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Table of Contents


 
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 September 30, 2019
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from              to        
Commission File Number 1-4717
KANSAS CITY SOUTHERN
(Exact name of registrant as specified in its charter)
Delaware
 
kcslineslogo2016a15.jpg
 
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
(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
 
October 11, 2019
Common Stock, $0.01 per share par value
 
99,119,608 Shares
 


Table of Contents


Kansas City Southern and Subsidiaries
Form 10-Q
September 30, 2019
Index
 
 
Page
PART I — FINANCIAL INFORMATION
 
Item 1.
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
PART II — OTHER INFORMATION
 
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
 


2

Table of Contents


PART I — FINANCIAL INFORMATION

Item 1.
Financial Statements (unaudited)

Kansas City Southern and Subsidiaries
Consolidated Statements of Income
 
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2019
 
2018
 
2019
 
2018
 
(In millions, except share and per share amounts)
(Unaudited)
Revenues
$
747.7

 
$
699.0

 
$
2,136.5

 
$
2,020.0

Operating expenses:
 
 
 
 
 
 
 
Compensation and benefits
134.8

 
123.5

 
392.0

 
367.4

Purchased services
53.4

 
52.6

 
162.9

 
149.2

Fuel
87.1

 
90.2

 
257.8

 
257.0

Mexican fuel excise tax credit

 
(9.4
)
 

 
(26.6
)
Equipment costs
25.1

 
33.0

 
81.8

 
95.9

Depreciation and amortization
86.5

 
87.5

 
262.7

 
257.1

Materials and other
66.8

 
65.6

 
198.5

 
199.5

Restructuring charges
12.0

 

 
130.5

 

Gain on insurance recoveries related to hurricane damage

 
(9.4
)
 

 
(9.4
)
Total operating expenses
465.7

 
433.6

 
1,486.2

 
1,290.1

Operating income
282.0

 
265.4

 
650.3

 
729.9

Equity in net earnings (losses) of affiliates
2.1

 
(0.2
)
 
3.6

 
1.8

Interest expense
(27.9
)
 
(28.3
)
 
(84.1
)
 
(81.8
)
Debt retirement costs

 

 
(0.6
)
 
(2.2
)
Foreign exchange gain (loss)
(3.4
)
 
9.5

 
9.5

 
16.3

Other income, net
2.0

 
0.6

 
2.2

 
0.8

Income before income taxes
254.8

 
247.0

 
580.9

 
664.8

Income tax expense
74.2

 
73.0

 
168.0

 
197.2

Net income
180.6

 
174.0

 
412.9

 
467.6

Less: Net income attributable to noncontrolling interest
0.4

 
0.4

 
1.2

 
1.3

Net income attributable to Kansas City Southern and subsidiaries
180.2

 
173.6

 
411.7

 
466.3

Preferred stock dividends
0.1

 
0.1

 
0.2

 
0.2

Net income available to common stockholders
$
180.1

 
$
173.5

 
$
411.5

 
$
466.1

 
 
 
 
 
 
 
 
Earnings per share:
 
 
 
 
 
 
 
Basic earnings per share
$
1.81

 
$
1.71

 
$
4.12

 
$
4.56

Diluted earnings per share
$
1.81

 
$
1.70

 
$
4.10

 
$
4.55

 
 
 
 
 
 
 
 
Average shares outstanding (in thousands):
 
 
 
 
 
 
 
Basic
99,296

 
101,658

 
99,939

 
102,106

Potentially dilutive common shares
403

 
452

 
405

 
418

Diluted
99,699

 
102,110

 
100,344

 
102,524

See accompanying notes to the unaudited consolidated financial statements.


3

Table of Contents


Kansas City Southern and Subsidiaries
Consolidated Statements of Comprehensive Income

 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2019
 
2018
 
2019
 
2018
 
(In millions)
(Unaudited)
Net income
$
180.6

 
$
174.0

 
$
412.9

 
$
467.6

Other comprehensive income (loss):
 
 
 
 
 
 
 
Unrealized gain (loss) on interest rate derivative instruments, net of tax of $(2.2) million, $1.1 million, $(6.3) million and $3.2 million, respectively
(7.1
)
 
3.5

 
(19.8
)
 
9.5

Foreign currency translation adjustments
(0.2
)
 
0.7

 
0.1

 
0.7

Other comprehensive income (loss)
(7.3
)
 
4.2

 
(19.7
)
 
10.2

Comprehensive income
173.3

 
178.2

 
393.2

 
477.8

Less: Comprehensive income attributable to noncontrolling interest
0.4

 
0.4

 
1.2

 
1.3

Comprehensive income attributable to Kansas City Southern and subsidiaries
$
172.9

 
$
177.8

 
$
392.0

 
$
476.5

See accompanying notes to the unaudited consolidated financial statements.


4

Table of Contents


Kansas City Southern and Subsidiaries
Consolidated Balance Sheets
 
 
September 30,
2019
 
December 31,
2018
 
(In millions, except share and per share amounts)
 
(Unaudited)
 
 
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
61.6

 
$
100.5

Accounts receivable, net
273.4

 
301.2

Materials and supplies
161.8

 
160.3

Other current assets
117.1

 
73.4

Total current assets
613.9

 
635.4

Operating lease right-of-use assets
180.2

 

Investments
53.5

 
44.9

Property and equipment (including concession assets), net
8,803.8

 
8,691.1

Other assets
47.0

 
98.4

Total assets
$
9,698.4

 
$
9,469.8

LIABILITIES AND EQUITY
 
 
 
Current liabilities:
 
 
 
Long-term debt due within one year
$
288.8

 
$
10.1

Accounts payable and accrued liabilities
497.4

 
436.9

Total current liabilities
786.2

 
447.0

Long-term operating lease liabilities
93.1

 

Long-term debt
2,394.8

 
2,679.3

Deferred income taxes
1,100.4

 
1,079.9

Other noncurrent liabilities and deferred credits
126.7

 
130.9

Total liabilities
4,501.2

 
4,337.1

Stockholders’ equity:
 
 
 
$25 par, 4% noncumulative, preferred stock, 840,000 shares authorized, 649,736 shares issued; 222,625 and 228,395 shares outstanding at September 30, 2019 and December 31, 2018, respectively
5.6

 
5.7

$.01 par, common stock, 400,000,000 shares authorized; 123,352,185 shares issued; 99,111,266 and 100,896,678 shares outstanding at September 30, 2019 and December 31, 2018, respectively
1.0

 
1.0

Additional paid-in capital
947.3

 
946.6

Retained earnings
3,951.2

 
3,870.6

Accumulated other comprehensive loss
(30.6
)
 
(10.9
)
Total stockholders’ equity
4,874.5

 
4,813.0

Noncontrolling interest
322.7

 
319.7

Total equity
5,197.2

 
5,132.7

Total liabilities and equity
$
9,698.4

 
$
9,469.8

See accompanying notes to the unaudited consolidated financial statements.


5

Table of Contents


Kansas City Southern and Subsidiaries
Consolidated Statements of Cash Flows

 
Nine Months Ended
 
September 30,
 
2019
 
2018
 
(In millions)
(Unaudited)
Operating activities:
 
 
 
Net income
$
412.9

 
$
467.6

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
262.7

 
257.1

Deferred income taxes
26.8

 
78.8

Equity in net earnings of affiliates
(3.6
)
 
(1.8
)
Share-based compensation
16.4

 
16.0

Distributions from affiliates
3.0

 
2.5

Settlement of foreign currency derivative instruments
10.8

 
13.8

Gain on foreign currency derivative instruments
(10.3
)
 
(10.3
)
Restructuring charges
130.5

 

Cash payments for restructuring charges
(2.9
)
 

Gain on insurance recoveries related to hurricane damage

 
(9.4
)
Deemed mandatory repatriation tax

 
(18.7
)
Changes in working capital items:
 
 
 
Accounts receivable
38.9

 
(39.2
)
Materials and supplies
(4.7
)
 
1.3

Other current assets
(33.0
)
 
(24.4
)
Accounts payable and accrued liabilities
12.2

 
(22.5
)
Other, net
(1.7
)
 
(5.0
)
Net cash provided by operating activities
858.0

 
705.8

 
 
 
 
Investing activities:
 
 
 
Capital expenditures
(468.2
)
 
(396.8
)
Purchase or replacement of assets under operating leases
(38.6
)
 
(98.9
)
Property investments in MSLLC
(25.6
)
 
(24.0
)
Investments in and advances to affiliates
(27.0
)
 
(10.3
)
Proceeds from disposal of property
18.4

 
7.2

Other, net
0.7

 
(2.2
)
Net cash used for investing activities
(540.3
)
 
(525.0
)
 
 
 
 
Financing activities:
 
 
 
Net short-term borrowings

 
(348.1
)
Proceeds from issuance of long-term debt

 
499.4

Repayment of long-term debt
(7.8
)
 
(78.7
)
Dividends paid
(108.6
)
 
(110.9
)
Shares repurchased
(242.5
)
 
(163.3
)
Debt issuance and retirement costs paid
(2.5
)
 
(8.0
)
Proceeds from employee stock plans
4.8

 
1.8

Net cash used for financing activities
(356.6
)
 
(207.8
)
Cash and cash equivalents:
 
 
 
Net decrease during each period
(38.9
)
 
(27.0
)
At beginning of year
100.5

 
134.1

At end of period
$
61.6

 
$
107.1

See accompanying notes to the unaudited consolidated financial statements.

6

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
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


See accompanying notes to the unaudited consolidated financial statements.


7

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
Loss
 
Non-
controlling
Interest
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2017
$
6.1

 
$
1.0

 
$
943.3

 
$
3,611.4

 
$
(12.9
)
 
$
316.5

 
$
4,865.4

Reclassification due to adoption of ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income
 
 
 
 


 
0.7

 
(0.7
)
 
 
 

Net income
 
 
 
 
 
 
144.5

 
 
 
0.4

 
144.9

Other comprehensive income
 
 
 
 
 
 
 
 
5.7

 
 
 
5.7

Dividends on common stock ($0.36/share)
 
 
 
 
 
 
(36.9
)
 
 
 
 
 
(36.9
)
Dividends on $25 par preferred stock ($0.25/share)
 
 
 
 
 
 
(0.1
)
 
 
 
 
 
(0.1
)
Share repurchases
 
 

 
(4.6
)
 
(49.4
)
 
 
 
 
 
(54.0
)
Options exercised and stock subscribed, net of shares withheld for employee taxes
 
 
 
 
0.6

 
 
 
 
 
 
 
0.6

Share-based compensation
 
 
 
 
5.8

 
 
 
 
 
 
 
5.8

Balance at March 31, 2018
6.1

 
1.0

 
945.1

 
3,670.2

 
(7.9
)
 
316.9

 
4,931.4

Net income
 
 
 
 
 
 
148.2

 
 
 
0.5

 
148.7

Other comprehensive income
 
 
 
 
 
 
 
 
0.3

 
 
 
0.3

Contribution from noncontrolling interest
 
 
 
 
 
 
 
 
 
 
1.2

 
1.2

Dividends on common stock ($0.36/share)
 
 
 
 
 
 
(36.8
)
 
 
 
 
 
(36.8
)
Dividends on $25 par preferred stock ($0.25/share)
 
 
 
 
 
 

 
 
 
 
 

Share repurchases
 
 

 
(4.6
)
 
(49.9
)
 
 
 
 
 
(54.5
)
Options exercised and stock subscribed, net of shares withheld for employee taxes
 
 
 
 
0.1

 
 
 
 
 
 
 
0.1

Share-based compensation
 
 
 
 
5.8

 
 
 
 
 
 
 
5.8

Balance at June 30, 2018
6.1

 
1.0

 
946.4

 
3,731.7

 
(7.6
)
 
318.6

 
4,996.2

Net income
 
 
 
 
 
 
173.6

 
 
 
0.4

 
174.0

Other comprehensive income
 
 
 
 
 
 
 
 
4.2

 
 
 
4.2

Dividends on common stock ($0.36/share)
 
 
 
 
 
 
(36.6
)
 
 
 
 
 
(36.6
)
Dividends on $25 par preferred stock ($0.25/share)
 
 
 
 
 
 
(0.1
)
 
 
 
 
 
(0.1
)
Share repurchases
(0.2
)
 

 
(4.4
)
 
(50.2
)
 
 
 
 
 
(54.8
)
Options exercised and stock subscribed, net of shares withheld for employee taxes
 
 
 
 
3.5

 
 
 
 
 
 
 
3.5

Share-based compensation
 
 
 
 
4.4

 
 
 
 
 
 
 
4.4

Balance at September 30, 2018
5.9

 
1.0

 
949.9

 
3,818.4

 
(3.4
)
 
319.0

 
5,090.8

Net income
 
 
 
 
 
 
161.1

 
 
 
0.7

 
161.8

Other comprehensive loss
 
 
 
 
 
 
 
 
(7.5
)
 
 
 
(7.5
)
Dividends on common stock ($0.36/share)
 
 
 
 
 
 
(36.4
)
 
 
 
 
 
(36.4
)
Dividends on $25 par preferred stock ($0.25/share)
 
 
 
 
 
 

 
 
 
 
 

Share repurchases
(0.2
)
 

 
(7.5
)
 
(72.5
)
 
 
 
 
 
(80.2
)
Options exercised and stock subscribed, net of shares withheld for employee taxes
 
 
 
 
(0.2
)
 
 
 
 
 
 
 
(0.2
)
Share-based compensation
 
 
 
 
4.4

 
 
 
 
 
 
 
4.4

Balance at December 31, 2018
$
5.7

 
$
1.0

 
$
946.6

 
$
3,870.6

 
$
(10.9
)
 
$
319.7

 
$
5,132.7


See accompanying notes to the unaudited consolidated financial statements.

8

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, 2018. The results of operations for the three and nine months ended September 30, 2019, are not necessarily indicative of the results to be expected for the full year ending December 31, 2019. Certain prior year amounts have been reclassified to conform to the current year presentation.
During the first quarter of 2019, the Company adopted Accounting Standards Update (“ASU”) No. 2016-02, Leases, also known as Accounting Standard Codification (“ASC”) Topic 842, which requires lessees to recognize for all operating leases a right-of-use asset and a lease obligation in the consolidated balance sheet. Expenses are recognized in the consolidated statement of income in a manner similar to previous accounting guidance. Lessor accounting under the new standard is substantially unchanged and is immaterial to the Company. The Company adopted the accounting standard using a prospective transition approach, which applies the provisions of the new guidance at the effective date without adjusting the comparative periods presented, with certain practical expedients available to ease the burden of adoption.
The Company elected the following practical expedients upon adoption: not to reassess whether any expired or existing contracts are or contain leases, not to reassess the lease classification for any expired or existing leases, not to reassess initial direct costs for any existing leases, not to separately identify lease and nonlease components (i.e. maintenance costs) except for fleet vehicles and real estate, and not to evaluate historical land easements under the new guidance. Additionally, the Company elected the short-term lease exemption policy, applying the requirements of ASC 842 to long-term leases (leases greater than 1 year).
Adoption of the new standard resulted in $175.2 million of additional right-of-use lease assets and lease liabilities as of January 1, 2019. The new standard did not have a significant impact on the consolidated statement of income. See Note 5, Leases for additional information.

2. Restructuring Charges
The Company is implementing certain principles of Precision Scheduled Railroading (“PSR”), which focus on providing reliable customer service, facilitating growth, improving asset utilization, and improving the cost profile of the Company. As a result of the PSR initiatives, management approved three separate restructuring plans during 2019, which resulted in restructuring charges during the three and nine months ended September 30, 2019 of $12.0 million and $130.5 million, respectively. Management approved the third restructuring plan during the third quarter of 2019, which coincided with the preparation of the Company’s quarterly financial statements.
Expenses related to these initiatives are shown in the following table (in millions):
 
 
2019
 
 
First Quarter
 
Second Quarter
 
Third Quarter
 
Year-to-Date
Restructuring charges:
 
 
 
 
 
 
 
 
Asset impairments
 
$
62.5

 
$
50.7

 
$
8.6

 
$
121.8

Workforce reduction
 
3.2

 

 
3.4

 
6.6

Contract restructuring
 
1.8

 
0.3

 

 
2.1

Total restructuring charges
 
$
67.5

 
$
51.0

 
$
12.0

 
$
130.5


Asset Impairments. The Company committed to plans to dispose of certain locomotives and rail cars to increase operational fluidity, reduce maintenance expense, and improve labor and fuel efficiency. Accordingly, the Company performed an impairment analysis to adjust the carrying amount of the assets to the lower of its depreciated book value or its estimated fair value, less costs to

9

Table of Contents

Kansas City Southern and Subsidiaries
Notes to the Unaudited Consolidated Financial Statements—(Continued)

dispose, and stopped recognizing depreciation expense. During the nine months ended September 30, 2019, the Company sold 65 of 97 locomotives and 457 of 1,482 rail cars identified under the plans. The carrying amount of the remaining assets held for sale of
$9.2 million is classified as other current assets within the consolidated balance sheets at September 30, 2019. Additionally, the Company wrote off parts inventory associated with the locomotive and rail car models that were disposed.
Workforce Reduction. The Company recognized severance costs associated with PSR initiatives focused on the cost profile of the Company and improving asset utilization by reducing the active locomotive fleet and rail cars online.
Contract Restructuring. The Company terminated certain third-party vendor contracts in order to drive operational efficiencies, which resulted in contract termination penalties.
    
3. Mexican Fuel Excise Tax Credit
Fuel purchases in Mexico are subject to an excise tax that is included in the price of fuel. Through April 29, 2019, the Company was eligible for a credit for the excise tax included in the price of fuel that is purchased and consumed in locomotives and certain work equipment in Mexico. For years 2018, 2017, and 2016, the Mexican fuel excise tax credit (“IEPS credit”) was utilized and realized through the offset of the total annual Mexico income tax liability and income tax withholding payment obligations of KCSM, with no carryforward to future periods and recognized as a benefit in operating expenses on the consolidated statements of income.
In December 2018, the Mexican government enacted changes in the tax law effective January 1, 2019 (“Mexico Tax Reform”), which, among other things, for 2019 eliminated the option to monetize the IEPS credit by offsetting income tax withholding payment obligations. As a result, the Company was allowed to offset the 2019 IEPS credit only against its Mexico corporate income tax liability on the 2019 annual income tax return. The elimination of the option to apply the IEPS credit to income tax withholding payment obligations required the Company to recognize the IEPS credit as a reduction of income tax expense rather than a reduction of operating expenses for 2019.
On April 29, 2019, the Servicio de Administración Tributaria (the “SAT”), the Mexican equivalent of the IRS, published the Miscellaneous Fiscal Resolution for 2019 (“2019 Resolution”), which eliminated the Company’s eligibility for the IEPS credit effective beginning April 30, 2019. During the period of eligibility in 2019, the Company generated IEPS credits resulting in an approximate $12.0 million net tax benefit, of which $8.6 million has been recognized as a reduction to income tax expense within the consolidated statements of income during the nine months ended September 30, 2019. The remainder of the net benefit will be recognized as a reduction to income tax expense during the last quarter of 2019.

4. Hurricane Harvey
In late August 2017, Hurricane Harvey made landfall on the Texas coast and caused flood damage to the Company’s track infrastructure and significantly disrupted the Company’s rail service. The Company filed a claim in the fourth quarter of 2017 under its insurance program for property damage, incremental expenses, and lost profits caused by Hurricane Harvey. In the third quarter of 2017, the Company recognized a receivable for probable insurance recovery offsetting the impact of incremental expenses recognized in the quarter. During the third quarter of 2018, the Company partially settled its insurance claim for $27.0 million. As a result of this nonrefundable partial settlement, the Company recognized a gain on insurance recoveries of $9.4 million, net of the self-insured retention and insurance receivable. The Company received the nonrefundable cash proceeds from this partial settlement in October 2018.
During the fourth quarter of 2018, the Company reached additional partial settlement of its insurance claim for $8.5 million, and recognized additional gain on insurance recoveries of $8.5 million. The Company received the nonrefundable cash proceeds from the additional partial settlement in the fourth quarter of 2018.

5. Leases
The Company leases transportation equipment, as well as office and other operating facilities, under various finance and operating leases. Operating lease right-of-use assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As the implicit rate is not readily determinable in most of the Company’s lease agreements, the Company uses its estimated secured incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. Lease expense is recognized on a straight-line basis over the lease term.
The Company determines if an arrangement is a lease or contains a lease at inception. The Company’s leases have remaining lease terms of approximately 1 year to 10 years, which may include the option to extend the lease when it is reasonably certain the

10

Table of Contents

Kansas City Southern and Subsidiaries
Notes to the Unaudited Consolidated Financial Statements—(Continued)

Company will exercise that option. The Company does not have lease agreements with residual value guarantees, sale leaseback terms or material restrictive covenants. Additionally, short-term leases and leases with variable lease costs are immaterial, and the Company does not have any sublease arrangements.
Leases
 
Classification
 
September 30, 2019
(in millions)
Assets
 
 
 
 
Operating
 
Operating lease right-of-use assets
 
$
180.2

Finance
 
Property and equipment (including concession assets), net
 
9.1

Total leased assets
 
 
 
$
189.3

 
 
 
 
 
Liabilities
 
 
 
 
Current
 
 
 


Operating
 
Accounts payable and accrued liabilities
 
$
44.8

Finance
 
Long-term debt due within one year
 
1.9

Noncurrent
 
 
 
 
Operating
 
Long-term operating lease liabilities
 
93.1

Finance
 
Long-term debt
 
7.2

Total lease liabilities
 
 
 
$
147.0


 
 
 
September 30, 2019
(in millions)
Lease Cost
 
Classification
Three Months Ended
 
Nine Months Ended
Operating lease cost
 
Equipment costs
$
13.4

 
$
40.6

Finance lease cost:
 
 
 
 
 
Amortization of finance lease assets
 
Depreciation and amortization
0.5

 
2.3

Interest on lease liabilities