UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q



☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, ~~2020~~2021



☐			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

44-0663509

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

427 West 12th Street

Kansas City

Missouri

64105

(Address of principal executive offices)

(Zip Code)

~~816~~.~~983.1303~~816.983.1303

(Registrant’s telephone number, including area code)

No Change

(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	Trading Symbol(s)	Name of Each Exchange on Which Registered
Preferred Stock, Par Value $25 Per Share, 4%, Noncumulative	KSU	New York Stock Exchange
Common Stock, $.01 Per Share Par Value	KSU	New York Stock Exchange

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 ý No ☐

Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted 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 such files). Yes ý No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated Filer ý Accelerated filer ☐ Non-accelerated filer ☐ Smaller reporting company ☐

Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ý

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.



Class						July ~~10, 2020~~9, 2021
Common Stock, $0.01 per share par value						~~94,349,268~~90,964,664 Shares

Table of Contents

Kansas City Southern and Subsidiaries

Form 10-Q

June 30, ~~2020~~2021

Index



		Page
PART I — FINANCIAL INFORMATION
Item 1.	Financial Statements (unaudited)	3
	Consolidated Statements of ~~Income~~Operations — Three and six months ended June 30, ~~2020~~2021 and ~~2019~~2020	3
	Consolidated Statements of Comprehensive Income (Loss) — Three and six months ended June 30, ~~2020~~2021 and ~~2019~~2020	4
	Consolidated Balance Sheets — June 30, ~~2020~~2021 and December 31, ~~2019~~2020	5
	Consolidated Statements of Cash Flows — Six months ended June 30, ~~2020~~2021 and ~~2019~~2020	6
	Consolidated Statements of Changes in Equity — Three months ended June 30, ~~2020,~~2021, March 31, ~~2020,~~2021, December 31, ~~2019,~~2020, September 30, ~~2019,~~2020, June 30, ~~2019~~2020 and March 31, ~~2019~~2020	7
	Notes to the Unaudited Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	3332
Item 4.	Controls and Procedures	3332
PART II — OTHER INFORMATION
Item 1.	Legal Proceedings	34
Item 1A.	Risk Factors	34
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	3536
Item 3.	Defaults Upon Senior Securities	3536
Item 4.	Mine Safety Disclosures	3536
Item 5.	Other Information	3536
Item 6.	Exhibits	3637
	SIGNATURES	3738

Table of Contents

PART I — FINANCIAL INFORMATION


~~Item 1.~~	~~Financial Statements (unaudited)~~

Item 1.Financial Statements (unaudited)

Kansas City Southern and Subsidiaries

Consolidated Statements of ~~Income~~Operations


	Three Months Ended						Six Months Ended							Three Months Ended				Six Months Ended
	June 30,						June 30,							June 30,				June 30,
	2020			2019			2020			2019				2021		2020		2021		2020
	(In millions, except share and per share amounts) (Unaudited)													(In millions, except share and per share amounts) (Unaudited)
Revenues	$	547.9		$	714.0		$	1,279.6		$	1,388.8		Revenues	$	749.5	$	547.9	$	1,455.5	$	1,279.6
Operating expenses:													Operating expenses:
Compensation and benefits	103.8			128.3			237.2			257.2			Compensation and benefits	128.4		103.8		257.9		237.2
Purchased services	44.6			56.7			97.9			109.5			Purchased services	55.8		44.6		109.6		97.9
Fuel	39.5			87.7			114.4			170.7			Fuel	79.0		39.5		149.9		114.4
Equipment costs	18.1			26.3			40.0			56.7			Equipment costs	24.1		18.1		45.2		40.0
Depreciation and amortization	89.3			87.7			178.7			176.2			Depreciation and amortization	91.2		89.3		183.2		178.7
Materials and other	61.7			68.3			125.7			131.7			Materials and other	81.9		61.7		148.3		125.7
Merger costs													Merger costs	720.8		0		740.1		0
Restructuring charges	10.5			51.0			16.5			118.5			Restructuring charges	0		10.5		0		16.5
Total operating expenses	367.5			506.0			810.4			1,020.5			Total operating expenses	1,181.2		367.5		1,634.2		810.4
Operating income	180.4			208.0			469.2			368.3
Equity in net earnings (losses) of affiliates	0.2			(0.2		)	1.2			1.5
Operating income (loss)													Operating income (loss)	(431.7)		180.4		(178.7)		469.2
Equity in net earnings of affiliates													Equity in net earnings of affiliates	3.4		0.2		9.4		1.2
Interest expense	(38.1		)	(28.0		)	(72.3		)	(56.2		)	Interest expense	(39.1)		(38.1)		(78.1)		(72.3)
Debt retirement costs	—			—			—			(0.6		)
Foreign exchange gain (loss)	7.8			8.3			(51.7		)	12.9			Foreign exchange gain (loss)	6.8		7.8		(0.5)		(51.7)
Other income, net	0.8			0.1			2.2			0.2			Other income, net	1.0		0.8		0.2		2.2
Income before income taxes	151.1			188.2			348.6			326.1
Income tax expense	40.8			59.1			86.0			93.8
Net income	110.3			129.1			262.6			232.3
Income (loss) before income taxes													Income (loss) before income taxes	(459.6)		151.1		(247.7)		348.6
Income tax expense (benefit)													Income tax expense (benefit)	(81.6)		40.8		(23.1)		86.0
Net income (loss)													Net income (loss)	(378.0)		110.3		(224.6)		262.6
Less: Net income attributable to noncontrolling interest	0.6			0.4			1.1			0.8			Less: Net income attributable to noncontrolling interest	0.5		0.6		0.9		1.1
Net income attributable to Kansas City Southern and subsidiaries	109.7			128.7			261.5			231.5
Net income (loss) attributable to Kansas City Southern and subsidiaries													Net income (loss) attributable to Kansas City Southern and subsidiaries	(378.5)		109.7		(225.5)		261.5
Preferred stock dividends	—			—			0.1			0.1			Preferred stock dividends	0.1		0		0.1		0.1
Net income available to common stockholders	$	109.7		$	128.7		$	261.4		$	231.4
Net income (loss) available to common stockholders													Net income (loss) available to common stockholders	$	(378.6)	$	109.7	$	(225.6)	$	261.4

Earnings per share:
Basic earnings per share	$	1.16		$	1.29		$	2.75		$	2.31
Diluted earnings per share	$	1.16		$	1.28		$	2.74		$	2.30
Earnings (loss) per share:													Earnings (loss) per share:
Basic earnings (loss) per share													Basic earnings (loss) per share	$	(4.17)	$	1.16	$	(2.48)	$	2.75
Diluted earnings (loss) per share													Diluted earnings (loss) per share	$	(4.17)	$	1.16	$	(2.48)	$	2.74

Average shares outstanding (in thousands):													Average shares outstanding (in thousands):
Basic	94,476			100,028			95,070			100,264			Basic	90,767		94,476		90,762		95,070
Potentially dilutive common shares	417			394			464			405
Effect of dilution													Effect of dilution	0		417		0		464
Diluted	94,893			100,422			95,534			100,669			Diluted	90,767		94,893		90,762		95,534

See accompanying notes to the unaudited consolidated financial statements.

Table of Contents

Kansas City Southern and Subsidiaries

Consolidated Statements of Comprehensive Income (Loss)

Three Months Ended Six Months Ended
June 30, June 30,
2020 2019 2020 2019
(In millions)
(Unaudited)
Net income $ 110.3
$ 129.1
$ 262.6
$ 232.3
Other comprehensive income (loss):
Unrealized gain (loss) on interest rate derivative instruments, net of tax of $1.5 million, $(2.4) million, $2.7 million and $(4.1) million, respectively 5.3
(7.6 ) 10.1
(12.7 )
Reclassification adjustment from cash flow hedges included in net income, net of tax of $0.2 million and $0.3 million, respectively 0.4
—
0.9
—
Foreign currency translation adjustments 0.2
0.1
(1.5 ) 0.3
Other comprehensive income (loss) 5.9
(7.5 ) 9.5
(12.4 )
Comprehensive income 116.2
121.6
272.1
219.9
Less: Comprehensive income attributable to noncontrolling interest 0.6
0.4
1.1
0.8
Comprehensive income attributable to Kansas City Southern and subsidiaries $ 115.6
$ 121.2
$ 271.0
$ 219.1


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2021		2020		2021		2020
	(In millions) (Unaudited)
Net income (loss)	$	(378.0)	$	110.3	$	(224.6)	$	262.6
Other comprehensive income (loss):
Unrealized gain (loss) on interest rate derivative instruments, net of tax of $(9.0) million, $1.5 million, $12.0 million and $2.7 million, respectively	(33.9)		5.3		45.2		10.1
Reclassification adjustment from cash flow hedges included in net income, net of tax of $0.1 million, $0.2 million, $0.2 million and $0.3 million, respectively	0.5		0.4		1.0		0.9
Foreign currency translation adjustments	0.3		0.2		0.1		(1.5)
Other comprehensive income (loss)	(33.1)		5.9		46.3		9.5
Comprehensive income (loss)	(411.1)		116.2		(178.3)		272.1
Less: Comprehensive income attributable to noncontrolling interest	0.5		0.6		0.9		1.1
Comprehensive income (loss) attributable to Kansas City Southern and subsidiaries	$	(411.6)	$	115.6	$	(179.2)	$	271.0

See accompanying notes to the unaudited consolidated financial statements.

Table of Contents

Kansas City Southern and Subsidiaries

Consolidated Balance Sheets


	June 30, 2020			December 31, 2019				June 30, 2021		December 31, 2020
	(In millions, except share and per share amounts)							(In millions, except share and per share amounts)
	(Unaudited)							(Unaudited)
ASSETS							ASSETS
Current assets:							Current assets:
Cash and cash equivalents	$	620.1		$	148.8		Cash and cash equivalents	$	325.8	$	188.2
Accounts receivable, net	222.8			274.2			Accounts receivable, net	298.9		247.1
Materials and supplies	131.2			150.6			Materials and supplies	135.3		127.2
Other current assets	142.1			155.0			Other current assets	52.0		63.3
Total current assets	1,116.2			728.6			Total current assets	812.0		625.8
Operating lease right-of-use assets	80.8			158.4			Operating lease right-of-use assets	71.8		70.9
Investments	44.0			47.6			Investments	50.6		42.6
Property and equipment (including concession assets), net	8,947.4			8,806.3			Property and equipment (including concession assets), net	9,139.0		8,997.8
Other assets	99.7			45.9			Other assets	320.3		226.9
Total assets	$	10,288.1		$	9,786.8		Total assets	$	10,393.7	$	9,964.0
LIABILITIES AND EQUITY							LIABILITIES AND EQUITY
Current liabilities:							Current liabilities:
Long-term debt due within one year	$	16.3		$	18.0		Long-term debt due within one year	$	8.5	$	6.4
Accounts payable and accrued liabilities	440.6			473.3			Accounts payable and accrued liabilities	1,234.3		470.0
Total current liabilities	456.9			491.3			Total current liabilities	1,242.8		476.4
Long-term operating lease liabilities	53.3			85.7			Long-term operating lease liabilities	47.6		45.4
Long-term debt	3,765.4			3,228.0			Long-term debt	3,771.7		3,764.4
Deferred income taxes	1,165.2			1,128.0			Deferred income taxes	1,062.2		1,185.4
Other noncurrent liabilities and deferred credits	102.3			107.9			Other noncurrent liabilities and deferred credits	153.0		108.8
Total liabilities	5,543.1			5,040.9			Total liabilities	6,277.3		5,580.4
Stockholders’ equity:							Stockholders’ equity:
$25 par, 4% noncumulative, preferred stock, 840,000 shares authorized, 649,736 shares issued; 222,130 and 222,625 shares outstanding at June 30, 2020 and December 31, 2019, respectively	5.6			5.6
$.01 par, common stock, 400,000,000 shares authorized; 123,352,185 shares issued; 94,327,807 and 96,115,669 shares outstanding at June 30, 2020 and December 31, 2019, respectively	1.0			1.0
$25 par, 4% noncumulative, preferred stock, 840,000 shares authorized, 649,736 shares issued; 214,542 and 215,199 shares outstanding at June 30, 2021 and December 31, 2020, respectively							$25 par, 4% noncumulative, preferred stock, 840,000 shares authorized, 649,736 shares issued; 214,542 and 215,199 shares outstanding at June 30, 2021 and December 31, 2020, respectively	5.4		5.4
$.01 par, common stock, 400,000,000 shares authorized; 123,352,185 shares issued; 90,947,526 and 91,047,107 shares outstanding at June 30, 2021 and December 31, 2020, respectively							$.01 par, common stock, 400,000,000 shares authorized; 123,352,185 shares issued; 90,947,526 and 91,047,107 shares outstanding at June 30, 2021 and December 31, 2020, respectively	0.9		0.9
Additional paid-in capital	922.8			843.7			Additional paid-in capital	913.2		830.9
Retained earnings	3,510.7			3,601.3			Retained earnings	2,822.9		3,219.6
Accumulated other comprehensive loss	(19.6		)	(29.1		)
Accumulated other comprehensive income							Accumulated other comprehensive income	46.7		0.4
Total stockholders’ equity	4,420.5			4,422.5			Total stockholders’ equity	3,789.1		4,057.2
Noncontrolling interest	324.5			323.4			Noncontrolling interest	327.3		326.4
Total equity	4,745.0			4,745.9			Total equity	4,116.4		4,383.6
Total liabilities and equity	$	10,288.1		$	9,786.8		Total liabilities and equity	$	10,393.7	$	9,964.0

See accompanying notes to the unaudited consolidated financial statements.

Table of Contents

Kansas City Southern and Subsidiaries

Consolidated Statements of Cash Flows


	Six Months Ended							Six Months Ended
	June 30,							June 30,
	2020			2019				2021		2020
	(In millions) (Unaudited)							(In millions) (Unaudited)
Operating activities:							Operating activities:
Net income	$	262.6		$	232.3
Adjustments to reconcile net income to net cash provided by operating activities:
Net income (loss)							Net income (loss)	$	(224.6)	$	262.6
Adjustments to reconcile net income (loss) to net cash provided by operating activities:							Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization	178.7			176.2			Depreciation and amortization	183.2		178.7
Deferred income taxes	34.3			12.2			Deferred income taxes	(135.5)		34.3
Equity in net earnings of affiliates	(1.2		)	(1.5		)	Equity in net earnings of affiliates	(9.4)		(1.2)
Share-based compensation	13.5			12.0			Share-based compensation	14.4		13.5
Loss on foreign currency derivative instruments							Loss on foreign currency derivative instruments	4.1		27.3
Foreign exchange (gain) loss							Foreign exchange (gain) loss	(3.6)		24.4
Merger costs							Merger costs	740.1		0
Restructuring charges							Restructuring charges	0		16.5
Distributions from affiliates	2.5			3.0			Distributions from affiliates	2.5		2.5
Settlement of foreign currency derivative instruments	(29.0		)	4.8			Settlement of foreign currency derivative instruments	(1.9)		(29.0)
(Gain) loss on foreign currency derivative instruments	27.3			(10.9		)
Foreign exchange (gain) loss	24.4			(2.0		)
Restructuring charges	16.5			118.5
Cash payments for restructuring charges	(3.2		)	(1.4		)
Cash payments for merger costs							Cash payments for merger costs	(719.5)		0
Reimbursement of merger termination fee							Reimbursement of merger termination fee	700.0		0
Refundable Mexican value added tax							Refundable Mexican value added tax	(34.5)		(18.1)
Changes in working capital items:							Changes in working capital items:
Accounts receivable	44.1			16.0			Accounts receivable	(52.1)		44.1
Materials and supplies	19.3			4.5			Materials and supplies	(6.6)		19.3
Other current assets	(47.1		)	(15.0		)	Other current assets	10.5		(29.0)
Accounts payable and accrued liabilities	(16.2		)	(6.4		)	Accounts payable and accrued liabilities	33.8		(19.4)
Other, net	(1.0		)	(1.1		)	Other, net	6.4		(1.0)
Net cash provided by operating activities	525.5			541.2			Net cash provided by operating activities	507.3		525.5

Investing activities:							Investing activities:
Capital expenditures	(194.7		)	(350.4		)	Capital expenditures	(250.5)		(194.7)
Purchase or replacement of assets under operating leases	(78.2		)	(0.9		)	Purchase or replacement of assets under operating leases	0		(78.2)
Property investments in MSLLC	(20.0		)	(22.3		)	Property investments in MSLLC	(19.4)		(20.0)
Investments in and advances to affiliates	(4.9		)	(15.3		)	Investments in and advances to affiliates	(7.2)		(4.9)
Proceeds from disposal of property	8.0			12.3			Proceeds from disposal of property	2.8		8.0
Other, net	(9.4		)	2.5			Other, net	(4.7)		(9.4)
Net cash used for investing activities	(299.2		)	(374.1		)	Net cash used for investing activities	(279.0)		(299.2)

Financing activities:							Financing activities:

Proceeds from issuance of long-term debt	545.6			—			Proceeds from issuance of long-term debt	0		545.6
Repayment of long-term debt	(4.8		)	(5.5		)	Repayment of long-term debt	(3.5)		(4.8)
Dividends paid	(76.9		)	(72.6		)	Dividends paid	(89.3)		(76.9)
Shares repurchased	(211.7		)	(142.7		)	Shares repurchased	0		(211.7)
Debt issuance costs paid	(6.6		)	(2.5		)	Debt issuance costs paid	0		(6.6)
Proceeds from employee stock plans	4.5			3.3			Proceeds from employee stock plans	2.5		4.5
Net cash provided by (used for) financing activities	250.1			(220.0		)	Net cash provided by (used for) financing activities	(90.3)		250.1

Effect of exchange rate changes on cash	(5.1		)	—			Effect of exchange rate changes on cash	(0.4)		(5.1)

Cash and cash equivalents:							Cash and cash equivalents:
Net increase (decrease) during each period	471.3			(52.9		)
Net increase during each period							Net increase during each period	137.6		471.3
At beginning of year	148.8			100.5			At beginning of year	188.2		148.8
At end of period	$	620.1		$	47.6		At end of period	$	325.8	$	620.1

See accompanying notes to the unaudited consolidated financial statements.

Table of Contents

Kansas City Southern and Subsidiaries

Consolidated Statements of Changes in Equity

(in millions, except per share amounts)

(Unaudited)


	$25 Par Preferred Stock		$.01 Par Common Stock		Additional Paid-in Capital		Retained Earnings		Accumulated Other Comprehensive Income (Loss)		Non- controlling Interest		Total


Balance at December 31, 2019	$	5.6	$	1.0	$	843.7	$	3,601.3	$	(29.1)	$	323.4	$	4,745.9
Net income							151.8				0.5		152.3
Other comprehensive income									3.6				3.6
Dividends on common stock ($0.40/share)					0		(38.2)						(38.2)
Dividends on $25 par preferred stock ($0.25/share)							(0.1)						(0.1)
Share repurchases			0		(11.4)		(182.8)						(194.2)
Settlement of forward contract for accelerated share repurchases					82.5								82.5
Options exercised and stock subscribed, net of shares withheld for employee taxes			0		(0.1)								(0.1)
Share-based compensation					10.3								10.3
Balance at March 31, 2020	5.6		1.0		925.0		3,532.0		(25.5)		323.9		4,762.0
Net income							109.7				0.6		110.3
Other comprehensive income									5.9				5.9
Dividends on common stock ($0.40/share)					0		(37.8)						(37.8)
Dividends on $25 par preferred stock ($0.25/share)							0						0
Share repurchases	0		0		(6.8)		(93.2)						(100.0)
Options exercised and stock subscribed, net of shares withheld for employee taxes			0		(0.3)								(0.3)
Share-based compensation					4.9								4.9
Balance at June 30, 2020	5.6		1.0		922.8		3,510.7		(19.6)		324.5		4,745.0
Net income							189.8				0.4		190.2
Other comprehensive income									3.3				3.3
Contribution from noncontrolling interest											0.9		0.9
Dividends on common stock ($0.40/share)					0		(37.6)						(37.6)
Dividends on $25 par preferred stock ($0.25/share)							(0.1)						(0.1)
Share repurchases	(0.1)		0		(6.5)		(110.5)						(117.1)
Options exercised and stock subscribed, net of shares withheld for employee taxes			0		3.9								3.9
Share-based compensation					5.4								5.4
Balance at September 30, 2020	5.5		1.0		925.6		3,552.3		(16.3)		325.8		4,793.9
Net income							165.7				0.6		166.3
Other comprehensive income									16.7				16.7
Dividends on common stock ($0.44/share)					0		(40.1)						(40.1)
Dividends on $25 par preferred stock ($0.25/share)							0						0
Share repurchases	(0.1)		(0.1)		(26.6)		(458.3)						(485.1)
Forward contract for accelerated share repurchases					(75.0)								(75.0)
Options exercised and stock subscribed, net of shares withheld for employee taxes			0		2.7								2.7
Share-based compensation					4.2								4.2
Balance at December 31, 2020	5.4		0.9		830.9		3,219.6		0.4		326.4		4,383.6
Net income							153.0				0.4		153.4
Other comprehensive income									79.4				79.4
Dividends on common stock ($0.54/share)					0		(49.1)						(49.1)
Dividends on $25 par preferred stock ($0.25/share)							0						0
Share repurchases	0		0		(2.1)		(72.9)						(75.0)
Settlement of forward contract for accelerated share repurchases					75.0								75.0
Options exercised and stock subscribed, net of shares withheld for employee taxes			0		(3.0)								(3.0)
Share-based compensation					8.2								8.2
Balance at March 31, 2021	5.4		0.9		909.0		3,250.6		79.8		326.8		4,572.5
Net income (loss)							(378.5)				0.5		(378.0)
Other comprehensive loss									(33.1)				(33.1)
Dividends on common stock ($0.54/share)					0		(49.1)						(49.1)
Dividends on $25 par preferred stock ($0.25/share)							(0.1)						(0.1)
Options exercised and stock subscribed, net of shares withheld for employee taxes			0		(2.0)								(2.0)
Share-based compensation					6.2								6.2
Balance at June 30, 2021	$	5.4	$	0.9	$	913.2	$	2,822.9	$	46.7	$	327.3	$	4,116.4

$25 Par
Preferred
Stock

$.01 Par
Common
Stock

Additional Paid-in
Capital

Retained
Earnings

Accumulated
Other
Comprehensive
Loss

Non-
controlling
Interest
Total

Balance at December 31, 2018 $ 5.7
$ 1.0
$ 946.6
$ 3,870.6
$ (10.9 ) $ 319.7
$ 5,132.7
Net income 102.8
0.4
103.2
Other comprehensive loss (4.9 ) (4.9 )
Contribution from noncontrolling interest 1.8
1.8
Dividends on common stock ($0.36/share) —
(36.3 ) (36.3 )
Dividends on $25 par preferred stock ($0.25/share) (0.1 ) (0.1 )
Share repurchases —
—
(4.4 ) (45.9 ) (50.3 )
Options exercised and stock subscribed, net of shares withheld for employee taxes —
(2.1 ) (2.1 )
Share-based compensation 6.0
6.0
Balance at March 31, 2019 5.7
1.0
946.1
3,891.1
(15.8 ) 321.9
5,150.0
Net income 128.7
0.4
129.1
Other comprehensive loss (7.5 ) (7.5 )
Dividends on common stock ($0.36/share) —
(36.0 ) (36.0 )
Dividends on $25 par preferred stock ($0.25/share) —
—
Share repurchases (0.1 ) —
(7.3 ) (85.0 ) (92.4 )
Options exercised and stock subscribed, net of shares withheld for employee taxes —
2.3
2.3
Share-based compensation 6.0
6.0
Balance at June 30, 2019 5.6
1.0
947.1
3,898.8
(23.3 ) 322.3
5,151.5
Net income 180.2
0.4
180.6
Other comprehensive loss (7.3 ) (7.3 )
Dividends on common stock ($0.36/share) —
(35.6 ) (35.6 )
Dividends on $25 par preferred stock ($0.25/share) (0.1 ) (0.1 )
Share repurchases —
—
(7.7 ) (92.1 ) (99.8 )
Options exercised and stock subscribed, net of shares withheld for employee taxes —
2.7
2.7
Share-based compensation 5.2
5.2
Balance at September 30, 2019 5.6
1.0
947.3
3,951.2
(30.6 ) 322.7
5,197.2
Net income 127.2
0.7
127.9
Other comprehensive income 1.5
1.5
Dividends on common stock ($0.40/share) —
(38.6 ) (38.6 )
Dividends on $25 par preferred stock ($0.25/share) —
—
Share repurchases —
—
(29.0 ) (438.5 ) (467.5 )
Forward contract for accelerated share repurchases (82.5 ) (82.5 )
Options exercised and stock subscribed, net of shares withheld for employee taxes —
1.2
1.2
Share-based compensation 6.7
6.7
Balance at December 31, 2019 5.6
1.0
843.7
3,601.3
(29.1 ) 323.4
4,745.9
Net income 151.8
0.5
152.3
Other comprehensive income 3.6
3.6
Dividends on common stock ($0.40/share) —
(38.2 ) (38.2 )
Dividends on $25 par preferred stock ($0.25/share) (0.1 ) (0.1 )
Share repurchases —
(11.4 ) (182.8 ) (194.2 )
Settlement of forward contract for accelerated share repurchases 82.5
82.5
Options exercised and stock subscribed, net of shares withheld for employee taxes —
(0.1 ) (0.1 )
Share-based compensation 10.3
10.3
Balance at March 31, 2020 $ 5.6
$ 1.0
$ 925.0
$ 3,532.0
$ (25.5 ) $ 323.9
$ 4,762.0
Net income 109.7
0.6
110.3
Other comprehensive income 5.9
5.9
Dividends on common stock ($0.40/share) —
(37.8 ) (37.8 )
Dividends on $25 par preferred stock ($0.25/share) —
—
Share repurchases —
—
(6.8 ) (93.2 ) (100.0 )
Options exercised and stock subscribed, net of shares withheld for employee taxes —
(0.3 ) (0.3 )
Share-based compensation 4.9
4.9
Balance at June 30, 2020 $ 5.6
$ 1.0
$ 922.8
$ 3,510.7
$ (19.6 ) $ 324.5
$ 4,745.0

See accompanying notes to the unaudited consolidated financial statements.

Table of Contents

Kansas City Southern and Subsidiaries

Notes to the Unaudited Consolidated Financial Statements

For purposes of this report, “KCS” or the “Company” may refer to Kansas City Southern or, as the context requires, to one or more subsidiaries of Kansas City Southern.

1. Basis of Presentation

In the opinion of the management of KCS, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of normal and recurring adjustments) necessary to reflect a fair statement of the results for interim periods in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”). Pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”), certain information and note disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. These consolidated financial statements should be read in conjunction with the consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2019~~.2020. The results of operations for the three and six months ended June 30, ~~2020~~,2021, are not necessarily indicative of the results to be expected for the full year ending December 31, ~~2020~~.2021. Certain prior year amounts have been reclassified to conform to the current year presentation.

~~During the first quarter of 2020, the Company adopted Accounting Standards Update (“ASU”) 2016-13, “Financial Instruments - Credit Losses,”~~ which required the Company to measure all expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions, and reasonable supportable forecasts. This replaced the existing incurred loss model and is applicable to the measurement of credit losses on financial assets, including trade receivables. Adoption of the new standard did not have a material impact on the Company’s consolidated financial statements.

~~During the first quarter of 2020, the Company early adopted the SEC’s,~~ ~~Financial Disclosures About Guarantors and Issuers of Guaranteed Securities and Affiliates Whose Securities Collateralize a Registrant’s Securities~~ rules, which simplify the disclosure requirements related to the Company’s registered securities under Rule 3-10 of Regulation S-X. The final rule also allows for the simplified disclosure to be included within Management’s Discussion and Analysis of Financial Condition and Results of Operations.

2. ~~Restructuring Charges~~

~~COVID-19.~~ In March 2020, the World Health Organization categorized Coronavirus Disease 2019 (“COVID-19”) as a pandemic, and the President of the United States declared the COVID-19 outbreak a national emergency. The U.S. and Mexico governments have deemed rail transportation as “critical infrastructure” providing essential services during this global emergency. As a provider of critical infrastructure, Kansas City Southern has an obligation to keep employees working and freight moving. KCS remains focused on protecting the health and wellbeing of its employees and the communities in which it operates while assuring the continuity of its business operations.Merger Agreement

On March ~~27, 2020,~~21, 2021, KCS entered into a merger agreement with Canadian Pacific Railway Limited, a Canadian corporation (“CP”), under which CP agreed to acquire KCS in a stock and cash transaction valued at $275 per common share. On April 20, 2021, KCS received an unsolicited merger proposal valued at $325 per common share from Canadian National Railway Company, a Canadian corporation (“CN”), which, after negotiation with and a revised proposal from CN, was determined on May 13, 2021 by the Company’s board of directors to be a superior proposal as defined by the CP merger agreement. On May 21, 2021, KCS terminated the CP merger agreement and paid CP a merger termination fee of $700.0 million, which was recognized in merger costs on the consolidated statements of operations.

On May 21, 2021, KCS and CN entered into a merger agreement (The “Merger Agreement”), and a U.S. ~~government enacted~~affiliate of CN paid KCS $700.0 million as reimbursement for the ~~Coronavirus Aid, Relief,~~termination fee paid to CP. KCS is obligated to repay the termination fee to CN under certain circumstances, including but not limited to, if KCS were to terminate the Merger Agreement to accept a superior proposal as defined by the Merger Agreement. As a result, the $700.0 million reimbursement from CN was recognized within accounts payable and ~~Economic Security Act (“CARES Act”~~accrued liabilities on the consolidated balance sheets. In addition, KCS would be required to pay CN a termination fee of $700.0 million to terminate the Merger Agreement with CN.

Per the Merger Agreement, KCS would merge into a wholly-owned, U.S. subsidiary of CN (the “Merger”) ~~which includes modifications~~and be the surviving entity of the Merger. The ownership interest of KCS would then be deposited into a voting trust subject to a voting trust agreement (the “Voting Trust Transaction”). Each share of common stock, par value $0.01 per share, of KCS that is outstanding immediately prior to the limitation on business interest expense and net operating loss provisions, and provides a payment delay of employer payroll taxes during 2020 after the date of enactment. The Company estimates the payment of approximately $11.0 million of employer payroll taxes otherwise due in 2020Merger will be ~~delayed with 50% due~~converted into the right to receive (1) 1.129 common shares of CN and (2) $200 in cash (together, the “Merger Consideration”), and each share of preferred stock, par value $25 per share, that is outstanding immediately prior to the Merger will be converted into the right to receive $37.50 in cash.

Subject to receipt of regulatory clearances, approval by ~~December 31,~~stockholders of KCS, and other customary closing conditions, the completion of the Voting Trust Transaction is currently expected to occur in the second half of 2021, and upon completion, KCS stockholders are expected to own approximately 12.65% of CN’s outstanding common shares. KCS’s management and its board of directors will continue to manage KCS while it is in the ~~remaining 50% by December 31,~~voting trust, pursuing KCS’s independent business plan and growth strategies. Final control approval from the Surface Transportation Board (“STB”) and other applicable regulatory authorities is expected to be completed in the second half of 2022. ~~The CARES Act did not have a material impact on the Company’s consolidated financial statements.~~

~~The Company began to experience the impacts of COVID-19 on customer demand in late March 2020. Revenues for~~For the three and six months ended June 30, ~~2020 decreased by 23% as compared~~2021, KCS incurred $720.8 million and $740.1 million, respectively, of merger-related costs, consisting of the $700.0 million termination fee paid to CP, and bankers’ and legal fees. These merger-related costs were recognized in merger costs in the consolidated statements of operations.

On June 8, 2021, KCS entered into a letter waiver with lenders to the ~~same period in 2019, primarily due~~KCS revolving credit facility to ~~an overall decline in demand due to COVID-19. As revenues declined,~~waive the Company responded quickly and implemented cost-saving measures and accelerated precision scheduled railroading (“PSR”) initiatives by further consolidating trains, which increased train length and reduced crew costs. In Juneevents of ~~2020,~~default that would occur under the Company offered a voluntary separation program, which resulted in a restructuring charge of $9.2 million for the three months ended June 30, 2020, consisting of severance and benefit costs that will be paid out in either lump-sum payments or over a six to twelve-month period. Approximately 6% of management employees were irrevocably accepted into the voluntary separation program.

~~PSR.~~ During 2019, the Company began implementing principles of PSR, which focus on providing reliable customer service, facilitating growth, improving asset utilization, and improving the cost profile of the Company. AsKCS revolving credit facility as a result of the ~~PSR initiatives in 2019, management approved 4 separate restructuring plans~~changes of control that ~~totaled $168.8 million, including restructuring plans of $67.5 million and $51.0 million in the first and second quarters of 2019, respectively. The restructuring plans~~ ~~were substantially completed in 2019.~~

During the first quarter of 2020, the Company purchased 91 locomotives for $78.2 million that were part of 2 existing leases. Of the 91 locomotives, 13 were impaired during the fourth quarter of 2019. The purchasewould arise upon consummation of the ~~impaired lease locomotives resulted in $6.0 million~~Voting Trust Transaction and as a result of ~~make-whole payments recorded as incremental restructuring charges in~~CN obtaining control of KCS following final approval of the ~~first quarter of 2020. During~~transaction by the ~~second~~STB.

Table of Contents

Kansas City Southern and Subsidiaries

Notes to the Unaudited Consolidated Financial Statements—(Continued)

~~quarter of 2020, the Company recognized approximately $1.3 million of restructuring charges from the disposal of held for sale equipment.~~

3. Revenue

Disaggregation of Revenue

The following table presents revenues disaggregated by the major commodity groups as well as the product types included within the major commodity groups (in millions). The Company believes disaggregation by product type best depicts how cash flows are affected by economic factors. See Note 12 for revenues by geographical area.

Three Months Ended Six Months Ended
June 30, June 30,
2020 2019 2020 2019
Chemical & Petroleum
Chemicals $ 52.2
$ 61.6
$ 114.7
$ 122.1
Petroleum 70.6
90.0
166.4
164.3
Plastics 35.7
36.7
76.0
70.5
Total 158.5
188.3
357.1
356.9

Industrial & Consumer Products
Forest Products 57.8
63.2
126.7
129.6
Metals & Scrap 40.4
59.9
102.7
116.9
Other 22.4
27.2
50.2
53.6
Total 120.6
150.3
279.6
300.1

Agriculture & Minerals
Grain 64.1
73.2
141.9
145.9
Food Products 39.0
34.7
81.7
70.4
Ores & Minerals 5.3
5.8
11.1
12.3
Stone, Clay & Glass 6.0
8.7
14.2
16.7
Total 114.4
122.4
248.9
245.3

Energy
Utility Coal 23.2
27.5
46.8
60.0
Coal & Petroleum Coke 9.5
10.1
21.1
20.6
Frac Sand 1.7
6.7
5.5
14.7
Crude Oil 4.9
9.6
22.2
23.2
Total 39.3
53.9
95.6
118.5

Intermodal 63.5
92.6
152.2
172.5

Automotive 15.6
70.9
69.5
128.5

Total Freight Revenues 511.9
678.4
1,202.9
1,321.8

Other Revenue 36.0
35.6
76.7
67.0

Total Revenues $ 547.9
$ 714.0
$ 1,279.6
$ 1,388.8


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2021		2020		2021		2020
Chemical & Petroleum
Chemicals	$	64.8	$	52.2	$	125.4	$	114.7
Petroleum	132.9		70.6		268.1		166.4
Plastics	34.8		35.7		70.3		76.0
Total	232.5		158.5		463.8		357.1

Industrial & Consumer Products
Forest Products	62.6		57.8		120.3		126.7
Metals & Scrap	51.0		40.4		97.3		102.7
Other	31.0		22.4		61.0		50.2
Total	144.6		120.6		278.6		279.6

Agriculture & Minerals
Grain	88.9		64.1		163.6		141.9
Food Products	36.6		39.0		73.6		81.7
Ores & Minerals	6.1		5.3		11.3		11.1
Stone, Clay & Glass	8.3		6.0		15.8		14.2
Total	139.9		114.4		264.3		248.9

Energy
Utility Coal	31.2		23.2		62.9		46.8
Coal & Petroleum Coke	12.0		9.5		22.4		21.1
Frac Sand	4.2		1.7		7.6		5.5
Crude Oil	7.1		4.9		19.1		22.2
Total	54.5		39.3		112.0		95.6

Intermodal	91.1		63.5		172.4		152.2

Automotive	49.4		15.6		93.5		69.5

Total Freight Revenues	712.0		511.9		1,384.6		1,202.9

Other Revenue	37.5		36.0		70.9		76.7

Total Revenues	$	749.5	$	547.9	$	1,455.5	$	1,279.6

Contract Balances

The amount of revenue recognized in the second quarter of ~~2020~~2021 from performance obligations partially satisfied in previous periods was ~~$18.2~~$27.0 million. The performance obligations that were unsatisfied or partially satisfied as of June 30, ~~2020,~~2021, were ~~$17.7~~$28.5 million, which represents in-transit shipments that are fully satisfied the following month.

A receivable is any unconditional right to consideration, and is recognized as shipments have been completed and the relating performance obligation has been fully satisfied. At June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, the accounts receivable, net balance was ~~$222.8~~$298.9 million and ~~$274.2~~$247.1 million, respectively. Contract assets represent a conditional right to consideration in exchange for goods or services. The Company did not have any contract assets at June 30, ~~2020~~2021 and December 31, ~~2019.~~

~~Table of Contents~~

~~Kansas City Southern and Subsidiaries~~

~~Notes to the Unaudited Consolidated Financial Statements—(Continued)~~

2020.

Contract liabilities represent consideration received in advance from customers, and are recognized as revenue over time as the relating performance obligation is satisfied. The amount of revenue recognized in the second quarter of ~~2020~~2021 that was included in the opening contract liability balance was ~~$7.8~~$8.3 million. The Company has recognized contract liabilities within the accounts payable and accrued liabilities financial statement caption on the balance sheet. These are considered current liabilities as they will be settled in less than 12 months.

Table of Contents

Kansas City Southern and Subsidiaries

Notes to the Unaudited Consolidated Financial Statements—(Continued)

The following tables summarize the changes in contract liabilities (in millions):


Contract liabilities	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2021		2020		2021		2020
Beginning balance	$	18.8	$	21.1	$	29.9	$	30.5
Revenue recognized that was included in the contract liability balance at the beginning of the period	(8.3)		(7.8)		(20.1)		(17.9)
Increases due to consideration received, excluding amounts recognized as revenue during the period	9.2		2.8		9.9		3.5
Ending balance	$	19.7	$	16.1	$	19.7	$	16.1

Contract liabilities Three Months Ended Six Months Ended
June 30, June 30,
2020 2019 2020 2019
Beginning balance $ 21.1
$ 22.3
$ 30.5
$ 32.4
Revenue recognized that was included in the contract liability balance at the beginning of the period (7.8 ) (10.1 ) (17.9 ) (24.2 )
Increases due to consideration received, excluding amounts recognized as revenue during the period 2.8
6.8
3.5
10.8
Ending balance $ 16.1
$ 19.0
$ 16.1
$ 19.0

4. Earnings (Loss) Per Share Data

Basic earnings (loss) per common share is computed by dividing net income (loss) available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted earnings (loss) per share adjusts basic earnings (loss) 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 stock option and performance award plans.

The following table reconciles the basic earnings (loss) per share computation to the diluted earnings (loss) per share computation (in millions, except share and per share amounts):


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2021		2020		2021		2020
Net income (loss) available to common stockholders for purposes of computing basic and diluted earnings (loss) per share	$	(378.6)	$	109.7	$	(225.6)	$	261.4
Weighted-average number of shares outstanding (in thousands):
Basic shares	90,767		94,476		90,762		95,070
Effect of dilution	0		417		0		464
Diluted shares	90,767		94,893		90,762		95,534
Earnings (loss) per share:
Basic earnings (loss) per share	$	(4.17)	$	1.16	$	(2.48)	$	2.75
Diluted earnings (loss) per share	$	(4.17)	$	1.16	$	(2.48)	$	2.74

Three Months Ended Six Months Ended
June 30, June 30,
2020 2019 2020 2019
Net income available to common stockholders for purposes of computing basic and diluted earnings per share $ 109.7
$ 128.7
$ 261.4
$ 231.4
Weighted-average number of shares outstanding (in thousands):

Basic shares 94,476
100,028
95,070
100,264
Effect of dilution 417
394
464
405
Diluted shares 94,893
100,422
95,534
100,669
Earnings per share:
Basic earnings per share $ 1.16
$ 1.29
$ 2.75
$ 2.31
Diluted earnings per share $ 1.16
$ 1.28
$ 2.74
$ 2.30

Potentially dilutive shares excluded from the calculation (in thousands):


Stock options excluded as their inclusion would be anti-dilutive			584						72						558						72

Stock options excluded as their inclusion would be anti-dilutive 72
134
72
212

For the three and six months ended June 30, 2021, 584,416 and 557,804 shares, respectively, were excluded from the computation of diluted shares because the impact would have been anti-dilutive due to the loss reported during the periods.

Table of Contents

Kansas City Southern and Subsidiaries

Notes to the Unaudited Consolidated Financial Statements—(Continued)

5. Property and Equipment (including Concession Assets)

Property and equipment, including concession assets, and related accumulated depreciation and amortization are summarized below (in millions):

June 30,
2020 December 31,
2019
Land $ 225.6
$ 224.9
Concession land rights 141.1
141.1
Road property 7,997.6
7,962.1
Equipment 2,757.5
2,652.6
Technology and other 352.2
345.1
Construction in progress 228.5
170.2
Total property 11,702.5
11,496.0
Accumulated depreciation and amortization 2,755.1
2,689.7
Property and equipment (including concession assets), net $ 8,947.4
$ 8,806.3


	June 30, 2021		December 31, 2020
Land	$	227.5	$	227.5
Concession land rights	141.1		141.1
Road property	8,263.0		8,174.4
Equipment	2,804.7		2,764.6
Technology and other	379.9		372.6
Construction in progress	304.6		221.9
Total property	12,120.8		11,902.1
Accumulated depreciation and amortization	2,981.8		2,904.3
Property and equipment (including concession assets), net	$	9,139.0	$	8,997.8

Concession assets, net of accumulated amortization of ~~$671.6~~$704.3 million and ~~$678.1~~$709.7 million, totaled ~~$2,355.1~~$2,416.6 million and ~~$2,335.5~~$2,383.5 million at June 30, ~~2020~~2021 and December 31, ~~2019~~2020, respectively.

~~, respectively.~~

6. Fair Value Measurements

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 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 carrying value of the Company’s debt was ~~$3,781.7~~$3,780.2 million and ~~$3,246.0~~$3,770.8 million at June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, 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 Level 2 in the fair value hierarchy.

The fair value of the Company’s financial instruments is presented in the following table (in millions):


	June 30, 2021		December 31, 2020
	Level 2		Level 2
Assets

Treasury lock agreements	$	92.8	$	35.6
Liabilities
Debt instruments	4,299.4		4,368.6
Foreign currency derivative instruments	2.2		0

June 30, 2020 December 31, 2019
Level 2 Level 2
Assets
Foreign currency derivative instruments $ 4.2
$ 2.5
Treasury lock agreements 12.8
—
Liabilities
Debt instruments 4,356.7
3,535.7

7. 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.

Table of Contents

Kansas City Southern and Subsidiaries

Notes to the Unaudited Consolidated Financial Statements—(Continued)

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

~~Table of Contents~~

~~Kansas City Southern and Subsidiaries~~

~~Notes to the Unaudited Consolidated Financial Statements—(Continued)~~

have an established banking relationship with the Company. As of June 30, ~~2020,~~2021, the Company did not expect any losses as a result of default of its counterparties.

Interest Rate Derivative Instruments. In March 2020, the Company executed 3 30-year treasury lock agreements with an aggregate notional value of $400.0 million and a weighted average interest rate of 1.45%, and in November 2020, the Company executed 3 30-year treasury lock agreements with an aggregate notional value of $250.0 million and a weighted-average interest rate of 1.78%. 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 $444.7 million principal amount of 3.00% senior notes due May 15, 2023 (the “3.00% Senior Notes”) and the $200.0 million principal amount of 3.85% senior notes due November 15, 2023 (the “3.85% Senior Notes”). The Company has designated the treasury locks as cash flow hedges and recorded unrealized gains and losses in accumulated other comprehensive ~~loss.~~income (loss). For the three and six months ended June 30, 2021, the unrealized gain of $92.8 million recognized in accumulated other comprehensive income decreased by $42.9 million and increased by $57.2 million, respectively, from the balances at March 31, 2021 and December 31, 2020, reflecting a change in the value of the treasury locks as U.S. treasury rates rose during the first quarter of 2021, and then fell during the second quarter of 2021. Upon settlement, the unrealized gain or loss in accumulated other comprehensive income (loss) 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.~~U.S dollar. This revaluation creates fluctuations in the Company’s Mexican income tax expense in the consolidated statements of operations and the amount of income taxes paid in Mexico. The Company also has net monetary assets denominated in Mexican pesos that are subject to periodic re-measurement and settlement that create fluctuations in foreign currency gains and losses in the consolidated statements of operations. The Company hedges its net exposure to ~~this cash tax risk~~foreign currency fluctuations in earnings by entering into foreign currency forward ~~contracts and foreign currency option contracts known as zero-cost collars.~~

contracts. The foreign currency forward contracts involve the Company’s ~~purchase of~~agreement to buy or sell pesos at an agreed-upon ~~weighted-average~~ exchange rate ~~to each U.S dollar. The zero-cost collars involve~~on a future date.

Below is a summary of the Company’s ~~purchase~~2021 and 2020 foreign currency derivative contracts (amounts in millions, except Ps./USD):


Foreign currency forward contracts
	Contracts to sell Ps./receive USD						Offsetting contracts to purchase Ps./pay USD
	Notional amount		Notional amount		Weighted-average exchange rate (in Ps./USD)		Notional amount		Notional amount		Weighted-average exchange rate (in Ps./USD)		Cash received/(paid) on settlement
Contracts executed in 2021 and outstanding	$	100.0	Ps.	2,088.1	Ps.	20.9	—		—		—		—
Contracts executed in 2020 and settled in 2020	$	75.0	Ps.	1,555.5	Ps.	20.7	$	78.0	Ps.	1,555.5	Ps.	20.0	$	(2.9)
	Contracts to purchase Ps./pay USD						Offsetting contracts to sell Ps./receive USD
	Notional amount		Notional amount		Weighted-average exchange rate (in Ps./USD)		Notional amount		Notional amount		Weighted-average exchange rate (in Ps./USD)		Cash received/(paid) on settlement

Contracts executed in 2021 and settled in 2021	$	100.0	Ps.	1,993.5	Ps.	19.9	$	98.1	Ps.	1,993.5	Ps.	20.3	$	(1.9)
Contracts executed in 2020 and settled in 2020 (i)	$	555.0	Ps.	11,254.3	Ps.	20.3	$	534.3	Ps.	11,254.3	Ps.	21.1	$	(20.7)
Contracts executed in 2019 and settled in 2020 (ii)	$	105.0	Ps.	2,041.2	Ps.	19.4	$	108.6	Ps.	2,041.2	Ps.	18.8	$	3.6

(i) During the first half of ~~a Mexican peso call option~~2020, the Company settled $430.0 million of these forward contracts, resulting in cash paid of $32.6 million.

(ii) During the first half of 2020, the Company settled $105.0 million of these forward contracts, resulting in cash received of $3.6 million.

Table of ~~a Mexican peso put option,~~Contents

Kansas City Southern and Subsidiaries

Notes to the Unaudited Consolidated Financial Statements—(Continued)

value in foreign exchange gain (loss) within the consolidated statements of operations. The cash flows associated with ~~equivalent U.S. dollar notional amounts for each option and no net~~these instruments is classified as an operating activity within the consolidated statements of cash ~~premium paid by the Company.~~ flows.

Offsetting. The Company’s treasury lock agreements and foreign currency forward ~~and zero-cost collar~~ contracts are executed with counterparties in the U.S. and are governed by International Swaps and Derivatives Association agreements that include standard netting arrangements. Asset and liability positions from contracts with the same counterparty are net settled upon maturity/expiration and presented on a net basis in the consolidated balance sheets prior to settlement.

~~Below is a summary~~ There was no offsetting of ~~the Company’s 2020 and 2019 foreign currency~~ derivative ~~contracts~~ ~~(amounts~~assets or liabilities 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)

Notional amount

Notional amount

Weighted-average exchange rate
(in Ps./USD)
Cash received/(paid) on settlement
Contracts executed in 2020 and outstanding $ 125.0
Ps. 3,002.6
Ps. 24.0
—
—
—
—
Contracts executed in 2020 and settled in 2020 $ 430.0
Ps. 8,251.7
Ps. 19.2
$ 397.4
Ps. 8,251.7
Ps. 20.8
$ (32.6 )
Contracts executed in 2019 and settled in 2020 $ 105.0
Ps. 2,041.2
Ps. 19.4
$ 108.6
Ps. 2,041.2
Ps. 18.8
$ 3.6
Contracts executed in 2019 and settled in 2019 (i) $ 400.0
Ps. 7,892.5
Ps. 19.7
$ 410.7
Ps. 7,892.5
Ps. 19.2
$ 10.7
Contracts executed in 2018 and settled in 2019 (i) $ 20.0
Ps. 410.9
Ps. 20.5
$ 20.9
Ps. 410.9
Ps. 19.6
$ 0.9

Foreign currency zero-cost collar contracts
Notional amount Cash received/(paid) on settlement
Contracts executed in 2018 and settled in 2019 (i) $ 120.0
$ 0.3

(i) During the first half of 2019, the Company settled $120.0 million and $240.0 million of zero-cost collar contracts and forward contracts, respectively, resulting in cash received of $0.3 million and $4.5 million.

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~~balance sheets as of ~~income. The cash flows associated with these instruments is classified as an operating activity within the consolidated statements of cash flows.~~

~~Table of Contents~~

~~Kansas City Southern~~June 30, 2021 and ~~Subsidiaries~~

~~Notes to the Unaudited Consolidated Financial Statements—(Continued)~~

December 31, 2020.

The following tables present the fair value of derivative instruments included in the Consolidated Balance Sheets (in millions):


	Derivative Assets
	Balance Sheet Location	June 30, 2021		December 31, 2020
Derivatives designated as hedging instruments:
Treasury lock agreements	Other assets	$	92.8	$	35.6
Total derivatives designated as hedging instruments		92.8		35.6




Total derivative assets		$	92.8	$	35.6

Derivative Assets
Balance Sheet Location June 30,
2020 December 31, 2019
Derivatives designated as hedging instruments:
Treasury lock agreements Other assets $ 12.8
$ —
Total derivatives designated as hedging instruments 12.8
—
Derivatives not designated as hedging instruments:
Foreign currency forward contracts Other current assets 4.2
2.5
Total derivatives not designated as hedging instruments 4.2
2.5
Total derivative assets $ 17.0
$ 2.5

~~The following tables summarize the gross and net fair value of derivative assets and liabilities (in millions~~):

Offsetting of Derivative Assets
As of June 30, 2020 Gross Assets Gross Liabilities Net Amounts Presented in the Consolidated Balance Sheets
Derivatives subject to a master netting arrangement or similar agreement $ 5.0
$ (0.8 ) $ 4.2
As of December 31, 2019
Derivatives subject to a master netting arrangement or similar agreement $ 2.5
$ —
$ 2.5

~~Table of Contents~~

~~Kansas City Southern and Subsidiaries~~

~~Notes to the Unaudited Consolidated Financial Statements—(Continued)~~


	Derivative Liabilities
	Balance Sheet Location	June 30, 2021		December 31, 2020




Derivatives not designated as hedging instruments:
Foreign currency forward contracts	Accounts payable and accrued liabilities	$	2.2	$	0

Total derivatives not designated as hedging instruments		2.2		0
Total derivative liabilities		$	2.2	$	0

The following table presents the effects of derivative instruments on the Consolidated Statements of ~~Income~~Operations and Consolidated Statements of Comprehensive Income (Loss) for the three months ended June 30 (in millions):


Derivatives in Cash Flow Hedging Relationships	Amount of Gain/(Loss) Recognized in OCI on Derivative					Location of Gain/(Loss) Reclassified from AOCI into Income	Amount of Gain/(Loss) Reclassified from AOCI into Income					Derivatives in Cash Flow Hedging Relationships	Amount of Gain/(Loss) Recognized in OCI on Derivative				Location of Gain/(Loss) Reclassified from AOCI into Income	Amount of Gain/(Loss) Reclassified from AOCI into Income
	2020		2019				2020			2019

													2021		2020			2021		2020
Treasury lock agreements	$	6.8	$	(10.0	)	Interest expense	$	(0.6	)	$	—	Treasury lock agreements	$	(42.9)	$	6.8	Interest expense	$	(0.6)	$	(0.6)
Total	$	6.8	$	(10.0	)		$	(0.6	)	$	—	Total	$	(42.9)	$	6.8		$	(0.6)	$	(0.6)


Derivatives Not Designated as Hedging Instruments	Location of Gain/(Loss) Recognized in Income on Derivative	Amount of Gain/(Loss) Recognized in Income on Derivative				Derivatives Not Designated as Hedging Instruments		Location of Gain/(Loss) Recognized in Income on Derivative			Amount of Gain/(Loss) Recognized in Income on Derivative
		2020		2019

											2021				2020
Foreign currency forward contracts	Foreign exchange gain (loss)	$	6.4	$	7.3	Foreign currency forward contracts	Foreign exchange gain (loss)		$	(1.7)			$	6.4

Total		$	6.4	$	7.3	Total					$	(1.7)			$	6.4

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Kansas City Southern and Subsidiaries

Notes to the Unaudited Consolidated Financial Statements—(Continued)

Derivatives in Cash Flow Hedging Relationships Amount of Gain/(Loss) Recognized in OCI on Derivative Location of Gain/(Loss) Reclassified from AOCI into Income Amount of Gain/(Loss) Reclassified from AOCI into Income
2020 2019 2020 2019
Treasury lock agreements $ 12.8
$ (16.8 ) Interest expense $ (1.2 ) $ —
Total $ 12.8
$ (16.8 ) $ (1.2 ) $ —


Derivatives in Cash Flow Hedging Relationships	Amount of Gain/(Loss) Recognized in OCI on Derivative				Location of Gain/(Loss) Reclassified from AOCI into Income	Amount of Gain/(Loss) Reclassified from AOCI into Income


	2021		2020			2021		2020
Treasury lock agreements	$	57.2	$	12.8	Interest expense	$	(1.2)	$	(1.2)
Total	$	57.2	$	12.8		$	(1.2)	$	(1.2)


Derivatives Not Designated as Hedging Instruments		Location of Gain/(Loss) Recognized in Income on Derivative			Amount of Gain/(Loss) Recognized in Income on Derivative


					2021				2020
Foreign currency forward contracts	Foreign exchange gain (loss)		$	(4.1)			$	(27.3)

Total					$	(4.1)			$	(27.3)

Derivatives Not Designated as Hedging Instruments Location of Gain/(Loss) Recognized in Income on Derivative Amount of Gain/(Loss) Recognized in Income on Derivative
2020 2019
Foreign currency forward contracts Foreign exchange gain (loss) $ (27.3 ) $ 10.9
Total $ (27.3 ) $ 10.9

See Note 6, Fair Value Measurements, for the determination of the fair values of derivatives.

8. Short-Term Borrowings

Commercial Paper. The Company’s commercial paper program generally serves as the primary means of short-term funding. As of June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, KCS had 0 commercial paper outstanding. For the six months ended June 30, ~~2020~~2021 and ~~2019,~~2020, any commercial paper borrowings were outstanding for less than 90 days and the related activity is presented on a net basis in the consolidated statements of cash flows.

9. ~~Long-Term Debt~~

~~Senior Notes~~

~~On April 22, 2020, KCS issued $550.0 million principal amount of senior unsecured notes due~~ ~~May 1, 2050~~ (the “3.50% Senior Notes”), which bear interest semiannually at a fixed annual rate of 3.50%. The 3.50% Senior Notes were issued at a discount to par value, resulting in a $4.4 million discount and a yield to maturity of 3.543%. The Company intends to use the net proceeds from the offering for general corporate purposes, including to repurchase shares of KCS’s common stock. However, given the uncertainties of the impacts of COVID-19, the Company currently retains the net proceeds from the offering as cash. The 3.50% 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, plus accrued interest thereon to, but excluding the redemption date.

~~Table of Contents~~

~~Kansas City Southern and Subsidiaries~~

~~Notes to the Unaudited Consolidated Financial Statements—(Continued)~~

The 3.50% Senior Notes include certain covenants which are customary for this type of debt instrument issued by borrowers with similar credit ratings. The 3.50% Senior Notes are unsecured senior obligations of KCS and are unconditionally guaranteed, jointly and severally, on an unsecured senior basis by each current and future domestic subsidiary of KCS that from time to time guarantees the KCS revolving credit facility or any other debt of KCS or KCS’s significant subsidiaries that is a guarantor.

~~10.~~ Share Repurchases

In November ~~2019,~~2020, the Company announced a new common share repurchase program authorizing the Company to purchase up to ~~$2.0~~$3.0 billion of its outstanding shares of common stock through December 31, ~~2022~~2023 (the ~~“2019~~“2020 Program”). Share repurchases may be made in the open market, through privately negotiated transactions, or through accelerated share repurchase (“ASR”) transactions. The 2020 Program replaced KCS’s $2.0 billion common share repurchase program announced on November 12, 2019 (the “2019 Program”).

Under an ASR agreement, the Company pays a specified amount to a financial institution and receives an initial delivery of shares. The final number and total cost of shares repurchased isare then based on the volume-weighted average price of the Company’s common stock during the term of the agreements. 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 fourth quarter of ~~2019,~~2020, the Company paid ~~$550.0~~$500.0 million ~~under~~for 2 ASR agreements under the 2019 Program and received an aggregate initial delivery of shares, which represented approximately 85% of the total shares to be received under the agreements. The final number and total cost of shares repurchased was then based on the volume-weighted-average price of the Company’s common stock during the term of the agreements, which were settled in ~~March 2020.~~January 2021. The terms of the ASR agreements, structured as outlined above, were as follows:

Third Party Institution Agreement Date Settlement Date
Total Amount of Agreement (in millions)
Initial Shares Delivered
Fair Market Value of Initial Shares
(in millions)
Additional Shares Delivered
Fair Market Value of Additional Shares
(in millions)
Total Shares Delivered Weighted-Average Price Per Share
ASR Agreement #1 November 2019 March 2020 $ 275.0
1,511,380 $ 233.75
224,244
$ 41.25
1,735,624 $ 158.44
ASR Agreement #2 November 2019 March 2020 $ 275.0
1,511,380 $ 233.75
221,692
$ 41.25
1,733,072 $ 158.68
Total $ 550.0
3,022,760
$ 467.5
445,936
$ 82.5
3,468,696
$ 158.56


Third Party Institution	Agreement Date	Settlement Date	Total Amount of Agreement (in millions)		Initial Shares Delivered	Fair Market Value of Initial Shares (in millions)		Additional Shares Delivered	Fair Market Value of Additional Shares (in millions)		Total Shares Delivered	Weighted-Average Price Per Share
ASR Agreement #1	October 2020	January 2021	$	250.0	1,187,084	$	212.5	116,314	$	37.5	1,303,398	$	191.81
ASR Agreement #2	October 2020	January 2021	$	250.0	1,187,084	$	212.5	117,088	$	37.5	1,304,172	$	191.69
Total			$	500.0	2,374,168	$	425.0	233,402	$	75.0	2,607,570	$	191.75

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Kansas City Southern and Subsidiaries

Notes to the Unaudited Consolidated Financial Statements—(Continued)

During the three months ended ~~June 30, 2020,~~March 31, 2021, KCS ~~repurchased 699,123~~received 233,402 shares of common stock as final settlement of the forward contracts totaling $75.0 million under the ASR agreements entered into during October 2020 under the 2019 Program. The final weighted-average price per share of the shares repurchased under these ASR agreements was $191.75. The excess of repurchase price over par value was allocated between additional paid-in capital and retained earnings.

During the three months ended March 31, 2021, KCS repurchased 657 shares of its $25 par preferred stock for ~~$100.0~~less than $0.1 million at an average price of $143.05 per share. During the six months ended June 30, 2020, KCS repurchased 1,990,758 shares of common stock for $294.2 million, which includes shares delivered to settle the ASR agreements noted above. Since inception of the 2019 Program, KCS has repurchased 5,013,518 shares of common stock for $761.7 million at an average price of $151.94$37.79 per share. The excess of repurchase price over par value iswas allocated between ~~additional paid-in capital~~paid-in-capital and retained earnings.

The Company terminated its share repurchase program upon entering into its initial merger agreement with CP in March 2021.

10. Refundable Mexican Value Added Tax

Kansas City Southern de México, S.A. de C.V. (“KCSM”) is not required to charge its customers value added tax (“VAT”) on international import or export transportation services, resulting in KCSM paying more VAT on its expenses than it collects from customers. These excess VAT payments are refundable by the Mexican government. Prior to 2019, KCSM could offset its monthly refundable VAT balance with other tax obligations. In January 2019, Mexico tax reform eliminated the ability to offset other tax obligations with refundable VAT. Since January 2019, the Company has generated a refundable VAT balance and filed refund claims with the Servicio de Administración Tributaria (the “SAT”) that are still under review. KCSM has prior favorable Mexican court decisions and a legal opinion supporting its right under Mexican law to recover the refundable VAT balance from the Mexican government and believes the VAT to be fully collectible. As of June 30, 2021 and December 31, 2020, the KCSM refundable VAT balance was $138.9 million and $103.1 million, respectively. Refundable VAT is classified as a long-term asset on the consolidated balance sheets as a result of the prolonged refund claim process.

11. Commitments and Contingencies

Concession Duty. Under ~~Kansas City Southern de México, S.A. de C.V. (“KCSM”)’s~~KCSM’s 50-year railroad concession from the Mexican government (the “Concession”), which could expire in 2047 unless extended, KCSM pays annual concession duty expense of 1.25% of gross revenues. For the three and six months ended June 30, ~~2020~~,2021, the concession duty expense, which is recorded within materials and other in operating expenses, was ~~$3.5~~$4.9 million and ~~$8.3~~$9.4 million, respectively, compared to ~~$4.9~~$3.5 million and ~~$9.1~~$8.3 million, for the same periods in ~~2019.~~2020.

Litigation. Occasionally, the Company is a party to various legal proceedings, regulatory examinations, investigations,

administrative actions, and other legal matters, arising for the most part in the ordinary course of business, 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. The outcome of litigation and other legal matters is always uncertain. KCS believes it has valid defenses to the legal matters currently pending against it, is defending itself vigorously, and has recorded accruals determined in accordance with U.S. GAAP, where appropriate. In making a determination regarding accruals, using available information, KCS evaluates the likelihood of an unfavorable outcome in legal or regulatory proceedings to which it is a party to and records a loss contingency when it is probable a liability has been incurred and the amount of the loss can be reasonably estimated.

~~Table of Contents~~

~~Kansas City Southern and Subsidiaries~~

~~Notes to the Unaudited Consolidated Financial Statements—(Continued)~~

These subjective determinations are based on the status of such legal or regulatory proceedings, the merits of KCS’s defenses and consultation with legal counsel. Actual outcomes of these legal and regulatory proceedings may materially differ from the current estimates. It is possible that resolution of one or more of the legal matters currently pending or threatened could result in losses material to KCS’s consolidated results of operations, liquidity or financial condition.

During the second quarter 2021, several shareholder lawsuits were filed against the Company, naming the Company and members of its board of directors or CN and a wholly-owned subsidiary of CN as defendants. These claims allege, among other things, that the defendants caused a materially incomplete and misleading registration statement on Form F-4 relating to the proposed merger to be filed with the SEC in violation of Section 14(a) and Section 20(a) of the Exchange Act and rules and regulations promulgated thereunder. The complaints seek, among other relief, an injunction preventing the defendants from proceeding with, consummating, or closing the Merger unless and until purportedly omitted information is disclosed; rescission of the Merger if consummated or awarding of rescissory damages; unspecified further damages; and an award of costs, including attorneys’ and experts’ fees. The Company believes the claims asserted in the lawsuits are without merit.

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 Clean Water Act, and the Hazardous Materials Transportation Act. CERCLA can impose joint and several

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Kansas City Southern and Subsidiaries

Notes to the Unaudited Consolidated Financial Statements—(Continued)

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 June 30, ~~2020~~,2021, is based on an updated actuarial study of personal injury claims through April 30, ~~2020,~~2021, and review of the last two months’ experience. Although these estimates cannot be predicted with certainty, management believes that the ultimate outcome will not have a material adverse effect on the Company’s consolidated financial statements.

Tax Contingencies. Tax returns filed in the U.S. for periods after 2015 and in Mexico for periods after 2012 remain open to examination by the taxing ~~authorities. During the second quarter of 2020, the~~authority. The Internal Revenue Service (“IRS”) has initiated an examination of the 2017 deemed mandatory repatriation tax included in the 2017 U.S. federal tax ~~return. In 2018, the IRS initiated~~return and an examination of the 2016 U.S. federal tax return. ~~In 2019, the Servicio de Administración Tributaria (the “SAT”),~~The SAT, the Mexican equivalent of the IRS has initiated ~~an audit~~examinations of the KCSM 2013 ~~and 2014~~through 2020 Mexico tax returns. The Company does not expect that these examinations will have a material impact on the consolidated financial statements. During the first quarter of 2017, the Company received audit assessments from the SAT for the KCSM 2009 and 2010 Mexico tax returns. In 2017, the Company commenced administrative actions with the SAT. During the first quarter of 2018, the audit assessments were nullified by the SAT. In the third quarter of 2018, the SAT issued new assessments and the Company filed administrative appeals with the SAT. The Company believes that it has strong legal arguments in its favor and it is more likely than not that it will prevail in any challenge of the assessments.

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

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~~Kansas City Southern and Subsidiaries~~

~~Notes to the Unaudited Consolidated Financial Statements—(Continued)~~

the SAT’s nullification action. In December 2016, KCSM was notified of a resolution 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. In February 2018, the Supreme Court decided not to hear the case and remanded the SAT’s appeal back to the circuit court for a decision. In July 2018, the circuit court ordered the tax court to consider certain arguments made by the SAT in the original court proceeding that were not addressed in the tax court’s December 2016 resolution. In October 2018, the tax court issued a decision confirming the 2008 Ruling. The SAT has appealed this 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 the 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.

Contractual Agreements. In the normal course of business, the Company enters into various contractual agreements related to commercial arrangements and the use of other railroads’ or governmental entities’ infrastructure needed for the operations of the business. The Company is involved or may become involved in certain disputes involving transportation rates, product loss or damage, charges, and interpretations related to these agreements. While the outcome of these matters cannot be predicted with certainty, the Company believes that, when resolved, these disputes will not have a material effect on its consolidated financial statements.

Credit Risk. The Company continually monitors risks related to economic changes and certain customer receivables concentrations. Significant changes in customer concentration or payment terms, deterioration of customer creditworthiness, bankruptcy, insolvency or liquidation of a customer, 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 recorded provisions for ~~uncollectability~~credit losses based on its best estimate at June 30, ~~2020.~~2021.

Panama Canal Railway Company (“PCRC”) Guarantees and Indemnities. At June 30, ~~2020,~~2021, the Company had issued and outstanding $5.6 million under a standby letter of credit to fulfill its obligation to fund 50 percent of the debt service reserve and

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Kansas City Southern and Subsidiaries

Notes to the Unaudited Consolidated Financial Statements—(Continued)

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.

12. Geographic Information

The Company strategically manages its rail operations as 1 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):


	Three Months Ended				Six Months Ended
	June 30,				June 30,
Revenues	2021		2020		2021		2020
U.S.	$	384.1	$	304.4	$	751.0	$	684.3
Mexico	365.4		243.5		704.5		595.3
Total revenues	$	749.5	$	547.9	$	1,455.5	$	1,279.6

Property and equipment (including concession assets), net					June 30, 2021		December 31, 2020
U.S.					$	5,703.6	$	5,594.6
Mexico					3,435.4		3,403.2
Total property and equipment (including concession assets), net					$	9,139.0	$	8,997.8

Three Months Ended Six Months Ended
June 30, June 30,
Revenues 2020 2019 2020 2019
U.S. $ 304.4
$ 363.8
$ 684.3
$ 729.4
Mexico 243.5
350.2
595.3
659.4
Total revenues $ 547.9
$ 714.0
$ 1,279.6
$ 1,388.8

Property and equipment (including concession assets), net June 30,
2020 December 31,
2019
U.S. $ 5,575.0
$ 5,435.9
Mexico 3,372.4
3,370.4
Total property and equipment (including concession assets), net $ 8,947.4
$ 8,806.3

13. Subsequent Event

Foreign Currency Hedging. During July 2021, the Company entered into a foreign currency forward contract with a notional amount of $20.0 million, which matures in January 2022. This contract obligates the Company to sell a total of Ps.407.6 million at a weighted-average exchange rate of Ps.20.4 to each U.S. dollar.

The Company has not designated this foreign currency derivative instrument as a hedging instrument for accounting purposes. The Company will measure the foreign currency derivative instrument at fair value each period and will recognize any change in fair value in foreign exchange gain (loss) within the consolidated statements of operations.

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~~Item 2.~~	~~Management’s Discussion and Analysis of Financial Condition and Results of Operations~~

Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations

The discussion below, as well as other portions of this Form 10-Q, contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended and the Private Securities Litigation Reform Act of 1995. In addition, management may make forward-looking statements orally or in other writing, 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 words as “may,” “will,” “should,” “likely,” “plans,” “projects,” “expects,” “anticipates,” “believes” or similar words. 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 the captions “Part II - Item 1A - Risk Factors” herein and Item 1A, “Risk Factors”, of the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2019~~2020 (the “Annual Report”). Readers are strongly encouraged to consider these factors and the following factors when evaluating any forward-looking statements concerning the Company: the merger with Canadian National Railway Company ("CN") is subject to various closing conditions and there can be no assurances as to whether and when it may be completed; failure to complete the Company’s merger with CN could negatively impact the Company’s stock price and future business and financial results; Company’s stockholders cannot be sure of the value of the merger consideration they will receive from CN in the merger; lawsuits may be filed against the Company and/or CN challenging the transactions contemplated by the merger between, among others, the Company and CN; the shares of CN common stock to be received by the Company’s stockholders upon completion of the merger will have different rights from shares of the Company’s common stock; after completion of the merger, CN may fail to realize the projected benefits and cost savings of the merger; public health threats or outbreaks of communicable diseases, such as the ongoing COVID-19 pandemic and its impact on KCS’s business, suppliers, consumers, customers, employees and supply chains;rail accidents or other incidents or accidents on KCS’s rail network or at KCS’s facilities or customer facilities involving the release of hazardous materials, including toxic inhalation hazards; legislative and regulatory developments and disputes, including environmental regulations; loss of the rail concession of Kansas City Southern’s subsidiary, Kansas City Southern de México, S.A. de C.V.; domestic and international economic, political and social conditions; disruptions to the Company’s technology infrastructure, including its computer systems; increased demand and traffic congestion; the level of trade between the United States and Asia or Mexico; fluctuations in the peso-dollar exchange rate; natural events such as severe weather, hurricanes and floods; the outcome of claims and litigation involving the Company or its subsidiaries; competition and consolidation within the transportation industry; the business environment in industries that produce and use items shipped by rail; the termination of, or failure to renew, agreements with customers, other railroads and third parties; fluctuation in prices or availability of key materials, in particular diesel fuel; access to capital; climate change and the market and regulatory responses to climate change; dependency on certain key suppliers of core rail equipment; changes in securities and capital markets; unavailability of qualified personnel; labor difficulties, including strikes and work stoppages; acts of terrorism or risk of terrorist activities, war or other acts of violence; and other factors affecting the operation of the business. For more discussion about each risk factor, see “Part II - Item 1A - Risk Factors” herein and Part I, Item 1A - “Risk Factors” in the Company’s Annual Report and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” herein and in the Company’s Annual Report, in each case as updated by the Company’s periodic filings with the Securities and Exchange Commission (the “SEC”).

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.

This discussion is intended to clarify and focus on KCS’s results of operations, certain changes in its financial position, liquidity, capital structure and business developments for the periods covered by the consolidated financial statements included under Item 1 of this Quarterly Report on Form 10-Q for the quarter ended June 30, ~~2020.~~2021. This discussion should be read in conjunction with those consolidated financial statements and the related notes and is qualified by reference to them.

Critical Accounting Policies and Estimates

The Company’s discussion and analysis of its financial position and results of operations is based upon its consolidated financial statements. The preparation of these consolidated financial statements requires estimation and judgment that affect the reported amounts of revenue, expenses, assets and liabilities. The Company bases its estimates on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the accounting for assets and liabilities that are not readily apparent from other sources. If the estimates differ materially from actual results, the impact on the consolidated financial statements may be material. The Company’s critical accounting policies are disclosed in its ~~2019~~2020 Annual Report.

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Overview

The Company is engaged primarily in the freight rail transportation business, operating a single coordinated rail network under one reportable business segment. The primary operating subsidiaries of the Company consist of the following: The Kansas City Southern Railway Company (“KCSR”), Kansas City Southern de México, S.A. de C.V. (“KCSM”), Meridian Speedway, LLC (“MSLLC”), and The Texas Mexican Railway Company (“TexMex”). The Company generates revenues and cash flows by providing 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 chemical and petroleum, industrial and

~~Table of Contents~~

consumer products, agriculture and minerals, energy, automotive, and intermodal transportation. Appropriate eliminations and reclassifications have been recorded in preparing the consolidated financial statements.

~~COVID-19 Update~~Merger Agreement

~~With the global outbreak of the Coronavirus Disease 2019~~On March 21, 2021, KCS entered into a merger agreement with Canadian Pacific Railway Limited, a Canadian corporation (“~~COVID-19”~~CP”), under which CP agreed to acquire KCS in a stock and ~~the declaration of~~cash transaction valued at $275 per common share. On April 20, 2021, KCS received an unsolicited merger proposal valued at $325 per common share from Canadian National Railway Company, a ~~pandemic~~Canadian corporation (“CN”), which, after negotiation with and a revised proposal from CN, was determined on May 13, 2021 by the ~~World Health Organization~~Company’s board of directors to be a superior proposal as defined by the CP merger agreement. On May 21, 2021, KCS terminated the CP merger agreement and paid CP a merger termination fee of $700.0 million, which was recognized in merger costs on ~~March 11, 2020,~~ the ~~U.S.~~consolidated statements of operations.

On May 21, 2021, KCS and ~~Mexico governments have deemed rail transportation~~CN entered into a merger agreement (“Merger Agreement”), and a U.S affiliate of CN paid KCS $700.0 million as ~~“critical infrastructure” providing essential services during this global emergency. As~~reimbursement for the termination fee paid to CP. KCS is obligated to repay the termination fee to CN under certain circumstances, including but not limited to, if KCS were to terminate the Merger Agreement to accept a ~~provider of critical infrastructure, Kansas City Southern has an obligation to keep employees working and freight moving. KCS remains focused on protecting~~superior proposal as defined by the ~~health and wellbeing of its employees and the communities in which it operates while assuring the continuity of its business operations.~~

KCS created a dedicated crisis team that proactively implemented its business continuity plans to ensure the ongoing availability of its transportation services, while taking a variety of health and safety measures, including separating dispatching and crew operations, implementing enhanced cleaning and hygiene protocols in its facilities and locomotives, implementing remote work policies, where possible, performing temperature checks and requiring facial coverings.Merger Agreement. As a result, the $700.0 million reimbursement from CN was recognized within accounts payable and accrued liabilities on the consolidated balance sheets. In addition, KCS would be required to ~~date,~~pay CN a termination fee of $700.0 million to terminate the Merger Agreement with CN.

Per the Merger Agreement, KCS would merge into a wholly-owned, U.S. subsidiary of CN (the “Merger”) and be the surviving entity of the Merger. The ownership interest of KCS would then be deposited into a voting trust subject to a voting trust agreement (the “Voting Trust Transaction”). Each share of common stock, par value $0.01 per share, of KCS that is outstanding immediately prior to the Merger will be converted into the right to receive (1) 1.129 common shares of CN and (2) $200 in cash (together, the “Merger Consideration”), and each share of preferred stock, par value $25 per share, that is outstanding immediately prior to the Merger will be converted into the right to receive $37.50 in cash.

Subject to receipt of regulatory clearances, approval by stockholders of KCS, and other customary closing conditions, the completion of the Voting Trust Transaction is currently expected to occur in the second half of 2021, and upon completion, KCS stockholders are expected to own approximately 12.65% of CN’s outstanding common shares. KCS’s management and its board of directors will continue to manage KCS while it is in the voting trust, pursuing KCS’s independent business plan and growth strategies. Final control approval from the Surface Transportation Board (“STB”) and other applicable regulatory authorities is expected to be completed in the second half of 2022.

For the three and six months ended June 30, 2021, KCS incurred $720.8 million and $740.1 million, respectively of merger-related costs, consisting of the $700.0 million termination fee paid to CP, and bankers’ and legal fees. These merger-related costs were recognized in merger costs in the consolidated statements of operations. Upon KCS shareholder vote on the Merger in the third quarter of 2021, the Company ~~has not experienced disruptions~~expects to recognize the $700.0 million reimbursement from CN within merger costs in the consolidated statement of operations. Excluding the termination fee payment and reimbursement, the Company expects to have estimated net merger costs in 2021 of approximately $260.0 million, consisting of bankers’ and legal fees and accelerated vesting of share-based compensation expense, assuming the Voting Trust Transaction occurs in the second half of 2021 and the Merger Consideration is $325 per share.

On June 8, 2021, KCS entered into a letter waiver with lenders to the KCS revolving credit facility to waive the events of default that would occur under the KCS revolving credit facility as a result of the changes of control that would arise upon consummation of the Voting Trust Transaction and as a result of CN obtaining control of KCS following final approval of the transaction by the STB. The foregoing description of the letter waiver is qualified in its ~~railroad operations.~~entirety by the full text of the letter waiver, attached hereto as Exhibit 10.3.

~~The Company began to experience the impacts~~

Table of ~~COVID-19 on customer demand in late March of 2020.~~ Contents

Second Quarter Highlights

Revenues increased 37% for the three months ended June 30, ~~2020 decreased by 23%~~2021, as compared to the second quarter of 2019, primarily due to a decline in demand as a result of COVID-19, unfavorable foreign currency impacts and lower fuel surcharge due to lower fuel prices. As revenues declined, the Company responded quickly and implemented a variety of cost-saving measures and accelerated Precision Scheduled Railroading (“PSR”) initiatives by further consolidating trains, which increased train length and reduced crew costs. Operating expenses decreased by 27% during the second quarter of 2020 compared to the same period in ~~2019,~~2020, due to a 31% increase in carload/unit volumes and a 7% increase in revenue per carload/unit. Revenues increased primarily due to higher volumes, higher fuel surcharge, and the strengthening of the Mexican peso against the U.S. dollar. The volume increases were primarily due to recovery from COVID-19 impacts and increased volumes in the chemical and petroleum business unit due to strength in refined fuel product shipments into Mexico.

Operating expenses increased 221% during the three months ended June 30, 2021, as compared to the same period in 2020, primarily due to the CP merger agreement termination fee payment, higher diesel fuel price and consumption, the strengthening of the Mexican peso against the U.S. dollar and increased overtime and recrews related to network congestion, partially offset by decreased restructuring ~~charges, fuel consumption and price, headcount and hours worked, and savings related~~charges. Operating expenses as a percentage of revenues was 157.6% for the three months ended June 30, 2021, compared to ~~PSR initiatives. By~~67.1% for the ~~end~~same period in 2020.

The Company reported quarterly losses of ~~June 2020, daily volumes had increased by approximately 40% since the low point in May, nearly returning to pre-COVID-19 levels. See Strategic Initiatives for further discussion~~$4.17 per diluted share on consolidated net loss of ~~PSR savings.~~

~~In the second quarter of 2020, the Company offered a voluntary separation program, which resulted in a restructuring charge of $9.2~~$378.5 million for the three months ended June 30, ~~2020, consisting~~2021, compared to earnings of ~~severance and benefit costs that will be paid out~~$1.16 per diluted share on consolidated net income of $109.7 million for the same period in either lump-sum payments or over a six to twelve-month period. Approximately 6% of management employees were irrevocably accepted into the voluntary separation program. Management expects the voluntary separation program reductions to result in annualized savings of approximately $11.0 million.

~~COVID-19 costs increased total expense in the second quarter of~~ 2020, ~~by approximately $4.0 million~~ primarily due to wages paid to certain high-risk employees that were allowed to stay home pursuant to a Mexican presidential decree, expenses related to cleaning and decontamination of locomotives and other workspaces, and costs of protective gearthe $700.0 million expense recognized for ~~employees. By~~ the ~~end~~termination fee associated with the termination of the ~~second quarter~~CP merger agreement by KCS.

Results of 2020, almost half of the high-risk employees allowed to stay home per the Mexican presidential degree returned to work. Management expects COVID-19 costs to decrease in the third and fourth quarters of 2020.Operations

KCS believes it has a strong liquidity position to continue business operations and service its debt obligations. As disclosed in the Liquidity and Capital Resources section, the Company has total available liquidity of $1,220.1 million as of June 30, 2020, consisting of cash on hand and a revolving credit facility. Total liquidity increased during the quarter as a result of the issuance of $550.0 million of 3.50% Senior Notes on April 22, 2020. Furthermore, the Company does not have any debt maturities until 2023. During the second quarter of 2020, KCS did not significantly alter the terms of its freight agreements with customers. Cash flows from operations remain strong; however, growth-related capital expenditures were reduced by $75.0 million to approximately $425.0 million. If the Company experienced another significant reduction in revenues, the Company would have additional alternatives to maintain liquidity, including further decreases in capital expenditures and cost reductions as well as adjustments to its capital allocation policy. To date, the Company has not reduced or suspended its share repurchase program or dividend payments. See Liquidity and Capital Resources section for additional information.

KCS continues to monitor the rapidly evolving situation and guidance from international and domestic authorities, including federal, state, and local public health authorities and may take additional actions based on their recommendations. In these circumstances, there may be developments outside KCS’ control requiring adjustments to operating plans. As such, given the dynamic nature of this situation, KCS cannot reasonably estimate with any degree of certainty the future impact COVID-19 may have on the Company’s resultsThe following summarizes KCS’s consolidated statement of operations financial position, and liquidity. See Part II, Item 1A - “Risk Factors” - “Public health threats or outbreaks of communicable diseases, including the ongoing COVID-19 pandemic, could have a material adverse effect on the Company’s operations and financial results.”components (in millions):


	Three Months Ended				Change
	June 30,
	2021		2020
Revenues	$	749.5	$	547.9	$	201.6
Operating expenses	1,181.2		367.5		813.7
Operating income (loss)	(431.7)		180.4		(612.1)
Equity in net earnings of affiliates	3.4		0.2		3.2
Interest expense	(39.1)		(38.1)		(1.0)
Foreign exchange gain	6.8		7.8		(1.0)
Other income, net	1.0		0.8		0.2
Income (loss) before income taxes	(459.6)		151.1		(610.7)
Income tax expense (benefit)	(81.6)		40.8		(122.4)
Net income (loss)	(378.0)		110.3		(488.3)
Less: Net income attributable to noncontrolling interest	0.5		0.6		(0.1)
Net income (loss) attributable to Kansas City Southern and subsidiaries	$	(378.5)	$	109.7	$	(488.2)


	Six Months Ended				Change
	June 30,
	2021		2020
Revenues	$	1,455.5	$	1,279.6	$	175.9
Operating expenses	1,634.2		810.4		823.8
Operating income (loss)	(178.7)		469.2		(647.9)
Equity in net earnings of affiliates	9.4		1.2		8.2
Interest expense	(78.1)		(72.3)		(5.8)
Foreign exchange loss	(0.5)		(51.7)		51.2
Other income, net	0.2		2.2		(2.0)
Income (loss) before income taxes	(247.7)		348.6		(596.3)
Income tax expense (benefit)	(23.1)		86.0		(109.1)
Net income (loss)	(224.6)		262.6		(487.2)
Less: Net income attributable to noncontrolling interest	0.9		1.1		(0.2)
Net income (loss) attributable to Kansas City Southern and subsidiaries	$	(225.5)	$	261.5	$	(487.0)

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~~Strategic Initiatives~~

~~During 2019, KCS began implementing principles of PSR, focusing on operational excellence and driving the following improvements:~~


•	~~Customer service~~—~~improve and sustain consistency and reliability of service and create a more resilient and dependable network;~~

~~Facilitating growth — additional capacity for new opportunities;~~

~~Improving asset utilization — meet growing or changing demand with the same or fewer assets; and,~~

~~Improving the cost profile of the Company — increased profitability driven by volume and revenue growth and improved productivity and asset utilization.~~

As a result of the PSR initiatives in 2019, management approved four separate restructuring plans that totaled $168.8 million, including a $51.0 million restructuring plan in the second quarter of 2019. The PSR plans included asset impairments, workforce reductions, and contract restructuring, which resulted in 2019 operating expense savings of approximately $58.0 million.Operating Metrics

The Company has established the following key metrics and goals to measure ~~PSR~~precision scheduled railroading (“PSR”) progress and performance:


	Three Months Ended		Improvement/ (Deterioration)	Six Months Ended		Improvement/ (Deterioration)	FY 2020 Goal		Three Months Ended		Improvement/ (Deterioration)	Six Months Ended		Improvement/ (Deterioration)	FY 2021 Goal
	June 30,			June 30,					June 30,			June 30,
	2020	2019		2020	2019				2021	2020		2021	2020
Gross velocity (mph) (i)	17.1	12.5	37%	16.4	12.5	31%	17.0	Gross velocity (mph) (i)	12.2	17.1	(29)%	12.6	16.4	(23)%	16.2
Terminal dwell (hours) (ii)	20.3	21.2	4%	20.0	21.5	7%	18.0	Terminal dwell (hours) (ii)	26.1	20.3	(29)%	26.4	20.0	(32)%	21.3
Train length (feet) (iii)	6,921	5,999	15%	6,349	5,879	8%	6,350	Train length (feet) (iii)	6,778	6,921	(2)%	6,800	6,349	7%	7,250
Car miles per day (iv)	118.6	104.6	13%	119.8	102.8	17%	135.0
Fuel efficiency (gallons per 1,000 GTM's) (v)	1.21	1.31	8%	1.24	1.33	7%	1.24

Fuel efficiency (gallons per 1,000 GTM's) (iv)								Fuel efficiency (gallons per 1,000 GTM's) (iv)	1.22	1.21	(1)%	1.24	1.24	—	1.16

(i) Gross velocity is the average train speed between origin and destination in miles per hour calculated as the sum of the miles traveled divided by the sum of total transit hours. Transit hours are measured as the difference between a train’s origin departure and destination arrival date and times broken down by segment across the train route (includes all time spent including crew changes, terminal dwell, delays, and incidents).

(ii) Terminal dwell is the average amount of time in hours between car arrival to and departure from the yard (excludes cars that move through a terminal on a run-through train, stored, bad ordered, and maintenance-of-way cars). Calculated by dividing the total number of hours cars spent in terminals by the total count of car dwell events.

(iii) Train length is the average length of a train across its reporting stations, including the origin and intermediate stations. Length of a train is the sum of car and locomotive lengths measured in feet.

~~(iv) Car miles per day is the miles a car travels divided by total transit days. Transit days are measured from opening event to closing event (includes all time spent in terminals and on trains).~~

~~(v)~~(iv) Fuel efficiency is calculated by taking locomotive fuel consumed in gallons divided by thousand gross ton miles (“GTM’s”) net of detours with no associated fuel gallons. GTM’s are the movement of one ton of train weight over one mile calculated by multiplying total train weight by distance the train moved. GTM’s exclude locomotive gross ton miles.

~~As revenues declined rapidly~~The decline in velocity and increase in dwell are primarily due to lingering network congestion as well as greater efficiencies realized during the second quarter of 2020 from lower volumes due to COVID-19, management accelerated PSR initiatives by rightsizing resources to volumes and further reduced costs. Train service plans were quickly adjusted as volumes began to decline and trains were consolidated, resulting in longer, more efficient trains. Record average train length reduced the number of train starts and crew costs, leading to operating efficiencies across the organization and record fuel efficiency. By the end of June 2020, daily volumes had increased by approximately 40% since the low point in May.

At the beginning of 2020, the Company estimated incremental annual operating savings of approximately $61.0 million. Due to acceleration of PSR initiatives in the second quarter of 2020, the Company is estimating incremental annual operating savings of approximately $95.0 million.

The Company remains focused on executing the strategic initiatives and achieving the operational metric targets noted above, which will deliver improved customer service, facilitate growth, and drive better asset utilization while improving the cost profile of the Company.

COVID-19.

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~~Second Quarter Highlights~~

Revenues decreased 23% for the three months ended June 30, 2020, as compared to the same period in 2019, due to a 21% decrease in carloads/unit volumes and a 4% decrease in revenue per carload/unit. Revenues decreased primarily due to lower volumes as a result of lower demand caused by COVID-19, unfavorable foreign currency impacts, and lower fuel surcharge due to lower fuel prices.

As revenues declined, the Company responded quickly by implementing cost-saving measures and accelerating PSR initiatives. Operating expenses decreased 27% during the three months ended June 30, 2020, as compared to the same period in 2019, primarily due to a decrease in restructuring charges, fuel consumption and price, headcount and hours worked, and savings related to PSR initiatives. Operating expenses as a percentage of revenues was 67.1% for the three months ended June 30, 2020, compared to 70.9% for the same period in 2019.

The Company reported quarterly earnings of $1.16 per diluted share on consolidated net income of $109.7 million for the three months ended June 30, 2020, compared to earnings of $1.28 per diluted share on consolidated net income of $128.7 million for the same period in 2019, due to lower operating income and an increase in interest expense due to the issuance of senior notes in the fourth quarter of 2019 and the second quarter of 2020. These decreases were partially offset by increases due to share repurchases and reduced income tax expense as a result of lower pre-tax income and a lower effective tax rate.

~~Results of Operations~~

~~The following summarizes KCS’s consolidated statement of income components~~ ~~(in millions)~~:

Three Months Ended Change
June 30,
2020 2019
Revenues $ 547.9
$ 714.0
$ (166.1 )
Operating expenses 367.5
506.0
(138.5 )
Operating income 180.4
208.0
(27.6 )
Equity in net earnings (losses) of affiliates 0.2
(0.2 ) 0.4
Interest expense (38.1 ) (28.0 ) (10.1 )
Foreign exchange gain 7.8
8.3
(0.5 )
Other income, net 0.8
0.1
0.7
Income before income taxes 151.1
188.2
(37.1 )
Income tax expense 40.8
59.1
(18.3 )
Net income 110.3
129.1
(18.8 )
Less: Net income attributable to noncontrolling interest 0.6
0.4
0.2
Net income attributable to Kansas City Southern and subsidiaries $ 109.7
$ 128.7
$ (19.0 )

Six Months Ended Change
June 30,
2020 2019
Revenues $ 1,279.6
$ 1,388.8
$ (109.2 )
Operating expenses 810.4
1,020.5
(210.1 )
Operating income 469.2
368.3
100.9
Equity in net earnings of affiliates 1.2
1.5
(0.3 )
Interest expense (72.3 ) (56.2 ) (16.1 )
Debt retirement costs —
(0.6 ) 0.6
Foreign exchange gain (loss) (51.7 ) 12.9
(64.6 )
Other income, net 2.2
0.2
2.0
Income before income taxes 348.6
326.1
22.5
Income tax expense 86.0
93.8
(7.8 )
Net income 262.6
232.3
30.3
Less: Net income attributable to noncontrolling interest 1.1
0.8
0.3
Net income attributable to Kansas City Southern and subsidiaries $ 261.5
$ 231.5
$ 30.0

~~Table of Contents~~

Revenues

The following summarizes revenues (in millions), carload/unit statistics (in thousands) and revenue per carload/unit:


	Revenues						Carloads and Units				Revenue per Carload/Unit
	Three Months Ended						Three Months Ended				Three Months Ended
	June 30,						June 30,				June 30,
	2021		2020		% Change		2021	2020	% Change		2021		2020		% Change
Chemical and petroleum	$	232.5	$	158.5	47	%	103.4	75.6	37	%	$	2,249	$	2,097	7	%
Industrial and consumer products	144.6		120.6		20	%	74.4	68.0	9	%	1,944		1,774		10	%
Agriculture and minerals	139.9		114.4		22	%	65.9	57.7	14	%	2,123		1,983		7	%
Energy	54.5		39.3		39	%	63.1	44.1	43	%	864		891		(3	%)
Intermodal	91.1		63.5		43	%	250.3	191.0	31	%	364		332		10	%
Automotive	49.4		15.6		217	%	27.7	11.6	139	%	1,783		1,345		33	%
Carload revenues, carloads and units	712.0		511.9		39	%	584.8	448.0	31	%	$	1,218	$	1,143	7	%
Other revenue	37.5		36.0		4	%
Total revenues (i)	$	749.5	$	547.9	37	%

(i) Included in revenues:
Fuel surcharge	$	69.9	$	37.6


	Revenues						Carloads and Units				Revenue per Carload/Unit							Revenues						Carloads and Units				Revenue per Carload/Unit
	Three Months Ended						Three Months Ended				Three Months Ended							Six Months Ended						Six Months Ended				Six Months Ended
	June 30,						June 30,				June 30,							June 30,						June 30,				June 30,
	2020		2019		% Change		2020	2019	% Change		2020		2019		% Change			2021		2020		% Change		2021	2020	% Change		2021		2020		% Change
Chemical and petroleum	$	158.5	$	188.3	(16	%)	75.6	86.9	(13	%)	$	2,097	$	2,167	(3	%)	Chemical and petroleum	$	463.8	$	357.1	30	%	205.0	166.5	23	%	$	2,262	$	2,145	5	%
Industrial and consumer products	120.6		150.3		(20	%)	68.0	79.2	(14	%)	1,774		1,898		(7	%)	Industrial and consumer products	278.6		279.6		—		146.7	151.4	(3	%)	1,899		1,847		3	%
Agriculture and minerals	114.4		122.4		(7	%)	57.7	61.8	(7	%)	1,983		1,981		—		Agriculture and minerals	264.3		248.9		6	%	126.6	120.8	5	%	2,088		2,060		1	%
Energy	39.3		53.9		(27	%)	44.1	54.7	(19	%)	891		985		(10	%)	Energy	112.0		95.6		17	%	124.7	101.7	23	%	898		940		(4	%)
Intermodal	63.5		92.6		(31	%)	191.0	244.6	(22	%)	332		379		(12	%)	Intermodal	172.4		152.2		13	%	483.1	424.6	14	%	357		358		—
Automotive	15.6		70.9		(78	%)	11.6	42.7	(73	%)	1,345		1,660		(19	%)	Automotive	93.5		69.5		35	%	54.1	43.8	24	%	1,728		1,587		9	%
Carload revenues, carloads and units	511.9		678.4		(25	%)	448.0	569.9	(21	%)	$	1,143	$	1,190	(4	%)	Carload revenues, carloads and units	1,384.6		1,202.9		15	%	1,140.2	1,008.8	13	%	$	1,214	$	1,192	2	%
Other revenue	36.0		35.6		1	%											Other revenue	70.9		76.7		(8	%)
Total revenues (i)	$	547.9	$	714.0	(23	%)											Total revenues (i)	$	1,455.5	$	1,279.6	14	%

(i) Included in revenues:																	(i) Included in revenues:
Fuel surcharge	$	37.6	$	74.9													Fuel surcharge	$	120.8	$	115.2

Revenues Carloads and Units Revenue per Carload/Unit
Six Months Ended Six Months Ended Six Months Ended
June 30, June 30, June 30,
2020 2019 % Change 2020 2019 % Change 2020 2019 % Change
Chemical and petroleum $ 357.1
$ 356.9
—
166.5
166.3
—
$ 2,145
$ 2,146
—
Industrial and consumer products 279.6
300.1
(7 %) 151.4
159.1
(5 %) 1,847
1,886
(2 %)
Agriculture and minerals 248.9
245.3
1 % 120.8
123.8
(2 %) 2,060
1,981
4 %
Energy 95.6
118.5
(19 %) 101.7
115.5
(12 %) 940
1,026
(8 %)
Intermodal 152.2
172.5
(12 %) 424.6
465.5
(9 %) 358
371
(4 %)
Automotive 69.5
128.5
(46 %) 43.8
79.3
(45 %) 1,587
1,620
(2 %)
Carload revenues, carloads and units 1,202.9
1,321.8
(9 %) 1,008.8
1,109.5
(9 %) $ 1,192
$ 1,191
—
Other revenue 76.7
67.0
14 %
Total revenues (i) $ 1,279.6
$ 1,388.8
(8 %)

(i) Included in revenues:
Fuel surcharge $ 115.2
$ 137.3

~~Revenues include both revenue for transportation services and fuel surcharges.~~ For the three months ended June 30, ~~2020,~~2021, revenues and carload/unit volumes ~~decreased 23%~~increased 37% and ~~21%~~31%, respectively, compared to the same period in ~~2019.~~2020. Revenues increased primarily due to higher volumes, higher fuel surcharge, and the strengthening of the Mexican peso against the U.S. dollar. For the six months ended June 30, ~~2020,~~2021, revenues and carload/unit volumes ~~decreased 8%~~increased 14% and 9%13%, respectively, compared to the same period in ~~2019.~~2020. Revenues ~~decreased~~increased primarily due to ~~lower~~higher volumes ~~as a result of~~resulting from the recovery from COVID-19 ~~unfavorable foreign currency~~ impacts and ~~lower fuel surcharge due to lower fuel prices. The volume declines were primarily~~increased volumes in the ~~automotive~~chemical and petroleum business unit due to ~~plant shutdowns and lower production volumes. Intermodal volumes were also affected by overall decline~~strength in demand due to COVID-19 and significant declines in auto part shipments. Chemical and petroleum and industrial and consumer business units were impacted by lower demand due to stay-at-home orders. In addition, volumes decreased as a result of reductions in crude and frac sand volumes due to the decline in oil prices.refined fuel product shipments into Mexico.

For the three months ended June 30, ~~2020,~~2021, revenue per carload/unit ~~decreased~~increased by 4%7%, compared to the same period in ~~2019,~~2020 due to higher fuel surcharge, the ~~weakening~~strengthening of the Mexican peso against the U.S. dollar, ~~shorter average length of haul,~~ and ~~lower fuel surcharge,~~positive pricing impacts, partially offset by ~~positive pricing impacts.~~mix. For the six months ended June 30, ~~2020,~~2021, revenue per carload/unit ~~remained flat,~~increased by 2%, compared to the same period in ~~2019 as~~2020 due to positive pricing impacts, ~~were offset by~~ the ~~weakening~~strengthening of the Mexican peso against the U.S. ~~dollar.~~dollar, and higher fuel surcharge, partially offset by shorter average length of haul. The average exchange rate of Mexican pesos per U.S. dollar was ~~Ps.23.4,~~Ps.20.1 for the three months ended June 30, ~~2020,~~2021, compared to ~~Ps.19.1~~Ps.23.4 for the same period in ~~2019,~~2020, which resulted in ~~a decrease~~an increase in ~~revenue~~revenues of approximately ~~$17.0~~$16.2 million. The average exchange rate of Mexican

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pesos per U.S. dollar was ~~Ps.21.6~~Ps.20.2 for the six months ended June 30, ~~2020,~~2021, compared to ~~Ps.19.2~~Ps.21.6 for the same period in ~~2019,~~2020, which resulted in ~~a decrease to~~an increase in revenues of approximately ~~$17.0~~$12.2 million.

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KCS’s fuel surcharges are a mechanism to adjust revenue based upon changes in fuel prices above fuel price thresholds set in KCS’s tariffs or contracts. Fuel surcharge revenue is calculated using a fuel price from a prior time period that can be up to 60 days earlier. In a period of volatile fuel prices or changing customer business mix, changes in fuel expense and fuel surcharge revenue may differ.

For the three and six months ended June 30, ~~2020,~~2021, fuel surcharge revenue ~~decreased $37.3~~increased $32.3 million and ~~$22.1~~$5.6 million, respectively, compared to the same periods in ~~2019,~~2020, primarily due to ~~lower volumes~~higher fuel prices and ~~fuel prices.~~volumes.

The following discussion provides an analysis of revenues by commodity group:



	Revenues by commodity group for the three months ended June 30, ~~2020~~2021
Chemical and petroleum. Revenues ~~decreased $29.8~~increased $74.0 million for the three months ended June 30, ~~2020,~~2021, compared to the same period in ~~2019,~~2020, due to a ~~13% decrease~~37% increase in carload/unit volumes ~~caused by lower market demand as a result of COVID-19~~ and ~~a 3% decrease~~an 7% increase in revenue per carload/~~unit~~unit. Revenues increased $106.7 million for the six months ended June 30, 2021, compared to the same period in 2020, due to ~~shorter than~~a 23% increase in carload/unit volumes and a 5% increase in revenue per carload/unit. Volumes increased due to refined fuel product shipments into Mexico. For the three months ended June 30, 2021, revenue per carload/unit increased due to longer average length of haul, higher fuel surcharge, the ~~weakening~~strengthening of the Mexican peso against the U.S. dollar, and ~~lower fuel surcharge,~~positive pricing impacts, partially offset by ~~positive pricing impacts and~~ mix. ~~Revenues and volumes remained flat for~~ For the six months ended June 30, 2020, compared to the same period in 2019 as volume increases from refined fuel products and liquid petroleum gas shipments to Mexico in the first quarter were offset by lower market demand as a result of COVID-19 in the second quarter. Revenue2021, revenue per carload/unit ~~remained flat as~~increased due to mix, positive pricing impacts, ~~mix, and higher fuel surcharge, were offset by shorter average length of haul and~~ the ~~weakening~~strengthening of the Mexican peso against the U.S. ~~dollar.~~ dollar, and higher fuel surcharge, partially offset by shorter average length of haul.



Industrial and consumer products. Revenues ~~decreased $29.7~~increased $24.0 million for the three months ended June 30, ~~2020,~~2021, compared to the same period in ~~2019,~~2020, due to a ~~14% decrease in carload/unit volumes and a 7% decrease~~10% increase in revenue per carload/~~unit. For the six months ended June 30, 2020, revenues decreased $20.5 million, compared to the same period in 2019, due to a 5% decrease~~unit and 9% increase in carload/unit ~~volumes and a 2% decrease in revenue per carload/unit. Volumes decreased primarily due to lower market demand as a result of COVID-19.~~volumes. Revenue per carload/unit ~~decreased~~increased due to ~~the weakening~~mix, strengthening of the Mexican peso against the U.S. dollar, higher fuel surcharge, and ~~mix,~~positive pricing impacts, partially offset by shorter average length of haul. Volumes increased primarily due to recovery from COVID-19 impacts and increased demand. Revenues decreased $1.0 million for the six months ended June 30, 2021, compared to the same period in 2020, due to a 3% decrease in carload/unit volumes, partially offset by a 3% increase in revenue per carload/unit. Forest products volumes decreased due to lingering network congestion resulting from weather impacts in February 2021. Revenue per carload/unit increased due to mix, positive pricing ~~impacts.~~impacts, and the strengthening of the Mexican peso against the U.S. dollar, partially offset by shorter average length of haul.

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			Revenues by commodity group for the three months ended June 30, ~~2020~~2021
Agriculture and minerals. Revenues ~~decreased $8.0~~increased $25.5 million for the three months ended June 30, ~~2020,~~2021, compared to the same period in ~~2019,~~2020, due to a ~~7% decrease~~14% increase in carload/unit volumes ~~driven by the acceleration of shipments into the first quarter~~ and ~~impacts from non-essential business shutdowns as~~ a ~~result of COVID-19.~~ 7% increase in revenue per carload/unit. Revenues increased ~~$3.6~~$15.4 million for the six months ended June 30, ~~2020,~~2021, compared to the same period in ~~2019,~~2020, due to a 4%5% increase in carload/unit volumes and a 1% increase in revenue per carload/unit primarily driven by mix, longer average length of haul, and positive pricing impacts. This increase was partially offset by a 2% decrease in carload/unit volumes driven by the shutdown of non-essential businessunit. Volumes increased due to ~~COVID-19.~~

recovery from COVID-19 impacts.



~~Energy.~~ ~~Revenues decreased $14.6 million for~~For the three months ended June 30, ~~2020,~~2021, revenue per carload/unit increased compared to the same period in ~~2019,~~2020 due to ~~a 19% decrease in carload/unit volumes~~higher fuel surcharge, longer average length of haul, the strengthening of the Mexican peso against the U.S. dollar, and ~~a 10% decrease in revenue per carload/unit. Revenues decreased $22.9 million for~~positive pricing impacts, partially offset by mix. For the six months ended June 30, ~~2020,~~2021, revenue per carload/unit increased compared to the same period in ~~2019,~~2020 due to a 12% decrease in carload/unit volumes and an 8% decrease in revenue per carload/unit. Frac sand and crude oil volumes decreased due to the declines in oil prices. Utility coal volumes decreased as a resultlonger average length of ~~low natural gas prices and warm weather. Revenue per carload/unit decreased due to mix, lower~~haul, higher fuel surcharge, positive pricing impacts, and the ~~weakening~~strengthening of the Mexican peso against the U.S. dollar, partially offset by ~~positive pricing impacts.~~mix.


Energy. Revenues increased $15.2 million for the three months ended June 30, 2021, compared to the same period in 2020, due to a 43% increase in carload/unit volumes, partially offset by a 3% decrease in revenue per carload/unit. Revenues increased $16.4 million for the six months ended June 30, 2021, compared to the same period in 2020, due to a 23% increase in carload/unit volumes, partially offset by a 4% decrease in revenue per carload/unit. Utility coal volumes increased as a result of higher natural gas prices, plant outages in prior year, colder weather, and rebuilding of stockpiles. For the three months ended June 30, 2021, revenue per carload/unit decreased compared to the same period in 2020 due to shorter average length of haul and pricing impacts, partially offset by higher fuel surcharge, mix, and the strengthening of the Mexican peso against the U.S. dollar. For the six months ended June 30, 2021, revenue per carload/unit decreased compared to the same period in 2020 due to mix, shorter average length of haul, lower fuel surcharge, and pricing impacts, partially offset by the strengthening of the Mexican peso against the U.S. dollar.

Intermodal. Revenues ~~decreased $29.1~~increased $27.6 million for the three months ended June 30, ~~2020,~~2021, compared to the same period in ~~2019,~~2020, due to a ~~22% decrease~~31% increase in carload/unit volumes and a ~~12% decrease~~10% increase in revenue per carload/unit. Revenues ~~decreased $20.3~~increased $20.2 million for the six months ended June 30, ~~2020,~~2021, compared to the same period in ~~2019,~~2020, due to a ~~9% decrease~~14% increase in carload/unit volumes. Carload/unit volumes ~~and a 4% decrease~~increased due to recovery from COVID-19 impacts, partially offset by slow recovery at the Lazaro Cardenas port in Mexico following service interruptions in the fourth quarter of 2020 due to KCSM right-of-way blockages resulting from teachers’ protests.

For the three months ended June 30, 2021, revenue per carload/~~unit. Volumes decreased primarily~~unit increased compared to the same period in 2020 due to ~~COVID-19, auto plant shutdowns impacting cross-border traffic and increased truck capacity. Revenue per carload/unit decreased due to mix, shorter~~higher fuel surcharge, longer average length of haul, ~~lower fuel surcharge~~positive pricing impacts, and the ~~weakening~~strengthening of the Mexican peso against the U.S. ~~dollar.~~dollar, partially offset by mix. For the six months ended June 30, 2021, revenue per carload/unit was flat compared to the same period in 2020 due to positive pricing impacts, higher fuel surcharge, and the strengthening of the Mexican peso against the U.S. dollar was offset by mix and shorter average length of haul.

Automotive. Revenues ~~decreased $55.3~~increased $33.8 million for the three months ended June 30, ~~2020,~~2021, compared to the same period in ~~2019,~~2020, due to a ~~73% decrease~~139% increase in carload/unit volumes ~~caused~~and a 33% increase in revenue per carload/unit. Revenues increased $24.0 million for

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the six months ended June 30, 2021, compared to the same period in 2020, due to a 24% increase in carload/unit volumes and a 9% increase in revenue per carload/unit. Volumes increased due to recovery from COVID-19 impacts, partially offset by auto plant shutdowns ~~and lower overall automotive production in Mexico as~~driven by a ~~result of COVID-19, and a 19% decrease in~~global microchip shortage.

For the three months ended June 30, 2021, revenue per carload/unit increased compared to the same period in 2020 due to ~~mix,~~ the ~~weakening~~strengthening of the Mexican peso against the U.S. dollar, ~~shorter average length of haul,~~higher fuel surcharge, and ~~lower fuel surcharge,~~positive pricing impacts, partially offset by ~~positive pricing impacts.~~

~~Revenues decreased $59.0 million for~~mix. For the six months ended June 30, ~~2020,~~2021, revenue per carload/unit increased compared to the same period in ~~2019,~~2020 due to a 45% decrease in carload/unit volumes, and a 2% decrease in revenue per carload/unit. Volumes decreased due to auto plant shutdowns and lower overall automotive production in Mexico as a result of COVID-19. Revenue per carload/unit decreased due to mix, the ~~weakening~~strengthening of the Mexican peso against the U.S. dollar, ~~and shorter average length of haul, partially offset by~~positive pricing impacts, higher fuel surcharge, and ~~positive pricing impacts.~~mix.

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Operating Expenses

Operating expenses, as shown below (in millions), ~~decreased $138.5 million and $210.1~~increased $813.7 million for the three ~~and six~~ months ended June 30, ~~2020, respectively,~~2021, compared to the same ~~periods~~period in ~~2019,~~2020, primarily due to ~~a decrease in restructuring charges,~~the CP merger agreement termination fee payment, higher diesel fuel price and consumption, the strengthening of the Mexican peso against the U.S. dollar and ~~price, headcount~~increased overtime and ~~hours worked, and savings~~recrews related to ~~PSR initiatives.~~network congestion, partially offset by decreased restructuring charges. The ~~weakening~~strengthening of the Mexican peso against the U.S. dollar during the three ~~and six~~ months ended June 30, ~~2020,~~2021, resulted in ~~reduced~~increased expense of approximately ~~$14.0~~$16.0 million, ~~and $18.0 million, respectively,~~ compared to the same ~~periods~~period in ~~2019,~~2020, for expense transactions denominated in Mexican pesos. The average exchange rate of Mexican pesos per U.S. dollar was ~~Ps.23.4 and Ps.21.6~~Ps.20.1 for the three ~~and~~months ended June 30, 2021, compared to Ps.23.4 for the same period in 2020.

Operating expenses, as shown below (in millions), increased $823.8 million for the six months ended June 30, ~~2020, respectively,~~2021, compared to ~~Ps.19.1~~the same period in 2020, primarily due to the termination fee associated with the CP merger and ~~Ps.19.2~~other merger costs, higher diesel fuel price and consumption, the strengthening of the Mexican peso against the U.S. dollar, increased overtime and recrews related to network congestion, and wage and benefit inflation, partially offset by decreased restructuring charges. The strengthening of the Mexican peso against the U.S. dollar during the six months ended June 30, 2021, resulted in increased expense of approximately $15.0 million, compared to the same period in 2020, for expense transactions denominated in Mexican pesos. The average exchange rate of Mexican pesos per U.S. dollar was Ps.20.2 for the six months ended June 30, 2021, compared to Ps.21.6 for the same ~~periods~~period in ~~2019.~~2020.


	Three Months Ended										Three Months Ended
	June 30,				Change						June 30,				Change
	2020		2019		Dollars			Percent			2021		2020		Dollars		Percent
Compensation and benefits	$	103.8	$	128.3	$	(24.5	)	(19	%)	Compensation and benefits	$	128.4	$	103.8	$	24.6	24	%
Purchased services	44.6		56.7		(12.1		)	(21	%)	Purchased services	55.8		44.6		11.2		25	%
Fuel	39.5		87.7		(48.2		)	(55	%)	Fuel	79.0		39.5		39.5		100	%

Equipment costs	18.1		26.3		(8.2		)	(31	%)	Equipment costs	24.1		18.1		6.0		33	%
Depreciation and amortization	89.3		87.7		1.6			2	%	Depreciation and amortization	91.2		89.3		1.9		2	%
Materials and other	61.7		68.3		(6.6		)	(10	%)	Materials and other	81.9		61.7		20.2		33	%
Merger costs										Merger costs	720.8		—		720.8		100	%
Restructuring charges	10.5		51.0		(40.5		)	(79	%)	Restructuring charges	—		10.5		(10.5)		(100	%)

Total operating expenses	$	367.5	$	506.0	$	(138.5	)	(27	%)	Total operating expenses	$	1,181.2	$	367.5	$	813.7	221	%


	Six Months Ended										Six Months Ended
	June 30,				Change						June 30,				Change
	2020		2019		Dollars			Percent			2021		2020		Dollars		Percent
Compensation and benefits	$	237.2	$	257.2	$	(20.0	)	(8	%)	Compensation and benefits	$	257.9	$	237.2	$	20.7	9	%
Purchased services	97.9		109.5		(11.6		)	(11	%)	Purchased services	109.6		97.9		11.7		12	%
Fuel	114.4		170.7		(56.3		)	(33	%)	Fuel	149.9		114.4		35.5		31	%
Equipment costs	40.0		56.7		(16.7		)	(29	%)	Equipment costs	45.2		40.0		5.2		13	%
Depreciation and amortization	178.7		176.2		2.5			1	%	Depreciation and amortization	183.2		178.7		4.5		3	%
Materials and other	125.7		131.7		(6.0		)	(5	%)	Materials and other	148.3		125.7		22.6		18	%
Merger costs										Merger costs	740.1		—		740.1		100	%
Restructuring charges	16.5		118.5		(102.0		)	(86	%)	Restructuring charges	—		16.5		(16.5)		(100	%)
Total operating expenses	$	810.4	$	1,020.5	$	(210.1	)	(21	%)	Total operating expenses	$	1,634.2	$	810.4	$	823.8	102	%

Compensation and benefits. Compensation and benefits ~~decreased $24.5~~increased $24.6 million for the three months ended June 30, ~~2020,~~2021, compared to the same period in ~~2019,~~2020, due to ~~a decrease~~an increase in ~~headcount~~overtime and ~~work hours~~recrews of approximately ~~$19.0~~$10.0 million, ~~caused by volume declines as a result~~wage and benefit inflation of ~~COVID-19 and~~approximately $6.0 million, the ~~continued application of PSR initiatives, the weakening~~strengthening of the Mexican peso ~~against the U.S dollar~~ of approximately ~~$6.0~~$5.0 million and ~~a decrease in~~increased incentive compensation of approximately ~~$6.0 million, partially offset by wage inflation~~$4.0 million.

Table of approximately $4.0 million and approximately $2.0 million of mandated wages related to COVID-19. Mandated wages were primarily due to high-risk employees that were allowed to stay home per the Mexican presidential degree.Contents

Compensation and benefits ~~decreased $20.0~~increased $20.7 million for the six months ended June 30, ~~2020,~~2021, compared to the same period in ~~2019,~~2020, due to an increase in overtime and recrews of approximately $13.0 million, wage and benefit inflation of approximately $12.0 million and the strengthening of the Mexican peso of approximately $5.0 million, partially offset by a decrease in headcount ~~and work hours~~ of approximately $25.0 million caused by volume declines as a result of COVID-19 and the continued application of PSR initiatives, and the weakening of the Mexican peso against the U.S dollar of approximately $7.0 million, partially offset by wage inflation and incentive compensation of approximately $9.0 million and $3.0 million, respectively.$10.0 million.

Purchased services. Purchased services expense ~~decreased $12.1~~increased $11.2 million and ~~$11.6~~$11.7 million for the three and six months ended June 30, ~~2020,~~2021, respectively, compared to the same ~~period~~periods in ~~2019,~~2020, due to ~~decreases~~increases in ~~repairs~~software and ~~maintenance~~programming expense of approximately $3.0 million and ~~detour expense caused by COVID-19 related volume declines~~$4.0 million, respectively, higher trackage rights of approximately $3.0 million and $4.0 million, respectively, and the ~~continued application of PSR initiatives, and the weakening~~strengthening of the Mexican peso ~~against the U.S. dollar.~~

~~Table~~ of ~~Contents~~approximately $2.0 million for both periods.

Fuel. Fuel ~~decreased $48.2~~increased $39.5 million for the three months ended June 30, ~~2020,~~2021, compared to the same period in ~~2019,~~2020, due to ~~lower consumption of approximately $15.0 million and $5.0 million in Mexico and the U.S., respectively, caused by volume declines as a result of COVID-19, lower~~higher diesel fuel prices ~~of approximately $12.0 million and $8.0 million~~ in the U.S. and Mexico of approximately $13.0 million and $6.0 million, respectively, increased consumption of approximately $13.0 million and the ~~weakening~~strengthening of the Mexican peso ~~against the U.S. dollar~~ of approximately ~~$4.0 million and increased efficiency of approximately $4.0~~$7.0 million.

Fuel ~~decreased $56.3~~increased $35.5 million for the six months ended June 30, ~~2020,~~2021, compared to the same period in ~~2019,~~2020, due to ~~lower~~higher diesel fuel prices ~~of approximately $15.0 million and $12.0 million~~ in the U.S. and Mexico of approximately $12.0 million and $6.0 million, respectively, ~~lower~~increased consumption of approximately $12.0 million, and ~~$4.0 million in Mexico and~~ the ~~U.S., respectively, caused by volume declines as a result of COVID-19, increased efficiency of approximately $8.0 million and the weakening~~strengthening of the Mexican peso ~~against the U.S. dollar~~ of approximately ~~$5.0~~$6.0 million. The average price per gallon was ~~$1.65~~$2.51 and ~~$2.04~~$2.38 for the three and six months ended June 30, ~~2020,~~2021, respectively, compared to ~~$2.70~~$1.65 and ~~$2.62, respectively,~~$2.04 for the same periods in ~~2019.~~2020.

Equipment costs. Equipment costs ~~decreased $8.2~~increased $6.0 million for the three months ended June 30, ~~2020,~~2021, compared to the same period in ~~2019,~~2020, due to ~~lower~~increased car hire expense of approximately ~~$4.0~~$6.0 million ~~primarily~~due to higher volumes and cycle times as a result of ~~lower volumes caused by~~ COVID-19 ~~and reduced cycle times due to PSR initiatives, and lower lease expense of approximately $4.0 million due to the termination of a locomotive lease during the first quarter of~~impacts in 2020.

Equipment costs ~~decreased $16.7~~increased $5.2 million for the six months ended June 30, ~~2020,~~2021, compared to the same period in ~~2019,~~2020, due to increased car hire expense of approximately $7.0 million due to higher cycle times and volumes as a result of COVID-19 impacts in 2020. This increase was partially offset by lower lease expense of approximately ~~$9.0~~$2.0 million primarily due to ~~the termination of locomotive leases during the second quarter of 2019~~freight car lease expirations and ~~the first quarter of 2020 and lower car hire expense of approximately $8.0 million primarily as a result of lower volumes caused by COVID-19 and reduced cycle times due to~~terminations resulting from PSR initiatives.

Depreciation and amortization. Depreciation and amortization expense increased ~~$1.6~~$1.9 million and ~~$2.5~~$4.5 million for the three and six months ended June 30, ~~2020,~~2021, compared to the same periods in ~~2019,~~2020, due to a larger asset ~~base, partially offset by lower depreciation as a result of PSR initiatives implemented during 2019.~~base.

Materials and other. Materials and other expense ~~decreased $6.6~~increased $20.2 million and $22.6 million for the three and six months ended June 30, 2021, respectively, compared to the same periods in 2020 due to a one-time contract dispute of approximately $9.0 million for both periods and increased locomotive materials expense of approximately $6.0 million and $11.0 million, respectively, resulting from the in-servicing of locomotives to support service recovery and preparing for volume growth in the second half of 2021. The remaining increase is due to the strengthening of the Mexican peso of approximately $3.0 million and $2.0 million respectively, and increased employee expenses of approximately $2.0 million for the three months ended June 30, ~~2020, compared to~~2021.

Merger costs. During the ~~same period in 2019, primarily due to lower employee expenses of approximately $5.0 million, lower materials~~three and supplies expense of approximately $3.0 million and the weakening of the Mexican peso against the U.S. dollar of approximately $2.0 million, partially offset by an increase in personal injury expense of approximately $4.0 million.

~~Materials and other expense decreased $6.0 million for the~~ six months ended June 30, ~~2020, compared~~2021, the Company recognized costs of $720.8 million and $740.1 million, respectively, primarily related to the ~~same period in 2019, primarily due to lower materials and supplies expense of approximately $5.0 million, lower employee expenses of approximately $5.0 million~~termination fee associated with the ~~weakening~~termination of the ~~Mexican peso against the U.S. dollar~~CP merger agreement by KCS of ~~approximately $3.0 million, partially offset by an increase in personal injury expense of approximately $5.0~~$700.0 million. The remaining costs primarily relate to bankers’ and legal fees. Please see Note 2, Merger Agreement for more information.

Restructuring charges. During the three and six months ended June 30, 2020, the Company recognized $10.5 million and $16.5 million, respectively of restructuring charges primarily related to the voluntary separation program of $9.2 million and the buyout of leased locomotives. ~~For~~There were no restructuring charges recognized during the three and six months ended June 30, 2019, the Company recognized $51.0 million and $118.5 million, respectively, of restructuring charges related to the implementation of PSR initiatives, which included the impairment of certain locomotives and rail cars, planned activities for workforce reduction, and contract restructuring activities. Refer to Note 2, Restructuring Charges for more information.2021.

Non-Operating Income and Expenses

Equity in net earnings ~~(losses)~~ of ~~affiliates.~~affiliates. For the three months ended June 30, ~~2020,~~2021, equity in net earnings of affiliates increased ~~$0.4~~$3.2 million, compared to the same period in ~~2019,~~2020, primarily due to an increase in equity in net earnings from the operations of Ferrocarril y Terminal del Valle de Mexico, S.A de C.V. (“FTVM”) as a result of higher expenses recognized in the second quarter of 2019 related to the cancellation of Mexico City’s new international airport, partially offset by a decrease in net earnings from the operations of Panama Canal Railway Company (“PCRC”) due to lower container volumes ~~due to~~in 2020 caused primarily by a water vessel striking a rail bridge ~~strike in late June 2020~~ that ~~has shutdown~~shut down the railroad for ~~an estimated 90 days.~~approximately three months.

For the six months ended June 30, ~~2020,~~2021, equity in net earnings of affiliates ~~decreased $0.3~~increased $8.2 million, compared to the same period in ~~2019,~~2020, primarily due to ~~a decrease~~an increase in net earnings from the operations of TFCM, S. de R.L de C.V. (“TCM”) due to increased revenues, decreased interest and tax expense, and lower foreign exchange losses, ~~in the first quarter of 2020, partially offset by an increase in equity in~~as well as increased net earnings from the operations of ~~FTVM~~PCRC as a result of ~~higher expenses recognized in~~ the ~~first half of 2019 related to the cancellation of Mexico City’s new international airport.~~aforementioned 2020 bridge outage.

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Interest expense.For the three and six months ended June 30, ~~2020,~~2021, interest expense increased ~~$10.1~~$1.0 million and ~~$16.1~~$5.8 million, respectively, compared to the same periods in ~~2019,~~2020, due to higher average debt ~~balances, partially offset by lower average interest rates.~~balances. During the three and six months ended June 30, ~~2020,~~2021, the average debt ~~balances~~balance (including commercial paper) ~~were $3,818.6~~was $3,810.5 million and ~~$3,546.9~~$3,807.5 million, respectively, compared to ~~$2,709.3~~$3,818.6 million and ~~$2,710.6~~$3,546.9 million for the same periods in ~~2019.~~2020. The average interest ~~rates~~rate during the three and six months ended June 30, ~~2020 were~~2021 was 4.1% for both periods, compared to 4.0% and 4.1%~~, respectively, compared to 4.1% and 4.2%~~ for the same periods in ~~2019.~~

~~Debt retirement costs~~. The Company did not incur debt retirement costs during 2020, or the second quarter of 2019. Debt retirement costs were $0.6 million for the six months ended June 30, 2019, related to the write-off of previously capitalized debt issuance costs associated with the establishment of the new revolving credit facility in the first quarter of 2019.2020.

Foreign exchange gain (loss). For the three and six months ended June 30, ~~2020,~~2021, the Company incurred a foreign exchange gain ~~was $7.8~~of $6.8 million and a loss of ~~$51.7~~$0.5 million, respectively, compared to a foreign exchange gain of ~~$8.3~~$7.8 million and ~~$12.9~~a loss of $51.7 million for the same periods in ~~2019.~~2020. 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. The significant fluctuation in foreign exchange gain (loss) is a result of depreciation in the Mexican peso against the U.S. dollar partially resulting from the increased market volatility driven by the global COVID-19 pandemic.

For the three and six months ended June 30, ~~2020,~~2021, the re-measurement and settlement of monetary assets and liabilities denominated in Mexican pesos resulted in a foreign exchange gain ~~and loss~~ of ~~$1.4~~$8.5 million and ~~$24.4~~$3.6 million, respectively, compared to a gain of ~~$1.0~~$1.4 million and ~~$2.0~~a loss of $24.4 million for the same periods in ~~2019.~~2020.

The Company enters into foreign currency derivative contracts to hedge its net exposure to fluctuations in ~~the Mexican cash tax obligation due to changes~~foreign currency caused by fluctuations in the value of the Mexican peso against the U.S. dollar. For the three and six months ended June 30, 2021 and 2020, the Company incurred a foreign exchange ~~gain and~~ loss on foreign currency derivative contracts of ~~$6.4~~$1.7 million and ~~$27.3~~$4.1 million, respectively, compared to a gain of ~~$7.3~~$6.4 million and ~~$10.9~~a loss of $27.3 million for the same periods in ~~2019.~~2020.

Other income, net. Other income, net ~~increased $0.7~~remained flat for the three months ended June 30, 2021, compared to the same period in 2020. Other income, net decreased $2.0 million for the six months ended June 30, 2021, compared to the same period in 2020, due to an increase in miscellaneous expenses.

Income tax expense. Income tax expense decreased $122.4 million and ~~$2.0~~$109.1 million for the three and six months ended June 30, ~~2020,~~2021, respectively, compared to the same periods in ~~2019,~~2020, primarily due to ~~an increase~~the payment of the termination fee associated with the termination of the CP merger agreement by KCS.A discrete tax benefit of $147.0 million was recognized on the CP termination fee resulting in ~~miscellaneous income.~~

~~Income~~a tax ~~expense.~~ ~~Income tax expense decreased $18.3 million~~benefit for the three ~~months ended June 30, 2020, compared to the same period in 2019, due to lower pre-tax income~~ and ~~a lower effective tax rate. The decrease in the effective tax rate was primarily due to fluctuations in the foreign exchange rate. See the tax rates reconciliation below.~~

~~Income tax expense decreased $7.8 million for the~~ six months ended June 30, ~~2020, compared~~2021, and is expected to reverse upon recognition of the ~~same period in 2019, due to a lower effective tax rate. The decrease~~termination fee reimbursement in the ~~effective tax rate was primarily due to fluctuations~~consolidated statements of operations in the ~~foreign exchange rate. See~~third quarter of 2021. Upon the ~~tax rates reconciliation below.~~Merger, the Company expects the termination fee paid to CP will be non-deductible and the reimbursement from CN will not be taxable.

The Treasury Department issued proposed regulations in June 2019 that provide for a high-tax exception to the GILTI tax. Specifically, if foreign earnings are subject to a foreign tax rate of at least 90% of the U.S. tax rate, an election can be made to not treat the high-taxed earnings as GILTI income. The regulations as proposed should render the GILTI tax immaterial to the consolidated financial statements if and when they become effective.

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The components of the effective tax rates for the ~~three and six~~ ~~months ended June 30, 2020, compared to the same periods in 2019, are as follows:~~

Three Months Ended Six Months Ended
June 30, June 30,
2020 2019 2020 2019
Statutory rate in effect 21.0 % 21.0 % 21.0 % 21.0 %
Tax effect of:
Difference between U.S. and foreign tax rate 4.9 % 6.2 % 5.3 % 6.0 %
Global intangible low-taxed income (“GILTI”) tax, net 1.3 % 0.1 % 1.2 % 0.5 %
Mexican fuel excise tax credit, net (i) —
1.0 % —
(1.5 %)
State and local income tax provision, net 1.5 % 0.9 % 1.4 % 1.0 %
Foreign exchange (ii) (1.8 %) 2.2 % (3.5 %) 1.8 %
Other, net 0.1 % —
(0.7 %) —
Effective tax rate 27.0 % 31.4 % 24.7 % 28.8 %


~~(i)~~	~~See discussion of the inclusion of the Mexican fuel excise tax credit, net within the effective tax rate in the Mexico Tax Reform section below.~~

~~(ii)~~

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 measured by the forward exchange rate. The foreign exchange impact on income taxes includes the gain or loss from the revaluation of 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 as described above. Refer to Note 7, Derivative Instruments for more information.

~~Mexico Tax Reform~~

In December 2019, the Mexican government enacted changes in the tax law effective January 1, 2020 (“Mexico 2020 Tax Reform”). Mexico 2020 Tax Reform excluded railroads from eligibility for the Mexican fuel excise tax credit. Mexico 2020 Tax Reform also included permanent changes to the Value Added Tax (“VAT”) Law, Income Tax Law and Federal Fiscal Code which, among other things, requires certain VAT withholding, limits the deduction of interest expense and certain payments to related parties in preferential tax regimes, adopts a general anti-avoidance rule, requires mandatory disclosure of reportable transactions beginning in 2021, and permanently eliminates universal compensation, which allowed Mexican taxpayers to offset recoverable tax balances against balances due for other federal taxes. The elimination of universal compensation, which was instituted at the beginning of 2019 and then made permanent beginning in 2020, resulted in favorable VAT balances of $65.0 million as of June 30, 2020. The Company believes it has strong arguments in its favor and it is more likely than not the favorable VAT balance will be refunded by the Mexican government. Inability to obtain the VAT refund would have a material adverse effect on the Company’s consolidated financial statements. Mexico 2020 Tax Reform did not have a material impact to the consolidated financial statements for the three and six months ended June 30, ~~2020.~~2021, compared to the same periods in 2020, are as follows:


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2021		2020		2021		2020
Statutory rate in effect	21.0	%	21.0	%	21.0	%	21.0	%
Tax effect of:
Difference between U.S. and foreign tax rate	(3.0	%)	4.9	%	(10.6	%)	5.3	%
GILTI tax, net	—		1.3	%	(0.1	%)	1.2	%
State and local income tax provision, net	(0.7	%)	1.5	%	(2.3	%)	1.4	%
Foreign exchange (i)	(0.5	%)	(1.8	%)	(1.3	%)	(3.5	%)
Other, net	1.0	%	0.1	%	2.6	%	(0.7	%)
Effective tax rate	17.8	%	27.0	%	9.3	%	24.7	%

(i)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 in the consolidated statements of operations and the amount of income taxes paid in Mexico. The Company also has net monetary assets denominated in Mexican pesos, that are subject to periodic re-measurement and settlement that creates fluctuations in foreign currency gains and losses in the consolidated statements of operations. The Company hedges its net exposure to variations in earnings by entering into foreign currency forward contracts. The foreign currency forward contracts involve the Company’s agreement to buy or sell pesos at an agreed-upon exchange rate on a future date. Refer to Note 7, Derivative Instruments for more information.

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Mexico Regulatory and Legal Updates

Outsourcing Reform. In April 2021, Mexico approved several amendments to federal labor, tax, social security, and other laws (“Outsourcing Reform”), which prohibit the subcontracting and outsourcing of personnel. Outsourcing Reform allows for certain exceptions, including the subcontracting of specialized services that are not part of a recipient company’s corporate purpose or main economic activities. A 90-day transition period was granted to allow companies to comply with Outsourcing Reform. Non-compliance could result in penalties and the loss of deductions and VAT credits on third party and related party service payments.

KCSM subcontracts its management and union employees, other than the president and executive representative of KCSM, from its affiliate, KCSM Servicios, S.A. de C.V. (“KCSM Servicios”), a wholly-owned and consolidated subsidiary of the Company. Under Outsourcing Reform, KCSM Servicios is prohibited from providing certain outsourced employees to KCSM. As a consequence, subsequent to June 30, 2021, KCSM Servicios was merged into KCSM, resulting in KCSM Servicios employees becoming employees of KCSM.

Outsourcing Reform also limits the statutory profit sharing payment per employee (referred to by its Spanish acronym “PTU”) to the greater of three months’ salary or the average of the amount of profit sharing received in the last three years. KCSM Servicios’ employees were eligible for PTU and received PTU payments and other bonuses. As employees of KCSM, employees will be eligible to receive PTU payments from KCSM upon the merger. As a result of the limitations on PTU, Outsourcing Reform is not expected to have a material impact on the consolidated financial statements.

Hydrocarbons Law. On May 5, 2021, new legislation pertaining to the transport and handling of hydrocarbons in Mexico became effective. This legislation addresses a wide array of issues related to the storage, transportation and handling of petroleum products, as well as the illegal import of hydrocarbons. The legislation is being challenged in the court system and is currently subject to a court-ordered injunction, resulting in a suspension of the implementation and enforcement of this new law. To date, this law has not had a material effect on the Company or its operations. However, the Company is continuing to the monitor this law and evaluating the effect on the Company and its financial statements.

Liquidity and Capital Resources

Overview

~~On November 12, 2019, the~~The Company ~~announced~~focuses its ~~new~~cash and capital ~~allocation policy (the “Policy”) that was approved by the Company’s Board of Directors (the “Board”). Pursuant to that Policy, the Company intends to deploy available cash~~resources on investing in the ~~following manner:~~business, shareholder returns and optimizing its capital structure.

• ~~Approximately 40-50%~~The Company believes, based on current expectations, that cash and other liquid assets, operating cash flows, and other available financing resources will be sufficient to fund anticipated operating expenses, capital ~~projects~~expenditures, debt service costs, dividends, and ~~strategic investments; and~~

~~Approximately 50-60% to share repurchases and dividends.~~

~~In connection with~~other commitments for the ~~new Policy, the Board also approved the following actions:~~

~~An increase in the quarterly dividend on KCS’s common stock from $0.36 to $0.40 per share; and~~

~~A new $2.0 billion share repurchase program (“2019 Program”), expiring December 31, 2022.~~

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foreseeable future.

During the six months ended June 30, ~~2020,~~2021, the Company invested ~~$186.5~~$249.2 million in capital expenditures. See the Capital Expenditures section for further details.

On May 21, 2021, KCS paid CP a merger termination fee of $700.0 million and a U.S. affiliate of CN paid KCS $700.0 million as reimbursement for the termination fee paid to CP. KCS is obligated to repay the termination fee to CN under certain circumstances, including but not limited to, if KCS were to terminate the Merger Agreement to accept a superior proposal as defined by the Merger Agreement. In addition, KCS would be required to pay CN a termination fee of $700.0 million to terminate the Merger Agreement with CN. For 2021, the Company expects to pay approximately $180.0 million of merger-related costs, assuming the Voting Trust Transaction occurs in the second half of 2021.

During the ~~second~~first quarter of ~~2020, the Company repurchased 699,123~~2021, KCS received 233,402 shares of common stock ~~for $100.0 million at an average price~~as final settlement of ~~$143.05 per share under~~ the ~~2019 Program. During the six months ended June 30, 2020, KCS repurchased 1,990,758 shares of common stock for $294.2~~forward contracts totaling $75.0 million under the ~~2019 Program, which includes shares delivered to settle the Company’s~~ accelerated share repurchase (“ASR”) agreements entered into ~~in November 2019. Since inception~~during October 2020 under the 2019 share repurchase program. The final weighted-average price per share of the ~~2019 Program, KCS has~~shares repurchased ~~5,013,518 shares~~under these ASR agreements was $191.75. As a result of ~~common stock for $761.7 million at an average price of $151.94 per share. Management’s assessment of market conditions, available liquidity and other factors will determine~~ the ~~timing and volume of any future repurchases.~~merger agreement with CP, the Company terminated its share repurchase program. Refer to Note ~~10,~~9, Share Repurchases, for additional information on the Company’s common share repurchase program and ASR agreements.

During the first quarter of 2021, the Company repurchased 657 shares of its $25 par preferred stock for less than $0.1 million at an average price of $37.79 per share.

During the first and second quarters of ~~2020,~~2021, the Company’s ~~Board~~board of ~~Directors~~directors declared a quarterly cash dividend on its common stock of ~~$0.40~~$0.54 per share (total of ~~$76.0~~$98.2 million). 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 April 22, 2020, the Company issued $550.0 million principal amount~~

Table of senior unsecured notes due May 1, 2050, which bear interest semiannually at a fixed annual rate of 3.50% (the “3.50% Notes”). The Company intends to use the net proceeds from the offering for general corporate purposes, including to repurchase shares of the Company’s common stock. However, given the uncertainties of the impacts of COVID-19, the Company currently retains the net proceeds from the offering as cash.Contents

At
June 30, 2020, the Company had $444.7 million principal amount outstanding of 3.00% senior notes that mature May 15, 2023 (the “3.00% Notes”). The Company has the intention and ability to refinance the 3.00% Notes into a new long-term debt instrument prior to maturity. The Company has executed treasury lock agreements to hedge the U.S. Treasury benchmark interest rate associated with any future interest payments related to the anticipated refinancing of the 3.00% Notes. See Note 7, Derivative Instruments for further discussion of the treasury lock agreements.

The Company’s current financing instruments contain restrictive covenants that 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 has been, and expects to continue to be, in compliance with all of its debt covenants.

For additional discussion of the agreements representing the indebtedness of KCS, see Note ~~13,~~12, Short-Term Borrowings and Note ~~14,~~13, Long-Term Debt in the “Notes to the Consolidated Financial Statements” section of the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2019.~~2020.

On ~~June 30, 2020~~,KCS believes it has a strong liquidity position to continue business operations and service its debt obligations. The Company has total available liquidity ~~(the~~of $925.8 million as of June 30, 2021, consisting of cash ~~balance plus~~on hand and a revolving credit facility, ~~availability) was $1,220.1 million,~~ compared to ~~availability~~available liquidity at December 31, ~~2019~~2020 of ~~$748.8~~$788.2 million. ~~This increase was due to higher cash balances as a result of~~Furthermore, the ~~issuance of the 3.50% Notes, partially offset by share repurchases during the first half of 2020.~~Company does not have any debt maturities until 2023.

As of June 30, ~~2020,~~2021, the total cash and cash equivalents held outside of the U.S. in foreign subsidiaries was ~~$28.4~~$144.4 million, after repatriating ~~approximately $66.0~~$52.8 million during ~~2020.~~2021. The Company expects that this cash will be available to fund operations without incurring significant additional income taxes.

Mexico 2020 ~~Tax Reform~~tax reform permanently eliminated universal compensation that allowed Mexican taxpayers to offset

recoverable tax balances against balances due for other federal taxes. ~~The~~As a result of the elimination of universal compensation, the refundable VAT balance increased to $138.9 million as of June 30, 2021, and could negatively impact the timing of KCSM’s cash flow by up to ~~$50.0~~$70.0 million in ~~2020~~2021 while awaiting refunds of value added tax from the Mexican government. KCSM has prior favorable Mexican court decisions and a legal opinion supporting its right under Mexican law to recover the refundable VAT balance from the Mexican government and believes the VAT to be fully collectible. However, the Company cannot predict the timing or amount of the Company’s ultimate collection of the refundable VAT balance from the Mexican government.

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Cash Flow Information

Summary cash flow data follows (in millions):


	Six Months Ended							Six Months Ended
	June 30,							June 30,
	2020			2019				2021		2020
Cash flows provided by (used for):							Cash flows provided by (used for):
Operating activities	$	525.5		$	541.2		Operating activities	$	507.3	$	525.5
Investing activities	(299.2		)	(374.1		)	Investing activities	(279.0)		(299.2)
Financing activities	250.1			(220.0		)	Financing activities	(90.3)		250.1
Effect of exchange rate changes on cash	(5.1		)	—			Effect of exchange rate changes on cash	(0.4)		(5.1)
Net increase (decrease) in cash and cash equivalents	471.3			(52.9		)
Net increase in cash and cash equivalents							Net increase in cash and cash equivalents	137.6		471.3
Cash and cash equivalents beginning of year	148.8			100.5			Cash and cash equivalents beginning of year	188.2		148.8
Cash and cash equivalents end of period	$	620.1		$	47.6		Cash and cash equivalents end of period	$	325.8	$	620.1

Cash flows from operating activities decreased ~~$15.7~~$18.2 million for the six months ended June 30, ~~2020,~~2021, compared to the same period in ~~2019,~~2020, primarily due to payments for merger-related costs and increased ~~cash paid~~payments related to refundable Mexican value added tax, partially offset by lower payments to settle foreign currency ~~derivative instruments partially offset by increased net income.~~derivatives.

Net cash used for investing activities decreased ~~$74.9~~$20.2 million for the six months ended June 30, ~~2020,~~2021, compared to the same period in ~~2019,~~2020, primarily due to a decrease ~~in capital expenditures of $155.7 million, partially offset by an increase~~ in the purchase or replacement of assets under existing operating leases of ~~$77.3~~$78.2 million, partially offset by an increase in capital expenditures of $55.8 million.

Net cash provided by financing activities ~~increased $470.1~~decreased $340.4 million for the six months ended June 30, ~~2020,~~2021, compared to the same period in ~~2019,~~2020, primarily due to ~~net~~a decrease in proceeds from the issuance of long-term debt of $545.6 million, ~~during the first half of 2020,~~ partially offset by ~~an increase~~a decrease in shares repurchased of ~~$69.0~~$211.7 million.

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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 (in millions):


	Six Months Ended						Six Months Ended
	June 30,						June 30,
	2020		2019				2021		2020
Roadway capital program	$	116.2	$	122.5		Roadway capital program	$	116.9	$	116.2
Locomotives and freight cars	20.7		165.0			Locomotives and freight cars	44.1		20.7
Capacity	20.1		39.9			Capacity	57.1		20.1
Information technology	21.0		15.1			Information technology	19.3		21.0
Positive train control	6.7		7.9			Positive train control	9.6		6.7
Other	1.8		4.5			Other	2.2		1.8
Total capital expenditures (accrual basis)	186.5		354.9			Total capital expenditures (accrual basis)	249.2		186.5
Change in capital accruals	8.2		(4.5		)	Change in capital accruals	1.3		8.2
Total cash capital expenditures	$	194.7	$	350.4		Total cash capital expenditures	$	250.5	$	194.7


Purchase or replacement of assets under operating leases (accrual basis)	$	78.2	$	0.9
Change in capital accruals	—		—
Total cash purchase or replacement of assets under operating leases	$	78.2	$	0.9		Total cash purchase or replacement of assets under operating leases	$	—	$	78.2

Generally, the Company’s capital program consists of capital replacement and equipment. During 2021, the Company is upgrading its ERP system with expected costs of approximately $30.0 million. For ~~2020,~~2021, internally generated cash flows are expected to fund cash capital expenditures, which are currently estimated to be approximately ~~$425.0 million or below, depending on market conditions.~~17% of revenue in 2021, assuming constant currency and fuel price. In addition, the Company periodically reviews its equipment and property under operating leases. Any additional purchase or replacement of equipment and property under operating leases during ~~2020~~2021 is expected to be funded with internally generated cash flows and/or debt.

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~~Other Matters~~

~~Collective Bargaining~~

KCSR participates in industry-wide multi-employer bargaining as a member of the National Carriers’ Conference Committee (“NCCC”), as well as local bargaining for agreements that are limited to KCSR's property. Over 70% of KCSR employees are covered by collective bargaining agreements. Long-term agreements were reached voluntarily or through the arbitration process during 2017 and 2018 covering all of the participating unions. The terms of these agreements will remain in effect until new agreements are reached in the next bargaining round. In November 2019, KCSR and its unions commenced negotiations in connection with the 2020 bargaining round.

KCSM Servicios, S.A. de C.V. (“KCSM Servicios”), a wholly owned subsidiary of KCS, provides employee services to KCSM, and KCSM pays KCSM Servicios market-based rates for these services. 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”), and which remains in effect during the period of the Concession, for the purpose of regulating the relationship between the parties. Over 75% 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 parties are currently negotiating compensation terms and benefits that will apply from July 1, 2019 to June 30, 2020, along with other terms. The finalization of the compensation terms is not expected to have a significant effect on the consolidated financial statements.

~~Union labor negotiations have not historically resulted in any strike, boycott, or other disruption in the Company’s business operations.~~

Supplemental Guarantor Financial Information

The following is a description of the terms and conditions of the guarantees with respect to senior notes for which KCS is an issuer or provides full and unconditional guarantee.

Note Guarantees

As of June 30, ~~2020,~~2021, KCS had outstanding $3,736.2 million principal amount of senior notes due through 2069. The Kansas City Southern Railway Company (“KCSR”) had outstanding $2.7 million principal amount of senior notes due through 2045 (together, the “Senior Notes”). The senior notes for which KCS is the issuer are unconditionally guaranteed, jointly and severally, on an unsecured senior basis, by each of KCS’s current and future domestic consolidated subsidiaries that from time to time guarantees certain of KCS’s credit agreements, or any other debt of KCS, or any of KCS’s significant subsidiaries that is a guarantor (each, a “Guarantor Subsidiary,” and collectively, the “Guarantor Subsidiaries”). In addition, the senior notes for which KCSR is the issuer are unconditionally guaranteed, jointly and severally, on an unsecured senior basis, by KCS and each of its current and future domestic consolidated subsidiaries that from time to time guarantees KCSR’s credit agreement, or any other debt of KCSR or any of KCSR’s significant subsidiaries that is a Guarantor Subsidiary. The obligations of each Guarantor Subsidiary under its note guarantee are limited as necessary to prevent such note guarantee from constituting a fraudulent conveyance under applicable law. A guarantee of the Senior Notes by KCS or a Guarantor Subsidiary is subject to release in the following circumstances: (i) the sale, disposition, exchange or other transfer (including through merger, consolidation, amalgamation or otherwise) of the capital stock of the Guarantor Subsidiary made in a manner not in violation of the indenture; (ii) the designation of the subsidiary as an “Unrestricted Subsidiary” under the indenture; (iii) the legal defeasance or covenant defeasance of the Senior Notes in accordance with the terms of the indenture; or (iv) the Guarantor Subsidiary ceasing to be KCS’s subsidiary as a result of any foreclosure of any pledge or security interest securing KCS’s Revolving Credit Facility or other exercise of remedies in respect thereof.

KCSM and any other foreign subsidiaries of KCS do not and will not guarantee the Senior Notes (“Non-Guarantor Subsidiaries”).

The following tables present summarized financial information for KCS and the Guarantor Subsidiaries on a combined basis after intercompany transactions have been eliminated, including adjustments to remove the receivable and payable balances, investment in, and equity in earnings from the Non-Guarantor Subsidiaries.

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Summarized Financial Information


Statements of Operations	KCS and Guarantor Subsidiaries
	Six Months Ended		Twelve Months Ended
	June 30, 2021		December 31, 2020
Revenues	$	740.5	$	1,368.7
Operating expenses	1,199.8		846.9
Operating income (loss)	(459.3)		521.8
Income (loss) before income taxes	(537.6)		375.4
Net income (loss)	(411.7)		329.8

Income Statements KCS and Guarantor Subsidiaries
Six Months Ended Twelve Months Ended
June 30, 2020 December 31, 2019
Revenues $ 673.6
$ 1,472.0
Operating expenses 423.8
1,068.5
Operating income 249.8
403.5
Income before income taxes 180.6
291.7
Net income 156.7
235.0


Balance Sheets	KCS and Guarantor Subsidiaries
	June 30, 2021		December 31, 2020
Assets:
Current assets	$	370.0	$	298.8
Property and equipment (including concession assets), net	4,836.6		4,751.3
Other non-current assets	156.4		110.8

Liabilities and equity:
Current liabilities	$	1,039.4	$	318.2
Non-current liabilities	4,763.5		4,841.2
Noncontrolling interest	327.3		326.4

Balance Sheets KCS and Guarantor Subsidiaries
June 30, 2020 December 31, 2019
Assets:
Current assets $ 764.9
$ 332.9
Property and equipment (including concession assets), net 4,725.3
4,596.3
Other non-current assets 88.5
156.9

Liabilities and equity:
Current liabilities $ 300.8
$ 313.5
Non-current liabilities 4,800.6
4,267.7
Noncontrolling interest 324.5
323.4

Excluded from current assets in the table above are ~~$187.0~~$187.2 million and ~~$95.2~~$183.7 million of current intercompany receivables due to KCS and the Guarantor Subsidiaries from the Non-Guarantor Subsidiaries as of June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, respectively. Excluded from current liabilities in the table above are ~~$162.0~~$239.5 million and ~~$55.0~~$235.8 million of current intercompany payables due to the Non-Guarantor Subsidiaries from KCS and the Guarantor Subsidiaries as of June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, respectively.

The Senior Notes are structurally subordinated to the indebtedness and other liabilities of the Non-Guarantor Subsidiaries. The Non-Guarantor Subsidiaries are separate and distinct legal entities and have no obligation, contingent or otherwise, to pay any amounts due pursuant to the Senior Notes or the indentures, or to make any funds available therefor, whether by dividends, loans, distributions or other payments. Any right that KCS or the Guarantor Subsidiaries have to receive any assets of any of the Non-Guarantor Subsidiaries upon the liquidation or reorganization of any Non-Guarantor Subsidiary, and the consequent rights of holders of Senior Notes to realize proceeds from the sale of any of a Non-Guarantor Subsidiary’s assets, would be effectively subordinated to the claims of such Non-Guarantor Subsidiary’s creditors, including trade creditors and holders of preferred equity interests, if any, of such Non-Guarantor Subsidiary. Accordingly, in the event of a bankruptcy, liquidation or reorganization of any of the Non-Guarantor Subsidiaries, the Non-Guarantor Subsidiaries will pay the holders of their debts, holders of preferred equity interests, if any, and their trade creditors before they will be able to distribute any of their assets to KCS or any Guarantor Subsidiary.

If a Guarantor Subsidiary were to become a debtor in a case under the U.S. Bankruptcy Code or encounter other financial difficulty, under federal or state fraudulent transfer or conveyance law, a court may avoid, subordinate or otherwise decline to enforce its guarantee of the Senior Notes. A court might do so if it is found that when such Guarantor Subsidiary entered into its guarantee of the Senior Notes, or in some states when payments became due under the Senior Notes, such Guarantor Subsidiary received less than reasonably equivalent value or fair consideration and either:

• was insolvent or rendered insolvent by reason of such incurrence;

• was left with unreasonably small or otherwise inadequate capital to conduct its business; or

• believed or reasonably should have believed that it would incur debts beyond its ability to pay.

The court might also avoid the guarantee of the Senior Notes without regard to the above factors, if the court found that a Guarantor Subsidiary entered into its guarantee with actual intent to hinder, delay or defraud its creditors.

A court would likely find that a Guarantor Subsidiary did not receive reasonably equivalent value or fair consideration for its guarantee of the Senior Notes, if such Guarantor Subsidiary did not substantially benefit directly or indirectly from the funding made available by the issuance of the Senior Notes. If a court were to avoid a guarantee of the Senior Notes provided by a Guarantor Subsidiary, holders of the Senior Notes would no longer have any claim against such Guarantor Subsidiary. The measures of

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insolvency for purposes of these fraudulent transfer or conveyance laws will vary depending upon the law applied in any proceeding to determine whether a fraudulent transfer or conveyance has occurred, such that the Company cannot predict what standards a court would use to determine whether or not a Guarantor Subsidiary was solvent at the relevant time or, regardless of the standard that a court uses, that the guarantee of a Guarantor Subsidiary would not be subordinated to such Guarantor Subsidiary’s other debt. As noted above, each guarantee provided by a Guarantor Subsidiary includes a provision intended to limit the Guarantor Subsidiary’s liability to the maximum amount that it could incur without causing the incurrence of obligations under its guarantee to be a fraudulent transfer or conveyance. This provision may not be effective to protect those guarantees from being avoided under fraudulent transfer or conveyance law, or it may reduce that Guarantor Subsidiary’s obligation to an amount that effectively makes its guarantee worthless, and the Company cannot predict whether a court will ultimately find it to be effective.

On the basis of historical financial information, operating history and other factors, the Company believes that each of the Guarantor Subsidiaries, after giving effect to the issuance of its guarantee of the Senior Notes when such guarantee was issued, was not insolvent, did not have unreasonably small capital for the business in which it engaged and did not and has not incurred debts beyond its ability to pay such debts as they mature. The Company cannot predict, however, as to what standard a court would apply in making these determinations or that a court would agree with the Company’s conclusions in this regard.

Other Matters

Collective Bargaining

KCSR participates in industry-wide multi-employer bargaining as a member of the National Carriers’ Conference Committee (“NCCC”), as well as local bargaining for agreements that are limited to KCSR's property. Approximately 70% of KCSR employees are covered by collective bargaining agreements. Long-term agreements were reached voluntarily or through the arbitration process during 2017 and 2018 covering all of the participating unions. The terms of these agreements will remain in effect until new agreements are reached in the current national bargaining round. In November 2019, KCSR and its unions commenced negotiations in connection with the 2020 bargaining round.

KCSM Servicios, a wholly owned subsidiary of KCS, provides employee services to KCSM, and KCSM pays KCSM Servicios market-based rates for these services. 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”), and which remains in effect during the period of the Concession, 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 parties finalized negotiations over compensation terms and benefits that will apply until June 30, 2021, along with other terms.

Subsequent to June 30, 2021, KCSM Servicios merged into KCSM as part of Mexico Outsourcing Reform. Upon merger, KCSM Servicios employees became employees of KCSM. As a result, the KCSM union employees continue to be covered under the existing labor agreement.

Union labor negotiations have not historically resulted in any strike, boycott, or other disruption in the Company’s business operations.


~~Item 3.~~	~~Quantitative and Qualitative Disclosures about Market Risk~~

Item 3.Quantitative and Qualitative Disclosures about Market Risk

There was no material change during the quarter from the information set forth in Part II, Item 7A. “Quantitative and Qualitative Disclosure about Market Risk” in the Annual Report on Form 10-K for the year ended December 31, ~~2019~~2020.


~~Item 4.~~	~~Controls and Procedures~~

Item 4.Controls and Procedures

(a) Disclosure Controls and Procedures

The Company maintains disclosure controls and procedures (as that term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) that are designed to ensure that information required to be disclosed in the Company’s reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of the end of the quarterly period covered by this Quarterly Report on Form 10-Q. Based upon

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that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the fiscal quarter ended June 30, ~~2020~~2021, the design and operation of the Company’s disclosure controls and procedures were effective to accomplish their objectives at a reasonable assurance level.

(b) Changes in Internal Control over Financial Reporting

There have been no changes in the Company’s internal control over financial reporting (as that term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the fiscal quarter ended June 30, ~~2020~~2021 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II — OTHER INFORMATION


~~Item 1.~~	~~Legal Proceedings~~

Item 1.Legal Proceedings

For information related to the Company’s legal proceedings, see Note 11, Commitments and Contingencies, under Part I, Item 1 of this quarterly report on Form 10-Q.


~~Item 1A.~~	~~Risk Factors~~

Item 1A.Risk Factors

Except as set forth below, during the quarter ended June 30, ~~2020,~~2021, there were no material changes to the Risk Factors disclosed in Item 1A - “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2019.~~2020.

~~Public health threats~~The Company’s Merger with CN is subject to various closing conditions, including regulatory and stockholder approvals as well as other uncertainties, and there can be no assurances as to whether and when it may be completed.

Completion of the Merger is subject to the satisfaction or ~~outbreaks~~waiver of ~~communicable diseases could have~~ a ~~material adverse effect~~number of customary conditions, and it is possible that such conditions may prevent, delay or otherwise materially adversely affect the completion of the Merger. These conditions include, among other things: (1) the adoption of the Merger Agreement by the Company’s stockholders; (2) the absence of any injunction or similar order prohibiting the consummation of the Merger or the Voting Trust Transaction; (3) approval of the Voting Trust Transaction by the STB, (4) approval by the Comisión Federal de Competencia Económica (the Mexican Antitrust Commission) and the Instituto Federal de Telecomunicaciones (the Mexican Federal Telecommunications Institute) of the transactions contemplated by the Merger Agreement, (5) the CN common shares issuable in the Merger having been approved for listing on the New York Stock Exchange and the Toronto Stock Exchange; (6) accuracy of the other party’s representations and warranties, subject to certain materiality standards set forth in the Merger Agreement and (7) compliance by the other party in all material respects with such other party’s obligations under the Merger Agreement.

The governmental authorities from which authorizations are required have broad discretion in administering the governing laws and regulations, and may take into account various facts and circumstances in their consideration of the Merger or the other transactions contemplated by the Merger Agreement. These governmental authorities may initiate proceedings or otherwise seek to prevent the Merger. As a condition to authorization of the Merger or the other transactions contemplated by the Merger Agreement, these governmental authorities also may impose requirements, limitations or costs, require divestitures or place restrictions on the conduct of CN’s business after completion of the Merger.

The Company can provide no assurance that all required consents and approvals will be obtained or that all closing conditions will otherwise be satisfied (or waived, if applicable), and, if all required consents and approvals are obtained and all closing conditions are satisfied (or waived, if applicable), the Company can provide no assurance as to the terms, conditions and timing of such consents and approvals or the timing of the completion of the Merger. Many of the conditions to completion of the Merger are not within either the Company’s ~~operations~~or CN’s control, and neither company can predict when or if these conditions will be satisfied (or waived, if applicable). Any delay in completing the Merger could cause the Company not to realize some or all of the benefits that the Company expects to achieve if the Merger is successfully completed within the expected timeframe.

Failure to complete the Company’s Merger with CN could negatively impact the Company’s stock price and future business and financial results.

~~The Company may face risks related to public health threats~~If the Merger or ~~outbreaks of communicable diseases. A widespread healthcare crisis, such as an outbreak of a communicable disease could adversely affect~~ the ~~global economy and~~other transactions contemplated by the ~~Company’s and its business partners’ ability to conduct business in the U.S. and Mexico~~Merger Agreement are not completed for ~~an indefinite period of time. The novel Coronavirus (“COVID-19”), which has been declared a pandemic, has spread to multiple global regions,~~any reason, including the U.S. and Mexico, and has negatively impacted the global economy, disrupted financial markets and international trade, resulted in increased unemployment levels and significantly impacted global supply chains, all of which negatively impacted the rail transportation industry and the Company’s business. In an effort to halt the outbreak of COVID-19, both the U.S. and Mexico have implemented various measures, including but not limited to, voluntary and mandatory quarantines, stay-at-home orders, travel restrictions, border closings, limitations on gatherings of people, and extended closures of nonessential businesses. The implementation of these measures resulted in a decline in demand that had a material impact on the Company’s results of operations and financial condition during the second quarter of 2020. The Company’s revenues decreased by approximately 23% in the second quarter of 2020, as compared to the prior year, and $4.0 million in additional expenses were incurred due to COVID-19 as part of the Company providing a safe and healthy work environment for KCS employees.

Although the Company has taken numerous measures to overcome the adverse impact derived from the COVID-19 outbreak and continued with the Company’s normal business activities, this pandemic could continue to materially impact revenues and profit. The full extent of any such impact to KCS results for the 2020 fiscal year will depend on a number of factors, including the pace of the spread of the virus in the U.S. and Mexico, a possible second outbreak, actions taken by governments and private businesses to attempt to contain the coronavirus as it continues to spread, all of which could:

•~~continue to impact customer demand of the Company’s transportation services;~~

•~~cause the Company to experience an increase in costs~~ as a result of the Company’s ~~emergency measures,~~stockholders failing to adopt the Merger Agreement, the Company will remain an independent public company. The Company’s ongoing business may be materially and ~~delayed payments~~adversely affected and the Company would be subject to a number of risks, including the following:

•the Company may experience negative reactions from the financial markets, including negative impacts on trading prices of the Company’s common stock, and from the Company’s employees, suppliers, vendors, regulators or customers;

•~~continue~~the Company may be required to ~~cause delays~~pay CN a termination fee of $700.0 million and ~~disruptions~~to refund CN the reimbursement of the $700.0 million termination fee paid by KCS to CP if the Merger Agreement is terminated in certain circumstances, including because the ~~supply chain resulting~~Company’s board of directors has changed its recommendation in ~~disruptions~~favor of the Merger, the Company has breached the Merger Agreement such that the closing conditions fail and CN terminates the Merger Agreement as a result, or the Company has terminated the Merger Agreement in ~~the commercial operation dates of certain projects;~~order to enter into an agreement providing for a Company Superior Proposal;

•~~continue~~the Merger Agreement places certain restrictions on the conduct of the Company’s business, and such restrictions, the waiver of which is subject to ~~impact availability~~the consent of ~~qualified personnel;~~CN, may prevent the Company from making certain acquisitions, entering into or

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amending certain contracts, taking certain other specified actions or otherwise pursuing business opportunities during the pendency of the Merger that the Company would have made, taken or pursued if these restrictions were not in place; and

•~~cause~~matters relating to the Merger will require substantial commitments of time and resources by the Company’s management and the expenditure of significant funds in the form of fees and expenses, which would otherwise have been devoted to day-to-day operations and other ~~unpredictable events.~~opportunities that may have been beneficial to the Company as an independent company.

In addition, the Company could be subject to litigation related to any failure to complete the Merger or related to any proceeding to specifically enforce the Company’s performance obligations under the Merger Agreement.

If any of these risks materialize, they may materially and adversely affect the Company’s business, financial condition, financial results and stock price.

Because the exchange ratio is fixed and the market price of shares of CN stock has fluctuated and will continue to fluctuate, the Company stockholders cannot be sure of the value of the Merger Consideration they will receive in the Merger.

Upon completion of the Merger, each share of common stock, par value $0.01 per share, of KCS that is outstanding immediately prior to the Merger will be converted into the right to receive (1) 1.129 common shares of CN and (2) $200 in cash (together, the “Merger Consideration”), and each share of preferred stock, par value $25 per share, that is outstanding immediately prior to the Merger will be converted into the right to receive $37.50 in cash. Because the exchange ratio of 1.129 common shares of CN is fixed, the value of the share consideration will depend on the market price of common shares of CN at the time the Merger is completed. The market price of common shares of CN has fluctuated since the date of the announcement of the Merger and is expected to continue to fluctuate from the date of this Quarterly Report on Form 10-Q until the date the Merger is completed, which could occur a considerable amount of time after the date hereof. CN’s common share price changes may result from a variety of factors, including, among others, general market and economic conditions, changes in CN’s and the Company’s respective businesses, operations and prospects, risks inherent in their respective businesses, changes in market assessments of the likelihood that the Merger will be completed and/or the value that may be generated by the Merger and changes with respect to expectations regarding the timing of the Merger and regulatory considerations. Many of these factors are beyond the Company’s control.

Lawsuits have been and additional lawsuits may be filed against the Company and/or CN challenging the transactions contemplated by the Merger Agreement. An adverse ruling in any such lawsuit may delay or prevent the Merger from being completed.

Additional lawsuits arising out of or relating to the Merger Agreement, CN’s registration statement on Form F-4 (which includes the prospectus of CN and the proxy statement of the Company) and/or the Merger of the Company with CN may be filed in the future. One of the conditions to completion of the Merger is the absence of any injunction or similar order prohibiting the consummation of the Mergers or the Voting Trust Transaction. Accordingly, if a plaintiff is successful in obtaining an injunction, then such order may prevent the Merger from being completed, or from being completed within the expected timeframe. There can be no assurances that additional complaints or demands will not be filed or made with respect to the Merger. If additional similar complaints or demands are filed or made, absent new or different allegations that are material, CN and/or the Company will not necessarily announce them.

The ~~situation surrounding COVID-19 remains fluid~~shares of CN common stock to be received by the Company’s stockholders upon completion of the Merger will have different rights from shares of the Company’s common stock.

Upon completion of the Merger, the Company’s stockholders will no longer be stockholders of the Company but will instead become stockholders of CN. The rights of the Company’s stockholders as stockholders will then be governed by Canadian law and by the terms of the CN’s restated certificate and articles of incorporation and bylaws, which are in some respects materially different than the terms of the Company’s certificate of incorporation and bylaws, which currently govern the rights of the Company’s stockholders.

After completion of the Merger, CN may fail to realize the projected benefits and cost savings of the Merger, which could adversely affect the value of CN common stock.

The success of the Merger will depend, in part, on CN’s ability to realize the anticipated benefits and cost savings from combining the respective businesses of the Company and CN, including operational and other synergies that the Company believes the combined company will be able to achieve. The anticipated benefits and cost savings of the Merger may not be realized fully or at all, may take longer to realize than expected or could have other adverse effects that the Company does not currently foresee. Some of the assumptions that the Company has made, such as the achievement of operating synergies, may not be realized. The integration process may, for the Company and CN, result in the loss of key employees, the disruption of ongoing businesses or inconsistencies in standards, controls, procedures and policies. There could be potential ~~for a material impact~~unknown liabilities and unforeseen expenses associated with the Merger that were not discovered in the course of performing due diligence. Additionally, the integration will require significant time and focus from management following the Merger.

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KCS’s business is subject to regulation by federal, state and local legislatures and agencies that could impose significant costs on the Company’s ~~results of operations, financial condition, and liquidity increases the longer the virus impacts activity levels~~business operations.

On July 9, 2021, President Biden issued an executive order promoting competition in the ~~United States~~American economy. The executive order encourages the chair of the Surface Transportation Board to work with the other board members to consider commencing or continuing rulemaking to strengthen regulations pertaining to reciprocal switching agreements, or any other matter of competitive access, including bottleneck rates, interchange commitments or other matters, consistent with policies set forth by the executive order, and ~~globally. For~~ensure that passenger rail service is not subject to unwarranted delays and interruptions in service, enforce new on-time performance requirements and further the work of the passenger rail working group. The Company is evaluating the impact of the executive order and any related regulations that may be adopted by the STB due to this ~~reason, KCS cannot reasonably estimate with any degree of certainty the future impact COVID-19 may have~~executive order on the Company’s results of operations, financial position, and liquidity. The extent to which the COVID-19 pandemic may impact the Company’s business, operating results, financial condition, or liquidity will depend on future developments, including the duration of the outbreak, travel restrictions, business and ~~workforce disruptions, and~~ the ~~effectiveness of actions taken to contain and treat the disease.~~consolidated financial statements.

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~~Item 2.~~	Item 2.Unregistered Sales ~~of Equity Securities and Use of Proceeds~~

~~Purchases~~ of Equity Securities and Use of Proceeds

~~The following table presents stock repurchases during each month for the second quarter of 2020:~~

Period
(a) Total
Number
of Shares
(or Units)
Purchased ⁽¹⁾

(b) Average
Price Paid
per Share (or Unit)

(c) Total
Number of
Shares
(or Units)
Purchased
as Part of
Publicly
Announced
Plans or
Programs ⁽²⁾

(d) Maximum
Number (or
Approximate
Dollar Value)
of Shares (or Units)
that may yet be
purchased under
the Plans
or Programs ⁽²⁾

Common stock
April 1-30, 2020 120,959
$ 132.27
120,959
$ 1,322,281,412

May 1-31, 2020 383,834
$ 140.02
383,834
$ 1,268,536,165

June 1-30, 2020 194,330
$ 155.74
194,330
$ 1,238,270,469

Total 699,123

699,123

$25 Par preferred stock
April 1-30, 2020 10
$ 27.75
—
—

May 1-31, 2020 285
$ 27.00
—
—

June 1-30, 2020 200
$ 28.46
—
—

Total 495
—

None.



(1	)	All $25 par preferred stock repurchases were made other than through a publicly disclosed plan or program. Repurchases of $25 par preferred stock were made through open market purchases and/or privately negotiated transactions.
(2	)	On November 12, 2019, the Company announced that the Board of Directors approved a share repurchase program, pursuant to which up to $2.0 billion in shares of common stock could be repurchased through December 31, 2022. Share repurchases may be made in the open market, through privately negotiated transactions, or through accelerated share repurchase (“ASR”) transactions.


~~Item 3.~~	~~Defaults upon Senior Securities~~

Item 3.Defaults upon Senior Securities

None.


~~Item 4.~~	~~Mine Safety Disclosures~~

Item 4.Mine Safety Disclosures

Not applicable.


~~Item 5.~~	~~Other Information~~

Item 5.Other Information

None.

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Item 6.Exhibits


~~Item 6.~~Exhibit No.						Exhibits



~~Exhibit~~ ~~No.~~ 2.1+		~~Exhibits~~

~~4.1~~	~~Eleventh Supplemental Indenture,~~Agreement and Plan of Merger, dated ~~April 22, 2020,~~as of May 21, 2021, by and among ~~KCS, the Note Guarantors~~Kansas City Southern, Canadian National Railroad Company and ~~U.S. Bank National Association, as trustee,~~Brooklyn Merger Sub, Inc., filed as Exhibit ~~4.1~~2.1 to the Company’s Current Report on Form 8-K filed on ~~April 22, 2020~~May 21, 2021 (File No. 1-4717), is incorporated herein by reference as Exhibit ~~4.1.~~2.1.

~~4.2~~10.1†		Form of ~~Note representing 3.500% Senior Notes due 2050 (included in Exhibit 4.1),~~Letter Agreement, dated May 21, 2021, filed as Exhibit ~~4.2~~10.1 to the Company’s Current Report on Form ~~8-k~~8-K filed on ~~April 22, 2020~~May 21, 2021 (File No. 1-4717), is incorporated herein by reference as Exhibit ~~4.2.~~10.1.

~~22.1~~10.2†		Form of Retention Award Agreement, dated May 21, 2021, filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on May 21, 2021 (File No. 1-4717), is incorporated herein by reference as Exhibit 10.2.

10.3*		Letter waiver, dated as of June 8, 2021, among the Company, the guarantors party thereto, the financial institutions party thereto and Bank of America, N.A., as administrative agent.

10.4†		Confidential Separation Agreement and Full and General Release, dated June 8, 2021, by and between The Kansas City Southern Railway Company and Brian Hancock, filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on June 11, 2021 (File No. 1-4717), is incorporated herein by reference as Exhibit 10.4 .

22.1		List of Issuers and Guarantor Subsidiaries, filed as Exhibit 22.1 to the Company’s Form 10-Q for the quarter ended March 31, 2020, filed on April 17, 2020 (File No. 1-4717), is incorporated herein by reference as Exhibit 22.1.

~~31.1~~31.1*		Principal Executive Officer’s Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 is attached to this Form 10-Q as Exhibit 31.1.

~~31.2~~31.2*		Principal Financial Officer’s Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 is attached to this Form 10-Q as Exhibit 31.2.

32.1**		Principal Executive Officer’s Certification furnished Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 is attached to this Form 10-Q as Exhibit 32.1.

32.2**		Principal Financial Officer’s Certification furnished Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 is attached to this Form 10-Q as Exhibit 32.2.

101.INS		XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

101.SCH		Inline XBRL Taxonomy Extension Schema Document.

101.CAL		Inline XBRL Taxonomy Extension Calculation Linkbase Document.

101.DEF		Inline XBRL Taxonomy Extension Definition Linkbase Document.

101.LAB		Inline XBRL Taxonomy Extension Label Linkbase Document.

101.PRE		Inline XBRL Taxonomy Extension Presentation Linkbase Document.

104		Cover Page Interactive Data File (formatted as an Inline XBRL document and included in Exhibit 101).

		+ Schedules have been omitted pursuant to Item 601(a)(5) of Regulation S-K. Kansas City Southern hereby undertakes to furnish supplemental copies of any of the omitted schedules upon request by the U.S. Securities and Exchange Commission; provided, that Kansas City Southern may request confidential treatment pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended, for any schedules so furnished.

		* Filed herewith.

		** Furnished herewith.

		† Management contract or compensatory plan or arrangement

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized and in the capacities indicated on July ~~17, 2020~~.16, 2021.



Kansas City Southern

/s/ MICHAEL W. UPCHURCH
Michael W. Upchurch
Executive Vice President and Chief Financial Officer (Principal Financial Officer)

/s/ SUZANNE M. GRAFTON
Suzanne M. Grafton
Vice President and Chief Accounting Officer
(Principal Accounting Officer)



	June 30, 2020		December 31, 2019
	Level 2		Level 2
Assets
Foreign currency derivative instruments	$	4.2	$	2.5
Treasury lock agreements	12.8		—
Liabilities
Debt instruments	4,356.7		3,535.7



Offsetting of Derivative Assets
As of June 30, 2020	Gross Assets		Gross Liabilities			Net Amounts Presented in the Consolidated Balance Sheets
Derivatives subject to a master netting arrangement or similar agreement	$	5.0	$	(0.8	)	$	4.2
As of December 31, 2019
Derivatives subject to a master netting arrangement or similar agreement	$	2.5	$	—		$	2.5



Income Statements	KCS and Guarantor Subsidiaries
	Six Months Ended		Twelve Months Ended
	June 30, 2020		December 31, 2019
Revenues	$	673.6	$	1,472.0
Operating expenses	423.8		1,068.5
Operating income	249.8		403.5
Income before income taxes	180.6		291.7
Net income	156.7		235.0



Period	(a) Total Number of Shares (or Units) Purchased ⁽¹⁾	(b) Average Price Paid per Share (or Unit)		(c) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs ⁽²⁾	(d) Maximum Number (or Approximate Dollar Value) of Shares (or Units) that may yet be purchased under the Plans or Programs ⁽²⁾
Common stock
April 1-30, 2020	120,959	$	132.27	120,959	$	1,322,281,412
May 1-31, 2020	383,834	$	140.02	383,834	$	1,268,536,165
June 1-30, 2020	194,330	$	155.74	194,330	$	1,238,270,469
Total	699,123			699,123
$25 Par preferred stock
April 1-30, 2020	10	$	27.75	—	—
May 1-31, 2020	285	$	27.00	—	—
June 1-30, 2020	200	$	28.46	—	—
Total	495			—