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 September 25, 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 September 25, 1998: 218,280,066 shares.
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<PAGE>
CSX CORPORATION
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 25, 1998
INDEX
Page Number
PART I. FINANCIAL INFORMATION
Item 1:
Financial Statements
1. Consolidated Statement of Earnings-
Quarters and Nine Months Ended September 25, 1998 and
September 26, 1997 3
2. Consolidated Statement of Cash Flows-
Nine Months Ended September 25, 1998 and September 26, 1997 4
3. Consolidated Statement of Financial Position-
At September 25, 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 15
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 25
Signature 25
- 2 -
<PAGE>
CSX CORPORATION AND SUBSIDIARIES
Consolidated Statement of Earnings
(Millions of Dollars, Except Per Share Amounts)
<TABLE>
<CAPTION>
(Unaudited)
Quarters Ended Nine Months Ended
----------------------------- ------------------------------
Sept. 25, Sept. 26, Sept. 25, Sept. 26,
1998 1997 1998 1997
----------------------------- --------------- -------------
<S> <C> <C> <C> <C>
Operating Revenue $ 2,432 $ 2,649 $ 7,387 $ 7,894
Operating Expense 2,162 2,265 6,503 6,753
---------- ---------- ----------- ----------
Operating Income 270 384 884 1,141
Other Income (Expense) 138 41 112 52
Interest Expense 120 125 367 320
---------- ---------- ----------- ----------
Earnings before Income Taxes 288 300 629 873
Income Tax Expense 101 94 200 289
---------- ---------- ----------- ----------
Net Earnings $ 187 $ 206 $ 429 $ 584
========== ========== =========== ==========
Earnings Per Share $ .89 $ .98 $ 2.03 $ 2.79
========== ========== =========== ==========
Earnings Per Share, Assuming Dilution $ .88 $ .96 $ 2.00 $ 2.73
========== ========== =========== ==========
Average Common Shares Outstanding
(Thousands) 210,810 210,311 211,081 209,779
========== ========== =========== ==========
Average Common Shares Outstanding,
Assuming Dilution (Thousands) 212,959 215,854 214,696 214,040
========== ========== =========== ==========
Cash Dividends Paid Per Common Share $ .30 $ .26 $ .90 $ .78
========== ========== =========== ==========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
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<PAGE>
CSX CORPORATION AND SUBSIDIARIES
Consolidated Statement of Cash Flows
(Millions of Dollars)
<TABLE>
<CAPTION>
(Unaudited)
Nine Months Ended
-----------------------------
Sept. 25, Sept. 26,
1998 1997
------------- -------------
<S> <C> <C>
OPERATING ACTIVITIES
Net Earnings $ 429 $ 584
Adjustments to Reconcile Net Earnings
to Net Cash Provided:
Depreciation 468 480
Deferred Income Taxes 181 120
Net Investment Gain (154) -
Equity in Conrail Earnings - Net (98) (65)
Restructuring Credit (30) -
Productivity/Restructuring Charge Payments (24) (37)
Other Operating Activities (6) -
Changes in Operating Assets and Liabilities
Accounts Receivable 30 (71)
Other Current Assets (55) (43)
Accounts Payable (71) (26)
Other Current Liabilities (68) 77
------------ ------------
Net Cash Provided by Operating Activities 602 1,019
------------ ------------
INVESTING ACTIVITIES
Property Additions (984) (686)
Net Proceeds from Conveyance of Barge Subsidiary 628 -
Proceeds from Property Dispositions 15 36
Investment in Conrail (12) (2,163)
Short-Term Investments - Net 99 (71)
Purchases of Long-Term Marketable Securities (25) (50)
Proceeds from Sales of Long-Term Marketable Securities 17 38
Other Investing Activities (46) (30)
------------ ------------
Net Cash Used by Investing Activities (308) (2,926)
------------ ------------
FINANCING ACTIVITIES
Short-Term Debt - Net (438) (485)
Long-Term Debt Issued 409 2,454
Long-Term Debt Repaid (115) (86)
Cash Dividends Paid (197) (170)
Common Stock Reacquired (67) -
Other Financing Activities (5) -
------------ ------------
Net Cash Provided (Used) by Financing Activities (413) 1,713
------------ ------------
Net Decrease in Cash and Cash Equivalents (119) (194)
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 132 174
Short-Term Investments at End of Period 340 385
------------ ------------
Cash, Cash Equivalents and Short-Term
Investments at End of Period $ 472 $ 559
============ ============
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
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<PAGE>
CSX CORPORATION AND SUBSIDIARIES
Consolidated Statement of Financial Position
(Millions of Dollars)
<TABLE>
<CAPTION>
(Unaudited)
Sept. 25, Dec. 26,
1998 1997
-------------- ---------------
<S> <C> <C>
ASSETS
Current Assets
Cash, Cash Equivalents and Short-Term Investments $ 472 $ 690
Accounts Receivable 899 987
Materials and Supplies 212 227
Deferred Income Taxes 149 134
Other Current Assets 172 137
-------------- --------------
Total Current Assets 1,904 2,175
Properties 18,192 18,270
Accumulated Depreciation (5,864) (5,864)
-------------- --------------
Properties - Net 12,328 12,406
Investment in Conrail 4,755 4,244
Affiliates and Other Companies 415 394
Other Long-Term Assets 711 738
-------------- --------------
Total Assets $ 20,113 $ 19,957
============== ==============
LIABILITIES
Current Liabilities
Accounts Payable $ 1,098 $ 1,179
Labor and Fringe Benefits Payable 397 477
Casualty, Environmental and Other Reserves 276 298
Current Maturities of Long-Term Debt 101 229
Short-Term Debt 188 126
Other Current Liabilities 333 398
-------------- --------------
Total Current Liabilities 2,393 2,707
Casualty, Environmental and Other Reserves 650 711
Long-Term Debt 6,200 6,416
Deferred Income Taxes 3,137 2,939
Other Long-Term Liabilities 1,757 1,418
-------------- --------------
Total Liabilities 14,137 14,191
-------------- --------------
SHAREHOLDERS' EQUITY
Common Stock, $1 Par Value 218 218
Other Capital 1,530 1,552
Retained Earnings 4,251 4,019
Accumulated Other Comprehensive Earnings (Loss) (23) (23)
-------------- --------------
Total Shareholders' Equity 5,976 5,766
-------------- --------------
Total Liabilities and Shareholders' Equity $ 20,113 $ 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 September 25, 1998 and December 26, 1997, the results of
its operations for the quarters and nine months ended September 25, 1998 and
September 26, 1997, and its cash flows for the nine months ended September 25,
1998 and September 26, 1997, such adjustments being of a normal recurring
nature. Certain prior-year data have been reclassified to conform to the 1998
presentation.
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.
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 and 39-week periods ended September 25, 1998 and September 26, 1997.
The current fiscal year will end on December 25, 1998; and the prior fiscal year
ended December 26, 1997.
NOTE 2. EARNINGS PER SHARE
Earnings per share are based on the weighted average of common shares
outstanding, as defined by Statement of Financial Accounting Standards No. 128,
"Earnings per Share" (SFAS No. 128), for the fiscal quarters and nine months
ended September 25, 1998 and September 26, 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 September 25, 1998 and September 26, 1997, potentially dilutive
common shares consisted of stock options (1.0 million shares and 3.3 million
shares, respectively), Stock Purchase and Loan Plan shares (.8 million shares
and 1.8 million shares, respectively), and performance shares and other stock
awards (.3 million shares and .5 million shares, respectively). For the nine
month periods ended September 25, 1998 and September 26, 1997, potentially
dilutive common shares consisted of stock options (2.0 million shares and 2.5
million shares, respectively), Stock Purchase and Loan Plan shares (1.4 million
shares in each period), and performance shares and other stock awards (.3
million shares in each period).
Certain stock options and Stock Purchase and Loan Plan shares
outstanding at September 25, 1998 were not included in the computation of
earnings per share, assuming dilution, since their exercise prices were greater
than the average market price of the common shares during the period and,
accordingly, their effect is antidilutive. These shares totaled 10.0 million at
a weighted-average exercise price of $50.06 per share. There were no
antidilutive securities outstanding at September 26, 1997.
Earnings per share for all prior periods presented have been restated to
reflect clarification of the treatment of Stock Purchase and Loan Plan shares
under SFAS No. 128. Earnings per share were revised to 98 cents from 95 cents
for third quarter 1997 and to $2.79 from $2.69 for the related nine-month
period. On a diluted basis, third quarter 1997 earnings per share were revised
to 96 cents from 93 cents; the nine-month 1997 figure was revised to $2.73 per
share from $2.65.
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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 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 available-for-sale securities and
foreign currency translation adjustments, which were reported separately in
shareholders' equity prior to adoption, 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 periods ended
September 25, 1998 and September 26, 1997. Accumulated other comprehensive
earnings at September 25, 1998 and December 26, 1997 consist of minimum pension
liability adjustments ($20 million) and foreign currency translation adjustments
($3 million).
The 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.
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 this pronouncement will have
a material impact on its financial statements.
The FASB has also issued Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities" which requires companies to record
derivatives on the statement of financial position, measured at fair value. The
statement also sets forth new accounting rules for gains or losses resulting
from changes in the values of derivatives. The company does not currently use
derivative financial instruments, but would expect to adopt this statement in
the fourth quarter of 1999 to the extent it may apply at that time. The company
would not expect the adoption of Statement No. 133 to have a material impact on
its financial statements.
NOTE 4. JOINT ACQUISITION OF CONRAIL
Background
- ----------
In May 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 terms of the
agreement, CSX contributed approximately $4.1 billion, in the form of cash and
Conrail shares previously acquired, for a 42% economic interest in Conrail.
Norfolk Southern contributed approximately $5.7 billion, also in the form of
cash and Conrail shares previously acquired, for a 58% economic interest in
Conrail. CSX and Norfolk Southern each have a 50% voting interest in Conrail
through the jointly owned entity.
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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 4. JOINT ACQUISITION OF CONRAIL, Continued
Background, Continued
- ---------------------
The Conrail shares acquired by the jointly owned entity were initially
held in a voting trust pending approval of the transaction by the Surface
Transportation Board (STB). On June 23, 1997, CSX and Norfolk Southern filed a
joint railroad control application with the STB outlining the terms of their
agreement, their respective operating plans, and the benefits expected from
combining the respective rail systems. On July 23, 1998, following an extensive
review, the STB issued a written decision approving the application with limited
conditions. The decision permitted CSX and Norfolk Southern to exercise joint
control over Conrail on August 22, 1998. At that time, the voting trust was
dissolved and a new Conrail board of directors was elected. Certain steps
necessary to integrate the operations of the Conrail rail system with those of
CSX and Norfolk Southern, such as the arrangement of labor implementing
agreements, could not commence until the August 22, 1998 control date. Those
steps and other planning activities are expected to be completed in early 1999,
at which time the integration of rail operations will take place.
Upon integration, CSX and Norfolk Southern will separately operate
designated routes, facilities, and equipment pursuant to various operating
agreements with Conrail and its subsidiaries. Certain other Conrail assets will
be operated by Conrail for the benefit of CSX and Norfolk Southern, or jointly
by the two owners. Substantially all of Conrail's customer freight contracts
will be assumed by either CSX or Norfolk Southern. The majority of Conrail's
operations workforce will be employed by CSX or Norfolk Southern, although
certain operations personnel, as well as certain management and administrative
employees, will remain at Conrail to oversee its ongoing business activities. As
a result of the acquisition, a number of positions will be eliminated and
certain duplicate facilities will be closed.
Acquisition Accounting by the Jointly Owned Entity and CSX
- ----------------------------------------------------------
The jointly owned entity has accounted for the acquisition of Conrail as
a purchase business combination effective as of the August 1998 control date. At
that time, its investment in Conrail was approximately $10.2 billion, consisting
of the original $9.8 billion purchase price plus equity in Conrail's earnings,
net of purchase price amortization, since the May 1997 acquisition date. This
amount has been allocated to reflect the fair values of Conrail's assets and
liabilities as follows (in millions):
Current assets $ 911
Property and equipment, net 17,505
Other assets 1,217
Current liabilities (1,279)
Long-term debt (1,879)
Deferred income taxes (5,585)
Other liabilities (690)
----------
Total $10,200
==========
The jointly owned entity's purchase price allocation included a
provision of $280 million for the cost to Conrail of separating non-union
employees whose positions are being eliminated as a result of the acquisition.
CSX has separately recorded liabilities totaling approximately $400 million to
provide for other acquisition-related obligations it will be required to fund,
including separation costs for Conrail union employees, relocation costs for
Conrail union and non-union employees, and costs
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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 4. JOINT ACQUISITION OF CONRAIL, Continued
Acquisition Accounting by the Jointly Owned Entity and CSX, Continued
- ---------------------------------------------------------------------
associated with the closure of certain Conrail facilities. CSX has increased its
investment in Conrail on the statement of financial position as a result of
recording these separate obligations. Any costs that may be incurred in
separating or relocating CSX employees or closing facilities at CSX will be
charged to operating expense when definitive plans are established and
communicated.
Under STB restrictions, CSX and Norfolk Southern did not have complete
access to Conrail's properties and records prior to the August 1998 control
date. As a result, the amounts recorded by the jointly owned entity and by CSX
for separation costs and other acquisition-related obligations are subject to
refinement as CSX and Norfolk Southern finalize and implement their integration
plans. These balances, along with other components of the purchase price
allocation recorded on the basis of preliminary data, may be adjusted within the
twelve-month period following the August 1998 control date. Any such adjustments
are not expected to have a material effect on CSX's operating results or
financial position.
Conrail Financial Information
- -----------------------------
Summary financial information for Conrail for its fiscal periods ended
September 30, 1998 and 1997, and at December 31, 1997, is as follows:
<TABLE>
<CAPTION>
Quarters Ended Nine Months Ended
September 30, September 30,
-------------------- ---------------------
1998 1997 1998 1997
-------- -------- --------- --------
<S> <C> <C> <C> <C>
Income Statement Information:
Revenues $ 976 $ 944 $2,886 $2,787
Income (Loss) From Operations (82) 218 284 103
Net Income (Loss) (65) 101 135 (111)
</TABLE>
<TABLE>
<CAPTION>
As Of
-------------------------------------------
September 30, 1998 December 31, 1997
-------------------- -------------------
<S> <C> <C>
Balance Sheet Information:
Current Assets $ 889 $ 954
Property and Equipment and Other Assets 7,832 7,530
Total Assets 8,721 8,484
Current Liabilities 1,262 1,208
Long-Term Debt 1,639 1,732
Total Liabilities 5,216 5,319
Stockholders' Equity 3,505 3,165
</TABLE>
Conrail's operating results for the quarter and nine months ended
September 30, 1998 include certain charges that the jointly owned entity is
required to record as part of the purchase transaction. The charges, which
totaled $187 million on an after-tax basis, were excluded in determining the
equity in Conrail's net income recorded by CSX. These amounts reflected the
accrual of separation costs for non-union employees below the executive level
whose positions will be eliminated as a result of the acquisition, as well as
adjustments to certain other assets and liabilities. Excluding these charges,
Conrail's net income totaled $122 million and $322 million for the quarter and
nine months ended September 30, 1998.
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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 4. JOINT ACQUISITION OF CONRAIL, Continued
Conrail Financial Information, Continued
- ----------------------------------------
Conrail's operating results for the nine months ended September 30, 1997
also included certain charges that the jointly owned entity is required to
record as part of the purchase transaction. The charges, which totaled $363
million on an after-tax basis, reflected the accrual of separation costs for
Conrail executives, as well as the vesting of benefits under certain stock
compensation plans and the termination of Conrail's Employee Stock Ownership
Plan. Excluding these charges, Conrail's net income totaled $252 million for the
nine months ended September 30, 1997.
CSX's Accounting for the Investment in Conrail
- ----------------------------------------------
CSX is using the equity method of accounting for its investment in
Conrail through the jointly owned entity. Under the equity method, the company
recognizes income from its proportionate share of Conrail's net income, as well
as the effect of the purchase price allocation on items such as depreciation of
property and equipment. Equity in Conrail's net income, the effect of the
purchase price allocation, and acquisition and transition expenses incurred
prior to the integration of rail operations are reported as net income (loss)
from investment in Conrail and are included in other income (expense) in the
consolidated statement of earnings. On a combined basis, these items and
interest on debt issued to acquire the Conrail investment reduced CSX's net
earnings by $40 million, 19 cents per share, and $24 million, 11 cents per
share, for the quarters ended September 25, 1998 and September 26, 1997,
respectively. For the related nine month periods, such items reduced net
earnings by $119 million, 56 cents per share, in 1998 and $58 million, 27 cents
per share, in 1997.
As previously outlined, CSX and Norfolk Southern completed the joint
acquisition of Conrail in May 1997. At that time, CSX's economic interest in
Conrail increased to 42% from approximately 20%. Had CSX held its 42% interest
in Conrail from the beginning of the fiscal year, its net earnings for the nine
months ended September 26, 1997 would have been reduced by $28 million to $556
million, $2.65 per share, $2.60 per share on a diluted basis, reflecting
additional amounts for equity in Conrail's net income, purchase price
amortization, and interest on the acquisition debt.
NOTE 5. CONVEYANCE OF BARGE SUBSIDIARY
On June 30, 1998, CSX completed the conveyance of its wholly-owned barge
subsidiary, American Commercial Lines LLC (ACL), to a venture formed with
Vectura Group, Inc. (Vectura). As part of the transaction, NMI Holdings LLC, a
wholly-owned barge subsidiary of Vectura, was combined with ACL. CSX received
cash proceeds of $695 million from the transaction, $67 million of which were
used to repay certain outstanding debt and other obligations of ACL and to pay
expenses of the transaction. Operating results for the quarter and nine months
ended September 25, 1998 include a net investment gain of $154 million, $90
million after tax, 42 cents per share.
CSX has a 32% common ownership in the new venture. Due to the reduction
in its ownership interest, CSX has accounted for its investment in the venture
under the equity method for the period ended September 25, 1998, retroactive to
the beginning of the fiscal year. For periods prior to fiscal year 1998, ACL was
accounted for as a consolidated subsidiary.
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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. RESTRUCTURING CREDIT
In July 1998, the company's rail unit, CSX Transportation, Inc. (CSXT),
entered into an agreement with a third-party vendor to provide
telecommunications services for a five-year term. The agreement replaced a 1995
contract with a previous vendor. At the inception of the 1995 contract, CSXT
recorded a restructuring charge which included a provision for separation and
labor protection payments to employees whose positions were expected to be
eliminated. As a result of the 1998 agreement, certain of those positions will
not be eliminated and the related separation and labor protection costs will not
be incurred. Accordingly, the company recorded a restructuring credit of $30
million, $19 million after tax, 9 cents per share, during the quarter ended
September 25, 1998.
NOTE 7. ACCOUNTS RECEIVABLE
The company sells revolving interests in its rail accounts receivable to
public investors through a securitization program and to a financial institution
through commercial paper conduit programs. The accounts receivable are sold,
without recourse, to a wholly-owned, special-purpose subsidiary, which then
transfers the receivables, with recourse, to a master trust. The securitization
and conduit programs are accounted for as sales in accordance with Statement of
Financial Accounting Standards No. 125 "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities." Receivables sold under
these arrangements are excluded from accounts receivable in the consolidated
statement of financial position. In June 1998, the company replaced an expiring
securitization program with a new program and reduced the amount of receivables
that can be sold under the conduit programs. At September 25, 1998, the
agreements provide for the sale of up to $350 million in receivables through the
securitization program and $50 million through the conduit programs.
At September 25, 1998, the company had sold $347 million of accounts
receivable; $300 million through the securitization program and $47 million
through the conduit programs. At December 26, 1997, $372 million of accounts
receivable were sold; $200 million through the securitization program and $172
million through the conduit programs. The certificates issued under the new
securitization program bear interest at 6% annually and mature in June 2003.
Receivables sold under the conduit program require yield payments based on
prevailing commercial paper rates plus incremental fees.
The company's retained interests in the receivables were $434 million at
September 25, 1998 and $429 million at December 26, 1997 and are included in
accounts receivable. Losses recognized on the sale of accounts receivable
totaled $7 million for each of the quarters and $22 million for each of the nine
month periods ended September 25, 1998 and September 26, 1997.
The company has retained the responsibility for servicing accounts
receivable transferred to the master trust. The average servicing period is
approximately 28 days. No servicing asset or liability has been recorded since
the fees the company receives for servicing the receivables approximate the
related costs.
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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 8. OPERATING EXPENSE
<TABLE>
<CAPTION>
Quarters Ended Nine Months Ended
----------------------------- -----------------------------
Sept. 25, Sept. 26, Sept. 25, Sept. 26,
1998 1997 1998 1997
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Labor and Fringe Benefits $ 784 $ 816 $ 2,356 $ 2,413
Materials, Supplies and Other 643 634 1,870 1,867
Building and Equipment Rent 274 275 807 834
Inland Transportation 248 254 740 749
Depreciation 152 157 457 470
Fuel 91 129 303 420
Restructuring Credit (30) - (30) -
----------- ----------- ----------- -----------
Total $ 2,162 $ 2,265 $ 6,503 $ 6,753
=========== =========== =========== ===========
</TABLE>
NOTE 9. OTHER INCOME (EXPENSE)
<TABLE>
<CAPTION>
Quarters Ended Nine Months Ended
--------------------- ---------------------
Sept. 25 Sept. 26 Sept. 25 Sept. 26
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Interest Income $ 9 $ 12 $ 32 $ 42
Income from Real Estate and Resort
Operations(1) 18 38 29 41
Net Losses from Accounts Receivable Sold (7) (7) (22) (22)
Minority Interest (11) (11) (25) (31)
Net Income (Loss) from Investment in (11) 21 (22) 39
Conrail
Equity Earnings of Other Affiliates 7 1 17 4
Net Investment Gain 154 - 154 -
Foreign Currency Gain (Loss) (5) 3 (10) 4
Miscellaneous (16) (16) (41) (25)
--------- --------- --------- ---------
Total $ 138 $ 41 $ 112 $ 52
========= ========= ========= =========
</TABLE>
(1) Gross revenue from real estate and resort operations was $64 million and
$140 million for the quarter and nine months ended September 25, 1998,
respectively, and $80 million and $142 million for the quarter and nine
months ended September 26, 1997, respectively.
NOTE 10. COMMITMENTS AND CONTINGENCIES
Telecommunications Contract
- ---------------------------
In July 1998, CSXT entered into an agreement with a third-party vendor
to provide and manage its domestic and international data and voice
communications networks. The contract extends five years at a total cost of
approximately $350 million.
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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 10. COMMITMENTS AND CONTINGENCIES, Continued
Environmental Contingencies
- ---------------------------
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 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 246 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 September 25, 1998, and December 26, 1997, were $80 million and $99
million, respectively. These recorded liabilities, which are undiscounted,
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 September 25,
1998 environmental liability is expected to be paid out over the next five to
seven years, funded by cash generated from operations.
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
- 13 -
<PAGE>
CSX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited), Continued
(All Tables in Millions of Dollars, Except Per Share Amounts)
NOTE 10. COMMITMENTS AND CONTINGENCIES, Continued
Environmental Contingencies, Continued
- --------------------------------------
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.
Litigation and Other 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 percent 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.
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.
A number of other legal actions 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 or cash flows of the
company.
- 14 -
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
- ---------------------
Third Quarter 1998 Compared with 1997
- -------------------------------------
The company reported net earnings for the quarter ended September 25,
1998 of $187 million, 88 cents per share on a diluted basis, versus net earnings
of $206 million, 96 cents per share on a diluted basis for the same period in
1997. Current quarter results include a net investment gain of $154 million, $90
million after-tax, or 42 cents per diluted share, primarily from the conveyance
of American Commercial Lines to a venture formed with Vectura Group. Also
included in current period results is a one-time restructuring credit of $30
million, $19 million after-tax, or 9 cents per diluted share to reflect
separation and labor protection costs that will not be incurred as a result of
entering into a new telecommunications contract in July 1998. Excluding the
effects of CSX's investment in Conrail and one-time items, earnings would have
been $118 million, 56 cents per share on a diluted basis, for the quarter ended
September 25, 1998 and $230 million, $1.06 per share on a diluted basis, for the
quarter ended September 26, 1997.
Operating income was $270 million, versus $384 million in the third
quarter of 1997. Weak coal exports, container shipping trade imbalances driven
by the Asian economic crisis, and costs of the Conrail integration were the
primary factors contributing to the earnings decline. Both operating revenue and
operating expense decreased, largely reflecting the absence of barge operations
in the 1998 quarter. Revenue declined from $2.6 billion in 1997 to $2.4 billion.
Expense decreased 5 percent, to $2.2 billion, after giving effect to the
restructuring credit.
The company's other income (expense) increased $97 million from $41
million for the 1997 quarter to $138 million for the 1998 quarter, primarily due
to the $154 million net investment gain in the current period, partially offset
by the net costs of the company's investment in Conrail, and a decrease in
income from the company's real estate and resort operations.
Earnings per share for all prior periods have been restated to reflect
clarification of the treatment of certain stock-based compensation plan shares
under Statement of Financial Accounting Standards No. 128, "Earnings per Share."
Earnings per share were revised to 98 cents from 95 cents for third quarter
1997. On a diluted basis, third quarter 1997 earnings per share were revised to
96 cents from 93 cents.
Rail Unit Results
- -----------------
The company's rail unit produced $231 million of operating income in the
third quarter of 1998 versus $282 million in 1997. Operating revenue decreased 1
percent to $1.20 billion, while operating expense rose 4 percent to $970
million. Operating expense was negatively impacted by a shift in mix to lower
margin cargo, increases in certain casualty and litigation reserves and Year
2000 preparations, partially offset by the restructuring credit and lower fuel
prices.
Coal volume totaled 40.5 million tons during the third quarter of 1998
versus 41.3 million tons in the 1997 quarter as a result of continued weakness
in the export coal market. Coal revenue for the quarter declined 2 percent to
$381 million.
Total merchandise carloads rose 2 percent to 744,000, while revenue
declined 1 percent to $787 million. The biggest traffic gain was seen in
phosphates and fertilizer shipments, up 8 percent reflecting increased
production and the extended spring season. Agricultural carloads grew 7 percent
on higher demand for Midwest grains by Southeast feed mills. Western railroad
service problems led
- 15 -
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION, CONTINUED
RESULTS OF OPERATIONS, Continued
- --------------------------------
Rail Unit Results, Continued
- ----------------------------
to an 8 percent decline in food and consumer product shipments. Auto revenue
decreased 8 percent despite a 2 percent increase in carloads, as the General
Motors strike reduced long haul traffic.
<TABLE>
<CAPTION>
RAIL OPERATING INCOME
(Millions of Dollars)
----------------------------------------------------------------------
Quarters Ended Nine Months Ended
------------------------ -----------------------
Sept. 25, Sept. 26, Percent Sept. 25, Sept. 26, Percent
1998 1997 Change 1998 1997 Change
---------- ----------- --------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Operating Revenue
Merchandise $ 787 $ 794 (1)% $ 2,460 $ 2,461 -%
Coal 381 390 (2)% 1,120 1,161 (4)%
Other 33 31 6% 121 93 30%
---------- ----------- ---------- ----------
Total 1,201 1,215 (1)% 3,701 3,715 -%
Operating Expense 970 933 4% 2,917 2,811 4%
---------- ----------- ---------- ----------
Operating Income $ 231 $ 282 (18)% $ 784 $ 904 (13)%
========== =========== ========== ==========
Operating Ratio 80.8% 76.8% 78.8 % 75.7%
========== =========== ========== ==========
Operating Income,
Excluding
Restructuring Credit $ 201 $ 282 (29)% $ 754 $ 904 (17)%
========== =========== ========== ==========
Operating Ratio,
Excluding
Restructuring Credit 83.3% 76.8% 79.6% 75.7%
========== =========== ========== ==========
</TABLE>
Container-Shipping Unit Results
- -------------------------------
The imbalances in the major trade lanes caused by the Asian economic
crisis continued to affect the container-shipping unit during the third quarter.
Operating income decreased to $50 million from $82 million in the 1997 quarter.
Revenue fell 3 percent to $988 million, while expense increased 1
percent to $938 million. Overall volume declined 7 percent for the quarter.
Container loads and average rates for westbound traffic in the Pacific trade
lane were both down more than 15 percent from the prior year quarter, reflecting
the continued impact of Asian economic difficulties on international trade.
Eastbound Pacific traffic volumes were comparable to the prior year quarter,
with significant rate improvements that helped offset some of the weakness in
westbound traffic.
Other Unit Results
- ------------------
The company's intermodal unit reported third-quarter operating income of
$7 million vs. $12 million a year ago. The decline was caused by severe
disruptions on the western rail network.
- 16 -
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION, CONTINUED
RESULTS OF OPERATIONS, Continued
- --------------------------------
Other Unit Results, Continued
- -----------------------------
Revenue for the quarter totaled $161 million versus $174 million in the
prior-year period, while expense decreased 5 percent to $154 million.
Operating income at the contract logistics unit remained level at $6
million for the quarter. While revenue declined 4 percent to $90 million as a
result of the General Motors strike, the company lowered its expense 5 percent
to $84 million.
Nine Months 1998 Compared with 1997
- -----------------------------------
For the first nine months of 1998, earnings for the company totaled $429
million, $2.00 per share on a diluted basis, compared to $584 million, $2.73 per
share on a diluted basis for the prior year period. Exclusive of the Conrail
impact and one-time items, the company would have reported earnings of $439
million, $2.05 per share on a diluted basis, for the nine months ended September
25, 1998, and $642 million, $3.00 per share on a diluted basis, for the nine
months ended September 26, 1997.
Operating income for the first nine months of 1998 was $884 million,
down $257 million from the same period in 1997. Weak coal exports, rail
congestion across the country, and container-shipping trade imbalances were the
primary factors contributing to the earnings decline. Approximately $37 million
of the decrease was attributable to the conveyance of the barge subsidiary to a
joint venture and the resulting exclusion of barge activity from 1998 operating
income.
Other income (expense) increased $60 million from $52 million for the
first nine months of 1997 to $112 million for the comparable period in 1998. The
increase is primarily attributable to the $154 million net investment gain
recognized during the current period, partially offset by the net costs of the
company's investment in Conrail and lower income from the company's real estate
and resort operations.
Earnings per share for all prior periods have been restated to reflect
clarification of the treatment of certain stock-based compensation plan shares
under Statement of Financial Accounting Standards No. 128, "Earnings per Share."
Earnings per share were revised to $2.79 from $2.69 for the nine-months ended
September 26, 1997. Earnings per share on a diluted basis were revised to $2.73
per share from $2.65 for the same period.
FINANCIAL CONDITION
- -------------------
Cash, cash equivalents and short-term investments totaled $472 million
at September 25, 1998, a decrease of $218 million since December 26, 1997. The
primary sources of cash and cash equivalents were normal transportation
operations, net proceeds from the conveyance of the company's barge subsidiary,
and the issuance of long-term debt. The primary uses of cash were property
additions, repayment of long-term and short-term debt, and dividend payments.
CSX has, and expects to continue to have, access to financing on
attractive terms. The company issued approximately $650 million in medium term
notes from May through October 1998. The notes were issued under the company's
available shelf registrations, principally to refinance commercial paper
borrowings which were classified as long-term debt in the company's financial
statements. Given recent general market conditions, particularly the volatility
in some sectors of the
- 17 -
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION, CONTINUED
FINANCIAL CONDITION, Continued
- ------------------------------
capital markets, the company believes that it is likely to continue to alter the
composition of its financing in this manner.
The company's working capital deficit at September 25, 1998 was $489
million, a $43 million improvement during the first nine months of the fiscal
year. 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.
FINANCIAL DATA
- --------------
(Millions of Dollars)
-----------------------------
September 25, December 26,
1998 1997
-------------- ---------------
Cash, Cash Equivalents and
Short-Term Investments $ 472 $ 690
Commercial Paper Outstanding -
Short-Term $ 188 $ 126
Commercial Paper Outstanding -
Long-Term $ 1,500 $ 2,000
Working Capital (Deficit) $ (489) $ (532)
Current Ratio 0.8 0.8
Debt Ratio 51 % 52 %
Ratio of Earnings to Fixed Charges 2.0 x 2.6 x
OUTLOOK
- -------
As CSX enters the fourth quarter of 1998, the major focus is on the
integration of Conrail operations, which is expected in early 1999. Rail
operations will reflect costs for hiring and training of employees as well as
other costs necessary to achieve a smooth integration. Demand for export steam
coal is expected to remain weak because of the strength of the U.S. dollar
versus currencies of other coal exporting countries. Merchandise strengths in
the agricultural products and minerals markets are being offset by weaknesses in
the chemicals, paper and metals markets. Automotive production is expected to be
strong through the end of the year. Overall, the company expects that its
results will continue to reflect the uncertain economic environment and the
costs of the Conrail integration.
The imbalance caused by the Asian economic decline and a weak overall
rate environment continue to hinder container-shipping earnings. The company
will continue to identify and implement cost control measures, which should help
mitigate some of these effects. The company's intermodal unit anticipates strong
seasonal demand, continued high service reliability on its core network and
improving conditions on the western rail system.
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 allocation 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
- 18 -
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION, CONTINUED
CONRAIL ACQUISITION, Continued
- ------------------------------
CSX/Norfolk Southern Agreement, Continued
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. CSX and Norfolk Southern filed an application for control of
Conrail with the Surface Transportation Board (STB) in June 1997. On July 23,
1998, following an extensive review, the STB issued a written decision approving
the application with limited conditions. The decision permitted CSX and Norfolk
Southern to exercise joint control over Conrail on August 22, 1998. At that
time, the voting trust was dissolved, and a new Conrail board of directors was
elected.
The parties expect that in early 1999, Conrail's assets will be
allocated 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.
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%. During 1998, the company has
replaced approximately $650 million of the commercial paper borrowings with
medium term note debt with maturities ranging from 2001 to 2008 and interest
rates ranging from 5.85% to 6.59%.
Integration Planning
- --------------------
The company is actively planning for the smooth integration of Conrail
operations into the CSX rail system. 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 operations; marketing; technology; labor agreements; and administration.
Related capital improvements to certain routes and facilities on the CSX rail
system also have been initiated. The integration of rail operations is expected
to take place once operating and technology systems are in place and necessary
implementing agreements have been reached, which currently is anticipated in
early 1999.
- 19 -
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION, CONTINUED
CONRAIL ACQUISITION, Continued
- ------------------------------
Financial Effects
Until the integration of rail operations takes place, Conrail will
continue to operate as a Class I railroad and CSX's operating results will
include 42% of Conrail's net income, reported under the equity method of
accounting. Effective as of the August 1998 STB control date, the joint
CSX/Norfolk Southern entity that owns Conrail has allocated the total purchase
price to Conrail's underlying assets and liabilities. CSX's operating results
include expense for its 42% share of the effect of that purchase price
allocation on items such as depreciation of property and equipment. CSX will
continue to incur interest expense on the debt issued to acquire the Conrail
investment. Acquisition and transition expenses are expected to continue through
1998 and into 1999 and will begin to decline once integration is achieved.
Net cash flow prior to integration is expected to be reduced by
acquisition and transition expenses, capital spending incurred to integrate CSX
and Conrail lines, and interest payments on the acquisition debt. At September
25, 1998, the average interest rate on debt incurred to acquire the Conrail
investment was approximately 6.8%.
Upon integration, CSX expects to begin realizing revenue benefits from
freight traffic that currently moves on other modes of transportation,
principally trucks. CSX also expects to begin realizing cost savings from the
elimination of duplicate positions and facilities, as well as other efficiencies
created by combining its allocated portion of the Conrail system with its
existing rail operations. As CSX and Norfolk Southern move to integrate the
Conrail operations, as expected, they will compete for traffic located in
markets formerly served solely by Conrail. The company expects that as a result
of this process of entering new markets, there may be changes in the historic
rate and traffic patterns, including some rate reductions and traffic volume
shifts. The process will be driven by market conditions, and the company
presently cannot assess the impact of these transition effects on either the
timing or realization of the projected benefits of the Conrail transaction.
Conrail's Results of Operations
Conrail incurred a net loss of $65 million for the third quarter of 1998
as compared with net income of $101 million for the third quarter of 1997. Net
income for the first nine months of 1998 was $135 million as compared with a net
loss of $111 million in the first nine months of 1997. The results for the third
quarter and first nine months of 1998 included a charge of $302 million, $187
million after tax, primarily for severance benefits covering certain non-union
employees as well as adjustments for certain other assets and liabilities. The
first nine months of 1997 included a $221 million ESOP termination charge (no
related income tax effect) and $173 million ($142 million after income taxes) of
merger-related stock compensation and executive severance costs. Without the
above-mentioned charges, Conrail's net income would have been $122 million for
the third quarter of 1998, and $322 million and $252 million for the first nine
months of 1998 and 1997, respectively.
Operating revenues increased $32 million, or 3 percent, and $99 million,
or 4 percent, for the quarter and nine months ended September 30, 1998,
respectively, compared with the same periods in 1997. Traffic volume increases
of 4 percent and 5 percent, respectively, were primarily responsible for the
revenue improvements.
- 20 -
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION, CONTINUED
CONRAIL ACQUISITION, Continued
- ------------------------------
Conrail's Results of Operations, Continued
Operating expenses, excluding the aforementioned charges, increased $30
million for the third quarter, and $10 million for the first nine months of
1998, as compared with the same periods in 1997. Increases in merger-related
costs, such as information technology expenses and employee retention bonuses,
as well as the effects of higher traffic volumes in 1998 were primarily
responsible for the increases, which were partially offset by lower fuel prices
and reductions in both the number and costs associated with employee injuries.
OTHER MATTERS
- -------------
Conveyance of Barge Unit
During the third quarter, CSX completed the conveyance of its barge
unit, American Commercial Lines LLC (ACL), to a venture formed with Vectura
Group, Inc. (Vectura). CSX received cash proceeds of $695 million from the
transaction, $67 million of which were used to repay certain outstanding debt
and other obligations of ACL and to pay expenses of the transaction. As part of
the transaction, NMI Holdings LLC, a wholly-owned barge subsidiary of Vectura,
was combined with ACL. CSX has a 32% common interest in the new venture. CSX
reported a net investment gain from the transaction of $154 million, $90 million
after tax, 42 cents per diluted share, in its third quarter 1998 operating
results.
Year 2000 Planning
State of Year 2000 Readiness
- ----------------------------
In 1996, CSX and its subsidiaries began a comprehensive initiative to
address the potential exposure associated with the functioning of its
information technology systems and non-information technology systems with
respect to dates in the Year 2000 and beyond. The company is following a
standard Year 2000 remediation model, consisting of the following phases:
-Awareness - General education about the Year 2000 problem.
-Inventory - Cataloging of all systems and business relationships that
may be impacted by a Year 2000 date rollover.
-Assessment - Estimating the degree of severity of the Year 2000 problem
for cataloged items.
-Remediation - Repair, replacement, or retirement of non-Year 2000
compliant systems.
-Validation - Testing to confirm the compliance of Year 2000 remediated
systems.
CSX's remediation efforts are focused first and foremost on the continued safe
operation of its rail and other transportation systems, encompassing employee
safety and the safety of the general public and the environments in which the
company operates. Maintaining service continuity both to customers and with
vendors before, during, and after the millenium change is also a priority. CSX
is also focusing efforts to ensure that, after the safety and service continuity
issues are addressed, a Year 2000 issue does not disrupt its revenue.
- 21 -
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION, CONTINUED
OTHER MATTERS, Continued
- ------------------------
Year 2000 Planning, Continued
State of Year 2000 Readiness, Continued
- ---------------------------------------
Overall, the CSX Year 2000 initiative is currently proceeding on
schedule and planned completion of all key areas is expected by mid-1999. The
company's Year 2000 remediation efforts are organized in five areas, which have
the following status:
Effort Estimated Completion Current Phase
- --------------------------- --------------------- -----------------------
Core Information Systems Second Quarter 1999 Remediation and Validation
Distributed Information
Technology Second Quarter 1999 Assessment and Remediation
Electronic Commerce Second Quarter 1999 Remediation
Non-Information Technology
(embedded) systems Third Quarter 1999 Inventory and Assessment
Trading Partners Fourth Quarter 1999 Inventory
As part of its Year 2000 initiative, CSX is in communication with its
significant suppliers, large customers and financial institutions to assess
their Year 2000 readiness and expects to conduct interface tests with its
external trading partners in 1999 upon completion of internal testing of
remediated applications.
CSX is also participating in interface tests with other Class I
railroads to ensure that electronic data interchanges can be processed in a Year
2000 format. The industry effort has been coordinated by the American
Association of Railroads since 1997 and is scheduled for completion by the
second quarter of 1999.
Year 2000 Costs
- ---------------
The company has incurred total costs of $33 million to date related to
Year 2000 compliance, which represents approximately 38% of the estimated
expenditures for the entire Year 2000 initiative. CSX estimates that over the
life of the project, Year 2000 costs will comprise approximately 10% of its
total information technology budget. The cost of the Year 2000 initiative is
being expensed as incurred and funded by cash generated from operations.
Projections of the remaining cost and completion date for the Year 2000
initiative are based on management's current estimates, which are derived
utilizing numerous assumptions of future events including the continued
availability of certain resources, and are inherently uncertain. No major
projects have been delayed as a result of Year 2000 remediation efforts, and CSX
is currently assessing its Year 2000 progress with the assistance of outside
consultants.
In connection with the integration of Conrail, CSX and Norfolk Southern
are jointly addressing the Year 2000 compliance of Conrail's core information
technology applications and non- information technology embedded systems.
Certain of Conrail's operations systems are being made Year 2000 compliant as a
contingency in the event that there are delays in the integration or Conrail
continues to operate such systems after the integration is completed. Conrail's
estimated cost for its Year 2000 initiative is approximately $28 million.
- 22 -
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION, CONTINUED
OTHER MATTERS, Continued
- ------------------------
Year 2000 Planning, Continued
Year 2000 Costs, Continued
- --------------------------
There are a number of other major information technology projects
currently under development or deployment, some of which replaced legacy systems
that may or may not have been Year 2000 compliant. These projects were required
to increase CSX's operational capacity as a direct result of the integration of
Conrail. These projects are not included in the Year 2000 costs outlined above.
Risks
- -----
CSX believes its Year 2000 planning efforts are adequate to address all
major risks. However, if some or all of the company's remediated or replaced
internal computer systems fail the testing phase, or if any software
applications or embedded systems critical to the company's operations are
overlooked in the assessment and remediation phases, particularly if the result
is a systemwide failure, there could be a material adverse effect on the
company's results of operations, liquidity and financial condition.
Contingency Plans
- -----------------
Contingency planning is an established and ongoing effort within CSX, to
address many types of potential operating disruptions, including Year 2000
issues. For example, detailed emergency operating plans already exist for
unanticipated outages of electricity, telecommunications, and other essential
services. Detailed Year 2000 contingency plans are expected to be complete by
June 1999.
CSX is creating contingency plans to address the consequences of each of
the primary failure scenarios outlined below. For each of the three primary
types of most reasonably likely worst-case scenarios, CSX anticipates that
detailed contingency measures will include the following:
-Systemwide failures - In the event of complete or nearly complete loss
of key assets or services throughout the entire CSX system, CSX will
conduct and maintain a safe and orderly shutdown of all operations that
depend on those systems.
-Geographically isolated failures - In the event of complete or nearly
complete loss of key assets or services throughout a region, CSX will
conduct and maintain a safe and orderly shutdown of all affected
operations within that region.
-Movable asset failures - In the event of a Year 2000 failure of a
transportation asset, such as a ship or locomotive, CSX will remove the
asset from service and scale its operations accordingly. This is
essentially the same process currently used for non-Year 2000 failures.
- 23 -
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION, CONTINUED
OTHER MATTERS, Continued
- ------------------------
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 percent 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 overall results of operations or
financial position, although it could be material to results of operations in a
particular quarterly accounting period.
--------------------------------------------------
This Quarterly Report contains certain forward-looking statements about
the financial position, results of operations and business of the company's
units and about the company after the integration of Conrail. Such
forward-looking statements are subject to certain uncertainties and other
factors that may cause actual results to differ materially from the views,
beliefs, and projections expressed in such statements. The words "believe",
"expect", "anticipate", "project", and similar expressions signify
forward-looking statements. Readers are cautioned not to place undue reliance on
any forward-looking statements made by or on behalf of the company. Any such
statement speaks only as of the date the statement was made. The company
undertakes no obligation to update or revise any forward-looking statement.
Factors that may cause actual results to differ materially from those
contemplated by these forward-looking statements include, among others, the
following possibilities: (i) cost savings expected from the integration of
Conrail may not be fully realized or realized within the time frame anticipated,
(ii) revenues following the integration of Conrail may be lower than expected,
(iii) costs or difficulties related to the integration of Conrail may be greater
than expected, (iv) general economic or business conditions, either nationally
or internationally, including the continuing Asian financial decline, an
increase in fuel prices, a tightening of the labor market or changes in demands
of organized labor resulting in higher wages, or increased benefits or other
costs or disruption of operations may adversely affect the businesses of the
company, (v) legislative or regulatory changes, including possible enactment of
initiatives to re-regulate the rail industry, may adversely affect the
businesses of the company, (vi) changes may occur in the securities markets, and
(vii) disruptions of the operations of the company or any other governmental or
private entity may occur as a result of issues related to the Year 2000. For
additional factors, please refer to the company's annual report on Form 10-K for
the fiscal year ended December 26, 1997.
- 24 -
<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 27, 1998 and June 26, 1998.
3. (27.3) Restated Financial Data Schedules for the year to date
periods ended March 28, 1997, June 27, 1997, September 26,
1997 and December 26, 1997.
4. (27.4) Restated Financial Data Schedules for the fiscal years
ended December 27, 1996 and December 29, 1995.
(b) Reports on Form 8-K
1. A report was filed on October 2, 1998, reporting Item 5, Other
Events authorization of issuance and sale of up to $750
million of Medium-Term Notes, Series B; plus Item 7, Financial
Statements and Exhibits documents related to the Notes filed
as exhibits.
2. A report was filed on October 27, 1998, reporting Item 5,
Other Events underwriting agreement for the public offering of
$400 million of 6.25% Notes Due 2008; plus Item 7, Financial
Statements and Exhibits - documents
related to the Notes filed as exhibits.
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: November 9, 1998
- 25 -
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