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 April 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 April 2, 1999: 217,390,846 shares.
- 1 -
<PAGE>
CSX CORPORATION
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED APRIL 2, 1999
INDEX
Page Number
PART I. FINANCIAL INFORMATION
Item 1:
Financial Statements
1. Consolidated Statement of Earnings-
Quarters Ended April 2, 1999 and March 27, 1998 3
2. Consolidated Statement of Cash Flows-
Quarters Ended April 2, 1999 and March 27, 1998 4
3. Consolidated Statement of Financial Position-
At April 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 15
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 26
Signature 26
- 2 -
<PAGE>
<TABLE>
CSX CORPORATION AND SUBSIDIARIES
Consolidated Statement of Earnings
(Millions of Dollars, Except Per Share Amounts)
<CAPTION>
(Unaudited)
Quarters Ended
---------------------------
April 2, March 27,
1999 1998
------------ ------------
<S> <C> <C>
Operating Revenue $ 2,541 $ 2,462
Operating Expense 2,265 2,184
------------ -----------
Operating Income 276 278
Other Income (Expense) (35) (29)
Interest Expense 133 123
------------ -----------
Earnings before Income Taxes 108 126
Income Tax Expense 33 35
------------ -----------
Earnings before Cumulative Effect of Accounting Change 75 91
Cumulative Effect on Prior Years of Accounting Change for
Insurance-Related Assessments, Net of Tax (49) -
------------ -----------
Net Earnings $ 26 $ 91
============ ===========
Earnings Per Share:
Before Cumulative Effect of Accounting Change $ .36 $ .43
Cumulative Effect of Accounting Change (.24) -
------------ -----------
Including Cumulative Effect of Accounting Change $ .12 $ .43
============ ===========
Earnings Per Share, Assuming Dilution
Before Cumulative Effect of Accounting Change $ .36 $ .42
Cumulative Effect of Accounting Change (.24) -
------------ -----------
Including Cumulative Effect of Accounting Change $ .12 $ .42
============ ===========
Average Common Shares Outstanding (Thousands) 210,124 210,999
============ ===========
Average Common Shares Outstanding, Assuming Dilution
(Thousands) 211,658 215,684
============ ===========
Cash Dividends Paid Per Common Share $ .30 $ .30
============ ===========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
- 3 -
<PAGE>
<TABLE>
CSX CORPORATION AND SUBSIDIARIES
Consolidated Statement of Cash Flows
(Millions of Dollars)
<CAPTION>
(Unaudited)
Quarters Ended
-----------------------------
April 2, March 27,
1999 1998
------------- -------------
<S> <C> <C>
OPERATING ACTIVITIES
Net Earnings $ 26 $ 91
Adjustments to Reconcile Net Earnings to Net Cash
Provided:
Cumulative Effect of Accounting Change 49 -
Depreciation 169 156
Deferred Income Taxes 39 11
Equity in Conrail Earnings - Net (13) (23)
Other Operating Activities (7) (17)
Changes in Operating Assets and Liabilities
Accounts Receivable (75) (5)
Other Current Assets 20 (48)
Accounts Payable (122) (70)
Other Current Liabilities (86) (27)
------------ ------------
Net Cash Provided by Operating Activities - 68
------------ ------------
INVESTING ACTIVITIES
Property Additions (190) (290)
Short-Term Investments - Net 32 59
Other Investing Activities (14) (16)
------------ ------------
Net Cash Used by Investing Activities (172) (247)
------------ ------------
FINANCING ACTIVITIES
Short-Term Debt - Net 250 169
Long-Term Debt Issued 79 5
Long-Term Debt Repaid (32) (90)
Cash Dividends Paid (65) (66)
Other Financing Activities (11) (11)
------------ ------------
Net Cash Provided by Financing Activities 221 7
------------ ------------
Net Increase (Decrease) in Cash and Cash Equivalents 49 (172)
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 154 79
Short-Term Investments at End of Period 396 380
------------ ------------
Cash, Cash Equivalents and Short-Term
Investments at End of Period $ 550 $ 459
============ ============
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
- 4 -
<PAGE>
<TABLE>
CSX CORPORATION AND SUBSIDIARIES
Consolidated Statement of Financial Position
(Millions of Dollars)
<CAPTION>
(Unaudited)
April 2, December 25,
1999 1998
----------- -----------
<S> <C> <C>
ASSETS
Current Assets
Cash, Cash Equivalents and Short-Term Investments $ 550 $ 533
Accounts Receivable 986 898
Materials and Supplies 234 225
Deferred Income Taxes 138 128
Other Current Assets 190 200
----------- -----------
Total Current Assets 2,098 1,984
Properties 18,830 18,678
Accumulated Depreciation (6,176) (6,033)
----------- -----------
Properties-Net 12,654 12,645
Investment in Conrail 4,811 4,798
Affiliates and Other Companies 459 448
Other Long-Term Assets 527 552
----------- -----------
Total Assets $ 20,549 $ 20,427
=========== ===========
LIABILITIES
Current Liabilities
Accounts Payable $ 1,103 $ 1,216
Labor and Fringe Benefits Payable 463 462
Casualty, Environmental and Other Reserves 280 283
Current Maturities of Long-Term Debt 104 100
Short-Term Debt 437 187
Other Current Liabilities 387 352
----------- -----------
Total Current Liabilities 2,774 2,600
Casualty, Environmental and Other Reserves 720 645
Long-Term Debt 6,476 6,432
Deferred Income Taxes 3,193 3,173
Other Long-Term Liabilities 1,544 1,697
----------- -----------
Total Liabilities 14,707 14,547
----------- -----------
SHAREHOLDERS' EQUITY
Common Stock, $1 Par Value 217 217
Other Capital 1,491 1,489
Retained Earnings 4,255 4,294
Accumulated Other Comprehensive Loss (121) (120)
----------- -----------
Total Shareholders' Equity 5,842 5,880
----------- -----------
Total Liabilities and Shareholders' Equity $ 20,549 $ 20,427
=========== ===========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
- 5 -
<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 April 2, 1999 and December 25, 1998, and the results of
its operations and its cash flows for the quarters ended April 2, 1999 and March
27, 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 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 will consist 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 14-week quarter ended April
2, 1999, the 13-week quarter ended March 27, 1998, and as of December 25, 1998.
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 ended April 2, 1999 and
March 27, 1998. Earnings per share, assuming dilution, are based on the weighted
average of common shares outstanding adjusted for the effect of potentially
dilutive securities, principally employee stock plans. For the fiscal quarters
ended April 2, 1999 and March 27, 1998, potentially dilutive common shares
totaled 1.5 million and 4.7 million, respectively.
- 6 -
<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
Certain potentially dilutive securities outstanding at April 2, 1999 and
March 27, 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 11.4 million at a weighted-average
exercise price of $50.29 per share at April 2, 1999 and 1.96 million with an
exercise price of $57.00 per share at March 27, 1998.
Earnings per share for the first 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 43 cents from
42 cents for first quarter 1998. On a diluted basis, first quarter 1998 earnings
per share were revised to 42 cents from 41 cents.
NOTE 4. ACCOUNTING PRONOUNCEMENTS
The FASB has 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. 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 2000 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 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.
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
- 7 -
<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 OF CONRAIL, Continued
Background, Continued
- ---------------------
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 by June 1, 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 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.
- 8 -
<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 OF CONRAIL, Continued
Acquisition Accounting by the Jointly Owned Entity and CSX, Continued
- ---------------------------------------------------------------------
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 finalize and implement their
integration plans. 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
March 31, 1999 and 1998, and at December 31, 1998, is as follows:
Quarters Ended
------------------------------
March 31, March 31,
1999 1998
------------ --------------
Income Statement Information:
Revenues $ 916 $ 927
Income from Operations 146 160
Net Income 76 85
As Of
--------------------------------
March 31, December 31,
1999 1998
----------- ---------------
Balance Sheet Information:
Current Assets $ 1,126 $ 1,005
Property and Equipment and Other Assets 7,987 8,039
Total Assets 9,113 9,044
Current Liabilities 1,210 1,207
Long-Term Debt 1,594 1,609
Total Liabilities 5,236 5,244
Stockholders' Equity 3,877 3,800
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.
- 9 -
<PAGE>
CSX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited), Continued
(All Tables in Millions of Dollars, Except Per Share Amounts)
NOTE 6. 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 April 2, 1999, 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 April 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
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 $566 million at
April 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 and $7 million for the quarters ended April 2, 1999 and March 27, 1998,
respectively.
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 7. OPERATING EXPENSE
Quarters Ended
--------------------------
April 2, March 27,
1999 1998
----------- -----------
Labor and Fringe Benefits $ 827 $ 814
Materials, Supplies and Other 621 591
Building and Equipment Rent 307 266
Inland Transportation 257 248
Depreciation 167 153
Fuel 86 112
----------- ----------
Total $ 2,265 $ 2,184
=========== ==========
-10 -
<PAGE>
CSX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited), Continued
(All Tables in Millions of Dollars, Except Per Share Amounts)
NOTE 8. OTHER INCOME (EXPENSE)
Quarters Ended
-------------------------
April 2, March 27,
1999 1998
----------- -----------
Interest Income $ 14 $ 14
Income (Loss) from Real Estate and Resort
Operations(1) (7) (5)
Net Losses from Accounts Receivable Sold (8) (7)
Minority Interest (9) (8)
Income (Loss) from Investment in Conrail - Net (28) (6)
Equity Earnings of Other Affiliates 7 1
Foreign Currency Gain (Loss) 5 (3)
Miscellaneous (9) (15)
----------- ----------
Total $ (35) $ (29)
=========== ==========
(1) Gross revenue from real estate and resort operations was $19 million and
$21 million for the quarters ended April 2, 1999 and March 27, 1998,
respectively.
NOTE 9. 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 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.
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 will begin in May 1999.
- 11 -
<PAGE>
CSX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited), Continued
(All Tables in Millions of Dollars, Except Per Share Amounts)
NOTE 9. COMMITMENTS AND CONTINGENCIES, Continued
New Orleans Tank Car Fire, Continued
- ------------------------------------
CSXT is pursuing 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 105 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 243 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
- 12 -
<PAGE>
CSX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited), Continued
(All Tables in Millions of Dollars, Except Per Share Amounts)
NOTE 9. COMMITMENTS AND CONTINGENCIES, Continued
Environmental , Continued
- -------------------------
environmental costs with respect to such sites. The recorded liabilities, for
estimated future environmental costs at April 2, 1999, and December 25, 1998,
were $72 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 April 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 10. 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 18,300 route miles in 20
states in the East, Midwest and South. 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 98 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 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.
- 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. BUSINESS SEGMENTS, Continued
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 April 2, 1999:
- ---------------------------
<CAPTION>
Surface Transportation
------------------------------- Container Contract
Rail Intermodal Total Shipping Logistics Totals
-------- ------------ --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Revenues from external customers $1,297 $163 $1,460 $973 $108 $2,541
Intersegment revenues - 6 6 - 12 18
Segment operating income 266 7 273 12 9 294
</TABLE>
<TABLE>
Quarter ended March 27, 1998:
- ----------------------------
<CAPTION>
Surface Transportation
------------------------------- Container Contract
Rail Intermodal Total Shipping Logistics Totals
-------- ------------ --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Revenues from external customers $1,255 $150 $1,405 $955 $102 $2,462
Intersegment revenues - 9 9 - 5 14
Segment operating income 264 9 273 15 7 295
</TABLE>
A reconciliation of the totals reported for the business segments to the
applicable line items in the consolidated financial statements is as follows:
1998 1997
--------- --------
Revenues:
- --------
Total external revenues for business segments $ 2,541 $ 2,462
Intersegment revenues for business segments 18 14
Elimination of intersegment revenues (18) (14)
- --
------- --------
Total consolidated revenues $ 2,541 $ 2,462
========= ========
Operating Income:
- ----------------
Total operating income for business segments $ 294 $ 295
Reclassification of intercompany interest income (15) (16)
Unallocated corporate expenses (3) (1)
- --
------- --------
Total consolidated operating income $ 276 $ 278
========= ========
- 14 -
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
RESULTS OF OPERATIONS
- ---------------------
First Quarter 1999 Compared with 1998
- -------------------------------------
CSX follows a 52/53-week fiscal calendar. Fiscal year 1999 will include
53 weeks. The quarter ended April 2, 1999 consisted of 14 weeks, compared with
13 weeks in the prior year's first quarter.
The company reported net earnings for the quarter ended April 2, 1999 of
$75 million, 36 cents per share on a diluted basis, excluding the cumulative
effect of a change in accounting. In the prior-year period, the company earned
$91 million, 42 cents per share on a diluted basis. Effective as of the
beginning of fiscal year 1999, CSX adopted AICPA Statement of Position No. 97-3,
"Accounting by Insurance and Other Enterprises for Insurance-Related
Assessments," which applies to workers compensation second-injury fund
assessments at the company's container-shipping unit. As a result of the
accounting change, first-quarter 1999 results include a non-cash,
cumulative-effect adjustment of $78 million, $49 million after-tax, or 24 cents
per share, and reduced net earnings for the quarter to $26 million, 12 cents per
share on a diluted basis.
Operating income for the first quarter of 1999 totaled $276 million,
compared with $278 million in the first quarter of 1998. Operating revenue of
$2.54 billion was 3 percent higher than the prior-year quarter, while operating
expense of $2.27 billion was 4 percent higher. The higher revenue and expense
were largely attributable to the additional week in the 1999 quarter.
Earnings per share for the first quarter of 1998 have been restated to
reflect clarification of the treatment of certain stock-based compensation plan
shares under FASB Statement No. 128, "Earnings per Share." Earnings per share
were revised to 43 cents from 42 cents for first quarter 1998. On a diluted
basis, first quarter 1998 earnings per share were revised to 42 cents from 41
cents.
Surface Transportation Results
- ------------------------------
Rail
The company's rail unit produced $266 million of operating income in the
first quarter of 1999 versus $264 million in 1998. Operating revenue was 3
percent higher, at $1.3 billion, primarily benefiting from the additional week
in the quarter, partially offset by lower coal revenue. Operating expense rose 4
percent, primarily due to traffic mix and severe winter weather that caused
congestion early in the quarter, partially offset by lower fuel costs and a
favorable experience credit on medical claims that reduced fringe benefits
expense.
Coal volume declined 2 percent, to 39 million tons, reflecting reduced
demand from overseas and from electric utilities. As a result, coal revenue fell
4 percent from the 1998 period. Total merchandise traffic and revenue were both
9 percent higher than the prior year quarter, led by significant increases in
automotive traffic and revenue which reflected continued strong demand for
vehicles and parts. Other merchandise categories were mixed, with strength in
minerals offset by weakness in metals and paper and forest products.
- 15 -
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION, CONTINUED
RESULTS OF OPERATIONS, Continued
- --------------------------------
Rail, Continued
RAIL OPERATING INCOME
(Millions of Dollars)
--------------------------------------
Quarters Ended
--------------------------
April 2, March 27, Percent
1999 1998 Change
----------- ----------- ----------
Operating Revenue
Merchandise $ 906 $ 831 9%
Coal 353 366 (4)%
Other 38 58 (34)%
----------- ----------- ----------
Total 1,297 1,255 3%
Operating Expense 1,031 991 4%
----------- ----------- ----------
Operating Income $ 266 $ 264 1%
=========== =========== ==========
Operating Ratio 79.5% 79.0%
=========== ===========
Intermodal
The company's intermodal unit reported first-quarter operating income of
$7 million vs. $9 million a year ago. The decline was primarily due to
international business lost during last year's service problems in the Western
half of the country. CSXI's domestic business (which primarily originates and
terminates on CSXT) remained strong. Revenue for the quarter totaled $169
million versus $159 million in the prior-year period, while expenses were 8
percent higher, at $162 million.
Container Shipping Unit Results
- -------------------------------
Ongoing rate pressures and trade imbalances produced another difficult
quarter for the container-shipping unit. Rate weakness in the Atlantic and
Americas trades was partially offset by improving rates in outbound Asian
trades. Trade flows to and from Asia continued to experience significant
imbalances. Operating income for the first quarter of 1999 totaled $12 million,
versus $15 million in the 1998 quarter.
First quarter revenue of $973 million was 2 percent higher than the
prior year quarter, primarily reflecting the extra week in the 1999 quarter.
Operating expenses totaled $961 million for the quarter, helped by lower fuel
prices and reduced volumes.
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 $120
million was 12 percent higher than the prior year quarter, as the unit benefited
from the extra week in the 1999 quarter as well as strong growth in managed
transportation and warehousing revenue.
- 16 -
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION, CONTINUED
FINANCIAL CONDITION
- -------------------
Cash, cash equivalents and short-term investments totaled $550 million
at April 2, 1999, an increase of $17 million since December 25, 1998. The
primary sources of cash and cash equivalents were the issuance of short-term and
long-term debt. The primary uses of cash were property additions, repayment of
long-term debt, and dividend payments. The company reported breakeven cash from
operations for the first quarter. Net cash flow from operations is generally
weakest in the first quarter of each year and typically reflects lower traffic
levels and more difficult operating conditions in the winter months.
The company's working capital deficit at April 2, 1999 was $676 million,
a $60 million net use of working capital during the first quarter 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)
-----------------------------
April 2, December 25,
1999 1998
-------------- ---------------
Cash, Cash Equivalents and
Short-Term Investments $ 550 $ 533
Commercial Paper Outstanding -
Short-Term $ 437 $ 187
Commercial Paper Outstanding -
Long-Term $ 1,000 $ 1,000
Working Capital (Deficit) $ (676) $ (616)
Current Ratio 0.8 0.8
Debt Ratio 52 % 52 %
Ratio of Earnings to Fixed Charges 1.4 x 1.8 x
OUTLOOK
- -------
Training and implementation efforts are currently on schedule to achieve
the planned integration of CSX and Conrail operations on June 1, 1999.
Technology systems are currently being tested, and all labor agreements are
expected to be in place prior to integration.
On its base business, the rail unit continues to experience diminished
coal traffic. Export coal volumes remain weak, with no recovery expected in
1999. The domestic utility coal market is also experiencing weakness as a result
of the mild winter weather and fuel substitution. Merchandise traffic remains
strong, particularly in the automotive category, which continues to benefit from
consumer demand and increased production levels at the auto plants.
- 17 -
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION, CONTINUED
OUTLOOK, Continued
- ------------------
CSX's container-shipping unit is being realigned into three distinct
businesses with the objectives of lowering costs and enabling the businesses to
take full advantage of deregulated global market opportunities. While trade
imbalances between Asia and Europe and Asia and the United States are expected
to continue to impact shipping operations in key trade lanes, operating results
are expected to improve with significant rate increases on eastbound Pacific
cargo which will take effect in late May 1999. In the Atlantic trade lane, rates
are being adversely affected by competitive pressure in the recently deregulated
environment.
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 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 holding the Conrail shares was dissolved, and a new
Conrail board of directors was elected.
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.
Financing Arrangements
CSX initially financed its portion of the Conrail acquisition through a
combination of fixed rate notes and commercial paper. The fixed rate notes,
issued through a $2.5 billion multitranche offering in May 1997, have maturities
ranging from 2002 to 2032 and interest rates ranging from 6.95% to 8.30%.
Through mid-1998, commercial paper borrowings supported by a bank credit
facility were used to finance approximately $1.7 billion of CSX's investment in
Conrail. From May through December 1998, the company replaced approximately $1
billion of the commercial paper borrowings with fixed rate debt. Maturities on
the new debt range from 2001 to 2028, and interest rates range from 5.85% to
6.80%. The company currently has approximately $800 million of capacity
available under a shelf registration and may replace additional commercial paper
borrowings with longer term debt.
- 18 -
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION, CONTINUED
CONRAIL ACQUISITION, Continued
- ------------------------------
Integration Planning
CSX and Norfolk Southern currently expect to implement integrated
operations with Conrail on June 1, 1999. On that date, the parties will begin
operating specified portions of the Conrail routes and other assets pursuant to
various operating agreements. Certain Conrail assets will be operated for the
joint benefit of CSX and Norfolk Southern.
The company is actively planning for the smooth integration of Conrail
operations into its 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 are
substantially complete. Preparations leading up to the June 1 implementation
date will be concentrated on the completion and testing of technology systems.
Labor Agreements
CSX has finalized the implementing agreement process with all the
organizations that represent Conrail's unionized work force except the
Brotherhood of Maintenance of Way Employees (BMWE). An implementing agreement
with the BMWE was imposed by an arbitrator, but the organization appealed to the
STB. CSX then negotiated a settlement with the BMWE that is subject to a
ratification vote by the membership. That vote is expected to be completed by
early May.
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, and its share of the expense arising from the allocation of the
joint purchase price to Conrail's underlying assets and liabilities. CSX will
continue to incur interest expense on the debt issued to acquire the Conrail
investment. Transition expenses are expected to continue into the second quarter
of 1999, but will decline rapidly once integration is achieved.
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.
- 19 -
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION, CONTINUED
CONRAIL ACQUISITION, Continued
- ------------------------------
Conrail's Results of Operations
Conrail reported net income of $76 million for the first quarter of
1999, compared with net income of $85 million for the first quarter of 1998.
Operating revenues totaled $916 million, a decline of $11 million, or 1
percent, compared with the same period in 1998. Coal and other unit train
revenue was down 17% from the 1998 quarter, but was partially offset by higher
automotive and intermodal revenues, which reflected increases of 8% and 5%,
respectively, over the prior-year quarter.
Operating expenses totaled $770 million, $3 million higher than the
first quarter of 1998. Expenses were unfavorably impacted by adverse weather
conditions early in the quarter, but benefited from a 20% decline in fuel
expense from the prior year quarter. First quarter 1999 expenses were also
affected by accruals for property and cargo damage and personal injuries
associated with two derailments and by continued transition spending in
preparation for the integration of rail operations with CSX and Norfolk
Southern. Transition spending during the first quarter of 1999 consisted
primarily of technology integration and employee training costs.
Conrail's working capital deficit was $84 million at March 31, 1999,
compared with $202 million at December 31, 1998. The improvement was principally
the result of cash provided by operations, which was $170 million for the first
quarter of 1999. The working capital deficit at quarter-end included $188
million of employee-related liabilities, principally severance accruals, which
are expected to be funded using assets from an employee benefits trust and
Conrail's overfunded pension plan. Conrail is expected to have sufficient cash
flow to meet its ongoing obligations both before and after the integration of
rail operations with CSX and Norfolk Southern.
OTHER MATTERS
- -------------
Realignment of Container-Shipping Business
In March 1999, the company announced that Sea-Land Service, Inc., its
container-shipping unit, will be managed as three separate businesses beginning
in mid-1999. Operations will be realigned to comprise an international
container-shipping business, an international terminal operations business, and
a domestic container-shipping business. Management reporting and performance
measures for the separate 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.
- 20 -
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION, CONTINUED
OTHER MATTERS, Continued
- ------------------------
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.
- 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, 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:
Estimated
Substantial
Effort Completion Current Phase
- --------------------------------------------------------------------------------
Core Information Systems Third Quarter 1999 Remediation and Validation
Distributed Information
Technology Third Quarter 1999 Assessment and Remediation
Electronic Commerce Third Quarter 1999 Remediation and Validation
Non-information Technology
(embedded systems) Third Quarter 1999 Assessment and Remediation
Trading Partners Fourth Quarter 1999 Assessment and Validation
Year 2000 Costs
- ---------------
The company has incurred total costs of $52 million to date related to
Year 2000 readiness, which represents approximately 66% 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.
In connection with the integration of Conrail, CSX and Norfolk Southern
are jointly addressing the Year 2000 readiness of Conrail's core information
technology applications and non-information technology embedded systems. Certain
of Conrail's operations systems are being made Year 2000 ready as a contingency
in the event that there are unexpected delays in the integration or Conrail
continues to operate such systems after the integration is completed. Conrail's
estimated cost for its Year 2000 plan is approximately $16 million.
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
- 22 -
<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
- ----------------------------
2000 scenarios or to estimate their overall business impacts. However, the
company is currently assessing possible problems and making plans to mitigate
the impacts.
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.
- 23 -
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION, 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 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. A trial for the claims of 20 additional plaintiffs for compensatory
damages will begin in May 1999.
CSXT is pursuing 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.
--------------------------------------------------
- 24 -
<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, 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 25, 1998.
- 25 -
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
1. (27.1) Financial Data Schedule
(b) Reports on Form 8-K
1. None
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: May 4, 1999
- 26 -
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> DEC-26-1998
<PERIOD-END> APR-2-1999
<CASH> 154
<SECURITIES> 396
<RECEIVABLES> 986
<ALLOWANCES> 0
<INVENTORY> 234
<CURRENT-ASSETS> 2,098
<PP&E> 18,830
<DEPRECIATION> 6,176
<TOTAL-ASSETS> 20,549
<CURRENT-LIABILITIES> 2,774
<BONDS> 6,476
0
0
<COMMON> 217
<OTHER-SE> 5,625
<TOTAL-LIABILITY-AND-EQUITY> 20,549
<SALES> 0
<TOTAL-REVENUES> 2,541
<CGS> 0
<TOTAL-COSTS> 2,265
<OTHER-EXPENSES> 35
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 133
<INCOME-PRETAX> 108
<INCOME-TAX> 33
<INCOME-CONTINUING> 75
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 49
<NET-INCOME> 26
<EPS-PRIMARY> .12
<EPS-DILUTED> .12
</TABLE>
