.0
Accounts payable and accrued liabilities470.9
 436.9
453.6
 473.3
Total current liabilities480.6
 447.0
470.7
 491.3
Long-term operating lease liabilities105.6
 —
51.4
 85.7
Long-term debt2,677.6
 2,679.3
3,227.0
 3,228.0
Deferred income taxes1,085.2
 1,079.9
1,149.2
 1,128.0
Other noncurrent liabilities and deferred credits138.7
 130.9
105.4
 107.9
Total liabilities4,487.7
 4,337.1
5,003.7
 5,040.9
Stockholders’ equity:      
$25 par, 4% noncumulative, preferred stock, 840,000 shares authorized, 649,736 shares issued; 226,285 and 228,395 shares outstanding at March 31, 2019 and December 31, 2018, respectively5.7
 5.7
$.01 par, common stock, 400,000,000 shares authorized; 123,352,185 shares issued; 100,580,696 and 100,896,678 shares outstanding at March 31, 2019 and December 31, 2018, respectively1.0
 1.0
$25 par, 4% noncumulative, preferred stock, 840,000 shares authorized, 649,736 shares issued; 222,625 shares outstanding at March 31, 2020 and December 31, 2019, respectively5.6
 5.6
$.01 par, common stock, 400,000,000 shares authorized; 123,352,185 shares issued; 95,014,649 and 96,115,669 shares outstanding at March 31, 2020 and December 31, 2019, respectively1.0
 1.0
Additional paid-in capital946.1
 946.6
925.0
 843.7
Retained earnings3,891.1
 3,870.6
3,532.0
 3,601.3
Accumulated other comprehensive loss(15.8) (10.9)(25.5) (29.1)
Total stockholders’ equity4,828.1
 4,813.0
4,438.1
 4,422.5
Noncontrolling interest321.9
 319.7
323.9
 323.4
Total equity5,150.0
 5,132.7
4,762.0
 4,745.9
Total liabilities and equity$9,637.7
 $9,469.8
$9,765.7
 $9,786.8
See accompanying notes to the unaudited consolidated financial statements.




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Kansas City Southern and Subsidiaries
Consolidated Statements of Cash Flows


Three Months EndedThree Months Ended
March 31,March 31,
2019 20182020 2019
(In millions)
(Unaudited)
(In millions)
(Unaudited)
Operating activities:      
Net income$103.2
 $144.9
$152.3
 $103.2
Adjustments to reconcile net income to net cash provided by operating activities:      
Depreciation and amortization88.5
 83.3
89.4
 88.5
Deferred income taxes6.9
 23.9
19.8
 6.9
Equity in net earnings of affiliates(1.7) (1.0)(1.0) (1.7)
Share-based compensation6.0
 5.8
10.3
 6.0
Settlement of foreign currency derivative instruments0.7
 12.1
(3.7) 0.7
Gain on foreign currency derivative instruments(3.6) (16.5)
Mexican fuel excise tax credit(6.8) (9.2)
(Gain) loss on foreign currency derivative instruments33.7
 (3.6)
Foreign exchange (gain) loss25.8
 (1.0)
Restructuring charges67.5
 —
6.0
 67.5
Cash payments for restructuring charges(0.5) —
(0.5) (0.5)
Changes in working capital items:      
Accounts receivable34.6
 (37.2)(2.9) 33.8
Materials and supplies(8.7) (7.5)5.9
 (8.7)
Other current assets3.0
 (22.1)(6.7) 4.2
Accounts payable and accrued liabilities(9.5) (19.2)(38.0) (15.6)
Other, net(6.9) (16.7)(7.2) (7.0)
Net cash provided by operating activities272.7
 140.6
283.2
 272.7
      
Investing activities:      
Capital expenditures(179.9) (110.0)(98.8) (179.9)
Purchase or replacement of equipment under operating leases—
 (11.2)
Purchase or replacement of assets under operating leases(78.2) —
Property investments in MSLLC(4.7) (3.9)(4.3) (4.7)
Investments in and advances to affiliates(8.4) (0.2)(4.3) (8.4)
Proceeds from disposal of property2.2
 1.4
3.3
 2.2
Other, net1.1
 (0.3)(6.3) 1.1
Net cash used for investing activities(189.7) (124.2)(188.6) (189.7)
      
Financing activities:      
Net short-term borrowings—
 (4.1)
Repayment of long-term debt(2.7) (8.7)(2.4) (2.7)
Dividends paid(36.4) (37.1)(38.6) (36.4)
Shares repurchased(50.3) (54.0)(111.7) (50.3)
Debt issuance costs paid(1.6) —
—
 (1.6)
Proceeds from employee stock plans0.2
 0.4
4.4
 0.2
Net cash used for financing activities(90.8) (103.5)(148.3) (90.8)
   
Effect of exchange rate changes on cash(4.1) —
   
Cash and cash equivalents:      
Net decrease during each period(7.8) (87.1)(57.8) (7.8)
At beginning of year100.5
 134.1
148.8
 100.5
At end of period$92.7
 $47.0
$91.0
 $92.7
See accompanying notes to the unaudited consolidated financial statements.


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Kansas City Southern and Subsidiaries
Consolidated Statements of Changes in Equity
(in millions, except per share amounts)
(Unaudited)
 
$25 Par
Preferred
Stock
 
$.01 Par
Common
Stock
 
Additional Paid-in
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Loss
 
Non-
controlling
Interest
 Total
 
  
Balance at December 31, 2018$5.7
 $1.0
 $946.6
 $3,870.6
 $(10.9) $319.7
 $5,132.7
Net income      102.8
   0.4
 103.2
Other comprehensive loss        (4.9)   (4.9)
Contribution from noncontrolling interest          1.8
 1.8
Dividends on common stock ($0.36/share)      (36.3)     (36.3)
Dividends on $25 par preferred stock ($0.25/share)      (0.1)     (0.1)
Share repurchases—
 —
 (4.4) (45.9)     (50.3)
Options exercised and stock subscribed, net of shares withheld for employee taxes    (2.1)       (2.1)
Share-based compensation    6.0
       6.0
Balance at March 31, 2019$5.7
 $1.0
 $946.1
 $3,891.1
 $(15.8) $321.9
 $5,150.0

td5 Par
Preferred
Stock
 
$.01 Par
Common
Stock
 
Additional Paid-in
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Loss
 
Non-
controlling
Interest
 Total
td5 Par
Preferred
Stock
 
$.01 Par
Common
Stock
 
Additional Paid-in
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Loss
 
Non-
controlling
Interest
 Total
                          
Balance at December 31, 2017$6.1
 $1.0
 $943.3
 $3,611.4
 $(12.9) $316.5
 $4,865.4
Reclassification due to adoption of ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income    

 0.7
 (0.7)   —
Balance at December 31, 2018$5.7
 $1.0
 $946.6
 $3,870.6
 $(10.9) $319.7
 $5,132.7
Net income      144.5
   0.4
 144.9
      102.8
   0.4
 103.2
Other comprehensive income        5.7
   5.7
Other comprehensive loss        (4.9)   (4.9)
Contribution from noncontrolling interest          1.8
 1.8
Dividends on common stock ($0.36/share)      (36.9)     (36.9)      (36.3)     (36.3)
Dividends on $25 par preferred stock ($0.25/share)      (0.1)     (0.1)      (0.1)     (0.1)
Share repurchases  —
 (4.6) (49.4)     (54.0)—
 —
 (4.4) (45.9)     (50.3)
Options exercised and stock subscribed, net of shares withheld for employee taxes    0.6
       0.6
    (2.1)       (2.1)
Share-based compensation    5.8
       5.8
    6.0
       6.0
Balance at March 31, 2018$6.1
 $1.0
 $945.1
 $3,670.2
 $(7.9) $316.9
 $4,931.4
Balance at March 31, 20195.7
 1.0
 946.1
 3,891.1
 (15.8) 321.9
 5,150.0
Net income      128.7
   0.4
 129.1
Other comprehensive loss        (7.5)   (7.5)
Dividends on common stock ($0.36/share)      (36.0)     (36.0)
Dividends on $25 par preferred stock ($0.25/share)      —
     —
Share repurchases(0.1) —
 (7.3) (85.0)     (92.4)
Options exercised and stock subscribed, net of shares withheld for employee taxes    2.3
       2.3
Share-based compensation    6.0
       6.0
Balance at June 30, 20195.6
 1.0
 947.1
 3,898.8
 (23.3) 322.3
 5,151.5
Net income      180.2
   0.4
 180.6
Other comprehensive loss        (7.3)   (7.3)
Dividends on common stock ($0.36/share)      (35.6)     (35.6)
Dividends on $25 par preferred stock ($0.25/share)      (0.1)     (0.1)
Share repurchases—
 —
 (7.7) (92.1)     (99.8)
Options exercised and stock subscribed, net of shares withheld for employee taxes    2.7
       2.7
Share-based compensation    5.2
       5.2
Balance at September 30, 20195.6
 1.0
 947.3
 3,951.2
 (30.6) 322.7
 5,197.2
Net income      127.2
   0.7
 127.9
Other comprehensive income        1.5
   1.5
Dividends on common stock ($0.40/share)      (38.6)     (38.6)
Dividends on $25 par preferred stock ($0.25/share)      —
     —
Share repurchases—
 —
 (29.0) (438.5)     (467.5)
Forward contract for accelerated share repurchases    (82.5)       (82.5)
Options exercised and stock subscribed, net of shares withheld for employee taxes    1.2
       1.2
Share-based compensation    6.7
       6.7
Balance at December 31, 20195.6
 1.0
 843.7
 3,601.3
 (29.1) 323.4
 4,745.9
Net income      151.8
   0.5
 152.3
Other comprehensive income        3.6
   3.6
Dividends on common stock ($0.40/share)      (38.2)     (38.2)
Dividends on $25 par preferred stock ($0.25/share)      (0.1)     (0.1)
Share repurchases  —
 (11.4) (182.8)     (194.2)
Settlement of forward contract for accelerated share repurchases    82.5
       82.5
Options exercised and stock subscribed, net of shares withheld for employee taxes    (0.1)       (0.1)
Share-based compensation    10.3
       10.3
Balance at March 31, 2020$5.6
 $1.0
 $925.0
 $3,532.0
 $(25.5) $323.9
 $4,762.0


See accompanying notes to the unaudited consolidated financial statements.





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


1. Basis of Presentation
In the opinion of the management of KCS, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of normal and recurring adjustments) necessary to reflect a fair statement of the results for interim periods in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”). Pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”), certain information and note disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. These consolidated financial statements should be read in conjunction with the consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 20182019. The results of operations for the three months ended March 31, 20192020, are not necessarily indicative of the results to be expected for the full year ending December 31, 20192020. Certain prior year amounts have been reclassified to conform to the current year presentation.
During the first quarter of 2019,2020, the Company adopted Accounting Standards Update (“ASU”) No. 2016-02, Leases,2016-13, “Financial Instruments - Credit Losses,” which is also known as Accounting Standard Codification (“ASC”) Topic 842, that requires lesseesrequired the Company to recognizemeasure all expected credit losses for all operating leases a right-of-use assetfinancial instruments held at the reporting date based on historical experience, current conditions, and a lease obligation inreasonable supportable forecasts. This replaced the consolidated balance sheet. Expenses are recognized in the consolidated statement of income in a manner similar to previous accounting guidance. Lessor accounting under the new standard is substantially unchangedexisting incurred loss model and is immaterialapplicable to the Company. The Company adopted the accounting standard using a prospective transition approach, which applies the provisionsmeasurement of the new guidance at the effective date without adjusting the comparative periods presented, with certain practical expedients available to ease the burden of adoption.
The Company elected the following practical expedients upon adoption: not to reassess whether any expired or existing contracts are or contain leases, not to reassess the lease classification for any expired or existing leases, not to reassess initial direct costs for any existing leases, not to separately identify lease and nonlease components (i.e. maintenance costs) except for fleet vehicles and real estate, and not to evaluate historical land easements under the new guidance. Additionally, the Company elected the short-term lease exemption policy, applying the requirements of ASC 842 to long-term leases (leases greater than 1 year).
credit losses on financial assets, including trade receivables. Adoption of the new standard resulted in $175.2 million of additional right-of-use lease assets and lease liabilities as of January 1, 2019. The new standard did not have a significantmaterial impact on the Company’s consolidated statementfinancial statements.
During the first quarter of income. See Note 4, Leases2020, the Company early adopted the SEC’s, Financial Disclosures About Guarantors and Issuers of Guaranteed Securities and Affiliates Whose Securities Collateralize a Registrant’s Securities rules, which simplify the disclosure requirements related to the Company’s registered securities under Rule 3-10 of Regulation S-X. The final rule also allows for additional information.the simplified disclosure to be included within Management’s Discussion and Analysis of Financial Condition and Results of Operations.


2. COVID-19
In March 2020, the World Health Organization categorized Coronavirus Disease 2019 (“COVID-19”) as a pandemic, and the President of the United States declared the COVID-19 outbreak a national emergency. 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.
The Company’s consolidated financial statements reflect estimates and assumptions made by management that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and reported amounts of revenue and expenses during the reporting periods presented. The Company considered the impact of COVID-19 on the assumptions and estimates used and determined that there were no material adverse impacts on the Company’s first quarter 2020 results of operations, excluding the impacts of foreign exchange losses. The Company recognized $59.5 million of foreign currency exchange losses due to the depreciation of the Mexican peso against the U.S. dollar, partially resulting from the increased market volatility driven by the global COVID-19 pandemic. The Company hedges its exposure to foreign currency fluctuations and the related impacts in Mexican income tax expense by entering into foreign currency contracts, which have historically offset on an annual basis.
On March 27, 2020, the U.S. government enacted the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) which includes modifications to the limitation on business interest expense and net operating loss provisions, and provides a payment delay of employer payroll taxes during 2020 after the date of enactment. The Company estimates the payment of approximately $12.0 million of employer payroll taxes otherwise due in 2020 will be delayed with 50% due by December 31, 2021 and the remaining 50% by December 31, 2022. The CARES Act is not expected to have a material impact on the Company’s consolidated financial statements.

3. Restructuring Charges
TheDuring 2019, the Company began implementing certain principles of Precision Scheduled Railroading (“PSR”), which focus on providing reliable customer service, facilitating growth, improving asset utilization, and improving the cost profile of the Company. As a result of the PSR initiatives in 2019, management approved 4 separate restructuring plans that totaled $168.8 million, including a $67.5 million restructuring plan duringin the first quarter of 2019, which coincides with the preparation of the Company’s quarterly financial statements, and recognized2019. The restructuring charges of $67.5 millionplans were substantially completed in the consolidated statements of income.2019.
Expenses related to these initiatives are shown in the following table (in millions):
  Three months ended March 31, 2019
Restructuring charges:  
Asset impairments $62.5
Workforce reduction 3.2
Contract restructuring 1.8
Total restructuring charges $67.5
Asset Impairments. The Company committed to a plan to dispose certain locomotives and rail cars to increase operational fluidity, reduce maintenance expense, and improve labor and fuel efficiency. Accordingly, the Company performed an impairment analysis to adjust the carrying amount of the assets to the lower of its depreciated book value or its estimated fair value, less costs to dispose, and stopped recognizing depreciation expense.
Workforce Reduction. The Company recognized severance costs associated with a planned workforce reduction as a result of a lower active locomotive fleet and rail cars online.


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


Contract Restructuring. During the first quarter of 2020, the Company purchased 91 locomotives for $78.2 million that were part of 2 existing leases. Of the 91 locomotives, 13 were impaired during the fourth quarter of 2019. The Company terminated certain third party vendor contracts in order to drive operational efficiencies, whichpurchase of the impaired lease locomotives resulted in contract termination penalties.$6.0 million of make-whole payments recorded as incremental restructuring charges in the first quarter of 2020.
    
3. Mexican Fuel Excise Tax Credit
Fuel purchases in Mexico are subject to an excise tax that is included in the price of fuel. The Company is eligible for and utilizes a credit for the excise tax included in the price of fuel that is purchased and consumed in locomotives and certain work equipment in Mexico. For years 2018, 2017, and 2016, the Mexican fuel excise tax credit (“IEPS credit”) was realized through the offset of the total annual Mexico income tax liability and income tax withholding payment obligations of KCSM, with no carryforward to future periods and recognized as a benefit in operating expenses on the consolidated statements of income. In December 2018, the Mexican government enacted changes in the tax law effective January 1, 2019 (“Mexico Tax Reform”), which, among other things, for 2019 eliminated the option to monetize the IEPS credit by offsetting income tax withholding payment obligations. As a result, the Company will be allowed to offset the 2019 IEPS credit only against its Mexico corporate income tax liability on the 2019 annual income tax return. The elimination of the option to apply the IEPS credit to income tax withholding payment obligations requires the Company to recognize the IEPS credit as a reduction of income tax expense rather than a reduction of operating expenses for 2019. For the three months ended March 31, 2019, the Company recognized a net benefit of $6.8 million in income tax expense within the consolidated statements of income.

4. Leases
The Company leases transportation equipment, as well as office and other operating facilities, under various finance and operating leases. Operating lease right-of-use assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As the implicit rate is not readily determinable in most of the Company’s lease agreements, the Company uses its estimated secured incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. Lease expense is recognized on a straight-line basis over the lease term.
The Company determines if an arrangement is a lease or contains a lease at inception. The Company’s leases have remaining lease terms of approximately 1 year to 15 years, which may include the option to extend the lease when it is reasonably certain the Company will exercise that option. The Company does not have lease agreements with residual value guarantees, sale leaseback terms or material restrictive covenants. Additionally, short-term leases and leases with variable lease costs are immaterial, and the Company does not have any sublease arrangements.
Leases Classification 
March 31, 2019
(in millions)
Assets    
Operating Operating lease right-of-use assets $199.1
Finance Property and equipment (including concession assets), net 10.5
Total leased assets   $209.6
     
Liabilities    
Current   

Operating Accounts payable and accrued liabilities $49.2
Finance Long-term debt due within one year 2.3
Noncurrent    
Operating Long-term operating lease liabilities 105.6
Finance Long-term debt 8.2
Total lease liabilities   $165.3


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

    Three Months Ended
Lease Cost Classification 
March 31, 2019
(in millions)
Operating lease cost Equipment costs $13.8
Finance lease cost:    
Amortization of finance lease assets Depreciation and amortization 0.9
Interest on lease liabilities Interest expense 0.3
Total lease cost   $15.0
Cash Flow Information  
Cash paid for operating leases included in operating activities $23.1
Cash paid for finance leases included in operating activities 0.3
Cash paid for finance leases included in financing activities 0.9
Lease Term and Discount Rate 
Weighted-Average Remaining Lease Term (years)
 Weighted-Average Discount Rate
Operating leases 7.1 4.4%
Finance leases 4.5 11.1%
Remaining Maturities of Lease Liabilities
Year Ending December 31 (in millions),
 Operating Leases Finance Leases
2019 $54.1
 $2.8
2020 32.4
 2.7
2021 24.3
 2.7
2022 17.7
 2.7
2023 12.3
 2.4
Thereafter 35.1
 0.1
Total lease payments 175.9
 13.4
Less imputed interest 21.1
 2.9
Total $154.8
 $10.5

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


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

5. Revenue
Disaggregation of Revenue
The following table presents revenues disaggregated by the major commodity groups as well as the product types included within the major commodity groups (in millions). The Company believes disaggregation by product type best depicts how cash flows are affected by economic factors. See Note 1412 for revenues by geographical area.
 Three Months Ended
 March 31,
 2020 2019
Chemical & Petroleum   
Chemicals$62.5
 $60.5
Petroleum95.8
 74.3
Plastics40.3
 33.8
Total198.6
 168.6
    
Industrial & Consumer Products   
Forest Products68.9
 66.4
Metals & Scrap62.3
 57.0
Other27.8
 26.4
Total159.0
 149.8
    
Agriculture & Minerals   
Grain77.8
 72.7
Food Products42.7
 35.7
Ores & Minerals5.8
 6.5
Stone, Clay & Glass8.2
 8.0
Total134.5
 122.9
    
Energy   
Utility Coal23.6
 32.5
Coal & Petroleum Coke11.6
 10.5
Frac Sand3.8
 8.0
Crude Oil17.3
 13.6
Total56.3
 64.6
    
Intermodal88.7
 79.9
    
Automotive53.9
 57.6
    
Total Freight Revenues691.0
 643.4
    
Other Revenue40.7
 31.4
    
Total Revenues$731.7
 $674.8
 Three Months Ended
 March 31,
 2019 2018
Chemical & Petroleum   
Chemicals$60.5
 $57.7
Petroleum74.3
 49.0
Plastics33.8
 33.0
Total168.6
 139.7
    
Industrial & Consumer Products   
Forest Products66.4
 65.3
Metals & Scrap57.0
 53.8
Other26.4
 27.2
Total149.8
 146.3
    
Agriculture & Minerals   
Grain72.7
 65.2
Food Products35.7
 36.2
Ores & Minerals6.5
 4.9
Stone, Clay & Glass8.0
 7.1
Total122.9
 113.4
    
Energy   
Utility Coal32.5
 29.3
Coal & Petroleum Coke10.5
 10.2
Frac Sand8.0
 11.1
Crude Oil13.6
 10.7
Total64.6
 61.3
    
Intermodal79.9
 90.9
    
Automotive57.6
 59.8
    
Total Freight Revenues643.4
 611.4
    
Other Revenue31.4
 27.2
    
Total Revenues$674.8
 $638.6

Contract Balances
The amount of revenue recognized in the first quarter of 20192020 from performance obligations partially satisfied in previous periods was $21.9$17.7 million. The performance obligations that were unsatisfied or partially satisfied as of March 31, 2019,2020, were $18.7$18.2 million, which represents in-transit shipments that are fully satisfied the following month.
A receivable is any unconditional right to consideration, and is recognized as shipments have been completed and the relating performance obligation has been fully satisfied. At March 31, 2019,2020 and December 31, 2018,2019, the accounts receivable, net balance was $277.9$269.8 million and $301.2$274.2 million, respectively. Contract assets represent a conditional right to consideration in exchange for goods or services. The Company did not have any contract assets at March 31, 2019,2020 and December 31, 2018.2019.

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

Contract liabilities represent consideration received in advance from customers, and are recognized as revenue over time as the relating performance obligation is satisfied. The amount of revenue recognized in the first quarter of 20192020 that was included in the opening contract liability balance was $15.7$10.5 million. The Company has recognized contract liabilities within the accounts payable and

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

accrued liabilities financial statement caption on the balance sheet. These are considered current liabilities as they will be settled in less than 12 months.
The following tables summarize the changes in contract liabilities (in millions):
Contract liabilitiesThree Months Ended
 March 31,
 2020 2019
Beginning balance$30.5
 $32.4
Revenue recognized that was included in the contract liability balance at the beginning of the period(10.5) (15.7)
Increases due to consideration received, excluding amounts recognized as revenue during the period1.1
 5.6
Ending balance$21.1
 $22.3

Contract liabilities Three Months Ended March 31,
  2019 2018
Beginning balance $32.4
 $26.8
Revenue recognized that was included in the contract liability balance at the beginning of the period (15.7) (11.2)
Increases due to consideration received, excluding amounts recognized as revenue during the period 5.6
 4.4
Ending balance $22.3
 $20.0


6.5. Earnings Per Share Data
Basic earnings per common share is computed by dividing net income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted earnings per share adjusts basic earnings per common share for the effects of potentially dilutive common shares, if the effect is not anti-dilutive. Potentially dilutive common shares include the dilutive effects of shares issuable under the stock option and performance award plans.
The following table reconciles the basic earnings per share computation to the diluted earnings per share computation (in millions, except share and per share amounts):
 Three Months Ended
 March 31,
 2020 2019
Net income available to common stockholders for purposes of computing basic and diluted earnings per share$151.7
 $102.7
Weighted-average number of shares outstanding (in thousands):
   
Basic shares95,662
 100,500
Effect of dilution509
 415
Diluted shares96,171
 100,915
Earnings per share:   
Basic earnings per share$1.59
 $1.02
Diluted earnings per share$1.58
 $1.02

 Three Months Ended
 March 31,
 2019 2018
Net income available to common stockholders for purposes of computing basic and diluted earnings per share$102.7
 $144.4
Weighted-average number of shares outstanding (in thousands):
   
Basic shares100,500
 102,574
Effect of dilution415
 402
Diluted shares100,915
 102,976
Earnings per share:   
Basic earnings per share$1.02
 $1.41
Diluted earnings per share$1.02
 $1.40


Potentially dilutive shares excluded from the calculation (in thousands):
Stock options excluded as their inclusion would be anti-dilutive72
 212

Stock options excluded as their inclusion would be anti-dilutive212
 100




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


7.6. Property and Equipment (including Concession Assets)
Property and equipment, including concession assets, and related accumulated depreciation and amortization are summarized below (in millions):
 March 31,
2020		 December 31,
2019
Land$225.2
 $224.9
Concession land rights141.1
 141.1
Road property7,969.3
 7,962.1
Equipment2,762.8
 2,652.6
Technology and other348.8
 345.1
Construction in progress203.5
 170.2
Total property11,650.7
 11,496.0
Accumulated depreciation and amortization2,726.7
 2,689.7
Property and equipment (including concession assets), net$8,924.0
 $8,806.3

 March 31,
2019		 December 31,
2018
Land$219.0
 $219.3
Concession land rights141.2
 141.2
Road property7,755.5
 7,720.1
Equipment2,699.7
 2,739.5
Technology and other310.9
 305.6
Construction in progress135.2
 152.5
Total property11,261.5
 11,278.2
Accumulated depreciation and amortization2,567.2
 2,587.1
Property and equipment (including concession assets), net$8,694.3
 $8,691.1
Concession assets, net of accumulated amortization of $671.6$695.0 million and $653.9$678.1 million, totaled $2,281.9$2,342.1 million and $2,260.42,335.5 million at March 31, 20192020 and December 31, 20182019, respectively.


8.7. Fair Value Measurements
The Company’s derivative financial instruments are measured at fair value on a recurring basis and consist of foreign currency forward and option contracts and treasury lock agreements, which are classified as Level 2 valuations. The Company determines the fair value of its derivative financial instrument positions based upon pricing models using inputs observed from actively quoted markets and also takes into consideration the contract terms as well as other inputs, including market currency exchange rates and in the case of option contracts, volatility, the risk-free interest rate and the time to expiration.
The Company’s short-term financial instruments include cash and cash equivalents, accounts receivable, accounts payable and short-term borrowings. The carrying value of the short-term financial instruments approximates their fair value.
The fair value of the Company’s debt is estimated using quoted market prices when available. When quoted market prices are not available, fair value is estimated based on current market interest rates for debt with similar maturities and credit quality. The carrying value of the Company’s debt was $2,687.3$3,244.1 million and $2,689.4$3,246.0 million at March 31, 20192020 and December 31, 2018,2019, respectively. If the Company’s debt were measured at fair value, the fair value measurements of the individual debt instruments would have been classified as Level 2 in the fair value hierarchy.


The fair value of the Company’s financial instruments is presented in the following table (in millions):
  March 31, 2020 December 31, 2019
  Level 2 Level 2
Assets    
Foreign currency derivative instruments $—
 $2.5
Treasury lock agreements 6.0
 —
Liabilities    
Debt instruments 3,403.0
 3,535.7
Foreign currency derivative instruments 27.5
 —

  March 31, 2019 December 31, 2018
  Level 2 Level 2
Assets    
Foreign currency derivative instruments $3.2
 $0.3
Liabilities    
Debt instruments 2,745.7
 2,661.3
Treasury lock agreements 8.8
 2.0


9.8. Derivative Instruments
The Company enters into derivative transactions in certain situations based on management’s assessment of current market conditions and perceived risks. Management intends to respond to evolving business and market conditions and in doing so, may enter into such transactions as deemed appropriate.

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

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

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

have an established banking relationship with the Company. As of March 31, 2019,2020, the Company did not expect any losses as a result of default of its counterparties.
Interest Rate Derivative Instruments. In May 2017,March 2020, the Company executed four3 30-year treasury lock agreements with an aggregate notional value of $275.0$400.0 million and a weighted average interest rate of 2.85%1.45%. The purpose of the treasury locks is to hedge the U.S. Treasury benchmark interest rate associated with future interest payments related to the anticipated refinancing of the $275.0$444.7 million, 2.35%3.00% senior notes due May 15, 2020.2023 (the “3.00% Senior Notes”). The Company has designated the treasury locks as cash flow hedges and recorded unrealized gains and losses in accumulated other comprehensive loss. Upon settlement, the unrealized gain or loss in accumulated other comprehensive income will be amortized to interest expense over the life of the future underlying debt issuance.
Foreign Currency Derivative Instruments. The Company’s Mexican subsidiaries have net U.S. dollar-denominated monetary liabilities which, for Mexican income tax purposes, are subject to periodic revaluation based on changes in the value of the Mexican peso against the U.S. dollar. This revaluation creates fluctuations in the Company’s Mexican income tax expense and the amount of income taxes paid in Mexico. The Company hedges its exposure to this cash tax risk by entering into foreign currency forward contracts and foreign currency option contracts known as zero-cost collars.
The foreign currency forward contracts involve the Company’s purchase of pesos at an agreed-upon weighted-average exchange rate to each U.S dollar. The zero-cost collars involve the Company’s purchase of a Mexican peso call option and a simultaneous sale of a Mexican peso put option, with equivalent U.S. dollar notional amounts for each option and no net cash premium paid by the Company. The Company’s foreign currency forward and zero-cost collar contracts are executed with counterparties in the U.S. and are governed by International Swaps and Derivatives Association agreements that include standard netting arrangements. Asset and liability positions from contracts with the same counterparty are net settled upon maturity/expiration and presented on a net basis in the consolidated balance sheets prior to settlement. There was no offsetting of derivative assets or liabilities in the consolidated balance sheets as of March 31, 20192020 and December 31, 2018.2019.
Below is a summary of the Company’s 20192020 and 20182019 foreign currency derivative contracts (amounts in millions, except Ps./USD):
Foreign currency forward contracts      
 Contracts to purchase Ps./pay USD Offsetting contracts to sell Ps./receive USD  
 
Notional amount 
 
Notional amount 
 
Weighted-average exchange rate
(in Ps./USD)
 
Notional amount 
 
Notional amount 
 
Weighted-average exchange rate
(in Ps./USD)
 Cash received/(paid) on settlement
Contracts executed in 2020 and outstanding$155.0
 Ps.3,158.4
 Ps.20.4
 —
 —
 —
 —
Contracts executed in 2020 and settled in 2020$305.0
 Ps.5,816.0
 Ps.19.1
 $293.3
 Ps.5,816.0
 Ps.19.8
 $(7.3) (i)
Contracts executed in 2019 and settled in 2020$105.0
 Ps.2,041.2
 Ps.19.4
 $108.6
 Ps.2,041.2
 Ps.18.8
 $3.6
Contracts executed in 2019 and settled in 2019 (ii)$400.0
 Ps.7,892.5
 Ps.19.7
 $410.7
 Ps.7,892.5
 Ps.19.2
 $10.7
Contracts executed in 2018 and settled in 2019 (ii)$20.0
 Ps.410.9
 Ps.20.5
 $20.9
 Ps.410.9
 Ps.19.6
 $0.9
              
Foreign currency zero-cost collar contracts    
 Notional amount Cash received/(paid) on settlement          
Contracts executed in 2018 and settled in 2019 (ii)$120.0
 $0.3
          
Foreign currency forward contracts      
 Contracts to purchase Ps./pay USD Offsetting contracts to sell Ps./receive USD 
 
Notional amount 
 
Notional amount 
 
Weighted-average exchange rate
(in Ps./USD)
  
Notional amount 
 
Notional amount 
 
Weighted-average exchange rate
(in Ps./USD)
 Cash received/(paid) on settlement
Contracts executed in 2019 and outstanding$275.0
 Ps.5,504.6
 Ps.20.0
  —
 —
 —
 —
Contracts executed in 2019 and settled in 2019$75.0
 Ps.1,448.6
 Ps.19.3
  $75.4
 Ps.1,448.6
 Ps.19.2
 $0.4
               
Foreign currency zero-cost collar contracts     
 Notional amount Cash received/(paid) on settlement           
Contracts executed in 2018 and settled in 2019$120.0
 $0.3
           
Contracts executed in 2018 and settled in 2018 (i)$220.0
 $3.9
           
Contracts executed in 2017 and settled in 2018 (i)$80.0
 $10.0
           

(i) During April 2020, the Company paid an additional $4.4 million for the settlement of these forward contracts.
(ii) During the first quarter of 2018,2019, the Company settled $85.0$120.0 million and $80.0$75.0 million of zero-cost collar contracts executed in 2018 and 2017,forward contracts, respectively, resulting in cash received of $2.1$0.3 million and $10.0$0.4 million.

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

The Company has not designated any of the foreign currency derivative contracts as hedging instruments for accounting purposes. The Company measures the foreign currency derivative contracts at fair value each period and recognizes any change in fair value in foreign exchange gain (loss) within the consolidated statements of income. The cash flows associated with these instruments is classified as an operating activity within the consolidated statements of cash flows.

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

The following tables present the fair value of derivative instruments included in the Consolidated Balance Sheets (in millions):
Derivative AssetsDerivative Assets
Balance Sheet Location March 31,
2019		 December 31, 2018Balance Sheet Location March 31,
2020		 December 31, 2019
Derivatives designated as hedging instruments:    
Treasury lock agreementsOther assets $6.0
 $—
Total derivatives designated as hedging instruments 6.0
 —
Derivatives not designated as hedging instruments:        
Foreign currency forward contractsOther current assets $3.2
 $—
Other current assets —
 2.5
Foreign currency zero-cost collar contractsOther current assets —
 0.3
Total derivatives not designated as hedging instruments 3.2
 0.3
 —
 2.5
Total derivative assets $3.2
 $0.3
 $6.0
 $2.5
 Derivative Liabilities
 Balance Sheet Location March 31,
2020		 December 31, 2019
Derivatives not designated as hedging instruments:     
Foreign currency forward contractsAccounts payable and accrued liabilities $27.5
 $—
Total derivatives not designated as hedging instruments  27.5
 —
Total derivative liabilities  $27.5
 $—
 Derivative Liabilities
 Balance Sheet Location March 31,
2019		 December 31, 2018
Derivatives designated as hedging instruments:     
 Treasury lock agreementsOther noncurrent liabilities and deferred credits $8.8
 $2.0
Total derivatives designated as hedging instruments  8.8
 2.0
Total derivative liabilities  $8.8
 $2.0

 
 

The following table presents the effects of derivative instruments on the Consolidated Statements of Income and Consolidated Statements of Comprehensive Income for the three months ended March 31 (in millions):
Derivatives in Cash Flow Hedging Relationships Amount of Gain/(Loss) Recognized in OCI on Derivative Location of Gain/(Loss) Reclassified from AOCI into Income Amount of Gain/(Loss) Reclassified from AOCI into Income
  2020 2019   2020 2019
Treasury lock agreements $6.0
 $(6.8) Interest expense $(0.6) $—
     Total $6.0
 $(6.8)   $(0.6) $—
Derivatives in Cash Flow Hedging Relationships  Amount of Gain/(Loss) Recognized in OCI on Derivative
 Three Months Ended
 March 31,
  2019 2018
Treasury lock agreements $(6.8) $6.1
Total $(6.8) $6.1




Derivatives Not Designated as Hedging InstrumentsLocation of Gain/(Loss) Recognized in Income on Derivative Amount of Gain/(Loss) Recognized in Income on Derivative Location of Gain/(Loss) Recognized in Income on Derivative Amount of Gain/(Loss) Recognized in Income on Derivative
 Three Months Ended 2020 2019
 March 31,
 2019 2018
Foreign currency forward contractsForeign exchange gain $3.6
 $—
 Foreign exchange gain (loss) $(33.7) $3.6
Foreign currency zero-cost collar contractsForeign exchange gain —
 16.5
Total $3.6
 $16.5
 $(33.7) $3.6



See Note 8,7, Fair Value Measurements, for the determination of the fair values of derivatives.


10.9. Short-Term Borrowings
Commercial Paper. The Company’s commercial paper program generally serves as the primary means of short-term funding. As of March 31, 20192020 and December 31, 2018,2019, KCS had no0 commercial paper outstanding. For the three months ended March 31, 20192020 and 2018,2019, any commercial paper borrowings were outstanding for less than 90 days and the related activity is presented on a net basis in the consolidated statements of cash flows.



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Notes to the Unaudited Consolidated Financial Statements—(Continued)


11. Long-Term Debt
Revolving Senior Credit Facility
On March 8, 2019, KCS, with certain of its domestic subsidiaries named therein as guarantors, entered into a new five-year, $600.0 million senior unsecured revolving credit facility (the “Facility”), with a $25.0 million standby letter of credit facility which, if utilized, constitutes usage under the Facility. The Facility replaced KCS’s existing $800.0 million revolving credit facility. The Facility serves as a backstop for the commercial paper program, which generally serves as the Company’s primary means of short-term funding.
Borrowings under the Revolving Credit Facility will bear interest at floating rates. Depending on the Company’s credit rating, the margin that KCS would pay above the London Interbank Offered Rate (“LIBOR”) at any point would be between 1.000% and 1.750%. As of March 31, 2019, the margin is 1.25% based on KCS’s current credit rating.
The Facility is guaranteed by KCSR, together with certain domestic subsidiaries named therein as guarantors, and matures on March 8, 2024. The Facility agreement contains representations, warranties, covenants and events of default that are customary for credit agreements of this type. The occurrence of an event of default could result in the termination of the commitments and the acceleration of the repayment of any outstanding principal balance on the Facility and the commercial paper program.
The Facility was categorized as a debt modification and the Company incurred $2.5 million of debt issuance costs, which were capitalized and will be amortized over the life of the related debt instrument. The Company recorded debt retirement costs of $0.6 million to write off previously capitalized debt issuance costs.
As of March 31, 2019, KCS had $600.0 million available under the Facility, with no outstanding borrowings. As of December 31, 2018, KCS had $800.0 million available under its previous revolving credit facility, with no outstanding borrowings.
12.10. Share Repurchases

In November 2019, the Company announced a new common share repurchase program authorizing the Company to purchase up to $2.0 billion of its outstanding shares of common stock through December 31, 2022 (the “2019 Program”). Share repurchases may be made in the open market, through privately negotiated transactions, or through accelerated share repurchase (“ASR”) transactions.

Under an ASR agreement, the Company pays a specified amount to a financial institution and receives an initial delivery of shares. The final number and total cost of shares repurchased is then based on the volume-weighted average price of the Company’s common stock during the term of the agreements. The transactions are accounted for as equity transactions with any excess of repurchase price over par value allocated between additional paid-in capital and retained earnings. At the time the shares are received, there is an immediate reduction in the weighted-average number of shares outstanding for purposes of the basic and diluted earnings per share computation.

During the fourth quarter of 2019, the Company paid $550.0 million under 2 ASR agreements and received an aggregate initial delivery of shares, which represented approximately 85% of the total shares to be received under the agreements. The final number and total cost of shares repurchased was then based on the volume-weighted-average price of the Company’s common stock during the term of the agreements, which were settled in March 2020. The terms of the ASR agreements, structured as outlined above, were as follows:

Third Party Institution Agreement Date Settlement Date 
Total Amount of Agreement (in millions)
 Initial Shares Delivered 
Fair Market Value of Initial Shares
(in millions)
 Additional Shares Delivered 
Fair Market Value of Additional Shares
(in millions)
 Total Shares Delivered Weighted-Average Price Per Share
ASR Agreement #1 November 2019 March 2020 $275.0
 1,511,380 $233.75
 224,244
 $41.25
 1,735,624 $158.44
ASR Agreement #2 November 2019 March 2020 $275.0
 1,511,380 $233.75
 221,692
 $41.25
 1,733,072 $158.68
Total     $550.0
 3,022,760
 $467.5
 445,936
 $82.5
 3,468,696
 $158.56


During the three months ended March 31, 2019,2020, KCS repurchased 465,5231,291,635 shares of common stock for $50.3$194.2 million, which includes shares delivered to settle the ASR agreements noted above. Since inception of the 2019 Program, KCS has repurchased 4,314,395 shares of common stock for $661.7 million at an average price of $108.02 per share. Since inception of the August 2017 common share repurchase program, KCS has repurchased 5,157,205 shares of common stock for $548.6 million at an average price of $106.37$153.37 per share. The excess of repurchase price over par value is allocated between additional paid-in capital and retained earnings.
During the three months ended March 31, 2019, KCS repurchased 2,110 shares of its $25 par preferred stock for less than $0.1 million at an average price of $26.40 per share. The excess of repurchase price over par value is allocated between additional paid-in capital and retained earnings.


13.11. Commitments and Contingencies
Concession Duty. Under KCSM’sKansas City Southern de México, S.A. de C.V. (“KCSM”)’s 50-year railroad concession from the Mexican government (the “Concession”), which could expire in 2047 unless extended, KCSM pays annual concession duty expense of 1.25% of gross revenues. For the three months ended March 31, 20192020, the concession duty expense, which is recorded within materials and other in operating expenses, was $4.2$4.8 million, compared to $4.1$4.2 million for the same period in 2018.2019.
Litigation. The Occasionally, the Company is a party to various legal proceedings, and regulatory examinations, investigations,
administrative actions, alland other legal matters, arising for the most part in the ordinary course of which are of an ordinary, routine nature andbusiness, 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 whichthat management believes are adequate to cover expected costs. AlthoughThe outcome of litigation and other legal matters is always uncertain. KCS believes it has valid defenses to the legal matters currently pending against it, is not possibledefending itself vigorously, and has recorded accruals determined in accordance with U.S. GAAP, where appropriate. In making a determination regarding accruals, using available information, KCS evaluates the likelihood of an unfavorable outcome in legal or regulatory proceedings to predictwhich it is a party to and records a loss contingency when it is probable a liability has been incurred and the outcomeamount of any legal proceeding, in the opinion of management, such proceedings and actions should not, individually, or in the aggregate, have a material adverse effectloss can be reasonably estimated. These subjective determinations are based on the Company’sstatus of such legal or regulatory proceedings, the merits of KCS’s defenses and consultation with legal counsel. Actual outcomes of these legal and regulatory proceedings may materially differ from the current

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Notes to the Unaudited Consolidated Financial Statements—(Continued)

estimates. It is possible that resolution of one or more of the legal matters currently pending or threatened could result in losses material to KCS’s consolidated results of operations, liquidity or financial statements.condition.
Environmental Liabilities. The Company’s U.S. operations are subject to extensive federal, state and local environmental laws and regulations. The major U.S. environmental laws to which the Company is subject include, among others, the Federalfederal Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA,” also known as the Superfund law), the Toxic Substances Control Act, the FederalClean 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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Notes to the Unaudited Consolidated Financial Statements—(Continued)

The Company’s Mexico operations are subject to Mexican federal and state laws and regulations relating to the protection of the environment through the establishment of standards for water discharge, water supply, emissions, noise pollution, hazardous substances and transportation and handling of hazardous and solid waste. The Mexican government may bring administrative and criminal proceedings, impose economic sanctions against companies that violate environmental laws, and temporarily or even permanently close non-complying facilities.
The risk of incurring environmental liability is inherent in the railroad industry. As part of serving the petroleum and chemicals industry, the Company transports hazardous materials and has a professional team available to respond to and handle environmental issues that might occur in the transport of such materials.
The Company performs ongoing reviews and evaluations of the various environmental programs and issues within the Company’s operations, and, as necessary, takes actions intended to limit the Company’s exposure to potential liability. Although these costs cannot be predicted with certainty, management believes that the ultimate outcome of identified matters will not have a material adverse effect on the Company’s consolidated financial statements.
Personal Injury. The Company’s personal injury liability is based on semi-annual actuarial studies performed on an undiscounted basis by an independent third party actuarial firm and reviewed by management. This liability is based on personal injury claims filed and an estimate of claims incurred but not yet reported. Actual results may vary from estimates due to the number, type and severity of the injury, costs of medical treatments and uncertainties in litigation. Adjustments to the liability are reflected within operating expenses in the period in which changes to estimates are known. Personal injury claims in excess of self-insurance levels are insured up to certain coverage amounts, depending on the type of claim and year of occurrence. The personal injury liability as of March 31, 20192020, wasis based on an updated actuarial study of personal injury claims through November 30, 2018,2019, and review of the last four months’ experience. Although these estimates cannot be predicted with certainty, management believes that the ultimate outcome will not have a material adverse effect on the Company’s consolidated financial statements.
Tax Contingencies. Tax returns filed in the U.S. for periods after 20142015 and in Mexico for periods after 2012 remain open to examination by the taxing authorities. In 2018, the IRS initiated an examination of the 2016 U.S. federal tax return. During the first quarter ofIn 2019, the Servicio de Administración Tributaria (the “SAT”), the Mexican equivalent of the IRS, initiated an audit of the KCSM 2013 and 2014 Mexico tax returns. The Company does not expect that these examinations will have a material impact on the consolidated financial statements. During the first quarter of 2017, the Company received audit assessments from the SAT for the KCSM 2009 and 2010 Mexico tax returns. In 2017, the Company commenced administrative actions with the SAT. During the first quarter of 2018, the audit assessments were nullified by the SAT. In the third quarter of 2018, the SAT issued new assessments and the Company filed administrative appeals with the SAT. The Company believes that it has strong legal arguments in its favor and it is more likely than not that it will prevail in any challenge of the assessments.
The Company litigated a Value Added Tax (“VAT”) audit assessment from the SAT for KCSM for the year ended December 31, 2005. In November 2016, KCSM was notified of a resolution by the Mexican tax court annulling this assessment. The SAT appealed this resolution to the Mexican circuit court. In September 2017, KCSM was notified of a resolution by the circuit court which ordered the tax court to consider an argument made by KCSM in the original tax court proceeding that was not addressed in the tax court’s November 2016 resolution. In October 2017, the tax court ruled that the arguments made by KCSM asserting that the SAT unduly extended the audit process were not valid, and also annulled the assessment consistent with the tax court’s earlier November 2016 ruling. In December 2017, KCSM and the SAT filed an appeal with the Federal Courts of Appeals. In November 2018, the Appeals Court issued a ruling denying the SAT appeal and permanently annulled the VAT assessment. The SAT is unable to appeal the decision. The Appeals Court also denied KCSM’s appeal. In February 2019, the SAT issued a new assessment that conflicted with the tax court’s guidelines. As such, in March 2019, KCSM filed a complaint with the tax court to require the SAT to follow the guidelines issued by the tax court that would result in no tax being assessed. In addition, in April 2019 the Company filed a nullification lawsuit with the tax court. Therefore, the Company believes any new assessment based on the tax court’s guidelines should not have a material impact to the Company’s consolidated financial statements.
KCSM has not historically assessed VAT on international import transportation services provided to its customers based on a written ruling that KCSM obtained from the SAT in 2008 stating that such services were not subject to VAT (the “2008 Ruling”). Notwithstanding the 2008 Ruling, in December 2013, the SAT unofficially informed KCSM of an intended implementation of new criteria effective as of January 1, 2014, pursuant to which VAT would be assessed on all international import transportation services on the portion of the services provided within Mexico. Additionally, in November 2013, the SAT filed an action to nullify the 2008 Ruling, potentially exposing the application of the new criteria to open tax years. In February 2014, KCSM filed an action opposing the SAT’s nullification action. In December 2016, KCSM was notified of a resolution issued by the Mexican tax court confirming the 2008 Ruling. The SAT appealed this resolution. In October 2017, the circuit court resolved to not render a decision on the case but

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Notes to the Unaudited Consolidated Financial Statements—(Continued)

rather to send the SAT’s appeal to the Supreme Court. In February 2018, the Supreme Court decided not to hear the case and

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Notes to the Unaudited Consolidated Financial Statements—(Continued)

remanded the SAT’s appeal back to the circuit court for a decision. In July 2018, the circuit court ordered the tax court to consider certain arguments made by the SAT in the original court proceeding that were not addressed in the tax court’s December 2016 resolution. OnIn October 2, 2018, the tax court issued a decision confirming the 2008 Ruling. The SAT has appealed this decision. The Company believes it is more likely than not that it will continue to prevail in this matter. Further, as of the date of this filing, the SAT has not implemented any new criteria regarding the assessment of VAT on international import transportation services. The Company believes it is probable that any unexpected nullification of the 2008 Ruling and the implementation of any new VAT criteria would be applied on a prospective basis, in which case, due to the pass-through nature of VAT, KCSM would begin to assess its customers for VAT on international import transportation services, resulting in no material impact to the Company’s consolidated financial statements.
Contractual Agreements. In the normal course of business, the Company enters into various contractual agreements related to commercial arrangements and the use of other railroads’ or governmental entities’ infrastructure needed for the operations of the business. The Company is involved or may become involved in certain disputes involving transportation rates, product loss or damage, charges, and interpretations related to these agreements. While the outcome of these matters cannot be predicted with certainty, the Company believes that, when resolved, these disputes will not have a material effect on its consolidated financial statements.
Credit Risk. The Company continually monitors risks related to economic changes and certain customer receivables concentrations. Significant changes in customer concentration or payment terms, deterioration of customer creditworthiness, bankruptcy, insolvency or liquidation of a customer, or weakening in economic trends could have a significant impact on the collectability of the Company’s receivables and its operating results. If the financial condition of the Company’s customers were to deteriorate and result in an impairment of their ability to make payments, additional allowances may be required. The Company has recorded provisions for uncollectability based on its best estimate at March 31, 2019.2020.
Panama Canal Railway Company (“PCRC”) Guarantees and Indemnities. At March 31, 2019,2020, the Company had issued and outstanding $5.6 million under a standby letter of credit to fulfill its obligation to fund fifty50 percent of the debt service reserve and liquidity reserve established by PCRC in connection with the issuance of the 7.0% Senior Secured Notes due November 1, 2026 (the “PCRC Notes”). Additionally, KCS has pledged its shares of PCRC as security for the PCRC Notes.


14.12. Geographic Information
The Company strategically manages its rail operations as one1 reportable business segment over a single coordinated rail network that extends from the midwest and southeast portions of the United States south into Mexico and connects with other Class I railroads. Financial information reported at this level, such as revenues, operating income and cash flows from operations, is used by corporate management, including the Company’s chief operating decision-maker, in evaluating overall financial and operational performance, market strategies, as well as the decisions to allocate capital resources. The Company’s chief operating decision-maker is the chief executive officer.
The following tables provide information by geographic area (in millions):
 Three Months Ended
 March 31,
Revenues2020 2019
U.S.$379.9
 $365.6
Mexico351.8
 309.2
Total revenues$731.7
 $674.8
    
Property and equipment (including concession assets), netMarch 31,
2020		 December 31,
2019
U.S.$5,559.4
 $5,435.9
Mexico3,364.6
 3,370.4
Total property and equipment (including concession assets), net$8,924.0
 $8,806.3

 Three Months Ended
 March 31,
Revenues2019 2018
U.S.$365.6
 $335.2
Mexico309.2
 303.4
Total revenues$674.8
 $638.6
    
Property and equipment (including concession assets), netMarch 31,
2019		 December 31,
2018
U.S.$5,407.9
 $5,401.3
Mexico3,286.4
 3,289.8
Total property and equipment (including concession assets), net$8,694.3
 $8,691.1


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15. Condensed Consolidating Financial Information
Pursuant to SEC Regulation S-X Rule 3-10 “Financial statements of guarantors and issuers of guaranteed securities registered or being registered,” the Company is required to provide condensed consolidating financial information for issuers of certain of its senior notes that are guaranteed.
As of March 31, 2019, KCS, the parent, had outstanding $2,593.5 million principal amount of senior notes due through 2048. The senior notes are unsecured obligations of KCS, and are also jointly and severally and fully and unconditionally guaranteed on an unsecured senior basis by The Kansas City Southern Railway Company (“KCSR”) and certain wholly-owned domestic subsidiaries of KCS (the “Guarantor Subsidiaries”).
As of March 31, 2019, KCSR had outstanding $2.7 million principal amount of senior notes due through 2045. The senior notes are unsecured obligations of KCSR, and are also jointly and severally and fully and unconditionally guaranteed on an unsecured senior basis by KCS and the Guarantor Subsidiaries.
The following condensed and consolidating financial information (in millions) of KCS, KCSR, the Guarantor Subsidiaries and the other KCS subsidiaries that are not guarantors (the "Non-Guarantor Subsidiaries") are being presented in order to meet the reporting requirements under Rule 3-10 of Regulation S-X. Pursuant to Rule 3-10(d) and (f) of Regulation S-X, separate financial statements for the Issuer, the Parent and the Guarantor Subsidiaries are not required to be filed with the SEC as the subsidiary debt issuer and the guarantors are directly or indirectly 100% owned by the Parent and the guarantees are full and unconditional and joint and several.
Condensed Consolidating Statements of Comprehensive Income
 Three Months Ended March 31, 2019
 Parent KCSR 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Consolidating
Adjustments
 
Consolidated
KCS
Revenues$—
 $324.2
 $11.7
 $349.3
 $(10.4) $674.8
Operating expenses1.2
 291.1
 9.6
 223.2
 (10.6) 514.5
Operating income (loss)(1.2) 33.1
 2.1
 126.1
 0.2
 160.3
Equity in net earnings (losses) of affiliates102.4
 (0.3) 0.7
 1.3
 (102.4) 1.7
Interest expense(26.4) (21.4) —
 (7.1) 26.7
 (28.2)
Debt retirement costs(0.2) (0.2) —
 (0.2) —
 (0.6)
Foreign exchange gain—
 —
 —
 4.6
 —
 4.6
Other income (expense), net26.5
 (0.4) —
 0.8
 (26.8) 0.1
Income before income taxes101.1
 10.8

2.8

125.5

(102.3) 137.9
Income tax expense (benefit)(1.7) 1.9
 0.7
 33.8
 —
 34.7
Net income102.8
 8.9

2.1

91.7

(102.3) 103.2
Less: Net income attributable to noncontrolling interest—
 —
 —
 0.4
 —
 0.4
Net income attributable to Kansas City Southern and subsidiaries102.8
 8.9

2.1

91.3

(102.3) 102.8
Other comprehensive income (loss)(4.9) —
 —
 0.2
 (0.2) (4.9)
Comprehensive income attributable to Kansas City Southern and subsidiaries$97.9
 $8.9
 $2.1
 $91.5
 $(102.5) $97.9








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Notes to the Unaudited Consolidated Financial Statements—(Continued)

Condensed Consolidating Statements of Comprehensive Income—(Continued)
 Three Months Ended March 31, 2018
 Parent KCSR 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Consolidating
Adjustments
 
Consolidated
KCS
Revenues$—
 $301.8
 $8.9
 $336.8
 $(8.9) $638.6
Operating expenses1.2
 225.8
 8.2
 193.6
 (8.9) 419.9
Operating income (loss)(1.2) 76.0
 0.7
 143.2
 —
 218.7
Equity in net earnings (losses) of affiliates154.7
 (0.2) 0.8
 0.6
 (154.9) 1.0
Interest expense(21.3) (17.3) —
 (6.9) 20.0
 (25.5)
Debt retirement costs—
 —
 —
 —
 —
 —
Foreign exchange gain—
 —
 —
 27.8
 —
 27.8
Other income (expense), net19.6
 (0.3) —
 0.5
 (20.1) (0.3)
Income before income taxes151.8
 58.2
 1.5
 165.2
 (155.0) 221.7
Income tax expense7.3
 12.4
 0.4
 56.7
 —
 76.8
Net income144.5
 45.8
 1.1
 108.5
 (155.0) 144.9
Less: Net income attributable to noncontrolling interest—
 —
 —
 0.4
 —
 0.4
Net income attributable to Kansas City Southern and subsidiaries144.5
 45.8
 1.1
 108.1
 (155.0) 144.5
Other comprehensive income5.7
 —
 —
 1.2
 (1.2) 5.7
Comprehensive income attributable to Kansas City Southern and subsidiaries$150.2
 $45.8
 $1.1
 $109.3
 $(156.2) $150.2

Condensed Consolidating Balance Sheets
 March 31, 2019
 Parent KCSR 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Consolidating
Adjustments
 
Consolidated
KCS
Assets:           
Current assets$217.6
 $256.9
 $6.1
 $392.0
 $(218.2) $654.4
Operating lease right-of-use assets

—
 170.1
 —
 33.4
 (4.4) 199.1
Investments—
 3.6
 5.6
 38.6
 —
 47.8
Investments in consolidated subsidiaries4,921.0
 3.8
 195.6
 —
 (5,120.4) —
Property and equipment (including concession assets), net—
 4,426.2
 163.2
 4,112.8
 (7.9) 8,694.3
Other assets2,523.1
 16.2
 —
 23.8
 (2,521.0) 42.1
Total assets$7,661.7
 $4,876.8
 $370.5
 $4,600.6
 $(7,871.9) $9,637.7
Liabilities and equity:           
Current liabilities$247.1
 $128.8
 $77.9
 $247.3
 $(220.5) $480.6
Long-term operating lease liabilities

—
 91.0
 —
 18.1
 (3.5) 105.6
Long-term debt2,563.7
 1,828.3
 —
 806.6
 (2,521.0) 2,677.6
Deferred income taxes(4.3) 814.5
 84.7
 192.3
 (2.0) 1,085.2
Other liabilities27.1
 96.4
 0.2
 15.0
 —
 138.7
Stockholders’ equity4,828.1
 1,917.8
 207.7
 2,999.4
 (5,124.9) 4,828.1
Noncontrolling interest—
 —
 —
 321.9
 —
 321.9
Total liabilities and equity$7,661.7
 $4,876.8
 $370.5
 $4,600.6
 $(7,871.9) $9,637.7




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Notes to the Unaudited Consolidated Financial Statements—(Continued)

Condensed Consolidating Balance Sheets—(Continued)
 December 31, 2018
 Parent KCSR 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Consolidating
Adjustments
 
Consolidated
KCS
Assets:           
Current assets$229.8
 $257.6
 $5.0
 $350.4
 $(207.4) $635.4
Operating lease right-of-use assets—
 —
 —
 —
 —
 —
Investments—
 3.9
 4.4
 36.6
 —
 44.9
Investments in consolidated subsidiaries4,852.8
 4.4
 190.2
 —
 (5,047.4) —
Property and equipment (including concession assets), net—
 4,429.2
 165.1
 4,104.8
 (8.0) 8,691.1
Other assets2,523.4
 59.3
 —
 36.8
 (2,521.1) 98.4
Total assets$7,606.0
 $4,754.4
 $364.7
 $4,528.6
 $(7,783.9) $9,469.8
Liabilities and equity:           
Current liabilities$214.2
 $109.2
 $80.1
 $252.3
 $(208.8) $447.0
Long-term operating lease liabilities—
 —
 —
 —
 —
 —
Long-term debt2,563.0
 1,828.8
 —
 808.5
 (2,521.0) 2,679.3
Deferred income taxes(4.4) 812.8
 84.7
 188.8
 (2.0) 1,079.9
Other liabilities20.2
 94.8
 0.2
 15.8
 (0.1) 130.9
Stockholders’ equity4,813.0
 1,908.8
 199.7
 2,943.5
 (5,052.0) 4,813.0
Noncontrolling interest—
 —
 —
 319.7
 —
 319.7
Total liabilities and equity$7,606.0
 $4,754.4
 $364.7
 $4,528.6
 $(7,783.9) $9,469.8

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Notes to the Unaudited Consolidated Financial Statements—(Continued)

Condensed Consolidating Statements of Cash Flows
 Three Months Ended March 31, 2019
 Parent KCSR 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Consolidating
Adjustments
 
Consolidated
KCS
Operating activities:           
Net cash provided$65.4
 $109.7
 $0.1
 $137.6
 $(40.1) $272.7
Investing activities:           
Capital expenditures—
 (113.5) (0.1) (66.3) —
 (179.9)
Purchase or replacement of equipment under operating leases—
 —
 —
 —
 —
 —
Property investments in MSLLC—
 —
 —
 (4.7) —
 (4.7)
Investments in and advances to affiliates(5.9) —
 (5.9) (7.2) 10.6
 (8.4)
Proceeds from repayment of loans to affiliates—
 —
 —
 —
 —
 —
Loans to affiliates—
 —
 —
 —
 —
 —
Proceeds from disposal of property—
 1.4
 —
 0.8
 —
 2.2
Other investing activities—
 (4.9) —
 6.0
 —
 1.1
Net cash used(5.9) (117.0) (6.0) (71.4) 10.6
 (189.7)
Financing activities:           
Net short-term borrowings—
 —
 —
 —
 —
 —
Repayment of long-term debt—
 (0.9) —
 (1.8) —
 (2.7)
Debt issuance costs paid—
 (0.3) —
 (1.3) —
 (1.6)
Dividends paid(36.4) —
 —
 (40.1) 40.1
 (36.4)
Shares repurchased(50.3) —
 —
 —
 —
 (50.3)
Proceeds from loans from affiliates—
 —
 —
 —
 —
 —
Repayment of loans from affiliates—
 —
 —
 —
 —
 —
Contribution from affiliates—
 —
 5.9
 4.7
 (10.6) —
Other financing activities0.2
 —
 —
 —
 —
 0.2
Net cash provided (used)(86.5) (1.2) 5.9
 (38.5) 29.5
 (90.8)
Cash and cash equivalents:           
Net increase (decrease)(27.0) (8.5) —
 27.7
 —
 (7.8)
At beginning of year41.5
 28.1
 —
 30.9
 —
 100.5
At end of period$14.5
 $19.6
 $—
 $58.6
 $—
 $92.7

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

Condensed Consolidating Statements of Cash Flows—(Continued)
 Three Months Ended March 31, 2018
 Parent KCSR 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Consolidating
Adjustments
 
Consolidated
KCS
Operating activities:           
Net cash provided$3.2
 $22.5
 $0.1
 $114.8
 $—
 $140.6
Investing activities:           
Capital expenditures—
 (49.4) —
 (60.6) —
 (110.0)
Purchase or replacement of equipment under operating leases—
 (11.2) —
 —
 —
 (11.2)
Property investments in MSLLC—
 —
 —
 (3.9) —
 (3.9)
Investment in and advances to affiliates(0.2) —
 (0.2) (0.2) 0.4
 (0.2)
Proceeds from repayment of loans to affiliates2,576.9
 —
 —
 —
 (2,576.9) —
Loans to affiliates(2,609.9) —
 —
 (125.0) 2,734.9
 —
Proceeds from disposal of property—
 0.3
 —
 1.1
 —
 1.4
Other investing activities—
 0.2
 —
 (0.5) —
 (0.3)
Net cash used(33.2) (60.1) (0.2) (189.1) 158.4
 (124.2)
Financing activities:           
Net short-term borrowings(4.1) —
 —
 —
 —
 (4.1)
Repayment of long-term debt—
 (0.9) (0.1) (7.7) —
 (8.7)
Debt issuance costs paid—
 —
 —
 —
 —
 —
Dividends paid(37.1) —
 —
 —
 —
 (37.1)
Shares repurchased(54.0) —
 —
 —
 —
 (54.0)
Proceeds from loans from affiliates125.0
 2,609.9
 —
 —
 (2,734.9) —
Repayment of loans from affiliates—
 (2,576.9) —
 —
 2,576.9
 —
Contribution from affiliates—
 —
 0.2
 0.2
 (0.4) —
Other financing activities0.4
 —
 —
 —
 —
 0.4
Net cash provided (used)30.2
 32.1
 0.1
 (7.5) (158.4) (103.5)
Cash and cash equivalents:           
Net increase (decrease)0.2
 (5.5) —
 (81.8) —
 (87.1)
At beginning of year0.7
 17.6
 —
 115.8
 —
 134.1
At end of period$0.9
 $12.1
 $—
 $34.0
 $—
 $47.0


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Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations
The discussion below, as well as other portions of this Form 10-Q, contain forward-looking statements that arewithin 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 based upon historical information. limited to, in press releases, quarterly earnings calls, executive presentations, in the annual report to stockholders and in other filings with the Securities and Exchange Commission.Readers can usually identify these forward-looking statements by the use of such verbswords as “expects,“may,” “will,” “should,” “likely,” “plans,” “projects,”“expects,” “anticipates,” “believes” or similar verbs or conjugationswords. These statements involve a number of risks and uncertainties. Actual results could materially differ from those anticipated by such verbs.forward-looking statements. Such forward-looking statements are based upon information currently available to management and management’s perception thereof as of the date of this Form 10-Q. However, such statements are dependent on and, therefore, candifferences could be influencedcaused by a number of external variables over which management has littlefactors or no control, including: competitioncombination of factors including, but not limited to, the factors identified below and consolidation within the transportation industry; the business environment in industries that produce and use items shipped by rail; lossthose discussed under Item 1A, “Risk Factors”, of the rail concessionCompany’s Annual Report on Form 10-K for the year ended December 31, 2019. 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 Kansas City Southern’s subsidiary, Kansas City Southern de México, S.A. de C.V.; the termination of, or failure to renew, agreements with customers, other railroads and third parties; access to capital; disruptions to the Company’s technology infrastructure, including its computer systems; natural eventscommunicable diseases, such as severe weather, hurricanesthe ongoing COVID-19 pandemic and floods; climate changeits impact on KCS’s business, suppliers, consumers, customers, employees and the market and regulatory responses to climate change; legislative and regulatory developments and disputes; 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 of Kansas 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 between the United States and Asia or Mexico; fluctuations in the peso-dollar exchange rate; natural events such as severe weather, hurricanes and floods; the outcome of claims and litigation involving the Company or its subsidiaries; 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;activities, war or riskother acts of war; domestic and international economic, political and social conditions; the level of trade between the United States and Asia or Mexico; fluctuations in the peso-dollar exchange rate; increased demand and traffic congestion; the outcome of claims and litigation involving the Company or its subsidiaries;violence; and other factors affecting the operation of the business. For more discussion about each risk factor, see Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Part I, Item 1A - “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018, which is on file2019, filed with the U.S. Securities and Exchange Commission (File No. 1-4717) and Part I Item 1A — “Risk Factors” in the Form 10-Kon January 24, 2020 and any updates contained herein. Readers are strongly encouraged to consider these factors when evaluating forward-looking statements.
Forward-looking statements should not be readreflect the information only as a guarantee of future performance or results and will not necessarily be accurate indications of the timing when, or bydate on which such performance or results will be achieved. As a result, actual outcomes or results could materially differ from those indicated in forward-looking statements. Wethey are made. The Company does not under any obligation, and we expressly disclaimundertake any obligation to update or alter 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 Kansas City Southern’s (“KCS” or the “Company”)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.10-Q for the quarter ended March 31, 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 the 2018its 2019 Annual Report on Form 10-K filed with the SEC.
Overview
The Company is engaged primarily in the freight rail transportation business, operating a single coordinated rail network under one reportable business segment. The primary operating subsidiaries of the Company consist of the following: The Kansas City Southern Railway Company (“KCSR”), Kansas City Southern de México, S.A. de C.V. (“KCSM”), Meridian Speedway, LLC (“MSLLC”), and The Texas Mexican Railway Company (“TexMex”). The Company generates revenues and cash flows by providing customers with freight delivery services both within its regions and throughout North America through connections with other Class I rail carriers. KCS’s customers conduct business in a number of different industries, including chemical and petroleum, industrial and

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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.

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Strategic Initiatives
During 2019, KCS started 2019 with a renewed and heightened focus on operational excellence. Throughout the year, the Company isbegan implementing principles of the Precision Scheduled Railroading (“PSR”) methodology that are most applicable to its network. The Company expects this focus, focusing on operational excellence and PSR principles to help drivedriving the following improvements:
Customer service—improve and sustain consistency and reliability of service and create a more resilient and dependable network;
•
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 utilizationutilization.
As a result of the PSR initiatives in 2019, management approved four separate restructuring plans that totaled $168.8 million, including a $67.5 million restructuring plan duringin the first quarter of 2019,2019. The PSR plans included asset impairments, workforce reductions, and the Company recognizedcontract restructuring, charges of $67.5 million in the consolidated statements of income. The Company expects this restructuring plan and other related PSR initiatives to be completedwhich resulted in 2019 and to provide costoperating expense savings of approximately $16.0 million for the remainder of$58.0 million. Management’s restructuring plans were substantially completed in 2019. As
In 2020, the Company continues to implement thesefocus on implementing PSR initiatives managementand expects to have incremental annual operating expense savings of approximately $61.0 million.
The Company established the following key metrics and goals to measure PSR progress and performance:
  Three Months Ended Improvement/ (Deterioration) 
FY 2020
Goal
  March 31, 
  2020 2019 
Gross velocity (mph) (i) 15.9 12.6 26% 17.0
Terminal dwell (hours) (ii) 19.8 21.8 9% 18.0
Train length (feet) (iii) 5,973 5,760 4% 6,350
Car miles per day (iv) 120.7 101.0 20% 135.0
Fuel efficiency (gallons per 1,000 GTM's) (v) 1.26 1.34 6% 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.
Operating performance continued to improve in the first three months of 2020, compared to the same period in 2019. Improvements in velocity and dwell are largely due to increased focus on execution, and refining service design. Additionally, the Company has consolidated trains, which has increased train length, improved fuel efficiency, and led to reduced crew costs.
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.     

COVID-19 Update

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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 and has taken a variety of measures to ensure the ongoing availability of its transportation services, while taking health and safety measures, including separating dispatching and crew operations, implementing enhanced cleaning and hygiene protocols in all of its facilities and locomotives, and implementing remote work policies, where possible. To date, as a result of these business continuity measures, the Company has not experienced disruptions in the Company’s railroad operations. 
The fundamentals of the Company remain strong. KCS believes it has sufficient liquidity on hand to continue business operations during this volatile period. As disclosed in the Liquidity and Capital Resources section, the Company has total available liquidity of $691.0 million as of March 31, 2020, consisting of cash on hand and a revolving credit facility. In addition, there are no debt maturities until 2023. If the Company experienced a significant reduction in revenues, the Company would have additional alternatives to maintain liquidity, including capital expenditure reductions, adjustments to its capital allocation policy, and cost reductions. As a result of the Company’s ongoing PSR initiatives, KCS has been able to respond quickly to its customers’ changing business demands related to the COVID-19 pandemic and has been able to further reduce costs through implementation of service design changes and consolidation of trains. At this time, the Company does not expect the impact of COVID-19 to reduce its projected cost savings from PSR initiatives.    
The pandemic presents potential new risks to the Company’s business. Although there have been logistical and other challenges to date, there has been no material adverse impact on the Company’s first quarter 2020 results of operations, excluding the impacts of foreign exchange losses (see foreign exchange gain (loss) within non-operating income and expenses for further discussion). The Company began to see the impacts of COVID-19 on customer demand in late March and continues to see declines in the second quarter of 2020, primarily in the automotive business unit due to plant shutdowns and expected lower production volumes. Intermodal volume has also been affected by overall decline in demand due to COVID-19 and automotive plant shutdowns resulting in significant declines in auto parts shipments. In addition, reductions in crude and frac sand volumes are expected due to the declines in oil prices. These volume declines are expected to result in lower second quarter 2020 volumes compared to the same period in 2019. The situation surrounding COVID-19 remains fluid and the potential for a material impact on the Company increases the longer the virus impacts the level of economic activity in the United States and globally. For this reason, KCS cannot reasonably estimate with any degree of certainty the future impact COVID-19 may develop additional restructuring plans as necessary.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.”  
First Quarter Highlights
Revenues increased 6%8% for the three months ended March 31, 2019,2020, as compared to the same period in 2018,2019, due to a 7%4% increase in carloads/unit volumes and a 3% increase in revenue per carload/unit, partially offset by a 1% decreaseunit. Revenues increased primarily due to growth in carload/unit volumes.refined fuel products and liquid petroleum gas shipments to Mexico, and favorable comparable volumes due to service interruptions at Lazaro Cardenas due to teacher protests in 2019. Revenue per carload/unit increased due to mix,as a result of higher fuel surcharge, positive pricing impacts, and higher fuel surcharge. These increases were partially offset by shorterlonger average length of haul, and the weakening of the Mexican peso against the U.S. dollar.partially offset by mix.
Operating expenses increased 23%decreased 14% during the three months ended March 31, 2019,2020, as compared to the same period in 2018,2019, primarily due to a decrease in restructuring charges as a result of PSR initiatives, exclusion of the Mexican fuel excise tax credit as a reduction of operating expenses due to changes in Mexican tax law effective January 1, 2019, and an increase in compensation and benefits. Expense fluctuations resulting from the weakening Mexican peso and changing fuel prices were offset by revenue fluctuations driven by these same macroeconomic factors.initiatives. Operating expenses as a percentage of revenues was 76.2%60.5% for the three months ended March 31, 2019,2020, compared to 65.8%76.2% for the same period in 2018.2019.
The Company reported quarterly earnings of $1.58 per diluted share on consolidated net income of $151.8 million for the three months ended March 31, 2020, compared to earnings of $1.02 per diluted share on consolidated net income of $102.8 million for the three months ended March 31, 2019, compared to earnings of $1.40 per diluted share on consolidated net income of $144.5 million for the same period in 2018. This change is2019, due to lowerhigher operating income, primarily as a result of the restructuring charges noted above and lower foreign exchange gain, partially offset by foreign exchange loss as compared to a lower effective tax rate.gain in 2019.












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Results of Operations
The following summarizes KCS’s consolidated statement of income components (in millions):
 
Three Months Ended ChangeThree Months Ended Change
March 31, March 31, 
2019 2018 2020 2019 
Revenues$674.8
 $638.6
 $36.2
$731.7
 $674.8
 $56.9
Operating expenses514.5
 419.9
 94.6
442.9
 514.5
 (71.6)
Operating income160.3
 218.7
 (58.4)288.8
 160.3
 128.5
Equity in net earnings of affiliates1.7
 1.0
 0.7
1.0
 1.7
 (0.7)
Interest expense(28.2) (25.5) (2.7)(34.2) (28.2) (6.0)
Debt retirement costs(0.6) —
 (0.6)—
 (0.6) 0.6
Foreign exchange gain4.6
 27.8
 (23.2)
Other income (expense), net0.1
 (0.3) 0.4
Foreign exchange gain (loss)(59.5) 4.6
 (64.1)
Other income, net1.4
 0.1
 1.3
Income before income taxes137.9
 221.7
 (83.8)197.5
 137.9
 59.6
Income tax expense34.7
 76.8
 (42.1)45.2
 34.7
 10.5
Net income103.2
 144.9
 (41.7)152.3
 103.2
 49.1
Less: Net income attributable to noncontrolling interest0.4
 0.4
 —
0.5
 0.4
 0.1
Net income attributable to Kansas City Southern and subsidiaries$102.8
 $144.5
 $(41.7)$151.8
 $102.8
 $49.0


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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/UnitRevenues Carloads and Units Revenue per Carload/Unit
Three Months Ended   Three Months Ended   Three Months Ended  Three Months Ended   Three Months Ended   Three Months Ended  
March 31,   March 31,   March 31,  March 31,   March 31,   March 31,  
2019 2018 % Change 2019 2018 % Change 2019 2018 % Change2020 2019 % Change 2020 2019 % Change 2020 2019 % Change
Chemical and petroleum$168.6
 $139.7
 21% 79.4
 68.1
 17% $2,123
 $2,051
 4%$198.6
 $168.6
 18% 90.9
 79.4
 14% $2,185
 $2,123
 3%
Industrial and consumer products149.8
 146.3
 2% 79.9
 82.0
 (3%) 1,875
 1,784
 5%159.0
 149.8
 6% 83.4
 79.9
 4% 1,906
 1,875
 2%
Agriculture and minerals122.9
 113.4
 8% 62.0
 56.9
 9% 1,982
 1,993
 (1%)134.5
 122.9
 9% 63.1
 62.0
 2% 2,132
 1,982
 8%
Energy64.6
 61.3
 5% 60.8
 57.5
 6% 1,063
 1,066
 —
56.3
 64.6
 (13%) 57.6
 60.8
 (5%) 977
 1,063
 (8%)
Intermodal79.9
 90.9
 (12%) 220.9
 243.0
 (9%) 362
 374
 (3%)88.7
 79.9
 11% 233.6
 220.9
 6% 380
 362
 5%
Automotive57.6
 59.8
 (4%) 36.6
 39.8
 (8%) 1,574
 1,503
 5%53.9
 57.6
 (6%) 32.2
 36.6
 (12%) 1,674
 1,574
 6%
Carload revenues, carloads and units643.4
 611.4
 5% 539.6
 547.3
 (1%) $1,192
 $1,117
 7%691.0
 643.4
 7% 560.8
 539.6
 4% $1,232
 $1,192
 3%
Other revenue31.4
 27.2
 15%            40.7
 31.4
 30%            
Total revenues (i)$674.8
 $638.6
 6%            $731.7
 $674.8
 8%            
                                  
(i) Included in revenues:                                  
Fuel surcharge$62.4
 $51.4
              $77.5
 $62.4
              
Revenues include both revenue for transportation services and fuel surcharges. For the three months ended March 31, 2019,2020, revenues increased 6%8% and carload/unit volumes decreased 1%increased 4%, compared to the same period in 2018. Revenue2019. Revenues increased primarily due to increasedgrowth in refined productfuel products and liquid petroleum gas shipments to Mexico, and grain increased as a result of improved cycle times. These increases were partially offset byfavorable comparable volumes due to service interruptioninterruptions at Lazaro Cardenas due to teacher protests which also affected volumes for certain commodity groups.in 2019.
For the three months ended March 31, 2019,2020, revenue per carload/unit increased by 7%3%, compared to the same period in 2018,2019, due to mix,higher fuel surcharge, positive pricing impacts, and higher fuel surcharge.longer average length of haul. These increases were partially offset by shorter average lengthmix.

20
Table of haul and the weakening of the Mexican peso against the U.S. dollar for revenue transactions denominated in Mexican pesos. Contents


The average exchange rate of Mexican pesos per U.S. dollar was Ps.19.2Ps.19.9 for the three months ended March 31, 2019,30, 2020, compared to Ps.18.8Ps.19.2 for the same period in 2018,2019, which resulted in a decrease to revenues of approximately $3.0$0.3 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 months ended March 31, 2019,2020, fuel surcharge revenue increased $11.0$15.1 million, compared to the same period in 2018,2019, primarily due to increased fuel surcharge rates due to higher fuel pricescosts as a result of the loss of the Mexican fuel excise tax credit and increasedhigher fuel surcharge rates.prices.

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The following discussion provides an analysis of revenues by commodity group:
 Revenues by commodity group

for the three months ended

March 31, 20192020
Chemical and petroleum. Revenues increased $28.9$30.0 million for the three months ended March 31, 2019,2020, compared to the same period in 2018,2019, due to a 17%14% increase in carload/unit volumes and a 4%3% increase in revenue per carload/unit. Volumes increased primarily due to increased refined fuel product and liquid petroleum gas shipments to Mexico partially offset byand favorable comparable petroleum volumes due to service interruptioninterruptions at Lazaro Cardenas due to teacher protests.in 2019. Revenue per carload/unit increased due to longer average length of haul,higher fuel surcharge and positive pricing impacts, and higher fuel surcharge.impacts.


chemandpetroq12019revgraph.jpgchemandpetroq12020revgraph.jpg
Industrial and consumer products. Revenues increased $3.5$9.2 million for the three months ended March 31, 2019,2020, compared to the same period in 2018,2019, due to a 5%4% increase in carload/unit volumes and a 2% increase in revenue per carload/unit, partially offset byunit. Revenues increased due to a 3% decreasechange in carload/unit volumes.traffic patterns and an increase in market demand for metals shipments. In addition, revenues increased due to favorable comparable volumes as a result of service interruptions at Lazaro Cardenas in 2019. Revenue per carload/unit increased due toas a result of longer average length of haul, positive pricing impacts, and higher fuel surcharge, mix, and positive pricing impacts, partially offset by shorter average length of haul. Volumes decreased due to lower military shipments, unplanned paper plant outages, and service interruption at Lazaro Cardenas due to teacher protests. These decreases were partially offset by an increase in metals due to improved cycle times.

mix.
indandconq12019revgraph.jpgindandconq12020revgraph.jpg




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 Revenues by commodity group

for the three months ended

March 31, 2019
2020
Agriculture and minerals. Revenues increased $9.5$11.6 million for the three months ended March 31, 2019,2020, compared to the same period in 2018,2019, due to an 8% increase in revenue per carload/unit and a 9%2% increase in carload/unit volumes, partially offset by a 1% decreasevolumes. The increase in revenue per carload/unit. Volumes increasedunit was driven by food products and grain as a result of improved cycle times and soft market demand in 2018. Revenues per carload/unit decreased due to shorterlonger average length of haul, partially offset by positive pricing impacts, higher fuel surcharge, and mix.positive pricing impacts. Food products volume increased primarily due to a customer change in traffic patterns.
agandminq12019revgraph.jpgagandminq12020revgraph.jpg
Energy. Revenues increased $3.3decreased $8.3 million for the three months ended March 31, 2019,2020, compared to the same period in 2018,2019, due to an 8% decrease in revenue per carload/unit and a 6% increase5% decrease in carload/unit volumes driven by an increase in utilityvolumes. Revenue per carload/unit decreased due to mix and shorter average length of haul. Utility coal volumes due to stockpile replenishment, partially offset by fracdecreased as a result of low natural gas prices and warm weather. Frac sand volume decreasesvolumes decreased due to changes in sourcing patterns. These decreases were partially offset by an increase in crude oil attributable to temporary improvement in Canadian crude spreads early in the quarter.
energyq12019revgraph.jpgenergyq12020revgraph.jpg
Intermodal. Revenues decreased $11.0increased $8.8 million for the three months ended March 31, 2019,2020, compared to the same period in 2018,2019, due to a 9% decrease6% increase in carload/unit volumes, and a 3% decrease5% increase in revenue per carload/unit. The volume decreaseincrease was primarily driven by strong cross-border shipments and favorable comparative volumes due to service interruptioninterruptions at Lazaro Cardenas in 2019, partially offset by volume declines due to teacher protests and unplanned auto plant shutdowns impacting cross border traffic.COVID-19 in late March. Revenue per carload/unit decreasedincreased due to shorter average length of haul.higher fuel surcharge.
Automotive. Revenues decreased $2.2$3.7 million for the three months ended March 31, 2019,2020, compared to the same period in 2018,2019, due to an 8%a 12% decrease in carload/unit volumes, partially offset by a 5%6% increase in revenue per carload/unit. Volumes decreased due to lower overall automotive production in Mexico and auto plant shutdowns due to COVID-19 in late March, partially offset by favorable comparable volumes due to service interruptioninterruptions at Lazaro Cardenas due to teacher protests and unplanned auto plant shutdowns.in 2019. Revenue per carload/unit increased due to positive pricing impacts and higher fuel surcharge partially offset by shorter average length of haul and the weakening of the Mexican peso against the U.S. dollar.positive pricing impacts.



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Operating Expenses
Operating expenses, as shown below (in millions), increased $94.6decreased $71.6 million for the three months ended March 31, 2019,2020, compared to the same period in 2018,2019, primarily due to a decrease in restructuring charges as a result of PSR initiatives, exclusion of the Mexican fuel excise tax credit as a reduction of operating expenses due to changes in Mexican tax law effective January 1, 2019, and an increase in compensation and benefits.initiatives. The weakening of the Mexican peso against the U.S. dollar during the three months ended March 31, 2019,2020, resulted in reduced expense of approximately $3.0$4.0 million, compared to the same period in 2018,2019, for expense transactions denominated in Mexican pesos. The average exchange rate of Mexican pesos per U.S. dollar was Ps.19.2Ps.19.9 for the three months ended March 31, 2019,2020, compared to Ps.18.8Ps.19.2 for the same period in 2018.2019.
 
Three Months Ended  Three Months Ended  
March 31, ChangeMarch 31, Change
2019 2018 Dollars Percent2020 2019 Dollars Percent
Compensation and benefits$128.9
 $121.6
 $7.3
 6%$133.4
 $128.9
 $4.5
 3%
Purchased services52.8
 47.1
 5.7
 12%53.3
 52.8
 0.5
 1%
Fuel83.0
 81.3
 1.7
 2%74.9
 83.0
 (8.1) (10%)
Mexican fuel excise tax credit—
 (9.2) 9.2
 (100%)
Equipment costs30.4
 32.2
 (1.8) (6%)21.9
 30.4
 (8.5) (28%)
Depreciation and amortization88.5
 83.3
 5.2
 6%89.4
 88.5
 0.9
 1%
Materials and other63.4
 63.6
 (0.2) —
64.0
 63.4
 0.6
 1%
Restructuring charges67.5
 —
 67.5
 100%6.0
 67.5
 (61.5) (91%)
Total operating expenses$514.5
 $419.9
 $94.6
 23%$442.9
 $514.5
 $(71.6) (14%)
Compensation and benefits. Compensation and benefits increased $7.3$4.5 million for the three months ended March 31, 2019,2020, compared to the same period in 2018,2019, due to increases in wagesincentive compensation of approximately $9.0 million and benefits and headcountwages of approximately $4.0 million, partially offset by a decrease of approximately $6.0 million in headcount and hours worked as a result of PSR initiatives, and the weakening of the Mexican peso against the U.S. dollar of approximately $2.0 million, respectively.million.
Purchased services. Purchased services expense increased $5.7$0.5 million for the three months ended March 31, 2019,2020, compared to the same period in 2018,2019, due to higherincreases in corporate services and trackage rights, partially offset by decreases in repairs and maintenance.maintenance and the weakening of the Mexican peso against the U.S. dollar.
Fuel.Fuel increased $1.7decreased $8.1 million for the three months ended March 31, 2019,2020, compared to the same period in 2018,2019, due to higher diesel fuel prices of approximately $7.0 million in Mexico, partially offset by lower diesel fuel prices of approximately $2.0$3.0 million in both Mexico and the U.S., increased efficiency of approximately $5.0 million and the weakening of the Mexican peso against the U.S. dollar of approximately $1.0 million, partially offset by increased consumption of approximately $4.0 million. The average price per gallon was $2.34 for the three months ended March 31, 2020, compared to $2.54 for the same period in 2019.
Equipment costs. Equipment costs decreased $8.5 million for the three months ended March 31, 2020, compared to the same period in 2019, due to lower lease expense as a result of the termination of locomotive leases during the second quarter of 2019 and first quarter of 2020 of approximately $5.0 million, and lower car hire expense primarily as a result of reduced cycle times due to PSR initiatives of approximately $3.0 million.
Depreciation and amortization. Depreciation and amortization expense increased $0.9 million for the three months ended March 31, 2020, compared to the same period 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 increased $0.6 million for the three months ended March 31, 2020, compared to the same period in 2019, primarily due to higher derailment activity of approximately $4.0 million, partially offset by a decrease in materials and supplies expense of approximately $2.0 million and the weakening of the Mexican peso against the U.S. dollar of approximately $1.0 million. The average price per gallon was $2.54 for
Restructuring charges. During the three months ended March 31, 2019, compared to $2.44 for the same period in 2018. Fuel purchases in Mexico are subject to an excise tax that is included in the price of fuel. For the three months ended March 31, 2019 and 2018,2020, the Company paid Mexican fuel excise taxrecognized restructuring charges of $13.8$6.0 million, and $9.2 million, respectively.
Mexican fuel excise tax credit. For the three months ended March 31, 2019, the Company did not recognize a benefit within operating expenses for the Mexican fuel excise tax credit, due to changes in Mexican tax law effective January 1, 2019. For 2019, any benefit is recognized as a reduction of income tax expense within the consolidated statements of income rather than a reduction of operating expenses. The Company recognized a benefit of $9.2 million within operating expenses for the three months ended March 31, 2018. For additional discussion, see Note 3, Mexican Fuel Excise Tax Credit.
Equipment costs. Equipment costs decreased $1.8 million for the three months ended March 31, 2019, compared to the same period in 2018, due to lower car hire expense primarily as a result of reduced cycle times.
Depreciation and amortization. Depreciation and amortization expense increased $5.2 millionmake-whole payments for leased locomotives impaired in the three months ended March 31, 2019, compared to the same period in 2018, due to a larger asset base, including investments in positive train control.
Materials and other.Materials and other expense was flat for the three months ended March 31, 2019, compared to the same period in 2018.
Restructuring charges. Duringfourth quarter of 2019. For the three months ended March 31, 2019, the Company recognized restructuring charges of $67.5 million, of restructuring charges related to the implementation of PSR initiatives most applicable to its network. Included in the restructuring charges were costs relating to the impairment of certain locomotives and rail cars, planned activities forseverance costs related to workforce reduction,reductions, and contract restructuring activities. For additional discussion, seeRefer to Note 2,3, Restructuring Charges.Charges for more information.




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Non-Operating Income and Expenses
Equity in net earnings of affiliates. Equity in net earnings fromof affiliates increaseddecreased $0.7 million for the three months ended March 31, 2019,2020, compared to the same period in 2018, driven2019, 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. This decrease was partially offset by increase in equity in net earnings from the operations of Panama Canal Railway Company dueFerrocarril y Terminal del Valle de Mexico, S.A de C.V. (“FTVM”) as a result of higher expenses recognized in the first quarter of 2019 related to lower operating expenses.the cancellation of Mexico City’s new international airport.
Interest expense. For the three months ended March 31, 2019,2020, interest expense increased $2.7$6.0 million, compared to the same period in 2018,2019, due to higher average interest rates and debt balances. During the three months ended March 31, 2019,2020, the average debt balance (including commercial paper) was $2,711.9$3,275.2 million, compared to $2,618.2$2,711.9 million for the same period in 2018.2019. The average interest rate during the three months ended March 31, 2020 and 2019 was 4.2%, compared to 3.9% for the same period in 2018.both periods.
Debt retirement costs. The Company did not incur debt retirement costs during the first quarter of 2020. Debt retirement costs were $0.6 million for the three months ended March 31, 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. The Company did not incur debt retirement costs during the first quarter of 2018.
Foreign exchange gain.gain (loss). For the three months ended March 31, 2019 and 2018,2020, foreign exchange loss was $59.5 million, compared to a gain wasof $4.6 million, and $27.8 million, respectively.for the same period 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 the U.S. dollar partially resulting from the increased market volatility driven by the global COVID-19 pandemic.
For the three months ended March 31, 2019 and 2018,2020, the re-measurement and settlement of monetary assets and liabilities denominated in Mexican pesos resulted in a foreign exchange loss of $25.8 million, compared to a gain of $1.0 million, and $11.3 million, respectively.for the same period 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 the U.S. dollar. For the three months ended March 31, 2019 and 2018,2020, the Company incurred a foreign exchange loss of $33.7 million, compared to a gain on foreign currency derivative contracts of $3.6 million, and $16.5 million, respectively.for the same period in 2019.
Other income, (expense), net. Other income, (expense), net increased $0.4$1.3 million for the three months ended March 31, 2019,2020, compared to the same period in 2018,2019, due to an increase in miscellaneous income.
Income tax expense. Income tax expense decreased $42.1increased $10.5 million for the three months ended March 31, 2019,2020, compared to the same period in 2018,2019, due to lowerhigher pre-tax income, as a result of restructuring charges related to PSR initiatives andpartially offset by a lower effective tax rate. The decrease in the effective tax rate was primarily due to fluctuations in the foreign exchange rate, partially offset by the loss of the Mexican fuel excise tax credit. See the tax rates reconciliation below.
The Treasury Department issued proposed regulations in June 2019 that provides 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 the U.S. tax rate, an election can be made to not treat the high-taxed earnings as GILTI income. As currently proposed, the high-tax exception provisions would not be effective until taxable years beginning on or after the date the proposed regulations are finalized. The regulations as proposed should render the GILTI tax immaterial to the consolidated financial statements if and when they become effective.

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The components of the effective tax rates for the three months ended March 31, 2019,2020, compared to the same periodperiods in 2018,2019, are as follows:
Three Months EndedThree Months Ended
March 31,March 31,
2019 20182020 2019
Statutory rate in effect21.0% 21.0%21.0% 21.0%
Tax effect of:      
Difference between U.S. and foreign tax rate5.8% 5.9%5.7% 5.8%
Global intangible low-taxed income (“GILTI”) tax, net1.0% 3.0%1.1% 1.0%
Mexican fuel excise tax credit, net (i)(4.9%) —
—
 (4.9%)
State and local income tax provision, net1.1% 1.1%1.3% 1.1%
Foreign exchange (ii)1.2% 4.0%(4.8%) 1.2%
Other, net—
 (0.4%)(1.4%) —
Effective tax rate25.2% 34.6%22.9% 25.2%
(i)See discussion of the inclusion of the Mexican fuel excise tax credit, net within the effective tax rate in the MexicanMexico 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 U.S. dollar measured by the forward exchange rate. The foreign exchange impact on income taxes includes the gain or loss from the revaluation of net U.S. dollar-denominated monetary liabilities into Mexican pesos which is included in Mexican taxable income under Mexican tax law. As a result, a strengthening of the Mexican peso against the U.S. dollar for the reporting period will generally increase the Mexican cash tax obligation and the effective income tax rate, and a weakening of the Mexican peso against the U.S. dollar for the reporting period will generally decrease the Mexican cash tax obligation and the effective tax rate. To hedge its exposure to this cash tax risk, the Company enters into foreign currency derivative contracts, which are measured at fair value each period and any change in fair value is recognized in foreign exchange gain (loss) within the consolidated statements of income as described above. Refer to Note 8, Derivative Instruments for more information.

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foreign currency derivative contracts, which are measured at fair value each period and any change in fair value is recognized in foreign exchange gain within the consolidated statements of income as described above. Refer to Note 9, Derivative Instruments for more information.
Mexico Tax Reform
In December 2018,2019, the Mexican government enacted changes in the tax law effective January 1, 20192020 (“Mexico 2020 Tax Reform”), which for 2019 eliminated the option to monetize the Mexican fuel excise tax credit by offsetting income tax withholding payment obligations. Previously, the Company had the option to monetize the Mexican fuel excise tax credit through income tax withholding and income tax obligations. As a result, the Company will be allowed to offset the 2019 Mexican fuel excise tax credit only against its. Mexico corporate income tax liability on the 2019 annual income tax return. The elimination of the option to apply the Mexican fuel excise tax credit to income tax withholding payment obligations requires the Company to recognize the credit as a reduction of income tax expense rather than a reduction of operating expenses. The Company believes it will continue to be eligible2020 Tax Reform excluded railroads from eligibility for the Mexican fuel excise tax creditcredit. Mexico 2020 Tax Reform also included permanent changes to the Value Added Tax (“VAT”) Law, Income Tax Law and expectsFederal 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 $53.2 million as of March 31, 2020. The Company believes the favorable VAT balance will ultimately be refunded by the Mexican government. As a result, Mexico 2020 Tax Reform did not have sufficient 2019 Mexico corporate income tax liabilitya material impact to fully utilize the credit in accordance with Mexico Tax Reform.    consolidated financial statements for the three months ended March 31, 2020, and is not expected to for the remainder of 2020.


Liquidity and Capital Resources
Overview
TheOn November 12, 2019, the Company focusesannounced its cash andnew capital resources on investingallocation 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 business, shareholder returnsfollowing manner:
• Approximately 40-50% to capital projects and optimizing its capital structure.strategic investments; and
The Company believes, based on current expectations, that cash and other liquid assets, operating cash flows, accessApproximately 50-60% to debt and equity capital markets, and other available financing resources will be sufficient to fund anticipated operating expenses, capital expenditures, debt service costs, dividends, share repurchases and other commitmentsdividends.

In connection with the new Policy, the Board also approved the following actions:
An increase in the foreseeable future. quarterly dividend on KCS’s common stock from $0.36 to $0.40 per share; and
A new $2.0 billion share repurchase program (“2019 Program”), expiring December 31, 2022.
During the three months ended March 31, 2020, the Company invested $86.6 million in capital expenditures. See the Capital Expenditures section for further details.

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During the first quarter of 2020, KCS repurchased 1,291,635 shares of common stock for $194.2 million under the 2019 Program, which includes shares delivered to settle the Company’s accelerated share repurchase (“ASR”) agreements entered into in November 2019. Since inception of the 2019 Program, KCS has repurchased 4,314,395 shares of common stock for $661.7 million at an average price of $153.37 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 quarter of 2020, the Company’s Board of Directors declared a quarterly cash dividend on its common stock of $0.40 per share (total of $38.2 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.
AtMarch 31, 2020, the Company had $444.7 million principal amount outstanding of 3.00% senior notes that mature May 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 the U.S. Treasury benchmark interest rate associated with any future interest payments related to the anticipated refinancing of the 3.00% Notes. See Note 8, Derivative Instruments for further discussion of the treasury lock agreements.
The Company’s current financing instruments contain restrictive covenants which limit or preclude certain actions; however, the covenants are structured such that the Company expects to have sufficient flexibility to conduct its operations. The Company was in compliance with all of its debt covenants as of March 31, 2019.
Though KCS’s cash flows from operations are expected to be sufficient to fund operations, capital expenditures, debt service and dividends, the Company may, from time to time, incur debt to refinance existing indebtedness, purchase equipment under operating leases, repurchase shares, or fund equipment additions or new investments.
During the three months ended March 31, 2019, the Company invested $174.9 million in capital expenditures. See the Capital Expenditures section for further details.
During the first quarter of 2019, KCS repurchased 465,523 shares of common stock for $50.3 million at an average price of $108.02 per share under the common share repurchase program announced in August 2017. Since inception of this program, KCS has repurchased 5,157,205 shares of common stock for $548.6 million at an average price of $106.37 per share. Management’s assessment of market conditions, available liquidity and other factors will determine the timing and volume of any future repurchases.
During the first quarter of 2019, the Company repurchased 2,110 shares of its $25 par preferred stock for less than $0.1 million at an average price of $26.40 per share.
During the first quarter of 2019, the Company’s Board of Directors declared a quarterly cash dividend on its common stock of $0.36 per share (total of $36.3 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.
On March 8, 2019, KCS entered into a new $600.0 million revolving credit facility which replaced its existing $800.0 million revolving credit facility.2020.
For additional discussion of the agreements representing the indebtedness of KCS, see Note 11,13, Short-Term Borrowings and Note 12,14, 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 ended December 31, 2018.2019.
On March 31, 20192020, total available liquidity (the cash balance plus revolving credit facility availability) was $692.7$691.0 million, compared to availability at December 31, 20182019 of $900.5$748.8 million. This decrease was due to shares repurchased during the reduction in the revolving credit facility availability discussed above.

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2020.
As of March 31, 2019,2020, the total cash and cash equivalents held outside of the U.S. in foreign subsidiaries was $51.7$33.5 million, after repatriating approximately $40.0$66.0 million during the first quarter of 2019.2020. 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”universal compensation that allowed Mexican taxpayers to offset
recoverable tax balances against balances due for other federal taxes. The elimination of “universal compensation”universal compensation could negatively impact the timing of KCSM’s cash flow by up to $60.0 million in 20192020 while awaiting refunds of value added tax from the Mexican government.


Cash Flow Information
Summary cash flow data follows (in millions):
Three Months EndedThree Months Ended
March 31,March 31,
2019 20182020 2019
Cash flows provided by (used for):      
Operating activities$272.7
 $140.6
$283.2
 $272.7
Investing activities(189.7) (124.2)(188.6) (189.7)
Financing activities(90.8) (103.5)(148.3) (90.8)
Effect of exchange rate changes on cash(4.1) —
Net decrease in cash and cash equivalents(7.8) (87.1)(57.8) (7.8)
Cash and cash equivalents beginning of year100.5
 134.1
148.8
 100.5
Cash and cash equivalents end of period$92.7
 $47.0
$91.0
 $92.7
Cash flows from operating activities increased $132.1$10.5 million for the three months ended March 31, 2019,2020, compared to the same period in 2018,2019, primarily due to an increase in net income, partially offset by a decrease in cash received for working capital items resulting mainly from the timing of certain receipts.

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Net cash used for investing activities increased $65.5decreased $1.1 million for the three months ended March 31, 2019,2020, compared to the same period in 2018,2019, due to an increasedecrease in capital expenditures of $69.9 million and an increase in investments in and advances to affiliates of $8.2$81.1 million, partially offset by a $11.2 million decreasean increase in the purchase or replacement of equipmentassets under existing operating leases. Additional information regarding capital expenditures is provided below.leases of $78.2 million.
Net cash used for financing activities decreased $12.7increased $57.5 million for the three months ended March 31, 2019,2020, compared to the same period in 2018,2019, primarily due to a decrease in repayment of long-term debt of $6.0 million, a decrease in repayments of net short-term borrowings of $4.1 million and a decreasean increase in shares repurchased of $3.7$61.4 million, partially offset by an increase in proceeds from employee stock plans of $4.2 million.



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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):
Three Months EndedThree Months Ended
March 31,March 31,
2019 20182020 2019
Roadway capital program$59.8
 $65.1
$56.6
 $59.8
Locomotives and freight cars85.3
 8.5
6.7
 85.3
Capacity16.4
 7.6
10.2
 16.4
Positive train control3.7
 6.2
3.3
 3.7
Information technology8.1
 7.9
9.0
 8.1
Other1.6
 2.8
0.8
 1.6
Total capital expenditures (accrual basis)174.9
 98.1
86.6
 174.9
Change in capital accruals5.0
 11.9
12.2
 5.0
Total cash capital expenditures$179.9
 $110.0
$98.8
 $179.9
      
      
Purchase or replacement of equipment under operating leases (accrual basis)$—
 $11.0
$78.2
 $—
Change in capital accruals—
 0.2
—
 —
Total cash purchase or replacement of equipment under operating leases$—
 $11.2
$78.2
 $—
Generally, the Company’s capital program consists of capital replacement and equipment. For 2019,2020, internally generated cash flows are expected to fund cash capital expenditures, which are currently estimated to be between $640.0$400.0 million and $660.0 million.$450.0 million, 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 20192020 is expected to be funded with internally generated cash flows and/or debt.


Other Matters


Regulatory Updates
USMCA.On November 30, 2018,January 16, 2020, the U.S. Senate approved the “USMCA Implementation Act” that had been approved by the U.S. House of Representatives on December 19, 2019. On January 29, 2020, U.S. President Donald J. Trump Canadian Prime Minister Trudeau, and then-Mexican President Peña Nieto signed the U.S.-Mexico-Canada Agreement (“USMCA”). implementing legislation into law.
Both Canada and Mexico have taken their required legislative actions to implement the new agreement.
The agreement would serve as a successorCanadian and Mexican governments have sent the notifications required under the USMCA that they have completed all the necessary requirements for its implementation. The U.S. has not provided the required notification. If the U.S. sends its notification before the end of April 2020, the deal could enter into force on July 1, 2020.  
North American trade is important to the 1994 North American Free Trade Agreement (“NAFTA”).Company and its business. The USMCA will not become effective until all three parties have completed their respective domestic ratification procedures.
In the United States, congressional review and approvalCompany believes completion of the USMCA is done underapproval process and implementation of the Bipartisan Trade Priorities and Accountability Act of 2015. Implementing legislation is expected to be introducedagreement should create more certainty about such trade going forward, improving the cross-border environment in Congress possibly inwhich the first half of 2019.Company operates.
U.S. Tariff Imposition on Imports. The administration of U.S. President Donald J. Trump has implemented new U.S. tariffs that could impact the level of trade between the U.S and Mexico and global commerce. U.S. trading partners have responded by announcing retaliatory tariffs on some U.S. exports. At this time, the Company cannot determine the impacts these tariffs will have on the Company’s consolidated financial statements.



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Collective Bargaining
KCSR participates in industry-wide multi-employer bargaining as a member of the National Carriers’ Conference Committee (“NCCC”), as well as local bargaining for agreements that are limited to KCSR's property. Approximately 75%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. TheseThe terms of these agreements will beremain in effect through December 2019.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. Approximately 80%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

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are subject to negotiation every two years. During the third quarter of 2018, theThe parties are currently negotiating compensation terms for the period coveringand benefits that will apply from July 1, 2018,2019 to June 30, 2019, were finalized between KCSM Servicios and the Mexican Railroad Union.2020, along with other terms. The finalization of the compensation terms didis 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 March 31, 2020, KCS had outstanding $3,186.2 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.

Summarized Financial Information

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Income StatementsKCS and Guarantor Subsidiaries
 Three Months Ended March 31, 2020 
Twelve Months Ended
December 31, 2019
Revenues$374.6
 $1,472.0
Operating expenses232.1
 1,068.5
Operating income142.5
 403.5
Income before income taxes111.3
 291.7
Net income99.2
 235.0

Balance SheetsKCS and Guarantor Subsidiaries
 March 31, 2020 December 31, 2019
Assets:   
Current assets$261.2
 $332.9
Property and equipment (including concession assets), net4,716.1
 4,596.3
Other non-current assets85.8
 156.9
    
Liabilities and equity:   
Current liabilities$280.7
 $313.5
Non-current liabilities4,252.2
 4,267.7
Noncontrolling interest323.9
 323.4

Excluded from current assets in the table above are $134.1 million and $95.2 million of current intercompany receivables due to KCS and the Guarantor Subsidiaries from the Non-Guarantor Subsidiaries as of March 31, 2020 and December 31, 2019, respectively. Excluded from current liabilities in the table above are $110.5 million and $55.0 million of current intercompany payables due to the Non-Guarantor Subsidiaries from KCS and the Guarantor Subsidiaries as of March 31, 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 the 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

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by a Guarantor Subsidiary, holders of the Senior Notes would no longer have any claim against such Guarantor Subsidiary. The measures of 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.

Item 3.Quantitative and Qualitative Disclosures about Market Risk
There was no material change during the quarter from the information set forth in Part II, Item 7A. “Quantitative and Qualitative Disclosure about Market Risk” in the Annual Report on Form 10-K for the year ended December 31, 20182019.


Item 4.Controls and Procedures
(a) Disclosure Controls and Procedures
As of the end of the period for which this Quarterly Report on Form 10-Q is filed, the Company’s Chief Executive Officer and Chief Financial Officer have each reviewed and evaluated the effectiveness of the Company’sThe Company maintains disclosure controls and procedures (as that term is defined in Rules 13a-15(e) and 15d-15(e) ofunder the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have each concluded that the Company’s current disclosure controls and procedures are effectivedesigned to ensure that information required to be disclosed byin the Company inCompany’s reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange CommissionSEC’s rules and forms, and include controls and procedures designed to ensure that information required to be disclosed by the Company in such reportsinformation is accumulated and communicated to the Company’s management, including theits Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.disclosures. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of the end of the quarterly period covered by this Quarterly Report on Form 10-Q.  Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the fiscal quarter ended March 31, 2020, the design and operation of the Company’s disclosure controls and procedures were effective to accomplish their objectives at a reasonable assurance level.
(b) Changes in Internal Control over Financial Reporting
There have not been anyno changes in the Company’s internal control over financial reporting (as that term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the firstfiscal quarter of 2019ended March 31, 2020 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. The Company implemented changes to internal controls due to the adoption of Accounting Standard Update No. 2016-02, Leases (Accounting Standard Codification Topic 842) effective January 1, 2019. These changes include implementing a new lease accounting system and processes to evaluate and account for contracts under the new accounting standard. There were no significant changes to the Company’s internal control over financial reporting due to the adoption of the new standard.




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PART II — OTHER INFORMATION


Item 1.Legal Proceedings
For information related to the Company’s legal proceedings, see Note 13,11, Commitments and Contingencies, under Part I, Item 1 of this quarterly report on Form 10-Q.


Item 1A.Risk Factors
ThereExcept as set forth below, during the quarter ended March 31, 2020, there were no material changes during the quarter to the Risk Factors disclosed in Item 1A - “Risk Factors” in our annual reportthe Company’s Annual Report on Form 10-K for the year ended December 31, 2018.2019.

Public health threats or outbreaks of communicable diseases could have a material adverse effect on the Company’s operations and financial results.
The Company may face risks related to public health threats or outbreaks of communicable diseases. A widespread healthcare crisis, such as an outbreak of a communicable disease could adversely affect the global economy and the Company’s and its business partners’ ability to conduct business in the U.S. and Mexico for an indefinite period of time. For example, the ongoing global Coronavirus Disease 2019 (COVID-19) pandemic, has negatively impacted global economy, disrupted financial markets and international trade, resulted in increased unemployment levels and significantly impacted global supply chains, all of which have started to negatively impact the rail transportation industry and the Company’s business. In addition, Federal, state, and local governments have implemented various mitigation measures, including travel restrictions, border closings, restrictions on public gatherings, shelter-in-place restrictions and limitations on business. Although the Company is considered an essential business, some of these actions have adversely impacted the ability of KCS employees, contractors, suppliers, customers, and other business partners to conduct business activities, and could ultimately do so for an indefinite period of time. This could have a material adverse effect on the Company’s results of operations, financial condition, and liquidity. In particular, the continued spread of COVID-19 and efforts to contain the virus could:
•continue to impact customer demand of the Company’s transportation services;
•cause the Company to experience an increase in costs as a result of the Company’s emergency measures, delayed payments from customers and uncollectable accounts;
•cause delays and disruptions in the supply chain resulting in disruptions in the commercial operation dates of certain projects;
•impact availability of qualified personnel; and
•cause other unpredictable events.
The situation surrounding COVID-19 remains fluid and the potential for a material impact on the Company’s results of operations, financial condition, and liquidity increases the longer the virus impacts activity levels in the United States and globally. For this reason, 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. The extent to which the COVID-19 pandemic may impact the Company’s business, operating results, financial condition, or liquidity will depend on future developments, including the duration of the outbreak, travel restrictions, business and workforce disruptions, and the effectiveness of actions taken to contain and treat the disease.


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Item 2.Unregistered Sales of Equity Securities and Use of Proceeds


Purchases of Equity Securities


The following table presents stock repurchases during each month for the first quarter of 2019:2020:
Period 
(a) Total 
Number 
of Shares 
(or Units) 
Purchased (1) 
 
(b) Average 
Price Paid 
per Share (or Unit) 
 
(c) Total 
Number of 
Shares 
(or Units) 
Purchased 
as Part of 
Publicly 
Announced 
Plans or
Programs (2) 
 
(d) Maximum 
Number (or 
Approximate 
Dollar Value) 
of Shares (or Units) 
that may yet be 
purchased under 
the Plans
or Programs (2)
 
Common stock             
January 1-31, 2019 123,050
  $107.64
  123,050
  $288,488,166
  
February 1-28, 2019 187,043
  $105.45
  187,043
  $268,764,223
  
March 1-31, 2019 155,430
  $111.40
  155,430
  $251,449,237
  
Total 465,523
   
  465,523
   
  
$25 Par preferred stock             
January 1-31, 2019 1,050
  $25.89
  —
  —
  
February 1-28, 2019 1,060
  $26.90
  —
  —
  
March 1-31, 2019 —
  —
  —
  —
  
Total 2,110
     —
     
Period 
(a) Total 
Number 
of Shares 
(or Units) 
Purchased
 
(b) Average 
Price Paid 
per Share (or Unit) 
 
(c) Total 
Number of 
Shares 
(or Units) 
Purchased 
as Part of 
Publicly 
Announced 
Plans or
Programs (1) 
 
(d) Maximum 
Number (or 
Approximate 
Dollar Value) 
of Shares (or Units) 
that may yet be 
purchased under 
the Plans
or Programs (1)
 
Common stock             
January 1-31, 2020 —
  —
  —
  $1,532,500,000
  
February 1-29, 2020 72,000
  $157.59
  72,000
  $1,521,153,565
  
March 1-31, 2020 (2)
 1,219,635
  $149.94
  1,219,635
  $1,338,280,820
  
Total 1,291,635
   
  1,291,635
   
  
(1)All $25 par preferred stock repurchases were made other than through a publicly disclosed plan or program. Repurchases of $25 par preferred stock were made through open market purchases and/or privately negotiated transactions.
(2)On August 15, 2017,November 12, 2019, the Company announced that the Board of Directors approved a share repurchase program, pursuant to which up to $800.0 million$2.0 billion in shares of common stock could be repurchased through June 30, 2020. The authorization included a $200.0 million AcceleratedDecember 31, 2022. Share Repurchaserepurchases may be made in the open market, through privately negotiated transactions, or through accelerated share repurchase (“ASR”) program and a $600.0 million open market share repurchase program.transactions.
(2)In March 2020, the Company received an aggregate delivery of 445,936 shares in settlement of its ASR agreements entered into in November 2019. This delivery of shares and their market price at time of delivery are included in the table above. The final number of total shares repurchased and the cost of shares repurchased was based on the volume-weighted average price of the Company’s common stock during the term of the agreements. Refer to Note 10, Share Repurchases for additional information.


Item 3.Defaults upon Senior Securities
None.


Item 4.Mine Safety Disclosures
Not applicable.


Item 5.Other Information
None.




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Item 6.Exhibits
Exhibit
No.
 Exhibits
   
10.122.1 
Credit Agreement, dated March 8, 2019, among the Company, the guarantors party thereto, the various financial institutionsList of Issuers and other persons from time to time parties thereto as lenders, Bank of America, N.A., as administrative agent, Citibank, N.A., JPMorgan Chase Bank, N.A., U.S. Bank National Association and Wells Fargo Bank, National Association, as co-syndication agents and Merrill Lynch, Pierce, Fenner & Smith Incorporated, Citibank, N.A., JPMorgan Chase Bank, N.A., U.S. Bank National Association and Wells Fargo Securities, LLC, as joint lead arrangers and joint bookrunning managers, filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on March 11, 2019 (File No. 1-4717), is incorporated herein by reference as Exhibit 10.1.Guarantor Subsidiaries.
   
10.231.1 
Form of Non-Qualified Stock Option, Restricted Share and Performance Share Award Agreement under the Kansas City Southern 2017 Equity Incentive Plan for the 2019 Long-Term Incentive Program, filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on March 11, 2019 (File No. 1-4717), is incorporated herein by reference as Exhibit 10.2.
10.3*
English translation of amendment no. 4, dated December 20, 2017, of concession title granted by Secretaría de Comunicaciones y Transportes (“SCT”) in favor of KCSM, formerly known as Ferrocarril del Noreste, S.A. de C.V. (“FNE”), December 2, 1996, as amended February 12, 2001, November 22, 2006 and December 31, 2013, is attached to this Form 10-Q as Exhibit 10.3.
10.4*
English translation of amendment no. 5, dated April 27, 2018, of concession title granted by SCT in favor of KCSM, formerly known as FNE, December 2, 1996, as amended February 12, 2001, November 22, 2006, December 31, 2013 and December 20, 2017, is attached to this Form 10-Q as Exhibit 10.4.
31.1*
Principal Executive Officer’s Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 is attached to this Form 10-Q as Exhibit 31.1.
   
31.2*31.2 
Principal Financial Officer’s Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 is attached to this Form 10-Q as Exhibit 31.2.
   
32.1* 
Principal Executive Officer’s Certification furnished Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 is attached to this Form 10-Q as Exhibit 32.1.
   
32.2* 
Principal Financial Officer’s Certification furnished Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 is attached to this Form 10-Q as Exhibit 32.2.
   
101101.INS The following unaudited financial information from Kansas City Southern’s Quarterly Report on Form 10-Q forXBRL Instance Document - the quarter ended March 31, 2019, formattedinstance document does not appear in the Interactive Data File because its XBRL
tags are embedded within the Inline XBRL (Extensible Business Reporting Language) includes: (i) Consolidated Statements of Income for the three months ended March 31, 2019document.
101.SCHInline XBRL Taxonomy Extension Schema Document.
101.CALInline XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEFInline XBRL Taxonomy Extension Definition Linkbase Document.
101.LABInline XBRL Taxonomy Extension Label Linkbase Document.
101.PREInline XBRL Taxonomy Extension Presentation Linkbase Document.
104Cover Page Interactive Data File (formatted as an Inline XBRL document and 2018, (ii) Consolidated Statements of Comprehensive Income for the three months ended March 31, 2019 and 2018, (iii) Consolidated Balance Sheets as of March 31, 2019 and December 31, 2018, (iv) Consolidated Statements of Cash Flows for the three months ended March 31, 2019 and 2018, (v) Consolidated Statements of Changesincluded in Equity for the three months ended March 31, 2019 and 2018, and (vi) the Notes to Consolidated Financial Statements.Exhibit 101).
   
  * Filed with this Report.Furnished herewith.
   




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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized and in the capacities indicated on April 17, 20192020.


Kansas City Southern
 
/s/    MICHAEL W. UPCHURCH        
Michael W. Upchurch
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
 
/s/    SUZANNE M. GRAFTON        
Suzanne M. Grafton
Vice President and Chief Accounting Officer
(Principal Accounting Officer)




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