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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
for the transition period from to
Commission File Number 1-4717
KANSAS CITY SOUTHERN
(Exact name of Company as specified in its charter)
Delaware 44-0663509
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
427 West 12th Street, Kansas City, Missouri 64105
(Address of principal executive offices) (Zip Code)
(816) 983-1303
(Company's telephone number,
including area code)
No Changes
(Former name, former address and former fiscal year,
if changed since last report.)
Indicate by check mark whether the Company (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Company was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the Company is an accelerated filer (as defined
in Rule 12b-2 of the Exchange Act).
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at April 30, 2004
- --------------------------------------------------------------------------------
Common Stock, $.01 per share par value 62,646,680 Shares
- --------------------------------------------------------------------------------
KANSAS CITY SOUTHERN
FORM 10-Q
MARCH 31, 2004
INDEX
Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Introductory Comments 2
Consolidated Balance Sheets -
March 31, 2004 and December 31, 2003 3
Consolidated Statements of Income -
Three Months Ended March 31, 2004 and 2003 4
Consolidated Statements of Cash Flows -
Three Months Ended March 31, 2004 and 2003 5
Consolidated Statement of Changes in Stockholders' Equity -
Three Months Ended March 31, 2004 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk 24
Item 4. Controls and Procedures 24
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 25
Item 4. Submission of Matters to a Vote of Security Holders 25
Item 6. Exhibits and Reports on Form 8-K 26
SIGNATURES 27
- ----------
KANSAS CITY SOUTHERN
FORM 10-Q
MARCH 31, 2004
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Introductory Comments
The Consolidated Financial Statements included herein have been prepared by
Kansas City Southern (the "Company" or "KCS"), without audit, pursuant to the
rules and regulations of the Securities and Exchange Commission ("SEC"). Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in the
United States of America ("U.S. GAAP") have been condensed or omitted pursuant
to such rules and regulations, although the Company believes that the
disclosures are adequate to enable a reasonable understanding of the information
presented. These Consolidated Financial Statements should be read in conjunction
with the consolidated financial statements and the notes thereto, 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, 2003 and Management's Discussion and Analysis of Financial
Condition and Results of Operations included in this Form 10-Q. Results for the
three months ended March 31, 2004 are not necessarily indicative of the results
expected for the full year 2004.
KANSAS CITY SOUTHERN
CONSOLIDATED BALANCE SHEETS
(Dollars in millions, except share amounts)
March 31, December 31,
2004 2003
------------------ ------------------
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ 188.6 $ 135.4
Accounts receivable, net 105.8 108.2
Accounts receivable from related parties 3.3 6.4
Inventories 41.9 36.8
Other current assets 25.0 21.3
------------------ ------------------
Total current assets 364.6 308.1
------------------ ------------------
Investments 446.5 442.7
Properties (net of $745.0 and $734.3 accumulated
depreciation and amortization, respectively) 1,372.0 1,362.5
Goodwill 10.6 10.6
Other assets 31.1 29.0
------------------ ------------------
Total assets $ 2,224.8 $ 2,152.9
================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Debt due within one year $ 9.9 $ 9.9
Accounts and wages payable 42.8 45.5
Accrued liabilities 134.1 119.4
------------------ ------------------
Total current liabilities 186.8 174.8
------------------ ------------------
Other Liabilities
Long-term debt 564.4 513.5
Deferred income taxes 391.7 391.5
Other noncurrent liabilities and deferred credits 111.4 109.4
------------------ ------------------
Total other liabilities 1,067.5 1,014.4
------------------ ------------------
Stockholders' Equity:
$25 par, 4% noncumulative, Preferred stock, 840,000
shares authorized, 649,736 shares issued, 242,170 6.1 6.1
shares outstanding
$1 par, Cumulative Preferred stock, 400,000 shares
authorized, issued and outstanding at March 31, 2004
and December 31, 2003 0.4 0.4
$.01 par, Common stock, 400,000,000 shares authorized;
73,369,116 shares issued; 62,641,294 and 62,175,621
shares outstanding at March 31, 2004 and December 31,
2003, respectively 0.6 0.6
Paid in capital 115.7 110.9
Retained earnings 847.4 846.2
Accumulated other comprehensive income (loss) 0.3 (0.5)
------------------ ------------------
Total stockholders' equity 970.5 963.7
------------------ ------------------
Total liabilities and stockholders' equity $ 2,224.8 $ 2,152.9
================== ==================
See accompanying notes to consolidated financial statements.
KANSAS CITY SOUTHERN
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in millions, except share and per share data)
(Unaudited)
Three Months
Ended March 31,
---------------------------------------
2004 2003
------------------ ------------------
Revenues $ 147.8 $ 140.2
Operating expenses
Compensation and benefits 50.8 50.5
Purchased services 15.6 15.1
Fuel 14.8 12.8
Equipment costs 13.0 14.0
Depreciation and amortization 12.8 15.9
Casualties and insurance 5.7 8.1
Other leases 2.7 2.5
Other 15.0 14.5
------------------ ------------------
Total operating expenses 130.4 133.4
------------------ ------------------
Operating income 17.4 6.8
Equity in net earnings of unconsolidated affiliates:
Grupo Transportacion Ferroviaria Mexicana, S.A. de C.V. 1.3 6.9
Other 0.1 0.1
Interest expense (10.8) (11.5)
Debt retirement costs (4.2) -
Other income 1.5 1.3
------------------ ------------------
Income before income taxes and cumulative effect of accounting change 5.3 3.6
Income tax provision (benefit) 1.9 (1.1)
------------------ ------------------
Income before cumulative effect of accounting change 3.4 4.7
Cumulative effect of accounting change, net of income taxes - 8.9
------------------ ------------------
Net income
3.4 13.6
Preferred stock dividends 2.2 0.1
------------------ ------------------
Net income available to common shareholders $ 1.2 $ 13.5
================== ==================
Per Share Data
Basic earnings per Common share
Income before cumulative effect of accounting change $ 0.02 $ 0.08
Cumulative effect of accounting change, net of income taxes - 0.14
------------------ ------------------
Total basic earnings per Common share $ 0.02 $ 0.22
================== ==================
Diluted earnings per Common share
Income before cumulative effect of accounting change $ 0.02 $ 0.08
Cumulative effect of accounting change, net of income taxes - 0.14
------------------ ------------------
Total diluted earnings per Common share $ 0.02 $ 0.22
================== ==================
Weighted average Common shares outstanding (in thousands)
Basic 62,504 61,427
Potential dilutive Common shares 1,307 1,436
------------------ ------------------
Diluted 63,811 62,863
================== ==================
See accompanying notes to consolidated financial statements.
KANSAS CITY SOUTHERN
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in millions)
(Unaudited)
Three Months
Ended March 31,
-------------------------------------
2004 2003
------------------ ------------------
CASH FLOWS PROVIDED BY (USED FOR):
OPERATING ACTIVITIES:
Net income $ 3.4 $ 13.6
Adjustments to reconcile net income to net cash
Provided by operating activities
Depreciation and amortization 12.8 15.9
Deferred income taxes (0.7) 7.0
Equity in undistributed earnings of unconsolidated affiliates (1.4) (7.0)
Gain on sale of property (0.2) (1.3)
Cumulative effect of accounting change - (8.9)
Tax benefit realized upon exercise of stock options 0.8 0.8
Changes in working capital items
Accounts receivable 5.5 9.6
Inventories (5.2) (2.1)
Other current assets (2.1) 15.6
Accounts and wages payable (0.9) (1.8)
Accrued liabilities 21.0 7.9
Other, net 7.0 (1.4)
------------------ ------------------
Net cash provided by operating activities 40.0 47.9
------------------ ------------------
INVESTING ACTIVITIES:
Property acquisitions (29.0) (12.1)
Proceeds from disposal of property 0.5 7.5
Investment in and loans to affiliates (2.2) -
Other, net (4.9) 1.0
------------------ ------------------
Net cash used for investing activities (35.6) (3.6)
------------------ ------------------
FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt 150.0 -
Repayment of long-term debt (99.0) (0.8)
Debt issuance costs (2.1) -
Proceeds from stock plans 2.1 1.6
Cash dividends paid (2.2) (0.1)
------------------ ------------------
Net cash provided by financing activities 48.8 0.7
------------------ ------------------
CASH AND CASH EQUIVALENTS:
Net increase in cash and cash equivalents 53.2 45.0
At beginning of year 135.4 19.0
------------------ ------------------
At end of period $ 188.6 $ 64.0
================== ==================
See accompanying notes to consolidated financial statements.
KANSAS CITY SOUTHERN
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(Dollars in millions, except share amounts)
(Unaudited)
$1 Par Accumulated
$25 Par Cumulative $.01 Par Paid Other
Preferred Preferred Common In Retained Comprehensive
Stock Stock Stock Capital Earnings Income (Loss) Total
------------ ----------- ------------- ------------ ------------ ---------------- ----------
Balance at December 31, 2003 $ 6.1 $ 0.4 $ 0.6 $ 110.9 $ 846.2 $ (0.5) $ 963.7
Comprehensive income:
Net income 3.4
Change in fair value of cash flow 0.7
hedges
Amortization of accumulated other
comprehensive income (loss)
related to
interest rate swaps 0.1
Comprehensive income 4.2
Dividends on $25 Par
Preferred Stock ($0.25/share) (0.1) (0.1)
Dividends on $1 Par Cumulative Preferred
Stock ($5.31/share) (2.1) (2.1)
Options exercised and stock subscribed 2.4 2.4
Stock plan shares issued from treasury 2.4 2.4
------------ ----------- -------------- ----------- ------------ ---------------- ----------
Balance at March 31, 2004 $ 6.1 $ 0.4 $ 0.6 $ 115.7 $ 847.4 $ 0.3 $ 970.5
============ =========== ============== =========== ============ ================ ==========
See accompanying notes to consolidated financial statements.
KANSAS CITY SOUTHERN
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Accounting Policies and Interim Financial Statements. In the opinion of the
management of KCS, the accompanying unaudited consolidated financial
statements contain all adjustments (consisting of normal recurring
adjustments) necessary to present fairly the financial position of the
Company and its subsidiary companies as of March 31, 2004 and December 31,
2003, the results of its operations for the three months ended March 31,
2004 and 2003, its cash flows for the three months ended March 31, 2004 and
2003, and its changes in stockholders' equity for the three months ended
March 31, 2004. The accompanying consolidated financial statements have
been prepared consistently with accounting policies described in Note 2 to
the consolidated financial statements included in the Company's Annual
Report on Form 10-K as of and for the year ended December 31, 2003, The
results of operations for the three-month period ended March 31, 2004 are
not necessarily indicative of the results to be expected for the full year
2004. For information regarding the Company's critical accounting policies
and estimates, please see Item 7 of the Company's Annual Report on Form
10-K "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Critical Accounting Policies and Estimates."
Certain prior year amounts have been reclassified to conform to the current
year presentation.
For the three months ended March 31, 2004, depreciation expense reflects
the results of a study performed by engineering consultants for the
Company. This study yielded longer estimates of depreciable lives, as well
as higher estimates of salvage values, based upon actual experience since
the previous study performed in 1999. The net impact of the application of
these new estimates is a decrease in depreciation expense for the three
months ended March 31, 2004 of approximately $3.2 million.
2. Earnings Per Share Data. Basic earnings per common share is computed by
dividing income available to common shareholders by the weighted-average
number of common shares outstanding for the period. Diluted earnings per
share reflects the potential dilution that could occur if convertible
securities or stock options were converted into common stock or stock
options were exercised. The following is a reconciliation from the weighted
average shares used for the basic earnings per share computation to the
diluted earnings per share computation for the three months ended March 31,
2004 and 2003, respectively (in thousands):
Three Months
Ended March 31,
--------------------------
2004 2003
------------ ----------
Basic shares 62,504 61,427
Effect of dilution: Stock options 1,307 1,436
Effect of dilution: Convertible preferred stock - -
------------ ----------
Diluted shares 63,811 62,863
============ ==========
Shares excluded from diluted computation 615 1,041
------------ ------------
For the three months ended March 31, 2004, 13,389 shares related to the
convertible preferred stock were excluded from the computation of diluted
earnings per share because the inclusion of these shares would have been
antidilutive to earnings per share. Additionally, for the three months
ended March 31, 2004 and 2003, 615 and 1,041 shares, respectively, related
to stock options were excluded from the calculation of diluted earnings per
share because the exercise prices were greater than the average market
price of the common shares.
3. Investments. Investments in unconsolidated affiliates and certain other
investments accounted for under the equity method generally include all
entities in which the Company or its subsidiaries have significant
influence, but not more than 50% voting control. Investments in
unconsolidated affiliates at March 31, 2004 include, among others, equity
interests in Grupo Transportacion Ferroviaria Mexicana, S.A. de C.V.
("Grupo TFM"), Southern Capital Corporation, LLC ("Southern Capital"), and
the Panama Canal Railway Company ("PCRC").
The Company is party to certain agreements with Grupo TMM, S.A. ("Grupo
TMM") covering the joint ownership of Grupo TFM. These agreements contain
"change in control" provisions, provisions intended to preserve the
Company's and Grupo TMM's proportionate ownership of the joint venture, and
super-majority provisions with respect to voting on certain significant
transactions. Such agreements also provide a right of first refusal in the
event that either party initiates
a divestiture of its equity interest in Grupo TFM and a prohibition on
transfers to competitors. Under certain circumstances, such agreements
could affect the Company's ownership percentage and rights in these equity
affiliates.
On April 20, 2003, the Company entered into an agreement with Grupo TMM and
other parties (the "Acquisition Agreement"), under which KCS ultimately
would acquire control of TFM, S.A., de C.V. ("TFM") through the purchase of
shares of common stock of Grupo TFM (the "Acquisition"). Grupo TFM holds an
80% economic interest in TFM and all of the shares of stock with full
voting rights of TFM. The remaining 20% economic interest in TFM is owned
by the Mexican government in the form of shares with limited voting rights.
KCS currently owns a 46.6% economic interest in Grupo TFM and 49.0% of the
shares of common stock of Grupo TFM entitled to full voting rights. The
Acquisition Agreement and other related agreements were designed to,
following KCS shareholder approval and regulatory approval, place The
Kansas City Southern Railway Company ("KCSR"), The Texas-Mexican Railway
Company ("Tex-Mex"), Gateway Eastern Railway Company ("Gateway Eastern")
and TFM, under the common control of a single transportation holding
company, NAFTA Rail, to be headquartered in Kansas City, Missouri. As part
of the Acquisition, subject to KCS shareholder approval, KCS is expected to
change its name to NAFTA Rail. For additional information regarding the
Acquisition Agreement, see Note 3 in the Notes to the Financial Statements
contained within Item 8 of the Company's Annual Report on Form 10-K for the
year ended December 31, 2003.
On August 18, 2003, Grupo TMM shareholders voted not to approve the sale of
Grupo TMM's interests in Grupo TFM to KCS. On August 23, 2003, Grupo TMM
sent a notice to KCS claiming to terminate the Acquisition Agreement
because the Grupo TMM shareholders had failed to approve the Acquisition
Agreement.
The March 19, 2004 Interim Award of the AAA International Centre for
Dispute Resolution Arbitration Panel found that the Acquisition Agreement
remains in full force and effect, until otherwise terminated according to
its terms or by law. Following that decision, the Company and Grupo TMM
agreed not to move immediately into the next phase of arbitration, but both
companies have reserved the right to proceed with the next phase of
arbitration at any time. In a stipulation signed by Grupo TMM and KCS and
accepted by the arbitration panel, the two companies have agreed to
discharge in good faith all of the obligations of the Acquisition
Agreement.
As of March 31, 2004 and December 31, 2003, costs of approximately $10.7
million and $9.3 million, respectively, related to the Acquisition have
been deferred and are reported as "other assets" in the accompanying
consolidated balance sheets. A termination fee of $18 million is payable in
the event of termination of the Acquisition Agreement due to (i) a change
of control of either KCS or Grupo TMM, in which case the party experiencing
the change of control shall pay the termination fee to the other party, or
(ii) the failure of the stockholders of KCS or of Grupo TMM to approve the
Acquisition if at or prior to the meeting of such stockholders to approve
the Acquisition, the Board of Directors of KCS, in the case of the KCS
stockholders' meeting, or the Board of Directors of Grupo TMM, in the case
of the Grupo TMM stockholders' meeting, has failed to recommend or has
withdrawn and not reinstated its recommendation of the Acquisition, then
the party whose stockholders shall not have approved the Acquisition shall
pay the termination fee to the other party provided that the party not
experiencing the change of control, or whose stockholders were not the
stockholders failing to approve the Acquisition, has elected to terminate
the Acquisition Agreement.
Condensed financial information of certain unconsolidated affiliates is
shown below. All amounts, including those for Grupo TFM, are presented
under U.S. GAAP. Financial information of immaterial unconsolidated
affiliates has been omitted:
Financial Condition (dollars in millions):
March 31, 2004 December 31, 2003
--------------------------------------- --------------------------------------
Southern Southern
PCRC Grupo TFM Capital PCRC Grupo TFM Capital
--------------------------------------- ---------------------------------------
Current assets $ 3.4 $ 235.0 $ 12.3 $ 3.6 $ 225.7 $ 5.0
Non-current assets 84.4 2,106.5 123.7 84.2 2,111.8 127.3
--------------------------------------- ---------------------------------------
Assets $ 87.8 $ 2,341.5 $ 136.0 $ 87.8 $ 2,337.5 $ 132.3
======================================= =======================================
Current liabilities $ 13.1 $ 370.6 $ 3.5 $ 9.9 $ 362.7 $ 1.2
Non-current liabilities 66.6 803.5 75.0 68.9 806.7 75.0
Minority interest - 354.9 - - 354.9 -
Equity of stockholders and partners 8.1 812.5 57.5 9.0 813.2 56.1
--------------------------------------- ---------------------------------------
Liabilities and equity $ 87.8 $ 2,341.5 $ 136.0 $ 87.8 $ 2,337.5 $ 132.3
======================================= =======================================
KCS's investment $ 4.0 $ 393.4 $ 28.8 $ 4.5 $ 392.1 $ 28.0
--------------------------------------- ---------------------------------------
Operating Results (dollars in millions):
Three Months
Ended March 31,
----------------------------
2004 2003
---------- ----------
Revenues:
Grupo TFM $ 167.5 $ 168.5
Southern Capital 3.0 8.0
PCRC 0.8 2.4
Operating costs and expenses:
Grupo TFM $ 137.8 $ 136.7
Southern Capital 1.8 7.0
PCRC 1.1 3.2
Net income (loss):
Grupo TFM $ 2.9 $ 15.0
Southern Capital 1.2 1.0
PCRC (0.3) (0.8)
4. Noncash Investing and Financing Activities. The Company initiated the
Fifteenth Offering of KCS common stock under the Employee Stock Purchase
Plan ("ESPP") during 2003. Stock subscribed under the Fifteenth Offering
will be issued to employees in 2005 and is being paid for through employee
payroll deductions in 2004. During the first three months of 2004, the
Company has received approximately $0.7 million from payroll deductions
associated with the Fifteenth Offering of the ESPP. In the first quarter of
2004, the Company issued approximately 197,734 shares of KCS common stock
under the Fourteenth Offering of the ESPP. These shares, totaling a
purchase price of approximately $2.4 million, were subscribed and paid for
through employee payroll deductions in 2003.
5. Derivative Financial Instruments. The Company does not engage in the
trading of derivatives for speculative purposes but uses them for risk
management purposes only. The Company's objective for using derivative
instruments is to manage its fuel and interest rate risk through the use of
derivative instruments as deemed appropriate. In general, the Company
enters into derivative transactions in limited situations based on
management's assessment of current market conditions and perceived risks.
Management intends to respond to evolving business and market conditions in
order to manage risks and exposures associated with the Company's various
operations, and in doing so, may enter into such transactions more
frequently as deemed appropriate.
Fuel Derivative Transactions
At March 31, 2004, the Company was a party to five fuel swap agreements for
a notional amount of approximately 9.0 million gallons of fuel. Under the
terms of these swaps, the Company receives a variable price based upon an
average of the spot prices calculated on a monthly basis as reported
through a petroleum price reporting service and pays a fixed price
determined at the time the Company enters into the swap transaction. The
variable price the Company receives is approximately equal to the price the
Company pays in the market for locomotive fuel. By entering into these swap
transactions, the Company is able to fix the cost of fuel for the notional
amount of gallons hedged.
A summary of the swap agreements to which KCSR was a party as of March 31,
2004 follows:
Trade Dates Notional Amount Fixed pay per gallon Expiration Date
- ---------------------------------------------------------------------------------------------------------------
March 18, 2003 through March 31, 2004 through
October 31, 2003 9.0 million gallons 64(cent)- 69.0(cent) December 31, 2005
Cash settlements of these swaps occur on a monthly basis on the fifth
business day of the month following the month in which the settlement is
calculated. As of March 31, 2004, the fair market value of the benefit of
the swaps was $1.6 million. For the years ended December 31, 2003 and 2002,
KCSR consumed 55.4 million and 57.6 million gallons of fuel, respectively.
Fuel hedging transactions, including fuel swaps as well as forward purchase
commitments, resulted in a decrease in fuel expense of $0.2 million and
$0.5 million in the first quarter of 2004 and 2003, respectively.
6. Stock Plans. Proceeds received from the exercise of stock options or
subscriptions are credited to the appropriate capital accounts in the
period they are exercised.
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 123 "Accounting for Stock-Based Compensation"
("SFAS 123") in October 1995. SFAS 123 allows companies to continue under
the approach set forth in Accounting Principles Board Opinion No. 25
"Accounting for Stock Issued to Employees" ("APB 25"), for recognizing
stock-based compensation expense in their financial statements. Because
KCS's practice is to set the option price equal to the market price of the
stock at date of grant, no compensation expense is recognized under APB 25.
Under SFAS 123, companies must either record compensation expense based on
the estimated grant date fair value of stock options granted or disclose
the impact on net income as if they had adopted the fair value method (for
grants subsequent to December 31, 1994.) If KCS had measured compensation
cost for the KCS stock options granted to its employees and shares
subscribed by its employees under the ESPP, under the fair value based
method prescribed by SFAS 123, net income and earnings per share would have
been as follows:
Three Months ended March 31,
--------------------------------------
2004 2003
------------------- ------------------
Net income (in millions):
As reported $ 3.4 $ 13.6
Total stock-based compensation expense
determined under fair value method, net of
income taxes (0.5) (0.5)
------------------- ------------------
Pro forma $ 2.9 $ 13.1
Earnings per Basic share:
As reported $ 0.02 $ 0.22
Pro forma $ 0.01 $ 0.21
Earnings per Diluted share:
As reported $ 0.02 $ 0.22
Pro forma $ 0.01 $ 0.21
7. Commitments and Contingencies. The Company has had no significant changes
in its outstanding litigation or other commitments and contingencies from
that previously reported in Note 9 of the Company's Annual Report on Form
10-K for the year ended December 31, 2003.
8. Other Post Employment Benefits. The Company provides certain medical, life
and other postretirement benefits other than pensions to its retirees. The
medical and life plans are available to employees not covered under
collective bargaining arrangements, who have attained age 60 and rendered
ten years of service. Individuals employed as of December 31, 1992 were
excluded from a specific service requirement. The medical plan is
contributory and provides benefits for retirees, their covered dependents
and beneficiaries. The medical plan provides for an annual adjustment of
retiree contributions, and also contains, depending on the plan coverage
selected, certain deductibles, co-payments, coinsurance and coordination
with Medicare. The life insurance plan is non-contributory and covers
retirees only. The Company's policy, in most cases, is to fund benefits
payable under these plans as the obligations become due. However, certain
plan assets (money market funds held in a life insurance company) exist
with respect to life insurance benefits. A life insurance company holds
these assets and the Company receives an investment return on these assets
based on the six-month Treasury Bill rate plus 25 basis points.
The Company's health care costs, excluding former Gateway Western Railway
Company ("Gateway Western") employees and certain former MidSouth Railroad
employees, are limited to the increase in the Consumer Price Index ("CPI")
with a maximum annual increase of 5%. Accordingly, health care costs in
excess of the CPI limit will be borne by the plan participants, and
therefore assumptions regarding health care cost trend rates are not
applicable.
The Gateway Western benefit plans are slightly different from those of the
Company and other subsidiaries. Gateway Western provides contributory
health, dental and life insurance benefits to these remaining employees and
retirees. In 2001, the assumed annual rate of increase in health care costs
for Gateway Western employees and retirees under this plan was 10%,
decreasing over six years to 5.5% in 2008 and thereafter. An increase or
decrease in the assumed health care cost trend rates by one percent during
the three months ended March 31, 2004 and 2003 would not have had a
significant impact on the accumulated postretirement benefit obligation.
The effect of this change on the aggregate of the service and interest cost
components of the net periodic postretirement benefit is not significant.
Net periodic postretirement benefit cost included the following components
(in millions):
Three Months ended March 31,
--------------------------------
2004 2003
--------------- ---------------
Service cost $ 0.1 $ 0.1
Interest cost 0.1 0.1
Expected return on plan assets - -
--------------- ---------------
Net periodic postretirement benefit cost $ 0.2 $ 0.2
=============== ===============
Under collective bargaining agreements, KCSR participates in a
multi-employer benefit plan, which provides certain post-retirement health
care and life insurance benefits to eligible union employees and certain
retirees. Premiums under this plan are expensed as incurred and were $1.7
million in 2003. Based on existing rates, premium amounts are not expected
to change substantially during the remainder of 2004 compared to 2003.
9. New Credit Facility. During March 2004, the Company used cash on hand to
repay approximately $98.5 million of debt relating to the Company's former
credit facility. On March 30, 2004, the Company closed on a new credit
facility ("2004 Credit Facility.") The 2004 Credit Facility consists of a
$100 million revolving credit facility ("2004 Revolving Credit Facility")
maturing on March 30, 2007 and a $150 million Term B loan facility ("Term B
Loan Facility") maturing on March 30, 2008. The Term B Loan Facility was
fully funded on the closing date and the proceeds are expected to be used
to pay transaction costs, and for other general corporate purposes
including additional investments in the Company's Mexican affiliates. There
were no funds drawn under the previous revolving credit facility and the
full $100 million borrowing capacity under the 2004 Revolving Credit
Facility is currently available to the Company. Up to $25.0 million of the
2004 Revolving Credit Facility is available for letters of credit and up to
$15 million is available for swing line loans. The proceeds from future
borrowings under the 2004 Revolving Credit Facility may be used for working
capital and for general corporate purposes, including additional
investments in our Mexican affiliates. The letters of credit may
be used for general corporate purposes. Borrowings under the 2004 Credit
Facility are secured by substantially all of the Company's assets and are
guaranteed by the majority of its subsidiaries.
The Term B Loan Facility and the 2004 Revolving Credit Facility bear
interest at the London Interbank Offered Rate ("LIBOR") plus an applicable
margin or at an alternative base rate plus an applicable margin. The
applicable margin for the Term B Loan facility is 2% for LIBOR borrowings.
The applicable margin for the 2004 Revolving Credit Facility is set at
2.25% for LIBOR borrowings for the first six months and thereafter is based
on the Company's leverage ratio (defined as the ratio of the Company's
total debt to consolidated EBITDA (earnings before interest, taxes,
depreciation and amortization, excluding the undistributed earnings of
unconsolidated affiliates and certain other non-cash charges) for the prior
four fiscal quarters).
The 2004 Credit Facility requires the payment of a commitment fee of 0.50%
per annum to the lenders on the average daily, unused amount of the 2004
Revolving Credit Facility. Additionally, a fee equal to the applicable
margin for LIBOR priced borrowings under the 2004 Revolving Credit Facility
will be paid on any letter of credit issued under the 2004 Revolving Credit
Facility.
The 2004 Credit Facility contains certain provisions, covenants and
restrictions customary for this type of debt and for borrowers with a
similar credit rating. These provisions include, among others, restrictions
on the Company's ability and its subsidiaries ability to 1) incur
additional debt or liens; 2) enter into sale and leaseback transactions; 3)
merge or consolidate with another entity; 4) sell assets; 5) enter into
certain transactions with affiliates; 6) make investments, loans, advances,
guarantees or acquisitions; 7) make certain restricted payments, including
dividends, or make certain payments on other indebtedness; or 8) make
capital expenditures. In addition, the Company is required to comply with
certain financial ratios, including minimum interest expense coverage and
leverage ratios. The 2004 Credit Facility also contains certain customary
events of default. These covenants, along with other provisions, could
restrict maximum utilization of the 2004 Revolving Credit Facility.
Approximately $2.1 million of debt issuance costs related to the 2004
Credit Facility were deferred and are being amortized over the respective
terms of the loans. Debt retirement costs associated with the previous
revolving credit facility and the prepayment of the term loan under the
previous credit facility were approximately $4.2 million in the quarter
ended March 31, 2004.
10. Condensed Consolidating Financial Information. In September 2000, KCSR
issued $200 million of 9 1/2% senior notes due 2008. In June 2002, KCSR
issued $200 million of 7 1/2% senior notes due 2009. Both of these note
issues are unsecured obligations of KCSR, however, they are also jointly
and severally and fully and unconditionally guaranteed on an unsecured
senior basis by KCS and certain of the subsidiaries (all of which are
wholly-owned) within the KCS consolidated group. For each of these note
issues, KCS registered exchange notes with the SEC that have substantially
identical terms and associated guarantees and all of the initial senior
notes for each issue have been exchanged for $200 million of registered
exchange notes for each respective note issue.
The accompanying condensed consolidating financial information has been
prepared and presented pursuant to SEC Regulation S-X Rule 3-10 "Financial
statements of guarantors and issuers of guaranteed securities registered or
being registered." This information is not intended to present the
financial position, results of operations and cash flows of the individual
companies or groups of companies in accordance with U.S. GAAP.
CONDENSED CONSOLIDATING STATEMENTS OF INCOME
Three months ended March 31, 2004 (dollars in millions)
------------------------------------------------------------------------------------
Non-
Subsidiary Guarantor Guarantor Consolidating Consolidated
Parent Issuer Subsidiaries Subsidiaries Adjustments KCS
------------- ------------- ------------- ------------- -------------- -------------
Revenues $ - $ 146.9 $ 6.3 $ 3.1 $ (8.5) $ 147.8
Operating expenses 3.7 126.0 6.0 3.2 (8.5) 130.4
------------- ------------- ------------- ------------- -------------- -------------
Operating income (loss) (3.7) 20.9 0.3 (0.1) - 17.4
Equity in net earnings (losses)of
unconsolidated affiliates and
subsidiaries 5.9 1.5 - 1.4 (7.4) 1.4
Interest expense (0.1) (10.7) - - - (10.8)
Debt retirement costs - (4.2) - - - (4.2)
Other income - 1.2 - 0.3 - 1.5
------------- ------------- ------------- ------------- -------------- -------------
Income (loss) before 2.1 8.7 0.3 1.6 (7.4) 5.3
income taxes
Income tax provision (benefit) (1.3) 2.9 0.1 0.2 - 1.9
------------- ------------- ------------- ------------- -------------- -------------
Net income (loss) $ 3.4 $ 5.8 $ 0.2 $ 1.4 $ (7.4) $ 3.4
============= ============= ============= ============= ============== =============
Three months ended March 31, 2003 (dollars in millions)
------------------------------------------------------------------------------------
Non-
Subsidiary Guarantor Guarantor Consolidating Consolidated
Parent Issuer Subsidiaries Subsidiaries Adjustments KCS
------------- ------------- ------------- ------------- -------------- -------------
Revenues $ - $ 138.7 $ 4.8 $ 6.9 $ (10.2) $ 140.2
Operating expenses 2.3 129.5 4.7 7.1 (10.2) 133.4
------------- ------------- ------------- ------------- -------------- -------------
Operating income (loss) (2.3) 9.2 0.1 (0.2) - 6.8
Equity in net earnings (losses)of
unconsolidated affiliates and
subsidiaries 6.3 7.0 - 6.9 (13.2) 7.0
Interest expense (0.2) (11.2) (0.1) - - (11.5)
Other income 0.1 1.0 - 0.2 - 1.3
------------- ------------- ------------- ------------- -------------- -------------
Income (loss) before
income taxes
and cumulative effect of
accounting change 3.9 6.0 - 6.9 (13.2) 3.6
Income tax provision (benefit) (0.8) (0.3) - - - (1.1)
------------- ------------- ------------- ------------- -------------- -------------
Income (loss) before cumulative
effect of accounting change 4.7 6.3 - 6.9 (13.2) 4.7
Cumulative effect of accounting
change,
net of income taxes 8.9 8.9 - - (8.9) 8.9
------------- ------------- ------------- ------------- -------------- -------------
Net income (loss) $ 13.6 $ 15.2 $ - $ 6.9 $ (22.1) $ 13.6
============= ============= ============= ============= ============== =============
Condensed Consolidating Balance Sheets
As of March 31, 2004 (dollars in millions)
------------------------------------------------------------------------------------
Non-
Subsidiary Guarantor Guarantor Consolidating Consolidated
Parent Issuer Subsidiaries Subsidiaries Adjustments KCS
------------- ------------- ------------- ------------- -------------- -------------
ASSETS
Current assets $ 216.3 $ 363.5 $ 11.5 $ 7.9 $ (234.6) $ 364.6
Investments 808.2 435.1 - 460.4 (1,257.2) 446.5
Properties, net 0.2 1,367.9 3.9 - - 1,372.0
Goodwill and other assets 12.4 29.3 1.8 11.1 (12.9) 41.7
------------- ------------- ------------- ------------- -------------- -------------
Total assets $ 1,037.1 $ 2,195.8 $ 17.2 $ 479.4 $ (1,504.7) $ 2,224.8
============= ============= ============= ============= ============== =============
LIABILITIES AND EQUITY
Current liabilities $ 4.6 $ 377.3 $ 3.5 $ 36.0 $ (234.6) $ 186.8
Long-term debt 1.3 562.4 0.7 - - 564.4
Payable to affiliates 26.0 - 0.7 - (26.7) -
Deferred income taxes 1.1 400.9 0.1 2.5 (12.9) 391.7
Other liabilities 33.6 56.0 4.6 17.2 - 111.4
Stockholders' equity 970.5 799.2 7.6 423.7 (1,230.5) 970.5
------------- ------------- ------------- ------------- -------------- -------------
Total liabilities and $ 1,037.1 $ 2,195.8 $ 17.2 $ 479.4 $ (1,504.7) $ 2,224.8
equity ============= ============= ============= ============= ============== =============
As of December 31, 2003 (dollars in millions)
------------------------------------------------------------------------------------
Non-
Guarantor Guarantor Consolidating Consolidated
Parent KCSR Subsidiaries Subsidiaries Adjustments KCS
------------- ------------- ------------- ------------- -------------- -------------
ASSETS
Current assets $ 221.9 $ 285.3 $ 11.7 $ 15.1 $ (225.9) $ 308.1
Investments 801.4 431.1 - 452.4 (1,242.2) 442.7
Properties, net 0.2 1,358.5 3.8 - - 1,362.5
Goodwill and other assets 11.0 28.6 1.7 11.3 (13.0) 39.6
------------- ------------- ------------- ------------- -------------- -------------
Total assets $ 1,034.5 $ 2,103.5 $ 17.2 $ 478.8 $ (1,481.1) $ 2,152.9
============= ============= ============= ============= ============== =============
LIABILITIES AND EQUITY
Current liabilities $ 14.8 $ 346.7 $ 3.8 $ 35.4 $ (225.9) $ 174.8
Long-term debt 1.3 511.5 0.7 - - 513.5
Payable to affiliates 19.5 - 0.7 - (20.2) -
Deferred income taxes 3.3 398.5 0.2 2.5 (13.0) 391.5
Other liabilities 31.9 54.4 4.3 18.8 - 109.4
Stockholders' equity 963.7 792.4 7.5 422.1 (1,222.0) 963.7
------------- ------------- ------------- ------------- -------------- -------------
Total liabilities and $ 1,034.5 $ 2,103.5 $ 17.2 $ 478.8 $ (1,481.1) $ 2,152.9
equity ============= ============= ============= ============= ============== =============
Condensed Consolidating Statements of Cash Flows
Three months ended March 31, 2004 (dollars in millions)
------------------------------------------------------------------------------------
Non-
Subsidiary Guarantor Guarantor Consolidating Consolidated
Parent Issuer Subsidiaries Subsidiaries Adjustments KCS
------------- ------------- ------------- ------------- -------------- -------------
Net cash flows provided by (used
For) operating activities: $ (35.4) $ 67.0 $ (0.2) $ 8.0 $ 0.6 $ 40.0
------------- ------------- ------------- ------------- -------------- -------------
Investing activities:
Property acquisitions - (28.8) (0.2) - - (29.0)
Proceeds from disposal of - 0.5 - - - 0.5
property
Investments in and loans to - (2.2) - (6.5) 6.5 (2.2)
affiliates
Other, net (1.4) (3.5) - 0.2 (0.2) (4.9)
------------- ------------- ------------- ------------- -------------- -------------
Net (1.4) (34.0) (0.2) (6.3) 6.3 (35.6)
------------- ------------- ------------- ------------- -------------- -------------
Financing activities:
Proceeds from issuance of
long-term debt - 150.0 - - - 150.0
Repayment of long-term debt - (99.0) - - - (99.0)
Proceeds from loans from 6.5 - - - (6.5) -
affiliates
Repayment of loans from - - - - - -
affiliates
Debt issuance costs - (2.1) - - - (2.1)
Proceeds from stock plans 1.9 0.2 - - - 2.1
Cash dividends paid (2.2) - - - - (2.2)
Other, net 1.8 - 0.1 (1.5) (0.4) -
------------- ------------- ------------- ------------- -------------- -------------
Net 8.0 49.1 0.1 (1.5) (6.9) 48.8
------------- ------------- ------------- ------------- -------------- -------------
Cash and cash equivalents:
Net increase (decrease) (28.8) 82.1 (0.3) 0.2 - 53.2
At beginning of period 40.0 94.0 - 1.4 - 135.4
------------- ------------- ------------- ------------- -------------- -------------
At end of period $ 11.2 $ 176.1 $ (0.3) $ 1.6 $ - $ 188.6
============= ============= ============= ============= ============== =============
Three months ended March 31, 2003 (dollars in millions)
------------------------------------------------------------------------------------
Non-
Subsidiary Guarantor Guarantor Consolidating Consolidated
Parent Issuer Subsidiaries Subsidiaries Adjustments KCS
------------- ------------- ------------- ------------- -------------- -------------
Net cash flows provided by (used
for) operating activities: $ (21.0) $ 49.7 $ (1.5) $ 21.4 $ (0.7) $ 47.9
------------- ------------- ------------- ------------- -------------- -------------
Investing activities:
Property acquisitions - (12.0) (0.1) - - (12.1)
Proceeds from disposal of - 7.5 - - - 7.5
property
Investments in and loans to - - - (24.2) 24.2 -
affiliates
Other, net (2.3) 0.1 0.1 2.4 0.7 1.0
------------- ------------- ------------- ------------- -------------- -------------
Net (2.3) (4.4) - (21.8) 24.9 (3.6)
------------- ------------- ------------- ------------- -------------- -------------
Financing activities:
Proceeds from issuance of
long-term debt - - - - - -
Repayment of long-term debt - (0.8) - - - (0.8)
Proceeds from loans from 24.2 - - - (24.2) -
affiliates
Proceeds from stock plans 1.6 - - - - 1.6
Cash dividends paid (0.1) - - - - (0.1)
Other, net (1.5) 1.0 0.1 0.4 - -
------------- ------------- ------------- ------------- -------------- -------------
Net 24.2 0.2 0.1 0.4 (24.2) 0.7
------------- ------------- ------------- ------------- -------------- -------------
Cash and cash equivalents:
Net increase (decrease) 0.9 45.5 (1.4) - - 45.0
At beginning of period (10.8) 17.4 11.8 0.6 - 19.0
------------- ------------- ------------- ------------- -------------- -------------
At end of period $ (9.9) $ 62.9 $ 10.4 $ 0.6 $ - $ 64.0
============= ============= ============= ============= ============== =============
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The discussion set forth below, as well as other portions of this Form
10-Q, contains forward-looking comments that are not based upon historical
information. Such forward-looking comments are based upon information
currently available to management and management's perception thereof as of
the date of this Form 10-Q. Readers can identify these forward-looking
comments 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 ("KCS" or the "Company") could
materially differ from those indicated in forward-looking comments. The
differences could be caused by a number of factors or combination of
factors including, but not limited to, those factors identified in the
Company's Annual Report on Form 10-K for the year ended December 31, 2003,
Item 7 "Management's Discussion and Analysis of Financial Condition and
Results of Operation - Risk Factors" and "Cautionary Information" which is
on file with the U.S. Securities and Exchange Commission (File No. 1-4717)
and which "Risk Factors" and "Cautionary Information" sections are hereby
incorporated by reference herein. Readers are strongly encouraged to
consider these factors when evaluating forward-looking comments. The
Company will not update any forward-looking comments set forth in this Form
10-Q.
The discussion herein is intended to clarify and focus on the Company's
results of operations, certain changes in its financial position,
liquidity, capital structure and business developments for the periods
covered by the consolidated financial statements included under Item 1 of
this Form 10-Q. This discussion should be read in conjunction with these
consolidated financial statements and the related notes thereto, and is
qualified by reference thereto.
CORPORATE OVERVIEW
KCS, a Delaware corporation, is a holding company with principal
subsidiaries and affiliates including the following:
o The Kansas City Southern Railway Company ("KCSR"), a wholly-owned
subsidiary;
o Grupo Transportacion Ferroviaria Mexicana, S.A. de C.V. ("Grupo TFM"),
a 46.6% owned unconsolidated affiliate, which owns 80% of the common
stock of TFM, S.A. de C.V. ("TFM"). TFM wholly owns Mexrail, Inc.
("Mexrail"). Mexrail owns 100% of The Texas-Mexican Railway Company
("Tex-Mex");
o Southern Capital Corporation, LLC ("Southern Capital"), a 50% owned
unconsolidated affiliate that leases locomotive and rail equipment to
KCSR;
o Panama Canal Railway Company ("PCRC"), an unconsolidated affiliate of
which KCSR owns 50% of the common stock. PCRC owns all of the common
stock of Panarail Tourism Company ("Panarail").
KCS, as the holding company, supplies its various subsidiaries with
managerial, legal, tax, financial and accounting services, in addition to
managing other "non-operating" investments.
EXECUTIVE SUMMARY
OVERVIEW
KCS operates under one reportable business segment in the rail
transportation industry and KCSR, the Company's principal subsidiary, is
the smallest of the Class I railroads. The Company generates its revenues
and cash flows by providing its customers with freight delivery services in
both our regional area and throughout the United States, Mexico and Canada
through connections with our affiliates and other Class I rail carriers.
Our customers conduct business in a number of different industries,
including electric-generating utilities, chemical and petroleum products,
paper and forest products, agriculture and mineral products, automotive
products and intermodal traffic. The Company uses its cash flows to support
its operations and to invest in its infrastructure. The rail industry is a
capital-intensive industry, and the Company's capital expenditures are a
significant use of cash each year. In the three months ended March 31,
2004, the Company's capital expenditures were approximately $29.0 million
and are projected to be approximately $95.0 million during the remainder of
2004. A more detailed discussion of capital expenditures is found in the
"Liquidity and Capital Resources" section below.
Grupo TFM is an unconsolidated affiliate and the Company uses the equity
accounting method to recognize its proportionate share of Grupo TFM's
earnings. TFM operates a strategically significant rail corridor between
Mexico and the United States. KCS management believes that its investment
in Grupo TFM is a strategic asset with substantial economic potential.
As further described in Part II, Item 7 of the Company's Annual Report on
Form 10-K for the year ended December 31, 2003 ("2003 Form 10-K"), on April
20, 2003, the Company reached an agreement (the "Acquisition Agreement")
with its partner, Grupo TMM, S.A. ("Grupo TMM") and other parties to
ultimately acquire control of TFM through the purchase of Grupo TMM's
shares of Grupo TFM (the "Acquisition"). The Company has been in dispute
with Grupo TMM over Grupo TMM's attempt to terminate the Acquisition
Agreement, which dispute has been the subject of binding arbitration.
Following an interim award of the arbitration panel hearing the dispute as
described further in "Recent Developments," the Company and Grupo TMM
signed a stipulation agreeing to discharge in good faith all of the
obligations of the Acquisition Agreement. However, consummation of the
Acquisition is subject to certain conditions, and the Company's management
cannot predict whether or not KCS will be able to complete the Acquisition.
The Company is spending substantial time and financial resources to address
these uncertainties, as well as the Acquisition and the ultimate resolution
of these items could have a material affect on the Company's results of
operations, financial condition and cash flows.
FIRST QUARTER ANALYSIS
During the first quarter of 2004, the Company's operating profit improved
over the first quarter of the prior year. The improvement in operating
profit was driven by both increased revenues and reduced operating
expenses. The increased revenue, which was experienced in all business
groups other than coal, was attributable to both increased customer demand,
fuel surcharges applied to rates in all commodity groups as well as certain
price increases. Management believes the increased demand is reflective of
a more favorable general economic environment. Also, KCSR continues to
experience improved yields due to greater efficiencies in operations
resulting from higher capacity utilization. The KCSR rail operation
continues to rank favorably against the rest of the North American rail
industry as measured by the primary industry benchmarks of average train
velocity, average terminal dwell time, and cars on line.
The reduction in operating expenses was largely caused by a $3.2 million
ongoing reduction in depreciation expenses attributable to revisions to
estimated depreciable lives, as well as salvage values, based on an updated
depreciation study, which was approved by the Surface Transportation Board
and lower casualty and insurance costs attributable, in large part, to a
$2.2 million insurance settlement. However, during the first quarter of
2004, the Company experienced a $2.0 million (16.7%) increase in fuel costs
as fuel prices continued to be high by historical standards.
For the first quarter of 2004, Grupo TFM continued to contribute to the
Company's net income. However, for the three months ended March 31, 2004,
equity in earnings of Grupo TFM decreased $5.6 million to $1.3 million from
$6.9 million for the same period in 2003. This decrease was primarily the
result of a $15.7 million decrease in the deferred tax benefit (calculated
under U.S. GAAP) to $7.3 million for the first three months of 2004 from
$23.0 million for the same period in 2003, as operating income for Grupo
TFM remained relatively flat for the three months ended March 31, 2004
compared to the same period in 2003.
As discussed in "Recent Developments - KCS and Grupo TMM Agree to
Stipulation," KCS and Grupo TMM have agreed to discharge in good faith all
of the obligations of the Acquisition Agreement signed April 20, 2003.
Should the acquisition of Grupo TFM be consummated in 2004, KCS would
include the operating revenues and expenses of Grupo TFM in its
consolidated financial statements from the date of the Acquisition.
2004 OUTLOOK
A current outlook for the Company's business for the remainder of 2004 is
included in the following discussion. The first paragraph above of this
Item 2 - "Management's Discussion and Analysis of Financial Condition and
Results of Operations" contains a discussion regarding forward-looking
comments.
For the remainder of 2004, management intends to take advantage of improved
general economic conditions and continue to focus on improving domestic
operations. Management expects overall KCSR revenues to continue to show
year over year increases for the balance of 2004. Except as discussed
herein, assuming normalized rail operations, management expects KCSR's
variable costs and expenses to be proportionate with revenue activity. Fuel
prices will fluctuate subject to market conditions. To mitigate the market
risk associated with fuel prices, KCSR currently has approximately 15.3% of
its remaining projected fuel usage hedged for the remainder of 2004 through
purchase commitments as well as fuel swaps, both of which reduce the risk
of the adverse impact of rising fuel prices. Insurance and claims costs
will likely increase compared to the first quarter which benefited from a
$2.2 million insurance settlement. Depreciation expense will continue to
reflect the favorable impact of the changes implemented January 1, 2004 by
approximately $3.0 million per quarter.
The Company expects to continue to participate in the earnings/losses from
its equity investments in Grupo TFM, Southern Capital and PCRC. Due to the
variability of factors affecting the Mexican economy, management can make
no assurances as to the impact that a change in the value of the peso or a
change in Mexican inflation will have on the results of Grupo TFM.
RECENT DEVELOPMENTS
KCS and Grupo TMM Agree to Stipulation. Following the March 19, 2004
Interim Award of the AAA International Centre for Dispute Resolution
Arbitration Panel, which found that the Acquisition Agreement remains in
force and is binding on the Company and Grupo TMM unless otherwise
terminated according to its terms or by law, the Company and Grupo TMM
agreed not to move immediately into the next phase of arbitration. Both
companies have reserved the right to proceed with the next phase of
arbitration at any time. In a stipulation signed by Grupo TMM and KCS on
April 4, 2004, and accepted by the arbitration panel, the two companies
have agreed to discharge in good faith all of the obligations of the
Acquisition Agreement signed April 20, 2003. For additional information
regarding the Acquisition Agreement, see Note 3 in the Notes to the
Financial Statements contained within Item 8 of the Company's 2003 Form
10-K.
Kansas City Southern Closes on New $250 Million Credit Facility. During
March 2004, the Company used cash on-hand to repay approximately $98.5
million relating to the Company's former credit facility. On March 30,
2004, the Company closed on a new credit facility ("2004 Credit Facility.")
The 2004 Credit Facility consists of a $100 million revolving credit
facility ("2004 Revolving Credit Facility") maturing on March 30, 2007 and
a $150 million Term B loan facility ("Term B Loan Facility") maturing on
March 30, 2008. The Term B Loan Facility was fully funded on the closing
date and the proceeds are expected to be used to pay transaction costs, and
for other general corporate purposes, including additional investments in
the Company's Mexican affiliates. There were no funds drawn under the
previous revolving credit facility and the full $100 million borrowing
capacity under the 2004 Revolving Credit Facility is currently available to
the Company. Up to $25 million of the 2004 Revolving Credit Facility is
available for letters of credit and up to $15 million is available for
swing line loans. The proceeds from future borrowings under the 2004
Revolving Credit Facility may be used for working capital and for general
corporate purposes, including additional investments in our Mexican
affiliates. The letters of credit may be used for general corporate
purposes. Borrowings under the 2004 Credit Facility are secured by
substantially all of the Company's assets and are guaranteed by the
majority of its subsidiaries. For additional information regarding the new
credit facility, See Note 9 to the consolidated financial statements under
Item 1 of this Form 10-Q.
RESULTS OF OPERATIONS
The following table summarizes the income statement components of the
Company for the three months ended March 31, 2004 and 2003, respectively.
(in millions):
Three Months
Ended March 31,
-------------------------------
2004 2003
--------------- ---------------
Revenues $ 147.8 $ 140.2
Operating expenses 130.4 133.4
--------------- ---------------
Operating income 17.4 6.8
Equity in net earnings of unconsolidated affiliates 1.4 7.0
Interest expense (10.8) (11.5)
Debt retirement costs (4.2) -
Other income 1.5 1.3
--------------- ---------------
Income before income taxes and
cumulative effect of accounting change 5.3 3.6
Income tax provision (benefit) 1.9 (1.1)
--------------- ---------------
Income before cumulative effect of accounting change 3.4 4.7
Cumulative effect of accounting change, net of income - 8.9
taxes
--------------- ---------------
Net income $ 3.4 $ 13.6
=============== ===============
The following table summarizes consolidated KCS revenues, including the revenues
and carload statistics of KCSR, for the three months ended March 31, 2004 and
2003, respectively. Certain prior period amounts have been reclassified to
reflect changes in the business groups and to conform to the current period
presentation.
Carloads and
Revenues Intermodal Units
------------------------------- -------------------------------
(in millions) (in thousands)
Three months Three months
ended March 31, ended March 31,
------------------------------- -------------------------------
2004 2003 2004 2003
-------------- --------------- -------------- --------------
General commodities:
Chemical and petroleum $ 32.0 $ 31.2 35.7 36.0
Paper and forest 36.7 33.9 46.3 44.8
Agricultural and mineral 30.7 25.1 38.0 33.5
-------------- --------------- -------------- --------------
Total general commodities 99.4 90.2 120.0 114.3
Intermodal and automotive 14.6 13.5 80.6 71.8
Coal 21.9 24.3 48.5 47.1
-------------- --------------- -------------- --------------
Carload revenues and carload
and intermodal units 135.9 128.0 249.1 233.2
============== ==============
Other rail-related revenues 11.1 10.8
-------------- ---------------
Total KCSR revenues 147.0 138.8
Other subsidiary revenues 0.8 1.4
-------------- ---------------
Total consolidated $ 147.8 $ 140.2
revenues ============== ===============
The following table summarizes KCS's consolidated operating expenses for the
three months ended March 31, 2004 and 2003, respectively. Certain prior period
amounts have been reclassified to conform to the current year presentation.
Three Months
Ended March 31,
-------------------------------
2004 2003
--------------- ---------------
Compensation and benefits $ 50.8 $ 50.5
Purchased services 15.6 15.1
Fuel 14.8 12.8
Equipment costs 13.0 14.0
Depreciation and amortization 12.8 15.9
Casualties and insurance 5.7 8.1
Other leases 2.7 2.5
Other 15.0 14.5
--------------- ---------------
Total consolidated operating expenses $ 130.4 $ 133.4
=============== ===============
Net Income. Net income for the three months ended March 31, 2004 was $3.4
million (2(cent) per diluted share) compared to $13.6 million (22(cent) per
diluted share) for the three months ended March 31, 2003. This $10.2 million
(75%) quarter to quarter decrease in net income was primarily the result of the
impact of the cumulative effect of a change in accounting principle of $8.9
million (net of income taxes of $5.6 million) in the quarter ended March 31,
2003, as well as a $5.6 million decrease in equity earnings from Grupo TFM and a
$3.0 million increase in the provision for income taxes. Also contributing to
the decrease in net income were debt retirement costs of $4.2 million reported
during the three months ended March 31, 2004 attributable to write-offs of the
unamortized balance of debt issuance costs related to retired debt. These
factors, which led to a decrease in net income, were partially offset by a $7.6
million increase in revenues, a $3.0 million decrease in operating expenses, a
$0.7 million decrease in interest expense, and a $0.2 million increase in other
income.
Revenues. Consolidated revenues for the three months ended March 31, 2004
increased $7.6 million (5.4%) to $147.8 million compared to $140.2 million for
the three months ended March 31, 2003. For the quarter ended March 31, 2004,
KCSR experienced revenue increases in chemical and petroleum products,
agriculture and mineral products, paper and forest products, as well as
intermodal traffic. The effect of these increases in revenues was partially
offset by decreases in
coal revenue. The increases in revenue were the result of increases in
carloadings for most commodity groups, as well as longer hauls, certain targeted
price improvements, and fuel surcharges on all commodity groups as a result of
higher fuel prices. The following discussion provides an analysis of KCSR
revenues by commodity group for the quarter ended March 31, 2004.
Chemical and petroleum products. Revenues for chemical and petroleum
products for the three months ended March 31, 2004 increased $0.8 million (2.6%)
to $32.0 million compared to $31.2 million for the three months ended March 31,
2003. Higher revenues for gases, organic and petroleum products were partially
offset by declines in agri-chemical, inorganic and plastic products. Increases
in demand for organic products led to an increase in production. Increases in
petroleum products were primarily the result of increased exports to Mexico.
Decreases in revenue for inorganic chemical products and plastic products were
primarily the result of the lower production stemming from the continued high
cost of natural gas as a feedstock and energy source for producers. Chemical and
petroleum products revenue accounted for 23.5% and 24.4% of carload revenues for
the three months ended March 31, 2004 and 2003, respectively.
Paper and forest products. For the three months ended March 31, 2004,
revenues for paper and forest products increased $2.8 million (8.3%) to $36.7
million compared to $33.9 million for the same period in 2003. These increases
were primarily the result of higher revenue from paper product, lumber and
plywood and military and other carloads, partially offset by declines in
pulpwood, logs and chips movements. Paper and lumber product revenues increased
primarily due to higher production and improved service, as well as certain
targeted rate increases. Higher military and other carload revenues were
primarily the result of increased military training exercises for which KCSR
handles equipment transportation. During the first quarter of 2003, certain
military training exercises were cancelled due to the associated military
buildup and deployment of troops to the Middle East. Declines in pulpwood, logs
and chips product were primarily related to a change in product mix for certain
customers resulting in a decreased demand for rail transportation by these
shippers. Revenues for scrap paper product as well as metal and scrap product
were relatively flat for the three months ended March 31, 2004 compared to the
same period in 2003. Paper and forest products revenue accounted for 27.0% and
26.5% of carload revenues for the three months ended March 31, 2004 and 2003,
respectively.
Agricultural and mineral products. Revenues for agricultural and mineral
products for the three months ended March 31, 2004 increased $5.6 million
(22.3%) to $30.7 million compared to $25.1 million for the same period in 2003,
primarily as a result of higher revenues for domestic grain, export grain and
ores and minerals. Domestic grain revenues were higher due to an increase in
movement of local crops by rail while export grain revenues rose as a result of
continued increases in shipments to Mexico. Ores and minerals revenue increased
as a result of higher production by certain customers, as well as certain
targeted rate increases. These revenue improvements were partially offset by
decreases in food and kindred products revenues, primarily as a result of
decreases in export shipments. Agricultural and mineral products revenue
accounted for 22.6% and 19.6% of carload revenues for the three months ended
March 31, 2004 and 2003, respectively.
Intermodal and automotive. Intermodal and automotive revenues for the three
months ended March 31, 2004 increased $1.1 million (8.2%) to $14.6 million
compared to $13.5 million for the same period in 2003, primarily as a result of
increased domestic traffic due to higher volume by existing customers, as well
as the generation of new intermodal business. Intermodal and automotive product
revenue accounted for 10.8% and 10.6% of carload revenues for the three months
ended March 31, 2004 and 2003, respectively.
Coal. Coal revenues for the three months ended March 31, 2004 decreased
$2.4 million (9.9%) to $21.9 million compared to $24.3 million for the same
period in 2003. Scheduled maintenance outages by certain KCSR electric utility
customers occurred in the first quarter 2004. During 2003, most of these
maintenance outages occurred in the second quarter. This decrease in revenue was
partially offset by increased carloadings due to higher short haul traffic
during the three month period ended March 31, 2004 compared to the same period
in 2003. Coal revenue accounted for 16.1% and 18.9% of carload revenues for the
three months ended March 31, 2004 and 2003, respectively.
Other. Other rail related revenues increased $0.3 million (2.7%) for the
three months ended March 31, 2004 compared to the three months ended March 31,
2003. This increase was primarily the result of an increase in haulage and
switching revenue, partially offset by a decrease in demurrage revenue.
Operating Expenses. Consolidated operating expenses for the three months ended
March 31, 2004 decreased $3.0 million (2.2%) compared to the three months ended
March 31, 2003. This decrease was the result of lower operating expenses at KCSR
of approximately $3.7 million, partially offset by increased operating expenses
at certain other subsidiaries of $0.7 million.
Compensation and Benefits. Consolidated compensation and benefits expense
increased $0.3 million (0.6%) to $50.8 million for the three months ended March
31, 2004 compared to $50.5 million for the three months ended March 31, 2003,
primarily as a result of certain increases in wage and salary rates.
Compensation expense also rose as a result of increased crew starts related to
higher traffic volume. These increases were partially offset by the impact of a
reduced employee headcount quarter to quarter. Average headcount for the three
months ended March 31, 2004 was 2,676 compared to 2,732 for the same period in
2003.
Purchased Services. Consolidated purchased services expense for the three
months ended March 31, 2004 was $15.6 million compared to $15.1 million for the
three months ended March 31, 2003. This $0.5 million (3.3%) increase was the
result primarily of higher infrastructure and locomotive and rolling stock
repairs performed by outside parties.
Fuel. Consolidated fuel expense for the three months ended March 31, 2004
increased $2.0 million (15.6%) to $14.8 million compared to $12.8 million for
the three months ended March 31, 2003. This quarter to quarter increase was the
result of a 10.4% increase in the average price per gallon, as well as a 5.2%
increase in fuel consumption. These factors, which led to an increase in fuel
expense, were partially mitigated by fuel cost savings of $0.2 million as a
result of the Company's fuel hedging program. Fuel cost represented
approximately 11.3% of operating expenses for the three months ended March 31,
2004 compared to 9.6% of operating costs and expenses for the three months ended
March 31, 2003.
Equipment Costs. For the three months ended March 31, 2004, consolidated
equipment costs decreased $1.0 million (7.1%) to $13.0 million from $14.0
million for the same period in 2003. This decrease was a result of reductions in
net car hire expense as a result of continued improvements in operating
efficiencies. Partially mitigating these savings was an increase in lease costs
related to KCSR locomotives and freight cars and other leased rolling stock due
to increased traffic.
Depreciation and Amortization. Consolidated depreciation and amortization
expense was $12.8 million for the three months ended March 31, 2004 compared to
$15.9 million for the three months ended March 31, 2003. This $3.1 million
(19.5%) decrease was primarily the result of changes in depreciable lives and
salvage values implemented January 1, 2004, based on an updated depreciation
study, which was approved by the Surface Transportation Board.
Casualties and Insurance. Consolidated casualties and insurance expense for
the three months ended March 31, 2004 decreased $2.4 million (29.6%) to $5.7
million compared to $8.1 million for the three months ended March 31, 2003. This
decrease was primarily attributable to the receipt of approximately $2.2 million
in insurance settlements during first quarter 2004.
Other Leases. For the three months ended March 31, 2004, consolidated other
lease expense was $2.7 million compared to $2.5 million for the three months
ended March 31, 2003. This $0.2 million (8.0%) increase was primarily the result
of additional lease expense associated with certain maintenance of way equipment
for the three months ended March 31, 2004 compared to the same period in 2003.
Other Expense. Consolidated other expense for the three months ended March
31, 2004 was $15.0 million compared to $14.5 million for the three months ended
March 31, 2003. The $0.5 million (3.4%) increase was largely the net result of a
$2.1 million increase in the provision for doubtful accounts, a $0.2 million
increase in other taxes, and a $0.1 million net increase in other expenses
partially mitigated by a $1.9 million decrease in materials and supplies
expense.
Operating Income and KCS Operating Ratio. Consolidated operating income for
the three months ended March 31, 2004 increased $10.6 million to $17.4 million
compared to $6.8 million for the same period in 2003. This increase was the
result of a $7.6 million increase in revenue combined with a $3.0 million
decrease in operating expenses. For the three months ended March 31, 2004, the
consolidated operating ratio for KCS was 84.0% compared to 93.3% for the three
months ended March 31, 2003.
Interest Expense. Consolidated interest expense for the three months ended March
31, 2004 decreased $0.7 million (6.1%) to $10.8 million compared to $11.5
million for the three months ended March 31, 2003. This decrease in interest
expense was due to lower debt balances coupled with slightly lower interest
rates. Consolidated debt balances declined $7.4 million from $581.7 million at
March 31, 2003 to $574.3 million at March 31, 2004.
Debt Retirement Costs. During the three months ended March 31, 2004, the Company
recorded $4.2 million of debt retirement costs resulting from the write-off of
the unamortized balance of debt issuance costs associated with early retirement
of the Company's previous credit facility.
Other Income. The Company's other income for the three months ended March 31,
2004 was $1.5 million compared to $1.3 million for the three months ended March
31, 2003. This $0.2 million (15.4%) increase was primarily the result of
fluctuations in gains and losses on sales of non operating property.
Income Tax Expense. The consolidated income tax expense for the three months
ended March 31, 2004 was $1.9 million compared to a consolidated income tax
benefit of $1.1 million for the same period in 2003. This increase in income tax
expense was primarily the result of higher domestic operating income.
Equity in Net Earnings (Losses) of Unconsolidated Affiliates. The Company
recorded equity in earnings of unconsolidated affiliates of $1.4 million
compared to $7.0 million for the same period in 2003. This $5.6 million (80.0%)
decrease was primarily the result of a decrease in equity in net earnings from
Grupo TFM. For the three months ended March 31, 2004, Grupo TFM's operating
income declined by $2.1 million compared to the same period in 2003, as revenues
declined $1.0 million while operating expenses increased $1.1 million. Results
for the first quarter of 2004 for Grupo TFM include a $7.3 million deferred
income tax benefit (calculated under accounting principles generally accepted in
the United States of America - "U.S. GAAP") compared to a deferred income tax
benefit of $23.0 million in the first quarter of 2003. This decrease in the
deferred income tax benefit of $15.7 million was the result of fluctuations in
the peso exchange rate and tax benefits derived from the impact of inflation in
Mexico and had a significant impact on the Company's equity in earnings from
Grupo TFM. The Company reports its equity in Grupo TFM under U.S. GAAP, while
Grupo TFM reports under International Financial Reporting Standards ("IFRS").
Cumulative Effect of Accounting Change. The Company adopted the provisions of
SFAS 143 effective January 1, 2003. As a result, the Company changed its method
of accounting for removal costs of certain track structure assets and recorded a
one time benefit of $8.9 million (net of income taxes of $5.6 million) during
the first quarter of 2003. This change is reported as a cumulative effect of an
accounting change in the accompanying consolidated statement of income.
LIQUIDITY AND CAPITAL RESOURCES
Summary cash flow data for the Company is as follows (in millions):
Three Months
Ended March 31,
-------------------------------
2004 2003
------------- -------------
Cash flows provided by (used for):
Operating activities $ 40.0 $ 47.9
Investing activities (35.6) (3.6)
Financing activities 48.8 0.7
------------- -------------
Cash and cash equivalents:
Net increase 53.2 45.0
At beginning of year 135.4 19.0
------------- -------------
At end of period $ 188.6 $ 64.0
============= =============
During the three months ended March 31, 2004, the Company's consolidated cash
position increased $53.2 million from December 31, 2003, primarily as a result
of operating cash inflows, proceeds from the issuance of long-term debt and the
proceeds from employee stock plans. These increases were partially offset by
debt repayments and property acquisitions. Net operating cash inflows were $40.0
million and $47.9 million for the three months ended March 31, 2004 and 2003,
respectively. The $7.9 million decrease in operating cash flows was primarily
attributable to changes in working capital
balances, resulting mainly from the timing of certain payments and receipts.
Changes in the accrued liabilities balance of $21.0 million were primarily
related to accrued interest as well as accrued operating leases.
Net investing cash outflows were $35.6 million and $3.6 million for the three
months ended March 31, 2004 and 2003, respectively. This $32.0 million increase
in cash outflows was primarily a result of a $16.9 million quarter to quarter
increase in capital expenditures, a $7.0 million decrease in proceeds from the
disposal of property and a $2.2 million increase in investments in and loans to
affiliates.
For the first three months of 2004, net financing cash inflows were $48.8
million compared to $0.7 million for the first three months of 2003. This $48.1
million difference was primarily a result of proceeds from the issuance of debt
under the 2004 Credit Facility of $150 million, partially offset by $99.0
million in repayment of long-term debt.
Management expects cash flows from operations to be positive throughout the
remainder of 2004 as a result of operating income, which has historically
resulted in positive operating cash flows. Investing activities are projected to
use significant amounts of cash for capital expenditures and investments in
subsidiaries. Future roadway improvement projects will continue to be primarily
funded by operating cash flows.
The Company's consolidated ratio of debt to total capitalization was 37.2% and
35.2% at March 31, 2004 and December 31, 2003, respectively.
In addition to operating cash flows, the Company has financing available under
the 2004 Revolving Credit Facility with a maximum borrowing amount of $100
million. As of March 31, 2004, all $100 million was available under the 2004
Revolving Credit Facility. The 2004 Revolving Credit Facility contains, among
other provisions, various financial covenants. As a result of certain financial
covenants contained in the 2004 Revolving Credit Facility, maximum utilization
of the Company's 2004 Revolving Credit Facility may be restricted. See "Recent
Developments - Kansas City Southern Closes on New $250 Million Credit Facility"
for further discussion of the 2004 Credit Facility.
Capital improvements for KCSR roadway track structures have historically been
funded with cash flows from operations and external debt. The Company has
historically used equipment trust certificates for major purchases of
locomotives and rolling stock, while using internally generated cash flows or
leasing for other equipment. Through its Southern Capital joint venture, the
Company has the ability to finance railroad equipment.
The following table summarizes the cash capital expenditures by type.
Three Months
Ended March 31,
-----------------------------------------
Capital Expenditure Category 2004 2003
(dollars in millions) ------------------- --------------------
Track infrastructure $ 19.1 $ 8.1
Locomotives, freight cars and other equipment 3.3 0.5
Information technology 1.3 0.8
Facilities and improvements 0.7 0.8
Other 4.6 1.9
------------------- --------------------
Total capital expenditures $ 29.0 $ 12.1
=================== ====================
The Company filed a Universal Shelf Registration Statement on Form S-3 ("Initial
Shelf" - Registration No. 33-69648) in September 1993, as amended in April 1996,
for the offering of up to $500.0 million in aggregate amount of securities. The
SEC declared the Initial Shelf effective on April 22, 1996; however, no
securities have been issued thereunder. The Company has carried forward $200
million aggregate amount of unsold securities from the Initial Shelf to a Shelf
Registration Statement filed on Form S-3 ("Second Shelf" - Registration No.
333-61006) on May 16, 2001 for the offering of up to $450 million in aggregate
amount of securities. The SEC declared the Second Shelf effective on June 5,
2001. Securities in the aggregate amount of $300 million remain available under
the Initial Shelf and securities in the
aggregate amount of $450 million remain available under the Second Shelf. To
date, no securities have been issued under either the Initial Shelf or Second
Shelf.
As discussed in the Company's Annual Report on Form 10-K for the year ended
December 31, 2003 - "Recent Developments - Mexican Government's Put Rights with
Respect to TFM Stock," Grupo TMM and KCS, or either Grupo TMM or KCS, could be
required to purchase the Mexican government's interest in TFM. If KCS and Grupo
TMM, or either KCS or Grupo TMM individually, had been required to purchase the
Mexican government's 20% interest in TFM, the total purchase price would have
been approximately $478.1 million as of March 31, 2004. The Company is exploring
various alternatives for financing this transaction. It is anticipated that this
financing, if necessary, can be accomplished using the Company's ability to
access the capital markets. No commitments for such financing have been obtained
at this time.
The Company believes, based on current expectations, that its cash and other
liquid assets, operating cash flows, access to capital markets, borrowing
capacity, and other available financing resources are sufficient to fund
anticipated operating, capital and debt service requirements and other
commitments through 2004. Also, if necessary, management believes it will be
able to fund the Acquisition using existing cash resources and availability
under the 2004 Revolving Credit Facility. Management also believes that, if
necessary, the Company could obtain financing to fund the purchase of the
Mexican government's 20% interest in TFM. The Company's operating cash flows and
financing alternatives, however, can be impacted by various factors, some of
which are outside of the Company's control. For example, if the Company were to
experience a substantial reduction in revenues or a substantial increase in
operating costs or other liabilities, its operating cash flows could be
significantly reduced. Additionally, the Company is subject to economic factors
surrounding capital markets and the Company's ability to obtain financing under
reasonable terms is subject to market conditions. Further, the Company's cost of
debt can be impacted by independent rating agencies, which assign debt ratings
based on certain credit measurements, such as interest coverage and leverage
ratios. During March 2004, Moody's Investors Service downgraded the debt ratings
of KCS while Standard & Poor's left the debt ratings unchanged. This reduction
in the Company's debt ratings did not have any impact on the Company's interest
rates or financial covenant ratios, but could adversely impact borrowing costs
in the future.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
There have been no significant changes in the Company's Quantitative and
Qualitative Disclosures About Market Risk from that previously reported in the
Annual Report on Form 10-K for the year ended December 31, 2003.
Item 4. Controls and Procedures
As of the end of the fiscal quarter for which this Quarterly Report on Form 10-Q
is filed, the Company's Chief Executive Officer and Chief Financial Officer have
reviewed and evaluated the effectiveness of the Company's disclosure controls
and procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the Securities
Exchange Act of 1934, as amended (the "Exchange Act")). Based on that
evaluation, the Chief Executive Officer and Chief Financial Officer have
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 Chief Executive Officer and Chief Financial Officer, as
appropriate to allow timely decisions regarding required disclosure.
There have not been any significant changes in the Company's internal controls
or in other factors that could significantly affect these controls subsequent to
the date of their evaluation. There were no significant deficiencies or material
weaknesses in the internal controls, and therefore no corrective actions were
taken.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Part I, Item 1. "Financial Statements", Note 7 to the Consolidated Financial
Statements of this Form 10-Q is hereby incorporated herein by reference.
Item 4. Submission of Matters to a Vote of Security Holders
a) The Company held its 2004 Annual Meeting of Stockholders ("Annual Meeting")
on May 6, 2004. A total of 55,802,443 shares of the Common stock, $.01 per
share par value, and Preferred stock, par value $25.00 per share, or 88.7%
of the outstanding voting stock on the record date (62,877,226 shares), was
represented at the Annual Meeting, thereby constituting a quorum. These
shares voted together as a single class.
b) Proxies for the meeting were solicited pursuant to Regulation 14A; there
was no solicitation in opposition to management's nominees for directors as
listed in such Proxy Statement and all such nominees were elected. The
voting for the election of directors was as follows:
Total
Shares
---------------------
Election of Three Directors
(i) A. Edward Allinson
For 54,330,526
Against -
Withheld 504,112
---------------------
Total 54,834,638
=====================
(ii) James R. Jones
For 54,356,751
Against -
Withheld 504,112
---------------------
Total 54,860,863
=====================
(iii) Karen L. Pletz
For 57,207,716
Against -
Withheld 504,112
---------------------
Total 57,711,828
=====================
c) Listed below are the other matters voted on at the Company's Annual
Meeting. These matters are fully described in the Company's Definitive
Proxy Statement. The voting was as follows:
Total
Shares
---------------------
Ratification of Audit Committee's
Selection of Independent Auditors
For 54,800,152
Against 945,789
Withheld 56,502
---------------------
Total 55,802,443
=====================
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
Exhibit 10.1 Credit Agreement dated as of March 30, 2004 among KCSR, the
Company, The Bank of Nova Scotia, Morgan Stanley Senior Funding,
Inc., Harris Trust and Savings Bank, and other parties thereto.
Exhibit 31.1 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002
Exhibit 31.2 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002
Exhibit 32.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K, dated January 9, 2004,
under Item 5 of such form, announcing the ruling by the Delaware Court
of Chancery regarding a motion to enforce injunction and hold Grupo TMM,
S.A. in contempt in the dispute between KCS and TMM over the Acquisition
Agreement.
The Company furnished a Current Report on Form 8-K, dated January 12,
2004, under Items 7 and 9 of such form, announcing the date, time and
other relevant information regarding the Company's fourth quarter
presentation and conference call of its financial results for the three
months and year ended December 31, 2003. The information included in
this Current Report on Form 8-K was furnished pursuant to Item 9 and
shall not be deemed to be filed.
The Company filed a Current Report on Form 8-K, dated January 20, 2004,
under Item 5 of such form, announcing that TFM S.A. de C.V. received, on
January 19, 2004, a Special Certificate from the Mexican Federal
Treasury in the amount of 2,111,111,790 pesos. The Special Certificate
has the same face amount as the value added tax refund claimed by TFM.
The Company filed a Current Report on Form 8-K, dated January 21, 2004,
under Item 5 of such form, announcing that on January 20, 2004, TFM,
S.A. de C.V. was served with an official letter notifying TFM of the
Mexican Government's findings and conclusions arising from its tax audit
of TFM's tax return for the fiscal year ended December 31, 1997.
The Company furnished a Current Report on Form 8-K, dated January 30,
2004, under Items 7 and 12 of such form, announcing KCS's fourth quarter
and year to date 2003 earnings and operating results and schedules
regarding certain financial information discussed at the Company's
fourth quarter 2003 analyst presentation and conference call. The
information furnished in this Current Report on Form 8-K pursuant to
item 12 shall not be deemed to be filed.
The Company filed a Current Report on Form 8-K, dated March 23, 2004,
under Item 5 of such form, announcing that the panel of the AAA
International Centre for Dispute Resolution hearing the dispute between
KCS and Grupo TMM, S.A. issued its interim award on March 19, 2004
finding that the Grupo Transportation Ferroviaria Mexicana, S.A. de C.V.
Acquisition Agreement remains in force and is binding on KCS and TMM in
accordance with its terms. Under the Acquisition Agreement, KCS would
acquire all of the common shares of Grupo TFM. Grupo TFM owns all of the
common stock of TFM, S.A. de C.V.
The Company furnished a Current Report on Form 8-K, dated March 31,
2004, under Item 12 of such form, announcing that KCS has filed its 2003
Form 10-K reporting final earnings for 2003. Additionally, in an
unrelated matter, the press release announced that the Company is
seeking renewed authority from the Mexican Competition Commission. The
Company also furnished schedules regarding certain financial information
contained within the Company's press release dated March 30, 2004. The
information furnished in this Current Report on Form 8-K pursuant to
item 12 shall not be deemed to be filed.
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 May 10, 2004.
Kansas City Southern
/s/ Ronald G. Russ
- --------------------------------------------------------------------------------
Ronald G. Russ
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)