FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarter ended March 27, 1998
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 1-8022
CSX CORPORATION
(Exact name of registrant as specified in its charter)
Virginia 62-1051971
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
901 East Cary Street, Richmond, Virginia 23219-4031
(Address of principal executive offices) (Zip Code)
(804) 782-1400
(Registrant's telephone number, including area code)
No Change
(Former name, former address and former fiscal year, if changed
since last report.)
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 (X) No ( )
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of March 27, 1998: 219,091,009 shares.
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<PAGE>
CSX CORPORATION
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 27, 1998
INDEX
Page Number
PART I. FINANCIAL INFORMATION
Item 1:
Financial Statements
1. Consolidated Statement of Earnings-
Quarters Ended March 27, 1998 and March 28, 1997 3
2. Consolidated Statement of Cash Flows-
Quarters Ended March 27, 1998 and March 28, 1997 4
3. Consolidated Statement of Financial Position-
At March 27, 1998 and December 26, 1997 5
Notes to Consolidated Financial Statements 6
Item 2:
Management's Discussion and Analysis of Results of
Operations and Financial Condition 12
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 18
Signature 18
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<TABLE>
CSX CORPORATION AND SUBSIDIARIES
Consolidated Statement of Earnings
(Millions of Dollars, Except Per Share Amounts)
<CAPTION>
(Unaudited)
Quarters Ended
--------------------------------
March 27, March 28,
1998 1997
-------------- --------------
<S> <C> <C>
Operating Revenue $ 2,580 $ 2,567
Operating Expense 2,293 2,243
------------- -------------
Operating Income 287 324
Other Income (Expense) (34) (7)
Interest Expense 124 84
------------- -------------
Earnings before Income Taxes 129 233
Income Tax Expense 38 82
------------- -------------
Net Earnings $ 91 $ 151
============= =============
Earnings Per Share $ .42 $ .70
============= =============
Earnings Per Share, Assuming Dilution $ .41 $ .69
============= =============
Average Common Shares Outstanding (Thousands) 218,661 217,227
============= =============
Average Common Shares Outstanding, Assuming Dilution
(Thousands) 221,612 219,494
============= =============
Common Shares Outstanding (Thousands) 219,091 217,663
============= =============
Cash Dividends Paid Per Common Share $ .30 $ .26
============= =============
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
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<PAGE>
<TABLE>
CSX CORPORATION AND SUBSIDIARIES
Consolidated Statement of Cash Flows
(Millions of Dollars)
<CAPTION>
(Unaudited)
Quarters Ended
-------------------------------
March 27, March 28,
1998 1997
------------- ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net Earnings $ 91 $ 151
Adjustments to Reconcile Net Earnings
to Net Cash Provided
Depreciation and Amortization 178 159
Deferred Income Taxes 11 17
Productivity/Restructuring Charge Payments (8) (15)
Equity in Conrail Earnings and Other Operating Activities (42) 14
Changes in Operating Assets and Liabilities
Accounts Receivable 12 (23)
Other Current Assets (67) (3)
Accounts Payable (64) (89)
Other Current Liabilities (35) (14)
------------- ------------
Net Cash Provided by Operating Activities 76 197
------------- ------------
INVESTING ACTIVITIES
Property Additions (305) (189)
Proceeds from Property Dispositions 12 3
Investment in Conrail (6) 9
Short-Term Investments - Net 101 41
Purchases of Long-Term Marketable Securities (58) (18)
Proceeds from Sales of Long-Term Marketable
Securities 8 8
Other Investing Activities (3) (34)
------------- ------------
Net Cash Used by Investing Activities (251) (180)
------------- ------------
FINANCING ACTIVITIES
Short-Term Debt - Net 169 (48)
Long-Term Debt Issued 5 5
Long-Term Debt Repaid (92) (51)
Dividends Paid (66) (57)
Other Financing Activities (13) 3
------------- ------------
Net Cash Provided (Used) by Financing Activities 3 (148)
------------- ------------
Net Decrease in Cash and Cash Equivalents (172) (131)
CASH, CASH EQUIVALENTS AND SHORT-
TERM INVESTMENTS
Cash and Cash Equivalents at Beginning of Period 251 368
------------- ------------
Cash and Cash Equivalents at End of Period 79 237
Short-Term Investments at End of Period 380 273
------------- ------------
Cash, Cash Equivalents and Short-Term
Investments at End of Period $ 459 $ 510
============= ============
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
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<TABLE>
CSX CORPORATION AND SUBSIDIARIES
Consolidated Statement of Financial Position
(Millions of Dollars)
<CAPTION>
(Unaudited)
March 27, December 26,
1998 1997
------------- ------------
<S> <C> <C>
ASSETS
Current Assets
Cash, Cash Equivalents and Short-Term
Investments $ 459 $ 690
Accounts Receivable 1,010 987
Materials and Supplies 268 227
Deferred Income Taxes 137 134
Other Current Assets 168 137
------------- -------------
Total Current Assets 2,042 2,175
Properties-Net 12,430 12,406
Investment in Conrail 4,267 4,244
Affiliates and Other Companies 374 394
Other Long-Term Assets 766 738
------------- -------------
Total Assets $ 19,879 $ 19,957
============= =============
LIABILITIES
Current Liabilities
Accounts Payable $ 1,115 $ 1,179
Labor and Fringe Benefits Payable 459 477
Casualty, Environmental and Other Reserves 303 298
Current Maturities of Long-Term Debt 78 229
Short-Term Debt 295 126
Other Current Liabilities 387 398
------------- -------------
Total Current Liabilities 2,637 2,707
Casualty, Environmental and Other Reserves 669 711
Long-Term Debt 6,389 6,416
Deferred Income Taxes 2,954 2,939
Other Long-Term Liabilities 1,390 1,418
------------- -------------
Total Liabilities 14,039 14,191
------------- -------------
SHAREHOLDERS' EQUITY
Common Stock, $1 Par Value 219 218
Other Capital 1,600 1,552
Retained Earnings 4,044 4,019
Accumulated Other Comprehensive Earnings (Loss) (23) (23)
------------- -------------
Total Shareholders' Equity 5,840 5,766
------------- -------------
Total Liabilities and Shareholders' Equity $ 19,879 $ 19,957
============= =============
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
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<PAGE>
CSX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
(All Tables in Millions of Dollars, Except Per Share Amounts)
NOTE 1. BASIS OF PRESENTATION
In the opinion of management, the accompanying consolidated financial
statements contain all adjustments necessary to present fairly the company's
financial position at March 27, 1998 and December 26, 1997, the results of its
operations and its cash flows for the quarters ended March 27, 1998 and March
28, 1997, such adjustments being of a normal recurring nature. Certain
prior-year data have been reclassified to conform to the 1998 presentation.
Earnings per share are based on the weighted average of common shares
outstanding for the fiscal quarters ended March 27, 1998 and March 28, 1997.
Earnings per share, assuming dilution, are based on the weighted average of
common shares outstanding adjusted for the effect of potentially dilutive
securities. For the fiscal quarters ended March 27, 1998 and March 28, 1997,
potentially dilutive common shares consist of stock options (2.7 million shares
and 2.1 million shares, respectively) and performance shares and other stock
awards (0.2 million in each quarter). Options to purchase 1,955,000 shares of
common stock at $57 per share and 1,953,506 shares at $51.44 per share were
outstanding during the quarters ended March 27, 1998 and March 28, 1997,
respectively, but were not included in the computation of earnings per share,
assuming dilution. The exercise prices of these options were greater than the
average prices of the common shares and, accordingly, their effect is
antidilutive.
While the company believes that the disclosures presented are adequate
to make the information not misleading, it is suggested that these financial
statements be read in conjunction with the financial statements and the notes
included in the company's latest Annual Report and Form 10-K.
NOTE 2. FISCAL REPORTING PERIODS
The company's fiscal year is composed of 52 weeks ending on the last
Friday in December. The financial statements presented are for the 13-week
quarters ended March 27, 1998 and March 28, 1997, and the fiscal year ended
December 26, 1997.
NOTE 3. ACCOUNTING PRONOUNCEMENTS
CSX adopted Financial Accounting Standards Board (FASB) Statement No.
130, "Reporting Comprehensive Income", at the beginning of fiscal year 1998.
Statement No. 130 establishes standards for reporting and display of
comprehensive earnings and its components in financial statements; however, the
adoption of this Statement had no impact on the company's net earnings or
shareholders' equity. Statement No. 130 requires minimum pension liability
adjustments, unrealized gains or losses on the company's available-for-sale
securities and foreign currency translation adjustments, which prior to adoption
were reported separately in shareholders' equity, to be included in other
comprehensive earnings. Prior year financial statements have been reclassified
to conform to the requirements of Statement No. 130. There were no material
differences between net earnings and comprehensive earnings for the fiscal
quarters ended March 27, 1998 and March 28, 1997. Accumulated other
comprehensive earnings at March 27, 1998 and December 27, 1996 consist of
minimum pension liability adjustments ($20 million) and foreign currency
translation adjustments ($3 million).
The Financial Accounting Standards Board (FASB) has issued two
accounting pronouncements which the company will adopt in the fourth quarter of
1998. FASB Statement No. 131 "Disclosures about Segments of an Enterprise and
Related Information" requires that a publicly-held company report financial and
descriptive information about its operating segments in financial statements
issued to shareholders for interim and annual periods. The Statement also
requires additional disclosures with respect to products and services,
geographic areas of operation, and major customers. The company operates
diversified freight transportation businesses and has historically provided
detailed operating segment and other information in its communications to
shareholders; however, such information has not typically been presented in the
consolidated financial statements and related notes.
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<PAGE>
CSX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited), Continued
(All Tables in Millions of Dollars, Except Per Share Amounts)
FASB Statement No. 132 "Employers' Disclosures about Pensions and Other
Postretirement Benefits - an amendment of FASB Statements No. 87, 88, and 106"
requires revised disclosures about pension and other postretirement benefit
plans. The company does not expect that adoption of the disclosure requirements
of this pronouncement will have a material impact on its financial statements.
NOTE 4. JOINT ACQUISITION OF CONRAIL, INC.
During the second quarter of 1997, CSX and Norfolk Southern Corporation
(Norfolk Southern) completed the acquisition of Conrail Inc. (Conrail) through a
jointly owned entity pursuant to an agreement dated April 8, 1997. Under the
agreement, CSX contributed approximately $4.1 billion, in the form of cash and
Conrail shares previously acquired, for a 42% investment in Conrail. CSX
financed the acquisition of its investment in Conrail by issuing a combination
of fixed-rate debentures and commercial paper. Norfolk Southern contributed
approximately $5.7 billion, also in the form of cash and Conrail shares
previously acquired, for a 58% investment in Conrail.
The Conrail shares acquired by CSX and Norfolk Southern have been
placed in a voting trust pending approval of the transaction by the Surface
Transportation Board (STB). In June 1997, CSX and Norfolk Southern completed
supplemental agreements governing the legal structure of the transaction and
operations of the Conrail rail system subsequent to STB approval. The terms of
these agreements, the operating plans of the respective companies, and the
benefits expected to result from combining the respective rail systems are
incorporated in a joint railroad control application that was filed with the STB
on June 23, 1997. The STB is expected to issue a final decision on the
application in July 1998. It is anticipated that operational integration of the
CSX and Conrail systems will take place in late 1998.
During the first quarter of 1997, the company held only a 19.9%
investment in Conrail and, accordingly, followed the cost method of accounting.
The completion of the joint acquisition, and the resulting increase in CSX's
ownership interest in Conrail to 42%, required a change from the cost method to
the equity method of accounting for the investment during the second quarter of
1997. The change in accounting method included adjustments retroactive to the
date of CSX's initial investment in Conrail in November 1996. The net amount of
these retroactive adjustments applicable to fiscal year 1996 was not material.
The company will continue to use the equity method of accounting while the
Conrail shares are held in the voting trust. Under this method, the company
recognizes income from its proportionate share of Conrail's net income and
expense for amortization of its purchase price in excess of its proportionate
share of Conrail's net book value. For the quarter ended March 27, 1998, equity
in Conrail's net income totaled $35 million, and amortization of the excess
purchase price totaled $12 million.
Summary financial information for Conrail for its fiscal periods ended
March 31, 1998 and March 31, 1997, and at December 31, 1997, is as follows:
Quarters Ended
----------------------------------
March 31, March 31,
1998 1997
------------- -------------
Income Statement Information:
Revenues $ 927 $ 906
Income from Operations 160 116
Net Income 85 61
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<PAGE>
CSX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited), Continued
(All Tables in Millions of Dollars, Except Per Share Amounts)
<TABLE>
<CAPTION>
As Of
---------------------------------------------------
March 31, 1998 December 31, 1997
----------------------- -----------------------
<S> <C> <C>
Balance Sheet Information:
Current Assets $ 961 $ 954
Property and Equipment and Other Assets 7,574 7,530
Total Assets 8,535 8,484
Current Liabilities 1,188 1,208
Long-Term Debt 1,703 1,732
Total Liabilities 5,204 5,319
Stockholders' Equity 3,331 3,165
</TABLE>
Conrail's operating results include various expenses related to the
transaction. On an after-tax basis, these expenses totaled $18 million and $14
million for the quarters ended March 31, 1998 and 1997, respectively. These
expenses were included in the net income of Conrail in determining the
proportionate share of such income recorded by the company.
The company is amortizing the difference between its purchase price for
the investment in Conrail and its proportionate share of Conrail's net assets. A
substantial portion of the excess purchase price is expected to be allocated to
reflect the fair value of Conrail's property and equipment. The provision for
amortization of the excess purchase price has been based upon preliminary
estimates of the fair values of such property and equipment and estimates of
their remaining useful lives, as well as estimates of the fair values of other
assets and liabilities of Conrail.
The combined effect of dividends or equity earnings, excess purchase
price amortization, net interest on debt issued to acquire the Conrail
investment, and other expenses related to the transaction reduced the company's
net earnings by $43 million, 19 cents per share, for the quarter ended March 27,
1998, and $16 million, 7 cents per share, for the quarter ended March 28, 1997.
The company's method of accounting for the investment in Conrail subsequent to
the STB decision and dissolution of the voting trust will depend on the final
terms of the ownership arrangement between the company and Norfolk Southern
approved by the STB.
NOTE 5. ACCOUNTS RECEIVABLE
The company has sold, directly and through Trade Receivables
Participation Certificates (Certificates), ownership interests in designated
pools of accounts receivable originated by CSX Transportation, Inc. (CSXT), its
rail unit. At March 27, 1998, the company had $200 million of Certificates
outstanding at 5.05%, due September 1998, which begin amortizing in July 1998.
The company expects that it will issue new Certificates in the second quarter of
1998. The Certificates represent undivided interests in a master trust holding
an ownership interest in a revolving pool of rail freight accounts receivable.
At March 27, 1998 and December 26, 1997, the Certificates were collateralized by
$247 million and $249 million, respectively, of accounts receivable held in the
master trust.
The company also has a revolving agreement with a financial institution
to sell with recourse on a monthly basis an undivided percentage ownership
interest in designated pools of freight and other accounts receivable. The
agreement provides for the sale of up to $200 million in accounts receivable and
expires in October 1998.
The company has retained the responsibility for servicing and
collecting accounts receivable held in trust or sold. At March 27, 1998 and
December 26, 1997, accounts receivable have been reduced by $372 million,
representing Certificates and accounts receivable sold. The net losses
associated with sales of Certificates and receivables were $7 million for the
quarters ended March 27, 1998 and March 28, 1997.
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<PAGE>
CSX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited), Continued
(All Tables in Millions of Dollars, Except Per Share Amounts)
NOTE 6. OPERATING EXPENSE
Quarters Ended
--------------------------------
March 27, March 28,
1998 1997
------------- -------------
Labor and Fringe Benefits $ 850 $ 799
Materials, Supplies and Other 637 614
Building and Equipment Rent 271 284
Inland Transportation 248 237
Depreciation 163 156
Fuel 123 157
Miscellaneous 1 (4)
------------- -------------
Total $ 2,293 $ 2,243
============= =============
NOTE 7. OTHER INCOME (EXPENSE)
<TABLE>
<CAPTION>
Quarters Ended
------------------------------
March 27, March 28,
1998 1997
------------- -------------
<S> <C> <C>
Interest Income $ 11 $ 12
Income from Real Estate and Resort Operations(1) (5) (7)
Net Losses from Accounts Receivable Sold (7) (7)
Minority Interest (7) (10)
Income (Loss) from Investment in Conrail - Net (6) 5
Equity Earnings of Other Affiliates 1 1
Foreign Currency Gain (Loss) (4) 3
Miscellaneous (17) (4)
------------- -------------
Total $ (34) $ (7)
============= =============
</TABLE>
(1) Gross revenue from real estate and resort operations was $21 million and
$17 million for the quarters ended March 27, 1998 and March 28, 1997,
respectively.
NOTE 8. COMMITMENTS AND CONTINGENCIES
In September 1997, a state court jury in New Orleans returned a $2.5
billion punitive damages award against CSXT. The award was made in a
class-action lawsuit against a group of nine companies based on personal
injuries alleged to have arisen from a 1987 fire. The fire was caused by a
leaking chemical tank car parked on CSXT tracks and resulted in the 36-hour
evacuation of a New Orleans neighborhood. In the same case, the court awarded a
group of 20 plaintiffs compensatory damages of approximately $2 million against
the defendants, including CSXT, to which the jury assigned 15% of the
responsibility for the incident. CSXT's liability under that compensatory
damages award is not material.
In October 1997, the Louisiana Supreme Court set aside the punitive
damages judgment, ruling the judgment should not have been entered until all
liability issues were resolved. CSX believes this decision means that 8,000
other cases must be resolved before the punitive damage claims can be decided.
CSXT is pursuing an aggressive legal strategy, and management believes that any
adverse outcome will not be material to CSX's or CSXT's overall results of
operations or financial position, although it could be material to results of
operations in a particular quarterly accounting period.
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CSX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited), Continued
(All Tables in Millions of Dollars, Except Per Share Amounts)
The company had been previously advised of a Federal investigation into
the activities of a former subsidiary. The former subsidiary, which was sold by
the company in 1992, had administered government-guaranteed student loans on
behalf of lenders and State guarantee agencies. The investigation focused on
allegations of improper administrative practices that, if true, would have
rendered certain loans ineligible for guaranty payments. The company has
recently reached a tentative agreement with the government resolving this matter
in exchange for payments that are not material to the company's overall results
of operations or financial position. During the course of the investigation, the
company recorded provisions to cover management's best estimates of the likely
exposure associated with the matter and at March 27, 1998 had reserved for
substantially all of the payments contemplated under the tentative agreement.
Although the company obtains substantial amounts of commercial
insurance for potential losses for third-party liability and property damage,
reasonable levels of risk are retained on a self-insurance basis. A portion of
the insurance coverage, $25 million limit above $100 million per occurrence from
rail and certain other operations, is provided by a company partially owned by
CSX.
CSXT is a party to various proceedings involving private parties and
regulatory agencies related to environmental issues. CSXT has been identified as
a potentially responsible party (PRP) at approximately 106 environmentally
impaired sites that are or may be subject to remedial action under the Federal
Superfund statute (Superfund) or similar state statutes. A number of these
proceedings are based on allegations that CSXT, or its railroad predecessors,
sent hazardous substances to the facilities in question for disposal. Such
proceedings arising under Superfund or similar state statutes can involve
numerous other waste generators and disposal companies and seek to allocate or
recover costs associated with site investigation and cleanup, which could be
substantial.
CSXT is involved in a number of administrative and judicial proceedings
and other clean-up efforts at approximately 264 sites, including the sites
addressed under the Federal Superfund statute or similar state statutes, where
it is participating in the study and/or clean-up of alleged environmental
contamination. The assessment of the required response and remedial costs
associated with most sites is extremely complex. Cost estimates are based on
information available for each site, financial viability of other PRPs, where
available, and existing technology, laws and regulations. CSXT's best estimates
of the allocation method and percentage of liability when other PRPs are
involved are based on assessments by consultants, agreements among PRPs, or
determinations by the U.S. Environmental Protection Agency or other regulatory
agencies.
At least once each quarter, CSXT reviews its role, if any, with respect
to each such location, giving consideration to the nature of CSXT's alleged
connection to the location (e.g., generator, owner or operator), the extent of
CSXT's alleged connection (e.g., volume of waste sent to the location and other
relevant factors), the accuracy and strength of evidence connecting CSXT to the
location, and the number, connection and financial position of other named and
unnamed PRPs at the location. The ultimate liability for remediation can be
difficult to determine with certainty because of the number and creditworthiness
of PRPs involved. Through the assessment process, CSXT monitors the
creditworthiness of such PRPs in determining ultimate liability.
Based upon such reviews and updates of the sites with which it is
involved, CSXT has recorded, and reviews at least quarterly for adequacy,
reserves to cover estimated contingent future environmental costs with respect
to such sites. The recorded liabilities for estimated future environmental costs
at March 27, 1998, and December 26, 1997, were $96 million and $99 million,
respectively. These recorded liabilities include amounts representing CSXT's
estimate of unasserted claims, which CSXT believes to be immaterial. The
liability has been accrued for future costs for all sites where the company's
obligation is probable and where such costs can be reasonably estimated. The
liability includes future costs for remediation and restoration of sites as well
as any significant ongoing monitoring costs, but excludes any anticipated
insurance recoveries. The majority of the March 27, 1998 environmental liability
is expected to be paid out over the next five to seven years, funded by cash
generated from operations.
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CSX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited), Continued
(All Tables in Millions of Dollars, Except Per Share Amounts)
The company does not currently possess sufficient information to
reasonably estimate the amounts of additional liabilities, if any, on some sites
until completion of future environmental studies. In addition, latent conditions
at any given location could result in exposure, the amount and materiality of
which cannot presently be reliably estimated. Based upon information currently
available, however, the company believes that its environmental reserves are
adequate to accomplish remedial actions to comply with present laws and
regulations, and that the ultimate liability for these matters will not
materially affect its overall results of operations and financial condition.
A number of legal actions, other than environmental, are pending
against CSX and certain subsidiaries in which claims are made in substantial
amounts. While the ultimate results of environmental investigations, lawsuits
and claims involving the company cannot be predicted with certainty, management
does not currently expect that resolution of these matters will have a material
adverse effect on the consolidated financial position, results of operations and
cash flows of the company.
NOTE 9. SUBSEQUENT EVENT
On April 20, 1998, CSX announced that it had agreed to convey its
barge unit, American Commercial Lines LLC (ACL), to a venture formed with
Vectura Group, Inc. (Vectura). In exchange for ACL, CSX will receive $695
million in cash and $155 million of securities issued by the venture, including
a 34% common interest in the venture. As part of the transaction, National
Marine, Inc. a wholly-owned subsidiary of Vectura, will be combined with ACL to
create a company with approximately $1 billion of assets. The transaction is
subject to customary conditions, including the arrangement of financing. Closing
is anticipated in the second quarter of 1998. The company expects that it will
report a gain for financial statement purposes in the period the transaction
closes.
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<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
RESULTS OF OPERATIONS
- ---------------------
First Quarter 1998 Compared with 1997
- -------------------------------------
The company reported net earnings for the quarter ended March 27, 1998
of $91 million, 42 cents per share, versus net earnings of $151 million, 70
cents per share, for the same period in 1997. The results for both years reflect
net costs associated with the company's investment in Conrail, partially offset
by its equity in Conrail's earnings in 1998 and dividends on the Conrail shares
in 1997. Excluding the Conrail impact, earnings would have been $134 million, 60
cents per share, for the quarter ended March 27, 1998 and $167 million, 76 cents
per share, for the quarter ended March 28, 1997.
Operating income was $287 million, down $37 million from the first
quarter of 1997. Operating revenue of $2.6 billion remained level with the 1997
period. Operating expense rose slightly over the prior year.
Rail Unit Results
- -----------------
The company's rail unit posted first quarter operating income of $264
million, vs. $282 million in the prior-year period. Revenue remained level at
$1.25 billion, while operating expense rose 2 percent.
Coal volume declined 4 percent, to 39.7 million tons, reflecting
slightly lower domestic demand and a weak export market. Coal revenue fell 6
percent from the 1997 period. Total merchandise traffic rose 2 percent,
reflecting strong demand overall. Increases occurred in chemicals (up 4
percent); food and consumer products (up 9 percent); metals (up 6 percent); and
phosphates and fertilizer (up 8 percent).
Rail operating expense rose 2 percent, primarily due to increased labor
costs resulting from a wage increase last July and higher staffing levels in
preparation for the Conrail integration.
RAIL OPERATING INCOME
(Millions of Dollars)
-----------------------------------------------
Quarters Ended
---------------------------------
March 27, March 28, Percent
1998 1997 Change
-------------- -------------- ------------
Operating Revenue
Merchandise $ 831 $ 826 1%
Coal 366 389 (6)%
Other 54 32 69%
-------------- --------------
Total 1,251 1,247 -%
Operating Expense 987 965 2%
-------------- --------------
Operating Income $ 264 $ 282 (6)%
============== ==============
Operating Ratio 78.9% 77.4%
============== ==============
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<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION, CONTINUED
RESULTS OF OPERATIONS, Continued
- --------------------------------
Container Shipping Unit Results
- -------------------------------
Ongoing rate pressure and the trade imbalance caused by the Asian
currency crisis lowered the container-shipping unit's first-quarter operating
income to $15 million, compared to $41 million in 1997.
Total volume declined just 11 percent; however, the Asian financial
crisis resulted in a significant decrease in U.S. exports to Asia. The imbalance
greatly affected operating expense, which rose to $940 million, vs. $909 million
in the 1997 period. Operating revenue totaled $955 million, vs. $950 million in
the prior-year period.
Other Unit Results
- ------------------
Performance at the barge unit improved significantly, with operating
income rising to $9 million. This compares to $2 million in the 1997 quarter,
which was severely affected by adverse weather conditions along the river
system. While lower rates this year had an effect on operating revenue, ACL
lowered its operating expense by 11 percent.
The company's intermodal unit achieved operating income of $9 million,
vs. $5 million in the 1997 quarter. Total volume rose 2 percent, mainly due to
stronger international volume. While rail service problems in the western United
States unfavorably affected the unit's long-haul business, the company was
successful in lowering its operating expense by 3 percent.
Growth at the contract logistics unit continued, with revenue rising 16
percent to $107 million and operating income totaling $7 million.
FINANCIAL CONDITION
- -------------------
Cash, cash equivalents and short-term investments totaled $459 million
at March 27, 1998, a decrease of $231 million since December 26, 1997. The
primary sources of cash and cash equivalents were normal transportation
operations and short-term debt borrowings, and the primary uses of cash were
property additions, repayment of long-term debt and dividend payments.
The company's working capital deficit at March 27, 1998 was $595
million, a $63 million increase during the first quarter. A working capital
deficit is not unusual for the company and does not indicate a lack of
liquidity. The company continues to maintain adequate current assets to satisfy
current liabilities when they are due and has sufficient liquidity and financial
resources to manage its day-to-day cash needs.
- 13 -
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION, CONTINUED
FINANCIAL DATA
- --------------
(Millions of Dollars)
----------------------------------
March 27, December 26,
1998 1997
--------------- -----------------
Cash, Cash Equivalents and
Short-Term Investments $ 459 $ 690
Commercial Paper Outstanding -
Short-Term 295 126
Commercial Paper Outstanding -
Long-Term 2,000 2,000
Working Capital (Deficit) (595) (532)
Current Ratio .8 .8
Debt Ratio 52% 52%
Ratio of Earnings to Fixed Charges 1.6x 2.6x
OUTLOOK
- -------
Entering the second quarter, weak export coal demand and high domestic
utility coal inventory levels are expected to continue to impact rail traffic
and revenues. The rail unit will continue working on service improvements, which
should help it gain merchandise traffic. The unit also will continue to prepare
for the smooth integration of its portion of Conrail, which promises to open
markets. Rail operations will reflect increased costs over the balance of the
year for hiring and training of employees and other activities related to the
Conrail integration.
Although the first quarter was challenging for the container-shipping
unit, the carrier expects rates for U.S. imports from Asia to strengthen in the
coming months and overall volume to be strong. Rationalization of the unit's
network should aid cost-control efforts and mitigate some of the imbalance
effects caused by the Asian financial crisis.
The company's intermodal unit anticipates strong demand and continued
high service reliability on its core network. However, congestion and related
traffic problems on the Union Pacific rail system will continue to have an
impact on the unit's revenues.
In the barge business, weaker rates caused by a short-term barge
supply/demand imbalance are expected to continue. However, performance at the
barge line should improve compared to last year, largely due to the company's
cost-control efforts. The company's conveyance of the barge subsidiary to a
joint venture is expected to close during the second quarter.
RECENT DEVELOPMENTS
- -------------------
On April 20, 1998, CSX announced that it had agreed to convey its
barge unit, American Commercial Lines LLC (ACL), to a venture formed with
Vectura Group, Inc. (Vectura). In exchange for ACL, CSX will receive $695
million in cash and $155 million of securities issued by the venture, including
a 34% common interest in the venture. As part of the transaction, National
Marine, Inc. a wholly-owned subsidiary of Vectura, will be combined with ACL to
create a company with approximately $1 billion of assets. The transaction is
subject to customary conditions, including the arrangement of financing. Closing
is anticipated in the second quarter of 1998. The company expects that it will
report a gain for financial statement purposes in the period the transaction
closes.
- 14 -
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION, CONTINUED
CONRAIL ACQUISITION
- -------------------
CSX/Norfolk Southern Agreement
In April 1997, CSX and Norfolk Southern entered into an agreement
providing for their joint acquisition of Conrail and the division of its routes
and other assets. Under the terms of the agreement, CSX and Norfolk Southern
acquired all outstanding shares of Conrail not already owned by them for $115
per share in cash during the second quarter of 1997. CSX and Norfolk Southern
each possess 50% of the voting and management rights of a jointly owned
acquisition company, and non-voting equity is divided between the parties to
achieve overall economic allocations of 42% for CSX and 58% for Norfolk
Southern. Following approval by the Surface Transportation Board (STB) as
described below, Conrail's assets will be segregated within Conrail, and CSX and
Norfolk Southern will each benefit from the operation of a specified portion of
the Conrail routes and other assets through the use of various operating
arrangements. Certain Conrail assets will be operated for the joint benefit of
CSX and Norfolk Southern.
The total cost of acquiring the outstanding shares of Conrail under the
joint CSX/Norfolk Southern agreement was approximately $9.8 billion. Pursuant to
the agreement, CSX has paid 42%, or approximately $4.1 billion, and Norfolk
Southern has paid 58%, or approximately $5.7 billion, of such cost. Including
its capitalized transaction costs, CSX's total purchase price was approximately
$4.2 billion.
Joint STB Application
The Conrail shares have been placed in a voting trust pending STB
approval of the joint acquisition, control and division of Conrail. The exercise
of control over Conrail by CSX and Norfolk Southern remains subject to a number
of conditions and approvals, including approval by the STB, which has the
authority to modify contract terms and impose additional conditions.
CSX and Norfolk Southern filed an application for control of Conrail
with the STB in June 1997. The STB has adopted a schedule that contemplates a
decision in late July 1998. CSX believes that the STB will approve the joint
application for control without imposing onerous conditions. However, should the
application not be approved by the STB, or should the STB impose onerous
approval conditions, the closing may be delayed, or CSX may be required to, or
may choose to, dispose of some or all of its investment in Conrail in a manner
that could cause CSX to incur a loss on its investment in Conrail.
Financing Arrangements
CSX originally arranged a $4.8 billion bank credit facility in November
1996 to provide initial financing for the Conrail acquisition and to meet
general working capital needs. The facility was amended in May 1997, and the
lenders' commitments were reduced to $2.5 billion, reflecting the issuance of
fixed rate debentures. Currently, the facility is used as support for commercial
paper issuance.
The fixed rate debentures, issued through a $2.5 billion multitranche
private offering in May 1997, have maturities ranging from 2002 to 2032 and
interest rates ranging from 6.95% to 8.30%.
Enhanced Efficiencies and Revenue Growth
Management expects the integration of Conrail operations resulting from
the transaction to add approximately $1.7 billion, or 16%, to CSX's annual
revenue beginning in the first 12 months following operational consolidation.
Management believes that the transaction also will result in growth of the
company's rail revenue base through expansion of single-line service and CSX's
ability to compete more effectively against trucks on major freight routes.
- 15 -
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION, CONTINUED
Integration Planning
The company is actively planning for the smooth integration of Conrail
operations into the CSXT rail system after the STB control date. Plans involve
all facets of combining the two systems, including: safety; customer service;
train scheduling, switching, and routing; equipment utilization and track
programs; commuter and passenger rail; marketing; technology; labor agreements;
and administration. Related capital improvements to certain routes and
facilities on the CSX rail system also have been initiated. Operational
integration is expected to take place once the necessary implementing agreements
have been reached, which currently is anticipated in late 1998.
Financial Effects
Including transaction costs, the overall purchase price paid by CSX
exceeded the historical book value of its proportionate share of Conrail's net
assets by approximately $2.9 billion. A substantial portion of the excess
purchase price is expected to be allocated to reflect the fair value of
Conrail's property and equipment. The company has based its provision for
amortization of the excess purchase price on preliminary estimates of the fair
values of such property and equipment and estimates of their remaining useful
lives, as well as estimates of the fair values of other assets and liabilities
of Conrail.
Because of the time required to obtain necessary regulatory and other
approvals, CSX does not expect integrated operations to have a significant
effect on operating and financial results prior to fiscal 1999. The primary
impact of the Conrail transaction on net earnings prior to the integration of
operations will be the after-tax effect of the company's share of Conrail's net
earnings, reported under the equity method of accounting, less amortization of
the excess purchase price and interest on debt incurred to acquire the Conrail
investment. Net cash flow prior to operational integration is expected to be
reduced by interest payments on the acquisition debt. At March 28, 1997, the
average interest rate on debt incurred to acquire Conrail shares was
approximately 6.9%. The degree of negative impact on net earnings and net cash
flow during the remainder of 1998 will depend primarily on the net earnings
reported by Conrail and the average interest rate and timing of interest
payments on the related debt.
OTHER MATTERS
- -------------
Litigation
In September 1997, a state court jury in New Orleans, Louisiana
returned a $2.5 billion punitive damages award against CSXT. The award was made
in a class action lawsuit against a group of nine companies based on personal
injuries alleged to have arisen from a 1987 fire. The fire was caused by a
leaking chemical tank car parked on CSXT tracks and resulted in the 36-hour
evacuation of a New Orleans neighborhood. In the same case, the court awarded a
group of 20 plaintiffs compensatory damages of approximately $2 million against
the defendants, including CSXT, to which the jury assigned 15% of the
responsibility for the incident. CSXT's liability under that compensatory
damages award is not material and adequate provision was made for the award in a
prior year.
In October 1997, the Louisiana Supreme Court set aside the punitive
damages judgment, ruling the judgment should not have been entered until all
liability issues were resolved. CSX believes this decision means that 8,000
other cases must be resolved before the punitive damage claims can be decided.
CSXT is pursuing an aggressive legal strategy, and management believes that any
adverse outcome will not be material to CSX's or CSXT's overall results of
operations or financial position, although it could be material to results of
operations in a particular quarterly accounting period.
- 16 -
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION, CONTINUED
The company had been previously advised of a Federal investigation into
the activities of a former subsidiary. The former subsidiary, which was sold by
the company in 1992, had administered government-guaranteed student loans on
behalf of lenders and State guarantee agencies. The investigation focused on
allegations of improper administrative practices that, if true, would have
rendered certain loans ineligible for guaranty payments. The company has
recently reached a tentative agreement with the government resolving this matter
in exchange for payments that are not material to the company's overall results
of operations or financial position. During the course of the investigation, the
company recorded provisions to cover management's best estimates of the likely
exposure associated with the matter and at March 27, 1998 had reserved for
substantially all of the payments contemplated under the tentative agreement.
- 17 -
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
1. (27.1) Financial Data Schedule
2. (27.2) Restated Financial Data Schedules for the
year to date periods ended March 28, 1997, June
27, 1997, September 26, 1997 and March 29, 1996
3. (27.3) Restated Financial Data Schedules for the
year to date periods ended June 28, 1996,
September 27, 1996 and the fiscal years ended
December 27, 1996 and December 29, 1995
(b) Reports on Form 8-K
1. A report was filed on April 22, 1998, reporting
Item 5, Other Events announcement of an agreement
to convey its wholly-owned barge subsidiary,
American Commercial Lines LLC, to a venture
formed with Vectura Group, Inc.; plus Item 7,
Financial Statements and Exhibits - (1)
Recapitalization Agreement, dated April 17, 1998,
by and among the company, Vectura Group, Inc.,
American Commercial Lines Holdings LLC, American
Commercial Lines LLC, and National Marine, Inc.;
and (2) a press release by the company.
Signature
---------
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CSX CORPORATION
(Registrant)
By: \s\ JAMES L. ROSS
------------------
James L. Ross
Vice President and Controller
(Principal Accounting Officer)
Dated: April 24, 1998
- 18 -
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