PAGE 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarter ended September 27, 1996March 28, 1997
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to ----------------- ----------------__________
Commission File Number 1-8022
CSX CORPORATION
(Exact name of registrant as specified in its charter)
Virginia 62-1051971
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
901 East Cary Street, Richmond, Virginia 23219-4031
(Address of principal executive offices) (Zip Code)
(804) 782-1400
(Registrant's telephone number, including area code)
No Change
(Former name, former address and former fiscal year, if changed since
last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes (X) No ( )
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of September 27, 1996: 216,925,500March 28, 1997: 217,662,928 shares.
- 1 -
PAGE 2
CSX CORPORATION
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 27, 1996MARCH 28, 1997
INDEX
Page Number
PART I. FINANCIAL INFORMATION Page Number
Item 1:
Financial Statements
1. Consolidated Statement of Earnings-
Quarters Ended March 28, 1997 and Nine Months Ended September 27,March 29, 1996
and September 29, 1995 3
2. Consolidated Statement of Cash Flows-
Nine MonthsQuarters Ended September 27,March 28, 1997 and March 29, 1996 and
September 29, 1995 4
3. Consolidated Statement of Financial Position-
At SeptemberMarch 28, 1997 and December 27, 1996 and December 29, 1995 5
Notes to Consolidated Financial Statements 6
Item 2:
Management's Discussion and Analysis of Results of
Operations and Financial Condition 1110
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 17
Signature 17
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PAGE 3
CSX CORPORATION AND SUBSIDIARIES
Consolidated Statement of Earnings
(Millions of Dollars, Except Per Share Amounts)
(Unaudited)
Quarters Ended
Nine Months Ended
----------------------- ----------------------
Sept. 27, Sept.-------------------------
March 28, March 29,
Sept. 27, Sept. 29,1997 1996
1995 1996 1995
--------- -------- -------- ------------------ ----------
Operating Revenue $ 2,6472,567 $ 2,601 $ 7,833 $ 7,5942,514
Operating Expense 2,255 2,232 6,737 6,608
Restructuring Charge --- --- --- 257
-------- ------- -------- -------
Total 2,255 2,232 6,737 6,865
-------- ------- -------- -------2,243 2,218
--------- ---------
Operating Income 392 369 1,096 729324 296
Other Income (Expense) 8 20 19 17(7) (12)
Interest Expense 57 68 188 203
-------- ------- -------- -------84 60
--------- ---------
Earnings before Income Taxes 343 321 927 543233 224
Income Tax Expense 121 119 325 201
-------- ------- -------- -------82 78
--------- ---------
Net Earnings $ 222151 $ 202 $ 602 $ 342
======== ======= ======== =======146
========= =========
Earnings Per Share $ 1.04.70 $ .96 $ 2.83 $ 1.62
======== ======= ======== =======.69
========= =========
Average Common Shares Outstanding (Thousands) 215,060 210,403 212,567 210,206
======== ======= ======== =======217,227 210,964
========= =========
Common Shares Outstanding (Thousands) 216,926 210,485 216,926 210,485
======== ======= ======== =======217,663 211,512
========= =========
Cash Dividends Paid Per Common Share $ .26 $ .22 $ .78 $ .66
======== ======= ======== =======.26
========= =========
See accompanying Notes to Consolidated Financial Statements.
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PAGE 4
CSX CORPORATION AND SUBSIDIARIES
Consolidated Statement of Cash Flows
(Millions of Dollars)
(Unaudited)
Nine MonthsQuarters Ended
---------------------
Sept. 27, Sept.----------------------
March 28, March 29,
1997 1996
1995--------- -------- ---------
OPERATING ACTIVITIES
Net Earnings $ 602151 $ 342146
Adjustments to Reconcile Net Earnings
to Net Cash Provided
Depreciation 461 446159 156
Deferred Income Taxes 92 (57)
Restructuring Charge Provision -- 25717 14
Productivity/Restructuring Charge Payments (67) (117)(15) (23)
Other Operating Activities 17 7514 (52)
Changes in Operating Assets and Liabilities
Accounts Receivable (112) (98)(23) (20)
Other Current Assets (23) (24)(3) (38)
Accounts Payable (32) 32(89) (58)
Other Current Liabilities (81) 108(14) (156)
----- -----
Net Cash Provided (Used) by Operating
Activities 857 964197 (31)
----- -----
INVESTING ACTIVITIES
Property Additions (876) (819)(189) (338)
Proceeds from Property Dispositions 3 24
Short-Term Investments - Net (9) (4)41 (44)
Purchases of Long-Term Marketable Securities (26) (87)(18) --
Proceeds from Sales of Long-Term Marketable
Securities 117 748 89
Other Investing Activities 69 56(25) 12
----- -----
Net Cash Used by Investing Activities (725) (780)(180) (257)
----- -----
FINANCING ACTIVITIES
Short-Term Debt - Net 128 (46)(48) 284
Long-Term Debt Issued 117 1155 57
Long-Term Debt Repaid (372) (95)
Cash(51) (120)
Dividends Paid (167) (139)(57) (55)
Other Financing Activities 12 53 3
----- -----
Net Cash UsedProvided (Used) by Financing (148) 169
Activities (282) (160)
----- -----
Net (Decrease) IncreaseDecrease in Cash and Cash Equivalents (150) 24(131) (119)
CASH, CASH EQUIVALENTS AND SHORT-TERMSHORT-
TERM INVESTMENTS
Cash and Cash Equivalents at Beginning of Period368 320
265Period
----- -----
Cash and Cash Equivalents at End of Period 170 289237 201
Short-Term Investments at End of Period 345 274273 380
----- -----
Cash, Cash Equivalents and Short-Term
Investments at End of Period $ 515510 $ 563581
===== =====
See accompanying Notes to Consolidated Financial Statements.
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CSX CORPORATION AND SUBSIDIARIES
Consolidated Statement of Financial Position
(Millions of Dollars)
(Unaudited)
SeptemberMarch December
28, 27,
December 29,1997 1996
1995--------- -------- ------------
ASSETS
Current Assets
Cash, Cash Equivalents and Short-Term
Investments $ 515510 $ 660682
Accounts Receivable 928 832924 894
Materials and Supplies 217 220243 229
Deferred Income Taxes 151 148145 139
Other Current Assets 108 75
------- -------119 128
-------- --------
Total Current Assets 1,919 1,9351,941 2,072
Properties-Net 11,720 11,29711,924 11,906
Investment in Conrail 1,955 1,965
Affiliates and Other Companies 331 312362 345
Other Long-Term Assets 671 738
------- -------706 677
-------- --------
Total Assets $14,641 $14,282
======= =======$ 16,888 $ 16,965
======== ========
LIABILITIES
Current Liabilities
Accounts Payable $ 1,0731,053 $ 1,1211,189
Labor and Fringe Benefits Payable 495 526444 499
Casualty, Environmental and Other Reserves 283 298 306
Current Maturities of Long-Term Debt 201 486143 101
Short-Term Debt 276 148287 335
Other Current Liabilities 371 412
------- -------346 327
-------- --------
Total Current Liabilities 2,699 2,9912,571 2,757
Casualty, Environmental and Other Reserves 755 813716 715
Long-Term Debt 2,288 2,2224,243 4,331
Deferred Income Taxes 2,657 2,5602,743 2,720
Other Long-Term Liabilities 1,427 1,454
------- -------1,488 1,447
-------- --------
Total Liabilities 9,826 10,040
------- -------11,761 11,970
-------- --------
SHAREHOLDERS' EQUITY
Common Stock, $1 Par Value 218 217 210
Other Capital 1,452 1,3191,470 1,433
Retained Earnings 3,255 2,8223,546 3,452
Minimum Pension Liability (109) (109)
------- -------(107) (107)
-------- --------
Total Shareholders' Equity 4,815 4,242
------- -------5,127 4,995
-------- --------
Total Liabilities and Shareholders'
Equity $14,641 $14,282
======= =======$ 16,888 $ 16,965
======== ========
See accompanying Notes to Consolidated Financial Statements.
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PAGE 6
CSX CORPORATION AND SUBSIDIARIES
--------------------------------
Notes to Consolidated Financial Statements (Unaudited)
(All Tables in Millions of Dollars, Except Per Share Amounts)
NOTE 1. BASIS OF PRESENTATION
In the opinion of management, the accompanying consolidated financial
statements contain all adjustments necessary to present fairly the company's
financial position as of SeptemberMarch 28, 1997 and December 27, 1996, and December 29, 1995, the results of
its operations for the quarters and nine months ended September 27, 1996
and September 29, 1995, and its cash flows for the nine monthsquarters ended September
27,March 28, 1997 and
March 29, 1996, and September 29, 1995, such adjustments being of a normal recurring nature.
Earnings per share are based on the weighted average of common shares
outstanding for the quarters ended March 28, 1997 and nine months ended September 27, 1996 and
SeptemberMarch 29, 1995.1996. Dilution
for these periods, which wouldcould result if all outstanding common stock
equivalents were exercised, is not significant.
Weighted average shares and earnings per share for 1995 have been restated to
reflect the 2-for-1 common stock split distributed to shareholders in
December.
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.
Beginning with the quarter ended June 28, 1996, the company changed its
earnings presentation to exclude non-transportation activities from operating
revenue and expense. These activities, principally real estate and resort
operations, are now included in "Other Income (Expense)." Prior-year data have
been reclassified to conform to the 1996new presentation.
NOTE 2. FISCAL REPORTING PERIODS
The company's fiscal year is composed of 52 weeks ending on the last
Friday in December. The financial statements presented are for the 13-week
quarters ended March 28, 1997 and 39-week periods ended September 27,March 29, 1996, and September 29, 1995, and the fiscal year ended
December 29, 1995.27, 1996.
NOTE 3. RESTRUCTURING CHARGE
InACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board (FASB) has issued Statement No.
128 "Earnings per Share," which establishes new guidelines for the secondcalculation
of and disclosures regarding earnings per share. The company will adopt the
provisions of Statement No. 128 during the fourth quarter of 1995,1997 and at that
time will be required to present basic and diluted earnings per share and to
restate all prior periods. There will be no impact on the calculation of basic
earnings per share for the quarters ended March 28, 1997 and March 29, 1996.
Diluted earnings per share is not expected to differ materially from basic
earnings per share.
The FASB also issued Statement No. 129 "Disclosure of Information About
Capital Structure," which the company recordedwill adopt during the fourth quarter of
1997. The company does not expect that adoption of the disclosure requirements
of this pronouncement will have a $257 million
pretax restructuring charge, $160 million after-tax, 76 centsmaterial impact on its financial statements.
NOTE 4. JOINT ACQUISITION OF CONRAIL, INC.
At March 28, 1997, the company held shares equivalent to approximately
19.9% of the aggregate outstanding common and ESOP Preferred stock (the Conrail
shares) of Conrail, Inc. (Conrail). The shares were acquired in November 1996
pursuant to a merger agreement entered into by the two companies in October 1996
and subsequent tender offer. The merger agreement was subsequently modified,
including an amendment on March 7, 1997 to increase the price to be paid for the
remaining outstanding Conrail shares to $115 cash per share and to recognizepermit the
estimated costcompany to negotiate with Norfolk Southern Corporation (Norfolk Southern) on a
division of initiatives undertakenthe Conrail rail system. On April 8, 1997, the company and Norfolk
Southern announced an agreement to revise, restructure,
and consolidate specific operations and administrative functions at its rail
and container-shipping units. At December 29, 1995,form a reserve of $69 million
remained, of which $3 million and $9 million was utilized for the quarter and
nine months ended September 27, 1996, respectively, for global integration and
vessel reflagging costs which were included in the container-shipping unit's
restructuring initiatives.
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PAGE 7
CSX CORPORATION AND SUBSIDIARIES
--------------------------------
Notes to Consolidated Financial Statements (Unaudited), Continued
(All Tables in Millions of Dollars, Except Per Share Amounts)
jointly-owned entity to acquire all outstanding Conrail shares for $115 cash per
share. The agreement provides for the company to contribute $4.3 billion for its
42% share of the acquisition and for Norfolk Southern to contribute $5.9 billion
for its 58% share, including the investments already held by each company. The
jointly-owned entity is expected to complete its tender offer for the remaining
Conrail shares in May 1997 and to place all Conrail shares in a voting trust
pending approval of the proposed transaction by the Surface Transportation Board
(STB). The joint STB application is expected to be filed shortly after
acquisition of the remaining Conrail shares is completed.
At March 28, 1997, the company has accounted for its 19.9% investment in
Conrail using the cost method. Upon acquiring its additional interest in Conrail
through the jointly-owned entity and until STB approval and release of the
Conrail shares from the voting trust, the company will account for the
investment using the equity method.
During the quarter ended March 28, 1997, the company incurred net costs
before income taxes of $24 million with respect to its investment in Conrail
shares. These net costs, principally interest on debt issued to acquire the
investment less dividends received on the shares, reduced net earnings by $16
million, 7 cents per share.
NOTE 4.5. ACCOUNTS RECEIVABLE
The company has sold, directly and through Trade Receivables
Participation Certificates ("Certificates")(Certificates), ownership interests in designated
pools of accounts receivable originated by CSX Transportation, Inc. ("CSXT")(CSXT),
its rail unit.
During 1993, $200 million of Certificates were issued at 5.05%, due
September 1998. The Certificates represent undivided interests in a master trust
holding an ownership interest in a revolving pool of rail freight accounts
receivable. TheAt March 28, 1997 and December 27, 1996, the Certificates were
collateralized by $241$249 million and $240$248 million, respectively, of accounts
receivable held in the master trust at September 27,
1996 and December 29, 1995, respectively.trust.
In addition, the company has a revolving agreement with a financial
institution to sell with recourse on a monthly basis an undivided percentage
ownership interest in designated pools of rail freight and other accounts receivable.
The agreement currently provides for the sale of up to $200 million in accounts receivable
and expires in September 1998.
The company has retained the responsibility for servicing and collecting
accounts receivable held in trust or sold. At SeptemberMarch 28, 1997 and December 27,
1996,
and December 29, 1995, accounts receivable have been reduced by $372 million, representing
Certificates and accounts receivable sold. The net costs associated with sales
of Certificates and receivables were $7 million for each of the quarters ended
March 28, 1997 and $22
millionMarch 29, 1996.
The company adopted FASB Statement No. 125 "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities" during the
first quarter of 1997. Adoption of the pronouncement, which established new
guidelines for accounting and nine months ended September 27, 1996,
respectively,disclosure related to transfers of trade accounts
receivable and $8 million and $24 million forother financial assets, did not have a material impact on the
quarter and nine months
ended September 29, 1995, respectively.
NOTE 5. OPERATING EXPENSE
Quarters Ended Nine Months Ended
------------------ ------------------
Sept. 27, Sept. 29, Sept. 27, Sept. 29,
1996 1995 1996 1995
-------- -------- -------- --------
Labor and Fringe Benefits $ 788 $ 786 $2,379 $2,338
Materials, Supplies and Other 646 664 1,896 1,940
Building and Equipment Rent 282 279 858 832
Inland Transportation 262 242 743 707
Depreciation 149 146 456 439
Fuel 128 115 405 352
Restructuring Charge --- --- --- 257
------ ------ ------ ------
Total $2,255 $2,232 $6,737 $6,865
====== ====== ====== ======company's financial statements.
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CSX CORPORATION AND SUBSIDIARIES
--------------------------------
Notes to Consolidated Financial Statements (Unaudited), Continued
(All Tables in Millions of Dollars, Except Per Share Amounts)
NOTE 6. OPERATING EXPENSE
Quarters Ended
---------------------
March 28, March 29,
1997 1996
--------- --------
Labor and Fringe Benefits $ 795 $ 794
Materials, Supplies and Other 614 618
Building and Equipment Rent 284 289
Inland Transportation 237 229
Depreciation 156 153
Fuel 157 135
------ ------
Total $2,243 $2,218
====== ======
NOTE 7. OTHER INCOME (EXPENSE)
Quarters Ended
Nine Months Ended
------------------ -----------------
Sept. 27, Sept.---------------------
March 28, March 29,
Sept. 27, Sept. 29,1997 1996
1995 1996 1995
-------- -------- ----------------- --------
Interest Income $ 912 $ 19 $ 33 $ 4812
Income from Real Estate and Resort Operations (1) 19 18 42 28
Foreign Currency Gain -- 8 1 2(7) (8)
Operations(1)
Net Costs for Accounts Receivable Sold (7) (8) (22) (24)(7)
Minority Interest (11)(10) (8)
(29) (19)Net Loss on Investment Transactions -- (2)
Equity Earnings (Losses) of Other Affiliates 1 2
Income from Investment in Conrail - Net 5 --
Miscellaneous (1) 4 (4)
Miscellaneous (4) (8) (10) (14)
------ ------ ------ ------(1)
----- -----
Total $ 8(7) $ 20 $ 19 $ 17
====== ====== ====== =======(12)
===== =====
(1) Gross revenue from real estate and resort operations was $58$17 million and
$137$13 million for the quarterquarters ended March 28, 1997 and nine months ended September 27,March 29, 1996, respectively, and $57 million and $124 million for the quarter
and nine months ended September 29, 1995,
respectively.
NOTE 7.8. COMMITMENTS AND CONTINGENCIES
During 1995, CSXT entered into an agreement with AT&T to supply and
manage its telecommunications needs through May 2005. The agreement requires
minimum payments totaling approximately $330 million over the ten-year period.
Certain terms and conditions of the agreement with AT&T are currently the
subject of renegotiation, which is expected to be completed without any
disruption of service.
In July 1996, CSXT reached agreements with two manufacturers for the
purchase of 80 alternating current traction locomotives to be delivered during
the remainder of 1996 and 1997. These agreements represent commitments for
additional locomotives above the company's 1993 order covering 300 units for
1994-1997 delivery. As of September 27, 1996, a total of 108 locomotives
remain for 1996 and 1997 delivery under the 1993 and 1996 purchase agreements.
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 substantial portion of the
insurance coverage, up to$25 million limit above $100 million per occurrence from
rail and certain other operations, may beis provided by companies owned ora company partially owned by
CSX.
The company has been advised that activities of a subsidiary that
administered student loans and that was sold by the company in 1992 are under
review to determine whether, and to what extent, damages should be asserted
against the company for government insurance payments on uncollected loans
related to alleged processing deficiencies or errors that may have occurred
prior to the time the subsidiary was sold. The company believes it has no
material liability for any claim that might be asserted, but the final outcome
of the review and the amount of potential damages are not yet reasonably
estimable. Based upon information currently available to the company, it is
believed any adverse outcome will not be material to the company's results of
operations or financial position.
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CSX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited), Continued
(All Tables in Millions of Dollars, Except Per Share Amounts)
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") in a number of investigations and
actions. CSXT has identified(PRP) at approximately 104111 environmentally
impaired sites
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PAGE 9
CSX CORPORATION AND SUBSIDIARIES
--------------------------------
Notes to Consolidated Financial Statements (Unaudited), Continued
(All Tables in Millions of Dollars, Except Per Share Amounts)
NOTE 7. COMMITMENTS AND CONTINGENCIES, Continued that are or may be subject to remedial action under the Federal
Superfund statute ("Superfund")(Superfund) or correspondingsimilar 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 correspondingsimilar state statutes typicallycan 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 approximately 271 sites, including the sites
addressed under the Federal Superfund statute or similar state statutes, at
which it is participating in the study and/or clean-up of alleged environmental
contamination. The assessment of the required response and remedial costs
associated with most sites is extremely complex. Cost estimates are based on
information available for each site, financial viability of other PRPs, where
available, and existing technology, laws and regulations. CSXT's best estimates
of the allocation method and percentage of liability when other PRPs are
involved are based on assessments by consultants, agreements among PRPs, or
determinations by the U.S. Environmental Protection Agency or other regulatory
agencies.
At least once each quarter, CSXT reviews its role, if any, with respect to
each such location, giving consideration to the nature of CSXT's alleged
connection to the location (e.g., generator, owner or operator), the extent of
CSXT's alleged connection (e.g., volume of waste sent to the location and other
relevant factors), the accuracy and strength of evidence connecting CSXT to the
location, and the number, connection and financial position of other named and
unnamed PRPs at the location. The ultimate liability for remediation iscan 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 28, 1997, and December 27, 1996, and December 29, 1995, were $121$115 million and $137$117 million,
respectively. These recorded liabilities include amounts representing CSXT's
estimate of unasserted claims, which CSXT believes to be immaterial. The
liability has been accrued for future costs for all sites where the company's
obligation is probable and where such costs can be reasonably estimated. The
liability includes future costs for remediation and restoration of sites as well
as any significant ongoing monitoring costs, but excludes any anticipated
insurance recoveries. The majority of the September 27, 1996March 28, 1997 environmental liability
is expected to be paid out over the next five to seven years, funded by cash
generated from operations.
The company does not currently possess sufficient information to
reasonably estimate the amounts of additional liabilities, if any, on some sites
until completion of future environmental studies. In addition, latent conditions
at any given location could result in exposure, the amount and
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PAGE 10
CSX CORPORATION AND SUBSIDIARIES
- --------------------------------
Notes to Consolidated Financial Statements (Unaudited), Continued
(All Tables in Million of Dollars, Except Per Share Amounts)
NOTE 7. COMMITMENTS AND CONTINGENCIES, Continued 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.
A number of legal actions, other than environmental, are pending against
CSX and certain subsidiaries in which claims are made in substantial amounts.
While the ultimate results of environmental investigations, lawsuits and claims
involving the company cannot be predicted with certainty, management does not
currently expect that resolution of these matters will have a material adverse
effect on the consolidated financial position, results of operations and cash
flows of the company.
NOTE 8. STOCK PURCHASE AND LOAN PLAN
In April 1996, the company's shareholders approved the amendment and
restatement of the 1991 Stock Purchase and Loan Plan (the "Plan"), which
otherwise would generally have come to an end when purchase loans issued in
1991 and 1992 matured on July 31, 1996. The Plan amendment continues the
original objective of providing a method for eligible employees to
significantly increase their ownership of common stock, thereby assuring their
interests are aligned with the company's non-employee shareholders.
On August 1, 1996, 58,960 shares were withdrawn from the Plan,
2,570,194 shares were exchanged and cancelled, and 7,590,218 new shares and
related rights were awarded and sold at an average market price of $47.50 per
share to existing and new participants, so that at September 27, 1996, there
were 8,123,090 shares outstanding and 188 officers and key employees
participating in the Plan. Non-recourse loans of approximately $283 million
and deferred compensation of approximately $88 million earned by Plan
participants have been classified as components of shareholders' equity at
that date.
- 109 -
PAGE 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
On April 8, 1997, the company and Norfolk Southern entered into an
agreement providing for the joint acquisition and division of Conrail. This
landmark agreement is outlined in more detail under "Joint CSX/Norfolk Southern
Acquisition of Conrail" in this section.
RESULTS OF OPERATIONS
- ---------------------
Third-Quarter 1996 Compared With 1995
- --------------------------------------
The company reported net earnings for the quarter ended September 27,
1996March 28, 1997, of
$222$151 million, $1.0470 cents per share. These results compare with 1995 third-
quartershare, versus net earnings of $202$146 million, $.9669 cents
per share.share, for the same period in 1996. Net earnings for the quarter rose 3%
over the 1996 first quarter results.
Excluding net costs of $24 million pretax and $16 million after tax
relating to CSX's 19.9% investment in Conrail, earnings would have been $167
million, 77 cents per share, for the 1997 quarter. These costs were principally
interest on debt issued to acquire the investment, less dividends received on
the Conrail stock.
Operating revenue for the thirdfirst quarter of 19961997 rose to $2.6 billion, $46 million abovevs.
$2.5 billion in the prior-year quarter.1996 period. Operating expense was $2.3of $2.2 billion for the third quarter of 1996, $23 million higher thanremained
level with the prior-year quarter. Operating income was $392$324 million, for the third quarter of 1996, up $23
million from 1995's third9% higher
than 1996's first quarter.
Rail Unit Results
- -----------------RAIL UNIT RESULTS
The company's rail unit achieved record quarterly operating income of $277$282
million, vs. 1995's $269 million third quarter. The19% above last year's first quarter, and 15% above the prior
first-quarter record set in 1995. Total rail operating revenue of $1.25 billion
exceeded 1996's weather-affected first-quarter results reflect the
combinationby $52 million.
Shipments of level traffic,coal, the unit's ongoing emphasis on managing expense,
and selective rate increases.
Revenue increased almost 2 percentlargest commodity, rose 9% to $1.21 billion, while traffic
remained level with 1995's third quarter. Despite expenses associated with
Hurricane Fran and higher fuel prices, operating expense increased just $1241.5 million
to $934 million. The unit's third-quarter operating ratio of 77.1
percent topped its 1995 third-quarter record of 77.4 percent.
Coal revenue rose 4 percent and coal tonnage rose 3 percent, largely
due totons, reflecting higher utility coal volume.traffic. Coal revenue increased 5% over
1996. Total merchandise traffic decreasedrose 4%, due to strong demand overall. Major
contributors to the increase included: autos and parts (up 14%); minerals (up
11%); metals (up 9%) and chemicals (up 6%).
Rail operating expense for the quarter increased 1% to $965 million.
RAIL OPERATING INCOME
(Millions of Dollars)
---------------------------------
Quarters Ended
-----------------------
March 28, March 29, Percent
1997 1996 Change
---------- ---------- ---------
Operating Revenue
Merchandise $ 826 $ 789 5 %
Coal 389 370 5 %
Other 32 36 (11)%
------ ------
Total 1,247 1,195 4 %
Operating Expense 965 959 1 percent, while merchandise revenue rose 1 percent.%
------ ------
Operating Income $ 282 $ 236 19 %
====== ======
Operating Ratio 77.4% 80.3%
====== ======
- 1110 -
PAGE 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION, CONTINUED
RESULTS OF OPERATIONS, Continued
- --------------------------------
Rail Unit Results, Continued
- ----------------------------
RAIL OPERATING INCOME
(Millions of Dollars)
-----------------------------
Quarters Ended Nine Months Ended
------------------ ------------------
Sept. 27, Sept. 29, Percent Sept. 27, Sept. 29, Percent
1996 1995 Change 1996 1995 Change
-------- -------- ------- ------- -------- -------
Operating Revenue
Merchandise $ 772 $ 767 1 % $ 2,374 $ 2,363 - %
Coal 404 388 4 % 1,178 1,133 4 %
Other 35 36 (3)% 109 100 9 %
------ ------ ------- -------
Total 1,211 1,191 2 % 3,661 3,596 2 %
Operating Expense 934 922 1 % 2,836 3,007 (6)%
------ ------ ------- -------
Operating Income $ 277 $ 269 3 % $ 825 $ 589 40 %
====== ====== ======= =======
Operating Income (a) $ 277 $ 269 3 % $ 825 $ 785 5 %
====== ====== ======= =======
Operating Ratio 77.1% 77.4% 77.5% 83.6%
====== ====== ======= =======
Operating Ratio (a) 77.1% 77.4% 77.5% 78.2%
====== ====== ======= =======
(a) Pro forma basis, excluding $196 million restructuring charge in 1995.
Container Shipping Unit Results
- -------------------------------CONTINUED
CONTAINER SHIPPING UNIT RESULTS
Despite ongoing rate pressures across allin major trade lanes, the container-
shippingcontainer-shipping
unit generatedachieved its second-best first quarter. Operating income totaled $41
million, compared with 1996's first-quarter record $52 million. During the
quarter, the unit continued to focus on stringent cost control and productivity
improvements.
Strength in global trade resulted in a quarterly operating income record of $95 million, an10% increase of 36 percent over 1995's third-quarter results. The 1996 third-
quarter results were 13 percent higher than the previous quarterly record of
$84 million, earnedin total volume - 33%
in the fourthAmericas trade lane, 16% in the Asia/Middle East/Europe (A.M.E.), and 14%
in the Atlantic. Operating revenue declined 1% over the prior-year quarter of 1995.
Third-quarter revenue rose $6 million above its previous third-
quarter recordto $1
billion, reflecting rate pressures in 1995. Volume increased across allthe major trade lanes,
averaging 9 percent. Operatinglanes.
While handling greater volume, operating expense decreased $19of $909 million was held
level with the 1996 period. This reflects the combined benefits of cost-cutting
measures to $938 million.
The unit's cost-control efforts have met with success in steadily lowering its
operating ratio. The unit achieved a record third-quarter operating ratio of
90.8 percent.
- 12 -
PAGE 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OFdate and strategic initiatives.
OTHER UNIT RESULTS
OF OPERATIONS
AND FINANCIAL CONDITION, CONTINUED
RESULTS OF OPERATIONS, Continued
- --------------------------------
Barge Unit Results
- ------------------
Third-quarter operating incomePerformance at the company's barge unit fell 17
percent, to $30was significantly affected by
adverse weather conditions along the river system. The unit's first-quarter
operating income totaled $2 million, compared with last year's record of $18
million. Despite a soft grain market, revenue rose 8 percent
due to higher volumeSevere flooding and increased marine construction activity. However,
such construction activity, along with higher fuel prices,ice resulted in a 16
percent increase inincreased operating expense.
Intermodal Unit Results
- -----------------------costs and
reduced shipments. Traffic is expected to rebound when the flooding subsides.
The company's intermodal unit increasedachieved operating income 80 percent
overof $5 million, vs.
$3 million in the prior-year quarter,1996 quarter. Although revenue decreased 3% due to $9 million. Expense reductionschanges in
traffic mix, better margins were achieved as a result of $13 million
more than offset a $9 million declinenetwork redesign and
rationalization measures implemented in revenue.
Contract Logistics Unit Results
- -------------------------------
Rapid growth continued at the company's1996.
The contract logistics unit continued its rapid growth, with revenue increasing 34 percent,rising
30% to $83$92 million and operating income rising to
$5reaching $6 million.
First Nine Months 1996 Compared with 1995
- ----------------------------------------
For the first nine months of the year, earnings for the company rose
to $602 million, $2.83 per share. These results represent a 20 percent
increase over the $502 million, $2.39 per share, earned in the first nine
months of 1995, exclusive of the 1995 charge.
The results for the first nine months of 1996 reflect the continued
success of the company's efforts to reduce costs, improve service and
profitably respond to growth opportunities and increased demand. In addition,
the strength of the domestic and global economies have positively impacted the
year-to-date results for 1996.
FINANCIAL CONDITION
- -------------------
Cash, cash equivalents and short-term investments totaled $515$510 million at
September 27, 1996,March 28, 1997, a decrease of $145$172 million since December 29,
1995. In addition to net cash provided by operations,27, 1996. The primary
sourcessource of cash and cash equivalents during the period were the issuance of short-term and
long-term debt and proceeds from the sale of long-term marketable securities.
Primary uses of cashquarter was business operations.
Cash and cash equivalents were primarily used by property additions, repayment
of long-term debt, payment of income taxes, and payment of dividends.
- 13 -
PAGE 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION, CONTINUED
FINANCIAL CONDITION, Continued
- ------------------------------
During the first nine monthsquarter of 1996,1997, net investing activities consumed $725$180
million of cash and cash equivalents compared with $780$257 million consumed in the
same periodfirst quarter of 1995.1996. The change in cash used by investing activities was
primarily due to lower property additions compared to the quarter ended March
29, 1996.
Financing activities used $282$148 million of cash and cash equivalents for
the nine monthsquarter ended September 27, 1996,March 28, 1997, a $122$317 million increase over thefrom 1996's first
nine months of 1995.quarter. The change was primarily due to an increasea reduction in scheduledshort-term debt repayments.levels.
The working capital deficit decreased $276$55 million during the nine
monthsquarter ended
September 27, 1996.March 28, 1997. The decrease was primarily due to reductions in current maturities of long-term debt.accounts payable
and labor and fringe benefits payable, partially offset by a decrease in cash,
cash equivalents and short-term investments. A working capital deficit is not
unusual for CSXthe company and does not indicate a lack of liquidity. CSXThe 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-
dayday-to-day cash needs.
FINANCIAL DATA
- -------------- (Millions of Dollars)
-----------------------------
September 27, December 29,
1996 1995
--------- ------------
Cash, Cash Equivalents and
Short-Term Investments $ 515 $ 660
Commercial Paper Outstanding11 -
Short-Term $ 276 $ 148
Commercial Paper Outstanding -
Long-Term $ 300 $ 300
Working Capital (Deficit) $ (780) $(1,056)
Current Ratio .7 .6
Debt Ratio 32% 34%
Ratio of Earnings to Fixed Charges 3.9 x 3.2 x(a)
(a) Excluding the pre-tax restructuring charge of $257 million, the
ratio of earnings to fixed charges would have been 3.7x for the
year ended December 29, 1995.
- 14 -
PAGE 15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION, CONTINUED
OUTLOOKFINANCIAL DATA
(Millions of Dollars)
--------------------------
March 28, December 27,
1997 1996
----------- ------------
Cash, Cash Equivalents and
Short-Term Investments $ 510 $ 682
Commercial Paper Outstanding -
-------Short-Term 287 335
Commercial Paper Outstanding -
Long-Term 2,300 2,300
Working Capital (Deficit) (630) (685)
Current Ratio 0.8 0.8
Debt Ratio 45% 46%
Ratio of Earnings to Fixed Charges 2.8x 4.0x
OUTLOOK
Each of CSX'sthe company's transportation units continues to anticipateanticipates overall favorable
revenue levelsperformance over the remainder of 1996,1997, compared with 1995.to 1996. The higher
revenue is expected from improving marketing strategiescompany expects
modest economic growth and modest growth in
the domestic economy. The companyrobust demand for transportation services. CSX also
plans to continue the intense focusremain focused on customer service, productivitysafety and expensecost control throughout
its transportation units.
As the fourthunits in order to enhance core earning power and increase shareholder
returns.
Following on its record first quarter of 1996 begins,results, the rail unit continuesexpects to
benefit from strong demand from domestic coal markets. Merchandise trafficcontinue on that same positive trend into the second quarter. Revenue is
expected to be flat throughout the balance of the year. Automotive traffic
levels could be negatively impactedimprove in 1997 propelled by the pending labor dispute between
General Motors Corporationstrength in merchandise and the United Auto Workers.coal
traffic. The rail unit, through the National Carriers Conference Committee, now
has agreements with all labor organizations except the Dispatchers
organization. All such agreements aresigned and in effect, and the parties are in the
process of implementing their terms and conditions. Negotiations continue
with the Dispatchers.effect.
The container-shipping unit anticipates traffic flowsincreased volume and permanent
cost reductions to mitigate the difficult rate environment. Improving the mix of
higher margin freight will remain an ongoing priority.
The barge unit will closely monitor the weather situation as it will
continue to have a negative impact on its operations in the fourth
quarter of 1996 to be at or slightly ahead of prior-year fourth quarter
levels. The unit expects that strong demand for ocean transportation and the
unit's technological advantages should allow it generally to select higher
margin traffic. The container-shipping industry anticipates that strong
volume will help mitigate the recent rate declines.second quarter. The
intermodal unit expectsforecasts overall improvement compared to continueprior year levels
attributable to improve the level of
shipments and revenue during the fourth quarter as a result of closer
alignment of its operations with CSXT and Sea-Land. The barge unit
anticipates solid revenue resulting from continued strong demand for its
services.network redesign implemented in 1996. The contract logistics
unitscompany expects its growth to continue throughout the year, due to expandingbased upon increased
demand for its services.
JOINT CSX/NORFOLK SOUTHERN ACQUISITION OF CONRAIL
CSX/NORFOLK SOUTHERN AGREEMENT
On April 8, 1997, the company and Norfolk Southern Corporation entered
into an agreement providing for their joint acquisition of Conrail and the
division of its routes and other assets. Conrail is a holding company of which
the principal subsidiary is Consolidated Rail Corporation, a Class I freight
railroad that operates approximately 10,500 route miles in the Northeast and
Midwest of the United States and the Province of Quebec, Canada, and which
possesses superior access to certain major northeast markets, including the New
York and Boston metropolitan areas. Norfolk Southern owns an eastern Class I
freight railroad, Norfolk Southern Railway Company.
- 1512 -
PAGE 16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION, CONTINUED
OTHER MATTERS
- -------------
OnUnder the CSX/Norfolk Southern agreement, the company and Norfolk Southern
will acquire all outstanding shares of Conrail not already owned by them for
$115 in cash per share through a jointly-owned acquisition entity. The company
and Norfolk Southern will each possess 50% of the voting and management rights
of the acquisition entity, and non-voting equity will be apportioned between the
parties to achieve overall economic allocations of 42% for CSX and 58% for
Norfolk Southern. Following approval by the STB as described below, Conrail's
assets will be segregated within Conrail, and the company and Norfolk Southern
will each benefit from the operation of a specified portion of the Conrail
routes and other assets through the use of various operating arrangements, and
certain Conrail assets will be operated for the joint benefit of the company and
Norfolk Southern.
The acquisition of the Conrail shares will be effected under a pending
tender offer initiated by the company in December 1996 and amended in April 1997
to include Norfolk Southern as a co-bidder (the joint tender offer) and a
subsequent cash merger. The estimated aggregate cost of the joint tender offer,
the merger and the shares of Conrail already acquired by the company and Norfolk
Southern is approximately $10.2 billion. Pursuant to the CSX/Norfolk Southern
agreement, the company will bear 42%, or approximately $4.3 billion, and Norfolk
Southern will bear 58%, or approximately $5.9 billion, of such cost. These
totals include approximately $2 billion previously spent by the company and $1
billion previously spent by Norfolk Southern to acquire approximately 30%, in
aggregate, of Conrail's shares.
The scheduled closing for the joint tender offer for the remaining
outstanding Conrail shares is May 23, 1997. However, the closing may be
extended, to a date not later than June 2, 1997, if certain conditions in the
original merger agreement, dated as of October 14, 1996 by and among Conrail,
the company and Green Acquisition Corp. (a wholly-owned subsidiary of the
company), as amended, are satisfied. The joint tender offer is not subject to
any financing condition but is conditioned, among other things, on the valid
tender of shares constituting, together with Conrail Inc. (Conrail) enteredshares already owned by CSX
and Norfolk Southern, at least a merger agreement wherebymajority of the outstanding Conrail shares on a
fully-diluted basis. Conrail shares purchased in the joint tender offer will,
together with all Conrail shares previously purchased by the company will acquire all of Conrail's
outstanding shares forand Norfolk
Southern, be deposited into a combination of cash and CSX shares initially valued
at $8.4 billion. A cash tender offer for approximately 19.9 percent of
Conrail's outstanding voting shares was commenced October 16, 1996 and, unless
extended, will expire November 15, 1996. The cash tender offer may be
increased to 40 percent of Conrail's outstanding voting shares,trust pending a vote
by Conrail's shareholders to remove restrictions which currently prevent the
acquisition of more than 20 percent of its outstanding shares. The remaining
60 percent of Conrail voting shares will be acquired in a tax-free exchange of
CSX stock. Consummation of the merger is subject toSTB approval of the shareholdersjoint
acquisition, control and division of both companies and approval ofConrail. Upon closing, the Surface Transportation
Board (STB). The application for STB approval is expected to be filed in
early 1997, and the parties will propose a schedule that contemplates
completion of the transaction by the end of that year. Pending STB review,
the shares purchased in connection with thejoint tender
offer will be placedfollowed by a merger in a
voting trust. On October 22, 1996,which all Conrail Shares not tendered for
purchase in the joint tender offer will be converted into the right to receive
$115 per share in cash.
JOINT CSX/NORFOLK SOUTHERN STB APPLICATION
While the obligation to purchase Conrail shares by the company announced commitmentsand Norfolk
Southern in the joint tender offer is not subject to any regulatory condition,
the exercise of control over Conrail by the acquiring companies remains subject
to a number of conditions and approvals, including approval by the STB, which
has the authority to modify contract terms and impose additional conditions,
including with respect to divestitures, grants of trackage rights and other
terms of continuing operations. Subject to the STB's authorization of an
accelerated filing date, the company and Norfolk Southern plan to file a joint
application with the STB in June 1997 for control and division of Conrail and
for such other matters as may be required to be approved by the STB. The joint
STB application will address traffic flows, operations and related matters; will
outline the capital investments each company plans to make in new connections
and facilities and to increase capacity on critical routes; and will detail
operating savings and other public benefits resulting from the transaction. The
application also will contain certain historical and pro forma financial
information required by the STB. The company and Norfolk Southern have asked the
STB to consider the joint application on an expedited schedule that would result
in an STB decision in early 1998. Under current law, the STB must rule within
approximately sixteen months from the filing date of the joint application. No
assurance can be given with respect to the receipt of STB approval or the
modifications or conditions that may be imposed in connection therewith.
- 13 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION, CONTINUED
PROPOSED DIVISION OF CONRAIL ROUTES
Until the date the company and Norfolk Southern are permitted by the STB
to assume control over Conrail (the Control Date), Conrail will continue to be
managed by its current Board of Directors and management. After the Control
Date, Conrail will segregate its assets primarily into two groups to facilitate
their separate operation pursuant to leasing, operating, partnership or other
similar arrangements. The remaining assets and liabilities of Conrail, including
joint facilities, generally will either be shared or allocated ratably between
the company and Norfolk Southern according to their respective 42% and 58%
economic allocations. In arriving at the proposed division of Conrail and these
percentages, the acquiring companies negotiated with a view toward producing the
best fits with their existing systems and optimizing service to their respective
customers.
The acquisition by the company of the Conrail shares and the right to use
the assets allocated to or shared by the company pursuant to the CSX/Norfolk
Southern agreement and the liabilities allocated to or shared by it pursuant to
that agreement will be hereinafter referred to as the "Transaction." Many of the
terms of the Transaction will be detailed in further definitive documentation
that is currently being negotiated between CSX and Norfolk Southern.
For additional information regarding the Transaction and the CSX/Norfolk
Southern agreement, reference is made to the company's Tender Offer Statement on
Schedule 14D-1, together with exhibits thereto, initially filed with the
Securities and Exchange Commission on December 6, 1996, as amended. In addition,
pursuant to the Securities Exchange Act of 1934, the company will be required to
file under cover of Form 8-K certain historical financial statements and pro
forma financial statements giving effect to the Transaction no later than 75
days after the consummation of the joint tender offer.
FINANCING ARRANGEMENTS
The company estimates that it will require $2.3 billion to purchase its
portion of the outstanding Conrail shares pursuant to the joint tender offer.
The company paid approximately $2 billion to acquire about 20% of Conrail's
shares in November 1996. At that time, the company arranged a five-year $4.8
billion bank credit facility to finance an acquisition of Conrail and to meet
general working capital needs. The company intends to utilize the capital
markets to raise substantially all of the remaining funds needed for its
contribution under the joint tender offer. Those securities will be sold in
private placements and will not be registered under the Securities Act of 1933.
Therefore, such securities may not be offered or sold in the United States
without registration or exemption.
Such financings are expected to result in the company's having outstanding
a combination of long-term debt with staggered maturities, trust preferred
securities and commercial paper. The company expects its long-term debt levels
(including the company's portion of Conrail debt and excluding trust preferred
securities) to peak in 1998 at approximately $6.5 billion, with related interest
charges (including interest payments on the company's portion of Conrail debt)
to peak at approximately $500 million. While definitive documentation is not
complete, the company and Norfolk Southern contemplate that payments to Conrail
under operating or similar arrangements and through capital contributions to the
jointly-owned acquisition entity will be sufficient to pay obligations on
Conrail's outstanding debt instruments. The agreement between the company and
Norfolk Southern provides that such debt will be shared ratably according to
their respective 42% and 58% percentages.
BROADEST GEOGRAPHIC NETWORK IN EASTERN UNITED STATES
The Transaction will significantly enhance the company's position as a
leading global transportation company. The company will remain the largest
railroad in the eastern United States and become the third largest railroad in
the nation, measured in terms of route miles and ton-miles.
- 14 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION, CONTINUED
The company, as a result of the Transaction, will be adding approximately
3,500 route miles, or 19%, to its rail network, and sharing with Norfolk
Southern approximately 1,200 additional route miles. The company will have
approximately 22,000 route miles in 22 states, the District of Columbia, and the
Provinces of Ontario and Quebec, Canada, and will provide financingdirect access to
virtually every major metropolitan area east of the Mississippi River and to
eleven of the largest east coast and gulf ports.
ENHANCED OPERATING EFFICIENCIES AND REVENUE GROWTH
Management expects the integration of Conrail operations resulting from
the Transaction to add approximately $1.6 billion, or 15%, to the company's
annual revenue beginning in the first twelve months following consolidation.
Management believes that the Transaction will also result in growth of the
company's rail revenue base through expansion of single-line service and the
company's ability to compete more effectively on certain routes along which
large quantities of goods are now transported by truck. Single-line service is
preferred by shippers over joint-line service because of lower transaction
costs, reduced delays, less damage from interchange operations and
single-carrier accountability. The addition of Conrail lines to the company's
rail network also will improve operational efficiency through better asset
utilization. Optimization of train sizes, increased length of haul, improved
backhauls, shorter routes to many destinations and fewer empty movements are all
expected to produce cost reductions for the cashcombined rail network. Other
significant savings will be achieved through the realization of economies of
scale, rationalization of administrative and other overhead expenses and
consolidation of duplicative facilities. Specific plans for achieving these cost
savings following the Control Date are currently under development and will be
more specifically identified in the STB application.
FINANCIAL EFFECTS
The company expects that the benefits from the Transaction will begin to
build from the Control Date and should be largely realized within a three-year
period thereafter. It is anticipated that STB approval will be granted in early
1998. Therefore, for the purposes of the following discussion, Year 1, Year 2
and Year 3 roughly correspond to 1998, 1999 and 2000, respectively. Based on
joint efforts of the company and Conrail to identify potential cost savings,
management currently estimates that the Transaction will lead to quantifiable
pre-tax benefits from increased traffic and cost efficiencies of approximately
$75 million, $170 million and $240 million annually in Years 1, 2 and 3,
respectively, compared to the separate operation of the company and its share of
Conrail. These benefits include estimated incremental operating income of $25
million, $54 million and $75 million expected through increased traffic in Years
1, 2 and 3, respectively. The remaining pre-tax benefits will be in the form of
operating cost savings, with $50 million, $116 million and $165 million expected
to be realized in Years 1, 2 and 3, respectively. Further, management expects a
reduction in the requirement for annual capital expenditures of approximately
$12 million, $28 million and $40 million in Years 1, 2 and 3, respectively.
Management estimates that the company will, in Years 1 and 2, incur
one-time transitional capital expenditures in connection with the integration of
operations. Those are expected to be $310 million in Year 1 and $178 million in
Year 2.
The overall purchase price paid by the company is expected to exceed the
historical book value of the net Conrail assets acquired by the company by
approximately $3.5 billion. Although purchase accounting adjustments will not be
finalized until the Transaction is completed, a substantial portion of the
merger transaction.excess purchase price is expected to be allocated to specific assets and
liabilities acquired, with the remainder allocated to goodwill. On October 23, 1996, Norfolk Southern Corporation announced an all-
cash competing bid for all outstanding sharesaggregate
basis, the excess purchase price is expected to be amortized over a period of
Conrail.approximately 40 years.
Because of the time required to obtain necessary regulatory and other
approvals, the company does not expected integrated operations to have a
significant effect on operating and financial results prior to fiscal 1998. The
company remains
optimistic about its prospects for completingprimary impact of the merger with Conrail.
-------------------------
Toproposed Transaction on net earnings prior to the
extent that these written statements include predictions
concerning future operations and results- 15 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION, CONTINUED
integration of operations is likely to be the after-tax effect of the
company's share of Conrail's net earnings, reported under the equity method of
accounting, less interest on debt incurred to acquire and hold Conrail shares.
Net cash flow prior to operational integration is expected to be reduced by
interest payments on such statements are
forward-looking statements that involve risksdebt, partially offset by Conrail dividends. The
average interest rate in 1996 on debt incurred to acquire Conrail shares was
approximately 5.6%. The degree of negative impact on net earnings and uncertainties,net cash
flow during 1997 will depend primarily on the net earnings reported by Conrail
and actual
results may differ materially. Factors that could cause actual results to
differ materially are described in the Company's Form 10-K for its most recent
fiscal yearaverage interest rate and include general economic downturns, which may limit demand and
pricing; labor matters, which may impacttiming of interest payments on the costs and feasibility of certain
operations; and commodity concentrations, which may affect traffic levels.related
debt.
-----------------------------------------------------
THE ABOVE ESTIMATES AND FORECASTS ARE BASED UPON NUMEROUS ESTIMATES AND
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 INVOLVE KNOWN
AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER IMPORTANT FACTORS THAT COULD CAUSE
THE ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS OF THE COMPANY TO DIFFER
MATERIALLY FROM ANY FUTURE RESULTS, PERFORMANCE OR ACHIEVEMENTS EXPRESSED OR
IMPLIED BY SUCH FORWARD LOOKING STATEMENTS. CERTAIN OF THOSE RISKS,
UNCERTAINTIES AND OTHER IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO
DIFFER MATERIALLY INCLUDE: (A) FUTURE ECONOMIC CONDITIONS IN THE MARKETS IN
WHICH THE COMPANY AND CONRAIL OPERATE; (B) FINANCIAL MARKET CONDITIONS; (C)
INFLATION RATES; (D) CHANGING COMPETITION; (E) CHANGES IN THE ECONOMIC
REGULATORY CLIMATE IN THE UNITED STATES RAILROAD INDUSTRY; (F) THE ABILITY TO
ELIMINATE DUPLICATIVE ADMINISTRATIVE FUNCTIONS; AND (G) ADVERSE CHANGES IN
APPLICABLE LAWS, REGULATIONS OR RULES GOVERNING ENVIRONMENTAL, TAX OR ACCOUNTING
MATTERS. THESE FORWARD LOOKING STATEMENTS SPEAK ONLY AS OF THE DATE OF THIS
FILING. THE COMPANY DISCLAIMS ANY OBLIGATION OR UNDERTAKING TO DISSEMINATE ANY
UPDATES OR REVISIONS TO ANY FORWARD LOOKING STATEMENT CONTAINED HEREIN TO
REFLECT ANY CHANGE IN THE COMPANY'S EXPECTATIONS WITH REGARD THERETO OR ANY
CHANGE IN EVENTS, CONDITIONS OR CIRCUMSTANCES ON WHICH ANY SUCH STATEMENT IS
BASED.
- 16 -
PAGE 17
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
1. None(10.1) 1987 Long-Term Performance Stock Plan
2. (27) Financial Data Schedule
(b) Reports on Form 8-K
1. None.
Signature
---------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/ /S/JAMES L. ROSS
----------------------------------------------
James L. Ross
Vice President and Controller
(Principal Accounting Officer)
Dated: October 31, 1996April 24, 1997
- 17 -