FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarter ended March 31, 2000
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number 1-8022
CSX CORPORATION
(Exact name of registrant as specified in its charter)
Virginia 62-1051971
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
901 East Cary Street, Richmond, Virginia 23219-4031
(Address of principal executive offices) (Zip Code)
(804) 782-1400
(Registrant's telephone number, including area code)
No Change
(Former name, former address and former fiscal year, if changed
since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes (X) No ( )
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of March 31, 2000: 218,452,847 shares.
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<PAGE>
CSX CORPORATION
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000
INDEX
Page Number
PART I. FINANCIAL INFORMATION
Item 1:
Financial Statements
1. Consolidated Statement of Earnings-
Quarters Ended March 31, 2000 and April 2, 1999
3
2. Consolidated Statement of Cash Flows-
Quarters Ended March 31, 2000 and April 2, 1999 4
3. Consolidated Statement of Financial Position-
At March 31, 2000 and December 31, 1999 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 6. Exhibits and Reports on Form 8-K 27
Signature 27
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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
---------------------------
March 31, April 2,
2000 1999
------------ ------------
<S> <C> <C>
Operating Revenue $ 2,147 $ 2,541
Operating Expense 1,967 2,265
------------ ------------
180 276
Operating Income
Other Income (Expense) (5) (35)
Interest Expense 134 133
------------ ------------
Earnings before Income Taxes 41 108
Income Tax Expense 12 33
------------ ------------
Earnings before Cumulative Effect of Accounting Change 29 75
Cumulative Effect on Prior Years of Accounting Change for
Insurance-Related Assessments, Net of Tax - (49)
------------ ------------
Net Earnings $ 29 $ 26
============ ============
Earnings Per Share:
Before Cumulative Effect of Accounting Change $ .14 $ .36
Cumulative Effect of Accounting Change - (.24)
------------ ------------
Including Cumulative Effect of Accounting Change $ .14 $ .12
============ ============
Earnings Per Share, Assuming Dilution
Before Cumulative Effect of Accounting Change $ .14 $ .36
Cumulative Effect of Accounting Change - (.24)
------------ ------------
Including Cumulative Effect of Accounting Change $ .14 $ .12
============ ============
Average Common Shares Outstanding (Thousands) 211,192 210,124
============ ============
Average Common Shares Outstanding, Assuming Dilution
(Thousands) 212,015 211,658
============ ============
Cash Dividends Paid Per Common Share $ .30 $ .30
============ ============
</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)
Quarters Ended
-----------------------------
March 31, April 2,
2000 1999
------------- -------------
<S> <C> <C>
OPERATING ACTIVITIES
Net Earnings $ 29 $ 26
Adjustments to Reconcile Net Earnings to Net Cash Provided:
Cumulative Effect of Accounting Change - 49
Depreciation 147 169
Deferred Income Taxes 2 39
Equity in Conrail Earnings - Net (6) (13)
Other Operating Activities 33 (7)
Changes in Operating Assets and Liabilities
Accounts Receivable 6 (75)
Other Current Assets (39) 20
Accounts Payable (21) (122)
Other Current Liabilities (152) (86)
------------ ------------
Net Cash Provided by Operating Activities (1) -
------------ ------------
INVESTING ACTIVITIES
Property Additions (107) (190)
Short-Term Investments - Net (23) 32
Other Investing Activities 11 (14)
------------ ------------
Net Cash Used by Investing Activities (119) (172)
------------ ------------
FINANCING ACTIVITIES
Short-Term Debt - Net (81) 250
Long-Term Debt Issued - 79
Long-Term Debt Repaid (34) (32)
Cash Dividends Paid (66) (65)
Other Financing Activities (32) (11)
------------ ------------
Net Cash Provided (Used) by Financing Activities (213) 221
------------ ------------
Net Increase (Decrease) in Cash and Cash Equivalents (333) 49
CASH, CASH EQUIVALENTS AND SHORT-TERM
INVESTMENTS
Cash and Cash Equivalents at Beginning of Period 626 105
------------ ------------
Cash and Cash Equivalents at End of Period 293 154
Short-Term Investments at End of Period 373 396
------------ ------------
Cash, Cash Equivalents and Short-Term
Investments at End of Period $ 666 $ 550
============ ============
</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)
March 31, December 31,
2000 1999
------------ -----------
<S> <C> <C>
ASSETS
Current Assets
Cash, Cash Equivalents and Short-Term Investments $ 666 $ 974
Accounts Receivable 1,129 1,135
Materials and Supplies 263 220
Deferred Income Taxes 133 135
Other Current Assets 159 99
----------- -----------
Total Current Assets 2,350 2,563
Properties 17,514 17,526
Accumulated Depreciation (5,301) (5,269)
----------- -----------
Properties-Net 12,213 12,257
Investment in Conrail 4,668 4,663
Affiliates and Other Companies 466 410
Other Long-Term Assets 828 827
----------- -----------
Total Assets $ 20,525 $ 20,720
=========== ===========
LIABILITIES
Current Liabilities
Accounts Payable $ 1,176 $ 1,197
Labor and Fringe Benefits Payable 441 436
Casualty, Environmental and Other Reserves 267 271
Current Maturities of Long-Term Debt 351 349
Short-Term Debt 493 574
Other Current Liabilities 557 646
----------- -----------
Total Current Liabilities 3,285 3,473
Casualty, Environmental and Other Reserves 763 767
Long-Term Debt 6,160 6,196
Deferred Income Taxes 3,228 3,227
Other Long-Term Liabilities 1,382 1,301
----------- -----------
Total Liabilities 14,818 14,964
----------- -----------
SHAREHOLDERS' EQUITY
Common Stock, $1 Par Value 218 218
Other Capital 1,514 1,525
Retained Earnings 3,997 4,034
Accumulated Other Comprehensive Loss (22) (21)
----------- -----------
Total Shareholders' Equity 5,707 5,756
----------- -----------
Total Liabilities and Shareholders' Equity $ 20,525 $ 20,720
=========== ===========
</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 March 31,
2000 and December 31, 1999, the results of its operations and cash flows for the
quarters ended March 31, 2000 and April 2, 1999, such adjustments being of a
normal recurring nature. Certain prior-year data have been reclassified to
conform to the 2000 presentation.
While the company believes that the disclosures presented are adequate
to make the information not misleading, it is suggested that these financial
statements be read in conjunction with the financial statements and the notes
included in the company's latest Annual Report and Form 10-K.
CSX follows a 52/53 week fiscal reporting calendar. Fiscal year 2000
consists of 52 weeks ending on December 29, 2000. Fiscal year 1999 consisted of
53 weeks ended December 31, 1999. The financial statements presented are for the
13-week quarter ended March 31, 2000, the 14-week quarter ended April 2, 1999,
and as of December 31, 1999.
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.
(Sea-Land), 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.
The majority of the Sea-Land workforce that could incur second injuries
and become eligible for these disability benefits in future periods transferred
their employment to the purchaser of Sea-Land's international liner business in
December 1999 (see Note 5). The company retained the obligations for second
injury fund assessments for claimants receiving benefits prior to the sale. As a
result of these changes, future expense for second injury fund assessments
associated with the continuing workforce should be minimal, but the company
expects to make annual contributions to the fund for a number of years until the
retained obligations are extinguished.
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
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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
ended March 31, 2000 and April 2, 1999. Earnings per share, assuming dilution,
are based on the weighted average of common shares outstanding adjusted for the
effect of potential common shares outstanding that were dilutive during the
period, principally arising from employee stock plans. For the fiscal quarters
ended March 31, 2000 and April 2, 1999, potential common shares that were
dilutive totaled 0.8 and 1.5 million, respectively.
Certain potential common shares outstanding at March 31, 2000 and April
2, 1999 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 23.9 million at a weighted-average exercise
price of $41.89 per share at March 31, 2000 and 11.4 million with a
weighted-average exercise price of $50.29 per share at April 2, 1999.
NOTE 4. INVESTMENT IN AND INTEGRATED RAIL OPERATIONS WITH CONRAIL
Background
CSX and Norfolk Southern Corporation (Norfolk Southern) completed the
acquisition of Conrail Inc. (Conrail) in May 1997. Conrail owns the primary
freight railroad system serving the northeastern United States, and its rail
network extends into several midwestern states and into Canada. 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. CSX and
Norfolk Southern received regulatory approval from the Surface Transportation
Board (STB) to exercise joint control over Conrail in August 1998 and
subsequently began integrated operations over allocated portions of the Conrail
lines in June 1999.
The rail subsidiaries of CSX and Norfolk Southern operate their
respective portions of the Conrail system pursuant to various operating
agreements that took effect on June 1, 1999. 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.
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<PAGE>
CSX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited), Continued
(All Tables in Millions of Dollars, Except Per Share Amounts)
NOTE 4. INVESTMENT IN AND INTEGRATED RAIL OPERATIONS WITH CONRAIL, Continued
Conrail Financial Information
Summary financial information for Conrail for its fiscal periods ended
March 31, 2000 and 1999, and at December 31, 1999, is as follows:
<TABLE>
<CAPTION>
Quarters Ended
------------------------------
March 31, March 31,
2000 1999
----------- ---------------
<S> <C> <C>
Income Statement Information:
Revenues $ 259 $ 916
Income from Operations 60 146
Net Income 65 76
</TABLE>
<TABLE>
<CAPTION>
As Of
-------------------------------
March 31, December 31,
2000 1999
----------- ---------------
<S> <C> <C>
Balance Sheet Information:
Current Assets $ 705 $ 669
Property and Equipment and Other Assets 7,662 7,714
Total Assets 8,367 8,383
Current Liabilities 825 863
Long-Term Debt 1,287 1,302
Total Liabilities 4,483 4,564
Stockholders' Equity 3,884 3,819
</TABLE>
Comparisons of Conrail's operating results for the quarters ended March
31, 2000 and 1999 reflect the significant changes in its business that occurred
as a result of the integration with CSX and Norfolk Southern in June 1999.
Revenues and expenses for the 1999 quarter were derived principally from freight
linehaul operations over the entire Conrail network. Results for the 2000
quarter reflect Conrail's post-integration business, with revenues consisting
primarily of operating fees, equipment rents, and shared area usage fees derived
from CSX and Norfolk Southern, and expenses consisting of salaries and wages,
rents, depreciation, and other costs reflective of the new operations. Results
for the 2000 quarter also include a non-recurring gain of $61 million before
tax, $37 million after tax, on the sale of property. To reflect the fair value
write-up arising from the Conrail acquisition, CSX excluded approximately $16
million of the after-tax gain on this transaction in recording its equity in
Conrail's net income.
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<PAGE>
CSX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited), Continued
(All Tables in Millions of Dollars, Except Per Share Amounts)
NOTE 4. INVESTMENT IN AND INTEGRATED RAIL OPERATIONS WITH CONRAIL, Continued
CSX's Accounting for its Investment in and Integrated Rail Operations with
- --------------------------------------------------------------------------
Conrail
- -------
CSX and Norfolk Southern assumed substantially all of Conrail's customer
freight contracts at the June 1999 integration date. CSX's rail and intermodal
operating revenue since that date include 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. Rail
operating expenses after the integration also include an expense category,
"Conrail Operating Fee, Rent and Services," which reflects payment to Conrail
for the use of right-of-way and equipment, as well as charges for
transportation, switching, and terminal services in the shared areas Conrail
operates for the joint benefit of CSX and Norfolk Southern. This expense
category also includes amortization of the fair value write-up arising from the
acquisition of Conrail, as well as CSX's proportionate share of Conrail's net
income or loss recognized under the equity method of accounting. Prior to
integration, CSX recorded its share of Conrail's net income, less amortization
of the fair value write-up, and acquisition and transition expenses, in other
income (expense) in the Consolidated Statement of Earnings.
Transactions With Conrail
- -------------------------
The agreement under which CSX operates its allocated portion of the
Conrail route system has an initial term of 25 years and may be renewed at CSX's
option for two five-year terms. Operating fees paid to Conrail under the
agreement are subject to adjustment every six years based on the fair value of
the underlying system. Lease agreements for the Conrail equipment operated by
CSX cover varying terms. CSX is responsible for all costs of operating,
maintaining, and improving the routes and equipment under these agreements.
At March 31, 2000 and December 31, 1999, CSX had $26 million and $53
million, respectively, in amounts receivable from Conrail, principally for
reimbursement of certain capital improvement costs. Conrail advances its
available cash balances to CSX and Norfolk Southern under variable-rate demand
loan agreements. At March 31, 2000 and December 31, 1999, Conrail had advanced
$87 million and $93 million, respectively, to CSX under this arrangement at
interest rates of 6.3% and 5.6%, respectively. CSX also had amounts payable to
Conrail of $118 million and $105 million at March 31, 2000 and December 31,
1999, respectively, representing expenses incurred under the operating,
equipment, and shared area 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 5. SALE OF INTERNATIONAL CONTAINER-SHIPPING ASSETS
In December 1999, CSX sold certain assets comprising Sea-Land's
international liner business to A. P. Moller-Maersk Line (Maersk). The
international liner business operated approximately 75 container vessels and
200,000 containers in worldwide trades and comprised a majority of CSX's
container-shipping revenue. In addition to vessels and containers, Maersk
acquired certain terminal facilities and various other assets and related
liabilities of the international liner business. The agreement with Maersk
provides for a post-closing adjustment to the sales price based on the final
amount of working capital conveyed, and the loss includes estimates of costs to
terminate various contractual obligations of the company. These matters will
affect the final determination of the loss on sale. While the Company is in
discussions about these matters with Maersk, it is expected that the parties
ultimately will seek to resolve these issues through third-party arbitration.
Such arbitration is expected to be resolved before year-end. Management is not
yet in a position to assess fully the likely outcome of this process.
CSX retained the container-shipping business serving the U.S. domestic
trade and part of the company's international terminal operations and manages
them separately. Management reporting and performance measures for these
businesses have been developed for fiscal year 2000. The company revised its
disclosures under FASB Statement No. 131, "Disclosures about Segments of an
Enterprise and Related Information," in the first quarter of 2000 to report
these as separate business segments; however, it is not practicable to provide
comparative segment disclosures for the prior year.
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 March 31, 2000, 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 March 31, 2000 and December 31, 1999, 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. Losses recognized on
the sale of accounts receivable totaled $8 million for the quarters ended March
31, 2000 and April 2, 1999.
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.
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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. OPERATING EXPENSE
<TABLE>
<CAPTION>
Quarters Ended
--------------------------
March 31, April 2,
2000 1999
----------- ----------
<S> <C> <C>
Labor and Fringe Benefits $ 778 $ 827
Materials, Supplies and Other 476 621
Conrail Operating Fee, Rent & Services 95 -
Building and Equipment Rent 200 307
Inland Transportation 117 257
Depreciation 141 167
Fuel 160 86
----------- ----------
Total $ 1,967 $ 2,265
=========== ==========
</TABLE>
NOTE 8. OTHER INCOME (EXPENSE)
<TABLE>
<CAPTION>
Quarters Ended
------------------------
March 31, April 2,
2000 1999
----------- -----------
<S> <C> <C>
Interest Income $ 16 $ 14
Income (Loss) from Real Estate and Resort 1 (7)
Operations(1)
Net Losses from Accounts Receivable Sold (8) (8)
Minority Interest (8) (9)
Income (Loss) from Investment in Conrail - Net - (28)
Equity Earnings (Loss) of Other Affiliates (5) 7
Foreign Currency Gain 1 5
Miscellaneous (2) (9)
----------- -----------
Total $ (5) $ (35)
=========== ===========
</TABLE>
(1) Gross revenue from real estate and resort operations was $29 million and
$19 million for the quarters ended March 31, 2000 and April 2, 1999,
respectively.
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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. 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.
The new trial motion was denied by the trial court in August 1999. On
November 5, 1999, the trial court issued an opinion that granted CSXT's motion
for judgment notwithstanding the verdict and effectively reduced the amount of
the punitive damages verdict from $2.5 billion to $850 million. CSXT believes
that this amount (or any amount of punitive damages) is unwarranted and intends
to pursue its full appellate remedies with respect to the 1997 trial as well as
the trial judge's decision on the motion for judgment notwithstanding the
verdict. The compensatory damages awarded by the jury in the 1997 trial were
also substantially reduced by the trial judge. A judgment reflecting the $850
million punitive award has been entered against CSXT. CSXT has obtained and
posted an appeal bond in the amount of $895 million, which will allow it to
appeal the 1997 compensatory and punitive awards, as reduced by the trial judge.
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 totaling approximately $330 thousand 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 punitive damages award was
unwarranted.
CSXT continues to pursue an aggressive legal strategy. Management
believes that an adverse outcome, if any, is not likely to 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
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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. COMMITMENTS AND CONTINGENCIES, Continued
Self-Insurance, Continued
- -------------------------
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 104 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 241 sites, including the sites addressed under the
Federal Superfund statute or similar state statutes, where it is participating
in the study and/or clean-up of alleged environmental contamination. The
assessment of the required response and remedial costs associated with most
sites is extremely complex. Cost estimates are based on information available
for each site, financial viability of other PRPs, where available, and existing
technology, laws and regulations. CSXT's best estimates of the allocation method
and percentage of liability when other PRPs are involved are based on
assessments by consultants, agreements among PRPs, or determinations by the U.S.
Environmental Protection Agency or other regulatory agencies.
At least once each quarter, CSXT reviews its role, if any, with respect
to each such location, giving consideration to the nature of CSXT's alleged
connection to the location (e.g., generator, owner or operator), the extent of
CSXT's alleged connection (e.g., volume of waste sent to the location and other
relevant factors), the accuracy and strength of evidence connecting CSXT to the
location, and the number, connection and financial position of other named and
unnamed PRPs at the location. The ultimate liability for remediation can be
difficult to determine with certainty because of the number and creditworthiness
of PRPs involved. Through the assessment process, CSXT monitors the
creditworthiness of such PRPs in determining ultimate liability.
Based upon such reviews and updates of the sites with which it is
involved, CSXT has recorded, and reviews at least quarterly for adequacy,
reserves to cover estimated contingent future environmental costs with respect
to such sites. The recorded liabilities for estimated future environmental costs
at March 31, 2000, and December 31, 1999, were $49 million and $53 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 March 31,
2000 environmental liability is expected to be paid out over the next five to
seven years, funded by cash generated from operations.
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<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
- -------------------------
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 against 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 company's
consolidated financial position, results of operations or cash flows. The
company is also party to a number of actions, the resolution of which could
result in gain realization in amounts that could be material to results of
operations in the quarter received.
NOTE 10. BUSINESS SEGMENTS
The company operates in five business segments: Rail, Intermodal,
Domestic Container Shipping, International Terminals, and Contract Logistics.
The Rail segment provides rail freight transportation over a network of more
than 23,400 route miles in 23 states, 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 Domestic Container Shipping segment
consists of a fleet of 16 ocean vessels and 27,000 containers serving the trade
between ports on the United States mainland and Alaska, Guam, Hawaii and Puerto
Rico. The International Terminals segment operates container freight terminal
facilities at 12 locations in Hong Kong, China, Australia, Europe, and the
Dominican Republic. Prior to the sale of its international liner operations in
December 1999 (see Note 5), Marine Services (formerly known as the Container
Shipping segment) provided 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 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 viewed on a
combined basis as Surface Transportation operations and the Domestic Container
Shipping and International Terminals segments are viewed on a combined basis as
Marine Services 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
non-recurring charges and gains. The accounting policies of the segments are the
same as those described in the summary of significant accounting policies (Note
1), except that for segment reporting purposes, CSX includes minority interest
expense on the international terminals segment's joint venture businesses in
operating expense. These amounts are reclassified in CSX's consolidated
financial statements to
- 14 -
<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
other income (expense) to conform to the customary reporting presentation under
generally accepted accounting principles. Intersegment sales and transfers are
generally accounted for as if the sales or transfers were to third parties, that
is, at current market prices.
Business segment information for the quarters ended March 31, 2000 and
April 2, 1999 is as follows:
Quarter ended March 31, 2000:
- -----------------------------
<TABLE>
<CAPTION>
Marine Services*
---------------------------
Surface Transportation Domestic
---------------------- Container International Contract
Rail Intermodal Total Shipping Terminals Total Logistics Totals
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues from external customers $1,515 $283 $1,798 $162 $74 $236 $113 $2,147
Intersegment revenues - 5 5 - - - 13 18
Segment operating income(loss) 147 13 160 (1) 14 13 7 180
Assets 12,976 389 13,365 338 720 1,058 181 14,604
</TABLE>
Quarter ended April 2, 1999:
<TABLE>
<CAPTION>
Surface Transportation
---------------------- Marine Contract
Rail Intermodal Total Services* 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(loss) 266 7 273 (12) 9 270
Assets 11,982 205 12,187 2,344 149 14,680
</TABLE>
* In December 1999, CSX sold the assets comprising the international liner
business of Sea-Land. Operating revenue and expenses related to assets sold are
included in the Marine Services segment in 1999, distorting comparisons to 2000.
The company reports the retained businesses as separate segments starting in the
first quarter of 2000; however, it is not practicable to provide comparative
segment disclosures for the prior year.
- 15 -
<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
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>
March 31, April 2,
------------ ---------
2000 1999
----------- ---------
<S> <C> <C>
Revenues:
- --------
Total external revenues for business segments $ 2,147 $ 2,541
Intersegment revenues for business segments 18 18
Elimination of intersegment revenues (18) (18)
----------- ---------
Total consolidated revenues $ 2,147 $ 2,541
=========== =========
Operating Income:
- ----------------
Total operating income for business segments $ 180 $ 270
Reclassification of minority interest expense for
international terminals segment 8 9
Unallocated corporate expenses (8) (3)
----------- ---------
Total consolidated operating income $ 180 $ 276
=========== =========
Assets:
- ------
Assets for Business Segments $ 14,604 $ 14,680
Investment in Conrail 4,668 4,811
Elimination of Intercompany Receivables (289) (151)
Non-segment Assets 1,542 1,209
----------- ---------
$ 20,525 $ 20,549
=========== =========
</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 2000 consists of
52 weeks, and fiscal year 1999 consisted of 53 weeks. The quarter ended March
31, 2000 consisted of 13 weeks and the quarter ended April 2, 1999 consisted of
14 weeks.
First Quarter 2000 Compared with 1999
- -------------------------------------
CSX reported net earnings of $29 million, 14 cents per share, for the
quarter ended March 31, 2000. In the prior year, the company earned $75 million,
36 cents per share, excluding a one-time, non-cash after-tax charge of $49
million, 24 cents per share, to recognize the cumulative effect of adopting a
new accounting rule related to second-injury fund assessments at its
container-shipping unit. Including the cumulative effect of the accounting
change, earnings for the 1999 quarter were $26 million, 12 cents per share.
Several significant factors affect the comparability of CSX's first
quarter 2000 operating results with the prior year. First quarter 1999 preceded
the company's integration with Conrail and, accordingly, rail and intermodal
results for that period do not include revenues and expenses associated with
operations over CSX's allocated portion of the Conrail network. Additionally,
CSX sold its international container-shipping liner business and certain
container terminal facilities in December 1999. Operating results for first
quarter 1999 included substantial revenues and expenses from those operations.
Finally, as mentioned above, under the company's fiscal calendar, first quarter
1999 included an extra week compared to first quarter 2000.
Operating income for the first quarter of 2000 totaled $180 million,
compared with $276 million in the first quarter of 1999. Operating revenue of
$2.15 billion was 16% below the prior year quarter, while operating expense of
$1.97 billion was 13% lower. The reductions in revenue and expense compared to
1999 result primarily from the business changes created by the Conrail
integration and the international container-shipping sale and are discussed in
more detail in the following analysis of segment results.
Surface Transportation Results
- ------------------------------
Rail
Rail operating income for the first quarter of 2000 totaled $147
million, compared to $266 million in the prior year quarter. Operating revenue
totaled $1.52 billion, an increase of $218 million, or 17%, due to the Conrail
integration and relatively strong demand across most commodity groups. Operating
expense increased $337 million, or 33%, to $1.37 billion. As discussed below,
both revenues and expenses were adversely affected by significant congestion on
key parts of the CSX network.
- 17 -
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION, CONTINUED
RESULTS OF OPERATIONS, Continued
Surface Transportation Results, Continued
- -----------------------------------------
Rail, Continued
The following table provides rail carload and revenue data by service
group and commodity for the quarters ended March 31, 2000 and April 2, 1999:
<TABLE>
<CAPTION>
Carloads Revenue
(Thousands) (Millions of Dollars)
--------------------- ----------------------
March 31, April 2, March 31, April 2,
2000 1999 2000 1999
----------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Merchandise
Phosphates and Fertilizer 131 148 $ 92 $ 90
Metals 91 72 107 82
Food and Consumer Products 41 34 53 39
Paper and Forest Products 137 121 168 137
Agricultural Products 92 76 122 104
Chemicals 149 121 247 205
Minerals 101 101 95 92
Government 3 3 5 7
----------- --------- ----------- ---------
Total Merchandise 745 676 889 756
Automotive 158 119 227 154
Coal, Coke & Iron Ore
Coal 396 396 371 353
Coke 12 12 12 12
Iron Ore 8 7 7 7
----------- --------- ----------- ---------
Total Coal, Coke & Iron Ore 416 415 390 372
Other - - 9 15
----------- --------- ----------- ---------
Total Rail 1,319 1,210 $ 1,515 $ 1,297
=========== ========= =========== =========
</TABLE>
Overall freight revenue was significantly higher than the first quarter
of 1999 due to the Conrail integration, although the increase in coal revenue
was tempered by mild winter weather in the East and continuing weakness in
export coal shipments. Merchandise demand was strong, particularly in the
chemicals, metals, food and consumer products, and paper and forest products
commodity groups. Automotive revenue was up significantly, benefiting from the
Conrail integration, continued strength in U.S. vehicle production, and rate
increases on some auto shipments.
Since the integration of Conrail, CSX's rail unit has experienced
operating difficulties and diminished service performance, particularly in
high-volume corridors of its network and during periods of peak traffic demand.
Key performance statistics that track average train velocity, the number of
freight cars on the network, and dwell time for trains in terminals and
classification yards have not shown sustainable improvement. As a result, the
unit continued to experience lost revenues during the first quarter as customers
diverted traffic to trucks or other carriers. Operating expenses include
significant costs related to the
- 18 -
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION, CONTINUED
RESULTS OF OPERATIONS, Continued
Surface Transportation Results, Continued
- -----------------------------------------
Rail, Continued
congestion problems, including lease costs for higher numbers of locomotives and
freight cars on the system and incremental labor costs for train crews and yard
personnel. Significantly higher fuel prices and cost-of-living increases for
union employees under previously-negotiated contracts also had a substantial
effect on operating expenses for the quarter. The average price per gallon of
diesel fuel was 86 cents vs. 45 cents in the prior year quarter, accounting for
$66 million of the increase in rail operating expense. As discussed in a later
section of Management's Discussion and Analysis, CSX has various initiatives
underway to relieve congestion, improve operations, and reduce operating
expenses.
Intermodal
Intermodal operating income totaled $13 million for the first quarter of
2000, compared to $7 million in the prior year quarter. Revenue for the quarter
increased $119 million, or 70%, to $288 million. Operating expense increased
$113 million, or 70%, to $275 million. These increases reflect the Conrail
integration, as well as new business associated with a contract signed last year
with a major intermodal customer. International container traffic continued to
show strength during the quarter; however, significant domestic container
business was lost to trucks and other carriers due to service problems and price
competition.
Marine Services Results
- -----------------------
Following the sale of its international container-shipping liner
business in 1999, CSX has redefined the retained portions of its
container-shipping business to consist of a Domestic Container Shipping segment
and an International Terminals segment. These segments are being managed as
separate businesses, and operating results for the first quarter of 2000 are
presented separately for each segment. It is not practicable to provide results
for these segments for the comparable period of 1999. For reporting purposes,
these businesses are also viewed in the aggregate as Marine Services. Prior year
results for the Marine Services grouping include the two retained businesses and
the international liner business that was sold. The Domestic Container Shipping
unit operates 16 vessels and 27,000 containers along six service routes between
the continental United States and Alaska, Guam, Hawaii, and Puerto Rico. The
International Terminals unit operates container freight terminals at 12
locations in Hong Kong, China, Australia, Europe, Russia, and Latin America.
Revenue from Marine Services operations totaled $236 million for the
first quarter of 2000, vs. $973 million for the 1999 quarter. Operating expenses
totaled $223 million, compared to $985 million in the prior year. Operating
income for first quarter 2000 was $13 million, compared to a loss of $12 million
in 1999. The significant declines in revenue and expense reflect the
international liner sale. That transaction also accounted for the significant
improvement in operating income as the international business operated at a loss
in the prior year under substantial rate pressure and seasonal traffic weakness.
Prior year results for the Marine Services grouping reflect certain
reclassifications to conform with the presentation for fiscal year 2000.
Domestic Container Shipping
The domestic container shipping unit reported an operating loss of $1
million for the first quarter of fiscal 2000 on operating revenue of $162
million. The unit's domestic ocean trades are stable environments,
- 19 -
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION, CONTINUED
RESULTS OF OPERATIONS, Continued
Marine Services Results, Continued
- ----------------------------------
Domestic Container Shipping, Continued
with business growth rates reflective of growth rates of the U.S. economy. The
first quarter is typically seasonally weak, with subsequent quarters steadily
growing stronger. First quarter results were moderately favorable to
expectations, despite the fact that operating expenses were adversely affected
by higher fuel prices.
International Terminals
The international terminals unit reported operating income of $14
million for the first quarter on operating revenue of $74 million. The business
enjoys a strong market position in the growing global container market and
benefited in particular from strong container traffic through its Hong Kong
terminal locations.
Contract Logistics Results
- --------------------------
The contract logistics unit reported operating income of $7 million for
the first quarter of 2000, compared to $9 million for the prior year quarter.
Operating revenue increased slightly, from $120 million to $126 million, while
operating expenses increased from $111 million to $119 million. First quarter
results were affected by higher fuel costs and expenses associated with the
start-up of several new customer contracts.
FINANCIAL CONDITION
Cash, cash equivalents and short-term investments totaled $666 million
at March 31, 2000, a decrease of $308 million since December 31, 1999. The
balance at the end of fiscal 1999 was significantly higher than normal,
reflecting planned levels to ensure liquidity over year-end in light of the Year
2000 date change and the fact that the company had not fully utilized the
proceeds from the sale of its international container-shipping business to
reduce short-term debt.
Primary sources of cash and cash equivalents during the first quarter of
2000 were normal transportation operations and a non-recurring dividend received
on the company's investment in a railcar leasing venture. Operations used $1
million of cash during the quarter, reflecting customary seasonal weakness and
the decline in operating income. The railcar venture dividend totaled $49
million. Approximately half of the dividend related to CSX's direct interest in
the venture and was reported as cash provided by other investing activities. The
remaining half of the dividend related to CSX's allocated interest within
Conrail; that amount was received by Conrail and transferred to CSX through the
related party advance arrangement described in the Notes to the Consolidated
Financial Statements. That portion appears in the Consolidated Statement of Cash
Flows as a reduction of net repayments of short-term debt. Primary uses of cash
and cash equivalents during the quarter were property additions, repayments of
short-term and long-term debt, and the payment of dividends on the company's
outstanding common stock.
CSX's working capital deficit at March 31, 2000 was $935 million,
roughly level with the deficit at December 31, 1999. The working capital deficit
at both dates included approximately $350 million in current maturities of
long-term debt, approximately $250 million of which are scheduled for the third
quarter. A working capital deficit is not unusual for the company and does not
indicate a lack of liquidity. The company
- 20 -
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION, CONTINUED
FINANCIAL CONDITION, Continued
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.
Under its normal equipment financing programs, the company's rail unit
expects to close approximately $200 million in long-term financing on
locomotives and railcars in the second and third quarters of 2000. CSX also has
$400 million of remaining capacity under a shelf registration that may be used
to issue debt or other securities at the company's discretion.
FINANCIAL DATA
(Millions of Dollars)
-----------------------------
March 31, December 31,
2000 1999
-------------- ---------------
Cash, Cash Equivalents and
Short-Term Investments $ 666 $ 974
Commercial Paper Outstanding -
Short-Term $ 493 $ 574
Commercial Paper Outstanding -
Long-Term $ 800 $ 800
Working Capital (Deficit) $ (935) $ (910)
Current Ratio .7 .7
Debt Ratio 55 % 53 %
Ratio of Earnings to Fixed Charges 1.2 x 1.1 x
OUTLOOK
With the sale of its international container-shipping liner business in
the fourth quarter of 1999, CSX's strategic emphasis is overwhelmingly oriented
toward its core rail and intermodal businesses. Financial performance during the
second quarter and the balance of fiscal 2000 will be largely dependent on the
company's success in achieving operational improvements that restore fluidity on
the rail network, improve customer service, eliminate substantial excess costs,
and allow the realization of planned merger synergies. Management expects to
make steady progress toward these goals as the year progresses.
Entering the second quarter of 2000, merchandise and automotive traffic
remain strong, and coal traffic is showing some signs of strengthening. On the
other hand, domestic intermodal traffic continues to reflect weakness
attributable to service issues and pricing competition. The company expects to
implement price increases on rail and intermodal shipments where appropriate and
competitively feasible, particularly where traffic demand is creating capacity
constraints on the system. Fuel prices have moderated over the past month, but
are expected to remain at levels significantly higher than the prior year.
The domestic container shipping business should move into positive
earnings territory in the second quarter as seasonal traffic demand picks up and
the U.S. economy remains strong. The international terminals business is
expected to report steady or improved earnings as container volumes remain
strong in Hong Kong and other key terminal locations. The contract logistics
unit continues to benefit from a growing market for
- 21 -
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION, CONTINUED
OUTLOOK, Continued
third party logistics services and should see earnings improve as certain new
contract start-up expenses incurred in the first quarter begin to wind down.
INVESTMENT IN AND INTEGRATED RAIL OPERATIONS WITH CONRAIL
Background
- ----------
CSX and Norfolk Southern Corporation (Norfolk Southern) completed the
acquisition of Conrail Inc. (Conrail) in May 1997. Conrail owns the primary
freight railroad system serving the northeastern United States, and its rail
network extends into several midwestern states and into Canada. 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. CSX and
Norfolk Southern received regulatory approval from the Surface Transportation
Board (STB) to exercise joint control over Conrail in August 1998 and
subsequently began integrated operations over allocated portions of the Conrail
lines in June 1999.
The rail subsidiaries of CSX and Norfolk Southern operate their
respective portions of the Conrail system pursuant to various operating
agreements that took effect on June 1, 1999. 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.
Accounting and Financial Reporting Effects
- ------------------------------------------
CSX and Norfolk Southern assumed substantially all of Conrail's customer
freight contracts at the June 1999 integration date. CSX's rail and intermodal
operating revenue since that date include 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. Rail
operating expenses after the integration also include an expense category,
"Conrail Operating Fee, Rent and Services," which reflects payment to Conrail
for the use of right-of-way and equipment, as well as charges for
transportation, switching, and terminal services in the shared areas Conrail
operates for the joint benefit of CSX and Norfolk Southern. This expense
category also includes amortization of the fair value write-up arising from the
acquisition of Conrail, as well as CSX's proportionate share of Conrail's net
income or loss recognized under the equity method of accounting. Prior to
integration, CSX recorded its share of Conrail's net income, less amortization
of the fair value write-up, and acquisition and transition expenses, in other
income (expense) in the Consolidated Statement of Earnings.
Operating and Financial Effects
- -------------------------------
The integration of Conrail in June 1999 initially resulted in congestion
and traffic delays on parts of the new CSX network and on the shared areas
operated by Conrail. Although substantial progress was made during the summer of
1999 in stabilizing post-integration operations and restoring service levels,
these improvements have not been sustained across the CSX system. Network
disruptions created by Hurricane Floyd in September 1999, followed by heavy
seasonal traffic build-up in the fourth quarter, adversely affected rail and
intermodal operating and service recovery efforts. As peak traffic levels
subsided and the company implemented network simplification plans throughout the
system, congestion problems eased and service levels improved in key areas.
During the first quarter of 2000, overall operations on the northern portion of
- 22 -
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION, CONTINUED
INVESTMENT IN AND INTEGRATED RAIL OPERATIONS WITH CONRAIL, Continued
Operating and Financial Effects, Continued
- ------------------------------------------
the CSX system (generally the lines allocated to CSX in the Conrail acquisition)
improved; however, operations in the south deteriorated. From a systemwide
perspective, key performance statistics that track average train velocity, the
number of freight cars on the network, and dwell time for trains in terminals
and classification yards did not show sustainable improvement during the
quarter. As a result, the company continued to experience lost rail and
intermodal revenue opportunities, significant incremental operating costs, and
delays in realizing merger synergies.
In April 2000, CSX announced a number of key management changes at its
rail unit aimed at accelerating the pace of operational and service recovery.
The company has a number of initiatives underway to achieve this goal. Although
progress is expected to be gradual, management expects steady improvement over
the coming quarters will result in improved network fluidity across the system
in adequate time to meet peak traffic demand in the fall. In conjunction with
the operational and service improvement initiatives, efforts are being focused
on reducing operating costs and realizing planned merger synergies that will
deliver significant improvements in earnings and cash flow. The company is also
closely reviewing its pricing policies and implementing rate increases where
competitively appropriate.
Management believes that steady improvement across the rail network will
be achieved, leading to increased customer satisfaction, the return of business
which had been diverted to other modes of transportation, and improved financial
performance. However, there can be no assurance that these objectives will be
met, or met within a specified time frame.
Conrail's Results of Operations
- -------------------------------
Comparisons of Conrail's operating results for the quarters ended March
31, 2000 and 1999 reflect the significant changes in its business that occurred
as a result of the integration with CSX and Norfolk Southern in 1999. Revenues
and expenses for the 1999 quarter were derived principally from freight linehaul
operations over the entire Conrail network. Results for the 2000 quarter reflect
Conrail's post-integration business, with revenues consisting primarily of
operating fees, equipment rents, and shared area usage fees derived from CSX and
Norfolk Southern, and expenses consisting of salaries and wages, rents,
depreciation, and other costs reflective of the new operations. Conrail reported
net income of $65 million on revenues of $259 million for the first quarter of
2000, compared to net income of $76 million on revenues of $916 million for the
prior year quarter. Results for the first quarter of 2000 benefited from a
non-recurring gain on the sale of property of $61 million, $37 million
after-tax.
Conrail's operating activities required a net use of cash of $112
million in the first quarter of 2000, compared with net cash provided by
operations of $170 million in the first quarter of 1999. The net use of cash in
the first quarter of 2000 resulted primarily from significant payments of
one-time items owed to CSX and Norfolk Southern. The decline in cash provided by
operations also reflected lower operating income resulting from Conrail's
post-integration structure and operations.
Conrail's working capital deficit was $120 million at March 31, 2000,
compared with $194 million at December 31, 1999. The working capital deficit at
both dates includes slightly more than $300 million in long-term debt
maturities, the majority of which will be paid in the second quarter and is
expected to require CSX
- 23 -
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION, CONTINUED
INVESTMENT IN AND INTEGRATED RAIL OPERATIONS WITH CONRAIL, Continued
Conrail's Results of Operations, Continued
- ------------------------------------------
and Norfolk Southern to repay some of their borrowings from Conrail under the
related party advance arrangements. Conrail expects to have sufficient cash flow
to meet its ongoing obligations.
SALE OF INTERNATIONAL CONTAINER-SHIPPING ASSETS
In December 1999, CSX sold certain assets comprising Sea-Land's
international liner business to A. P. Moller-Maersk Line (Maersk). The
international liner business operated approximately 75 container vessels and
200,000 containers in worldwide trades and comprised a majority of CSX's
container-shipping revenue. In addition to vessels and containers, Maersk
acquired certain terminal facilities and various other assets and related
liabilities of the international liner business. The agreement with Maersk
provides for a post-closing adjustment to the sales price based on the final
amount of working capital conveyed, and the loss includes estimates of costs to
terminate various contractual obligations of the company. These matters will
affect the final determination of the loss on sale. While the Company is in
discussions about these matters with Maersk, it is expected that the parties
ultimately will seek to resolve these issues through third-party arbitration.
Such arbitration is expected to be resolved before year-end. Management is not
yet in a position to assess fully the likely outcome of this process.
CSX retained the container-shipping business serving the U.S. domestic
trade and part of the company's international terminal operations and manages
them separately. Management reporting and performance measures for these
businesses have been developed for fiscal year 2000. The company revised its
disclosures under FASB Statement No. 131, "Disclosures about Segments of an
Enterprise and Related Information," in the first quarter of 2000 to report
these as separate business segments; however, it is not practicable to provide
comparative segment disclosures for the prior year.
OTHER MATTERS
Federal Railroad Administration Track Audit
- -------------------------------------------
In March 2000, the Federal Railroad Administration (FRA) released a
draft report of the results of a two-week audit of track conditions on CSX's
rail system. The audit, which began on February 22, identified track defects on
certain portions of the system, the nature of which led the FRA to question the
effectiveness of the quality control procedures in CSX's track maintenance and
inspection programs. CSX responded to the findings immediately by making
necessary track repairs and by restricting train speeds on certain portions of
track until repairs could be completed.
As a result of the audit, CSX and the FRA entered into a Safety
Compliance Agreement in April 2000 that includes measures to improve the
railroad's track inspection and maintenance processes. Under the agreement,
which is effective though May 1, 2001, CSX will increase the frequency of
automated track inspections, enhance management oversight of track inspection
and large scale maintenance operations, and implement a new track inspection
procedures manual developed in a joint effort with the FRA and Brotherhood of
Maintenance of Way Employees.
CSX estimates that it will incur approximately $20 million to $30
million in additional costs over the remainder of fiscal year 2000 to address
the issues raised in the audit and the commitments made in the Safety
- 24 -
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION, CONTINUED
OTHER MATTERS, Continued
Federal Railroad Administration Track Audit, Continued
- ------------------------------------------------------
Compliance Agreement. The company is in the process of refining those cost
estimates and expects that a portion will represent operating expenses for
fiscal 2000 and a portion will consist of capital expenditures to be depreciated
over the useful life of the related track improvements.
Surface Transportation Board Moratorium on Rail Merger Applications
- -------------------------------------------------------------------
In March 2000, the Surface Transportation Board (STB) issued a decision
establishing a moratorium on rail merger applications for a 15-month time
period. The moratorium precluded the anticipated filing of an application by the
Burlington Northern Santa Fe (BNSF) and Canadian National (CN) railroads to
combine their respective systems. The moratorium is intended to address the
potential downstream effects that a rail merger might have on the railroad
industry at the present time, given the lingering difficulties and service
issues attributable to recent rail mergers. In the STB's public hearings on the
matter, particular concern was expressed that a combination by BNSF and CN might
precipitate further merger activity among other Class I railroads at an unstable
time in the industry. The STB's decision had the support of CSX and other major
railroads, as well as many shippers and other constituents of the rail industry.
BNSF and CN are currently challenging the STB decision in the federal courts.
Federal Court Decision Affecting Coal Mining Operations
- -------------------------------------------------------
In October 1999, a federal district court judge ruled that certain
mountaintop coal mining practices in West Virginia were in violation of the
federal Clean Water Act and the federal Surface Mining and Control Reclamation
Act. The decision, which is currently under appeal, could adversely affect CSX's
coal traffic and revenues if upheld.
Litigation
- ----------
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.
- 25 -
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION, CONTINUED
OTHER MATTERS, Continued
Litigation, Continued
- ---------------------
The new trial motion was denied by the trial court in August 1999. On
November 5, 1999, the trial court issued an opinion that granted CSXT's motion
for judgment notwithstanding the verdict and effectively reduced the amount of
the punitive damages verdict from $2.5 billion to $850 million. CSXT believes
that this amount (or any amount of punitive damages) is unwarranted and intends
to pursue its full appellate remedies with respect to the 1997 trial as well as
the trial judge's decision on the motion for judgment notwithstanding the
verdict. The compensatory damages awarded by the jury in the 1997 trial were
also substantially reduced by the trial judge. A judgment reflecting the $850
million punitive award has been entered against CSXT. CSXT has obtained and
posted an appeal bond in the amount of $895 million, which will allow it to
appeal the 1997 compensatory and punitive awards, as reduced by the trial judge.
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 totaling approximately $330 thousand 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 punitive damages award was
unwarranted.
CSXT continues to pursue an aggressive legal strategy. Management
believes that an adverse outcome, if any, is not likely to 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.
--------------------------------------------------
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
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) costs and operating difficulties related to the
integration of Conrail may not be eliminated or resolved within the time frame
currently anticipated; (ii) revenue and cost synergies expected from the
integration of Conrail may not be fully realized or realized within the
timeframe anticipated; (iii) 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; (iv) legislative or regulatory changes,
including possible enactment of initiatives to reregulate the rail industry, may
adversely affect the businesses of the company; (v) possible additional
consolidation of the rail industry in the near future may adversely affect the
operations and business of the company; and (vi) changes may occur in the
securities and capital markets.
- 26 -
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
1. (27) Financial Data Schedule
(b) Reports on Form 8-K
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 12, 2000
- 27 -
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