Attached files
file | filename |
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EX-31.1 - EX-31.1 - Kansas City Southern de Mexico, S.A. de C.V. | c57450exv31w1.htm |
EX-18.1 - EX-18.1 - Kansas City Southern de Mexico, S.A. de C.V. | c57450exv18w1.htm |
EX-32.2 - EX-32.2 - Kansas City Southern de Mexico, S.A. de C.V. | c57450exv32w2.htm |
EX-10.2 - EX-10.2 - Kansas City Southern de Mexico, S.A. de C.V. | c57450exv10w2.htm |
EX-31.2 - EX-31.2 - Kansas City Southern de Mexico, S.A. de C.V. | c57450exv31w2.htm |
EX-10.1 - EX-10.1 - Kansas City Southern de Mexico, S.A. de C.V. | c57450exv10w1.htm |
EX-32.1 - EX-32.1 - Kansas City Southern de Mexico, S.A. de C.V. | c57450exv32w1.htm |
Table of Contents
SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C.
20549
Form 10-Q
þ
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the quarterly period ended March 31, 2010 | ||
or
|
||
o
|
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
333-08322
KANSAS CITY SOUTHERN DE
MÉXICO, S.A. DE C.V.
(Exact name of Company as
specified in its charter)
Kansas City Southern of Mexico
(Translation of
Registrants name into English)
Mexico (State or other jurisdiction of incorporation or organization) |
N/A (I.R.S. Employer Identification No.) |
|||
Montes Urales 625 Lomas de Chapultepec 11000 Mexico, D.F. Mexico (Address of Principal Executive Offices) |
(5255) 9178-5686
(Companys 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 þ No o
Not applicable
o
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such
files). Yes o No o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act. (Check one):
Large accelerated filer o | Accelerated filer o | Non-accelerated filer þ | Smaller reporting company o |
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
Indicate the number of shares outstanding of each of the
issuers classes of common stock, as of March 31,
2010: 4,785,510,235
Kansas City Southern de México, S.A. de C.V. meets the
conditions set forth in General Instruction H(1)(a) and
(b) of
Form 10-Q
and is therefore filing this form with the reduced disclosure
format.
Kansas
City Southern de México, S.A. de C.V. and Subsidiaries
Form 10-Q
March 31, 2010
Index
Form 10-Q
March 31, 2010
Index
2
Table of Contents
Kansas
City Southern de México, S.A. de C.V. and
Subsidiaries
Form 10-Q
March 31, 2010
March 31, 2010
PART I
FINANCIAL INFORMATION
Item 1. | Financial Statements. |
Introductory
Comments.
The Consolidated Financial Statements included herein have been
prepared by Kansas City Southern de México, S.A. de C.V.
(KCSM or the Company), without audit,
pursuant to the rules and regulations of the Securities and
Exchange Commission (SEC). For the purposes of this
report, unless the context otherwise requires, all references
herein to KCSM and the Company shall
mean Kansas City Southern de México, S.A. de C.V. and its
subsidiaries. Certain information and footnote disclosures
normally included in financial statements prepared in accordance
with U.S. generally accepted accounting principles
(U.S. GAAP) have been condensed or omitted
pursuant to such rules and regulations. The Company believes
that the disclosures are adequate to enable a reasonable
understanding of the information presented. The Consolidated
Financial Statements and Managements Discussion and
Analysis of Financial Condition and Results of Operations
included in this
Form 10-Q
should be read in conjunction with the consolidated financial
statements and the related notes, as well as Managements
Discussion and Analysis of Financial Condition and Results of
Operations, included in the Companys Annual Report on
Form 10-K
for the year ended December 31, 2009. Results for the three
months ended March 31, 2010 are not necessarily indicative
of the results expected for the full year ending
December 31, 2010.
3
Table of Contents
Three Months |
||||||||
Ended |
||||||||
March 31, | ||||||||
2010 | 2009 | |||||||
(In millions) |
||||||||
(Unaudited) | ||||||||
Revenues
|
$ | 190.8 | $ | 137.3 | ||||
Operating expenses:
|
||||||||
Compensation and benefits
|
22.5 | 16.6 | ||||||
Purchased services
|
32.0 | 28.2 | ||||||
Fuel
|
26.4 | 18.2 | ||||||
Equipment costs
|
18.5 | 20.6 | ||||||
Depreciation and amortization
|
23.9 | 27.9 | ||||||
Casualties and insurance
|
1.4 | 2.0 | ||||||
Materials and other
|
9.8 | 7.5 | ||||||
Total operating expenses
|
134.5 | 121.0 | ||||||
Operating income
|
56.3 | 16.3 | ||||||
Equity in net earnings of unconsolidated affiliates
|
1.5 | 0.5 | ||||||
Interest expense
|
(27.5 | ) | (22.1 | ) | ||||
Debt retirement costs
|
(14.9 | ) | (0.6 | ) | ||||
Foreign exchange gain (loss)
|
2.8 | (5.1 | ) | |||||
Other income, net
|
0.5 | 0.3 | ||||||
Income (loss) before income taxes
|
18.7 | (10.7 | ) | |||||
Income tax (benefit) expense
|
7.6 | (11.5 | ) | |||||
Net income
|
$ | 11.1 | $ | 0.8 | ||||
See accompanying notes to consolidated financial statements.
4
Table of Contents
March 31, |
December 31, |
|||||||
2010 | 2009 | |||||||
(In millions, |
||||||||
except share amounts) | ||||||||
(Unaudited) | ||||||||
ASSETS
|
||||||||
Current assets:
|
||||||||
Cash and cash equivalents
|
$ | 108.9 | $ | 92.6 | ||||
Accounts receivable, net
|
77.2 | 61.6 | ||||||
Related company receivable
|
17.5 | 16.8 | ||||||
Materials and supplies
|
39.3 | 37.4 | ||||||
Deferred income tax asset
|
117.4 | 117.3 | ||||||
Other current assets
|
51.0 | 48.9 | ||||||
Total current assets
|
411.3 | 374.6 | ||||||
Investments
|
48.8 | 46.8 | ||||||
Property and equipment (including concession assets), net
|
2,260.7 | 2,239.7 | ||||||
Related company receivable
|
1.0 | 31.1 | ||||||
Other assets
|
28.4 | 25.3 | ||||||
Total assets
|
$ | 2,750.2 | $ | 2,717.5 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY | ||||||||
Current liabilities:
|
||||||||
Debt due within one year
|
$ | 11.2 | $ | 11.0 | ||||
Accounts payable and accrued liabilities
|
132.8 | 112.7 | ||||||
Related company payable
|
24.0 | 27.1 | ||||||
Total current liabilities
|
168.0 | 150.8 | ||||||
Long-term debt
|
1,099.1 | 1,103.5 | ||||||
Related company debt
|
21.6 | 21.6 | ||||||
Deferred income tax liability
|
24.5 | 16.8 | ||||||
Other noncurrent liabilities and deferred credits
|
95.1 | 94.5 | ||||||
Total liabilities
|
1,408.3 | 1,387.2 | ||||||
Commitments and contingencies
|
| | ||||||
Stockholders equity:
|
||||||||
Common stock, 4,785,510,235 shares authorized, issued
without par value
|
507.3 | 507.3 | ||||||
Additional paid-in capital
|
243.6 | 243.6 | ||||||
Retained earnings
|
593.9 | 582.8 | ||||||
Accumulated other comprehensive loss
|
(2.9 | ) | (3.4 | ) | ||||
Total stockholders equity
|
1,341.9 | 1,330.3 | ||||||
Total liabilities and stockholders equity
|
$ | 2,750.2 | $ | 2,717.5 | ||||
See accompanying notes to consolidated financial statements.
5
Table of Contents
Three Months |
||||||||
Ended |
||||||||
March 31, | ||||||||
2010 | 2009 | |||||||
(In millions) |
||||||||
(Unaudited) | ||||||||
Operating activities:
|
||||||||
Net income
|
$ | 11.1 | $ | 0.8 | ||||
Adjustments to reconcile net income to net cash provided by
operating activities:
|
||||||||
Depreciation and amortization
|
23.9 | 27.9 | ||||||
Deferred income taxes
|
7.6 | (11.5 | ) | |||||
Equity in undistributed earnings of unconsolidated affiliates
|
(1.5 | ) | (0.5 | ) | ||||
Deferred compensation
|
1.5 | (1.6 | ) | |||||
Debt retirement cost
|
14.9 | 0.6 | ||||||
Changes in working capital items:
|
||||||||
Accounts receivable
|
(15.6 | ) | (4.3 | ) | ||||
Related companies
|
(3.9 | ) | 9.3 | |||||
Materials and supplies
|
(2.1 | ) | (2.0 | ) | ||||
Other current assets
|
(2.6 | ) | 0.2 | |||||
Accounts payable and accrued liabilities
|
22.8 | 22.0 | ||||||
Other, net
|
0.5 | 0.4 | ||||||
Net cash provided by operating activities
|
56.6 | 41.3 | ||||||
Investing activities:
|
||||||||
Capital expenditures
|
(21.8 | ) | (42.4 | ) | ||||
Net proceeds from loan to related company
|
30.2 | | ||||||
Acquisition of an intermodal facility, net of cash acquired
|
(25.0 | ) | | |||||
Proceeds from disposal of property
|
0.3 | 1.4 | ||||||
Other, net
|
(0.5 | ) | 0.9 | |||||
Net cash used for investing activities
|
(16.8 | ) | (40.1 | ) | ||||
Financing activities:
|
||||||||
Proceeds from issuance of long-term debt
|
295.7 | 189.0 | ||||||
Repayment of long-term debt
|
(300.3 | ) | (33.7 | ) | ||||
Debt costs
|
(18.9 | ) | (4.2 | ) | ||||
Capital reduction pro-rata distribution of common
stock
|
| (65.0 | ) | |||||
Net cash provided by (used for) for financing activities
|
(23.5 | ) | 86.1 | |||||
Cash and cash equivalents:
|
||||||||
Net increase during each period
|
16.3 | 87.3 | ||||||
At beginning of the year
|
92.6 | 38.9 | ||||||
At end of period
|
$ | 108.9 | $ | 126.2 | ||||
See accompanying notes to consolidated financial statements.
6
Table of Contents
Kansas
City Southern de México, S.A. de C.V. and Subsidiaries
(Amounts in millions of U.S. dollars)
1. | Accounting Policies, Interim Financial Statements and Basis of Presentation. |
In the opinion of the management of KCSM, the accompanying
unaudited consolidated financial statements contain all
adjustments necessary for a fair presentation of the results for
interim periods. All adjustments made were of a normal recurring
nature. Certain information and footnote 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 Companys Annual Report on
Form 10-K
for the year ended December 31, 2009. The results of
operations for the three months ended March 31, 2010, are
not necessarily indicative of the results expected for the full
year ending December 31, 2010. Certain prior year amounts
have been reclassified to conform to the current year
presentation.
During the third quarter of 2009, the Company identified that
changes in accounts payable and accrued liabilities related to
capital spending had not been correctly presented in the
Companys prior period consolidated cash flow statements.
Changes in these accruals had previously been classified within
cash flows from operating activities and should have been
classified as capital expenditures within investing activities,
in order to report capital expenditures on a cash basis rather
than on an accrual basis. The accompanying consolidated cash
flow statement for the three months ended March 31, 2010
presents capital expenditures on a cash basis. The accompanying
consolidated cash flow statement for the three months ended
March 31, 2009 has been revised to present capital
expenditures on a cash basis. This revision did not impact the
change in cash and cash equivalents as previously reported,
however, net cash provided by operating activities, capital
expenditures and cash used by investing activities increased by
$20.5 million for the three months ended March 31,
2009. This revision did not impact operating income or net
income and working capital as previously reported.
During the first quarter of 2010, the Company elected to change
its accounting policy for rail grinding costs from a
capitalization method to a direct expense method. Previously,
the Company capitalized rail grinding costs as an improvement to
the rail. The Company believes it is preferable to expense these
costs as incurred to eliminate the subjectivity in determining
the period of benefit associated with rail grinding over which
to depreciate the associated capitalized costs. The Company has
reflected this change as a change in accounting principle from
an accepted accounting principle to a preferable accounting
principle in accordance with Accounting Standards Codification
250 Accounting for Changes and Error Corrections.
Comparative financial statements for all periods have been
adjusted to apply the change in accounting principle
retrospectively.
This change in accounting principle did not impact the
consolidated statements of income for the three months ended
March 31, 2009.
The following line items in the consolidated balance sheet were
affected by the change in accounting principle (in
millions):
December 31, 2009 | ||||||||||||
As Reported | As Adjusted | Change | ||||||||||
Investments
|
$ | 46.9 | $ | 46.8 | $ | (0.1 | ) | |||||
Property and equipment (including concession assets), net
|
2,246.0 | 2,239.7 | (6.3 | ) | ||||||||
Deferred income tax liability
|
18.2 | 16.8 | (1.4 | ) | ||||||||
Other noncurrent liabilities and deferred credits
|
95.0 | 94.5 | (0.5 | ) | ||||||||
Retained earnings
|
587.3 | 582.8 | (4.5 | ) | ||||||||
Total stockholders equity
|
1,334.8 | 1,330.3 | (4.5 | ) |
The change in accounting principle and the revision related to
the classification of capital expenditures on a cash basis
rather than on an accrual basis did not have an impact on the
change in cash and cash equivalents
7
Table of Contents
Kansas
City Southern de México, S.A. de C.V. and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
in the consolidated statement of cash flows; however, the
following line items were affected by these adjustments (in
millions):
Three Months Ended March 31, 2009 | ||||||||||||
As Reported | As Adjusted | Change | ||||||||||
Net cash provided by operating activities
|
$ | 20.8 | $ | 41.3 | $ | 20.5 | ||||||
Net cash used for investing activities
|
$ | (19.6 | ) | $ | (40.1 | ) | $ | (20.5 | ) |
As of January 1, 2008, the cumulative effect of the change
in accounting principle on property and equipment (including
concession assets), deferred income tax liability, other
noncurrent liabilities and deferred credits and retained
earnings was ($3.9) million, ($1.0) million,
($0.4) million and ($2.5) million, respectively.
2. | Accounting Pronouncements |
Effective January 1, 2010, the Company adopted the
Financial Accounting Standards Board (the FASB)
Accounting Standards Update (ASU)
No. 2009-17,
Improvements to Financial Reporting by Enterprises
Involved with Variable Interest Entities (ASU
2009-17).
ASU 2009-17
addresses the elimination of certain exceptions to consolidating
qualifying special-purpose entities, which means more entities
will be subject to consolidation assessments and reassessments.
The new guidance requires ongoing reassessment of whether a
company is the primary beneficiary of a variable interest entity
(VIE) and clarifies characteristics that identify a
VIE. In addition, ASU
2009-17
requires additional disclosures about a companys
involvement with a VIE and any significant changes in risk
exposure due to that involvement. The adoption of ASU
2009-17 did
not have any impact on the Companys results of operations
and financial condition.
3. | Property and equipment (including Concession Assets). |
Property and Equipment. Property and
equipment, including concession assets, and related accumulated
depreciation and amortization are summarized below (in
millions):
March 31, |
December 31, |
|||||||
2010 | 2009 | |||||||
Land
|
$ | 76.8 | $ | 65.0 | ||||
Concession land rights
|
137.6 | 137.6 | ||||||
Road property
|
1,938.5 | 1,900.4 | ||||||
Equipment
|
390.9 | 373.7 | ||||||
Technology & other
|
18.1 | 17.7 | ||||||
Construction in progress
|
61.7 | 95.4 | ||||||
Total property
|
2,623.6 | 2,589.8 | ||||||
Accumulated depreciation and amortization
|
362.9 | 350.1 | ||||||
Net property
|
$ | 2,260.7 | $ | 2,239.7 | ||||
Concession assets, net of accumulated amortization of
$264.7 million and $259.4 million, totaled
$1,774.7 million and $1,768.0 million at
March 31, 2010 and December 31, 2009, respectively.
4. | Foreign Currency Balances. |
At March 31, 2010, KCSM had financial assets and financial
liabilities denominated in Mexican pesos of
Ps.1,218.5 million and Ps.580.5 million, respectively.
At December 31, 2009, KCSM had financial assets and
financial liabilities denominated in Mexican pesos of
Ps.1,355.2 million and Ps.833.4 million, respectively.
At March 31, 2010 and at December 31, 2009, the
exchange rate was Ps.12.46 and Ps.13.06, per U.S. dollar,
respectively.
8
Table of Contents
Kansas
City Southern de México, S.A. de C.V. and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
5. | Fair Value Measurements. |
The Companys short term financial instruments include cash
and cash equivalents, accounts receivable, and accounts payable.
The carrying value of the short term financial instruments
approximates the fair value due to their short term nature.
The fair value of the Companys 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. The fair
value of the Companys debt was $1,174.6 million and
$1,170.0 million at March 31, 2010 and
December 31, 2009, respectively. The financial statement
carrying value was $1,131.9 million and
$1,136.1 million at March 31, 2010 and
December 31, 2009, respectively.
Assets and liabilities recognized at fair value are required to
be classified into a three-level hierarchy. In general, fair
values determined by Level 1 inputs utilize quoted prices
(unadjusted) in active markets for identical assets or
liabilities that the Company has the ability to access.
Level 2 inputs include quoted prices for similar assets and
liabilities in active markets, and inputs other than quoted
prices that are observable for the asset or liability.
Level 3 inputs are unobservable inputs for the asset or
liability, and include situations where there is little, if any,
market activity for the asset or liability. In certain cases,
the inputs used to measure fair value may fall into different
levels of the fair value hierarchy. In such cases, the level in
the fair value hierarchy within which the fair value measurement
in its entirety falls has been determined based on the lowest
level input that is significant to the fair value measurement in
its entirety. The Companys assessment of the significance
of a particular input to the fair value in its entirety requires
judgment and considers factors specific to the asset or
liability.
At March 31, 2010 the fair value of the Companys fuel
swap agreements was $0.8 million. Fair value is determined
using a level 2 valuation.
6. | Derivative Instruments. |
The Company does not engage in the trading of derivative
financial instruments except where the Companys objective
is to manage the variability of forecasted fuel price risk. In
general, the Company enters into derivative transactions in
limited situations based on managements assessment of
current market conditions and perceived risks.
Fuel Derivative Transactions. In the first
quarter of 2010, the Company entered into fuel swap agreements,
which have not been designated as hedging instruments. Gains and
losses relating to these derivatives are recorded in fuel
expense in the consolidated statements of income. As of
March 31, 2010, the Company has outstanding fuel swap
agreements for 6.6 million gallons of diesel fuel
purchases, from July 1, 2010 through December 31, 2010
at an average swap price of $2.15 per gallon. At March 31,
2010, the fair value of the fuel swaps agreements was
$0.8 million, which was included in other current assets on
the consolidated balance sheet. The Company recognized a gain of
$0.8 million in fuel expense related to fuel swaps
agreements.
7. | Comprehensive Income. |
Other comprehensive income refers to revenues, expenses, gains
and losses that under U.S. GAAP are included in
comprehensive income, a component of stockholders equity
within the consolidated balance sheets, rather than net income.
Under existing accounting standards, other comprehensive income
for KCSM
9
Table of Contents
Kansas
City Southern de México, S.A. de C.V. and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
reflects the cumulative translation adjustment on Ferrocarril y
Terminal del Valle de México, S.A. de C.V.
(FTVM).
KCSMs total comprehensive income is as follows (in
millions):
Three Months |
||||||||
Ended |
||||||||
March 31, | ||||||||
2010 | 2009 | |||||||
(Unaudited) | ||||||||
Net income
|
$ | 11.1 | $ | 0.8 | ||||
Other comprehensive income:
|
||||||||
Cumulative translation adjustment FTVM
|
0.5 | (1.5 | ) | |||||
Total comprehensive income (loss)
|
$ | 11.6 | $ | (0.7 | ) | |||
8. | Long Term Debt. |
On January 7, 2010, pursuant to an offer to purchase, KCSM
commenced a cash tender offer for a portion of its
93/8% senior
unsecured notes due May 1, 2012 (the
93/8% Senior
Notes). On January 22, 2010, the Company purchased
$290.0 million of the tendered
93/8% Senior
Notes in accordance with the terms and conditions of the tender
offer set forth in the offer to purchase using the proceeds
received from the issuance of $300.0 million of
8.0% senior unsecured notes due February 1, 2018 (the
8.0% Senior Notes). Additionally, on
February 1, 2010, the Company purchased $6.3 million
of the
93/8% Senior
Notes. KCSM recorded debt retirement costs of $14.9 million
in the first quarter of 2010. The remaining
93/8% Senior
Notes mature on May 1, 2012 and are redeemable by KCSM at
its option.
On January 22, 2010, KCSM issued the 8.0% Senior
Notes, which bear interest semiannually at a fixed annual rate
of 8.0%. The 8.0% Senior Notes were issued at a discount to
par value, resulting in a $4.3 million discount and a yield
to maturity of
81/4%.
KCSM used the net proceeds from the issuance of the
8.0% Senior Notes and cash on hand to purchase
$290.0 million in principal amount of the
93/8% Senior
Notes tendered under an offer to purchase and pay all fees and
expenses incurred in connection with the 8.0% Senior Notes
offering and the
93/8% Senior
Notes tender offer. The 8.0% Senior Notes are redeemable at
KCSMs option, in whole or in part, on and after
February 1, 2014, at the following redemption prices
(expressed as percentages of principal amount) plus any accrued
and unpaid interest: 2014 104.000%, 2015
102.000% and 2016 100.000%. In addition, KCSM may
redeem up to 35% of the 8.0% Senior Notes any time prior to
February 1, 2013 from the proceeds of the sale of capital
stock in KCSM or KCS and the notes are redeemable, in whole but
not in part, at KCSMs option at their principal amount in
the event of certain changes in the Mexican withholding tax rate.
The 8.0% Senior Notes are denominated in dollars and are
unsecured, unsubordinated obligations, rank pari passu in
right of payment with KCSMs existing and future unsecured,
unsubordinated obligations, and are senior in right of payment
to KCSMs future subordinated indebtedness. In addition,
the 8.0% Senior Notes include certain covenants which are
customary for these types of debt instruments and borrowers with
similar credit ratings. The 8.0% Senior Notes contain
certain covenants that, among other things, prohibit or restrict
KCSM for taking certain actions, including the ability to incur
debt, pay dividends or make other distributions in respect of
our stock, issue guarantees, enter into certain transactions
with affiliates, make restricted payments, sell certain assets,
create liens, engage in sale-leaseback transactions and engage
in mergers, divestitures and consolidations. However, these
limitations are subject to a number of important qualifications
and exceptions.
10
Table of Contents
Kansas
City Southern de México, S.A. de C.V. and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
9. | Acquisition. |
On March 3, 2010, the Company acquired an intermodal
facility in Mexico. The aggregate purchase price for the
intermodal facility was $25.0 million, which was funded by
existing cash. The Company has determined that the acquisition
is not material to the Companys consolidated financial
statements; therefore, pro forma financial information is not
presented. In addition, the Company has made a preliminary
purchase allocation as of March 31, 2010, based on incomplete
valuations. The Company expects to complete the purchase
valuation during the second quarter of 2010.
10. | Commitments and Contingencies. |
Concession duty. Under KCSMs railroad
concession from the Mexican government (the
Concession), the Mexican government has the right to
receive a payment from the Company equivalent to 0.5% of the
gross revenue during the first 15 years of the Concession
period and 1.25% during the remaining years of the Concession
period. For the three months ended March 31, 2010 and 2009,
the concession duty expense amounted to $1.0 million and
$0.7 million, respectively, which was recorded within
operating expenses.
Litigation. The Company is a party to various
legal proceedings and administrative actions, all of which,
except as set forth below, are of an ordinary, routine nature
and incidental to its operations. Included in these proceedings
are various tort claims brought by current and former employees
for job-related injuries and by third parties for injuries
related to railroad operations. KCSM aggressively defends these
matters and has established liability reserves, which management
believes are adequate to cover expected costs. Although it is
not possible to predict the outcome of any legal proceeding, in
the opinion of management, other than those proceedings
described in detail below, such proceedings and actions should
not, individually, or in the aggregate, have a material adverse
effect on the Companys financial condition and liquidity.
However, a material adverse outcome in one or more of these
proceedings could have a material adverse impact on the
operating results of a particular quarter or fiscal year.
Environmental Liabilities. The Companys
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 and 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 and handle
environmental issues that might occur in the transport of such
materials.
Settlement Agreement. On February 9,
2010, (i) KCSM and (ii) Ferrocarril Mexicano, S.A. de
C.V. (Ferromex), Ferrosur, S.A. de C.V.
(Ferrosur), Minera México, S.A. de C.V.,
Infraestructura y Transportes Ferroviarios, S.A. de C.V.,
Infraestructura y Transportes México, S.A. de C.V.,
Líneas Ferroviarias de México, S.A. de C.V., Grupo
Ferroviario Mexicano, S.A. de C.V., and Grupo México,
S.A.B. de C.V. (jointly, the Ferromex Parties)
entered into a Settlement Agreement (the Settlement
Agreement).
Pursuant to the Settlement Agreement, the parties agreed to
completely, definitively and irrevocably terminate (i) the
private disputes, procedures and controversies among KCSM and
the Ferromex Parties, in connection with the merger between
Ferromex and Ferrosur, including KCSMs involvement in such
procedures as an interested party; and (ii) the lawsuit
filed against KCSM and the Mexican Government in connection with
several disputes, procedures and controversies before judicial
authorities with respect to the acquisition of the shares of
Ferrocarril del Noreste, S.A. de C.V. (now KCSM) by Grupo
Transportación Ferroviaria Mexicana, S.A. de C.V., in 1997
(the Settlement Procedures). The parties waived
their rights to
11
Table of Contents
Kansas
City Southern de México, S.A. de C.V. and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
any future actions derived from or related to the Settlement
Procedures. Further, the parties did not settle or agree to
settle any disputes, controversies or procedures other than the
Settlement Procedures.
Under the Settlement Agreement, Ferrosur agreed to grant KCSM
certain trackage and switching rights within Veracruz,
México, and switching rights in the Puebla-Tlaxcala zone.
In a related agreement, the parties further agreed to amend the
FTVM by-laws to, among other changes, grant certain veto and
voting rights to KCSM at the shareholders and the board of
directors levels.
The Settlement Agreement shall remain in effect until the term
of the concession title of KCSM expires, unless the parties
mutually agree to renew the Settlement Agreement beyond the
expiration of KCSMs concession title. The Settlement
Agreement may be terminated earlier upon delivery by KCSM of a
notice to the Ferromex Parties indicating any breach by the
Ferromex Parties of any of their respective obligations under
the Settlement Agreement. Notwithstanding, the settlement and
termination of the Settlement Procedures shall not be subject to
rescission or termination.
The Settlement Agreement may be terminated, at KCSMs
option, before its stipulated term if Ferromex is sold or if it
transfers, directly or indirectly, its concession under its
concession title. A change in control of KCSM or its affiliates,
however, shall not be a cause for termination. Likewise, the
Settlement Agreement will terminate three years after Ferromex
and Ferrosur cease to be under the common control of one person
or group of persons acting jointly or in agreement to adopt
coordinated resolutions (Common Control).
Notwithstanding, if for any reason Ferromex and Ferrosur are
under Common Control within five years after the Settlement
Agreement is terminated due to Ferromex and Ferrosur ceasing to
be under Common Control, the Settlement Agreement would
automatically be reinstated.
In November 2005, Ferromex acquired control of and merged with
Ferrosur creating Mexicos largest railway, though such
merger has been previously rejected by the Comisión Federal
de Competencia (Mexican Antitrust Commission)
(COFECO). If the COFECO does not authorize the
merger of Ferromex and Ferrosur, the Settlement Agreement shall
be terminated twelve months after the relevant resolution of the
Governmental Authority is issued or when the unwinding is
effective, whichever is later.
Trackage Rights Settlement Agreement with
Ferromex. KCSM operations are subject to certain
trackage rights, switching rights, and interline services with
Ferromex. KCSM and Ferromex entered into a Trackage Rights,
Switching and Interline Settlement Agreement, dated
February 9, 2010 (the Trackage Rights
Agreement). Pursuant to the Trackage Rights Agreement, the
parties terminated, in a definitive and irrevocable manner, all
actions and procedures regarding: (a) rates applicable to
trackage rights, switching and interlinear services from
January 1, 2009 onward, but not regarding the applicable
rates before January 1, 2009 or the amounts owed by the
parties to one another prior to the execution of the Trackage
Rights Agreement; (b) the scope of certain trackage rights
in Monterrey, Nuevo León, Guadalajara, Jalisco and
Altamira, Tamaulipas, and Aguascalientes; and (c) court
costs, as well as any other directly-related issue or dispute
that arises from, is related in any manner directly or
indirectly with, the terms and conditions
and/or scope
of such mandatory trackage
and/or
switching rights or that arises by reason of the definition of
trackage rights (the Settlement Controversies). The
parties waived their rights to any future actions derived from
or related to the Settlement Controversies. Further, KCSM and
Ferromex set the rates applicable for January 1, 2009 for
each party for the use of the other partys trackage. The
retroactive application of these rates to January 1, 2009
did not have a material impact on the results of operations for
the quarter ended March 31, 2010.
Explicitly excluded from the scope and purpose of the Trackage
Rights Agreement are all procedures, disputes, lawsuits,
remedies, appeals and disagreements that were not expressly
identified in the Trackage Rights Agreement, including without
limitation, the disputes, claims and lawsuits that relate to the
determination of rates for mandatory trackage
and/or
switching rights and for interconnection
and/or
terminal services, accrued prior to January 1, 2009, as
well as the disputes among the parties regarding amounts payable
to one another for trackage rights, interline services and
switching services, that are currently being disputed by both
parties at the
12
Table of Contents
Kansas
City Southern de México, S.A. de C.V. and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
Federal Court of Fiscal and Administrative Justice. Furthermore,
the parties did not settle or agree to settle any other trackage
and switching rights not specifically mentioned in the Trackage
Rights Agreement.
The Trackage Rights Agreement shall remain in effect until the
term of the concession title of Ferromex or the concession title
of KCSM expire, unless the parties mutually agree to renew the
Trackage Rights Agreement beyond the expiration of either
partys concession title. The Trackage Rights Agreement may
be terminated, at KCSMs option, before its stipulated term
if Ferromex is sold or if it transfers, directly or indirectly,
its concession under its concession title. A change in control
of KCSM or its affiliates, however, shall not be a cause for
termination.
Certain Disputes with Ferromex. KCSMs
operations are subject to certain trackage rights, haulage
rights, and interline services (the Services) with
Ferromex. Other than the rates to be charged pursuant to the
Trackage Rights Agreement, dated February 9, 2010, between
KCSM and Ferromex, the rates payable for these services have not
been agreed upon by KCSM and Ferromex for the periods beginning
in 1998 through December 31, 2008. If KCSM cannot reach an
agreement with Ferromex for rates applicable for services prior
to January 1, 2009 which are not subject to the Trackage
Rights Agreement, the Mexican Secretaría de
Comunicaciones y Transportes (Ministry of
Communications and Transportation or SCT) is
entitled to set the rates in accordance with Mexican law and
regulations. KCSM and Ferromex both initiated administrative
proceedings seeking a determination by the SCT of the rates that
KCSM and Ferromex should pay each other in connection with the
services. The SCT issued rulings in 2002 and 2008 setting the
rates for the services and both KCSM and Ferromex challenged
these rulings.
In addition, KCSM is currently involved in judicial, civil and
administrative proceedings and negotiations with Ferromex
regarding the rates payable to each other for the Services for
the periods prior to January 1, 2009. Although KCSM and
Ferromex have challenged these matters based on different
grounds and these cases continue to evolve, management believes
the amounts recorded related to these matters are adequate and
does not believe there will be a future material impact to the
results of operations arising out of these disputes.
SCT Sanction Proceedings. In April 2006, the
SCT initiated proceedings against KCSM, claiming that KCSM had
failed to make certain minimum capital investments projected for
2004 and 2005 under its five-year business plan filed with the
SCT prior to its April 2005 acquisition by KCS (collectively,
the Capital Investment Proceedings). KCSM believes
it made capital expenditures exceeding the required amounts.
KCSM responded to the SCT by providing evidence in support of
its investments and explaining why it believes sanctions are not
appropriate. In May 2007, KCSM was served with an SCT resolution
regarding the Capital Investment Proceeding for 2004, in which
the SCT resolved to impose no sanction. In June 2007, KCSM was
served with an SCT resolution regarding the Capital Investment
Proceeding for 2005, in which the SCT determined that KCSM had
indeed failed to make the minimum capital investments required
for such year, and imposed a minimum fine. KCSM has filed an
action in the Mexican Administrative and Fiscal Federal Court
challenging this ruling. KCSM will have the right to challenge
any adverse ruling.
In May 2008, the SCT initiated a proceeding against KCSM, at the
request of a Mexican subsidiary of a large U.S. Auto
Manufacturer (the Auto Manufacturer), alleging that
KCSM impermissibly bundled international rail services and
engaged in discriminatory pricing practices with respect to rail
services provided by KCSM to the Auto Manufacturer. In March
2009, the SCT issued a decision determining that KCSM had
engaged in the activities alleged, but imposed no sanction since
this was the first time KCSM had engaged in such activities. On
May 6, 2009, KCSM challenged the SCTs decision and
the appeal is currently pending in the Administrative and Fiscal
Federal Court.
On July 23, 2008, the SCT delivered notice to KCSM of new
proceedings against KCSM, claiming, among other things, that
KCSM refused to grant Ferromex access to certain trackage over
which Ferromex alleges it has trackage rights on six different
occasions and, thus denied Ferromex the ability to provide
13
Table of Contents
Kansas
City Southern de México, S.A. de C.V. and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
service to the Auto Manufacturer at this location. On
August 13, 2008, KCSM filed a response to the SCT and final
resolution is pending.
KCSM believes it has defenses to the imposition of sanctions for
the foregoing proceedings and intends to vigorously contest
these allegations. KCSM does not believe that these SCT
proceedings will have a material adverse effect on KCSMs
results of operations or financial condition. However, if KCSM
is ultimately sanctioned by the SCT for generic
sanctions on five occasions over the term of the Concession,
KCSM could be subject to possible future SCT action seeking
revocation of the Concession.
Disputes Relating to the Provision of Services to the Auto
Manufacturer. KCSM is involved in several
disputes related to providing service to the Auto Manufacturer.
In March 2008, the Auto Manufacturer filed an arbitration suit
against KCSM under a contract for services to the Auto
Manufacturers plants in Mexico, which, as amended, had a
stated termination date of January 31, 2008. Among other
claims, the Auto Manufacturer claimed that the contract was
implicitly extended and continued in effect beyond its stated
termination date. The Auto Manufacturer is seeking a declaration
by the arbitrator that the rates being assessed by KCSM are
discriminatory, even though the rates being charged are within
the legal rate limits set by Mexican law for such freight
transportation. KCSM claimed that the contract did in fact
expire on its stated termination date, and that services
rendered thereafter are thus subject to the general terms and
conditions (including rates) applicable in the absence of a
specific contract, pursuant to Mexican law. Accordingly, KCSM
filed a counterclaim against the Auto Manufacturer to, among
other things, recover the applicable rate difference between the
rates under the contract and KCSMs rates. The arbitration
was divided in two phases. On May 18, 2009, the arbitrator
issued an award on the first phase of the arbitration
proceeding, ruling that the contract had terminated on
May 8, 2008. As of the date of this filing, the second
phase of the arbitration proceeding, regarding the claim that
the rates assessed by KCSM are discriminatory, is in the
evidentiary stage and has not been resolved. Management believes
the final resolution of these claims will not have any material
impact on KCSMs results of operations.
Credit Risk. The Company continually monitors
risks related to economic changes and certain customer
receivable concentrations. Significant changes in customer
concentration or payment terms, deterioration of customer
credit-worthiness or further weakening in economic trends could
have a significant impact on the collectability of KCSMs
receivables and operating results. If the financial condition of
KCSMs customers were to deteriorate, resulting in an
impairment of their ability to make payments, additional
allowances may be required. The Company has recorded reserves
for uncollectability based on its best estimate at
March 31, 2010.
Income Tax. Tax returns filed in Mexico from
2003 through the current year remain open to examination by the
taxing authority in Mexico. The 2003 through 2005 tax returns
are currently under examination. The Company received an audit
assessment for the year ended December 31, 2003, from
Servicio de Administracion Tributaria (the SAT), the
Mexican equivalent of the IRS. The Company filed its response to
this assessment on March 8, 2010, and continues to
negotiate with the SAT. If a settlement is not reached, the
matter will be litigated. The Company believes that it has
strong legal arguments in its favor and will more likely than
not ultimately prevail in any challenge of this assessment. The
Company believes that an adequate provision has been made for
any adjustment (tax and interest) that will be due for all open
years. However, an unexpected adverse resolution could have a
material effect on the results of operations in a particular
quarter or fiscal year.
14
Table of Contents
Report of
Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Kansas City Southern de México, S.A. de C.V.:
We have reviewed the accompanying consolidated balance sheet of
Kansas City Southern de México, S.A. de C.V. and
subsidiaries (the Company) as of March 31, 2010, and the
related consolidated statements of income and cash flows for the
three-month periods ended March 31, 2010 and 2009. These
consolidated financial statements are the responsibility of the
Companys management.
We conducted our reviews in accordance with the standards of the
Public Company Accounting Oversight Board (United States). A
review of interim financial information consists principally of
applying analytical procedures and making inquiries of persons
responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in
accordance with the standards of the Public Company Accounting
Oversight Board (United States), the objective of which is the
expression of an opinion regarding the consolidated financial
statements taken as a whole. Accordingly, we do not express such
an opinion.
Based on our review, we are not aware of any material
modifications that should be made to the consolidated financial
statements referred to above for them to be in conformity with
U.S. generally accepted accounting principles.
We have previously audited, in accordance with the standards of
the Public Company Accounting Oversight Board (United States),
the consolidated balance sheet of the Company as of
December 31, 2009, and the related consolidated statements
of income, changes in stockholders equity, and cash flows
for the year then ended (not presented herein); and in our
report dated February 11, 2010, we expressed an unqualified
opinion on those consolidated financial statements. In our
opinion, the information set forth in the accompanying
consolidated balance sheet as of December 31, 2009 is
fairly stated, in all material respects, in relation to the
consolidated balance sheet from which it has been derived.
KPMG LLP
Kansas City, Missouri
April 27, 2010
15
Table of Contents
Item 2. | Managements 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 are not based upon
historical information. Such forward-looking statements are
based upon information currently available to management and
managements perception thereof as of the date of this
Form 10-Q.
Readers can identify these forward-looking statements by the use
of such verbs as expects, anticipates,
believes or similar verbs or conjugations of such
verbs. The actual results of operations of Kansas City Southern
de México, S.A. de C.V. (the Company or
KCSM) could materially differ from those indicated
in forward-looking statements. The differences could be caused
by a number of factors or combination of factors including, but
not limited to, those factors identified in
Item 1A Risk Factors of the Companys
Annual Report on
Form 10-K
for the year ended December 31, 2009, which is on file with
the U.S. Securities and Exchange Commission (File
No. 333-08322)
and which Risk Factors section is hereby
incorporated by reference herein. Readers are strongly
encouraged to consider these factors when evaluating
forward-looking statements. Forward-looking statements contained
in this
Form 10-Q
will not be updated.
The following discussion, which is intended to clarify and
focus on the Companys 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
Form 10-Q,
is abbreviated pursuant to General Instruction H(2)(a) of
Form 10-Q.
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 Companys 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 Companys significant
accounting policies are disclosed in the 2009 Annual Report on
Form 10-K.
During the first quarter of 2010, the Company elected to change
its accounting policy for rail grinding costs from a
capitalization method to a direct expense method. Refer to
Note 1, Accounting Policies, Interim Financial Statements
and Basis of Presentation, for further details of this change in
accounting policy. Comparative financial information for all
prior periods have been adjusted to reflect the retroactive
application of this change in accounting principle.
Managements narrative analysis relates to the financial
condition and results of operations of KCSM and its subsidiaries.
16
Table of Contents
Results
of Operations.
The following summarizes the consolidated income statement
components (in millions).
Three Months |
||||||||||||
Ended |
||||||||||||
March 31, | Change | |||||||||||
2010 | 2009 | Dollars | ||||||||||
Revenues
|
$ | 190.8 | $ | 137.3 | $ | 53.5 | ||||||
Operating expenses
|
134.5 | 121.0 | 13.5 | |||||||||
Operating income
|
56.3 | 16.3 | 40.0 | |||||||||
Equity in net earnings of unconsolidated affiliates
|
1.5 | 0.5 | 1.0 | |||||||||
Interest expense
|
(27.5 | ) | (22.1 | ) | (5.4 | ) | ||||||
Debt retirement costs
|
(14.9 | ) | (0.6 | ) | (14.3 | ) | ||||||
Foreign exchange gain (loss)
|
2.8 | (5.1 | ) | 7.9 | ||||||||
Other income, net
|
0.5 | 0.3 | 0.2 | |||||||||
Income (loss) before income taxes
|
18.7 | (10.7 | ) | 29.4 | ||||||||
Income tax (benefit) expense
|
7.6 | (11.5 | ) | 19.1 | ||||||||
Net income
|
$ | 11.1 | $ | 0.8 | $ | 10.3 | ||||||
Revenues.
The following table summarizes revenues (in millions),
carload/unit statistics (in thousands) and revenue per
carload/unit:
Revenues | Carloads and Units | Revenue per Carload/Unit | ||||||||||||||||||||||||||||||||||
Three Months |
Three Months |
Three Months |
||||||||||||||||||||||||||||||||||
Ended |
Ended |
Ended |
||||||||||||||||||||||||||||||||||
March 31, | March 31, | March 31, | ||||||||||||||||||||||||||||||||||
2010 | 2009 | % Change | 2010 | 2009 | % Change | 2010 | 2009 | % Change | ||||||||||||||||||||||||||||
Chemical and petroleum
|
$ | 42.2 | $ | 30.6 | 38 | % | 25.3 | 20.3 | 25 | % | $ | 1,668.0 | $ | 1,507.4 | 11 | % | ||||||||||||||||||||
Industrial and consumer products
|
46.5 | 34.7 | 34 | % | 36.7 | 33.5 | 10 | % | 1,267.0 | 1,035.8 | 22 | % | ||||||||||||||||||||||||
Agriculture and minerals
|
48.6 | 37.0 | 31 | % | 30.6 | 28.7 | 7 | % | 1,588.2 | 1,289.2 | 23 | % | ||||||||||||||||||||||||
Total general commodities
|
137.3 | 102.3 | 34 | % | 92.6 | 82.5 | 12 | % | 1,482.7 | 1,240.0 | 20 | % | ||||||||||||||||||||||||
Coal
|
3.1 | 3.7 | (16 | )% | 4.3 | 4.6 | (7 | )% | 720.9 | 804.3 | (10 | )% | ||||||||||||||||||||||||
Intermodal
|
24.8 | 16.0 | 55 | % | 69.7 | 47.8 | 46 | % | 355.8 | 334.7 | 6 | % | ||||||||||||||||||||||||
Automotive
|
20.6 | 11.7 | 76 | % | 16.2 | 9.9 | 64 | % | 1,271.6 | 1,181.8 | 8 | % | ||||||||||||||||||||||||
Carload revenues, carloads and units
|
185.8 | 133.7 | 39 | % | 182.8 | 144.8 | 26 | % | $ | 1,016.4 | $ | 923.3 | 10 | % | ||||||||||||||||||||||
Other revenue
|
5.0 | 3.6 | 39 | % | ||||||||||||||||||||||||||||||||
Total revenues(i)
|
$ | 190.8 | $ | 137.3 | 39 | % | ||||||||||||||||||||||||||||||
(i) Included in revenues:
|
||||||||||||||||||||||||||||||||||||
Fuel surcharge
|
$ | 18.1 | $ | 10.1 | ||||||||||||||||||||||||||||||||
Freight revenues include both revenue for transportation
services and fuel surcharges. For the three months ended
March 31, 2010, revenues increased $53.5 million
compared to the same period in 2009, primarily due to the
overall increase in carload/unit volumes resulting from the
relative improvement in the economy, positive pricing impacts,
the effect of fluctuations in the value of the U.S. dollar
against the value of the Mexican peso for revenues denominated
in Mexican pesos and increased fuel surcharge. Revenue per
17
Table of Contents
carload/unit increased by 10% for the three months ended
March 31, 2010, compared to the same period in 2009, due to
increases in pricing and fuel surcharge.
KCSMs fuel surcharge is a mechanism to adjust revenue
based upon changing fuel prices. Fuel surcharges are calculated
differently depending on the type of commodity transported. For
most commodities, fuel surcharge is calculated using a fuel
price from a prior time period that can be as much as
60 days earlier. In a period of volatile fuel prices or
changing customer business mix, changes in fuel expense and fuel
surcharge may differ.
The following discussion provides an analysis of revenues by
commodity group:
Revenues by Commodity Group |
||
for the three months ended March 31, 2010 | ||
Chemical and petroleum. Revenues increased
$11.6 million for the three months ended March 31,
2010, compared to the same period in 2009, primarily due to
increases in volume, fluctuations in the value of the U.S.
dollar against the value of the Mexican peso and pricing.
Petroleum and plastics product shipments increased primarily due
to inventory replenishment. Additionally, petroleum revenues
increased due to a Mexican government initiated oil export
program, which resulted in record high levels of oil production
and storage.
|
||
Industrial and consumer products. Revenues
increased $11.8 million for the three months ended
March 31, 2010, compared to the same period in 2009,
primarily due to increases in pricing, volume and fuel
surcharge. A strengthening economy accounted for growth in most
commodities. Metals and scrap revenue increased primarily due to
longer length of haul, and appliances and pulp paper revenue
increased due to a shift in manufacturing to Mexico as well as
conversion from truck to rail. This growth was partially offset
by a decrease in beer volumes due to a change in a
customers distribution network.
|
||
Agriculture and minerals. Revenues increased
$11.6 million for the three months ended March 31,
2010, compared to the same period in 2009, due to increases in
pricing, volume, fluctuations in the value of the
U.S. dollar against the value of the Mexican peso and
length of haul. Grain revenue and volume increased as a portion
of the traffic lost to vessel in 2009 was converted back to
rail. Food products showed continued strength primarily due to
increased distiller dried grain shipments from the U.S.
|
Coal. Revenue decreased $0.6 million for
the three months ended March 31, 2010, compared to the same
period in 2009, primarily due to a decrease in volume and
shorter length of haul.
Intermodal. Revenues increased
$8.8 million for the three months ended March 31,
2010, compared to the same period in 2009, primarily due to an
increase in volume. Growth was driven by increased automotive
parts traffic, conversion of cross border truck traffic to rail,
haulage and trans-Pacific container volume due to inventory
replenishment, a rebound in North American demand for
automobiles and improvement in the economy.
18
Table of Contents
Automotive. Revenues increased
$8.9 million for the three months ended March 31,
2010, compared to the same period in 2009, primarily due to
increases in volume, fluctuations in the value of the
U.S. dollar against the value of the Mexican peso and fuel
surcharge. The volume increase was driven by strong year over
year growth in North American automobile sales and an increase
in parts and vehicle volume driven by a shift in production and
distribution patterns from the U.S. to Mexico.
Operating
expenses.
Operating expenses, as shown below (in millions),
increased $13.5 million for the three months ended
March 31, 2010, when compared to 2009, primarily due to
increased carload/unit volumes and the effect of fluctuations in
the value of the U.S. dollar against the value of the
Mexican peso for operating expenses denominated in Mexican pesos.
Three Months |
||||||||||||||||
Ended |
||||||||||||||||
March 31, | Change | |||||||||||||||
2010 | 2009 | Dollars | Percent | |||||||||||||
Compensation and benefits
|
$ | 22.5 | $ | 16.6 | $ | 5.9 | 36 | % | ||||||||
Purchased services
|
32.0 | 28.2 | 3.8 | 13 | % | |||||||||||
Fuel
|
26.4 | 18.2 | 8.2 | 45 | % | |||||||||||
Equipment costs
|
18.5 | 20.6 | (2.1 | ) | (10 | )% | ||||||||||
Depreciation and amortization
|
23.9 | 27.9 | (4.0 | ) | (14 | )% | ||||||||||
Casualties and insurance
|
1.4 | 2.0 | (0.6 | ) | (30 | )% | ||||||||||
Materials and other
|
9.8 | 7.5 | 2.3 | 31 | % | |||||||||||
Total operating expenses
|
$ | 134.5 | $ | 121.0 | $ | 13.5 | 11 | % | ||||||||
Compensation and benefits. Compensation and
benefits increased $5.9 million for the three months ended
March 31, 2010, compared to the same period in 2009,
primarily due to an increase in statutory profit sharing
expenses, increases in compensation and benefits due to
fluctuations in the value of the U.S. dollar against the
value of the Mexican peso and annual wage and salary rate
increases. These increases were partially offset by lower
employee headcount as compared to the prior year.
Purchased services. Purchased services expense
increased $3.8 million for the three months ended
March 31, 2010, compared to the same period in 2009, due to
increases in corporate services provided by a related company,
volume-sensitive costs including joint facilities, security, and
track and terminal services. These increases were partially
offset by lower locomotive maintenance as a result of a newer
locomotive fleet and having fewer locomotives covered by
maintenance agreements.
Fuel. Fuel expense increased $8.2 million
for the three months ended March 31, 2010, compared to the
same period in 2009. The increase was driven by higher
consumption due to the increase in traffic volume, higher fuel
prices and fluctuations in the value of the U.S. dollar
against the value of the Mexican peso.
Equipment costs. Equipment costs decreased
$2.1 million for the three months ended March 31,
2010, compared to the same period in 2009, primarily due to a
decrease in freight car lease expense, which was partially
offset by an increase in the use of other railroads
freight cars and car leases.
Depreciation and amortization. Depreciation
and amortization expenses decreased $4.0 million for the
three months ended March 31, 2010, compared to the same
period in 2009, primarily due to a change in the estimated
useful lives of certain Mexican concession assets, which was
effective as of October 1, 2009. In addition, depreciation
expense decreased due to the impact of lower rates based on the
depreciation study completed in third quarter 2009. Depreciation
expense on the asset base as of year-end 2009 will be lower on a
quarterly basis by approximately $2.6 million due to the
change in estimated useful lives of certain Mexican concession
assets and approximately $0.5 million as a result of lower
rates based on the depreciation study.
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Casualties and insurance. Casualties and
insurance expenses decreased $0.6 million for the three
months ended March 31, 2010, compared with the same period
in 2009, primarily due to a lower derailment activity and
environmental expense.
Materials and other. Materials and other
expenses increased $2.3 million for the three months ended
March 31, 2010, compared to the same period in 2009,
primarily due to a settlement related to a legal dispute and
increases in other employee expenses and concession duty.
Non-Operating
Expenses
Equity in net earnings of unconsolidated
affiliates. Equity in earnings from
unconsolidated affiliates was $1.5 million for the three
months ended March 31, 2010, compared to $0.5 million
the same period in 2009. Significant components of this change
are as follows:
| KCSMs equity in earnings of FTVM was $0.2 million for the three months ended March 31, 2010, compared to a loss of $0.4 million for the same period in 2009. The increase is primarily due to a slight recovery in volumes. | |
| KCSMs equity in earnings of Mexrail, Inc. was $1.3 million for the three months ended March 31, 2010, compared to $0.9 million for 2009. This increase was primarily due to an increase in carload/unit volumes. |
Interest expense. Interest expense increased
$5.4 million for the three months ended March 31,
2010, compared to the same period 2009. The increase in interest
expense was primarily attributable to higher debt balances and
average interest rates.
Debt retirement cost. Debt retirement costs
for the three months ended March 31, 2010 and 2009 were
$14.9 million and $0.6 million, respectively. In the
first quarter of 2010, KCSM purchased $296.3 million of its
93/8% Senior
Notes due May 1, 2012. The Company recorded debt retirement
costs of $14.9 million related to the call premium and the
write-off of unamortized debt issuance costs. In March 2009,
KCSM repaid all amounts outstanding under, and terminated, its
credit agreement and upon termination, wrote-off the unamortized
debt issuance cost related to this debt.
Foreign exchange. For the three months ended
March 31, 2010 and 2009, the foreign exchange gain was
$2.8 million compared to a foreign exchange loss of
$5.1 million, primarily due to fluctuations in the value of
the U.S. dollar against the value of the Mexican peso.
Other income, net. Other income, net consists
primarily of miscellaneous interest income. For the three months
ended March 31, 2010, other income, net was
$0.5 million compared to $0.3 million in the same
period 2009.
Income tax (benefit) expense. For the three
months ended March 31, 2010, the income tax expense was
$7.6 million as compared to an $11.5 million income
tax benefit for the same period in 2009. The effective income
tax rate was 40.6% and (107.5%) for the three months ended
March 31, 2010 and 2009, respectively. The changes in
income tax expense and the effective tax rate were primarily due
to higher pre-tax income, foreign exchange rate fluctuations and
an increase in the statutory income tax rate from 28% to 30%.
Liquidity
and Capital Resources
Overview
KCSMs primary uses of cash are to support operations;
maintain and improve its railroad; pay debt service; acquire new
and maintain existing locomotives, rolling stock and other
equipment; and meet other obligations. KCSMs cash flow
from operations has historically been sufficient to fund
operations, maintenance capital expenditures and debt service.
External sources of cash (principally bank debt, public and
private debt and leases) have been used to refinance existing
indebtedness and to fund acquisitions, new investments and
equipment additions. As of March 31, 2010, total available
liquidity was approximately $108.9 million.
20
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The Company believes, based on current expectations, that cash
and other liquid assets, operating cash flows, access to debt
capital markets and other available financing resources will be
sufficient to fund anticipated operating, capital and debt
service requirements and other commitments in the foreseeable
future. KCSM has no significant debt maturities until 2012.
As of March 31, 2010, KCSM has a debt capitalization ratio
(total debt as a percentage of total debt plus total equity) of
46.0 percent. Its primary sources of liquidity are cash
flows generated from operations and access to debt capital
markets. Although KCSM has had adequate access to the debt
capital markets, as a non-investment grade company, the
financial terms under which funding is obtained often contain
restrictive covenants. The covenants constrain financial
flexibility by restricting or prohibiting certain actions,
including the ability to incur additional debt for any purpose
other than refinancing existing debt, create or suffer to exist
additional liens, make prepayments of particular debt, pay
dividends on common stock, make investments, engage in
transactions with stockholders and affiliates, sell certain
assets, and engage in mergers and consolidations or in sale
leaseback transactions. These restrictions, however, are subject
to a number of qualifications and exceptions that provide the
Company with varying levels of additional borrowing capacity.
The Company was in compliance with all of its debt covenants as
of March 31, 2010.
KCSMs operating results and financing alternatives can be
unexpectedly impacted by various factors, some of which are
outside of its control. For example, if KCSM was to experience a
reduction in revenues or a substantial increase in operating
costs or other liabilities, its earnings could be significantly
reduced, increasing the risk of non-compliance with debt
covenants. Additionally, KCSM is subject to economic factors
surrounding debt and its ability to obtain financing under
reasonable terms is subject to market conditions. Volatility in
capital markets and the tightening of market liquidity could
impact KCSMs access to capital. Further, KCSMs cost
of debt can be impacted by independent rating agencies, which
assign debt ratings based on certain factors including credit
measurements such as interest coverage and leverage ratios,
liquidity and competitive position.
On January 7, 2010, pursuant to an offer to purchase, KCSM
commenced a cash tender offer for a portion of its
93/8% Senior
Notes. On January 22, 2010, the Company purchased
$290.0 million of the tendered
93/8% Senior
Notes in accordance with the terms and conditions of the tender
offer set forth in the offer to purchase using the proceeds
received from the issuance of $300.0 million of
8.0% senior unsecured notes due February 1, 2018 (the
8.0% Senior Notes). Additionally, on
February 1, 2010, the Company purchased $6.3 million
of the
93/8% Senior
Notes. KCSM recorded debt retirement costs of $14.9 million
in the first quarter of 2010. The remaining
93/8% Senior
Notes mature on May 1, 2012 and are redeemable by KCSM at
its option.
On January 22, 2010, KCSM issued the 8.0% Senior
Notes, which bear interest semiannually at a fixed annual rate
of 8.0%. The 8.0% Senior Notes were issued at a discount to
par value, resulting in a $4.3 million discount and a yield
to maturity of
81/4%.
KCSM used the net proceeds from the issuance of the
8.0% Senior Notes and cash on hand to purchase
$290.0 million in principal amount of the
93/8% Senior
Notes tendered under an offer to purchase and pay all fees and
expenses incurred in connection with the 8.0% Senior Notes
offering and the
93/8% Senior
Notes tender offer. The 8.0% Senior Notes are redeemable at
KCSMs option, in whole or in part, on and after
February 1, 2014, at the following redemption prices
(expressed as percentages of principal amount) plus any accrued
and unpaid interest: 2014 104.000%, 2015
102.000% and 2016 100.000%. In addition, KCSM may
redeem up to 35% of the 8.0% Senior Notes any time prior to
February 1, 2013 from the proceeds of the sale of capital
stock in KCSM or KCS and the notes are redeemable, in whole but
not in part, at KCSMs option at their principal amount in
the event of certain changes in the Mexican withholding tax rate.
The 8.0% Senior Notes are denominated in dollars and are
unsecured, unsubordinated obligations, rank pari passu in
right of payment with KCSMs existing and future unsecured,
unsubordinated obligations, and are senior in right of payment
to KCSMs future subordinated indebtedness. In addition,
the 8% Senior Notes include certain covenants which are
customary for these types of debt instruments and borrowers with
similar credit ratings. The 8.0% Senior Notes contain
certain covenants that, among other things prohibit or restrict
KCSM for taking certain actions, including the ability to incur
debt, pay dividends or make other distributions in respect of
our stock, issue guarantees, enter into certain transactions
with affiliates, make restricted payments, sell certain assets,
create liens, engage in sale-leaseback transactions and engage
in mergers,
21
Table of Contents
divestitures and consolidations. However, these limitations are
subject to a number of important qualifications and exceptions.
Standard & Poors Rating Services
(S&P) rates the Companys senior unsecured
debt as B+ and improved the outlook to stable. Moodys
Investors Service (Moodys) rates the
Companys senior unsecured debt as B2 and improved the
outlook to stable.
Cash
Flow Information
Summary cash flow data follows (in millions):
Three Months |
||||||||
Ended |
||||||||
March 31, | ||||||||
2010 | 2009 | |||||||
Cash flows provided by (used for):
|
||||||||
Operating activities
|
$ | 56.6 | $ | 41.3 | ||||
Investing activities
|
(16.8 | ) | (40.1 | ) | ||||
Financing activities
|
(23.5 | ) | 86.1 | |||||
Net increase in cash and cash equivalents
|
16.3 | 87.3 | ||||||
Cash and cash equivalents beginning of year
|
92.6 | 38.9 | ||||||
Cash and cash equivalents end of period
|
$ | 108.9 | $ | 126.2 | ||||
As compared to the three months ended March 31, 2009, cash
flows from operating activities increased $15.3 million
primarily as a result of increased net income from higher
carload/unit volumes due to the recovery of the economy. Net
investing cash outflows decreased $23.3 million due to
lower capital expenditures, and net proceeds received from a
loan to a related company. These decreases were partially offset
by the acquisition of an intermodal facility in Mexico in the
first quarter of 2010. Additional information regarding capital
expenditures is provided below. Financing cash inflows decreased
$109.6 million. During the three months ended
March 31, 2010, the Company purchased $296.3 million
of the
93/8% Senior
Notes due 2012 and paid debt cost of $18.9 million, which
was partially offset by the proceeds from the issuance of the
8.0% Senior Notes of $295.7 million. During the three
months ended March 31, 2009, the Company received proceeds
of $189.0 million from the issuance of the
121/2% Senior
Notes due 2016, partially offset by the capital reduction to the
Companys shareholders and repayment of borrowings under
its credit agreement, which has been terminated.
Capital
Expenditures
Capital improvements are generally funded with cash flows from
operations. KCSM has historically used external sources such as
loans or lease financing for capacity and equipment acquisition.
The following summarizes the capital expenditures by type (in
millions):
Three Months |
||||||||
Ended |
||||||||
March 31, | ||||||||
2010 | 2009 | |||||||
Roadway capital program
|
$ | 14.4 | $ | 17.5 | ||||
Equipment
|
1.7 | 1.3 | ||||||
Locomotive acquisitions
|
| 1.1 | ||||||
Information technology
|
1.6 | 1.2 | ||||||
Other
|
1.0 | 0.8 | ||||||
Total capital expenditures accruals basis
|
18.7 | 21.9 | ||||||
Change in capital accruals
|
3.1 | 20.5 | ||||||
Total cash capital expenditures
|
$ | 21.8 | $ | 42.4 | ||||
Item 3. | Quantitative and Qualitative Disclosure About Market Risk. |
Omitted pursuant to General Instruction H(2)(c) of
Form 10-Q.
22
Table of Contents
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 Companys President and Executive
Representative and Chief Financial Officer have each reviewed
and evaluated the effectiveness of the Companys disclosure
controls and procedures (as defined in
Rules 13a-15(e)
and
15d-15(e) of
the Securities Exchange Act of 1934, as amended (the
Exchange Act)). Based on that evaluation, the
President and Executive Representative and Chief Financial
Officer have each concluded that the Companys current
disclosure controls and procedures are effective to ensure that
information required to be disclosed by the Company in 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 Commission rules and
forms, and include controls and procedures designed to ensure
that information required to be disclosed by the Company in such
reports is accumulated and communicated to the Companys
management, including the President and Executive Representative
and Chief Financial Officer, as appropriate, to allow timely
decisions regarding required disclosure.
(b) Changes
in Internal Control over Financial Reporting.
There have not been any changes in the Companys internal
controls over financial reporting that occurred during the first
quarter of 2010 that have materially affected, or are reasonably
likely to materially affect, the Companys internal
controls over financial reporting.
Item 4T. | Controls and Procedures. |
Not applicable.
PART II
OTHER INFORMATION.
Item 1. | Legal Proceedings. |
For information related to the Companys settlement and
other legal proceedings, see Note 10 Commitments and
Contingencies, under Part I, Item 1, of this
quarterly report on
Form 10-Q.
Item 1A. | Risk Factors. |
There were no material changes during the quarter in the Risk
Factors disclosed in Item 1A, Risk Factors, in
KCSMs Annual Report on
Form 10-K
for the fiscal year ended December 31, 2009.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds. |
Omitted pursuant to General Instruction H(2)(b) of
Form 10-Q.
Item 3. | Defaults Upon Senior Securities. |
Omitted pursuant to General Instruction H(2)(b) of
Form 10-Q.
Item 4. | Reserved. |
Item 5. | Other Information. |
None.
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Table of Contents
Item 6. | Exhibits. |
Exhibit No.
|
Description of Exhibits Filed with this Report
|
|||
Exhibit 10 | .1 | Settlement Agreement, dated February 9, 2010, between KCSM and Ferrocarril Mexicano, S.A. de C.V. (Ferromex), Ferrosur S.A. de C.V., Minera México, S.A. de C.V., Infraestructura y Transportes Ferroviarios, S.A. de C.V., Infraestructura y Transportes México, S.A. de C.V., Líneas Ferroviarias de México, S.A. de C.V., Grupo Ferroviario Mexicano, S.A. de C.V., and Grupo México, S.A.B. de C.V. is attached to this Form 10-Q as Exhibit 10.1.* | ||
Exhibit 10 | .2 | Trackage Rights Agreement, dated February 9, 2010, between KCSM and Ferromex is attached to this Form 10-Q as Exhibit 10.2.* | ||
Exhibit 18 | .1 | Letter regarding change in accounting principle is attached to this Form 10-Q as Exhibit 18.1. | ||
Exhibit 31 | .1 | Principal Executive Officers Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 is attached to this Form 10-Q as Exhibit 31.1. | ||
Exhibit 31 | .2 | Principal Financial Officers Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 is attached to this Form 10-Q as Exhibit 31.2. | ||
Exhibit 32 | .1 | Principal Executive Officers Certification furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 is attached to this Form 10-Q as Exhibit 32.1. | ||
Exhibit 32 | .2 | Principal Financial Officers Certification furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 is attached to this Form 10-Q as Exhibit 32.2. |
Exhibit No.
|
Description of Exhibits Incorporated by Reference
|
|||
Exhibit 2 | .1 | Registration Rights Agreement, dated as of January 22, 2010, between KCSM and Banc of America Securities LLC, as representative of the placement agents listed therein (the 2010 Registration Rights Agreement), filed as Exhibit 4.2 to the Companys Current Report on Form 8-K, filed on January 28, 2010 (File No. 1-4717), is incorporated by reference as Exhibit 2.7. | ||
Exhibit 4 | .1 | Indenture, dated as of January 22, 2010, between KCSM and U.S. Bank National Association, as trustee and paying agent, covering up to $300,000,000 of KCSMs 8% Senior Notes due 2018 (the 2010 KCSM Indenture), filed as Exhibit 4.1 to the Companys Current Report on Form 8-K, filed on January 28, 2010 (File No. 1-4717), is incorporated by reference as Exhibit 4.1. | ||
Exhibit 10 | .3 | Placement Agreement, dated January 7, 2010 between the Company and Banc of America Securities LLC, as representative of the Placement Agents, filed as Exhibit 10.1 to the Companys Current Report on Form 8-K, filed on January 13, 2010 (File No. 1-4717), is incorporated by reference as Exhibit 10.3. |
*Certain portions of these exhibits have been omitted pursuant
to our request for confidential treatment under
Rule 24b-2
of the Securities Exchange Act of 1934, as amended.
24
Table of Contents
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 27, 2010.
Kansas City Southern de México, S.A. de C.V.
/s/ Michael
W. Upchurch
Michael W. Upchurch
Chief Financial Officer
(Principal Financial Officer)
/s/ Mary
K. Stadler
Mary K. Stadler
Chief Accounting Officer
(Principal Accounting Officer)
25