FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(X)[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarter ended September 29, 2000March 30, 2001
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)[X] No ( )[_]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of September 29, 2000: 216,994,736March 30, 2001: 213,395,907 shares.
- 1 --1-
CSX CORPORATION
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 29, 2000MARCH 30, 2001
INDEX
Page Number
PART I. FINANCIAL INFORMATION
Item 1:
Financial Statements
1. Consolidated Statement of Earnings-
Quarters and Nine Months Ended September 29, 2000 and
October 1, 1999 3
2. Consolidated Statement of Cash Flows-
Nine Months Ended September 29, 2000 and October 1, 1999 4
3. Consolidated Statement of Financial Position-
At September 29, 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 18
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 32
Signature 32
- 2 -
Page Number
PART I. FINANCIAL INFORMATION
Item 1:
Financial Statements
1. Consolidated Statement of Earnings-
Quarters Ended March 30, 2001 and March 31, 2000 3
2. Consolidated Statement of Cash Flows-
Quarters Ended March 30, 2001 and March 31, 2000 4
3. Consolidated Statement of Financial Position-
At March 30, 2001 and December 29, 2000 5
Notes to Consolidated Financial Statements 6
Item 2:
Management's Discussion and Analysis of Results of
Operations and Financial Condition 16
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 24
Signature 24
-2-
CSX CORPORATION AND SUBSIDIARIES
Consolidated Statement of Earnings
(Millions of Dollars, Except Per Share Amounts)
(Unaudited)
Quarters Ended
Nine Months Ended
--------------------- ---------------------
Sept. 29, Oct. 1, Sept. 29, Oct. 1,-----------------------------------
March 30, March 31,
2001 2000
1999 2000 1999
---------- ---------- ---------- ------------------------ -------------
Operating Revenue $ 2,0392,025 $ 2,807 $ 6,144 $ 7,7492,034
Operating Expense 1,815 2,482 5,557 6,893
Asset Impairment Charge - 315 - 315
---------- ---------- ---------- ----------
Total Operating Expense 1,815 2,797 5,557 7,208
---------- ---------- ---------- ----------1,836 1,860
-------------- -------------
Operating Income 224 10 587 541189 174
Other Income (Expense) 3 17 22Expense 31 5
Interest Expense 140 133 413 393
---------- ---------- ---------- ----------131 134
-------------- -------------
Earnings (Loss) before Income Taxes 87 (106) 196 15327 35
Income Tax Expense 28 12 64 94
---------- ---------- ---------- ----------7 10
-------------- -------------
Earnings (Loss) before Discontinued Operations and Cumulative Effect
of Accounting Change 59 (118) 132 5920 25
Earnings from Discontinued Operations, Net of Tax 3 5 14 17
Gain on Sale of Discontinued Operations, Net of Tax 365 - 365 -
---------- ---------- ---------- ----------
Earnings (Loss) before Cumulative Effect of Accounting Change 427 (113) 511 76
Cumulative Effect on Prior Years of Accounting Change for
Insurance-Related Assessments, Net of Tax - - - (49)
---------- ---------- ---------- ----------4
-------------- -------------
Net Earnings (Loss) $ 42720 $ (113) $ 511 $ 27
========== ========== ========== ==========29
============== =============
Earnings Per Share:
Before Discontinued Operations and Cumulative Effect of
Accounting Change $ .28.10 $ (.56) $ .62 $ .28.12
Earnings from Discontinued Operations .01- .02
.07 .08
Gain on Sale of Discontinued Operations 1.73 - 1.73 -
Cumulative Effect of Accounting Change - - - (.24)
---------- ---------- ---------- ------------------------ -------------
Including Cumulative Effect of Accounting Change and Discontinued Operations $ 2.02.10 $ (.54) $ 2.42 $ .12
========== ========== ========== ==========.14
============== =============
Earnings Per Share, Assuming Dilution:Dilution
Before Discontinued Operations and Cumulative Effect of
Accounting Change $ .28.10 $ (.56) $ .62 $ .28.12
Earnings from Discontinued Operations .01- .02
.07 .08
Gain on Sale of Discontinued Operations 1.73 - 1.73 -
Cumulative Effect of Accounting Change - - - (.23)
---------- ---------- ---------- ------------------------ -------------
Including Cumulative Effect of Accounting Change and Discontinued Operations $ 2.02.10 $ (.54) $ 2.42 $ .13
========== ========== ========== ==========.14
============== =============
Average Common Shares Outstanding (Thousands) 210,934 210,790 211,047 210,477
========== ========== ========== ==========211,299 211,192
============== =============
Average Common Shares Outstanding, Assuming Dilution
(Thousands) 211,254 210,790 211,476 212,808
========== ========== ========== =========211,897 212,015
============== =============
Cash Dividends Paid Per Common Share $ .30 $ .30
$ .90 $ .90
========== ========== ========== ======================= =============
See accompanying Notes to Consolidated Financial Statements.
- 3 --3-
CSX CORPORATION AND SUBSIDIARIES
Consolidated Statement of Cash Flows
(Millions of Dollars)
(Unaudited)
Nine Months Ended
---------------------
Sept. 29, Oct. 1,
2000 1999
---------- ----------
OPERATING ACTIVITIES
Net Earnings $ 511 $ 27
Adjustments to Reconcile Net Earnings to Net Cash Provided:
Cumulative Effect of Accounting Change - 49
Depreciation 445 483
Deferred Income Taxes 70 (63)
Gain on Sale of Contract Logistics Segment (365) -
Asset Impairment Charge - 315
Equity in Conrail Earnings - Net (4) (5)
Other Operating Activities 35 (35)
Changes in Operating Assets and Liabilities
Accounts Receivable 299 (461)
Other Current Assets (95) 53
Accounts Payable (58) 68
Other Current Liabilities (289) 157
---------- ----------
Net Cash Provided by Operating Activities 549 588
---------- ----------
INVESTING ACTIVITIES
Property Additions (643) (847)
Net Investment Proceeds 650 49
Short-Term Investments - Net (9) 121
Other Investing Activities (32) (12)
---------- ----------
Net Cash Used by Investing Activities (34) (689)
---------- ----------
FINANCING ACTIVITIES
Short-Term Debt - Net (247) 384
Long-Term Debt Issued 588 194
Long-Term Debt Repaid (737) (85)
Cash Dividends Paid (197) (196)
Other Financing Activities (56) (2)
---------- ----------
Net Cash (Used by) Provided by Financing Activities (649) 295
---------- ----------
Net (Decrease) Increase in Cash and Cash Equivalents (134) 194
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 492 299
Short-Term Investments at End of Period 377 320
---------- ----------
Cash, Cash Equivalents and Short-Term
Investments at End of Period $ 869 $ 619
========== ==========
(Unaudited)
Quarters Ended
------------------------------------
March 30, March 31,
2001 2000
----------- -------------
OPERATING ACTIVITIES
Net Earnings $ 20 $ 29
Adjustments to Reconcile Net Earnings to Net Cash Provided:
Depreciation 157 147
Deferred Income Taxes 4 2
Equity in Conrail Earnings - Net (5) (6)
Other Operating Activities 1 33
Changes in Operating Assets and Liabilities
Accounts Receivable 10 6
Other Current Assets (18) (39)
Accounts Payable (22) (21)
Other Current Liabilities (147) (152)
----------- -------------
Net Cash Used by Operating Activities - (1)
----------- -------------
INVESTING ACTIVITIES
Property Additions (183) (107)
Short-Term Investments - Net (83) (23)
Other Investing Activities 1 11
----------- -------------
Net Cash Used by Investing Activities (265) (119)
----------- -------------
FINANCING ACTIVITIES
Short-Term Debt - Net (271) (81)
Long-Term Debt Issued 500 -
Long-Term Debt Repaid (48) (34)
Cash Dividends Paid (64) (66)
Other Financing Activities 8 (32)
----------- -------------
Net Cash Provided (Used) by Financing Activities 125 (213)
----------- -------------
Net Decrease in Cash and Cash Equivalents (140) (333)
CASH, CASH EQUIVALENTS AND SHORT-TERM
INVESTMENTS
Cash and Cash Equivalents at Beginning of Period 261 626
----------- -------------
Cash and Cash Equivalents at End of Period 121 293
Short-Term Investments at End of Period 500 373
----------- -------------
Cash, Cash Equivalents and Short-Term
Investments at End of Period $ 621 $ 666
=========== =============
See accompanying Notes to Consolidated Financial Statements.
- 4 --4-
CSX CORPORATION AND SUBSIDIARIES
Consolidated Statement of Financial Position
(Millions of Dollars)
(Unaudited)
Sept. 29, Dec. 31,
2000 1999
------------ -----------
ASSETS
Current Assets
Cash, Cash Equivalents and Short-Term Investments $ 869 $ 974
Accounts Receivable 833 1,135
Materials and Supplies 276 220
Deferred Income Taxes 128 135
Other Current Assets 146 99
---------- ----------
Total Current Assets 2,252 2,563
Properties 17,968 17,526
Accumulated Depreciation (5,426) (5,269)
---------- ----------
Properties-Net 12,542 12,257
Investment in Conrail 4,667 4,663
Affiliates and Other Companies 417 410
Other Long-Term Assets 829 827
---------- ----------
Total Assets $ 20,707 $ 20,720
========== ==========
LIABILITIES
Current Liabilities
Accounts Payable $ 1,141 $ 1,197
Labor and Fringe Benefits Payable 414 436
Current Portion of Casualty, Environmental and
Other Reserves 241 271
Current Maturities of Long-Term Debt 173 349
Short-Term Debt 427 574
Other Current Liabilities 675 646
---------- ----------
Total Current Liabilities 3,071 3,473
Casualty, Environmental and Other Reserves 771 767
Long-Term Debt 6,122 6,196
Deferred Income Taxes 3,311 3,227
Other Long-Term Liabilities 1,387 1,301
---------- ----------
Total Liabilities 14,662 14,964
---------- ----------
SHAREHOLDERS' EQUITY
Common Stock, $1 Par Value 217 218
Other Capital 1,501 1,525
Retained Earnings 4,348 4,034
Accumulated Other Comprehensive Loss (21) (21)
---------- ----------
Total Shareholders' Equity 6,045 5,756
---------- ----------
Total Liabilities and Shareholders' Equity $ 20,707 $ 20,720
========== ==========
(Unaudited)
March 30, December 29,
2001 2000
------------- -------------
ASSETS
Current Assets
Cash, Cash Equivalents and Short-Term Investments $ 621 $ 684
Accounts Receivable 840 850
Materials and Supplies 269 245
Deferred Income Taxes 122 121
Other Current Assets 148 146
------------- -------------
Total Current Assets 2,000 2,046
Properties 17,981 17,839
Accumulated Depreciation (5,297) (5,197)
------------- -------------
Properties-Net 12,684 12,642
Investment in Conrail 4,673 4,668
Affiliates and Other Companies 344 362
Other Long-Term Assets 737 773
------------- -------------
Total Assets $ 20,438 $ 20,491
============= =============
LIABILITIES
Current Liabilities
Accounts Payable $ 1,057 $ 1,079
Labor and Fringe Benefits Payable 410 405
Casualty, Environmental and Other Reserves 251 246
Current Maturities of Long-Term Debt 188 172
Short-Term Debt 478 749
Income and Other Taxes Payable 250 372
Other Current Liabilities 256 257
------------- -------------
Total Current Liabilities 2,890 3,280
Casualty, Environmental and Other Reserves 745 755
Long-Term Debt 6,212 5,810
Deferred Income Taxes 3,391 3,384
Other Long-Term Liabilities 1,224 1,245
------------- -------------
Total Liabilities 14,462 14,474
------------- -------------
SHAREHOLDERS' EQUITY
Common Stock, $1 Par Value 213 213
Other Capital 1,470 1,467
Retained Earnings 4,293 4,337
------------- -------------
Total Shareholders' Equity 5,976 6,017
------------- -------------
Total Liabilities and Shareholders' Equity $ 20,438 $ 20,491
============= =============
See accompanying Notes to Consolidated Financial Statements.
- 5 --5-
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 SeptemberMarch 30,
2001 and December 29, 2000, and December 31, 1999, the results of its operations for the quarters
and nine months ended September 29, 2000 and October 1, 1999, and its cash flows for the
nine monthsquarters ended September 29,March 30, 2001 and March 31, 2000, and October 1, 1999, such adjustments being of a
normal recurring nature. Certain prior yearprior-year data have been reclassified to
conform to the 20002001 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 20002001
consists of 52 weeks ending on December 29, 2000.28, 2001. Fiscal year 19992000 consisted of
5352 weeks ended December 31, 1999.29, 2000. The financial statements presented are for the
13-week quartersquarter ended September 29,March 30, 2001, the 13-week quarter ended March 31, 2000, and October 1, 1999, the 39-week
period ended September 29, 2000, the 40-week period ended October 1, 1999,
and as of December 31, 1999.29, 2000.
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 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 container-shipping unit workforce that could incur
second injuries and become eligible for these disability benefits in future
periods transferred their employment to the purchaser of the container-shipping
unit's international liner business in December 1999 (see Note 6). 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.
- 6 -
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
Earnings per share are based on the weighted average number of common
shares outstanding, as defined by Financial Accounting Standards Board (FASB)
Statement No. 128, "Earnings per Share," for the fiscal quarters ended March 30,
2001 and nine months ended
September 29, 2000 and October 1, 1999.March 31, 2000. Earnings per share, assuming dilution, are based on the
weighted average number 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
September 29,March 30, 2001 and March 31, 2000, and October 1, 1999, potential common shares that were dilutive
totaled 0.30.6 and 0.8 million, and zero, respectively. For the nine months ended
September 29, 2000 and October 1, 1999, potentially dilutive shares totaled 0.4
million and 2.3 million.
Certain potential common shares outstanding at September 29,March 30, 2001 and March 31,
2000 and
October 1, 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 26.117.0 million at a weighted-average exercise
price of $40.07$43.76 per share at September 29, 2000March 30, 2001 and 4.923.9 million with a weighted-averageweighted-
average exercise price of $52.65$41.89 per share at October 1, 1999.March 31, 2000.
-6-
CSX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited), Continued
(All Tables in Millions of Dollars, Except Per Share Amounts)
NOTE 4.3. 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 midwesternmid-western 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.
Conrail Financial Information
- 7 ------------------------------
Summary financial information for Conrail for its fiscal periods ended
March 31, 2001 and 2000, and at December 31, 2000, is as follows:
Quarters Ended
-----------------------------------------
March 31, March 31,
2001 2000
--------------- -------------------
Income Statement Information:
Revenues $ 233 $ 259
Income from Operations 64 60
Net Income 45 65
As Of
-----------------------------------------
March 31, December 31,
2001 2000
--------------- -------------------
Balance Sheet Information:
Current Assets $ 608 $ 520
Property and Equipment and Other Assets 7,463 7,540
Total Assets 8,071 8,060
Current Liabilities 476 435
Long-Term Debt 1,208 1,229
Total Liabilities 4,024 4,078
Stockholders' Equity 4,047 3,982
-7-
CSX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited), Continued
(All Tables in Millions of Dollars, Except Per Share Amounts)
NOTE 4.3. INVESTMENT IN AND INTEGRATED RAIL OPERATIONS WITH CONRAIL, Continued
Conrail Financial Information, Continued
- -----------------------------
Summarized financial information for Conrail for its fiscal periods
ended September 30, 2000 and 1999, and at December 31, 1999, is as follows:
Quarters Ended Nine Months Ended
Sept. 30, Sept. 30,
------------------ -----------------
2000 1999 2000 1999
-------- -------- -------- --------
Income Statement Information:
Revenues $ 243 $ 259 $ 748 $ 1,912
Income (Loss) From Operations 65 (64) 177 21
Net Income (Loss) 35 (49) 131 (36)
As Of
--------------------------
Sept. 30, Dec. 31,
2000 1999
------------ ------------
Balance Sheet Information:
Current Assets $ 559 $ 669
Property and Equipment and Other Assets 7,569 7,714
Total Assets 8,128 8,383
Current Liabilities 576 863
Long-Term Debt 1,259 1,302
Total Liabilities 4,178 4,564
Stockholders' Equity 3,950 3,819
Comparisons of Conrail's operating results for 2000 and 1999 are
affected by the significant changes in its business that occurred with the
integration with CSX and Norfolk Southern in June 1999. Revenues and expenses
for five months of 1999 were derived principally from freight linehaul
operations over the entire Conrail network. Beginning in June 1999, financial
results 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's results for the first nine months ofquarter ended March 31, 2000 benefited from a non-recurringnon-
recurring gain on the sale of property of $61 million, $37 million after-tax.
Results in 1999 included non-recurring expenses of $81 million, $51
million after-tax, in the third quarter and $173 million, $117 million
after-tax, in the second quarter. These charges were recorded principally to
increase certain components of Conrail's casualty reserves based on the method
of settlement of casualty liabilities agreed to between CSX, Norfolk Southern
and Conrail, and to adjust certain litigation and environmental reserves based
on settlements and completions of site reviews. Certain of these items were
considered by the joint acquisition entity in its fair value allocation of
Conrail's assets and liabilities and, accordingly, were excluded in determining
the equity in Conrail's net income recorded by CSX.
- 8 -
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 daterevenues 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 paymentspayment to Conrail for the use of right-of-wayright-
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 Withwith 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 additional 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 SeptemberMarch 30, 2001 and December 29, 2000, and December 31, 1999, CSX had $14$4 million and $53$2 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 SeptemberMarch 30, 2001 and December 29, 2000, and December 31, 1999, Conrail had advanced $58$98 million and
$93$40 million, respectively, to CSX under this arrangement at interest rates of
6.2%4.75% and 5.6%5.90%, respectively. CSX also had amounts payable to Conrail of $87$104
million and $105$127 million at SeptemberMarch 30, 2001 and December 29, 2000,
and December 31, 1999, respectively,
representing expenses incurred under the operating, equipment, and shared area
agreements.
NOTE 5.4. DISCONTINUED OPERATIONS
On September 22, 2000, CSX completed the sale of CTI Logistx, Inc., its
wholly-owned logistics subsidiary, for $650 million. The contract logistics
segment is now reported as a discontinued operation and all prior periods in the
statement of earnings have been restated accordingly. Revenues from the contract
logistics segment for the quarter and nine-months ended September 29,March 31, 2000 were $78 million and $335 million, respectively. Revenues for the quarter and
nine-months ended October 1, 1999 were $110 million and $347 million,
respectively. CSX recorded a gain of $570 million before tax, $365 million after
tax, $1.73 per share, on the sale.
- 9 -$126 million.
-8-
CSX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited), Continued
(All Tables in Millions of Dollars, Except Per Share Amounts)
NOTE 6.5. 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 company recorded a $315
million asset impairment charge in the third quarter of 1999 to adjust the book
value of the related property, equipment and other long-lived assets to their
fair value less cost to sell. In addition, in accordance with the provisions of
Statement No. 121, no depreciation was recorded on these assets subsequent to
their classification as "held for sale." The impairment charge, net of a $17
million benefit from lower depreciation expense, reduced third quarter 1999
earnings by $298 million before taxes, $236 million after tax, or $1.11 per
share. In the fourth quarter of 1999, based on subsequent accounting for the
completed transaction, including adjustments to reflect asset allocations agreed
to at closing, the company determined that the loss on sale was approximately
$86 million higher than the third-quarter charge. The final loss on sale of $401
million, net of a $41 million benefit from the lower depreciation expense,
reduced 1999 earnings by $360 million, $271 million after tax, $1.27 per share.
The agreement with Maersk providesprovided for a post-closing adjustment to
the sales price based on the change in working capital, as defined in the
agreement, between June 25, 1999, and December 10, 1999. The loss recorded includes the
estimated costs to terminate various contractual obligations of the company.
These matters will affect the determination of the final loss on sale. The
company has
recorded a receivable of approximately $60 million in connection with the post-closingpost-
closing adjustment and this amount is currently in dispute. TheThis matter,
together with other disputed issues, has been submitted to arbitration.
Management is not yet in a position to assess fully the likely outcome of this
process but believes it will prevail in the arbitration.
CSX retainedarbitrations. During 1999, the
container-shipping business serving the U.S. domestic
trade and partcompany recorded a net loss of $360 million, $271 million after-tax, related to
this transaction. Included in this amount were estimated costs to terminate
various contractual obligations 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 has revised its
disclosures under FASB Statement No. 131, "Disclosures about Segmentscompany. These matters could affect the
determination of an
Enterprise and Related Information," for fiscal year 2000 to report these as
separate business segments; however, it is not practicable to provide
comparative segment disclosures for the prior year.final loss on sale.
NOTE 7.6. ACCOUNTS RECEIVABLE
The company sells revolving interests in its rail accounts receivable to
public investors through a securitization program and to financial institutions
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 September 29, 2000,March 30, 2001, the agreements provide for the sale of up to $350
million in receivables through the securitization program and $250 million
through the conduit programs.
- 10 -
CSX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited), Continued
(All Tables in Millions of Dollars, Except Per Share Amounts)
NOTE 7. ACCOUNTS RECEIVABLE, Continued
At SeptemberMarch 30, 2001 and December 29, 2000, the company had sold $547 million
of accounts receivable; $300 million through the securitization program and $247 million
through the conduit programs. At December 31, 1999, $347 million of accounts
receivable were sold, $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 programs were increased by $200 million
during September 2000 and require yield payments based on
prevailing commercial paper rates plus incremental fees. Losses recognized on
the sale of accounts receivable totaled $8$12 million and $24$8 million for the
quarterquarters ended March 30, 2001 and nine months
ended September 29,March 31, 2000, respectively, and $8 million and $23 million for the
quarter and nine months ended October 1, 1999, respectively.
The company has retained the responsibility for servicing accounts
receivable transferred to the master trust. The average servicing period is
approximately one month. No servicing asset or liability has been recorded since
the fees the company receives for servicing the receivables approximate the
related costs.
In September 2000, the FASB issued Statement No. 140, " Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities."
Statement No. 140 replaces the earlier Statement No. 125 in its entirety. While
the new statement revises certain accounting guidance for transfers of financial
assets, most of the provisions of Statement No. 125 have been carried over
without reconsideration. Statement No. 140 is effective for transfers and
servicing of financial assets occurring after March 31, 2001, but requires
certain disclosures relating to securitizations for fiscal years ending after
December 15, 2000. The company does not expect thataccounting provisions of Statement No. 140 will affect its current accounting fornot
impact the sale of revolving interests in its rail
accounts receivable.
NOTE 8. OPERATING EXPENSE
Quarters Ended Nine Months Ended
--------------------- -----------------
Sept. 29, Oct. 1, Sept. 29, Oct. 1,
2000 1999 2000 1999
---------- -------- ----------- ------
Labor and Fringe Benefits $ 709 $ 866 $ 2,156 $ 2,453
Materials, Supplies and Other 467 699 1,443 1,972
Conrail Operating Fee, Rent and Services 90 118 286 164
Building and Equipment Rent 169 300 540 862
Inland Transportation 93 239 276 690
Depreciation 137 138 409 458
Fuel 157 127 464 308
Miscellaneous (7) (5) (17) (14)
Asset Impairment Charge - 315 - 315
------- -------- -------- ---------
Total $1,815 $ 2,797 $ 5,557 $ 7,208
======= ======== ==================
- 11 -company's financial statements.
-9-
CSX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited), Continued
(All Tables in Millions of Dollars, Except Per Share Amounts)
NOTE 9.7. OPERATING EXPENSE
Quarters Ended
-----------------------------------
March 30, March 31,
2001 2000
------------- -------------
Labor and Fringe Benefits $ 736 $ 727
Materials, Supplies and Other 459 473
Conrail Operating Fee, Rent & Services 83 95
Building and Equipment Rent 155 188
Inland Transportation 85 83
Depreciation 148 138
Fuel 170 156
------------- -------------
Total $ 1,836 $ 1,860
============= =============
NOTE 8. OTHER INCOME (EXPENSE)
Quarters Ended Nine Months Ended
------------------- -----------------
Sept. 29, Oct. 1, Sept. 29, Oct. 1,
2000 1999 2000 1999
-------- --------- -------- --------
Interest Income $ 12 $ 11 $ 40 $ 35
Income from Real Estate and Resort
Operations(1) 15 30 49 40
Net Investment (Loss) Gain (1) - (1) 27
Net Losses from Accounts Receivable Sold (8) (8) (24) (23)
Minority Interest (11) (10) (31) (29)
Income (Loss) from Investment in Conrail-Net - - - (42)
Equity Earnings (Loss) from Other Affiliates - 3 (5) 17
Miscellaneous (4) (9) (6) (20)
-------- -------- ------- -------
Total $ 3 $ 17 $ 22 $ 5
======== ======== ======= =======
EXPENSE
Quarters Ended
--------------------------------
March 30, March 31,
2001 2000
------------ ------------
Interest Income $ 11 $ 16
Income (Loss) from Real Estate and Resort Operations/(1)/ (3) 1
Net Losses from Accounts Receivable Sold (12) (8)
Minority Interest (8) (8)
Equity Losses in Other Affiliates/(2)/ (16) (5)
Miscellaneous (3) (1)
------------ ------------
Total $ (31) $ (5)
============ ============
/(1)/ Gross revenue from real estate and resort operations was $52$25 million and
$148$29 million for the quarterquarters ended March 30, 2001 and nine months ended September 29,March 31, 2000,
respectively, and $65respectively.
/(2)/ Included in equity losses in other affiliates was the $14 million and $136 million forwrite-
off of an investment in a non-rail affiliate, during the quarter and nine
months ended
October 1, 1999, respectively.March 30, 2001.
NOTE 10. COMMITMENTS9. DEBT 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),CREDIT AGREEMENTS
During 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 inquarter ended March 30, 2001, 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 Courtcompany 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$500 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.
- 12 -6.75% notes due in 2011.
-10-
CSX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited), Continued
(All Tables in Millions of Dollars, Except Per Share Amounts)
NOTE 10. COMMITMENTS AND CONTINGENCIES Continued
New Orleans Tank Car Fire, continued
- ------------------------------------
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 July 1999, 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.
In 1999, six of the nine defendants in the case reached a tentative
settlement with the plaintiffs group. The basis of that settlement is an
agreement that all claims for compensatory and punitive damages against the six
defendants would be compromised for the sum of $215 million. That settlement was
approved by the trial court earlier this year.
The City of New Orleans recently was granted permission by the trial
court to assert an amended claim against CSXT, including a newly asserted claim
for punitive damages. The City's case was originally filed in 1988, and while
based on the 1987 tank car fire, is not considered to be part of the class
action.
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 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.
- 13 -
CSX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited), Continued
(All Tables in Millions of Dollars, Except Per Share Amounts)
NOTE 10. COMMITMENTS AND CONTINGENCIES, Continued
Environmental
- ---------------------------
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 115104 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 230243 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.(i.e., generator, owner or operator), the extent of
CSXT's alleged connection (e.g.(i.e., 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
SeptemberMarch 30, 2001 and Dec. 29, 2000 and December 31, 1999, were $43 million and $53 million,
respectively.$41 million. These recorded liabilities,
which are undiscounted, include amounts representing CSXT's estimate of
unasserted claims, which CSXT believes to be immaterial. The liability has
-11-
CSX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited), Continued
(All Tables in Millions of Dollars, Except Per Share Amounts)
NOTE 10. COMMITMENTS AND CONTINGENCIES, Continued
Environmental, Continued
- ------------------------
been accrued for future costs for all sites where the company's obligation is
probable and where such costs can be reasonably estimated. The liability
includes future costs for remediation and restoration of sites as well as any
significant ongoing monitoring costs, but excludes any anticipated insurance
recoveries. The majority of the September 29,
2000March 30, 2001 environmental liability is
expected to be paid out over the next five to seven years, funded by cash
generated from operations.
- 14 -
CSX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited), Continued
(All Tables in Millions of Dollars, Except Per Share Amounts)
-------------------------------------------------------------
NOTE 10. COMMITMENTS AND CONTINGENCIES, Continued
Environmental, Continued
- ------------------------
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 ProceedingsNew Orleans Tank Car Fire
- -----------------------
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 11. BUSINESS SEGMENTS
The company operates in four business segments: Rail, Intermodal,
Domestic Container Shipping, and International Terminals. 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 6), 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 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 other income (expense). Intersegment sales and transfers
are generally accounted for as if the sales or transfers were to third parties,
that is, at current market prices.
- 15 -
CSX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited), Continued
(All Tables in Millions of Dollars, Except Per Share Amounts)
NOTE 11. BUSINESS SEGMENTS, Continued
Business segment information for the quarters and nine months ended
September 29, 2000 and October 1, 1999 is as follows:
Quarter ended September 29, 2000:
- ---------------------------------
Marine Services*
------------------------------
Surface Transportation Domestic
--------------------------- Container International
Rail Intermodal Total Shipping Terminals Total Total
-----------------------------------------------------------------------
Revenues from external customers $1,500 $283 $1,783 $176 80 $256 $2,039
Intersegment revenues - 5 5 - 1 1 6
Segment operating income 163 27 190 7 19 26 216
Assets 13,153 416 13,569 355 773 1,128 14,697
Quarter ended October 1, 1999:
- ------------------------------
Surface Transportation
--------------------------- Marine
Rail Intermodal Total Services Total
--------------------------------------------
Revenues from external customers $1,485 $287 $1,772 $1,035 $2,807
Intersegment revenues - 1 1 - 1
Segment operating income 185 28 213 78 291
Assets 12,462 262 12,724 2,309 15,033
Nine Months ended September 29, 2000:
- -------------------------------------
Marine Services*
-----------------------------------
Surface Transportation
--------------------------- Domestic
Container International Total Total
Rail Intermodal Total Shipping Terminals
----------------------------------------------------------------------------
Revenues from external customers $4,563 $852 $5,415 $500 $229 $729 $6,144
Intersegment revenues - 15 15 - 2 2 17
Segment operating income 448 60 508 10 51 61 569
Assets 13,153 416 13,569 355 773 1,128 14,697
- 16 -
CSX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited), Continued
(All Tables in Millions of Dollars, Except Per Share Amounts)
NOTE 11. BUSINESS SEGMENTS, Continued
Nine Months ended October 1, 1999:
Surface Transportation
------------------------------ Marine
Rail Intermodal Total Services Total
----------------------------------------------
Revenues from external customers $4,116 $648 $4,764 $2,985 $7,749
Intersegment revenues - 16 16 - 16
Segment operating income 659 51 710 96 806
Assets 12,462 262 12,724 2,309 15,033
* 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 Domestic Container Shipping and International
Terminals 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.
A reconciliation of the totals reported for the business segments to the
applicable line items in the consolidated financial statements is as follows:
Quarters Ended Nine Months Ended
-------------------------- ----------------------
Sept. 29, Oct. 1, Sept. 29, Oct. 1,
2000 1999 2000 1999
------------ ------------ ---------- ----------
Revenues:
- ---------
Total external revenues for business segments $ 2,039 $ 2,807 $ 6,144 $ 7,749
Intersegment revenues for business segments 6 1 17 16
Elimination of intersegment revenues (6) (1) (17) (16)
---------- ---------- ---------- ----------
Total consolidated revenues $ 2,039 $ 2,807 $ 6,144 $ 7,749
========== ========== ========== ==========
Operating Income:
- ----------------
Total operating income for business segments $ 216 $ 291 $ 569 $ 806
Reclassification of minority interest expense
for International terminals segment 11 10 31 29
Unallocated corporate expenses (3) 7 (13) 4
Container-shipping asset impairment charge,
net of depreciation benefit - (298) - (298)
------------ ------------ ------------ ----------
Total consolidated operating income $ 224 $ 10 $ 587 $ 541
============ ============ ============ ==========
Sept. 29, Oct. 1,
2000 1999
------------ -----------
Assets:
- ------
Assets for business segments $ 14,697 $ 15,033
Investment in Conrail 4,667 4,730
Elimination of intercompany receivables (198) (169)
Non-segment assets 1,541 1,442
----------- -----------
Total consolidated assets $ 20,707 $ 21,036
=========== ===========
- 17 -
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 quarters ended
September 29, 1999 and October 1, 1999 consisted of 13 weeks. The nine-month
period ended September 29, 2000 consisted of 39 weeks, while the nine-month
period ended October 1, 1999 consisted of 40 weeks.
Consolidated Results
- --------------------
Third Quarter 2000 Compared with 1999
- -------------------------------------
CSX reported net earnings of $427 million, $2.02 per share on a diluted
basis, for the quarter ended September 29, 2000. In the prior year, the Company
reported a net loss of $113 million, 54 cents per share. On September 22, 2000,
CSX completed the sale of its wholly-owned logistics subsidiary, CTI Logistx,
Inc. to TNT Post Group for $650 million, realizing a pre-tax gain of $570
million, $365 million after-tax, or $1.73 per share. The contract logistics
segment is now being treated as discontinued operations for accounting purposes,
and all prior periods statement of earnings and segment data have been restated
accordingly. CSX had net earnings from continuing operations of $59 million, 28
cents per share on a diluted basis, for the quarter ended September 29, 2000. In
the prior year, the company reported a net loss from continuing operations of
$118 million, 56 cents per share.
One significant factor affects comparability of CSX's third-quarter 2000
operating results with the prior year. CSX sold its international
container-shipping liner business and certain container terminal facilities in
December 1999. Operating results for the third quarter 1999 included substantial
revenues and expenses from those operations and a $315 million impairment charge
relating to the assets of the international container-shipping liner business.
The impairment charge, net of a $17 million benefit from lower depreciation
expense, reduced third quarter 1999 earnings by $298 million before taxes, $236
million after tax, or $1.11 per share.
Operating income for the third quarter of 2000 totaled $224 million,
compared with $10 million in the third quarter of 1999. Operating revenue of
$2.0 billion was 27% below the prior year quarter, while operating expense of
$1.8 billion was 35% lower. The reductions in revenue and expense compared to
1999 result primarily from the international container-shipping sale and are
discussed in more detail in the following analysis of segment results.
First Nine Months 2000 Compared with 1999
- -----------------------------------------
For the first nine months of the year, earnings for the company totaled
$511 million, $2.42 per share on a diluted basis, compared to $27 million, 13
cents per share on a diluted basis for the prior year period. As previously
noted, the Contract Logistics segment was classified as a discontinued operation
in 2000. Earnings from continuing operations were $132 million, 62 cents per
share for the nine months ended September 29, 2000 as compared with $59 million,
28 cents per share in the prior year period. The 1999 results included a $236
million after-tax loss, or $1.11 per share, on an impairment charge relating to
its international liner business that was sold in 1999; a $17 million after-tax
gain, or 8 cents per share, on the June 1999 sale of the company's Grand Teton
Lodge resort; and an after-tax charge of $49 million, 23 cents per share, in the
first quarter of 1999 to record the cumulative effect of an accounting change.
As previously mentioned, the 2000 period covers 39 weeks of results, versus 40
weeks for the 1999 period. The additional week in 1999 was included in the first
quarter.
- 18 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION, CONTINUED
RESULTS OF OPERATIONS, Continued
- --------------------------------
First Nine Months 2000 Compared with 1999, Continued
- ----------------------------------------------------
Operating revenue for the first nine months of 2000 totaled $6.1
billion, compared to $7.7 billion in the prior year. Surface Transportation
revenue increased $650 million, primarily as a result of the Conrail
integration, while Marine Services revenue declined $2.3 billion as a result of
the international liner sale.
Operating income totaled $587 million for the first nine months of 2000,
versus $541 million for the comparable 1999 period. The 1999 period was
negatively impacted by the $315 million impairment charge mentioned above, but
there was no significant increase in 2000 operating income primarily because of
significantly higher fuel prices that negatively impacted the 2000 period by
$167 million as compared to 1999.
Business Segment Analysis
- -------------------------
Surface Transportation Results
- ------------------------------
Rail
Rail operating income for the third quarter of 2000 totaled $163
million, compared to $185 million in the prior year quarter. Operating revenue
totaled $1.50 billion, an increase of $15 million, or 1%, as compared to the
prior year. Operating expense increased $37 million, or 3%, to $1.34 billion due
primarily to higher wages and higher fuel prices in 2000 offsetting reductions
in other operating expense categories, such as materials, supplies and other and
rent expense.
- 19 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION, CONTINUED
RESULTS OF OPERATIONS, Continued
- --------------------------------
Rail, Continued
The following tables provide rail carload and revenue data by service
group and commodity for the quarters and nine months ended September 29, 2000
and October 1, 1999:
Carloads Revenue
Quarter Ended Quarter Ended
(Thousands) (Millions of Dollars)
--------------------- ----------------------
Sept. 29, Oct. 1, Sept. 29, Oct. 1,
2000 1999 2000 1999
----------- --------- ----------- ---------
Merchandise
Phosphates and Fertilizer 115 127 $ 75 $ 71
Metals 85 85 102 100
Food and Consumer Products 40 39 57 50
Paper and Forest Products 128 132 160 160
Agricultural Products 86 84 116 112
Chemicals 150 147 249 245
Minerals 116 107 104 99
Government 2 3 7 7
--------- -------- ----------- ---------
Total Merchandise 722 724 870 844
Automotive 132 145 196 203
Coal, Coke and Iron Ore
Coal 433 428 397 396
Coke 12 15 11 14
Iron Ore 14 19 8 11
--------- -------- ----------- ---------
Total Coal, Coke and Iron Ore 459 462 416 421
Other - - 18 17
--------- -------- ----------- ---------
Total Rail 1,313 1,331 $ 1,500 $ 1,485
========= ======== =========== =========
As mentioned above, overall freight revenue in the third quarter
was consistent with the prior year quarter increasing $15 million to $1.5
billion in 2000 as the effects of the Conrail integration impacts both periods
for the first time. Merchandise demand remained strong, but was consistent with
the prior year with a small decrease in shipments offset by price increases.
The automotive group also experienced a decrease in shipments during the third
quarter of 2000 as compared to the third quarter of 1999 as production was
lower and inventory levels higher.
- 20 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION, CONTINUED
RESULTS OF OPERATIONS, Continued
- --------------------------------
Rail, Continued
Carloads Revenue
Nine Months Ended Nine Months Ended
(Thousands) (Millions of Dollars)
-------------------- ---------------------
Sept. 29, Oct. 1, Sept. 29, Oct. 1,
2000 1999 2000 1999
----------- --------- ----------- ---------
Merchandise
Phosphates and Fertilizer 369 403 $ 242 $ 239
Metals 266 235 316 270
Food and Consumer Products 120 108 165 130
Paper and Forest Products 400 374 497 439
Agricultural Products 265 233 355 316
Chemicals 453 397 751 669
Minerals 334 317 303 290
Government 8 9 22 23
----------- --------- ----------- ---------
Total Merchandise 2,215 2,076 2,651 2,376
Automotive 448 396 661 534
Coal, Coke and Iron Ore
Coal 1,238 1,201 1,151 1,093
Coke 36 42 36 39
Iron Ore 35 48 22 31
----------- --------- ----------- ---------
Total Coal, Coke and Iron Ore 1,309 1,291 1,209 1,163
Other - - 42 43
----------- --------- ----------- ---------
Total Rail 3,972 3,763 $ 4,563 $ 4,116
=========== ========= =========== =========
As mentioned above, overall freight revenue was significantly higher for
the first nine months than in 1999 as the Conrail integration impacted all nine
months of 2000 compared to four months of 1999. The increase in coal revenue was
tempered by generally mild weather conditions in the East and continuing
weakness in export coal shipments. Merchandise demand was generally 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 and rate increases on some auto
shipments.
- 21 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION, CONTINUED
RESULTS OF OPERATIONS, Continued
- --------------------------------
Rail, Continued
Following the integration of Conrail in 1999, the railroad 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 or
classification yards did not show sustainable improvement through the end of the
first quarter of 2000. At the beginning of the second quarter, the company
announced key management changes and operational initiatives aimed at
accelerating the pace of operational and service recovery. Additional action
plans were implemented in the third quarter to prepare the network for
seasonally higher traffic demand typically experienced in the fall. The railroad
has seen steady and significant improvement in most operating measures since
these initiatives were implemented. With the improved fluidity across the
network, the company began to realize operating expense savings in some
categories, although continuing high fuel prices and resourcing to accommodate
the higher fall traffic have limited improvements to operating income through
the third quarter.
Intermodal
Intermodal operating income totaled $27 million for the third quarter of
2000, compared to $28 million in the prior year quarter. Revenue for the quarter
was constant at $288 million, as compared to the prior year. Operating expense
was essentially constant at $261 million. International container traffic
remained relatively strong during the quarter; however, domestic revenues
continued to be adversely affected by business lost to trucks and other carriers
as a result of service problems and by 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 third quarter and first nine
months of 2000 are presented separately for each segment. It is not practicable
to provide results for these segments for the comparable periods 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.
- 22 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION, CONTINUED
RESULTS OF OPERATIONS, Continued
- --------------------------------
Marine Services Results, Continued
- ----------------------------------
Revenue from Marine Services operations totaled $256 million for the
third quarter of 2000, vs. $1.04 billion for the 1999 quarter. Operating
expenses totaled $230 million, compared to $1.26 billion in the prior year.
Operating income for third quarter 2000 was $26 million, compared to $78 million
in 1999 before the $298 million one-time net charge related to the agreement to
sell the international liner business. The significant declines in revenue,
expense and operating income reflect the international liner sale. That
transaction also accounted for the significant improvement in operating ratio as
the international business operated at a low margin 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 operating income of $7
million for the third quarter of fiscal 2000 on operating revenue of $176
million. Traffic demand remained strong in the Alaska and Hawaii-Guam trade
lanes. However, weakness in the Puerto Rico trade due to competitive pressures
and a slower Puerto Rican economy continued, and negatively impacted earnings
for the quarter.
International Terminals
The international terminals unit reported operating income of $19
million for the third quarter on operating revenue of $81 million. International
trade remained robust, with ongoing growth in world trade and the continued
rebound of Asian economies. In addition to strong container traffic through its
Hong Kong terminal, the unit benefited from continued productivity enhancements
and improved capacity utilization at that facility.
FINANCIAL CONDITION
- -------------------
Cash, cash equivalents and short-term investments totaled $869 million
at September 29, 2000, a decrease of $105 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 nine months
ended September 29, 2000 were normal transportation operations, the sale of
accounts receivable, and the sale of the contract logistics segment. The sale of
accounts receivable and the sale of the contract logistics segment generated
cash of $200 million and $650 million, respectively in September 2000. On a net
basis, operations provided $549 million of cash for the nine-month period.
Primary uses of cash and cash equivalents were property additions, repayments of
short-term and long-term debt, the payment of dividends on the company's
outstanding common stock, and stock repurchases.
- 23 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION, CONTINUED
FINANCIAL CONDITION, Continued
- ------------------------------
CSX's working capital deficit at September 29, 2000 was $819 million,
$91 million less than at December 31, 1999. The working capital deficit at
September 29, 2000 includes approximately $173 million in current maturities of
long term debt versus $349 million at December 31, 1999. A working capital
deficit is not unusual for the company and does not indicate a lack of
liquidity. The company continues to maintain adequate current assets to satisfy
current liabilities when they are due and has sufficient liquidity and financial
resources to manage its day-to-day cash needs.
The company issued $400 million in medium term notes during 2000. These
medium term notes mature in 2002 and bear interest at rates based on LIBOR.
Also, under its normal equipment financing programs, the company's rail unit
closed approximately $184 million in long-term financing on locomotives and
railcars through the third quarter of 2000. These notes mature in 2015 and bear
interest rates ranging from 6.5 to 9.0%.
FINANCIAL DATA
- --------------
(Millions of Dollars)
-----------------------------
Sept. 20, Dec. 31,
2000 1999
-------------- ---------------
Cash, Cash Equivalents and
Short-Term Investments $ 869 $ 974
Commercial Paper and Equivalents -
Short-Term $ 427 $ 574
Commercial Paper -
Long-Term $ 700 $ 800
Working Capital (Deficit) $ (819) $ (910)
Current Ratio .7 .7
Debt Ratio 51 % 54 %
Ratio of Earnings to Fixed Charges 1.4 x 1.1 x
OUTLOOK
- -------
CSX's financial performance during the fourth quarter of fiscal 2000
will be dependent on its success in achieving cost reductions and maintaining
fluidity on its rail network while dealing with a potentially slowing economy.
Demand remains level with prior year across most commodity groups and management
continues to be confident that the company will recapture traffic that has moved
to other modes of transportation as the company continues on the improvement
seen in customer service in the third quarter of 2000. With recent heavy capital
spending to prepare for the Conrail integration and modest economic growth
expected over the next several quarters, CSX expects to constrain capital
spending in the next fiscal period. Significant attention is being given to
resource management which will enable the company to reduce excess costs and
achieve planned synergies associated with the Conrail transaction. However,
there can be no assurance that these objectives will be met, or met within a
specific time frame. The company will continue its initiative to review and
increase prices on rail and intermodal shipments where appropriate and
competitively feasible, and has initiated a fuel surcharge program that will
impact the fourth quarter as fuel expense is expected to remain at levels
significantly higher than the prior year.
- 24 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION, CONTINUED
OUTLOOK, Continued
- ------------------
The domestic container shipping business should continue to benefit
from seasonal traffic strength, particularly in the Alaska and Hawaii-Guam trade
lanes, but will likely see a continuation of competitive pressures and economic
slowdown in Puerto Rico that affected that trade lane in the second and third
quarters. The international terminals business expects container volumes to
remain strong in Hong Kong and other key terminal locations and should see
steady or improved earnings.
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 the company made subsequent progress in
stabilizing post-integration operations and restoring service levels, peak
traffic volume in the fall of 1999 and network disruptions from Hurricane Floyd
adversely affected operating and service recovery efforts. During the first
quarter of 2000, overall operations on the northern portion of the CSX system
(generally the lines allocated to CSX in the Conrail acquisition) improved;
however, operations in the south deteriorated.
-25-
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
- ------------------------------------------
At the beginning of the second quarter, the company announced key
management changes and operational initiatives aimed at accelerating the pace of
operational and service recovery. Additional action plans were implemented in
the third quarter to prepare the network for the higher seasonal traffic levels.
The railroad has seen steady and significant improvement in most operating
measures since these initiatives were implemented. Through the end of the third
quarter, the improved operations have resulted in some cost savings; however,
high fuel prices, heavier resources on the network to accommodate the fall
traffic levels, and some softening of traffic demand have mitigated the benefit
to operating income. Entering the fourth quarter, CSX's rail network is fluid,
and major emphasis is being placed on the reduction of operating expenses
through productivity improvement teams. The company is also continuing its
review of pricing policies and implementing rate increases where competitively
appropriate. A fuel-price surcharge was implemented in October 2000 to
facilitate recovery of a portion of the railroad's higher fuel costs.
Management believes that the recent operational improvements will be
sustained and fluid conditions will be maintained across the rail system.
Financial results for the rail unit are expected to improve as the company
reduces operating costs, regains business which had been diverted to other modes
of transportation, and begins to realize many of the synergies envisioned with
the Conrail acquisition. However, there can be no assurance that these
objectives will be met, or met within a specified timeframe.
Conrail's Results of Operations
- -------------------------------
Comparisons of Conrail's operating results for 2000 and 1999 are
affected by the significant changes in its business that occurred with the
integration with CSX and Norfolk Southern in June 1999. Revenues and expenses
for the first five months of the 1999 were derived principally from freight
linehaul operations over the entire Conrail network. Beginning in June 1999,
financial results 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 $35 million on revenues of $243 million
for the third quarter of 2000, compared to a net loss of $49 million on revenues
of $259 million for the prior year quarter. For the related nine-month periods,
Conrail reported net income of $131 million on revenues of $748 million in 2000
and a net loss of $36 million on revenues of $1.9 billion in 1999. As noted
above, the nine-month comparisons reflect five months of freight linehaul
operations in 1999 prior to the integration. Conrail's results for the first
nine months of 2000 benefited from a non-recurring gain on the sale of property
of $61 million, $37 million after-tax. Results in 1999 included non-recurring
expenses of $81 million, $51 million after-tax, in the third quarter and $173
million, $117 million after-tax in the second quarter. These charges were
recorded principally to increase certain components of Conrail's casualty
reserves based on the method of settlement of casualty liabilities agreed to
between CSX, Norfolk Southern and Conrail, and to adjust certain litigation and
environmental reserves based on settlements and completions of site reviews.
- 26 -
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
- ------------------------------------------
Conrail's operating activities provided cash of $85 million for the
first nine months of 2000, compared with $369 million for the first nine months
of 1999. The decline in cash provided by operations reflected lower operating
income resulting from Conrail's post-integration structure and operations, as
well as significant payments of one-time items owed to CSX and Norfolk Southern
in the early part of fiscal 2000.
Conrail's working capital deficit was $17 million at September 30, 2000,
compared with $194 million at December 31, 1999. The working capital deficit at
December 31, 1999 included slightly more than $300 million in long-term debt
maturities, the majority of which was paid in the second quarter of 2000 and
required CSX 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 CONTRACT LOGISTICS SEGMENT
- ----------------------------------
On September 22, 2000, CSX completed the sale of CTI Logistx, Inc., its
wholly-owned logistics subsidiary, for $650 million. The contract logistics
segment is now reported as a discontinued operation, and all prior-periods in
the statement of earnings have been restated accordingly. Revenues from the
contract logistics segment for the quarter and nine-months ended September 29,
2000 were $78 million and $335 million, respectively. Revenues for the quarter
and nine-months ended October 1, 1999 were $110 million and $347 million,
respectively. CSX recorded a gain of $570 million before tax, $365 million after
tax, $1.73 per share, on the sale.
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 change in
working capital, as defined in the agreement, between June 25, 1999, and
December 10, 1999. The loss recorded includes the estimated costs to terminate
various contractual obligations of the company. These matters will affect the
determination of the final loss on sale. The company has recorded a receivable
of approximately $60 million in connection with the post-closing adjustment and
this amount is currently in dispute. The matter has been submitted to
arbitration. Management is not yet in a position to assess fully the likely
outcome of this process but believes it will prevail in the arbitration.
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," for fiscal 2000 to report these as separate
business segments; however, it is not practicable to provide comparative segment
disclosures for the prior year.
- 27 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION, CONTINUED
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 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 through May 1, 2001, CSX has increased the frequency of
automated track inspections, enhanced management oversight of track inspection
and large scale maintenance operations, and implemented 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 during fiscal year 2000 to address
the issues raised in the audit and the commitments made in the Safety Compliance
Agreement. A portion of these costs will be changed to 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 and Proposed
- --------------------------------------------------------------------------------
New Rules for Rail Mergers
- --------------------------
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 STB's deliberations on this matter were prompted by significant
public concerns expressed following the December 1999 announcement by the
Burlington Northern Santa Fe (BNSF) and Canadian National (CN) railroads of
plans to merge and combine their respective rail systems. The moratorium was
instituted to allow the STB time to address the potential downstream effects
that a rail merger might have on the railroad industry at the present time, and
to consider changes in the rules by which future rail mergers will be evaluated.
In October 2000, the STB issued proposed new rules for rail mergers that would
require companies to demonstrate how future mergers would enhance competition
and make companies more accountable for claimed merger benefits and service.
After considering public comments on the proposed new rules, the STB anticipates
issuing final rules in June 2001.
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.
- 28 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION, CONTINUED
OTHER MATTERS, Continued
- ------------------------
Litigation
- ----------
In September 1997, a state court jury in New Orleans, Louisiana returned a
$2.5 billion punitive damages award against 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
-12-
CSX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited), Continued
(All Tables in Millions of Dollars, Except Per Share Amounts)
NOTE 10. COMMITMENTS AND CONTINGENCIES, Continued
New Orleans Tank Car Fire, Continued
- ------------------------------------
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 July 1999, 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.
In 1999, six of the nine defendants in the case reached a tentative
settlement with the plaintiffs group. The basis of that settlement is an
agreement that all claims for compensatory and punitive damages against the six
defendants would be compromised for the sum of $215 million. That settlement was
approved by the trial court earlier this year.
- 29 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION, CONTINUED
OTHER MATTERS, Continued
- ------------------------
Litigation, Continued
- ---------------------
Thein early 2000.
In 2000, the City of New Orleans recently was granted permission by the trial court
to assert an amended claim against CSXT, including a newly asserted claim for
punitive damages. The City's case was originally filed in 1988, and while based
on the 1987 tank car fire, is not considered to be part of the class action.
Oral argument in the Louisiana Court of Appeals for the Fourth Circuit with
regard to CSXT's appeal was held on January 12, 2001. A ruling is expected some
time this year. Any review beyond that court is by discretionary writ.
CSXT continues to pursue an aggressive legal strategy. Management
believesAt the present time,
management is not in a position to determine whether the resolution of this case
will have a material adverse effect on the Company's financial position or
results of operations in any future reporting period.
ECT Dispute
- -----------
Recently, CSX received a claim amounting to approximately $180 million plus
interest from Europe Container Terminals bv (ECT), owner of the Rotterdam
Container Terminal previously operated by Sea-Land prior to its sale to Maersk
in December 1999. ECT has claimed that an adverse outcome,the sale of the international liner
business to Maersk resulted in a breach of the Sea-Land terminal agreements. ECT
has refused to accept containers at the former Sea-Land facility tendered by
Maersk Sea-Land and is seeking compensation from CSX related to the alleged
breach. CSX has also advised Maersk that CSX holds them responsible for any
damages that may result from this case. Management's initial evaluation of the
claim indicates that valid defenses exist, but at this point management cannot
estimate what, if any islosses may result from this case.
-13-
CSX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited), Continued
(All Tables in Millions of Dollars, Except Per Share Amounts)
NOTE 10. COMMITMENTS AND CONTINGENCIES, Continued
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 likely to becurrently expect that resolution
of these matters will have a material to CSX's
or CSXT's overalladverse effect on the company's
consolidated financial position, results of operations or financial position, although itcash 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 11. BUSINESS SEGMENTS
The company operates in four business segments: Rail, Intermodal, Domestic
Container Shipping, and International Terminals. The Rail segment provides rail
freight transportation over a particular quarterlynetwork 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, Russia, and the Dominican Republic. 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 period.
Investment in Yukon Pacific Corporation
- ---------------------------------------
CSX is currently reviewing strategic alternatives with respect to its
investment in Yukon Pacific Corporation as part of its ongoing review of core
business holdings. Yukon Pacific is a majority-owned subsidiary whose business
objective is to promote constructionpolicies of the Trans-Alaska Gas Systemsegments 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 transport
natural gas from Alaska's North Slopeother expense. 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 30, 2001 and
March 31, 2000 is as follows:
Quarter ended March 30, 2001:
- -----------------------------
Marine Services
---------------------------------------------
Surface Transportation Domestic
-------------------------------- Container International
Rail Intermodal Total Shipping Terminals Total Total
--------------------------------------------------------------------------------------
Revenues from external customers $ 1,532 $ 265 $ 1,797 $ 161 $ 67 $ 228 $ 2,025
Intersegment revenues - 5 5 - 1 1 6
Segment operating income 166 16 182 (3) 12 9 191
Assets 12,911 418 13,329 299 795 1,094 14,423
-14-
CSX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited), Continued
(All Tables in Millions of Dollars, Except Per Share Amounts)
NOTE 11. BUSINESS SEGMENTS, Continued
Quarter ended March 31, 2000:
- -----------------------------
Marine Services
---------------------------------------------
Surface Transportation Domestic
------------------------------- Container International
Rail Intermodal Total Shipping Terminals Total Total
--------------------------------------------------------------------------------------
Revenues from external customers $ 1,515 $ 283 $ 1,798 $ 162 $ 74 $ 236 $ 2,034
Intersegment revenues - 5 5 - - - 5
Segment operating income 147 13 160 (1) 14 13 173
Assets 12,976 389 13,365 338 720 1,058 14,423
A reconciliation of the totals reported for the business segments to the
port of Valdez for export
principally to Asian markets. As part of the strategic review, management
anticipates developing information about the current market value of the
investment. The company expects to complete the review of alternatives during
the fourth quarter.
Workforce Reduction
- -------------------
In October 2000, the company communicated to employees plans to review
functions and staffing levels throughout the non-union workforce at its rail and
intermodal units, its corporate headquarters, and its technology subsidiary. The
objective of the review is to identify unnecessary or redundant work, or
otherwise revise or restructure work in a manner that will allow a meaningful
reductionapplicable line items in the workforce. The process will result in involuntary terminations
of employees over the next twelve to fourteen months. While the company has
established separation benefits to be paid to employees affected by this review,
the number of employees to be terminated has not yet been determined. Formal
decisions on terminations will be made on a departmental basis. The company
anticipates incurring expense for termination benefits. Substantially all
termination benefits will be paid from CSX's defined benefit pension plan in the
form of a lump-sum payment or an enhancement to employees' normal retirement
benefits.
- -------------------------------------------------------------------------------
-consolidated financial statements is as follows:
March 30, March 31,
2001 2000
------------------- -------------------
Revenues:
- --------
Total external revenues for business segments $ 2,025 $ 2,034
Intersegment revenues for business segments 6 5
Elimination of intersegment revenues (6) (5)
------------------- -------------------
Total consolidated revenues $ 2,025 $ 2,034
=================== ===================
Operating Income:
- ----------------
Total operating income for business segments $ 191 $ 173
Reclassification of minority interest expense for
International terminals segment 8 8
Unallocated corporate expenses (10) (7)
------------------- -------------------
Total consolidated operating income $ 189 $ 174
=================== ===================
Assets:
- ------
Assets for Business Segments $ 14,423 $ 14,423
Investment in Conrail 4,673 4,668
Elimination of Intercompany Receivables 180 (289)
Non-segment Assets 1,162 1,723
------------------- -------------------
$ 20,438 $ 20,525
=================== ===================
-15-
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 years 2001 and 2000
consist of 52 weeks. The quarters ended March 30, 2001 and March 31, 2000
consisted of 13 weeks.
First Quarter 2001 Compared with 2000
- -------------------------------------
CSX reported net earnings from continuing operations of $20 million, 10
cents per diluted share, for the quarter ended March 30, 2001 as compared to $25
million, 12 cents per diluted share for the quarter ended March 31, 2000.
Operating income for the first quarter of 2001 totaled $189 million,
compared with $174 million in the first quarter of 2000 on revenues of $2.03
billion in both years. Operating expenses for the first quarter of 2001 totaled
$1.84 billion compared to $1.86 billion in the prior year, a 1% decrease.
Other expense totaled $31 million in the first quarter of 2001 compared to
$5 million in the first quarter of 2000, more than offsetting the year over year
increase in operating income. This was due primarily to the $14 million write-
off of an investment in a non-rail affiliate along with a decrease in interest
income and an increase in net losses from sales of accounts receivable and
expenses from real estate and resort operations.
Surface Transportation Results
- ------------------------------
Rail
Rail operating income for the first quarter of 2001 totaled $166 million,
compared to $147 million in the prior year quarter, an increase of 13%.
Operating revenue totaled $1.53 billion, an increase of $17 million, or 1%, due
primarily to the exceptionally strong demand for coal. Operating expense was
consistent at $1.37 billion in both years.
-16-
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 30, 2001 and March 31, 2000:
Carloads Revenue
(Thousands) (Millions of Dollars)
---------------------------------- ---------------------------------
March 30, March 31, March 30, March 31,
2001 2000 2001 2000
--------------- ---------------- -------------- ----------------
Merchandise
Phosphates and Fertilizer 119 131 $ 89 $ 92
Metals 82 91 102 107
Food and Consumer Products 40 41 58 53
Paper and Forest Products 122 137 160 168
Agricultural Products 100 92 134 122
Chemicals 150 149 250 247
Minerals 95 101 90 95
Government 3 3 7 5
--------------- ---------------- -------------- ----------------
Total Merchandise 711 745 890 889
Automotive 127 158 194 227
Coal, Coke & Iron Ore
Coal 439 396 416 371
Coke 10 12 11 12
Iron Ore 5 8 3 7
--------------- ---------------- -------------- ----------------
Total Coal, Coke & Iron Ore 454 416 430 390
Other - - 18 9
--------------- ---------------- -------------- ----------------
Total Rail 1,292 1,319 $ 1,532 $ 1,515
=============== ================ ============== ================
Overall freight revenue was significantly higher than the first quarter of
2000 due primarily to an increase in coal revenue and strategic price
initiatives. Merchandise demand decreased from prior year, particularly in the
phosphates and fertilizer group and the paper and forest products commodity
group. Automotive revenue decreased significantly, due primarily to automotive
plant shut downs relating to a weak economy.
As compared to the first quarter of 2000, operations of the railroad are
running smoother in 2001. During the first quarter of 2000, CSX's rail unit was
still experiencing operating difficulties and diminished service performance
relating to the initial integration of operations over the Conrail territories.
In 2001, primarily the result of strategic initiatives begun in mid-2000, CSX's
rail unit has seen improvement in operations and service performance and the
railroad has seen significant improvements in most operating
-17-
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
measures. The improved performance allowed the Company to selectively raise
rates helping offset decreased demand while also enabling the Company to realize
savings in certain operating expense categories. Increases in fuel expense due
to price increases year over year and labor costs somewhat offset the savings in
other operating expense categories.
Intermodal
- ----------
Intermodal operating income totaled $16 million for the first quarter of
2001, compared to $13 million in the prior year quarter. Revenue for the
quarter decreased $18 million, or 6%, to $270 million. Operating expense
decreased $21 million, or 8%, to $254 million. The decrease in revenues
represent a slight loss in market share year over year along with the weakening
economy, but this was offset by increased savings in certain operating expense
categories.
Marine Services Results
- -----------------------
Domestic Container Shipping
The domestic container shipping unit reported an operating loss of $3
million for the first quarter of fiscal 2001 as compared to an operating loss of
$1 million in the prior year. Operating revenues were relatively constant at
$161 million for the first quarter of 2001 and $162 million in the prior year.
The Puerto Rico tradelane is continuing to experience excess capacity which is
putting pressure on rates. The results for both the Alaska and Hawaii
tradelanes have improved compared to first quarter 2000.
International Terminals
The international terminals unit reported operating income of $12 million
for the first quarter as compared to $14 million in the prior year. Operating
revenues were $68 million for the first quarter of 2001 as compared to $74
million in the prior year. The decrease in operating revenues and income was
primarily due to the economic slowdown which hit particularly strong at the
Company's main terminal in Hong Kong early in the quarter.
FINANCIAL CONDITION
Cash, cash equivalents and short-term investments totaled $621 million at
March 30, 2001, a decrease of $63 million since December 29, 2000.
The primary source of cash and cash equivalents during the first quarter of
2001 was the issuance of $500 million of notes. Cash flow from operations was
neutral reflecting customary seasonal weakness. Primary uses of cash and cash
equivalents during the quarter were property additions, repayments of short-term
debt, and the payment of dividends on the company's outstanding common stock.
-18-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION, CONTINUED
FINANCIAL CONDITION, Continued
CSX's working capital deficit at March 30, 2001 was $890 million, down from
$1.2 billion at December 29, 2000. The working capital deficit at both dates
includes approximately $300 million of commercial paper that is classified as
short-term debt due to the fact that it is supported by the Company's line of
credit agreement which expires in November 2001. A working capital deficit is
not unusual for the company and does not indicate a lack of liquidity. The
company continues to maintain adequate current assets to satisfy current
liabilities when they are due and has sufficient liquidity and financial
resources to manage its day-to-day cash needs.
CSX also has $300 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 30, December 29,
2001 2000
------------------- ----------------
Cash, Cash Equivalents and
Short-Term Investments $ 621 $ 684
Commercial Paper Outstanding -
Short-Term $ 478 $ 749
Working Capital (Deficit) $ (890) $ (1,234)
Current Ratio .7 .6
Debt Ratio 53% 52%
Ratio of Earnings to Fixed Charges 1.2 x 1.4 X
OUTLOOK
- -------
In the remainder of 2001, the challenge will be to continue to improve the
financial performance of the railroad. This will be accomplished through
continued service improvements, aggressive cost cutting initiatives and taking
full advantage of revenue synergy opportunities from the Conrail transaction.
Despite an economy that is showing clear signs of at least a short-term slow
down, if not a contraction, CSX expects to produce full year earnings that will
show an increase from previous years. The coal unit is expected to continue to
offset the decreased demand in other sectors through the remainder of the year.
CSX is hopeful that the second half of 2001 will produce some year over year
increases in rail volumes. On the cost side, the impact of higher fuel costs is
expected to have a negative impact on cost comparisons during the first part of
the year but could be favorable if prices decline throughout the year.
Although CSX World Terminals encountered a difficult first quarter,
especially its main terminal in Hong Kong, it is still expected to produce both
earnings and cash flow levels above 2000's results. Results in Hong Kong
improved late in the first quarter and are expected to continue improving
throughout the remainder of 2001.
CSX Lines continues to struggle with price competition in Puerto Rico, but
other trade-lanes continue to be strong.
-19-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION, CONTINUED
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. 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 have assumed substantially all of Conrail's former
customer freight contracts. CSX's rail and intermodal operating revenue include
revenue from traffic previously moving on Conrail. Operating expenses reflect
corresponding increases for costs incurred to 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.
Conrail's Results of Operations
- -------------------------------
Conrail reported net income of $45 million on revenues of $233 million for
the first quarter of 2001, compared to net income of $65 million on revenues of
$259 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 provided net cash of $121 million in the
first quarter of 2001, compared with a net use of cash of $112 million in the
first quarter of 2000.
Conrail's working capital was $132 million at March 31, 2001, compared with
$85 million at December 31, 2000.
-20-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION, CONTINUED
OTHER MATTERS
Surface Transportation Board Moratorium on Rail Merger Applications and Proposed
- --------------------------------------------------------------------------------
New Rules for Rail Mergers
- ---------------------------
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 STB's deliberations on this matter were prompted by significant
public concerns expressed following the December 1999 announcement by the
Burlington Northern Santa Fe and Canadian National railroads of plans to merge
and combine their respective rail systems. The moratorium was instituted to
allow the STB time to address the potential downstream effects that a rail
merger might have on the railroad industry at the present time, and to consider
changes in the rules by which future rail mergers will be evaluated. In October
2000, the STB issued proposed new rules for rail mergers that would require
companies to demonstrate how future mergers would enhance competition and make
companies more accountable for claimed merger benefits and service. After
considering public comments on the proposed new rules, the STB anticipates
issuing final rules in June 2001.
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, if enforced, could have adversely affected CSX's coal traffic
and revenues if upheld. A federal appeals court overturned the decision on April
24, 2001, ruling that the case should properly have been brought in the West
Virginia state courts.
New Orleans Tank Car Fire 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.
-21-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION, CONTINUED
OTHER MATTERS, Continued
New Orleans Tank Car Fire 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 July 1999, 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.
In 1999, six of the nine defendants in the case reached a tentative
settlement with the plaintiffs group. The basis of that settlement is an
agreement that all claims for compensatory and punitive damages against the six
defendants would be compromised for the sum of $215 million. That settlement was
approved by the trial court in early 2000.
In 2000, the City of New Orleans was granted permission by the trial court
to assert an amended claim against CSXT, including a newly asserted claim for
punitive damages. The City's case was originally filed in 1988, and while based
on the 1987 tank car fire, is not considered to be part of the class action.
Oral argument in the Louisiana Court of Appeals for the Fourth Circuit with
regard to CSXT's appeal was held on January 12, 2001. A ruling is expected some
time this year. Any review beyond that court is by discretionary writ.
CSXT continues to pursue an aggressive legal strategy. At the present time,
management is not in a position to determine whether the resolution of this case
will have a material adverse effect on the Company's financial position or
results of operations in any future reporting period.
ECT Dispute
- ------------
Recently, CSX received a claim amounting to approximately $180 million plus
interest from Europe Container Terminals bv (ECT), owner of the Rotterdam
Container Terminal previously operated by Sea-Land prior to its sale to Maersk
in December 1999. ECT has claimed that the sale of the international liner
business to Maersk resulted in a breach of the Sea-Land terminal agreements. ECT
has refused to accept containers at the former Sea-Land facility tendered by
Maersk and is seeking compensation from CSX relating to the alleged breach. CSX
has advised Maersk that CSX holds them responsible for any damages that may
arise from this case. Management's initial evaluation of the claim indicates
that valid defenses exist, but at this point management cannot estimate what, if
any, losses may result from this case.
-22-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION, CONTINUED
__________________________________________________
Estimates and forecasts in Management's Discussion and Analysis and in
other sections of this Quarterly Report are based on many assumptions about
complex economic and operating factors with respect to industry performance,
general business and economic conditions and other matters that cannot be
predicted accurately and that are subject to contingencies over which the
company has no control. Such forward-looking statements are subject to
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-lookingforward-
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 businessbusinesses of the company; and (vi) changes may occur in the
securities and capital markets.
- 31 --23-
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
1. (27) Financial Data ScheduleNone
(b) Reports on Form 8-K
1. A report wasForm 8-K filed on August 10, 2000 reporting Item 5, Other
Events - authorization of issuance and1/31/01 to restate CSX Corporation's financial
statements to reflect the sale of an additional U.S.
$150,000,000CTI Logistx as a discontinued
operation.
Form 8-K filed on 3/12/01 to announce the public offering of
Medium Term$500,000,000 aggregate principal amount of the Company's 6.75% Notes
Series C; plus Item 7,
Financial Statements and Exhibits - documents related to the
notes filed as exhibits.due 2011.
Signature
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CSX CORPORATION
(Registrant)
By: /s/ JAMES L. ROSS
-------------------------------------
James L. Ross
Vice President and Controller
(Principal Accounting Officer)
Dated: November 1, 2000
- 32 -
May 2, 2001
-24-