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EX-31.2 - PRINCIPAL FINANCIAL OFFICER'S CERTIFICATION - Kansas City Southern de Mexico, S.A. de C.V.kcsm-93012xex312.htm
EX-32.1 - PRINCIPAL EXECUTIVE OFFICER'S CERTIFICATION - Kansas City Southern de Mexico, S.A. de C.V.kcsm-93012xex321.htm

 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2012
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 Registrant’s name into English)
Mexico
 
 
98-0519243
(State or other jurisdiction of
incorporation or organization)
 
 
(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
(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  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  x    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  x     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  x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of September 30, 2012: 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
September 30, 2012
Index
 
 
Page
 
 
 
Item 1.
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
 
 
 
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
 


2


Kansas City Southern de México, S.A. de C.V. and Subsidiaries
Form 10-Q
September 30, 2012
PART I—FINANCIAL INFORMATION
 
Item 1.
Financial Statements

Introductory Comments
The unaudited Consolidated Financial Statements included herein have been prepared by Kansas City Southern de México, S.A. de C.V. (“KCSM” or the “Company”) 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 Management’s Discussion and Analysis of Financial Condition and Results of Operations included in this Form 10-Q should be read in conjunction with the consolidated financial statements and the related notes, as well as Management’s Discussion and Analysis of Financial Condition and Results of Operations, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011. Results for the three and nine months ended September 30, 2012, are not necessarily indicative of the results expected for the full year ending December 31, 2012.


3


Kansas City Southern de México, S.A. de C.V. and Subsidiaries
Consolidated Statements of Comprehensive Income
 
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2012
 
2011
 
2012
 
2011
 
(In millions)
(Unaudited)
Revenues
$
266.1

 
$
243.3

 
$
759.5

 
$
708.2

Operating expenses:
 
 
 
 
 
 
 
Compensation and benefits
29.8

 
35.8

 
93.5

 
99.3

Purchased services
36.3

 
30.7

 
109.2

 
96.6

Fuel
42.5

 
39.9

 
121.2

 
114.5

Equipment costs
20.6

 
21.0

 
57.4

 
63.5

Depreciation and amortization
23.0

 
22.8

 
67.5

 
64.9

Materials and other
17.2

 
13.9

 
41.6

 
42.9

Elimination of deferred statutory profit sharing liability, net

 

 
(43.0
)
 

Gain on insurance recoveries related to hurricane damage

 
(14.8
)
 

 
(14.8
)
Total operating expenses
169.4

 
149.3

 
447.4

 
466.9

Operating income
96.7

 
94.0

 
312.1

 
241.3

Equity in net earnings of unconsolidated affiliates
0.6

 
1.1

 
2.1

 
2.6

Interest expense
(22.0
)
 
(19.6
)
 
(66.7
)
 
(59.1
)
Debt retirement costs

 

 

 
(10.3
)
Foreign exchange gain (loss)
4.8

 
(7.7
)
 
4.9

 
(7.3
)
Other income (expense), net
(0.1
)
 
0.5

 
(0.2
)
 
2.6

Income before income taxes
80.0

 
68.3

 
252.2

 
169.8

Income tax expense
39.5

 
20.1

 
103.5

 
55.9

Net income
40.5

 
48.2

 
148.7

 
113.9

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Foreign currency translation adjustments, net of tax of $0.0 million for all periods presented
0.8

 
(1.5
)
 
1.0

 
(1.0
)
Other comprehensive income (loss)
0.8

 
(1.5
)
 
1.0

 
(1.0
)
Comprehensive income
$
41.3

 
$
46.7

 
$
149.7

 
$
112.9


See accompanying notes to consolidated financial statements.

4


Kansas City Southern de México, S.A. de C.V. and Subsidiaries
Consolidated Balance Sheets
 
 
September 30,
2012
 
December 31,
2011
 
(In millions, except
share amounts)
 
(Unaudited)
 
 
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
70.8

 
$
15.7

Accounts receivable, net
115.6

 
83.4

Related company receivables
42.9

 
6.6

Materials and supplies
32.6

 
35.4

Deferred income taxes
76.1

 
145.4

Other current assets
61.1

 
83.9

Total current assets
399.1

 
370.4

Investments
12.1

 
11.3

Property and equipment (including concession assets), net
2,451.4

 
2,413.1

Other assets
69.5

 
101.0

Total assets
$
2,932.1

 
$
2,895.8

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Debt due within one year
$
17.3

 
$
17.2

Related company debt

 
39.0

Accounts payable and accrued liabilities
119.4

 
137.8

Related company payables
37.6

 
6.7

Total current liabilities
174.3

 
200.7

Long-term debt
934.9

 
945.8

Related company debt
199.9

 
217.5

Deferred income taxes
134.9

 
127.4

Other noncurrent liabilities and deferred credits
11.1

 
77.1

Total liabilities
1,455.1

 
1,568.5

Commitments and contingencies

 

Stockholders’ equity:
 
 
 
Common stock, 4,785,510,235 shares authorized, issued without par value
267.3

 
267.3

Additional paid-in capital
243.6

 
243.6

Retained earnings
969.2

 
820.5

Accumulated other comprehensive loss
(3.1
)
 
(4.1
)
Total stockholders’ equity
1,477.0

 
1,327.3

Total liabilities and stockholders’ equity
$
2,932.1

 
$
2,895.8


See accompanying notes to consolidated financial statements.

5


Kansas City Southern de México, S.A. de C.V. and Subsidiaries
Consolidated Statements of Cash Flows
 
 
Nine Months Ended
 
September 30,
 
2012
 
2011
 
(In millions)
(Unaudited)
Operating activities:
 
 
 
Net income
$
148.7

 
$
113.9

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
67.5

 
64.9

Deferred income taxes
76.8

 
55.9

Equity in net earnings of unconsolidated affiliates
(2.1
)
 
(2.6
)
Deferred compensation
7.3

 
15.9

Elimination of deferred statutory profit sharing liability
(47.8
)
 

Distributions from unconsolidated affiliates
2.3

 
2.3

Gain on insurance recoveries related to hurricane damage

 
(14.8
)
Cash payments related to hurricane damage

 
(1.9
)
Insurance proceeds related to hurricane damage

 
36.6

Debt retirement costs

 
10.3

Changes in working capital items:
 
 
 
Accounts receivable
(32.4
)
 
(19.7
)
Related companies
7.1

 
(19.9
)
Materials and supplies
4.8

 
5.4

Other current assets
(9.4
)
 
(29.6
)
Accounts payable and accrued liabilities
11.3

 
(7.0
)
Other, net
4.3

 
(1.5
)
Net cash provided by operating activities
238.4

 
208.2

Investing activities:
 
 
 
Capital expenditures
(116.4
)
 
(117.4
)
Insurance proceeds related to hurricane damage

 
12.4

Proceeds from disposal of property
5.0

 
4.0

Other, net
(0.7
)
 

Net cash used for investing activities
(112.1
)
 
(101.0
)
Financing activities:
 
 
 
Proceeds from issuance of long-term debt

 
200.0

Proceeds from related company debt
9.0

 
17.5

Repayment of long-term debt
(14.6
)
 
(211.6
)
Repayment of related company debt
(65.6
)
 

Debt costs

 
(15.6
)
Pro-rata distribution of common stock

 
(75.0
)
Net cash used for financing activities
(71.2
)
 
(84.7
)
Cash and cash equivalents:
 
 
 
Net increase during each period
55.1

 
22.5

At beginning of year
15.7

 
37.0

At end of period
$
70.8

 
$
59.5


See accompanying notes to consolidated financial statements.

6


Kansas City Southern de México, S.A. de C.V. and Subsidiaries
Notes to Consolidated Financial Statements

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 and 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 Company’s Annual Report on Form 10-K for the year ended December 31, 2011. The results of operations for the three and nine months ended September 30, 2012, are not necessarily indicative of the results to be expected for the full year ending December 31, 2012. Certain prior year amounts have been reclassified to conform to the current year presentation.
Effective January 1, 2012, the Company adopted, on a retrospective basis, the new accounting guidance on the presentation of comprehensive income. As a result of the adoption, the Company reports net income and other comprehensive income in a single statement.
2.
Elimination of Deferred Statutory Profit Sharing Liability, Net
During the second quarter of 2012, Kansas City Southern (“KCS”) completed an organizational restructuring whereby all employees of KCSM became employees of KCSM Servicios, S.A. de C.V. (“KCSM Servicios”), a wholly-owned subsidiary of KCS. KCSM Servicios provides employee services to KCSM, and KCSM pays KCSM Servicios market-based rates for these services. The effective date of this organizational restructuring was May 1, 2012.
Mexican employees are entitled to receive statutory profit sharing. The related cash payment to employees is based on an employer’s net profit determined under accounting principles prescribed in Mexican law, rather than its net profit determined under U.S. GAAP. U.S. GAAP requires the recording of deferred liabilities or assets for financial reporting purposes on the differences between the amounts determined under the two different accounting principles.   
As a result of the organizational restructuring, KCSM’s obligation to pay statutory profit sharing terminated on the effective date. Accordingly, in the second quarter of 2012, KCSM recognized a $43.0 million net reduction to operating expense. This reduction includes the elimination of $47.8 million of the deferred statutory profit sharing liability, net of $4.8 million of transaction costs. KCSM Servicios became obligated to pay statutory profit sharing to its employees beginning on the effective date of the organizational restructuring.
3.
Hurricane Alex
In the third quarter of 2011, the Company settled its insurance claim related to Hurricane Alex, which struck in 2010 and resulted in extensive damage to KCSM’s track and bridge infrastructures, caused multiple track-related incidents and significantly disrupted the Company’s rail service. As a result of this settlement, the Company recognized a gain on insurance recoveries of $14.8 million in the third quarter of 2011. This gain primarily represented the recovery of lost profits and the replacement value of property in excess of its carrying value, net of the self-insured retentions.

7

Kansas City Southern de México, S.A. de C.V. and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)




4.
Property and Equipment (including Concession Assets)
Property and equipment, including concession assets, and related accumulated depreciation and amortization are summarized below (in millions):
 
September 30,
2012
 
December 31,
2011
Land
$
76.9

 
$
76.2

Concession land rights
141.2

 
141.2

Road property
2,171.6

 
2,092.3

Equipment
500.9

 
493.7

Technology and other
24.0

 
20.1

Construction in progress
85.4

 
78.4

Total property
3,000.0

 
2,901.9

Accumulated depreciation and amortization
548.6

 
488.8

Property and equipment (including concession assets), net
$
2,451.4

 
$
2,413.1

Concession assets, net of accumulated amortization of $387.0 million and $347.1 million, totaled $1,893.3 million and $1,855.1 million at September 30, 2012 and December 31, 2011, respectively.
5.
Fair Value Measurements
The Company’s short-term financial instruments include cash and cash equivalents, accounts receivable and accounts payable. The carrying value of the short-term financial instruments approximates their fair value.
The fair value of the Company’s debt, including related company debt, is estimated using quoted market prices when available, which is classified as Level 1 in the fair value hierarchy. When quoted market prices are not available, fair value is estimated based on current market interest rates for debt with similar maturities and credit quality, which is classified as Level 2. The fair value of the Company’s debt was $1,260.1 million and $1,297.1 million at September 30, 2012 and December 31, 2011, respectively. The carrying value was $1,152.1 million and $1,219.5 million at September 30, 2012 and December 31, 2011, respectively. If the Company’s debt was measured at fair value, the individual debt instruments would have been classified as either Level 1 or Level 2 in the fair value hierarchy.
6.
Related Companies
On September 28, 2012, KCSM entered into a new unsecured loan agreement (the “Loan Agreement”) with a wholly-owned subsidiary of KCS. The Loan Agreement allows KCSM to receive one or more loans up to an aggregate principal amount of $350.0 million, due on September 30, 2017. Pursuant to the terms of the Loan Agreement, on September 28, 2012, KCSM entered into a loan agreement for $48.0 million consisting of $9.0 million in cash and $39.0 million from an outstanding principal amount under the 2009 loan agreement between KCSM and a wholly-owned subsidiary of KCS, which was amended in 2010 and subsequently terminated as part of the Loan Agreement. KCSM is required to make annual interest payments on the outstanding principal amount at a rate equivalent to annual London Interbank Offered Rate ("LIBOR") plus 2.00%.
7.
Commitments and Contingencies
Concession Duty. Under KCSM’s 50-year railroad concession from the Mexican government (the “Concession”), KCSM paid concession duty expense of 0.5% of gross revenues for the first 15 years of the Concession period, and on June 24, 2012, KCSM began paying 1.25% of gross revenues, which is effective for the remaining years of the Concession. For the three and nine months ended September 30, 2012, the concession duty expense, which is recorded within materials and other in operating expenses, was $3.5 million and $6.2 million, respectively, compared to $1.3 million and $3.7 million for the same periods in 2011.
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. KCSM aggressively defends these matters and has established liability provisions, which management believes are adequate to cover expected costs. Although it is not possible to predict the outcome of any legal proceeding, in the opinion of management, other than those proceedings described in detail below, such proceedings and actions should not, individually, or in the aggregate, have a material adverse effect on the Company’s consolidated financial statements.

8

Kansas City Southern de México, S.A. de C.V. and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)




Environmental Liabilities. The Company’s operations are subject to Mexican federal and state laws and regulations relating to the protection of the environment through the establishment of standards for water discharge, water supply, emissions, noise pollution, hazardous substances and transportation and handling of hazardous and solid waste. The Mexican government may bring administrative and criminal proceedings, impose economic sanctions against companies that violate environmental laws and temporarily or even permanently close non-complying facilities.
The risk of incurring environmental liability is inherent in the railroad industry. As part of serving the petroleum and chemicals industry, the Company transports hazardous materials and has a professional team available to respond to and handle environmental issues that might occur in the transport of such materials.
The Company performs ongoing reviews and evaluations of the various environmental programs and issues within the Company’s operations and, as necessary, takes actions intended to limit the Company’s exposure to potential liability. Although these costs cannot be predicted with certainty, management believes that the ultimate outcome of identified matters will not have a material adverse effect on the Company’s consolidated financial statements.
Certain Disputes with Ferromex. KCSM and Ferrocarril Mexicano, S.A. de C.V. (“Ferromex”) use certain trackage rights, haulage rights and interline services (the “Services”) provided by each other. The rates to be charged after January 1, 2009, were agreed to pursuant to the Trackage Rights Agreement, dated February 9, 2010 (the “Trackage Rights Agreement”), between KCSM and Ferromex. The rates payable for these Services for the period beginning in 1998 through December 31, 2008, are still not resolved. KCSM is currently involved in discussions with Ferromex regarding the amounts payable to each other for the Services for this period. If KCSM cannot reach an agreement with Ferromex for rates applicable for Services prior to January 1, 2009, which are not subject to the Trackage Rights Agreement, the Secretaría de Comunicaciones y Transportes (“Secretary of Communications and Transportation” or “SCT”) is entitled to set the rates in accordance with Mexican law and regulations. KCSM and Ferromex both initiated administrative proceedings seeking a determination by the SCT of the rates that KCSM and Ferromex should pay each other in connection with the Services. The SCT issued rulings in 2002 and 2008 setting the rates for the Services, and both KCSM and Ferromex challenged these rulings. Although KCSM and Ferromex have challenged these matters based on different grounds and these cases continue to evolve, management believes the amounts recorded related to these matters are adequate.
While the outcome of these matters cannot be predicted with certainty, the Company does not believe, when resolved, that these disputes will have a material effect on its consolidated financial statements.
SCT Sanction Proceedings. On July 23, 2008, the SCT delivered notice to KCSM of 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 service to a Mexican subsidiary of a large U.S. auto manufacturer at this location. On July 15, 2010, the SCT resolved to consolidate these six sanction proceedings into a single proceeding, determining that the actions that motivated the underlying claims constitute a single occasion. On February 27, 2012, the SCT dismissed this proceeding on the basis that the extent of the Ferromex trackage rights had not been determined prior to the time KCSM refused Ferromex access.
Contractual Agreements. In the normal course of business, the Company enters into various contractual agreements related to commercial arrangements and the use of other railroads’ or governmental entities’ infrastructure needed for the operations of the business. The Company is involved or may become involved in certain disputes involving transportation rates, product loss or damage, charges and interpretations related to these agreements. While the outcome of these matters cannot be predicted with certainty, the Company does not believe, when resolved, that these disputes will have a material effect on its consolidated financial statements.
Credit Risk. The Company continually monitors risks related to economic changes and certain customer receivables concentrations. Significant changes in customer concentration or payment terms, deterioration of customer creditworthiness or further weakening in economic trends could have a significant impact on the collectability of KCSM’s receivables and operating results. If the financial condition of KCSM’s customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. The Company has recorded provisions for uncollectability based on its best estimate at September 30, 2012.

9

Kansas City Southern de México, S.A. de C.V. and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)




Income Tax. Tax returns filed by the Company for 2005 and from 2007 through the current year remain open to examination by the taxing authorities. The 2006 tax return is closed to examination except for certain depreciation adjustments included on an amended return. In March 2012, the 2004 tax return audit was completed without adjustment. The 2005 tax return is currently under examination. The Company believes that no provision is required as it expects to resolve these audits without adjustment. However, an unexpected adverse resolution could have a material effect on the consolidated financial statements in a particular quarter or fiscal year.

10


Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
The discussion below, as well as other portions of this Form 10-Q, contain forward-looking statements that are not based upon historical information. 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. Such forward-looking statements are based upon information currently available to management and management’s perception thereof as of the date of this Form 10-Q. However, such statements are dependent on and, therefore, can be influenced by, a number of external variables over which management has little or no control, including: competition and consolidation within the transportation industry; the business environment in industries that produce and consume rail freight; revocation of KCSM’s concession; the termination, or failure to renew, agreements with customers, other railroads and third parties; interest rates; access to capital; disruptions to the Company’s technology infrastructure, including its computer systems; natural events such as severe weather, hurricanes and floods; market and regulatory responses to climate change; credit risk of customers and counterparties and their failure to meet their financial obligations; legislative and regulatory developments and disputes; rail accidents or other incidents or accidents along KCSM’s rail network, facilities or customer facilities involving the release of hazardous materials, including toxic inhalation hazards; fluctuation in prices or availability of key materials, in particular diesel fuel; dependency on certain key suppliers of core rail equipment; changes in securities and capital markets; labor difficulties, including strikes and work stoppages; insufficiency of insurance to cover lost revenue, profits or other damages; acts of terrorism or risk of terrorist activities; war or risk of war; domestic and international economic conditions; political and economic conditions in Mexico and the level of trade between Mexico and the United States; and the outcome of claims and litigation. For more discussion about each risk factor, see Part I, Item 1A –“Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011, which is on file with the U.S. Securities and Exchange Commission (File No. 333-08322) and any updates contained herein. Readers are strongly encouraged to consider these factors when evaluating forward-looking statements. Forward-looking statements should not be read as a guarantee of future performance or results and will not necessarily be accurate indications of the timing when, or by which, such performance or results will be achieved. As a result, actual outcomes or results could materially differ from those indicated in forward-looking statements. We are not under any obligation, and we expressly disclaim any obligation, to update or alter any forward-looking statements.
This discussion is intended to clarify and focus on Kansas City Southern de México, S. A. de C.V.’s (“KCSM” or the “Company”) 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, and has been 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 Company’s discussion and analysis of its financial position and results of operations is based upon its consolidated financial statements. The preparation of these consolidated financial statements requires estimation and judgment that affect the reported amounts of revenue, expenses, assets and liabilities. The Company bases its estimates on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the accounting for assets and liabilities that are not readily apparent from other sources. If the estimates differ materially from actual results, the impact on the consolidated financial statements may be material. The Company’s critical accounting policies are disclosed in the 2011 Annual Report on Form 10-K.
Third Quarter Analysis
The Company reported quarterly net income of $40.5 million for the three months ended September 30, 2012, compared to quarterly net income of $48.2 million for the same period in 2011.
The Company reported a 9% increase in revenues during the three months ended September 30, 2012, as compared to the same period in 2011, driven primarily by an increase in carload/unit volumes, positive pricing impacts and increased fuel surcharge, partially offset by the effect of fluctuations in the value of the Mexican peso against the U.S. dollar for revenues denominated in Mexican pesos and commodity mix.
Operating expenses increased 13% during the three months ended September 30, 2012, as compared to the same period in 2011, primarily due to the $14.8 million gain on insurance recoveries related to the settlement of the Hurricane Alex insurance claim recognized in the third quarter of 2011 and an increase in volume sensitive costs, partially offset by the effect of fluctuations in the value of the Mexican peso against the U.S. dollar for operating expenses denominated in Mexican pesos. In addition, compensation and benefits decreased as a result of the organizational restructuring in the second quarter of 2012.

11


Operating expenses as a percentage of revenues increased to 63.7% for the three months ended September 30, 2012, as compared to 61.4% for the same period in 2011. Operating expenses as a percentage of revenues for the third quarter of 2011 would have been 600 basis points higher if the gain on insurance recoveries had been excluded from the financial results.
KCSM’s revenues and operating expenses are affected by fluctuations in the value of the Mexican peso against the U.S. dollar. Based on the volume of revenue and expense transactions denominated in Mexican pesos, revenue and expense fluctuations generally offset, with insignificant net impacts to operating income.
Results of Operations
The following summarizes KCSM’s consolidated income statement components (in millions):
 
 
Three Months Ended
 
Change
Dollars
 
September 30,
 
 
2012
 
2011
 
Revenues
$
266.1

 
$
243.3

 
$
22.8

Operating expenses
169.4

 
149.3

 
20.1

Operating income
96.7

 
94.0

 
2.7

Equity in net earnings of unconsolidated affiliates
0.6

 
1.1

 
(0.5
)
Interest expense
(22.0
)
 
(19.6
)
 
(2.4
)
Foreign exchange gain (loss)
4.8

 
(7.7
)
 
12.5

Other income (expense), net
(0.1
)
 
0.5

 
(0.6
)
Income before income taxes
80.0

 
68.3

 
11.7

Income tax expense
39.5

 
20.1

 
19.4

Net income
$
40.5

 
$
48.2

 
$
(7.7
)
 
 
Nine Months Ended
 
Change
Dollars
 
September 30,
 
 
2012
 
2011
 
Revenues
$
759.5

 
$
708.2

 
$
51.3

Operating expenses
447.4

 
466.9

 
(19.5
)
Operating income
312.1

 
241.3

 
70.8

Equity in net earnings of unconsolidated affiliates
2.1

 
2.6

 
(0.5
)
Interest expense
(66.7
)
 
(59.1
)
 
(7.6
)
Debt retirement costs

 
(10.3
)
 
10.3

Foreign exchange gain (loss)
4.9

 
(7.3
)
 
12.2

Other income (expense), net
(0.2
)
 
2.6

 
(2.8
)
Income before income taxes
252.2

 
169.8

 
82.4

Income tax expense
103.5

 
55.9

 
47.6

Net income
$
148.7

 
$
113.9

 
$
34.8


12


Revenues
The following summarizes revenues (in millions), carload/unit statistics (in thousands) and revenue per carload/unit:
 
Revenues
 
Carloads and Units
 
Revenue per Carload/Unit
 
Three Months Ended
September 30,
 
 
 
Three Months Ended
September 30,
 
 
 
Three Months Ended
September 30,
 
 
 
2012
 
2011
 
% Change
 
2012
 
2011
 
% Change
 
2012
 
2011
 
% Change
Chemical and petroleum
$
51.8

 
$
47.2

 
10
%
 
26.4

 
25.6

 
3
%
 
$
1,962

 
$
1,844

 
6
%
Industrial and consumer products
64.0

 
59.8

 
7
%
 
44.1

 
43.2

 
2
%
 
1,451

 
1,384

 
5
%
Agriculture and minerals
42.6

 
49.5

 
(14
%)
 
23.4

 
26.9

 
(13
%)
 
1,821

 
1,840

 
(1
%)
Total general commodities
158.4

 
156.5

 
1
%
 
93.9

 
95.7

 
(2
%)
 
1,687

 
1,635

 
3
%
Energy (i)
7.0

 
7.4

 
(5
%)
 
7.2

 
7.3

 
(1
%)
 
972

 
1,014

 
(4
%)
Intermodal
52.0

 
40.8

 
27
%
 
131.2

 
109.6

 
20
%
 
396

 
372

 
6
%
Automotive
43.6

 
33.6

 
30
%
 
24.8

 
19.2

 
29
%
 
1,758

 
1,750

 

Carload revenues, carloads and units
261.0

 
238.3

 
10
%
 
257.1

 
231.8

 
11
%
 
1,015

 
1,028

 
(1
%)
Other revenue
5.1

 
5.0

 
2
%
 
 
 
 
 
 
 
 
 
 
 
 
Total revenues (ii)
$
266.1

 
$
243.3

 
9
%
 
 
 
 
 
 
 
 
 
 
 
 
(ii) Included in revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fuel surcharge
$
38.9

 
$
32.3

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(i) Effective January 1, 2012, the Company established the Energy commodity group, which includes the previous Coal commodity group and certain amounts previously included within the Agriculture and minerals commodity group. Prior period amounts have been reclassified to conform to the current year presentation.
 
Revenues
 
Carloads and Units
 
Revenue per Carload/Unit
 
Nine Months Ended
September 30,
 
 
 
Nine Months Ended
September 30,
 
 
 
Nine Months Ended
September 30,
 
 
 
2012
 
2011
 
% Change
 
2012
 
2011
 
% Change
 
2012
 
2011
 
% Change
Chemical and petroleum
$
143.3

 
$
142.1

 
1
%
 
73.9

 
76.3

 
(3
%)
 
$
1,939

 
$
1,862

 
4
%
Industrial and consumer products
184.6

 
171.9

 
7
%
 
126.1

 
125.1

 
1
%
 
1,464

 
1,374

 
7
%
Agriculture and minerals
143.1

 
151.8

 
(6
%)
 
77.9

 
81.8

 
(5
%)
 
1,837

 
1,856

 
(1
%)
Total general commodities
471.0

 
465.8

 
1
%
 
277.9

 
283.2

 
(2
%)
 
1,695

 
1,645

 
3
%
Energy (i)
20.0

 
22.7

 
(12
%)
 
21.5

 
21.9

 
(2
%)
 
930

 
1,037

 
(10
%)
Intermodal
141.0

 
110.6

 
27
%
 
360.6

 
295.0

 
22
%
 
391

 
375

 
4
%
Automotive
114.2

 
94.7

 
21
%
 
66.8

 
55.9

 
19
%
 
1,710

 
1,694

 
1
%
Carload revenues, carloads and units
746.2

 
693.8

 
8
%
 
726.8

 
656.0

 
11
%
 
1,027

 
1,058

 
(3
%)
Other revenue
13.3

 
14.4

 
(8
%)
 
 
 
 
 
 
 
 
 
 
 
 
Total revenues (ii)
$
759.5

 
$
708.2

 
7
%
 
 
 
 
 
 
 
 
 
 
 
 
(ii) Included in revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fuel surcharge
$
107.3

 
$
87.7

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(i) Effective January 1, 2012, the Company established the Energy commodity group, which includes the previous Coal commodity group and certain amounts previously included within the Agriculture and minerals commodity group. Prior period amounts have been reclassified to conform to the current year presentation.

13


Freight revenues include both revenue for transportation services and fuel surcharges. For the three and nine months ended September 30, 2012, revenues increased $22.8 million and $51.3 million compared to the same periods in 2011, primarily due to an increase in carload/unit volumes, positive pricing impacts and increased fuel surcharge, partially offset by the effect of fluctuations in the value of the Mexican peso against the U.S. dollar for revenues denominated in Mexican pesos. Revenue per carload/unit decreased by 1% and 3% for the three and nine months ended September 30, 2012, compared to the same periods in 2011, reflecting commodity mix.
KCSM’s 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 up to 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 
September 30, 2012
Chemical and petroleum. Revenues increased $4.6 million and $1.2 million for the three and nine months ended September 30, 2012, compared to the same periods in 2011, primarily due to increases in pricing and fuel surcharge, partially offset by fluctuations in the value of the Mexican peso against the U.S. dollar. Revenues increased for the three and nine months ended September 30, 2012, due to positive pricing impacts for plastics and chemicals used to manufacture glass and paint. For the nine months ended September 30, 2012, petroleum volumes decreased compared to the same period in 2011, primarily due to a customer’s lost business; however, the recovery of some of this business in the third quarter of 2012 mitigated this decline.
Industrial and consumer products. Revenues increased $4.2 million and $12.7 million for the three and nine months ended September 30, 2012, compared to the same periods in 2011, primarily due to increases in pricing and fuel surcharge, partially offset by fluctuations in the value of the Mexican peso against the U.S. dollar. Metals and scrap grew primarily due to increases in pricing and high demand for slab and steel coil driven by strength in the automotive and oil and gas industries. Paper product revenue increased due to inventory restocking and traffic diversion from other carriers due to a bridge outage.

14


 
Revenues by commodity group
for the three months ended 
September 30, 2012
Agriculture and mineralsRevenues decreased $6.9 million and $8.7 million for the three and nine months ended September 30, 2012, compared to the same periods in 2011, primarily due to decreases in volume and fluctuations in the value of the Mexican peso against the U.S. dollar. Food products volumes decreased due to lost cross border corn syrup business and lower dried distillers grain volume. Cross border grain shipments increased during the first quarter of 2012 as 2011 volumes were negatively impacted by a strong Mexico harvest; however, drought-driven increases in the price of corn caused third quarter grain volumes to decrease as a higher percentage of Mexico grain purchases were imported via ports and local crops.
Energy. Revenues decreased $0.4 million and $2.7 million for the three and nine months ended September 30, 2012, compared to the same periods in 2011, primarily due to a decrease in pricing and fluctuations in the value of the Mexican peso against the U.S. dollar. Petroleum coke pricing was negatively impacted by a shorter average length of haul.
Intermodal. Revenues increased $11.2 million and $30.4 million for the three and nine months ended September 30, 2012, compared to the same periods in 2011, primarily due to increases in volume and pricing. The increase in volume was driven by strong cross border auto part business, conversion of truck traffic to rail and Trans-Pacific imports via the Port of Lazaro Cardenas.
Automotive. Revenues increased $10.0 million and $19.5 million for the three and nine months ended September 30, 2012, compared to the same periods in 2011, primarily due to increases in volume and pricing, partially offset by fluctuations in the value of the Mexican peso against the U.S. dollar. The increase was driven by strong year over year growth in North American automobile sales for Original Equipment Manufacturers, increased import/export volume through the Port of Lazaro Cardenas and increased length of haul through new cross border vehicle routings.
Operating Expenses
Operating expenses, as shown below (in millions), increased $20.1 million for the three months ended September 30, 2012, compared to the same period in 2011, primarily due to the gain on insurance recoveries related to Hurricane Alex recognized in the third quarter of 2011 and higher carload/unit volumes. These increases were partially offset by a decrease in compensation and benefits as a result of the organizational restructuring in the second quarter of 2012. Operating expenses decreased $19.5 million for the nine months ended September 30, 2012, compared to the same period in 2011, primarily due to the elimination of the deferred statutory profit sharing liability as a result of the organizational restructuring in the second quarter of 2012. This decrease was partially offset by the gain on insurance recoveries related to Hurricane Alex recognized in 2011 and higher carload/unit volumes. During the three and nine months ended September 30, 2012, operating expenses decreased due to fluctuations in the value of the Mexican peso against the U.S. dollar for operating expenses denominated in Mexican pesos.

15


As a result of the organizational restructuring in the second quarter of 2012, KCSM pays KCSM Servicios, S.A. de C.V.("KCSM Servicios"), a wholly-owned subsidiary of KCS, market-based rates for employee services. This market-based rate was determined by applying a percentage mark-up to amounts paid by KCSM Servicios to its employees and vendors. For comparative purposes, amounts paid to KCSM Servicios are classified according to the nature of the services provided to KCSM and the percentage mark-up portion of payments to KCSM Servicios is included within materials and other expense.
 
Three Months Ended
 
 
 
 
 
September 30,
 
Change
 
2012
 
2011
 
Dollars
 
Percent
Compensation and benefits
$
29.8

 
$
35.8

 
$
(6.0
)
 
(17
%)
Purchased services
36.3

 
30.7

 
5.6

 
18
%
Fuel
42.5

 
39.9

 
2.6

 
7
%
Equipment costs
20.6

 
21.0

 
(0.4
)
 
(2
%)
Depreciation and amortization
23.0

 
22.8

 
0.2

 
1
%
Materials and other
17.2

 
13.9

 
3.3

 
24
%
Gain on insurance recoveries related to hurricane damage

 
(14.8
)
 
14.8

 
(100
%)
Total operating expenses
$
169.4

 
$
149.3

 
$
20.1

 
13
%
 
Nine Months Ended
 
 
 
 
 
September 30,
 
Change
 
2012
 
2011
 
Dollars
 
Percent
Compensation and benefits
$
93.5

 
$
99.3

 
$
(5.8
)
 
(6
%)
Purchased services
109.2

 
96.6

 
12.6

 
13
%
Fuel
121.2

 
114.5

 
6.7

 
6
%
Equipment costs
57.4

 
63.5

 
(6.1
)
 
(10
%)
Depreciation and amortization
67.5

 
64.9

 
2.6

 
4
%
Materials and other
41.6

 
42.9

 
(1.3
)
 
(3
%)
Elimination of deferred statutory profit sharing liability, net
(43.0
)
 

 
(43.0
)
 
(100
%)
Gain on insurance recoveries related to hurricane damage

 
(14.8
)
 
14.8

 
(100
%)
Total operating expenses
$
447.4

 
$
466.9

 
$
(19.5
)
 
(4
%)
Compensation and benefits. Compensation and benefits decreased $6.0 million and $5.8 million for the three and nine months ended September 30, 2012, compared to the same periods in 2011, primarily due to a decrease in statutory profit sharing expense as a result of the organizational restructuring in the second quarter of 2012. This decrease was partially offset by annual salary and benefit rate increases and higher carload / units volumes. In addition, compensation and benefits decreased due to fluctuations in the value of the Mexican peso against the U.S. dollar. The organizational restructuring is expected to reduce expense in the fourth quarter of 2012, as compared to 2011, by approximately $2.5 million.
Purchased services. Purchased services expense increased $5.6 million and $12.6 million for the three and nine months ended September 30, 2012, compared to the same periods in 2011, due to higher net joint facility income related to non-recurring usage of certain trackage rights recognized during the third quarter of 2011 and increases in volume-sensitive costs, primarily locomotive maintenance expense and freight car repairs.
Fuel. Fuel expense increased $2.6 million and $6.7 million for the three and nine months ended September 30, 2012, compared to the same periods in 2011, primarily due to higher diesel fuel prices, higher consumption due to an increase in carload/unit volumes and decreased fuel efficiency, partially offset by fluctuations in the value of the Mexican peso against the U.S. dollar.
Equipment costs. Equipment costs decreased $0.4 million and $6.1 million for the three and nine months ended September 30, 2012, compared to the same periods in 2011, primarily due to lower locomotive lease expense due to the acquisition of 75 locomotives during the third quarter of 2011, which were previously leased by the Company under an operating lease agreement. This decrease was partially offset by an increase in the use of other railroads’ freight cars due to increased traffic volumes.

16


Depreciation and amortization. Depreciation and amortization expense increased $0.2 million for the three months ended September 30, 2012, compared to the same period in 2011, primarily due to a larger asset base offset by the impact of higher rates based on the depreciation study completed in the third quarter of 2011. Depreciation and amortization increased $2.6 million for the nine months ended September 30, 2012, compared to the same period in 2011, primarily due to a larger asset base.
Materials and other. Materials and other expense increased $3.3 million for the three months ended September 30, 2012, compared to the same period in 2011, primarily due to the percentage mark-up paid to KCSM Servicios as a result of the organizational restructuring in the second quarter of 2012 and increased concession duty rate, partially offset by decreased casualty expense. Materials and other expense decreased $1.3 million for the nine months ended September 30, 2012, compared to the same period in 2011, primarily due to decreased casualty expense, partially offset by the percentage mark-up paid to KCSM Servicios and the increase in concession duty rate. The Company expects expense to increase in the fourth quarter of 2012, as compared to 2011, by approximately $3.5 million as a result of the organizational restructuring. KCSM paid concession duty expense of 0.5% of gross revenues for the first 15 years of the Concession period, and on June 24, 2012, KCSM began paying 1.25% of gross revenues, which is effective for the remaining years of the Concession. The concession duty rate increase is expected to increase expense in the fourth quarter of 2012, as compared to 2011, by approximately $2.0 million.
Elimination of deferred statutory profit sharing liability, net. As a result of the organizational restructuring in the second quarter of 2012, KCSM’s obligation to pay statutory profit sharing terminated as of May 1, 2012 and accordingly, KCSM recognized a $43.0 million net reduction to operating expense. This reduction includes the elimination of $47.8 million of the deferred statutory profit sharing liability, net of $4.8 million of transaction costs. 
Gain on insurance recoveries related to hurricane damage. In the third quarter of 2011, the Company settled its insurance claims related to Hurricane Alex and recognized a $14.8 million gain on insurance recoveries which primarily represented the recovery of lost profits and the replacement value of property in excess of its carrying value, net of the self-insured retentions.
Non-Operating Income and Expenses
Equity in net earnings of unconsolidated affiliates. Equity in earnings from the operations of Ferrocarril y Terminal del Valle de Mexico, S.A. de C.V. was $0.6 million and $2.1 million for the three and nine months ended September 30, 2012, compared to $1.1 million and $2.6 million for the same periods in 2011. These decreases were primarily due to higher volume sensitive costs.
Interest expense. Interest expense increased $2.4 million and $7.6 million for the three and nine months ended September 30, 2012, compared to the same periods in 2011, primarily due to higher average debt balances, partially offset by lower average interest rates. During the three and nine months ended September 30, 2012, the average debt balance was $1,164.6 million and $1,190.3 million, respectively, compared to $952.5 million and $935.8 million for the same periods in 2011.
Debt retirement costs. Debt retirement costs decreased $10.3 million for the nine months ended September 30, 2012, compared to the same period in 2011. In the second quarter of 2011, KCSM purchased and redeemed the remaining $32.4 million principal amount and all of the outstanding $165.0 million aggregate principal amount of its 7 5/8% Senior Notes due December 1, 2013, and 7 3/8% Senior Notes due June 1, 2014, respectively. KCSM recognized debt retirement costs of $10.3 million related to the call and tender premiums and the write-off of unamortized debt issuance costs. The Company did not incur debt retirement costs during the nine months ended September 30, 2012.
Foreign exchange. Fluctuations in the value of the Mexican peso against the U.S. dollar resulted in a foreign exchange gain of $4.8 million and $4.9 million for the three and nine months ended September 30, 2012, compared to a foreign exchange loss of $7.7 million and $7.3 million for the same periods in 2011.
Other income (expense), net. Other income (expense), net, decreased $0.6 million and $2.8 million for the three and nine months ended September 30, 2012, compared to the same periods in 2011, primarily attributable to lower miscellaneous income.
Income tax expense. Income tax expense increased $19.4 million and $47.6 million for the three and nine months ended September 30, 2012, compared to the same periods in 2011, primarily due to higher pre-tax income and increased effective tax rates due to foreign exchange rate fluctuations. The effective income tax rate was 49.4% and 41.0% for the three and nine months ended September 30, 2012, compared to 29.4% and 32.9% for the same periods in 2011.

17


Liquidity and Capital Resources
Overview
KCSM’s primary uses of cash are to support operations; maintain and improve its railroad; pay debt service costs; acquire new and maintain existing locomotives, rolling stock and other equipment; and meet other obligations. Though KCSM’s cash flows from operations are sufficient to fund operations, capital expenditures and debt service, the Company may, from time to time, use external sources of cash (principally bank debt, public and private debt, and leases) to refinance existing indebtedness and to fund new investments and equipment additions. On September 30, 2012, total available liquidity (the unrestricted cash balance plus revolving credit facility availability) was approximately $270.8 million.
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’s primary sources of liquidity are cash flows generated from operations, borrowings under its revolving credit facility and access to debt capital markets. Although KCSM has had adequate access to capital markets, the financial terms under which funding has been obtained contain restrictive covenants, which limit or preclude 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. Though these covenants may restrict or prohibit certain activities, the covenants contain a number of qualifications, thresholds and exceptions that provide the Company with what management believes is an appropriate degree of flexibility to conduct its operations. The Company was in compliance with all of its debt covenants as of September 30, 2012. For a discussion of the agreements representing the indebtedness of KCSM, see “Item 8 Financial Statements and Supplemental Data – Note 7. Long-Term Debt” in KCSM’s Annual Report on Form 10-K for the year ended December 31, 2011.
KCSM’s 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 external factors impacting debt and capital markets 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 KCSM’s access to capital. Further, KCSM’s 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.
Three credit rating agencies provide their views of the Company’s outlook and ratings. In the third quarter of 2012, Fitch Ratings (“Fitch”) upgraded KCSM’s Issuer Default Rating (“IDR”) and senior unsecured debt rating to investment grade. Standard & Poor’s Rating Services (“S&P”) and Moody’s Investors Service (“Moody’s”) each rate the remaining debt and corporate credit of KCSM as non-investment grade. These ratings and outlooks change from time to time and can be found on the websites of S&P, Moody’s and Fitch.
Cash Flow Information
Summary cash flow data follows (in millions):
 
Nine Months Ended
 
September 30,
 
2012
 
2011
Cash flows provided by (used for):
 
 
 
Operating activities
$
238.4

 
$
208.2

Investing activities
(112.1
)
 
(101.0
)
Financing activities
(71.2
)
 
(84.7
)
Net increase in cash and cash equivalents
55.1

 
22.5

Cash and cash equivalents beginning of year
15.7

 
37.0

Cash and cash equivalents end of period
$
70.8

 
$
59.5


18


Cash flows from operating activities increased $30.2 million for the nine month period ended September 30, 2012, compared to the same period in 2011, primarily as a result of the changes in working capital items, resulting mainly from the timing of certain payments and receipts. These increases were partially offset by insurance proceeds of $36.6 million received during 2011 related to hurricane damage. Net cash used for investing activities increased $11.1 million, primarily due to insurance proceeds of $12.4 million received during 2011 related to hurricane damage. Information regarding capital expenditures is provided below. Net cash used for financing activities decreased $13.5 million primarily due to the capital distribution paid to the Company’s shareholders during the third quarter of 2011, partially offset by related company debt payments.
Capital Expenditures
KCSM’s cash flows from operations are sufficient to fund capital expenditures; however, the Company may, from time to time, use external sources of cash (principally bank debt, public debt and private debt) to fund capital expenditures.
The following table summarizes capital expenditures by type (in millions):
 
Nine Months Ended
 
September 30,
 
2012
 
2011
Roadway capital program
$
82.6

 
$
63.5

Locomotive acquisitions

 
103.8

Equipment
12.0

 
2.9

Capacity
6.6

 
1.9

Information technology
2.5

 
3.5

Other
5.3

 
20.6

Total capital expenditures (accrual basis)
109.0

 
196.2

Locomotive financed under operating lease buyout

 
(91.0
)
Change in capital accruals
7.4

 
12.2

Total cash capital expenditures
$
116.4

 
$
117.4

For 2012, internally generated cash flows are expected to fund cash capital expenditures, currently estimated at approximately $165.0 million.
Other Matters
KCSM Servicios union employees are covered by one labor agreement, which was signed on June 23, 1997, between KCSM and the Mexican Railroad Union, for a term of 50 years, for the purpose of regulating the relationship between the parties. Approximately 80% of KCSM Servicios employees are covered by this labor agreement. The compensation terms under this labor agreement are subject to renegotiation on an annual basis and all other benefits are subject to negotiation every two years. As a result of the labor agreement signed on April 19, 2012, compensation terms for the period from July 1, 2012 through June 30, 2013, were finalized. Additionally, this labor agreement enabled KCS to complete the organizational restructuring whereby all employees of KCSM became employees of KCSM Servicios. KCSM Servicios provides employee services to KCSM, and KCSM pays KCSM Servicios market-based rates for these services. The union labor negotiation with the Mexican Railroad Union has not historically resulted in any strike, boycott or other disruption in KCSM’s business operations.
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
Omitted pursuant to General Instruction H(2)(c) of Form 10-Q.
Item 4.
Controls and Procedures
(a) Disclosure Controls and Procedures.

19


As of the end of the period for which this Quarterly Report on Form 10-Q is filed, the Company’s President and Executive Representative and Chief Financial Officer have each reviewed and evaluated the effectiveness of the Company’s 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 Company’s 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 Company’s 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 Company’s internal control over financial reporting that occurred during the third quarter of 2012 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

20


PART II—OTHER INFORMATION
 
Item 1.
Legal Proceedings
For information related to the Company’s settlements and other legal proceedings, see Note 7 “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 to the Risk Factors disclosed in Item 1A, “Risk Factors,” in KCSM’s Annual Report on Form 10-K for the year ended December 31, 2011.
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.
Mine Safety Disclosures
Omitted pursuant to General Instruction H(2)(b) of Form 10-Q.
Item 5.
Other Information
None.

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Item 6.
Exhibits
 
Exhibit
No.
  
Description of Exhibits Filed with this Report
 
 
 
31.1
  
Principal Executive Officer’s Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 is attached to this Form 10-Q as Exhibit 31.1.
 
 
 
31.2
  
Principal Financial Officer’s Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 is attached to this Form 10-Q as Exhibit 31.2.
 
 
 
32.1
  
Principal Executive Officer’s Certification furnished Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 is attached to this Form 10-Q as Exhibit 32.1.
 
 
 
32.2
  
Principal Financial Officer’s Certification furnished Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 is attached to this Form 10-Q as Exhibit 32.2.
 
 
 
101
  
The following unaudited financial information from Kansas City Southern de México, S.A. de C.V.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2012, formatted in XBRL (Extensible Business Reporting Language) includes: (i) Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2012 and 2011, (ii) Consolidated Balance Sheets as of September 30, 2012 and December 31, 2011, (iii) Consolidated Statements of Cash Flows for the nine months ended September 30, 2012 and 2011, and (iv) the Notes to Consolidated Financial Statements.
 
 
 
 


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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized and in the capacities indicated on October 19, 2012.
 
 
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)

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