20
17
Annual
Report
CONNECTING NORTH AMERICA
FOR PROSPERITY AND SECURITY
KANSAS CITY SOUTHERN
KANSAS CITY SOUTHERN
Kansas City Southern is a transportation holding company with two primary subsidiaries. The
Kansas City Southern Railway Company is one of seven Class I railroads operating in the United
States. Kansas City Southern de México, S.A. de C.V. is one of two large regional railroads in Mexico.
KCS also owns 50% of the Panama Canal Railway Company in Panama. The combined North
American rail network comprises approximately 6,700 route miles that link commercial and
industrial markets in the United States and Mexico.
2 0 1 7 F I N A N C I A L H I G H L I G H T S
2 0 1 7 F I N A N C I A L H I G H L I G H T ST
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2 0 1 7 F I N A N C I A L H I G H L I G H T ST S
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In millions, except share and per share amounts. Years ended December 31.
OPERATIONS
Revenues
Operating income
2017
2016
2015
2014
$
2,582.9
$
2,334.2
$
2,418.8
$ 2,577.1
921.6
818.5
803.8
809.1
Net income attributable to Kansas City Southern
and subsidiaries
962.0
478.1
483.5
502.6
PER COMMON SHARE
Earnings per diluted share
$
9.16
$
4.43
$
4.40
$
4.55
CLOSING STOCK PRICE RANGES
Common - High
Common - Low
4% Non-Cumulative Preferred - High
4% Non-Cumulative Preferred - Low
$
113.44
$
80.82
29.50
26.75
99.47
64.35
28.99
25.40
$
120.42
$
125.88
70.01
28.85
25.25
91.12
29.00
24.15
FINANCIAL CONDITION
Total assets
$
9,198.7
$
8,817.5
$
8,341.0
$
7,976.4
Total debt, including short-term borrowings
Total stockholders’ equity
Total equity
2,619.4
4,548.9
4,865.4
2,478.2
4,089.9
4,404.5
2,401.1
3,914.3
4,224.7
2,301.4
3,755.5
4,064.1
COMMON STOCKHOLDER INFORMATION AT YEAR END
Stockholders of record
Shares outstanding (in thousands)
Average diluted shares outstanding (in thousands)
2,141
103,037
105,040
2,233
106,607
107,761
2,289
108,461
109,915
2,512
110,392
110,433
LETTER TO OUR
STOCKHOLDERS
Patrick J. Ottensmeyer
(cid:51)(cid:85)(cid:72)(cid:86)(cid:76)(cid:71)(cid:72)(cid:81)(cid:87)(cid:3)(cid:9)(cid:3)(cid:38)(cid:75)(cid:76)(cid:72)(cid:73)(cid:3)
(cid:40)(cid:91)(cid:72)(cid:70)(cid:88)(cid:87)(cid:76)(cid:89)(cid:72)(cid:3)(cid:50)(cid:73)(cid:73)(cid:76)(cid:70)(cid:72)(cid:85)
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By almost any standard, 2017 was one of the best years in
Kansas City Southern’s (“KCS”or“the Company”) 130-year history.
Despite challenging conditions, our company’s resilience, focus
and discipline resulted in record-setting financial performance
in a number of key measures:
• Revenues of $2.6 billion, up 11% over 2016, on strength from
all business units;
• Operating ratio of 64.3%, an improvement of 60 basis points
from 2016;
• Adjusted earnings per share* of $5.25, up 17% over
2016 (excluding impacts of changes in the U.S. tax law
and foreign exchange fluctuations); and
• Record free cash flow, resulting from strong top line
growth, a focus on cost control and disciplined capital
spending.
In addition to deliveri(cid:81)(cid:74)(cid:3)(cid:86)(cid:87)(cid:85)(cid:82)(cid:81)(cid:74)(cid:3)(cid:192)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:83)(cid:72)(cid:85)(cid:73)(cid:82)(cid:85)(cid:80)(cid:68)(cid:81)(cid:70)(cid:72)(cid:15)(cid:3)(cid:76)(cid:81)(cid:3)(cid:21)(cid:19)(cid:20)(cid:26)(cid:3)(cid:46)(cid:38)(cid:54)(cid:3)(cid:72)(cid:73)(cid:73)(cid:72)(cid:70)(cid:87)(cid:76)(cid:89)(cid:72)(cid:79)(cid:92)(cid:3)
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Strategically Positioning KCS for Growth
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(cid:72)(cid:87)(cid:75)(cid:68)(cid:81)(cid:72)(cid:3) (cid:70)(cid:85)(cid:68)(cid:70)(cid:78)(cid:72)(cid:85)(cid:3) (cid:68)(cid:81)(cid:71)(cid:3) (cid:71)(cid:72)(cid:85)(cid:76)(cid:89)(cid:68)(cid:87)(cid:76)(cid:89)(cid:72)(cid:86)(cid:3) (cid:83)(cid:85)(cid:82)(cid:77)(cid:72)(cid:70)(cid:87)(cid:17)(cid:3) (cid:55)(cid:75)(cid:72)
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(cid:69)(cid:72)(cid:87)(cid:90)(cid:72)(cid:72)(cid:81)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:87)(cid:90)(cid:82)(cid:3)(cid:70)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:76)(cid:72)(cid:86)(cid:17)
NAFTA
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(cid:68)(cid:81)(cid:71)(cid:15)(cid:3)(cid:69)(cid:92)(cid:3)(cid:72)(cid:91)(cid:87)(cid:72)(cid:81)(cid:86)(cid:76)(cid:82)(cid:81)(cid:15)(cid:3)(cid:87)(cid:82)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:74)(cid:79)(cid:82)(cid:69)(cid:68)(cid:79)(cid:3)(cid:86)(cid:88)(cid:83)(cid:83)(cid:79)(cid:92)(cid:3)(cid:70)(cid:75)(cid:68)(cid:76)(cid:81)(cid:17)(cid:3)
Looking Forward
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(cid:72)(cid:80)(cid:83)(cid:79)(cid:82)(cid:92)(cid:72)(cid:72)(cid:86)(cid:3)(cid:68)(cid:85)(cid:72)(cid:3)(cid:87)(cid:68)(cid:79)(cid:72)(cid:81)(cid:87)(cid:72)(cid:71)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:71)(cid:72)(cid:71)(cid:76)(cid:70)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:87)(cid:82)(cid:3)(cid:68)(cid:70)(cid:75)(cid:76)(cid:72)(cid:89)(cid:76)(cid:81)(cid:74)(cid:3)
(cid:82)(cid:88)(cid:85)(cid:3) (cid:89)(cid:76)(cid:86)(cid:76)(cid:82)(cid:81)(cid:3) to consistently be the fastest-growing,
best-performing, most customer-focused transportation
provider in North America.
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(cid:86)(cid:87)(cid:85)(cid:68)(cid:87)(cid:72)(cid:74)(cid:92)(cid:3)(cid:87)(cid:82)(cid:29)
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2017
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 registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
427 West 12th Street,
Kansas City, Missouri
(Address of principal executive offices)
44-0663509
(I.R.S. Employer
Identification No.)
64105
(Zip Code)
816.983.1303
(Registrant’s telephone number, including area code)
None
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Preferred Stock, Par Value $25 Per Share, 4%, Noncumulative
Common Stock, $.01 Per Share Par Value
Name of Each Exchange on Which Registered
New York Stock Exchange
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes
No
Indicate by check mark whether the registrant (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 registrant was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes
No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was
required to submit and post such files). Yes
No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.
See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
No
The aggregate market value of common stock held by non-affiliates of the registrant was $10.75 billion at June 30, 2017. There were 103,053,604
shares of $.01 par common stock outstanding at January 19, 2018.
Kansas City Southern’s Definitive Proxy Statement for the 2018 Annual Meeting of Stockholders which will be filed no later than 120 days after
December 31, 2017, is incorporated by reference in Part III.
DOCUMENTS INCORPORATED BY REFERENCE
KANSAS CITY SOUTHERN
2017 FORM 10-K ANNUAL REPORT
Table of Contents
PART I
PART II
Business
Item 1.
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2.
Properties
Item 3.
Item 4. Mine Safety Disclosures
Legal Proceedings
Item 5. Market for KCS’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Selected Financial Data
Item 6.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9.
Item 9A. Controls and Procedures
Item 9B. Other Information
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14. Principal Accountant Fees and Services
PART IV
Item 15. Exhibits and Financial Statement Schedules
Item 16. Form 10-K Summary
Signatures
2
Page
3
10
17
17
19
20
20
23
24
43
46
97
97
97
98
98
99
99
99
100
106
106
Item 1. Business
COMPANY OVERVIEW
Kansas City Southern, a Delaware corporation, is a holding company with domestic and international rail operations in
North America that are strategically focused on the growing north/south freight corridor connecting key commercial and
industrial markets in the central United States with major industrial cities in Mexico. As used herein, “KCS” or the “Company”
may refer to Kansas City Southern or, as the context requires, to one or more subsidiaries of Kansas City Southern. KCS and its
subsidiaries had approximately 7,130 employees on December 31, 2017.
KCS controls and owns all of the stock of The Kansas City Southern Railway Company (“KCSR”), a U.S. Class I
railroad founded in 1887. KCSR serves a ten-state region in the midwest and southeast regions of the United States and has the
shortest north/south rail route between Kansas City, Missouri and several key ports along the Gulf of Mexico in Alabama,
Louisiana, Mississippi and Texas.
KCS controls and owns all of the stock of Kansas City Southern de México, S.A. de C.V. (“KCSM”). Through its 50-year
concession from the Mexican government (the “Concession”), which could expire in 2047 unless extended, KCSM operates a
key commercial corridor of the Mexican railroad system and has as its core route the most strategic portion of the shortest,
most direct rail passageway between Mexico City and Laredo, Texas. Laredo is a principal international gateway through
which a substantial portion of rail and truck traffic between the United States and Mexico crosses the border. KCSM serves
most of Mexico’s principal industrial cities and three of its major seaports. KCSM’s rail lines provide exclusive rail access to
the United States and Mexico border crossing at Nuevo Laredo, Tamaulipas, the largest rail freight interchange point between
the United States and Mexico. Under the Concession, KCSM has the right to control and operate the southern half of the rail
bridge at Laredo, Texas, which spans the Rio Grande River between the United States and Mexico. The Company also controls
the northern half of this bridge through its ownership of Mexrail, Inc. (“Mexrail”).
KCSM also provides exclusive rail access to the port of Lazaro Cardenas on the Pacific Ocean. The Mexican government
developed the port at Lazaro Cardenas principally to serve Mexican markets and as an alternative to the U.S. west coast ports
for Asian and South American traffic bound for North America.
The Company wholly owns Mexrail which, in turn, wholly owns The Texas Mexican Railway Company (“Tex-Mex”).
Tex-Mex owns a 157-mile rail line extending from Laredo, Texas to the port city of Corpus Christi, Texas, which connects the
operations of KCSR with KCSM.
The KCS coordinated rail network (KCSR, KCSM and Tex-Mex) comprises approximately 6,700 route miles extending
from the midwest and southeast portions of the United States south into Mexico and connects with all other Class I railroads,
providing shippers with an effective alternative to other railroad routes and giving direct access to Mexico and the southeast
and southwest United States through alternate interchange hubs.
Panama Canal Railway Company (“PCRC”), an unconsolidated joint venture company owned equally by KCS and Mi-
Jack Products, Inc. (“Mi-Jack”), was awarded a concession from the Republic of Panama to reconstruct and operate the Panama
Canal Railway, a 47-mile railroad located adjacent to the Panama Canal that provides international container shipping
companies with a railway transportation alternative to the Panama Canal. The concession was awarded in 1998 for an initial
term of 25 years with an automatic renewal for an additional 25-year term. The Panama Canal Railway is a north-south railroad
traversing the isthmus of Panama between the Atlantic and Pacific oceans.
Other subsidiaries and affiliates of KCS include the following:
• KCSM Servicios, S.A. de C.V. (“KCSM Servicios”), a wholly-owned and consolidated subsidiary that provides
employee services to KCSM;
• Meridian Speedway, LLC (“MSLLC”), a seventy percent-owned consolidated affiliate that owns the former KCSR
rail line between Meridian, Mississippi and Shreveport, Louisiana, which is the portion of the rail line between
Dallas, Texas and Meridian known as the “Meridian Speedway.” Norfolk Southern Corporation, through its wholly-
owned subsidiary, The Alabama Great Southern Railroad Company, owns the remaining thirty percent of MSLLC;
• TFCM, S. de R.L. de C.V. (“TCM”), a forty-five percent-owned unconsolidated affiliate that operates a bulk liquid
terminal in San Luis Potosí, Mexico;
3
• Ferrocarril y Terminal del
TT
VV
Valle de México, S.A. de C.V
VV
. (“FTVM”), a
twenty-five percent-owned unconsolidated
d
ff
affiliate that provides railroad services as well as ancillary services in the greater Mexico City area; and
ff
• PTC-220, LLC (“PTC-220”), a fourteen percent-owned unconsolidated af
filiate that holds the licenses to lar
of radio spectrum and other assets for the deployment of Positive Train Control (“PTC”). See Government
Regulation section for further information regarding PTC.
TT
d
ge blocks
MARKETS SERVEDRR
Chemical and petroleum.
rr
This sector includes products
such as plastics, other petroleum refined products and
miscellaneous chemicals. KCS transports these products to
markets in the midwest, southeast and northeast United States
and throughout Mexico through interchanges with other rail
carriers. The products within the chemicals and plastics
channels are used in the automotive, housing and packaging
industries as well as in general manufacturing. KCS hauls
petroleum products across its network and as petroleum
refineries have continued to increase their refining capacity, yy
they have coordinated with KCS to develop additional long-
term storage opportunities which complement a fluid freight
railroad operation.
Intermodal
14%
Energy
11%
2017 Revenues
Business Mix
Automotive
9%
Other
4%
Chemical &
Petroleum
21%
Agriculture &
Minerals
18%
Industrial &
Consumer
Products
23%
Industrial and consumer products.
rr
This sector includes metals and ores such as iron, steel, zinc and copper. The majority
of metals, minerals and ores mined, and steel produced in Mexico is consumed within Mexico. The volume of Mexican steel
domestic consumption and exports fluctuates based on global market prices. Higher-end finished products such as steel coils
are used by Mexican manufacturers in automobiles, household appliances, the oil and gas industry, and other consumer goods
which are imported from the United States through land borders and through the seaports served by KCS’s rail network. KCS
also transports steel coils, plates and pipe from U.S. and Mexican-based mini-mills to locations in the U.S. and Mexico for oil
drilling, appliance and automotive applications.
yy
This sector also serves paper mills directly and indirectly through its various short-line connections. KCS’s rail lines run
through the heart of the southeast United States timber-producing region. Additionally, KCS is uniquely positioned to serve
many paper mills in the southeast United States whose products are increasing in demand due to a general growth of consumer
goods and industrial production in central Mexico.
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Agriculture and minerals.
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The agriculture and minerals sector consists primarily of grain and food products. Shipper
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demand for agriculture products is affected by competition among sources of grain and grain products, as well as price
fluctuations in international markets for key commodities. In the United States, KCS’s rail lines receive and originate shipments
of grain and grain products for delivery to feed mills, food and industrial consumers in the U.S. and Mexico. United States
export grain shipments and Mexico import grain shipments include primarily corn, wheat, and soybeans. Over the long term,
export grain shipments to Mexico are expected to increase as a result of Mexico’s reliance on grain imports and KCS’s
coordinated rail network is well-positioned to meet these increases in demand. Food products consist mainly of soybean meal,
grain meal, oils, canned goods, distillers dried grains, corn syrup and sugar. Other shipments consist of a variety of products
including ores, minerals, clay and glass used across North America.
Energyr
.yy The energy sector includes coal, frac sand, petroleum coke and crude oil. KCS hauls unit trains (trains
transporting a single commodity from one source to one destination) of coal for eight electric generating plants in the central
United States. The coal originates from the Powder River Basin in Wyoming and is interchanged to KCS at Kansas City
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Missouri. Coal mined in the midwest United States is transported in non-unit trains to industrial consumers such as paper mills,
steel mills, and cement companies. Frac sand originating primarily in Wisconsin, Illinois or Iowa is delivered to transloads
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4
located in northeast Texas, northern Louisiana and south Texas for distribution to gas and oil wells in the region. KCS
transports petroleum coke from refineries in the United States to cement companies in Mexico as well as to vessels for
international distribution through the Pabtex export terminal located in Port Arthur, Texas. The majority of crude by rail
business originates in Canada, with spot shipments coming from west Texas, and is delivered to U.S. Gulf Coast refineries and
tank farms in Texas, Louisiana, and Alabama.
Intermodal. The intermodal freight sector consists primarily of hauling freight containers or truck trailers on behalf of
steamship lines, motor carriers, and intermodal marketing companies with rail carriers serving as long-distance haulers. KCS
serves and supports the U.S. and Mexican markets, as well as cross-border traffic between the U.S. and Mexico. In light of the
importance of trade between Asia and North America, the Company believes the Port of Lazaro Cardenas continues to be a
strategically beneficial location for ocean carriers, manufacturers and retailers. Equally important, the increase in foreign direct
investment in Mexico has caused the KCS Mexico/U.S. cross border corridor to emerge as an increasingly important tool for
the North American Free Trade Agreement (“NAFTA”) freight flow. The Company also provides premium service to customers
over its line from Dallas through the Meridian Speedway — a critical link in creating the most direct route between the
southwest and southeast/northeast U.S.
Automotive. KCS provides rail transportation to every facet of the automotive industry supply chain, including
automotive manufacturers, assembly plants and distribution centers throughout North America. Several U.S., European and
Asian automakers have built or intend to build assembly plants in central Mexico to take advantage of access to lower costs,
which has driven a shift in production and distribution patterns from various countries to Mexico. In addition, KCS transports
finished vehicles imported and exported to and from various countries through a distribution facility at the Port of Lazaro
Cardenas. As the automotive industry shifts production and distribution patterns, KCS is poised to serve the automotive
industry’s evolving transportation requirements.
GOVERNMENT REGULATION
The Company’s United States operations are subject to federal, state and local laws and regulations generally applicable
to all businesses subject to federal preemption under certain circumstances. Rail operations are also subject to the regulatory
jurisdiction of the Surface Transportation Board (“STB”), the Federal Railroad Administration (“FRA”) of the U.S. Department
of Transportation (“DOT”), the Occupational Safety and Health Administration (“OSHA”), as well as other federal and state
regulatory agencies. The STB has jurisdiction over disputes and complaints involving certain rates, routes and services, the sale
or abandonment of rail lines, applications for line extensions and construction, and consolidation or merger with, or acquisition
of control of, rail common carriers. DOT and OSHA each has jurisdiction under several federal statutes over a number of safety
and health aspects of rail operations, including the transportation of hazardous materials. In 2008, the President of the United
States signed the Rail Safety Improvement Act of 2008 into law, which, among other things, revised hours of service for train
and certain other employees and mandated implementation of PTC at certain locations by the end of 2015. PTC is a technology
designed to help prevent train-to-train collisions, overspeed derailments, incursions into rail work zones, and entry into main
line track if a switch is misaligned at certain locations, including main line track where toxic inhalation hazard or poison
inhalation hazard movements occur or where passenger operations occur. The Surface Transportation Extension Act of 2015
extended the PTC implementation deadline from the end of 2015 to the end of 2018, conditioned upon the filing of revised
PTC Implementation Plans, with a further two-year extension possible subject to review by the DOT. KCS filed a revised PTC
Implementation Plan by the statutory due date. PTC will add to operating costs, increase the number of employees the
Company employs and require KCS to make significant investments in new safety technology.
KCS’s U.S. subsidiaries are subject to extensive federal, state and local environmental regulations. These laws cover
discharges to water, air emissions, toxic substances, and the generation, handling, storage, transportation and disposal of waste
and hazardous materials. These regulations have the effect of increasing the costs, risks and liabilities associated with rail
operations. Environmental risks are also inherent in rail operations, which frequently involve transporting chemicals and other
hazardous materials.
Primary regulatory jurisdiction for the Company’s Mexican operations is overseen by the new Mexican Agencia
Reguladora del Transporte Ferroviario (“Regulatory Agency of Rail Transportation” or “ARTF”). The ARTF establishes
regulations concerning railway safety and operations, and is responsible for resolving disputes between railways and between
railways and customers. KCSM must register its maximum rates with the ARTF and make regular reports to the ARTF and the
Secretaría de Comunicaciones y Transportes (“Secretary of Communications and Transportation” or “SCT”). KCSM must
provide reports on investments, traffic volumes, theft and vandalism on the general right of way, customer complaints, fuel
5
consumption, number of locomotives, railcars and employees, and activities around maintenance of way, sidings and spurs,
among other financial information and reports. The Company may freely set rates on a non-discriminatory basis. At any time,
the ARTF may request additional information regarding the determination of such rates and may issue recommendations with
respect to proposed rate increases. If the ARTF or another party considers there to be no effective competition, they can request
an opinion from the Comisión Federal de Competencia Económica (“Mexican Antitrust Commission” or “COFECE”)
regarding market conditions. If the COFECE determines that there is no effective competition for particular movements, the
ARTF could set fixed maximum rates for those movements or grant limited trackage rights to another railroad while the
condition of no effective competition remains.
KCSM holds a concession from the Mexican government until June 2047 (exclusively through 2027, subject to certain
trackage and haulage rights granted to other concessionaires), which is renewable under certain conditions for an additional
period of up to 50 years. The Concession authorizes KCSM to provide freight transportation services over north-east rail lines
which are a primary commercial corridor of the Mexican railroad system. KCSM is required to provide railroad services to all
users on a fair and non-discriminatory basis and in accordance with efficiency and safety standards approved periodically by
the Mexican government. KCSM has the right to use, but does not own, all track and buildings that are necessary for the rail
lines’ operation. KCSM is obligated to maintain the right of way, track structure, buildings and related maintenance facilities to
the operational standards specified in the Concession agreement and to return the assets in that condition at the end of the
Concession period. During the remainder of the Concession period, KCSM is required to pay the Mexican government an
annual concession duty equal to 1.25% of gross revenues. The ARTF may request information to verify KCSM´s compliance
with the Concession and any applicable regulatory framework.
The Company’s Mexican operations are subject to Mexican federal and state laws and regulations relating to the
protection of the environment through the establishment of standards for water discharge, water supply, emissions, noise
pollution, hazardous substances and transportation and handling of hazardous and solid waste. The Mexican government may
bring administrative and criminal proceedings and impose economic sanctions against companies that violate environmental
laws, and temporarily or even permanently close non-complying facilities.
Noncompliance with applicable legal provisions may result in the imposition of fines, temporary or permanent shutdown
of operations or other injunctive relief, criminal prosecution or, with respect to KCSM, the termination of the Concession. KCS
maintains environmental provisions that are believed by management to be appropriate with respect to known and existing
environmental contamination of its properties that KCS may be responsible to remedy. In addition, KCS’s subsidiaries are party
to contracts and other legally binding obligations by which previous owners of certain facilities now owned by KCS are
responsible to remedy contamination of such sites remaining from their previous ownership.
Government regulations are further discussed within Item 7, “Management’s Discussion and Analysis” under “Other
Matters.”
COMPETITION
The Company competes against other railroads, many of which are much larger and have significantly greater financial
and other resources. The railroad industry in North America is dominated by a few very large carriers. The larger U.S. western
railroads (BNSF Railway Company and Union Pacific Railroad Company), in particular, are significant competitors of KCS
because of their substantial resources and competitive routes.
In Mexico, KCSM’s operations are subject to competition from other railroads, particularly Ferrocarril Mexicano, S.A. de
C.V. (“Ferromex”) and Ferrosur, S.A. de C.V. (“Ferrosur”), both controlled by Grupo Mexico S.A.B. de C.V. Ferromex and
Ferrosur together are much larger and have significantly greater financial and other resources than KCSM, serving most of the
major ports and cities in Mexico and together owning fifty percent of FTVM, which serves industries located within Mexico
City.
The ongoing impact of past and future rail consolidation is uncertain. However, KCS believes that its investments and
strategic alliances continue to competitively position the Company to attract additional rail traffic throughout its rail network.
The Company is subject to competition from motor carriers, barge lines and other maritime shipping, which compete
across certain routes in KCS’s operating areas. In the past, truck carriers have generally eroded the railroad industry’s share of
total transportation revenues. Intermodal traffic and certain other traffic face highly price sensitive competition, particularly
6
from motor carriers. However, rail carriers, including KCS, have placed an emphasis on competing in the intermodal
marketplace and working with motor carriers to provide end-to-end transportation of products.
While deregulation of U.S. freight rates has enhanced the ability of railroads to compete with each other and with
alternative modes of transportation, this increased competition has generally resulted in downward pressure on freight rates
since deregulation. Competition with other railroads and other modes of transportation is generally based on the rates charged,
the quality and reliability of the service provided and the quality of the carrier’s equipment for certain commodities.
RAIL SECURITY
The Company and its rail subsidiaries have continued to research, develop and implement multidisciplinary approaches
to secure the Company’s assets and personnel against transnational criminal organizations that actively target transportation
networks. In addition, the Company has developed a variety of vertically integrated strategies to mitigate the risk terrorist
attacks could pose to the Company, its personnel and assets. Many of the specific measures the Company utilizes for these
efforts are required to be kept confidential through arrangements with government agencies, such as the Department of
Homeland Security (“DHS”), or through jointly-developed and implemented strategies and plans with connecting carriers.
KCSR and KCSM developed a proprietary security plan based on an industry-wide plan developed by the Association of
American Railroads (“AAR”) members which focuses on comprehensive risk assessments in five areas — hazardous materials;
train operations; critical physical assets; military traffic; and information technology and communications. The security plan is
kept confidential, with access to the plan tightly limited to members of management with direct security and anti-terrorism
implementation responsibilities. The Company participates with other AAR members in periodic drills under the industry plan
to test and refine its various provisions.
To protect the confidentiality and sensitivity of both the AAR plans and the proprietary strategies the Company has
developed to safeguard against criminal enterprises, terrorism, and other security and safety threats, the following paragraphs
will provide only a general overview of some of these efforts.
The Company’s security activities range from periodically providing security awareness updates to KCS employees and
including safety and security information on the Company’s internet website (which can be found under the “Corporate
Responsibility” tab at www.kcsouthern.com) to its ongoing implementation of security plans for rail facilities in areas labeled
by the DHS as High Threat Urban Areas (“HTUAs”). The Company’s other activities to bolster security against terrorism
include, but are not limited to, the following:
• Conferring regularly with other railroads’ security personnel and with industry experts on security issues;
• Routing shipments of certain chemicals, which might be toxic if inhaled, pursuant to federal regulations;
•
Initiating a series of over 20 voluntary action items agreed to between AAR and DHS as enhancing security in the
rail industry;
• Conducting constant and targeted security training as part of the scheduled training for operating employees and
managers;
• Developing smartphone applications to ensure immediate information, live video and pictures from security
supervisors and protection assets pertaining to potential operational risks;
• Developing a multi-layered security model using high-speed digital imaging, system velocity and covert and overt
security filters to mitigate the risk of illicit activity;
• Measuring key security metrics to ensure positive risk mitigation and product integrity trends;
• Performing constant due diligence with the existing security model and by benchmarking rail security on a world-
wide basis to monitor threat streams related to rail incidents;
•
Implementing a Tactical Intelligence Center by KCSM, which provides constant training with core members in new
technology helping to prevent, detect, deter, deny and respond to potentially illicit activities; and
• Deploying an array of non-intrusive technologies including, but not limited to, digital video surveillance and
analytics as part of an intelligent video security solution, including a closed circuit television platform with geo-
fencing for intrusion detection, to allow for remote viewing access to monitor ports of entry, intermodal and rail
yards.
7
In addition, the Company utilizes dedicated security personnel with extensive special operations forces, intelligence, and
law enforcement backgrounds to oversee the ongoing and increasingly complex security efforts of the Company in both the
United States and Mexico. While the risk of theft and vandalism is higher in Mexico, KCSM remains among the safest methods
of transportation for freight shipments in Mexico. KCSM’s record in rail safety is due in large part to the implementation of a
multi-layered safety and security process throughout the KCSM network. In addition to having its own internal system, the
process is connected to, and supported by a high level of federal, state and local law enforcement. A primary focus of this effort
involves maintaining constant due diligence, intelligence and counterintelligence operations, technology-reporting applications
and active vigilance while enhancing overall system velocity, which reduces the residual risk for incidents to occur.
RAILWAY LABOR ACT
Labor relations in the U.S. railroad industry are subject to extensive governmental regulation under the Railway Labor
Act (“RLA”). Under the RLA, national labor agreements are renegotiated on an industry-wide scale when they become open
for modification, but their terms remain in effect until new agreements are reached or the RLA’s procedures (which include
mediation, cooling-off periods, and the possibility of presidential intervention) are exhausted. Contract negotiations with the
various unions generally take place over an extended period of time and the Company rarely experiences work stoppages
during negotiations. Wages, health and welfare benefits, work rules and other issues have traditionally been addressed during
these negotiations.
COLLECTIVE BARGAINING
Approximately 75% of KCSR employees are covered by collective bargaining agreements. These agreements do not have
expiration dates, but rather remain in place until modified by subsequent agreements. KCSR participates in industry-wide
multi-employer bargaining as a member of the National Carriers’ Conference Committee (the “NCCC”), as well as local
bargaining for agreements that are limited to KCSR's property. Multi-employer agreements are subject to a procedure that
allows requests for changes to be served every five years. The last amendments to the collective bargaining agreements with all
of the participating unions were reached and ratified during 2011 and the first half of 2012, and were retroactive to January 1,
2010. The current round of multi-employer bargaining began on January 1, 2015. The subjects of bargaining primarily concern
salary and benefits payable to the various union employees. On October 5, 2017, the NCCC, as representatives of KCSR and
the railroad industry, reached a tentative agreement with the Collective Bargaining Group (the “CBG”), a coalition comprised
of multiple unions that represent approximately 60% of KCSR’s unionized workforce. The unions in the CBG coalition have
now ratified the tentative agreement by its members. The ratification concludes this round of bargaining for those unions, and
the revised agreement will be in effect through December 2019. In December 2017, the NCCC reached a tentative agreement
with the TCU Bargaining Group, a coalition comprised of four unions that represent approximately 20% of KCSR’s unionized
workforce. The terms of this tentative agreement are substantially identical to the agreement with the CBG. The unions in the
TCU Bargaining Group coalition are ratifying this agreement. The NCCC is still in mediation with the other union coalition
(BMWE/Smart Mechanical) regarding proposed amendments to their agreements. The union labor negotiation has not
historically resulted in any strike, lock-out, or other disruption in the Company’s business operations. The Company does not
believe the expected settlements will have a material impact on the consolidated financial statements.
KCSM Servicios union employees are covered by one labor agreement, which was signed on April 16, 2012, between
KCSM Servicios and the Sindicato de Trabajadores Ferrocarrileros de la República Mexicana (“Mexican Railroad Union”), for
an indefinite period of time, for the purpose of regulating the relationship between the parties. Approximately 80% of KCSM
Servicios employees are covered by this labor agreement. The compensation terms under this labor agreement are subject to
renegotiation on an annual basis and all other benefits are subject to negotiation every two years. The union labor negotiations
with the Mexican Railroad Union have not historically resulted in any strike, boycott or other disruption in KCSM’s business
operations. KCSM Servicios has started negotiations of compensation and all other benefits terms with the Mexican Railroad
Union for the period covering July 1, 2017 to June 30, 2018. The anticipated resolution of this negotiation is not expected to
have a material impact to the consolidated financial statements.
EXECUTIVE OFFICERS OF KCS AND SUBSIDIARIES
All executive officers are elected annually and serve at the discretion of the Board of Directors. All of the executive
officers have employment agreements with KCS and/or its subsidiaries. The mailing address of the principal executive officers
other than Mr. Zozaya is 427 W. 12th Street, Kansas City, Missouri 64105. Mr. Zozaya’s mailing address is Montes Urales No.
625, Col. Lomas de Chapultepec, C.P. 11000, Mexico D.F.
8
Patrick J. Ottensmeyer — President and Chief Executive Officer— 60 — Served in this capacity since July 1, 2016. Mr.
Ottensmeyer has been a director of KCS since July 1, 2016 and served as President of KCS since March 1, 2015. He served as
Executive Vice President Sales and Marketing of KCS from October 16, 2008 through March 1, 2015. Mr. Ottensmeyer joined
KCS in May 2006 as Executive Vice President and Chief Financial Officer.
Warren K. Erdman — Executive Vice President — Administration and Corporate Affairs — 59 — Served in this capacity
since April 2010. Mr. Erdman served as Executive Vice President — Corporate Affairs from October 2007 until April 2010. He
served as Senior Vice President — Corporate Affairs of KCS and KCSR from January 2006 to September 2007. Mr. Erdman
served as Vice President — Corporate Affairs of KCS from April 15, 1997 to December 31, 2005 and as Vice President —
Corporate Affairs of KCSR from May 1997 to December 31, 2005. Prior to joining KCS, Mr. Erdman served as Chief of Staff
to United States Senator Kit Bond of Missouri from 1987 to 1997.
Brian D. Hancock — Executive Vice President and Chief Marketing Officer — 52 — Served in this capacity since
joining KCS in August 2015. Prior to joining KCS, Mr. Hancock served as Senior Vice President of Supply Chain for Family
Dollar Stores, Inc. from 2013 to July 2015. From 2011 to 2013, Mr. Hancock served as President – North America for The
Martin – Brower Company, L.L.C. From 2005 to 2011, he served as Vice President – Global Supply Chain for Whirlpool
Corporation.
Jeffrey M. Songer — Executive Vice President and Chief Operating Officer — 48 — Served in this capacity since March
2016. Mr. Songer served as Senior Vice President Engineering and Chief Transportation Officer of the Company from August
2014 to February 2016 and as Vice President and Chief Engineer for KCSR from June 2012 to July 2014. Prior to serving as
KCSR’s Vice President and Chief Engineer, Mr. Songer served as Assistant Vice President — Engineering and Planning from
March 2011 to June 2012, and as its General Director — Planning, Scheduling & Administration from January 2007 to March
2011.
Michael W. Upchurch — Executive Vice President and Chief Financial Officer — 57 — Served in this capacity since
October 16, 2008. Mr. Upchurch joined KCS in March 2008 as Senior Vice President Purchasing and Financial Management.
From 1990 through September 2006, Mr. Upchurch served in various senior financial leadership positions at Sprint
Corporation, including Senior Vice President Financial Operations, Senior Vice President Finance Sprint Business Solutions
and Senior Vice President Finance Long Distance Division.
José Guillermo Zozaya Delano — President and Executive Representative — KCSM — 65 — Served in this position
since April 20, 2006. Mr. Zozaya has 35 years of experience in law and government relations, most recently as the Legal and
Government Relations Director for ExxonMobil México, S.A. de C.V., where he spent nine years prior to joining KCSM.
Lora S. Cheatum — Senior Vice President — Human Resources — 61 — Served in this capacity since joining KCS in
October 2014. Ms. Cheatum previously served as Senior Vice President Global Human Resources of Layne Christensen from
2012 to October 2014. From 2010 to 2012, she served as Director — Field Operations at Fitness Together Holdings, Inc. Ms.
Cheatum spent nine years with Kansas City Power & Light, from 2001 to 2010, where she was Vice President of Procurement
and previously as Vice President Human Resources.
Michael J. Naatz — Senior Vice President Operations Support and Chief Information Officer — 52 — Served in this
capacity since August 2014. Mr. Naatz served as Senior Vice President and Chief Information Officer of the Company from
May 2012 to July 2014. Prior to joining KCS, Mr. Naatz served as President of USF Holland, a YRC Worldwide, Inc.
(“YRCW”) company, from 2011 to May 2012. From 2010 to 2011, Mr. Naatz served as President and Chief Customer Officer -
Customer Care Division at YRCW. From 2008 to 2010, he served as Executive Vice President and Chief Information & Service
Officer at YRCW. From 2005 to 2007, he served as President — Enterprise Services Division at YRCW. From 1994 to 2005, he
held various leadership positions with USF Corporation.
Suzanne M. Grafton — Vice President and Chief Accounting Officer — 42 — Served in this capacity since July 24,
2017. Ms. Grafton served as Vice President of Audit and Enterprise Risk Management of the Company from April 2016 to July
2017 and as Vice President of Accounting from May 2014 to March 2016. From September 2006 to May 2014, Ms. Grafton
served in various accounting leadership positions at KCS.
William J. Wochner — Senior Vice President and Chief Legal Officer — 70 — Served in this capacity since February
2007. He served as Vice President and Interim General Counsel from December 2006 to January 2007. From September 2006
to December 2006, Mr. Wochner served as Vice President and Associate General Counsel. From March 2005 to September
2006, Mr. Wochner served as Vice President Sales and Marketing/Contracts for KCSR. From February 1993 to March 2005,
Mr. Wochner served as Vice President and General Solicitor of KCSR.
9
There are no arrangements or understandings between the executive officers and any other person pursuant to which the
executive officer was or is to be selected as an officer of KCS, except with respect to the executive officers who have entered
into employment agreements designating the position(s) to be held by the executive officer.
None of the above officers is related to another, or to any of the directors of KCS.
AVAILABLE INFORMATION
KCS’s website (www.kcsouthern.com) provides at no cost KCS’s Annual Reports on Form 10-K, Quarterly Reports on
Form 10-Q, and Current Reports on Form 8-K, and amendments to those reports, as soon as reasonably practicable after the
electronic filing of these reports is made with the Securities and Exchange Commission. In addition, KCS’s corporate
governance guidelines, ethics and legal compliance policy, and the charters of the Audit Committee, the Finance Committee,
the Nominating and Corporate Governance Committee and the Compensation and Organization Committee of the Board of
Directors are available on KCS’s website. These guidelines, policies and charters are available in print without charge to any
stockholder requesting them. Written requests for these materials may be made to the Corporate Secretary, P.O. Box 219335,
Kansas City, Missouri 64121-9335 (or if by express delivery to 427 West 12th Street, Kansas City, Missouri 64105). From time
to time, KCS publicly designates material information by posting it on the website, investors.kcsouthern.com, in lieu of press
releases.
See Item 8, Financial Statements and Supplementary Data — Note 1 “Description of the Business” and Note 17
“Geographic Information” for more information on the description and general development of the Company’s business and
financial information about geographic areas.
Item 1A. Risk Factors
KCS U.S. and Mexico rail common carrier subsidiaries are required by United States and Mexican laws, respectively, to
transport hazardous materials, which could expose KCS to significant costs and claims.
Under United States federal statutes and applicable Mexican laws, KCS’s common carrier responsibility requires it to
transport hazardous materials. Any rail accident or other incident or accident on KCS’s network, facilities, or at the facilities of
KCS’s customers involving the release of hazardous materials, including toxic inhalation hazard materials, could involve
significant costs and claims for personal injury, property damage, and environmental penalties and remediation in excess of the
Company’s insurance coverage for these risks, which could have a material adverse effect on KCS’s consolidated financial
statements.
KCS’s business is subject to regulation by federal, state and local legislatures and agencies that could impose significant
cost on the Company’s business operations.
KCS rail subsidiaries are subject to legislation and regulation enacted by federal, state and local legislatures and agencies
in the U.S. and Mexico with respect to railroad operations. Government regulation of the railroad industry is a significant
determinant of the competitiveness and profitability of railroads. Changes in legislation or regulation could have a negative
impact on KCS’s ability to negotiate prices for rail services, could negatively affect competition among rail carriers, or could
negatively impact operating practices, resulting in reduced efficiency, increased operating costs or increased capital investment,
all of which could result in a material adverse effect on KCS’s consolidated financial statements.
New economic regulation in the U.S. or Mexico in current or future proceedings could change the regulatory framework
within which the Company operates which could materially change the Company's business and have an adverse effect on the
Company's consolidated financial statements.
Pursuant to the Mexican Antitrust Law and the Regulatory Railroad Service Law, the COFECE announced that it would
review competitive conditions in the Mexican railroad industry, with respect to the existence of effective competition in the
provision of interconnection services, trackage rights, switching rights and interline services used to render public freight
transport in Mexico. The COFECE review includes the entire freight rail transportation market in Mexico and is not targeted to
any single rail carrier. If the COFECE determines there is a lack of effective competition, the COFECE could request the ARTF,
which has primary regulatory jurisdiction over the Company’s Mexican operations, to conduct proceedings to determine
whether to establish new limited mandatory trackage rights and/or rate regulation under the Amendments to the Mexican
Regulatory Railroad Service Law. Such proceedings could have a material adverse effect on the Company’s consolidated
financial statements.
10
As part of the Rail Safety Improvement Act of 2008 in the United States, Class I railroad carriers and passenger and
commuter rail operators must implement PTC, a technology designed to help prevent train-to-train collisions, overspeed
derailments, incursions into rail work zones, and entry into main line track if a switch is misaligned. PTC is required to be
implemented at certain locations, including main line track where toxic inhalation hazard movements regularly occur or where
passenger operations occur. The Surface Transportation Extension Act of 2015 extended the PTC implementation deadline from
the end of 2015 to the end of 2018, conditioned upon the filing of revised PTC Implementation Plans, with a further two-year
extension possible subject to review by the Department of Transportation. KCS filed a revised PTC Implementation Plan by the
statutory due date. PTC will add to operating costs, increase the number of employees the Company employs and require KCS
to make significant investments in new safety technology. KCS’s failure to meet deadlines, including any extension, could
result in fines, service interruptions or penalties and could have a material adverse effect on the Company’s consolidated
financial statements.
KCS’s inadvertent failure or inability to comply with applicable laws and regulations could have a material adverse effect
on the Company’s consolidated financial statements and operations, including fines, penalties, or limitations on operating
activities until compliance with applicable requirements is achieved. Congress and government agencies may change the
legislative or regulatory framework within which the Company operates without providing any recourse for any adverse effects
on the Company’s business that occur as a result of such change. Additionally, some of the regulations require KCS to obtain
and maintain various licenses, permits and other authorizations. Any failure to obtain or maintain these licenses, permits, and
other authorizations could adversely affect KCS’s business operations.
KCSM’s Mexican Concession is subject to revocation or termination in certain circumstances which would prevent
KCSM from conducting rail operations over the Concession and would have a material adverse effect on the Company’s
consolidated financial statements.
KCSM operates under the Concession granted by the Mexican government until June 2047, which is renewable for an
additional period of up to 50 years, subject to certain conditions. The Concession gives KCSM exclusive rights to provide
freight transportation services over its rail lines for the first 30 years of the 50-year Concession, subject to certain trackage and
haulage rights granted to other concessionaires. The SCT and ARTF, which are principally responsible for regulating railroad
services in Mexico, have broad powers to monitor KCSM’s compliance with the Concession, and they can require KCSM to
supply them with any technical, administrative and financial information they request. Among other obligations, KCSM must
comply with the investment commitments established in its business plan, which forms an integral part of the Concession, and
must update the plan every three years. The SCT treats KCSM’s business plans confidentially. The SCT and ARTF also monitor
KCSM’s compliance with efficiency and safety standards established in the Concession. The SCT and ARTF review, and may
amend, these standards from time to time.
Under the Concession, KCSM has the right to operate its rail lines, but it does not own the land, roadway or associated
structures. If the Mexican government legally terminates the Concession, it would own, control, and manage such public
domain assets used in the operation of KCSM’s rail lines. All other property not covered by the Concession, including all
locomotives and railcars otherwise acquired, would remain KCSM’s property. In the event of early termination, or total or
partial revocation of the Concession, the Mexican government would have the right to cause the Company to lease all service-
related assets to it for a term of at least one year, automatically renewable for additional one-year terms up to five years. The
amount of rent would be determined by experts appointed by KCSM and the Mexican government. The Mexican government
must exercise this right within four months after early termination or revocation of the Concession. In addition, the Mexican
government would also have a right of first refusal with respect to certain transfers by KCSM of railroad equipment within
90 days after revocation of the Concession.
The Mexican government may also temporarily seize control of KCSM’s rail lines and its assets in the event of a natural
disaster, war, significant public disturbance or imminent danger to the domestic peace or economy. In such a case, the SCT may
restrict KCSM’s ability to exploit the Concession in such manner as the SCT deems necessary under the circumstances, but
only for the duration of any of the foregoing events. Mexican law requires that the Mexican government pay compensation if it
effects a statutory appropriation for reasons of the public interest. With respect to a temporary seizure due to any cause other
than international war, the Mexican Regulatory Railroad Service Law and regulations provide that the Mexican government
will indemnify an affected concessionaire for an amount equal to damages caused and losses suffered. However, these
payments may not be sufficient to compensate KCSM for its losses and may not be made timely.
11
The SCT may revoke the Concession if KCSM is sanctioned at least three times within a period of five years for any of
the following: unjustly interrupting the operation of its rail lines or for charging rates higher than those it has registered with the
ARTF; unlawfully restricting the ability of other Mexican rail operators to use its rail lines; failing to make payments for
damages caused during the performance of services; failing to comply with any term or condition of the Mexican Regulatory
Railroad Service Law and regulations or the Concession; failing to make the capital investments required under its three-year
business plan filed with the SCT; or failing to maintain an obligations compliance bond and insurance coverage as specified in
the Mexican Regulatory Railroad Service Law and regulations. In addition, the Concession would terminate automatically if
KCSM changes its nationality or assigns or creates any lien on the Concession, or if there is a change in control of KCSM
without the SCT’s approval. The SCT may also terminate the Concession as a result of KCSM’s surrender of its rights under
the Concession, or for reasons of public interest or upon KCSM’s liquidation or bankruptcy. If the Concession is terminated or
revoked by the SCT for any reason, KCSM would receive no compensation and its interest in its rail lines, and all other fixtures
covered by the Concession, as well as all improvements made by it, would revert to the Mexican government. Revocation or
termination of the Concession could adversely affect the Company’s consolidated financial statements.
KCS’s ownership of KCSM and operations in Mexico subject it to economic and political risks.
The Mexican government has exercised, and continues to exercise, significant influence over the Mexican economy.
Accordingly, Mexican governmental actions concerning the economy and state-owned enterprises could have a significant
impact on Mexican private sector entities in general and on KCSM’s operations in particular. KCS cannot predict the impact
that the political landscape, including multiparty rule and civil disobedience, will have on the Mexican economy. Furthermore,
KCS’s consolidated financial statements and prospects may be affected by currency fluctuations, inflation, interest rates,
regulation, taxation and other political, social and economic developments in or affecting Mexico.
The Mexican economy in the past has suffered balance of payment deficits and shortages in foreign exchange reserves.
Although Mexico has imposed foreign exchange controls in the past, there are currently no exchange controls in Mexico.
Pursuant to the provisions of NAFTA, if Mexico experiences serious balance of payment difficulties or the threat of such
difficulties in the future, Mexico would have the right to impose foreign exchange controls on investments made in Mexico,
including those made by United States and Canadian investors. Any restrictive exchange control policy could adversely affect
KCS’s ability to obtain U.S. dollars or to convert Mexican pesos (“pesos” or “Ps.”) into dollars for purposes of making
payments. This could have a material adverse effect on KCS’s consolidated financial statements.
The social and political situation in Mexico could adversely affect the Mexican economy and changes in laws, public
policies and government programs could be enacted, which could have an adverse effect on KCS’s consolidated financial
statements.
Downturns in the United States economy or in trade between the United States and Asia or Mexico and fluctuations in the
peso-dollar exchange rates would likely have adverse effects on KCS’s consolidated financial statements.
The level and timing of KCS’s Mexican business activity is heavily dependent upon the level of United States-Mexican
trade and the effects of NAFTA on such trade. The Mexican operations depend on the United States and Mexican markets for
the products KCSM transports, the relative position of Mexico and the United States in these markets at any given time, and
tariffs or other barriers to trade. Failure to preserve NAFTA free trade provisions, or any other action imposing import duties or
border taxes, could negatively impact KCS customers and the volume of rail shipments, and could have a material adverse
effect on KCS’s consolidated financial statements.
Downturns in the United States or Mexican economies or in trade between the United States and Mexico would likely
have adverse effects on KCS’s consolidated financial statements and the Company’s ability to meet debt service obligations. In
addition, KCS has invested significant amounts in developing its intermodal operations, including the Port of Lazaro Cardenas,
in part to provide Asian importers with an alternative to the west coast ports of the United States, and the level of intermodal
traffic depends, to an extent, on the volume of Asian shipments routed through Lazaro Cardenas. Reduction in trading volumes,
which may be caused by factors beyond KCS’s control, including increased government regulations regarding the safety and
quality of Asian-manufactured products, may adversely affect KCS’s consolidated financial statements.
Additionally, fluctuations in the peso-dollar exchange rates could lead to shifts in the types and volumes of Mexican
imports and exports. Although a decrease in the level of exports of some of the commodities that KCSM transports to the
United States may be offset by a subsequent increase in imports of other commodities KCSM hauls into Mexico and vice versa,
any offsetting increase might not occur on a timely basis, if at all. Future developments in United States-Mexican trade beyond
12
the Company’s control may result in a reduction of freight volumes or in an unfavorable shift in the mix of products and
commodities KCSM carries.
Severe weakening of the peso against the U.S. dollar may result in disruption of the international foreign exchange
markets and may limit the ability to transfer pesos or to convert pesos into U.S. dollars for the purpose of making timely
payments of interest and principal on the non-peso denominated indebtedness. Although the Mexican government currently
does not restrict, and for many years has not restricted, the right or ability of Mexican or foreign persons or entities to convert
pesos into U.S. dollars or to transfer foreign currencies out of Mexico, the Mexican government could, as in the past, institute
restrictive exchange rate policies that could limit the ability to transfer or convert pesos into U.S. dollars or other currencies for
the purpose of making timely payments and contractual commitments. Devaluation or depreciation of the peso against the
U.S. dollar may also adversely affect U.S. dollar prices for KCS’s securities.
Fluctuations in the peso-dollar exchange rates also have an effect on KCS’s consolidated financial statements. A
weakening of the peso against the U.S. dollar would cause reported peso-denominated revenues and expenses to decrease, and
would increase reported foreign exchange loss due to the Company’s net monetary assets that are peso-denominated. Exchange
rate variations also affect the calculation of taxes under Mexican income tax law, and a strengthening of the peso against the
U.S. dollar would cause an increase in the Company’s cash tax obligation and effective income tax rate.
Severe weather or other natural disasters could result in significant business interruptions and expenditures.
The Company’s operations may be affected by severe weather or other natural disasters. The Company operates in and
along the Gulf of Mexico, and its facilities may be adversely affected by hurricanes, floods and other extreme weather
conditions that could also adversely affect KCS’s shipping, agricultural, chemical and other customers. Severe weather or other
natural disasters could result in significant business interruption and could have a material adverse effect on KCS’s
consolidated financial statements.
KCS’s business may be adversely affected by changes in general economic or other conditions.
KCS’s operations may be adversely affected by changes in the economic conditions of the industries and geographic
areas that produce and consume the freight that KCS transports. The relative strength or weakness of the United States and
Mexican economies affects the businesses served by KCS. A significant and sustained decrease in crude oil prices could
adversely affect the transport of crude oil by rail to the U.S. Gulf region as well as negatively impact railroad volumes related
to equipment and other materials that support crude oil production. Prolonged negative changes in domestic and global
economic conditions or disruptions of either or both of the financial and credit markets, including the availability of short and
long-term debt financing, may affect KCS, as well as the producers and consumers of the commodities that KCS transports and
may have a material adverse effect on KCS’s consolidated financial statements.
The transportation industry is highly cyclical, generally tracking the cycles of the world economy. Although
transportation markets are affected by general economic conditions, there are numerous specific factors within each particular
market that may influence operating results. Some of KCS’s customers do business in industries that are highly cyclical,
including the energy, automotive, housing and agriculture industries. Any downturn or change in government policy in these
industries could have a material adverse effect on operating results. Also, some of the products transported have had a historical
pattern of price cyclicality which has typically been influenced by the general economic environment and by industry capacity
and demand. KCS cannot assure that prices and demand for these products will not decline in the future, adversely affecting
those industries and, in turn, the Company’s consolidated financial statements.
Significant reductions in the volume of rail shipments due to economic or other conditions could have a material adverse
effect on KCS’s consolidated financial statements.
KCS depends on the stability, availability and security of its information technology systems to operate its business.
KCS relies on information technology in all aspects of its business. A significant disruption or failure of its information
technology systems, including its computer hardware, software, communications equipment, wayside equipment or locomotive
onboard equipment could result in service interruptions, safety failures, security failures, regulatory compliance failures or
other operational difficulties.
The security risks associated with information technology systems have increased in recent years because of the increased
sophistication, activities and evolving techniques of perpetrators of cyber attacks. A failure in or breach of KCS’s information
13
technology security systems, or those of its third party service providers, as a result of cyber attacks or unauthorized access to
its network could disrupt KCS’s business, result in the disclosure or misuse of confidential or proprietary information, increase
its costs and/or cause losses and reputational damage. KCS also confronts the risk that a terrorist or nation-state sponsored
group may seek to use its property, including KCS’s information technology systems, to inflict major harm.
A significant disruption, failure or unauthorized access of KCS’s information technology system could have a material
adverse effect on KCS’s consolidated financial statements.
Capacity constraints could adversely affect service and operating efficiency.
KCS may experience capacity constraints due to increased demand for rail services, unavailability of equipment, crew
shortages, or extreme weather. Also, due to the interconnectivity between all railroads, especially in the U.S., congestion on
other railroads could result in operational inefficiencies for KCS.
Traffic congestion experienced in the U.S. or Mexican railroad system may result in overall traffic congestion which
would impact the ability to move traffic to and from Mexico. In addition, the growth of cross border traffic in recent years has
contributed to congestion on the international bridge at the Nuevo Laredo-Laredo border gateway, which is expected to
continue in the near future. This could also result in operational inefficiencies for KCS and adversely affect KCS’s operations.
Significant expansions in the capacity of the Company’s network can require a substantial amount of time and investment.
Although KCS constantly monitors its network in an effort to optimize its rail services, there can be no assurance that such
measures will adequately address capacity constraints on a timely basis.
KCS may be subject to various claims and litigation that could have a material adverse effect on KCS’s consolidated
financial statements.
The Company may be exposed to the potential of various claims and litigation related to labor and employment, personal
injury, commercial disputes, freight loss and other property damage, and other matters that arise in the normal course of
business. Any material changes to litigation trends or a catastrophic rail accident or series of accidents involving any or all of
property damage, personal injury, and environmental liability could have a material adverse effect on KCS’s consolidated
financial statements.
KCS competes against other railroads and other transportation providers.
The Company’s domestic and international operations are subject to competition from other railroads, as well as from
truck carriers, barge lines, and other maritime shippers. Many of KCS’s rail competitors are much larger and have significantly
greater financial and other resources than KCS, which may enable rail competitors to reduce rates and make KCS’s freight
services less competitive. KCS’s ability to respond to competitive pressures by matching rate reductions and decreasing rates
without adversely affecting gross margins and operating results will depend on, among other things, the ability to reduce
operating costs. KCS’s failure to respond to competitive pressures, and particularly rate competition, in a timely manner could
have a material adverse effect on the Company’s consolidated financial statements.
The railroad industry is dominated by a few large carriers. These larger railroads could attempt to use their size and
pricing power to block other railroads’ access to gateways and routing options that are currently and have historically been
available. In addition, if there is future consolidation in the railroad industry in the United States or Mexico, there can be no
assurance that it will not have an adverse effect on the Company’s consolidated financial statements.
Trucking, maritime, and barge competitors, while able to provide rate and service competition to the railroad industry, are
able to use public rights-of-way, require substantially smaller capital investment and maintenance expenditures than railroads
and allow for more frequent and flexible scheduling. Continuing competitive pressures, any reduction in margins due to
competitive pressures, developments that increase the quality or decrease the cost of alternative modes of transportation in the
locations in which the Company operates, or legislation or regulations that provide motor carriers with additional advantages,
such as increased size of vehicles and reduced weight restrictions, could result in downward pressure on freight rates, which in
turn could have a material adverse effect on the Company’s consolidated financial statements.
A key part of KCS’s growth strategy is based upon the conversion of truck traffic to rail. There can be no assurance the
Company will succeed in its efforts to convert traffic from truck to rail transport or that the customers already converted will be
retained. If the railroad industry in general is unable to preserve its competitive advantages vis-à-vis the trucking industry,
14
revenue growth could be adversely affected. Additionally, revenue growth could be affected by, among other factors, an
expansion in the availability, or an improvement in the quality, of the trucking services offered by carriers resulting from
regulatory and administrative interpretations and implementation of certain provisions of NAFTA, and KCS’s inability to grow
its existing customer base and capture additional cargo transport market share because of competition from the shipping
industry and other railroads.
KCS’s business strategy, operations and growth rely significantly on agreements with other railroads and third parties.
Operation of KCS’s rail network and its plans for growth and expansion rely significantly on agreements with other
railroads and third parties, including joint ventures and other strategic alliances, as well as interchange, trackage rights, haulage
rights and marketing agreements with other railroads and third parties that enable KCS to exchange traffic and utilize trackage
the Company does not own. KCS’s ability to provide comprehensive rail service to its customers depends in large part upon its
ability to maintain these agreements with other railroads and third parties, and upon the performance of the obligations under
the agreements by the other railroads and third parties. The termination of, or the failure to renew, these agreements could
adversely affect KCS’s consolidated financial statements. KCS is also dependent in part upon the financial strength and
efficient performance of other railroads. There can be no assurance that KCS will not be materially adversely affected by
operational or financial difficulties of other railroads.
KCS is subject to environmental regulations, which may impose significant costs on the Company’s business operations.
KCS subsidiaries’ operations are subject to environmental regulation enacted by federal, state and local legislatures in the
U.S. and Mexico. From time to time, certain KCS facilities have not been in compliance with environmental health and safety
laws and regulations and there can be no assurance that KCS will always be in compliance with such laws and regulations in
the future. Environmental liability under federal and state law in the United States can also extend to previously owned or
operated properties, leased properties and properties owned by third parties, as well as to properties currently owned and used
by the Company. Environmental liabilities may also arise from claims asserted by adjacent landowners or other third parties.
Given the nature of its business, the Company incurs, and expects to continue to incur, environmental compliance costs,
including, in particular, costs necessary to maintain compliance with requirements governing chemical and hazardous material
shipping operations, refueling operations and repair facilities. KCS presently has environmental investigation and remediation
obligations at certain sites, and will likely incur such obligations at additional sites in the future.
The Company’s Mexican subsidiaries’ operations are subject to Mexican federal and state laws and regulations relating to
the protection of the environment, including standards for, among other things, water discharge, water supply, emissions, noise
pollution, hazardous substances and transportation and handling of hazardous and solid waste. Under applicable Mexican law
and regulations, administrative and criminal proceedings may be brought and economic sanctions imposed against companies
that violate environmental laws, and non-complying facilities may be temporarily or permanently closed. KCSM is also subject
to the laws of various jurisdictions with respect to the discharge of materials into the environment and to environmental laws
and regulations issued by the governments of each of the Mexican states in which KCSM’s facilities are located. The terms of
KCSM’s Concession from the Mexican government also impose environmental compliance obligations on KCSM. Failure to
comply with any environmental laws or regulations may result in the termination of KCSM’s Concession or in fines or
penalties that may affect profitability.
Liabilities accrued for environmental costs represent the Company’s best estimate of the probable future obligation for
the remediation and settlement of matters related to these sites. However, remediation costs may exceed such estimates, due to
various factors such as evolving environmental laws and regulations, changes in technology, the extent of other parties’
participation, developments in environmental surveys and studies, and the extent of corrective action that may ultimately be
required. The Company cannot predict the effect, if any, that unidentified environmental matters or the adoption of additional or
more stringent environmental laws and regulations would have on KCS’s consolidated financial statements.
KCS’s inadvertent failure or inability to comply with applicable environmental laws and regulations could have a
material adverse effect on the Company’s consolidated financial statements and operations, including fines, penalties, or
limitations on operating activities until compliance with applicable requirements is achieved. Government entities may change
the legislative or regulatory framework within which the Company operates without providing any recourse for any adverse
effects on the Company’s business that occur as a result of such change. Additionally, some of the regulations require KCS to
obtain and maintain various licenses, permits and other authorizations. Any failure to obtain or maintain these licenses, permits,
and other authorizations could adversely affect KCS’s business operations.
15
KCS’s business is vulnerable to fluctuations in fuel costs and disruptions in fuel supplies.
KCS incurs substantial fuel costs in its railroad operations and these costs represent a significant portion of its
transportation expenses. Significant price increases for fuel may have a material adverse effect on operating results. If KCS is
unable to recapture its costs of fuel from its customers, operating results could be materially adversely affected. In addition, a
severe disruption of fuel supplies resulting from supply shortages, political unrest, a disruption of oil imports, weather events,
war, or otherwise, and the resulting impact on fuel prices could materially adversely affect KCS’s consolidated financial
statements.
KCSM currently meets the majority of its fuel requirements through purchases from PEMEX Transformación Industrial
(“PEMEX”), the national oil company of Mexico, and other authorized fuel distributors of PEMEX fuel around the country. If
PEMEX were to experience significant operational difficulties not quickly resolved, the KCSM operations could be materially
adversely affected.
Weaknesses in the short and long-term debt markets could negatively impact the Company’s access to capital.
Due to the significant capital expenditures required to operate and maintain a safe and efficient railroad, the Company
regularly relies on debt markets for the issuance of long-term debt instruments, bank financing and commercial paper.
Instability or disruptions of the capital markets, including debt markets, or the deterioration of the Company’s financial
condition due to internal or external factors, could restrict or prohibit access and could increase the cost of financing sources. A
significant deterioration of the Company’s financial condition could also reduce credit ratings to below investment grade,
limiting its access to external sources of capital, and increasing the costs of short and long-term debt financing, and could have
a material adverse effect on KCS’s consolidated financial statements.
KCS’s business may be affected by market and regulatory responses to climate change.
KCS’s operations may be adversely affected by restrictions, caps, taxes, or other controls on emissions of greenhouse
gases, including diesel exhaust. Restrictions on emissions could also affect KCS’s customers that use commodities that KCS
transports to produce energy, use significant amounts of energy in producing or delivering the commodities KCS transports, or
manufacture or produce goods that consume significant amounts of energy or burn fossil fuels, including coal-fired power
plants, chemical producers, farmers and food producers, and automakers and other manufacturers. Significant cost increases,
government regulation, or changes of consumer preferences for goods or services relating to alternative sources of energy or
emissions reductions could materially affect the markets for the commodities KCS transports, which in turn could have a
material adverse effect on KCS’s consolidated financial statements. Government incentives encouraging the use of alternative
sources of energy could also affect certain customers and their respective markets for certain commodities KCS transports in an
unpredictable manner that could alter traffic patterns, including, for example, the impacts of ethanol incentives on farming and
ethanol producers. Any of these factors, individually or in conjunction with one or more of the other factors, or other
unforeseen impacts of climate change could have a material adverse effect on KCS’s consolidated financial statements.
A majority of KCS’s employees belong to labor unions. Strikes or work stoppages could adversely affect operations.
The Company is a party to collective bargaining agreements with various labor unions in the United States and Mexico.
As of December 31, 2017, approximately 75% and 80% of KCSR and KCSM Servicios employees, respectively, were covered
by labor contracts subject to collective bargaining. The Company may be subject to, among other things, strikes, work
stoppages or work slowdowns as a result of disputes under these collective bargaining agreements and labor contracts or KCS’s
potential inability to negotiate acceptable contracts with these unions. In the United States, because such agreements are
generally negotiated on an industry-wide basis, determination of the terms and conditions of labor agreements have been and
could continue to be beyond KCS’s control. KCS may, therefore, be subject to terms and conditions in industry-wide labor
agreements that could have a material adverse effect on its consolidated financial statements. If the unionized workers in the
United States or Mexico were to engage in a strike, work stoppage or other slowdown; if other employees were to become
unionized or if the terms and conditions in future labor agreements were renegotiated, KCS could experience a significant
disruption of its operations and higher ongoing labor costs. Although the U.S. Railway Labor Act imposes restrictions on the
right of United States railway workers to strike, there is no law in Mexico imposing similar restrictions on the right of railway
workers in that country to strike.
16
KCS is dependent on certain key suppliers of core rail equipment.
KCS relies on a limited number of suppliers of core rail equipment (including locomotives, rolling stock equipment, rail
and ties). The capital intensive nature and complexity of such equipment creates high barriers of entry for any potential new
suppliers. If any of KCS’s suppliers discontinue production or experience capacity or supply shortages, this could result in
increased costs or difficulty in obtaining rail equipment and materials, which could have a material adverse effect on KCS’s
consolidated financial statements.
The unavailability of qualified personnel could adversely affect KCS’s operations.
Changes in demographics, training requirements and the unavailability of qualified personnel could negatively affect
KCS’s ability to meet demand for rail service. Unforeseen increases in demand for rail services may exacerbate such risks,
which could have a negative impact on KCS’s operational efficiency and otherwise have a material adverse effect on KCS’s
consolidated financial statements.
KCS’s business may be affected by future acts of terrorism, war or other acts of violence or crime.
Terrorist attacks, such as an attack on the Company’s chemical transportation activities, any government response thereto
and war or risk of war may adversely affect KCS’s consolidated financial statements. These acts may also impact the
Company’s ability to raise capital or its future business opportunities. KCS’s rail lines and facilities could be direct targets or
indirect casualties of acts of terror, which could cause significant business interruption and damage to KCS’s property. In recent
years, there have been reported incidents of train-related robberies in Mexico, including incidents involving KCSM’s trains and
infrastructure. Other acts of violence or crime could also adversely affect the Company’s business.
As a result, acts of terrorism or war or acts of crime or violence could result in increased costs and liabilities and
decreased revenues for KCS. In addition, insurance premiums charged for some or all of the applicable coverage currently
maintained by KCS could increase dramatically or certain coverage may not be adequate to cover losses or may not be
available in the future.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
Track Configuration
The Kansas City Southern Railway Company (“KCSR”) operates over a railroad system consisting of approximately
3,400 route miles in ten states extending from the midwest and southeast portions of the United States south to the Mexican
border, which includes approximately 635 miles of trackage rights that permit KCSR to operate its trains with its crews over
other railroads’ tracks.
Under its concession from the Mexican government (the “Concession”), Kansas City Southern de México, S.A. de C.V.
(“KCSM”) has the right to operate approximately 3,300 route miles, but does not own the land, roadway, or associated
structures, and additionally has approximately 550 miles of trackage rights. The Concession requires KCSM to make
investments as described in a business plan filed every three years with the Mexican government. See Item 1A, “Risk
Factors — KCSM’s Mexican Concession is subject to revocation or termination in certain circumstances which would prevent
KCSM from operating its railroad and would have a material adverse effect on the Company’s consolidated financial
statements.”
17
Kansas City Southern Rail Network
18
Equipment Configuration
As of December 31, 2017 and 2016, KCS owned and leased the following units of equipment:
Freight Cars:
Box cars
Hoppers (covered and open top)
Gondolas
Automotive
Flat cars (intermodal and other)
Tank cars
Total
Locomotives:
Freight
Switching
Total
Owned
2017
Leased
Total
Owned
2016
Leased
Total
3,205
4,735
2,619
2,731
850
4
1,212
2,107
1,267
1,142
98
568
4,417
6,842
3,886
3,873
948
572
3,212
4,333
2,993
2,483
851
4
2,105
2,030
1,295
768
97
645
5,317
6,363
4,288
3,251
948
649
14,144
6,394
20,538
13,876
6,940
20,816
736
187
923
146
—
146
882
187
1,069
736
187
923
121
—
121
Average Age (in Years) of Owned and Leased Locomotives:
Freight
Switching
All locomotives
Property and Facilities
2017
2016
16.2
42.0
20.2
KCS operates numerous facilities, including terminals for intermodal and other freight, rail yards for train-building,
switching, storage-in-transit (the temporary storage of customer goods in rail cars prior to shipment) and other activities; offices
to administer and manage operations; dispatch centers to direct traffic on the rail network; crew quarters to house train crews
along the rail line; and shops and other facilities for fueling and maintenance and repair of locomotives, freight cars and other
equipment.
Capital Expenditures
The Company’s cash capital expenditures for the three years ended December 31, 2017, 2016, and 2015, and planned
2018 capital expenditures are included in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results
of Operations — Liquidity and Capital Resources — Capital Expenditures”. See also Item 7, “Management’s Discussion and
Analysis of Financial Condition and Results of Operations — Critical Accounting Policies and Estimates — Capitalization,
Depreciation and Amortization of Property and Equipment (including Concession Assets)” regarding the Company’s policies
and guidelines related to capital expenditures.
Item 3.
Legal Proceedings
The Company is subject to various legal proceedings and claims that arise in the ordinary course of business. For more
information on legal proceedings, see Item 1A, “Risk Factors — KCS may be subject to various claims and litigation that could
have a material adverse effect on KCS’s consolidated financial statements,” Item 7, “Management’s Discussion and Analysis of
Financial Condition and Results of Operations — “Other Matters — Litigation,” and Item 8, “Financial Statements and
Supplementary Data — Note 15 Commitments and Contingencies.”
19
857
187
1,044
15.0
41.0
19.7
Item 4. Mine Safety Disclosures
Not applicable.
Part II
Item 5. Market for KCS’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
The Company’s common stock is traded on the New York Stock Exchange under the ticker symbol “KSU”. The
following table presents for the quarters indicated the dividends declared and the high and low sales price of the Company’s
common and preferred stock.
2017
Dividends per share:
Common stock
$25 par preferred stock
Stock price ranges:
$25 par preferred:
— High
— Low
Common:
— High
— Low
2016
Dividends per share:
Common stock
$25 par preferred stock
Stock price ranges:
$25 par preferred:
— High
— Low
Common:
— High
— Low
Dividend Policy
Fourth
Third
Second
First
$
$
$
$
$
$
0.36
0.25
28.91
26.96
114.85
99.70
0.33
0.25
31.10
25.52
96.83
79.30
$
$
$
$
$
$
0.36
0.25
29.14
27.35
109.13
100.17
0.33
0.25
29.54
26.40
100.69
86.52
$
$
$
$
$
$
0.33
0.25
29.50
25.45
105.15
84.92
0.33
0.25
29.00
25.70
98.99
83.00
$
$
$
$
$
$
0.33
0.25
29.35
26.75
90.82
79.05
0.33
0.25
27.30
25.31
88.84
62.20
Common Stock. Any declarations and payments of dividends to holders of the Company’s common stock are at the
discretion of the Board of Directors, and are based on many factors, including the Company’s financial condition, earnings,
capital requirements and other factors that the Board of Directors deems relevant. Subject to these qualifications, the Company
expects to continue to pay dividends on an ongoing basis.
Holders
There were 2,138 record holders of KCS common stock on January 19, 2018; however, the number of actual holders of
KCS common stock is greater due to the practice of brokerage firms registering many shares for clients in the brokerage firm’s
name.
20
Securities Authorized for Issuance Under Equity Compensation Plans
See Part III, Item 12, “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters” for information about securities authorized for issuance under KCS’s equity compensation plans.
Performance Graph
The following graph shows the changes in value over the five years ended December 31, 2017, of an assumed investment
of $100 in: (i) KCS’s common stock; (ii) the stocks that comprise the Dow Jones U.S. Industrial Transportation Index; and
(iii) the stocks that comprise the S&P 500 Index. The table following the graph shows the value of those investments on
December 31 for each of the years indicated. The values for the assumed investments depicted on the graph and in the table
have been calculated assuming that any cash dividends are reinvested.
COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN
Among Kansas City Southern, the S&P 500 Index
and the Dow Jones U.S. Industrial Transportation Index
Kansas City Southern
S&P 500 (1)
Dow Jones U.S. Industrial Transportation (2)
_____________________
2012
2013
2014
2015
2016
2017
$
100.00 $
149.50 $
148.83 $
92.38 $
106.56 $
133.99
100.00
100.00
132.39
140.91
150.51
171.45
152.59
133.47
170.84
172.86
208.14
221.67
(1)
(2)
The S&P 500 is a registered trademark of the McGraw-Hill Companies, Inc. The S&P 500 Index reflects the weighted
average market value for 500 companies whose shares are traded on the New York Stock Exchange, American Stock
Exchange and the Nasdaq Stock Market.
The Dow Jones U.S. Industrial Transportation Index is a registered trademark of Dow Jones & Co., Inc., an
independent company.
21
Purchases of Equity Securities
During the first half of 2017, KCS concluded its $500.0 million share repurchase program, announced on May 14, 2015
(the “2015 Program”). On August 15, 2017, the Company announced that the Board of Directors approved a new share
repurchase program, pursuant to which up to $800.0 million in shares of common stock could be repurchased through June 30,
2020 (the “2017 Program”). The authorization included a $200.0 million Accelerated Share Repurchase program and a $600.0
million open market share repurchase program.
During 2017, KCS repurchased 1,340,209 shares of common stock for $120.4 million at an average price of $89.83 per
share under the 2015 Program, and 2,419,469 shares of common stock for $255.2 million at an average price of $105.48 per
share under the 2017 Program. In total during 2017, KCS repurchased 3,759,678 shares of common stock for $375.6 million at
an average price of $99.90 per share under both the 2015 Program and the 2017 Program. The following table presents
common stock repurchases during each month for the fourth quarter of 2017:
(c) Total
Number of
Shares
(or Units)
Purchased
as Part of
Publicly
Announced
Plans or
Programs
(a) Total
Number
of Shares
(or Units)
Purchased
(b) Average
Price Paid
per Share
(or Unit)
254,792 (i) $
$
299,724
114,676
$
669,192
101.10 (i)
105.46
111.86
254,792 (i) $
$
299,724
114,676
$
669,192
(d) Maximum
Number (or
Approximate
Dollar Value)
of Shares (or Units)
that may yet be
purchased under
the Plans
or Programs
589,239,305
557,631,058
544,803,013
Period
October 1-31, 2017
November 1-30, 2017
December 1-31, 2017
Total
(i)
In the third quarter of 2017, the Company paid $200.0 million under two ASR agreements and received an aggregate of
initial delivery of 1,598,796 shares. One of the ASR agreements was settled in the third quarter of 2017, with the Company
receiving 151,481 additional shares for a total of 1,750,277 and a value of $185.0 million. In October 2017, the second ASR
agreement was settled with the Company receiving 151,492 additional shares and a value of $15.0 million, which is included
in the number of shares and the average price paid per share in the table above. The average price paid per share upon
completion of the ASR agreements was $105.17. See Note 13 to the consolidated financial statements included in Item 8.
22
Item 6.
Selected Financial Data
The selected financial data below (in millions, except per share amounts) should be read in conjunction with
“Management’s Discussion and Analysis of Financial Condition and Results of Operations” included under Item 7 of this
Form 10-K as well as the consolidated financial statements and the related notes.
Earnings From Continuing Operations
Revenues
Operating expenses (i) (ii)
Operating income
Net income (iii) (iv)
Earnings per common share:
Basic
Diluted
Financial Position
Total assets
Total long-term debt obligations,
including current portion and short-term
borrowings
Total stockholders’ equity
Total equity
Other Data Per Common Share
2017
2016
2015
2014
2013
$
$
$
$
$
2,582.9
1,661.3
921.6
963.9
9.18
9.16
$
$
$
$
2,334.2
1,515.7
818.5
479.9
4.44
4.43
$
$
$
$
2,418.8
1,615.0
803.8
485.3
4.41
4.40
$
$
$
$
2,577.1
1,768.0
809.1
504.3
4.56
4.55
$
$
$
$
2,369.3
1,630.7
738.6
353.3
3.19
3.18
9,198.7
$
8,817.5
$
8,341.0
$
7,976.4
$
7,283.7
2,619.4
4,548.9
4,865.4
2,478.2
4,089.9
4,404.5
2,401.1
3,914.3
4,224.7
2,301.4
3,755.5
4,064.1
2,168.8
3,370.6
3,676.6
Cash dividends declared per common share
$
1.38
$
1.32
$
1.32
$
1.12
$
0.86
_____________________
(i)
(ii)
(iii)
(iv)
During 2017 and 2016, the Company recognized a benefit of $44.1 million and $62.8 million, respectively, related to a
credit available for the excise tax included in the price of fuel that is purchased and consumed in locomotives and
certain work equipment in Mexico.
During 2015 and 2014, the Company recognized pre-tax lease termination costs of $9.6 million and $38.3 million,
respectively, within operating expenses due to the early termination of certain operating leases and the related
purchase of equipment.
During 2017, the Company recognized a $413.0 million net tax benefit as a result of the Tax Cuts and Jobs Act (the
“Tax Reform Act”), which was signed into law December 22, 2017. Further information on the tax impacts of the Tax
Reform Act is presented in Note 12 to the consolidated financial statements in Item 8.
During 2015, 2014 and 2013, the Company recognized pre-tax debt retirement and exchange costs of $7.6 million,
$6.6 million and $119.2 million, respectively, related to debt restructuring activities that occurred during the periods.
23
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following is a discussion of Kansas City Southern’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 8 of this Form 10-K. This discussion should be read in conjunction with the included consolidated financial
statements, the related notes, and other information included in this report.
CAUTIONARY INFORMATION
The discussions set forth in this Annual Report on Form 10-K may contain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended. In addition, management may make forward-looking statements orally or in other writings, including, but not limited
to, in press releases, quarterly earnings calls, executive presentations, in the annual report to stockholders and in other filings
with the Securities and Exchange Commission. Readers can usually identify these forward-looking statements by the use of
such verbs as “expects,” “anticipates,” “believes” or similar verbs or conjugations of such verbs. These statements involve a
number of risks and uncertainties. Actual results could materially differ from those anticipated by such forward-looking
statements. Such differences could be caused by a number of factors or combination of factors including, but not limited to, the
factors identified below and those discussed under Item 1A of this Form 10-K, “Risk Factors.” Readers are strongly encouraged
to consider these factors and the following factors when evaluating any forward-looking statements concerning the Company:
•
the outcome of claims and litigation, including those related to environmental contamination, personal injuries and
property damage;
• changes in legislation and regulations or revisions of controlling authority;
•
the adverse impact of any termination or revocation of Kansas City Southern de México, S.A. de C.V. (“KCSM”)’s
concession by the Mexican government;
• United States, Mexican and global economic, political and social conditions;
•
•
•
the effects of the North American Free Trade Agreement (“NAFTA”), on the level of trade among the United States,
Mexico and Canada;
the level of trade between the United States and Asia or Mexico;
the effects of fluctuations in the peso-dollar exchange rate;
• natural events such as severe weather, fire, floods, hurricanes, earthquakes or other disruptions to the Company’s
operating systems, structures and equipment or the ability of customers to produce or deliver their products;
•
•
•
the effects of adverse general economic conditions affecting customer demand and the industries and geographic
areas that produce and consume the commodities KCS carries;
the dependence on the stability, availability and security of the information technology systems to operate its
business;
the effect of demand for KCS’s services exceeding network capacity or traffic congestion on operating efficiencies
and service reliability;
• uncertainties regarding the litigation KCS faces and any future claims and litigation;
•
the impact of competition, including competition from other rail carriers, trucking companies and maritime shippers
in the United States and Mexico;
• KCS’s reliance on agreements with other railroads and third parties to successfully implement its business strategy,
operations and growth and expansion plans, including the strategy to convert customers from using trucking services
to rail transportation services;
• compliance with environmental regulations;
• disruption in fuel supplies, changes in fuel prices and the Company’s ability to recapture its costs of fuel from
customers;
• material adverse changes in economic and industry conditions, including the availability of short and long-term
financing, both within the United States and Mexico and globally;
• market and regulatory responses to climate change;
24
• changes in labor costs and labor difficulties, including strikes and work stoppages affecting either operations or
customers’ abilities to deliver goods for shipment;
• KCS’s reliance on certain key suppliers of core rail equipment;
• availability of qualified personnel; and
• acts of terrorism, war or other acts of violence or crime or risk of such activities.
Forward-looking statements reflect the information only as of the date on which they are made. The Company does not
undertake any obligation to update any forward-looking statements to reflect future events, developments, or other information.
If KCS does update one or more forward-looking statements, no inference should be drawn that additional updates will be
made regarding that statement or any other forward-looking statements.
CORPORATE OVERVIEW
Kansas City Southern, a Delaware corporation, is a transportation holding company that has railroad investments in the
U.S., Mexico and Panama. In the U.S., the Company serves the central and south central U.S. Its international holdings serve
northeastern and central Mexico and the port cities of Lazaro Cardenas, Tampico and Veracruz, and a fifty percent interest in
Panama Canal Railway Company provides ocean-to-ocean freight and passenger service along the Panama Canal. KCS’s North
American rail holdings and strategic alliances are primary components of a NAFTA railway system, linking the commercial
and industrial centers of the U.S., Canada and Mexico. Its principal subsidiaries and affiliates include the following:
• The Kansas City Southern Railway Company (“KCSR”), a wholly-owned subsidiary;
• KCSM, a wholly-owned subsidiary;
• Mexrail, Inc. (“Mexrail”), a wholly-owned consolidated subsidiary; which, in turn, wholly owns The Texas Mexican
Railway Company (“Tex-Mex”);
• KCSM Servicios, S.A. de C.V. (“KCSM Servicios”), a wholly-owned subsidiary;
• Meridian Speedway, LLC (“MSLLC”), a seventy percent-owned consolidated affiliate;
• Panama Canal Railway Company (“PCRC”), a fifty percent-owned unconsolidated affiliate;
• TFCM, S. de R.L. de C.V. (“TCM”), a forty-five percent-owned unconsolidated affiliate;
• Ferrocarril y Terminal del Valle de México, S.A. de C.V. (“FTVM”), a twenty-five percent-owned unconsolidated
affiliate; and
• PTC-220, LLC (“PTC-220”), a fourteen percent-owned unconsolidated affiliate.
EXECUTIVE SUMMARY
2017 Financial Overview
Revenues in 2017 increased 11% from 2016, due to 6% and 5% increases in revenue per carload/unit and carload/unit
volumes, respectively. Revenue per carload/unit increased due to mix, increased average length of haul, positive pricing
impacts and higher fuel surcharge. Energy revenue increased $81.1 million, primarily due to an increase in utility coal volumes
due to higher natural gas prices and lower coal inventory levels. In addition, frac sand volumes increased due to strong demand
as a result of higher crude oil prices.
Operating expenses increased 10% compared to 2016, primarily due to higher fuel prices and consumption, and
compensation and benefits. Expense fluctuations resulting from higher fuel prices largely offset the revenue fluctuations driven
by these same macroeconomic factors. Operating expenses as a percentage of revenues decreased to 64.3% in 2017 from 64.9%
in 2016.
In 2017, the Company invested $559.5 million in capital expenditures. In addition, the Company purchased $42.6 million
of equipment under existing operating leases or replacement equipment as certain operating leases expired, which was
primarily funded with internally generated cash flows and short-term borrowings.
The Company reported 2017 earnings of $9.16 per diluted share on consolidated net income attributable to Kansas City
Southern and subsidiaries of $962.0 million for the year ended December 31, 2017, compared to annual earnings of $4.43 per
25
diluted share on consolidated net income attributable to Kansas City Southern and subsidiaries of $478.1 million for 2016, due
to increased net income, largely resulting from the recognition of a $413.0 million net tax benefit as a result of the Tax Cuts and
Jobs Act (the “Tax Reform Act”), and the accelerated share repurchase program that was implemented during the third quarter
of 2017, which reduced the weighted-average shares outstanding. Further information on the tax impacts of the Tax Reform Act
is included in the Company’s consolidated financial statements presented in Note 12 to the consolidated financial statements in
Item 8.
RESULTS OF OPERATIONS
Year Ended December 31, 2017, compared with the Year Ended December 31, 2016
The following summarizes KCS’s consolidated income statement components (in millions):
Revenues
Operating expenses
Operating income
Equity in net earnings of affiliates
Interest expense
Foreign exchange gain (loss)
Other expense, net
Income before income taxes
Income tax expense (benefit)
Net income
Less: Net income attributable to noncontrolling interest
Net income attributable to Kansas City Southern and
subsidiaries
Revenues
2017
2016
Change
$
2,582.9
$
2,334.2
$
1,661.3
1,515.7
921.6
11.5
(100.2)
41.7
(0.3)
874.3
(89.6)
963.9
1.9
818.5
14.6
(97.7)
(72.0)
(0.7)
662.7
182.8
479.9
1.8
248.7
145.6
103.1
(3.1)
(2.5)
113.7
0.4
211.6
(272.4)
484.0
0.1
$
962.0
$
478.1
$
483.9
The following summarizes revenues (in millions), carload/unit statistics (in thousands) and revenue per carload/unit:
Chemical and petroleum $
Industrial and consumer
products
Agriculture and
minerals
Energy
Intermodal
Automotive
Carload revenues,
carloads and units
Revenues
2016
475.4
$
2017
539.9
Carloads and Units
Revenue per Carload/Unit
% Change
14%
2017
273.5
2016
258.5
% Change
2017
6% $ 1,974
2016
$ 1,839
% Change
7%
588.3
554.0
6%
329.9
317.0
4%
1,783
1,748
2%
477.4
283.8
363.8
230.8
461.0
202.7
357.6
189.9
4%
40%
2%
22%
244.3
291.7
975.1
155.5
251.4
253.9
952.8
133.3
(3%)
1,954
1,834
15%
2%
17%
973
373
798
375
1,484
1,425
7%
22%
(1%)
4%
2,484.0
2,240.6
11% 2,270.0
2,166.9
5% $ 1,094
$ 1,034
6%
Other revenue
98.9
93.6
Total revenues (i)
$ 2,582.9
$ 2,334.2
6%
11%
(i) Included in revenues:
Fuel surcharge
$
169.5
$
103.8
26
11% and 5%, respectively, for the year ended
Revenues include revenue for transportation services and fuel surcharges. Notwithstanding the impacts of Hurricane
yy
Harvey, revenues and carload/unit volumes increased
compared to the prior year. Revenue per carload/unit increased by 6% due to mix, increased average length of haul, positive
pricing impacts, and higher fuel surcharge. Energy revenues increased $81.1 million, primarily due to an increase in utility coal
volumes due to higher natural gas prices and lower coal inventory levels. In addition, frac sand volumes increased due to strong
demand as a result of higher crude oil prices. Chemical and petroleum revenues increased $64.5 million, primarily due to
increased refined product and liquefied petroleum gas shipments to Mexico. The increase in revenue per carload/unit was
partially offset by the weakening of the Mexican peso against the U.S. dollar of approximately $8.0 million, compared to the
prior year, for revenue transactions denominated in Mexican pesos. The average exchange rate of Mexican pesos per U.S.
dollar was Ps.18.9 for 2017 compared to Ps.18.7 for 2016.
December 31, 2017,
yy
ff
KCS’s fuel surcharges are a mechanism to adjust revenue based upon changes in fuel prices above fuel price thresholds
ff
set in KCS’s tariffs or contracts. Fuel surchar
to 60 days earlier. In a period of volatile fuel prices or changing customer business mix, changes in fuel expense and fuel
.
surcharge revenue may differ
ge revenue is calculated using a fuel price from a prior time period that can be up
ff
Fuel surcharge revenue increased $65.7 million for the year ended December 31, 2017, compared to the prior year, due to
higher fuel prices and the impact of fuel prices increasing above the fuel price thresholds for certain of KCS’s tariffs and
contracts. Additionally, fuel surchar
rate, as well as increased volumes.
ge increased due to separating the fuel surcharge for certain customers from the line haul
yy
ff
The following discussion provides an analysis of revenues by commodity group:
Revenues by commodity
group for 2017
rr
Chemical and petroleum.
Revenues increased $64.5 million for the
year ended December 31, 2017, compared to 2016, due to a 7% increase
in revenue per carload/unit and a 6% increase in carload/unit volumes.
Revenue per carload/unit increased due to longer average length of haul
and positive pricing impacts. Petroleum volumes increased due to
refined product and liquefied petroleum gas shipments to Mexico.
Industrial and consumer products.
rr
Revenues increased $34.3
million for the year ended December 31, 2017, compared to 2016, due to
a 4% increase in carload/unit volumes and a 2% increase in revenue per
carload/unit. Other carloads’ volumes increased due to strong military
movements. Revenue per carload/unit increased due to higher fuel
surcharge, metals and scrap longer average length of haul, and positive
pricing impacts.
27
Plastics
24%
Petroleum
34%
Other
19%
Metals &
Scrap
38%
Chemicals
42%
Forest
Products
43%
Agriculture and minerals.
rr
Revenues increased $16.4 million for
the year ended December 31, 2017 compared to 2016, due to a 7%
increase in revenue per carload/unit, partially offset by a 3% decrease in
carload/unit volumes. Revenue per carload/unit increased due to positive
pricing impacts, longer average length of haul, and higher fuel
surcharge. Food products volumes decreased due to change in market
demand.
ff
Revenues by commodity
group for 2017
Stone,
Clay, &
Glass
6%
Ores &
Minerals
4%
Food
Products
32%
Frac Sand
18%
Energyr
.yy Revenues increased $81.1 million for the year ended
December 31, 2017, compared to 2016, due to a 22% increase in
revenue per carload/unit and a 15% increase in carload/unit volumes.
Revenues per carload/unit increased due to longer average length of
haul, positive pricing impacts, mix, and higher fuel surcharge. Utility
coal volumes increased due to higher natural gas prices and lower coal
inventory levels. Additionally, frac sand volumes increased due to strong
demand as a result of higher crude oil prices.
yy
Crude Oil
9%
Coal &
Petroleum
Coke
14%
Grain
58%
Utility
Coal
59%
Intermodal. Revenues increased $6.2 million for the year ended December 31, 2017, compared to 2016, due to a 2%
increase in carload/unit volumes, partially offset by a
attributable to new business and lower volumes in second half of 2016 due to service disruptions from protests, partially offset
by truck capacity in the U.S. and Mexico. Revenue per carload/unit decreased due to shorter average length of haul and mix.
1% decrease in revenue per carload/unit. The volume increase was
ff
ff
Automotive. Revenues increased $40.9 million for the year ended December 31, 2017, compared to 2016, due to 17%
increase in carload/unit volumes and a 4% increase in revenue per carload/unit. Volumes increased due to customers’
plant shutdowns in the first half of 2016, the introduction of new automobile models, and new plant openings. Revenue per
carload/unit increased due to higher fuel surcharge and positive pricing impacts, partially offset by the weakening of the
Mexican peso against the U.S. dollar.
VV
ff
temporary
28
Operating Expenses
Operating expenses, as shown below (in millions), increased $145.6 million for the year ended December 31, 2017,
compared to 2016, primarily due to higher fuel prices and consumption, and compensation and benefits. The weakening of the
Mexican peso against the U.S. dollar resulted in an expense reduction of approximately $5.0 million for expense transactions
denominated in Mexican pesos. The average exchange rate of Mexican pesos per U.S. dollar was Ps.18.9 for 2017 compared to
Ps.18.7 for 2016.
Compensation and benefits
Purchased services
Fuel
Mexican fuel excise tax credit
Equipment costs
Depreciation and amortization
Materials and other
Total operating expenses
2017
2016
Dollars
Percent
Change
$
493.8
$
462.4
$
193.7
316.1
(44.1)
129.2
320.9
251.7
208.5
253.8
(62.8)
120.0
305.0
228.8
31.4
(14.8)
62.3
18.7
9.2
15.9
22.9
$
1,661.3
$
1,515.7
$
145.6
7%
(7%)
25%
(30%)
8%
5%
10%
10%
Compensation and benefits. Compensation and benefits increased $31.4 million for the year ended December 31, 2017,
compared to 2016, due to increases in annual wages and benefits of approximately $16.0 million. In addition, compensation
and benefits increased by approximately $12.0 million due to increased headcount as a result of higher carloads and car repair
in Mexico being performed in-house starting in October 2016.
Purchased services. Purchased services expense decreased $14.8 million for the year ended December 31, 2017,
compared to 2016, due to car repair in Mexico being performed in-house starting in October 2016, partially offset by increases
in repairs and maintenance, joint facilities expenses, computer software expenses, and detours.
Fuel. Fuel expense increased $62.3 million for the year ended December 31, 2017, compared to 2016, due to higher
diesel fuel prices of approximately $30.0 million and $21.0 million in Mexico and the U.S., respectively, and higher
consumption of approximately $19.0 million, partially offset by the weakening of the Mexican peso of approximately $4.0
million and improved efficiency of approximately $4.0 million. The average price per gallon, inclusive of the impact from the
weakening of the Mexican peso, was $2.27 in 2017, compared to $1.95 in 2016.
Mexican fuel excise tax credit. Fuel purchases made in Mexico are subject to an excise tax that is included in the price of
fuel. The Company is eligible for and utilizes an available credit for the excise tax included in the price of fuel that is purchased
and consumed in locomotives and certain work equipment in Mexico. For the year ended December 31, 2017, the Company
recognized a $44.1 million benefit, compared to a $62.8 million benefit recognized in 2016. The reduced benefit is due to a
lower excise tax rate in effect for 2017 as compared to 2016. The Mexican fuel excise tax credit is realized through the offset of
the total annual Mexico income tax liability and income tax withholding payment obligations of KCSM, with no carryforward
to future periods.
Equipment costs. Equipment costs increased $9.2 million for the year ended December 31, 2017, compared to 2016, due
to higher car hire expense resulting from increased automotive business impacting rates and volumes, partially offset by
improved efficiency.
Depreciation and amortization. Depreciation and amortization expense increased $15.9 million for the year ended
December 31, 2017, compared to 2016, due to a larger asset base.
Materials and other. Materials and other expense increased $22.9 million for the year ended December 31, 2017,
compared to 2016, due to car repair in Mexico being performed in-house starting in October 2016, which resulted in additional
materials purchased, and in an increase in casualty derailment expense.
29
Non-Operating Expenses
Equity in net earnings of affiliates. Equity in net earnings from affiliates decreased $3.1 million for the year ended
December 31, 2017, compared to 2016, as a result of lower equity in net earnings from the operations of PCRC due to a
decrease in container volumes.
Interest expense. Interest expense increased $2.5 million for the year ended December 31, 2017, compared to 2016, due
to higher average debt balances, partially offset by lower average interest rates as a result of an increased proportion of
commercial paper in the overall debt mix. For the year ended December 31, 2017, the average debt balance (including
commercial paper) was $2,603.6 million, compared to $2,492.7 million in 2016. The average interest rate for the year ended
December 31, 2017 was 3.9%, compared to 4.0% in 2016.
Foreign exchange gain (loss). For the year ended December 31, 2017 foreign exchange gain was $41.7 million,
compared to a loss of $72.0 million in 2016. Foreign exchange gain (loss) includes the re-measurement and settlement of net
monetary assets denominated in Mexican pesos and the gain (loss) on foreign currency derivative contracts.
For the year ended December 31, 2017, the re-measurement and settlement of net monetary assets denominated in
Mexican pesos resulted in a foreign exchange gain of $3.5 million, compared to a loss of $18.5 million in 2016.
The Company enters into foreign currency derivative contracts to hedge its net exposure to fluctuations in the Mexican
cash tax obligation due to changes in the value of the Mexican peso against the U.S. dollar. For the year ended December 31,
2017, foreign exchange gain on foreign currency derivative contracts was $38.2 million compared to a loss of $53.5 million in
2016.
Other expense, net. Other expense, net, decreased $0.4 million for the year ended December 31, 2017, compared to 2016,
due to an increase in miscellaneous income.
Income tax expense (benefit). Income tax expense (benefit) decreased $272.4 million for the year ended December 31,
2017, compared to 2016, due to the impact of the Tax Reform Act enacted on December 22, 2017. The Company recognized a
$487.6 million tax benefit as a result of revaluing the U.S. ending net deferred tax liabilities from 35% to the newly enacted
U.S. corporate income tax rate of 21%. The tax benefit was partially offset by tax expense of $74.6 million for the deemed
mandatory repatriation of undistributed earnings. The effective tax rate was (10.2%) and 27.6% for the years ended
December 31, 2017 and 2016, respectively. The decrease in the effective tax rate was due to impact of the Tax Reform Act.
The strengthening of the Mexican peso as of December 31, 2017 as compared to December 31, 2016 increased the
Company’s Mexican cash tax obligation by $18.8 million for the year ended December 31, 2017, whereas the weakening of the
Mexican peso as of December 31, 2016 decreased the Company’s Mexican cash tax obligation by $49.2 million for the year
ended December 31, 2016. The Company enters into foreign currency derivative contracts to hedge its net exposure to
fluctuations in the Mexican cash tax obligation due to changes in the value of the Mexican peso against the U.S. dollar, and
gains and losses on these foreign currency derivative contracts are recorded in foreign exchange gain (loss).
Further information on the components of the effective tax rates for the years ended December 31, 2017 and 2016, is
presented in Note 12 to the consolidated financial statements in Item 8.
Beginning in 2018, the Company’s effective tax rate is expected to be reduced to 29%-30%, assuming a constant
exchange rate of the Mexican peso against the U.S. dollar. The Company expects U.S. tax reform to reduce U.S. cash taxes by
approximately $90.0 million over 2018 through 2020.
30
Year Ended December 31, 2016, compared with the Year Ended December 31, 2015
The following summarizes KCS’s consolidated income statement components (in millions):
Revenues
Operating expenses
Operating income
Equity in net earnings of affiliates
Interest expense
Debt retirement and exchange costs
Foreign exchange loss
Other expense, net
Income before income taxes
Income tax expense
Net income
Less: Net income attributable to noncontrolling interest
Net income attributable to Kansas City Southern and
subsidiaries
Revenues
2016
2015
Change
$
2,334.2
$
2,418.8
$
1,515.7
1,615.0
818.5
14.6
(97.7)
—
(72.0)
(0.7)
662.7
182.8
479.9
1.8
803.8
18.3
(81.9)
(7.6)
(56.6)
(3.4)
672.6
187.3
485.3
1.8
$
478.1
$
483.5
$
(84.6)
(99.3)
14.7
(3.7)
(15.8)
7.6
(15.4)
2.7
(9.9)
(4.5)
(5.4)
—
(5.4)
The following summarizes revenues (in millions), carload/unit statistics (in thousands) and revenue per carload/unit:
Chemical and petroleum $
Industrial and consumer
products
Agriculture and minerals
Energy
Intermodal
Automotive
Carload revenues,
carloads and units
Revenues
Carloads and Units
Revenue per Carload/Unit
2016
475.4
2015
474.2
$
% Change
—
2016
258.5
2015
259.7
% Change
2016
— $ 1,839
2015
$ 1,826
% Change
1%
554.0
461.0
202.7
357.6
189.9
570.4
429.3
252.3
381.5
218.7
(3%)
7%
(20%)
(6%)
(13%)
317.0
251.4
253.9
952.8
133.3
320.5
238.8
280.8
990.3
126.5
(1%)
5%
(10%)
(4%)
5%
1,748
1,834
798
375
1,780
1,798
899
385
1,425
1,729
(2%)
2%
(11%)
(3%)
(18%)
2,240.6
2,326.4
(4%)
2,166.9
2,216.6
(2%) $ 1,034
$ 1,050
(2%)
Other revenue
93.6
92.4
Total revenues (i)
$ 2,334.2
$ 2,418.8
1%
(3%)
(i) Included in revenues:
Fuel surcharge
$
103.8
$
230.1
Revenues include both revenue for transportation services and fuel surcharges. For the year ended December 31, 2016,
revenues and carload/unit volumes decreased 3% and 2%, respectively, compared to the prior year. Revenue decreased by $66.0
million or approximately 3%, compared to the prior year, due to the weakening of the Mexican peso against the U.S. dollar for
revenue transactions denominated in Mexican pesos. The average exchange rate of Mexican pesos per U.S. dollar was Ps.18.7
for 2016 compared to Ps.15.8 for 2015.
31
Revenue per carload/unit decreased by 2% for the year ended December 31, 2016, compared to the prior year, due to the
weakening of the Mexican peso against the U.S. dollar and lower fuel surcharge, partially offset by positive pricing impacts.
ff
KCS’s fuel surcharges are a mechanism to adjust revenue based upon changes in fuel prices above fuel price thresholds
ff
set in KCS’s tariffs or contracts. Fuel surchar
to 60 days earlier. In a period of volatile fuel prices or changing customer business mix, changes in fuel expense and fuel
.
surcharge revenue may differ
ge revenue is calculated using a fuel price from a prior time period that can be up
ff
Fuel surcharge revenue decreased $126.3 million for the year ended December 31, 2016, compared to the prior year, due
in part to combining the fuel surcharge for certain customers with the line haul rate. In addition, fuel surcharge revenue
decreased due to lower U.S. fuel prices and the impact of fuel prices falling below fuel price thresholds for certain of KCS’s
tariffs and contracts during 2016.
ff
The following discussion provides an analysis of revenues by commodity group:
Revenues by commodity
group for 2016
Plastics
27%
Petroleum
30%
Other
17%
Metals &
Scrap
38%
Chemicals
43%
Forest
Products
45%
i
rr
k i
Reven
d h
l
Chemical and petroleum.
ues increased $1.2 million for the
year ended December 31, 2016, compared to 2015, due to a 1% increase
in revenue per carload/unit. Revenue per carload/unit increased due to
positive pricing impacts and mix, partially of
f
fff
fset by lower fuel surchar
l
positive pricing impacts and mix, partially off
h
. Plastic
i
l
and the weakening of the Mexican peso against the U.S. dollar
d ll
i
i
f h
volumes increased due to strong market demand and low commodity
di
pricing environment and petroleum volumes increased as a result of
pricing environment and petroleum volumes increased as a result of
several customers’ b i
i ll
i
These increases were partially
ff
fset by a decrease in chemical volumes due to oversupply caused by
d b
l
d
off
l
low natural gas prices that drove fertilizer prices down and a customer’s
l
lost business.
b i
l
business expansion. h
d
l
h
h d
b l
h
k d
d d
l
d
l
b
d l
ili
d
d
f
i
i
i
i
i
i
ge
Industrial and consumer products.
rr
Revenues decreased $16.4
million for the year ended December 31, 2016, compared to 2015, due to
a 2% decrease in revenue per carload/unit and a 1% decrease in carload/
unit volumes. Revenue per carload/unit decreased due to the weakening
of the Mexican peso against the U.S. dollar and lower fuel surcharge,
partially offset by positive pricing impacts. Paper volumes decreased
due to competitive trucking market, global softness in the market, and
high inventory levels.
ff
32
Agriculture and minerals.
rr
Revenues increased $31.7 million for
the year ended December 31, 2016 compared to 2015, due to a 5%
increase in carload/unit volumes and a 2% increase in revenue per
carload/unit. Grain and food product volumes increased due to improved
cycle times. In addition, grain volumes increased due to additional
equipment capacity, partially of
ff
fset by a decrease in ores and minerals
volumes due to weather related issues in the southeast region of the
United States. Revenue per carload/unit increased due to longer average
length of haul and mix, partially offset by lower fuel surchar
weakening of the Mexican peso against the U.S. dollar.
ge and the
yy
ff
Energyr
.yy Revenues decreased $49.6 million for the year ended
December 31, 2016, compared to 2015, due to an 11% decrease in
revenue per carload/unit and a 10% decrease in carload/unit volumes.
Revenue per carload/unit decreased due to shorter average length of haul
and lower fuel surcharge. Volumes decreased as low natural gas prices
and high coal inventory levels reduced the demand for utility coal in
2016. In addition, crude oil volumes decreased as result of low crude oil
spreads and increased pipeline capacity, and the decline in new crude
drilling operations in the U.S. has reduced the demand for frac sand.
VV
yy
Revenues by commodity
group for 2016
Stone,
Clay, &
Glass
6%%
Ores &
Minerals
4%
Food
Products
33%
Frac Sand
12%
Crude Oil
7%
Coal &
Petroleum
Coke
19%
Grain
57%
Utility
Coal
62%
Intermodal. Revenues decreased $23.9 million for the year ended December 31, 2016, compared to 2015, due to a 4%
decrease in carload/unit volumes and a 3% decrease in revenue per carload/unit. Volumes decreased due to service disruptions
related to the flooding in the southeastern United States earlier in the year and protests in Mexico during July of 2016,
increased truck conversion, and high retail inventory levels. Revenue per carload/unit decreased as a result of pricing impacts
and shorter average length of haul.
VV
Automotive. Revenues decreased $28.8 million for the year ended December 31, 2016, compared to 2015, due to an 18%
decrease in revenue per carload/unit, partially offset by a
decreased due to the weakening of the Mexican peso against the U.S. dollar and lower fuel surcharge. Volumes increased due to
2015 service-related issues and new customers in 2016, partially offset by customers’
half of 2016.
5% increase in carload/unit volumes. Revenue per carload/unit
temporary plant shutdowns in the first
VV
ff
ff
33
Operating Expenses
Operating expenses, as shown below (in millions), decreased $99.3 million for the year ended December 31, 2016,
compared to 2015, primarily due to the Mexican fuel excise tax credit, the weakening of the Mexican peso against the U.S.
dollar, and lower fuel prices. The weakening of the Mexican peso against the U.S. dollar resulted in an expense reduction of
approximately $63.0 million or 4% for expense transactions denominated in Mexican pesos. The average exchange rate of
Mexican pesos per U.S. dollar was Ps.18.7 for 2016 compared to Ps.15.8 for 2015.
Compensation and benefits
Purchased services
Fuel
Mexican fuel excise tax credit
Equipment costs
Depreciation and amortization
Materials and other
Lease termination costs
Total operating expenses
2016
2015
Dollars
Percent
Change
$
462.4
$
442.2
$
208.5
253.8
(62.8)
120.0
305.0
228.8
—
223.0
306.9
—
119.4
284.6
229.3
9.6
$
1,515.7
$
1,615.0
$
20.2
(14.5)
(53.1)
(62.8)
0.6
20.4
(0.5)
(9.6)
(99.3)
5%
(7%)
(17%)
100%
1%
7%
—
(100%)
(6%)
Compensation and benefits. Compensation and benefits increased $20.2 million for the year ended December 31, 2016,
compared to 2015, due to higher incentive compensation of approximately $34.0 million and annual wage increases of
approximately $14.0 million. Incentive compensation increased due to higher expected achievement of short and long-term
incentive performance targets in 2016, as compared to 2015. These increases were partially offset by the weakening of the
Mexican peso of approximately $19.0 million compared to 2015, and lower U.S. labor costs of approximately $15.0 million
due to reduced volumes and increased productivity.
Purchased services. Purchased services expense decreased $14.5 million for the year ended December 31, 2016,
compared to 2015, due to car repair in Mexico being performed in-house starting in October 2016 and the weakening of the
Mexican peso.
Fuel. Fuel expense decreased $53.1 million for the year ended December 31, 2016, compared to 2015, due to the
weakening of the Mexican peso of approximately $28.0 million and lower diesel fuel prices of approximately $18.0 million and
$4.0 million in the U.S. and Mexico, respectively. The average price per gallon, inclusive of the impact from the weakening of
the Mexican peso, was $1.95 in 2016, compared to $2.32 in 2015. In addition, fuel expense decreased due to improved fuel
efficiency and lower fuel consumption.
Mexican fuel excise tax credit. Fuel purchases made in Mexico are subject to an excise tax that is included in the price of
fuel. In 2016, the Company determined it was eligible for and could utilize an available credit for the excise tax included in the
price of fuel that is purchased and consumed in locomotives and certain work equipment in Mexico and recognized a $62.8
million benefit. The Mexican fuel excise tax credit is realized through the offset of the total annual 2016 Mexico income tax
liability and income tax withholding payment obligations of KCSM, with no carryforward to future periods.
Equipment costs. Equipment costs increased $0.6 million for the year ended December 31, 2016, compared to 2015, due
to higher car hire expense due to volume mix, partially offset by lower lease expense as a result of the purchase of equipment
under existing operating leases and replacement equipment as certain operating leases expired.
Depreciation and amortization. Depreciation and amortization increased $20.4 million for the year ended December 31,
2016, compared to 2015, due to a larger asset base.
Materials and other. Materials and other expense was flat for the year ended December 31, 2016, compared to 2015.
34
Lease termination costs. Lease termination costs were $9.6 million for the year ended December 31, 2015, due to the
early termination of certain operating leases and the related purchase of the equipment. The Company did not incur lease
termination costs for the year ended December 31, 2016.
Non-Operating Expenses
Equity in net earnings of affiliates. Equity in net earnings from affiliates decreased $3.7 million for the year ended
December 31, 2016, compared to 2015, due to lower net earnings from the operations of PCRC and FTVM as a result of lower
volumes.
Interest expense. Interest expense increased $15.8 million for the year ended December 31, 2016, compared to 2015, due
to higher average debt balances and average interest rates as a result of the Company’s issuance of debt during the third quarter
of 2015 and the second quarter of 2016. For the year ended December 31, 2016, the average debt balance (including short-term
borrowings) was $2,492.7 million, compared to $2,257.8 million in 2015. The average interest rate for the year ended
December 31, 2016 was 4.0%, compared to 3.7% in 2015.
Debt retirement and exchange costs. The Company did not incur debt retirement and exchange costs during 2016. For the
year ended December 31, 2015, debt retirement and exchange costs were $7.6 million, related to costs that were payable to
parties other than the debt holders as a result of the KCSR and KCSM senior notes exchanged for KCS senior notes.
Foreign exchange loss. For the years ended December 31, 2016 and 2015, foreign exchange loss was $72.0 million and
$56.6 million, respectively. Foreign exchange loss includes the re-measurement and settlement of net monetary assets
denominated in Mexican pesos and the loss on foreign currency derivative contracts.
For the years ended December 31, 2016 and 2015, the re-measurement and settlement of net monetary assets
denominated in Mexican pesos resulted in a foreign exchange loss of $18.5 million and $9.4 million, respectively.
The Company enters into foreign currency derivative contracts to hedge its net exposure to fluctuations in the Mexican
cash tax obligation due to changes in the value of the Mexican peso against the U.S. dollar. For the years ended December 31,
2016 and 2015, foreign exchange loss on foreign currency derivative contracts was $53.5 million and $47.2 million,
respectively.
Other expense, net. Other expense, net, decreased $2.7 million for the year ended December 31, 2016, compared to 2015,
due to lower miscellaneous expenses.
Income tax expense. Income tax expense decreased $4.5 million for the year ended December 31, 2016, compared to
2015, due to lower pre-tax income and a lower effective tax rate. The effective tax rate was 27.6% and 27.8% for the years
ended December 31, 2016 and 2015, respectively. The decrease in the effective tax rate was primarily due to the more
significant weakening of the Mexican peso against the U.S. dollar in 2016 as compared to 2015.
The weakening of the Mexican peso as of December 31, 2016 and 2015 decreased the Company’s Mexican cash tax
obligation by $49.2 million and $46.4 million for the years ended December 31, 2016 and 2015, respectively. The Company
enters into foreign currency derivative contracts to hedge its net exposure to fluctuations in the Mexican cash tax obligation due
to changes in the value of the Mexican peso against the U.S. dollar, and gains and losses on these foreign currency derivative
contracts are recorded in foreign exchange gain (loss).
Further information on the components of the effective tax rates for the years ended December 31, 2016 and 2015, is
presented in Note 12 to the consolidated financial statements in Item 8.
35
LIQUIDITY AND CAPITAL RESOURCES
Overview
The Company focuses its cash and capital resources on investing in the business, shareholder returns and optimizing its
capital structure.
The Company believes, based on current expectations, that cash and other liquid assets, operating cash flows, access to
debt and equity capital markets, and other available financing resources will be sufficient to fund anticipated operating
expenses, capital expenditures, debt service costs, dividends, share repurchases and other commitments in the foreseeable
future. The Company may, from time to time, incur debt to refinance existing indebtedness, purchase equipment under
operating leases, repurchase shares or fund equipment additions or new investments.
During 2017, the Company invested $559.5 million in capital expenditures. See Capital Expenditures section for further
details.
During the first half of 2017, KCS concluded its $500.0 million share repurchase program, announced in May 2015 (the
“2015 Program”). In August 2017, the Company announced a new share repurchase program of up to $800.0 million, which
expires on June 30, 2020 (the “2017 Program”). Included within the 2017 Program was authorization for an accelerated share
repurchase (“ASR”) program limited to $200.0 million. The Company entered into an ASR program of $200.0 million in the
third quarter of 2017, and settled the program in the fourth quarter of 2017. The Company’s 2017 repurchases of common
stock, which include shares repurchased through the 2015 Program and the 2017 Program, totaled 3,759,678 shares at an
average price of $99.90 per share and a total cost of $375.6 million. Remaining share repurchases are expected to be funded by
cash on hand, cash generated from operations and debt. Management's assessment of market conditions, available liquidity and
other factors will determine the timing and volume of any future repurchases. Refer to Note 13, Stockholders’ Equity in the
notes to the consolidated financial statements in Item 8 for additional detail on the Company’s share repurchase activity.
The Company’s financing instruments contain restrictive covenants which limit or preclude certain actions; however, the
covenants are structured such that the Company expects to have sufficient flexibility to conduct its operations. The Company
was in compliance with all of its debt covenants as of December 31, 2017.
For discussion regarding the agreements representing the indebtedness of KCS, see Note 10, Short-Term Borrowings and
Note 11, Long-Term Debt in the notes to the consolidated financial statements section in Item 8.
During the first half of 2017, the Company’s Board of Directors declared quarterly cash dividends of $0.33 per share or
$69.9 million on its common stock. During the second half of 2017, the Company’s Board of Directors declared quarterly cash
dividends of $0.36 per share or $74.3 million on its common stock. On January 23, 2018, the Company’s Board of Directors
declared a cash dividend of $0.36 per share payable on April 4, 2018, to common stockholders of record as of March 12, 2018.
Subject to the discretion of the Board of Directors, capital availability and a determination that cash dividends continue to be in
the best interest of its stockholders, the Company intends to pay a quarterly dividend on an ongoing basis.
On December 31, 2017, total available liquidity (the cash balance plus revolving credit facility availability) was $588.9
million, compared to available liquidity at December 31, 2016 of $789.2 million. This decrease was primarily due to an
increase in commercial paper and reduction in cash on hand to fund share repurchases made during 2017.
As of December 31, 2017, the total cash and cash equivalents held outside of the U.S. in foreign subsidiaries was $113.7
million. The Company expects that this cash will be available to fund company operations without incurring significant
additional taxes.
KCS’s operating results and financing alternatives can be impacted by various factors, some of which are outside of its
control. For example, if KCS were to experience a reduction in revenues or a substantial increase in operating costs or other
liabilities, its earnings could be significantly reduced, increasing the risk of non-compliance with debt covenants. Additionally,
the Company is subject to external factors impacting debt and equity capital markets and its ability to obtain financing under
reasonable terms is subject to market conditions. Volatility in capital markets and the tightening of market liquidity could
impact KCS’s access to capital. Further, KCS’s cost of debt can be impacted by independent rating agencies which assign debt
ratings based on certain factors including competitive position, credit measurements such as interest coverage and leverage
ratios, and liquidity.
36
Cash Flow Information and Contractual Obligations
Summary cash flow data follows (in millions):
Cash flows provided by (used for):
Operating activities
Investing activities
Financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents beginning of year
Cash and cash equivalents end of year
2017
2016
2015
$
$
$
1,028.4
(681.1)
(383.8)
(36.5)
170.6
$
919.0
(628.2)
(256.8)
34.0
136.6
134.1
$
170.6
$
909.2
(873.0)
(247.6)
(211.4)
348.0
136.6
During 2017, cash and cash equivalents decreased $36.5 million as a result of the impacts discussed in the paragraphs
below. During 2016, cash and cash equivalents increased $34.0 million as a result of the impacts discussed in the paragraphs
below.
Operating Cash Flows. Net cash provided by operating activities increased $109.4 million for 2017, as compared to
2016, primarily due to increased operating income of $103.1 million. Net cash provided by operating activities increased $9.8
million for 2016, as compared to 2015, due to an increase in cash inflows from working capital items resulting mainly from the
timing of certain payments, partially offset by the 2016 Mexican fuel excise tax credit, which reduced cash taxes paid during
2017.
Investing Cash Flows. Net cash used for investing activities increased $52.9 million for 2017, as compared to 2016, due
to a a $21.8 million increase in capital expenditures, $19.5 million increase in investments in and advances to affiliates, and a
$16.0 million increase in expenditures for the purchase or replacement of equipment under existing operating leases. Net cash
used for investing activities decreased $244.8 million for 2016, as compared to 2015, due to a $124.4 million decrease in
capital expenditures and a $117.6 million decrease in expenditures for the purchase or replacement of equipment under existing
operating leases. Additional capital expenditure information is included within the Capital Expenditure section of Liquidity and
Capital Resources.
Financing Cash Flows. Net cash used for financing activities increased $127.0 million for 2017, as compared to 2016,
due to an increase in the repurchase of common stock of $190.2 million, partially offset by an increase in net proceeds from
short-term borrowings of $58.2 million. Net cash used for financing activities increased $9.2 million for 2016, as compared to
2015, due to a decrease in net proceeds from long-term debt and short-term borrowings of $29.7 million, partially offset by a
decrease in debt cost payments of $17.7 million.
37
Contractual Obligations. The following table outlines the material obligations and commitments as of December 31,
2017 (in millions):
Payments Due by Period
Total
Less Than
1 Year
1-3 Years
3-5 Years
Long-term debt and short-term borrowings
(including interest and capital lease obligations) (i)
Operating leases
Deemed mandatory repatriation tax (ii)
Capital expenditure obligations (iii)
Other contractual obligations (iv)
Total
$ 4,083.4
281.7
44.9
400.3
547.5
$ 5,357.8
$
$
474.5
60.9
3.6
149.8
105.3
794.1
$
$
491.1
93.9
7.2
250.5
143.4
986.1
$
$
182.5
49.7
7.2
—
89.6
329.0
_____________________
More than
5 years
$ 2,935.3
77.2
26.9
—
209.2
$ 3,248.6
(i)
(ii)
(iii)
For variable rate obligations, interest payments were calculated using the December 31, 2017 rate. For fixed rate
obligations, interest payments were calculated based on the applicable rates and payment dates.
U.S. federal income tax on deemed mandatory repatriation is payable over 8 years pursuant to the Tax Reform Act.
Capital expenditure obligations include minimum capital expenditures under the KCSM Concession agreement and
other regulatory requirements.
(iv)
Other contractual obligations include purchase commitments and certain maintenance agreements.
In the normal course of business, the Company enters into long-term contractual commitments for future goods and
services needed for the operations of the business. Such commitments are not in excess of expected requirements and are not
reasonably likely to result in performance penalties or payments that would have a material adverse effect on the Company’s
liquidity. Such commitments are not included in the above table.
The Company is party to three utilization leases covering 571 railcars in which car hire revenue as defined in the lease
agreements is shared between the lessor and the Company. The leases expire at various times through 2024. Amounts that may
be due to lessors under these utilization leases vary from month to month based on car hire rental with the minimum monthly
cost to the Company being zero. Accordingly, the utilization leases have been excluded from contractual obligations above.
The SCT requires KCSM to submit a three-year capital expenditures plan every three years. The most recent three-year
plan was submitted in December 2017 for the years 2018 — 2020, and has not yet been approved by the SCT. KCSM expects
to continue capital spending at current levels in future years and will continue to have capital expenditure obligations past
2020, which are not included in the table above.
Off-Balance Sheet Arrangements
On November 2, 2007, PCRC completed an offering of $100.0 million of 7.0% senior secured notes due November 1,
2026 (the “Notes”). The Notes are senior obligations of PCRC, secured by certain assets of PCRC. KCS has pledged its shares
of PCRC as security for the Notes. The Notes are otherwise non-recourse to KCS. The Company has agreed, along with Mi-
Jack Products, Inc. (“Mi-Jack”), the other 50% owner of PCRC, to each fund 50% of any debt service reserve and liquidity
reserve (reserves which are required to be established by PCRC in connection with the issuance of the Notes). As of
December 31, 2017, the Company’s portion of these reserves was $5.5 million. The Company has issued a standby letter of
credit in the amount of $5.5 million to fund its share of these reserves.
38
Capital Expenditures
KCS has funded, and expects to continue to fund, capital expenditures with operating cash flows and short and long-term
debt.
The following table summarizes capital expenditures by type for the years ended December 31, 2017, 2016, and 2015,
respectively (in millions):
Roadway capital program
Locomotives and freight cars
Capacity
Positive train control
Information technology
Other
Total capital expenditures (accrual basis)
Change in capital accruals
Total cash capital expenditures
Purchase or replacement of equipment under operating
leases (accrual basis)
Change in capital accruals
Total cash purchase or replacement of equipment under
operating leases
2017
2016
2015
$
$
$
269.3
75.7
111.4
51.7
33.7
17.7
559.5
25.9
585.4
42.6
—
$
$
$
271.8
112.6
109.6
49.6
29.3
11.1
584.0
(20.4)
563.6
26.6
—
294.0
201.2
86.6
34.0
21.9
11.0
648.7
39.3
688.0
144.2
—
42.6
$
26.6
$
144.2
$
$
$
$
Generally, the Company’s capital program consists of capital replacement and equipment. For 2018, internally generated
cash flows and short-term borrowings are expected to fund cash capital expenditures, which are currently estimated to be
between $530.0 million and $550.0 million. In addition, the Company periodically reviews its equipment under operating
leases. Any additional purchase or replacement of equipment under operating leases during 2018 is expected to be funded with
internally generated cash flows and/or short-term debt.
Property Statistics
The following table summarizes certain property statistics as of December 31:
Track miles of rail installed
Cross ties installed (thousands)
2017
2016
2015
174
699
146
711
177
829
Shelf Registration Statements and Public Securities Offerings
KCS has one current, universal shelf registration statement on file with the SEC (the “Universal Shelf” — Registration
No. 333-221537). The Universal Shelf was filed on November 13, 2017 in accordance with the securities offering reform rules
of the SEC that allow “well-known seasoned issuers” to register an unspecified amount of different types of securities on an
immediately effective Form S-3 registration statement. The Universal Shelf will expire on November 13, 2020.
39
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
KCS’s accounting and financial reporting policies are in conformity with U.S. generally accepted accounting principles
(“U.S. GAAP”). The preparation of financial statements in conformity with U.S. GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and
liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting
period. Management believes that the following accounting policies and estimates are critical to an understanding of KCS’s
historical and future performance. Management has discussed the development and selection of the following critical
accounting estimates with the Audit Committee of KCS’s Board of Directors and the Audit Committee has reviewed the
selection, application and disclosure of the Company’s critical accounting policies and estimates.
Capitalization, Depreciation and Amortization of Property and Equipment (including Concession Assets)
Due to the highly capital intensive nature of the railroad industry, capitalization and depreciation of property and
equipment are a substantial portion of the Company’s consolidated financial statements. Net property and equipment, including
concession assets, comprised approximately 91% of the Company’s total assets as of December 31, 2017, and related
depreciation and amortization comprised approximately 19% of total operating expenses for the year ended December 31,
2017.
KCS capitalizes costs for self-constructed additions and improvements to property including direct labor and material,
indirect overhead costs, and interest during long-term construction projects. Direct costs are charged to capital projects based
on the work performed and the material used. Indirect overhead costs are allocated to capital projects as a standard percentage,
which is evaluated annually, and applied to direct labor and material costs. Asset removal activities are performed in
conjunction with replacement activities; therefore, removal costs are estimated based on a standard percentage of direct labor
and indirect overhead costs related to capital replacement projects. For purchased assets, all costs necessary to make the asset
ready for its intended use are capitalized. Expenditures that significantly increase asset values, productive capacity, efficiency,
safety or extend useful lives are capitalized. Repair and maintenance costs are expensed as incurred.
Property and equipment are carried at cost and are depreciated primarily on the group method of depreciation, which the
Company believes closely approximates a straight line basis over the estimated useful lives of the assets measured in years. The
group method of depreciation applies a composite rate to classes of similar assets rather than to individual assets. Composite
depreciation rates are based upon the Company’s estimates of the expected average useful lives of assets as well as expected
net salvage value at the end of their useful lives. In developing these estimates, the Company utilizes periodic depreciation
studies performed by an independent engineering firm. Depreciation rate studies are performed at least every three years for
equipment and at least every six years for road property (rail, ties, ballast, etc.). The depreciation studies take into account
factors such as:
• Statistical analysis of historical patterns of use and retirements of each asset class;
• Evaluation of any expected changes in current operations and the outlook for the continued use of the assets;
• Evaluation of technological advances and changes to maintenance practices; and
• Historical and expected salvage to be received upon retirement.
The depreciation studies may also indicate that the recorded amount of accumulated depreciation is deficient or in excess
of the amount indicated by the study. Any such deficiency or excess is amortized as a component of depreciation expense over
the remaining useful lives of the affected asset class, as determined by the study. The Company also monitors these factors in
non-study years to determine if adjustments should be made to depreciation rates. The Company completed depreciation
studies for KCSM in 2016 and KCSR in 2015. The impacts of the studies were immaterial to the consolidated financial results
for all periods.
Also under the group method of depreciation, the cost of railroad property and equipment (net of salvage or sales
proceeds) retired or replaced in the normal course of business is charged to accumulated depreciation with no gain or loss
recognized. Actual historical costs are retired when available, such as with equipment costs. The use of estimates in recognizing
the retirement of roadway assets is necessary as it is impractical to track individual, homogeneous network-type assets. Certain
types of roadway assets are retired using statistical curves derived from the depreciation studies that indicate the relative
distribution of the age of the assets retired. For other roadway assets, historical costs are estimated by (1) deflating current costs
40
using inflation indices published by the U.S. Bureau of Labor Statistics and (2) the estimated useful life of the assets as
determined by the depreciation studies. The indices applied to the replacement value are selected because they closely correlate
with the major costs of the items comprising the roadway assets. Because of the number of estimates inherent in the
depreciation and retirement processes and because it is impossible to precisely estimate each of these variables until a group of
assets is completely retired, the Company continually monitors the estimated useful lives of its assets and the accumulated
depreciation associated with each asset group to ensure the depreciation rates are appropriate.
Estimation of the average useful lives of assets and net salvage values requires management judgment. Estimated
average useful lives may vary over time due to changes in physical use, technology, asset strategies and other factors that could
have an impact on the retirement experience of the asset classes. Accordingly, changes in the assets’ estimated useful lives
could significantly impact future periods’ depreciation expense. Depreciation and amortization expense for the year ended
December 31, 2017 was $320.9 million. If the weighted average useful lives of assets were changed by one year, annual
depreciation and amortization expense would change approximately $10.0 million.
Gains or losses on dispositions of land or non-group property and abnormal retirements of railroad property are
recognized through income. A retirement of railroad property would be considered abnormal if the cause of the retirement is
unusual in nature and its actual life is significantly shorter than what would be expected for that group based on the
depreciation studies. An abnormal retirement could cause the Company to re-evaluate the estimated useful life of the impacted
asset class. There were no significant gains or losses from abnormal retirements of property or equipment for any of the three
years ended December 31, 2017.
Costs incurred by the Company to acquire the concession rights and related assets, as well as subsequent improvements
to the concession assets, are capitalized and amortized using the group method of depreciation over the lesser of the current
expected Concession term, including probable renewal of an additional 50-year term, or the estimated useful lives of the assets
and rights. The Company’s ongoing evaluation of the useful lives of concession assets and rights considers the aggregation of
the following facts and circumstances:
• The Company’s executive management is dedicated to ensuring compliance with the various provisions of the
Concession and to maintaining positive relationships with the SCT and other Mexican federal, state, and municipal
governmental authorities;
• During the time since the Concession was granted, the relationships between KCSM and the various Mexican
governmental authorities have matured and the guidelines for operating under the Concession have become more
defined with experience;
• There are no known supportable sanctions or compliance issues that would cause the SCT to revoke the Concession
or prevent KCSM from renewing the Concession; and
• KCSM operations are an integral part of the KCS operations strategy, and related investment analyses and
operational decisions assume that the Company’s cross border rail business operates into perpetuity, and do not
assume that Mexico operations terminate at the end of the current Concession term.
Based on the above factors, as of December 31, 2017, the Company continues to believe that it is probable that the
Concession will be renewed for an additional 50-year term beyond the current term.
Long-lived assets are reviewed for impairment when events or circumstances indicate that the carrying amount of an asset
may not be recoverable. If impairment indicators are present and the estimated future undiscounted cash flows are less than the
carrying value of the long-lived assets, the carrying value would be reduced to the estimated fair value. Future cash flow
estimates for an impairment review would be based on the lowest level of identifiable cash flows, which are the Company’s
U.S. and Mexican operations. During the years ended December 31, 2017 and 2016, management did not identify any
indicators of impairment.
41
Income Taxes
Deferred income taxes represent a net asset or liability of the Company. For financial reporting purposes, management
determines the current tax liability, as well as deferred tax assets and liabilities, in accordance with the asset and liability
method of accounting for income taxes. The provision for income taxes is the sum of income taxes both currently payable and
deferred into the future. Currently payable income taxes represent the liability related to the Company’s U.S., state and foreign
income tax returns for the current year and anticipated tax payments resulting from income tax audits, while the net deferred
tax expense or benefit represents the change in the balance of net deferred tax assets or liabilities as reported on the balance
sheet. The changes in deferred tax assets and liabilities are determined based upon the estimated timing of reversal of
differences between the carrying amount of assets and liabilities for financial reporting purposes and the basis of assets and
liabilities for tax purposes as measured using the currently enacted tax rates that will be in effect at the time these differences
are expected to reverse. Additionally, management estimates whether taxable operating income in future periods will be
sufficient to fully recognize any deferred tax assets. Valuation allowances are recorded as appropriate to reduce deferred tax
assets to the amount considered likely to be realized.
On December 22, 2017, the President of the United States signed into law the Tax Reform Act. The legislation
significantly changes U.S. tax law by, among other things, lowering corporate income tax rates, implementing a territorial tax
system and imposing a repatriation tax on deemed repatriated earnings of foreign subsidiaries. The Tax Reform Act
permanently reduces the U.S. corporate income tax rate from a maximum of 35% to a flat 21% rate, effective January 1, 2018.
The SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) to address the application of U.S. GAAP in situations
when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in
reasonable detail to complete the accounting for certain income tax effects of the Tax Reform Act. The Company has
recognized the provisional tax impacts related to deemed repatriated earnings and the revaluation of deferred tax assets and
liabilities and included these amounts in its consolidated financial statements for the year ended December 31, 2017. The
ultimate impact may differ from these provisional amounts, possibly materially, due to, among other things, additional analysis,
changes in interpretations and assumptions the Company has made, additional regulatory guidance that may be issued, and
actions the Company may take as a result of the Tax Reform Act. The accounting is expected to be complete when the 2017
U.S. corporate income tax return is filed in 2018.
Income tax expense related to Mexican operations has additional complexities such as the impact of exchange rate
variations, which can have a significant impact on the effective income tax rate.
Management believes that the assumptions and estimates related to the provision for income taxes are critical to the
Company’s results of operations. For the year ended December 31, 2017, income tax benefit totaled $89.6 million. For every
1% change in the 2017 effective rate, income tax expense would have changed by approximately $8.7 million. For further
information on the impact of foreign exchange fluctuation on income taxes, refer to Foreign Exchange Sensitivity in Item 7A.
OTHER MATTERS
Litigation. The Company is a party to various legal proceedings and administrative actions, all of which are of an
ordinary, routine nature and incidental to its operations. Included in these proceedings are various tort claims brought by current
and former employees for job-related injuries and by third parties for injuries related to railroad operations. KCS aggressively
defends these matters and has established liability provisions that management believes are adequate to cover expected costs.
Although it is not possible to predict the outcome of any legal proceeding, in the opinion of the Company’s management, other
than those proceedings described in Note 15 to the consolidated financial statements in Item 8 of this Form 10-K, such
proceedings and actions should not, individually or in the aggregate, have a material adverse effect on the Company’s
consolidated financial statements.
Inflation. U.S. generally accepted accounting principles require the use of historical cost, which does not reflect the
effects of inflation on the replacement cost of property. Due to the capital intensive nature of KCS’s business, the replacement
cost of these assets would be significantly higher than the amounts reported under the historical cost basis.
Recent Accounting Pronouncements. Refer to Note 2 to the consolidated financial statements in Item 8 of this Form
10-K for information relative to recent accounting pronouncements.
42
Regulatory Updates
Mexican Antitrust Law. Pursuant to the Mexican Antitrust Law and the Regulatory Railroad Service Law, the COFECE
announced that it would review competitive conditions in the Mexican railroad industry, with respect to the existence of
effective competition in the provision of interconnection services, trackage rights, switching rights and interline services used
to render public freight transport in Mexico. The COFECE review includes the entire freight rail transportation market in
Mexico and is not targeted to any single rail carrier.
On March 15, 2017, the COFECE published an executive summary of its preliminary report in the Diario Oficial de la
Federación. The COFECE’s preliminary report concluded that there was a lack of effective competition in the market for
trackage rights (“Relevant Market”) throughout the entire networks of KCSM, Ferrocarril Mexicano, S.A. de C.V., Ferrosur,
S.A. de C.V., and Ferrocarril y Terminal del Valle de Mexico, S.A. de C.V.
The Company disagrees with the COFECE’s reasoning and preliminary conclusions, and responded on April 20, 2017,
with its evidence and arguments to support its position, as provided in the Mexican antitrust law. The Company’s response
argues that the investigation which supports the conclusions in the preliminary report was conducted contrary to the rule of law,
the rules of procedure, and relied upon faulty economic analysis.
On April 27, 2017, the COFECE initiated the incidental procedure to analyze the recusal of two of its commissioners
from ongoing proceedings (“Motion to Recuse”). On June 6, 2017, KCSM presented arguments in connection with the Motion
to Recuse. On July 7, 2017, KCSM was served with rulings dated June 22, 2017 and June 2, 2017, regarding the Motion to
Recuse. Consequently, the two commissioners excluded themselves from further participation in the investigation.
It is expected a final ruling will be issued around April 2018. It is too early to determine what, if any, impact this
review may have on Mexican rail operations in the future. If the COFECE determines there is a lack of effective competition,
the COFECE could request the ARTF, which has primary regulatory jurisdiction over the Company’s Mexican operations, to
conduct proceedings to determine whether to establish new limited mandatory trackage rights and/or rate regulation under the
Amendments to the Mexican Regulatory Railroad Service Law.
Surface Transportation Board. On July 27, 2016, the Surface Transportation Board issued a Notice of Proposed
Rulemaking in Ex Parte 711 (Sub-No.1) Reciprocal Switching, proposing rules related to reciprocal switching. Initial
comments on the proposed rule were due by October 26, 2016, and replies to the initial comments were due by January 13,
2017. On December 27, 2016, the agency suspended the procedural deadline following submission of reply comments, pending
anticipated changes in the agency’s membership.
NAFTA. NAFTA is currently being renegotiated. Negotiations will continue in late January with no certainty of progress
or continuation. In addition, U.S. President Donald J. Trump, some members of Congress, and key U.S. administration officials
and policy makers have suggested the implementation of tariffs, border taxes or other measures that could impact the level of
trade between the U.S. and Mexico. Any notice of U.S. withdrawal from NAFTA could be for negotiating position and may be
challenged in courts. KCS believes North American trade will continue due to its economic importance and the economic
realties that already exist in the North American marketplace.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
KCS utilizes various financial instruments that have certain inherent market risks. These instruments have been entered
into for hedging rather than trading purposes. The following information, together with information included in Item 7,
Management’s Discussion and Analysis of Financial Condition and Results of Operations, and Note 9 to the consolidated
financial statements in Item 8 of this Form 10-K, describe the key aspects of certain financial instruments that have market risk
to KCS.
Interest Rate Sensitivity. Floating-rate indebtedness includes commercial paper borrowings and revolving credit facilities
which totaled $345.2 million and $181.4 million at December 31, 2017 and 2016, respectively. Considering the balance of
$345.2 million of variable rate debt at December 31, 2017, KCS is sensitive to fluctuations in interest rates. For example, a
hypothetical 100 basis points increase in interest rates would result in additional interest expense of $3.5 million on an
annualized basis for the floating-rate instruments issued by the Company as of December 31, 2017.
43
Based upon the borrowing rates available to KCS and its subsidiaries for indebtedness with similar terms and average
maturities, the fair value of long-term debt was approximately $2,377.8 million and $2,303.8 million at December 31, 2017 and
2016, respectively, compared with a carrying value of $2,274.3 million and $2,296.9 million at December 31, 2017 and 2016,
respectively.
In May 2017, the Company executed four treasury lock agreements with an aggregate notional value of $275.0 million
and a weighted-average interest rate of 2.85%. The purpose of the treasury locks is to hedge the U.S. Treasury benchmark
interest rate associated with future interest payments related to the anticipated refinancing of the $275.0 million of 2.35%
senior notes due May 15, 2020.
Commodity Price Sensitivity. KCS periodically participates in diesel fuel purchase commitments and derivative financial
instruments. At December 31, 2017 and 2016, KCS did not have any outstanding fuel derivative financial instruments. The
Company also holds fuel inventories for use in operations. These inventories are not material to KCS’s overall financial
position. Fuel costs are expected to reflect market conditions in 2018; however, fuel costs are unpredictable and subject to a
variety of factors outside the Company’s control. Assuming annual consumption of 140 million gallons, a 10 cent change in the
price per gallon of fuel would cause a $14.0 million change in operating expenses. KCS mitigates the impact of increased fuel
costs through fuel surcharge revenues from customers; however, in a period of volatile fuel prices or changing customer
business mix, changes in fuel expense and fuel surcharge revenue may differ.
Foreign Exchange Sensitivity. KCS’s foreign subsidiaries use the U.S. dollar as their functional currency; however, a
portion of the foreign subsidiaries’ revenues and expenses is denominated in Mexican pesos. Based on the volume of revenue
and expense transactions denominated in Mexican pesos, revenue and expense fluctuations have historically offset.
The Company has exposure to fluctuations in the value of the Mexican peso against the U.S. dollar due to its net
monetary assets that are denominated in Mexican pesos. The Company had Ps.2,389.1 million of net monetary assets at
December 31, 2017.
The following table presents an estimate of the impact to the consolidated statements of income that would result from a
hypothetical change in the exchange rate of one Mexican peso at December 31, 2017:
Net monetary assets denominated in Mexican pesos at
December 31, 2017:
Ps.2,389.1 million
Ps.2,389.1 million
Hypothetical
Change in
Exchange Rate
Amount of
Gain (Loss)
Affected Line Item
in the Consolidated
Statements of
Income
From Ps.19.7 to Ps.
20.7
From Ps.19.7 to Ps.
18.7
($5.8 million)
$6.5 million
Foreign exchange
gain (loss)
Foreign exchange
gain (loss)
Mexican income taxes are paid in Mexican pesos, and as a result, the effective income tax rate reflects fluctuations in the
value of the Mexican peso against the U.S. dollar. Most significantly, any gain or loss from the revaluation of the Company’s
net U.S. dollar-denominated monetary liabilities into Mexican pesos is included in Mexican taxable income under Mexican tax
law. As a result, a strengthening of the Mexican peso against the U.S. dollar for the reporting period will generally increase the
Mexican cash tax obligation and the effective income tax rate, and a weakening of the Mexican peso against the U.S. dollar for
the reporting period will generally decrease the Mexican cash tax obligation and the effective tax rate.
44
The following table presents an estimate of the impact to the effective income tax rate and income tax expense that would
result from a hypothetical change in the exchange rate of one Mexican peso at December 31, 2017:
Hypothetical Change in Exchange Rate
From Ps.19.7 to Ps.20.7
From Ps.19.7 to Ps.18.7
Increase (Decrease)
in Effective Income
Tax Rate
(1.9%)
Amount of
Expense (Benefit)
($16.6 million)
2.1%
$18.3 million
Affected Line Item
in the Consolidated
Statements of
Income
Income tax expense
(benefit)
Income tax expense
(benefit)
The Company has executed, and expects to continue to execute foreign currency derivative instruments to hedge its
exposure to fluctuations in the Mexican cash tax obligation due to changes in the value of the Mexican peso against the U.S.
dollar.
At December 31, 2017, the Company had outstanding foreign currency option contracts known as zero-cost collars with
an aggregate notional amount of $80.0 million, which matured during January 2018 and resulted in cash received of $10.0
million. During January 2018, the Company entered into several zero-cost collar contracts with an aggregate notional amount
of $340.0 million and maturity dates throughout 2018 and in January 2019. The zero-cost collar contracts have a weighted-
average rate of Ps.19.23 to each U.S. dollar for the Mexican peso call options purchased by KCS and a weighted-average rate
of Ps.21.45 to each U.S. dollar for the Mexican peso put options sold by KCS.
The Company has not designated these foreign currency derivative instruments as hedging instruments for accounting
purposes. The foreign currency derivative instruments will be measured at fair value each period and any change in fair value
will be recognized in foreign exchange gain (loss) within the consolidated statements of income.
45
Item 8. Financial Statements and Supplementary Data
Index to Consolidated Financial Statements
Management’s Report on Internal Control Over Financial Reporting
Report of Independent Registered Public Accounting Firm on the Company’s Internal Control over Financial
Reporting
Report of Independent Registered Public Accounting Firm on the Company’s Consolidated Financial Statements
Consolidated Statements of Income for the Three Years ended December 31, 2017
Consolidated Statements of Comprehensive Income for the Three Years ended December 31, 2017
Consolidated Balance Sheets at December 31, 2017 and 2016
Consolidated Statements of Cash Flows for the Three Years ended December 31, 2017
Consolidated Statements of Changes in Equity for the Three Years ended December 31, 2017
Notes to Consolidated Financial Statements
Financial Statement Schedules:
Page
47
48
49
50
51
52
53
54
55
All schedules are omitted because they are not applicable, are insignificant, or the required information is shown in the
consolidated financial statements or notes thereto.
46
Management’s Report on Internal Control over Financial Reporting
The management of Kansas City Southern is responsible for establishing and maintaining adequate internal control over
financial reporting as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). KCS’s internal control over
financial reporting was designed to provide reasonable assurance to the Company’s management and Board of Directors
regarding the preparation and fair presentation of published financial statements.
All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems
determined to be effective can provide only reasonable assurance with respect to financial statement preparation and
presentation.
Under the supervision and with the participation of the Company’s Chief Executive Officer and Chief Financial Officer,
management conducted an evaluation of the effectiveness of the Company’s internal control over financial reporting as of
December 31, 2017, based on the framework established by the Committee of Sponsoring Organizations of the Treadway
Commission in Internal Control — Integrated Framework (2013) (commonly referred to as the COSO Framework). Based on
its evaluation, management concluded that the Company’s internal control over financial reporting was effective as of
December 31, 2017, based on the criteria outlined in the COSO Framework.
The effectiveness of the Company’s internal control over financial reporting as of December 31, 2017, has been audited
by KPMG LLP, an independent registered public accounting firm, as stated in their attestation report, which immediately
follows this report.
47
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
Kansas City Southern:
Opinion on Internal Control over Financial Reporting
We have audited Kansas City Southern’s (the Company) internal control over financial reporting as of December 31, 2017,
based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2017, based on the criteria established in Internal Control -
Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the Standards of the Public Company Accounting Oversight Board (United States)
(“PCAOB”), the consolidated balance sheets of the Company and its subsidiaries as of December 31, 2017 and 2016, the
related consolidated statements of income, comprehensive income, changes in equity, and cash flows for each of the years in
the three-year period ended December 31, 2017, and the related notes, and our report dated January 26, 2018 expressed an
unqualified opinion on those consolidated financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s
Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal
control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are
required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all
material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control
over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures
that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the
company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ KPMG LLP
We have served as the Company’s auditor since 2001.
Kansas City, Missouri
January 26, 2018
48
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
Kansas City Southern:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Kansas City Southern and subsidiaries (the Company) as of
December 31, 2017 and 2016, and the related consolidated statements of income, comprehensive income, changes in equity,
and cash flows for each of the years in the three-year period ended December 31, 2017, and the related notes (collectively, the
“consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material
respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash
flows for each of the years in the three-year period ended December 31, 2017, in conformity with U.S. generally accepted
accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), Kansas City Southern’s internal control over financial reporting as of December 31, 2017, based on criteria
established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the
Treadway Commission, and our report dated January 26, 2018 expressed an unqualified opinion on the effectiveness of Kansas
City Southern’s internal control over financial reporting.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the
PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws
and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement,
whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the
consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such
procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial
statements. Our audits also included evaluating the accounting principles used and significant estimates made by management,
as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a
reasonable basis for our opinion.
/s/ KPMG LLP
We have served as the Company’s auditor since 2001.
Kansas City, Missouri
January 26, 2018
49
Kansas City Southern and Subsidiaries
Consolidated Statements of Income
Years Ended December 31,
Revenues
Operating expenses:
Compensation and benefits
Purchased services
Fuel
Mexican fuel excise tax credit
Equipment costs
Depreciation and amortization
Materials and other
Lease termination costs
Total operating expenses
Operating income
Equity in net earnings of affiliates
Interest expense
Debt retirement and exchange costs
Foreign exchange gain (loss)
Other expense, net
Income before income taxes
Income tax expense (benefit)
Net income
Less: Net income attributable to noncontrolling interest
Net income attributable to Kansas City Southern and subsidiaries
Preferred stock dividends
Net income available to common stockholders
Earnings per share:
Basic earnings per share
Diluted earnings per share
Average shares outstanding (in thousands):
Basic
Potentially dilutive common shares
Diluted
2017
2016
2015
(In millions, except share
and per share amounts)
$
2,582.9
$
2,334.2
$
2,418.8
493.8
193.7
316.1
(44.1)
129.2
320.9
251.7
—
1,661.3
921.6
11.5
(100.2)
—
41.7
(0.3)
874.3
(89.6)
963.9
1.9
962.0
0.2
961.8
9.18
9.16
104,728
312
105,040
$
$
$
462.4
208.5
253.8
(62.8)
120.0
305.0
228.8
—
1,515.7
818.5
14.6
(97.7)
—
(72.0)
(0.7)
662.7
182.8
479.9
1.8
478.1
0.2
477.9
4.44
4.43
107,560
201
107,761
$
$
$
442.2
223.0
306.9
—
119.4
284.6
229.3
9.6
1,615.0
803.8
18.3
(81.9)
(7.6)
(56.6)
(3.4)
672.6
187.3
485.3
1.8
483.5
0.2
483.3
4.41
4.40
109,709
206
109,915
$
$
$
See accompanying notes to consolidated financial statements.
50
Kansas City Southern and Subsidiaries
Consolidated Statements of Comprehensive Income
Years Ended December 31,
Net income
Other comprehensive loss:
Unrealized loss on interest rate derivative instruments during the
period, net of tax of $(2.2) million
Amortization of prior service credit, net of tax of less than $(0.1)
million
Foreign currency translation adjustments, net of tax of $3.8 million,
$(1.0) million and $(0.8) million
Other comprehensive loss
Comprehensive income
Less: comprehensive income attributable to noncontrolling interest
Comprehensive income attributable to Kansas City Southern and
subsidiaries
2017
2016
(In millions)
2015
$
963.9
$
479.9
$
485.3
(3.4)
—
(3.3)
(6.7)
957.2
1.9
—
—
(1.5)
(1.5)
478.4
1.8
—
(0.1)
(1.4)
(1.5)
483.8
1.8
$
955.3
$
476.6
$
482.0
See accompanying notes to consolidated financial statements.
51
Kansas City Southern and Subsidiaries
Consolidated Balance Sheets
December 31,
ASSETS
Current assets:
Cash and cash equivalents
Accounts receivable, net
Materials and supplies
Other current assets
Total current assets
Investments
Property and equipment (including concession assets), net
Other assets
Total assets
Current liabilities:
LIABILITIES AND EQUITY
Long-term debt due within one year
Short-term borrowings
Accounts payable and accrued liabilities
Total current liabilities
Long-term debt
Deferred income taxes
Other noncurrent liabilities and deferred credits
Total liabilities
Stockholders’ equity:
$25 par, 4% noncumulative, preferred stock, 840,000 shares authorized, 649,736
shares issued, 242,170 shares outstanding
$.01 par, common stock, 400,000,000 shares authorized, 123,352,185 shares issued;
103,036,805 and 106,606,619 shares outstanding at December 31, 2017 and 2016,
respectively
Additional paid-in capital
Retained earnings
Accumulated other comprehensive loss
Total stockholders’ equity
Noncontrolling interest
Total equity
Total liabilities and equity
$
$
$
2017
2016
(In millions, except share
and per share amounts)
$
134.1
237.8
150.8
157.4
680.1
44.6
8,403.8
70.2
170.6
191.0
152.6
133.8
648.0
32.9
8,069.7
66.9
9,198.7
$
8,817.5
$
38.8
345.1
587.8
971.7
2,235.5
987.2
138.9
4,333.3
25.4
181.3
537.7
744.4
2,271.5
1,289.3
107.8
4,413.0
6.1
6.1
1.0
943.3
3,611.4
(12.9)
4,548.9
316.5
4,865.4
$
9,198.7
$
1.1
954.8
3,134.1
(6.2)
4,089.9
314.6
4,404.5
8,817.5
See accompanying notes to consolidated financial statements.
52
Kansas City Southern and Subsidiaries
Consolidated Statements of Cash Flows
Years Ended December 31,
Operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization
Deferred income taxes
Equity in net earnings of affiliates
Share-based compensation
Distributions from unconsolidated affiliates
Debt retirement and exchange costs
Settlement of foreign currency derivative instruments
(Gain) loss on foreign currency derivative instruments
Mexican fuel excise tax credit
Deemed mandatory repatriation tax
Changes in working capital items:
Accounts receivable
Materials and supplies
Other current assets
Accounts payable and accrued liabilities
Other, net
Net cash provided by operating activities
Investing activities:
Capital expenditures
Purchase or replacement of equipment under operating leases
Property investments in MSLLC
Investments in and advances to affiliates
Proceeds from disposal of property
Other, net
Net cash used for investing activities
Financing activities:
Proceeds from short-term borrowings
Repayment of short-term borrowings
Proceeds from issuance of long-term debt
Repayment of long-term debt
Dividends paid
Shares repurchased
Debt costs
Proceeds from employee stock plans
Net cash used for financing activities
Cash and cash equivalents:
Net increase (decrease) during each year
At beginning of year
At end of year
Supplemental cash flow information
Non-cash investing and financing activities:
Capital expenditures and purchase or replacement of equipment under
operating lease accrued but not yet paid at end of year
Other investing activities accrued but not yet paid at the end of the year
Capital lease obligations incurred
Non-cash asset acquisitions
Dividends accrued but not yet paid at end of year
Cash payments:
Interest paid, net of amounts capitalized
Income tax payments, net of refunds
2017
2016
(In millions)
2015
$
963.9
$
479.9
$
485.3
320.9
(301.3)
(11.5)
18.2
12.5
—
(10.8)
(38.2)
(44.1)
41.3
(46.7)
1.4
(24.5)
160.4
(13.1)
1,028.4
(585.4)
(42.6)
(26.0)
(20.4)
8.8
(15.5)
(681.1)
12,102.6
(11,943.6)
—
(25.4)
(142.5)
(375.6)
—
0.7
(383.8)
(36.5)
170.6
134.1
34.9
56.7
0.1
0.1
37.2
97.9
51.1
$
$
$
$
$
$
305.0
104.8
(14.6)
19.2
13.0
—
(58.4)
53.5
(62.8)
—
(18.3)
(14.2)
9.9
101.8
0.2
919.0
(563.6)
(26.6)
(33.1)
(0.9)
5.0
(9.0)
(628.2)
8,698.7
(8,597.9)
248.7
(276.4)
(142.8)
(185.4)
(2.6)
0.9
(256.8)
34.0
136.6
170.6
60.8
38.3
2.4
4.8
35.2
84.3
40.5
$
$
$
284.6
135.8
(18.3)
11.4
16.5
7.6
(5.5)
47.2
—
—
12.0
(26.2)
(10.1)
(27.1)
(4.0)
909.2
(688.0)
(144.2)
(17.4)
(0.7)
4.6
(27.3)
(873.0)
10,866.2
(11,237.3)
623.7
(149.8)
(140.1)
(194.2)
(20.3)
4.2
(247.6)
(211.4)
348.0
136.6
40.4
22.3
4.7
7.6
35.9
81.1
40.3
See accompanying notes to consolidated financial statements.
53
Kansas City Southern and Subsidiaries
Consolidated Statements of Changes in Equity
(in millions, except per share amounts)
Balance at December 31, 2014
Net income
Other comprehensive loss
Dividends on common stock ($1.32/share)
Dividends on $25 par preferred stock ($1.00/share)
Share repurchases
Options exercised and stock subscribed, net of shares withheld for
employee taxes
Excess tax benefit from share-based compensation
Share-based compensation
Balance at December 31, 2015
Net income
Other comprehensive loss
Contributions from noncontrolling interest
Dividends on common stock ($1.32/share)
Dividends on $25 par preferred stock ($1.00/share)
Share repurchases
Options exercised and stock subscribed, net of shares withheld for
employee taxes
Excess tax benefit from share-based compensation
Share-based compensation
Balance at December 31, 2016
Cumulative-effect adjustment due to adoption of ASU 2016-09,
Improvements to Employee Share-Based Payment Accounting
Net income
Other comprehensive loss
Dividends on common stock ($1.38/share)
Dividends on $25 par preferred stock ($1.00/share)
Share repurchases
Options exercised and stock subscribed, net of shares withheld for
employee taxes
Share-based compensation
Balance at December 31, 2017
$25 Par
Preferred
Stock
$.01 Par
Common
Stock
Additional
Paid-in
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Loss
Non-
controlling
Interest
$
6.1
$
1.1
$
949.8
$ 2,801.7
483.5
$
(3.2)
$
(1.5)
308.6
1.8
(144.8)
(0.2)
(175.5)
2,964.7
478.1
(141.9)
(0.2)
(166.6)
3,134.1
1.2
962.0
(144.2)
(0.2)
(341.5)
(4.7)
(1.5)
310.4
1.8
2.4
(6.2)
314.6
1.9
(6.7)
Total
$ 4,064.1
485.3
(1.5)
(144.8)
(0.2)
(194.2)
4.7
(0.1)
11.4
4,224.7
479.9
(1.5)
2.4
(141.9)
(0.2)
(185.4)
1.6
5.7
19.2
4,404.5
2.5
963.9
(6.7)
(144.2)
(0.2)
(375.6)
3.0
$ 3,611.4
$
(12.9)
$
316.5
18.2
$ 4,865.4
(18.7)
4.7
(0.1)
11.4
947.1
(18.8)
1.6
5.7
19.2
954.8
1.3
6.1
1.1
6.1
1.1
(0.1)
(34.0)
$
6.1
$
1.0
$
3.0
18.2
943.3
See accompanying notes to consolidated financial statements.
54
Kansas City Southern and Subsidiaries
Notes to Consolidated Financial Statements
Note 1. Description of the Business
Kansas City Southern (“KCS” or the “Company”), a Delaware corporation, is a holding company with principal
operations in rail transportation.
The Company is engaged in the freight rail transportation business operating through a single coordinated rail network
under one reportable business segment. The Company generates revenues and cash flows by providing its customers with
freight delivery services both within its regions, and throughout North America through connections with other Class I rail
carriers. KCS’s 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
transportation.
The primary subsidiaries of the Company consist of the following:
• The Kansas City Southern Railway Company (“KCSR”), a wholly-owned consolidated subsidiary. KCSR is a U.S.
Class I railroad that services the midwest and southeast regions of the United States;
• Kansas City Southern de México, S.A. de C.V. (“KCSM”), a wholly-owned consolidated subsidiary which operates
under the rights granted by the Concession acquired from the Mexican government in 1997 (the “Concession”) as
described below;
• Mexrail, Inc. (“Mexrail”), a wholly-owned consolidated subsidiary; which wholly owns The Texas Mexican
Railway Company (“Tex-Mex”);
• KCSM Servicios, S.A. de C.V. (“KCSM Servicios”), a wholly-owned consolidated subsidiary which provides
employee services to KCSM; and
• Meridian Speedway, LLC (“MSLLC”), a seventy percent-owned consolidated affiliate. MSLLC owns the former
KCSR rail line between Meridian, Mississippi and Shreveport, Louisiana, which is the portion of the rail line
between Dallas, Texas and Meridian known as the “Meridian Speedway”.
Including equity investments in:
• Panama Canal Railway Company (“PCRC”), a fifty percent-owned unconsolidated affiliate which provides ocean to
ocean freight and passenger services along the Panama Canal;
• TFCM, S. de R.L. de C.V. (“TCM”), a forty-five percent-owned unconsolidated affiliate that operates a bulk liquid
terminal in San Luis Potosí, Mexico;
• Ferrocarril y Terminal del Valle de México, S.A. de C.V. (“FTVM”), a twenty-five percent-owned unconsolidated
affiliate that provides railroad services as well as ancillary services in the greater Mexico City area; and
• PTC-220, LLC (“PTC-220”), a fourteen percent-owned unconsolidated affiliate that holds the licenses to large
blocks of radio spectrum and other assets for the deployment of positive train control.
The KCSM Concession. KCSM holds a concession from the Mexican government until June 2047 (exclusive service
through 2027, subject to certain trackage and haulage rights granted to other concessionaires), which is renewable under certain
conditions for an additional period of up to 50 years (the “Concession”). The Concession is to provide freight transportation
services over north-east rail lines which are a primary commercial corridor of the Mexican railroad system. KCSM has the right
to use, but does not own, all track and buildings that are necessary for the rail lines’ operation. KCSM is required to pay the
Mexican government an annual concession duty equal to 1.25% of gross revenues during the Concession period.
Employees and Labor Relations. KCSR participates in industry-wide multi-employer bargaining as a member of the
National Carriers’ Conference Committee, as well as local bargaining for agreements that are limited to KCSR's property.
Approximately 75% of KCSR employees are covered by collective bargaining agreements.
55
Kansas City Southern and Subsidiaries
Notes to Consolidated Financial Statements-(Continued)
KCSM Servicios union employees are covered by one labor agreement, which was signed on April 16, 2012, between
KCSM Servicios and the Sindicato de Trabajadores Ferrocarrileros de la República Mexicana (“Mexican Railroad Union”), for
an indefinite period of time, for the purpose of regulating the relationship between the parties. Approximately 80% of KCSM
Servicios employees are covered by this labor agreement.
Union labor negotiations have not historically resulted in any strike, boycott, or other disruption in the Company’s
business operations.
Note 2. Significant Accounting Policies
Principles of Consolidation. The accompanying consolidated financial statements are presented using the accrual basis of
accounting and include the Company and its majority-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated. Certain prior year amounts have been reclassified to conform to the current year
presentation.
The equity method of accounting is used for all entities in which the Company or its subsidiaries have significant
influence, but not a controlling interest. The Company evaluates less-than-majority-owned investments for consolidation
pursuant to consolidation and variable interest entity guidance. The Company does not have any less-than-majority-owned
investments requiring consolidation.
During the first quarter of 2017, the Company adopted Accounting Standards Update (“ASU”) No. 2016-09,
Improvements to Employee Share-Based Payment Accounting. The Company now recognizes forfeitures as they occur rather
than estimating a forfeiture rate for the year. Excess tax benefits or deficiencies resulting from the exercise or vesting of awards
are included in income tax expense in the reporting period in which they occur. Upon adoption, the Company recognized a
cumulative-effect adjustment to equity at the beginning of 2017.
During the third quarter of 2017, the Company early adopted ASU No. 2017-12, Derivatives and Hedging: Targeted
Improvements to Accounting for Hedging Activities. The Company now asserts qualitatively, on a quarterly basis, that the
hedging relationship was and continues to be highly effective as long as facts and circumstances related to the hedging
relationship have not changed. If facts and circumstances have changed, the Company will perform a quantitative assessment to
ensure the hedging relationship is still deemed highly effective. In addition, the ineffective portion of an effective hedge is no
longer measured periodically and included in the income statement; rather, the total periodic change in fair value of an effective
hedge is included in accumulated other comprehensive income on the balance sheet, until settlement occurs. The adoption of
the new guidance had no impact on the Company’s consolidated financial statements as there was no ineffectiveness
recognized on the Company’s cash flow hedges prior to adoption.
Use of Estimates. The accounting and financial reporting policies of the Company conform to accounting principles
generally accepted in the United States of America (“U.S. GAAP”). The preparation of financial statements in conformity with
U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities,
the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues
and expenses during the reporting period. Significant items subject to such estimates and assumptions include those related to
the recoverability and useful lives of assets, litigation provisions, and income taxes. Changes in facts and circumstances may
result in revised estimates and actual results could differ from those estimates.
Revenue Recognition. Freight revenue is recognized proportionally as a shipment moves from origin to destination, with
the related expense recognized as incurred. Other revenues, in general, are recognized when the product is shipped, as services
are performed or contractual obligations are fulfilled.
Foreign Exchange Gain (Loss). For financial reporting purposes, foreign subsidiaries maintain records in U.S. dollars,
which is the functional currency. The dollar is the currency that reflects the economic substance of the underlying events and
circumstances relevant to the entity. Monetary assets and liabilities denominated in pesos are remeasured into dollars using
current exchange rates. The difference between the exchange rate on the date of the transaction and the exchange rate on the
settlement date, or balance sheet date if not settled, is included in the income statement as foreign exchange gain or loss.
56
Kansas City Southern and Subsidiaries
Notes to Consolidated Financial Statements-(Continued)
Cash Equivalents. Short-term liquid investments with an initial maturity of three months or less are classified as cash and
cash equivalents.
Accounts Receivable, net. Accounts receivable are net of an allowance for uncollectible accounts as determined by
historical experience and adjusted for economic uncertainties or known trends. Accounts are charged to the allowance when a
customer enters bankruptcy, when an account has been transferred to a collection agent or submitted for legal action, or when a
customer is significantly past due and all available means of collection have been exhausted. At December 31, 2017 and 2016,
the allowance for doubtful accounts was $4.6 million and $5.3 million, respectively. For the years ended December 31, 2017,
2016 and 2015, bad debt expense was $1.6 million, $1.2 million and $1.0 million, respectively.
Materials and Supplies. Materials and supplies consisting of diesel fuel, items to be used in the maintenance of rolling
stock and items to be used in the maintenance or construction of road property are valued at the lower of average cost or net
realizable value.
Derivative Instruments. Derivatives are measured at fair value and recorded on the balance sheet as either assets or
liabilities. Changes in the fair value of derivatives are recorded either through current earnings or as other comprehensive
income, depending on hedge designation. Gains and losses on derivative instruments classified as cash flow hedges are
reported in other comprehensive income and are reclassified into earnings in the periods in which earnings are impacted by the
variability of the cash flow of the hedged item.
Property and Equipment (including Concession Assets). KCS capitalizes costs for self-constructed additions and
improvements to property including direct labor and material, indirect overhead costs, and interest during long-term
construction projects. For purchased assets, all costs necessary to make the asset ready for its intended use are capitalized.
Expenditures that significantly increase asset values, productive capacity, efficiency, safety or extend useful lives are
capitalized. Repair and maintenance costs are expensed as incurred.
Property and equipment are carried at cost and are depreciated primarily on the group method of depreciation, which the
Company believes closely approximates a straight line basis over the estimated useful lives of the assets measured in years. The
group method of depreciation applies a composite rate to classes of similar assets rather than to individual assets. Composite
depreciation rates are based upon the Company’s estimates of the expected average useful lives of assets as well as expected
net salvage value at the end of their useful lives. In developing these estimates, the Company utilizes periodic depreciation
studies performed by an independent engineering firm. Depreciation rate studies are performed at least every three years for
equipment and at least every six years for road property (rail, ties, ballast, etc.). The Company completed depreciation studies
for KCSM in 2016 and KCSR in 2015. The impacts of the studies were immaterial to the consolidated financial results for all
periods.
Under the group method of depreciation, the cost of railroad property and equipment (net of salvage or sales proceeds)
retired or replaced in the normal course of business is charged to accumulated depreciation with no gain or loss recognized.
Gains or losses on dispositions of land or non-group property and abnormal retirements of railroad property are recognized
through income. A retirement of railroad property would be considered abnormal if the cause of the retirement is unusual in
nature and its actual life is significantly shorter than what would be expected for that group based on the depreciation studies.
An abnormal retirement could cause the Company to re-evaluate the estimated useful life of the impacted asset class.
Costs incurred by the Company to acquire the concession rights and related assets, as well as subsequent improvements to
the concession assets, are capitalized and amortized using the group method of depreciation over the lesser of the current
expected Concession term, including probable renewal of an additional 50-year term, or the estimated useful lives of the assets
and rights.
Long-lived assets are reviewed for impairment when events or circumstances indicate that the carrying amount of an asset
may not be recoverable. If impairment indicators are present and the estimated future undiscounted cash flows are less than the
carrying value of the long-lived assets, the carrying value would be reduced to the estimated fair value. Future cash flow
estimates for an impairment review would be based on the lowest level of identifiable cash flows, which are the Company’s
57
Kansas City Southern and Subsidiaries
Notes to Consolidated Financial Statements-(Continued)
U.S. and Mexican operations. During the years ended December 31, 2017 and 2016, management did not identify any
indicators of impairment.
Goodwill. Goodwill represents the excess of the purchase price over the fair value of the net identifiable assets acquired
in business combinations. As of December 31, 2017 and 2016, the goodwill balance was $13.2 million, which is included in
other assets in the consolidated balance sheets. Goodwill is not amortized, but is reviewed at least annually, or more frequently
as indicators warrant, for impairment. An impairment loss would be recognized to the extent that the carrying amount exceeds
the assets’ fair values. The Company performed its annual impairment review for goodwill as of November 30, 2017 and 2016,
and concluded there was no impairment.
Fair Value of Financial Instruments. Non-financial assets and liabilities are recognized at fair value on a nonrecurring
basis. These assets and liabilities are measured at fair value on an ongoing basis but are subject to recognition in the financial
statements only in certain circumstances. Fair value is defined as the exchange price that would be received for an asset or paid
to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly
transaction between market participants on the measurement date. The Company determines the fair values of its financial
instruments based on the fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize
the use of unobservable inputs when measuring fair value. The hierarchy is broken down into three levels based upon the
observability of inputs. Fair values determined by Level 1 inputs utilize quoted prices (unadjusted) in active markets for
identical assets or liabilities that the Company has the ability to access. Level 2 inputs include quoted prices for similar assets
and liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability. Level 3 inputs
are unobservable inputs for the asset or liability, and include situations where there is little, if any, market activity for the asset
or liability. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In
such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been
determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s
assessment of the significance of a particular input to the fair value in its entirety requires judgment and considers factors
specific to the asset or liability.
Environmental Liabilities. The Company recognizes liabilities for remediation and restoration costs related to past
activities when the Company’s obligation is probable and the costs can be reasonably estimated. Costs of future expenditures
for environmental remediation are not discounted to their present value. Recoveries of environmental remediation costs from
other parties are recorded as assets when their receipt is deemed probable. Costs of ongoing compliance activities related to
current operations are expensed as incurred.
Personal Injury Claims. Personal injury claims in excess of self-insurance levels are insured up to certain coverage
amounts, depending on the type of claim and year of occurrence. The Company’s personal injury liability is based on actuarial
studies performed on an undiscounted basis by an independent third party actuarial firm and reviewed by management. The
liability is based on claims filed and an estimate of claims incurred but not yet reported. Adjustments to the liability are
reflected as operating expenses in the period in which the adjustments are known. Legal fees related to personal injury claims
are recognized in operating expense in the period incurred.
Health and Welfare and Postemployment Benefits. The Company provides certain medical, life and other
postemployment benefits to certain active employees and retirees. The Company uses actuaries to assist management in
measuring the benefit obligation and cost based on the current plan provisions, employee demographics, and assumptions about
financial and demographic factors affecting the probability, timing and amount of expected future benefit payments. Significant
assumptions include the discount rate, rate of increase in compensation levels, and the health care cost trend rate. Actuarial
gains and losses determined at the measurement date (December 31) are recognized immediately in the consolidated statements
of income.
Share-Based Compensation. The Company accounts for all share-based compensation in accordance with fair value
recognition provisions. Under this method, compensation expense is measured at grant date fair value and is recognized over
the requisite service period in which the award is earned. The Company issues treasury stock to settle share-based awards.
58
Kansas City Southern and Subsidiaries
Notes to Consolidated Financial Statements-(Continued)
Income Taxes. Deferred income tax effects of transactions reported in different periods for financial reporting and income
tax return purposes are recognized under the asset and liability method of accounting for income taxes. This method gives
consideration to the future tax consequences of the deferred income tax items and immediately recognizes changes in income
tax laws in the year of enactment. On December 22, 2017, the President of the United States signed into law the Tax Cuts and
Jobs Act (the “Tax Reform Act”). Further information on the tax impacts of the Tax Reform Act is included in Note 12 of the
Company’s consolidated financial statements.
The Company has recognized a deferred tax asset, net of a valuation allowance, for net operating loss carryovers. The
Company projects sufficient future taxable income to realize the deferred tax asset recorded less the valuation allowance. These
projections take into consideration assumptions about future income, future capital expenditures and inflation rates. If
assumptions or actual conditions change, the deferred tax asset, net of the valuation allowance, will be adjusted to properly
reflect the expected tax benefit.
Treasury Stock. The excess of repurchase price over par value of common shares held in treasury is allocated between
additional paid-in capital and retained earnings.
New Accounting Pronouncements
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which requires companies to
recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration
it expects to be entitled in exchange for those goods or services. The new standard will become effective for the Company
beginning with the first quarter 2018 and the Company plans to adopt the accounting standard using the modified retrospective
transition approach. The modified retrospective transition approach will recognize any changes from the beginning of the year
of initial application through retained earnings with no restatement of comparative periods. The Company has completed a
review of the impacts of the application of the new standard to its existing portfolio of customer contracts. Under the new
standard, the Company will continue to recognize freight revenue proportionally as a shipment moves from origin to
destination. Furthermore, the Company will be required to assess variable consideration included in its contracts and make
judgments and estimates throughout the applicable periods. Certain additional financial statement disclosure requirements are
mandated by the new standard including disclosure of contract assets and contract liabilities as well as a disaggregated view of
revenue. Based on the Company’s review, the adoption of this guidance will not have a significant impact on the Company’s
consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02, Leases, which requires lessees to recognize for all leases a right-
to-use asset and a lease obligation in the consolidated balance sheet. Expenses are recognized in the consolidated statement of
income in a manner similar to current accounting guidance. Lessees are permitted to make an accounting policy election to not
recognize an asset and liability for leases with a term of twelve months or less. Lessor accounting under the new standard is
substantially unchanged. Additional qualitative and quantitative disclosures, including significant judgments made by
management, will be required. The new standard will become effective for the Company beginning with the first quarter 2019
and requires a modified retrospective transition approach. The Company created a cross functional team to assess the
contractual arrangements that may qualify as a lease under the new standard and implement a lease management system. At
December 31, 2017, KCS disclosed approximately $281.7 million of operating leases in the leases and debt maturities table
within Note 11 - Long-Term Debt and will evaluate those contracts as well as other existing arrangements to determine if they
qualify for lease accounting under the new standard. The Company is continuing to evaluate the impacts the adoption of this
accounting guidance will have on the consolidated financial statements.
59
Kansas City Southern and Subsidiaries
Notes to Consolidated Financial Statements-(Continued)
Note 3. Mexican Fuel Excise Tax Credit
Fuel purchases made in Mexico are subject to an excise tax that is included in the price of fuel. The Company is eligible
for and utilizes an available credit for the excise tax included in the price of fuel that is purchased and consumed in locomotives
and certain work equipment in Mexico. For the years ended December 31, 2017 and 2016, the Company recognized a $44.1
million and $62.8 million benefit, respectively. The Mexican fuel excise tax credit is realized through the offset of the total
annual Mexico income tax liability and income tax withholding payment obligations of KCSM, with no carryforward to future
periods.
Note 4. Hurricane Harvey
In late August 2017, Hurricane Harvey made landfall on the Texas coast and caused flood damage to the Company’s track
infrastructure and significantly disrupted the Company’s rail service. The Company filed a claim in the fourth quarter of 2017
under its insurance program for property damage, incremental expenses, and lost profits caused by Hurricane Harvey. In the
third quarter of 2017, the Company recognized a receivable for probable insurance recovery offsetting the impact of
incremental expenses recognized in the quarter. The recognition of remaining probable insurance recoveries in excess of
incremental expenses and self-insured retention represents a contingent gain, which will be recognized when all contingencies
have been resolved, which generally occurs at the time of final settlement or when nonrefundable cash payments are received.
Note 5. Earnings Per Share
Basic earnings per common share is computed by dividing net income available to common stockholders by the
weighted-average number of common shares outstanding for the period. Diluted earnings per share adjusts basic earnings per
common share for the effects of potentially dilutive common shares, if the effect is not anti-dilutive. Potentially dilutive
common shares include the dilutive effects of shares issuable under the 2008 and 2017 Equity Incentive Plans and shares
issuable upon the conversion of preferred stock to common stock.
The following table reconciles the basic earnings per share computation to the diluted earnings per share computation (in
millions, except share and per share amounts):
Net income available to common stockholders for purposes of
computing basic and diluted earnings per share
$
961.8
$
477.9
$
483.3
2017
2016
2015
Weighted-average number of shares outstanding (in thousands):
Basic shares
Effect of dilution
Diluted shares
Earnings per share:
Basic earnings per share
Diluted earnings per share
104,728
312
105,040
107,560
201
107,761
109,709
206
109,915
$
$
9.18
9.16
$
$
4.44
4.43
$
$
4.41
4.40
Potentially dilutive shares excluded from the calculation (in
thousands):
Stock options excluded as their inclusion would be anti-dilutive
2017
2016
2015
150
185
84
60
Kansas City Southern and Subsidiaries
Notes to Consolidated Financial Statements-(Continued)
Note 6. Property and Equipment (including Concession Assets)
The following tables list the major categories of property and equipment, including concession assets, as well as the
weighted-average composite depreciation rate for each category (in millions):
Cost
Accumulated
Depreciation
Net Book
Value
Depreciation
Rates for 2017
As of December 31, 2017
Land
Concession land rights
Rail and other track material
Ties
Grading
Bridges and tunnels
Ballast
Other (a)
Total road property
Locomotives
Freight cars
Other equipment
Total equipment
Technology and other
Construction in progress
$
218.6
$
— $
141.2
1,967.0
1,779.6
969.9
775.0
795.2
1,270.4
7,557.1
1,527.9
937.9
69.1
2,534.9
229.1
223.7
(26.5)
(425.9)
(441.0)
(162.1)
(144.9)
(222.0)
(363.3)
(1,759.2)
(375.2)
(168.9)
(26.6)
(570.7)
(144.4)
—
218.6
114.7
1,541.1
1,338.6
807.8
630.1
573.2
907.1
5,797.9
1,152.7
769.0
42.5
1,964.2
84.7
223.7
N/A
1.0%
2.7-3.0%
2.0-4.8%
0.9%
1.1%
2.3-4.2%
3.2%
2.8%
4.7%
2.7%
5.9%
4.0%
17.1%
N/A
N/A
Total property and equipment (including
concession assets)
$
10,904.6
$
(2,500.8) $
8,403.8
_____________
(a)
Other includes signals, buildings and other road assets.
61
As of December 31, 2016
Land
Concession land rights
Rail and other track material
Ties
Grading
Bridges and tunnels
Ballast
Other (a)
Total road property
Locomotives
Freight cars
Other equipment
Total equipment
Technology and other
Construction in progress
Kansas City Southern and Subsidiaries
Notes to Consolidated Financial Statements-(Continued)
Cost
Accumulated
Depreciation
Net Book
Value
Depreciation
Rates for 2016
$
219.2
$
— $
141.2
1,925.4
1,710.1
910.7
739.4
748.3
1,152.1
7,186.0
1,485.9
887.7
66.2
2,439.8
182.2
293.4
(25.1)
(445.0)
(423.8)
(153.9)
(137.6)
(215.1)
(332.4)
(1,707.8)
(356.9)
(152.5)
(23.6)
(533.0)
(126.2)
—
219.2
116.1
1,480.4
1,286.3
756.8
601.8
533.2
819.7
5,478.2
1,129.0
735.2
42.6
1,906.8
56.0
293.4
N/A
1.0%
1.6-3.2%
2.0-5.0%
0.9%
1.1%
2.5-4.7%
3.0%
2.8%
4.5%
3.5%
6.4%
4.2%
17.4%
N/A
N/A
Total property and equipment (including
concession assets)
$
10,461.8
$
(2,392.1) $
8,069.7
_____________
(a)
Other includes signals, buildings and other road assets.
Concession assets, net of accumulated amortization of $638.2 million and $610.7 million, totaled $2,208.1 million and
$2,131.6 million at December 31, 2017 and 2016, respectively.
The Company capitalized $0.3 million, $0.5 million, and $0.7 million of interest for the years ended December 31, 2017,
2016, and 2015, respectively.
Depreciation and amortization of property and equipment (including concession assets) totaled $320.9 million, $305.0
million and $284.6 million, for 2017, 2016, and 2015, respectively.
Note 7. Other Balance Sheet Captions
Other Current Assets. Other current assets included the following items at December 31 (in millions):
Refundable taxes
Mexican fuel excise tax credit
Prepaid expenses
Other
Other current assets
2017
2016
$
81.6
35.1
18.3
22.4
64.0
49.2
18.2
2.4
157.4
$
133.8
$
$
62
Kansas City Southern and Subsidiaries
Notes to Consolidated Financial Statements-(Continued)
Accounts Payable and Accrued Liabilities. Accounts payable and accrued liabilities included the following items at
December 31 (in millions):
Accounts payable
Income and other taxes
Accrued wages and vacation
Derailments, personal injury and other claim provisions
Foreign currency derivative instruments
Dividends payable
Other
2017
2016
$
225.1
$
111.8
89.0
48.0
—
37.2
76.7
247.8
36.0
78.7
39.2
41.1
35.2
59.7
Accounts payable and accrued liabilities
$
587.8
$
537.7
Note 8. Fair Value Measurements
The Company’s assets and liabilities recognized at fair value have been categorized based upon a fair value hierarchy as
described in Note 2 — “Significant Accounting Policies.” As of December 31, 2017, the Company’s derivative financial
instruments are measured at fair value on a recurring basis and consist of foreign currency forward and option contracts and
treasury lock agreements, which are classified as Level 2 valuations. The Company determines the fair value of its derivative
financial instrument positions based upon pricing models using inputs observed from actively quoted markets and also takes
into consideration the contract terms as well as other inputs, including market currency exchange rates and in the case of option
contracts, volatility, the risk-free interest rate and the time to expiration. The fair value of the foreign currency derivative
instruments was an asset of $7.9 million and a liability of $41.1 million at December 31, 2017 and 2016, respectively, and the
fair value of the forward treasury lock agreements was a liability of $5.6 million at December 31, 2017. There were no
outstanding treasury lock agreements at December 31, 2016.
The Company’s short-term financial instruments include cash and cash equivalents, accounts receivable, accounts
payable and short-term borrowings. The carrying value of the short-term financial instruments approximates their fair value.
The fair value of the Company’s debt is estimated using quoted market prices when available. When quoted market prices
are not available, fair value is estimated based on current market interest rates for debt with similar maturities and credit
quality. The fair value of the Company’s debt was $2,377.8 million and $2,303.8 million at December 31, 2017 and 2016,
respectively. The carrying value was $2,274.3 million and $2,296.9 million at December 31, 2017 and 2016, respectively. If the
Company’s debt were measured at fair value, the fair value measurements of the individual debt instruments would have been
classified as either Level 1 or Level 2 in the fair value hierarchy.
63
Kansas City Southern and Subsidiaries
Notes to Consolidated Financial Statements-(Continued)
Note 9. Derivative Instruments
The Company enters into derivative transactions in certain situations based on management’s assessment of current
market conditions and perceived risks. Management intends to respond to evolving business and market conditions and in
doing so, may enter into such transactions as deemed appropriate.
Credit Risk. As a result of the use of derivative instruments, the Company is exposed to counterparty credit risk. The
Company manages this risk by limiting its counterparties to large financial institutions which meet the Company’s credit rating
standards and have an established banking relationship with the Company. As of December 31, 2017, the Company did not
expect any losses as a result of default of its counterparties.
Interest Rate Derivative Instruments. In May 2017, the Company executed four treasury lock agreements with an
aggregate notional value of $275.0 million and a weighted-average interest rate of 2.85%. The purpose of the treasury locks is
to hedge the U.S. Treasury benchmark interest rate associated with future interest payments related to the anticipated
refinancing of the $275.0 million, 2.35% senior notes due May 15, 2020. The Company has designated the treasury locks as
cash flow hedges and recorded unrealized gains and losses in accumulated other comprehensive income. Upon settlement, the
unrealized gain or loss in accumulated other comprehensive income will be amortized to interest expense over the life of the
future underlying debt issuance.
Foreign Currency Derivative Instruments. The Company’s Mexican subsidiaries have net U.S. dollar-denominated
monetary liabilities which, for Mexican income tax purposes, are subject to periodic revaluation based on changes in the value
of the Mexican peso against the U.S. dollar. This revaluation creates fluctuations in the Company’s Mexican income tax
expense and the amount of income taxes paid in Mexico. The Company hedges its exposure to this cash tax risk by entering
into foreign currency forward contracts and foreign currency option contracts known as zero-cost collars.
The foreign currency forward contracts involve the Company’s purchase of pesos at an agreed-upon weighted-average
exchange rate to each U.S dollar. The zero-cost collars involve the Company’s purchase of a Mexican peso call option and a
simultaneous sale of a Mexican peso put option, with equivalent U.S. dollar notional amounts for each option and no net cash
premium paid by the Company. The Company does not physically exchange currencies upon maturity or expiration of its
forward contracts or zero-cost collars. Instead, the Company settles the maturing/expiring transactions by entering into
offsetting transactions, which results in a physical exchange of only the net gain or loss between the Company and the
counterparty.
64
Kansas City Southern and Subsidiaries
Notes to Consolidated Financial Statements-(Continued)
Below is a summary of the Company’s 2017, 2016 and 2015 foreign currency derivative contracts (amounts in millions,
except Ps./USD):
Foreign currency forward contracts
Contracts to purchase Ps./pay USD
Offsetting contracts to sell Ps./receive USD
Notional
amount
Notional
amount
Weighted-
average
exchange
rate
(in Ps./USD)
Maturity
date
Notional
amount
Notional
amount
Weighted-
average
exchange
rate
(in Ps./USD)
Maturity
date
Cash
received/
(paid) on
settlement
Contracts executed
in 2016 and settled
in 2017 $
340.0
Ps. 6,207.7
Ps.
18.3
1/17/2017
60.0
Ps. 1,057.3
Ps.
17.6
4/29/2016
300.0
Ps. 4,480.4
Ps.
14.9
1/15/2016
$
$
$
287.0
Ps. 6,207.7
Ps.
21.6
1/17/2017
60.7
Ps. 1,057.3
Ps.
17.4
4/29/2016
251.0
Ps. 4,480.4
Ps.
17.9
1/15/2016
Contracts executed
in 2016 and settled
in 2016 $
Contracts executed
in 2015 and settled
in 2016 $
Contracts executed
in 2014 and settled
in 2015 $
$
$
$
$
(53.0)
0.7
(49.0)
(1.2)
300.0
Ps. 4,364.7
Ps.
14.6
1/15/2015
$
298.8
Ps. 4,364.7
Ps.
14.6
1/15/2015
Foreign currency zero-cost collar contracts
Notional
amount
Maturity
date
Weighted-
average
call rate
outstanding
options
Weighted-
average put
rate
outstanding
options
Cash
received/
(paid) on
settlement
Contracts executed
in 2017 and
outstanding at
December 31, 2017 $
Contracts executed
in 2017 and settled
80.0
1/16/2018
Ps.
21.7
Ps.
24.8
—
in 2017 $
450.0
Contracts executed
in 2015 and settled
in 2016 $
80.0
Contracts executed
in 2015 and settled
in 2015 $
50.0
—
—
—
—
—
—
— $
42.2
— $
(10.1)
— $
(4.3)
The Company has not designated any of the foreign currency derivative contracts as hedging instruments for accounting
purposes. The Company measures the foreign currency derivative contracts at fair value each period and recognizes any change
in fair value in foreign exchange gain (loss) within the consolidated statements of income.
65
Kansas City Southern and Subsidiaries
Notes to Consolidated Financial Statements-(Continued)
The following table presents the fair value of derivative instruments included in the consolidated balance sheets at
December 31 (in millions):
Balance Sheet Location
2017
2016
Derivative Assets
Derivatives not designated as hedging instruments:
Foreign currency zero-cost collar contracts
Other current assets
Total derivatives not designated as hedging
instruments
Total derivative assets
$
$
7.9
$
7.9
7.9
$
—
—
—
Derivatives designated as hedging instruments:
Treasury lock agreements
Total derivatives designated as hedging
instruments
Derivatives not designated as hedging instruments:
Foreign currency forward contracts
Total derivatives not designated as hedging
instruments
Total derivative liabilities
Derivative Liabilities
Balance Sheet Location
2017
2016
Other noncurrent liabilities and
deferred credits
$
5.6
$
Accounts payable and accrued
liabilities
5.6
—
—
5.6
$
$
—
—
41.1
41.1
41.1
The following table presents the effects of derivative instruments on the consolidated statements of income and
consolidated statements of comprehensive income for the years ended December 31 (in millions):
Derivatives in Cash Flow Hedging Relationships
Treasury lock agreements
Total
Amount of Gain/(Loss) Recognized
in OCI on Derivative
2017
2016
2015
$
$
(5.6) $ — $ —
(5.6) $ — $ —
Derivatives Not Designated as Hedging Instruments
Location of Gain/(Loss) Recognized in
Income on Derivative
Amount of Gain/(Loss) Recognized
in Income on Derivative
Foreign currency forward contracts
Foreign currency zero-cost collar contracts
Foreign exchange gain (loss)
Foreign exchange gain (loss)
Total
Note 10. Short-Term Borrowings
2015
2017
2016
$ (11.9) $ (49.6) $ (36.7)
(10.5)
$ (53.5) $ (47.2)
50.1
38.2
(3.9)
$
Commercial Paper. The Company’s commercial paper program generally serves as the primary means of short-term
funding. As of December 31, 2017, KCS had $345.1 million of commercial paper outstanding, net of $0.1 million discount, at a
weighted-average interest rate of 1.846%. As of December 31, 2016, KCS had $181.3 million of commercial paper outstanding,
net of $0.1 million discount, at a weighted-average interest rate of 1.290%.
66
Kansas City Southern and Subsidiaries
Notes to Consolidated Financial Statements-(Continued)
Note 11. Long-Term Debt
Long-term debt at December 31 (in millions):
2017
Unamortized
Discount
and Debt
Issuance
Costs
Principal
2016
Unamortized
Discount
and Debt
Issuance
Costs
Net
Principal
Revolving credit facilities, variable interest rate,
due 2020
KCS 2.35% senior notes, due 2020
KCS 3.00% senior notes, due 2023
KCS 3.85% senior notes, due 2023
KCS 3.125% senior notes, due 2026
KCS 4.30% senior notes, due 2043
KCS 4.95% senior notes, due 2045
KCSR senior notes 3.85% to 4.95%, due through
2045
KCSM senior notes 2.35% to 3.00%, due through
2023
RRIF loans 2.96% to 4.29%, due serially through
2037
Financing agreements 5.737% to 9.310%, due
serially through 2023
Capital lease obligations, due serially to 2024
Other debt obligations
Total
Less: Debt due within one year
$
— $
257.3
439.1
199.2
250.0
448.7
499.2
2.9
28.5
77.8
84.2
15.0
0.3
2,302.2
38.8
— $
1.2
4.0
1.7
3.1
9.3
7.6
—
0.2
0.5
0.3
—
—
27.9
—
— $
— $
256.1
435.1
197.5
246.9
439.4
491.6
2.9
28.3
77.3
257.3
439.1
199.2
250.0
448.7
499.2
2.9
28.5
81.4
83.9
15.0
0.3
2,274.3
38.8
102.5
18.3
0.3
2,327.4
25.4
— $
1.7
4.7
2.0
3.4
9.6
8.0
—
0.2
0.5
0.4
—
—
30.5
—
Net
—
255.6
434.4
197.2
246.6
439.1
491.2
2.9
28.3
80.9
102.1
18.3
0.3
2,296.9
25.4
Long-term debt
$2,263.4
$
27.9
$2,235.5
$2,302.0
$
30.5
$2,271.5
Revolving Credit Facility
KCS with certain of its domestic subsidiaries named therein as guarantors, has an $800.0 million revolving credit facility
(the “KCS Revolving Credit Facility”), with a $25.0 million standby letter of credit facility which, if utilized, constitutes usage
under the revolving facility. The KCS Revolving Credit Facility serves as a backstop for KCS’s $800.0 million commercial
paper program (the “KCS Commercial Paper Program”) which generally serves as the Company’s primary means of short-term
funding.
Borrowings under the KCS Revolving Credit Facility bear interest at floating rates. Depending on the Company’s credit
rating, the margin that KCS pays above the London Interbank Offered Rate (“LIBOR”) at any point is between 1.125% and
2.0%. As of December 31, 2017, the margin was 1.5% based on KCS’s current credit rating.
The KCS Revolving Credit Facility is guaranteed by KCSR, together with certain domestic subsidiaries named therein as
guarantors (the “Subsidiary Guarantors”) and matures on December 9, 2020. The KCS Revolving Credit Facility agreement
contains representations, warranties, covenants (including financial covenants related to a leverage ratio and an interest
coverage ratio) and events of default that are customary for credit agreements of this type. The occurrence of an event of
67
Kansas City Southern and Subsidiaries
Notes to Consolidated Financial Statements-(Continued)
default could result in the termination of the commitments and the acceleration of the repayment of any outstanding principal
balance on the KCS Revolving Credit Facility and the KCS Commercial Paper Program.
As of December 31, 2017 and 2016, KCS had no outstanding borrowings under the KCS Revolving Credit Facility.
Senior Notes
The Company’s senior notes include certain covenants which are customary for these types of debt instruments issued by
borrowers with similar credit ratings.
The KCS Notes are unsecured and unsubordinated obligations of the Company and are unconditionally guaranteed,
jointly and severally, by KCSR and each current and future domestic subsidiary of KCS that guarantees the KCS Revolving
Credit Facility or certain other debt of KCS or a Note Guarantor (collectively, the “Note Guarantors”).
KCSR’s senior notes are unconditionally guaranteed, jointly and severally, on an unsecured senior basis, by KCS and
each current and future domestic subsidiary of KCS that guarantees the KCS Revolving Credit Facility or certain other debt of
KCS or a note guarantor. KCSR’s senior notes and the note guarantees rank pari passu in right of payment with KCSR’s, KCS’s
and the Note Guarantors’ existing and future unsecured, unsubordinated obligations.
KCSM’s senior notes are denominated in U.S. dollars; are unsecured, unsubordinated obligations; rank pari passu in right
of payment with KCSM’s existing and future unsecured, unsubordinated obligations and are senior in right of payment to
KCSM’s future subordinated indebtedness.
Senior notes are redeemable at the issuer’s option, in whole or in part, at any time, by paying the greater of either 100%
of the principal amount to be redeemed and a formula price based on interest rates prevailing at the time of redemption and
time remaining to maturity. In addition, KCSM senior notes are redeemable, in whole but not in part, at KCSM’s option at any
time at a redemption price of 100% of their principal amount, plus any accrued unpaid interest in the event of certain changes
in the Mexican withholding tax rate.
RRIF Loan Agreements
The following loans were made under the Railroad Rehabilitation and Improvement Financing (“RRIF”) Program
administered by the Federal Railroad Administration (“FRA”):
KCSR RRIF Loan Agreement. On February 21, 2012, KCSR entered into an agreement with the FRA to borrow $54.6
million to be used to reimburse KCSR for a portion of the purchase price of thirty new locomotives (the “Locomotives”)
acquired by KCSR in the fourth quarter of 2011. The loan bears interest at 2.96% annually and the principal balance amortizes
quarterly with a final maturity of February 24, 2037. The obligations under the financing agreement are secured by a first
priority security interest in the Locomotives and certain related rights. In addition, the Company has agreed to guarantee
repayment of the amounts due under the financing agreement and certain related agreements. The occurrence of an event of
default could result in the acceleration of the repayment of any outstanding principal balance of the loan.
Tex-Mex RRIF Loan Agreement. On June 28, 2005, Tex-Mex entered into an agreement with the FRA to borrow $50.0
million to be used for infrastructure improvements in order to accommodate growing freight rail traffic related to the NAFTA
corridor. The loan bears interest at 4.29% annually and the principal balance amortizes quarterly with a final maturity of
July 13, 2030. The loan is guaranteed by Mexrail, which has issued a pledge agreement in favor of the lender equal to the gross
revenues earned by Mexrail on per-car fees on traffic crossing the International Rail Bridge in Laredo, Texas. In addition, the
Company has agreed to guarantee the scheduled principal payment installments due to the FRA from Tex-Mex under the loan
agreement on a rolling five-year basis.
Locomotive Financing Agreements
During 2008 and 2011, KCSM entered into various financing agreements totaling $216.0 million to purchase
locomotives. The agreements mature between December 2020 and September 2023, are payable on a quarterly or semi-annual
basis and contain annual interest rates ranging between 5.737% and 9.310%. KCSM has either granted the lender a security
interest in the locomotives to secure the loan or has secured the loans by transferring legal ownership of the locomotives to
irrevocable trusts established by KCSM to which the lender is the primary beneficiary and KCSM has a right of reversion upon
satisfaction of the obligations of the loan agreements.
68
Kansas City Southern and Subsidiaries
Notes to Consolidated Financial Statements-(Continued)
KCSM’s locomotive financing agreements contain representations, warranties and covenants typical of such equipment
loan agreements. Events of default in the financing agreements include, but are not limited to, certain payment defaults, certain
bankruptcy and liquidation proceedings and the failure to perform any covenants or agreements contained in the financing
agreements. Any event of default could trigger acceleration of KCSM’s payment obligations under the terms of the financing
agreements.
Debt Covenants Compliance
The Company was in compliance with all of its debt covenants as of December 31, 2017.
Other Debt Provisions
Certain loan agreements and debt instruments entered into or guaranteed by the Company and its subsidiaries provide for
default in the event of a specified change in control of the Company or particular subsidiaries of the Company.
Leases and Debt Maturities
The Company leases transportation equipment, as well as office and other operating facilities, under various capital and
operating leases. Rental expenses under operating leases were $59.5 million, $61.0 million, and $63.9 million for the years
ended December 31, 2017, 2016 and 2015, respectively. Operating leases that contain scheduled rent adjustments are
recognized on a straight-line basis over the term of the lease. Contingent rentals and sublease rentals were not significant.
Minimum annual payments and present value thereof under existing capital leases, other debt maturities and minimum annual
rental commitments under non-cancelable operating leases are as follows (in millions):
Years
2018
2019
2020
2021
2022
Thereafter
Total
Capital Leases
$
Long-
Term
Debt
35.2
15.5
299.0
12.3
12.4
1,912.8
Minimum
Lease
Payments
4.9
$
$
3.6
2.7
2.7
2.7
2.5
$ 2,287.2
$
19.1
$
Less
Interest
Net
Present
Value
Total
Debt
Operating
Leases
Total
1.3
0.9
0.8
0.6
0.4
0.1
4.1
$
$
3.6
2.7
1.9
2.1
2.3
2.4
$
38.8
18.2
300.9
14.4
14.7
1,915.2
60.9
52.1
41.8
28.2
21.5
77.2
$
99.7
70.3
342.7
42.6
36.2
1,992.4
$
15.0
$ 2,302.2
$
281.7
$ 2,583.9
In the normal course of business, the Company enters into long-term contractual requirements for future goods and
services needed for the operations of the business. Such commitments are not in excess of expected requirements and are not
reasonably likely to result in performance penalties or payments that would have a material adverse effect on the Company’s
liquidity.
69
Kansas City Southern and Subsidiaries
Notes to Consolidated Financial Statements-(Continued)
Note 12. Income Taxes
Current income tax expense represents the amounts expected to be reported on the Company’s income tax returns, and
deferred tax expense or benefit represents the change in net deferred tax assets and liabilities. Deferred tax assets and liabilities
are determined based on the difference between the financial statement and tax bases of assets and liabilities as measured by the
enacted tax rates that will be in effect when these differences reverse. Valuation allowances are recorded as appropriate to
reduce deferred tax assets to the amount considered likely to be realized.
On December 22, 2017, the President of the United States signed into law the Tax Reform Act. The legislation
significantly changes U.S. tax law by, among other things, lowering corporate income tax rates, implementing a territorial tax
system and imposing a repatriation tax on deemed repatriated earnings of foreign subsidiaries. The Tax Reform Act
permanently reduces the U.S. corporate income tax rate from a maximum of 35% to a flat 21% rate, effective January 1, 2018.
The Company uses the asset and liability method of accounting for income taxes. Under this method, deferred tax assets
and liabilities are recognized for the future tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to
reverse. As a result of the reduction in the U.S. corporate income tax rate from 35% to 21% under the Tax Reform Act, the
Company revalued its ending net deferred tax liabilities at December 31, 2017 and recognized a provisional $487.6 million tax
benefit in the Company’s consolidated statement of income for the year ended December 31, 2017.
The Tax Reform Act provided for a one-time deemed mandatory repatriation of post-1986 undistributed foreign
subsidiary earnings and profits (“E&P”) through the year ended December 31, 2017. The Company had an estimated $1,479.2
million of undistributed foreign E&P subject to the deemed mandatory repatriation and recognized a provisional $74.6 million
of income tax expense in the Company’s consolidated statement of income for the year ended December 31, 2017. After the
utilization of existing tax credits, the Company expects to pay additional U.S. federal cash taxes of approximately $44.9 million
on the deemed mandatory repatriation, payable over eight years.
While the Tax Reform Act provides for a territorial tax system, beginning in 2018, it includes two new U.S. tax base
erosion provisions, the global intangible low-taxed income (“GILTI”) provisions and the base-erosion and anti-abuse tax
(“BEAT”) provisions.
The GILTI provisions require the Company to include in its U.S. income tax return foreign subsidiary earnings in excess
of an allowable return on the foreign subsidiary’s tangible assets. The Company expects that it will be subject to incremental
U.S. tax on GILTI income beginning in 2018, due to expense allocations required by the U.S. foreign tax credit rules. The
Company has elected to account for GILTI tax in the period in which it is incurred, and therefore has not provided any deferred
tax impacts of GILTI in its consolidated financial statements for the year ended December 31, 2017.
The BEAT provisions in the Tax Reform Act eliminates the deduction of certain base-erosion payments made to related
foreign corporations, and impose a minimum tax if greater than regular tax. The Company does not expect it will be subject to
this tax and therefore has not included any tax impacts of BEAT in its consolidated financial statements for the year ended
December 31, 2017.
On December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) to address the application
of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed
(including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Reform Act.
The Company has recognized the provisional tax impacts related to deemed repatriated earnings and the revaluation of deferred
tax assets and liabilities and included these amounts in its consolidated financial statements for the year ended December 31,
2017. The ultimate impact may differ from these provisional amounts, possibly materially, due to, among other things,
additional analysis, changes in interpretations and assumptions the Company has made, additional regulatory guidance that may
be issued, and actions the Company may take as a result of the Tax Reform Act. The accounting is expected to be complete
when the 2017 U.S. corporate income tax return is filed in 2018.
70
Kansas City Southern and Subsidiaries
Notes to Consolidated Financial Statements-(Continued)
Tax Expense (Benefit). Income tax expense (benefit) consists of the following components (in millions):
2017
2016
2015
Current:
Federal
State and local
Foreign
Total current
Deferred:
Federal
State and local
Foreign
Total deferred
Total income tax expense (benefit)
$
$
$
47.3
0.6
163.8
211.7
(350.1)
11.9
36.9
(301.3)
(89.6) $
1.0
0.6
76.4
78.0
92.7
13.1
(1.0)
104.8
182.8
Income before income taxes consists of the following (in millions):
Income before income taxes:
U.S.
Foreign
Total income before income taxes
2017
2016
$
$
331.8
542.5
874.3
$
$
279.9
382.8
662.7
$
$
$
$
—
0.3
51.2
51.5
109.3
15.5
11.0
135.8
187.3
2015
315.0
357.6
672.6
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax
liabilities at December 31 follow (in millions):
Assets:
Tax credit and loss carryovers
Reserves not currently deductible for tax
Other
Gross deferred tax assets before valuation allowance
Valuation allowance
Net deferred tax assets
Liabilities:
Property
Investments
Other
Gross deferred tax liabilities
Net deferred tax liability
71
2017
2016
$
$
26.9
54.1
25.2
106.2
(2.1)
104.1
(1,012.7)
(48.0)
(30.6)
(1,091.3)
$
(987.2) $
70.7
106.4
31.6
208.7
(1.7)
207.0
(1,389.0)
(73.8)
(33.5)
(1,496.3)
(1,289.3)
Kansas City Southern and Subsidiaries
Notes to Consolidated Financial Statements-(Continued)
Tax Rates. Differences between the Company’s effective income tax rate and the U.S. federal statutory income tax rate of
35% follow (in millions):
Income tax expense using the statutory
rate in effect
Tax effect of:
Difference between U.S. and foreign tax
rate
Foreign exchange (i)
State and local income tax provision, net
Change in U.S. tax rate
Deemed mandatory repatriation
Other, net
2017
2016
2015
Dollars
Percent
Dollars
Percent
Dollars
Percent
$
306.0
35.0% $
231.9
35.0% $
235.4
35.0%
(25.1)
(2.9%)
31.6
8.3
(487.6)
74.6
2.6
3.6%
1.0%
(55.8%)
8.6%
0.3%
(17.4)
(45.0)
8.1
—
—
5.2
(2.6%)
(6.8%)
1.2%
—
—
0.8%
(17.8)
(40.5)
10.3
—
—
(0.1)
187.3
(2.6%)
(6.1%)
1.5%
—
—
—
27.8%
Income tax expense (benefit)
$
(89.6)
(10.2%) $
182.8
27.6% $
_____________________
(i)
Mexican income taxes are paid in Mexican pesos, and as a result, the effective income tax rate reflects fluctuations in
the value of the Mexican peso against the U.S. dollar. The foreign exchange impact on income taxes includes the gain
or loss from the revaluation of the Company’s net U.S. dollar-denominated monetary liabilities into Mexican pesos
which is included in Mexican taxable income under Mexican tax law. As a result, a strengthening of the Mexican peso
against the U.S. dollar for the reporting period will generally increase the Mexican cash tax obligation and the
effective income tax rate, and a weakening of the Mexican peso against the U.S. dollar for the reporting period will
generally decrease the Mexican cash tax obligation and the effective tax rate. To hedge its exposure to this cash tax
risk, the Company enters into foreign currency derivative contracts, which are measured at fair value each period and
any change in fair value is recognized in foreign exchange gain (loss) within the consolidated statements of income.
Refer to Note 9 “Derivative Instruments” for further information.
Difference Attributable to Foreign Investments. As a result of the deemed mandatory repatriation provisions in the Tax
Reform Act, the Company included an estimated $1,479.2 million of undistributed earnings in income subject to U.S. tax at
reduced tax rates. The Company does not intend to distribute earnings in a taxable manner, and therefore intends to limit
distributions to earnings previously taxed in the U.S., or earnings that would qualify for the 100 percent dividends received
deduction provided for in the Tax Reform Act, and earnings that would not result in any significant foreign taxes. As a result,
the Company has not recognized a deferred tax liability on its investment in foreign subsidiaries.
Tax Carryovers. The Company has U.S. state net operating losses which are carried forward from 5 to 20 years and are
analyzed each year to determine the likelihood of realization. The state loss carryovers arise from both combined and separate
tax filings from as early as 1999 and may expire as early as December 31, 2018 and as late as December 31, 2037. The state
loss carryover at December 31, 2017, was $426.2 million.
The Mexico federal loss carryovers at December 31, 2017, were $8.4 million and, if not used, will begin to expire in
2026. A deferred tax asset was recognized in prior periods for the expected future tax benefit of these losses which will be
carried forward to reduce only Mexican income tax payable in future years.
The valuation allowance for deferred tax assets as of December 31, 2017 and 2016, was $2.1 million and $1.7 million,
respectively. The Company believes it is more likely than not that reversals of existing temporary differences that will produce
future taxable income and the results of future operations will generate sufficient taxable income to realize the deferred tax
assets, net of valuation allowances, related to loss carryovers.
72
Kansas City Southern and Subsidiaries
Notes to Consolidated Financial Statements-(Continued)
Uncertain Tax Positions. The accounting guidance for uncertainty in income taxes prescribes a recognition threshold and
measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken
in a tax return. The guidance requires the Company to recognize in the consolidated financial statements the benefit of a tax
position only if the impact is more likely than not of being sustained on audit based on the technical merits of the position. A
reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in millions):
Balance at January 1,
Additions based on tax positions related to the current year
Additions for tax positions of prior years
Reductions for tax positions of prior years
Reductions as a result of lapse of statute of limitations
Balance at December 31,
2017
2016
$
$
$
3.8
—
—
(0.1)
(3.7)
— $
1.7
1.3
2.5
—
(1.7)
3.8
A tax benefit of $3.7 million was recognized in the third quarter of 2017 relating to a previous uncertain tax position as a
result of a lapse of the statute of limitations.
Interest and penalties related to uncertain tax positions are included in income before taxes on the consolidated statements
of income. Accrued interest and penalties on unrecognized tax benefits and interest and penalty expense was immaterial to the
consolidated financial statements for all periods presented.
Tax Contingencies. Tax returns filed in the U.S. for periods after 2013 and in Mexico for periods after 2011 remain open
to examination by the taxing authorities. The Servicio de Administración Tributaria (the “SAT”), the Mexican equivalent of the
IRS, completed the examination of the KCSM 2011 Mexico tax return during the third quarter of 2017 without adjustment. An
SAT examination was completed during the second quarter of 2017 without adjustment for the KCSM Servicios 2013 Mexico
tax return. The Company received audit assessments from the SAT during the first quarter of 2017 for the KCSM 2009 and
2010 Mexico tax returns. The Company commenced administrative actions with the SAT and if these assessments are not
nullified, the matters will be litigated. The Company believes that it has strong legal arguments in its favor and it is more likely
than not that the Company will prevail in any challenge of the assessments.
The Company litigated a Value Added Tax (“VAT”) audit assessment from the SAT for KCSM for the year ended
December 31, 2005. In November 2016, KCSM was notified of a resolution by the Mexican tax court annulling this
assessment. The SAT appealed this resolution to the Mexican circuit court. In September 2017, KCSM was notified of a
resolution by the circuit court which ordered the tax court to consider an argument made by KCSM in the original tax court
proceeding that was not addressed in the tax court’s November 2016 resolution. In October 2017, the tax court ruled that the
arguments made by KCSM asserting that the SAT unduly extended the audit process were not valid, and also annulled the
assessment consistent with the tax courts earlier November 2016 ruling. In December 2017, KCSM and the SAT filed an appeal
with the Federal Courts of Appeals. The Company believes it is probable that the court will continue to annul the 2005 VAT
assessment. Further, the Company believes it is more likely than not that the SAT will ultimately be precluded from issuing a
new 2005 VAT audit assessment. In the unexpected event that the SAT is provided the opportunity to issue a new 2005 VAT
audit assessment, the Company cannot predict if the SAT would issue a new assessment or the basis of any new assessment.
Accordingly, the Company is not able to estimate any related potential exposure.
KCSM has not historically assessed VAT on international import transportation services provided to its customers based
on a written ruling that KCSM obtained from the SAT in 2008 stating that such services were not subject to VAT (the “2008
Ruling”). Notwithstanding the 2008 Ruling, in December 2013, the SAT unofficially informed KCSM of an intended
implementation of new criteria effective as of January 1, 2014, pursuant to which VAT would be assessed on all international
import transportation services on the portion of the services provided within Mexico. Additionally, in November 2013, the SAT
filed an action to nullify the 2008 Ruling, potentially exposing the application of the new criteria to open tax years. In February
2014, KCSM filed an action opposing the SAT’s nullification action. In December 2016, KCSM was notified of a resolution
73
Kansas City Southern and Subsidiaries
Notes to Consolidated Financial Statements-(Continued)
issued by the Mexican tax court confirming the 2008 Ruling. The SAT appealed this resolution. In October 2017, the Circuit
Court resolved to not render a decision on the case but rather to send the SAT’s appeal to the Supreme Court. The Supreme
Court will decide whether it will hear the case and render a decision, or remand the SAT’s appeal back to the Circuit Court for a
decision. The Company believes it is more likely than not that it will continue to prevail in this matter. Further, as of the date of
this filing, the SAT has not implemented any new criteria regarding this assessment of VAT on international import
transportation services. The Company believes it is probable that any unexpected nullification of the 2008 Ruling and the
implementation of any new VAT criteria would be applied on a prospective basis, in which case, due to the pass-through nature
of VAT, KCSM would begin to assess its customers for VAT on international import transportation services, resulting in no
material impact to the Company’s consolidated financial statements.
Note 13. Stockholders’ Equity
Information regarding the Company’s capital stock at December 31 follows:
$25 par, 4% noncumulative, preferred stock
$1 par, preferred stock
$.01 par, common stock
Shares outstanding at December 31:
$25 par, 4% noncumulative, preferred stock
$.01 par, common stock
Shares Authorized
Shares Issued
2017
840,000
2,000,000
2016
840,000
2,000,000
2017
2016
649,736
—
649,736
—
400,000,000
400,000,000
123,352,185
123,352,185
2017
2016
242,170
242,170
103,036,805
106,606,619
Share Repurchase Programs. During the first half of 2017, KCS concluded its $500.0 million share repurchase program,
announced in May 2015 (the “2015 Program”). In August 2017, the Company announced a new share repurchase program of
up to $800.0 million, which expires on June 30, 2020 (the “2017 Program”). Share repurchases may be made in the open
market, through privately negotiated transactions, or through an accelerated share repurchase (“ASR”) program limited to
$200.0 million.
Under an ASR agreement, the Company pays a specified amount to a financial institution and receives an initial delivery
of shares. Upon settlement of the ASR agreement, typically the financial institution delivers additional shares, with the final
aggregate number of shares delivered determined with reference to the volume weighted-average price per share of the
Company’s common stock over the term of the ASR agreement, less a negotiated discount. The transactions are accounted for
as equity transactions with any excess of repurchase price over par value allocated between additional paid-in capital and
retained earnings. At the time the shares are received, there is an immediate reduction in the weighted-average number of
shares outstanding for purposes of the basic and diluted earnings per share computation.
During the second half of 2017, the Company entered into and settled two ASR agreements under its ASR program. In
total, the Company repurchased 1,901,769 shares of common stock at an average price of $105.17 per share and a cost of
$200.0 million.
74
Kansas City Southern and Subsidiaries
Notes to Consolidated Financial Statements-(Continued)
During 2017, KCS repurchased 1,340,209 shares of common stock for $120.4 million at an average price of $89.83 per
share under the 2015 Program, and 2,419,469 shares of common stock for $255.2 million at an average price of $105.48 per
share under the 2017 Program. In total during 2017, the Company repurchased 3,759,678 shares at an average price of $99.90
per share and a total cost of $375.6 million under both the 2015 Program and the 2017 Program.
Treasury Stock. Shares of common stock in treasury and related activity follow:
Balance at beginning of year
Shares repurchased
Shares issued to fund stock option exercises
Employee stock purchase plan shares issued
Nonvested shares issued
Nonvested shares forfeited
Balance at end of year
2017
2016
2015
16,745,566
14,891,041
12,959,855
3,759,678
(9,110)
(76,401)
(124,519)
20,166
2,127,612
(15,264)
(82,372)
(179,309)
3,858
2,133,984
(89,035)
(52,736)
(62,936)
1,909
20,315,380
16,745,566
14,891,041
Change in Control Provisions. The Company and certain of its subsidiaries have entered into agreements with certain
employees whereby, upon defined circumstances constituting a change in control of the Company or subsidiary, certain stock
options become exercisable, certain benefit entitlements are automatically funded and such employees are entitled to specified
cash payments upon termination of employment.
The Company and certain of its subsidiaries have established trusts to provide for the funding of corporate commitments
and entitlements of certain officers, directors, employees and others in the event of a specified change in control of the
Company or subsidiary. Assets held in such trusts on December 31, 2017 and 2016, were not material. Depending upon the
circumstances at the time of any such change in control, the most significant of which would be the price paid for KCS
common stock by a party seeking to control the Company, funding of the Company’s trusts could be substantial.
Cash Dividends on Common Stock. The following table presents the amount of cash dividends declared per common
share by the Company’s Board of Directors:
Cash dividends declared per common share
$
1.38
$
1.32
$
1.32
2017
2016
2015
Note 14. Share-Based Compensation
On May 4, 2017, the Company’ stockholders approved the Kansas City Southern 2017 Equity Incentive Plan (the “2017
Plan”), which replaced the Kansas City Southern 2008 Stock Option and Performance Award Plan (the “2008 Plan”). The
Board of Directors and its Compensation and Organization Committee had previously adopted the 2017 Plan, subject to
stockholder approval, on January 26, 2017, and February 17, 2017, respectively. The 2017 Plan provides for the granting of up
to 3,750,000 shares of the Company’s common stock to eligible persons as defined in the 2017 Plan. Outstanding equity awards
granted under the 2008 Plan and the 2017 Plan (the “Plans”) are to be governed by the terms and conditions of each individual
plan and the related award agreements.
Stock Options. The exercise price for options granted under the Plans equals the closing market price of the Company’s
stock on the date of grant. Options generally have a 3-year vesting period and are exercisable over the 10-year contractual term,
except that options outstanding become immediately exercisable upon certain defined circumstances constituting a change in
control of the Company. The grant date fair value is recorded to expense on a straight-line basis over the vesting period.
75
Kansas City Southern and Subsidiaries
Notes to Consolidated Financial Statements-(Continued)
The fair value of each option award is estimated on the date of grant using the Black-Scholes option pricing model. The
weighted-average assumptions used were as follows:
Expected dividend yield
Expected volatility
Risk-free interest rate
Expected term (years)
1.52%
30.74%
2.20%
6.0
1.60%
32.29%
1.51%
6.0
Weighted-average grant date fair value of stock options granted $
24.49
$
22.98
$
0.94%
37.11%
1.82%
6.0
41.49
2017
2016
2015
The expected dividend yield is calculated as the ratio of dividends paid per share of common stock to the stock price on
the date of grant. The expected volatility is based on the historical volatility of the Company’s stock price over a term equal to
the estimated life of the options. The risk-free interest rate is determined based on U.S. Treasury rates for instruments with
terms approximating the expected term of the options granted, which represents the period of time the awards are expected to
be outstanding and is based on the historical experience of similar awards.
A summary of stock option activity is as follows:
Number of
Shares
Weighted-
Average
Exercise
Price
Per Share
Weighted-
Average
Remaining
Contractual
Term
In years
Aggregate
Intrinsic
Value
In millions
Options outstanding at December 31, 2016
414,803
$
Granted
Exercised
Forfeited or expired
Options outstanding at December 31, 2017
Exercisable at December 31, 2017
97,090
(9,110)
(2,159)
500,624
339,711
$
$
76.87
87.11
80.32
88.35
78.74
74.33
6.1
$
5.0
$
14.0
11.0
The aggregate intrinsic value in the table above, which is the amount by which the market value of the underlying stock
exceeded the exercise price of outstanding options, represents the amount optionees would have realized if all in-the-money
options had been exercised on the last business day of the period indicated.
Compensation cost of $2.3 million, $2.5 million, and $2.0 million was recognized for stock option awards for the years
ended December 31, 2017, 2016, and 2015, respectively. The total income tax benefit recognized in the consolidated statements
of income was $0.8 million, $0.9 million, and $0.7 million for the years ended December 31, 2017, 2016 and 2015,
respectively.
Additional information regarding stock option exercises appears in the table below (in millions):
Aggregate grant-date fair value of stock options vested
Intrinsic value of stock options exercised
Cash received from option exercises
Tax benefit from options exercised during the annual period
$
2017
2016
2015
$
2.8
0.2
0.7
0.1
$
1.8
0.6
0.9
0.2
2.0
6.1
4.2
2.3
76
Kansas City Southern and Subsidiaries
Notes to Consolidated Financial Statements-(Continued)
As of December 31, 2017, $1.2 million of unrecognized compensation cost relating to nonvested stock options is
expected to be recognized over a weighted-average period of 1.0 year. At December 31, 2017, there were 3,694,802 shares
available for future grants under the 2017 Plan.
Nonvested Stock. The Plans provide for the granting of nonvested stock awards to officers and other designated
employees. The grant date fair value is based on the closing market price on the date of the grant. These awards are subject to
forfeiture if employment terminates during the vesting period, which is generally 3 year or 5 year vesting for employees.
Awards granted to the Company’s directors vest immediately on date of grant. The grant date fair value of nonvested shares is
recorded to compensation expense on a straight-line basis over the vesting period.
On February 19, 2016 the Company granted 66,320 shares of nonvested stock (“the market-based award”) under the 2008
Plan. The market-based award contained a market condition that accelerated the vesting in three tranches if the twenty trading
day volume-weighted average price of the Company’s common stock was above $84.14, $91.79 or $99.44. The first two target
prices of $84.14 and $91.79 were met in the first and second quarters of 2016, respectively, and the remaining target price of
$99.44 was met in June 2017.
The fair value and requisite service period of nonvested market-based awards granted on February 19, 2016 were
estimated on the date of grant using the Monte Carlo simulation model. The assumptions used in the Monte Carlo simulation
model are consistent with those used to value stock options and were as follows:
Expected dividend yield
Expected volatility
Risk-free interest rate
Expected term (years)
Weighted-average grant date fair value
A summary of nonvested stock activity is as follows:
Nonvested stock at December 31, 2016
Granted
Vested
Forfeited
Nonvested stock at December 31, 2017
Nonvested Stock
1.58%
31.68%
0.53% - 1.89%
1.9
$
70.95
Number of
Shares
Weighted-
Average Grant
Date Fair
Value
Aggregate
Intrinsic
Value
In millions
238,010
121,307
(62,472)
(20,166)
276,679
$
$
91.55
93.29
87.51
90.83
93.28
$
29.1
The fair value (at vest date) of shares vested during the years ended December 31, 2017, 2016, and 2015 was $5.9
million, $7.0 million, and $6.4 million, respectively.
The weighted-average grant date fair value of nonvested stock granted during 2017, 2016, and 2015 was $93.29, $80.92
and $112.03, respectively. Compensation cost for nonvested stock and market-based awards was $9.3 million, $9.6 million, and
$5.1 million for the years ended December 31, 2017, 2016, and 2015, respectively. The total income tax benefit recognized in
the consolidated statements of income was $3.5 million, $3.5 million, and $1.9 million for the years ended December 31, 2017,
2016, and 2015, respectively.
As of December 31, 2017, $13.6 million of unrecognized compensation costs related to nonvested stock is expected to be
recognized over a weighted-average period of 1.4 years.
77
Kansas City Southern and Subsidiaries
Notes to Consolidated Financial Statements-(Continued)
Performance Based Awards. The Company granted performance based nonvested stock awards during 2017 (the “2017
Awards”), 2016 (the “2016 Awards”) and 2015 (the “2015 Awards”). The awards granted provide a target number of shares that
generally vest at the end of a 3-year requisite service period following the grant date. In addition to the service condition, the
number of nonvested shares to be received depends on the attainment of defined Company-wide performance goals based on
operating ratio (“OR”) and return on invested capital (“ROIC”) over a three-year performance period. The 2017 and 2016
Awards are also subject to a revenue growth multiplier based on a three-year performance period calculated as defined in the
related award agreement that can range from 80% to 140% of the award earned based on the OR and ROIC achieved. The
number of nonvested shares ultimately earned will range between zero to 200% of the target award.
A summary of performance based nonvested stock activity at target is as follows:
Nonvested stock, at December 31, 2016
Granted
Vested
Forfeited
Nonvested stock, at December 31, 2017
_____________________
Target Number of
Shares *
Weighted-Average
Grant Date Fair
Value
144,399
54,588
(36,323)
(23,162)
139,502
$
$
97.08
87.09
94.23
102.30
93.05
* For the 2017 Awards and the 2016 Awards, participants in the aggregate can earn up to a maximum of 107,888 and
105,320 shares, respectively. For the 2015 Awards, the performance shares earned were 21,397.
The weighted-average grant date fair value of performance based nonvested stock granted during 2017, 2016 and 2015
was $87.09, $82.71 and $119.35, respectively. The Company expenses the grant date fair value of the awards which are
probable of being earned over the performance periods. Compensation cost on performance based awards was $6.0 million,
$5.7 million and $3.0 million for the years ended December 31, 2017, 2016 and 2015, respectively. Total income tax benefit
recognized in the consolidated statements of income for performance based awards was $2.2 million, $2.1 million and $1.1
million for the years ended December 31, 2017, 2016 and 2015, respectively.
As of December 31, 2017, $5.6 million of unrecognized compensation cost related to performance based awards is
expected to be recognized over a weighted-average period of eleven months. The fair value (at vest date) of shares vested for
the year ended December 31, 2017 was $3.2 million.
Employee Stock Purchase Plan. The employee stock purchase plan (“ESPP”) provides substantially all U.S. full-time
employees of the Company, certain subsidiaries and certain other affiliated entities, with the right to subscribe to an aggregate
of 4.0 million shares of common stock of the Company. Under the ESPP, eligible employees may contribute, through payroll
deductions, up to 10% of their regular base compensation during six-month purchase periods at a purchase price equal to 85%
of the closing market price on either the exercise date or the offering date, whichever is lower.
At the end of each purchase period, the accumulated deductions are applied toward the purchase of the Company’s
common stock. Both the discount in grant price and the share option purchase price are valued to derive the award’s fair value.
The awards vest and the expense is recognized ratably over the offering period.
78
Kansas City Southern and Subsidiaries
Notes to Consolidated Financial Statements-(Continued)
The following table summarizes activity related to the various ESPP offerings:
Exercise Date
Date
Issued
Purchase
Price
Shares
Issued
Received
from
Employees(i)
In millions
$
January 4, 2018
July 5, 2017
January 12, 2017
July 11, 2016
January 8, 2016
July 6, 2015
89.18
68.70
72.12
62.66
63.47
77.52
$
30,595
40,293
36,108
41,895
40,477
35,097
2.7
2.8
2.6
2.6
2.6
2.7
July 2017 offering
January 2017 offering
July 2016 offering
January 2016 offering
July 2015 offering
January 2015 offering
_____________________
(i)
Represents amounts received from employees through payroll deductions for share purchases under applicable
offering.
The fair value of the ESPP stock purchase rights is estimated on the date of grant using the Black-Scholes option pricing
model. The weighted-average assumptions used for each of the respective periods were as follows:
Year Ended December 31,
2017
2016
2015
Expected dividend yield
Expected volatility
Risk-free interest rate
Expected term (years)
1.47%
17.09%
0.89%
0.5
1.65%
23.84%
0.46%
0.5
Weighted-average grant date fair value
$
17.90
$
17.29
$
1.20%
17.00%
0.10%
0.5
20.55
Compensation expense of $1.3 million, $1.4 million, and $1.3 million was recognized for ESPP option awards for the
years ended December 31, 2017, 2016, and 2015, respectively. At December 31, 2017, there were 3.5 million remaining shares
available for future ESPP offerings under the plan.
Note 15. Commitments and Contingencies
Concession Duty. Under KCSM’s 50-year Concession, which could expire in 2047 unless extended, KCSM pays annual
concession duty expense of 1.25% of gross revenues. For the year ended December 31, 2017, the concession duty expense,
which is recorded within materials and other in operating expenses, was $17.0 million, compared to $14.9 million and $15.4
million for the same periods in 2016 and 2015, respectively.
Litigation. The Company is a party to various legal proceedings and administrative actions, all of which are of an
ordinary, routine nature and incidental to its operations. Included in these proceedings are various tort claims brought by current
and former employees for job-related injuries and by third parties for injuries related to railroad operations. KCS aggressively
defends these matters and has established liability provisions, which management believes are adequate to cover expected costs.
Although it is not possible to predict the outcome of any legal proceeding, in the opinion of management, such proceedings and
actions should not, individually, or in the aggregate, have a material adverse effect on the Company’s consolidated financial
statements.
79
Kansas City Southern and Subsidiaries
Notes to Consolidated Financial Statements-(Continued)
Environmental Liabilities. The Company’s U.S. operations are subject to extensive federal, state and local environmental
laws and regulations. The major U.S. environmental laws to which the Company is subject include, among others, the Federal
Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA,” also known as the Superfund law), the
Toxic Substances Control Act, the Federal Water Pollution Control Act, and the Hazardous Materials Transportation Act.
CERCLA can impose joint and several liabilities for cleanup and investigation costs, without regard to fault or legality of the
original conduct, on current and predecessor owners and operators of a site, as well as those who generate, or arrange for the
disposal of, hazardous substances. The Company does not believe that compliance with the requirements imposed by the
environmental legislation will impair its competitive capability or result in any material additional capital expenditures,
operating or maintenance costs. The Company is, however, subject to environmental remediation costs as described in the
following paragraphs.
The Company’s Mexico operations are subject to Mexican federal and state laws and regulations relating to the protection
of the environment through the establishment of standards for water discharge, water supply, emissions, noise pollution,
hazardous substances and transportation and handling of hazardous and solid waste. The Mexican government may bring
administrative and criminal proceedings, impose economic sanctions against companies that violate environmental laws, and
temporarily or even permanently close non-complying facilities.
The risk of incurring environmental liability is inherent in the railroad industry. As part of serving the petroleum and
chemicals industry, the Company transports hazardous materials and has a professional team available to respond to and handle
environmental issues that might occur in the transport of such materials.
The Company performs ongoing reviews and evaluations of the various environmental programs and issues within the
Company’s operations, and, as necessary, takes actions intended to limit the Company’s exposure to potential liability. Although
these costs cannot be predicted with certainty, management believes that the ultimate outcome of identified matters will not
have a material adverse effect on the Company’s consolidated financial statements.
Personal Injury. The Company’s personal injury liability is based on semi-annual actuarial studies performed on an
undiscounted basis by an independent third party actuarial firm and reviewed by management. This liability is based on
personal injury claims filed and an estimate of claims incurred but not yet reported. Actual results may vary from estimates due
to the number, type and severity of the injury, costs of medical treatments and uncertainties in litigation. Adjustments to the
liability are reflected within operating expenses in the period in which changes to estimates are known. Personal injury claims
in excess of self-insurance levels are insured up to certain coverage amounts, depending on the type of claim and year of
occurrence. The personal injury liability as of December 31, 2017, is based on an updated actuarial study of personal injury
claims through November 30, 2017, and review of December 2017 experience. For the years ended December 31, 2017 and
2016, the Company recognized a $3.6 million and $1.1 million reduction, respectively, in personal injury liability, due to
changes in estimates as a result of the Company’s claims development and settlement experience.
The personal injury liability activity was as follows (in millions):
Balance at beginning of year
Accruals
Changes in estimate
Payments
Balance at end of year
2017
2016
$
$
23.8
$
4.8
(3.6)
(5.7)
19.3
$
23.9
4.8
(1.1)
(3.8)
23.8
Tax Contingencies. Information regarding tax contingencies is included in Note 12 Income Taxes - Tax Contingencies.
Contractual Agreements. In the normal course of business, the Company enters into various contractual agreements
related to commercial arrangements and the use of other railroads’ or governmental entities’ infrastructure needed for the
operations of the business. The Company is involved or may become involved in certain disputes involving transportation rates,
80
Kansas City Southern and Subsidiaries
Notes to Consolidated Financial Statements-(Continued)
product loss or damage, charges, and interpretations related to these agreements. While the outcome of these matters cannot be
predicted with certainty, the Company does not believe that, when resolved, these disputes will have a material effect on its
consolidated financial statements.
Credit Risk. The Company continually monitors risks related to economic changes and certain customer receivables
concentrations. Significant changes in customer concentration or payment experience, deterioration of customer
creditworthiness or weakening in economic trends could have a significant impact on the collectability of the Company’s
receivables and its operating results. If the financial condition of the Company’s customers were to deteriorate and result in an
impairment of their ability to make payments, additional allowances may be required. The Company has recognized provisions
for uncollectability based on its best estimate as of December 31, 2017.
Panama Canal Railway Company (”PCRC”) Guarantees and Indemnities. At December 31, 2017, the Company had
issued and outstanding $5.5 million under a standby letter of credit to fulfill its obligation to fund fifty percent of the debt
service reserve and liquidity reserve established by PCRC in connection with the issuance of the 7.0% Senior Secured Notes
due November 1, 2026 (the “PCRC Notes”). Additionally, KCS has pledged its shares of PCRC as security for the PCRC
Notes.
81
Kansas City Southern and Subsidiaries
Notes to Consolidated Financial Statements-(Continued)
Note 16. Quarterly Financial Data (Unaudited)
2017
Revenues
Operating income
Net income
Fourth
Third
Second
First
(In millions, except per share amounts)
$
660.4
$
656.6
$
656.4
$
609.5
237.8(i)
552.4(iii)
233.8(i)
129.9
239.3(i)
134.7
210.7(i)
146.9
Net income attributable to Kansas City
Southern and subsidiaries
Per share data:
Basic earnings per common share
$
Diluted earnings per common share
551.7
5.35
5.33
2016
Revenues
Operating income
Net income
$
598.5
210.9(ii)
130.3
Net income attributable to Kansas City
Southern and subsidiaries
Per share data:
Basic earnings per common share
$
Diluted earnings per common share
129.6
1.21
1.21
_____________________
129.3
134.4
146.6
$
1.24
1.23
1.27
1.27
604.5
$
568.5
199.8(ii)
121.0
219.9(ii)
120.5
120.6
120.1
$
1.12
1.12
1.12
1.11
$
$
$
1.38
1.38
562.7
187.9
108.1
107.8
1.00
0.99
$
$
$
(i)
(ii)
During the first, second, third and fourth quarters of 2017, the Company recognized an $11.7 million, $12.8 million,
$11.1 million and $8.5 million benefit, respectively, related to a credit available for the excise tax included in the price
of fuel that is purchased and consumed in locomotives and certain work equipment in Mexico.
During the second, third and fourth quarters of 2016, the Company recognized a $34.0 million, $15.6 million and
$13.2 million benefit, respectively, related to a credit available for the excise tax included in the price of fuel that is
purchased and consumed in locomotives and certain work equipment in Mexico.
(iii)
During the fourth quarter of 2017, the Company recognized a $413.0 million net tax benefit as a result of the Tax
Reform Act, which was signed into law December 22, 2017.
82
Kansas City Southern and Subsidiaries
Notes to Consolidated Financial Statements-(Continued)
Note 17. Geographic Information
The Company strategically manages its rail operations as one reportable business segment over a single coordinated rail
network that extends from the midwest and southeast portions of the United States south into Mexico and connects with other
Class I railroads. Financial information reported at this level, such as revenues, operating income and cash flows from
operations, is used by corporate management, including the Company’s chief operating decision-maker, in evaluating overall
financial and operational performance, market strategies, as well as the decisions to allocate capital resources. The Company’s
chief operating decision-maker is the chief executive officer.
The following tables provide information by geographic area (in millions):
Years ended December 31,
2017
2016
2015
Revenues
U.S.
Mexico
Total revenues
$
$
1,359.5
1,223.4
2,582.9
Property and equipment (including concession assets), net
U.S.
Mexico
Total property and equipment (including concession assets), net
Note 18. Subsequent Events
Foreign Currency Hedging
$
$
$
$
1,210.8
1,123.4
2,334.2
$
$
1,248.4
1,170.4
2,418.8
December 31,
2017
2016
5,227.3
3,176.5
8,403.8
$
$
4,960.6
3,109.1
8,069.7
As of December 31, 2017, the Company had outstanding foreign currency option contracts known as zero-cost collars
with an aggregate notional amount of $80.0 million, to hedge its exposure to fluctuations in the Mexican cash tax obligation
due to changes in the value of the Mexican peso against the U.S. dollar. During January 2018, these contracts matured,
resulting in cash received of $10.0 million.
During January 2018, the Company entered into several zero-cost collar contracts with an aggregate notional amount of
$340.0 million and maturity dates throughout 2018 and in January 2019. The zero-cost collar contracts have a weighted-
average rate of Ps.19.23 to each U.S. dollar for the Mexican peso call options purchased by KCS and a weighted-average rate
of Ps.21.45 to each U.S. dollar for the Mexican peso put options sold by KCS.
The Company has not designated these foreign currency derivative instruments as hedging instruments for accounting
purposes. The Company will measure the foreign currency derivative instruments at fair value each period and will recognize
any change in fair value in foreign exchange gain (loss) within the consolidated statements of income.
Common Stock Dividend
On January 23, 2018, the Company’s Board of Directors declared a cash dividend of $0.36 per share payable on April 4,
2018, to common stockholders of record as of March 12, 2018. The aggregate amount of the dividend declared was
approximately $37.1 million.
83
Kansas City Southern and Subsidiaries
Notes to Consolidated Financial Statements-(Continued)
Note 19. Condensed Consolidating Financial Information
Pursuant to Securities and Exchange Commission (“SEC”) Regulation S-X Rule 3-10 “Financial statements of guarantors
and issuers of guaranteed securities registered or being registered”, the Company is required to provide condensed
consolidating financial information for issuers of certain of its senior notes that are guaranteed.
As of December 31, 2017, KCS had outstanding $2,093.5 million senior notes due through 2045. The senior notes are
unsecured obligations of KCS, and are also jointly and severally and fully and unconditionally guaranteed on an unsecured
senior basis by KCSR and certain wholly-owned domestic subsidiaries of KCS. As a result, the Company is providing the
following condensed consolidating financial information (in millions).
Condensed Consolidating Statements of Comprehensive Income - KCS Notes
Revenues
Operating expenses
Operating income (loss)
Equity in net earnings of affiliates
Interest expense
Debt retirement and exchange costs
Foreign exchange gain
Other income (expense), net
Income before income taxes
Income tax expense (benefit)
Net income
Less: Net income attributable to
noncontrolling interest
Net income attributable to Kansas City
Southern and subsidiaries
Other comprehensive income (loss)
Comprehensive income attributable to
Kansas City Southern and subsidiaries
2017
Parent
Guarantor
Subsidiaries
Non-Guarantor
Subsidiaries
Consolidating
Adjustments
Consolidated
KCS
$
— $
5.7
(5.7)
974.8
(81.3)
—
—
86.7
974.5
9.9
964.6
—
964.6
(6.7)
$
1,244.7
882.2
362.5
6.4
(72.2)
—
—
(0.6)
296.1
(353.1)
649.2
—
649.2
—
$
1,359.0
791.0
568.0
9.6
(34.4)
—
41.7
1.2
586.1
254.2
331.9
1.9
330.0
0.5
(20.8) $
(17.6)
(3.2)
(979.3)
87.7
—
—
(87.6)
(982.4)
(0.6)
(981.8)
—
(981.8)
(0.5)
2,582.9
1,661.3
921.6
11.5
(100.2)
—
41.7
(0.3)
874.3
(89.6)
963.9
1.9
962.0
(6.7)
$
957.9
$
649.2
$
330.5
$
(982.3) $
955.3
84
Kansas City Southern and Subsidiaries
Notes to Consolidated Financial Statements-(Continued)
Condensed Consolidating Statements of Comprehensive Income - KCS Notes—(Continued)
Revenues
Operating expenses
Operating income (loss)
Equity in net earnings of affiliates
Interest expense
Debt retirement and exchange costs
Foreign exchange loss
Other income (expense), net
Income before income taxes
Income tax expense
Net income
Less: Net income attributable to
noncontrolling interest
Net income attributable to Kansas City
Southern and subsidiaries
Other comprehensive loss
Comprehensive income attributable to
Kansas City Southern and subsidiaries
Revenues
Operating expenses
Operating income (loss)
Equity in net earnings of affiliates
Interest expense
Debt retirement and exchange costs
Foreign exchange loss
Other income (expense), net
Income before income taxes
Income tax expense
Net income
Less: Net income attributable to
noncontrolling interest
Net income attributable to Kansas City
Southern and subsidiaries
Other comprehensive loss
Comprehensive income attributable to
Kansas City Southern and subsidiaries
2016
$
Parent
Guarantor
Subsidiaries
Non-Guarantor
Subsidiaries
Consolidating
Adjustments
Consolidated
KCS
— $
4.7
(4.7)
468.5
(81.9)
—
—
104.4
486.3
7.1
479.2
—
479.2
(1.5)
$
1,101.3
794.7
306.6
5.3
(83.0)
—
—
(0.2)
228.7
87.4
141.3
—
141.3
—
$
1,252.5
734.0
518.5
12.7
(63.1)
—
(72.0)
24.1
420.2
89.2
331.0
1.8
329.2
(2.5)
(19.6) $
(17.7)
(1.9)
(471.9)
130.3
—
—
(129.0)
(472.5)
(0.9)
(471.6)
—
(471.6)
2.5
2,334.2
1,515.7
818.5
14.6
(97.7)
—
(72.0)
(0.7)
662.7
182.8
479.9
1.8
478.1
(1.5)
$
477.7
$
141.3
$
326.7
$
(469.1) $
476.6
2015
$
Parent
Guarantor
Subsidiaries
Non-Guarantor
Subsidiaries
Consolidating
Adjustments
Consolidated
KCS
— $
4.6
(4.6)
464.0
(4.6)
0.1
—
45.9
500.8
16.5
484.3
—
484.3
(1.5)
$
1,135.9
779.7
356.2
5.6
(84.9)
(5.2)
—
(3.1)
268.6
98.3
170.3
—
170.3
—
$
1,302.3
849.3
453.0
16.5
(40.1)
(2.5)
(56.6)
1.4
371.7
72.5
299.2
1.8
297.4
(2.2)
(19.4) $
(18.6)
(0.8)
(467.8)
47.7
—
—
(47.6)
(468.5)
—
(468.5)
—
(468.5)
2.2
2,418.8
1,615.0
803.8
18.3
(81.9)
(7.6)
(56.6)
(3.4)
672.6
187.3
485.3
1.8
483.5
(1.5)
$
482.8
$
170.3
$
295.2
$
(466.3) $
482.0
85
Kansas City Southern and Subsidiaries
Notes to Consolidated Financial Statements-(Continued)
Condensed Consolidating Balance Sheets - KCS Notes
Assets:
Current assets
Investments
Investments in consolidated subsidiaries
Property and equipment (including
concession assets), net
Other assets
Total assets
Liabilities and equity:
Current liabilities
Long-term debt
Deferred income taxes
Other liabilities
Stockholders’ equity
Noncontrolling interest
Total liabilities and equity
Assets:
Current assets
Investments
Investments in consolidated subsidiaries
Property and equipment (including
concession assets), net
Other assets
Total assets
Liabilities and equity:
Current liabilities
Long-term debt
Deferred income taxes
Other liabilities
Stockholders’ equity
Noncontrolling interest
Total liabilities and equity
December 31, 2017
Parent
Guarantor
Subsidiaries
Non-Guarantor
Subsidiaries
Consolidating
Adjustments
Consolidated
KCS
222.9
3.9
184.2
4,454.8
46.8
4,912.6
673.6
1,517.2
818.8
70.3
1,832.7
—
4,912.6
$
$
$
$
475.5
40.7
—
3,954.9
252.5
4,723.6
332.0
1,040.3
177.0
55.1
2,802.7
316.5
4,723.6
$
$
$
$
(310.3) $
—
(4,646.6)
(5.9)
(2,388.7)
(7,351.5) $
(311.8) $
(2,388.8)
(1.5)
—
(4,649.4)
—
(7,351.5) $
680.1
44.6
—
8,403.8
70.2
9,198.7
971.7
2,235.5
987.2
138.9
4,548.9
316.5
9,198.7
December 31, 2016
Guarantor
Subsidiaries
Non-Guarantor
Subsidiaries
Consolidating
Adjustments
Consolidated
KCS
275.4
3.9
179.1
4,203.6
43.0
4,705.0
432.8
1,928.9
1,075.3
86.3
1,181.7
—
4,705.0
$
$
$
$
389.6
29.0
—
3,868.8
252.6
4,540.0
261.0
1,274.9
188.0
17.5
2,484.0
314.6
4,540.0
$
$
$
$
(35.3) $
—
(3,676.8)
(2.7)
(2,996.6)
(6,711.4) $
(36.7) $
(2,996.6)
(0.9)
—
(3,677.2)
—
(6,711.4) $
648.0
32.9
—
8,069.7
66.9
8,817.5
744.4
2,271.5
1,289.3
107.8
4,089.9
314.6
8,817.5
$
$
$
$
$
$
$
$
292.0
—
4,462.4
—
2,159.6
6,914.0
277.9
2,066.8
(7.1)
13.5
4,562.9
—
6,914.0
Parent
18.3
—
3,497.7
—
2,767.9
6,283.9
87.3
2,064.3
26.9
4.0
4,101.4
—
6,283.9
$
$
$
$
$
$
$
$
86
Kansas City Southern and Subsidiaries
Notes to Consolidated Financial Statements-(Continued)
Condensed Consolidating Statements of Cash Flows - KCS Notes
Operating activities:
Net cash provided
Investing activities:
Capital expenditures
Purchase or replacement of equipment
under operating leases
Property investments in MSLLC
Investments in and advances to affiliates
Proceeds from repayment of loans to
affiliates
Loans to affiliates
Proceeds from disposal of property
Other investing activities
Net cash provided (used)
Financing activities:
Proceeds from short-term borrowings
Repayment of short-term borrowings
Repayment of long-term debt
Dividends paid
Shares repurchased
Proceeds from loans from affiliates
Repayment of loans from affiliates
Contributions from affiliates
Other financing activities
Net cash used
Cash and cash equivalents:
Net increase (decrease)
At beginning of year
At end of year
2017
Parent
Guarantor
Subsidiaries
Non-Guarantor
Subsidiaries
Consolidating
Adjustments
Consolidated
KCS
$
220.4
$
557.0
$
266.9
$
(15.9) $
1,028.4
—
—
—
(0.6)
12,241.7
(12,102.6)
—
—
138.5
12,102.6
(11,943.6)
—
(142.5)
(375.6)
—
—
—
0.7
(358.4)
0.5
0.2
0.7
$
(375.5)
(209.9)
(42.6)
—
(0.6)
—
—
6.0
(17.2)
(429.9)
—
—
(3.6)
—
—
12,102.6
(12,241.7)
0.6
—
(142.1)
(15.0)
32.6
—
(26.0)
(20.4)
—
—
2.8
(1.7)
(255.2)
—
—
(21.8)
(12.5)
—
—
—
0.6
—
(33.7)
(22.0)
137.8
—
—
—
1.2
(12,241.7)
12,102.6
—
3.4
(134.5)
—
—
—
12.5
—
(12,102.6)
12,241.7
(1.2)
—
150.4
—
—
$
17.6
$
115.8
$
— $
(585.4)
(42.6)
(26.0)
(20.4)
—
—
8.8
(15.5)
(681.1)
12,102.6
(11,943.6)
(25.4)
(142.5)
(375.6)
—
—
—
0.7
(383.8)
(36.5)
170.6
134.1
87
Kansas City Southern and Subsidiaries
Notes to Consolidated Financial Statements-(Continued)
Condensed Consolidating Statements of Cash Flows - KCS Notes—(Continued)
Operating activities:
Net cash provided
Investing activities:
Capital expenditures
Purchase or replacement of equipment
under operating leases
Property investments in MSLLC
Investments in and advances to affiliates
Proceeds from repayment of loans to
affiliates
Loans to affiliates
Proceeds from disposal of property
Other investing activities
Net cash used
Financing activities:
Proceeds from short-term borrowings
Repayment of short-term borrowings
Proceeds from issuance of long-term debt
Repayment of long-term debt
Dividends paid
Shares repurchased
Proceeds from loans from affiliates
Repayment of loans from affiliates
Contribution from affiliates
Other financing activities
Net cash provided (used)
Cash and cash equivalents:
Net increase
At beginning of year
At end of year
2016
Parent
Guarantor
Subsidiaries
Non-Guarantor
Subsidiaries
Consolidating
Adjustments
Consolidated
KCS
$
434.1
$
236.0
$
482.7
$
(233.8) $
919.0
(372.8)
(190.8)
—
—
—
159.9
(9,067.7)
9,123.4
(0.1)
2.0
217.5
(243.5)
243.5
—
—
230.2
—
(8,879.9)
8,824.2
(159.9)
1.7
16.3
—
—
—
(33.1)
(0.9)
—
—
3.1
3.9
(217.8)
—
—
—
(28.1)
(230.2)
—
—
—
6.8
(1.8)
(253.3)
11.6
126.2
(563.6)
(26.6)
(33.1)
(0.9)
—
—
5.0
(9.0)
(628.2)
8,698.7
(8,597.9)
248.7
(276.4)
(142.8)
(185.4)
—
—
—
(1.7)
(256.8)
34.0
136.6
170.6
$
137.8
$
— $
—
—
—
(153.4)
9,067.7
(9,123.4)
—
—
(209.1)
8,698.7
(8,597.9)
248.7
(244.8)
(142.8)
(185.4)
—
—
—
(1.5)
(225.0)
(26.6)
—
(6.5)
—
—
2.0
(14.9)
(418.8)
243.5
(243.5)
—
(3.5)
—
—
8,879.9
(8,824.2)
153.1
(0.1)
205.2
—
0.2
0.2
$
22.4
10.2
32.6
$
88
Kansas City Southern and Subsidiaries
Notes to Consolidated Financial Statements-(Continued)
Condensed Consolidating Statements of Cash Flows - KCS Notes—(Continued)
Operating activities:
Net cash provided
Investing activities:
Capital expenditures
Purchase or replacement of equipment
under operating leases
Property investments in MSLLC
Investments in and advances to affiliates
Proceeds from repayment of loans to
affiliates
Loans to affiliates
Proceeds from disposal of property
Other investing activities
Net cash provided (used)
Financing activities:
Proceeds from short-term borrowings
Repayment of short-term borrowings
Proceeds from issuance of long-term debt
Repayment of long-term debt
Dividends paid
Shares repurchased
Repayment of loans from affiliates
Other financing activities
Net cash provided (used)
Cash and cash equivalents:
Net decrease
At beginning of year
At end of year
2015
Parent
Guarantor
Subsidiaries
Non-Guarantor
Subsidiaries
Consolidating
Adjustments
Consolidated
KCS
$
45.2
$
356.6
$
526.0
$
(18.6) $
909.2
—
—
—
(0.7)
293.9
(80.0)
—
(0.1)
213.1
80.0
—
—
—
(140.1)
(194.2)
—
(4.0)
(258.3)
(382.8)
(305.2)
(82.8)
—
(0.7)
—
—
1.3
(32.0)
(497.0)
10,786.2
(10,937.3)
663.7
(88.4)
—
—
(293.9)
(9.2)
121.1
(61.4)
(17.4)
(0.7)
—
—
3.6
3.6
(377.5)
—
(300.0)
40.0
(61.4)
(17.8)
—
—
(1.4)
(340.6)
—
—
—
1.4
(293.9)
80.0
(0.3)
1.2
(211.6)
—
—
(80.0)
—
17.8
—
293.9
(1.5)
230.2
(688.0)
(144.2)
(17.4)
(0.7)
—
—
4.6
(27.3)
(873.0)
10,866.2
(11,237.3)
623.7
(149.8)
(140.1)
(194.2)
—
(16.1)
(247.6)
—
0.2
0.2
$
(19.3)
29.5
10.2
$
(192.1)
318.3
126.2
$
—
—
— $
(211.4)
348.0
136.6
$
89
Kansas City Southern and Subsidiaries
Notes to Consolidated Financial Statements-(Continued)
As of December 31, 2017, KCSR had outstanding $2.9 million principal amount of senior notes due through 2045. The
senior notes are unsecured obligations of KCSR, and are also jointly and severally and fully and unconditionally guaranteed on
an unsecured senior basis by KCS and certain wholly-owned domestic subsidiaries. As a result, the Company is providing the
following condensed consolidating financial information (in millions).
Condensed Consolidating Statements of Comprehensive Income - KCSR Notes
Revenues
Operating expenses
$
Operating income (loss)
Equity in net earnings of affiliates
Interest expense
Debt retirement and exchange costs
Foreign exchange gain
Other income (expense), net
Income before income taxes
Income tax expense (benefit)
Net income
Less: Net income attributable to
noncontrolling interest
Net income attributable to Kansas
City Southern and subsidiaries
Other comprehensive income (loss)
Comprehensive income attributable
to Kansas City Southern and
subsidiaries
Parent
KCSR
— $
5.7
(5.7)
974.8
(81.3)
—
—
86.7
974.5
9.9
964.6
—
964.6
(6.7)
1,220.8
862.8
358.0
19.0
(72.2)
—
—
(0.6)
304.2
(310.6)
614.8
—
614.8
—
2017
Guarantor
Subsidiaries
43.5
$
39.1
4.4
4.5
—
—
—
—
8.9
(42.5)
51.4
Non-
Guarantor
Subsidiaries
1,359.0
$
791.0
568.0
9.6
(34.4)
—
41.7
1.2
586.1
254.2
331.9
Consolidating
Adjustments
$
Consolidated
KCS
2,582.9
1,661.3
921.6
11.5
(100.2)
—
41.7
(0.3)
874.3
(89.6)
963.9
(40.4) $
(37.3)
(3.1)
(996.4)
87.7
—
—
(87.6)
(999.4)
(0.6)
(998.8)
—
51.4
—
1.9
330.0
0.5
—
1.9
(998.8)
(0.5)
962.0
(6.7)
$
957.9
$
614.8
$
51.4
$
330.5
$
(999.3) $
955.3
90
Kansas City Southern and Subsidiaries
Notes to Consolidated Financial Statements-(Continued)
Condensed Consolidating Statements of Comprehensive Income - KCSR Notes—(Continued)
Revenues
Operating expenses
Operating income (loss)
Equity in net earnings (losses) of
affiliates
Interest expense
Debt retirement and exchange costs
Foreign exchange loss
Other income (expense), net
Income before income taxes
Income tax expense
Net income
Less: Net income attributable to
noncontrolling interest
Net income attributable to Kansas
City Southern and subsidiaries
Other comprehensive loss
Comprehensive income attributable
to Kansas City Southern and
subsidiaries
Parent
KCSR
$
— $
4.7
(4.7)
1,077.3
776.3
301.0
2016
Guarantor
Subsidiaries
43.7
$
38.1
5.6
Non-
Guarantor
Subsidiaries
1,252.5
$
734.0
518.5
Consolidating
Adjustments
$
Consolidated
KCS
2,334.2
1,515.7
818.5
(39.3) $
(37.4)
(1.9)
468.5
(81.9)
—
—
104.4
486.3
7.1
479.2
—
479.2
(1.5)
(0.2)
(83.0)
—
—
(0.2)
217.6
84.3
133.3
—
133.3
—
3.5
—
—
—
—
9.1
3.1
6.0
—
6.0
—
12.7
(63.1)
—
(72.0)
24.1
420.2
89.2
331.0
(469.9)
130.3
—
—
(129.0)
(470.5)
(0.9)
(469.6)
14.6
(97.7)
—
(72.0)
(0.7)
662.7
182.8
479.9
1.8
—
1.8
329.2
(2.5)
(469.6)
2.5
478.1
(1.5)
$
477.7
$
133.3
$
6.0
$
326.7
$
(467.1) $
476.6
91
Kansas City Southern and Subsidiaries
Notes to Consolidated Financial Statements-(Continued)
Condensed Consolidating Statements of Comprehensive Income - KCSR Notes—(Continued)
Revenues
Operating expenses
Operating income (loss)
Equity in net earnings (losses) of
affiliates
Interest expense
Debt retirement and exchange costs
Foreign exchange loss
Other income (expense), net
Income before income taxes
Income tax expense
Net income
Less: Net income attributable to
noncontrolling interest
Net income attributable to Kansas
City Southern and subsidiaries
Other comprehensive loss
Comprehensive income attributable
to Kansas City Southern and
subsidiaries
Parent
KCSR
$
— $
4.6
(4.6)
1,112.5
760.4
352.1
2015
Guarantor
Subsidiaries
42.1
$
38.0
4.1
Non-
Guarantor
Subsidiaries
1,302.3
$
849.3
453.0
Consolidating
Adjustments
$
Consolidated
KCS
2,418.8
1,615.0
803.8
(38.1) $
(37.3)
(0.8)
464.0
(4.6)
0.1
—
45.9
500.8
16.5
484.3
—
484.3
(1.5)
(1.4)
(84.8)
(5.2)
—
(3.2)
257.5
95.2
162.3
—
162.3
—
3.7
(0.1)
—
—
0.1
7.8
3.1
4.7
—
4.7
—
16.5
(40.1)
(2.5)
(56.6)
1.4
371.7
72.5
299.2
(464.5)
47.7
—
—
(47.6)
(465.2)
—
(465.2)
18.3
(81.9)
(7.6)
(56.6)
(3.4)
672.6
187.3
485.3
1.8
—
1.8
297.4
(2.2)
(465.2)
2.2
483.5
(1.5)
$
482.8
$
162.3
$
4.7
$
295.2
$
(463.0) $
482.0
92
Kansas City Southern and Subsidiaries
Notes to Consolidated Financial Statements-(Continued)
Condensed Consolidating Balance Sheets - KCSR Notes
Parent
KCSR
December 31, 2017
Guarantor
Subsidiaries
Non-
Guarantor
Subsidiaries
Consolidating
Adjustments
Consolidated
KCS
Assets:
Current assets
Investments
Investments in consolidated
subsidiaries
Property and equipment (including
concession assets), net
Other assets
Total assets
Liabilities and equity:
Current liabilities
Long-term debt
Deferred income taxes
Other liabilities
Stockholders’ equity
Noncontrolling interest
Total liabilities and equity
Assets:
Current assets
Investments
Investments in consolidated
subsidiaries
Property and equipment (including
concession assets), net
Other assets
Total assets
Liabilities and equity:
Current liabilities
Long-term debt
Deferred income taxes
Other liabilities
Stockholders’ equity
Noncontrolling interest
Total liabilities and equity
$
$
$
$
$
$
$
$
680.1
44.6
—
$
292.0
—
$
214.1
3.9
$
8.8
—
$
475.5
40.7
(310.3) $
—
4,462.4
—
2,159.6
6,914.0
277.9
2,066.8
(7.1)
13.5
4,562.9
—
6,914.0
$
$
$
7.4
4,283.2
46.8
4,555.4
578.7
1,517.2
734.8
70.0
1,654.7
—
4,555.4
$
$
$
182.2
171.6
—
362.6
94.9
—
84.0
0.3
183.4
—
362.6
$
$
$
—
(4,652.0)
3,954.9
252.5
4,723.6
332.0
1,040.3
177.0
55.1
2,802.7
316.5
4,723.6
(5.9)
(2,388.7)
(7,356.9) $
8,403.8
70.2
9,198.7
(311.8) $
(2,388.8)
(1.5)
—
(4,654.8)
—
(7,356.9) $
971.7
2,235.5
987.2
138.9
4,548.9
316.5
9,198.7
$
$
$
Parent
KCSR
December 31, 2016
Guarantor
Subsidiaries
Non-
Guarantor
Subsidiaries
Consolidating
Adjustments
Consolidated
KCS
$
18.3
—
$
271.8
3.9
$
4.6
—
$
389.6
29.0
(36.3) $
—
648.0
32.9
—
—
(3,665.0)
3,868.8
252.6
4,540.0
261.0
1,274.9
188.0
17.5
2,484.0
314.6
4,540.0
(2.7)
(2,996.6)
(6,700.6) $
8,069.7
66.9
8,817.5
(37.7) $
(2,996.6)
(0.9)
—
(3,665.4)
—
(6,700.6) $
744.4
2,271.5
1,289.3
107.8
4,089.9
314.6
8,817.5
$
$
$
177.1
179.1
—
360.8
91.7
0.1
137.6
0.1
131.3
—
360.8
$
$
$
3,497.7
—
2,767.9
6,283.9
87.3
2,064.3
26.9
4.0
4,101.4
—
6,283.9
$
$
$
(9.8)
4,024.5
43.0
4,333.4
342.1
1,928.8
937.7
86.2
1,038.6
—
4,333.4
93
$
$
$
Kansas City Southern and Subsidiaries
Notes to Consolidated Financial Statements-(Continued)
Condensed Consolidating Statements of Cash Flows - KCSR Notes
Operating activities:
Net cash provided
Investing activities:
Capital expenditures
Purchase or replacement of
equipment under operating leases
Property investments in MSLLC
Investments in and advances to
affiliates
Proceeds from repayment of loans to
affiliates
Loans to affiliates
Proceeds from disposal of property
Other investing activities
Net cash provided (used)
Financing activities:
Proceeds from short-term
borrowings
Repayment of short-term borrowings
Repayment of long-term debt
Dividends paid
Shares repurchased
Proceeds from loans from affiliates
Repayment of loans from affiliates
Contributions from affiliates
Other financing activities
Net cash provided (used)
Cash and cash equivalents:
Net increase (decrease)
At beginning of year
At end of year
Parent
KCSR
2017
Guarantor
Subsidiaries
Non-
Guarantor
Subsidiaries
Consolidating
Adjustments
Consolidated
KCS
$
220.4
$
556.6
$
0.4
$
266.9
$
(15.9) $
1,028.4
—
—
—
(0.6)
12,241.7
(12,102.6)
—
—
138.5
12,102.6
(11,943.6)
—
(142.5)
(375.6)
—
—
—
0.7
(358.4)
(375.2)
(0.3)
(209.9)
(42.6)
—
—
—
—
6.0
(17.2)
(429.0)
—
—
(3.5)
—
—
12,102.6
(12,241.7)
—
—
(142.6)
—
—
(0.6)
—
—
—
—
(0.9)
—
—
(0.1)
—
—
—
—
0.6
—
0.5
—
(26.0)
(20.4)
—
—
2.8
(1.7)
(255.2)
—
—
(21.8)
(12.5)
—
—
—
0.6
—
(33.7)
—
—
—
1.2
(12,241.7)
12,102.6
—
3.4
(134.5)
—
—
—
12.5
—
(12,102.6)
12,241.7
(1.2)
—
150.4
(585.4)
(42.6)
(26.0)
(20.4)
—
—
8.8
(15.5)
(681.1)
12,102.6
(11,943.6)
(25.4)
(142.5)
(375.6)
—
—
—
0.7
(383.8)
0.5
0.2
0.7
$
(15.0)
32.6
17.6
$
—
—
— $
(22.0)
137.8
115.8
$
—
—
— $
(36.5)
170.6
134.1
$
94
Kansas City Southern and Subsidiaries
Notes to Consolidated Financial Statements-(Continued)
Condensed Consolidating Statements of Cash Flows - KCSR Notes—(Continued)
Parent
KCSR
2016
Guarantor
Subsidiaries
Non-
Guarantor
Subsidiaries
Consolidating
Adjustments
Consolidated
KCS
$
434.1
$
235.4
$
0.6
$
482.7
$
(233.8) $
919.0
—
—
—
(372.2)
(0.6)
(190.8)
(26.6)
—
—
(33.1)
—
—
—
Operating activities:
Net cash provided
Investing activities:
Capital expenditures
Purchase or replacement of
equipment under operating leases
Property investments in MSLLC
Investments in and advances to
affiliates
Proceeds from repayment of loans to
affiliates
Loans to affiliates
Proceeds from disposal of property
Other investing activities
Net cash used
Financing activities:
Proceeds from short-term
borrowings
Repayment of short-term borrowings
Proceeds from issuance of long-term
debt
Repayment of long-term debt
Dividends paid
Shares repurchased
Proceeds from loans from affiliates
Repayment of loans from affiliates
Contribution from affiliates
Other financing activities
Net cash provided (used)
Cash and cash equivalents:
Net increase (decrease)
At beginning of year
At end of year
(153.4)
—
9,067.7
(9,123.4)
—
—
(209.1)
8,698.7
(8,597.9)
248.7
(244.8)
(142.8)
(185.4)
—
—
—
(1.5)
(225.0)
—
—
2.0
(14.9)
(411.7)
243.5
(243.5)
—
(3.4)
—
—
8,879.9
(8,824.2)
146.6
(0.1)
198.8
—
—
(6.5)
—
—
—
—
(7.1)
—
—
—
(0.1)
—
—
—
—
6.5
—
6.4
(0.9)
159.9
—
—
3.1
3.9
(217.8)
(9,067.7)
9,123.4
(0.1)
2.0
217.5
—
(28.1)
(230.2)
—
—
—
6.8
(1.8)
(253.3)
—
—
230.2
—
(8,879.9)
8,824.2
(159.9)
1.7
16.3
—
—
(243.5)
243.5
8,698.7
(8,597.9)
(563.6)
(26.6)
(33.1)
(0.9)
—
—
5.0
(9.0)
(628.2)
248.7
(276.4)
(142.8)
(185.4)
—
—
—
(1.7)
(256.8)
34.0
136.6
170.6
—
0.2
0.2
$
22.5
10.1
32.6
$
(0.1)
0.1
— $
11.6
126.2
137.8
$
—
—
— $
$
95
Kansas City Southern and Subsidiaries
Notes to Consolidated Financial Statements-(Continued)
Condensed Consolidating Statements of Cash Flows - KCSR Notes—(Continued)
Parent
KCSR
2015
Guarantor
Subsidiaries
Non-
Guarantor
Subsidiaries
Consolidating
Adjustments
Consolidated
KCS
$
45.2
$
355.6
$
1.0
$
526.0
$
(18.6) $
909.2
(381.5)
(1.3)
(305.2)
(61.4)
(17.4)
(0.7)
—
—
3.6
3.6
(377.5)
—
(300.0)
40.0
(61.4)
(17.8)
—
—
(1.4)
(340.6)
—
—
(0.7)
—
—
—
—
(2.0)
—
—
—
(0.1)
—
—
—
0.7
0.6
(0.4)
0.5
0.1
—
—
—
1.4
(293.9)
80.0
(0.3)
1.2
(211.6)
(688.0)
(144.2)
(17.4)
(0.7)
—
—
4.6
(27.3)
(873.0)
—
—
10,866.2
(11,237.3)
(80.0)
—
17.8
—
293.9
(1.5)
230.2
623.7
(149.8)
(140.1)
(194.2)
—
(16.1)
(247.6)
(211.4)
348.0
136.6
(192.1)
318.3
126.2
$
$
—
—
— $
Operating activities:
Net cash provided
Investing activities:
Capital expenditures
Purchase or replacement of
equipment under operating leases
Property investments in MSLLC
Investments in and advances to
affiliates
Proceeds from repayment of loans to
affiliates
Loans to affiliates
Proceeds from disposal of property
Other investing activities
Net cash provided (used)
Financing activities:
Proceeds from short-term
borrowings
Repayment of short-term borrowings
Proceeds from issuance of long-term
debt
Repayment of long-term debt
Dividends paid
Shares repurchased
Repayment of loans from affiliates
Other financing activities
Net cash provided (used)
Cash and cash equivalents:
Net decrease
At beginning of year
At end of year
—
—
—
(0.7)
293.9
(80.0)
—
(0.1)
213.1
(82.8)
—
—
—
—
1.3
(32.0)
(495.0)
80.0
—
10,786.2
(10,937.3)
—
—
(140.1)
(194.2)
—
(4.0)
(258.3)
663.7
(88.3)
—
—
(293.9)
(9.9)
120.5
—
0.2
0.2
$
(18.9)
29.0
10.1
$
$
96
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not Applicable.
Item 9A. Controls and Procedures
(a) Disclosure Controls and Procedures
The 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-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as
amended (the “Exchange Act”), as of the end of the fiscal year for which this annual report on Form 10-K is filed. Based on
that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the current disclosure controls and
procedures are effective to ensure that information required to be disclosed in reports filed or submitted 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 management, including the Chief Executive Officer and
Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures.
(b) Changes in Internal Control over Financial Reporting
There have been no changes in the Company’s internal control over financial reporting that occurred during the last fiscal
quarter (the fourth quarter in the case of an annual report) that have materially affected, or are reasonably likely to materially
affect, the Company’s internal control over financial reporting.
(c) Internal Control over Financial Reporting
The report of management on the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) and
15d-15(f) under the Exchange Act) is included as “Management’s Report on Internal Control over Financial Reporting” in
Item 8.
KPMG LLP, the independent registered public accounting firm that audited the Company’s financial statements contained
herein, has issued an attestation report on the Company’s internal control over financial reporting as of December 31, 2017. The
attestation report is included in Item 8 of this Form 10-K.
Item 9B. Other Information
None.
97
The Company has incorporated by reference certain responses to the Items of this Part III pursuant to Rule 12b-23 under
the Exchange Act and General Instruction G(3) to Form 10-K. The Company’s definitive proxy statement for the annual
meeting of stockholders scheduled for May 17, 2018 (“Proxy Statement”), will be filed no later than 120 days after
December 31, 2017.
Part III
Item 10. Directors, Executive Officers and Corporate Governance
(a) Directors of the Company
The sections of the Proxy Statement entitled “Proposal 1 — Election of Directors” and “The Board of Directors” are
incorporated by reference in partial response to this Item 10.
(b) Executive Officers of the Company
See “Executive Officers of KCS and Subsidiaries” in Part I, Item 1 of this annual report incorporated by reference herein
for information about the executive officers of the Company.
(c) Changes to Shareholder Nominating Procedures
None.
(d) Audit Committee and Audit Committee Financial Experts
The section of the Proxy Statement entitled “Board Committees — Audit Committee” is incorporated by reference in
partial response to this Item 10.
(e) Compliance with Section 16(a) of the Exchange Act
The response to Item 405 of Regulation S-K under “Section 16(a) Beneficial Ownership Reporting Compliance” in the
Proxy Statement is incorporated by reference in partial response to this Item 10.
(f) Code of Ethics
The Company has adopted a Code of Business Conduct and Ethics (“Code of Ethics”) that applies to directors, officers
(including, among others, the principal executive officer, principal financial officer and principal accounting officer) and
employees. The Company has posted its Code of Ethics on its website (www.kcsouthern.com) and will post on its website any
amendments to, or waivers from, a provision of its Code of Ethics that applies to the Company’s principal executive officer,
principal financial officer or principal accounting officer as required by applicable rules and regulations. The Code of Ethics is
available, in print, upon written request to the Corporate Secretary, P.O. Box 219335, Kansas City, Missouri 64121-9335.
(g) Annual Certification to the New York Stock Exchange
KCS’s common stock is listed on the New York Stock Exchange (“NYSE”) under the ticker symbol “KSU”. As a result,
the Chief Executive Officer is required to make annually, and he made on June 2, 2017, a CEO’s Annual Certification to the
New York Stock Exchange in accordance with Section 303A.12 of the NYSE Listed Company Manual stating that he was not
aware of any violations by KCS of the NYSE corporate governance listing standards.
Item 11. Executive Compensation
The sections of the Proxy Statement entitled “Compensation Discussion and Analysis”, “Compensation Committee
Report”, “Executive Compensation”, “Board Committees - Compensation Committee Interlocks and Insider Participation”, and
“Director Compensation” are incorporated by reference in response to this Item 11.
98
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The section of the Proxy Statement entitled “Beneficial Ownership” is incorporated by reference in partial response to
this Item 12.
Equity Compensation Plan Information
The following table provides information as of December 31, 2017, about the common stock that may be issued upon the
exercise of options, warrants and rights, as well as shares remaining available for future issuance under the Company’s existing
equity compensation plans.
Plan Category
Equity compensation plans:
Approved by security holders
Not approved by security holders
Total
Number of Securities
to Be Issued upon
Exercise of
Outstanding Options,
Warrants and Rights
Weighted-
Average Exercise
Price of
Outstanding
Options,
Warrants and
Rights
Number of Securities
Remaining Available for
Future Issuance under
Equity Compensation
Plans-Excluding
Securities Reflected in
the First Column (i)
678,415
—
678,415
$
$
82.22
—
82.22
7,242,526
—
7,242,526
_____________________
(i)
Includes 3,547,724 shares available for issuance under the 2009 Employee Stock Purchase Plan and 3,694,802 shares
available for issuance under the 2017 Plan in the form of Nonvested Shares, Bonus Shares, Performance Units or
Performance Shares or issued upon the exercise of Options (including ISOs) or stock appreciation rights awarded
under the 2017 Plan.
The Company has no knowledge of any arrangement the operation of which may at a subsequent date result in a change
of control of the Company.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The sections of the Proxy Statement entitled “Certain Transactions” and “Corporate Governance - Director
Independence” are incorporated by reference in response to this Item 13.
Item 14. Principal Accountant Fees and Services
The section of the Proxy Statement entitled “Independent Registered Public Accounting Firm” is incorporated by
reference in response to this Item 14.
99
Item 15. Exhibits and Financial Statement Schedules
(a) List of Documents filed as part of this Report
(1) Financial Statements
Part IV
The consolidated financial statements and related notes, together with the reports of KPMG LLP, Independent Registered
Public Accounting Firm, appear in Part II Item 8, Financial Statements and Supplementary Data, of this Form 10-K.
(2) Financial Statement Schedules
None.
(3) List of Exhibits
(a) Exhibits
The Company has attached or incorporated by reference herein certain exhibits as specified below pursuant to
Rule 12b-32 under the Exchange Act.
Exhibit
3.1
3.1.1
3.2
4.1
4.2
4.2.1
4.2.2
4.3
4.3.1
4.3.2
4.3.3
4.3.4
Description
Amended and Restated Certificate of Incorporation of Kansas City Southern, filed as Exhibit 3.1 to the
Company’s Current Report on Form 8-K, filed on May 7, 2012 (File No. 1-4717), is incorporated herein by
reference as Exhibit 3.1.
Amendments to the Kansas City Southern Amended and Restated Certificate of Incorporation, filed as Exhibit
3.1 to the Company’s Current Report on Form 8-K filed on May 5, 2014 (File No. 1-4717), is incorporated herein
by reference as Exhibit 3.1.1.
Kansas City Southern Bylaws, amended and restated as of May 6, 2016, filed as Exhibit 3.1 to the Company’s
Current Report on Form 8-K filed on May 10, 2016 (File No. 1-4717), is incorporated herein by reference as
Exhibit 3.2.
As permitted by Item 601(b)(4)(iii)(A) of Regulation S-K, the Company has not filed with this Annual Report on
Form 10-K certain instruments defining the rights of holders of long-term debt of the Company and its
subsidiaries because the total amount of securities authorized under any of such instruments does not exceed 10%
of the total assets of the Company and its subsidiaries on a consolidated basis. The Company agrees to furnish a
copy of any such agreements to the Securities and Exchange Commission upon request.
2043 Notes Indenture, dated April 29, 2013, among KCSR, the Guarantors and U.S. Bank National Association,
as trustee and paying agent, filed as exhibit 4.1 to the Company’s Current Report on Form 8-K filed on April 29,
2013 (File No. 1-4717), is incorporated herein by reference as Exhibit 4.2.
First Supplemental Indenture, dated November 23, 2015, among KCSR, the Guarantors and the U.S. Bank
National Association, as trustee and paying agent, filed as exhibit 4.2 to the Company’s Current Report on Form
8-K filed on November 24, 2015 (File No. 1-4717), is incorporated herein by reference as Exhibit 4.2.1.
Form of Special Global Note representing KCSR’s 4.30% Senior Notes due 2043, filed as Exhibit 4.2.4 to the
Company’s Registration Statement on Form S-4 filed on April 21, 2014 (File No. 333-195413), is incorporated
herein by reference as Exhibit 4.2.2.
2020 KCSM Notes Indenture, dated May 3, 2013, filed as exhibit 4.1 to the Company’s Current Report on Form
8-K filed on May 8, 2013 (File No. 1-4717), is incorporated herein by reference as Exhibit 4.3.
First Supplemental Indenture, dated November 23, 2015, filed as exhibit 4.5 to the Company’s Current Report on
Form 8-K filed on November 24, 2015 (File No. 1-4717), is incorporated herein by reference as Exhibit 4.3.1.
2023 KCSM Notes Indenture, dated May 3, 2013, filed as exhibit 4.2 to the Company’s Current Report on Form
8-K filed on May 8, 2013 (File No. 1-4717), is incorporated herein by reference as Exhibit 4.3.2.
First Supplemental Indenture, dated November 23, 2015, filed as exhibit 4.6 to the Company’s Current Report on
Form 8-K filed on November 24, 2015 (File No. 1-4717), is incorporated herein by reference as Exhibit 4.3.3.
Special Global Note representing the 2.35% Senior Notes due 2020, filed as Exhibit 4.4.3 to the Registration
Statement on Form S-4 for KCSM, filed on August 26, 2013 (File No. 333-190820), is incorporated herein by
reference as Exhibit 4.3.4.
100
Exhibit
4.3.5
4.4
4.4.1
4.4.2
4.5
4.5.1
4.5.2
4.5.3
4.6
4.6.1
4.6.2
4.6.3
4.6.4
4.6.5
4.6.6
4.6.7
10.1
Description
Special Global Note representing the 3.0% Senior Notes due 2023, filed as Exhibit 4.5.3 to the Registration
Statement on Form S-4 for KCSM, filed on August 26, 2013 (File No. 333-190820), is incorporated herein by
reference as Exhibit 4.3.5.
2023 Notes Indenture, dated October 29, 2013, among KCSR, the Guarantors and U.S. Bank National
Association, as trustee and paying agent, filed as exhibit 4.1 to the Company’s Current Report on Form 8-K filed
on October 30, 2013 (File No. 1-4717), is incorporated herein by reference as Exhibit 4.4.
First Supplemental Indenture, dated November 23, 2015, among KCSR, the Guarantors and U.S. Bank National
Association, as trustee and paying agent, filed as exhibit 4.1 to the Company’s Current Report on Form 8-K filed
on November 24, 2015 (File No. 1-4717), is incorporated herein by reference as Exhibit 4.4.1.
Form of Special Global Note representing KCSR’s 3.85% Senior Notes due 2023, filed as Exhibit 4.4.4 to the
Company’s Registration Statement on Form S-4 filed on April 21, 2014 (File No. 333-195413), is incorporated
herein by reference as Exhibit 4.4.2.
2045 Notes Indenture, dated July 27, 2015, among KCSR, the Note Guarantors and U.S. Bank National
Association, as trustee, filed as exhibit 4.1 to the Company’s Current Report on Form 8-K filed on July 28, 2015
(File No. 1-4717), is incorporated herein by reference as Exhibit 4.5.
First Supplemental Indenture, dated July 27, 2015, among KCSR, the Note Guarantors and U.S. Bank National
Association, as trustee, filed as exhibit 4.2 to the Company’s Current Report on Form 8-K filed on July 28, 2015
(File No. 1-4717), is incorporated herein by reference as Exhibit 4.5.1.
Second Supplemental Indenture, dated November 23, 2015, among KCSR, the Note Guarantors and U.S. Bank
National Association, as trustee, filed as exhibit 4.3 to the Company’s Current Report on Form 8-K filed on
November 24, 2015 (File No. 1-4717), is incorporated herein by reference as Exhibit 4.5.2.
Form of Note representing 4.950% Senior Notes due 2045 (included in Exhibit 4.2), filed as exhibit 4.3 to the
Company’s Current Report on Form 8-K filed on July 28, 2015 (File No. 1-4717), is incorporated herein by
reference as Exhibit 4.5.3.
Base Indenture, dated December 9, 2015, among KCS, the Note Guarantors and U.S. Bank National Association,
as trustee, filed as exhibit 4.1 to the Company’s Current Report on Form 8-K filed on December 15, 2015 (File
No. 1-4717), is incorporated herein by reference as Exhibit 4.6.
Second Supplemental Indenture, dated December 9, 2015, among KCS, the Note Guarantors and U.S. Bank
National Association, as trustee, filed as exhibit 4.3 to the Company’s Current Report on Form 8-K filed on
December 15, 2015 (File No. 1-4717), is incorporated herein by reference as Exhibit 4.6.1.
Third Supplemental Indenture, dated December 9, 2015, among KCS, the Note Guarantors and U.S. Bank
National Association, as trustee, filed as exhibit 4.4 to the Company’s Current Report on Form 8-K filed on
December 15, 2015 (File No. 1-4717), is incorporated herein by reference as Exhibit 4.6.2.
Fourth Supplemental Indenture, dated December 9, 2015, among KCS, the Note Guarantors and U.S. Bank
National Association, as trustee, filed as exhibit 4.5 to the Company’s Current Report on Form 8-K filed on
December 15, 2015 (File No. 1-4717), is incorporated herein by reference as Exhibit 4.6.3.
Fifth Supplemental Indenture, dated December 9, 2015, among KCS, the Note Guarantors and U.S. Bank
National Association, as trustee, filed as exhibit 4.6 to the Company’s Current Report on Form 8-K filed on
December 15, 2015 (File No. 1-4717), is incorporated herein by reference as Exhibit 4.6.4.
Sixth Supplemental Indenture, dated December 9, 2015, among KCS, the Note Guarantors and U.S. Bank
National Association, as trustee, filed as exhibit 4.7 to the Company’s Current Report on Form 8-K filed on
December 15, 2015 (File No. 1-4717), is incorporated herein by reference as Exhibit 4.6.5.
Seventh Supplemental Indenture, dated May 16, 2016, among the Company, the Note Guarantors and U.S. Bank
National Association, as trustee, filed as exhibit 4.2 to the Company’s Current Report on Form 8-K filed on May
17, 2016 (File No. 1-4717), is incorporated herein by reference as Exhibit 4.6.6.
Form of Note representing 3.125% Senior Notes due 2026 (included in Exhibit 4.2), filed as exhibit 4.3 to the
Company’s Current Report on Form 8-K filed on May 17, 2016 (File No. 1-4717), is incorporated herein by
reference as Exhibit 4.6.7.
Form of Officer Indemnification Agreement, attached as Exhibit 10.1 to the Company’s Form 10-K for the year
ended December 31, 2001, filed on March 29, 2002 (File No. 1-4717), is incorporated herein by reference as
Exhibit 10.1.
101
Exhibit
10.2
10.3*
10.4*
10.5*
10.6*
10.7
10.7.1
10.7.2
10.7.3
10.8
10.9
10.10
10.10.1
10.10.2
Description
Form of Director Indemnification Agreement, attached as Exhibit 10.2 to the Company’s Form 10-K for the year
ended December 31, 2001, filed on March 29, 2002 (File No. 1-4717), is incorporated herein by reference as
Exhibit 10.2.
Directors Deferred Fee Plan, adopted August 20, 1982, as amended and restated effective May 2, 2007, filed as
Exhibit 10.3 to the Company’s Form 10-K for the year ended December 31, 2010, filed on February 9, 2011 (File
No. 1-4717), is incorporated herein by reference as Exhibit 10.3.
Employment Agreement, dated February 19, 2015, between KCSR and Patrick J. Ottensmeyer filed as Exhibit
10.9 to the Company’s Current Report on Form 8-K filed on February 23, 2015 (File No. 1-4717), is incorporated
herein by reference as Exhibit 10.4.
Kansas City Southern Executive Plan (Amended and Restated February 18, 2015), filed as Exhibit 10.7 to the
Company’s Current Report on Form 8-K filed on February 23, 2015 (File No. 1-4717), is incorporated herein by
reference as Exhibit 10.5.
Kansas City Southern Annual Incentive Plan, as amended and restated February 17, 2017, filed as Exhibit 10.2 to
the Company’s Current Report on Form 8-K filed on February 24, 2017 (File No. 1-4717), is incorporated herein
by reference as Exhibit 10.6.
English translation of concession title granted by the Secretaría de Comunicaciones y Transportes (“SCT”) in
favor of Ferrocarril del Noreste, S.A. de C.V. (“FNE”), dated December 2, 1996, filed as Exhibit 10.10 to the
Company’s Form 10-K for the year ended December 31, 2011, filed on February 8, 2012 (File No. 1-4717), is
incorporated herein by reference as Exhibit 10.7.
English translation of amendment, dated February 12, 2001, filed as Exhibit 10.10.1 to the Company’s Form 10-
K for the year ended December 31, 2011, filed on February 8, 2012 (File No. 1-4717), of concession title granted
by SCT in favor of KCSM, formerly known as FNE, December 2, 1996, is incorporated herein by reference as
Exhibit 10.7.1.
English translation of amendment no. 2, dated November 22, 2006, filed as Exhibit 10.10.2 to the Company’s
Form 10-K for the year ended December 31, 2011, filed on February 8, 2012 (File No. 1-4717), of concession
title granted by SCT in favor of KCSM, formerly known as FNE, December 2, 1996, as amended February 12,
2001, is incorporated herein by reference as Exhibit 10.7.2.
English translation of amendment no. 3, dated March 26, 2014, of concession title granted by SCT in favor of
KCSM, formerly known as FNE, December 2, 1996, as amended February 12, 2001 and November 22, 2006,
filed as Exhibit 10.8.3 to the Company’s Form 10-K for the year ended December 31, 2016, filed on January 27,
2017 (File No. 1-4717), is incorporated herein by reference as Exhibit 10.7.3.
Agreement to Forego Compensation between A. Edward Allinson and the Company, fully executed on March 30,
2001; Loan Agreement between A. Edward Allinson and the Company, fully executed on September 18, 2001;
and the Promissory Note executed by the Trustees of The A. Edward Allinson Irrevocable Trust Agreement, dated
June 4, 2001, Courtney Ann Arnot, A. Edward Allinson III and Bradford J. Allinson, Trustees, as Maker, and the
Company, as Holder, filed as Exhibit 10.36 to the Company’s Form 10-K for the year ended December 31, 2002,
filed on March 28, 2003 (File No. 1-4717), are incorporated herein by reference as Exhibit 10.8.
Agreement to Forego Compensation between Michael G. Fitt and the Company, fully executed on March 30,
2001; Loan Agreement between Michael G. Fitt and the Company, fully executed on September 7, 2001; and the
Promissory Note executed by the Trustees of The Michael G. and Doreen E. Fitt Irrevocable Insurance Trust,
Anne E. Skyes, Colin M-D. Fitt and Ian D.G. Fitt, Trustees, as Maker, and the Company, as Holder, filed as
Exhibit 10.37 to the Company’s Form 10-K for the year ended December 31, 2002, filed on March 28, 2003 (File
No. 1-4717), are incorporated herein by reference as Exhibit 10.9.
Transaction Agreement, dated December 1, 2005, among the Company, KCSR, Norfolk Southern Corporation
and The Alabama Great Southern Railroad Company (the “Transaction Agreement”), filed as Exhibit 10.46 to the
Company’s Form 10-K for the year ended December 31, 2005, filed on April 7, 2006 (File No. 1-4717), is
incorporated herein by reference as Exhibit 10.10.
Amendment No. 1 to the Transaction Agreement, dated January 17, 2006, filed as Exhibit 10.47 to the
Company’s Form 10-K for the year ended December 31, 2005, filed on April 7, 2006 (File No. 1-4717), is
incorporated herein by reference as Exhibit 10.10.1.
Amendment No. 2 to the Transaction Agreement, dated May 1, 2006, filed as Exhibit 10.2 to the Company’s
Form 10-Q for the quarter ended March 31, 2006, filed on May 9, 2006 (File No. 1-4717), is incorporated herein
by reference as Exhibit 10.10.2.
102
Exhibit
10.10.3
10.10.4
10.10.5
10.11
10.11.1
10.12
10.12.1
10.13*
10.13.1*
10.13.2*
10.13.3*
10.13.4*
10.13.5*
10.13.6*
Description
Limited Liability Company Agreement of Meridian Speedway, LLC, dated May 1, 2006, between the Alabama
Great Southern Railroad Company and the Company, filed as Exhibit 10.3 to the Company’s Form 10-Q for the
quarter ended March 31, 2006, filed on May 9, 2006 (File No. 1-4717), is incorporated herein by reference as
Exhibit 10.10.3.
Amendment No. 1 and Waiver to Limited Liability Company Agreement, dated August 12, 2011, among
Meridian Speedway, LLC, the Company, KCS Holdings, Inc. and The Alabama Great Southern Railroad
Company, filed as Exhibit 10.2 to the Company’s Form 10-Q for the quarter ended September 30, 2011, filed on
October 21, 2011 (File No. 1-4717), is incorporated herein by reference as Exhibit 10.10.4.
Amendment No. 2 to Limited Liability Company Agreement, dated December 9, 2013, among the Company,
KCS Holdings, Inc. and The Alabama Great Southern Railroad Company, filed as Exhibit 10.11.5 to the
Company’s Form 10-K for the year ended December 31, 2016, filed on January 27, 2017 (File No. 1-4717), is
incorporated herein by reference as Exhibit 10.10.5.
Participation Agreement, dated August 2, 2006, among KCSR, KCSR Trust 2006-1 (acting through Wilmington
Trust Company, as owner trustee) (“2006 Trust”), HSH Nordbank AG, New York Branch, Wells Fargo Bank
Northwest, National Association, and DVB Bank AG, filed as Exhibit 10.4 to the Company’s Form 10-Q for the
quarter ended September 30, 2006, filed on November 9, 2006 (File No. 1-4717), is incorporated herein by
reference as Exhibit 10.11.
Equipment Lease Agreement, dated August 2, 2006, between KCSR and the KCSR Trust 2006-1, filed as
Exhibit 10.41 to the Company’s Form 10-Q for the quarter ended September 30, 2006, filed on November 9,
2006 (File No. 1-4717), is incorporated herein by reference as Exhibit 10.11.1.
Participation Agreement, dated September 27, 2007, among KCSR, KCSR 2007-1 Statutory Trust (acting through
U.S. Bank Trust National Association, as owner trustee) (“2007 Trust”), U.S. Bank Trust National Association,
GS Leasing (KCSR 2007-1) LLC, Wilmington Trust Company, and KfW, filed as Exhibit 10.51 to the
Company’s Form 10-K for the year ended December 31, 2007, filed on February 15, 2008 (File No. 1-4717), is
incorporated herein by reference as Exhibit 10.12.
Equipment Lease Agreement, dated September 27, 2007, between KCSR and the KCSR 2007-1 Statutory Trust,
filed as Exhibit 10.52 to the Company’s Form 10-K for the year ended December 31, 2007, filed on February 15,
2008 (File No. 1-4717), is incorporated herein by reference as Exhibit 10.12.1.
Kansas City Southern 2008 Stock Option and Performance Award Plan (Amended and Restated February 18,
2015) (the “2008 Plan”), filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed on February
23, 2015 (File No. 1-4717), is incorporated herein by reference as Exhibit 10.13.
Form of Restricted Shares Award Agreement (Standard Form) under the 2008 Plan, filed as Exhibit 10.4 to the
Company’s Current Report on Form 8-K filed on February 23, 2015 (File No. 1-4717), is incorporated herein by
reference as Exhibit 10.13.1.
Form of Restricted Shares Award Agreement (for use with the Executive Plan) under the 2008 Plan, filed as
Exhibit 10.5 to the Company’s Current Report on Form 8-K filed on February 23, 2015 (File No. 1-4717), is
incorporated herein by reference as Exhibit 10.13.2.
Form of Restricted Stock Award Agreement under the 2008 Plan, filed as Exhibit 10.1 to the Company’s Current
Report on Form 8-K filed on May 10, 2016 (File No. 1-4717), is incorporated herein by reference as Exhibit
10.13.3.
Form of Restricted Share Award Agreement (Employees) under the 2008 Plan for the 2016 Stock Appreciation
Incentive Plan, filed as Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on February 25, 2016
(File No. 1-4717), is incorporated herein by reference as Exhibit 10.13.4.
Form of Non-Qualified Stock Option, Restricted Share and Performance Share Award Agreement (United States
Employees) under the 2008 Plan for the 2014 Long-Term Incentive Program, filed as Exhibit 10.1 to the
Company’s Current Report on Form 8-K filed on February 26, 2014 (File No. 1-4717), is incorporated herein by
reference as Exhibit 10.13.5.
Form of Non-Qualified Stock Option, Restricted Share and Performance Share Award Agreement (Non-United
States Employees) under the 2008 Plan for the 2014 Long-Term Incentive Program, filed as Exhibit 10.2 to the
Company’s Current Report on Form 8-K filed on February 26, 2014 (File No. 1-4717), is incorporated herein by
reference as Exhibit 10.13.6.
103
Exhibit
10.13.7*
10.13.8*
10.13.9*
10.14
10.14.1
10.15
10.16
10.17*
10.17.1*
10.18*
10.18.1*
10.19*
10.20*
10.21
10.22
Description
Form of Non-Qualified Stock Option, Restricted Share and Performance Share Award Agreement (Employees)
under the 2008 Plan for the 2015 Long-Term Incentive Program, filed as Exhibit 10.2 to the Company’s Current
Report on Form 8-K filed on February 23, 2015 (File No. 1-4717), is incorporated herein by reference as Exhibit
10.13.7.
Form of Non-Qualified Stock Option, Restricted Share and Performance Share Award Agreement (Employees)
under the 2008 Plan for the 2016 Long-Term Incentive Program, filed as Exhibit 10.1 to the Company’s Current
Report on Form 8-K filed on February 25, 2016 (File No. 1-4717), is incorporated herein by reference as Exhibit
10.13.8.
Form of Non-Qualified Stock Option, Restricted Share and Performance Share Award Agreement under the 2008
Plan for the 2017 Long-Term Incentive Program, filed as Exhibit 10.1 to the Company’s Current Report on Form
8-K filed on February 24, 2017 (File No. 1-4717), is incorporated herein by reference as Exhibit 10.13.9.
Participation Agreement (KCSR 2008-1), dated as of April 1, 2008, among KCSR, KCSR 2008-1 Statutory Trust
(acting through U.S. Bank Trust National Association, not in its individual capacity, but solely as Owner Trustee)
(“KCSR 2008-1 Statutory Trust”), U.S. Bank Trust National Association (only in its individual capacity as
expressly provided therein), MetLife Capital, Limited Partnership (as Owners Participant), Wilmington
Trust Company (as Indenture Trustee) and Export Development Canada (as Loan Participant), filed as
Exhibit 10.2 to the Company’s Form 10-Q for the quarter ended March 31, 2008, filed on April 24, 2008 (File
No. 1-4717), is incorporated herein by reference as Exhibit 10.14.
Equipment Lease Agreement (KCSR 2008-1), dated as of April 1, 2008, between KCSR 2008-1 Statutory Trust
(as Lessor) and KCSR (as Lessee), filed as Exhibit 10.3 to the Company’s Form 10-Q for the quarter ended
March 31, 2008, filed on April 24, 2008 (File No. 1-4717), is incorporated herein by reference as Exhibit 10.14.1.
Loan and Security Agreement, dated February 26, 2008, between KCSM and Export Development Canada, filed
as Exhibit 10.1 to the Company’s Form 10-Q for the quarter ended March 31, 2008, filed on April 24, 2008 (File
No. 1-4717), is incorporated herein by reference as Exhibit 10.15.
Loan Agreement, dated as of September 24, 2008, between KCSM and DVB Bank AG, filed as Exhibit 10.1 to
the Company’s Form 10-Q for the quarter ended September 30, 2008, filed on October 28, 2008 (File
No. 1-4717), is incorporated herein by reference as Exhibit 10.16.
English translation of the Employment Agreement, dated April 20, 2006, between Kansas City Southern de
México, S.A. de C.V. and José Guillermo Zozaya Delano, filed as Exhibit 10.4 to the Company’s Form 10-Q for
the quarter ended March 31, 2009, filed on April 30, 2009 (File No. 1-4717), is incorporated herein by reference
as Exhibit 10.17.
English translation of Amendment Agreement to the Individual Indefinite Employment Contract of April 20,
2006, dated May 27, 2009, between KCSM and José Guillermo Zozaya Delano, filed as Exhibit 10.1 to the
Company’s Current Report on Form 8-K, filed on June 2, 2009 (File No. 1-4717), is incorporated herein by
reference as Exhibit 10.17.1.
Employment Agreement, dated August 15, 2008, between KCSR and Michael W. Upchurch, filed as Exhibit 10.1
to the Company’s Current Report on Form 8-K, filed on October 22, 2008 (File No. 1-4717), is incorporated
herein by reference as Exhibit 10.18.
Amendment to Employment Agreement dated December 17, 2012, between KCSR and Michael W. Upchurch,
filed as Exhibit 10.28.1 to the Company’s Form 10-K for the year ended December 31, 2012, filed on February 4,
2013 (File No. 1-4717), is incorporated herein by reference as Exhibit 10.18.1.
Employment Agreement, dated February 18, 2015, between The Kansas City Southern Railway Company and
Jeffrey M. Songer, filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on March 15, 2016
(File No. 1-4717), is incorporated herein by reference as Exhibit 10.19.
Employment Agreement, dated July 13, 2015, between The Kansas City Southern Railway Company and Brian
Hancock, filed as Exhibit 10.1 to the Company’s Form 10-Q for the quarter ended March 31, 2016, filed on April
19, 2016 (File No. 1-4717), is incorporated herein by reference as Exhibit 10.20.
Trackage Rights Agreement, dated February 9, 2010, between KCSM and Ferromex, filed as Exhibit 10.2 to the
Company’s Form 10-Q for the quarter ended March 31, 2010, filed on April 27, 2010 (File No. 1-4717), is
incorporated herein by reference as Exhibit 10.21.
Form of Loan Agreement between Locomotives Structured Holdings LLC (as successor by assignment from
General Electric Capital Corporation) and KCSM, dated September 1, 2011, filed as Exhibit 10.1 to the
Company’s Form 10-Q for the quarter ended September 30, 2011, filed on October 21, 2011 (File No. 1-4717), is
incorporated herein by reference as Exhibit 10.22.
104
Exhibit
10.23
10.24
10.24.1
10.25
10.26*
10.27*
Description
Financing Agreement dated as of February 21, 2012, between The Kansas City Southern Railway Company and
the United States of America represented by the Secretary of Transportation acting through the Administrator of
the Federal Railroad Administration, filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on
February 22, 2012 (File No. 1-4717), is incorporated herein by reference as Exhibit 10.23.
Financing Agreement between The Texas-Mexican Railway Company and the Federal Railroad Administration,
dated June 28, 2005, filed as Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q, filed on August 15,
2005 (File No. 1-04717), are incorporated herein by reference as Exhibit 10.24.
Pledge Agreement between Mexrail, Inc. and the Federal Railroad Administration, and Guaranty of Mexrail, Inc.
in favor of the Federal Railroad Administration, filed as Exhibit 10.4 to the Company’s Quarterly Report on Form
10-Q, filed on August 15, 2005 (File No. 1-04717), are incorporated herein by reference as Exhibit 10.24.1.
Credit Agreement, dated December 9, 2015, among the Company, the guarantors party thereto, the various
financial institutions and other persons from time to time parties thereto as lenders, Bank of America, N.A., as
administrative agent, JPMorgan Chase Bank, N.A. and Citibank, N.A., as co-syndication agents and Merrill
Lynch, Pierce, Fenner & Smith Incorporated, J.P. Morgan Securities LLC and Citigroup Global Markets Inc., as
joint lead arrangers and joint bookrunning managers, filed as exhibit 10.1 to the Company’s Current Report on
Form 8-K filed on December 15, 2015 (File No. 1-4717), is incorporated herein by reference as Exhibit 10.25.
Form of Executive Arbitration Agreement with the Company’s executive officers, filed as Exhibit 10.1 to the
Company’s Quarterly Report on Form 10-Q, filed on July 21, 2017 (File No. 1-04717), is incorporated herein by
reference as Exhibit 10.26.
Kansas City Southern 2017 Equity Incentive Plan, effective May 4, 2017 (the “2017 Plan”), filed as exhibit 10.1
to the Company’s Current Report on Form 8-K filed on May 9, 2017 (File No. 1-4717), is incorporated herein by
reference as Exhibit 10.27.
10.27.1*
Form of Restricted Shares Award Agreement under the 2017 Plan, filed as exhibit 10.2 to the Company’s Current
Report on Form 8-K filed on May 9, 2017 (File No. 1-4717), is incorporated herein by reference as Exhibit
10.27.1.
10.27.2*
Form of Non-Management Director Deferred Stock Award Agreement under the 2017 Plan is attached to this
Form 10-K as Exhibit 10.27.2.
12.1
21.1
23.1
24.1
31.1
31.2
32.1
32.2
101
Computation of Ratio of Earnings to Fixed Charges
Subsidiaries of the Company
Consent of KPMG LLP, Independent Registered Public Accounting Firm, is attached to this Form 10-K as
Exhibit 23.1.
Power of Attorney (contained in the signature page herein).
Certification of Patrick J. Ottensmeyer, Chief Executive Officer of the Company, is attached to this Form 10-K as
Exhibit 31.1.
Certification of Michael W. Upchurch, Chief Financial Officer of the Company, is attached to this Form 10-K as
Exhibit 31.2.
Certification of Patrick J. Ottensmeyer, Chief Executive Officer of the Company, furnished pursuant to 18 U.S.C.
Section 1350, is attached to this Form 10-K as Exhibit 32.1.
Certification of Michael W. Upchurch, Chief Financial Officer of the Company, furnished pursuant to 18 U.S.C.
Section 1350, is attached to this Form 10-K as Exhibit 32.2.
The following financial information from Kansas City Southern’s Annual Report on Form 10-K for the year
ended December 31, 2017, formatted in XBRL (Extensible Business Reporting Language) includes: (i)
Consolidated Statements of Income for the years ended December 31, 2017, 2016 and 2015, (ii) Consolidated
Statements of Comprehensive Income for the years ended December 31, 2017, 2016, and 2015, (iii) Consolidated
Balance Sheets as of December 31, 2017 and December 31, 2016, (iv) Consolidated Statements of Cash Flows
for the years ended December 31, 2017, 2016, and 2015, (v) Consolidated Statements of Changes in Equity for
the Three Years ended December 31, 2017, 2016, and 2015, and (vi) the Notes to Consolidated Financial
Statements.
* Management contract or compensatory plan or arrangement.
105
Item 16. Form 10-K Summary
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) 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.
Kansas City Southern
By:
/S/ PATRICK J. OTTENSMEYER
Patrick J. Ottensmeyer
President, Chief Executive Officer and Director
January 26, 2018
POWER OF ATTORNEY
Know all people by these presents, that each person whose signature appears below constitutes and appoints Patrick J.
Ottensmeyer and Michael W. Upchurch, and each of them, his or her true and lawful attorneys-in-fact and agents, with full
power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign
any amendments to this annual report on Form 10-K, and to file the same, with all exhibits thereto, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and
perform each and every act and thing requisite and necessary to be done in and about the premises, as fully and to all intents
and purposes as he or she might or could do in person, hereby confirming all that said attorneys-in-fact and agents or either of
them, or his or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the Company and in the capacities indicated on January 26, 2018.
Signature
Title
/S/ PATRICK J. OTTENSMEYER
Patrick J. Ottensmeyer
/S/ MICHAEL W. UPCHURCH
Michael W. Upchurch
/s/ SUZANNE M. GRAFTON
Suzanne M. Grafton
/S/ ROBERT J. DRUTEN
Robert J. Druten
/s/ LYDIA I. BEEBE
Lydia I. Beebe
/S/ LU M. CÓRDOVA
Lu M. Córdova
/S/ TERRENCE P. DUNN
Terrence P. Dunn
President, Chief Executive Officer and Director
(Principal Executive Officer).
Executive Vice President and
Chief Financial Officer (Principal Financial Officer).
Vice President and Chief Accounting Officer
(Principal Accounting Officer).
Chairman of the Board and Director.
Director.
Director.
Director.
106
Signature
/S/ ANTONIO O. GARZA, JR.
Antonio O. Garza, Jr.
/S/ DAVID GARZA-SANTOS
David Garza-Santos
/s/ JANET H. KENNEDY
Janet H. Kennedy
/s/ MITCHELL J. KREBS
Mitchell J. Krebs
/s/ HENRY J. MAIER
Henry J. Maier
/S/ THOMAS A. MCDONNELL
Thomas A. McDonnell
/S/ RODNEY E. SLATER
Rodney E. Slater
Title
Director.
Director.
Director.
Director.
Director.
Director.
Director.
107
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Reconciliation of Diluted Earnings per Share
to Adjusted Diluted Earnings per Share
As reported
Adjustments for:
Foreign exchange gain
Foreign exchange component of income taxes
Change in tax law
Adjusted - see (a) below
Year ended
December 31, 2017
$
$
9.16
(0.28)
0.30
(3.93)
5.25
(a)
The Company believes adjusted diluted earnings per share is meaningful as it allows investors to evaluate the Company’s
performance for different periods on a more comparable basis by excluding the impact of changes in foreign currency
exchange rates, and the impacts of the changes in tax law due to the enactment of the Tax Cuts and Jobs Act of 2017.
The income tax expense impacts related to these adjustments are calculated at the applicable statutory tax rate.
109
[THIS PAGE INTENTIONALLY LEFT BLANK]
D I R E C T O R S A N D O F F I C E R S
D ID ID ID ID ID ID ID ID R ER ER ER ER ER ER ER E C TC TC TC TC TC TC TC TCC O RO RO RO RO RO RO RO ROO SSSSSSSSS A NA NA NA NA NA NA NA NA DDDDDDDDD O FO FO FO FO FO FO FO FOO F IF IF IF IF IF IF IF I C EC EC EC EC EC EC EC ECC R SR SR SR SR SR SR SR SS
D I R E C T O R S A N D O F F I C E R S
KANSAS CITY SOUTHERN DIRECTORS
Lydia I. Beebe (4)
Principal, LIBB Advisors LLC
Retired Senior Of Counsel
Wilson Sonsini Goodrich & Rosati PC
San Francisco, California
Lu M. Córdova (2, 5)
President
Techstars Foundation
Boulder, Colorado
Robert J. Druten (1, 3)
Chairman of the Board, Kansas City Southern
Retired Executive Vice President
& Chief Financial Officer
Hallmark Cards, Inc.
Kansas City, Missouri
Terrence P. Dunn (4)
Retired President & Chief Executive Officer
J.E. Dunn Construction Group, Inc.
Kansas City, Missouri
Antonio O. Garza, Jr. (1, 4)
Former U.S. Ambassador to Mexico
Partner, ViaNovo
Counsel, White & Case, LLP
Mexico City, D.F.
David Garza-Santos (3)
Chief Executive Officer
MADISA
Santa Catarina, N.L. Mexico
Janet H. Kennedy (3)
Vice President US Digital Transformation
Microsoft Corporation
Redmond, Washington
Mitchell J. Krebs (2,5)
President & Chief Executive Officer
Coeur Mining Inc.
Chicago, Illinios
Henry J. Maier (3)
President & Chief Executive Officer
FedEx Ground
Moon Township, Pennsylvania
Thomas A. McDonnell (2, 5)
Retired President & Chief Executive Officer
Ewing Marion Kauffman Foundation
Kansas City, Missouri
Patrick J. Ottensmeyer (1)
President & Chief Executive Officer
Kansas City Southern
Kansas City, Missouri
Rodney E. Slater (4)
Partner
Squire Patton Boggs
Washington, DC
Committees of the Board:
(1) Executive
(2) Audit
(3) Compensation and Organization
(4) Nominating and Corporate Governance
(5) Finance
KANSAS CITY SOUTHERN OFFICERS
Patrick J. Ottensmeyer
President & Chief Executive
Officer
Michael W. Upchurch
Executive Vice President
& Chief Financial Officer
Warren K. Erdman
Executive Vice President
Administration & Corporate Affairs
Lora S. Cheatum
Senior Vice President
Human Resources
Brian D. Hancock
Executive Vice President
& Chief Marketing Officer
Jeffrey M. Songer
Executive Vice President
& Chief Operating Officer
Michael J. Naatz
Senior Vice President
Operations Support
& Chief Information
Officer
William J. Wochner
Senior Vice President &
Chief Legal Officer
Michael W. Cline
Vice President Finance
& Treasurer
Adam J. Godderz
Vice President
& Corporate Secretary
Suzanne M. Grafton
Vice President &
Chief Accounting Officer
Daniel L. Hynek
Vice President
International Taxes
Ashley A. Thorne
Vice President Investor Relations
Julie D. Powell
Assistant Secretary
& Assistant Treasurer
Rafael Andrade
Assistant Treasurer
Kansas City Southern companies provide
equal employment and advancement
opportunities to qualified employees
without regard to race, color, religion,
gender, national origin, age, disability,
or other categories protected by law.
Kansas City Southern’s U.S. companies
are also affirmative action employers.
This annual report is printed on
recycled papers. The recycled paper
industry is an important part of the
market served by Kansas City Southern.
Find Kansas City Southern
on the internet at:
http://www.kcsouthern.com
Securities Listed
New York Stock Exchange
Common Stock
4% Preferred Stock
Symbol KSU
Transfer Agent and Registrar
Computershare
P.O. Box 30170
College Station, TX 77842-3170
Independent Registered Public
Accounting Firm
KPMG LLP
1000 Walnut Street, Suite 1000
Kansas City, Missouri 64106
Annual Meeting of Stockholders
3:00 P.M., May 17, 2018
Kansas City Southern
Grand Hall
427 West 12th Street
Kansas City, Missouri 64105
Corporate Offices
427 West 12th Street
Kansas City, Missouri 64105
(816) 983-1303
KANSAS CITY SOUTHERN
427 West 12th Street
Kansas City, Missouri 64105
www.KCSouthern.com
SKU #002CSN8F1C