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 July 2, 1999
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 July 2, 1999: 217,661,923 shares.
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<PAGE>
CSX CORPORATION
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JULY 2, 1999
INDEX
Page Number
PART I. FINANCIAL INFORMATION
Item 1:
Financial Statements
1. Consolidated Statement of Earnings-
Quarters and Six Months Ended July 2, 1999 and June 26, 1998 3
2. Consolidated Statement of Cash Flows-
Six Months Ended July 2, 1999 and June 26, 1998 4
3. Consolidated Statement of Financial Position-
At July 2, 1999 and December 25, 1998 5
Notes to Consolidated Financial Statements 6
Item 2:
Management's Discussion and Analysis of Results of
Operations and Financial Condition 17
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 29
Item 6. Exhibits and Reports on Form 8-K 30
Signature 30
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<PAGE>
CSX CORPORATION AND SUBSIDIARIES
Consolidated Statement of Earnings
(Millions of Dollars, Except Per Share Amounts)
<TABLE>
<CAPTION>
(Unaudited)
Quarters Ended Six Months Ended
--------------------------- --------------------------
July 2, June 26, July 2, June 26,
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Operating Revenue $ 2,616 $ 2,490 $ 5,157 $ 4,952
Operating Expense 2,342 2,154 4,607 4,338
----------- ------------ ----------- -----------
Operating Income 274 336 550 614
Other Income (Expense) 23 3 (12) (26)
Interest Expense 127 124 260 247
----------- ------------ ----------- -----------
Earnings before Income Taxes 170 215 278 341
Income Tax Expense 56 64 89 99
----------- ------------ ----------- -----------
Earnings before Cumulative Effect of
Accounting Change 114 151 189 242
Cumulative Effect on Prior Years of
Accounting Change for Insurance-
Related Assessments, Net of Tax - - (49) -
----------- ------------ ----------- -----------
Net Earnings $ 114 $ 151 $ 140 $ 242
=========== ============ =========== ===========
Earnings Per Share:
Before Cumulative Effect of Accounting
Change $ .54 $ .71 $ .90 $ 1.14
Cumulative Effect of Accounting
Change - - (.24) -
----------- ------------ ----------- -----------
Including Cumulative Effect of
Accounting Change $ .54 $ .71 $ .66 $ 1.14
=========== ============ =========== ===========
Earnings Per Share, Assuming Dilution:
Before Cumulative Effect of Accounting
Change $ .53 $ .70 $ .89 $ 1.12
Cumulative Effect of Accounting
Change - - (.23) -
----------- ------------ ----------- -----------
Including Cumulative Effect of
Accounting Change $ .53 $ .70 $ .66 $ 1.12
=========== ============ =========== ===========
Average Common Shares Outstanding
(Thousands) 210,517 211,434 210,321 211,221
=========== ============ =========== ===========
Average Common Shares Outstanding,
Assuming Dilution (Thousands) 213,157 215,490 212,407 215,592
=========== ============ =========== ===========
Cash Dividends Paid Per Common Share $ .30 $ .30 $ .60 $ .60
=========== ============ =========== ===========
</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)
Six Months Ended
-----------------------------
July 2, June 26,
1999 1998
------------- -------------
<S> <C> <C>
OPERATING ACTIVITIES
Net Earnings $ 140 $ 242
Adjustments to Reconcile Net Earnings to Net Cash Provided:
Cumulative Effect of Accounting Change 49 -
Depreciation 335 312
Deferred Income Taxes 45 61
Equity in Conrail Earnings - Net (22) (59)
Other Operating Activities (67) (33)
Changes in Operating Assets and Liabilities
Accounts Receivable (255) (16)
Other Current Assets - (82)
Accounts Payable (109) (110)
Other Current Liabilities 39 (26)
------------ ------------
Net Cash Provided by Operating Activities 155 289
------------ ------------
INVESTING ACTIVITIES
Property Additions (562) (655)
Short-Term Investments - Net 71 146
Other Investing Activities 35 (103)
------------ ------------
Net Cash Used by Investing Activities (456) (612)
------------ ------------
FINANCING ACTIVITIES
Short-Term Debt - Net 383 133
Long-Term Debt Issued 195 306
Long-Term Debt Repaid (60) (107)
Cash Dividends Paid (130) (132)
Other Financing Activities - (38)
------------ ------------
Net Cash Provided by Financing Activities 388 162
------------ ------------
Net Increase (Decrease) in Cash and Cash Equivalents 87 (161)
CASH, CASH EQUIVALENTS AND SHORT-TERM
INVESTMENTS
Cash and Cash Equivalents at Beginning of Period 105 251
------------ ------------
Cash and Cash Equivalents at End of Period 192 90
Short-Term Investments at End of Period 357 293
------------ ------------
Cash, Cash Equivalents and Short-Term
Investments at End of Period $ 549 $ 383
============ ============
</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)
July 2, December 25,
1999 1998
------------ -----------
<S> <C> <C>
ASSETS
Current Assets
Cash, Cash Equivalents and Short-Term Investments $ 549 $ 533
Accounts Receivable 1,172 898
Materials and Supplies 245 225
Deferred Income Taxes 125 128
Other Current Assets 197 200
----------- -----------
Total Current Assets 2,288 1,984
Properties 19,142 18,678
Accumulated Depreciation (6,317) (6,033)
----------- -----------
Properties-Net 12,825 12,645
Investment in Conrail 4,820 4,798
Affiliates and Other Companies 468 448
Other Long-Term Assets 526 552
----------- -----------
Total Assets $ 20,927 $ 20,427
=========== ===========
LIABILITIES
Current Liabilities
Accounts Payable $ 1,116 $ 1,216
Labor and Fringe Benefits Payable 481 462
Casualty, Environmental and Other Reserves 278 283
Current Maturities of Long-Term Debt 112 100
Short-Term Debt 570 187
Other Current Liabilities 477 352
----------- -----------
Total Current Liabilities 3,034 2,600
Casualty, Environmental and Other Reserves 702 645
Long-Term Debt 6,555 6,432
Deferred Income Taxes 3,180 3,173
Other Long-Term Liabilities 1,544 1,697
----------- -----------
Total Liabilities 15,015 14,547
----------- -----------
SHAREHOLDERS' EQUITY
Common Stock, $1 Par Value 218 217
Other Capital 1,512 1,489
Retained Earnings 4,303 4,294
Accumulated Other Comprehensive Loss (121) (120)
----------- -----------
Total Shareholders' Equity 5,912 5,880
----------- -----------
Total Liabilities and Shareholders' Equity $ 20,927 $ 20,427
=========== ===========
</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 financial
position of CSX Corporation and subsidiaries (CSX or the "company") at July 2,
1999 and December 25, 1998, and the results of its operations and its cash flows
for the quarters and six months ended July 2, 1999 and June 26, 1998, such
adjustments being of a normal recurring nature.
Certain prior-year data have been reclassified to conform to the 1999
presentation. Included in these reclassifications is the restatement of 1998
earnings and cash flow information to present the company's investment in its
barge subsidiary under the equity method of accounting. In June 1998, CSX
conveyed the subsidiary to a joint venture in which it holds a 32 percent
ownership interest.
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 or 53 weeks ending on the
last Friday in December. Fiscal year 1999 consists of 53 weeks ending on
December 31, 1999. Fiscal year 1998 consisted of 52 weeks ended December 25,
1998. The financial statements presented are for the 13-week quarters ended July
2, 1999 and June 26, 1998, the 27-week period ended July 2, 1999, the 26-week
period ended June 26, 1998, and as of December 25, 1998.
Comprehensive income approximates net earnings for all periods presented
in the accompanying consolidated statement of earnings.
NOTE 2. CHANGE IN METHOD OF ACCOUNTING FOR INSURANCE-RELATED
ASSESSMENTS
CSX adopted the American Institute of Certified Public Accountants'
Statement of Position No. 97-3, "Accounting by Insurance and Other Enterprises
for Insurance-Related Assessments," (SOP No. 97-3) effective as of the beginning
of fiscal year 1999. SOP No. 97-3 requires companies to accrue assessments
related to workers' compensation second injury funds and is applicable to CSX
with respect to certain assessments incurred by Sea-Land Service, Inc., the
company's container-shipping unit. The assessments relate to employees who have
experienced second injuries over periods dating back to the 1970's and are
receiving a disability type benefit. Previously, the assessments were charged to
expense in the fiscal year they were paid. As a result of adopting SOP No. 97-3,
the company recorded a non-cash charge of $78 million, $49 million after-tax, 24
cents per share, during the quarter ended April 2, 1999 to reflect the
cumulative effect on prior years of the accounting change. Had the accounting
change been applied retroactively, the effect on net earnings and related per
share amounts would not have been material to any period presented.
NOTE 3. EARNINGS PER SHARE
Earnings per share are based on the weighted average of common shares
outstanding, as defined by Financial Accounting Standards Board (FASB) Statement
No. 128, "Earnings per Share," for the fiscal quarters and six months ended July
2, 1999 and June 26, 1998. Earnings per share, assuming dilution, are based on
the
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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. EARNINGS PER SHARE, Continued
weighted average of common shares outstanding adjusted for the effect of
potentially dilutive securities, principally employee stock plans. For the
fiscal quarters ended July 2, 1999 and June 26, 1998, potentially dilutive
common shares totaled 2.6 million and 4.1 million, respectively. For the six
month periods ended July 2, 1999 and June 26, 1998, potentially dilutive shares
totaled 2.1 million and 4.4 million respectively.
Certain potentially dilutive securities outstanding at July 2, 1999 and
June 26, 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 7.0 million at a weighted-average
exercise price of $50.79 per share at July 2, 1999 and 3.5 million with a
weighted-average exercise price of $54.97 per share at June 26, 1998.
NOTE 4. ACCOUNTING PRONOUNCEMENTS
The FASB has issued Statement No. 137, "Accounting for Derivative
Instruments and Hedging Activities Deferral of Effective Date of FASB Statement
No. 133" which postpones the effective date of FASB Statement No. 133 until
fiscal quarters of all fiscal years beginning after June 15, 2000. Statement No.
133 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.
While CSX does not currently use derivative financial instruments, and its
historical use of such instruments has not been material, the company plans to
adopt this statement in the first quarter of 2001 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 5. JOINT ACQUISITION AND INTEGRATION OF CONRAIL
Background
- ----------
On June 1, 1999, CSX and Norfolk Southern Corporation (Norfolk Southern)
formally began integrated operations over their respective portions of the
Conrail Inc. (Conrail) rail system. This step implements the operating plan
envisioned by CSX and Norfolk Southern when they completed the joint acquisition
of Conrail in May 1997 and later received regulatory approval permitting them to
exercise joint control over Conrail in August 1998.
The rail subsidiaries of CSX and Norfolk Southern operate their respective
portions of the Conrail system pursuant to various operating and equipment
agreements which took effect on June 1. Under these agreements, which have terms
of 25 years plus extension options, the railroads pay operating fees to Conrail
for the use of right-of-way and rent for the use of equipment. Conrail continues
to provide rail service in certain shared geographic areas for the joint benefit
of CSX and Norfolk Southern for which it is compensated on the basis of usage by
the respective railroads. CSX and Norfolk Southern, through a jointly-owned
acquisition entity, hold economic interests in Conrail of 42% and 58%,
respectively, and voting interests of 50% each.
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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 5. JOINT ACQUISITION AND INTEGRATION OF CONRAIL , Continued
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 were eliminated as a result of the acquisition. CSX
has separately recorded liabilities totaling approximately $400 million to
provide for other acquisition-related obligations it is required to fund,
including separation costs for Conrail union employees, relocation costs for
Conrail union and non-union employees, and costs associated with the closure of
certain Conrail facilities. CSX increased its investment in Conrail on the
statement of financial position as a result of recording these separate
obligations.
Under STB restrictions, CSX and Norfolk Southern did not have complete
access to Conrail's properties and records and also were prevented from
negotiating labor implementing agreements 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 preliminary and
subject to refinement as CSX and Norfolk Southern complete their integration of
the Conrail network. Any such adjustments are expected to be completed in the
third quarter of 1999 and are not expected to have a material effect on CSX's
operating results or financial position.
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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 5. JOINT ACQUISITION AND INTEGRATION OF CONRAIL, Continued
Conrail Financial Information
- -----------------------------
Summary financial information for Conrail for its fiscal periods ended
June 30, 1999 and 1998, and at December 31, 1998, is as follows:
<TABLE>
<CAPTION>
Quarters Ended Six Months Ended
June 30, June 30,
-------------------- ----------------------
1999 1998 1999 1998
-------- -------- --------- ---------
<S> <C> <C> <C> <C>
Income Statement Information:
Revenues $737 $983 $1,653 $1,910
Income (Loss) From Operations (61) 206 85 366
Net Income (Loss) (63) 115 13 200
</TABLE>
<TABLE>
<CAPTION>
As Of
------------------------------
June 30, December 31,
1999 1998
------------ --------------
<S> <C> <C>
Balance Sheet Information:
Current Assets $ 893 $ 1,005
Property and Equipment and Other Assets 7,788 8,039
Total Assets 8,681 9,044
Current Liabilities 1,048 1,207
Long-Term Debt 1,337 1,609
Total Liabilities 4,820 5,244
Stockholders' Equity 3,861 3,800
</TABLE>
Conrail's operating results for the quarter ended June 30, 1999 were
significantly impacted by the changes in its business resulting from the
integration with CSX and Norfolk Southern. Effective June 1, 1999, Conrail's
major sources of revenue are derived from CSX and Norfolk Southern and consist
principally of operating fees, equipment rent, and shared area usage fees. The
nature of Conrail's operating expenses has also changed to reflect the new
operations. In addition, Conrail's operating results included certain
non-recurring expenses during the quarter and six months ended June 30, 1999.
These expenses include amounts related to the integration, such as employee
training and costs to discontinue certain activities, as well as an adjustment
to reflect an increase in a state property tax rate and an increase in casualty
reserves based on a recently-completed actuarial valuation. The increase in
Conrail's casualty reserves was considered by the joint acquisition entity in
its fair value allocation of Conrail's assets and liabilities and, accordingly,
was excluded in determining the equity in Conrail's net income recorded by CSX.
CSX's Accounting for Conrail
- ----------------------------
Upon integration, substantially all of Conrail's customer freight
contracts were assumed by CSX and Norfolk Southern. As a result, beginning June
1, 1999, CSX's rail and intermodal segment operating revenue includes revenue
from traffic previously moving on Conrail. Operating expenses reflect
corresponding increases for costs incurred to handle the new traffic and operate
the former Conrail lines. Effective June 1, 1999, rail operating expenses also
include a new expense category, "Conrail Operating Fee, Rent and Services",
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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 5. JOINT ACQUISITION AND INTEGRATION OF CONRAIL, Continued
CSX's Accounting for Conrail, Continued
- ---------------------------------------
which reflects payments to Conrail for the use of right-of-way and equipment; as
well as charges for transportation, switching, and terminal services provided by
Conrail in the shared areas operated for the joint benefit of CSX and Norfolk
Southern. The new expense category also includes purchase price amortization and
CSX's proportionate share of Conrail's net income, which continues to be
recognized under the equity method of accounting.
Prior to the June 1, 1999 integration, CSX recorded its share of
Conrail's net income, less purchase price amortization, and acquisition and
transition expenses, in other income (expense) in the consolidated statement of
earnings.
NOTE 6. SALE OF INTERNATIONAL CONTAINER-SHIPPING ASSETS
On July 21, 1999, CSX entered into an agreement to sell certain assets
comprising the international liner business of Sea-Land Service, Inc.
(Sea-Land), its wholly-owned container-shipping subsidiary, to A. P.
Moller-Maersk Line (Maersk) for $800 million in cash. The transaction is
contingent upon receiving regulatory approvals. The sales price is subject to
adjustment based on the final amounts of certain assets and related obligations
conveyed at closing. The parties currently expect to close the transaction in
the fourth quarter of 1999.
The international liner business operates approximately 70 container
vessels and 200,000 containers in worldwide trades and comprises a majority of
CSX's container-shipping revenue. In addition to vessels and containers, Maersk
will acquire certain terminal facilities and various other assets and related
liabilities of the international liner business, including the assumption of
certain lease obligations.
Based on preliminary calculations, the book value of the net assets to
be conveyed exceeds the sales price. As a result, CSX expects to classify these
assets as held for sale and record an impairment loss in the third quarter of
1999 to adjust the book value of the related property, equipment and other
long-lived assets to fair value. The impairment loss will be determined and
accounted for under the provisions of FASB Statement No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." While the final impairment loss will not be determined until late in the
third quarter, management currently expects the loss to exceed $300 million
before income taxes. With the recognition of the impairment charge in the third
quarter, no significant gain or loss is expected upon the subsequent closing of
the transaction.
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 FASB
Statement 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. At July 2, 1999, the agreements
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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 7. ACCOUNTS RECEIVABLE, Continued
provide for the sale of up to $350 million in receivables through the
securitization program and $50 million through the conduit programs.
At July 2, 1999 and December 25, 1998, the company had sold $347 million
of accounts receivable; $300 million through the securitization program and $47
million through the conduit programs. The certificates issued under the
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 $705 million at
July 2, 1999 and $482 million at December 25, 1998 and are included in accounts
receivable. Losses recognized on the sale of accounts receivable totaled $8
million for the quarters ended July 2, 1999 and June 26, 1998, and $15 million
for the six month periods ended July 2, 1999 and June 26, 1998.
The company has retained the responsibility for servicing accounts
receivable transferred to the master trust. The average servicing period is
approximately one month. No servicing asset or liability has been recorded since
the fees the company receives for servicing the receivables approximate the
related costs.
NOTE 8. OPERATING EXPENSE
<TABLE>
<CAPTION>
Quarters Ended Six Months Ended
-------------------------- --------------------------
July 2, June 26, July 2, June 26,
1999 1998 1999 1998
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Labor and Fringe Benefits $ 853 $ 758 $ 1,680 $ 1,572
Materials, Supplies and Other 645 625 1,266 1,216
Conrail Operating Fee, Rent and Services 46 - 46 -
Building and Equipment Rent 279 275 586 541
Inland Transportation 259 244 516 492
Depreciation 159 152 326 305
Fuel 101 100 187 212
----------- ----------- ---------- ------------
Total $ 2,342 $ 2,154 $ 4,607 $ 4,338
=========== =========== ========== ============
</TABLE>
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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 9. OTHER INCOME (EXPENSE)
<TABLE>
<CAPTION>
Quarters Ended Six Months Ended
---------------------- ----------------------
July 2, June 26, July 2, June 26,
1999 1998 1999 1998
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Interest Income $ 10 $ 13 $ 24 $ 27
Income from Real Estate and Resort
Operations(1) 17 16 10 11
Net Investment Gain 27 - 27 -
Net Losses from Accounts Receivable Sold (7) (8) (15) (15)
Minority Interest (10) (6) (19) (14)
Income (Loss) from Investment in Conrail - Net (14) (5) (42) (11)
Equity Earnings of Other Affiliates 7 9 14 10
Foreign Currency Gain (Loss) - (2) 5 (5)
Miscellaneous (7) (14) (16) (29)
---------- --------- ---------- ---------
Total $ 23 $ 3 $ (12) $ (26)
========== ========= ========== =========
</TABLE>
(1) Gross revenue from real estate and resort operations was $52 million and
$71 million for the quarter and six months ended July 2, 1999, respectively,
and $55 million and $76 million for the quarter and six months ended June 26,
1999, respectively.
NOTE 10. COMMITMENTS AND CONTINGENCIES
New Orleans Tank Car Fire
- -------------------------
In September 1997, a state court jury in New Orleans, Louisiana returned
a $2.5 billion punitive damages award against CSX Transportation, Inc. (CSXT),
the wholly-owned rail subsidiary of CSX. 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 has been made for the award.
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. In February 1999, the Louisiana Supreme Court
issued a further decision, authorizing and instructing the trial court to enter
individual punitive damages judgments in favor of the 20 plaintiffs who had
received awards of compensatory damages, in amounts representing an appropriate
share of the jury's award. The trial court on April 8, 1999 entered judgment
awarding approximately $2 million in compensatory damages and approximately $8.5
million in punitive damages to those 20 plaintiffs. Approximately $6.2 million
of the punitive damages awarded were assessed against CSXT. CSXT then filed
post-trial motions, for a new trial and for judgment notwithstanding the
verdict, as to the April 8 judgment. CSXT believes that these recent judicial
decisions will expedite the process of full appellate review of the 1997 trial.
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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
New Orleans Tank Car Fire, Continued
- ------------------------------------
A trial for the claims of 20 additional plaintiffs for compensatory
damages began on May 24, 1999. In early July, the jury in that trial rendered
verdicts of approximately $330,000 in favor of eighteen of those twenty
plaintiffs. Two plaintiffs received nothing; that is, the jury found that they
had not proved any damages. Management believes that this result, while still
excessive, supports CSXT's contention that the $2.5 billion punitive damages
award was unwarranted.
CSXT continues to pursue an aggressive legal strategy. 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.
Self-Insurance
- --------------
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.
Environmental
- -------------
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 108 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
- 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 , Continued
- -------------------------
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 July 2, 1999, and December 25, 1998, were $69 million and $75 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 July 2, 1999
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 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.
Other Legal Proceedings
- -----------------------
A number of 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.
NOTE 11. BUSINESS SEGMENTS
The company operates in four business segments: Rail, Intermodal,
Container Shipping and Contract Logistics. The Rail segment provides rail
freight transportation over a network of approximately 22,700 route miles in 23
states in the East, Midwest and South; the District of Columbia and two Canadian
provinces. The Intermodal segment provides transcontinental intermodal
transportation services and operates a network of dedicated intermodal
facilities across North America. The Container Shipping segment provides global
transportation services via a fleet of 91 container ships and more than 220,000
containers. The Contract Logistics segment provides customized logistics
solutions, including inventory management, distribution, warehousing, assembly
and just-in-time delivery. The company's segments are strategic business units
that
- 14 -
<PAGE>
CSX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited), Continued
(All Tables in Millions of Dollars, Except Per Share Amounts)
NOTE 11. BUSINESS SEGMENTS, Continued
offer different services and are managed separately based on the differences in
these services. Because of their close interrelationship, the Rail and
Intermodal segments are also viewed on a combined basis as Surface
Transportation operations.
The company evaluates performance and allocates resources based on
several factors, of which the primary financial measure is business segment
operating income, defined as income from operations, excluding the effects of
special charges and gains. Intersegment sales and transfers are generally
accounted for as if the sales or transfers were to third parties, that is, at
current market prices.
<TABLE>
Quarter ended July 2, 1999:
- --------------------------
<CAPTION>
Surface Transportation
------------------------------- Container Contract
Rail Intermodal Total Shipping Logistics Totals
-------- ------------ --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Revenues from external $1,334 $199 $1,533 $977 $106 $2,616
customers
Intersegment revenues - 8 8 - 11 19
Segment operating income 208 16 224 56 9 289
</TABLE>
<TABLE>
Quarter ended June 26, 1998:
- ---------------------------
<CAPTION>
Surface Transportation
------------------------------- Container Contract
Rail Intermodal Total Shipping Logistics Totals
-------- ------------ --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Revenues from external $1,253 $150 $1,403 $993 $94 $2,490
customers
Intersegment revenues - 8 8 - 6 14
Segment operating income 289 6 295 52 7 354
</TABLE>
<TABLE>
Six Months ended July 2, 1999:
- -----------------------------
<CAPTION>
Surface Transportation
------------------------------- Container Contract
Rail Intermodal Total Shipping Logistics Totals
-------- ------------ --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Revenues from external $2,631 $362 $2,993 $1,950 $214 $5,157
customers
Intersegment revenues - 14 14 - 23 37
Segment operating income 474 23 497 68 18 583
</TABLE>
<TABLE>
Six Months ended June 26, 1998:
- ------------------------------
<CAPTION>
Surface Transportation
------------------------------- Container Contract
Rail Intermodal Total Shipping Logistics Totals
-------- ------------ --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Revenues from external $2,508 $300 $2,808 $1,948 $196 $4,952
customers
Intersegment revenues - 17 17 - 11 28
Segment operating income 553 15 568 67 14 649
</TABLE>
- 15 -
<PAGE>
CSX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited), Continued
(All Tables in Millions of Dollars, Except Per Share Amounts)
NOTE 11. BUSINESS SEGMENTS, Continued
A reconciliation of the totals reported for the business segments to the
applicable line items in the consolidated financial statements is as follows:
<TABLE>
<CAPTION>
Quarters Ended Six Months Ended
------------------------ ---------------------
July 2, June 26, July 2, June 26,
1999 1998 1999 1998
----------- ----------- --------- ----------
<S> <C> <C> <C> <C>
Revenues:
- --------
Total external revenues for business segments $ 2,616 $ 2,490 $ 5,157 $ 4,952
Intersegment revenues for business segments 19 14 37 28
Elimination of intersegment revenues (19) (14) (37) (28)
---------- --------- --------- ---------
Total consolidated revenues $ 2,616 $ 2,490 $ 5,157 $ 4,952
=========== =========== ========= =========
Operating Income:
- ----------------
Total operating income for business segments $ 289 $ 354 $ 583 $ 649
Reclassification of intercompany interest income (16) (15) (31) (31)
Unallocated corporate expenses 1 (3) (2) (4)
---------- --------- --------- ---------
Total consolidated operating income $ 274 $ 336 $ 550 $ 614
=========== =========== ========= =========
</TABLE>
- 16 -
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
RESULTS OF OPERATIONS
- ---------------------
CSX follows a 52/53-week fiscal calendar. Fiscal year 1999 consists of
53 weeks. The quarters ended July 2, 1999 and June 26, 1998 consisted of 13
weeks. The six-month period ended July 2, 1999 consisted of 27 weeks, while the
six-month period ended June 26, 1998 consisted of 26 weeks.
Second Quarter 1999 Compared with 1998
- --------------------------------------
The company reported net earnings for the quarter ended July 2, 1999 of
$114 million, 53 cents per share on a diluted basis. In the prior-year period,
the company earned $151 million, 70 cents per share on a diluted basis.
Operating income for the second quarter of 1999 totaled $274 million,
compared with $336 million in the second quarter of 1998. Operating revenue of
$2.6 billion was 5 percent higher than the prior-year quarter, while operating
expense of $2.3 billion was 9 percent higher.
Operating results for the second quarter and six months ended July 2,
1999 include a net investment gain of $27 million, $17 million after tax, 8
cents per share, on the sale of the Grand Teton Lodge Company, a wholly-owned
resort subsidiary located in Jackson Hole, Wyoming. CSX received net cash
proceeds of $49 million from the transaction.
Earnings per share for the second quarter of 1998 have been restated to
reflect clarification of the treatment of certain stock-based compensation plan
shares under Statement No. 128. Earnings per share were revised to 71 cents from
69 cents for second quarter 1998. On a diluted basis, second quarter 1998
earnings per share were revised to 70 cents from 68 cents.
Surface Transportation Results
- ------------------------------
Rail
The company's rail unit produced $208 million of operating income in the
second quarter of 1999 versus $289 million in 1998. Operating revenue was 6
percent higher, at $1.3 billion. Operating expense rose 17 percent to $1.1
billion. The second quarter of 1999 includes one month of integrated Conrail
operations, distorting comparisons to 1998.
Coal volume declined 7 percent, to 37.4 million tons, reflecting reduced
demand from overseas markets and from electric utilities. As a result, coal
revenue fell 10 percent from the 1998 period. Total merchandise traffic was 8
percent higher than the prior year quarter, with related revenue up 14 percent
in the aggregate. The largest revenue increase was in autos and parts (up 24
percent) due to the new Conrail traffic, strong vehicle sales in 1999, and the
strike at major General Motors plants that adversely affected 1998 revenue.
Metals revenue increased 16 percent due to the former Conrail traffic and
strength in the iron ore market. Chemicals revenue was up 14 percent, also
benefiting from the integration of former Conrail business, as well as growth in
the plastics industry. Rail operating expense rose 17 percent, primarily due to
expenses related to the integration of Conrail operations.
- 17 -
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION, CONTINUED
RESULTS OF OPERATIONS, Continued
- --------------------------------
Rail, Continued
<TABLE>
<CAPTION>
RAIL OPERATING INCOME
(Millions of Dollars)
----------------------------------------------------------------------
Quarters Ended Six Months Ended
------------------------ -----------------------
July 2, June 26, Percent July 2, June 26, Percent
1999 1998 Change 1999 1998 Change
---------- ----------- --------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Operating Revenue
Merchandise $ 958 $ 842 14% $ 1,864 $ 1,673 11%
Coal 337 373 (10) 690 739 (7)
Other 39 38 3 77 96 (20)
---------- ----------- ---------- ----------
Total 1,334 1,253 6 2,631 2,508 5
Operating Expense 1,126 964 17 2,157 1,955 10
---------- ----------- ---------- ----------
Operating Income $ 208 $ 289 (28)% $ 474 $ 553 (14)%
========== =========== ========== ==========
Operating Ratio 84.4% 76.9% 82.0% 78.0%
========== =========== ========== ==========
</TABLE>
Intermodal
The company's intermodal unit reported second-quarter operating income
of $16 million versus $6 million a year ago. The increase was primarily due to
the integration of Conrail. Strengthening international business and improved
rail service in the Western half of the country also benefited the 1999 quarter.
Revenue for the quarter totaled $207 million versus $158 million in the
prior-year period. Operating expense totaled $191 million, compared to $152
million in the prior year quarter. The significant revenue and expense increases
are almost entirely attributable to the Conrail integration.
Container Shipping Unit Results
- -------------------------------
Rate weakness and lower traffic volume in the Atlantic and Americas
trade lanes adversely affected container-shipping results for the quarter.
However, significant rate increases and improved volume in the Pacific,
particularly the Asia-to-U.S. trade, helped offset weaknesses in the other trade
lanes. Operating income for the second quarter of 1999 totaled $56 million,
versus $52 million in the 1998 quarter.
Second quarter revenue of $977 million was 2 percent lower than the
prior year quarter. Operating expenses totaled $921 million for the quarter,
helped by cost reduction efforts.
Contract Logistics
- ------------------
Operating income at the contract logistics unit was $9 million for the
quarter compared to $7 million for the same quarter last year. Revenue of $117
million was 17 percent higher than the prior year quarter, as the unit benefited
from strong growth in managed transportation and warehousing revenue.
- 18 -
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION, CONTINUED
First Six Months 1999 Compared with 1998
- ----------------------------------------
For the first six months of the year, earnings for the company totaled
$189 million, 89 cents per share on a diluted basis, compared to $242 million,
$1.12 per share on a diluted basis for the prior year period. The 1999 results
exclude the cumulative effect of an accounting change recorded in the first
quarter. As previously mentioned, the 1999 period covers 27 weeks of results,
versus 26 weeks for the 1998 period. The additional week in 1999 was included in
the first quarter.
The year-over-year increases in operating revenue and expense are due
largely to the integration of Conrail rail and intermodal operations for one
month in 1999, as well as the extra week in the 1999 period. Costs related to
preparation and start-up of the Conrail integration adversely affected the 1999
earnings.
FINANCIAL CONDITION
- -------------------
Cash, cash equivalents and short-term investments totaled $549 million
at July 2, 1999, a slight increase since December 25, 1998. The primary sources
of cash and cash equivalents were normal transportation operations, the issuance
of short-term debt and long-term equipment financings. The primary uses of cash
were property additions, repayment of long-term debt, and dividend payments.
The company's working capital deficit at July 2, 1999 was $746 million,
reflecting a $70 million net use of working capital during the second quarter
and a $130 million net use for the first six months of the year. The higher
working capital deficit was principally due to an increase in short-term debt
during the first half of 1999, reflecting lower cash flow from operations and
the timing of expenditures for property additions. 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.
In June 1999, the company issued $250 million of medium-term notes with
a one year maturity. The notes were issued under a shelf registration
established in 1998 and are classified as short-term debt in the consolidated
statement of financial position. Subsequent to quarter end, an additional $150
million in medium term notes were issued, also with a one year maturity.
Following this latest issuance, the company has $400 million of capacity
remaining under the shelf registration.
- 19 -
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION, CONTINUED
FINANCIAL DATA
- --------------
(Millions of Dollars)
-----------------------------
July 2, December 25,
1999 1998
-------------- ---------------
Cash, Cash Equivalents and
Short-Term Investments $ 549 $ 533
Commercial Paper and Equivalents -
Short-Term $ 570 $ 187
Commercial Paper -
Long-Term $ 1,000 $ 1,000
Working Capital (Deficit) $ (746) $ (616)
Current Ratio .8 .8
Debt Ratio 52 % 52 %
Ratio of Earnings to Fixed Charges 1.6 x 1.8 x
OUTLOOK
- -------
As CSX enters the third quarter of 1999, the company continues to focus
on the integration of the Conrail rail and intermodal operations. Stabilizing
operations and avoiding congestion are primary goals, as the rail and intermodal
units plan for the fall traffic peak and work to ensure customer satisfaction.
The rail unit will continue to experience diminished coal traffic.
Export coal volumes remain weak, with no recovery anticipated in 1999. The
domestic utility coal market is expected to improve as warm summer weather
causes coal stockpiles to be depleted. Merchandise traffic should remain strong,
particularly in the automotive category, which continues to benefit from
consumer demand and increased production levels at the auto plants. Intermodal
volumes should continue to benefit from the recent strengthening in
international traffic. As a result of the Conrail integration, rail and
intermodal revenue and expense will be significantly higher for the second half
of the year compared to the same period in 1998.
CSX anticipates closing the sale of the container-shipping unit's
international liner business to A.P. Moller-Maersk Line by year-end.
Container-shipping operating results will continue to include the international
business until the transaction is finalized. Operating results are expected to
improve throughout the balance of the year. Rate increases in the Pacific,
particularly the Asia-to-U.S. trade, along with productivity improvements,
should more than offset rate and volume weakness in the Atlantic and Americas
trade lanes.
- 20 -
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION, CONTINUED
CONRAIL ACQUISITION AND INTEGRATION
- -----------------------------------
Background and Integration
On June 1, 1999, CSX and Norfolk Southern Corporation (Norfolk Southern)
formally began integrated operations over their respective portions of the
Conrail Inc. (Conrail) rail system. This step implements the operating plan
envisioned by CSX and Norfolk Southern when they completed the joint acquisition
of Conrail in May 1997 and later received regulatory approval permitting them to
exercise joint control over Conrail in August 1998.
Under this operating plan, CSX Transportation, Inc. (CSXT), CSX's rail
subsidiary, has added approximately 4,400 route miles of track in the
Northeastern and Midwestern United States and in Canada to its existing lines
concentrated in the Middle Atlantic and Southeastern United States. To service
the new operations, approximately 6,200 former Conrail employees have joined
CSXT. CSXT now operates a network of more than 22,700 route miles in 23 states,
the District of Columbia, and two Canadian provinces and employs approximately
34,500 employees across the combined system.
The rail subsidiaries of CSX and Norfolk Southern operate their
respective portions of the Conrail system pursuant to various operating
agreements which took effect on June 1. Under these agreements, the railroads
pay operating fees to Conrail for the use of right-of-way and rent for the use
of equipment. Conrail continues to provide rail service in certain shared
geographic areas for the joint benefit of CSX and Norfolk Southern for which it
is compensated on the basis of usage by the respective railroads. CSX and
Norfolk Southern, through a jointly-owned acquisition entity, hold economic
interests in Conrail of 42% and 58%, respectively, and voting interests of 50%
each.
Financial Effects
Upon integration, substantially all of Conrail's customer freight
contracts were assumed by CSX and Norfolk Southern. As a result, beginning June
1, 1999, CSX's rail and intermodal operating revenue includes revenue from
traffic previously moving on Conrail. Operating expenses reflect corresponding
increases for costs incurred to handle the new traffic and operate the former
Conrail lines. Effective June 1, 1999, rail operating expenses also include a
new expense category, "Conrail Operating Fee, Rent and Services", which reflects
payments to Conrail for the use of right-of-way and equipment; as well as
charges for transportation, switching, and terminal services provided by Conrail
in the shared areas operated for the joint benefit of CSX and Norfolk Southern.
The new expense category also includes purchase price amortization and CSX's
proportionate share of Conrail's net income, which continues to be recognized
under the equity method of accounting.
Prior to the June 1, 1999 integration, CSX recorded its share of
Conrail's net income, less purchase price amortization, and acquisition and
transition expenses in other income (expense) in the consolidated statement of
earnings.
Shortly after beginning integrated operations with Conrail, CSX
experienced some technology problems and other start-up difficulties that
resulted in congestion and delays on parts of the new CSX network. Conrail's
operations in the shared geographic areas servicing both CSX and Norfolk
Southern traffic experienced similar congestion and delays. CSX incurred
approximately $40 million of additional costs
- 21 -
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION, CONTINUED
CONRAIL ACQUISITION AND INTEGRATION, Continued
- ----------------------------------------------
Financial Effects, Continued
during the month of June to address and resolve those problems. In addition,
some customers elected to ship some time-sensitive freight via other modes of
transportation. Service levels remained below expectation through most of June;
however, steady improvement was made throughout the month of July. CSX expects
the entire network to reflect normal operating conditions and service levels
before the peak traffic demand in the fall.
With the completion of 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. CSX and Norfolk Southern compete for
traffic located in markets formerly served solely by Conrail. As a result of
this process of entering new markets, there have been changes in the historic
rate and traffic patterns, including some rate reductions and traffic volume
shifts. The process is being driven by market conditions, and the company
presently cannot fully 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's operating results for the quarter and six months ended June
30, 1999 were significantly impacted by the changes in its business resulting
from the integration with CSX and Norfolk Southern. Effective June 1, 1999,
Conrail's major sources of revenue derive from CSX and Norfolk Southern and
consist principally of operating fees, equipment rent, and shared area usage
fees. The nature of Conrail's operating expenses has also changed to reflect the
new operations.
Conrail reported a net loss of $63 million for the second quarter of
1999, compared with net income of $115 million for the prior year quarter. For
the related six-month periods, Conrail reported net income of $13 million in
1999 and $200 million in 1998.
For the first five months of 1999, Conrail's operating results from
freight linehaul operations in the aggregate reflected modest unfavorable
variances when compared with the same period in 1998. Coal and other unit train
revenue was down 16% from the comparable 1998 period, while automotive and
intermodal revenues were 7% and 4% higher, respectively, and offset most of the
revenue shortfall. Operating expenses for this five-month period were
unfavorably impacted by adverse weather conditions during the winter, but
benefited from significantly lower fuel prices during the early part of the
year. The 1999 expenses were also affected by accruals for property and cargo
damage and personal injuries associated with two derailments, continued
transition spending in preparation for the CSX/Norfolk Southern integration, an
adjustment to reflect an increase in a state property tax rate, and an increase
in casualty reserves based on a recently-completed actuarial valuation.
Conrail expects its operating results for the remainder of 1999 will
reflect a net loss, principally as a result of expenses related to the
integration and the phase-out of numerous functions that will not be required
after a brief transition and wind-down period. The net loss is not expected to
be significant, nor is it expected to affect Conrail's ability to operate its
ongoing business activities for the benefit of CSX and Norfolk Southern.
- 22 -
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION, CONTINUED
CONRAIL ACQUISITION AND INTEGRATION, Continued
- ----------------------------------------------
Conrail's Results of Operations, Continued
Conrail's working capital deficit was $155 million at June 30, 1999,
compared with $202 million at December 31, 1998. In addition to cash flow from
operations, the improvement in working capital resulted in part from the
reclassification of certain employee obligations. The improvements in working
capital were partially offset by the reclassification of approximately $250
million of long-term debt to current liabilities, reflecting the maturity of the
debt in June 2000. Certain components of working capital, such as accounts
receivable, accounts payable, and accrued wages and employee benefits were
significantly affected by the integration as outstanding balances were collected
or paid. Conrail is expected to have sufficient cash flow to meet its ongoing
post-integration obligations.
SALE OF INTERNATIONAL CONTAINER-SHIPPING ASSETS
- -----------------------------------------------
On July 21, 1999, CSX entered into an agreement to sell certain assets
comprising the international liner business of Sea-Land Service, Inc.
(Sea-Land), its wholly-owned container-shipping subsidiary, to A. P.
Moller-Maersk Line (Maersk) for $800 million in cash. The transaction is
contingent upon receiving regulatory approvals. The sales price is subject to
adjustment based on the final amounts of certain assets and related obligations
conveyed at closing. The parties currently expect to close the transaction in
the fourth quarter of 1999.
The international liner business operates approximately 70 container
vessels and 200,000 containers in worldwide trades and comprises a majority of
CSX's container-shipping revenue. In addition to vessels and containers, Maersk
will acquire certain terminal facilities and various other assets and related
liabilities of the international liner business, including the assumption of
certain lease obligations.
Based on preliminary calculations, the book value of the net assets to
be conveyed exceeds the sales price. As a result, CSX expects to classify these
assets as held for sale and record an impairment loss in the third quarter of
1999 to adjust the book value of the related property, equipment and other
long-lived assets to fair value. The impairment loss will be determined and
accounted for under the provisions of FASB Statement No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." While the final impairment loss will not be determined until late in the
third quarter, management currently expects the loss to exceed $300 million
before income taxes. With the recognition of the impairment charge in the third
quarter, no significant gain or loss is expected upon the subsequent closing of
the transaction.
In March 1999, CSX announced that Sea-Land's operations would be
re-aligned to comprise separate businesses for international container-shipping,
international terminal operations, and domestic container-shipping. After the
sale of the international liner assets to Maersk, Sea-Land will continue to
operate the terminal and domestic shipping businesses and will manage them
separately. Management reporting and performance measures for these businesses
will be developed and refined during the second half of 1999, and the company
expects to revise its segment reporting under FASB Statement No. 131,
"Disclosures about Segments of an Enterprise and Related Information," in the
first quarter of 2000.
- 23 -
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION, CONTINUED
OTHER MATTERS
- -------------
Year 2000 Planning
State of Year 2000 Readiness
- ----------------------------
Technology systems and embedded computer chips that are not Year 2000
ready are unable to distinguish between the calendar year 1900 and the calendar
year 2000. CSX recognizes that it must work to minimize the risks that its
business operations will be adversely affected by transition to the upcoming
calendar year 2000. Accordingly, in 1996, CSX and each of its transportation
subsidiaries began a comprehensive plan to address the potential exposure. The
company's Year 2000 plan includes 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 readiness efforts are focused, first and foremost, on the
continued safe operation of its rail and other transportation systems. That
includes employee safety, the safety of the general public, and the safety of
the environments in which the company operates. Maintaining service continuity
both to customers and with vendors before, during, and after the millennium
change also is a priority.
CSX has material relationships with third parties whose failure to be
Year 2000 ready could have adverse impacts on the company's business, operations
or financial condition. Third parties CSX considers to be in this category
include significant suppliers, large customers and financial institutions.
Accordingly, the company has met with or surveyed those parties to assess their
Year 2000 readiness and, where applicable, is conducting interface tests with
them upon completion of internal testing of remediated applications. Based on
the results of those tests, and the information received, follow-up action or
contingency plans will be made by the company as it deems appropriate.
CSX also is 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 Association of
American Railroads since 1997 and is largely complete, with final work scheduled
in the third quarter of 1999.
- 24 -
<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, substantial completion of key areas of CSX's Year 2000
readiness plan is expected by the end of the third quarter of 1999. The
company's readiness efforts are organized in five areas, which have the
following status:
<TABLE>
<CAPTION>
Estimated Substantial
Effort Completion Current Phase
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
Core Information Systems Third Quarter 1999 Remediation and Validation
Distributed Information Technology Third Quarter 1999 Remediation and Validation
Electronic Commerce Third Quarter 1999 Remediation and Validation
Non-information Technology
(embedded systems) Third Quarter 1999 Remediation and Validation
Trading Partners Fourth Quarter 1999 Validation
</TABLE>
While CSX estimates that its readiness plan for distributed information
technology will be substantially complete by the end of the third quarter, the
company does expect that some distributed systems at Sea-Land will not be fully
Year 2000 ready until early in the fourth quarter, due in part to the global
geographic dispersion of the systems. The anticipated completion schedule for
these systems is not expected to adversely affect their ultimate readiness or
Sea-Land's current contingency planning efforts.
During the second quarter of 1999 the integration of Conrail operations
was formally implemented and Conrail's Year 2000 effort was incorporated into
the Year 2000 efforts of CSX and Norfolk Southern.
Year 2000 Costs
- ---------------
The company has incurred total costs of $60 million to date related to
Year 2000 readiness, which represents approximately 76% of the estimated
expenditures for the entire plan. To provide a consistent, objective method for
identifying costs of the Year 2000 plan, the company classifies expenditures as
Year 2000 plan costs for reporting purposes only if they remedy only Year 2000
risks and would otherwise be unnecessary in the normal course of business. The
cost of the Year 2000 plan is being expensed as incurred and funded by cash
generated from operations. Projections of the remaining cost and completion
dates for the Year 2000 plan are based on management's current estimates, which
are derived utilizing 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 readiness efforts, and CSX
is periodically assessing its Year 2000 progress with the assistance of outside
consultants.
Contingency Plans
- -----------------
Contingency planning is an established and ongoing effort within CSX to
address many types of potential operating disruptions which may include Year
2000 issues. For example, detailed emergency operating plans already exist for
unanticipated outages of electricity, telecommunications, and other essential
services. The company is not in a position to identify or to avoid all possible
Year 2000 scenarios or to estimate their overall business impacts. However, the
company is currently assessing possible problems and making plans to mitigate
the impacts.
- 25 -
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION, CONTINUED
OTHER MATTERS, Continued
- ------------------------
Year 2000 Planning, Continued
Contingency Plans, Continued
- ----------------------------
These plans may include identifying alternate suppliers, vendors,
procedures and operational sites; generating equipment lists; conducting staff
training; and developing communication plans. CSX defines three primary types of
most reasonably likely worst-case scenarios, and 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 may employ
manual fallback plans for non-transportation functions and may maintain a
safe and orderly shutdown of affected transportation operations. For
Sea-Land, overseas port operations represent a higher Year 2000 risk, since
preparedness of providers in some foreign countries is believed to lag that
in the United States. Sea-Land may minimize its exposure to high-risk ports,
for instance, by temporarily modifying its vessel schedules.
- - Movable asset failures -- In the event of a Year 2000 failure of a
transportation asset, such as a ship or locomotive that does not have
redundant systems for operation, CSX may temporarily remove the asset from
service and scale its operations accordingly.
Risks
- -----
CSX believes that its Year 2000 planning efforts are adequate to address
all major risks. There can be no assurance, however, that the company's systems
or equipment, or those of third parties on which CSX relies, will be Year 2000
ready in a timely manner or that the company's or third parties' contingency
plans will mitigate the effects of the transition to the calendar Year 2000. The
failure of the systems or equipment of CSX or third parties (which the company
believes is the most reasonably likely worst case scenario) could result in the
reduction or suspension of the company's operations and could have a material
adverse effect on the company's results of operations, liquidity and financial
condition.
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 has been made for the
award.
- 26 -
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION, CONTINUED
OTHER MATTERS, Continued
- ------------------------
Litigation , Continued
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. In February 1999, the Louisiana Supreme Court
issued a further decision, authorizing and instructing the trial court to enter
individual punitive damages judgments in favor of the 20 plaintiffs who had
received awards of compensatory damages, in amounts representing an appropriate
share of the jury's award. The trial court on April 8, 1999 entered judgment
awarding approximately $2 million in compensatory damages and approximately $8.5
million in punitive damages to those 20 plaintiffs. Approximately $6.2 million
of the punitive damages awarded were assessed against CSXT. CSXT then filed
post-trial motions, for a new trial and for judgment notwithstanding the
verdict, as to the April 8 judgment. CSXT believes that these recent judicial
decisions will expedite the process of full appellate review of the 1997 trial.
A trial for the claims of 20 additional plaintiffs for compensatory
damages began on May 24, 1999. In early July, the jury in that trial rendered
verdicts of approximately $330,000 in favor of eighteen of those twenty
plaintiffs. Two plaintiffs received nothing; that is, the jury found that they
had not proved any damages. Management believes that this result, while still
excessive, supports CSXT's contention that the $2.5 billion punitive damages
award was unwarranted.
CSXT continues to pursue an aggressive legal strategy. 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.
--------------------------------------------------
- 27 -
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION, CONTINUED
Estimates and forecasts in Management's Discussion and Analysis and in
other sections of this Quarterly Report are based on many assumptions about
complex economic and operating factors with respect to industry performance,
general business and economic conditions and other matters that cannot be
predicted accurately and that are subject to contingencies over which the
company has no control. 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, 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.
- 28 -
<PAGE>
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
(a) Annual meeting held April 27, 1999.
(b) Not applicable.
(c) There were 217,319,374 shares of CSX common stock outstanding as
of February 26, 1999, the record date for the 1999 annual meeting
of shareholders. A total of 183,047,348 shares were voted. All of
the nominees for directors of the corporation were elected with
the following vote:
Votes Broker
Nominee Votes For Withheld Non-Votes
------- ---------- -------- ---------
Elizabeth E. Bailey 180,623,727 2,423,621 --
H. Furlong Baldwin 180,562,198 2,485,150 --
Claude S. Brinegar 176,993,435 6,053,913 --
Robert L. Burrus, Jr. 180,593,878 2,453,470 --
Bruce C. Gottwald 180,565,031 2,482,317 --
John R. Hall 177,104,817 5,942,531 --
E. Bradley Jones 176,417,630 6,629,718 --
Robert D. Kunisch 180,627,916 2,419,432 --
James W. McGlothlin 175,450,263 7,597,085 --
Southwood J. Morcott 180,664,310 2,383,038 --
Charles E. Rice 180,494,464 2,552,884 --
William C. Richardson 180,641,606 2,405,742 --
Frank S. Royal 180,542,348 2,523,000 --
John W. Snow 180,257,028 2,790,320 --
The appointment of Ernst & Young LLP as independent auditors to
audit and report on CSX's financial statements for the year 1999
was ratified by the shareholders with the following vote:
Votes Broker
Votes For Against Abstentions Non-Votes
--------- ------- ----------- ---------
181,711,351 879,584 456,413 --
The shareholder proposal regarding the Shareholder Rights Plan
was not presented at the meeting, and, therefore, no action was
taken.
(d) Not applicable.
- 29 -
<PAGE>
PART II. OTHER INFORMATION, Continued
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
1. (27) Financial Data Schedule
(b) Reports on Form 8-K
1. A report was filed on May 11, 1999, reporting Item 5, Other Events -
authorization of issuance and sale of up to U.S. $400,000,000 of Medium-Term
Notes, Series C; plus Item 7, Financial Statements and Exhibits - documents
related to the notes filed as exhibits.
2. A report was filed on June 11, 1999, reporting Item 5, Other Events -
announcement of the integrated operations of CSX Corporation and Norfolk
Southern Corporation of their respective portions of the Conrail Inc. rail
system; plus Item 7, Financial Statements and Exhibits - (1) Amendment No. 1
dated August 22, 1998 and Amendment No. 2 dated June 1, 1999 to the Transaction
Agreement dated June 10, 1997 by and among the company, CSX Transportation,
Inc., Norfolk Southern Corporation, Norfolk Southern Railway Company, Conrail
Inc., Consolidated Rail Corporation and CRR Holdings LLC and; (2) Operating
Agreement dated June 1, 1999 by and between New York Central Lines, LLC and CSX
Transportation, Inc. and; (3) Shared Assets Area Operating Agreements for North
Jersey, South Jersey/Philadelphia, and Detroit dated June 1, 1999 by and among
Consolidated Rail Corporation, CSX Transportation, Inc. and Norfolk Southern
Railway Company and; (4) Monongahela Usage Agreement dated June 1, 1999 by and
among CSX Transportation, Inc., Norfolk Southern Railway Company, Pennsylvania
Lines LLC, and New York Central Lines LLC and; (5) a press release by the
company dated June 1, 1999.
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: August 6, 1999
- 30 -
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