SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) Quarterly report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended March 31, 1997
--------------
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 1-12184
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CONRAIL INC.
------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2728514
- ------------------------------------ ------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2001 Market Street, Philadelphia, Pennsylvania 19101
- ----------------------------------------------------------------------
(Address of principal executive offices)
(Zip Code)
(215) 209-4000
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(Registrant's telephone number, including area code)
- ----------------------------------------------------------------------
(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 the latest practicable date.
Number of shares of common stock outstanding (as of April 30, 1997)
83,344,079
CONRAIL INC.
INDEX
Page Number
-----------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Statements
of Income - Quarters ended
March 31, 1997 and 1996 3
Condensed Consolidated Balance
Sheets - March 31, 1997 and
December 31, 1996 4
Condensed Consolidated Statements
of Cash Flows - Quarters ended
March 31, 1997 and 1996 5
Notes to Condensed Consolidated
Financial Statements 6
Report of Independent Accountants 8
Item 2. Management's Discussion and
Analysis of Financial Condition
and Results of Operations 9
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 13
SIGNATURES 14
- 2 -
<PAGE>
PART I. FINANCIAL INFORMATION
CONRAIL INC.
Item 1. Financial Statements.
--------------------
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
($ In Millions Except Per Share Data)
Quarters ended
March 31,
-------------------
1997 1996
---- ----
Revenues $906 $889
---- ----
Operating expenses
Way and structures 124 140
Equipment 202 219
Transportation 354 362
General and administrative 110 99
---- ----
Total operating expenses 790 820
---- ----
Income from operations 116 69
Interest expense (45) (47)
Other income, net 27 28
---- ----
Income before income taxes 98 50
Income taxes 37 19
---- ----
Net income $ 61 $ 31
==== ====
Net income per common share
Primary $ .74 $ .36
Fully diluted .70 .35
Dividends per common share $.475 $.425
Weighted average number of shares used in
computing earnings per share (thousands)
Primary 80,025 78,002
Fully diluted 86,842 87,759
Ratio of earnings to fixed charges 2.52x 1.75x
See accompanying notes.
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<PAGE>
CONRAIL INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
($ In Millions) March 31, December 31,
1997 1996
--------- ------------
ASSETS
Current assets
Cash and cash equivalents $ 32 $ 30
Accounts receivable 662 630
Deferred tax assets 293 293
Material and supplies 141 139
Other current assets 34 25
------ ------
Total current assets 1,162 1,117
Property and equipment, net 6,599 6,590
Other assets 709 695
------ ------
Total assets $8,470 $8,402
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Short-term borrowings 65 99
Current maturities of long-term debt 82 130
Accounts payable 148 135
Wages and employee benefits 167 143
Casualty reserves 140 141
Accrued and other current liabilities 476 444
------ ------
Total current liabilities 1,078 1,092
Long-term debt 1,889 1,876
Casualty reserves 195 190
Deferred income taxes 1,520 1,478
Special income tax obligation 330 346
Other liabilities 306 313
------ ------
Total liabilities 5,318 5,295
------ ------
Stockholders' equity
Series A ESOP convertible junior
preferred stock 183 211
Unearned ESOP compensation (221) (222)
Common stock 89 88
Additional paid-in capital 2,430 2,404
Employee benefits trust (357) (384)
Retained earnings 1,376 1,357
------ ------
3,500 3,454
Treasury stock (348) (347)
------ ------
Total stockholders' equity 3,152 3,107
------ ------
Total liabilities and
stockholders' equity $8,470 $8,402
====== ======
See accompanying notes.
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<PAGE>
CONRAIL INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
($ In Millions)
Quarters ended
March 31,
------------------
1997 1996
----- ----
Cash flows from operating activities $170 $ 121
---- -----
Cash flows from investing activities
Property and equipment acquisitions (41) (18)
Other (4) (16)
---- -----
Net cash used in investing activities (45) (34)
---- -----
Cash flows from financing activities
Net proceeds from (repayment of)
short-term borrowings (34) 45
Payment of long-term debt (63) (97)
Repurchase of common stock - (41)
Dividends paid on common stock (40) (35)
Dividends paid on preferred stock (3) (10)
Other 17 5
---- -----
Net cash used in financing activities (123) (133)
---- -----
Increase (decrease) in cash and cash equivalents 2 (46)
Cash and cash equivalents
Beginning of period 30 73
---- -----
End of period $ 32 $ 27
==== =====
See accompanying notes.
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<PAGE>
CONRAIL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. The unaudited financial statements contained herein present
the consolidated financial position of Conrail Inc. (the
"Company") as of March 31, 1997 and December 31, 1996, and the
consolidated results of operations and cash flows for the three-
month periods ended March 31, 1997 and 1996. In the opinion of
management, these financial statements include all adjustments,
consisting of normal recurring adjustments, necessary to present
fairly the results for the interim periods included.
The rules and regulations of the Securities and Exchange
Commission permit certain information and footnote disclosures,
ordinarily required by generally accepted accounting principles,
to be condensed or omitted from interim financial reports.
Accordingly, the financial statements included herein should be
read in conjunction with the audited financial statements and
notes for the year ended December 31, 1996, presented in the
Company's Annual Report on Form 10-K.
2. In January 1997, Consolidated Rail Corporation ("CRC") assumed
$31 million of Equipment Trust Certificates, at an interest rate of
8.31%, due 2012, to finance the lease buyout of 20 locomotives from
Locomotive Management Services, a general partnership of which CRC
holds a fifty percent interest.
3. Effective April 1, 1997, the Company's Board of Directors
authorized the vesting of all stock options and performance shares
outstanding in connection with the proposed acquisition of the
Company by CSX Corporation and Norfolk Southern Corporation. The
vesting of the performance shares will result in an $18 million
charge to operating expenses in April 1997, while the vesting of
stock options will not have an income statement effect.
4. During February 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 128,
"Earnings per Share" (SFAS 128), which establishes new standards
for computing and presenting earnings per share ("EPS"). SFAS 128
replaces the presentation of primary EPS with a presentation of
basic EPS. It also requires dual presentation of basic and
diluted EPS on the face of the income statement for all entities
with a complex capital structure. This Statement is effective for
financial statements issued for periods ending after December 15,
1997, with earlier application not permitted. The EPS included in
the Company's financial statements is computed in accordance with
APB Opinion No. 15, "Earnings per Share". However, had the
Company adopted the provisions of SFAS 128 in the first quarter of
1997, basic EPS and diluted EPS would be approximately the same as
the current computations of primary EPS and fully diluted EPS,
respectively, included in the Company's financial statements.
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<PAGE>
5. Information regarding contingent liabilities and litigation
was included in Note 13 to Consolidated Financial Statements and
Part I, Item 3 - Legal Proceedings in the Company's Annual Report
on Form 10-K for the year ended December 31, 1996. There have
been no material developments with respect to these matters during
the first three months of 1997, except as disclosed in the Annual
Report on Form 10-K or elsewhere herein.
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<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
The Stockholders and Board of Directors of
Conrail Inc.
We have reviewed the accompanying condensed consolidated balance
sheet of Conrail Inc. and its subsidiaries (the "Company") as of
March 31, 1997 and the related condensed consolidated statements of
income and cash flows for the three months ended March 31, 1997 and
March 31, 1996. This financial information is the responsibility of
the Company's management.
We conducted our review in accordance with standards established by
the American Institute of Certified Public Accountants. A review of
interim financial information consists principally of applying
analytical procedures to financial data and making inquiries of
persons responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which
is the expression of an opinion regarding the financial statements
taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications
that should be made to the accompanying interim financial informa
tion for it to be in conformity with generally accepted accounting
principles.
We previously audited in accordance with generally accepted auditing
standards, the consolidated balance sheet as of December 31, 1996,
and the related consolidated statements of income, of stockholders'
equity and of cash flows for the year then ended (not presented
herein), and in our report dated January 21, 1997, except as to Note
2 to the consolidated financial statements, which is as of March 7,
1997, we expressed an unqualified opinion on those consolidated
financial statements. In our opinion, the information set forth in
the accompanying condensed consolidated balance sheet as of
December 31, 1996, is fairly stated in all material respects in
relation to the consolidated balance sheet from which it has been
derived.
PRICE WATERHOUSE LLP
Thirty South Seventeenth Street
Philadelphia, PA 19103
April 16, 1997
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<PAGE>
CONRAIL INC.
Item 2. Management's Discussion and Analysis of Financial
-------------------------------------------------
Condition and Results of Operations.
-----------------------------------
Results of Operations
---------------------
Overview
--------
Net income for Conrail Inc. ("Conrail" or "the Company") for the
first quarter of 1997 was $61 million ($.74 per share, primary and
$.70 per share, fully diluted basis) compared with net income of
$31 million ($.36 per share, primary and $.35 per share, fully
diluted basis) for the first quarter of 1996. Included in net
income for the first quarter of 1997 were merger-related costs of
$14 million (net of $8 million of tax benefits). Without these
costs, net income would have been $75 million ($.91 and $.86 per
share, primary and fully diluted, respectively).
Traffic volume and revenues for the first quarter of 1997
increased 4.9% and 1.9%, respectively, as compared with the
first quarter of 1996. Operating expenses, excluding merger-
related costs of $22 million, decreased $52 million, or 6.3%,
for the first three months of 1997 as compared with the
comparable period for 1996. The Company's operating expenses for
the first quarter of 1996 were unfavorably affected by difficult
operating conditions caused by severe weather experienced over
most of the Company's service area. The increase in revenues
and decrease in operating expenses resulted in an operating
ratio (operating expenses as a percent of revenues) of 87.2%
(84.7% excluding merger-related costs) for the first quarter of
1997 as compared with 92.3% for the first quarter of 1996.
Proposed Merger
---------------
On April 8, 1997, Conrail and CSX Corporation ("CSX") entered
into the Fourth Amendment (the "Fourth Amendment") to the Merger
Agreement (as amended through the Fourth Amendment, the "Merger
Agreement") which facilitated CSX and Norfolk Southern
Corporation ("NSC") entering into an agreement with respect to
their joint acquisition of the Company as contemplated by the
Third Amendment to the Merger Agreement, dated as of March 7,
1997. The terms of the CSX-NSC Agreement are embodied in a
letter agreement dated as of April 8, 1997 (the "CSX/NSC Letter
Agreement").
The CSX/NSC Letter Agreement provides, among other things, (i)
for the termination of the NSC's outstanding offer to purchase
Conrail shares and the dismissal of litigation between CSX and
NSC, (ii) that the Company will, after the effective time of its
merger into a wholly-owned subsidiary of CSX, become a direct or
indirect jointly-owned subsidiary of CSX and NSC, (iii) that CSX
and NSC will jointly acquire, for $115 in cash, all Conrail
shares not already owned by CSX and NSC through a tender offer
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<PAGE>
scheduled to close on May 23, 1997 and subsequent merger, and
(iv) that the Company is expected to continue to be managed by
its existing Board of Directors until the requisite approval of
the Surface Transportation Board is obtained, at which time CSX
and NSC will be separately allocated certain of the Company's
railroad assets and will jointly operate certain other railroad
operations of the Company.
The Fourth Amendment also provides that, following April 8,
1997, the Company's Board of Directors will not declare, and the
Company will not pay, any dividend on the Company's capital
stock with a record date on or prior to May 30, 1997.
In light of the pending acquisition of Conrail by CSX and NSC,
Standard & Poor's rating agency has downgraded Consolidated Rail
Corporation's ("CRC") long-term unsecured debt to BBB and its
secured equipment trust certificates to A, while affirming CRC's
A1 commercial paper rating. Moody's Investors Service has rated
CRC's long-term unsecured debt as Baa2, its secured equipment
trust certificates as A1 and its commercial paper as P-2.
First Quarter 1997 compared with First Quarter 1996
---------------------------------------------------
Net income for the first quarter of 1997 was $61 million as
compared with net income for the first quarter of 1996 of $31
million.
Operating revenues (primarily freight and line-haul revenues,
but also including switching, demurrage and incidental revenues)
increased $17 million, or 1.9%, from $889 million in the first
quarter of 1996 to $906 million in the first quarter of 1997. A
4.9% increase in traffic volume in units (freight cars and
intermodal trailers and containers) resulted in a $41 million
increase in revenues. However, a decline in average revenue per
unit decreased revenues by $22 million for the quarter, due to
decreases in average rates, $14 million, and an unfavorable
traffic mix, $8 million.
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<PAGE>
Operating expenses decreased $30 million, or 3.7%, from $820
million in the first quarter of 1996 to $790 million in the
first quarter of 1997. The following table sets forth the
operating expenses for the two periods:
First Quarter
-------------
Increase
($ In Millions) 1997 1996 (Decrease)
---- ---- ----------
Compensation and benefits $313 $344 $(31)
Fuel 57 50 7
Material and supplies 49 60 (11)
Equipment rents 92 98 (6)
Depreciation and amortization 73 71 2
Casualties and insurance 39 48 (9)
Other 167 149 18
---- ---- -----
$790 $820 $(30)
==== ==== =====
Compensation and benefits decreased $31 million, or 9.0%,
primarily as a result of reductions in employment levels and
other employee-related costs, as well as lower accruals for wage
increases and less weather-related overtime costs occurring
during the first quarter of 1997 as compared with the same
period of 1996. Compensation and benefits as a percent of
revenues was 34.6% in the first quarter of 1997 as compared with
38.7% in the first quarter of 1996.
Fuel costs increased $7 million, or 14.0%, as a result of higher
average fuel prices during the first quarter of 1997 as compared
with the same quarter of 1996. Fuel prices are expected to
decline during the remainder of 1997.
The decline in material and supplies costs of $11 million, or
18.3%, was mostly attributable to a higher level of expenditures
for repairs and maintenance of locomotives and freight cars in
the first quarter of 1996 due to adverse weather conditions and
an increase in the allocation of material used in capital vs.
maintenance projects in the first quarter of 1997.
Casualties and insurance costs decreased $9 million, or 18.8%,
primarily due to reductions in employee injuries and loss and
damage claims.
Other expenses increased $18 million, or 12.1%, primarily as a
result of merger-related costs of $22 million incurred in
connection with the proposed acquisition of the Company by CSX
and NSC.
The Company's operating ratio was 87.2% for the first quarter of
1997 compared with 92.3% for the first quarter of 1996.
Excluding the merger-related costs, the operating ratio for the
first quarter of 1997 would have been 84.7%.
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<PAGE>
Liquidity and Capital Resources
-------------------------------
The Company's cash and cash equivalents increased $2 million in
the first quarter of 1997, from $30 million at December 31, 1996
to $32 million at March 31, 1997. Cash generated from
operations, primarily from its wholly-owned subsidiary,
CRC, and borrowings have been the Company's principal sources of
liquidity and are used primarily for capital expenditures, debt
service and dividends. In the first quarter of 1997, operating
activities provided cash of $170 million.
The principal uses of cash during the quarter were for: property
and equipment acquisitions, $41 million; payment of long-term
debt, $63 million; and cash dividends on common and preferred
stock, $43 million.
Working capital (current assets less current liabilities) of $84
million existed at March 31, 1997 as compared with $25 million
at December 31, 1996.
During the first quarter of 1997, CRC issued $45 million of
commercial paper and repaid $79 million. At March 31, 1997,
$165 million of commercial paper remained outstanding, of
which $100 million is classified as long-term debt since it
is expected to be refinanced through subsequent issuances of
commercial paper and is supported by a long-term credit facility.
In January 1997, CRC assumed $31 million of Equipment Trust
Certificates, at an interest rate of 8.31%, due 2012, to finance
the lease buyout of 20 locomotives from Locomotive Management
Services, a general partnership of which CRC holds a fifty percent
interest.
Other Matters
-------------
Except for the historical information contained herein, the matters
discussed in this report are forward-looking statements that
involve risks and uncertainties that may cause actual results to
differ, including but not limited to the effect of economic
conditions, competition, regulation and weather on Conrail's
operations, customers, service and prices, and other factors
discussed elsewhere in this report and, from time to time, in other
reports filed with the Securities and Exchange Commission.
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<PAGE>
PART II. OTHER INFORMATION
CONRAIL INC.
Item 6. Exhibits and Reports on Form 8-K.
--------------------------------
(a) Exhibits
11 Statement of earnings per share
computations.
12 Computations of the ratio of
earnings to fixed charges.
15 Letter re unaudited interim
financial information from Price Waterhouse
LLP.
27 Financial data schedule.
(b) Reports on Form 8-K
None
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<PAGE>
SIGNATURES
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.
CONRAIL INC.
Registrant
/s/ Timothy T. O'Toole
-----------------------
Timothy T. O'Toole
Senior Vice President - Law
/s/ John A. McKelvey
-----------------------
John A. McKelvey
Senior Vice President - Finance
(Principal Financial Officer)
Date: May 9, 1997
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<PAGE>
EXHIBIT INDEX
-------------
Exhibit
No.
-------
11 Statement of earnings per share
computations.
12 Computations of the ratio of
earnings to fixed charges.
15 Letter re unaudited interim
financial information from Price
Waterhouse LLP.
27 Financial data schedule.
<PAGE>
Exhibit 11
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CONRAIL INC.
------------
EARNINGS PER SHARE COMPUTATIONS
-------------------------------
($ In Millions Except Per Share)
Quarters ended
March 31,
------------------------
1997 1996
---- ----
Net income
----------
Primary
Net income $61 $31
Dividends declared on Series A
ESOP convertible junior preferred
stock (ESOP Stock), net of
tax benefits (2) (3)
--- ---
$59 $28
=== ===
Fully diluted
Net income 61 31
Nondiscretionary adjustment (1) - (1)
--- ---
$61 $30
=== ===
Weighted average number of shares (2)
---------------------------------
Primary
Weighted average number of
common shares outstanding 79,586,743 77,286,233
Effect of shares issuable under
employee stock compensation plans 437,758 716,213
---------- ----------
80,024,501 78,002,446
========== ==========
Fully diluted
Weighted average number of
common shares outstanding 79,586,743 77,286,233
ESOP Stock 6,782,269 9,756,470
Effect of shares issuable under
employee stock compensation plans 473,088 716,213
---------- ----------
86,842,100 87,758,916
=========== ==========
Net income per common share
Primary $.74 $.36
Fully diluted .70 .35
Page 1 of 2
<PAGE>
Exhibit 11
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CONRAIL INC.
------------
EARNINGS PER SHARE COMPUTATIONS
-------------------------------
Notes: 1. Represents the increase, net of income tax benefits,
in ESOP-related expenses assuming conversion of all
ESOP Stock to common stock.
2. Shares held by the Employee Benefits Trust (the
"Trust") are not considered outstanding for earnings
per share computations until issued by the Trust.
Page 2 of 2
<PAGE>
Exhibit 12
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CONRAIL INC.
------------
COMPUTATIONS OF THE RATIO OF EARNINGS TO FIXED CHARGES
------------------------------------------------------
($ In Millions)
Quarters ended
March 31,
-----------------
1997 1996
---- ----
Earnings
--------
Pre-tax income $ 98 $ 50
Add:
Interest expense 45 47
Rental expense interest factor 16 14
Less equity in undistributed earnings
of 20-50% owned companies (5) (4)
---- ----
Earnings available for fixed charges $154 $107
==== ====
Fixed charges
-------------
Interest expense 45 47
Rental expense interest factor 16 14
---- ----
Fixed charges $ 61 $ 61
==== ====
Ratio of earnings to fixed charges 2.52x 1.75x
For purposes of computing the ratio of earnings to fixed
charges, earnings represent income before income taxes plus
fixed charges, less equity in undistributed earnings of 20% to
50% owned companies. Fixed charges represent interest expense
together with interest capitalized and a portion of rent under
long-term operating leases representative of an interest factor.
<PAGE>
Exhibit 15
----------
May 9, 1997
Securities and Exchange Commission
450 Fifth Street, NW
Washington, DC 20549
Dear Sirs:
We are aware that Conrail Inc. has incorporated by
reference our report dated April 16, 1997 (issued
pursuant to the provisions of Statement on Auditing
Standards No. 71) in the following documents:
* Registration Statement on Form S-8 No. 33-19155
* Registration Statement on Form S-8 No. 33-44140
* Registration Statement on Form S-8 No. 33-57717
* Registration Statement on Form S-8 No. 33-60445
* Registration Statement on Form S-8 No. 333-6513
* Prospectus constituting part of Registration
Statement on Form S-3 No. 33-64670
* Prospectus constituting part of Registration
Statement on Form S-3 No. 33-62929.
We are also aware of our responsibilities under the
Securities Act of 1933 and that pursuant to Rule 436(c)
our report dated April 16, 1997 shall not be considered
part of a registration statement prepared or certified
by us or a report prepared or certified by us within
the meaning of Sections 7 and 11 of the Securities Act
of 1933.
Yours very truly,
PRICE WATERHOUSE LLP
Thirty South Seventeenth Street
Philadelphia, PA 19103
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
Exhibit 27
----------
CONRAIL INC.
FINANCIAL DATA SCHEDULE
($ In Millions Except Per Share)
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM FORM 10-Q
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-Q.
<MULTIPLIER> 1,000,000
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<PERIOD-TYPE> 3-MOS
<CASH> 32
<SECURITIES> 0
<RECEIVABLES> 662
<ALLOWANCES> 0
<INVENTORY> 141
<CURRENT-ASSETS> 1,162
<PP&E> 6,599
<DEPRECIATION> 0
<TOTAL-ASSETS> 8,470
<CURRENT-LIABILITIES> 1,078
<BONDS> 1,889
0
183
<COMMON> 89
<OTHER-SE> 2,880
<TOTAL-LIABILITY-AND-EQUITY> 8,470
<SALES> 0
<TOTAL-REVENUES> 906
<CGS> 0
<TOTAL-COSTS> 790
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 45
<INCOME-PRETAX> 98
<INCOME-TAX> 37
<INCOME-CONTINUING> 61
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 61
<EPS-PRIMARY> .74
<EPS-DILUTED> .70
<PAGE>
</TABLE>
