FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarter ended March 28,September 26, 2003
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 |
| |
incorporation or organization) | (I.R.S. Employer Identification No.) |
500 Water Street, | 32202 | |
(Address of principal executive offices) | (Zip Code) |
(904) 359-3200
(Registrant’s telephone number, including area code)
901 East Cary Street, Richmond, Virginia, 23219-4031No 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. Yesx No¨
Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes x No ¨
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of March 28,September 26, 2003: 213,718,513214,018,692 shares.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 28,SEPTEMBER 26, 2003
Page Number | ||||
PART | FINANCIAL INFORMATION | |||
Item 1: | Financial Statements | |||
3 | ||||
Consolidated Balance Sheets - At September 26, 2003 (Unaudited) and December 27, 2002 | 4 | |||
| ||||
| 5 | |||
6 | ||||
Management’s Discussion and Analysis of Results of Operations and Financial Condition |
| |||
30 | ||||
Item 3: |
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45 | ||||
Item 4: |
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PART | OTHER INFORMATION | |||
Item 1: | 46 | |||
Item 2: | 46 | |||
Item 6: |
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-2-
CSX CORPORATION AND SUBSIDIARIES
ITEM I: FINANCIAL STATEMENTS
Consolidated Income Statements
(Dollars in Millions, Except Per Share Amounts)
(Unaudited) Quarters Ended | (Unaudited) | |||||||||||||||||||||
(Dollars in Millions, Except Per Share Amounts) | Quarter Ended | Nine Months Ended | ||||||||||||||||||||
March 28, 2003 | March 29, 2002 | September 26, 2003 | September 27, 2002 | September 26, 2003 | September 27, 2002 | |||||||||||||||||
Operating Revenue | $ | 2,016 |
| $ | 1,964 |
| $ | 1,882 | $ | 2,055 | $ | 5,840 | $ | 6,092 | ||||||||
Operating Expense |
| 1,839 |
|
| 1,752 |
| 1,980 | 1,779 | 5,476 | 5,283 | ||||||||||||
Operating Income |
| 177 |
|
| 212 |
| ||||||||||||||||
Other (Expense) Income |
| (10 | ) |
| 9 |
| ||||||||||||||||
Operating Income (Loss) | (98 | ) | 276 | 364 | 809 | |||||||||||||||||
Other Income | 21 | 28 | 30 | 41 | ||||||||||||||||||
Interest Expense |
| 103 |
|
| 114 |
| 103 | 108 | 311 | 338 | ||||||||||||
Earnings before Income Taxes and Cumulative Effect of Accounting Change |
| 64 |
|
| 107 |
| ||||||||||||||||
Income Tax Expense |
| 22 |
|
| 39 |
| ||||||||||||||||
Earnings (Loss) before Income Taxes and Cumulative | ||||||||||||||||||||||
Effect of Accounting Change | (180 | ) | 196 | 83 | 512 | |||||||||||||||||
Income Tax Expense (Benefit) | (77 | ) | 69 | 17 | 182 | |||||||||||||||||
Earnings before Cumulative Effect of Accounting Change |
| 42 |
|
| 68 |
| ||||||||||||||||
Cumulative Effect of Accounting Change – Net of Tax |
| 57 |
|
| (43 | ) | ||||||||||||||||
Earnings (Loss) before Cumulative Effect of Accounting Change | (103 | ) | 127 | 66 | 330 | |||||||||||||||||
Net Earnings | $ | 99 |
| $ | 25 |
| ||||||||||||||||
Cumulative Effect of Accounting Change - Net of Tax | — | — | 57 | (43 | ) | |||||||||||||||||
Earnings Per Share: | ||||||||||||||||||||||
Net Earnings (Loss) | $ | (103 | ) | $ | 127 | $ | 123 | $ | 287 | |||||||||||||
Earnings (Loss) Per Share: | ||||||||||||||||||||||
Before Cumulative Effect of Accounting Change | $ | 0.20 |
| $ | 0.32 |
| $ | (0.48 | ) | $ | 0.60 | $ | 0.31 | $ | 1.55 | |||||||
Cumulative Effect of Accounting Change |
| 0.26 |
|
| (0.20 | ) | — | — | 0.26 | (0.20 | ) | |||||||||||
Including Cumulative Effect of Accounting Change | $ | 0.46 |
| $ | 0.12 |
| $ | (0.48 | ) | $ | 0.60 | $ | 0.57 | $ | 1.35 | |||||||
Earnings Per Share, Assuming Dilution: | ||||||||||||||||||||||
Earnings (Loss) Per Share, Assuming Dilution: | ||||||||||||||||||||||
Before Cumulative Effect of Accounting Change | $ | 0.20 |
| $ | 0.32 |
| $ | (0.48 | ) | $ | 0.60 | $ | 0.31 | $ | 1.55 | |||||||
Cumulative Effect of Accounting Change |
| 0.26 |
|
| (0.20 | ) | — | — | 0.26 | (0.20 | ) | |||||||||||
Including Cumulative Effect of Accounting Change | $ | 0.46 |
|
| 0.12 |
| $ | (0.48 | ) | $ | 0.60 | $ | 0.57 | $ | 1.35 | |||||||
Average Common Shares Outstanding (Thousands) |
| 213,866 |
|
| 212,053 |
| 213,955 | 213,041 | 213,890 | 212,548 | ||||||||||||
Average Common Shares Outstanding, Assuming Dilution (Thousands) |
| 214,164 |
|
| 213,190 |
| 213,955 | 213,633 | 214,281 | 213,453 | ||||||||||||
Cash Dividends Paid Per Common Share | $ | 0.10 |
| $ | 0.10 |
| $ | 0.10 | $ | 0.10 | $ | 0.30 | $ | 0.30 | ||||||||
See accompanying Notes to Consolidated Financial Statements.
-3-
CSX CORPORATION AND SUBSIDIARIES
ITEM I: FINANCIAL STATEMENTS
Consolidated Cash Flow Statements
(Dollars in Millions)Balance Sheets
(Unaudited) Quarters Ended | ||||||||
March 28, 2003 | March 29, 2002 | |||||||
OPERATING ACTIVITIES | ||||||||
Net Earnings | $ | 99 |
| $ | 25 |
| ||
Adjustments to Reconcile Net Earnings to Net Cash Provided: | ||||||||
Depreciation |
| 160 |
|
| 155 |
| ||
Deferred Income Taxes |
| 18 |
|
| 20 |
| ||
Cumulative Effect of Accounting Change—Net of Tax |
| (57 | ) |
| 43 |
| ||
Other Operating Activities |
| 22 |
|
| 5 |
| ||
Changes in Operating Assets and Liabilities: | ||||||||
Accounts Receivable |
| (73 | ) |
| 34 |
| ||
Other Current Assets |
| (31 | ) |
| (43 | ) | ||
Accounts Payable |
| 51 |
|
| (26 | ) | ||
Other Current Liabilities |
| (145 | ) |
| (53 | ) | ||
Net Cash Provided by Operating Activities |
| 44 |
|
| 160 |
| ||
INVESTING ACTIVITIES | ||||||||
Property Additions |
| (150 | ) |
| (162 | ) | ||
Short-term Investments – Net |
| (1 | ) |
| (158 | ) | ||
Net Proceeds from Divestitures |
| 214 |
|
| — |
| ||
Other Investing Activities |
| (32 | ) |
| (11 | ) | ||
Net Cash Provided (Used) by Investing Activities |
| 31 |
|
| (331 | ) | ||
FINANCING ACTIVITIES | ||||||||
Short-term Debt – Net |
| 12 |
|
| — |
| ||
Long-term Debt Issued |
| 67 |
|
| 450 |
| ||
Long-term Debt Repaid |
| (95 | ) |
| (267 | ) | ||
Dividends Paid |
| (21 | ) |
| (21 | ) | ||
Other Financing Activities |
| (6 | ) |
| 12 |
| ||
Net Cash (Used) Provided by Financing Activities |
| (43 | ) |
| 174 |
| ||
Net Increase in Cash and Cash Equivalents |
| 32 |
|
| 3 |
| ||
CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS | ||||||||
Cash and Cash Equivalents at Beginning of Period |
| 127 |
|
| 137 |
| ||
Cash and Cash Equivalents at End of Period |
| 159 |
|
| 140 |
| ||
Short-term Investments at End of Period |
| 135 |
|
| 641 |
| ||
Cash, Cash Equivalents and Short-term | ||||||||
Investments at End of Period | $ | 294 |
| $ | 781 |
| ||
(Dollars in Millions) | (Unaudited) September 26, 2003 | December 27, 2002 | ||||||
ASSETS | ||||||||
Current Assets: | ||||||||
Cash, Cash Equivalents and Short-term Investments | $ | 736 | $ | 264 | ||||
Accounts Receivable - Net | 1,250 | 845 | ||||||
Materials and Supplies | 168 | 180 | ||||||
Deferred Income Taxes | 134 | 128 | ||||||
Other Current Assets | 92 | 155 | ||||||
Domestic Container-Shipping Assets Held for Disposition | — | 263 | ||||||
Total Current Assets | 2,380 | 1,835 | ||||||
Properties | 19,050 | 18,560 | ||||||
Accumulated Depreciation | 5,436 | 5,274 | ||||||
Properties - Net | 13,614 | 13,286 | ||||||
Investment in Conrail | 4,661 | 4,653 | ||||||
Affiliates and Other Companies | 488 | 381 | ||||||
Other Long-term Assets | 784 | 807 | ||||||
Total Assets | $ | 21,927 | $ | 20,962 | ||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
Current Liabilities: | ||||||||
Accounts Payable | $ | 800 | $ | 802 | ||||
Labor and Fringe Benefits Payable | 418 | 457 | ||||||
Casualty, Environmental and Other Reserves | 226 | 246 | ||||||
Current Maturities of Long-term Debt | 575 | 391 | ||||||
Short-term Debt | 729 | 143 | ||||||
Income and Other Taxes Payable | 101 | 144 | ||||||
Other Current Liabilities | 175 | 178 | ||||||
Domestic Container-Shipping Liabilities Held for Disposition | — | 104 | ||||||
Total Current Liabilities | 3,024 | 2,465 | ||||||
Casualty, Environmental and Other Reserves | 862 | 604 | ||||||
Long-term Debt | 6,480 | 6,519 | ||||||
Deferred Income Taxes | 3,630 | 3,567 | ||||||
Other Long-term Liabilities | 1,619 | 1,566 | ||||||
Total Liabilities | 15,615 | 14,721 | ||||||
Shareholders’ Equity: | ||||||||
Common Stock, $1 Par Value | 214 | 214 | ||||||
Other Capital | 1,556 | 1,548 | ||||||
Retained Earnings | 4,858 | 4,797 | ||||||
Accumulated Other Comprehensive Loss | (316 | ) | (318 | ) | ||||
Total Shareholders’ Equity | 6,312 | 6,241 | ||||||
Total Liabilities and Shareholders’ Equity | $ | 21,927 | $ | 20,962 | ||||
See accompanying Notes to Consolidated Financial Statements.
-4-
CSX CORPORATION AND SUBSIDIARIES
ITEM I: FINANCIAL STATEMENTS
Consolidated Balance Sheets
(Dollars in Millions)Cash Flow Statements
(Unaudited) | ||||||||
March 28, 2003 | December 27, 2002 | |||||||
ASSETS | ||||||||
Current Assets: | ||||||||
Cash, Cash Equivalents and Short-term Investments | $ | 294 |
| $ | 264 |
| ||
Accounts Receivable—Net |
| 847 |
|
| 799 |
| ||
Materials and Supplies |
| 187 |
|
| 180 |
| ||
Deferred Income Taxes |
| 130 |
|
| 128 |
| ||
Other Current Assets |
| 164 |
|
| 155 |
| ||
Domestic Container Assets Held for Disposition |
| — |
|
| 263 |
| ||
Total Current Assets |
| 1,622 |
|
| 1,789 |
| ||
Properties |
| 18,636 |
|
| 18,560 |
| ||
Accumulated Depreciation |
| 5,285 |
|
| 5,274 |
| ||
Properties—Net |
| 13,351 |
|
| 13,286 |
| ||
Investment in Conrail |
| 4,655 |
|
| 4,653 |
| ||
Affiliates and Other Companies |
| 467 |
|
| 381 |
| ||
Other Long-term Assets |
| 864 |
|
| 842 |
| ||
Total Assets | $ | 20,959 |
| $ | 20,951 |
| ||
LIABILITIES | ||||||||
Current Liabilities: | ||||||||
Accounts Payable |
| 839 |
| $ | 802 |
| ||
Labor and Fringe Benefits Payable |
| 392 |
|
| 457 |
| ||
Casualty, Environmental and Other Reserves |
| 254 |
|
| 246 |
| ||
Current Maturities of Long-term Debt |
| 362 |
|
| 391 |
| ||
Short-term Debt |
| 155 |
|
| 143 |
| ||
Income and Other Taxes Payable |
| 99 |
|
| 144 |
| ||
Other Current Liabilities |
| 141 |
|
| 167 |
| ||
Liabilities Held for Disposition |
| — |
|
| 104 |
| ||
Total Current Liabilities |
| 2,242 |
|
| 2,454 |
| ||
Casualty, Environmental and Other Reserves |
| 590 |
|
| 604 |
| ||
Long-term Debt |
| 6,527 |
|
| 6,519 |
| ||
Deferred Income Taxes |
| 3,630 |
|
| 3,567 |
| ||
Other Long-term Liabilities |
| 1,647 |
|
| 1,566 |
| ||
Total Liabilities |
| 14,636 |
|
| 14,710 |
| ||
SHAREHOLDERS’ EQUITY | ||||||||
Common Stock, $1 Par Value |
| 216 |
|
| 215 |
| ||
Other Capital |
| 1,549 |
|
| 1,547 |
| ||
Retained Earnings |
| 4,875 |
|
| 4,797 |
| ||
Accumulated Other Comprehensive Loss |
| (317 | ) |
| (318 | ) | ||
Total Shareholders’ Equity |
| 6,323 |
|
| 6,241 |
| ||
Total Liabilities and Shareholders’ Equity | $ | 20,959 |
| $ | 20,951 |
| ||
(Unaudited) | ||||||||
(Dollars in Millions) | Nine Months Ended | |||||||
September 26, 2003 | September 27, 2002 | |||||||
OPERATING ACTIVITIES | ||||||||
Net Earnings | $ | 123 | $ | 287 | ||||
Adjustments to Reconcile Net Earnings to Net Cash Provided: | ||||||||
Depreciation | 482 | 477 | ||||||
Deferred Income Taxes | 22 | 102 | ||||||
Cumulative Effect of Accounting Change - Net of Tax | (57 | ) | 43 | |||||
Additional Loss on Sale | 108 | — | ||||||
Provision for Casualty Reserves | 232 | — | ||||||
Other Operating Activities | 17 | (17 | ) | |||||
Changes in Operating Assets and Liabilities: | ||||||||
Accounts Receivable | (48 | ) | (13 | ) | ||||
Termination of Sale of Receivables | (380 | ) | (120 | ) | ||||
Other Current Assets | 7 | (11 | ) | |||||
Accounts Payable | 18 | (66 | ) | |||||
Other Current Liabilities | (120 | ) | 11 | |||||
Net Cash Provided by Operating Activities | 404 | 693 | ||||||
INVESTING ACTIVITIES | ||||||||
Property Additions | (757 | ) | (743 | ) | ||||
Net Proceeds from Divestitures | 214 | — | ||||||
Short-term Investments - Net | (213 | ) | 177 | |||||
Other Investing Activities | (26 | ) | (58 | ) | ||||
Net Cash (Used) by Investing Activities | (782 | ) | (624 | ) | ||||
FINANCING ACTIVITIES | ||||||||
Short-term Debt – Net | 586 | 571 | ||||||
Long-term Debt Issued | 433 | 519 | ||||||
Long-term Debt Repaid | (292 | ) | (1,113 | ) | ||||
Dividends Paid | (65 | ) | (65 | ) | ||||
Other Financing Activities | (26 | ) | 2 | |||||
Net Cash Provided (Used) by Financing Activities | 636 | (86 | ) | |||||
Net Increase (Decrease) in Cash and Cash Equivalents | 258 | (17 | ) | |||||
CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS | ||||||||
Cash and Cash Equivalents at Beginning of Period | 127 | 137 | ||||||
Cash and Cash Equivalents at End of Period | 385 | 120 | ||||||
Short-term Investments at End of Period | 351 | 302 | ||||||
Cash, Cash Equivalents and Short-term Investments at End of Period | $ | 736 | $ | 422 | ||||
See accompanying Notes to Consolidated Financial Statements.
-5-
CSX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
NOTE 1. BASIS OF PRESENTATION
In the opinion of management, the accompanying consolidated financial statements contain all adjustments necessary to fairly present the financial position of CSX Corporation and subsidiaries (“CSX” or the “Company”) at March 28,September 26, 2003 and December 27, 2002, and the results of its operations for the quarters and nine months ended September 26, 2003 and September 27, 2002, and its cash flows for the threenine months ended March 28,September 26, 2003 and March 29,September 27, 2002, such adjustments being of a normal recurring nature. Certain prior-year data have been reclassified to conform to the 2003 presentation.
The Company believes that the disclosures presented are accurate and not misleading, and suggests that these financial statements be read in conjunction with the financial statements and the notes included in the Company’s most recent Annual Report and Form 10-K.10-K, 2003 Quarterly Reports on Form 10-Q, and any Current Reports on Form 8-K.
CSX follows a 52/53 week fiscal reporting calendar. Fiscal years 2003 and 2002 consist of 52 weeks ending on December 26, 2003 and December 27, 2002, respectively. The financial statements presented are for the 13-week quarters ended March 28,September 26, 2003 and March 29,September 27, 2002, the 39-week periods ended September 26, 2003 and September 27, 2002, and as of December 27, 2002.
Comprehensive income approximates net earnings for all periods presented in the accompanying consolidated income statements.
NOTE 2. EARNINGS PER SHARE
The following table sets forth the computation of basic earnings (loss) per share and earnings (loss) per share, assuming dilution:
Quarters Ended | Quarters Ended | Nine Months Ended | |||||||||||||||||
March 28, 2003 | March 29, 2002 | September 26, 2003 | September 27, 2002 | September 26, 2003 | September 27, 2002 | ||||||||||||||
Numerator (millions): | |||||||||||||||||||
Net Earnings Before Cumulative Effect of Accounting Change | $ | 42 | $ | 68 | |||||||||||||||
Denominator (thousands): | |||||||||||||||||||
Numerator (Millions): | |||||||||||||||||||
Net Earnings (Loss) Before Cumulative Effect of Accounting Change | $ | (103 | ) | $ | 127 | $ | 66 | $ | 330 | ||||||||||
Denominator (Thousands): | |||||||||||||||||||
Average Common Shares Outstanding |
| 213,866 |
| 212,053 | 213,955 | 213,041 | 213,890 | 212,548 | |||||||||||
Effect of Potentially Dilutive Common Shares |
| 298 |
| 1,137 | — | 592 | 391 | 905 | |||||||||||
Average Common Shares Outstanding, Assuming Dilution |
| 214,164 |
| 213,190 | 213,955 | 213,633 | 214,281 | 213,453 | |||||||||||
Earnings Per Share: | |||||||||||||||||||
Earnings (Loss) Per Share: | |||||||||||||||||||
Before Cumulative Effect of Accounting Change | $ | 0.20 | $ | 0.32 | $ | (0.48 | ) | $ | 0.60 | $ | 0.31 | $ | 1.55 | ||||||
Assuming Dilution, Before Cumulative Effect of Accounting Change | $ | 0.20 | $ | 0.32 | $ | (0.48 | ) | $ | 0.60 | $ | 0.31 | $ | 1.55 |
CSX CORPORATION AND SUBSIDIARIES
ITEM 1: FINANCIAL STATEMENTS
Notes to Consolidated Financial Statements (Unaudited)
NOTE 2. EARNINGS PER SHARE, Continued
Earnings per share are based on the weighted-average number of common shares outstanding. Earnings per share, assuming dilution, are based on the weighted-average number of common shares outstanding adjusted for the effect of potentially dilutive common shares, outstanding, mainly arising from employee stock options. Potentially dilutive common shares at CSX include stock options and awards, and common stock that would be issued relating to convertible long-term debt. As the Company reported a loss from continuing operations for the quarter ended September 26, 2003, 34 million of potential common shares are excluded from the computation of diluted earnings per share as their effect is antidilutive. During the quartersquarter and nine months ended March 28,September 26, 2003, 38,912 and March 29,214,557 options, respectively, were exercised. During the third quarter of 2002, no shares and 0.7 million shares, respectively,options were issuedexercised, while 1,020,161 options were exercised for options exercised.
-6-
CSX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
NOTE 2. EARNINGS PER SHARE, Continuedthe nine month period ended September 27, 2002.
Certain potentially dilutive common shares at March 28, 2003 and March 29,September 27, 2002 were not included in the computation of earnings per share, assuming dilution, since their exercise or conversion prices were greater than the average market price of the common shares during the period and, therefore, their effect is antidilutive. These potentially dilutive common shares were as follows:
Quarters Ended | Quarter Ended | ||||||||
March 28, 2003 | March 29, 2002 | September 27, 2002 | |||||||
Number of Shares (millions) |
| 34 |
| 30 | |||||
Number of Shares (Thousands) | 33,769 | ||||||||
Average Exercise / Conversion Price | $ | 46.33 | $ | 47.32 | $ | 46.32 |
A substantial increase in the fair market value of the Company’s stock price could negatively impact earnings per share if the 34 million shares were to become dilutive.
NOTE 3. DIVESTITURESDEBT AND CREDIT AGREEMENTS
On August 5, 2003 the Company issued $300 million aggregate principal amount of 5.50% notes due 2013.
As of September 26, 2003, the Company has commercial paper borrowings of $729 million with a weighted average rate of 1.8%.
On October 2, 2003, CSX Corporation issued a press release announcing its intention to satisfy its obligation to purchase its Zero Coupon Convertible Debentures due October 30, 2021 in the event that the holders of the debentures require CSX to purchase them on October 30, 2003. If any such securities are required to be purchased by CSX, they will be purchased for cash, paid promptly following the later of October 30, 2003, or the book-entry transfer of the Debentures to the trustee of the Debentures. The procedures that holders must follow in electing to have CSX purchase their Debentures are set forth in the Debentures and have been provided in a notice delivered to holders through The Depository Trust Company by the trustee. The Debentures have been classified as long-term debt due to the Company’s ability and intent to refinance the Debentures on a long-term basis.
CSX CORPORATION AND SUBSIDIARIES
ITEM 1: FINANCIAL STATEMENTS
Notes to Consolidated Financial Statements (Unaudited)
NOTE 4. DIVESTITURES
In February 27, 2003, CSX conveyed most of its interest in its domestic container-shipping subsidiary, CSX Lines LLC (“CSX Lines”), to a new venture formed with the Carlyle Group for approximately $300 million (gross cash proceeds of approximately $240 million, $214 million net of transaction costs and $60 million of securities). CSX Lines was subsequently renamed Horizon Lines LLC (“Horizon”). Horizon has subleased vessel and equipment from certain affiliates of CSX covering CSX’sthe primary financial obligations related to $319$300 million of vessel and equipment leases under which CSX or one of its affiliates will remain a lessee.lessee / sublessor or guarantor. A deferred pretax gain of approximately $127 million as a result of the transaction will be recognized over the 12 year12-year sub-lease term. Less than $1Approximately $3 million of this gain was recognized in the first quarter.third quarter, with $7 million being recognized year to date. The $60 million of securities have a term of 7 years and a preferred return feature. During the third quarter, CSX will account for thereceived a $15 million payment from Horizon Lines, which included $3 million of interest, in return of a portion of its investment under the cost method.in Horizon and now holds $48 million of securities.
NOTE 4.5. NEW ACCOUNTING PRONOUNCEMENTS AND CUMULATIVE EFFECT OF ACCOUNTING CHANGES
In 2001, Statement of Financial Accounting Standard (“SFAS”) 143, “Accounting for Asset Retirement Obligations” was issued.issued in 2001. This statement addresses financial accounting and reporting for legal obligations associated with the retirement of tangible long-lived assets and the associated retirement costs. In conjunction with the group-life method of accounting for asset costs, the Company historically accrued crosstie removal costs as a component of depreciation, which is not permitted under SFAS 143. With the adoption of SFAS 143 in the first quarter offiscal year 2003, CSX recorded pretax income of $93 million, $57 million after tax, or 26 cents per share, as a cumulative effect of an accounting change in the first quarter, representing the reversal of the accrued liability for crosstie removal costs. The adoption of SFAS 143 did not have a material effect on prior reporting periods, and the Company does not believe it will have a material effect on future earnings. On an ongoing basis, depreciation expense will be reduced, while labor and fringe and materials, supplies and other expense will be increased.
-7-
CSX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
NOTE 4. NEW ACCOUNTING PRONOUNCEMENTS AND CUMULATIVE EFFECT OF ACCOUNTING CHANGES, Continued
In December 2002, SFAS 148, “Accounting for Stock-Based Compensation – Transition and Disclosure” was issued.issued in December 2002. SFAS 148 amends SFAS 123, “Accounting for Stock-Based Compensation,” to provide alternative methods of transition to Statement 123’s fair value method of accounting for stock-based employee compensation and require disclosure of the effects of an entity’s accounting policy with respect to stock-based employee compensation. Effective beginning with fiscal year 2003, CSX has voluntarily adopted the fair value recognition provisions of SFAS 123, “Accounting for Stock-Based Compensation,” and adopted the disclosure requirements of SFAS 148, “Accounting for Stock-Based Compensation – Transition and Disclosure – an amendment of SFAS 123.” In accordance with the prospective method of adoption permitted under SFAS 148, any future stock-based compensation will beawards issued subsequent to fiscal year 2002 are accounted for under the fair value recognition provisions of SFAS 123 utilizing the Black-Scholes valuation method and, accordingly, will beare expensed. (See Note 11, Stock Based Compensation)
CSX CORPORATION AND SUBSIDIARIES
ITEM 1: FINANCIAL STATEMENTS
Notes to Consolidated Financial Statements (Unaudited)
In 2002, the FASB issued Financial Accounting Standard Interpretation (“FASI”) No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” This statement requires that certain guarantees entered into be recorded at fair value on the balance sheet and additional disclosures be made about guarantees. CSX is required to adopt the accounting provisions of this statement in fiscal year 2003.
NOTE 5. | NEW ACCOUNTING PRONOUNCEMENTS AND CUMULATIVE EFFECT OF ACCOUNTING CHANGES, Continued |
In 2001, SFAS 142, “Goodwill and Other Intangible Assets,” was issued.issued in 2001. Under the provisions of SFAS 142, goodwill and other indefinite lived intangible assets are no longer amortized, but are reviewed for impairment on a periodic basis. The Company adopted this standard inat the first quarterbeginning of fiscal year 2002, and incurred a pretax charge of $83 million, $43 million after tax and consideration of minority interest, 20 cents per share, as a cumulative effect of an accounting change, which represents the difference between book value and the fair value of indefinite lived intangible assets. These indefinite lived intangible assets are permits and licenses that the Company holds relating to a proposed pipeline to transfer natural gas from Alaska’s north slope to the port in Valdez, Alaska. The fair value was determined using a discount method of projected future cash flows relating to these assets. The carrying value of these assets is now approximately $3 million. The adoption of SFAS 142 did not have a material effect on prior reporting periods, and it willdoes not have a material effect on future earnings.
NOTE 5.6. INVESTMENT IN AND INTEGRATED RAIL OPERATIONS WITH CONRAIL
Background
CSX and Norfolk Southern Corporation (“Norfolk Southern”) acquired Conrail Inc. (“Conrail”) in May 1997. Conrail owns the primary freight railroad system serving the Northeastern United States, and its rail network extends throughout 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 operate over allocated portions of the Conrail lines.
The rail subsidiaries of CSX and Norfolk Southern each operate their respectiveseparate 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 services in certain shared geographic areas (“Shared Asset Areas”) for the joint benefit of CSX and Norfolk Southern, for which it is compensated on the basis of usage by the respective railroads.
-8-In June 2003, CSX, Norfolk Southern and Conrail jointly filed a petition with the Surface Transportation Board (STB) to establish direct ownership and control by their respective subsidiaries, CSX Transportation Inc. (“CSXT”) and Norfolk Southern Railway of their portions of the Conrail system. Conrail would continue to own, manage and operate the Shared Assets Areas as previously approved by the STB. CSX, Norfolk Southern and Conrail also jointly filed a ruling request with the Internal Revenue Service to qualify the transaction as a non-taxable distribution. The proposed transaction is subject to a number of conditions, including, among others, STB approval and a favorable IRS ruling. If all necessary conditions are satisfied, Conrail intends to restructure its existing $800 million of unsecured public debt and seek consents to restructure its operating leases and approximately $348 million of capitalized lease and equipment obligations. It is currently contemplated that guaranteed debt securities of two newly formed subsidiaries of CSXT and Norfolk Southern Railway would be offered in a 42%/58% ratio in exchange for Conrail’s unsecured debentures. The debt securities would be fully and unconditionally guaranteed by CSXT and Norfolk Southern Railway. Upon completion of the proposed transaction, the new debt securities would become direct unsecured obligations of CSXT and Norfolk Southern Railway. Conrail’s secured debt and lease obligations will remain obligations of Conrail and are expected to be supported by new leases and subleases which, upon completion of the proposed transaction, would be the direct lease and sublease obligations of CSXT or Norfolk Southern Railway. This transaction would significantly impact the balance sheet by increasing debt and fixed assets, while reducing the investment in Conrail. There would not be a material impact on earnings per share.
CSX CORPORATION AND SUBSIDIARIES
ITEM 1: FINANCIAL STATEMENTS
Notes to Consolidated Financial Statements (Unaudited)
NOTE 5.6. INVESTMENT IN AND INTEGRATED RAIL OPERATIONS WITH CONRAIL , Continued
Accounting and Financial Reporting Effects
CSX’s rail and intermodal operating revenue includes revenue from traffic moving on Conrail property. Operating expenses include costs incurred to handle thatsuch traffic and operate the Conrail lines. Rail operating expense includes an expense category, “Conrail Rents, Fees and Services,” which reflects:
1. | Right-of-way usage fees to |
2. | Equipment rental payments to |
3. | Transportation, switching, and terminal service charges provided by Conrail in the Shared Asset Areas that Conrail operates for the joint benefit of CSX and Norfolk |
4. | Amortization of the fair value write-up arising from the acquisition of Conrail and certain other adjustments |
5. | CSX’s 42% share of Conrail’s net income before cumulative effect of accounting change recognized under the equity method of |
Detail of Conrail Rents, Fees and Services
Quarters Ended | ||||||||||||||||||||||||
(Dollars in Millions) | ||||||||||||||||||||||||
March 28, 2003 | March 29, 2002 | Quarters Ended | Nine Months Ended | |||||||||||||||||||||
(dollars in millions) | September 26, 2003 | September 27, 2002 | September 26, 2003 | September 27, 2002 | ||||||||||||||||||||
Rents and Services | $ | 87 |
| $ | 88 |
| $ | 90 | $ | 86 | $ | 268 | $ | 260 | ||||||||||
Purchase Price Amortization and Other |
| 15 |
|
| 14 |
| 14 | 14 | 41 | 39 | ||||||||||||||
Equity in Income of Conrail |
| (16 | ) |
| (15 | ) | (18 | ) | (18 | ) | (50 | ) | (51 | ) | ||||||||||
Total Conrail Operating Fees, Rents and Services | $ | 86 |
| $ | 87 |
| ||||||||||||||||||
Total Conrail | $ | 86 | $ | 82 | $ | 259 | $ | 248 | ||||||||||||||||
Conrail Financial Information
Summary financial information for Conrail for its fiscal periods ended September 30, 2003 and 2002, and at December 31, 2002, is as follows:
Quarters Ended March 31, | ||||||||||||||||||
(Dollars in Millions) | ||||||||||||||||||
2003 | 2002 | Quarters Ended | Nine Months Ended | |||||||||||||||
(dollars in millions) | 2003 | 2002 | 2003 | 2002 | ||||||||||||||
Income Statement Information: | ||||||||||||||||||
Revenues | $ | 226 | $ | 225 | $ | 228 | $ | 221 | $ | 685 | $ | 668 | ||||||
Expenses |
| 163 |
| 164 | 161 | 151 | 489 | 473 | ||||||||||
Operating Income | $ | 63 | $ | 61 | $ | 67 | $ | 70 | $ | 196 | $ | 195 | ||||||
Net Income Before Cumulative Effect of Accounting Change | $ | 37 | $ | 36 | $ | 42 | $ | 44 | $ | 118 | $ | 122 | ||||||
Cumulative Effect of Accounting Change—Net of Tax |
| 40 |
| — | ||||||||||||||
Cumulative Effect of Accounting Change - Net of Tax | — | — | 40 | — | ||||||||||||||
Net Income | $ | 77 | $ | 36 | $ | 42 | $ | 44 | $ | 158 | $ | 122 | ||||||
-9-
CSX CORPORATION AND SUBSIDIARIES
ITEM 1: FINANCIAL STATEMENTS
Notes to Consolidated Financial Statements (Unaudited)
NOTE 5.6. INVESTMENT IN AND INTEGRATED RAIL OPERATIONS WITH CONRAIL, Continued
March 31, 2003 | December 31, 2002 | |||||||||||
(Dollars in Millions) | ||||||||||||
(dollars in millions) | September 30, 2003 | December 31, 2002 | ||||||||||
Balance Sheet Information: | ||||||||||||
Current Assets | $ | 280 | $ | 300 | $ | 268 | $ | 300 | ||||
Property and Equipment and Other Assets |
| 7,957 |
| 7,857 | 7,973 | 7,857 | ||||||
Total Assets | $ | 8,237 | $ | 8,157 | $ | 8,241 | $ | 8,157 | ||||
Current Liabilities | $ | 354 | $ | 329 | $ | 342 | $ | 329 | ||||
Long-term Debt |
| 1,113 |
| 1,123 | 1,090 | 1,123 | ||||||
Other Long-term Liabilities |
| 2,467 |
| 2,479 | 2,425 | 2,479 | ||||||
Total Liabilities |
| 3,934 |
| 3,931 | 3,857 | 3,931 | ||||||
Stockholders’ Equity |
| 4,303 |
| 4,226 | 4,384 | 4,226 | ||||||
Total Liabilities and Stockholders’ Equity | $ | 8,237 | $ | 8,157 | $ | 8,241 | $ | 8,157 | ||||
Transactions with Conrail
As listed below, CSX has amounts payable to Conrail, representing expenses incurred under the operating, equipment and shared asset area agreements. Also, Conrail advances its available cash balances to CSX and Norfolk Southern under variable-rate notes, with CSX’s note maturing on March 28, 2007.
March 28, 2003 | December 27, 2002 | |||||||||||||||||||||
(Dollars in Millions) | ||||||||||||||||||||||
(dollars in millions) | September 26, 2003 | December 27, 2002 | ||||||||||||||||||||
CSX Payable to Conrail | $ | 60 |
| $ | 69 |
| $ | 49 | $ | 69 | ||||||||||||
Conrail Advances to CSX | $ | 437 |
| $ | 371 |
| $ | 490 | $ | 371 | ||||||||||||
Interest Rates on Conrail Advances to CSX |
| 1.56 | % |
| 1.82 | % | 1.51 | % | 1.82 | % | ||||||||||||
Quarters Ended | Quarters Ended | Nine Months Ended | ||||||||||||||||||||
March 28, 2003 | December 27, 2002 | September 26, 2003 | September 27, 2002 | September 26, 2003 | September 27, 2002 | |||||||||||||||||
Interest Expense Related to Conrail Advances | $ | 2 |
| $ | 2 |
| $ | 1 | $ | 2 | $ | 5 | $ | 6 |
The agreement under which CSX operates its allocated portion of the Conrail route system has an initial term of 25 years and may be renewed at CSX’s option for two five-year terms. Operating fees paid to Conrail under the agreement are subject to adjustment every six years based on the fair value of the underlying system. Lease agreements for the Conrail equipment operated by CSX cover varying terms. CSX is responsible for all costs of operating, maintaining, and improving the routes and equipment under these agreements.
-10-
CSX CORPORATION AND SUBSIDIARIES
ITEM 1: FINANCIAL STATEMENTS
Notes to Consolidated Financial Statements (Unaudited)
NOTE 6.7. ACCOUNTS RECEIVABLE
Sale of Accounts Receivable
CSX Transportation Inc. (“CSXT”) sells, generallyAs of June 27, 2003, CSXT discontinued the sale of accounts receivable, which resulted in a $380 million increase in accounts receivable and increased commercial paper borrowings included in short-term debt. Prior to June 27, 2003, CSXT sold, without recourse, a revolving pool of accounts receivable to CSX Trade Receivables Corporation (“CTRC”), a bankruptcy-remote (special purpose) entity wholly-owned by CSX Corporation. CTRC transferstransferred the accounts receivable to a master trust and causescaused the trust to issue two series of certificates representing undivided interests in the receivables, which arereceivables. The certificates issued by the master trust were sold to investors, for proceeds.and the proceeds from those sales were paid to CSXT.
Two series of certificates issued by the trust were outstanding as of March 28, 2003 and December 27, 2002. One series issued in 1998 for $300 million to the public matures in June 2003 and bears interest payable to the investors at 6% annually. A second series in the amount of $200$300 million was issuedsold to investors in 1998 and matured in June 2003. A second series was sold to a private special purpose entity in 2000 which funded the purchase through a bank-supported commercial paper program. This second series of certificates was issued for a one-year maturity, and as currently amended maturesmatured in June 2003 as well. The private seriesAs of certificates bears interest at a floating rate based uponDecember 27, 2002, the program’s commercial paper rates. The yield onamount sold to the private certificates at March 28, 2003entity was 1.33%.
$80 million. Accounts receivable related amounts for the current period arewere as follows:
March 28, 2003 | December 27, 2002 | |||||||||||
(Dollars in Millions) | ||||||||||||
(dollars in millions) | September 26, 2003 | December 27, 2002 | ||||||||||
Amounts sold under: | ||||||||||||
Public Series of Certificates | $ | 300 | $ | 300 | $ | — | $ | 300 | ||||
Private Series of Certificates |
| 80 |
| 80 | — | 80 | ||||||
Total | $ | 380 | $ | 380 | $ | — | $ | 380 | ||||
Retained Interest in Master Trust | $ | 476 | $ | 534 | $ | — | $ | 534 | ||||
The fair value of retained interests approximatesapproximated book value as the receivables arewere collected in approximately one month.
Quarters Ended | ||||||
March 28, 2003 | March 29, 2002 | |||||
(dollars in millions) | ||||||
Discounts on Sales of Accounts Receivable | $ | 6 | $ | 7 |
Net losses associated with the sale of receivables are as follows:
(Dollars in Millions) | Quarters Ended | Nine Months Ended | ||||||||||
September 26, 2003 | September 27, 2002 | September 26, 2003 | September 27, 2002 | |||||||||
Discounts on Sales of Accounts Receivable | $ | — | $ | 6 | $ | 10 | $ | 20 |
CSXT has retained responsibility for servicing accounts receivables held by the master trust. The average servicing period is less thanwas approximately one month. No servicing asset or liability has beenwas recorded since the fees CSXT receives approximatesreceived approximated its related costs.
-11-
CSX CORPORATION AND SUBSIDIARIES
ITEM 1: FINANCIAL STATEMENTS
Notes to Consolidated Financial Statements (Unaudited)
NOTE 6.7. ACCOUNTS RECEIVABLE, Continued
Allowance for Doubtful Accounts
The Company maintains an allowance for doubtful accounts based on the expected collectibility of all accounts receivable, including receivables transferred to the master trust that could be subsequently sold to outside parties with recourse.receivable. The allowance for doubtful accounts is included in the balance sheet as follows:
March 28, 2003 | December 27, 2002 | |||||
(dollars in millions) | ||||||
Allowance for Doubtful Accounts | $ | 95 | $ | 125 |
(Dollars in Millions) | ||||||
September 26, 2003 | December 27, 2002 | |||||
Allowance for Doubtful Accounts | $ | 78 | $ | 125 |
The decrease in the allowance for doubtful accounts was primarily due to the write-off of uncollectible receivables.receivables during 2003.
NOTE 7.8. OPERATING EXPENSE
Operating expense consists of the following:
Quarters Ended | ||||||||||||||||||
(Dollars in Millions) | ||||||||||||||||||
March 28, 2003 | March 29, 2002 | Quarters Ended | Nine Months Ended | |||||||||||||||
(dollars in millions) | September 26, 2003 | September 27, 2002 | September 26, 2003 | September 27, 2002 | ||||||||||||||
Labor and Fringe | $ | 739 | $ | 730 | $ | 666 | $ | 720 | $ | 2,082 | $ | 2,165 | ||||||
Materials, Supplies and Other |
| 446 |
| 433 | 376 | 421 | 1,210 | 1,298 | ||||||||||
Conrail |
| 86 |
| 87 | ||||||||||||||
Conrail Rents, Fees and Services | 86 | 82 | 259 | 248 | ||||||||||||||
Building and Equipment Rent |
| 146 |
| 148 | 146 | 161 | 422 | 463 | ||||||||||
Inland Transportation |
| 92 |
| 86 | 76 | 104 | 247 | 267 | ||||||||||
Depreciation |
| 157 |
| 152 | 158 | 163 | 475 | 470 | ||||||||||
Fuel |
| 173 |
| 116 | 132 | 128 | 441 | 372 | ||||||||||
Additional Loss on Sale (See Note 13) | 108 | — | 108 | — | ||||||||||||||
Provision for Casualty Claims (See Note 12) | 232 | — | 232 | — | ||||||||||||||
Total | $ | 1,839 | $ | 1,752 | $ | 1,980 | $ | 1,779 | $ | 5,476 | $ | 5,283 | ||||||
-12-Operating expenses include amounts from the Company’s domestic container-shipping subsidiary, CSX Lines for fiscal year 2002 and through February of 2003, when most of CSX’s interest in the entity was conveyed to a new venture. See note 4, “Divestitures.”
CSX CORPORATION AND SUBSIDIARIES
ITEM 1: FINANCIAL STATEMENTS
Notes to Consolidated Financial Statements (Unaudited)
NOTE 8.9. OTHER INCOME
Other income (expense) consists of the following:
Quarters Ended | ||||||||||||||||||||||||
(Dollars in Millions) | ||||||||||||||||||||||||
March 28, 2003 | March 29, 2002 | Quarters Ended | Nine Months Ended | |||||||||||||||||||||
(dollars in millions) | September 26, 2003 | September 27, 2002 | September 26, 2003 | September 27, 2002 | ||||||||||||||||||||
Interest Income | $ | 4 |
| $ | 7 |
| $ | 8 | $ | 7 | $ | 16 | $ | 22 | ||||||||||
Income from Real Estate and Resort Operations |
| 1 |
|
| 32 |
| 25 | 45 | 58 | 88 | ||||||||||||||
Discounts on Sales of Accounts Receivable |
| (6 | ) |
| (7 | ) | — | (6 | ) | (10 | ) | (20 | ) | |||||||||||
Minority Interest |
| (11 | ) |
| (8 | ) | (12 | ) | (13 | ) | (32 | ) | (31 | ) | ||||||||||
Equity Loss of Other Affiliates |
| — |
|
| (6 | ) | — | — | — | (5 | ) | |||||||||||||
Miscellaneous |
| 2 |
|
| (9 | ) | — | (5 | ) | (2 | ) | (13 | ) | |||||||||||
Total | $ | (10 | ) | $ | 9 |
| $ | 21 | $ | 28 | $ | 30 | $ | 41 | ||||||||||
Gross Revenue from Real Estate and Resort Operations Included in Other Income | $ | 35 |
| $ | 63 |
| $ | 74 | $ | 91 | $ | 184 | $ | 205 | ||||||||||
NOTE 9.10. DERIVATIVE FINANCIAL INSTRUMENTS
CSX uses derivative financial instruments to manage its overall exposure to fluctuations in interest rates and fuel costs.
Interest Rate Swaps
CSX has entered into various interest rate swap agreements on the following fixed rate notes:
Maturity Date | Notional Amount (millions) | Fixed Interest Rate | Notional Amount (Millions) | Fixed Interest Rate | ||||||||
December 1, 2003 | $ | 150 | 5.85 | % | $ | 150 | 5.85 | % | ||||
May 1, 2004 |
| 300 | 7.25 | % | 300 | 7.25 | % | |||||
June 22, 2005 |
| 50 | 6.46 | % | 50 | 6.46 | % | |||||
August 15, 2006 |
| 300 | 9.00 | % | 300 | 9.00 | % | |||||
May 1, 2007 |
| 450 | 7.45 | % | 450 | 7.45 | % | |||||
May 1, 2032 |
| 150 | 8.30 | % | 150 | 8.30 | % | |||||
Total/Average | $ | 1,400 | 7.62 | % | $ | 1,400 | 7.62 | % | ||||
These agreements were entered for interest rate risk exposure management purposes and mature at the time the related notes are due. Under these agreements, the Company will pay variable interest based on LIBOR in exchange for a fixed rate, effectively transforming the notes to floating rate obligations. Accordingly, theThe instruments qualify, and are designated, as fair value hedges.
-13-
CSX CORPORATION AND SUBSIDIARIES
ITEM 1: FINANCIAL STATEMENTS
Notes to Consolidated Financial Statements (Unaudited)
NOTE 9.10. DERIVATIVE FINANCIAL INSTRUMENTS, Continued
For derivative instruments thatThe interest rate swap agreements are designated and qualify as a fair value hedge,hedges and the gain or loss on the derivative instrument, as well as the offsetting gain or loss on the hedged item, in this case long-term fixed rate notes,note attributable to the hedged risk, are recognized in current earnings during the period of change in fair values. The accounting for hedgeHedge effectiveness is measured at least quarterly based on the relative change in fair value betweenof the derivative contract andin comparison with changes over time in the hedged item over time.fair value of the fixed rate notes. Any change in fair value resulting from ineffectiveness, as defined by SFAS 133, “Accounting For Derivative Instruments and Hedging Activities,” is recognized immediately in earnings. The Company’s interest rate swaps qualify as perfectly effective fair value hedges, as defined by SFAS 133. As such, there was no ineffective portion to the hedge recognized in earnings during the current or prior year periods. Long-term debt has been increased by $85$77 million and $78 million for the fair market value of the interest rate swap agreements at March 28,September 26, 2003 and December 27, 2002, respectively.
The differential to be paid or received under these agreements is accrued based on the terms of the agreements and is recognized in interest expense over the term of the related debt. The related amounts payable to, or receivable from, counterparties are included in other current liabilities or assets. Cash flows related to interest rate swap agreements are classified as “Operating Activities” in the Consolidated Cash Flow Statement. For the threequarter and nine month periods ended March 28,September 26, 2003, and March 29, 2002, the Company reduced interest expense by approximately $11 million and $7$33 million, respectively, as a result of the interest rate swap agreements that were in place during that period. For the quarter and nine month periods ended September 27, 2002, the Company reduced interest expense by approximately $8 million and $24 million, respectively.
The Company is exposed to credit loss in the event of nonperformance by the other parties to the interest rate swap agreements. However, the Company does not anticipate nonperformance by the counterparties.
Fuel Hedging
In the third quarter of 2003, CSX began a program to hedge a portion of its 2004 and 2005 locomotive fuel purchases. This program was established to manage exposure to fuel price fluctuations. In order to minimize this risk, CSX has entered into a series of swaps in order to fix the price of a portion of its estimated future fuel purchases.
Following is a summary of fuel swaps executed during the quarter:
September 26, 2003 | ||||
Approximate Gallons Hedged (Millions) | 118 | |||
Average Price Per Gallon | $0.69 | |||
Swap Maturities | Feb. 2004 - Sept. 2005 |
2004 | 2005 | |||||
Estimated % of Future Fuel Consumption Hedged at September 26, 2003 | 11 | % | 9 | % |
CSX CORPORATION AND SUBSIDIARIES
ITEM 1: FINANCIAL STATEMENTS
Notes to Consolidated Financial Statements (Unaudited)
NOTE 10. STOCK BASEDDERIVATIVE FINANCIAL INSTRUMENTS, Continued
The program limits fuel hedges to a 24 month duration and a maximum of 80% of CSX’s average monthly fuel purchased for any month within the 24 month period, and places the hedges among selected counterparties. Fuel hedging activity did not have a material affect on fuel expense for the quarter and nine months ended September 26, 2003. Ineffectiveness, or the extent to which changes in the fair values of the fuel swaps did not offset changes in the fair values of the expected fuel purchases, was immaterial.
These instruments qualify, and are designated by management, as cash-flow hedges of variability in expected future cash flows attributable to fluctuations in fuel prices. The fair values of fuel derivative instruments are determined based upon current fair market values as quoted by third party dealers and are recorded on the balance sheet with offsetting adjustments to Accumulated Other Comprehensive Income, a component of Shareholders’ Equity. These amounts are immaterial as of September 26, 2003. Fair value adjustments are noncash transactions, and accordingly, are excluded from the Cash Flow Statement.
The Company is exposed to credit loss in the event of nonperformance by other parties to fuel swap agreements. However, the Company does not anticipate nonperformance by the counterparties.
NOTE 11. STOCK-BASED COMPENSATION
Effective beginning with fiscal year 2003, CSX has voluntarily adopted the fair value recognition provisions of SFAS 123, “Accounting for Stock-Based Compensation,” and adopted the disclosure requirements of SFAS 148, “Accounting for Stock-Based Compensation – Transition and Disclosure – an amendment of SFAS 123.” In accordance with the prospective method of adoption permitted under SFAS 148, any future stock-based compensation will be accounted for underthe Company has adopted the fair value recognition provisions of SFAS 123 utilizing the Black-Scholes valuation methodon a prospective basis and accordingly, will be expensed.
-14-expense of $2 million and $3 million, respectively, was recognized in the quarter and nine months ended September 26, 2003 for stock options granted in May 2003.
CSX CORPORATION AND SUBSIDIARIES
ITEM 1: FINANCIAL STATEMENTS
Notes to Consolidated Financial Statements (Unaudited)
NOTE 10.11. STOCK BASED COMPENSATION, Continued
Had compensation expense been determined based upon fair values atThe following table illustrates the date of grant, consistent with the methods of SFAS 123 for all past compensation awards, the Company’spro forma effect on net earningsincome and earnings per share would haveas if the fair value based method had been reducedapplied to the pro forma amounts indicated below:all outstanding and unvested awards in each period:
Quarters Ended | ||||||||
March 28, 2003 | March 29, 2002 | |||||||
(dollars in millions, except per share amounts) | ||||||||
Net Earnings—As Reported | $ | 99 |
| $ | 25 |
| ||
Add (Deduct): Stock Based Employee Compensation Expense (Credit) Included in Reported | ||||||||
Net Income—Net of Related Tax Effects |
| (2 | ) |
| 1 |
| ||
Deduct: Total Stock Based Employee Compensation Expense Determined Under the Fair | ||||||||
Value Based Method For all Awards—Net of Related Tax Effects |
| (5 | ) |
| (7 | ) | ||
Pro Forma Net Earnings | $ | 92 |
| $ | 19 |
| ||
Earnings Per Share: | ||||||||
Basic—As Reported | $ | 0.46 |
| $ | 0.12 |
| ||
Basic—Pro Forma | $ | 0.43 |
| $ | 0.09 |
| ||
Diluted—As Reported | $ | 0.46 |
| $ | 0.12 |
| ||
Diluted—Pro Forma | $ | 0.43 |
| $ | 0.09 |
| ||
(Dollars in Millions, Except Per Share Amounts) | ||||||||||||||||
Quarters Ended | Nine Months Ended | |||||||||||||||
September 26, 2003 | September 27, 2002 | September 26, 2003 | September 27, 2002 | |||||||||||||
Net Earnings (Loss) - As Reported | $ | (103 | ) | $ | 127 | $ | 123 | $ | 287 | |||||||
Add: Stock Based Employee Compensation Expense Included in Reported Net Income - Net of Related Tax Effects | 2 | 1 | 1 | 3 | ||||||||||||
Deduct: Total Stock Based Employee Compensation Expense Determined Under the Fair Value Based Method For all Awards - Net of Related Tax Effects | (12 | ) | (8 | ) | (26 | ) | (23 | ) | ||||||||
Pro Forma Net Earnings | $ | (113 | ) | $ | 120 | $ | 98 | $ | 267 | |||||||
Earnings (Loss) Per Share: | ||||||||||||||||
Basic - As Reported | $ | (0.48 | ) | $ | 0.60 | $ | 0.57 | $ | 1.35 | |||||||
Basic - Pro Forma | $ | (0.53 | ) | $ | 0.56 | $ | 0.46 | $ | 1.25 | |||||||
Diluted - As Reported | $ | (0.48 | ) | $ | 0.60 | $ | 0.57 | $ | 1.35 | |||||||
Diluted - Pro Forma | $ | (0.53 | ) | $ | 0.56 | $ | 0.46 | $ | 1.25 |
NOTE 11.12. CASUALTY, ENVIRONMENTAL AND OTHER RESERVES
Casualty, environmental and other reserves are provided for in the balance sheet as follows:
(Dollars in Millions) | ||||||||||||||||||||||||||||||||||||
March 28, 2003 | December 27, 2002 | September 26, 2003 | December 27, 2002 | |||||||||||||||||||||||||||||||||
Current | Long-term | Total | Current | Long-term | Total | Current | Long-term | Total | Current | Long-term | Total | |||||||||||||||||||||||||
Casualty and Other | $ | 224 | $ | 379 | $ | 603 | $ | 216 | $ | 389 | $ | 605 | $ | 196 | $ | 656 | $ | 852 | $ | 216 | $ | 389 | $ | 605 | ||||||||||||
Separation | 15 | 185 | 200 | 15 | 195 | 210 | ||||||||||||||||||||||||||||||
Environmental |
| 15 |
| 20 |
| 35 |
| 15 |
| 20 |
| 35 | 15 | 21 | 36 | 15 | 20 | 35 | ||||||||||||||||||
Separation |
| 15 |
| 191 |
| 206 |
| 15 |
| 195 |
| 210 | ||||||||||||||||||||||||
Total | $ | 254 | $ | 590 | $ | 844 | $ | 246 | $ | 604 | $ | 850 | $ | 226 | $ | 862 | $ | 1,088 | $ | 246 | $ | 604 | $ | 850 | ||||||||||||
-15-
CSX CORPORATION AND SUBSIDIARIES
ITEM 1: FINANCIAL STATEMENTS
Notes to Consolidated Financial Statements (Unaudited)
NOTE 11.12. CASUALTY, ENVIRONMENTAL AND OTHER RESERVES, Continued
Casualty Reserves
Casualty reserves represent accruals for the uninsured portion of occupational injury and personal injury claims. In the third quarter of 2003, the Company changed its estimate of casualty reserves to include an estimate of incurred but not reported claims for asbestos and other occupational injuries to be received over the next seven years. Other occupational claims include allegations of exposure to certain materials in the work place, such as solvents and diesel fuel, or alleged physical injuries, such as carpal tunnel syndrome or hearing loss.
In conjunction with the change in estimate, the Company recorded a charge of $232 million ($145 million after tax, 68 cents per share) in the third quarter of 2003 to increase its provision for these claims. Approximately $141 million relates to asbestos claims.
Asbestos and Other Occupational Injuries
During the third quarter of 2003, the Company retained third party professionals to work with it to project the number of asbestos and other occupational injury (asbestos, carpal tunnel, etc.)claims to be received over the next seven years and accident claims. Thesethe related costs. Based on this analysis, the Company established reserves for the probable and reasonably estimable asbestos and other occupational injury liabilities.
The methodology used by the third party to project future occupational injury claims was based largely on CSX’s recent experience, including claim-filing and settlement rates, injury and disease mix, open claims and claim settlement costs. However, projecting future occupational injury claims and settlements costs is subject to numerous variables that are recorded upondifficult to predict. In addition to the first reportingsignificant uncertainties surrounding the number of an incident, and estimates are updated as information develops. The amount of liability accrued is based onclaims that might be received, other variables, including the type and severity of claim,the injury or disease alleged by each claimant, the long latency period associated with exposure, dismissal rates, costs of medical treatment, uncertainties surrounding the litigation process from jurisdiction to jurisdiction and an estimatefrom case to case and the impact of changes in legislative or judicial standards, may cause actual results to differ significantly from estimates. Furthermore, predictions with respect to these variables are subject to greater uncertainty as the projection period lengthens. In light of these uncertainties, CSX believes that seven years is the most reasonable period for estimating future claims, development based on current trends and historical data. The Company believes it has recorded liabilities in sufficient amountsthat claims received after that period are not reasonably estimable.
CSX increased its reserve for asbestos and other occupational claims by a net $206 million to cover all identified claims and estimatesthe estimate of incurred but not reported personal injuryclaims to be filed during the next seven years. Reflecting the additional provisions, CSX’s reserve for asbestos and accident claims. Unreportedother occupational injuries are not subjectclaims on an undiscounted basis amounted to reasonable estimation, thus no provision is made for incurred but not reported occupational injuries. Accruals for occupational injury, personal injury and accident liabilities amount to $603 million and $605$350 million at March 28,September 26, 2003, compared to $171 million at December 27, 2002.
CSX CORPORATION AND SUBSIDIARIES
ITEM 1: FINANCIAL STATEMENTS
Notes to Consolidated Financial Statements (Unaudited)
NOTE 12. CASUALTY, ENVIRONMENTAL AND OTHER RESERVES, Continued
Casualty Reserves, Continued
A summary of existing claims activity is as follows:
Nine Months Ended September 26, 2003 | Fiscal Year Ended December 27, 2002 | |||||
Asserted Claims: | ||||||
Open Claims - Beginning of Period | 14,278 | 15,369 | ||||
New Claims Filed | 2,111 | 2,091 | ||||
Claims Settled | (2,582 | ) | (2,877 | ) | ||
Claims Dismissed | (222 | ) | (305 | ) | ||
Open Claims - End of Period | 13,585 | 14,278 | ||||
Approximately 5,500 of the open claims above are asbestos claims against the Company’s previously owned international container-shipping business, Sea-Land. Because the Sea-Land claims are claims against multiple vessel owners, the Company’s reserves reflect its portion of those claims. The remaining open claims have been asserted against CSX Transportation. At September 26, 2003 and December 27, 2002, respectively.the Company had approximately $13 million and $10 million reserved for the Sea-Land claims.
Personal Injury
During the third quarter of 2003, CSX retained an independent actuarial firm to assess the value of CSX’s personal injury portfolio. This firm’s methods and procedures yielded a slightly higher valuation for personal injury claims than previously recognized by CSX due to a higher estimated cost for adverse development. Utilizing the analysis provided, CSX increased its reserves for alleged personal injury claims by $26 million.
Environmental Reserves
CSX 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 approximately 90100 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.
CSX CORPORATION AND SUBSIDIARIES
ITEM 1: FINANCIAL STATEMENTS
Notes to Consolidated Financial Statements (Unaudited)
NOTE 12. CASUALTY, ENVIRONMENTAL AND OTHER RESERVES, Continued
Environmental Reserves, Continued
CSXT is involved in administrative and judicial proceedings, and other clean-up efforts at approximately 210224 sites, which include the 90100 Superfund sites noted above, where it is participating in the study or clean-up of alleged environmental contamination. At least once each quarter, CSXT reviews its role if any, with respect to each such location, giving consideration to a number of factors, including the nature of CSXT’s alleged connection to the location (e.g., generator of waste sent to the site, or owner or operator of the site), 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 viability of other named and unnamed PRPs at the location.
Based on the review process, CSXT has recorded reserves to cover estimated contingent future environmental costs with respect to such sites. The recorded liabilities for estimated future environmental costs at March 28,September 26, 2003, and December 27, 2002 were $36 million and $35 million.million, respectively. These liabilities, which are undiscounted, include amounts representing CSXT’s estimate of unasserted claims, which CSXT believes to be immaterial. The liability includes future costs for all sites where the Company’s obligation is (1) deemed probable and (2) where such costs can be reasonably estimated. The liability includes future costs for remediation and restoration of sites as well as any significant ongoing monitoring costs, but excludes any anticipated insurance recoveries. The majority of the March 28,September 26, 2003 environmental liability is expected to be paid out over the next seven years, funded by cash generated from operations.
-16-
CSX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
NOTE 11. CASUALTY, ENVIRONMENTAL AND OTHER RESERVES, 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 its environmental reserves are adequate to accomplish remedial actions to comply with present laws and regulations, and that the ultimate liability for these matters, if any, will not materially affect its overall results of operations and financial condition.
NOTE 12.13. COMMITMENTS AND CONTINGENCIES
Purchase Commitments
The Company has a commitment under a long-term maintenance program for approximately 40% of CSXT’s fleet of locomotives. The agreement expires in 2026 and totals $2.7approximates $3.1 billion. The long-term maintenance program assuresis intended to provide CSX access to efficient, high-quality locomotive maintenance services at fixed price levels through the term of the program. Under the program, CSX paid $33$32 million and $31$98 million in the quartersquarter and nine month periods ended March 28, 2003September 26, 2003. In the quarter and March 29,nine month periods ended September 27, 2002, respectively.$31 million and $93 million, respectively was paid.
CSX CORPORATION AND SUBSIDIARIES
ITEM 1: FINANCIAL STATEMENTS
Notes to Consolidated Financial Statements (Unaudited)
NOTE 13. COMMITMENTS AND CONTINGENCIES, Continued
Purchase Commitments, Continued
The Company has entered into fuel purchase agreements for approximately 14% of its fuel requirements over the next five months. These agreements amount to approximately 88 million gallons in commitments at a weighted average of 75 cents per gallon. These contracts require the Company to take monthly delivery of specified quantities of fuel at a fixed price. These contracts cannot be net settled.
Self-Insurance
The Company obtains substantial amounts of commercial insurance for potential losses for third-party liability and property damages. ReasonableSpecified levels of risk (up to $35 million for property and $25 million for liability per occurrence) are retained on a self-insurance basis. UsingThe Company uses a combination of third-party and self-insurance allows the Company to realize savings on insurance premium costs and preserves flexibility in achieving the best insurance solutions for various categories of risk.costs.
Guarantees
The Company and its subsidiaries are contingently liable individually and jointly with others as guarantors of obligations principally relating to leased equipment, joint ventures and joint facilities used by CSX in its business operations. Utilizing a CSX guarantee for these obligations allows CSX to take advantage of lower interest rates and obtain other favorable terms when negotiating leases or financing debt. Guarantees are contingent commitments issued by the Company that could require CSX or one of its affiliates to make payment or to perform certain actions to the guaranteed party based on another entity’s failure to perform. CSX’s guarantees can be segregated into three main categories:
1. | Guarantees of approximately $511 million of lease commitments assumed by A.P. Moller-Maersk (“Maersk”) for which the Company is contingently liable. CSX believes that Maersk will fulfill its contractual commitments with respect to such leases and that CSX will have no further liabilities for those obligations. |
2. | Guarantees of approximately |
-17-
CSX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
NOTE 12. COMMITMENTS AND CONTINGENCIES, Continued
3. |
The maximum amount of future payments the Company could be required to make under these guarantees is the amount of the guarantees themselves.
CSX CORPORATION AND SUBSIDIARIES
ITEM 1: FINANCIAL STATEMENTS
Notes to Consolidated Financial Statements (Unaudited)
NOTE 13. COMMITMENTS AND CONTINGENCIES, Continued
Matters Arising Out of Sale of International Container-Shipping Assets
CSX has received a claim amounting to approximately $180 million plus interest from Europe Container Terminals bv (“ECT”), ownerentered into two settlement agreements with Maersk which resolve all material disputes pending between the companies arising out of the Rotterdam Container Terminal formerly operated by Sea-Land Service Inc. (“Sea-Land”). ECT has claimed that the December 1999 sale of the international liner business to Maersk resulted incontainer-shipping assets. On September 17, 2003, CSX entered into a breach of the Sea-Land terminal agreement with ECT. An initial arbitration panel of the Netherlands Arbitration Institute ruled on February 10, 2003, that CSX was in breach of the terminal agreement. The ruling by the panel dealt only with the existence of liability for a breach, and did not address the level of ECT damages, if any, which will be the subject of a second hearing before the same panel sometime in 2003. CSX disputes this claim and believes it does not reflect the mitigating benefits ECT gained from its ability to service other customers at the former Sea-Land facility. Management believes that valid defenses to this claim exist but cannot estimate what loss, if any, may result from this matter. CSX believes that Maersk is responsible for any damages that may result from this dispute and has taken preliminary steps to initiate an arbitration against Maersk under the purchase and sale agreement with Maersk.
The purchase and salefinal settlement agreement with Maersk providesallocating responsibility between the two companies for third party claims and litigation relating to the assets acquired by Maersk
On October 20, 2003, CSX entered into a conditional settlement agreement with Maersk designed to settle all the remaining material disputes pending between the companies. The agreement settles the two major disputes arising out of the Maersk transaction. The first dispute involves a post-closing working capital adjustment to the salessale price based onfor which the change in working capital, as defined in the agreement, between June 25, 1999, and December 10, 1999. The Company hashad recorded a receivable of approximately $70 million. The second dispute involves a claim of 425 million in connection withDutch Guilders plus interest (amounting to approximately $180 million plus interest under then prevailing currency exchange rates) received from Europe Container Terminals bv (“ECT”) alleging certain breaches by the post-closing adjustment and this amountCompany at the Rotterdam container terminal facility owned by ECT. The settlement is currently in dispute. This matter, together with other disputed issues relatingsubject to certain conditions which the contractual obligations ofCompany believes it is probable will be met. Accordingly, the Company has been submittedrecorded a charge relating to arbitration.
Although management believes it will prevail in some or allthis settlement. The charge set forth below primarily includes the write-off of the Maerskreceivable recorded for the working capital adjustment as well as a net cash payment. If the conditions are not satisfied, then CSX will not be bound by the settlement agreement and ECT disputes and arbitrations, it can give no assurance in this regard. An adverse outcome could have a material effect on the determinationwill proceed with litigation of the finaldisputed matters. The effect of the two settlements is to reduce the Company’s earnings by $108 million pretax, $67 million after tax, or 31 cents per share. This charge is reflected in the financial statements as the additional loss on sale of Sea-Land’s International Liner business and the financial results andinternational container-shipping assets. Neither settlement is expected to have a material impact on future cash flows in future reporting periods.flows.
Other Legal Proceedings
A number of other legal actions are pending against CSX and certain subsidiaries in which claims are made in substantial amounts. While the ultimate results of these legal actions cannot be predicted with certainty, management does not currently expect that the resolution of these matters will have a material effect on CSX’s consolidated balance sheet, income statement 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.
-18-
CSX CORPORATION AND SUBSIDIARIES
ITEM 1: FINANCIAL STATEMENTS
Notes to Consolidated Financial Statements (Unaudited)
NOTE 13.14. BUSINESS SEGMENTS
The Company operates in three business segments: rail, intermodal, and international terminals. The rail segment provides rail freight transportation over a network of more than 23,000 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 international terminals segment operates container freight terminal facilities and related businesses in Asia, Europe, Australia, Latin America and the United States. 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.
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) in the CSX Annual Report on Form 10-K, 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 through eliminations in CSX’s consolidated financial statements to other income. Intersegment sales and transfers are generally accounted for as if the sales or transfers were to third parties, at current market prices.
Business segment information for the quarters and nine months ended March 28,September 26, 2003 and March 29,September 27, 2002 is as follows:
(Dollars in Millions) | ||||||||||||||||||||
Surface Transportation | ||||||||||||||||||||
Rail | Intermodal | Total | International Terminals | Other (1) | Total | |||||||||||||||
Quarter Ended September 26, 2003 | ||||||||||||||||||||
Revenues from external customers | $ | 1,510 | $ | 313 | $ | 1,823 | $ | 59 | $ | — | $ | 1,882 | ||||||||
Intersegment revenues | — | — | — | — | — | — | ||||||||||||||
Segment operating income (Loss) | (45 | ) | 29 | (16 | ) | 20 | — | 4 | ||||||||||||
Assets | 12,549 | 594 | 13,143 | 1,006 | — | 14,149 | ||||||||||||||
Quarter Ended September 27,2002 | ||||||||||||||||||||
Revenues from external customers | $ | 1,473 | $ | 306 | $ | 1,779 | $ | 64 | $ | 215 | $ | 2,058 | ||||||||
Intersegment revenues | — | 7 | 7 | — | — | 7 | ||||||||||||||
Segment operating income | 188 | 39 | 227 | 18 | 22 | 267 | ||||||||||||||
Assets | 12,657 | 520 | 13,177 | 949 | 303 | 14,429 |
Quarter ended March 28, 2003:
Surface Transportation | International Terminals | Other | Total | |||||||||||||||
Rail | Intermodal | Total | ||||||||||||||||
(dollars in millions) | ||||||||||||||||||
Revenues from external customers | $ | 1,531 | $ | 298 | $ | 1,829 | $ | 56 | $ | 131 | $ | 2,016 | ||||||
Intersegment revenues |
| — |
| 4 |
| 4 |
| — |
| — |
| 4 | ||||||
Segment operating income |
| 147 |
| 22 |
| 169 |
| 15 |
| 1 |
| 185 | ||||||
Assets |
| 12,663 |
| 544 |
| 13,207 |
| 961 |
| — |
| 14,168 |
Quarter ended March 29, 2002:
Surface Transportation | International Terminals | Other | Total | |||||||||||||||
Rail | Intermodal | Total | ||||||||||||||||
(dollars in millions) | ||||||||||||||||||
Revenues from external customers | $ | 1,486 | $ | 257 | $ | 1,743 | $ | 58 | $ | 163 | $ | 1,964 | ||||||
Intersegment revenues |
| — |
| 5 |
| 5 |
| — |
| 1 |
| 6 | ||||||
Segment operating income |
| 177 |
| 17 |
| 194 |
| 11 |
| 1 |
| 206 | ||||||
Assets |
| 12,734 |
| 437 |
| 13,171 |
| 895 |
| 482 |
| 14,548 |
-19-
CSX CORPORATION AND SUBSIDIARIES
ITEM 1: FINANCIAL STATEMENTS
Notes to Consolidated Financial Statements (Unaudited)
NOTE 13.14. BUSINESS SEGMENTS, Continued
Prior to the disposition of CSX Lines, it was a segment of CSX and was presented with international terminals on a combined basis, as the Marine Services operations of the Company. Results for CSX Lines are now presented in the other column.
(Dollars in Millions) | ||||||||||||||||||
Surface Transportation | International Terminals | Other (1) | Total | |||||||||||||||
Rail | Intermodal | Total | ||||||||||||||||
Nine Months Ended September 26, 2003 | ||||||||||||||||||
Revenues from external customers | $ | 4,614 | $ | 929 | $ | 5,543 | $ | 169 | $ | 128 | $ | 5,840 | ||||||
Intersegment revenues | — | 4 | 4 | — | — | 4 | ||||||||||||
Segment operating income | 334 | 78 | 412 | 52 | 1 | 465 | ||||||||||||
Assets | 12,549 | 594 | 13,143 | 1,006 | — | 14,149 | ||||||||||||
Nine Months Ended September 27, 2002 | ||||||||||||||||||
Revenues from external customers | $ | 4,497 | $ | 851 | $ | 5,348 | $ | 179 | $ | 565 | $ | 6,092 | ||||||
Intersegment revenues | — | 20 | 20 | 1 | — | 21 | ||||||||||||
Segment operating income | 609 | 105 | 714 | 45 | 32 | 791 | ||||||||||||
Assets | 12,657 | 520 | 13,177 | 949 | 303 | 14,429 |
(1) | Prior to the conveyance of CSX Lines, it was a segment of CSX and was presented with international terminals on a combined basis, as the Marine Services operations of the Company. Results for CSX Lines are now presented in the other column. |
A reconciliation of the totals reported for the business segments to the applicable line items in the consolidated financial statements is as follows:
(Dollars in Millions) | ||||||||||||||||||||||||
March 28, 2003 | March 29, 2002 | Quarters Ended | Nine Months Ended | |||||||||||||||||||||
(dollars in millions) | September 26, 2003 | September 27, 2002 | September 26, 2003 | September 27, 2002 | ||||||||||||||||||||
Revenues: | ||||||||||||||||||||||||
Total external revenues for business segments | $ | 2,016 |
| $ | 1,964 |
| $ | 1,882 | $ | 2,058 | $ | 5,840 | $ | 6,092 | ||||||||||
Intersegment revenues for business segments |
| 4 |
|
| 6 |
| — | 7 | 4 | 21 | ||||||||||||||
Elimination of intersegment revenues |
| (4 | ) |
| (6 | ) | — | (7 | ) | (4 | ) | (21 | ) | |||||||||||
Other | — | (3 | ) | — | — | |||||||||||||||||||
Total consolidated revenues | $ | 2,016 |
| $ | 1,964 |
| $ | 1,882 | $ | 2,055 | $ | 5,840 | $ | 6,092 | ||||||||||
Operating Income: | ||||||||||||||||||||||||
Operating Income (Loss): | ||||||||||||||||||||||||
Total operating income for business segments | $ | 185 |
| $ | 206 |
| $ | 4 | $ | 267 | $ | 465 | $ | 791 | ||||||||||
Reclassification of minority interest expense for | ||||||||||||||||||||||||
International Terminals segment |
| 10 |
|
| 8 |
| ||||||||||||||||||
Reclassification of minority interest expense for International Terminals segment | 9 | 12 | 28 | 29 | ||||||||||||||||||||
Unallocated corporate expenses |
| (18 | ) |
| (2 | ) | (3 | ) | (3 | ) | (21 | ) | (11 | ) | ||||||||||
Additional Loss on Sale (See Note 13) | (108 | ) | — | (108 | ) | — | ||||||||||||||||||
Total consolidated operating income | $ | 177 |
| $ | 212 |
| ||||||||||||||||||
Total consolidated operating income (loss) | $ | (98 | ) | $ | 276 | $ | 364 | $ | 809 | |||||||||||||||
September 26, 2003 | September 27, 2002 | |||||||||||||||||||||||
Assets: | ||||||||||||||||||||||||
Assets for Business Segments | $ | 14,168 |
| $ | 14,548 |
| $ | 14,149 | $ | 14,429 | ||||||||||||||
Investment in Conrail |
| 4,655 |
|
| 4,656 |
| 4,661 | 4,667 | ||||||||||||||||
Elimination of intersegment receivables |
| (130 | ) |
| (231 | ) | (132 | ) | (222 | ) | ||||||||||||||
Non-segment assets |
| 2,266 |
|
| 1,869 |
| 3,249 | 2,151 | ||||||||||||||||
Total consolidated assets | $ | 20,959 |
| $ | 20,842 |
| $ | 21,927 | $ | 21,025 | ||||||||||||||
-20-
CSX CORPORATION AND SUBSIDIARIES
ITEM 1: FINANCIAL STATEMENTS
Notes to Consolidated Financial Statements (Unaudited)
NOTE 14.15. SUMMARIZED CONSOLIDATING FINANCIAL DATA
During 1987, the predecessor company to CSX Lines entered into agreements to sell and lease back by charter three new U.S.-built, U.S.-flag, D-7 class container ships. CSX guaranteed the obligations of CSX Lines pursuant to the related charters which, along with the container ships, serve as collateral for debt securities registered with the Securities and Exchange Commission (“SEC”). On February 27, 2003, CSX conveyed most of its interest in CSX Lines to a new venture. A newly formed CSX subsidiary, CSX Vessel Leasing, will retain certain vessel obligations, with CSX remaining as the guarantor. These obligationsvessels have been subleased to Horizon. CSX believes that Horizon will fulfill its contractual commitments with respect to such leases and that CSX will have no further liabilities for these obligations. The March 28,September 26, 2003 consolidating schedules reflect CSX Vessel Leasing as the obligor, while the March 29,September 27, 2002, and December 27, 2002 consolidating schedules reflect CSX Lines as the obligor. In accordance with SEC disclosure requirements, consolidating financial information for the parent and obligor are as follows:
Consolidating Income Statement
CSX Corporation | CSX Vessel Leasing | Other | Eliminations | Consolidated | |||||||||||||||||||||||||||||||||
(millions of dollars) | |||||||||||||||||||||||||||||||||||||
Quarter ended March 28, 2003 | |||||||||||||||||||||||||||||||||||||
(Dollars in Millions) | CSX Corporation | CSX Vessel Leasing | Other | Eliminations | Consolidated | ||||||||||||||||||||||||||||||||
Quarter ended September 26, 2003 | |||||||||||||||||||||||||||||||||||||
Operating Revenue | $ | — |
| $ | — | $ | 2,049 | $ | (33 | ) | $ | 2,016 |
| $ | — | $ | — | $ | 1,896 | $ | (14 | ) | $ | 1,882 | |||||||||||||
Operating Expense |
| (36 | ) |
| — |
| 1,905 |
| (30 | ) |
| 1,839 |
| (42 | ) | — | 2,033 | (11 | ) | 1,980 | |||||||||||||||||
Operating Income (Loss) |
| 36 |
|
| — |
| 144 |
| (3 | ) |
| 177 |
| 42 | — | (137 | ) | (3 | ) | (98 | ) | ||||||||||||||||
Other Income (Expense) |
| 145 |
|
| — |
| 3 |
| (158 | ) |
| (10 | ) | (98 | ) | 1 | 30 | 88 | 21 | ||||||||||||||||||
Interest Expense |
| 91 |
|
| — |
| 22 |
| (10 | ) |
| 103 |
| 91 | — | 19 | (7 | ) | 103 | ||||||||||||||||||
Earnings before Income Taxes and Cumulative Effect of | |||||||||||||||||||||||||||||||||||||
Accounting Change |
| 90 |
|
| — |
| 125 |
| (151 | ) |
| 64 |
| ||||||||||||||||||||||||
Earnings (Loss) before Income Taxes | (147 | ) | 1 | (126 | ) | 92 | (180 | ) | |||||||||||||||||||||||||||||
Income Tax Expense (Benefit) |
| (19 | ) |
| — |
| 41 |
| — |
|
| 22 |
| (17 | ) | — | (60 | ) | — | (77 | ) | ||||||||||||||||
Earnings Before Cumulative Effect of Accounting Change |
| 109 |
|
| — |
| 84 |
| (151 | ) |
| 42 |
| ||||||||||||||||||||||||
Cumulative Effect of Accounting Change—Net of Tax |
| — |
|
| — |
| 57 |
| — |
|
| 57 |
| ||||||||||||||||||||||||
Net Earnings (Loss) | $ | (130 | ) | $ | 1 | $ | (66 | ) | $ | 92 | $ | (103 | ) | ||||||||||||||||||||||||
Net Earnings | $ | 109 |
| $ | — | $ | 141 | $ | (151 | ) | $ | 99 |
| ||||||||||||||||||||||||
CSX Corporation | CSX Lines | Other | Eliminations | Consolidated | |||||||||||||||||||||||||||||||||
Quarter ended September 27, 2002 | |||||||||||||||||||||||||||||||||||||
Operating Revenue | $ | — | $ | 215 | $ | 1,903 | $ | (63 | ) | $ | 2,055 | ||||||||||||||||||||||||||
Operating Expense | (58 | ) | 193 | 1,704 | (60 | ) | 1,779 | ||||||||||||||||||||||||||||||
Operating Income (Loss) | 58 | 22 | 199 | (3 | ) | 276 | |||||||||||||||||||||||||||||||
Other Income (Expense) | 161 | 1 | 43 | (177 | ) | 28 | |||||||||||||||||||||||||||||||
Interest Expense | 97 | 1 | 23 | (13 | ) | 108 | |||||||||||||||||||||||||||||||
Earnings (Loss) before Income Taxes | 122 | 22 | 219 | (167 | ) | 196 | |||||||||||||||||||||||||||||||
Income Tax Expense (Benefit) | 13 | 8 | 48 | — | 69 | ||||||||||||||||||||||||||||||||
Net Earnings (Loss) | $ | 109 | $ | 14 | $ | 171 | $ | (167 | ) | $ | 127 | ||||||||||||||||||||||||||
Quarter ended March 29, 2002 | CSX Corporation | CSX Lines | Other | Eliminations | Consolidated | ||||||||||||||
Operating Revenue | $ | — |
| $ | 161 | $ | 1,916 |
| $ | (113 | ) | $ | 1,964 |
| |||||
Operating Expense |
| (67 | ) |
| 160 |
| 1,769 |
|
| (110 | ) |
| 1,752 |
| |||||
Operating Income (Loss) |
| 67 |
|
| 1 |
| 147 |
|
| (3 | ) |
| 212 |
| |||||
Other Income (Expense) |
| 48 |
|
| 2 |
| 24 |
|
| (65 | ) |
| 9 |
| |||||
Interest Expense |
| 100 |
|
| 2 |
| 27 |
|
| (15 | ) |
| 114 |
| |||||
Earnings before Income Taxes and Cumulative Effect of | |||||||||||||||||||
Accounting Change |
| 15 |
|
| 1 |
| 144 |
|
| (53 | ) |
| 107 |
| |||||
Income Tax Expense (Benefit) |
| (11 | ) |
| 1 |
| 49 |
|
| — |
|
| 39 |
| |||||
Earnings Before Cumulative Effect of Accounting Change |
| 26 |
|
| — |
| 95 |
|
| (53 | ) |
| 68 |
| |||||
Cumulative Effect of Accounting Change—Net of Tax |
| — |
|
| — |
| (43 | ) |
| — |
|
| (43 | ) | |||||
Net Earnings | $ | 26 |
| $ | — | $ | 52 |
| $ | (53 | ) | $ | 25 |
| |||||
-21-
CSX CORPORATION AND SUBSIDIARIES
ITEM 1: FINANCIAL STATEMENTS
Notes to Consolidated Financial Statements (Unaudited)
NOTE 14.15. SUMMARIZED CONSOLIDATING FINANCIAL DATA, Continued
Consolidating Cash FlowIncome Statement
CSX Corporation | CSX Vessel Leasing | Other | Eliminations | Consolidated | |||||||||||||||
(millions of dollars) | |||||||||||||||||||
Three Months Ended March 28, 2003 | |||||||||||||||||||
Operating Activities | |||||||||||||||||||
Net Cash Provided (Used) by Operating Activities | $ | (28 | ) | $ |
| $ | 132 |
| $ | (60 | ) | $ | 44 |
| |||||
Investing Activities | |||||||||||||||||||
Property Additions |
| — |
|
| (15 | )0 |
| — |
|
| (150 | ) | |||||||
Short-term Investments—Net |
| (1 | ) |
| — |
|
| — |
|
| (1 | ) | |||||||
Net Proceeds from Divestitures |
| — |
|
| 214 |
|
| — |
|
| 214 |
| |||||||
Other Investing Activities |
| 11 |
|
| (11 | ) |
| (32 | ) |
| (32 | ) | |||||||
Net Cash Provided (Used) by Investing Activities |
| 10 |
|
| 53 |
|
| (32 | ) |
| 31 |
| |||||||
Financing Activities | |||||||||||||||||||
Short-term Debt-Net |
| 10 |
|
| 2 |
|
| — |
|
| 12 |
| |||||||
Long-term Debt Issued |
| 66 |
|
| 1 |
|
| — |
|
| 67 |
| |||||||
Long-term Debt Repaid |
| — |
|
| (95 | ) |
| — |
|
| (95 | ) | |||||||
Cash Dividends Paid |
| (22 | ) |
| (59 | ) |
| 60 |
|
| (21 | ) | |||||||
Other Financing Activities |
| 10 |
|
| 45 |
| (93 | ) |
| 32 |
|
| (6 | ) | |||||
Net Cash Provided (Used) by Financing Activities |
| 64 |
|
| 45 |
| (244 | ) |
| 92 |
|
| (43 | ) | |||||
Net Increase (Decrease) in Cash and Cash Equivalents |
| 46 |
|
| 45 |
| (59 | ) |
| — |
|
| 32 |
| |||||
Cash and Cash Equivalents at Beginning of Period |
| 264 |
|
| — |
| (137 | ) |
| — |
|
| 127 |
| |||||
Cash and Cash Equivalents at End of Period | $ | 310 |
| $ | 45 | $ | (196 | ) | $ | — |
| $ | 159 |
| |||||
Three Months Ended March 29, 2002 | CSX Corporation | CSX Lines | Other | Eliminations | Consolidated | |||||||||||||||
Operating Activities | ||||||||||||||||||||
Net Cash Provided (Used) by Operating Activities | $ | 103 |
| $ | (9 | ) | $ | 127 |
| $ | (61 | ) | $ | 160 |
| |||||
Investing Activities | ||||||||||||||||||||
Property Additions |
| — |
|
| (6 | ) |
| (156 | ) |
| — |
|
| (162 | ) | |||||
Short-term Investments-net |
| (288 | ) |
| (3 | ) |
| 133 |
|
| — |
|
| (158 | ) | |||||
Other Investing Activities |
| 3 |
|
| (1 | ) |
| (1 | ) |
| (12 | ) |
| (11 | ) | |||||
Net Cash Used by Investing Activities |
| (285 | ) |
| (10 | ) |
| (24 | ) |
| (12 | ) |
| (331 | ) | |||||
Financing Activities | ||||||||||||||||||||
Long-term Debt Issued |
| 450 |
|
| — |
|
| — |
|
| — |
|
| 450 |
| |||||
Long-term Debt Repaid |
| (200 | ) |
| — |
|
| (67 | ) |
| — |
|
| (267 | ) | |||||
Cash Dividends Paid |
| (22 | ) |
| — |
|
| (52 | ) |
| 53 |
|
| (21 | ) | |||||
Other Financing Activities |
| 20 |
|
| — |
|
| (28 | ) |
| 20 |
|
| 12 |
| |||||
Net Cash Provided (Used) by Financing Activities |
| 248 |
|
| — |
|
| (147 | ) |
| 73 |
|
| 174 |
| |||||
Net Increase (Decrease) in Cash and Cash Equivalents |
| 66 |
|
| (19 | ) |
| (44 | ) |
| — |
|
| 3 |
| |||||
Cash and Cash Equivalents at Beginning of Period |
| 156 |
|
| 52 |
|
| (71 | ) |
| — |
|
| 137 |
| |||||
Cash and Cash Equivalents at End of Period | $ | 222 |
| $ | 33 |
| $ | (115 | ) | $ | — |
| $ | 140 |
| |||||
(Dollars in Millions) Nine Months ended September 26, 2003 Operating Revenue Operating Expense Operating Income (Loss) Other Income (Expense) Interest Expense Earnings before Income Taxes and Cumulative Effect of Accounting Change Income Tax Expense (Benefit) Earnings Before Cumulative Effect of Accounting Change Cumulative Effect of Accounting Change - Net of Tax Net Earnings Nine Months ended September 27, 2002 Operating Revenue Operating Expense Operating Income (Loss) Other Income (Expense) Interest Expense Earnings before Income Taxes and Cumulative Effect of Accounting Change Income Tax Expense Earnings Before Cumulative Effect of Accounting Change Cumulative Effect of Accounting Change - Net of Tax Net Earnings CSX
Corporation CSX Vessel
Leasing Other Eliminations Consolidated $ — $ — $ 5,899 $ (59 ) $ 5,840 (119 ) — 5,647 (52 ) 5,476 119 — 252 (7 ) 364 216 2 63 (251 ) 30 274 — 61 (24 ) 311 61 2 254 (234 ) 83 (53 ) — 70 — 17 114 2 184 (234 ) 66 — — 57 — 57 $ 114 $ 2 $ 241 $ (234 ) $ 123 CSX
Corporation CSX Lines Other Eliminations Consolidated $ — $ 565 $ 5,691 $ (164 ) $ 6,092 (194 ) 533 5,100 (156 ) 5,283 194 32 591 (8 ) 809 378 5 83 (425 ) 41 299 6 73 (40 ) 338 273 31 601 (393 ) 512 34 12 136 — 182 239 19 465 (393 ) 330 — — (43 ) — (43 ) $ 239 $ 19 $ 422 $ (393 ) $ 287
-22-
CSX CORPORATION AND SUBSIDIARIES
ITEM 1: FINANCIAL STATEMENTS
Notes to Consolidated Financial Statements (Unaudited)
NOTE 14.15. SUMMARIZED CONSOLIDATING FINANCIAL DATA, Continued
Consolidating Balance Sheet
CSX Corporation | CSX Vessel Leasing | Other | Eliminations | Consolidated | ||||||||||||||||||||||||||||||||||
(millions of dollars) | ||||||||||||||||||||||||||||||||||||||
March 28, 2003 | ||||||||||||||||||||||||||||||||||||||
(Dollars in Millions) | CSX Corporation | CSX Vessel Leasing | Other | Eliminations | Consolidated | |||||||||||||||||||||||||||||||||
September 26, 2003 | ||||||||||||||||||||||||||||||||||||||
ASSETS | ||||||||||||||||||||||||||||||||||||||
Current Assets | ||||||||||||||||||||||||||||||||||||||
Cash, Cash Equivalents and Short-term Investments | $ | 427 |
| $ | 45 | $ | (178 | ) | $ | — |
| $ | 294 |
| $ | 1,658 | $ | 45 | $ | (967 | ) | $ | — | $ | 736 | |||||||||||||
Accounts Receivable—Net |
| 72 |
|
| 2 |
| 867 |
|
| (94 | ) |
| 847 |
| ||||||||||||||||||||||||
Accounts Receivable - Net | 44 | 9 | 1,333 | (136 | ) | 1,250 | ||||||||||||||||||||||||||||||||
Materials and Supplies |
| — |
|
| — |
| 187 |
|
| — |
|
| 187 |
| — | — | 168 | — | 168 | |||||||||||||||||||
Deferred Income Taxes |
| — |
|
| — |
| 130 |
|
| — |
|
| 130 |
| — | — | 134 | — | 134 | |||||||||||||||||||
Other Current Assets |
| 3 |
|
| — |
| 298 |
|
| (137 | ) |
| 164 |
| 5 | — | 223 | (136 | ) | 92 | ||||||||||||||||||
Total Current Assets |
| 502 |
|
| 47 |
| 1,304 |
|
| (231 | ) |
| 1,622 |
| 1,707 | 54 | 891 | (272 | ) | 2,380 | ||||||||||||||||||
Properties |
| 28 |
|
| — |
| 18,608 |
|
| — |
|
| 18,636 |
| 29 | — | 19,021 | — | 19,050 | |||||||||||||||||||
Accumulated Depreciation |
| (24 | ) |
| — |
| (5,261 | ) |
| — |
|
| (5,285 | ) | 25 | — | 5,411 | — | 5,436 | |||||||||||||||||||
Properties, net |
| 4 |
|
| — |
| 13,347 |
|
| — |
|
| 13,351 |
| ||||||||||||||||||||||||
Properties - Net | 4 | — | 13,610 | — | 13,614 | |||||||||||||||||||||||||||||||||
Investment in Conrail |
| 339 |
|
| — |
| 4,316 |
|
| — |
|
| 4,655 |
| 334 | — | 4,327 | — | 4,661 | |||||||||||||||||||
Affiliates and Other Companies |
| — |
|
| — |
| 501 |
|
| (34 | ) |
| 467 |
| 12,409 | — | 916 | (12,837 | ) | 488 | ||||||||||||||||||
Investment in Consolidated Subsidiaries |
| 12,824 |
|
| — |
| 396 |
|
| (13,220 | ) |
| — |
| — | — | — | — | — | |||||||||||||||||||
Other Long-term assets |
| 1,209 |
|
| — |
| 284 |
|
| (629 | ) |
| 864 |
| ||||||||||||||||||||||||
Other Long-term Assets | 1,400 | — | 30 | (646 | ) | 784 | ||||||||||||||||||||||||||||||||
Total Assets | $ | 14,878 |
| $ | 47 | $ | 20,148 |
| $ | (14,114 | ) | $ | 20,959 |
| $ | 15,854 | $ | 54 | $ | 19,774 | $ | (13,755 | ) | $ | 21,927 | |||||||||||||
LIABILITIES | ||||||||||||||||||||||||||||||||||||||
Current Liabilities | ||||||||||||||||||||||||||||||||||||||
Accounts Payable | $ | 101 |
| $ | — | $ | 831 |
| $ | (93 | ) | $ | 839 |
| $ | 104 | $ | — | $ | 829 | $ | (133 | ) | $ | 800 | |||||||||||||
Labor and Fringe Benefits Payable |
| 11 |
|
| — |
| 381 |
|
| — |
|
| 392 |
| 17 | — | 401 | — | 418 | |||||||||||||||||||
Payable to Affiliates |
| — |
|
| 9 |
| 128 |
|
| (137 | ) |
| — |
| — | — | 137 | (137 | ) | — | ||||||||||||||||||
Casualty, Environmental and Other Reserves |
| 1 |
|
| — |
| 253 |
|
| — |
|
| 254 |
| — | — | 226 | — | 226 | |||||||||||||||||||
Current Maturities of Long-term Debt |
| 150 |
|
| — |
| 212 |
|
| — |
|
| 362 |
| 450 | — | 125 | — | 575 | |||||||||||||||||||
Short-term Debt |
| 150 |
|
| — |
| 5 |
|
| — |
|
| 155 |
| 725 | — | 4 | — | 729 | |||||||||||||||||||
Income and Other Taxes Payable |
| 1,461 |
|
| — |
| (1,362 | ) |
| — |
|
| 99 |
| 1,472 | — | (1,371 | ) | — | 101 | ||||||||||||||||||
Other Current Liabilities |
| 28 |
|
| 13 |
| 101 |
|
| (1 | ) |
| 141 |
| 30 | 8 | 139 | (2 | ) | 175 | ||||||||||||||||||
Total Current Liabilities |
| 1,902 |
|
| 22 |
| 549 |
|
| (231 | ) |
| 2,242 |
| 2,798 | 8 | 490 | (272 | ) | 3,024 | ||||||||||||||||||
Casualty, Environmental and Other reserves |
| — |
|
| — |
| 590 |
|
| — |
|
| 590 |
| ||||||||||||||||||||||||
Long-term Debt |
| 5,584 |
|
| — |
| 943 |
|
| — |
|
| 6,527 |
| 5,645 | — | 835 | — | 6,480 | |||||||||||||||||||
Deferred Income Taxes |
| — |
|
| — |
| 3,630 |
|
| — |
|
| 3,630 |
| (24 | ) | — | 3,654 | — | 3,630 | ||||||||||||||||||
Casualty, Environmental and Other reserves | — | — | 862 | — | 862 | |||||||||||||||||||||||||||||||||
Long-term Payable to Affiliates |
| 396 |
|
| — |
| 147 |
|
| (543 | ) |
| — |
| 396 | — | 147 | (543 | ) | — | ||||||||||||||||||
Other Long-term Liabilities |
| 687 |
|
| 23 |
| 1,056 |
|
| (119 | ) |
| 1,647 |
| 733 | 42 | 955 | (111 | ) | 1,619 | ||||||||||||||||||
Total Liabilities |
| 8,569 |
|
| 45 |
| 6,915 |
|
| (893 | ) |
| 14,636 |
| 9,548 | 50 | 6,943 | (926 | ) | 15,615 | ||||||||||||||||||
SHAREHOLDER’S EQUITY | ||||||||||||||||||||||||||||||||||||||
Preferred Stock |
| — |
|
| — |
| 396 |
|
| (396 | ) |
| — |
| — | — | — | — | — | |||||||||||||||||||
Common Stock |
| 216 |
|
| — |
| 209 |
|
| (209 | ) |
| 216 |
| 214 | — | 209 | (209 | ) | 214 | ||||||||||||||||||
Other Capital |
| 1,549 |
|
| 2 |
| 8,280 |
|
| (8,282 | ) |
| 1,549 |
| 1,556 | 1 | 8,052 | (8,053 | ) | 1,556 | ||||||||||||||||||
Retained Earnings |
| 4,875 |
|
| — |
| 4,334 |
|
| (4,334 | ) |
| 4,875 |
| 4,858 | 3 | 4,564 | (4,567 | ) | 4,858 | ||||||||||||||||||
Accumulated Other Comprehensive Loss |
| (331 | ) |
| — |
| 14 |
|
| (317 | ) | (331 | ) | — | 15 | — | (316 | ) | ||||||||||||||||||||
Total Shareholders’ Equity |
| 6,309 |
|
| 2 |
| 13,233 |
|
| (13,221 | ) |
| 6,323 |
| 6,297 | 4 | 12,840 | (12,829 | ) | 6,312 | ||||||||||||||||||
Total Liabilities and Shareholders’ Equity | $ | 14,878 |
| $ | 47 | $ | 20,148 |
| $ | (14,114 | ) | $ | 20,959 |
| $ | 15,845 | $ | 54 | $ | 19,783 | $ | (13,755 | ) | $ | 21,927 | |||||||||||||
-23-
CSX CORPORATION AND SUBSIDIARIES
ITEM 1: FINANCIAL STATEMENTS
Notes to Consolidated Financial Statements (Unaudited)
NOTE 14.15. SUMMARIZED CONSOLIDATING FINANCIAL DATA, Continued
(Dollars in Millions) | CSX Corporation | CSX Lines | Other | Eliminations | Consolidated | |||||||||||||||
December 27, 2002 | ||||||||||||||||||||
ASSETS | ||||||||||||||||||||
Current Assets | ||||||||||||||||||||
Cash, Cash Equivalents and Short-term Investments | $ | 379 | $ | 37 | $ | (152 | ) | $ | — | $ | 264 | |||||||||
Accounts Receivable - Net | 43 | — | 948 | (146 | ) | 845 | ||||||||||||||
Materials and Supplies | — | — | 180 | — | 180 | |||||||||||||||
Deferred Income Taxes | — | — | 128 | — | 128 | |||||||||||||||
Domestic Container-Shipping Assets Held For Disposition | — | 263 | — | — | 263 | |||||||||||||||
Other Current Assets | 5 | — | 287 | (137 | ) | 155 | ||||||||||||||
Total Current Assets | 427 | 300 | 1,391 | (283 | ) | 1,835 | ||||||||||||||
Properties | 33 | 11 | 18,516 | — | 18,560 | |||||||||||||||
Accumulated Depreciation | (29 | ) | (2 | ) | (5,243 | ) | — | (5,274 | ) | |||||||||||
Properties - Net | 4 | 9 | 13,273 | — | 13,286 | |||||||||||||||
Investment in Conrail | 342 | — | 4,311 | — | 4,653 | |||||||||||||||
Affiliates and Other Companies | — | — | 414 | (33 | ) | 381 | ||||||||||||||
Investment in Consolidated Subsidiaries | 12,761 | — | 396 | (13,157 | ) | — | ||||||||||||||
Other Long-term Assets | 1,192 | — | 238 | (623 | ) | 807 | ||||||||||||||
Total Assets | $ | 14,726 | $ | 309 | $ | 20,023 | $ | (14,096 | ) | $ | 20,962 | |||||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||||||||||||||
Current Liabilities: | ||||||||||||||||||||
Accounts Payable | $ | 77 | $ | 20 | $ | 848 | $ | (143 | ) | $ | 802 | |||||||||
Labor and Fringe Benefits Payable | 49 | 11 | 397 | — | 457 | |||||||||||||||
Payable to Affiliates | — | — | 137 | (137 | ) | — | ||||||||||||||
Casualty, Environmental and Other Reserves | 1 | — | 245 | — | 246 | |||||||||||||||
Current Maturities of Long-term Debt | 150 | — | 241 | — | 391 | |||||||||||||||
Short-term Debt | 140 | — | 3 | — | 143 | |||||||||||||||
Income and Other Taxes Payable | 1,458 | 9 | (1,284 | ) | (39 | ) | 144 | |||||||||||||
Other Current Liabilities | 28 | 4 | 110 | 36 | 178 | |||||||||||||||
Domestic Container-Shipping Liabilities Held For Disposition | — | 104 | — | — | 104 | |||||||||||||||
Total Current Liabilities | 1,903 | 148 | 697 | (283 | ) | 2,465 | ||||||||||||||
Casualty, Environmental and Other reserves | 4 | 1 | 599 | — | 604 | |||||||||||||||
Long-term Debt | 5,510 | — | 1,009 | — | 6,519 | |||||||||||||||
Deferred Income Taxes | — | 3 | 3,564 | — | 3,567 | |||||||||||||||
Long-term Payable to Affiliates | 396 | — | 148 | (544 | ) | — | ||||||||||||||
Other Long-term Liabilities | 685 | 49 | 925 | (93 | ) | 1,566 | ||||||||||||||
Total Liabilities | 8,498 | 201 | 6,942 | (920 | ) | 14,721 | ||||||||||||||
Shareholders’ Equity | ||||||||||||||||||||
Preferred Stock | — | — | 396 | (396 | ) | — | ||||||||||||||
Common Stock | 214 | — | 209 | (209 | ) | 214 | ||||||||||||||
Other Capital | 1,548 | 73 | 8,238 | (8,311 | ) | 1,548 | ||||||||||||||
Retained Earnings | 4,797 | 35 | 4,225 | (4,260 | ) | 4,797 | ||||||||||||||
Accumulated Other Comprehensive Loss | (331 | ) | — | 13 | (318 | ) | ||||||||||||||
Total Shareholders’ Equity | 6,228 | 108 | 13,081 | (13,176 | ) | 6,241 | ||||||||||||||
Total Liabilities and Shareholders’ Equity | $ | 14,726 | $ | 309 | $ | 20,023 | $ | (14,096 | ) | $ | 20,962 | |||||||||
CSX CORPORATION AND SUBSIDIARIES
ITEM 1: FINANCIAL STATEMENTS
Notes to Consolidated Financial Statements (Unaudited)
NOTE 15. SUMMARIZED CONSOLIDATING FINANCIAL DATA, Continued
Consolidating Balance SheetCash Flow Statements
CSX Corporation | CSX Lines | Other | Eliminations | Consolidated | ||||||||||||||||
(millions of dollars) | ||||||||||||||||||||
December 27, 2002 | ||||||||||||||||||||
ASSETS | ||||||||||||||||||||
Current Assets | ||||||||||||||||||||
Cash, Cash Equivalents and Short-term Investments | $ | 379 |
| $ | 37 |
| $ | (152 | ) | $ | — |
| $ | 264 |
| |||||
Accounts Receivable—Net |
| 43 |
|
| — |
|
| 902 |
|
| (146 | ) |
| 799 |
| |||||
Materials and Supplies |
| — |
|
| — |
|
| 180 |
|
| — |
|
| 180 |
| |||||
Deferred Income Taxes |
| — |
|
| — |
|
| 128 |
|
| — |
|
| 128 |
| |||||
Assets Held For Disposition |
| — |
|
| 263 |
|
| — |
|
| — |
|
| 263 |
| |||||
Other Current Assets |
| 5 |
|
| — |
|
| 287 |
|
| (137 | ) |
| 155 |
| |||||
Total Current Assets |
| 427 |
|
| 300 |
|
| 1,345 |
|
| (283 | ) |
| 1,789 |
| |||||
Properties |
| 33 |
|
| 11 |
|
| 18,516 |
|
| — |
|
| 18,560 |
| |||||
Accumulated Depreciation |
| (29 | ) |
| (2 | ) |
| (5,243 | ) |
| — |
|
| (5,274 | ) | |||||
Properties, net |
| 4 |
|
| 9 |
|
| 13,273 |
|
| — |
|
| 13,286 |
| |||||
Investment in Conrail |
| 342 |
|
| — |
|
| 4,311 |
|
| — |
|
| 4,653 |
| |||||
Affiliates and Other Companies |
| — |
|
| — |
|
| 414 |
|
| (33 | ) |
| 381 |
| |||||
Investment in Consolidated Subsidiaries |
| 12,761 |
|
| — |
|
| 396 |
|
| (13,157 | ) |
| — |
| |||||
Other Long-term assets |
| 1,192 |
|
| — |
|
| 273 |
|
| (623 | ) |
| 842 |
| |||||
Total Assets | $ | 14,726 |
| $ | 309 |
| $ | 20,012 |
| $ | (14,096 | ) | $ | 20,951 |
| |||||
LIABILITIES | ||||||||||||||||||||
Current Liabilities | ||||||||||||||||||||
Accounts Payable | $ | 77 |
| $ | 20 |
| $ | 848 |
| $ | (143 | ) | $ | 802 |
| |||||
Labor and Fringe Benefits Payable |
| 49 |
|
| 11 |
|
| 397 |
|
| — |
|
| 457 |
| |||||
Payable to Affiliates |
| — |
|
| — |
|
| 137 |
|
| (137 | ) |
| — |
| |||||
Casualty, Environmental and Other Reserves |
| 1 |
|
| — |
|
| 245 |
|
| — |
|
| 246 |
| |||||
Current Maturities of Long-term Debt |
| 150 |
|
| — |
|
| 241 |
|
| — |
|
| 391 |
| |||||
Short-term Debt |
| 140 |
|
| — |
|
| 3 |
|
| — |
|
| 143 |
| |||||
Liabilities Held For Disposition |
| — |
|
| 104 |
|
| — |
|
| — |
|
| 104 |
| |||||
Income and Other Taxes Payable |
| 1,458 |
|
| 9 |
|
| (1,284 | ) |
| (39 | ) |
| 144 |
| |||||
Other Current Liabilities |
| 28 |
|
| 4 |
|
| 99 |
|
| 36 |
|
| 167 |
| |||||
Total Current Liabilities |
| 1,903 |
|
| 148 |
|
| 686 |
|
| (283 | ) |
| 2,454 |
| |||||
Casualty, Environmental and Other reserves |
| 4 |
|
| 1 |
|
| 599 |
|
| — |
|
| 604 |
| |||||
Long-term Debt |
| 5,510 |
|
| — |
|
| 1,009 |
|
| — |
|
| 6,519 |
| |||||
Deferred Income Taxes |
| — |
|
| 3 |
|
| 3,564 |
|
| — |
|
| 3,567 |
| |||||
Long-term Payable to Affiliates |
| 396 |
|
| — |
|
| 148 |
|
| (544 | ) |
| — |
| |||||
Other Long-term Liabilities |
| 685 |
|
| 49 |
|
| 925 |
|
| (93 | ) |
| 1,566 |
| |||||
Total Liabilities |
| 8,498 |
|
| 201 |
|
| 6,931 |
|
| (920 | ) |
| 14,710 |
| |||||
SHAREHOLDER’S EQUITY | ||||||||||||||||||||
Preferred Stock |
| — |
|
| — |
|
| 396 |
|
| (396 | ) |
| — |
| |||||
Common Stock |
| 215 |
|
| — |
|
| 209 |
|
| (209 | ) |
| 215 |
| |||||
Other Capital |
| 1,547 |
|
| 73 |
|
| 8,238 |
|
| (8,311 | ) |
| 1,547 |
| |||||
Retained Earnings |
| 4,797 |
|
| 35 |
|
| 4,225 |
|
| (4,260 | ) |
| 4,797 |
| |||||
Accumulated Other Comprehensive Loss |
| (331 | ) |
| — |
|
| 13 |
|
| (318 | ) | ||||||||
Total Shareholders’ Equity |
| 6,228 |
|
| 108 |
|
| 13,081 |
|
| (13,176 | ) |
| 6,241 |
| |||||
Total Liabilities and Shareholders’ Equity | $ | 14,726 |
| $ | 309 |
| $ | 20,012 |
| $ | (14,096 | ) | $ | 20,951 |
| |||||
(Dollars in Millions) Nine Months Ended September 26, 2003 Operating Activities Net Cash Provided (Used) by Operating Activities Investing Activities Property Additions Net Proceeds from Divestitures Short-term Investments Other Investing Activities Net Cash Provided (Used) by Investing Activities Financing Activities Short-term Debt-Net Long-term Debt Issued Long-term Debt Repaid Cash Dividends Paid Other Financing Activities Net Cash Provided (Used) by Financing Activities Net Increase (Decrease) in Cash and Cash Equivalents Cash and Cash Equivalents at Beginning of Period Cash and Cash Equivalents at End of Period Nine Months Ended September 27, 2002 Operating Activities Net Cash Provided (Used) by Operating Activities Investing Activities Property Additions Short-term Investments-net Other Investing Activities Net Cash Provided (Used) by Investing Activities Financing Activities Short-term Debt - Net Long-term Debt Issued Long-term Debt Repaid Dividends Paid Other Financing Activities Net Cash Provided (Used) by Financing Activities Net Increase (Decrease) in Cash and Cash Equivalents Cash and Cash Equivalents at Beginning of Period Cash and Cash Equivalents at End of Period CSX
Corporation CSX
Vessel Leasing Other Eliminations Consolidated $ 69 $ — $ 516 $ (181 ) $ 404 — — (757 ) — (757 ) — — 214 — 214 (190 ) — (23 ) — (213 ) 241 — (6 ) (261 ) (26 ) 51 — (572 ) (261 ) (782 ) 585 — 1 — 586 433 — — — 433 — — (292 ) — (292 ) (66 ) — (179 ) 180 (65 ) 17 45 (350 ) 262 (26 ) 969 45 (820 ) 442 636 1,089 45 (876 ) — 258 264 — (137 ) — 127 $ 1,353 $ 45 $ (1,013 ) $ — $ 385 CSX
Corporation CSX Lines Other Eliminations Consolidated $ 257 $ (3 ) $ 620 $ (181 ) $ 693 (4 ) (16 ) (723 ) — (743 ) (17 ) (26 ) 220 — 177 (25 ) 18 (64 ) 13 (58 ) (46 ) (24 ) (567 ) 13 (624 ) 570 — 1 — 571 518 — 1 — 519 (950 ) — (163 ) — (1,113 ) (65 ) — (157 ) 157 (65 ) 25 — (34 ) 11 2 98 — (352 ) 168 (86 ) 309 (27 ) (299 ) — (17 ) 156 52 (71 ) — 137 $ 465 $ 25 $ (370 ) $ — $ 120
-24-
CSX CORPORATION AND SUBSIDIARIES
ITEM 2.2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
CSX follows a 52/53-week fiscal reporting calendar. Fiscal years 2003 and 2002 consist of 52 weeks ending on December 26, 2003 and December 27, 2002, respectively. The financial statements presented are for the 13-week quarters and nine months ended March 28,September 26, 2003 and March 29,September 27, 2002, and as of December 27, 2002.
Quarter ended September 26, 2003 Compared to September 27, 2002
Consolidated Results
Operating Revenue
Operating revenue increased $52decreased $173 million to $1,882 million in the quarter ended March 28,September 26, 2003, fromas compared to the quarter ended March 29, 2002.2002 quarter. Surface Transportation revenue increased $85$37 million quarter-over-quarter, but was offset by the elimination of $215 million in revenue from the domestic container-shipping business as a majority of CSX’s interest in CSX Lines was conveyed during the first quarter of 2003 (See Note 4, Divestitures).
Operating Income
Operating income for the quarter ended September 26, 2003 was down $374 million to a loss of $98 million, compared to income of $276 million in the 2002 quarter.
The decline is primarily the result of the Company recording a charge in conjunction with changing its estimate of casualty reserves to include an estimate of incurred but not reported claims for asbestos and other occupational injuries to be received over the next seven years. The Company recorded a charge of $232 million in the third quarter of 2003 to increase its provision for casualty reserves. (See Note 12, Casualty, Environmental, and Other Reserves).
Additionally, in the third quarter of 2003, CSX entered into one final settlement agreement and another conditional settlement agreement, which together resolve all material outstanding disputes with Maersk. This decreased operating income by $108 million, and is reflected in operating expense as the additional loss on sale of international container-shipping assets (See Note 13, Commitments and Contingencies).
The remaining decline in operating income is due to a $22 million decrease in operating income from the sale of a majority of CSX’s interest in CSX Lines during the first quarter of 2003 as previously discussed, and increased operating expenses at the Surface Transportation Segment, primarily due to increased materials, supplies and other costs and labor and fringe benefit expense.
CSX CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
Consolidated Results, Continued
Other Income
Other income decreased $7 million in the third quarter of 2003, as compared to the same period of the prior year. The decrease is primarily the result of decreased income from real estate and resort operations, offset by the elimination of costs resulting from the discontinuance of the sale of accounts receivable program.
Interest Expense
Interest expense decreased $5 million in the quarter ended September 26, 2003, as compared to the prior year quarter. Lower interest rates on floating rate debt and the favorable impact of interest rate swaps (see Note 10, Derivative Financial Instruments) continue to benefit the Company.
Net Earnings
CSX’s net loss was $103 million, or 48 cents per share, in the quarter ended September 26, 2003, compared to earnings of $127 million or 60 cents per share for the same period of the prior year. The decrease is a result of the previously mentioned items.
CSX CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
Segment Results
The following tables provide a detail of operating revenue and expense by segment:
(Dollars in Millions) (Unaudited)(1) | |||||||||||||||||||||||||||||||||||||||||||||||||
Quarters Ended September 26, 2003 and September 27, 2002 | |||||||||||||||||||||||||||||||||||||||||||||||||
Rail | Intermodal | Surface Transportation | International Terminals | Eliminations/ Other(2) | Total | ||||||||||||||||||||||||||||||||||||||||||||
2003 | 2002 | 2003 | 2002 | 2003 | 2002 | 2003 | 2002 | 2003 | 2002 | 2003 | 2002 | ||||||||||||||||||||||||||||||||||||||
Operating Revenue | $ | 1,510 | $ | 1,473 | $ | 313 | $ | 313 | $ | 1,823 | $ | 1,786 | $ | 59 | $ | 64 | $ | — | $ | 205 | $ | 1,882 | $ | 2,055 | |||||||||||||||||||||||||
Operating Expense | |||||||||||||||||||||||||||||||||||||||||||||||||
Labor and Fringe | 636 | 627 | 17 | 16 | 653 | 643 | 12 | 14 | 1 | 61 | 666 | 718 | |||||||||||||||||||||||||||||||||||||
Materials, Supplies and Other | 318 | 297 | 48 | 46 | 366 | 343 | 20 | 19 | 1 | 68 | 387 | 430 | |||||||||||||||||||||||||||||||||||||
Conrail Rents, Fees & Services | 86 | 82 | — | — | 86 | 82 | — | — | — | — | 86 | 82 | |||||||||||||||||||||||||||||||||||||
Building and Equipment Rent | 109 | 117 | 38 | 34 | 147 | 151 | 2 | 3 | (3 | ) | 7 | 146 | 161 | ||||||||||||||||||||||||||||||||||||
Inland Transportation | (100 | ) | (93 | ) | 174 | 171 | 74 | 78 | 2 | 3 | — | 23 | 76 | 104 | |||||||||||||||||||||||||||||||||||
Depreciation | 145 | 146 | 7 | 7 | 152 | 153 | 3 | 3 | 3 | 7 | 158 | 163 | |||||||||||||||||||||||||||||||||||||
Fuel | 132 | 109 | — | — | 132 | 109 | — | — | — | 19 | 132 | 128 | |||||||||||||||||||||||||||||||||||||
Miscellaneous | — | — | — | — | — | �� | — | — | 4 | (11 | ) | (11 | ) | (11 | ) | (7 | ) | ||||||||||||||||||||||||||||||||
Provision for Casualty Claims(3) | 229 | — | — | — | 229 | — | — | — | 3 | — | 232 | — | |||||||||||||||||||||||||||||||||||||
Additional Loss on Sale(4) | — | — | — | — | — | — | — | — | 108 | — | 108 | — | |||||||||||||||||||||||||||||||||||||
Total Operating Expense | 1,555 | 1,285 | 284 | 274 | 1,839 | 1,559 | 39 | 46 | 102 | 174 | 1,980 | 1,779 | |||||||||||||||||||||||||||||||||||||
Operating Income (Loss) | $ | (45 | ) | $ | 188 | $ | 29 | $ | 39 | $ | (16 | ) | $ | 227 | $ | 20 | $ | 18 | $ | (102 | ) | $ | 31 | $ | (98 | ) | $ | 276 | |||||||||||||||||||||
Operating Ratio | 103.0 | % | 87.2 | % | 90.7 | % | 87.5 | % | 100.9 | % | 87.3 | % | 66.1 | % | 71.9 | % | |||||||||||||||||||||||||||||||||
Nine Months Ended September 26, 2003 and September 27, 2002 | |||||||||||||||||||||||||||||||||||||||||||||||||
Rail | Intermodal | Surface Transportation | International Terminals | Eliminations/ Other(2) | Total | ||||||||||||||||||||||||||||||||||||||||||||
2003 | 2002 | 2003 | 2002 | 2003 | 2002 | 2003 | 2002 | 2003 | 2002 | 2003 | 2002 | ||||||||||||||||||||||||||||||||||||||
Operating Revenue | $ | 4,614 | $ | 4,497 | $ | 929 | $ | 871 | $ | 5,543 | $ | 5,368 | $ | 169 | $ | 180 | $ | 128 | $ | 544 | $ | 5,840 | $ | 6,092 | |||||||||||||||||||||||||
Operating Expense | |||||||||||||||||||||||||||||||||||||||||||||||||
Labor and Fringe | 1,929 | 1,892 | 54 | 49 | 1,983 | 1,941 | 38 | 45 | 61 | 171 | 2,082 | 2,157 | |||||||||||||||||||||||||||||||||||||
Materials, Supplies and Other | 988 | 946 | 144 | 131 | 1,132 | 1,077 | 55 | 59 | 50 | 187 | 1,237 | 1,323 | |||||||||||||||||||||||||||||||||||||
Conrail Rents, Fees & Services | 259 | 248 | — | — | 259 | 248 | — | — | — | — | 259 | 248 | |||||||||||||||||||||||||||||||||||||
Building and Equipment Rent | 308 | 326 | 108 | 98 | 416 | 424 | 6 | 7 | — | 32 | 422 | 463 | |||||||||||||||||||||||||||||||||||||
Inland Transportation | (297 | ) | (271 | ) | 522 | 466 | 225 | 195 | 6 | 6 | 16 | 66 | 247 | 267 | |||||||||||||||||||||||||||||||||||
Depreciation | 438 | 422 | 23 | 22 | 461 | 444 | 7 | 7 | 7 | 19 | 475 | 470 | |||||||||||||||||||||||||||||||||||||
Fuel | 426 | 325 | — | — | 426 | 325 | — | — | 15 | 47 | 441 | 372 | |||||||||||||||||||||||||||||||||||||
Miscellaneous | — | — | — | — | — | — | 5 | 11 | (32 | ) | (28 | ) | (27 | ) | (17 | ) | |||||||||||||||||||||||||||||||||
Provision for Casualty Claims(3) | 229 | — | — | — | 229 | — | — | — | 3 | — | 232 | — | |||||||||||||||||||||||||||||||||||||
Additional Loss on Sale(4) | — | — | — | — | — | — | — | — | 108 | — | 108 | — | |||||||||||||||||||||||||||||||||||||
Total Operating Expense | 4,280 | 3,888 | 851 | 766 | 5,131 | 4,654 | 117 | 135 | 228 | 494 | 5,476 | 5,283 | |||||||||||||||||||||||||||||||||||||
Operating Income (Loss) | $ | 334 | $ | 609 | $ | 78 | $ | 105 | $ | 412 | $ | 714 | $ | 52 | $ | 45 | $ | (100 | ) | $ | 50 | $ | 364 | $ | 809 | ||||||||||||||||||||||||
Operating Ratio | 92.8 | % | 86.5 | % | 91.6 | % | 87.9 | % | 92.6 | % | 86.7 | % | 69.2 | % | 75.0 | % |
(1) | Prior periods have been reclassified to conform to the current presentation. |
(2) | Eliminations / Other consists of the following: |
(a) | Charge incurred upon entering into settlement agreements with Maersk |
(b) | Reclassification of International Terminals minority interest expense |
(c) | Operations of CSX Lines and gain amortization |
(d) | Expenses related to the 2003 retirement of the Company’s former Chairman and Chief Executive Officer |
(e) | Other items |
(3) | Represents charge recorded during the third quarter of 2003 in connection with the Company’s change in estimating casualty reserves (See Note 12, Casualty, Environmental and Other Reserves). |
(4) | Represents the charge incurred upon entering into settlement agreements with Maersk (See Note 13, Commitments and Contingencies) |
CSX CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
Surface Transportation Results
The following tables provide Surface Transportation carload and revenue data by service group and commodity:
Quarters ended September 26, 2003 and September 27, 2002
Carloads (Thousands) | Revenue (Dollars in Millions) | ||||||||||||||||
2003 | 2002 | % Change | 2003 | 2002 | % Change | ||||||||||||
Merchandise | |||||||||||||||||
Phosphates and Fertilizer | 114 | 113 | 1 | % | $ | 74 | $ | 73 | 1 | % | |||||||
Metals | 85 | 83 | 2 | 107 | 104 | 3 | |||||||||||
Forest and Industrial Products | 153 | 151 | 1 | 205 | 195 | 5 | |||||||||||
Agricultural and Food | 111 | 109 | 2 | 157 | 154 | 2 | |||||||||||
Chemicals | 136 | 134 | 1 | 249 | 239 | 4 | |||||||||||
Emerging Markets | 130 | 115 | 13 | 125 | 106 | 18 | |||||||||||
Total Merchandise | 729 | 705 | 3 | 917 | 871 | 5 | |||||||||||
Automotive | 120 | 124 | (3 | ) | 193 | 195 | (1 | ) | |||||||||
Coal, Coke & Iron Ore | |||||||||||||||||
Coal | 391 | 395 | (1 | ) | 384 | 382 | 1 | ||||||||||
Coke and Iron Ore | 17 | 22 | (23 | ) | 14 | 19 | (26 | ) | |||||||||
Total Coal, Coke & Iron Ore | 408 | 417 | (2 | ) | 398 | 401 | (1 | ) | |||||||||
Other | — | — | — | 2 | 6 | (67 | ) | ||||||||||
Total Rail | 1,257 | 1,246 | 1 | 1,510 | 1,473 | 3 | |||||||||||
Intermodal | |||||||||||||||||
Domestic | 263 | 252 | 4 | 195 | 178 | 10 | |||||||||||
International | 301 | 314 | (4 | ) | 120 | 133 | (10 | ) | |||||||||
Other | — | — | — | (2 | ) | 2 | (200 | ) | |||||||||
Total Intermodal | 564 | 566 | — | 313 | 313 | — | |||||||||||
Total Surface Transportation | 1,821 | 1,812 | — | % | $ | 1,823 | $ | 1,786 | 2 | % | |||||||
CSX CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
Nine Months ended September 26, 2003 and September 27, 2002
Carloads (Thousands) | Revenue (Dollars in Millions) | |||||||||||||||
2003 | 2002 | % Change | 2003 | 2002 | % Change | |||||||||||
Merchandise | ||||||||||||||||
Phosphates and Fertilizer | 344 | 351 | (2 | ) % | $ | 246 | $ | 245 | — | % | ||||||
Metals | 260 | 240 | 8 | 325 | 302 | 8 | ||||||||||
Forest and Industrial Products | 454 | 447 | 2 | 607 | 581 | 4 | ||||||||||
Agricultural and Food | 338 | 334 | 1 | 489 | 479 | 2 | ||||||||||
Chemicals | 408 | 409 | — | 744 | 723 | 3 | ||||||||||
Emerging Markets | 356 | 323 | 10 | 355 | 301 | 18 | ||||||||||
Total Merchandise | 2,160 | 2,104 | 3 | 2,766 | 2,631 | 5 | ||||||||||
Automotive | 390 | 401 | (3 | ) | 625 | 626 | — | |||||||||
Coal, Coke & Iron Ore | ||||||||||||||||
Coal | 1,164 | 1,179 | (1 | ) | 1,155 | 1,143 | 1 | |||||||||
Coke and Iron Ore | 47 | 52 | (10 | ) | 42 | 54 | (22 | ) | ||||||||
Total Coal, Coke & Iron Ore | 1,211 | 1,231 | (2 | ) | 1,197 | 1,197 | — | |||||||||
Other | — | — | — | 26 | 43 | (40 | ) | |||||||||
Total Rail | 3,761 | 3,736 | 1 | 4,614 | 4,497 | 3 | ||||||||||
Intermodal | ||||||||||||||||
Domestic | 775 | 714 | 9 | 570 | 498 | 14 | ||||||||||
International | 880 | 870 | 1 | 354 | 367 | (4 | ) | |||||||||
Other | — | — | — | 5 | 6 | (17 | ) | |||||||||
Total Intermodal | 1,655 | 1,584 | 4 | 929 | 871 | 7 | ||||||||||
Total Surface Transportation | 5,416 | 5,320 | 2 | % | $ | 5,543 | $ | 5,368 | 3 | % | ||||||
CSX CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
Rail
Operating Revenue
Rail revenue increased $37 million, or 3% in the quarter ended September 26, 2003, as compared to the quarter ended September 27, 2002.
Merchandise
Merchandise showed strong growth in the third quarter with revenues up 5% on 3% volume growth. All markets showed year-over-year improvements in revenue and volume.
• | Phosphates and Fertilizers – Strong international phosphate demand limited movements to domestic markets. Weakness in port phosphate rock was offset by strength in the ammonia market. |
• | Metals – Steel production and mill utilization have been on a downward trend due to overcapacity and softer demand. Continued strength in scrap metals due to export demand from east coast supply points, renewed strength in semi-finished metals and continued growth in modal conversions contributed to year-over-year improvement. |
• | Forest and Industrial Products – Building products and lumber remain strong as the construction industry catches up from severe weather earlier in the year. Woodchip orders were strong as mills build sufficient inventory for fall. Strength in printing paper is being driven by import traffic. |
• | Agricultural and Food – A large southeast crop has negatively impacted feed grain. Sweeteners continue to be negatively impacted by source shifts and a plant closure. Strength in refrigerated products, wheat and flour, exports and grocery LOBs helped drive year-over-year gains. |
• | Chemicals – Plastics market recently benefited from lower feedstock prices and rebuilding of shipper inventories. Strength exists in all petroleum commodities, except alcohols. Year-over-year strength in inorganic acids, partially due to a strike in eastern Canada, has allowed CSX to supply sulfuric acid to the northeast. The strike was settled in mid-September. |
• | Emerging Markets – Growth continued in aggregate shipments, primarily in Florida and Georgia, due to strong regional construction demand. Strength also continues across all waste markets. Modal conversions and increased demand are driving growth in cement. Redeployments are still driving growth in ammunition and general military cargo. |
Automotive
Volume decline was directly attributed to flat sales and a 200,000 unit year-over-year decline in North American light vehicle production. Field inventories were five days higher year-over-year. Haul extensions and price increases partially mitigated sales and production impact on revenue and improved yield.
Coal, Coke and Iron Ore
Reduced production levels drove year-over-year weakness in steel related traffic. Strength in export moves resulted due to high European steam coal demand for electricity generation to cooling systems. Utility revenue was favorable year-over-year due to pricing initiatives and strong long haul mix.
CSX CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
Rail, Continued
Operating Expense
• | Labor and Fringe expenses were up $9 million in the third quarter of 2003, compared to the same period of the prior year. Benefits of reduced staffing levels and reversal of the Company’s incentive compensation accrual were offset by increased costs relating to contract wage inflation, overtime costs and severance and related costs. |
• | Materials, Supplies and Other expenses increased $21 million quarter-over-quarter due to increased derailment costs, increased railway maintenance costs and decreased efficiencies. These expenses were offset, in part, by favorable environmental and other costs. |
• | Conrail Rents, Fees & Servicesexpense increased $4 million in the third quarter of 2003, as compared to the prior year period, as a result of increased usage of Shared Areas and a contractual increase in the rental fee for Shared Area facilities. |
• | Building and Equipment Rent decreased $8 million in the 2003 third quarter compared to the prior year as a result of car hire reclaims in the 2002 period that did not recur in this quarter. |
• | Fuel expense increased $23 million in the third quarter of 2003, as compared to the same period of the prior year. The expense increase is primarily due to $16 million in fuel price increases. |
• | Provision for Casualty Claims of $229 represent the charge recorded in conjunction with the Company’s change in estimate for its casualty reserves to include an estimate of incurred but not reported claims for asbestos and other occupational injuries to be received over the next seven years. (See Note 12, Casualty, Environmental and Other Reserves). |
Operating Income
Operating income decreased $233 million to a loss of $45 million in the third quarter of 2003, compared to income of $188 million in 2002 due to the $229 million provision for casualty claims and other expenses previously discussed. Excluding the provision for casualty claims, operating income would have been $184 million.
Intermodal
Operating Revenue
• | Domestic – Double digit revenue growth was supported by transloading international volumes into domestic equipment, new 53’ containers and the Union Pacific / CSX Intermodal container program. Truck brokerage strengthened as rollout of Pegasus, a new dispatch system, was completed and yield per box has improved. |
• | International – Shifts in imports/exports from Pacific to Atlantic ports has resulted in volume declines, shorter hauls and lower per-unit revenues. |
CSX CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
Intermodal, Continued
Operating Expense
Intermodal operating expense increased $10 million, or 4% compared to the prior year quarter. The increase is due primarily to traffic mix and inflationary factors.
Operating Income
Operating income decreased to $29 million in the third quarter of 2003, compared to $39 million in the prior year quarter.
International Terminals Results
Operating Revenue
Revenue decreased $5 million, or 8% to $59 million for the 2003 quarter, compared to $64 million in the prior year quarter, primarily due to weakness in the Hong Kong market.
Operating Expense
Expense decreased $7 million to $39 million for the third quarter, compared to $46 million for the 2002 quarter, partially attributed to reduced labor and fringe costs due to reduced volume at its Hong Kong operations and a $3 million gain related to the divestiture of a portion of the Caucedo terminal ownership interest, which offset other miscellaneous expenses.
Operating Income
Operating income increased $2 million for the 2003 quarter, as compared to the 2002 quarter, due to a gain on the sale of a portion of the Caucedo terminal ownership interest and aggressive cost focus to offset the revenue decline in Hong Kong.
Nine Months ended September 26, 2003 Compared to September 27, 2002
Consolidated Results
Operating Revenue
Operating revenue decreased $252 million for the nine months ended September 26, 2003, as compared to the nine months ended 2002. A $416 million decline resulted from a reduction of revenue fromin the domestic container-shipping segment as a majority of CSX’s interest in CSX Lines was conveyed during the first quarter (seeof 2003 (See Note 3,4, Divestitures)., which was offset by an increase in Surface Transportation revenue of $175 million.
CSX CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
Consolidated Results, Continued
Operating Income
Operating income for the nine months ended September 26, 2003 was $177down $445 million to $364 million, compared to $809 million for the quarter ended March 28, 2003, as compared to $212 million forsame period of the prior year quarter. year.
The $35 million decreasedecline is aprimarily the result of increasedthe Company recording a $232 million charge in conjunction with the change in estimate for casualty reserves (See Note 12, Casualty, Environmental and Other Reserves).
Additionally, in the third quarter of 2003, CSX entered into one final settlement agreement and another conditional settlement agreement, which together resolve all material outstanding disputes with Maersk. This decreased the Company’s operating expenses, primarily atincome by $108 million. This is reflected in operating expense as the rail segment, fromadditional loss on sale of international container-shipping assets (See Note 13, Commitments and Contingencies).
Other factors contributing to the decline are increased fuel prices and abnormally harsh winter weather that burdened operations during the first quarter of 2003. The quarter ended March 28, 2003 was alsowhich impacted by $16 million in expenses relating to the retirement of John Snow, the Company’s former Chairman and Chief Executive Officer, to become Secretary of the Treasury for the United States.Surface Transportation operating income.
Other Income (Expense)
Other income decreased $19$11 million to a net expense$30 million for the nine months ended September 26, 2003, compared to $41 million for the same period of $10 million in the quarter ended March 28, 2003. Incomeprior year. The decline primarily results from real estate and resort operations was down $31 million, primarily due to a large real estate transaction that was completedgains in the 2002 nine-month period being larger than those during the first quarter of 2002. This decrease was offset by lower losses primarily relating to equity investments.2003 period.
Interest Expense
Interest expense was down $11decreased $27 million infor the first quarter ofnine months ended September 26, 2003, as compared to the prior-year quarter, primarily from the impact of lowerprior year period. Lower interest rates on floating-ratefloating rate debt and the favorable impact of interest rate swaps (see note 9,Note 10, Derivative Financial Instruments). continue to benefit the Company.
Net Earnings
CSX reported netNet earnings for the quarter ended March 28, 2003 of $99were $123 million, 46or 57 cents per share, for the nine months ended September 26, 2003, compared with $25to $287 million, 12or $1.35 per share for the same period of the prior year.
The nine months ended September 26, 2003 included a cumulative effect of accounting change after tax benefit of $57 million, or 26 cents per share, offset by a $145 million after tax, or 68 cents per share, charge to increase the Company’s provision for casualty reserves and a $67 million after tax, 31 cents per share, charge to record the loss on sale of international container-shipping assets.
The nine months ended September 27, 2002 included a cumulative effect of accounting change charge of $43 million, or 20 cents per share.
Earnings before the cumulative effect of accounting changes were $66 million and $330 million for the nine months ended September 26, 2003 and September 27, 2002, respectively.
The effective tax rate for the nine month period is lower than the Company’s historical effective tax rate due to a change in the quarter ended March 29, 2002.
mix of earnings to lower tax rate jurisdictions and a favorable adjustment to deferred state tax liabilities.
CSX CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS, Continued
Consolidated Results, Continued
Divestitures
In 2001, SFASFebruary 2003, CSX conveyed most of its interest in its domestic container-shipping subsidiary, CSX Lines LLC (“CSX Lines”), to a new venture formed with the Carlyle Group for approximately $300 million (gross cash proceeds of approximately $240 million, $214 million net of transaction costs and $60 million of securities). CSX Lines was subsequently renamed Horizon Lines LLC (“Horizon”). Horizon has subleased vessels and equipment from certain affiliates of CSX covering the primary financial obligations related to $300 million of leases under which CSX or one of its affiliates will remain a lessee or guarantor. A deferred pretax gain of approximately $127 million as a result of the transaction will be recognized over the 12-year sub-lease term. Approximately $3 million of this gain was recognized in the third quarter, with $7 million being recognized year to date. The securities have a term of 7 years and a preferred return feature. During the third quarter, CSX received a $15 million payment from Horizon Lines, which included $3 million of interest, in return of a portion of its investment in Horizon and now holds $48 million of securities.
New Accounting Pronouncements and Cumulative Effect of Accounting Change
Statement of Financial Accounting Standard (“SFAS”) 143, “Accounting for Asset Retirement Obligations” was issued.issued in 2001. This statement addresses financial accounting and reporting for legal obligations associated with the retirement of tangible long-lived assets and the associated retirement costs. In conjunction with the group-life method of accounting for asset costs, the Company historically accrued crosstie removal costs as a component of depreciation, which is not permitted under SFAS 143. With the adoption of SFAS 143 in the first quarter offiscal year 2003, CSX recorded pretax income of $93 million, $57 million after tax, or 26 cents per share, as a cumulative effect of an accounting change in the first quarter, representing the reversal of the accrued liability for crosstie removal costs. The adoption of SFAS 143 did not have a material effect on prior reporting periods, and the Company does not believe it will have a material effect on future earnings. On an ongoing basis, depreciation expense will be reduced, while labor and fringe and materials, supplies and other expense will be increased.
SFAS 148, “Accounting for Stock-Based Compensation – Transition and Disclosure” was issued in December 2002. SFAS 148 amends SFAS 123, “Accounting for Stock-Based Compensation,” to provide alternative methods of transition to Statement 123’s fair value method of accounting for stock-based employee compensation and require disclosure of the effects of an entity’s accounting policy with respect to stock-based employee compensation. Effective beginning with fiscal year 2003, CSX has voluntarily adopted the fair value recognition provisions of SFAS 123, “Accounting for Stock-Based Compensation,” and adopted the disclosure requirements of SFAS 148, “Accounting for Stock-Based Compensation – Transition and Disclosure – an amendment of SFAS 123.” In 2001, accordance with the prospective method of adoption permitted under SFAS 148, stock-based awards issued subsequent to fiscal year 2002 are accounted for under the fair value recognition provisions of SFAS 123 utilizing the Black-Scholes valuation method and, accordingly, are expensed. (See Note 11, Stock Based Compensation)
CSX CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
Consolidated Results, Continued
New Accounting Pronouncements and Cumulative Effect of Accounting Change, Continued
SFAS 142, “Goodwill and Other Intangible Assets,” was issued.issued in 2001. Under the provisions of SFAS 142, goodwill and other indefinite lived intangible assets are no longer amortized, but are reviewed for impairment on a periodic basis. The Company adopted this standard inat the first quarterbeginning of fiscal year 2002, and incurred a pretax charge of $83 million, $43 million after tax and consideration of minority interest, 20 cents per share, as a cumulative effect of an accounting change, which represents the difference between book value and the fair value of indefinite lived intangible assets. These indefinite lived intangible assets are permits and licenses that the Company holds relating to a proposed pipeline to transfer natural gas from Alaska’s north slope to the port in Valdez, Alaska. The fair value was determined using a discount method of projected future cash flows relating to these assets. The carrying value of these assets is now approximately $3 million. The adoption of SFAS 142 did not have a material effect on prior reporting periods, and it willdoes not have a material effect on future earnings.
Earnings before the cumulative effect of accounting changes were $42 million and $68 million for the quarters ended March 28, 2003 and March 29, 2002, respectively. This $26 million decrease results primarily from the decrease in operating income and other income, partially offset by a decrease in income tax expense.
Divestitures
On February 27, 2003, CSX conveyed most of its interest in its domestic container-shipping subsidiary, CSX Lines, to a new venture formed with the Carlyle Group for approximately $300 million (gross cash proceeds of approximately $240 million, $214 million net of transaction costs, and $60 million of securities). CSX Lines was subsequently renamed Horizon Lines LLC (“Horizon”). Horizon has subleased equipment from CSX covering CSX’s primary financial obligations related to $319 million of vessel and equipment leases under which CSX will remain a lessee. A deferred pretax gain of approximately $127 million as a result of the transaction will be recognized over the 12 year sub-lease term. Less than $1 million of this gain was recognized in the first quarter. The $60 million of securities have a term of 7 years and a preferred return feature. CSX will account for the investment under the cost method.
CSX CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS, Continued
Segment Results
The following table provides a detail of operating revenue and expense by segment:
Quarters Ended March 28, 2003 and March 29, 2002(1)
(Dollars in Millions) (Unaudited)
Rail | Intermodal | Surface Transportation | International Terminals | Eliminations/ Other (2) | Total | |||||||||||||||||||||||||||||||||||||||||||
2003 | 2002 | 2003 | 2002 | 2003 | 2002 | 2003 | 2002 | 2003 | 2002 | 2003 | 2002 | |||||||||||||||||||||||||||||||||||||
Operating Revenue | $ | 1,531 |
| $ | 1,486 |
| $ | 302 |
| $ | 262 |
| $ | 1,833 |
| $ | 1,748 |
| $ | 56 |
| $ | 58 |
| $ | 127 |
| $ | 158 |
| $ | 2,016 |
| $ | 1,964 |
| ||||||||||||
Operating Expense | ||||||||||||||||||||||||||||||||||||||||||||||||
Labor and Fringe |
| 648 |
|
| 640 |
|
| 19 |
|
| 17 |
|
| 667 |
|
| 657 |
|
| 13 |
|
| 16 |
|
| 59 |
|
| 57 |
|
| 739 |
|
| 730 |
| ||||||||||||
Materials, Supplies and Other |
| 339 |
|
| 324 |
|
| 49 |
|
| 41 |
|
| 388 |
|
| 365 |
|
| 19 |
|
| 22 |
|
| 47 |
|
| 51 |
|
| 454 |
|
| 438 |
| ||||||||||||
Conrail |
| 86 |
|
| 87 |
|
| — |
|
| — |
|
| 86 |
|
| 87 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 86 |
|
| 87 |
| ||||||||||||
Building and Equipment Rent |
| 107 |
|
| 102 |
|
| 31 |
|
| 31 |
|
| 138 |
|
| 133 |
|
| 2 |
|
| 2 |
|
| 6 |
|
| 13 |
|
| 146 |
|
| 148 |
| ||||||||||||
Inland Transportation |
| (99 | ) |
| (86 | ) |
| 173 |
|
| 149 |
|
| 74 |
|
| 63 |
|
| 2 |
|
| 2 |
|
| 16 |
|
| 21 |
|
| 92 |
|
| 86 |
| ||||||||||||
Depreciation |
| 145 |
|
| 138 |
|
| 8 |
|
| 7 |
|
| 153 |
|
| 145 |
|
| 2 |
|
| 2 |
|
| 2 |
|
| 5 |
|
| 157 |
|
| 152 |
| ||||||||||||
Fuel |
| 158 |
|
| 104 |
|
| — |
|
| — |
|
| 158 |
|
| 104 |
|
| — |
|
| — |
|
| 15 |
|
| 12 |
|
| 173 |
|
| 116 |
| ||||||||||||
Miscellaneous |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 3 |
|
| 3 |
|
| (11 | ) |
| (8 | ) |
| (8 | ) |
| (5 | ) | ||||||||||||
Total Operating Expense |
| 1,384 |
|
| 1,309 |
|
| 280 |
|
| 245 |
|
| 1,664 |
|
| 1,554 |
|
| 41 |
|
| 47 |
|
| 134 |
|
| 151 |
|
| 1,839 |
|
| 1,752 |
| ||||||||||||
Operating Income | $ | 147 |
| $ | 177 |
| $ | 22 |
| $ | 17 |
| $ | 169 |
| $ | 194 |
| $ | 15 |
| $ | 11 |
| $ | (7 | ) | $ | 7 |
| $ | 177 |
| $ | 212 |
| ||||||||||||
Operating Ratio |
| 90.4 | % |
| 88.1 | % |
| 92.7 | % |
| 93.5 | % |
| 90.8 | % |
| 88.9 | % |
| 73.2 | % |
| 81.0 | % |
Operating Income | ||||||
2003 | 2002 | |||||
(a) expenses related to the retirement of John Snow, the Company’s former Chairman and Chief Executive Officer | (16 | ) | — |
| ||
(b) the reclassification of international terminals minority interest expense | 10 |
| 8 |
| ||
(c) the operations of CSX Lines through Feb. 27, 2003, when it was conveyed to a new entity, and gain amortization on the conveyance | 2 |
| 1 |
| ||
(d) other items | (3 | ) | (2 | ) | ||
Total | (7 | ) | 7 |
| ||
CSX CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS, Continued
Surface Transportation Results
The following table provides Surface Transportation carload and revenue data by service group and commodity for the quarters ended March 28, 2003 and March 29, 2002:
Carloads (Thousands) | Revenue (Dollars in Millions) | |||||||||||||||
2003 | 2002 | %Change | 2003 | 2002 | %Change | |||||||||||
Merchandise | ||||||||||||||||
Phosphates and Fertilizer | 117 | 119 | (2 | )% | $ | 87 | $ | 89 | (2 | )% | ||||||
Metals | 88 | 77 | 14 | % |
| 110 |
| 98 | 12 | % | ||||||
Forest and Industrial Products | 148 | 144 | 3 | % |
| 195 |
| 189 | 3 | % | ||||||
Agricultural and Food | 114 | 115 | (1 | )% |
| 167 |
| 166 | 1 | % | ||||||
Chemicals | 138 | 135 | 2 | % |
| 251 |
| 238 | 5 | % | ||||||
Emerging Markets | 101 | 93 | 9 | % |
| 112 |
| 88 | 27 | % | ||||||
Total Merchandise | 706 | 683 | 3 | % |
| 922 |
| 868 | 6 | % | ||||||
Automotive | 131 | 129 | 2 | % |
| 208 |
| 200 | 4 | % | ||||||
Coal, Coke & Iron Ore | ||||||||||||||||
Coal | 373 | 393 | (5 | )% |
| 370 |
| 381 | (3 | )% | ||||||
Coke and Iron Ore | 12 | 12 | — | % |
| 13 |
| 16 | (19 | )% | ||||||
Total Coal, Coke & Iron Ore | 385 | 405 | (5 | )% |
| 383 |
| 397 | (4 | )% | ||||||
Other | — | — | — | % |
| 18 |
| 21 | (14 | )% | ||||||
Total Rail | 1,222 | 1,217 | — | % |
| 1,531 |
| 1,486 | 3 | % | ||||||
Intermodal | ||||||||||||||||
Domestic | 247 | 220 | 12 | % |
| 183 |
| 152 | 20 | % | ||||||
International | 279 | 261 | 7 | % |
| 113 |
| 110 | 3 | % | ||||||
Other | — | — | — | % |
| 6 |
| — | NM |
| ||||||
Total Intermodal | 526 | 481 | 9 | % |
| 302 |
| 262 | 15 | % | ||||||
Total Surface Transportation | 1,748 | 1,698 | 3 | % | $ | 1,833 | $ | 1,748 | 5 | % | ||||||
CSX CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS, Continued
Rail
Operating Revenue
Rail revenue increased $45 million in the quarter ended March 28, 2003, as compared to the quarter ended March 29, 2002.
Merchandise
Overall merchandise revenues were up 6 percent on 3 percent volume growth. Emerging markets, chemicals, metals and forest and industrial products’ revenue levels increased over the prior year quarter, while phosphates and fertilizers had a slight decrease. The positive performance in emerging markets was driven by continued strength in military shipments during the first quarter of 2003.
Automotive
Automotive revenues grew $8 million or 4% over the prior year quarter. Growth was driven by increased vehicle production while extended linehauls resulted in yield improvements. Light truck and remarketed vehicles revenues are up year over year due to shifts to sports utility and crossover vehicles and aggressive manufacturer incentives.
Coal
Coal revenues were down $11 million or 3 percent from prior year. Abnormally harsh winter weather adversely affected lake loadings, as lakes were frozen and, therefore, inaccessible. Additionally, weakness in exports continued due to the reduced competitive standing of United States coal in the international market. These two factors more than offset the strength in utility coal shipments that occurred in the latter part of the quarter.
Operating Expense
Operating expenses increased to $1.4 billion from $1.3 billion for the quarters ended March 28, 2003 and March 29, 2002, respectively. The $75 million increase was primarily due to higher fuel prices, operational inefficiencies due to severe winter weather during 2003, and increased personal injury claims.
CSX CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS, Continued
Rail, Continued
Operating Income
Operating income was $147 million for the quarter ended March 28, 2003, as compared to $177 million for the quarter ended March 29, 2002. This $30 million decrease resulted from the large increase in fuel and other operating expenses more than offsetting the benefit of higher revenues.
Intermodal
Operating Revenue
Intermodal operating revenues increased $40 million in the quarter ended March 28, 2003, as compared to the quarter ended March 29, 2002. Revenue per unit improved due to increased length of haul, a favorable price environment and growth in higher priced door-to-door traffic. The increase in revenue included $7 million of fuel surcharges in 2003.
Operating Expense
Intermodal operating expenses increased $35 million over the prior year quarter, primarily due to increased lift costs and inland transportation charges associated with higher volumes.
Operating Income
Intermodal operating income was $22 million for the quarter ended March 28, 2003, as compared to $17 million for the quarter ended March 29, 2002.
CSX CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS, Continued
International Terminals Results
Operating Revenue
International Terminals operating revenue decreased to $56 million for the 2003 quarter, from $58 million in the prior year quarter. This decrease was primarily a result of the discontinuance from the Transpacific trade by one of the major Hong Kong customers.
Operating Expense
Operating expenses decreased to $41 million for the quarter, from $47 million in the prior year quarter, due to cost reduction initiatives implemented during the second half of 2002 and decreased volumes.
Operating Income
Operating income increased to $15 million for the quarter, from $11 million for the prior year quarter.
CSX CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and short-termshort term investments totaled $294increased $472 million to $736 million, from $264 million at March 28, 2003, an increase of $30 million since December 27, 2002.
Primary sources of cash and cash equivalents during the threenine months ended March 28,September 26, 2003 wereinclude normal transportation operations, $214 million of net proceeds from the divestiture of CSX Lines LLC (see Note 3,4, Divestitures), $67and the issuance of $300 million of long-term notes.
Additionally, short-term commercial paper borrowings have netted proceeds of $586 million for the nine month period. The majority of the proceeds of these borrowings are being held to fund the potential purchase of the Company’s zero coupon convertible debentures which may be put to CSX on October 30, 2003. The aggregate value of these debentures is approximately $470 million. Should the Company not be required to purchase the convertible debentures on October 30, 2003, the Company expects to use its excess cash reserve to reduce its commercial paper balance. In the event the Company is required to purchase the convertible debentures, the Company has the ability and intent to refinance the debt issuedon a long-term basis.
The Company has a $1 billion five-year revolving credit facility and casha $345 million 364-day revolving credit facility. A portion of these credit facilities may be used to support the Company’s commercial paper. The facilities may also be used for working capital and other general corporate purposes. Under the 364-day facility, the Company pays an annual fee to the participating banks of .125% of total commitment. Under the five-year facility, the Company pays annual fees to the participating banks that may range from general operations. 0.08% to 0.23% of total commitment, depending on the Company’s credit rating. As of September 26, 2003, the Company had no borrowings outstanding under these facilities.
CSX CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES, Continued
Primary uses of cash and cash equivalents were $150include $757 million ofin property additions, $95 million of debt repayments, and approximately $56 million related to payments made and related taxes due to the retirement of John Snow, the Company’s former Chairman and Chief Executive Officer, in the first quarter of 2003. The quarterly dividend for the current and prior year period was 10 cents per share, and amounted to $21$292 million in the first quarterscheduled repayments of 2003.long-term debt, and $65 million in dividend payments.
CSX’s working capital deficit at March 28,September 26, 2003 was $620$644 million, downup from $665$630 million at December 27, 2002. 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 and maturing obligations when they come due and has sufficient financial capacity to manage its day-to-day cash requirements and any obligations arising from legal, tax and other regulatory rulings.
FINANCIAL DATA
March 28, | December 27, | |||||||
2003 | 2002 | |||||||
(Dollars in Millions) | ||||||||
Cash, Cash Equivalents and Short-Term Investments | $ | 294 |
| $ | 264 |
| ||
Working Capital (Deficit) | $ | (620 | ) | $ | (665 | ) | ||
Current Ratio |
| 0.7 |
|
| 0.7 |
| ||
Debt Ratio |
| 51 | % |
| 52 | % | ||
Ratio of Earnings to Fixed Charges |
| 1.5 | x |
| 2.3 | x |
(Dollars in Millions) | ||||||||
September 26, 2003 | December 27, 2002 | |||||||
Cash, Cash Equivalents and Short-Term Investments | $ | 736 | $ | 264 | ||||
Working Capital (Deficit) | $ | (644 | ) | $ | (630 | ) | ||
Current Ratio | 0.8 | 0.7 | ||||||
Debt Ratio | 52 | % | 52 | % | ||||
Ratio of Earnings to Fixed Charges | 1.1 x | 2.3 x |
CSX CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
FACTORS EXPECTED TO INFLUENCE 2003
Fuel expenses fluctuate and are a significant cost butof CSX Surface Transportation operations. Fuel prices can vary significantly from period to period and impact future results. Although the Company expects that the impact of price variance will be lessis in the second quarterimplementation stage of 2003 thana fuel price hedging program, it will remain subject to fuel price fluctuation over the $50 million impact during the first quarterremainder of 2003. The full year impactEconomic factors also influence results and it is still uncertain whether significant improvements in the industrial sector will come in the last part of fuel expenses cannot be estimated with reasonable certainty.2003.
INVESTMENT IN AND INTEGRATED RAIL OPERATIONS WITH CONRAIL
See background, accounting and financial reporting effects and summary financial information in Note 5, Investment In and Integrated Rail Operations with Conrail.
Conrail’s Results of Operations
Conrail reported net income before cumulative effect of accounting change of $37$42 million in the firstthird quarter of 2003, compared to $36$44 million in the prior year quarter. Operating revenues increased $1$7 million to $226$228 million for the 2003 quarter, while operating expenses decreased $1 million to $163increased $10 million for the same period.
In June 2003, CSX, Norfolk Southern and Conrail jointly filed a petition with the Surface Transportation Board (STB) to establish direct ownership and control by CSXT and Norfolk Southern Railway of their portions of the Conrail system. CSX, Norfolk Southern and Conrail also jointly filed a ruling request with the Internal Revenue Service to qualify the transaction as a non-taxable distribution. See Note 6, “Investment and Integrated Rail Operations With Conrail.”
OTHER MATTERS
Critical Accounting Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires that management make estimates in reporting the amounts of certain assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of certain revenues and expenses during the reporting period. Actual results may differ from those estimates. For information regarding CSX’s significant estimates using management judgment, see management’s discussion and analysis of financial condition and results of operations on page 26 of the 2002 Annual Report.
In the third quarter of 2003, the Company evaluated and changed its estimate for casualty reserves to include an estimate of incurred but not reported claims for asbestos and other occupational injuries to be received over the next seven years. (See Note 12, Casualty, Environmental and Other Reserves). As of March 28,September 26, 2003, there have been no significantother material changes to these estimates.significant estimates as stated in the 2002 Annual Report.
CSX CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
OTHER MATTERS, Continued
Matters Arising From Sale of International Container-Shipping Assets
CSX has receivedentered into two settlement agreements with Maersk which resolve all material disputes pending between the companies arising out of the 1999 sale of the international container-shipping assets. On September 17, 2003, CSX entered into a final settlement agreement with Maersk allocating responsibility between the two companies for third party claims and litigation relating to the assets acquired by Maersk.
On October 20, 2003, CSX entered into a conditional settlement agreement with Maersk designed to settle all the remaining material disputes pending between the companies. The agreement settles the two major disputes arising out of the Maersk transaction. The first dispute involves a post-closing working capital adjustment to the sale price for which the Company had recorded a receivable of approximately $70 million. The second dispute involves a claim amounting to approximately $180 million plus interestreceived from Europe Container Terminals bv (“ECT”), owner alleging certain breaches by the Company at the Rotterdam container terminal facility owned by ECT. The settlement is subject to certain conditions which the Company believes it is probable will be met. Accordingly, the Company has recorded a charge relating to this settlement. The charge set forth below primarily includes the write-off of the Rotterdam Container Terminal formerly operatedreceivable recorded for the working capital adjustment as well as a net cash payment. If the condition is not satisfied, then CSX will not be bound by Sea-Land Service Inc. (“Sea-Land”). ECT has claimed that the December 1999settlement agreement and will proceed with litigation of the disputed matters. The effect of the two settlements is to reduce the Company’s earnings by $108 million pretax, $67 million after tax, or 31 cents per share. This charge is reflected in the financial statements as the additional loss on sale of the international liner businesscontainer-shipping assets. Neither settlement is expected to Maersk resulted inhave a breach of the Sea-Land terminal agreement with ECT. An initial arbitration panel of the Netherlands Arbitration Institute ruledmaterial impact on February 10, 2003, that CSX was in breach of the terminal agreement. The ruling by the panel dealt only with the existence of liability for a breach, and did not address the level of ECT damages, if any, which will be the subject of a second hearing before the same panel sometime in 2003. CSX disputes this claim and believes it does not reflect the mitigating benefits ECT gained from its ability to service other customers at the former Sea-Land facility. Management believes that valid defenses to this claim exist but cannot estimate what, if any, loss may result from this matter. CSX believes that Maersk is responsible for any damages that may result from this dispute and has taken preliminary steps to initiate an arbitration against Maersk under the purchase and sale agreement with Maersk.future cash flows.
CSX CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
OTHER MATTERS, Continued
Matters Arising From Sale of International Container-Shipping Assets, Continued
The purchase and sale agreement with Maersk provides for a post-closing working capital 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 Company has recorded a receivable of approximately $70 million in connection with the post-closing adjustment and this amount is currently in dispute. This matter, together with other disputed issues relating to the contractual obligations of the Company, has been submitted to arbitration.
Although management believes it will prevail in some or all of the Maersk and ECT disputes and arbitrations, it can give no assurance in this regard. An adverse outcome could have a material effect on the determination of the final loss on sale of Sea-Land’s International Liner business and the financial results and cash flows in future reporting periods.
CSX CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
FORWARD LOOKING STATEMENTS
This Quarterly Report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act with respect to, among other items: projections and estimates of earnings, revenues, cost-savings, expenses, or other financial items; statements of management’s plans, strategies and objectives for future operations, and management’s expectations as to future performance and operations and the time by which objectives will be achieved; statements concerning proposed new products and services; and statements regarding future economic, industry or market conditions or performance. Forward-looking statements are typically identified by words or phrases such as “believe”, “expect”, “anticipate”, “project”, and similar expressions. Forward-looking statements speak only as of the date they are made, and the Company undertakes no obligation to update or revise any forward-looking statement. If the Company does update any forward-looking statement, no inference should be drawn that the Company will make additional updates with respect to that statement or any other forward-looking statements.
Forward-looking statements are subject to a number of risks and uncertainties, and actual performance or results could differ materially from that anticipated by these forward-looking statements. Factors that may cause actual results to differ materially from those contemplated by these forward-looking statements include, among others: (i) the Company’s success in implementing its financial and operational initiatives, (ii) changes in domestic or international economic or business conditions, including those affecting the rail industry (such as the impact of industry competition, conditions, performance and consolidation); (iii) legislative or regulatory changes; and (iv) the outcome of claims and litigation involving or affecting the Company. Other important assumptions and factors that could cause actual results to differ materially from those in the forward-looking statements are specified elsewhere in this report, and in the Company’s other SEC reports, accessible on the Sec’sSEC’s website atwww.sec.gov and at the Company’s website at www.csx.com.www.csx.com.
CSX CORPORATION AND SUBSIDIARIES
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We address ourCSX addresses market risk exposure to market risks, principally the market risk of changesfluctuations in interest rates and the risk of volatility in its fuel costs through the use of derivative financial instruments. The Company does not hold or issue derivative financial instruments for trading purposes.
The Company addresses its exposure to interest rate market risk through a controlled program of risk management that includes the use of interest rate swap agreements. We do not hold or issue derivative financial instruments for trading purposes. In the event of a 1% increase or decrease in the LIBOR interest rate, the interest expense related to these agreements would increase or decrease approximately $1.4$14 million on an annual basis.
During the third quarter of 2003, the Company began a program to hedge its exposure to fuel price volatility through swap transactions. As of September 26, 2003, CSX has hedged approximately 11% and 9% of expected requirements for 2004 and 2005, respectively. At September 26, 2003, a 1% change in fuel prices would result in a $1 million increase or decrease in the liability related to the swaps.
The Company is exposed to credit loss in the event of non-performance by any counter-party to the interest rate swap or fuel hedging agreements. The Company does not anticipate non-performance by such counter-parties, and no material loss would be expected from non-performance.
At March 28,Exclusive of derivative contracts that swap fixed rate notes to floating, at September 26, 2003 and December 27, 2002, CSX had approximately $790 million$1.4 billion and $709 million, respectively, of floating rate debt outstanding. A 1% variance in interest rates would on average effect annual interest expense by approximately $8 million.
The Company is subject to risk relating to changes in the price of diesel fuel. A one cent change in the price per gallon of fuel would impact annual fuel expense by approximately $6$14 million.
While the Company’s international terminals segment does business in several foreign countries, a substantial portion of its revenue and expenses are transacted in U.S. dollars, or currencies with little fluctuation against the U.S. dollar. For this reason, CSX does not believe its foreign currency market risk is significant.
A substantial increase in the fair market value of the Company’s stock price could negatively impact earnings per share due to the dilutive effect of stock options and convertible debt.
ITEM 4. DISCLOSURE CONTROLS AND PROCEDURES
As of April 28,September 26, 2003, under the supervision and with the participation of the Company’s Chief Executive Officer (CEO) and the Chief Financial Officer (CFO), management has evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on that evaluation, the CEO and CFO, concluded that the Company’s disclosure controls and procedures were effective as of April 28,September 26, 2003. There were no significant changes in the Company’s internal controls over financial reporting during the fiscal quarter covered by this quarterly report that have materially affected or inare reasonably likely to materially affect the Company’s internal control over financial reporting.
CSX CORPORATION AND SUBSIDIARIES
PART II: OTHER INFORMATION
For information relating to CSX’s settlements with Maersk and other factors that could significantly affect those controls subsequentlegal proceedings, see Note 13.
ITEM 2: CHANGES IN SECURITIES AND USE OF PROCEEDS
On October 8, 2003, the CSX of Board of Directors, approved Amendment No. 2 to the Rights Agreement, dated as of May 29, 1998, as amended by Amendment No. 1 thereto, dated as of June 27, 2000 (as amended, the “Rights Agreement”), between the Company and Harris Trust and Savings Bank, as Rights Agent, to change the final expiration date of the evaluation.
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CSX CORPORATION AND SUBSIDIARIESRights Agreement from June 8, 2008 to October 10, 2003. As a result of this action, the preferred stock purchase rights granted under the Rights Agreement expired at 5:00 p.m., New York City time, on October 10, 2003.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
4.1 | ||
4.3 | Amendment No. 2, dated as of October 9, 2003, to the Rights Agreement, dated as of |
31.1* | ||
31.2* | Principal Financial Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
32.1* | Principal Executive Officer Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
32.2* | Principal Financial Officer Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
CSX CORPORATION AND SUBSIDIARIES
PART II: OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K, Continued
(b) Reports on Form 8-K
Form 8-K filed on |
* | Filed herewith |
CSX CORPORATION AND SUBSIDIARIES
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 | ||
(Registrant) | ||
By: | /s/ | |
Carolyn T. Sizemore | ||
Vice President and Controller | ||
(Principal Accounting Officer) |
Dated: April 30, 2002
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CERTIFICATE OF CHIEF EXECUTIVE OFFICER
I, Michael J. Ward, certify that:
Date: April 30,October 24, 2003
/s/ MICHAEL J. WARD
Michael J. Ward
Chairman, President and Chief Executive Officer
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CERTIFICATE OF CHIEF FINANCIAL OFFICER
I, Paul R. Goodwin, certify that:
Date: April 30, 2003
/s/ PAUL R. GOODWIN
Paul R. Goodwin
Vice Chairman and Chief Financial Officer
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