FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
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 INDUSTRIES, INC.
(Exact name of Company as specified in its charter)
Delaware 44-0663509
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
114 West 11th Street, Kansas City, Missouri 64105
(Address of principal executive offices) (Zip Code)
(816) 983-1303
(Company's telephone number, including area code)
No Changes
(Former name, former address and former fiscal year,
if changed since last report.)
Indicate by check mark whether the Company (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 Company was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at July 31, 1997
Common Stock, $.01 per share par value 35,721,898 Shares (pro forma
107,165,694 shares post-split)
KANSAS CITY SOUTHERN INDUSTRIES, INC.
FORM 10-Q
JUNE 30, 1997
INDEX
Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Introductory Comments 1
Consolidated Condensed Balance Sheets -
June 30, 1997 and December 31, 1996 2
Consolidated Condensed Statements of Income -
Three and Six Months Ended June 30, 1997 and 1996 3
Computation of Primary Earnings per Common Share 3
Consolidated Condensed Statements of Cash Flows -
Six Months Ended June 30, 1997 and 1996 4
Notes to Consolidated Condensed Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 22
Item 6. Exhibits and Reports on Form 8-K 22
SIGNATURES 23
KANSAS CITY SOUTHERN INDUSTRIES, INC.
FORM 10-Q
JUNE 30, 1997
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
INTRODUCTORY COMMENTS
The Consolidated Condensed Financial Statements included herein have been
prepared by the Company, without audit, pursuant to the rules and regulations
of the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations, although the Company believes that the
disclosures are adequate to enable a reasonable understanding of the
information presented. These Consolidated Condensed Financial Statements
should be read in conjunction with the financial statements and the notes
thereto included in the Company's Annual Report on Form 10-K for the year
ended December 31, 1996.
<PAGE 2>
KANSAS CITY SOUTHERN INDUSTRIES, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollars in Millions)
(Unaudited)
June 30, December 31,
1997 1996
ASSETS
Current Assets:
Cash and equivalents $ 18.1 $ 22.9
Accounts receivable, net 163.0 138.1
Inventories 39.9 39.3
Other current assets 66.9 91.8
Total current assets 287.9 292.1
Investments held for operating purposes 655.5 335.2
Properties (net of $509.8 and $491.3 accumulated
depreciation and amortization, respectively) 1,262.1 1,219.3
Intangibles and Other Assets, net 241.4 237.5
Total assets $ 2,446.9 $ 2,084.1
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Debt due within one year $ 7.5 $ 7.6
Accounts and wages payable 91.5 102.6
Accrued liabilities 169.7 134.4
Total current liabilities 268.7 244.6
Other Liabilities:
Long-term debt 927.3 637.5
Deferred income taxes 352.0 337.7
Other deferred credits 138.2 129.8
Total other liabilities 1,417.5 1,105.0
Minority Interest in consolidated subsidiaries 15.5 18.8
Stockholders' Equity:
Preferred stock 7.1 7.1
Common stock 0.4 0.4
Capital surplus - -
Retained earnings 903.7 883.3
Net unrealized gain on investments 34.0 24.9
Shares held in trust (200.0) (200.0)
Total stockholders' equity 745.2 715.7
Total liabilities and stockholders' equity $ 2,446.9 $ 2,084.1
See accompanying notes to consolidated condensed financial statements.
<PAGE 3>
KANSAS CITY SOUTHERN INDUSTRIES, INC.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Dollars in Millions, Except per Share Data)
(Unaudited)
Three Months Six Months
Ended June 30, Ended June 30,
1997 1996 1997 1996
Revenues $ 252.6 $ 206.9 $ 490.4 $ 408.2
Costs and expenses 166.8 142.0 330.5 283.8
Depreciation and amortization 18.4 19.2 36.9 38.2
Operating Income 67.4 45.7 123.0 86.2
Equity in net earnings (losses) of
unconsolidated affiliates:
DST Systems, Inc. 5.7 5.0 11.8 6.9
Grupo Transportacion Ferroviaria
Mexicana, S.A. de C.V. (3.0) - (3.0) -
Other 1.2 0.2 1.8 1.5
Interest expense (13.6) (14.2) (27.3) (27.1)
Other, net 4.3 5.3 10.3 9.9
Pretax Income 62.0 42.0 116.6 77.4
Income tax provision 24.3 15.7 45.7 28.2
Minority interest in
consolidated earnings 5.9 3.9 10.6 6.9
Net Income 31.8 22.4 60.3 42.3
Less: dividends on preferred stock 0.1 0.1 0.1 0.1
Net Income Applicable to
Common Stockholders $ 31.7 $ 22.3 $ 60.2 $ 42.2
Computation of Primary Earnings per Common Share
Weighted Average Primary Common
Shares Outstanding (in thousands) 36,506 39,279 36,648 39,650
Primary Earnings per Common Share $ 0.87 $ 0.57 $ 1.64 $ 1.06
Pro Forma Weighted Average Primary
Common Shares Outstanding
(in thousands) (Note 3) 109,518 117,837 109,944 118,950
Pro Forma Primary Earnings
per Common Share (Note 3) $ 0.29 $ 0.19 $ 0.55 $ 0.35
Cash Dividends Paid:
Per Preferred share $ .25 $ .25 $ .50 $ .50
Per Common share .10 .10 .20 .20
Pro Forma Per Common share (Note 3) .03 .03 .07 .07
See accompanying notes to consolidated condensed financial statements.
<PAGE 4>
KANSAS CITY SOUTHERN INDUSTRIES, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in Millions)
(Unaudited)
Six Months
Ended June 30,
1997 1996
CASH FLOWS PROVIDED BY (USED FOR):
OPERATING ACTIVITIES:
Net income $ 60.3 $ 42.3
Adjustments to net income:
Depreciation and amortization 36.9 38.2
Deferred income taxes 10.7 3.9
Equity in undistributed earnings (10.6) (4.6)
Changes in working capital items:
Accounts receivable (14.9) (1.9)
Inventories 0.9 1.0
Other current assets (4.6) (1.7)
Accounts and wages payable (17.6) (5.2)
Accrued liabilities 24.7 (59.8)
Other, net (5.7) (8.6)
Net 80.1 3.6
INVESTING ACTIVITIES:
Property acquisitions (33.1) (73.3)
Proceeds from disposal of property 4.3 2.6
Investment in and loans with affiliates (298.9) (27.8)
Net sales (purchases) of short-term investments 27.1 (19.3)
Proceeds from disposal of investments - 8.8
Other, net 8.0 4.6
Net (292.6) (104.4)
FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt 298.0 172.8
Repayment of long-term debt (50.3) (5.3)
Proceeds from stock plans 7.8 6.5
Stock repurchased (42.4) (84.8)
Cash dividends paid (11.0) (10.9)
Other, net 5.6 1.4
Net 207.7 79.7
CASH AND EQUIVALENTS:
Net decrease (4.8) (21.1)
At beginning of year 22.9 31.8
At end of period $ 18.1 $ 10.7
See accompanying notes to consolidated condensed financial statements.
<PAGE 5>
KANSAS CITY SOUTHERN INDUSTRIES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1. In the opinion of Kansas City Southern Industries, Inc. ("Company";
"KCSI"), the accompanying unaudited consolidated condensed financial
statements contain all adjustments (consisting of normal closing
procedures) necessary to present fairly the financial position of the
Company and its subsidiaries as of June 30, 1997 and December 31, 1996,
the results of operations for the three and six months ended June 30,
1997 and 1996, and cash flows for the six months ended June 30, 1997
and 1996.
2. The results of operations for the three and six months ended June 30,
1997 and 1996 are not necessarily indicative of the results to be
expected for the full year 1997.
3. The accompanying consolidated condensed financial statements have been
prepared consistently with accounting policies described more fully in
Note 1 to the consolidated financial statements included in the Company's
Annual Report on Form 10-K for the year ended December 31, 1996.
On July 29, 1997, the Company's Board of Directors authorized a 3-for-1
split of the Company's common stock to be effected in the form of a
stock dividend payable September 16, 1997 to stockholders of record as of
August 25, 1997. Appropriate pro forma share and per share data has been
provided to reflect the stock split.
Effective January 1, 1997, the Company realigned its business segments to
better define the core industries in which it operates. The various
components comprising the segment formerly known as Corporate & Other
have been assigned to either the Transportation or Financial Asset
Management segment. Transportation consists of: The Kansas City
Southern Railway Company ("KCSR"); Southern Group, Inc.; Gateway Western
Railway Company ("Gateway Western"); transportation-related KCSI Holding
Company amounts; and transportation-related subsidiaries and equity
investments, including Grupo Transportacion Ferroviaria Mexicana, S.A. de
C.V. ("Grupo TFM," formerly Transportacion Ferroviaria Mexicana S. de
R.L. de C.V.), Southern Capital Corporation, LLC ("Southern
Capital"), and Mexrail, Inc. ("Mexrail"). Financial Asset Management
includes Janus Capital Corporation ("Janus"), Berger Associates, Inc.
("Berger"), the Company's equity interest in DST Systems, Inc. ("DST"),
as well as Financial Asset Management-related KCSI Holding Company
amounts. Prior year's information has been realigned to reflect the new
segment approach.
The accumulation of the 1996 first quarter and second quarter Primary
Earnings per Common Share does not total the Primary Earnings per Common
Share for the six months ended June 30, 1996, as a result of repurchases
of Company common stock.
4. The Company's inventories ($39.9 million at June 30, 1997 and $39.3
million at December 31, 1996) primarily consist of material and supplies
related to rail transportation. Other components of inventories are not
material.
5. Investments in unconsolidated affiliates and certain other investments
accounted for under the equity method generally include all entities in
which the Company or its subsidiaries have significant influence but not
more than 50% voting interest. Investments in unconsolidated affiliates
at June 30, 1997 include equity interests in DST (approximately 41%),
Grupo TFM (37%), Southern Capital (50%) and Mexrail (49%), as well as
the Company's interests in other companies.
<PAGE 6>
As more fully discussed in the Company's Annual Report on Form 10-K for
the year ended December 31, 1996, during first quarter 1997, Gateway
Western was accounted for under the equity method as a majority-owned
subsidiary while the Company awaited approval from the Surface
Transportation Board ("STB") for the acquisition of Gateway Western.
The STB approved the Company's acquisition of Gateway Western, effective
May 5, 1997. Accordingly, the assets, liabilities, revenues and expenses
of Gateway Western are included in the Company's consolidated financial
statements. Additionally, the Company restated first quarter 1997 to
include Gateway Western as a consolidated subsidiary as of
January 1, 1997, and results of operations for the six months ended
June 30, 1997 reflect this restatement.
DST has a Stockholders' Rights Agreement, which includes provisions
providing that under certain circumstances following a "change in
control" of KCSI, as defined in DST's Stockholders' Rights Agreement,
substantial dilution of the Company's interest in DST could result.
Additionally, the Company is party to certain agreements with
Transportacion Maritima Mexicana, S.A. de C.V. ("TMM")
covering the Grupo TFM and Mexrail ventures. TMM (including its
affiliates) owns approximately 38.4% of Grupo TFM and 51% of Mexrail.
These agreements contain "change in control" provisions, provisions
intended to preserve the Company's and TMM's proportionate ownership of
the ventures, and super majority provisions with respect to voting on
certain significant transactions. Such agreements also provide a right
of first refusal in the event that either party initiates a divestiture
of its equity interest in Grupo TFM or Mexrail. Under certain
circumstances, such agreements could affect the Company's
ownership percentage and rights in these equity affiliates.
Combined condensed financial information of unconsolidated affiliates is
shown below (dollars in millions):
Financial Condition:
June 30, 1997 December 31, 1996
DST Grupo TFM Other DST Grupo TFM Other
Current Assets $ 208.9 $ 45.4 $ 19.4 $ 201.3 $ 1.2 $ 34.4
Non-current assets 970.0 1,879.8 272.1 920.3 4.2 331.7
Assets $1,178.9 $1,925.2 $ 291.5 $1,121.6 $ 5.4 $ 366.1
Current liabilities $ 100.9 $ 16.6 $ 16.1 $ 125.7 $ 1.2 $ 27.2
Non-current liabilities 331.6 1,109.5 201.3 300.7 - 267.7
Equity of stockholders
and partners 746.4 799.1 74.1 695.2 4.2 71.2
Liabilities and
equity $1,178.9 $1,925.2 $ 291.5 $1,121.6 $ 5.4 $ 366.1
Investment in
unconsolidated
affiliates $ 306.3 $ 298.4 $ 41.0 $ 283.5 $ 2.7 $ 39.7
<PAGE 7>
Operating Results:
Three Months Six Months
Ended June 30, Ended June 30,
1997 1996 1997 1996
Revenues:
DST $ 155.4 $ 143.2 $ 314.1 $ 287.5
Grupo TFM (a) 7.0 - 7.0 -
All others 17.0 6.9 32.8 15.1
Total revenues $ 179.4 $ 150.1 $ 353.9 $ 302.6
Operating costs and expenses:
DST $ 134.4 $ 125.7 $ 269.4 $ 250.8
Grupo TFM (a) 7.0 - 7.0 -
All others 13.6 6.0 27.2 13.7
Total operating costs
and expenses $ 155.0 $ 131.7 $ 303.6 $ 264.5
Net income:
DST $ 13.8 $ 12.3 $ 28.9 $ 16.7
Grupo TFM (a) (7.9) - (7.9) -
All others 2.3 0.7 3.1 0.1
Total net income $ 8.2 $ 13.0 $ 24.1 $ 16.8
(a) The operating results provided for Grupo TFM reflect its operation of TFM,
S.A. de C.V. ("TFM Rail," formerly Ferrocarril del Noreste, S.A. de C.V.)
beginning on June 23, 1997. See discussion in Note 8 below.
6. For purposes of the Statement of Cash Flows, the Company considers all
short-term liquid investments with a maturity of generally three months
or less to be cash equivalents.
a. Supplemental Cash Flow Information (in millions):
Six Months
Ended June 30,
1997 1996
Interest paid (excluding capitalized interest) $ 25.1 $ 29.5
Income taxes paid 18.9 88.3
The Company's income taxes paid for the six months ended June 30, 1996
included the payment of federal and state income taxes resulting from the
DST initial public offering transactions, which occurred in fourth quarter
1995.
b. Noncash Investing and Financing Activities:
In first quarter 1997, the Company issued approximately 82,000 shares of
KCSI common stock under the Ninth Offering of the Employee Stock Purchase
Plan ("ESPP"). These shares, totaling a purchase price of approximately
$3.1 million, were subscribed and paid for through employee payroll
deductions in 1996.
In first quarter 1996, the Company issued approximately 101,800 shares of
KCSI common stock under the Eighth Offering of the ESPP. These shares,
totaling a purchase price of approximately $3.8 million, were subscribed
and paid for through employee payroll deductions in 1994 and 1995.
<PAGE 8>
Certain Company subsidiaries and affiliates hold investments which are
accounted for as "available for sale" securities as defined by Statement
of Financial Accounting Standards No. 115 "Accounting for Certain
Investments in Debt and Equity Securities." The Company records its
proportionate share of any unrealized gains or losses related to these
investments, net of deferred taxes, in stockholders' equity. The
unrealized gain as of June 30, 1997, net of deferred taxes, related to
these investments increased $9.1 million from December 31, 1996. The
unrealized gain as of June 30, 1996, net of deferred taxes, increased
$3.3 million from December 31, 1995.
7. Statement of Financial Accounting Standards No. 128 "Earnings per Share"
("SFAS 128") was issued in February 1997, effective for financial
statements for interim and annual periods ending after December 15, 1997.
The statement specifies the computation, presentation and disclosure
requirements for earnings per share. The statement requires the
computation of earnings per share under two methods: "basic" and
"diluted." Basic earnings per share is computed by dividing income
available to common stockholders by the weighted average number of common
shares outstanding during the period. Diluted earnings per share is
computed giving effect to all dilutive potential common shares that were
outstanding during the period (i.e., the denominator used in the basic
calculation is increased to include the number of additional common shares
that would have been outstanding if the dilutive potential common shares
had been issued). SFAS 128 requires the Company to present basic and
diluted per share amounts for income from continuing operations and for
net income on the face of the income statement.
Although early adoption of SFAS 128 is not permitted, pro forma earnings
per share amounts may be disclosed in the notes to the financial state-
ments. Accordingly, if the Company's earnings per share had been computed
in accordance with SFAS 128 for the three and six months ended June 30,
1997 and 1996, pro forma earnings per share (on a pre and post-split
basis) would have been as follows:
Three Months Six Months
Ended June 30, Ended June 30,
1997 1996 1997 1996
Pro Forma Earnings per Share (pre-split):
Basic $ 0.89 $ 0.58 $ 1.68 $ 1.10
Diluted 0.87 0.57 1.64 1.06
Pro Forma Earnings per Share (post-split):
Basic $ 0.30 $ 0.19 $ 0.56 $ 0.37
Diluted 0.29 0.19 0.55 0.35
8. As discussed more fully in Notes 2 and 11 to the consolidated financial
statements included in the Company's Annual Report on Form 10-K for the
year ended December 31, 1996, the Mexican Government ("Government")
awarded to Grupo TFM the right to purchase 80% of the common stock of TFM
Rail for approximately 11.072 billion Mexican pesos (approximately $1.4
billion U.S. based on the U.S. dollar/Mexican peso exchange rate on
December 5, 1996). TFM Rail holds the concession to operate Mexico's
Northeast rail lines for the next 50 years, with the option of a 50 year
extension (subject to certain conditions).
The remaining 20% of TFM Rail was retained by the Government. The
Government has the option of selling its interest through a public
offering, or selling it to Grupo TFM after October 31, 2003 at the
initial share price paid by Grupo TFM plus interest computed at the
Mexican Base Rate (the Unidad de Inversiones (UDI) published by Banco de
Mexico). In the event that Grupo TFM does not purchase the Government's
20% interest in TFM Rail, the Government may require TMM and KCSI to
purchase the Government's holdings in proportion to each partner's
respective ownership interest in Grupo TFM (without regard to the
Government's interest in Grupo TFM - see below).
<PAGE 9>
On January 31, 1997, Grupo TFM paid the first installment of the purchase
price (approximately $565 million U.S. based on the U.S. dollar/Mexican
peso exchange rate) to the Government, representing approximately 40% of
the purchase price. This initial installment of the TFM Rail purchase
price was funded by Grupo TFM through capital contributions from TMM and
the Company. The Company contributed approximately $297 million to Grupo
TFM, of which approximately $277 million was used by Grupo TFM as part of
the initial installment payment. The Company financed this contribution
using borrowings under existing lines of credit.
On June 23, 1997, Grupo TFM completed the purchase of 80% of TFM Rail
through the payment of the remaining $835 million U.S. to the Government.
This payment was funded by Grupo TFM using a significant portion of the
funds obtained from: (i) senior secured term credit facilities ($325
million U.S.); (ii) senior notes and discount debentures ($400 million
U.S.); (iii) proceeds from the sale of 24.6% of Grupo TFM to the
Government (approximately $199 million U.S. based on the U.S. dollar/
Mexican peso exchange rate on June 23, 1997); and (iv) additional capital
contributions from TMM and the Company (approximately $1.4 million from
each partner). Additionally, Grupo TFM entered into a $150 million
revolving credit facility for general working capital purposes. The
Government's interest in Grupo TFM is in the form of limited voting right
shares, and the purchase agreement includes a call option for TMM and the
Company, which is exercisable at the original amount (in U.S. dollars)
paid by the Government plus interest based on one-year U.S. Treasury
securities.
In February and March 1997, the Company entered into two separate forward
contracts - $98 million in February 1997 and $100 million in March
1997 - to purchase Mexican pesos in order to hedge against a portion of
the Company's exposure to fluctuations in the value of the Mexican peso
versus the U.S. dollar. In April 1997, the Company realized a $3.8
million pretax gain in connection with these contracts. This gain was
deferred, and has been accounted for as a component of the Company's
investment in Grupo TFM. These contracts were intended to hedge only a
portion of the Company's exposure related to the final installment of the
purchase price and not any other transactions or balances.
Concurrent with the financing transactions, Grupo TFM, TMM and the Company
entered into a Capital Contribution Agreement ("Contribution Agreement")
with TFM Rail, which could include a possible capital call of $150
million from TMM and the Company if certain performance benchmarks,
outlined in the agreement, are not met. The Company would be
responsible for approximately $74 million of the capital call. The
term of the Contribution Agreement is three years. In a related agreement
between Grupo TFM, TFM Rail and the Government, among others, the
Government has agreed to contribute up to $37.5 million of equity capital
to Grupo TFM if TMM and the Company are required to contribute under the
capital call provisions of the Contribution Agreement prior to July 16,
1998. In the event the Government has not made any contributions by such
date, the Government has committed up to July 31, 1999 to make
additional capital contributions to Grupo TFM (of up to an aggregate
amount of $37.5 million) on a 1:3 proportionate basis with TMM and the
Company if capital contributions are required. Any capital contributions
to Grupo TFM from the Government would be used to reduce the contribution
amounts required to be paid by TMM and the Company pursuant to the
Contribution Agreement.
Based on the completed financing arrangements for Grupo TFM, significant
additional contributions from the Company to Grupo TFM are not expected to
be necessary (except for the possible capital call discussed above).
As of June 30, 1997, the Company's investment in Grupo TFM was
approximately $298 million. With the sale of 24.6% of Grupo TFM to the
Government, the Company's interest in Grupo TFM declined from 49% to
approximately 37% (with TMM and a TMM affiliate owning the remaining
38.4%). The Company accounts for its investment in Grupo TFM under the
equity method.
<PAGE 10>
In connection with the Company's investment in Grupo TFM, a Mexican
company, matters arise with respect to financial accounting and reporting
for foreign currency transactions and for translating foreign currency
financial statements from Mexican pesos into U.S. dollars. The Company
follows the requirements outlined in Statement of Financial Accounting
Standards No. 52 "Foreign Currency Translation" ("SFAS 52"), and related
authoritative guidance.
Mexico's economy is currently classified as "highly inflationary" as
defined in SFAS 52; accordingly, the U.S. dollar is Grupo TFM's functional
currency, and any gains or losses from translating its financial statements
into U.S. dollars will be included in the determination of its net income.
Any equity earnings or losses from Grupo TFM included in the Company's
results of operations will reflect the Company's share of such transla-
tion gains and losses. The Company will evaluate existing alternatives
with respect to utilizing foreign currency instruments to hedge its U.S.
dollar investment in Grupo TFM as market conditions change or exchange
rates fluctuate.
9. In accordance with Statement of Financial Accounting Standards No. 58
"Capitalization of Interest Cost in Financial Statements That Include
Investments Accounted for by the Equity Method" ("SFAS 58"), the Company
has capitalize interest incurred on the borrowings under its lines of
credit associated with the approximate $297 million capital contribution
to Grupo TFM (see Note 8 above). Pursuant to SFAS 58, once Grupo TFM
assumed operational control of TFM Rail (Jun 23, 1997) and the planned
principal operations of Grupo TFM commenced, capitalization of interest
by the Company ceased. Interest capitalized by the Company for the three
and six months ended June 30, 1997 totaled $4.3 and $7.4 million,
respectively.
10. In June 1997, Statement of Financial Accounting Standards No. 130
"Reporting Comprehensive Income" ("SFAS 130") and Statement of Financial
Accounting Standards No. 131 "Disclosures about Segments of an Enterprise
and Related Information" ("SFAS 131") were issued. SFAS 130 establishes
standards for reporting and disclosure of comprehensive income and its
components in the financial statements. SFAS 131 establishes standards
for reporting information about operating segments in the financial
statements. The reporting and disclosure required by these statements
must be included in the Company's financial statements beginning in 1998.
The Company is reviewing SFAS 130 and SFAS 131 and expects to adopt them
by the required dates.
11. The Company has had no significant changes in its outstanding litigation or
other contingencies from that previously reported in the Company's Annual
Report on Form 10-K for the year ended December 31, 1996.
12. See the Recent Developments section of Item 2, Management's Discussion and
Analysis of Financial Condition and Results of Operations, for significant
transactions and events that will have an impact on the Company's future
results of operations and financial position.
<PAGE 11>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
OVERVIEW
The discussion set forth below, as well as other portions of this Form 10-Q,
contains comments not based upon historical fact. Such forward-looking
comments are based upon information currently available to management and
management's perception thereof as of the date of this Form 10-Q. The actual
results of operations of Kansas City Southern Industries, Inc. ("Company";
"KCSI") could materially differ from those indicated in forward-looking
comments. The differences could be caused by a number of factors or
combination of factors including, but not limited to, those factors identified
in the Company's Current Report on Form 8-K dated November 12, 1996 and its
amendment, Form 8-K/A dated June 3, 1997, which have been filed with the U.S.
Securities and Exchange Commission (File No. 1-4717) and are hereby
incorporated by reference herein. Readers are strongly encouraged to consider
these factors when evaluating any such forward-looking comments.
KCSI, a Delaware Corporation organized in 1962, is a diversified holding
company with principal operations in rail transportation and Financial Asset
Management. The Company supplies its various subsidiaries with managerial,
legal, tax, financial and accounting services, in addition to managing other
"non-operating" and more passive investments.
Effective January 1, 1997, the Company realigned its industry segments to more
clearly reflect the Company's focus on its core businesses. The various
components which formerly comprised the Corporate & Other segment were assigned
to either the Transportation or Financial Asset Management segment.
Accordingly, the Company's business activities by newly aligned industry
segment and principal subsidiary companies are:
Transportation - The Transportation segment consists of all transportation-
related subsidiaries and investments, including:
* The Kansas City Southern Railway Company ("KCSR"), a wholly-owned sub-
sidiary of the Company, operating a Class I Common Carrier railroad system;
* Southern Group, Inc. ("SGI"), a wholly-owned subsidiary of KCSR, owning
100% of Carland, Inc. ("Carland") and managing the loan portfolio for
Southern Capital Corporation, LLC ("Southern Capital," a 50% owned joint
venture);
* Gateway Western Railway Company ("Gateway Western"), an indirect wholly-
owned subsidiary of the Company, operating a regional railroad system;
* Equity investments in Southern Capital, Grupo Transportacion Ferroviaria
Mexicana, S.A. de C.V. ("Grupo TFM," formerly Transportacion Ferroviaria
Mexicana S. de R.L. de C.V., a 37% owned affiliate), and Mexrail, Inc.
("Mexrail," a 49% owned affiliate);
* Various other consolidated subsidiaries;
* KCSI Holding Company amounts.
Financial Asset Management - This segment consists of all subsidiaries engaged
in the management of investments for mutual funds, private and other accounts,
as well as any Financial Asset Management-related investments. Included are:
* Janus Capital Corporation ("Janus"), an 83% owned subsidiary;
* Berger Associates, Inc. ("Berger"), an 87% owned subsidiary;
* DST Systems, Inc. ("DST"), an approximate 41% owned equity investment;
* KCSI Holding Company amounts.
<PAGE 12>
RECENT DEVELOPMENTS
Mexico's Northeast Rail Lines - As disclosed previously, Grupo TFM, a joint
venture of the Company and Transportacion Maritima Mexicana, S.A. de C.V.
("TMM") was awarded the right to purchase 80% of the common stock of TFM, S.A.
de C.V. ("TFM Rail," formerly Ferrocarril del Noreste, S.A. de C.V.) for
approximately 11.072 billion Mexican pesos (approximately $1.4 billion U.S.
based on the U.S. dollar/Mexican peso exchange rate on December 5, 1996). TFM
Rail holds the concession to operate Mexico's Northeast rail lines for the next
50 years, with the option of a 50 year extension (subject to certain
conditions).
As previously disclosed, the remaining 20% of TFM Rail was retained by the
Mexican Government ("Government"). The Government has the option of selling
its 20% interest through a public offering, or selling it to Grupo TFM after
October 31, 2003 at the initial share price paid by Grupo TFM plus interest
computed at the Mexican Base Rate (the Unidad de Inversiones (UDI) published by
Banco de Mexico). In the event that Grupo TFM does not purchase the
Government's 20% interest in TFM Rail, the Government may require TMM and
KCSI to purchase the Government's holdings in proportion to each partner's
respective ownership interest in Grupo TFM (without regard to the
Government's interest in Grupo TFM - see below).
On January 31, 1997, Grupo TFM paid the first installment of the purchase price
(approximately $565 million U.S. based on the U.S. dollar/Mexican peso exchange
rate) to the Government, representing approximately 40% of the purchase
price. This initial installment of the TFM Rail purchase price was funded by
Grupo TFM through capital contributions from TMM and the Company. The
Company contributed approximately $297 million to Grupo TFM, of which
approximately $277 million was used by Grupo TFM as part of the initial
installment payment. The Company financed this contribution using borrowings
under existing lines of credit.
On June 23, 1997, Grupo TFM completed the purchase of 80% of TFM Rail through
the payment of the remaining $835 million U.S. to the Government. This
payment was funded by Grupo TFM using a significant portion of the funds
obtained from: (i) senior secured term credit facilities ($325 million U.S.);
(ii) senior notes and discount debentures ($400 million U.S.); (iii) proceeds
from the sale of 24.6% of Grupo TFM to the Government (approximately
$199 million U.S. based on the U.S. dollar/Mexican peso exchange rate on June
23, 1997); and (iv) additional capital contributions from TMM and the Company
(approximately $1.4 million from each partner). Additionally, Grupo TFM
entered into a $150 million revolving credit facility for general working
capital purposes. The Government's interest in Grupo TFM is in the form of
limited voting right shares, and the purchase agreement includes a call
option for TMM and the Company, which is exercisable at the original amount
(in U.S. dollars) paid by the Government plus interest based on one-year U.S.
Treasury securities.
In February and March 1997, the Company entered into two separate forward
contracts - $98 million in February 1997 and $100 million in March 1997 -
to purchase Mexican pesos in order to hedge against a portion of the Company's
exposure to fluctuations in the value of the Mexican peso versus the U.S.
dollar. In April 1997, the Company realized a $3.8 million pretax gain in
connection with these contracts. This gain was deferred, and has been
accounted for as a component of the Company's investment in Grupo TFM.
These contracts were intended to hedge only a portion of the Company's
exposure related to the final installment of the purchase price and not any
other transactions or balances.
Concurrent with the financing transactions, Grupo TFM, TMM and the Company
entered into a Capital Contribution Agreement ("Contribution Agreement") with
TFM Rail, which could include a possible capital call of $150 million from TMM
and the Company if certain performance benchmarks, outlined in the agreement,
are not met. The Company would be responsible for approximately $74 million of
the capital call. The term of the Contribution Agreement is three years. In a
related agreement between Grupo TFM, TFM Rail and the Government, among others,
the Government has agreed to contribute up to $37.5 million of
<PAGE 13>
equity capital to Grupo TFM if TMM and the Company are required to contribute
under the capital call provisions of the Contribution Agreement prior to
July 16, 1998. In the event the Government has not made any contributions
by such date, the Government has committed up to July 31, 1999 to make
additional capital contributions to Grupo TFM (of up to an aggregate amount
of $37.5 million) on a 1:3 proportionate basis with TMM and the Company if
capital contributions are required. Any capital contributions to Grupo TFM
from the Government would be used to reduce the contribution amounts
required to be paid by TMM and the Company pursuant to the Contribution
Agreement.
Based on the completed financing arrangements for Grupo TFM, significant
additional contributions from the Company to Grupo TFM are not expected to
be necessary (except for the possible capital call discussed above).
As of June 30, 1997, the Company's investment in Grupo TFM was approximately
$298 million. With the sale of 24.6% of Grupo TFM to the Government, the
Company's interest in Grupo TFM declined from 49% to approximately 37% (with
TMM and a TMM affiliate owning the remaining 38.4%). The Company accounts for
its investment in Grupo TFM under the equity method.
Stock Split and 20% Increase in Quarterly Common Stock Dividend -
On July 29, 1997, the Company's Board of Directors ("Board") authorized a
3-for-1 split in the Company's common stock effected in the form of a stock
dividend. The Board also voted to increase the quarterly dividend 20% to $0.12
per share (on a pre-split basis). Both dividends are payable on September
16, 1997 to stockholders of record as of August 25, 1997. Amounts reported
in this Form 10-Q have been restated to reflect the stock split on a pro forma
basis.
Common Stock Repurchases - The Company's Board has authorized management to
repurchase a total of eleven million shares (pro forma 33 million shares post-
split) of KCSI common stock under two programs - the 1995 program for eight
million shares (pro forma 24 million shares post-split) and the 1996 program
for three million shares (pro forma nine million shares post-split). During
first quarter 1997, the Company purchased the final 800,000 shares (pro forma
2.4 million shares post-split) under the forward purchase contract disclosed
in Note 8 to the consolidated financial statements included in the Company's
Annual Report on Form 10-K for the year ended December 31, 1996. With these
transactions, the Company has repurchased approximately 9.1 million (pro
forma 27.3 million shares post-split) of its common shares, completing the
1995 program and part of the 1996 program. Additional share
repurchases may be made during 1997 based on management's assessment of current
market conditions and perceived risks, as well as the Company's available
capital and liquidity.
Gateway Western - KCS Transportation Company ("KCSTC," a wholly-owned
subsidiary of the Company) acquired beneficial ownership of the outstanding
stock of Gateway Western in December 1996. The stock acquired by KCSTC was
held in an independent voting trust until the Company received approval from
the Surface Transportation Board ("STB") on the Company's proposed acquisition
of Gateway Western. The STB issued its approval of the transaction effective
May 5, 1997. Because the Gateway Western stock was held in trust during
first quarter 1997, the Company accounted for Gateway Western under the
equity method as a majority-owned unconsolidated subsidiary. Upon STB
approval of the acquisition, the Company consolidated Gateway Western in the
Transportation segment. Additionally, the Company restated first quarter
1997 to include Gateway Western as a consolidated subsidiary as of January 1,
1997, and results of operations for the six months ended June 30, 1997 reflect
this restatement.
<PAGE 14>
RESULTS OF OPERATIONS
Segment revenues, operating income and net income comparisons follow (dollars
in millions):
Three Months Six Months
Ended June 30, Ended June 30,
1997 1996 1997 1996
Revenues:
Transportation $139.9 $129.7 $274.2 $260.6
Financial Asset Management 112.7 77.2 216.2 147.6
Total $252.6 $206.9 $490.4 $408.2
Operating Income:
Transportation $ 14.1 $ 11.7 $ 28.1 $ 26.9
Financial Asset Management 53.3 34.0 94.9 59.3
Total $ 67.4 $ 45.7 $123.0 $ 86.2
Net Income (Loss):
Transportation $ 0.3 $ (0.2) $ 3.3 $ 2.2
Financial Asset Management 31.5 22.6 57.0 40.1
Total $ 31.8 $ 22.4 $ 60.3 $ 42.3
The Company reported second quarter 1997 earnings of $31.8 million, or $0.87
per share (pro forma $0.29 per share post-split), compared to $22.4 million, or
$0.57 per share (pro forma $0.19 per share post-split) in second quarter 1996.
Consolidated second quarter 1997 revenues rose 22% compared to the same period
in 1996 from improvements in both of the Company's segments. Operating
income for the three months ended June 30, 1997 increased 47% (to $67.4
million) versus comparable 1996, largely due to higher revenues, together
with lower proportionate growth in Financial Asset Management operating
expenses as compared to revenues. Total equity earnings in unconsolidated
affiliates decreased $1.3 million. This decrease reflects a $3.0 million
equity loss from Grupo TFM, which more than offset increased equity earnings
from DST and other investments. Interest expense for the three months ended
June 30, 1997 was approximately 4% lower than comparable 1996 as a result of
slightly lower average debt balances in 1997 (exclusive of indebtedness on
which interest was capitalized during 1997).
For the six months ended June 30, 1997, consolidated earnings were $60.3
million, or $1.64 per share (pro forma $0.55 per share post-split), versus
$42.3 million, or $1.06 per share (pro forma $0.35 per share post-split) in
comparable 1996. Year to date 1997 consolidated revenues increased 20% to
$490.4 million compared to the same period in 1996, primarily due to the
growth in assets under management in the Financial Asset Management segment
and the addition of Gateway Western revenues. Operating expenses for the six
months ended 1997 increased at a lower proportionate rate than revenues
compared to 1996, leading to a 43% improvement in operating income. Year to
date 1997 equity earnings of unconsolidated affiliates increased by
$2.2 million, mainly because of earnings improvements at DST, partially offset
by the equity losses in Grupo TFM.
<PAGE 15>
TRANSPORTATION
Three Months Ended Three Months Ended
June 30, 1997 June 30, 1996
(in millions)
Holding Holding
Company and Company and
Trans- Trans-
portation- Consol- portation- Consol-
Related idated Related idated
Affil- Trans- Affil- Trans-
KCSR iates portation KCSR iates portation
Revenues $ 126.2 $ 13.7 $ 139.9 $ 121.6 $ 8.1 $ 129.7
Costs and expenses 99.5 11.3 110.8 91.3 10.8 102.1
Depreciation and
amortization 13.7 1.3 15.0 14.9 1.0 15.9
Operating income (loss) 13.0 1.1 14.1 15.4 (3.7) 11.7
Equity in net earnings
(losses) of unconsol-
idated affiliates:
Grupo TFM - (3.0) (3.0) - - -
Other 0.6 0.4 1.0 - 0.3 0.3
Interest expense (9.5) (1.7) (11.2) (12.2) (0.5) (12.7)
Other, net 0.6 0.3 0.9 0.7 (0.2) 0.5
Pretax income (loss) 4.7 (2.9) 1.8 3.9 (4.1) (0.2)
Income tax provision
(benefit) 2.1 (0.6) 1.5 1.6 (1.6) -
Net income (loss) $ 2.6 $ (2.3) $ 0.3 $ 2.3 $(2.5) $ (0.2)
The Transportation segment contributed $0.3 million to the Company's second
quarter 1997 earnings versus a loss of $0.2 million in second quarter 1996.
Exclusive of the Company's equity in the net loss of Grupo TFM, Transportation
second quarter 1997 earnings were $3.5 million higher than 1996, reflecting
higher KCSR net income, the inclusion of Gateway Western results in 1997, and
1996 non-recurring allocated Holding Company costs related to the Company's
efforts with respect to the Union Pacific/Southern Pacific merger ("UP/SP
merger").
KCSR second quarter 1997 revenues increased 4% over comparable 1996, primarily
due to a 5% increase in unit coal revenues (mix of traffic and length of haul)
and a 34% increase in domestic/export grain revenues (volume and mix of
traffic). Additionally, second quarter intermodal revenues increased 6% on
less than a 3% increase in carloadings, indicative of KCSR's focus on higher
rate business. Second quarter 1997 Holding Company and Transportation-Related
Affiliates revenues increased over 1996 due to the inclusion of $10.5 million
of Gateway Western revenues (consolidated effective January 1, 1997), offset
partially by reduced revenues as a result of the dissolution of Southern
Leasing Corporation ("SLC") in connection with the formation of the Southern
Capital joint venture in October 1996.
Second quarter 1997 Transportation operating expenses increased 7% compared to
second quarter 1996, primarily due to higher KCSR operating expenses. KCSR
experienced increases in salaries and wages (increased crew levels), fuel
costs (higher prices in 1997 than 1996) and operating lease expenses
(payments to Southern Capital). Additionally, second quarter 1997 KCSR
operating expenses include costs and expenses from SGI - which became a
consolidated KCSR subsidiary in October 1996. These increases were partially
offset by lower depreciation as a result of the contribution and sale of
rail property to the Southern Capital joint venture. However, while total
second quarter 1997 KCSR operating expenses were higher than 1996, variable
expenses as a percentage of revenues were virtually unchanged. This result
highlights KCSR's efforts to maintain (or reduce) controllable cost components
given anticipated revenue levels.
Holding Company and Transportation-Related Affiliates costs and expenses
increased 5% over second quarter 1996 due to the inclusion of Gateway
Western activity in 1997. The increase would have been higher if not for the
non-recurring costs incurred in second quarter 1996 related to the UP/SP
merger as discussed above, together with reduced costs and expenses due to
the dissolution of SLC.
<PAGE 16>
The Company recorded $3.0 million in equity losses during second quarter 1997
associated with its investment in Grupo TFM. Of this total, $2.6 million
represented the Company's proportionate share of a one-time charge recorded by
Grupo TFM with respect to financing-related fees in connection with the final
installment payment of the TFM Rail purchase price. KCSR recorded $0.6
million of equity income, reflecting KCSR's 50% share of Southern Capital
second quarter earnings.
Interest expense decreased 12% from second quarter 1996 because of the re-
payment of KCSR, Carland and SGI debt using proceeds from the Southern Capital
transaction. Interest expense related to the indebtedness incurred in
connection with the Company's investment in Grupo TFM was capitalized until
the final installment of the TFM Rail purchase price was made (June 23,
1997). Interest capitalized during the quarter ended June 30, 1997 totaled
$4.3 million.
Six Months Ended Six Months Ended
June 30, 1997 June 30, 1996
(in millions)
Holding Holding
Company and Company and
Trans- Trans-
portation- Consol- portation- Consol-
Related idated Related idated
Affil- Trans- Affil- Trans-
KCSR iates portation KCSR iates portation
Revenues $ 247.2 $ 27.0 $ 274.2 $ 244.9 $ 15.7 $ 260.6
Costs and expenses 193.0 22.6 215.6 185.4 16.4 201.8
Depreciation and
amortization 27.3 3.2 30.5 29.5 2.4 31.9
Operating income (loss) 26.9 1.2 28.1 30.0 (3.1) 26.9
Equity in net earnings
(losses) of unconsol-
idated affiliates:
Grupo TFM - (3.0) (3.0) - - -
Other 1.1 0.4 1.5 - 0.9 0.9
Interest expense (19.2) (3.4) (22.6) (24.3) (0.6) (24.9)
Other, net 3.0 0.4 3.4 1.6 (0.5) 1.1
Pretax income (loss) 11.8 (4.4) 7.4 7.3 (3.3) 4.0
Income tax provision
(benefit) 5.2 (1.1) 4.1 3.0 (1.2) 1.8
Net income (loss) $ 6.6 $ (3.3) $ 3.3 $ 4.3 $(2.1) $ 2.2
The Transportation segment contributed $3.3 million to the Company's earnings
for the six months ended June 30, 1997, compared to $2.2 million for the
same period in 1996. The increase in earnings was primarily attributable to
higher earnings from KCSR as a result of reduced interest expense, offset
by equity in net losses from Grupo TFM.
Transportation revenues increased 5% compared to 1996. This increase was
primarily attributable to the inclusion of Gateway Western revenues in 1997,
together with a $2.3 million increase in KCSR revenues. KCSR revenue gains
were evident in grain, metal products and various petroleum products (largely
due to increased average rates per carload), offset substantially by lower
unit coal revenues as a result of volume declines. Holding Company and
Transportation-Related Affiliates revenues reflect the Gateway Western
revenues, offset partially by the lack of SLC revenues in 1997.
Year to date 1997 Transportation operating expenses increased 5% versus the
same period in 1996. While total year to date 1997 KCSR costs and expenses
increased over 1996, variable operating expenses decreased, including
reductions in salaries and wages, fringe benefits, and supplies.
Additionally, depreciation and amortization decreased by 7% (as discussed
above). These reductions were offset by higher fuel costs due to increased
prices and fixed equipment lease charges to Southern Capital. Higher operating
expenses from Holding Company and Transportation-Related Affiliates were
attributable to the inclusion of Gateway Western, offset by the lack of SLC
costs in 1997 and the 1996 non-recurring UP/SP merger costs.
<PAGE 17>
The Transportation segment reported equity losses from unconsolidated
affiliates for the six months ended June 30, 1997, reflecting the Company's
proportionate share of Grupo TFM's 1997 net loss.
Year to date 1997 Transportation interest expense decreased from 1996 as
discussed above. Other, net increased for the six months ended June 30, 1997
due to a one time pretax gain of $1.6 million recorded in first quarter 1997
resulting from the sale of track by KCSR.
FINANCIAL ASSET MANAGEMENT
Three Months Ended Three Months Ended
June 30, 1997 June 30, 1996
(in millions)
Holding Holding
Company Company
Janus and FAM- Consol- Janus and FAM- Consol-
and Related idated and Related idated
Berger Affiliates FAM Berger Affiliates FAM
Revenues $ 113.1 $ (0.4) $ 112.7 $ 77.8 $ (0.6) $ 77.2
Costs and expenses 54.6 1.4 56.0 38.3 1.6 39.9
Depreciation and
amortization 3.3 0.1 3.4 3.1 0.2 3.3
Operating income (loss) 55.2 (1.9) 53.3 36.4 (2.4) 34.0
Equity in net earnings
(losses) of unconsol-
idated affiliates:
DST Systems, Inc. - 5.7 5.7 - 5.0 5.0
Other 0.2 - 0.2 - (0.1) (0.1)
Interest income (expense) (1.7) (0.7) (2.4) (1.6) 0.1 (1.5)
Other, net 1.3 2.1 3.4 0.9 3.9 4.8
Pretax income 55.0 5.2 60.2 35.7 6.5 42.2
Income tax provision 22.0 0.8 22.8 14.5 1.2 15.7
Minority interest 5.9 - 5.9 3.9 - 3.9
Net income $ 27.1 $ 4.4 $ 31.5 $ 17.3 $ 5.3 $ 22.6
Financial Asset Management contributed $31.5 million to KCSI's 1997 second
quarter consolidated earnings, an increase of 39% over comparable 1996.
Average assets under management by Janus and Berger were 43% higher during
second quarter 1997 than second quarter 1996, leading to a $35.5 and $19.3
million increase in revenues and operating income, respectively, over second
quarter 1996.
Assets under management increased $10.4 billion during second quarter 1997 as a
result of net fund sales of $3.2 billion and market appreciation. Assets under
management totaled $63.6 billion at June 30, 1997 ($60.0 billion at Janus; $3.6
billion at Berger) versus $42.8 billion at June 30, 1996.
While revenues for the second quarter 1997 increased 46% over comparable 1996,
costs and expenses increased at a lower proportionate rate, resulting in an
improved operating margin. This improved margin (3% higher than second
quarter 1996) was primarily attributable to increased average shareholder
balances and efficiencies through the use of enhanced technology.
Second quarter 1997 equity earnings from DST increased to $5.7 million from
$5.0 million in comparable 1996, primarily due to improved operating margins
compared to second quarter 1996.
Financial Asset Management interest expense increased over second quarter 1996
as a result of higher average KCSI Holding Company allocated debt balances
during second quarter 1997, reflecting the Company's common stock repurchases
in first quarter 1997. Other, net decreased from prior year second quarter due
to a one time gain recognized on the sale of a KCSI equity investment in 1996.
<PAGE 18>
Six Months Ended Six Months Ended
June 30, 1997 June 30, 1996
(in millions)
Holding Holding
Company Company
Janus and FAM- Consol- Janus and FAM- Consol-
and Related idated and Related idated
Berger Affiliates FAM Berger Affiliates FAM
Revenues $ 216.7 $ (0.5) $ 216.2 $ 147.9 $ (0.3) $ 147.6
Costs and expenses 112.2 2.7 114.9 78.8 3.2 82.0
Depreciation and
amortization 6.2 0.2 6.4 6.1 0.2 6.3
Operating income (loss) 98.3 (3.4) 94.9 63.0 (3.7) 59.3
Equity in net earnings of
unconsolidated affiliates:
DST Systems, Inc. - 11.8 11.8 - 6.9 6.9
Other 0.3 - 0.3 - 0.6 0.6
Interest income (expense) (3.2) (1.5) (4.7) (2.7) 0.5 (2.2)
Other, net 1.6 5.3 6.9 1.7 7.1 8.8
Pretax income 97.0 12.2 109.2 62.0 11.4 73.4
Income tax provision 38.4 3.2 41.6 25.1 1.3 26.4
Minority interest 10.6 - 10.6 6.9 - 6.9
Net income $ 48.0 $ 9.0 $ 57.0 $ 30.0 $ 10.1 $ 40.1
For the six months ended June 30, 1997, Financial Asset Management contributed
$57.0 million, a 42% increase over the same period in 1996. This increase
was attributable to higher revenues (driven by growth in assets under
management), operating income and equity earnings.
Year to date 1997 revenues increased 46% to $216.2 million and operating
income 60% to $94.9 million compared to the six months ended June 30, 1996.
Assets under management increased $13.3 billion during the first six months
of 1997 from net fund sales and market appreciation. Shareowner accounts
numbered more than 2.8 million as of June 30, 1997 (a 4% increase from
December 31, 1996).
Equity earnings from DST increased 71% over year to date 1996, largely due
to the Company's proportionate share of a first quarter 1996 non-recurring
charge recorded by DST related to a former DST equity affiliate, The Continuum
Company, Inc. Exclusive of this item, DST's 1997 earnings reflect an increase
in mutual fund, output processing and subscriber management revenues and higher
operating margins compared to 1996.
Year to date 1997 interest expense increased and other, net decreased from
comparable 1996 as discussed in the quarterly review above.
A brief discussion of Janus and Berger activity during the six months ended
June 30, 1997 follows:
Janus
Janus continues to report growth in assets under management - a 28% increase
from December 31, 1996. This increase is attributable to several factors,
including, among others: (i) the investment performance of the Janus group of
mutual funds, as evidenced by more than 50% of (separately tracked) Janus
fund products ranking in the first quartile when compared to their
respective peer categories based on product performance over a rolling one-
year period through June 30, 1997 (using data from Lipper Analytical
Services, Inc.); (ii) growth through new monies - less than half of the
growth in assets under management was due to market appreciation; and
(iii) individual fund performance, particularly the Janus Overseas Fund and
Janus Worldwide Fund, combining for $11.9 billion in assets under management
as of June 30, 1997 compared to $4.0 billion at June 30, 1996.
<PAGE 19>
Berger
In February 1997, Berger assumed the advisory contract for the Omni Fund,
renaming it The Berger Small Cap Value Fund ("Small Cap"). At June 30, 1997,
assets under management for the Small Cap fund totaled approximately $67
million. Also, the Berger/BIAM International Fund (introduced in fourth
quarter 1996) increased its assets under management to $92 million as of
June 30, 1997. Exclusive of these new funds, assets under management of
Berger's core funds decreased approximately $198 million from December 31,
1996, reflecting net redemptions in excess of market appreciation during the
six months ended June 30, 1997.
In January 1997, KCSI's ownership in Berger increased to approximately 87%
(from 80%) due to Berger's repurchase of its common stock (for treasury)
from a minority shareholder. The Company recorded $8.7 million in
intangibles in connection with this transaction, which will be amortized
over 15 years.
TRENDS AND OUTLOOK
The Company reported a 53% improvement in second quarter 1997 earnings per
share compared to second quarter 1996. Year to date 1997 earnings per share
were 55% higher than the same period in 1996. Second quarter and year to
date 1997 earnings from the Financial Asset Management segment reflect
continued growth in assets under management and revenues, as well as efficient
operations as evidenced by improved operating margins. Despite a $3.0 million
equity loss from Grupo TFM (the majority of which was attributable to a non-
recurring charge), the Transportation segment continued its earnings
improvement, raising net income by $0.5 and $1.1 million compared to the three
and six months ended June 30, 1996, respectively.
A current outlook for the Company's businesses for the remainder of 1997 is as
follows (refer to the first paragraph of "Overview" section of this Item 2,
Management's Discussion and Analysis of Financial Condition and Results of
Operations, regarding forward-looking comments):
i) KCSR - General commodities and intermodal traffic will continue to be
largely dependent on economic trends within certain industries in
the geographic region served by KCSR. (I) Based on anticipated
traffic levels, including consideration of recent rail mergers,
revenues are expected to be relatively flat during the remainder of
1997. (I) Variable costs and expenses are expected to continue at
levels proportionate with revenue activity. (I) Consistent with the
first half of 1997, equipment lease costs will be higher than 1996 as
a result of operating leases with Southern Capital. Interest expense
is expected to increase in the second half of 1997 due to expense
associated with the indebtedness incurred to finance the $297 million
capital contribution to Grupo TFM (i.e., the interest capitalization
period ceased on June 23, 1997). (I)
ii) Financial Asset Management - Future growth will be largely dependent on
prevailing financial market conditions, relative performance of Janus'
and Berger's products, introduction and market reception of new
products, as well as other factors. (I) Costs and expenses should
continue at operating levels consistent with the rate of growth, if
any, in revenues. (I)
iii) Equity Investments - The Company will continue to participate in the
earnings from its equity investments in DST, Southern Capital and
Mexrail. (I) However, the Company expects to report equity losses
from Grupo TFM during the initial period of its operation of Mexico's
Northeast rail lines. (I)
(I) See the first paragraph of "Overview" section of Item 2, Management's
Discussion and Analysis of Financial Condition and Results of Operations,
regarding forward-looking comments
<PAGE 20>
LIQUIDITY AND CAPITAL RESOURCES
Summary cash flow data is as follows (in millions):
Six Months
Ended June 30,
1997 1996
Cash flows provided by (used for):
Operating activities $ 80.1 $ 3.6
Investing activities (292.6) (104.4)
Financing activities 207.7 79.7
Cash and equivalents:
Net decrease (4.8) (21.1)
At beginning of year 22.9 31.8
At end of period $ 18.1 $ 10.7
During the six months ended June 30, 1997, the Company's cash position
decreased $4.8 million from December 31, 1996. This decrease was
caused primarily by cash used for property acquisitions and Company common
stock repurchases, offset partially by positive operating cash flows and the
sale of short-term investments by Janus.
Year to date 1997 operating cash flows increased $76.5 million compared to
the same period in 1996. This increase was chiefly attributable to the
1996 payment of approximately $74 million in federal and state income taxes
resulting from the taxable gains associated with the DST public stock
offering completed in November 1995, offset partially by changes in other
working capital components.
Investing expenditures for the six months ended June 30, 1997 included the
Company's approximate $297 million capital contribution to Grupo TFM and
KCSR road property additions. Cash from investing activities was generated
primarily from the sale of short-term investments by Janus.
Financing cash flows were generated through borrowings under credit lines
in excess of repayments, essentially to fund the Grupo TFM capital
contribution. The Company repurchased approximately $42.4 million of its
common stock during 1997, funded primarily through operating cash flows.
Cash flows from operations are expected to increase during the remainder of
1997 from positive operating income, which has historically resulted in
favorable cash flows. (I) Investing activities will continue to use
significant amounts of cash. Future roadway improvement projects are
expected to be funded by KCSR operating cash flow. (I) Based on the
completion of financing for Grupo TFM, significant additional contributions
from the Company to Grupo TFM are not expected to be necessary. (I) However,
as discussed earlier, there exists a possible capital call ($74 million) if
certain Grupo TFM benchmarks are not met.
In addition to operating cash flows, the Company has financing available
through its various lines of credit (with a maximum borrowing amount of
$560 million, of which $233 million was available at June 30, 1997). Because
of certain financial covenants contained in the credit agreements, however,
maximum utilization of the Company's available lines of credit may be
restricted. The Company also has the ability to issue $500 million of
securities under a Universal Shelf Registration Statement ("Registration
Statement") filed in September 1993, as amended in April 1996. The
Securities and Exchange Commission declared the Registration Statement
effective on April 22, 1996; however, no securities have been issued.
(I) See the first paragraph of "Overview" section of Item 2, Management's
Discussion and Analysis of Financial Condition and Results of Operations,
regarding forward-looking comments
<PAGE 21>
The Company believes its operating cash flows and available financing
resources are sufficient to fund working capital and other requirements for
the remainder of 1997, as well as other potential business opportunities
that the Company is currently pursuing. (I)
The Company's debt ratio (total debt as a percent of total debt plus equity)
at June 30, 1997 was 55.6% compared to 47.4% at December 31, 1996. Company
consolidated debt increased $289.7 million from December 31, 1996 (to $934.8
million at June 30, 1997) primarily as a result of borrowings to fund the
approximate $297 million capital contribution to Grupo TFM. Consolidated
equity increased $29.5 million from December 31, 1996. This increase was
primarily due to net income and a positive non-cash equity adjustment
related to unrealized gains on "available for sale" securities held by
affiliates, offset partially by common stock repurchases. The higher increase
in debt, however, resulted in an increase in the debt ratio from
December 31, 1996.
Management anticipates that the debt ratio throughout the remainder of 1997
will remain relatively consistent with the ratio as of June 30, 1997. (I)
During May 1997, Standard & Poor's Corporation ("S&P") and Moody's
Investing Service ("Moody's") issued opinions of the Company's credit
and senior secured debt ratings. S&P lowered its rating on the Company to
BBB- from BBB+, but commented that the Company's outlook is stable.
According to S&P, the reduced rating was a result of the Company's increased
debt levels to fund share repurchases and its investment in the Mexican
Northeast rail lines, combined with increased competitive pressures on the
Company's core U.S. railroad operations. Moody's confirmed as unchanged its
previous rating of the Company at Baa2. According to Moody's, this decision
was based on the Company's diversified nature of businesses and the
considerable strength of a number of assets whose market value exceeds book
value.
(I) See the first paragraph of "Overview" section of Item 2, Management's
Discussion and Analysis of Financial Condition and Results of Operations,
regarding forward-looking comments
<PAGE 22>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Part I, Item 1. Financial Statements, Note 11 to the Consolidated Condensed
Financial Statements of this Form 10-Q is hereby incorporated herein by
reference.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
Exhibit 10.1 - The Amended and Restated Five-Year Competitive Advance and
Revolving Credit Facility dated May 2, 1997, by and between
the Company and the lenders named therein, is attached
to this Form 10-Q as Exhibit 10.1
Exhibit 27.1 - Financial Data Schedule
b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K/A dated June 3, 1997, an
amendment to a Current Report on Form 8-K dated November 12, 1996,
reporting cautionary statements identifying significant factors that
could cause the Company's actual operating results to materially differ
from the projections in forward-looking statements made by, or on behalf
of, the Company.
The Company filed a Current Report on Form 8-K dated July 9, 1997
reporting the payment of the remaining 60% of the purchase price for
TFM, S.A. de C.V. (formerly Ferrocarril del Noreste, S.A. de C.V.), who
holds the concession to operate Mexico's Northeast rail lines, by Grupo
Transportacion Ferroviaria Mexicana, S.A. de C.V. (formerly
Transportacion Ferroviaria Mexicana S. de R.L. de C.V.), a joint
venture of the Company and Transportacion Maritima Mexicana, S.A. de C.V.
The Company filed a Current Report on Form 8-K dated July 29, 1997
reporting the announcement of a 3-for-1 split in the Company's common
stock to be effected in the form of a stock dividend and a 20% increase
in the quarterly dividend.
<PAGE 23>
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 August 12, 1997.
Kansas City Southern Industries, Inc.
/s/ Joseph D. Monello
Joseph D. Monello
Vice President and Chief Financial Officer
(Principal Financial Officer)
/s/ Louis G. Van Horn
Louis G. Van Horn
Vice President and Comptroller
(Principal Accounting Officer)