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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 SEPTEMBER 30, 2002
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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
CLASS OUTSTANDING AT OCTOBER 31, 2002
- --------------------------------------------------------------------------------
COMMON STOCK, $.01 PER SHARE PAR VALUE 60,954,700 SHARES
- --------------------------------------------------------------------------------
KANSAS CITY SOUTHERN
FORM 10-Q
SEPTEMBER 30, 2002
INDEX
PAGE
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Introductory Comments 2
Consolidated Balance Sheets -
September 30, 2002 and December 31, 2001 3
Consolidated Statements of Income -
Three and Nine Months Ended September 30, 2002 and 2001 4
Per Share Data 4
Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 2002 and 2001 5
Consolidated Statement of Changes in Stockholders' Equity -
Nine Months Ended September 30, 2002 6
Notes to Consolidated Financial Statements 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 16
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK 28
ITEM 4. CONTROLS AND PROCEDURES 28
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 28
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 28
SIGNATURES 29
- ----------
KANSAS CITY SOUTHERN
FORM 10-Q
SEPTEMBER 30, 2002
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, 2001 (as amended), and Management's Discussion and Analysis
of Financial Condition and Results of Operations included in this Form 10-Q.
Results for the three and nine months ended September 30, 2002 are not
necessarily indicative of the results expected for the full year 2002.
KANSAS CITY SOUTHERN
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN MILLIONS)
September 30, December 31,
2002 2001
------------------ ------------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 35.5 $ 24.7
Accounts receivable, net 112.3 130.0
Inventories 35.3 27.9
Other current assets 38.3 71.8
------------------ ------------------
Total current assets 221.4 254.4
------------------ ------------------
Investments 404.6 386.8
Properties (net of $686.5 and $660.0 accumulated
depreciation and amortization, respectively) 1,336.3 1,327.4
Goodwill 10.6 19.3
Other assets 22.8 23.0
------------------ ------------------
Total assets $ 1,995.7 $ 2,010.9
================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Debt due within one year $ 10.0 $ 46.7
Accounts and wages payable 40.3 50.4
Accrued liabilities 153.9 150.0
------------------ ------------------
Total current liabilities 204.2 247.1
------------------ ------------------
Other Liabilities
Long-term debt 578.7 611.7
Deferred income taxes 374.3 370.2
Other liabilities and deferred credits 108.9 101.6
------------------ ------------------
Total other liabilities 1,061.9 1,083.5
------------------ ------------------
Stockholders' Equity
Preferred stock 6.1 6.1
Common stock 0.6 0.6
Retained earnings 725.8 676.5
Accumulated other comprehensive loss (2.9) (2.9)
------------------ ------------------
Total stockholders' equity 729.6 680.3
------------------ ------------------
Total liabilities and stockholders' equity $ 1,995.7 $ 2,010.9
================== ==================
See accompanying notes to consolidated financial statements.
KANSAS CITY SOUTHERN
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
(UNAUDITED)
Three Months Nine Months
Ended September 30, Ended September 30,
---------------------------------- ----------------------------------
2002 2001 2002 2001
---------------- ----------------- ----------------------------------
Revenues $ 137.6 $ 144.6 $ 418.0 $ 431.8
Costs and expenses
Compensation and benefits 51.2 48.7 147.1 145.4
Depreciation and amortization 15.8 14.7 45.3 43.6
Purchased services 15.9 15.4 43.5 41.8
Operating leases 12.4 12.6 37.1 38.1
Fuel 8.9 11.5 27.7 35.3
Casualties and insurance 6.9 6.1 22.0 28.4
Car hire 5.6 3.5 14.9 15.7
Other 14.7 16.1 46.3 48.5
---------------- ----------------- ----------------- ----------------
Total costs and expenses 131.4 128.6 383.9 396.8
Operating income 6.2 16.0 34.1 35.0
Equity in net earnings (losses) of unconsolidated
affiliates:
Grupo Transportacion Ferroviaria Mexicana, S.A. de C.V. 9.8 7.5 27.6 23.5
Other (0.7) (0.6) (1.9) (0.2)
Gain on sale of Mexrail, Inc. - - 4.4 -
Interest expense (11.5) (13.2) (33.3) (42.9)
Other income 6.5 0.9 15.3 3.0
---------------- ----------------- ----------------- -----------------
Income before income taxes, extraordinary item and
cumulative effect of accounting change 10.3 10.6 46.2 18.4
Income tax provision (benefit) (0.3) 1.6 6.7 (1.6)
---------------- ----------------- ----------------- -----------------
Income before extraordinary item and cumulative effect
of accounting change 10.6 9.0 39.5 20.0
Extraordinary item, net of income taxes - - (2.7) -
Cumulative effect of accounting change, net of income taxes - - - (0.4)
---------------- ----------------- ----------------- -----------------
Net income $ 10.6 $ 9.0 $ 36.8 $ 19.6
================ ================= ================= =================
PER SHARE DATA
Basic earnings per Common share
Income before extraordinary item and cumulative effect
of accounting change $ 0.17 $ 0.15 $ 0.65 $ 0.34
Extraordinary item, net of income taxes - - (0.04) -
Cumulative effect of accounting change, net of income
taxes - - - (0.01)
---------------- ----------------- ----------------- -----------------
Total basic earnings per Common share $ 0.17 $ 0.15 $ 0.61 $ 0.33
================ ================= ================= =================
Diluted earnings per Common share
Income before extraordinary item and cumulative effect
of accounting change $ 0.17 $ 0.15 $ 0.63 $ 0.33
Extraordinary item, net of income taxes - - (0.04) -
Cumulative effect of accounting change, net of income
taxes - - - (0.01)
---------------- ----------------- ----------------- -----------------
Total diluted earnings per Common share $ 0.17 $ 0.15 $ 0.59 $ 0.32
================ ================= ================= =================
Weighted average Common shares outstanding (in thousands)
Basic 60,481 58,656 60,123 58,442
Potential dilutive Common shares 1,972 2,515 2,090 2,492
---------------- ----------------- ----------------- -----------------
Diluted 62,453 61,171 62,213 60,934
================ ================= ================= =================
Dividends per Preferred share $ 0.25 $ 0.25 $ 0.75 $ 0.75
See accompanying notes to consolidated financial statements.
KANSAS CITY SOUTHERN
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN MILLIONS)
(UNAUDITED)
Nine Months
Ended September 30,
-------------------------------------
2002 2001
----------------- -----------------
CASH FLOWS PROVIDED BY (USED FOR):
OPERATING ACTIVITIES:
Net income $ 36.8 $ 19.6
Adjustments to reconcile net income to net cash
Provided by operating activities
Depreciation and amortization 45.3 43.6
Deferred income taxes 1.7 14.9
Equity in undistributed earnings of unconsolidated affiliates (25.7) (23.3)
Distributions from unconsolidated affiliates - 3.0
Gain on sale of investments (9.3) -
Gain on sale of property (10.0) (3.5)
Tax benefit realized upon exercise of stock options 3.6 4.6
Changes in working capital items
Accounts receivable 18.7 (6.4)
Inventories (7.4) 5.2
Other current assets 35.8 7.6
Accounts and wages payable (10.3) (4.6)
Accrued liabilities 5.9 (26.0)
Other, net 8.9 (4.5)
---------------- ------------------
Net cash provided by operating activities 94.0 30.2
---------------- ------------------
INVESTING ACTIVITIES:
Property acquisitions (63.1) (42.2)
Proceeds from disposal of property 17.5 15.0
Investment in and loans to affiliates (4.0) (6.1)
Proceeds from sale of investments, net 31.7 -
Other, net (1.3) (0.8)
---------------- ------------------
Net cash used for investing activities (19.2) (34.1)
---------------- ------------------
FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt 200.0 35.0
Repayment of long-term debt (264.8) (24.8)
Debt issuance costs (5.5) (0.4)
Proceeds from stock plans 7.7 5.6
Cash dividends paid (0.2) (0.2)
Other, net (1.2) (5.9)
---------------- ------------------
Net cash provided by (used for) financing activities (64.0) 9.3
---------------- ------------------
CASH AND CASH EQUIVALENTS:
Net increase in cash and cash equivalents 10.8 5.4
At beginning of year 24.7 21.5
---------------- ------------------
At end of period $ 35.5 $ 26.9
================ ==================
See accompanying notes to consolidated financial statements.
KANSAS CITY SOUTHERN
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(DOLLARS IN MILLIONS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
Accumulated
$25 Par $.01 Par Other
Preferred Common Retained Comprehensive
stock Stock Earnings income (loss) Total
------------------ --------------- ----------------- ---------------- -----------------
Balance at December 31, 2001 $ 6.1 $ 0.6 $ 676.5 $ (2.9) $ 680.3
Comprehensive income:
Net income 36.8
Change in fair value of cash flow hedge (0.3)
Amortization of accumulated other
comprehensive income (loss) related
to interest rate swap 0.3
Comprehensive income 36.8
Dividends (0.2) (0.2)
Options exercised and stock subscribed 12.7 12.7
------------------ --------------- ----------------- ---------------- -----------------
Balance at September 30, 2002 $ 6.1 $ 0.6 $ 725.8 $ (2.9) $ 729.6
================== =============== ================= ================ =================
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 Kansas City Southern, the accompanying unaudited consolidated
financial statements contain all adjustments (consisting of normal closing
procedures) necessary to present fairly the financial position of the
Company and its subsidiary companies as of September 30, 2002 and December
31, 2001, the results of its operations for the three months and nine
months ended September 30, 2002 and 2001, its cash flows for the nine
months ended September 30, 2002 and 2001, and its changes in stockholders'
equity for the nine months ended September 30, 2002. 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, 2001 (as amended). The results of
operations for the three and nine month periods ended September 30, 2002
are not necessarily indicative of the results to be expected for the full
year 2002. Certain comparative prior year amounts in the consolidated
financial statements have been reclassified to conform to the current
period presentation. These reclassifications did not impact net income.
2. EARNINGS PER SHARE DATA. The effect of stock options to employees represent
the only difference between the weighted average shares used for the basic
earnings per share computation compared to the diluted earnings per share
computation. The following is a reconciliation from the weighted average
shares used for the basic earnings per share computation and the diluted
earnings per share computation for the three and nine months ended
September 30, 2002 and 2001, respectively (in thousands):
Three Months Nine Months
Ended September 30, Ended September 30,
------------------------- --------------------------
2002 2001 2002 2001
------------- ------------ --------------------------
Basic shares 60,481 58,656 60,123 58,442
Effect of dilution: Stock options 1,972 2,515 2,090 2,492
------------- ------------ ------------ ------------
Diluted shares 62,453 61,171 62,213 60,934
============= ============ ============ ============
Shares excluded from diluted computation 175 79 83 44
------------- ------------ ------------ ------------
Shares were excluded from the applicable periods diluted earnings per share
computation because the exercise prices were greater than the average
market price of the common shares. Preferred dividends, which were not
material for the periods presented, are the only adjustments that affect
the numerator of the diluted earnings per share computation.
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 September 30, 2002 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, our Mexican partner, Grupo TMM, S.A. ("Grupo TMM"), and
certain of Grupo TMM's affiliates entered into an agreement on February 27,
2002 with TFM, S.A. de C.V. ("TFM") to sell to TFM all of the common stock
of Mexrail, Inc., ("Mexrail") a former 49% unconsolidated affiliate of the
Company. Mexrail owns the northern half of the international railway bridge
at Laredo and all of the common stock of The Texas-Mexican Railway Company
("Tex Mex"). The sale closed on March 27, 2002 and the Company received
approximately $31.4 million for its 49% interest in Mexrail. The Company
used the proceeds from the sale to reduce debt. Although the Company no
longer directly owns 49% of Mexrail, it retains an indirect ownership
through its ownership of Grupo TFM. The Company's share of the proceeds
from the sale of Mexrail to TFM exceeded the carrying value of the
Company's investment in Mexrail by $11.2 million. The Company recognized a
$4.4 million gain on the sale of Mexrail to TFM in the first quarter of
2002, while the remaining $6.8 of excess proceeds was deferred and is being
amortized into net income over 20 years.
As discussed in note 8 below, on July 29, 2002, TFM completed the purchase
of the Mexican government's 24.6% ownership of Grupo TFM for a purchase
price of $256.1 million, and the shares purchased are held as treasury
stock by TFM. This transaction results in an increase in the Company's
ownership percentage of Grupo TFM from 36.9% to approximately 46.6%.
Following this transaction, Grupo TMM (together with certain of its
affiliates) owns approximately
48.5% of Grupo TFM and the Mexican government owns an effective interest of
4.9% in Grupo TFM due to its 20% minority interest in TFM.
The Company is party to certain agreements with Grupo TMM covering the
Grupo TFM joint venture. 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.
Condensed financial information of certain unconsolidated affiliates is
shown below. All amounts, including those for Grupo TFM, are presented
under U.S. GAAP. Mexrail financial results were consolidated into the
accounts of Grupo TFM effective April 1, 2002 and are not presented
separately. The amounts reflected herein for Grupo TFM do not include the
recognition of any recovery relating to the value of the Value Added Tax
("VAT") claim of Grupo TFM (See note 10). For purposes of recording equity
in earnings of unconsolidated affiliate and investment in unconsolidated
subsidiary, KCS has not recognized the value of the VAT credit certificate
pending completion of the legal process. Financial information of
immaterial unconsolidated affiliates has been omitted:
FINANCIAL CONDITION (DOLLARS IN MILLIONS):
September 30, 2002 December 31, 2001
-------------------------------- ---------------------------------------------
Southern Southern
PCRC Grupo TFM Capital Mexrail PCRC Grupo TFM Capital
-------- ------------ --------- --------- ---------- ------------- ---------
Current assets $ 5.1 $ 277.6 $ 13.0 $ 34.9 $ 3.6 $ 294.3 $ 2.5
Non-current assets 87.6 1,991.8 143.0 59.3 85.5 1,924.3 240.6
-------- ------------ --------- --------- ---------- ------------- ---------
Assets $ 92.7 $ 2,269.4 $ 156.0 $ 94.2 $ 89.1 $ 2,218.6 $ 243.1
======== ============ ========= ========= ========== ============= =========
Current liabilities $ 3.9 $ 128.0 $ 3.4 $ 42.8 $ 10.8 $ 350.8 $ 196.6
Non-current liabilities 71.9 1,049.9 104.0 27.5 55.3 593.8 -
Minority interest - 339.6 - - - 376.3 -
Equity of stockholders and partners 16.9 751.9 48.6 23.9 23.0 897.7 46.5
-------- ------------ --------- --------- ---------- ------------- ---------
Liabilities and equity $ 92.7 $ 2,269.4 $ 156.0 $ 94.2 $ 89.1 $ 2,218.6 $ 243.1
======== ============ ========= ========= ========== ============= =========
KCS's investment $ 15.0* $ 361.9 $ 24.3 $ 11.7 $ 13.9 $ 334.4 $ 23.2
-------- ------------ --------- --------- ---------- ------------- ---------
OPERATING RESULTS (DOLLARS IN MILLIONS):
Three Months Nine Months
Ended September 30, Ended September 30,
---------------------------- ----------------------------
2002 2001 2002** 2001
---------- ---------- ---------- ----------
Revenues:
Mexrail $ - $ 11.7 $ 13.3 $ 40.8
PCRC 0.9 - 2.5 -
Grupo TFM 175.3 168.1 519.1 496.0
Southern Capital 8.0 7.6 23.0 22.7
Operating costs and expenses:
Mexrail $ - $ 13.6 $ 13.3 $ 44.2
PCRC 2.5 0.9 8.5 1.8
Grupo TFM 132.1 123.6 384.3 323.1
Southern Capital 7.1 6.4 19.2 19.6
Net income (loss):
Mexrail $ - $ (0.7) $ 0.0 $ (1.5)
PCRC (2.2) (0.3) (6.0) (0.6)
Grupo TFM 23.1 20.1 71.1 63.6
Southern Capital 0.9 1.1 2.1 3.1
* Of this investment, approximately $9.0 million constitutes an investment in equity, while approximately $6.0 million is
comprised of notes receivable from PCRC.
** Results for Mexrail are through March, 2002 only. Consolidated with Grupo TFM effective April 1, 2002.
4. NONCASH INVESTING AND FINANCING ACTIVITIES. The Company initiated the
Thirteenth Offering of KCS common stock under the Employee Stock Purchase
Plan ("ESPP") during 2001. Stock subscribed under the Thirteenth Offering
will be issued to employees in 2003 and is being paid for through employee
payroll deductions in 2002. During the first nine months of 2002, the
Company has received approximately $2.4 million from payroll deductions
associated with the Thirteenth Offering of the ESPP. In the first quarter
of 2002, the Company issued approximately 611,107 shares of KCS common
stock under the Twelfth Offering of the ESPP. These shares, totaling a
purchase price of approximately $4.5 million, were subscribed and paid for
through employee payroll deductions in 2001.
5. DERIVATIVE FINANCIAL INSTRUMENTS. The Company adopted the provisions of
Statement of Financial Accounting Standards No. 133 "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS 133") effective
January 1, 2001. As a result of this change in the method of accounting for
derivative financial instruments, the Company recorded an after-tax charge
to earnings of $0.4 million in the first quarter of 2001. This charge is
presented as a cumulative effect of an accounting change in the
accompanying consolidated financial statements and represents the
ineffective portion of interest rate cap agreements that the Company held
at the time of adoption of SFAS 133. These interest rate cap agreements,
which expired during the first quarter of 2002, had a fair value of
approximately zero at December 31, 2001 and were completely charged off
during 2001. During the nine months ended September 30, 2002, the Company
did not record any adjustments to income for derivative transactions. The
Company does not currently have any derivative financial instruments
outstanding.
In addition, the Company records adjustments to its stockholders' equity
(accumulated other comprehensive income (loss)) for its portion of the
adjustment to the fair value of interest rate swap transactions to which
Southern Capital, a 50% owned unconsolidated affiliate, is a participant.
The Company also adjusts its investment in Southern Capital by the change
in the fair value of these derivative instruments. During the nine months
ended September 30, 2002, the Company recorded comprehensive income (loss)
of ($0.3) million related to an adjustment to the fair value of interest
rate swap transactions of Southern Capital.
In conjunction with the refinancing transaction discussed below in note 6,
Southern Capital terminated these interest rate swap transactions. As a
result, Southern Capital will amortize the balance of accumulated other
comprehensive income (loss) into interest expense over the former remaining
life of the interest rate swap transactions. This charge will impact
Southern Capital's interest expense by approximately $1.3 million in 2002,
$2.4 million in 2003 and $0.9 million in each of 2004, 2005 and 2006. The
Company is realizing the impact of this charge through a related reduction
in equity earnings from Southern Capital and will amortize its balance in
accumulated other comprehensive income (loss) to its investment in Southern
Capital. During the nine months ended September 30, 2002, the Company
recorded amortization of its balance in accumulated other comprehensive
income (loss) of $0.3 million.
6. DEBT REFINANCING. During the second quarter of 2002, the Company completed
several debt refinancing transactions as described below.
SENIOR NOTES On June 12, 2002, KCSR issued $200 million of 7 1/2% senior
notes due June 15, 2009 ("7 1/2% Notes") through a private offering
pursuant to Rule 144A under the Securities Act of 1933 in the United States
and Regulation S outside the United States ("Note Offering"). These notes
are general unsecured obligations of Kansas City Southern Railway Company
("KCSR"), are guaranteed by the Company and certain of its subsidiaries,
and contain certain covenants and restrictions customary for this type of
debt instrument and for borrowers with similar credit ratings.
Net proceeds from the Note Offering of $195.8 million, together with cash,
were used to repay term debt under the Company's senior secured credit
facility ("KCS Credit Facility") and certain other secured indebtedness of
the Company. Debt issuance costs related to the Note Offering of
approximately $4.4 million were deferred and are being amortized over the
seven-year term of the 7 1/2% Notes. See "New Credit Agreement" below.
KCS submitted a Form S-4 Registration Statement to the SEC on July 12,
2002, as amended on July 24, 2002, relative to an Exchange Offer for the
$200 million 7 1/2% senior notes due 2009. On July 30, 2002, the SEC
declared this Registration Statement effective thereby providing the
opportunity for holders of the initial 7 1/2% Senior Notes due 2009 to
exchange them for registered notes with substantially identical terms. All
of the 7 1/2% Senior Notes due 2009 were exchanged for
$200 million of registered notes due June 15, 2009. The registered notes
bear a fixed annual interest rate to be paid semi-annually on June 15 and
December 15 and are due June 15, 2009.
NEW CREDIT AGREEMENT
On June 12, 2002, in conjunction with the repayment of certain of the term
loans under the KCS Credit Facility using the net proceeds received from
the Note Offering, the Company amended and restated the KCS Credit Facility
(the amended and restated credit agreement is referred to as the New Credit
Agreement herein). The New Credit Agreement provides KCSR with a $150
million term loan ("Tranche B term loan"), which matures on June 12, 2008,
and a $100 million revolving credit facility ("Revolver"), which matures on
January 11, 2006. Letters of credit are also available under the Revolver
up to a limit of $15 million. The proceeds from future borrowings under the
Revolver may be used for working capital and for general corporate
purposes. The letters of credit may be used for general corporate purposes.
Borrowings under the New Credit Agreement are secured by substantially all
of the Company's assets and are guaranteed by the majority of its
subsidiaries.
The Tranche B term loan and the Revolver bear interest at the London
Interbank Offered Rate ("LIBOR") or an alternate base rate, as the Company
shall select, plus an applicable margin. The applicable margin for the
Tranche B term loan is 2% for LIBOR borrowings and 1% for alternate base
rate borrowings. The applicable margin for the Revolver 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) for the prior four fiscal quarters). Based on the Company's
leverage ratio as of September 30, 2002, the applicable margin was 2.25%
per annum for LIBOR borrowings and 1.25% per annum for alternate base rate
borrowings.
The New Credit Agreement also requires the payment to the lenders of a
commitment fee of 0.50% per annum on the average daily, unused amount of
the Revolver and Tranche B term loan. Additionally, a fee equal to a per
annum rate of 0.25% plus the applicable margin for LIBOR priced borrowings
under the Revolver will be paid on any letter of credit issued under the
Revolver.
The New Credit Agreement 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; and 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 New Credit Agreement also contains certain customary
events of default. These covenants, along with other provisions, could
restrict maximum utilization of the Revolver.
Debt issuance costs related to the New Credit Agreement of approximately
$1.1 million were deferred and are being amortized over the respective term
of the loans. Extraordinary debt retirement costs associated with the
prepayment of certain term loans under the KCS Credit Facility using
proceeds from the Note Offering were approximately $4.3 million ($2.7
million, net of income taxes).
SOUTHERN CAPITAL
On June 25, 2002, Southern Capital refinanced the outstanding balance of
its bridge loan through the issuance of approximately $167.6 million of
pass through trust certificates and the sale of 50 locomotives. The pass
through trust certificates are secured by the sold locomotives, all of the
remaining locomotives and rolling stock owned by Southern Capital and
rental payments payable by KCSR under the sublease of the sold locomotives
and its leases of the equipment owned by Southern Capital. Payments of
interest and principal of the pass through trust certificates, which are
due semi-annually on June 30 and December 30 commencing on December 30,
2002 and ending on June 30, 2022, are insured under a financial guarantee
insurance policy by MBIA Insurance Corporation. KCSR leases or subleases
all of the equipment securing the pass through trust certificates.
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 11 of the Company's Annual Report on Form
10-K for the year ended December 31, 2001. The following provides an update
of the Bogalusa cases.
BOGALUSA CASES. In July 1996, KCSR was named as one of twenty-seven
defendants in various lawsuits in Louisiana and Mississippi arising from
the explosion of a rail car loaded with chemicals in Bogalusa, Louisiana on
October 23, 1995. As a result of the explosion, nitrogen dioxide and oxides
of nitrogen were released into the atmosphere over parts of that town and
the surrounding area allegedly causing evacuations and injuries.
Approximately 25,000 residents of Louisiana and Mississippi (plaintiffs)
have asserted claims to recover damages allegedly caused by exposure to the
released chemicals. On October 29, 2001, KCSR and representatives for its
excess insurance carriers negotiated a settlement in principle with the
plaintiffs for $22.3 million. The settlement was finalized with the
execution of a Master Global Settlement Agreement ("MGSA") in early 2002.
As of September 30, 2002, the Company had made $19.3 million of payments
under the MGSA and remitted the final payment of $3.0 million on October 1,
2002. Additionally the Company has collected approximately $16.3 million
from its excess insurance carriers for these cases and has an insurance
receivable of $ 3.0 million recorded at September 30, 2002 related to the
final payment. This is expected to be collected during the fourth quarter
of 2002.
8. PURCHASE OF MEXICAN GOVERNMENT'S OWNERSHIP OF GRUPO TFM. KCS and Grupo TMM
exercised their call option and, on July 29, 2002 completed the purchase of
the Mexican government's 24.6% ownership of Grupo TFM. The Mexican
government's ownership interest of Grupo TFM was purchased by TFM for a
purchase price of $256.1 million, utilizing a combination of proceeds from
an offering by TFM of debt securities, a credit from the Mexican government
for the reversion of certain rail facilities and other resources. This
transaction results in an increase in the Company's ownership percentage of
Grupo TFM from 36.9% to approximately 46.6%.
9. NEW ACCOUNTING PRONOUNCEMENT. Effective January 1, 2002, the Company
implemented Statement of Financial Accounting Standards No. 142, "Goodwill
and Other Intangible Assets" ("SFAS 142"). SFAS 142 provides, among other
things, that goodwill with an indefinite life shall no longer be amortized,
but shall be evaluated for impairment on an annual basis. SFAS 142 also
requires separate presentation of goodwill on the balance sheet and
impairment losses are to be shown as a separate item on the income
statement. Additionally, changes in the carrying amount of goodwill should
be disclosed in the footnotes to the financial statements. SFAS 142 also
requires various transitional disclosures until all periods presented
reflect the provisions of SFAS 142. These transitional disclosures include
the presentation of net income and earnings per share information adjusted
to exclude amortization expense (including the related income tax effects)
for all periods presented. These transitional disclosures are presented in
the table below.
The Company has presented its goodwill as a separate line item in the
accompanying balance sheets. Additionally, the Company has performed its
transitional goodwill impairment test and determined that existing goodwill
is not impaired. During the nine months ended September 30, 2002, the
Company's goodwill decreased $8.5 million due to the sale of Mexrail to TFM
and $0.2 million due to the sale of Wyandotte Garage Corporation.
Three Months Nine Months
Ended September 30, Ended September 30,
------------------------ --------------------------
2002 2001 2002 2001
----------- ----------- ----------- ------------
(dollars in millions, except per share amounts)
Reported net income $ 10.6 $ 9.0 $ 36.8 $ 19.6
Add back: Goodwill amortization - 0.2 - 0.5
----------- ---------- ---------- -----------
Adjusted net income $ 10.6 $ 9.2 $ 36.8 $ 20.1
=========== ========== ========== ===========
Reported diluted earnings per share $ 0.17 $ 0.15 $ 0.59 $ 0.32
Add back: Goodwill amortization - 0.00 - 0.01
----------- ---------- ---------- -----------
Adjusted diluted earnings per share $ 0.17 $ 0.15 $ 0.59 $ 0.33
=========== ========== ========== ===========
10. FAVORABLE RULING IN VALUE ADDED TAX LAWSUIT. As previously announced in the
Company's Current Report on Form 8-K dated October 11, 2002, a three judge
panel of the Court of the First Circuit ("Federal Court") in Mexico City
unanimously ruled in favor of Grupo TFM in its VAT lawsuit. The claim dates
back to January 1997. By a unanimous decision, the three-judge panel of the
Federal Court found that the ruling by the Superior Court of Federal
Tribunal of Fiscal and Administrative Justice ("Fiscal Court") denying
TFM's claim had violated TFM's constitutional rights. The Federal Court
remanded the case back to the Fiscal Court with specific instructions to
vacate its prior decision and enter a new decision consistent with the
guidance provided by the Federal Court's ruling. The Federal Court ruling
requires the fiscal authorities to issue the VAT credit certificate only in
the name of the interested party, to issue the VAT credit
certificate only in strict accordance with the terms of the fiscal code,
and to deliver the VAT credit certificate only to the beneficiary. The new
decision of the Fiscal Court must be issued in accordance with the
guidelines of the Federal Court. The Company and Grupo TMM have been
advised that the Federal Court's order is not subject to appeal by the
Mexican government. However, the Fiscal Court's forthcoming decision may be
challenged by either of the parties if such party believes that the new
ruling does not comply with the order of the Federal Court. In addition, a
third party who can establish that its rights have been adversely and
improperly affected by the new ruling may seek to bring a claim against
TFM, but TFM management has indicated to the Company that it believes it
would prevail in any such action. The face value of the VAT credit
certificate at issue is approximately $206 million, and the amount of any
recovery will reflect that principal amount adjusted for inflation and
interest accruals from 1997 in accordance with Mexican Law. For the three
and nine months ended September 30, 2002, the amounts reported in the
Company's consolidated financial statements as equity in net earnings of
Grupo TFM of $9.8 million and $27.6 million, respectively, do not include
the recognition of any recovery relating to the value of the VAT credit
certificate which might be received. Based upon the language of the Federal
Court's order and the advice of legal counsel, Grupo TMM and the Company
remain optimistic about the ultimate outcome of this matter. However, the
Company's independent accountants and outside legal counsel have advised,
and management believes, that the recognition of any recovery relating to
the VAT credit certificate, including the timing and final amount thereof,
must await the conclusion of the legal process.
11. CONDENSED CONSOLIDATING FINANCIAL INFORMATION. In September 2000, KCSR
issued $200 million of 9 1/2% senior notes due 2008. In addition, as
discussed above in note 6, in June 2002, KCSR issued $200 million of 7 1/2%
senior notes due 2009. Both of these note issues are an unsecured
obligation 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
Nine months ended September 30, 2002 (dollars in millions)
------------------------------------------------------------------------------------
Non-
Subsidiary Guarantor Guarantor Consolidating Consolidated
Parent Issuer Subsidiaries Subsidiaries Adjustments KCS
------------- ------------- ------------- ------------- -------------- -------------
Revenues $ - $ 412.4 $ 20.7 $ 12.5 $ (27.6) $ 418.0
Costs and expenses 8.3 370.5 19.8 12.9 (27.6) 383.9
------------- ------------- ------------- ------------- -------------- -------------
Operating income (loss) (8.3) 41.9 0.9 (0.4) - 34.1
Equity in net earnings (losses)
of Unconsolidated affiliates and
subsidiaries 36.9 32.3 (0.1) 25.8 (69.2) 25.7
Gain on sale of Mexrail 4.4 4.4 - - (4.4) 4.4
Interest expense (0.3) (32.6) (0.4) (0.2) 0.2 (33.3)
Other income 5.0 2.6 7.5 0.4 (0.2) 15.3
------------- ------------- ------------- ------------- -------------- -------------
Income (loss) before
income taxes 37.7 48.6 7.9 25.6 (73.6) 46.2
Income tax provision (benefit) (1.8) 6.2 3.0 (0.7) - 6.7
------------- ------------- ------------- ------------- -------------- -------------
Income (loss) before
extraordinary item 39.5 42.4 4.9 26.3 (73.6) 39.5
Extraordinary item (2.7) (2.7) - - 2.7 (2.7)
------------- ------------- ------------- ------------- -------------- -------------
Net income $ 36.8 $ 39.7 $ 4.9 $ 26.3 $ (70.9) $ 36.8
============= ============= ============= ============= ============== =============
Nine months ended September 30, 2001 (dollars in millions)
------------------------------------------------------------------------------------
Non-
Subsidiary Guarantor Guarantor Consolidating Consolidated
Parent Issuer Subsidiaries Subsidiaries Adjustments KCS
------------- ------------- ------------- ------------- -------------- -------------
Revenues $ - $ 422.4 $ 15.9 $ 13.0 $ (19.5) $ 431.8
Costs and expenses 9.8 379.5 14.1 12.9 (19.5) 396.8
------------- ------------- ------------- ------------- -------------- -------------
Operating income (loss) (9.8) 42.9 1.8 0.1 - 35.0
Equity in net earnings (losses)
of Unconsolidated affiliates
and subsidiaries 26.7 24.8 (0.1) 24.1 (52.2) 23.3
Interest expense (0.5) (43.8) (0.5) (0.3) 2.2 (42.9)
Other income 0.2 4.9 0.1 - (2.2) 3.0
------------- ------------- ------------- ------------- -------------- -------------
Income (loss) before
income taxes 16.6 28.8 1.3 23.9 (52.2) 18.4
Income tax provision (benefit) (3.4) 1.1 0.5 0.2 - (1.6)
Income (loss) before cumulative
effect of accounting change 20.0 27.7 0.8 23.7 (52.2) 20.0
------------- ------------- ------------- ------------- -------------- -------------
Cumulative effect of accounting
change, net of income taxes (0.4) (0.4) - - 0.4 (0.4)
------------- ------------- ------------- ------------- -------------- -------------
Net income $ 19.6 $ 27.3 $ 0.8 $ 23.7 $ (51.8) $ 19.6
============= ============= ============= ============= ============== =============
CONDENSED CONSOLIDATING BALANCE SHEETS
As of September 30, 2002 (dollars in millions)
------------------------------------------------------------------------------------
Non-
Subsidiary Guarantor Guarantor Consolidating Consolidated
Parent Issuer Subsidiaries Subsidiaries Adjustments KCS
------------- ------------- ------------- ------------- -------------- -------------
ASSETS
Current assets $ 46.2 $ 241.9 $ 28.2 $ 9.2 $ (104.1) $ 221.4
Investments 742.7 434.2 - 411.4 (1,183.7) 404.6
Properties, net 0.2 1,300.0 36.1 - - 1,336.3
Goodwill and other assets 1.6 31.7 1.5 2.2 (3.6) 33.4
------------- ------------- ------------- ------------- -------------- -------------
Total assets $ 790.7 $ 2,007.8 $ 65.8 $ 422.8 $ (1,291.4) $ 1,995.7
============= ============= ============= ============= ============== =============
LIABILITIES AND EQUITY
Current liabilities $ 8.8 $ 274.4 $ 7.0 $ 18.1 $ (104.1) $ 204.2
Long-term debt 1.3 575.7 1.7 - - 578.7
Payable to affiliates 10.1 - 0.6 - (10.7) -
Deferred income taxes 9.6 362.5 4.9 1.2 (3.9) 374.3
Other liabilities 31.3 58.9 3.7 15.0 - 108.9
Stockholders' equity 729.6 736.3 47.9 388.5 (1,172.7) 729.6
------------- ------------- ------------- ------------- -------------- -------------
Total liabilities and
equity $ 790.7 $ 2,007.8 $ 65.8 $ 422.8 $ (1,291.4) $ 1,995.7
============= ============= ============= ============= ============== =============
As of December 31, 2001 (dollars in millions)
------------------------------------------------------------------------------------
Non-
Subsidiary Guarantor Guarantor Consolidating Consolidated
Parent Issuer Subsidiaries Subsidiaries Adjustments KCS
------------- ------------- ------------- ------------- -------------- -------------
ASSETS
Current assets $ 25.5 $ 223.4 $ 22.0 $ 6.6 $ (23.1) $ 254.4
Investments 701.4 413.6 - 376.4 (1,104.6) 386.8
Properties, net 0.3 1,287.1 38.2 1.8 - 1,327.4
Goodwill and other assets 1.7 40.4 1.7 0.1 (1.6) 42.3
------------- ------------- ------------- ------------- -------------- -------------
Total assets $ 728.9 $ 1,964.5 $ 61.9 $ 384.9 $ (1,129.3) $ 2,010.9
============= ============= ============= ============= ============== =============
LIABILITIES AND EQUITY
Current liabilities $ 7.2 $ 252.3 $ 6.9 $ 3.8 $ (23.1) $ 247.1
Long-term debt 1.3 602.9 2.8 4.7 - 611.7
Payable to affiliates 4.8 - 0.6 - (5.4) -
Deferred income taxes 9.5 350.9 5.2 6.2 (1.6) 370.2
Other liabilities 25.8 62.0 3.4 10.4 - 101.6
Stockholders' equity 680.3 696.4 43.0 359.8 (1,099.2) 680.3
------------- ------------- ------------- ------------- -------------- -------------
Total liabilities and
equity $ 728.9 $ 1,964.5 $ 61.9 $ 384.9 $ (1,129.3) $ 2,010.9
============= ============= ============= ============= ============== =============
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
Nine months ended September 30, 2002 (dollars in millions)
------------------------------------------------------------------------------------
Non-
Subsidiary Guarantor Guarantor Consolidating Consolidated
Parent Issuer Subsidiaries Subsidiaries Adjustments KCS
------------- ------------- ------------- ------------- -------------- -------------
Net cash flows provided by (used
for) operating activities: $ (14.1) $ 106.1 $ (6.6) $ 8.2 $ 0.4 $ 94.0
------------- ------------- ------------- ------------- -------------- -------------
Investing activities:
Property acquisitions - (61.4) (1.7) - - (63.1)
Proceeds from disposal of
property - 8.7 8.8 - - 17.5
Investments in and loans to
affiliates - - - (9.3) 5.3 (4.0)
Proceeds from sale of
investments 1.4 31.4 - - (1.1) 31.7
Other, net - 0.3 - (2.2) 0.6 (1.3)
------------- ------------- ------------- ------------- -------------- -------------
Net 1.4 (21.0) 7.1 (11.5) 4.8 (19.2)
------------- ------------- ------------- ------------- -------------- -------------
Financing activities:
Proceeds from issuance of
long-term debt - 200.0 - - - 200.0
Repayment of long-term debt (0.4) (263.2) (1.0) (0.2) - (264.8)
Proceeds from loans from
affiliates 7.3 - 0.1 - (7.4) -
Repayment of loans from
affiliates (2.0) - - - 2.0 -
Debt issuance costs - (5.5) - - - (5.5)
Proceeds from stock plans 7.7 - - - - 7.7
Cash dividends paid (0.2) - - - - (0.2)
Other, net - (6.2) 0.2 4.6 0.2 (1.2)
------------- ------------- ------------- ------------- -------------- -------------
Net 12.4 (74.9) (0.7) 4.4 (5.2) (64.0)
------------- ------------- ------------- ------------- -------------- -------------
Cash and cash equivalents:
Net increase (decrease) (0.3) 10.2 (0.2) 1.1 - 10.8
At beginning of period 1.3 23.2 - 0.2 - 24.7
------------- ------------- ------------- ------------- -------------- -------------
At end of period $ 1.0 $ 33.4 $ (0.2) $ 1.3 $ - $ 35.5
============= ============= ============= ============= ============== =============
Nine months ended September 30, 2001 (dollars in millions)
------------------------------------------------------------------------------------
Non-
Subsidiary Guarantor Guarantor Consolidating Consolidated
Parent Issuer Subsidiaries Subsidiaries Adjustments KCS
------------- ------------- ------------- ------------- -------------- -------------
Net cash flows provided by (used
for) operating activities: $ (7.7) $ 34.8 $ (3.6) $ 5.5 $ 1.2 $ 30.2
------------- ------------- ------------- ------------- -------------- -------------
Investing activities:
Property acquisitions - (41.3) (0.9) - - (42.2)
Proceeds from disposal of
property - 11.5 3.5 - - 15.0
Investments in and loans to
affiliates - (2.0) - (7.3) 3.2 (6.1)
Proceeds from sale of
investments - - - - - -
Other, net - (2.2) 1.7 - (0.3) (0.8)
------------- ------------- ------------- ------------- -------------- -------------
Net - (34.0) 4.3 (7.3) 2.9 (34.1)
------------- ------------- ------------- ------------- -------------- -------------
Financing activities:
Proceeds from issuance of
long-term debt - 35.0 - - - 35.0
Repayment of long-term debt - (23.6) (1.0) (0.2) - (24.8)
Proceeds from loans from
affiliates 1.7 - - - (1.7) -
Debt issuance costs - (0.4) - - - (0.4)
Proceeds from stock plans 5.6 - - - - 5.6
Cash dividends paid (0.2) - - - - (0.2)
Other, net (0.3) (5.6) 0.3 2.1 (2.4) (5.9)
------------- ------------- ------------- ------------- -------------- -------------
Net 6.8 5.4 (0.7) 1.9 (4.1) 9.3
------------- ------------- ------------- ------------- -------------- -------------
Cash and cash equivalents:
Net increase (decrease) (0.9) 6.2 - 0.1 - 5.4
At beginning of period 1.5 19.4 0.1 0.5 - 21.5
------------- ------------- ------------- ------------- -------------- -------------
At end of period $ 0.6 $ 25.6 $ 0.1 $ 0.6 $ - $ 26.9
============= ============= ============= ============= ============== =============
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
THE DISCUSSION SET FORTH BELOW, AS WELL AS OTHER PORTIONS OF THIS FORM 10-Q,
CONTAINS 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 CURRENT REPORT ON FORM 8-K DATED DECEMBER 11, 2001,
WHICH IS ON FILE WITH THE U.S. SECURITIES AND EXCHANGE COMMISSION (FILE NO.
1-4717) AND IS 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.
GENERAL
KCS is a Delaware corporation. KCS, formerly named Kansas City Southern
Industries, Inc., is a holding company and its principal subsidiaries and
affiliates include 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.
RECENT DEVELOPMENTS
FAVORABLE RULING IN VALUE ADDED TAX LAWSUIT. As previously announced in the
Company's Current Report on Form 8-K dated October 11, 2002, a three judge panel
of the Court of the First Circuit ("Federal Court") in Mexico City unanimously
ruled in favor of Grupo TFM in its VAT lawsuit. The claim dates back to January
1997. By a unanimous decision, the three-judge panel of the Federal Court found
that the ruling by the Superior Court of Federal Tribunal of Fiscal and
Administrative Justice ("Fiscal Court") denying TFM's claim had violated TFM's
constitutional rights. The Federal Court remanded the case back to the Fiscal
Court with specific instructions to vacate its prior decision and enter a new
decision consistent with the guidance provided by the Federal Court's ruling.
The Federal Court ruling requires the fiscal authorities to issue the VAT credit
certificate only in the name of the interested party, to issue the VAT credit
certificate only in strict accordance with the terms of the fiscal code, and to
deliver the VAT credit certificate only to the beneficiary. The new decision of
the Fiscal Court must be issued in accordance with the guidelines of the Federal
Court. The Company and Grupo TMM have been advised that the Federal Court's
order is not subject to appeal by the Mexican government. However, the Fiscal
Court's forthcoming decision may be challenged by either of the parties if such
party believes that the new ruling does not comply with the order of the Federal
Court. In addition, a third party who can establish that its rights have been
adversely and improperly affected by the new ruling may seek to bring a claim
against TFM, but TFM management has indicated to the Company that it believes it
would prevail in any such action. The face value of the VAT credit certificate
at issue is approximately $206 million, and the amount of any recovery will
reflect that principal amount adjusted for inflation and interest accruals from
1997 in accordance with Mexican Law. For the three
and nine months ended September 30, 2002, the amounts reported in the Company's
consolidated financial statements as equity in net earnings of Grupo TFM of $9.8
million and $27.6 million, respectively, do not include the recognition of any
recovery relating to the value of the VAT credit certificate which might be
received. Based upon the language of the Federal Court's order and the advice of
legal counsel, Grupo TMM and the Company remain optimistic about the ultimate
outcome of this matter. However, the Company's independent accountants and
outside legal counsel have advised, and management believes, that the
recognition of any recovery relating to the VAT credit certificate, including
the timing and final amount thereof, must await the conclusion of the legal
process.
PURCHASE OF MEXICAN GOVERNMENT'S OWNERSHIP OF GRUPO TFM. KCS and Grupo TMM
exercised their call option and, on July 29, 2002, completed the purchase of the
Mexican government's 24.6% ownership of Grupo TFM. The Mexican government's
ownership interest of Grupo TFM was purchased by TFM for a purchase price of
$256.1 million, utilizing a combination of proceeds from an offering by TFM of
debt securities, a credit from the Mexican government for the reversion of
certain rail facilities and other resources. This transaction resulted in an
increase in the Company's ownership percentage of Grupo TFM from 36.9% to
approximately 46.6%.
DEBT REFINANCING. During the second quarter of 2002, the Company completed
several debt refinancing transactions as described below.
SENIOR NOTES
On June 12, 2002, KCSR issued $200 million of 7 1/2% senior notes due June 15,
2009 ("7 1/2% Notes") through a private offering pursuant to Rule 144A under the
Securities Act of 1933 in the United States and Regulation S outside the United
States ("Note Offering"). These notes are general unsecured obligations of KCSR,
are guaranteed by the Company and certain of its subsidiaries, and contain
certain covenants and restrictions customary for this type of debt instrument
and for borrowers with similar credit ratings.
Net proceeds from the Note Offering of $195.8 million, together with cash, were
used to repay term debt under the Company's senior secured credit facility ("KCS
Credit Facility") and certain other secured indebtedness of the Company. Debt
issuance costs related to the Note Offering of approximately $4.4 million were
deferred and are being amortized over the seven-year term of the 7 1/2% Notes.
See "New Credit Agreement" below.
KCS submitted a Form S-4 Registration Statement to the SEC on July 12, 2002, as
amended on July 24, 2002, relative to an Exchange Offer for the $200 million 7
1/2% senior notes due 2009. On July 30, 2002, the SEC declared this Registration
Statement effective thereby providing the opportunity for holders of the initial
7 1/2% Senior Notes due 2009 to exchange them for registered notes with
substantially identical terms. All of the 7 1/2% Senior Notes due 2009 were
exchanged for $200 million of registered notes due June 15, 2009. The registered
notes bear a fixed annual interest rate to be paid semi-annually on June 15 and
December 15 and are due June 15, 2009.
NEW CREDIT AGREEMENT
On June 12, 2002, in conjunction with the repayment of certain of the term loans
under the Company's senior secured credit facility ("KCS Credit Facility") using
the net proceeds received from the Note Offering, the Company amended and
restated the KCS Credit Facility (the amended and restated credit agreement is
referred to as the New Credit Agreement herein). The New Credit Agreement
provides KCSR with a $150 million term loan ("Tranche B term loan"), which
matures on June 12, 2008, and a $100 million revolving credit facility
("Revolver"), which matures on January 11, 2006. Letters of credit are also
available under the Revolver up to a limit of $15 million. The proceeds from
future borrowings under the Revolver may be used for working capital and for
general corporate purposes. The letters of credit may be used for general
corporate purposes. Borrowings under the New Credit Agreement are secured by
substantially all of the Company's assets and are guaranteed by the majority of
its subsidiaries.
The Tranche B term loan and the Revolver bear interest at the London Interbank
Offered Rate ("LIBOR") or an alternate base rate, as the Company shall select,
plus an applicable margin. The applicable margin for the Tranche B term loan is
2% for LIBOR borrowings and 1% for alternate base rate borrowings. The
applicable margin for the Revolver 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) for the prior four fiscal
quarters). Based on the Company's leverage ratio as of September 30, 2002, the
applicable margin was 2.25% per annum for LIBOR borrowings and 1.25% per annum
for alternate base rate borrowings.
The New Credit Agreement also requires the payment to the lenders of a
commitment fee of 0.50% per annum on the average daily, unused amount of the
Revolver and Tranche B term loan. Additionally, a fee equal to a per annum rate
of 0.25% plus the applicable margin for LIBOR priced borrowings under the
Revolver will be paid on any letter of credit issued under the Revolver.
The New Credit Agreement 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; and 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 New Credit Agreement also contains
certain customary events of default. These covenants, along with other
provisions, could restrict maximum utilization of the Revolver.
Debt issuance costs related to the New Credit Agreement of approximately $1.1
million were deferred and are being amortized over the respective term of the
loans. Extraordinary debt retirement costs associated with the prepayment of
certain term loans under the KCS Credit Facility using proceeds from the Note
Offering were approximately $4.3 million ($2.7 million, net of income taxes).
SOUTHERN CAPITAL
On June 25, 2002, Southern Capital refinanced the outstanding balance of its
bridge loan through the issuance of approximately $167.6 million of pass through
trust certificates and the sale of 50 locomotives. The pass through trust
certificates are secured by the sold locomotives, all of the remaining
locomotives and rolling stock owned by Southern Capital and rental payments
payable by KCSR under the sublease of the sold locomotives and its leases of the
equipment owned by Southern Capital. Payments of interest and principal of the
pass through trust certificates, which are due semi-annually on June 30 and
December 30 commencing on December 30, 2002 and ending on June 30, 2022, are
insured under a financial guarantee insurance policy by MBIA Insurance
Corporation. KCSR leases or subleases all of the equipment securing the pass
through trust certificates.
IMPLEMENTATION OF NEW TRANSPORTATION COMPUTER SYSTEM. On July 14, 2002, the
Company initiated a switch-over from its legacy system operating platform to a
Management Control System ("MCS") on KCSR. This state-of-the-art system is
designed to provide better analytical tools for management to use in its
decision-making processes. MCS, among other things, provides tracking of
individual shipments across our rail system and compares that movement to the
service sold to the customer. If a shipment falls behind schedule, MCS
automatically generates alerts and action recommendations. The Company's
depreciation expense is expected to increase by approximately $4.8 million per
annum ($2.4 million in 2002) as a result of the implementation of MCS.
As previously announced, the Company's third quarter and year to date results
were impacted by higher operating costs and some temporary traffic diversions
caused by congestion directly related to the implementation of MCS. The MCS
implementation slowed the railroad as employees learned to respond to the data
discipline demanded by this new system. Although management believes that the
issues with the implementation of MCS have been largely resolved, the initial
difficulties experienced by office and field personnel in transitioning to this
new platform led to the congestion issues and operating inefficiencies during
the third quarter 2002, which contributed to a decline in consolidated operating
income. See Results of Operations below for a discussion of the impact on third
quarter operations.
SALE OF MEXRAIL, INC. TO TFM. The Company, Grupo TMM, and certain of Grupo TMM's
affiliates entered into an agreement on February 27, 2002 with TFM to sell to
TFM all of the common stock of Mexrail. Mexrail owns the northern half of the
international railway bridge at Laredo, Texas and all of the common stock of the
Tex Mex. The sale closed on March 27, 2002 and the Company received
approximately $31.4 million for its 49% interest in Mexrail. The Company used
the proceeds from the sale of Mexrail to reduce debt. Although the Company no
longer directly owns 49% of Mexrail, it retains an indirect ownership through
its ownership of Grupo TFM. The Company's proportionate share of the proceeds
from the sale of Mexrail to TFM exceeded the carrying value of the Company's
investment in Mexrail by $11.2 million. The Company recognized a $4.4 million
gain on the sale of Mexrail to TFM in the first quarter of 2002, while the
remaining $6.8 of excess proceeds was deferred and is being amortized over 20
years.
COMPANY CHANGES NAME TO KANSAS CITY SOUTHERN. On May 2, 2002, at the Annual
Meeting of Stockholders, the shareholders of the Company approved a proposal to
amend the Certificate of Incorporation to change the name of the Company from
"Kansas City Southern Industries, Inc." to "Kansas City Southern." The name
change became effective on May 2, 2002 following the filing of the amended
Certificate of Incorporation with the Secretary of State of the State of
Delaware. The name change reflects the change in the Company's business and
holdings following the spin-off of Stilwell Financial Inc. on July 12, 2000. By
dropping "Industries, Inc." from the name, KCS will maintain the identification
in the marketplace of the Company and KCSR, while emphasizing our focus on
transportation rather than a variety of industries. The name change does not
require a change in the security ticker symbol of KSU on the New York Stock
Exchange.
CHANGES TO MEXICAN TAX LAW. As discussed in the Company's Annual Report on Form
10-K for the year ended December 31, 2001, as amended by Amendment No. 1 on Form
10-K/A ("2001 Form 10-K"), effective January 1, 2002, Mexico implemented changes
in its income tax laws. One of these changes reduced the Mexican corporate
income tax rate from 35% to 32% in one-percent increments beginning in 2003,
resulting in a 32% income tax rate in 2005. Accordingly, under accounting
principles generally accepted in the United States of America ("U.S. GAAP"),
Grupo TFM recorded the impact of this rate change during the first quarter of
2002. After consideration of minority interest, the impact of this rate change
did not have a significant impact on the Company's equity in earnings of Grupo
TFM for the first quarter of 2002.
KCSR AND THE BURLINGTON NORTHERN AND SANTA FE RAILWAY COMPANY ("BNSF") FORM
MARKETING ALLIANCE. On April 22, 2002, KCSR and BNSF entered into a marketing
agreement forming a comprehensive joint marketing alliance to promote
cooperation, revenue growth and extend market reach for both railroads in the
United States and Canada. The marketing alliance is also designed to improve
operating efficiencies for both KCSR and BNSF in key market areas, as well as
provide customers with expanded service options. KCSR and BNSF will coordinate
marketing and operational initiatives in a number of target markets. Similarly,
KCSR and BNSF will also coordinate operations to provide improved and extended
service options for grain customers. The marketing alliance is expected to allow
the two railroads to be more responsive to shippers' requests for rates and
service, whenever mutually advantageous. Coal and unit train operations are
excluded from the marketing alliance, as well as any points where KCSR and BNSF
are the only direct rail competitors. Movements to and from Mexico by either
party are also excluded. Management believes this new marketing alliance will
provide important opportunities to grow KCSR's revenue base, particularly in the
chemical, grain and forest product markets, and provide both participants with
expanded access to important markets and provide shippers with enhanced options
and competitive alternatives.
RESULTS OF OPERATIONS
The following table summarizes the income statement components of the Company
for the three and nine months ended September 30, 2002 and 2001 respectively,
for use in the analysis below. See consolidated statements of income
accompanying this Form 10-Q for other captions not presented in this table (IN
MILLIONS):
Three Months Nine Months
Ended September 30, Ended September 30,
------------------------------- -------------------------------
2002 2001 2002 2001
---------------- -------------- --------------- ---------------
Revenues $ 137.6 $ 144.6 $ 418.0 $ 431.8
Costs and expenses 131.4 128.6 383.9 396.8
---------------- -------------- --------------- ---------------
Operating income 6.2 16.0 34.1 35.0
Equity in net earnings (losses) of unconsolidated
affiliates 9.1 6.9 25.7 23.3
Gain on sale of Mexrail, Inc. - - 4.4 -
Interest expense (11.5) (13.2) (33.3) (42.9)
Other income 6.5 0.9 15.3 3.0
---------------- -------------- --------------- ---------------
Income before income taxes, extraordinary item, and
cumulative effect of accounting change 10.3 10.6 46.2 18.4
Income tax provision (benefit) (0.3) 1.6 6.7 (1.6)
---------------- -------------- --------------- ---------------
Income before extraordinary item and cumulative effect
of accounting change 10.6 9.0 39.5 20.0
Extraordinary item, net of income taxes - - (2.7) -
Cumulative effect of accounting change, net of income
taxes - - - (0.4)
---------------- -------------- --------------- ---------------
Net income $ 10.6 $ 9.0 $ 36.8 $ 19.6
================ ============== =============== ===============
The following table summarizes the revenues and carload statistics of KCSR for
the three and nine months ended September 30, 2002 and 2001, 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 Nine months Three months Nine months
ended September 30, ended September 30, ended September 30, ended September 30,
----------- ---------- ----------- --------- ---------- ---------- --------- -----------
2002 2001 2002 2001 2002 2001 2002 2001
----------- ---------- ----------- --------- ---------- ---------- --------- -----------
General commodities:
Chemical and petroleum $ 32.4 $ 30.4 $ 98.1 $ 93.8 35.6 34.0 109.3 111.8
Paper and forest 34.7 34.6 100.8 96.4 46.0 47.4 134.8 137.2
Agricultural and mineral 20.8 22.3 67.2 64.5 29.1 31.6 93.5 93.4
----------- ---------- ----------- --------- ---------- ---------- ---------- ----------
Total general commodities 87.9 87.3 266.1 254.7 110.7 113.0 337.6 342.4
Intermodal and automotive 14.0 14.3 43.3 50.9 75.3 70.4 213.6 220.7
Coal 24.4 31.1 74.7 87.0 50.2 53.3 155.4 148.0
----------- ---------- ----------- -------- ----------- --------- ----------- ---------
Carload revenues and carload
and intermodal units 126.3 132.7 384.1 392.6 236.2 236.7 706.6 711.1
Other rail-related revenues 10.0 10.0 28.8 30.4 ========== ========== ========== ==========
----------- ---------- ----------- ---------
Total KCSR revenues 136.3 142.7 412.9 423.0
Other subsidiary revenues 1.3 1.9 5.1 8.8
----------- ---------- ----------- ---------
Total consolidated
revenues $ 137.6 $ 144.6 $ 418.0 $ 431.8
=========== ========== =========== =========
The following table summarizes KCS's consolidated costs and expenses for the
three and nine months ended September 30, 2002 and 2001, respectively. Certain
prior period amounts have been reclassified to conform to the current year
presentation.
Three Months Nine Months
Ended September 30, Ended September 30,
------------------------------- -------------------------------
2002 2001 2002 2001
--------------- --------------- --------------- ---------------
Compensation and benefits $ 51.2 $ 48.7 $ 147.1 $ 145.4
Depreciation and amortization 15.8 14.7 45.3 43.6
Purchased services 15.9 15.4 43.5 41.8
Operating leases 12.4 12.6 37.1 38.1
Fuel 8.9 11.5 27.7 35.3
Casualties and insurance 6.9 6.1 22.0 28.4
Car hire 5.6 3.5 14.9 15.7
Other 14.7 16.1 46.3 48.5
--------------- --------------- --------------- ---------------
Total consolidated costs and expenses $ 131.4 $ 128.6 $ 383.9 $ 396.8
=============== =============== =============== ===============
NET INCOME. Net income for the three months ended September 30, 2002 was $10.6
million (17(cent) per diluted share) compared to $9.0 million (15(cent) per
diluted share) for the three months ended September 30, 2001. This $1.6 million
quarter to quarter increase was primarily the result of a $5.6 million increase
in other income, $2.3 million increase in equity in earnings from Grupo TFM, a
$1.9 million reduction in the provision (benefit) for income taxes, and a $1.7
million decrease in interest expense. These factors, which led to an increase in
net income were partially mitigated by a $7.0 million decline in consolidated
revenue, a $2.8 million increase in consolidated operating expenses and a $0.1
million increase in losses associated with other unconsolidated affiliates (PCRC
and Southern Capital).
For the nine months ended September 30, 2002, net income increased $17.2 million
to $36.8 million (59(cent) per diluted share) from $19.6 million (32(cent) per
diluted share) for the nine months ended September 30, 2001. This increase was
primarily the result of a $12.9 million decline in consolidated operating
expenses, a $12.3 million increase in other income, a $9.6 million decrease in
interest expense, a $4.4 million gain realized on the sale of Mexrail to TFM,
and a $4.1 million increase in equity in net earnings of Grupo TFM. This year to
date increase was partially offset by a $13.8 million decline in consolidated
revenue, an $8.3 million increase in the provision for income taxes, and a $1.7
million decline in equity in net earnings (losses) of other unconsolidated
affiliates. Additionally, net income for the nine months ended September 30,
2002 includes extraordinary debt retirement costs of $2.7 million (after-tax)
associated with the early retirement of term debt in June 2002. Net income for
the nine months ended September 30, 2001 includes a $0.4 million charge relating
to the
implementation of Statement of Financial Accounting Standards No. 133
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133").
REVENUES. Consolidated revenues for the three and nine months ended September
30, 2002 declined $7.0 million and $13.8 million to $137.6 million and $418.0
million, respectively, compared to $144.6 million and $431.8 million for the
three and nine months ended September 30, 2001, respectively. During the third
quarter of 2002, KCSR experienced revenue growth in several commodity groups,
including chemical and petroleum products, certain forest products and
intermodal traffic compared to the third quarter of 2001, continuing the
positive revenue trends noted for these commodities during the first half of
2002 and in spite of the MCS related difficulties encountered this quarter. The
increase in revenue for these shipments was driven by volume gains, increased
length of haul and price improvements in key traffic lanes. KCS management
believes that revenues for these commodities as well as certain other traffic
would have improved even further during the quarter, but were adversely affected
by lower carloadings arising from MCS related congestion. These quarter to
quarter revenue improvements were offset by comparatively lower revenues for
coal, automotive and grain business. As a result, third quarter 2002 revenues
for KCSR were $6.4 million lower than the comparable prior year quarter. For the
nine months ended September 30, 2002, revenue from KCSR declined $10.1 million
compared to the nine months ended September 30, 2001, primarily as a result of
lower coal and automotive revenues as well as MCS related issues in the third
quarter. These declines were partially offset by revenue increases in chemical
and petroleum products, agriculture and minerals, paper and forest products and
intermodal and haulage services. The following discussion provides an analysis
of KCSR revenues by commodity group for the quarter and year to date ended
September 30, 2002.
CHEMICAL AND PETROLEUM PRODUCTS. Revenues for chemical and petroleum
products for the three and nine months ended September 30, 2002 increased $2.0
million (6.6%) and $4.3 million (4.6%), respectively, compared to the same
periods in 2001. These increases resulted from a combination of higher traffic
volumes for certain commodities in this business group, together with targeted
rate increases and longer hauls due to gateway changes. Higher revenues for
gases and organic product for the three and nine months ended September 30, 2002
were primarily the result of production increases by certain customers.
Increased inorganic revenues were the result of increased access to production
facilities in Geismar, Louisiana as well as new business previously shipped by
other rail carriers. Increases in the production of PVC and plastic pellet
products yielded higher plastics product revenue for the three and nine months
ended September 30, 2002 compared to the same periods in 2001. These quarterly
and year to date increases were partially offset by decreases in agrichemical
and petroleum product revenue as a result of lower industrial production due to
the continued slowdown in the U.S. economy. Chemical and petroleum products
revenue accounted for 25.7% and 22.9% of carload revenues for the three months
ended September 30, 2002 and 2001, respectively, and 25.6% and 23.9% of carload
revenues for the nine months ended September 30, 2002 and 2001, respectively.
PAPER AND FOREST PRODUCTS. Revenues for paper and forest products for the
three and nine months ended September 30, 2002 increased $0.1 million (0.3%) and
$4.4 million (4.6%) compared to the same periods in 2001. For the three months
ended September 30, 2002, higher revenues in pulp and paper, lumber and plywood
and metal/scrap were mostly offset by revenue declines in pulpwood/logs/chips,
and military/other carloads. For the nine months ended September 30, 2002,
increases in revenues for pulp and paper and lumber/plywood were partially
mitigated by decreases in all other paper and forest products revenues. The
increases in pulp and paper product revenues for the quarter and year to date
were the result of production growth in the paper industry. Increases in
revenues for lumber and plywood products reflect continued strength in the home
building market and an increase in housing starts. Lower revenues for pulpwood,
logs and chips products and metal and scrap products for the three and nine
months ended September 30, 2002 were primarily the result of declines in
industrial production as a result of the continued slowdown of the U.S. economy.
These decreases were partially offset by targeted rate increases. Paper and
forest products revenue accounted for 27.4% and 26.1% of carload revenues for
the three months ended September 30, 2002 and 2001, respectively, and 26.2% and
24.6% of carload revenues for the nine months ended September 30, 2002 and 2001,
respectively.
AGRICULTURAL AND MINERAL PRODUCTS. Revenues for agricultural and mineral
products decreased $1.5 million for the three months ended September 30, 2002
compared to the same period in 2001. For the nine months ended September 30,
2002, however, revenues for this commodity group increased $2.7 million compared
to the same period in 2001. For the three months ended September 30, 2002,
increases in revenues for food products and stone, clay and glass products
partially mitigated revenue declines in all other agricultural and mineral
products. For the nine months ended September 30, 2002, increases in revenues
for domestic and export grain, food, and stone, clay and glass products were
partially offset by declines in revenues for ores and minerals products. Revenue
increases for domestic grain resulting from certain rate increases and longer
hauls were partially offset by lower domestic demand. For the nine months ended
September 30, 2002, export grain increased over the same period in 2001
primarily as a result of higher demand from Mexico and other
export markets in the first quarter of 2002. Increases in revenue for stone,
clay and glass product were primarily the result of higher production by two
customers as well as targeted rate increases and longer hauls. Agricultural and
mineral products revenue accounted for 16.5% and 16.8% of carload revenues for
the three months ended September 30, 2002 and 2001, respectively, and 17.5% and
16.4% of carload revenues for the nine months ended September 30, 2002 and 2001,
respectively.
INTERMODAL AND AUTOMOTIVE. Intermodal and automotive revenues combined
decreased $0.3 million and $7.6 million for the three and nine months ended
September 30, 2002, respectively, compared to the same periods in 2001.
Automotive revenues declined $1.6 million and $10.0 million for the three and
nine months ended September 30, 2002, respectively, compared to the same periods
in 2001. These declines were a result of the loss of certain Ford business in
the third quarter of 2001 due to competitive pricing from another railroad as
well as the impact of the continued weakness of the U.S. economy on the
automotive industry resulting in a 65.4% and 61.0% decline in carload volumes
for the three and nine-month periods ended September 30, 2002, respectively, for
automotive traffic. Intermodal revenues increased $1.3 million and $2.4 million
for the three and nine months ended September 30, 2002, respectively, compared
to the same periods in 2001. Both the quarter to quarter and year to date
increases were the result of increases in domestic carloads as well as
international traffic moving to Mexico. Intermodal and automotive revenue
accounted for 11.1% and 10.8% of carload revenues for the three months ended
September 30, 2002 and 2001, respectively, and 11.3% and 13.0% of carload
revenues for the nine months ended September 30, 2002 and 2001, respectively.
COAL. Coal revenues decreased $6.7 million and $12.3 million for the
three and nine month periods ended September 30, 2002, respectively, compared to
the same periods in 2001. Coal revenues for both periods were significantly
impacted by a rate reduction at our largest utility customer and the loss of a
coal customer in April 2002 due to the expiration of a contract. The effect of
these revenue declines were partially mitigated by increases in year-to-date
carload volume due to higher demand at certain utility customers and as a result
of the re-opening of a utility plant in Kansas City that had been out of service
since July of 1999. Coal revenue accounted for 19.3% and 23.4% of carload
revenues for the quarters ended September 30, 2002 and 2001, respectively, and
19.4% and 22.2% of carload revenues for the nine months ended September 30, 2002
and 2001, respectively.
OTHER. Other rail related revenues remained relatively flat for the three
months ended September 30, 2002, and decreased $1.6 million for the nine months
ended September 30, 2002, compared to the same periods in 2001. These
fluctuations were primarily due to higher haulage and other revenues partially
offset by declines in switching and demurrage revenues.
COSTS AND EXPENSES. Consolidated costs and expenses increased $2.8 million for
the three months ended September 30, 2002 and decreased $12.9 million for the
nine months ended September 30, 2002 compared to the same periods in 2001. The
quarter to quarter increase was primarily the result of higher KCSR expenses of
$5.8 million and lower expenses at certain other subsidiaries of $3.0 million.
The year to date decrease was primarily the result of lower KCSR expenses of
$9.1 million partially offset by lower expenses at certain other subsidiaries of
$3.8 million. Third quarter and year to date costs were impacted by higher costs
associated with the implementation of MCS. The categories most affected were
compensation and benefits, depreciation, purchased services, and car hire. See
further discussion below.
COMPENSATION AND BENEFITS. Consolidated compensation and benefits expense
increased $2.5 million and $1.7 million for the three and nine month periods
ended September 30, 2002, respectively, compared to the same periods in 2001.
The quarterly and year to date increases resulted primarily from higher overtime
and crew costs as a result of congestion related to the implementation of MCS in
the third quarter of 2002. Additionally, compensation costs were impacted by the
implementation of an increase in certain union wages in the third quarter of
2002 as well as higher health insurance related costs. These increases were
partially offset by declines arising from lower employee counts, the automation
of certain locomotive crew functions, a favorable adjustment related to an
accrual for retroactive wage increases to union employees, which was not
provided for in the national labor union contract and lower railroad retirement
taxes. The year to date increase in compensation and benefits expense was also
affected by the impact of a $2.0 million reduction in retirement-based costs for
certain union employees recorded in the first quarter of 2001. Additionally, the
year to date increase was partially mitigated by the effect of workforce
reduction costs of $1.3 million also recorded in the first quarter of 2001.
DEPRECIATION AND AMORTIZATION. Consolidated depreciation and amortization
expense was $15.8 million and $45.3 million for the three and nine months ended
Sep