FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
| | |
þ | | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarter ended July 1,September 30, 2005
OR
| | |
o | | 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 (State or other jurisdiction of incorporation or organization) | | 62-1051971 (I.R.S. Employer Identification No.) |
| | |
500 Water Street, 15th Floor, Jacksonville, FL (Address of principal executive offices) | | 32202 (Zip Code) |
(904) 359-3200
(Registrant’s telephone number, including area code)
No Change
(Former name, former address and former fiscal year, if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yesþ Noo
Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).
Yesþ Noo
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2).
Yeso Noþ
Indicate the number of shares outstanding of each of the issuer’s classes of common stock,
as of July 1,September 30, 2005: 216,959,519217,239,119 shares.
CSX CORPORATION
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JULY 1,SEPTEMBER 30, 2005
INDEX
2
CSX CORPORATION AND SUBSIDIARIES
PART I: FINANCIAL INFORMATION
ITEM I:1: FINANCIAL STATEMENTS
CONSOLIDATED INCOME STATEMENTS
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in Millions, Except Per Share Amounts) | | Quarters Ended | | Six Months Ended | | | Quarters Ended | | Nine Months Ended | |
| | July 1, | | June 25, | | July 1, | | June 25, | | | Sept. 30, | | Sept. 24, | | Sept. 30, | | Sept. 24, | |
| | 2005 | | 2004 | | 2005 | | 2004 | | | 2005 | | 2004 | | 2005 | | 2004 | |
Operating Revenue | | $ | 2,166 | | $ | 1,997 | | $ | 4,274 | | $ | 3,917 | | | $ | 2,125 | | $ | 1,943 | | $ | 6,399 | | $ | 5,860 | |
Operating Expense | | |
Labor and Fringe | | 707 | | 665 | | 1,403 | | 1,343 | | | 727 | | 671 | | 2,130 | | 2,014 | |
Materials, Supplies and Other | | 438 | | 435 | | 907 | | 859 | | | 462 | | 410 | | 1,365 | | 1,266 | |
Depreciation | | 205 | | 159 | | 410 | | 321 | | | 207 | | 172 | | 617 | | 493 | |
Fuel | | 176 | | 151 | | 355 | | 305 | | | 188 | | 162 | | 543 | | 467 | |
Building and Equipment Rent | | 127 | | 140 | | 259 | | 277 | | | 124 | | 140 | | 383 | | 417 | |
Inland Transportation | | 64 | | 70 | | 120 | | 144 | | | 55 | | 72 | | 175 | | 216 | |
Conrail Rents Fees and Services | | 19 | | 82 | | 39 | | 169 | | |
Conrail Rents, Fees and Services | | | 9 | | 63 | | 48 | | 232 | |
Restructuring Charge | | — | | 15 | | — | | 68 | | | — | | 3 | | — | | 71 | |
Miscellaneous | | | (1 | ) | | | (2 | ) | | | (4 | ) | | | (3 | ) | |
| | | | | | | | | | | | | | | | | | |
Total Operating Expenses | | 1,735 | | 1,715 | | 3,489 | | 3,483 | | | 1,772 | | 1,693 | | 5,261 | | 5,176 | |
| |
Operating Income | | 431 | | 282 | | 785 | | 434 | | | 353 | | 250 | | 1,138 | | 684 | |
| |
Other Income (Expense) | | |
Other Income — Net (Note 9) | | 30 | | 5 | | 28 | | 1 | | |
Debt Repurchase Expense (Note 4) | | | (192 | ) | | — | | | (192 | ) | | — | | |
Other Income — Net (Note 10) | | | 11 | | 32 | | 39 | | 33 | |
Debt Repurchase Expense (Note 5) | | | — | | — | | | (192 | ) | | — | |
Interest Expense | | | (110 | ) | | | (109 | ) | | | (224 | ) | | | (217 | ) | | | (100 | ) | | | (106 | ) | | | (324 | ) | | | (323 | ) |
| | | | | | | | | | | | | | | | | | |
| |
Earnings | | |
Earnings from Continuing Operations before Income Taxes | | 159 | | 178 | | 397 | | 218 | | | 264 | | 176 | | 661 | | 394 | |
Income Tax (Benefit) Expense | | | (6 | ) | | 60 | | 78 | | 73 | | |
Income Tax Expense | | | | (100 | ) | | | (62 | ) | | | (178 | ) | | | (135 | ) |
| | | | | | | | | | | | | | | | | | |
| |
Earnings from Continuing Operations | | 165 | | 118 | | 319 | | 145 | | | 164 | | 114 | | 483 | | 259 | |
Discontinued Operations — Net of Tax (Note 3) | | — | | 1 | | 425 | | 4 | | |
Discontinued Operations — Net of Tax (Note 4) | | | — | | 9 | | 425 | | 13 | |
| | | | | | | | | | | | | | | | | | |
| |
Net Earnings | | $ | 165 | | $ | 119 | | $ | 744 | | $ | 149 | | | $ | 164 | | $ | 123 | | $ | 908 | | $ | 272 | |
| | | | | | | | | | | | | | | | | | |
| |
Per Common Share | | |
Earnings Per Share (Note 2): | | |
Earnings Per Share (Note 3): | | |
Income from Continuing Operations | | $ | 0.76 | | $ | 0.55 | | $ | 1.48 | | $ | 0.68 | | | $ | 0.75 | | $ | 0.53 | | $ | 2.23 | | $ | 1.21 | |
Discontinued Operations | | — | | — | | 1.97 | | 0.01 | | | — | | 0.04 | | 1.97 | | 0.06 | |
| | | | | | | | | | | | | | | | | | |
| |
Net Earnings | | $ | 0.76 | | $ | 0.55 | | $ | 3.45 | | $ | 0.69 | | | $ | 0.75 | | $ | 0.57 | | $ | 4.20 | | $ | 1.27 | |
| | | | | | | | | | | | | | | | | | |
| |
Earnings Per Share, Assuming Dilution (Note 2): | | |
Earnings Per Share, Assuming Dilution (Note 3): | | |
Income from Continuing Operations | | $ | 0.73 | | $ | 0.53 | | $ | 1.41 | | $ | 0.66 | | | $ | 0.72 | | $ | 0.51 | | $ | 2.12 | | $ | 1.16 | |
Discontinued Operations | | — | | — | | 1.88 | | 0.01 | | | — | | 0.04 | | 1.88 | | 0.06 | |
| | | | | | | | | | | | | | | | | | |
| |
Net Earnings | | $ | 0.73 | | $ | 0.53 | | $ | 3.29 | | $ | 0.67 | | | $ | 0.72 | | $ | 0.55 | | $ | 4.00 | | $ | 1.22 | |
| | | | | | | | | | | | | | | | | | |
| |
Average Common Shares Outstanding (Thousands) | | 216,418 | | 214,734 | | 215,887 | | 214,702 | | | 216,705 | | 214,821 | | 216,160 | | 214,740 | |
| | | | | | | | | | | | | | | | | | |
| |
Average Common Shares Outstanding, Assuming Dilution (Thousands) | | 227,453 | | 224,877 | | 226,850 | | 224,879 | | | 228,423 | | 224,980 | | 227,374 | | 224,911 | |
| | | | | | | | | | | | | | | | | | |
| |
Cash Dividends Paid Per Common Share | | $ | 0.10 | | $ | 0.10 | | $ | 0.20 | | $ | 0.20 | | | $ | 0.10 | | $ | 0.10 | | $ | 0.30 | | $ | 0.30 | |
| | | | | | | | | | | | | | | | | | |
See accompanying Notes to Consolidated Financial Statements.
3
CSX CORPORATION AND SUBSIDIARIES
PART I: FINANCIAL INFORMATION
ITEM I:1: FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
| | | | | | | | | | | | | | | | |
| | (Unaudited) | | | | | (Unaudited) | | | |
(Dollars in Millions) | | July 1, 2005 | | December 31, 2004 | | | Sept. 30, 2005 | | Dec. 31, 2004 | |
| ASSETS | ASSETS | |
Current Assets: | | |
Cash, Cash Equivalents and Short-term Investments (Note 1) | | $ | 513 | | $ | 859 | | |
Accounts Receivable — Net (Note 8) | | 1,123 | | 1,143 | | |
Cash, Cash Equivalents and Short-term | | |
Investments (Note 1) | | | $ | 590 | | $ | 859 | |
Accounts Receivable — Net (Note 9) | | | 1,274 | | 1,159 | |
Materials and Supplies | | 196 | | 165 | | | 203 | | 165 | |
Deferred Income Taxes | | 120 | | 20 | | | 141 | | 20 | |
Other Current Assets — Net (Note 8) | | 252 | | 157 | | |
International Terminals Assets Held for Sale (Note 3) | | — | | 643 | | |
Other Current Assets — Net (Note 9) | | | 239 | | 157 | |
International Terminals Assets Held for Sale (Note 4) | | | — | | 643 | |
| | | | | | | | | | |
Total Current Assets | | 2,204 | | 2,987 | | | 2,447 | | 3,003 | |
| | |
Properties | | 26,121 | | 25,852 | | | 26,275 | | 25,852 | |
Accumulated Depreciation | | | (6,240 | ) | | | (5,907 | ) | | | (6,300 | ) | | | (5,907 | ) |
| | | | | | | | | | |
Properties — Net | | 19,881 | | 19,945 | | | 19,975 | | 19,945 | |
| | |
Investment in Conrail (Note 7) | | 583 | | 574 | | |
Investment in Conrail (Note 8) | | | 603 | | 574 | |
Affiliates and Other Companies | | 310 | | 296 | | | 317 | | 296 | |
Other Long-term Assets — Net (Note 8) | | 772 | | 804 | | |
Other Long-term Assets | | | 679 | | 802 | |
| | | | | | | | | | |
Total Assets | | $ | 23,750 | | $ | 24,606 | | | $ | 24,021 | | $ | 24,620 | |
| | | | | | | | | | |
| | |
LIABILITIES AND SHAREHOLDERS’ EQUITY | LIABILITIES AND SHAREHOLDERS’ EQUITY | |
| | |
Current Liabilities: | | |
Accounts Payable | | $ | 885 | | $ | 879 | | | $ | 930 | | $ | 879 | |
Labor and Fringe Benefits Payable | | 429 | | 371 | | | 513 | | 371 | |
Casualty, Environmental and Other Reserves (Note 11) | | 315 | | 312 | | |
Casualty, Environmental and Other Reserves (Note 13) | | | 312 | | 312 | |
Current Maturities of Long-term Debt | | 618 | | 983 | | | 947 | | 983 | |
Short-term Debt | | 3 | | 101 | | | 3 | | 101 | |
Income and Other Taxes Payable | | 206 | | 170 | | | 341 | | 170 | |
Other Current Liabilities | | 53 | | 115 | | | 94 | | 115 | |
International Terminals Liabilities Held for Sale (Note 3) | | — | | 386 | | |
International Terminals Liabilities Held for Sale (Note 4) | | | — | | 386 | |
| | | | | | | | | | |
Total Current Liabilities | | 2,509 | | 3,317 | | | 3,140 | | 3,317 | |
| | |
Casualty, Environmental and Other Reserves (Note 11) | | 697 | | 735 | | |
Casualty, Environmental and Other Reserves (Note 13) | | | 703 | | 735 | |
Long-term Debt | | 5,399 | | 6,234 | | | 5,058 | | 6,248 | |
Deferred Income Taxes | | 6,006 | | 5,979 | | | 6,011 | | 5,979 | |
Other Long-term Liabilities | | 1,522 | | 1,530 | | | 1,347 | | 1,530 | |
| | | | | | | | | | |
Total Liabilities | | 16,133 | | 17,795 | | | 16,259 | | 17,809 | |
| | | | | | | | | | |
| | |
Shareholders’ Equity: | | |
Common Stock, $1 Par Value | | 217 | | 216 | | | 217 | | 216 | |
Other Capital | | 1,678 | | 1,605 | | | 1,698 | | 1,605 | |
Retained Earnings | | 5,912 | | 5,210 | | | 6,053 | | 5,210 | |
Accumulated Other Comprehensive Loss (Note 1) | | | (190 | ) | | | (220 | ) | |
Accumulated Other Comprehensive Loss (Note 2) | | | | (206 | ) | | | (220 | ) |
| | | | | | | | | | |
Total Shareholders’ Equity | | 7,617 | | 6,811 | | | 7,762 | | 6,811 | |
| | | | | | | | | | |
Total Liabilities and Shareholders’ Equity | | $ | 23,750 | | $ | 24,606 | | | $ | 24,021 | | $ | 24,620 | |
| | | | | | | | | | |
See accompanying Notes to Consolidated Financial Statements.
4
CSX CORPORATION AND SUBSIDIARIES
PART I: FINANCIAL INFORMATION
ITEM I:1: FINANCIAL STATEMENTS
CONSOLIDATED CASH FLOW STATEMENTS
(Unaudited)
| | | | | | | | | | | | | | | | |
(Dollars in Millions) | | Six Months Ended | | | Nine Months Ended | |
| | July 1, | | June 25, | | |
| | 2005 | | 2004 | | | Sept. 30, | | Sept. 24, | |
| | | | | | | 2005 | | 2004 | |
OPERATING ACTIVITIES | | |
Net Earnings | | $ | 744 | | $ | 149 | | | $ | 908 | | $ | 272 | |
Adjustments to Reconcile Net Earnings to Net Cash Provided: | | |
Depreciation | | 418 | | 332 | | | 620 | | 511 | |
Deferred Income Taxes | | | (51 | ) | | 67 | | | | (132 | ) | | 115 | |
Gain on Sale of International Terminals — Net of Tax (Note 3) | | | (428 | ) | | — | | |
Restructuring Charge (Note 15) | | — | | 68 | | |
Gain on Sale of International Terminals — Net of Tax (Note 4) | | | | (428 | ) | | — | |
Restructuring Charge (Note 17) | | | — | | 71 | |
Net Gain on Conrail Spin-off After Tax | | | — | | | (16 | ) |
Other Operating Activities | | | (124 | ) | | | (38 | ) | | 27 | | | (105 | ) |
Changes in Operating Assets and Liabilities: | | |
Accounts Receivable | | 41 | | | (47 | ) | | | (74 | ) | | 2 | |
Other Current Assets | | | (45 | ) | | | (18 | ) | | | (37 | ) | | 4 | |
| Accounts Payable | | 16 | | 31 | | | 62 | | | (1 | ) |
Other Current Liabilities | | | (242 | ) | | | (25 | ) | | | (168 | ) | | 12 | |
| | | | | | |
| | | | | |
Net Cash Provided by Operating Activities | | 329 | | 519 | | | 778 | | 865 | |
| | | | | | | | | | |
| | |
INVESTING ACTIVITIES | | |
Property Additions | | | (381 | ) | | | (484 | ) | | | (726 | ) | | | (734 | ) |
Net Proceeds from Sale of International Terminals (Note 3) | | 1,110 | | — | | |
Purchase of Minority Interest in an International Terminals’ Subsidiary (Note 3) | | | (110 | ) | | — | | |
Net Proceeds from Sale of International Terminals (Note 4) | | | 1,108 | | — | |
Purchase of Minority Interest in an International Terminals’ Subsidiary (Note 4) | | | | (110 | ) | | — | |
Proceeds from Divestitures | | | — | | 55 | |
Purchases of Short-term Investments | | | (1,576 | ) | | | (719 | ) | | | (2,041 | ) | | | (1,285 | ) |
Proceeds from Sale of Short-term Investments | | 1,679 | | 644 | | | 2,050 | | 936 | |
Other Investing Activities | | 1 | | | (37 | ) | | 26 | | | (24 | ) |
| | | | | | |
| | | | | |
Net Cash Provided by (Used in) Investing Activities | | 723 | | | (596 | ) | | 307 | | | (1,052 | ) |
| | | | | | | | | | |
| | |
FINANCING ACTIVITIES | | |
Short-term Debt — Net | | | (98 | ) | | 702 | | | | (98 | ) | | 101 | |
Long-term Debt Issued | | 27 | | 62 | | | 29 | | 412 | |
Long-term Debt Repaid | | | (1,213 | ) | | | (379 | ) | | | (1,239 | ) | | | (385 | ) |
Dividends Paid | | | (44 | ) | | | (43 | ) | | | (65 | ) | | | (64 | ) |
Other Financing Activities | | 55 | | 3 | | | 44 | | 18 | |
| | | | | | |
| | | | | |
Net Cash (Used in) Provided by Financing Activities | | | (1,273 | ) | | 345 | | | | (1,329 | ) | | 82 | |
| | | | | | | | | | |
| |
Net (Decrease) Increase in Cash and Cash Equivalents | | | (221 | ) | | 268 | | | | (244 | ) | | | (105 | ) |
| | |
CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS | | |
Cash and Cash Equivalents at Beginning of Period | | 522 | | 296 | | | 522 | | 296 | |
| | | | | | | | | | |
| |
Cash and Cash Equivalents at End of Period | | 301 | | 564 | | | 278 | | 191 | |
Short-term Investments at End of Period | | 212 | | 164 | | | 312 | | 438 | |
| | | | | | | | | | |
| |
Cash, Cash Equivalents and Short-term Investments at End of Period | | $ | 513 | | $ | 728 | | | $ | 590 | | $ | 629 | |
| | | | | | | | | | |
See accompanying Notes to Consolidated Financial Statements.
5
CSX CORPORATION AND SUBSIDIARIES
PART I: FINANCIAL INFORMATION
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 (“CSX”) and subsidiaries (“CSX” or(CSX, together with such subsidiaries, the “Company”) at July 1,September 30, 2005 and December 31, 2004, and the Consolidated Income Statements for the quarters and nine months ended September 30, 2005 and September 24, 2004, and Consolidated Cash Flow Statements for the quarters and sixnine months ended July 1,September 30, 2005 and June 25,September 24, 2004, such adjustments being of a normal recurring nature. Certain prior-year data have been reclassified to conform to the 2005 presentation.
The Company suggests that theseThese financial statements should be read in conjunction with the audited financial statements and the notes included in the Company’sits most recent Annual Report and Form 10-K, the unaudited financial statements and the notes included in its 2005 First and Second Quarterly ReportReports on Form 10-Q and any Current Reports on Form 8-K. The Company’s SEC reports are accessible on the SEC’s website atwww.sec.gov and the Company’s website atwww.csx.com.
CSXThe Company follows a 52/53 week fiscal reporting calendar. Fiscal year 2005 consists of 52 weeks ending on December 30, 2005. Fiscal year 2004 consisted of 53 weeks ending on December 31, 2004. The financial statements presented are for the 13-week quarters ended July 1,September 30, 2005 and June 25,September 24, 2004, the 26-week39-week periods ended July 1,September 30, 2005 and June 25,September 24, 2004 and as of December 31, 2004. In 2004, the fourth quarter ending December 31, 2004, consisted of 14 weeks.
Accumulated Other Comprehensive Loss consists of the following:
| | | | | | | | | | | | |
| | Balance | | | Net Gain | | | Balance | |
(Dollars in Millions) | | December 31, 2004 | | | (Loss) | | | July 1, 2005 | |
| | | | | | |
Minimum Pension Liability (net of $161 of taxes as of December 31, 2004 and July 1, 2005) | | $ | (292 | ) | | $ | — | | | $ | (292 | ) |
Fair Value of Fuel Derivatives (net of $45 and $65 of taxes as of December 31, 2004 and July 1, 2005, respectively) | | | 72 | | | | 31 | | | | 103 | |
Other | | | — | | | | (1 | ) | | | (1 | ) |
| | | | | | | | | |
|
Total | | $ | (220 | ) | | $ | 30 | | | $ | (190 | ) |
| | | | | | | | | |
Other comprehensive income for the second quarter of 2004 was $28 million, after tax resulting from the increase in fair value of fuel derivative instruments. Other comprehensive income for the six months ended June 25, 2004 was $95 million after tax resulting from the increase in fair value of fuel derivative instruments and a reduction in the Company’s additional minimum pension liability. (See Note 10. Derivative Financial Instruments.)
CSX acquires auction rate securities and classifies these investments as available for sale. Accordingly, these investments are included in current assets as Short-term Investments on the Consolidated Balance Sheets. On the Consolidated Cash Flow Statements, purchases and sales of these assets are classified as investing activities.
NOTE 2. Accumulated Other Comprehensive Loss
Other comprehensive loss for the quarter ended September 30, 2005 was $16 million, after tax, resulting from a decrease in the quantity of fuel derivative contracts outstanding. CSX has suspended entering into new swaps in its fuel hedge program since the third quarter of 2004. (See Note 12. Derivative Financial Instruments.)
Other comprehensive income for the nine months ended September 30, 2005 was $14 million, after tax. Despite a decline in the quantity of outstanding contracts, the fair value of fuel derivative instruments continues to rise with the price of fuel.
| | | | | | | | | | | | |
| | Balance | | | Net Gain | | | Balance | |
(Dollars in Millions) | | Dec. 31, 2004 | | | (Loss) | | | Sept. 30, 2005 | |
Minimum Pension Liability | | $ | (292 | ) | | $ | — | | | $ | (292 | ) |
Fair Value of Fuel Derivatives | | | 72 | | | | 15 | | | | 87 | |
Other | | | — | | | | (1 | ) | | | (1 | ) |
| | | | | | | | | |
| | | | | | | | | | | | |
Total | | $ | (220 | ) | | $ | 14 | | | $ | (206 | ) |
| | | | | | | | | |
Other comprehensive income for the quarter ended September 24, 2004 was $60 million, after tax, resulting from the increase in fair value of fuel derivative instruments primarily derived from higher fuel prices.
Other comprehensive income for the nine months ended September 24, 2004 was $155 million after tax resulting from the increase in fair value of fuel derivative instruments and a reduction in the Company’s additional minimum pension liability.
6
CSX CORPORATION AND SUBSIDIARIES
PART I: FINANCIAL INFORMATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 2.3. Earnings Per Share
The following table sets forth the computation of basic earnings per share and earnings per share, assuming dilution:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars In Millions, Except Per Share Amounts) | | Quarters Ended | | Six Months Ended | | | Quarters Ended | | Nine Months Ended | |
| | July 1, | | June 25, | | July 1, | | June 25, | | | Sept. 30, | | Sept. 24, | | Sept. 30, | | Sept. 24, | |
| | 2005 | | 2004 | | 2005 | | 2004 | | | 2005 | | 2004 | | 2005 | | 2004 | |
Numerator: | | | �� | |
Earnings from Continuing Operations | | $ | 165 | | $ | 118 | | $ | 319 | | $ | 145 | | | $ | 164 | | $ | 114 | | $ | 483 | | $ | 259 | |
Interest Expense on Convertible Debt — Net of Tax | | 1 | | 1 | | 2 | | 2 | | | 1 | | 1 | | 3 | | 3 | |
| | | | | | | | | | | | | | | | | | |
Net Earnings from Continuing Operations, If-Converted | | 166 | | 119 | | 321 | | 147 | | | 165 | | 115 | | 486 | | 262 | |
| |
Discontinued Operations — Net of Tax | | — | | 1 | | 425 | | 4 | | | — | | 9 | | 425 | | 13 | |
| | | | | | | | | | | | | | | | | | |
Net Earnings, If-Converted | | 166 | | 120 | | 746 | | 151 | | | 165 | | 124 | | 911 | | 275 | |
Interest Expense on Convertible Debt — Net of Tax | | | (1 | ) | | | (1 | ) | | | (2 | ) | | | (2 | ) | | | (1 | ) | | | (1 | ) | | | (3 | ) | | | (3 | ) |
| | | | | | | | | | | | | | | | | | |
Net Earnings | | $ | 165 | | $ | 119 | | $ | 744 | | $ | 149 | | | $ | 164 | | $ | 123 | | $ | 908 | | $ | 272 | |
| | | | | | | | | | | | | | | | | | |
| | |
Denominator (Thousands): | | |
Average Common Shares Outstanding | | 216,418 | | 214,734 | | 215,887 | | 214,702 | | | 216,705 | | 214,821 | | 216,160 | | 214,740 | |
Convertible Debt | | 9,728 | | 9,728 | | 9,728 | | 9,728 | | | 9,728 | | 9,728 | | 9,728 | | 9,728 | |
Effect of Potentially Dilutive Common Shares | | 1,307 | | 415 | | 1,235 | | 449 | | |
Stock Options | | | 1,585 | | 282 | | 1,230 | | 305 | |
Other Potentially Dilutive Common Shares | | | 405 | | 149 | | 256 | | 138 | |
| | | | | | | | | | | | | | | | | | |
Average Common Shares Outstanding, Assuming Dilution | | 227,453 | | 224,877 | | 226,850 | | 224,879 | | | 228,423 | | 224,980 | | 227,374 | | 224,911 | |
| | | | | | | | | | | | | | | | | | |
| | |
Earnings Per Share: | | |
Income from Continuing Operations | | $ | 0.76 | | $ | 0.55 | | $ | 1.48 | | $ | 0.68 | | | $ | 0.75 | | $ | 0.53 | | $ | 2.23 | | $ | 1.21 | |
Discontinued Operations | | — | | — | | 1.97 | | 0.01 | | | — | | 0.04 | | 1.97 | | 0.06 | |
| | | | | | | | | | | | | | | | | | |
Net Earnings | | $ | 0.76 | | $ | 0.55 | | $ | 3.45 | | $ | 0.69 | | | $ | 0.75 | | $ | 0.57 | | $ | 4.20 | | $ | 1.27 | |
| | | | | | | | | | | | | | | | | | |
| | |
Earnings Per Share, Assuming Dilution: | | |
Income from Continuing Operations | | $ | 0.73 | | $ | 0.53 | | $ | 1.41 | | $ | 0.66 | | | $ | 0.72 | | $ | 0.51 | | $ | 2.12 | | $ | 1.16 | |
Discontinued Operations | | — | | — | | 1.88 | | 0.01 | | | — | | 0.04 | | 1.88 | | 0.06 | |
| | | | | | | | | | | | | | | | | | |
Net Earnings | | $ | 0.73 | | $ | 0.53 | | $ | 3.29 | | $ | 0.67 | | | $ | 0.72 | | $ | 0.55 | | $ | 4.00 | | $ | 1.22 | |
| | | | | | | | | | | | | | | | | | |
Basic earnings per share isare based on the weighted-average number of common shares outstanding. Earnings per share, assuming dilution, is based on the weighted-average number of common shares outstanding adjusted for the effect of potentially dilutive common shares from convertible debt and employee stock options and awards.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(In Thousands) | | Quarters Ended | | Six Months Ended | | | Quarters Ended | | Nine Months Ended |
| | July 1, 2005 | | June 25, 2004 | | July 1, 2005 | | June 25, 2004 | | | Sept. 30, 2005 | | Sept. 24, 2004 | | Sept. 30, 2005 | | Sept. 24, 2004 |
Number of Stock Options Exercised | | 382 | | 114 | | 1,466 | | 192 | | | 316 | | 67 | | 1,802 | | 259 | |
7
CSX CORPORATION AND SUBSIDIARIES
PART I: FINANCIAL INFORMATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 2.3. Earnings Per Share, Continued
Certain potentially dilutive common sharesstock options at July 1,September 30, 2005, and June 25,September 24, 2004 were excluded from the computation of earnings per share, assuming dilution, since their related option exercise prices were greater than the average market price of the common shares during the period. The following table indicates information about potentially dilutive common sharesstock options excluded from the computation of earnings per share:
| | | | | | | | |
| | Quarters Ended |
| | Sept. 30, 2005 | | Sept. 24, 2004 |
Number of Shares (Thousands) | | | 6,006 | | | | 20,801 | |
Average Exercise / Conversion Price | | $ | 48.34 | | | $ | 40.92 | |
| | | | | | | | |
| | Quarters Ended | |
| | July 1, 2005 | | | June 25, 2004 | |
Number of Shares (Millions) | | | 7 | | | | 22 | |
Average Exercise / Conversion Price | | $ | 47.61 | | | $ | 40.82 | |
The CSX Long Term Incentive Program is designed to reward participants for the attainment of CSX financial and certain strategic initiatives leading to share price appreciation for shareholders and employees. The objective of the plan is to motivate and reward key members of management and executives for achieving and exceeding a two-year modified free cash flow goal, at which time the award is payable in cash and CSX common stock. If the Company achieves the maximum payout under the program by the end of 2005, approximately 1,196 thousand shares could be issued under the plan In September 2004,addition, the Emerging Issues Task Force (“EITF”) reached a consensus on Issue No. 04-8, “The Effect of Contingently Convertible Debt on Diluted Earnings Per Share.”Share” in September 2004. The EITF states that contingently convertible debt instruments are subject to the “if-converted” method under SFAS 128, Earnings Per Share, regardless of fulfillment of any of the contingent features included in the instrument. Consequently, CSX is required to include approximately 10 million shares underlying its convertible debentures using the “if-converted” method in the computation of earnings per share, assuming dilution. Additionally, earnings per share, assuming dilution, has been restated for all prior periods presented.
A substantial increase in the fair market value of the Company’sCSX’s stock price could trigger contingent conditions for conversion and allowallowing holders to convert their debentures into CSX common stock, and thusas well as causing an increase in the exercise of stock options. Thus, both could negatively impact basic earnings per share.
NOTE 3.4. Discontinued Operations
CSX sold its International Terminals business, which included the capital stock of SL Service, Inc. (“SLSI”), in February 2005 to Dubai Ports International FZE (“DPI”) for closing cash consideration of $1.142 billion, subject to final working capital and long-term debt adjustments that have yet to be determined.billion. Of the gross proceeds, approximately $110 million was paid for the purchase of a minority interest in an International Terminals’ subsidiary, acquired during the first quarter of 2005 and divested as part of the sale to Dubai Ports International FZE (“DPI”).DPI. Other related cash transaction costs amounted to approximately $32 million. The Company$34 million, including resolution of working capital and long-term debt adjustments. CSX has paid and expects to make additional substantial income tax payments attributable to the transaction.
CSX recognized income of $683 million pretax, $428 million after tax, for the sixnine months ended July 1,September 30, 2005 as a result of the sale. Discontinued Operations for the sixnine months ended July 1,September 30, 2005 also includes revenue of $14 million and an after-tax loss on operations of $3 million from the International Terminals business through the closing date of the transaction in February 2005. Discontinued operationsOperations for the quarter and sixnine months ended June 25,September 24, 2004 include revenue of $38$42 million and $86$128 million, respectively.
SLSI also holdsheld certain residual assets and liabilities as a result of prior divestitures and discontinuances. A wholly-owned subsidiary of CSX retains the rights toThe Company retained those assets and indemnifies DPI, SLSI and related entities against those liabilities pursuant to a separate agreement. CSX guarantees the obligations of its subsidiary under this separate agreement.
The results of operations (See Note 14. Commitments and financial position of the Company’s former International Terminals business are reported as Discontinued Operations for all periods presented. Additional information about the sale is included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004.Contingencies.)
8
CSX CORPORATION AND SUBSIDIARIES
PART I: FINANCIAL INFORMATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 4. Discontinued Operations, Continued
The results of operations and financial position of CSX’s former International Terminals business are reported as Discontinued Operations and International Terminals Assets and Liabilities Held for Sale for all periods presented on the Consolidated Income Statements and Balance Sheets, respectively. Additional information about the sale is included in CSX’s Annual Report on Form 10-K for the year ended December 31, 2004.
NOTE 4.5. Debt and Credit Agreements
In June 2005, the CompanyCSX repurchased $1.0 billion of its publicly-traded notes listed below pursuant to offers to purchase that commenced in May 2005, and expired in June 2005.
(Dollars in Millions)
| | | | | | | | |
| | | | | | Aggregate Principal |
| | | | | | Amount of Tendered |
| | Principal Amount | | Notes Accepted for |
Notes | | Outstanding | | Purchase |
|
CSX 2.75% Notes due 2006 | | $ | 200 | | | $ | 186 | |
CSX 9% Notes due 2006 | | | 300 | | | | 206 | |
CSX Floating Rate Notes due 2006 | | | 300 | | | | 58 | |
CSX 8.625% Notes due 2022 | | | 200 | | | | 84 | |
CSX 7.95% Notes due 2027 | | | 500 | | | | 227 | |
CSX 8.10% Notes due 2022 | | | 150 | | | | 57 | |
CSX 7.25% Notes due 2027 | | | 250 | | | | 167 | |
CSX 7.90% Notes due 2017 | | | 400 | | | | 15 | |
| | |
| | $ | 2,300 | | | $ | 1,000 | |
| | |
The total consideration paid for these notes totaled $1.2 billion, which includes a pretax charge of $192 million for costs to repurchase the debt which primarily reflects the market value above original issue value. The CompanyCSX used cash on hand to finance this repurchase.
The CompanyPursuant to the terms of CSX’s Zero Coupon Convertible Debentures (“Debentures”) due October 30, 2021, the holders of such Debentures have the right to require CSX to purchase their Debentures on October 30, 2005. CSX notified these holders of this right on September 30, 2005. Holders must submit notice for purchase by October 24, 2005 and have the right to withdraw such notice by October 27, 2005. If any of the Debentures are required to be purchased by CSX, they will be purchased for cash. As of September 30, 2005, the Company’s cash and short-term investments balance was $590 million, which is more than adequate to fund the potential purchase of the Debentures if CSX is required to do so on October 30, 2005. As of September 30, 2005, the aggregate value of the Debentures is approximately $467 million and is included in Current Maturities of Long-term Debt within the Consolidated Balance Sheets.
CSX has a $1.2 billion five-year unsecured revolving credit facility expiring in May 2009 and a $400 million 364-day unsecured revolving credit facility expiring in May 2006. The facilities were entered into in May 2004 and May 2005, respectively, on terms substantially similar to the facilities they replaced: a $1.0 billion unsecured revolving credit facility that would have expired in May 2006 and a $400 million unsecured revolving credit facility that would have expired in May 2005.replaced. Generally, these facilities may be used for general corporate purposes, to support the Company’sCSX’s commercial paper, and for working capital. Neither of the credit facilities was drawn on as of July 1,September 30, 2005. Commitment fees and interest rates payable under the facilities are similar to fees and rates available to comparably rated investment-grade borrowers. These credit facilities allow for borrowings at floating (LIBOR-based) rates, plus a spread, depending upon ourCSX’s senior unsecured debt ratings. At July 1,September 30, 2005, the CompanyCSX was in compliance with all covenant requirements under the facilities.
9
CSX CORPORATION AND SUBSIDIARIES
PART I: FINANCIAL INFORMATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 5.6. Share-Based Compensation
As permitted under SFAS 148, the CompanyCSX has adopted the fair value recognition provisions on a prospective basis and, accordingly, recognized expense for stock options granted in May 2003.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in Millions) | | Quarters Ended | | Six Months Ended | | | Quarters Ended | | Nine Months Ended |
| | July 1, | | June 25, | | July 1, | | June 25, | | | Sept. 30, | | Sept. 24, | | Sept. 30, | | Sept. 24, |
| | 2005 | | 2004 | | 2005 | | 2004 | | | 2005 | | 2004 | | 2005 | | 2004 |
Stock Option Compensation Expense | | $ | 1 | | $ | 2 | | $ | 2 | | $ | 9 | | | $ | 1 | | $ | 2 | | $ | 3 | | $ | 11 | |
Stock compensation expense includes $5 million recorded in conjunction with the Company’s management restructuring for the six-monthnine-month period ended June 25,September 24, 2004 related to recognition of unamortized expense for 2003 stock option awards retained by terminated employees (see Note 15.17. Management Restructuring). In addition to stock option expense, stock-based employee compensation expense included in reported net income consists of restricted stock awards, stock issued to CSX directors and the Company’s long-term incentive compensation programLong Term Incentive Program for all periods presented.
The following table illustrates the pro forma effect on net earnings and earnings per share as if the fair value based method had been applied to all outstanding and unvested awards in each period:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in Millions, Except Per Share Amounts) | | Quarters Ended | | Six Months Ended | | | Quarters Ended | | Nine Months Ended | |
| | July 1, | | June 25, | | July 1, | | June 25, | | | Sept. 30, | | Sept. 24, | | Sept. 30, | | Sept. 24, | |
| | 2005 | | 2004 | | 2005 | | 2004 | | | 2005 | | 2004 | | 2005 | | 2004 | |
Net Earnings — As Reported | | $ | 165 | | $ | 119 | | $ | 744 | | $ | 149 | | | $ | 164 | | $ | 123 | | $ | 908 | | $ | 272 | |
Add: Stock-Based Employee Compensation Expense Included in Reported Net Income — Net of Tax | | 7 | | 3 | | 11 | | 8 | | | 7 | | 2 | | 18 | | 10 | |
Deduct: Total Stock-Based Employee Compensation Expense Determined under the Fair Value Based Method for All Awards — Net of Tax | | | (8 | ) | | | (5 | ) | | | (14 | ) | | | (19 | ) | | | (8 | ) | | | (5 | ) | | | (22 | ) | | | (24 | ) |
| | | | | | | | | | | | | | | | | | |
| | |
Pro Forma Net Earnings | | $ | 164 | | $ | 117 | | $ | 741 | | $ | 138 | | | $ | 163 | | $ | 120 | | $ | 904 | | $ | 258 | |
Interest Expense on Convertible Debt — Net of Tax | | 1 | | 1 | | 2 | | 2 | | | 1 | | 1 | | 3 | | 3 | |
| | | | | | | | | | | | | | | | | | |
Pro Forma Net Earnings, If-Converted | | $ | 165 | | $ | 118 | | $ | 743 | | $ | 140 | | | $ | 164 | | $ | 121 | | $ | 907 | | $ | 261 | |
| | | | | | | | | | | | | | | | | | |
| | |
Earnings Per Share: | | |
Basic — As Reported | | $ | 0.76 | | $ | 0.55 | | $ | 3.45 | | $ | 0.69 | | | $ | 0.75 | | $ | 0.57 | | $ | 4.20 | | $ | 1.27 | |
Basic — Pro Forma | | $ | 0.76 | | $ | 0.54 | | $ | 3.43 | | $ | 0.64 | | | $ | 0.75 | | $ | 0.56 | | $ | 4.18 | | $ | 1.20 | |
| |
Diluted — As Reported | | $ | 0.73 | | $ | 0.53 | | $ | 3.29 | | $ | 0.67 | | | $ | 0.72 | | $ | 0.55 | | $ | 4.00 | | $ | 1.22 | |
Diluted — Pro Forma | | $ | 0.73 | | $ | 0.52 | | $ | 3.28 | | $ | 0.62 | | | $ | 0.72 | | $ | 0.54 | | $ | 3.99 | | $ | 1.16 | |
10
CSX CORPORATION AND SUBSIDIARIES
PART I: FINANCIAL INFORMATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 6.7. New Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS 123(R), “Share-Based Payment”, which is a revision of SFAS 123, “Accounting for Stock-Based Compensation”. Currently, the CompanyCSX uses the Black-Scholes-Merton formula to estimate the value of stock options granted to employees and expects to continue to use this acceptable option valuation model upon the required adoption of SFAS 123(R) on January 1, 2006. Compensation cost for unvested awards that were not recognized under SFAS 123 will be recognized under SFAS 123(R). The new rules must be applied to new and existing unvested awards on the effective date. The CompanyCSX adopted SFAS 123 using the prospective transition method (which applied only to awards granted, modified or settled after the adoption date). Had CSX adopted SFAS 123(R) in prior periods, the impact would have estimated the impact of SFAS 123 would have been estimated as described in the disclosure of pro forma net income and earnings per share in Note 5.6. Share-Based Compensation. SFAS 123(R) also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required under current literature. This requirement will reduce net operating cash flows and increase net financing cash flows in periods after adoption. The Company is currently evaluating the impact of SFAS 123(R) on its consolidated financial statements, but does not expect the impact to be material.
Currently, the Company’sCSX’s stock-based employee compensation expense is recognized over the amortization period which could continue beyond the date an employee is eligible for retirement. Upon adoption of SFAS 123(R), if the CompanyCSX allows vesting beyond retirement eligibility (which is based on age and years of service) for new stock awards granted, the expense recognition period for these awards will not extend beyond the date an employee is eligible for retirement, resulting in the CompanyCSX’s recognizing this expense over a shorter period of time.
NOTE 7.8. Investment in and Integrated Rail Operations with Conrail
In August 2004, the ownership of portions of the Conrail Inc. (“Conrail”) system already operated by CSX Transportation, Inc. (“CSXT”) and Norfolk Southern Railway Company (“NSR”), were transferred to and therefore directly owned by CSXT and NSR, and the parties consummated an exchange offer of new unsecured securities for unsecured securities of Conrail. Conrail’s secured debt and lease obligations are supported by new leases and subleases which became the direct lease and sublease obligations of CSXT and NSR.
The CompanyCSX recorded this spin-off transaction at fair value based on the results of an independent valuation. Since September 2004, the impact of the transaction has been included in the Company’sCSX’s Consolidated Balance Sheets and Consolidated Income and Cash Flow Statements.
As a result of the transaction, the assets and liabilities transferred to CSXT are reflected in their respective line items in CSX’s Consolidated Balance Sheet.
Additional information about this transaction is included in the Company’sCSX’s annual report on Form 10-K for the year ended December 31, 2004.
11
CSX CORPORATION AND SUBSIDIARIES
PART I: FINANCIAL INFORMATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 7.8. Investment in and Integrated Rail Operations with Conrail, Continued
Accounting and Financial Reporting Effects
For periods prior to the spin-off transaction, CSX’sthe Company’s rail and intermodal operating revenue included revenue from traffic moving on the Conrail property. Operating expenses included costs incurred to handle such traffic and to operate the Conrail lines. Rail operating expense included an expense category, “Conrail Rents, Fees and Services,” which reflected:
| 1. | | Right-of-way usage fees paid to Conrail through August 2004.
|
|
| 2. | | Equipment rental payments to Conrail through August 2004. |
|
| 3. | | Transportation, switching, and terminal service charges levied by Conrail in the Shared Assets Areas that Conrail operates for the joint benefit of CSXT and NSR. |
|
| 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 income before the cumulative effect of accounting change recognized under the equity method of accounting. |
Conrail will continue to own, manage, and operate the Shared Assets Areas for the joint benefit of CSXT and NSR. However, theThe spin-off transaction, however, effectively decreased rents paid to Conrail after the transaction date, as some assets previously leased from Conrail are now owned by CSXT.CSXT or NSR.
Transactions with Conrail
As listed below, CSXCSXT owes certain amounts to Conrail representing expenses incurred under the operating, equipment and Shared Assets Area agreements with Conrail.
| | | | | | | | |
(Dollars in Millions) | | Periods Ended | |
| | July 1, | | | December 31, | |
| | 2005 | | | 2004 | |
CSX Payable to Conrail | | $ | 39 | | | $ | 59 | |
As a result of the spin-off transaction, liabilities associated with Conrail advances to CSX were transferred to CSXT. Consequently, there is no longer an advance between CSX and Conrail. For the quarter and six months ended June 25, 2004, interest expense on Conrail advances amounts to $2 million and $4 million, respectively. | | | | | | | | |
(Dollars in Millions) | | Periods Ended |
| | Sept. 30, | | Dec. 31, |
| | 2005 | | 2004 |
CSXT Payable to Conrail | | $ | 45 | | | $ | 59 | |
In March 2005, CSXT executed a long-term promissory note with a subsidiary of Conrail for $23 million, which is included in Long-term Debt in the Company’s Consolidated Balance Sheet as of April 1,September 30, 2005. The note bears interest at 4.52% and matures in March 2035. Interest expense on this promissory note was not material for the quarter or nine months ended September 30, 2005.
As a result of the spin-off transaction, liabilities associated with Conrail advances to CSX were transferred to CSXT. As of September 30, 2005, there was no advance between CSX and Conrail or any related interest expense. For the quarter and nine months ended September 24, 2004, interest expense on Conrail advances amounted to $3 million and $7 million, respectively.
In October 2005, CSX executed a long-term promissory note with a subsidiary of Conrail for $73 million. The note bears interest at 4.40% and matures in October 2035 .
The agreement under which CSXT operated its allocated portion of the Conrail route system was terminated upon consummation of the spin-off transaction as CSXT then became the direct owner of the railroad assets comprising its allocated portion of the Conrail system. Leases and subleases of Conrail equipment operated by CSXT cover varying terms. CSXT is responsible for all costs of operating, maintaining, and improving the equipment under these agreements.
12
CSX CORPORATION AND SUBSIDIARIES
PART I: FINANCIAL INFORMATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 8.9. Allowance for Doubtful Accounts
The Company maintains an allowance for doubtful accounts for the estimated probable losses on uncollectible accounts and other receivables. The allowance is based upon the creditworthiness of customers, historical experience, the age of the receivable and current market and economic conditions. Uncollectible amounts are charged against the allowance account. The allowance for doubtful accounts is maintained against both current and long-term asset accounts. Allowance for doubtful accounts of $123$118 million and $95 million is included in the Consolidated Balance Sheets as of July 1,September 30, 2005 and December 31, 2004.
NOTE 9.10. Other Income — Net
Other Income — Net consists of the following:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in Millions) | | Quarters Ended | | Six Months Ended | | | Quarters Ended | | Nine Months Ended | |
| | July 1, | | June 25, | | July 1, | | June 25, | | | Sept. 30, | | Sept. 24, | | Sept. 30, | | Sept. 24, | |
| | 2005 | | 2004 | | 2005 | | 2004 | | | 2005 | | 2004 | | 2005 | | 2004 | |
Interest Income | | $ | 15 | | $ | 5 | | $ | 22 | | $ | 8 | | | $ | 7 | | $ | 5 | | $ | 30 | | $ | 13 | |
Income (Loss) from Real Estate and Resort Operations | | 24 | | 5 | | 16 | | | (2 | ) | |
Minority Interest | | | (7 | ) | | | (4 | ) | | | (10 | ) | | | (7 | ) | |
Income from Real Estate and Resort Operations | | | 10 | | 19 | | 26 | | 17 | |
Minority Interest Expense | | | | (4 | ) | | | (5 | ) | | | (14 | ) | | | (12 | ) |
Net Gain on Conrail Spin-off — After Tax | | | — | | 16 | | — | | 16 | |
Miscellaneous | | | (2 | ) | | | (1 | ) | | — | | 2 | | | | (2 | ) | | | (3 | ) | | | (3 | ) | | | (1 | ) |
| | | | | | | | | | | | | | | | | | |
Other Income — Net | | $ | 30 | | $ | 5 | | $ | 28 | | $ | 1 | | | $ | 11 | | $ | 32 | | $ | 39 | | $ | 33 | |
| | | | | | | | | | | | | | | | | | |
NOTE 11. Hurricane Katrina
In late August 2005, Hurricane Katrina caused extensive damage to Company assets on the Gulf Coast. The most significant damage is concentrated on CSXT’s approximately 100-mile route starting in New Orleans, LA and going east to Pascagoula, MS and includes damage to track infrastructure and bridges.
The Company incurred losses resulting from damage to the rail infrastructure, business interruption and other incremental expenses associated with storm damage. The Company expects that insurance over its self-insured retention of $25 million will be adequate to cover these losses. Subject to the foregoing deductible, the Company’s limits for insurance coverage are expected to exceed the storm losses, currently estimated to be approximately $250 million. Actual covered expenses from Hurricane Katrina could differ materially from current estimates. The Company has multiple applicable layers of insurance coverage and received its first insurance payment for Hurricane Katrina damage in October 2005. Further insurance recovery payments are expected to be paid as claims are incurred, submitted and the appropriate documentation becomes available for review by the Company’s insurers.
In the third quarter of 2005, the net book values of damaged assets as a result of Hurricane Katrina are currently estimated at $41 million and have been recognized as a loss within the Consolidated Income Statements. Accordingly, these damaged assets are no longer being depreciated, which resulted in an immaterial effect on depreciation expense for the quarter. Other incremental expenses incurred as a result of the storm amounted to $19 million for the third quarter. The Company recognized corresponding insurance recoveries of $55 million, which represents recovery of these losses less $5 million of the $25 million self-insured deductible, which has been allocated in proportion to the estimated insurance recoveries. The remaining self-insured deductible will be applied and recognized in the Company’s results of operations as expected gains from insurance recoveries relating to fixed asset losses and business interruption lost profits are recognized.
13
CSX CORPORATION AND SUBSIDIARIES
PART I: FINANCIAL INFORMATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 11. Hurricane Katrina, Continued
Materials, Supplies and Other expenses within the Consolidated Income Statements include losses and insurance recoveries for the quarter ended September 30, 2005 as follows:
(Dollars in Millions)
| | | | | | | | | | | | |
| | | | | | | | | | Net |
| | | | | | Insurance | | Loss |
| | Loss | | Recovery | | Recognized |
|
Fixed Asset Impairment | | $ | (41 | ) | | $ | 41 | | | $ | — | |
Incremental Business Expenses | | | (19 | ) | | | 14 | | | | (5 | ) |
|
Totals | | $ | (60 | ) | | $ | 55 | | | $ | (5 | ) |
|
While management expects losses above the self-insured deductible will be covered, certain insurance recoveries related to business interruption lost profits will be recognized in the Company’s results of operations as settlements are reached with the Company’s insurers. Also, the Company believes replacement value for damaged fixed assets may exceed book value, which could result in gain realization in accordance with FASB Interpretation No. 30, “Accounting for Involuntary Conversions of Nonmonetary Assets to Monetary Assets.” These gains could be material to results of operations in the quarters received.
NOTE 10.12. 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 long-term interest rate swap agreements on the following fixed rate notes:
(Dollars in Millions)
| | | | | | | | | |
| | | | | | | | | | Fixed Interest | |
Maturity Date | | Notional Amount | | Fixed Interest Rate | | | Notional Amount | | Rate | |
August 15, 2006 | | $ | 94 | | | 9.00 | % | |
May 1, 2007 | | 450 | | | 7.45 | % | | $ | 450 | | | 7.45 | % |
May 1, 2032 | | 150 | | | 8.30 | % | | 150 | | | 8.30 | % |
| | | | | | |
Total/Average | | $ | 694 | | | 7.84 | % | | $ | 600 | | | 7.66 | % |
| | |
Under these agreements, the CompanyCSX will pay variable interest based on LIBOR in exchange for a fixed rate, effectively transforming the notes to floating rate obligations. The interest rate swap agreements are designated and qualify as fair value hedges and the gain or loss on the derivative instrument, as well as the offsetting gain or loss on the fixed rate note attributable to the hedged risk, are recognized in current earnings during the period of change in fair values. Hedge effectiveness is measured at least quarterly based on the relative change in fair value of the derivative contract in comparison with changes over time in the 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’sCSX’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 $11$8 million and $26 million for the fair market value of the interest rate swap agreements at July 1,September 30, 2005 and December 31, 2004, 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 Statements. For the quarter and six months ended July 1, 2005, the Company reduced interest expense by approximately $3 million and $8 million, respectively, as a result of the interest rate swap agreements that were in place during each period. For the quarter and six-month period ended June 25, 2004, the Company reduced interest expense by approximately $8 million and $21 million, respectively. Fair value adjustments are non-cash transactions and, accordingly, have no cash impact on the Consolidated Cash Flow Statements.
In June 2005, the Company purchased $206 million in aggregate principal amount of its publicly-traded 9% Notes due 2006 (see Note 4. Debt and Credit Agreements), and settled an identical portion of the corresponding interest rate swap agreement. The partial settlement of this interest rate swap agreement resulted in no effect on results of operations for the quarter ended July 1, 2005.
The counterparties to the interest rate swap agreements expose the Company to credit loss in the event of non-performance. The Company does not anticipate non-performance by the counterparties.
14
CSX CORPORATION AND SUBSIDIARIES
PART I: FINANCIAL INFORMATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 10.12. Derivative Financial Instruments, Continued
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 Statements. For the quarter and nine months ended September 30, 2005, CSX reduced interest expense by approximately $3 million and $11 million, respectively, as a result of the interest rate swap agreements that were in place during each period. For the quarter and nine-month period ended September 24, 2004, CSX reduced interest expense by approximately $5 million and $26 million, respectively. Fair value adjustments are non-cash transactions and, accordingly, have no cash impact on the Consolidated Cash Flow Statements.
The counterparties to the interest rate swap agreements expose CSX to credit loss in the event of non-performance. CSX does not anticipate non-performance by the counterparties.
Fuel Hedging
In 2003, CSX began a program to hedge a portion of itsCSXT’s future locomotivediesel 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 itsCSXT’s estimated future fuel purchases.
Following is a summary of outstanding fuel swaps:
| | | | |
| | Sept. 30, |
| | 2005 |
Approximate Gallons Hedged (Millions) | | | 115 | |
Average Price Per Gallon | | $ | 0.83 | |
Swap Maturities | | October 2005 - July 2006 |
| | | | |
| | July 1, |
| | 2005 |
Approximate Gallons Hedged (Millions) | | 187 |
Average Price Per Gallon | | $0.81 |
Swap Maturities | | July 2005 — July 2006 |
| | | | | | | | |
| | 2005 | | | 2006 | |
| | |
Estimated % of Future Fuel Purchases Hedged at end of period | | | 43 | % | | | 9 | % |
| | | | | | | | | | | | | | | | |
| | 2005 | | 2006 |
| | Q4 | | Q1 | | Q2 | | Q3 |
Estimated % of Future Fuel Purchases Hedged at end of period | | | 37 | % | | | 25 | % | | | 11 | % | | | 1 | % |
The program limits fuel hedges to a 24-month duration and a maximum of 80% of CSX’sCSXT’s average monthly fuel purchased for any month within the 24-month period, and places the hedges among selected counterparties. Fuel hedging activity favorably impacted fuel expense for the quarter and sixnine months ended July 1,September 30, 2005 by $63$77 million and $114$191 million, respectively. Fuel hedging activity favorably impacted fuel expense for the quarter and sixnine months ended June 25,September 24, 2004 by $4 million.$13 million and $17 million, respectively. 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 Consolidated Balance Sheets with offsetting adjustments to Accumulated Other Comprehensive Loss, a component of Shareholders’ Equity. The fair value of fuel derivative instruments was $142 million and $118 million as of September 30, 2005 and December 31, 2004, respectively. Amounts are reclassified from Accumulated Other Comprehensive Loss as the underlying fuel that was hedged is consumed by rail operations. Fair value adjustments are non-cash transactions and, accordingly, have no cash impact on the Consolidated Cash Flow Statements. See Note 1. Basis of Presentation, for the impact of fuel hedging activity on Accumulated Other Comprehensive Loss.
The Company has temporarily suspended entering into new swaps in its fuel hedge program since the third quarter of 2004. The Company will continue to monitor and assess the current issues facing the global fuel marketplace to decide whether and when to resume hedging under the program.
The counterparties to the fuel hedge agreements expose the Company to credit loss in the event of non-performance. The Company does not anticipate non-performance by the counterparties.
15
CSX CORPORATION AND SUBSIDIARIES
PART I: FINANCIAL INFORMATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 12. Derivative Financial Instruments, Continued
CSX suspended entering into new swaps in its fuel hedge program since the third quarter of 2004. CSX will continue to monitor and assess the global fuel marketplace to decide if and when to resume hedging under the program.
The counterparties to the fuel hedge agreements expose CSX to credit loss in the event of non-performance. CSX does not anticipate non-performance by the counterparties.
NOTE 11.13. Casualty, Environmental and Other Reserves
Casualty, environmental and other reserves are provided for in the Consolidated Balance Sheets as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in Millions) | | July 1, 2005 | | December 31, 2004 | | | Sept. 30, 2005 | | Dec. 31, 2004 | |
| | Current | | Long-term | | Total | | Current | | Long-term | | Total | | | Current | | Long-term | | Total | | Current | | Long-term | | Total | |
Casualty and Other | | $ | 275 | | $ | 543 | | $ | 818 | | $ | 272 | | $ | 561 | | $ | 833 | | |
Casualty | | | $ | 228 | | $ | 494 | | $ | 722 | | $ | 230 | | $ | 475 | | $ | 705 | |
Separation | | 20 | | 114 | | 134 | | 20 | | 135 | | 155 | | | 19 | | 111 | | 130 | | 20 | | 135 | | 155 | |
Environmental | | 20 | | 40 | | 60 | | 20 | | 39 | | 59 | | | 20 | | 40 | | 60 | | 20 | | 40 | | 60 | |
Other | | | 45 | | 58 | | 103 | | 42 | | 85 | | 127 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Total | | $ | 315 | | $ | 697 | | $ | 1,012 | | $ | 312 | | $ | 735 | | $ | 1,047 | | | $ | 312 | | $ | 703 | | $ | 1,015 | | $ | 312 | | $ | 735 | | $ | 1,047 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Casualty Reserves
Casualty reserves represent accruals for the uninsured portion of personal injury and occupational injury claims. The majority of claims are related to CSXT unless otherwise noted.
Personal Injury
CSXCSXT retains an independent actuarial firm to assist management in assessing the value of CSX’sCSXT’s personal injury portfolio.claims and cases. An analysis is performed by the independent actuarial firm semi-annually.semi-annually and is reviewed by management. The methodology used by the actuary includes a development factor to reflect growth in the value of the Company’sCSXT’s personal injury claims. This methodology is based largely on CSX’sCSXT’s historical claims and settlement activity. Actual results may vary from estimates due to the type and severity of the injury, costs of medical treatments, and uncertainties surrounding the litigation process.in litigation. Reserves for personal injury claims are $401$420 million and $383 million at July 1,September 30, 2005 and December 31, 2004, respectively.
Occupational
Occupational claims include allegations of exposure to certain materials in the work place, such as asbestos, solvents and diesel fuel, or alleged physical injuries, such as carpal tunnel syndrome or hearing loss.
Reserves for asbestos related claims are $198$195 million and $212 million at July 1,September 30, 2005 and December 31, 2004, respectively. Reserves for other occupational related claims are $108$107 million and $110 million at July 1,September 30, 2005 and December 31, 2004, respectively.
The Company is party to a number of occupational claims by employees exposed to asbestos in the workplace. The heaviest exposure for CSX employees was due to work conducted in and around the use of steam locomotive engines that were phased out between the early 1950’s and late 1960’s. However, other types of exposures, including exposure from locomotive component parts and building materials, continued after 1967, until it was substantially eliminated by 1985.
16
CSX CORPORATION AND SUBSIDIARIES
PART I: FINANCIAL INFORMATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 11.13. Casualty, Environmental and Other Reserves, Continued
CSX engagedThe Company is party to a number of occupational claims by employees exposed to asbestos in the workplace. According to rail industry statistics, the heaviest exposure for employees was due to work conducted in and around the use of steam locomotive engines that were phased out between the early 1950’s and late 1960’s. However, other types of exposures, including exposure from locomotive component parts and building materials, continued until it was substantially eliminated by 1985.
The Company retains a third party specialist, who has extensive experience in performing asbestos and other occupational studies, to assist in assessing the unasserted liability exposure. The analysis is performed by the specialist semi-annually. The objective of the analysis is to determine the number of estimated incurred but not reported claims and the estimated average cost per claim to be received over the next seven years. Seven years was determined by management to be the time period in which probable claim filings and claim values could be estimated with more certainty.
The methodology used by the specialist includes an estimate of future anticipated claims based on the Company’s trends of average historical claim filing rates, future anticipated dismissal rates and settlement rates. CSX’sThe Company’s future liability for incurred but not reported claims is estimated by multiplying the future anticipated claims by the average settlement values.
In review of asbestos claims, the Company has observed that recent filing rates have declined. A trend in declining filing rates could result in a reduction of the reserve for asbestos related claims. Because the pace of asbestos claim filings have been inconsistent, the Company has not yet determined the decline to be a trend.
A summary of existing asbestos and other occupational claims activity is as follows:
| | | | | | | | | | | | | | | | |
| | Six Months Ended | | Twelve Months Ended | | | Nine Months Ended Sept. | | Twelve Months Ended | |
| | July 1, 2005 | | December 31, 2004 | | | 30, 2005 | | Dec. 31, 2004 | |
Asserted Claims: | | |
Open Claims — Beginning of Period | | 11,460 | | 13,478 | | | 11,461 | | 13,479 | |
New Claims Filed | | 432 | | 1,178 | | | 551 | | 1,178 | |
Claims Settled | | | (746 | ) | | | (2,758 | ) | |
Claims Resolved | | | | (973 | ) | | | (2,758 | ) |
Claims Dismissed | | | (304 | ) | | | (438 | ) | | | (350 | ) | | | (438 | ) |
| | | | | | | | | | |
Open Claims — End of Period | | 10,842 | | 11,460 | | | 10,689 | | 11,461 | |
| | | | | | | | | | |
Approximately 6,000 of the open claims at July 1,September 30, 2005 are asbestos claims against the Company’s previously owned international container-shipping business, Sea-Land.container shipping business. Because the Sea-Landthese claims are against multiple vessel owners, the Company’s reserves reflect its portion of those claims. The Company had approximately $11 million and $13 million reserved for those shipping business claims at September 30, 2005 and December 31, 2004, respectively. The remaining open claims have been asserted against CSXT. The Company had approximately $13 million reserved for the Sea-Land claims at July 1, 2005 and December 31, 2004.
The amounts recorded by CSXthe Company for theasbestos and other occupational liabilities are based upon currently known facts.information and judgements based upon that information. Projecting future events, such as the number of new claims to be filed each year, the average cost of disposing of claims, as well as the numerous uncertainties surrounding asbestos and other occupational litigation in the United States, could cause the actual costs to be higher or lower than projected. Recent asbestos filing rates have declined. Continued declining filing rates could become a trend that would result in a reduction of the reserve for asbestos related claims. Because the pace of asbestos claim filings has been inconsistent, the Company has not yet determined the decline to be a trend.
While the final outcome of casualty-related matters cannot be predicted with certainty, considering among other thingsitems the meritorious legal defenses available and the liabilities that have been recorded, it is the opinion of CSX management that none of these items, when finally resolved, will have a materiallymaterial adverse effect on the Company’s results of operations, financial position or liquidity. However, shouldShould a number of these items occur in the same period, ithowever, they could have a materially adverse effect on the results of operations in a particular quarter or fiscal year.
17
CSX CORPORATION AND SUBSIDIARIES
PART I: FINANCIAL INFORMATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 11.13. Casualty, Environmental and Other Reserves, Continued
Separation Liability
Separation liabilities at July 1,September 30, 2005 and December 31, 2004 provide for the estimated costs of implementing workforce reductions, improvements in productivity and other cost reductions at the Company’s major transportation units since 1991. These liabilities are expected to be paid out over the next 15 to 20 years from general corporate funds.
Environmental Reserves
CSXThe Company is a party to various proceedings, including administrative and judicial proceedings, involving private parties and regulatory agencies related to environmental issues. CSXThe Company has been identified as a potentially responsible party (“PRP”) at approximately 262 environmentally impaired sites, many of which are, or may be, subject to remedial action under the Federal Comprehensive Environmental Response, Compensation and Liability Act of 1980 (“CERCLA”), also known as the Superfund law, or similar state statutes. A number of these proceedings are based on allegations that CSX,CSXT, or its railroad predecessors, sent hazardous substances to the facilities in question for disposal.
In addition, some of CSX’sthe Company’s land holdings are and have been used for industrial or transportation-related purposes or leased to commercial or industrial companies whose activities may have resulted in releases of various regulated materials onto the property. Therefore, CSXthe Company is subject to environmental cleanup and enforcement actions under the Superfund law, as well as similar state laws that may impose joint and several liability for cleanup and enforcement costs on current and former owners and operators of a site without regard to fault or the legality of the original conduct, which could be substantial.
At least once a quarter, CSXthe Company reviews its role with respect to each site identified. Based on the review process, CSXthe Company has recorded reserves to cover estimated contingent future environmental costs with respect to such sites. Environmental costs are charged to expense when they relate to an existing condition caused by past operations and do not contribute to current or future revenue generation. The recorded liabilities for estimated future environmental costs at July 1, 2005 and December 31, 2004 were $60 million and $59 million, respectively. These liabilities, which are undiscounted and include amounts representing CSX’sthe Company’s estimate of unasserted claims, which CSXthe Company 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 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.
Other
Other claims include amounts reserved for longshoremen disability claims, freight loss and damage, and other related injuries and losses.
18
CSX CORPORATION AND SUBSIDIARIES
PART I: FINANCIAL INFORMATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 12.14. Commitments and Contingencies
Purchase Commitments
The CompanyCSXT has a commitment under a long-term maintenance program forthat currently covers approximately 40% of CSX’sCSXT’s fleet of locomotives. The agreement expiresis based on the maintenance cycle for each locomotive and is currently predicted to expire in 2026 and the2026. The costs expected to be incurred underthrough the duration of the agreement approximate $5.8total approximately $6.8 billion. The long-term maintenance program is intended to provide CSX access to efficient, high-quality locomotive maintenance servicesCSXT may terminate the agreement at fixed price levels throughits convenience though such action might trigger certain liquidated damages provisions that could result in damages adjusted over the predicted term of the program.agreement. Under the program, CSXCSXT paid $43 million and $84$127 million for the quarter and sixnine months ending July 1,September 30, 2005, respectively. The CompanyCSXT paid $38$39 million and $75$114 million during the quarter and sixnine months ended June 25,September 24, 2004, respectively.
Insurance
The Company maintains numerous insurance programs, most notably for third party casualty liability and for Company property damage and business interruption property insurance with substantial limits; a specific amount of risk ($25 million per occurrence) is retained by the Company on both programs. For information on insurance issues resulting from the effects of Hurricane Katrina on the Company’s operations and assets, see Note 11. Hurricane Katrina.
Guarantees
CSX and its subsidiaries are contingently liable individually and jointly with others as guarantors of approximately $351 million in obligations principally relating to leased equipment, joint ventures and joint facilities used by the Company in its business operations. Utilizing the Company’s guarantee for these obligations allows the obligor to take advantage of lower interest rates and obtain other favorable terms. Guarantees are contingent commitments issued by the Company that could require CSX or one of its affiliates to make payment to or to perform certain actions for the guaranteed party based on another entity’s failure to perform. As of September 30, 2005, the Company’s three main guarantees are as follows:
| 1. | | Guarantee of approximately $245 million relating to leases assumed as part of the conveyance of its interest in a former subsidiary, CSX Lines, subsequently renamed Horizon Lines LLC (“Horizon”). CSX believes Horizon will fulfill its contractual commitments with respect to such leases, and CSX will have no further liabilities for those obligations. |
|
| 2. | | Guarantee of approximately $87 million of obligations of a former subsidiary, CSX Energy, in connection with a sale-leaseback transaction. CSX is, in turn, indemnified by several subsequent owners of the subsidiary against payments made with respect to this guarantee. CSX management does not expect that CSX will be required to make any payments under this guarantee for which CSX will not be reimbursed. |
|
| 3. | | Guarantee of approximately $13 million of lease commitments assumed by A.P. Moller-Maersk (“Maersk”) for which CSX is contingently liable. CSX believes Maersk will fulfill its contractual commitments with respect to such lease, and CSX will have no further liabilities for those obligations. |
The maximum amount of future payments CSX could be required to make under these guarantees is the amount of the guarantees themselves.
1819
CSX CORPORATION AND SUBSIDIARIES
PART I: FINANCIAL INFORMATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 12. Commitments and Contingencies, Continued
STB Proceeding
In 2001 Duke Energy Corporation (“Duke”) filed a complaint before the STB alleging that certain CSXT common carrier coal rates were unreasonably high. In June 2005, CSXT and Duke reached a settlement agreement pursuant to which Duke dismissed the STB proceedings with prejudice. Consequently, the Company reversed a $17 million reserve which increased coal, coke and iron ore revenue in the second quarter of 2005. Duke and CSXT have entered into a transportation contract establishing commercial terms for the future transportation of coal to Duke power plants served by CSXT.
Insurance
The Company maintains numerous insurance programs, most notably for third party casualty liability and the CSX property damage and business interruption property insurance with substantial limits; a specific amount of risk ($25 million per occurrence) is retained by the Company on both programs.
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 the Company in its business operations. Utilizing the Company’s guarantee for these obligations allows the obligor to take advantage of lower interest rates and obtain other favorable terms. Guarantees are contingent commitments issued by the Company that could require CSX or one of its affiliates to make payment to or to perform certain actions for the guaranteed party based on another entity’s failure to perform. As of July 1, 2005, the Company’s three main guarantees are as follows:
| 1. | | Guarantees of approximately $249 million relating to leases assumed as part of the conveyance of its interest in a former subsidiary, CSX Lines, (subsequently renamed to Horizon Lines LLC “Horizon”). CSX guarantees approximately $249 million relating to leases assumed as part of this conveyance. CSX believes Horizon will fulfill its contractual commitments with respect to such leases, and CSX will have no further liabilities for those obligations. |
|
| 2. | | Guarantee of approximately $87 million of obligations of a former subsidiary, CSX Energy, in connection with a sale-leaseback transaction. The Company is, in turn, indemnified by several subsequent owners of the subsidiary against payments made with respect to this guarantee. CSX management does not expect that the Company will be required to make any payments under this guarantee for which CSX will not be reimbursed. |
|
| 3. | | Guarantee of approximately $13 million of lease commitments assumed by A.P. Moller-Maersk (“Maersk”) for which the Company is contingently liable. CSX believes Maersk will fulfill its contractual commitments with respect to such lease, and CSX will have no further liabilities for those obligations. During the second quarter of 2005, Maersk assumed and the Company was consequently released from approximately $301 million of its obligation for other lease commitments. |
The maximum amount of future payments the Company could be required to make under these guarantees is the amount of the guarantees themselves.
19
CSX CORPORATION AND SUBSIDIARIES
PART I: FINANCIAL INFORMATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 12.14. Commitments and Contingencies, Continued
Other Legal Proceedings
CSXThe Company is involved in routine litigation incidental to its business and is a party to a number of legal actions and claims, various governmental proceedings and private civil lawsuits, including those related to environmental matters, Federal Employers’ Liability Act claims by employees, other personal injury claims, and disputes and complaints involving certain transportation rates and charges. Some of the legal proceedings include claims for compensatory as well as punitive damages, and others purport to be class actions. While the final outcome of these matters cannot be predicted with certainty, considering among other things, the meritorious legal defenses available and liabilities that have been recorded along with applicable insurance, it is the opinion of CSX management that none of these items will have a materially adverse effect on the results of operations, financial position or liquidity of CSX. However, anthe Company. An unexpected adverse resolution of one or more of these items, however, could have a materially adverse effect on the results of operations in a particular quarter or fiscal year. 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 quarters received.
20
CSX CORPORATION AND SUBSIDIARIES
PART I: FINANCIAL INFORMATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 13.15. Business Segments
The Company operates primarily in two business segments: rail and intermodal. The rail segment provides rail freight transportation over a network of more thanapproximately 22,000 route miles in 23 states, the District of Columbia and two Canadian provinces. The intermodal segment provides integrated rail and truck transportation services and operates a network of dedicated intermodal facilities across North America. The Company’s segments are strategic business units that offer different services and are managed separately. The rail and intermodal segments are also 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. The accounting policies of the segments are the same as those described in Nature of Operations and Significant Accounting Policies (Note 1) in the CSX 2004 Annual Report on Form 10-K.
Prior toConsolidated operating income includes the conveyanceresults of operations of Surface Transportation and other operating income. Other operating income includes the gain amortization on the 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, which primarily represents the pretax gain amortization of approximately $127 million as a result of the conveyance, being recognized over the 12-year sublease term. The Other column also includes net sublease income from assets formerly included in the Company’s Marine Services segment, and other items.
The International Terminals business segment has been reclassified to Discontinued Operations. (SeeOperations (see Note 3.4. Discontinued Operations.)Operations).
Business segment information for the quarters ended July 1,September 30, 2005 and June 25,September 24, 2004 is as follows:
(Dollars in Millions)
| | Surface Transportation | | | | | | | |
| | Rail | | | Intermodal | | | Total | | | Other | | | Total | |
| | | | | | | | |
Quarter Ended July 1, 2005 | | | | | | | | | | | | | | | | | | | | |
Revenues from External Customers | | $ | 1,836 | | | $ | 330 | | | $ | 2,166 | | | $ | — | | | $ | 2,166 | |
Segment Operating Income | | | 367 | | | | 55 | | | | 422 | | | | 9 | | | | 431 | |
Assets | | | 20,401 | | | | 797 | | | | 21,198 | | | | — | | | | 21,198 | |
| | | | | | | | | | | | | | | | | | | | |
Quarter Ended June 25, 2004 | | | | | | | | | | | | | | | | | | | | |
Revenues from External Customers | | $ | 1,672 | | | $ | 325 | | | $ | 1,997 | | | $ | — | | | $ | 1,997 | |
Segment Operating Income | | | 249 | | | | 31 | | | | 280 | | | | 2 | | | | 282 | |
Assets | | | 13,119 | | | | 623 | | | | 13,742 | | | | 1,045 | | | | 14,787 | |
| | | | | | | | | | | | | | | | | | | | |
Six Months Ended July 1, 2005 | | | | | | | | | | | | | | | | | | | | |
Revenues from External Customers | | $ | 3,615 | | | $ | 659 | | | $ | 4,274 | | | $ | — | | | $ | 4,274 | |
Segment Operating Income | | | 666 | | | | 107 | | | | 773 | | | | 12 | | | | 785 | |
Assets | | | 20,401 | | | | 797 | | | | 21,198 | | | | — | | | | 21,198 | |
| | | | | | | | | | | | | | | | | | | | |
Six Months Ended June 25, 2004 | | | | | | | | | | | | | | | | | | | | |
Revenues from External Customers | | $ | 3,277 | | | $ | 640 | | | $ | 3,917 | | | $ | — | | | $ | 3,917 | |
Segment Operating Income | | | 381 | | | | 50 | | | | 431 | | | | 3 | | | | 434 | |
Assets | | | 13,119 | | | | 623 | | | | 13,742 | | | | 1,045 | | | | 14,787 | |
| | | | | | | | | | | | | | | | | | | | |
| | Surface Transportation | | | | |
| | Rail | | Intermodal | | Total | | Other | | Total |
Quarter Ended September 30, 2005 | | | | | | | | | | | | | | | | | | | | |
Revenues from External Customers | | $ | 1,788 | | | $ | 337 | | | $ | 2,125 | | | $ | — | | | $ | 2,125 | |
Segment Operating Income | | | 293 | | | | 68 | | | | 361 | | | | (8 | ) | | | 353 | |
| | | | | | | | | | | | | | | | | | | | |
Quarter Ended September 24, 2004 | | | | | | | | | | | | | | | | | | | | |
Revenues from External Customers | | $ | 1,616 | | | $ | 327 | | | $ | 1,943 | | | $ | — | | | $ | 1,943 | |
Segment Operating Income | | | 216 | | | | 31 | | | | 247 | | | | 3 | | | | 250 | |
| | | | | | | | | | | | | | | | | | | | |
Nine Months Ended September 30, 2005 | | | | | | | | | | | | | | | | | | | | |
Revenues from External Customers | | $ | 5,403 | | | $ | 996 | | | $ | 6,399 | | | $ | — | | | $ | 6,399 | |
Segment Operating Income | | | 959 | | | | 175 | | | | 1,134 | | | | 4 | | | | 1,138 | |
Assets | | | 20,719 | | | | 861 | | | | 21,580 | | | | — | | | | 21,580 | |
| | | | | | | | | | | | | | | | | | | | |
Nine Months Ended September 24, 2004 | | | | | | | | | | | | | | | | | | | | |
Revenues from External Customers | | $ | 4,893 | | | $ | 967 | | | $ | 5,860 | | | $ | — | | | $ | 5,860 | |
Segment Operating Income | | | 597 | | | | 81 | | | | 678 | | | | 6 | | | | 684 | |
Assets | | | 19,929 | | | | 651 | | | | 20,580 | | | | 1,065 | | | | 21,645 | |
|
21
CSX CORPORATION AND SUBSIDIARIES
PART I: FINANCIAL INFORMATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 13.15. Business Segments, Continued
A reconciliation of the totals reported for the business segments to the applicable line items in the consolidated financial statements is as follows:
| | | | | | | | |
|
| | Quarter Ended | |
| | Sept. 30, | | | Sept. 24, | |
| | 2005 | | | 2004 | |
Assets: | | | | | | | | |
Assets for Business Segments | | $ | 21,580 | | | $ | 21,645 | |
Investment in Conrail | | | 603 | | | | 567 | |
Elimination of Intersegment Payables (Receivables) | | | (581 | ) | | | (499 | ) |
Non-segment Assets | | | 2,419 | | | | 2,652 | |
| | | | | | |
Total Consolidated Assets | | $ | 24,021 | | | $ | 24,365 | |
| | | | | | |
|
| | Quarter Ended | |
| | July 1, | | | June 25, | |
| | 2005 | | | 2004 | |
| | | | | | | | |
Assets: | | | | | | | | |
Assets for Business Segments | | $ | 21,223 | | | $ | 14,787 | |
Investment in Conrail | | | 583 | | | | 4,691 | |
Elimination of Intersegment Payables (Receivables) | | | (622 | ) | | | 131 | |
Non-segment Assets | | | 2,566 | | | | 2,843 | |
| | | | | | |
Total Consolidated Assets | | $ | 23,750 | | | $ | 22,452 | |
| | | | | | |
NOTE 14.16. Employee Benefit Plans
The Company sponsors defined benefit pension plans principally for salaried, non-contractmanagement personnel. The plans provide eligible employees with retirement benefits based predominantly on years of service and compensation rates near retirement. Employees hired after December 31, 2002 are covered by a cash balance plan. The cash balance plan provides benefits by utilizing interest and pay credits based upon age, service and compensation.
In addition to the defined benefit pension plans, the CompanyCSX sponsors one post-retirement medical plan and one life insurance plan that provide benefits to full-time, salaried, non-contractmanagement employees hired prior to January 2003,December 31, 2002, upon their retirement if certain eligibility requirements are met. The postretirementpost-retirement medical plans areplan is contributory (partially funded by retirees), with retiree contributions adjusted annually. The life insurance plan is non-contributory.
22
CSX CORPORATION AND SUBSIDIARIES
PART I: FINANCIAL INFORMATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 14.16. Employee Benefit Plans, Continued
The following table presents components of net periodic benefit cost:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Quarters Ended | | | Quarters Ended |
(Dollars in Millions) | | Pension Benefits | | Other Benefits | | | Pension Benefits | | Other Benefits |
| | July 1, 2005 | | June 25, 2004 | | July 1, 2005 | | June 25, 2004 | | | Sept. 30, 2005 | | Sept. 24, 2004 | | Sept. 30, 2005 | | Sept. 24, 2004 |
| | | |
Expense/(Income) Components | | |
Service Cost | | $ | 8 | | $ | 9 | | $ | 2 | | $ | 2 | | | $ | 8 | | $ | 9 | | $ | 2 | | $ | 2 | |
Interest Cost | | 27 | | 28 | | 6 | | 6 | | | 27 | | 28 | | 6 | | 6 | |
Expected Return on Plan Assets | | | (30 | ) | | | (33 | ) | | — | | — | | | | (30 | ) | | | (33 | ) | | N/A | | N/A | |
Amortization of Prior Service Cost | | 1 | | 1 | | | (1 | ) | | | (1 | ) | | 1 | | 1 | | | (1 | ) | | | (1 | ) |
Amortization of Net Loss | | 6 | | 4 | | 3 | | 4 | | | 6 | | 4 | | 3 | | 4 | |
| | | | | | | | | | | |
| |
Net Periodic Benefit Cost | | $ | 12 | | $ | 9 | | $ | 10 | | $ | 11 | | | $ | 12 | | $ | 9 | | $ | 10 | | $ | 11 | |
| | | | | | | | | | | |
SFAS 88 Curtailment Charges | | — | | — | | — | | 3 | | |
| | |
Net Periodic Benefit Cost, Including Termination Benefits | | $ | 12 | | $ | 9 | | $ | 10 | | $ | 14 | | |
| | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended | | | Nine Months Ended |
(Dollars in Millions) | | Pension Benefits | | Other Benefits | | | Pension Benefits | | Other Benefits |
| | July 1, 2005 | | June 25, 2004 | | July 1, 2005 | | June 25, 2004 | | | Sept. 30, 2005 | | Sept. 24, 2004 | | Sept. 30, 2005 | | Sept. 24, 2004 |
| | | |
Expense/(Income) Components | | |
Service Cost | | $ | 16 | | $ | 20 | | $ | 4 | | $ | 4 | | | $ | 24 | | $ | 29 | | $ | 6 | | $ | 6 | |
Interest Cost | | 54 | | 56 | | 12 | | 12 | | | 81 | | 84 | | 18 | | 18 | |
Expected Return on Plan Assets | | | (60 | ) | | | (67 | ) | | — | | — | | | | (90 | ) | | | (100 | ) | | N/A | | N/A | |
Amortization of Prior Service Cost | | 2 | | 2 | | | (2 | ) | | | (2 | ) | | 3 | | 3 | | | (3 | ) | | | (3 | ) |
Amortization of Net Loss | | 12 | | 7 | | 6 | | 8 | | | 18 | | 11 | | 9 | | 12 | |
| | | | | | | | | | | |
| |
Net Periodic Benefit Cost | | $ | 24 | | $ | 18 | | $ | 20 | | $ | 22 | | | $ | 36 | | $ | 27 | | $ | 30 | | $ | 33 | |
| | | | | | | | | | | |
SFAS 88 Curtailment Charges | | — | | 6 | | — | | 18 | | | — | | 6 | | — | | 18 | |
| | |
Net Periodic Benefit Cost, Including Termination Benefits | | $ | 24 | | $ | 24 | | $ | 20 | | $ | 40 | | | $ | 36 | | $ | 33 | | $ | 30 | | $ | 51 | |
| | | | | | | | | | | |
The Company expects to contribute $2 million to its pension plans in 2005. As of July 1,September 30, 2005, CSX has contributed approximately $1$2 million to its pension plans.
Due to the termination of employees under the management restructuring plan (see Note 15.17. Management Restructuring), a curtailment occurred in the Company’s defined benefit pension plans and postretirementpost-retirement medical plan.plan in 2004. The estimated cost of the curtailments of $24 million was included in the management restructuring charge for the sixnine months ended June 25,September 24, 2004.
The Company is required to estimate and record the effects of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (“Act”). The Company believes its medical plan’s prescription drug benefit will qualify as actuarially equivalent to Medicare Part D based upon a review by the plan’s health and welfare actuary of the plan’s prescription drug benefit compared with the prescription drug benefit that would be paid under Medicare Part D beginning in 2006.
23
CSX CORPORATION AND SUBSIDIARIES
PART I: FINANCIAL INFORMATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 15.17. Management Restructuring
During 2004, Surface Transportationthe Company incurred restructuring charges related to management restructuring plans to streamline the structure, eliminate organizational layers and realign certain functions. For the quarter and sixnine months ended June 25,September 24, 2004, the Company recorded expense of $15$3 million and $68$71 million, respectively, for separation expense, pension and postretirement benefit curtailment charges, stock compensation expense and other related expenses.
NOTE 16.18. Summarized Consolidating Financial Data
During 1987, a subsidiary of the CompanyCSX entered into agreements to sell and lease back, by charter, three new U.S.-built, U.S.-flag,U.S.–built, U.S.–flag, D-7 class container ships. CSX has guaranteedguarantees certain obligations which, along with the container ships, serve as collateral for debt securities registered with the Securities and Exchange Commission (“SEC”). Another CSXCompany entity became the obligor in 2003.2003, while CSX’s guarantee obligations continued. In accordance with SEC disclosure requirements, the following table presents consolidating summarized financial information for the parent and obligor follows.Company. Certain prior year amounts have been reclassified to conform to the current presentation.
Consolidating Income Statement
(Dollars in Millions) | | | | | | | | | | | | | | | | | | | | |
(Dollars in Millions) | |
| | CSX | | | | | | | | | | | | | |
| | Corporation | | | Vessel Leasing | | | Other | | | Eliminations | | | Consolidated | |
Quarter Ended September 30, 2005 | | | | | | | | | | | | | | | | | | | | |
Operating Revenue | | $ | — | | | $ | — | | | $ | 2,125 | | | $ | — | | | $ | 2,125 | |
Operating Expense | | | (19 | ) | | | — | | | | 1,791 | | | | — | | | | 1,772 | |
| | | | | | | | | | | | | | | |
Operating Income | | | 19 | | | | — | | | | 334 | | | | — | | | | 353 | |
| | | | | | | | | | | | | | | | | | | | |
Equity in Earnings of Subsidiaries | | | 272 | | | | — | | | | — | | | | (272 | ) | | | — | |
Other Income — Net | | | (40 | ) | | | 1 | | | | 112 | | | | (62 | ) | | | 11 | |
Debt Repurchase Expense | | | — | | | | — | | | | — | | | | — | | | | — | |
Interest Expense | | | (106 | ) | | | — | | | | (56 | ) | | | 62 | | | | (100 | ) |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Earnings (Loss) from Continuing Operations before Income Taxes | | | 145 | | | | 1 | | | | 390 | | | | (272 | ) | | | 264 | |
Income Tax (Benefit) Expense | | | (19 | ) | | | — | | | | 119 | | | | — | | | | 100 | |
| | | | | | | | | | | | | | | |
Net Earnings (Loss) | | $ | 164 | | | $ | 1 | | | $ | 271 | | | $ | (272 | ) | | $ | 164 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | CSX | | | | | | | | | | | | | |
| | Corporation | | | Vessel Leasing | | | Other | | | Eliminations | | | Consolidated | |
Quarter Ended September 24, 2004 | | | | | | | | | | | | | | | | | | | | |
Operating Revenue | | $ | — | | | $ | — | | | $ | 1,943 | | | $ | — | | | $ | 1,943 | |
Operating Expense | | | (39 | ) | | | — | | | | 1,732 | | | | — | | | | 1,693 | |
| | | | | | | | | | | | | | | |
Operating Income | | | 39 | | | | — | | | | 211 | | | | — | | | | 250 | |
| | | | | | | | | | | | | | | | | | | | |
Equity in Earnings of Subsidiaries | | | 166 | | | | — | | | | — | | | | (166 | ) | | | — | |
Other Income — Net | | | (13 | ) | | | 1 | | | | 50 | | | | (6 | ) | | | 32 | |
Interest Expense | | | (88 | ) | | | — | | | | (17 | ) | | | (1 | ) | | | (106 | ) |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Earnings (Loss) from Continuing Operations before Income Taxes | | | 104 | | | | 1 | | | | 244 | | | | (173 | ) | | | 176 | |
Income Tax (Benefit) Expense | | | (19 | ) | | | — | | | | 81 | | | | — | | | | 62 | |
| | | | | | | | | | | | | | | |
Earnings from Continuing Operations | | | 123 | | | | 1 | | | | 163 | | | | (173 | ) | | | 114 | |
Discontinued Operations — Net of Tax | | | — | | | | — | | | | 9 | | | | — | | | | 9 | |
| | | | | | | | | | | | | | | |
Net Earnings (Loss) | | $ | 123 | | | $ | 1 | | | $ | 172 | | | $ | (173 | ) | | $ | 123 | |
| | | | | | | | | | | | | | | |
| | CSX Corporation | | | CSX Vessel Leasing | | | Other | | | Eliminations | | | Consolidated | |
Quarter Ended July 1, 2005 | | | | | | | | | | | | | | | | | | | | |
Operating Revenue | | $ | — | | | $ | — | | | $ | 2,166 | | | $ | — | | | $ | 2,166 | |
Operating Expense | | | (26 | ) | | | — | | | | 1,761 | | | | — | | | | 1,735 | |
| | | | | | | | | | | | | | | |
Operating Income | | | 26 | | | | — | | | | 405 | | | | — | | | | 431 | |
| | | | | | | | | | | | | | | | | | | | |
Equity in Earnings of Subsidiaries | | | 272 | | | | — | | | | — | | | | (272 | ) | | | — | |
Other Income — Net | | | 89 | | | | 1 | | | | (4 | ) | | | (56 | ) | | | 30 | |
Debt Repurchase Expense | | | (192 | ) | | | — | | | | — | | | | — | | | | (192 | ) |
Interest Expense | | | (117 | ) | | | — | | | | (49 | ) | | | 56 | | | | (110 | ) |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Earnings (Loss) from Continuing Operations before Income Taxes | | | 78 | | | | 1 | | | | 352 | | | | (272 | ) | | | 159 | |
Income Tax (Benefit) Expense | | | (97 | ) | | | — | | | | 91 | | | | — | | | | (6 | ) |
| | | | | | | | | | | | | | | |
Net Earnings (Loss) | | $ | 175 | | | $ | 1 | | | $ | 261 | | | $ | (272 | ) | | $ | 165 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | CSX Corporation | | | CSX Vessel Leasing | | | Other | | | Eliminations | | | Consolidated | |
Quarter Ended June 25, 2004 | | | | | | | | | | | | | | | | | | | | |
Operating Revenue | | $ | — | | | $ | — | | | $ | 1,997 | | | $ | — | | | $ | 1,997 | |
Operating Expense | | | (38 | ) | | | — | | | | 1,753 | | | | — | | | | 1,715 | |
| | | | | | | | | | | | | | | |
Operating Income | | | 38 | | | | — | | | | 244 | | | | — | | | | 282 | |
| | | | | | | | | | | | | | | | | | | | |
Equity in Earnings of Subsidiaries | | | 169 | | | | — | | | | — | | | | (169 | ) | | | — | |
Other Income — Net | | | (8 | ) | | | 2 | | | | 22 | | | | (11 | ) | | | 5 | |
Interest Expense | | | (101 | ) | | | — | | | | (16 | ) | | | 8 | | | | (109 | ) |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Earnings (Loss) from Continuing Operations before Income Taxes | | | 98 | | | | 2 | | | | 250 | | | | (172 | ) | | | 178 | |
Income Tax (Benefit) Expense | | | (21 | ) | | | — | | | | 81 | | | | — | | | | 60 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Earnings from Continuing Operations | | | 119 | | | | 2 | | | | 169 | | | | (172 | ) | | | 118 | |
Discontinued Operations — Net of Tax | | | — | | | | — | | | | 1 | | | | — | | | | 1 | |
| | | | | | | | | | | | | | | |
Net Earnings (Loss) | | $ | 119 | | | $ | 2 | | | $ | 170 | | | $ | (172 | ) | | $ | 119 | |
| | | | | | | | | | | | | | | |
24
CSX CORPORATION AND SUBSIDIARIES
PART I: FINANCIAL INFORMATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 16.18. Summarized Consolidating Financial Data, Continued
Consolidating Income Statement
(Dollars in Millions) | | | | | | | | | | | | | | | | | | | | |
(Dollars in Millions) | |
| | CSX | | | Vessel | | | | | | | | | | |
| | Corporation | | | Leasing | | | Other | | | Eliminations | | | Consolidated | |
Nine Months Ended September 30, 2005 | | | | | | | | | | | | | | | | | | | | |
Operating Revenue | | $ | — | | | $ | — | | | $ | 6,399 | | | $ | — | | | $ | 6,399 | |
Operating Expense | | | (94 | ) | | | — | | | | 5,355 | | | | — | | | | 5,261 | |
| | | | | | | | | | | | | | | |
Operating Income | | | 94 | | | | — | | | | 1,044 | | | | — | | | | 1,138 | |
| | | | | | | | | | | | | | | | | | | | |
Equity in Earnings of Subsidiaries | | | 686 | | | | — | | | | — | | | | (686 | ) | | | — | |
Other Income — Net | | | 91 | | | | 3 | | | | 83 | | | | (138 | ) | | | 39 | |
Debt Repurchase Expense | | | (192 | ) | | | — | | | | — | | | | — | | | | (192 | ) |
Interest Expense | | | (317 | ) | | | — | | | | (145 | ) | | | 138 | | | | (324 | ) |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Earnings (Loss) from Continuing Operations before Income Taxes | | | 362 | | | | 3 | | | | 982 | | | | (686 | ) | | | 661 | |
Income Tax (Benefit) Expense | | | (118 | ) | | | — | | | | 296 | | | | — | | | | 178 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Earnings from Continuing Operations | | | 480 | | | | 3 | | | | 686 | | | | (686 | ) | | | 483 | |
Discontinued Operations — Net of Tax | | | 428 | | | | — | | | | (3 | ) | | | — | | | | 425 | |
| | | | | | | | | | | | | | | |
Net Earnings (Loss) | | $ | 908 | | | $ | 3 | | | $ | 683 | | | $ | (686 | ) | | $ | 908 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | CSX | | | Vessel | | | | | | | | | | |
| | Corporation | | | Leasing | | | Other | | | Eliminations | | | Consolidated | |
Nine Months Ended September 24, 2004 | | | | | | | | | | | | | | | | | | | | |
Operating Revenue | | $ | — | | | $ | — | | | $ | 5,860 | | | $ | — | | | $ | 5,860 | |
Operating Expense | | | (103 | ) | | | — | | | | 5,279 | | | | — | | | | 5,176 | |
| | | | | | | | | | | | | | | |
Operating Income | | | 103 | | | | — | | | | 581 | | | | — | | | | 684 | |
| | | | | | | | | | | | | | | | | | | | |
Equity in Earnings of Subsidiaries | | | 420 | | | | — | | | | — | | | | (420 | ) | | | — | |
Other Income — Net | | | (32 | ) | | | 3 | | | | 86 | | | | (24 | ) | | | 33 | |
Interest Expense | | | (285 | ) | | | — | | | | (52 | ) | | | 14 | | | | (323 | ) |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Earnings (Loss) from Continuing Operations before Income Taxes | | | 206 | | | | 3 | | | | 615 | | | | (430 | ) | | | 394 | |
Income Tax (Benefit) Expense | | | (66 | ) | | | — | | | | 201 | | | | — | | | | 135 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Earnings from Continuing Operations | | | 272 | | | | 3 | | | | 414 | | | | (430 | ) | | | 259 | |
Discontinued Operations — Net of Tax | | | — | | | | — | | | | 13 | | | | — | | | | 13 | |
| | | | | | | | | | | | | | | |
Net Earnings (Loss) | | $ | 272 | | | $ | 3 | | | $ | 427 | | | $ | (430 | ) | | $ | 272 | |
| | | | | | | | | | | | | | | |
| | CSX Corporation | | | CSX Vessel Leasing | | | Other | | | Eliminations | | | Consolidated | |
Six Months Ended July 1, 2005 | | | | | | | | | | | | | | | | | | | | |
Operating Revenue | | $ | — | | | $ | — | | | $ | 4,274 | | | $ | — | | | $ | 4,274 | |
Operating Expense | | | (74 | ) | | | — | | | | 3,563 | | | | — | | | | 3,489 | |
| | | | | | | | | | | | | | | |
Operating Income | | | 74 | | | | — | | | | 711 | | | | — | | | | 785 | |
| | | | | | | | | | | | | | | | | | | | |
Equity in Earnings of Subsidiaries | | | 414 | | | | — | | | | — | | | | (414 | ) | | | — | |
Other Income — Net | | | 90 | | | | 2 | | | | 13 | | | | (77 | ) | | | 28 | |
Debt Repurchase Expense | | | (192 | ) | | | — | | | | — | | | | — | | | | (192 | ) |
Interest Expense | | | (210 | ) | | | — | | | | (91 | ) | | | 77 | | | | (224 | ) |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Earnings (Loss) from Continuing Operations before Income Taxes | | | 176 | | | | 2 | | | | 633 | | | | (414 | ) | | | 397 | |
Income Tax (Benefit) Expense | | | (110 | ) | | | — | | | | 188 | | | | — | | | | 78 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Earnings from Continuing Operations | | | 286 | | | | 2 | | | | 445 | | | | (414 | ) | | | 319 | |
Discontinued Operations — Net of Tax | | | 428 | | | | — | | | | (3 | ) | | | — | | | | 425 | |
| | | | | | | | | | | | | | | |
Net Earnings (Loss) | | $ | 714 | | | $ | 2 | | | $ | 442 | | | $ | (414 | ) | | $ | 744 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | CSX Corporation | | | CSX Vessel Leasing | | | Other | | | Eliminations | | | Consolidated | |
Six Months Ended June 25, 2004 | | | | | | | | | | | | | | | | | | | | |
Operating Revenue | | $ | — | | | $ | — | | | $ | 3,917 | | | $ | — | | | $ | 3,917 | |
Operating Expense | | | (61 | ) | | | — | | | | 3,544 | | | | — | | | | 3,483 | |
| | | | | | | | | | | | | | | |
Operating Income | | | 61 | | | | — | | | | 373 | | | | — | | | | 434 | |
| | | | | | | | | | | | | | | | | | | | |
Equity in Earnings of Subsidiaries | | | 257 | | | | — | | | | — | | | | (257 | ) | | | — | |
Other Income — Net | | | (18 | ) | | | 2 | | | | 35 | | | | (18 | ) | | | 1 | |
Interest Expense | | | (198 | ) | | | — | | | | (34 | ) | | | 15 | | | | (217 | ) |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Earnings (Loss) from Continuing Operations before Income Taxes | | | 102 | | | | 2 | | | | 374 | | | | (260 | ) | | | 218 | |
Income Tax Expense (Benefit) | | | (47 | ) | | | — | | | | 120 | | | | — | | | | 73 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Earnings from Continuing Operations | | | 149 | | | | 2 | | | | 254 | | | | (260 | ) | | | 145 | |
Discontinued operations — Net of Tax | | | — | | | | — | | | | 4 | | | | — | | | | 4 | |
| | | | | | | | | | | | | | | |
Net Earnings (Loss) | | $ | 149 | | | $ | 2 | | | $ | 258 | | | $ | (260 | ) | | $ | 149 | |
| | | | | | | | | | | | | | | |
25
CSX CORPORATION AND SUBSIDIARIES
PART I: FINANCIAL INFORMATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 16.18. Summarized Consolidating Financial Data, Continued
Consolidating Balance Sheet
(Dollars in Millions) | | | | | | | | | | | | | | | | | | | | |
(Dollars in Millions) | |
| | CSX | | | Vessel | | | | | | | | | | |
| | Corporation | | | Leasing | | | Other | | | Eliminations | | | Consolidated | |
September 30, 2005 | | | | | | | | | | | | | | | | | | | | |
ASSETS | | | | | | | | | | | | | | | | | | | | |
Current Assets: | | | | | | | | | | | | | | | | | | | | |
Cash, Cash Equivalents and Short-term Investments | | $ | 291 | | | $ | 47 | | | $ | 252 | | | $ | — | | | $ | 590 | |
Accounts Receivable — Net | | | — | | | | 16 | | | | 1,278 | | | | (20 | ) | | | 1,274 | |
Other Current Assets — Net | | | — | | | | — | | | | 710 | | | | (127 | ) | | | 583 | |
| | | | | | | | | | | | | | | |
Total Current Assets | | | 291 | | | | 63 | | | | 2,240 | | | | (147 | ) | | | 2,447 | |
Properties — Net | | | 1 | | | | — | | | | 19,974 | | | | — | | | | 19,975 | |
Investment in Consolidated Subsidiaries | | | 13,183 | | | | — | | | | — | | | | (13,183 | ) | | | — | |
Other Long-term Assets | | | 1,377 | | | | — | | | | 325 | | | | (103 | ) | | | 1,599 | |
| | | | | | | | | | | | | | | |
Total Assets | | $ | 14,852 | | | $ | 63 | | | $ | 22,539 | | | $ | (13,433 | ) | | $ | 24,021 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | | | | | | | | | | | | | | | | |
Current Liabilities: | | | | | | | | | | | | | | | | | | | | |
Accounts Payable | | $ | 584 | | | $ | 19 | | | $ | 348 | | | $ | (21 | ) | | $ | 930 | |
Other Current Liabilities | | | 2,287 | | | | — | | | | 49 | | | | (126 | ) | | | 2,210 | |
| | | | | | | | | | | | | | | |
Total Current Liabilities | | | 2,871 | | | | 19 | | | | 397 | | | | (147 | ) | | | 3,140 | |
Other Long-term Liabilities | | | 4,219 | | | | 31 | | | | 8,972 | | | | (103 | ) | | | 13,119 | |
| | | | | | | | | | | | | | | |
Total Liabilities | | | 7,090 | | | | 50 | | | | 9,369 | | | | (250 | ) | | | 16,259 | |
| | | | | | | | | | | | | | | |
Shareholders’ Equity: | | | | | | | | | | | | | | | | | | | | |
Common Stock, $1 Par Value | | | 217 | | | | — | | | | 181 | | | | (181 | ) | | | 217 | |
Other Capital | | | 1,698 | | | | 1 | | | | 8,090 | | | | (8,091 | ) | | | 1,698 | |
Retained Earnings | | | 6,053 | | | | 12 | | | | 4,812 | | | | (4,824 | ) | | | 6,053 | |
Accumulated Other Comprehensive Loss | | | (206 | ) | | | — | | | | 87 | | | | (87 | ) | | | (206 | ) |
| | | | | | | | | | | | | | | |
Total Shareholders’ Equity | | | 7,762 | | | | 13 | | | | 13,170 | | | | (13,183 | ) | | | 7,762 | |
| | | | | | | | | | | | | | | |
Total Liabilities and Shareholders’ Equity | | $ | 14,852 | | | $ | 63 | | | $ | 22,539 | | | $ | (13,433 | ) | | $ | 24,021 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | CSX | | | Vessel | | | | | | | | | | |
| | Corporation | | | Leasing | | | Other | | | Eliminations | | | Consolidated | |
December 31, 2004 | | | | | | | | | | | | | | | | | | | | |
ASSETS | | | | | | | | | | | | | | | | | | | | |
Current Assets: | | | | | | | | | | | | | | | | | | | | |
Cash, Cash Equivalents and Short-term Investments | | $ | 1,110 | | | $ | 46 | | | $ | (297 | ) | | $ | — | | | $ | 859 | |
Accounts Receivable — Net | | | (482 | ) | | | 19 | | | | 1,647 | | | | (25 | ) | | | 1,159 | |
Other Current Assets — Net | | | 9 | | | | — | | | | 1,246 | | | | (270 | ) | | | 985 | |
| | | | | | | | | | | | | | | |
Total Current Assets | | | 637 | | | | 65 | | | | 2,596 | | | | (295 | ) | | | 3,003 | |
Properties — Net | | | 1 | | | | — | | | | 19,944 | | | | — | | | | 19,945 | |
Investment in Consolidated Subsidiaries | | | 13,078 | | | | — | | | | — | | | | (13,078 | ) | | | — | |
Other Long-term Assets | | | 1,345 | | | | — | | | | 551 | | | | (224 | ) | | | 1,672 | |
| | | | | | | | | | | | | | | |
Total Assets | | $ | 15,061 | | | $ | 65 | | | $ | 23,091 | | | $ | (13,597 | ) | | $ | 24,620 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | | | | | | | | | | | | | | | | |
Current Liabilities: | | | | | | | | | | | | | | | | | | | | |
Accounts Payable | | $ | 88 | | | $ | 19 | | | $ | 796 | | | $ | (24 | ) | | $ | 879 | |
Other Current Liabilities | | | 1,034 | | | | — | | | | 1,540 | | | | (136 | ) | | | 2,438 | |
| | | | | | | | | | | | | | | |
Total Current Liabilities | | | 1,122 | | | | 19 | | | | 2,336 | | | | (160 | ) | | | 3,317 | |
Other Long-term Liabilities | | | 7,128 | | | | 37 | | | | 7,574 | | | | (247 | ) | | | 14,492 | |
| | | | | | | | | | | | | | | |
Total Liabilities | | | 8,250 | | | | 56 | | | | 9,910 | | | | (407 | ) | | | 17,809 | |
| | | | | | | | | | | | | | | |
Shareholders’ Equity: | | | | | | | | | | | | | | | | | | | | |
Common Stock, $1 Par Value | | | 216 | | | | — | | | | 296 | | | | (296 | ) | | | 216 | |
Other Capital | | | 1,605 | | | | 1 | | | | 8,107 | | | | (8,108 | ) | | | 1,605 | |
Retained Earnings | | | 5,210 | | | | 8 | | | | 4,706 | | | | (4,714 | ) | | | 5,210 | |
Accumulated Other Comprehensive Loss | | | (220 | ) | | | — | | | | 72 | | | | (72 | ) | | | (220 | ) |
| | | | | | | | | | | | | | | |
Total Shareholders’ Equity | | | 6,811 | | | | 9 | | | | 13,181 | | | | (13,190 | ) | | | 6,811 | |
| | | | | | | | | | | | | | | |
Total Liabilities and Shareholders’ Equity | | $ | 15,061 | | | $ | 65 | | | $ | 23,091 | | | $ | (13,597 | ) | | $ | 24,620 | |
| | | | | | | | | | | | | | | |
| | CSX Corporation | | | CSX Vessel Leasing | | | Other | | | Eliminations | | | Consolidated | |
July 1, 2005 | | | | | | | | | | | | | | | | | | | | |
ASSETS | | | | | | | | | | | | | | | | | | | | |
Current Assets: | | | | | | | | | | | | | | | | | | | | |
Cash, Cash Equivalents and Short-term Investments | | $ | 415 | | | $ | 46 | | | $ | 52 | | | $ | — | | | $ | 513 | |
Accounts Receivable — Net | | | — | | | | 15 | | | | 1,121 | | | | (13 | ) | | | 1,123 | |
Other Current Assets | | | — | | | | — | | | | 695 | | | | (127 | ) | | | 568 | |
| | | | | | | | | | | | | | | |
Total Current Assets | | | 415 | | | | 61 | | | | 1,868 | | | | (140 | ) | | | 2,204 | |
Properties — Net | | | 1 | | | | — | | | | 19,880 | | | | — | | | | 19,881 | |
Investment in Consolidated Subsidiaries | | | 12,985 | | | | — | | | | — | | | | (12,985 | ) | | | — | |
Other Long-term Assets | | | 1,465 | | | | — | | | | 303 | | | | (103 | ) | | | 1,665 | |
| | | | | | | | | | | | | | | |
Total Assets | | $ | 14,866 | | | $ | 61 | | | $ | 22,051 | | | $ | (13,228 | ) | | $ | 23,750 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | | | | | | | | | | | | | | | | |
Current Liabilities: | | | | | | | | | | | | | | | | | | | | |
Accounts Payable | | $ | 619 | | | $ | 20 | | | $ | 260 | | | $ | (14 | ) | | $ | 885 | |
Other Current Liabilities | | | 2,051 | | | | — | | | | (301 | ) | | | (126 | ) | | | 1,624 | |
| | | | | | | | | | | | | | | |
Total Current Liabilities | | | 2,670 | | | | 20 | | | | (41 | ) | | | (140 | ) | | | 2,509 | |
Other Long-term Liabilities | | | 4,579 | | | | 30 | | | | 9,118 | | | | (103 | ) | | | 13,624 | |
| | | | | | | | | | | | | | | |
Total Liabilities | | $ | 7,249 | | | $ | 50 | | | $ | 9,077 | | | $ | (243 | ) | | $ | 16,133 | |
| | | | | | | | | | | | | | | |
Shareholders’ Equity: | | | | | | | | | | | | | | | | | | | | |
Common Stock | | | 217 | | | | — | | | | 181 | | | | (181 | ) | | | 217 | |
Other Capital | | | 1,678 | | | | 1 | | | | 8,084 | | | | (8,085 | ) | | | 1,678 | |
Retained Earnings | | | 5,912 | | | | 10 | | | | 4,606 | | | | (4,616 | ) | | | 5,912 | |
Accumulated Other Comprehensive Loss | | | (190 | ) | | | — | | | | 103 | | | | (103 | ) | | | (190 | ) |
| | | | | | | | | | | | | | | |
Total Shareholders’ Equity | | | 7,617 | | | | 11 | | | | 12,974 | | | | (12,985 | ) | | | 7,617 | |
| | | | | | | | | | | | | | | |
Total Liabilities and Shareholders’ Equity | | $ | 14,866 | | | $ | 61 | | | $ | 22,051 | | | $ | (13,228 | ) | | $ | 23,750 | |
| | | | | | | | | | | | | | | |
| | CSX Corporation | | | CSX Vessel Leasing | | | Other | | | Eliminations | | | Consolidated | |
December 31, 2004 | | | | | | | | | | | | | | | | | | | | |
ASSETS | | | | | | | | | | | | | | | | | | | | |
Current Assets: | | | | | | | | | | | | | | | | | | | | |
Cash, Cash Equivalents and Short-term Investments | | $ | 1,110 | | | $ | 46 | | | $ | (297 | ) | | $ | — | | | $ | 859 | |
Accounts Receivable — Net | | | (482 | ) | | | 19 | | | | 1,631 | | | | (25 | ) | | | 1,143 | |
Other Current Assets | | | 9 | | | | — | | | | 1,246 | | | | (270 | ) | | | 985 | |
| | | | | | | | | | | | | | | |
Total Current Assets | | | 637 | | | | 65 | | | | 2,580 | | | | (295 | ) | | | 2,987 | |
Properties — Net | | | 1 | | | | — | | | | 19,944 | | | | — | | | | 19,945 | |
Investment in Consolidated Subsidiaries | | | 13,078 | | | | — | | | | — | | | | (13,078 | ) | | | — | |
Other Long-term Assets | | | 1,345 | | | | — | | | | 553 | | | | (224 | ) | | | 1,674 | |
| | | | | | | | | | | | | | | |
Total Assets | | $ | 15,061 | | | $ | 65 | | | $ | 23,077 | | | $ | (13,597 | ) | | $ | 24,606 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | | | | | | | | | | | | | | | | |
Current Liabilities: | | | | | | | | | | | | | | | | | | | | |
Accounts Payable | | $ | 88 | | | $ | 19 | | | $ | 796 | | | $ | (24 | ) | | $ | 879 | |
Other Current Liabilities | | | 1,034 | | | | — | | | | 1,540 | | | | (136 | ) | | | 2,438 | |
| | | | | | | | | | | | | | | |
Total Current Liabilities | | | 1,122 | | | | 19 | | | | 2,336 | | | | (160 | ) | | | 3,317 | |
Other Long-term Liabilities | | | 7,128 | | | | 37 | | | | 7,560 | | | | (247 | ) | | | 14,478 | |
| | | | | | | | | | | | | | | |
Total Liabilities | | $ | 8,250 | | | $ | 56 | | | $ | 9,896 | | | $ | (407 | ) | | $ | 17,795 | |
| | | | | | | | | | | | | | | |
Shareholders’ Equity: | | | | | | | | | | | | | | | | | | | | |
Common Stock | | | 216 | | | | — | | | | 296 | | | | (296 | ) | | | 216 | |
Other Capital | | | 1,605 | | | | 1 | | | | 8,107 | | | | (8,108 | ) | | | 1,605 | |
Retained Earnings | | | 5,210 | | | | 8 | | | | 4,706 | | | | (4,714 | ) | | | 5,210 | |
Accumulated Other Comprehensive Loss | | | (220 | ) | | | — | | | | 72 | | | | (72 | ) | | | (220 | ) |
| | | | | | | | | | | | | | | |
Total Shareholders’ Equity | | | 6,811 | | | | 9 | | | | 13,181 | | | | (13,190 | ) | | | 6,811 | |
| | | | | | | | | | | | | | | |
Total Liabilities and Shareholders’ Equity | | $ | 15,061 | | | $ | 65 | | | $ | 23,077 | | | $ | (13,597 | ) | | $ | 24,606 | |
| | | | | | | | | | | | | | | |
26
CSX CORPORATION AND SUBSIDIARIES
PART I: FINANCIAL INFORMATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 16.18. Summarized Consolidating Financial Data, Continued
Consolidating Cash Flow Statements
(Dollars in Millions) | | | | | | | | | | | | | | | | | | | | |
(Dollars in Millions) | |
| | CSX | | | Vessel | | | | | | | | | | |
| | Corporation | | | Leasing | | | Other | | | Eliminations | | | Consolidated | |
Nine Months Ended September 30, 2005 | | | | | | | | | | | | | | | | | | | | |
Operating Activities | | | | | | | | | | | | | | | | | | | | |
Net Cash Provided by (Used in) Operating Activities | | $ | (554 | ) | | $ | — | | | $ | 1,535 | | | $ | (203 | ) | | $ | 778 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Investing Activities | | | | | | | | | | | | | | | | | | | | |
Property Additions | | | — | | | | — | | | | (726 | ) | | | — | | | | (726 | ) |
Net Proceeds from Sale of International Terminals | | | 1,110 | | | | — | | | | (2 | ) | | | — | | | | 1,108 | |
Purchase of Minority Interest in an International Terminals’ Subsidiary | | | (110 | ) | | | — | | | | — | | | | — | | | | (110 | ) |
Purchases of Short-term Investments | | | (2,010 | ) | | | — | | | | (31 | ) | | | — | | | | (2,041 | ) |
Proceeds from Sale of Short-term Investments | | | 2,041 | | | | — | | | | 9 | | | | — | | | | 2,050 | |
Other Investing Activities | | | 75 | | | | — | | | | 266 | | | | (315 | ) | | | 26 | |
| | | | | | | | | | | | | | | |
Net Cash Provided by (Used in) Investing Activities | | | 1,106 | | | | — | | | | (484 | ) | | | (315 | ) | | | 307 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Financing Activities | | | | | | | | | | | | | | | | | | | | |
Short-term Debt — Net | | | (100 | ) | | | — | | | | 2 | | | | — | | | | (98 | ) |
Long-term Debt Issued | | | — | | | | — | | | | 29 | | | | — | | | | 29 | |
Long-term Debt Repaid | | | (1,125 | ) | | | — | | | | (114 | ) | | | — | | | | (1,239 | ) |
Dividends Paid | | | (66 | ) | | | — | | | | (175 | ) | | | 176 | | | | (65 | ) |
Other Financing Activities | | | (49 | ) | | | 1 | | | | (250 | ) | | | 342 | | | | 44 | |
| | | | | | | | | | | | | | | |
Net Cash Provided by (Used in) Financing Activities | | | (1,340 | ) | | | 1 | | | | (508 | ) | | | 518 | | | | (1,329 | ) |
| | | | | | | | | | | | | | | | | | | | |
Net (Decrease) Increase in Cash and Cash Equivalents | | | (788 | ) | | | 1 | | | | 543 | | | | — | | | | (244 | ) |
Cash and Cash Equivalents at Beginning of Period | | | 816 | | | | 46 | | | | (340 | ) | | | — | | | | 522 | |
| | | | | | | | | | | | | | | |
Cash and Cash Equivalents at End of Period | | $ | 28 | | | $ | 47 | | | $ | 203 | | | $ | — | | | $ | 278 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | CSX Corporation | | | CSX Vessel Leasing | | | Other | | | Eliminations | | | Consolidated | |
Six Months Ended July 1, 2005 | | | | | | | | | | | | | | | | | | | | |
Operating Activities | | | | | | | | | | | | | | | | | | | | |
Net Cash Provided (Used) by Operating Activities | | $ | (453 | ) | | $ | — | | | $ | 918 | | | $ | (136 | ) | | $ | 329 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Investing Activities | | | | | | | | | | | | | | | | | | | | |
Property Additions | | | — | | | | — | | | | (381 | ) | | | — | | | | (381 | ) |
Net Proceeds from Sale of International Terminals | | | 1,110 | | | | — | | | | — | | | | — | | | | 1,110 | |
Purchase of Minority Interest in an International Terminals’ Subsidiary | | | (110 | ) | | | — | | | | — | | | | — | | | | (110 | ) |
Purchases of Short Term Investments | | | (1,576 | ) | | | — | | | | — | | | | — | | | | (1,576 | ) |
Proceeds from Sale of Short-term Investments | | | 1,679 | | | | — | | | | — | | | | — | | | | 1,679 | |
Other Investing Activities | | | 75 | | | | — | | | | 241 | | | | (315 | ) | | | 1 | |
| | | | | | | | | | | | | | | |
Net Cash Provided (Used) by Investing Activities | | | 1,178 | | | | — | | | | (140 | ) | | | (315 | ) | | | 723 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Financing Activities | | | | | | | | | | | | | | | | | | | | |
Short-term Debt — Net | | | (100 | ) | | | — | | | | 2 | | | | — | | | | (98 | ) |
Long-term Debt Issued | | | — | | | | — | | | | 27 | | | | — | | | | 27 | |
Long-term Debt Repaid | | | (1,125 | ) | | | — | | | | (88 | ) | | | — | | | | (1,213 | ) |
Cash Dividends Paid | | | (44 | ) | | | — | | | | (118 | ) | | | 118 | | | | (44 | ) |
Other Financing Activities | | | (48 | ) | | | — | | | | (230 | ) | | | 333 | | | | 55 | |
| | | | | | | | | | | | | | | |
Net Cash Provided (Used) by Financing Activities | | | (1,317 | ) | | | — | | | | (407 | ) | | | 451 | | | | (1,273 | ) |
Net Increase (Decrease) in Cash and Cash Equivalents | | | (592 | ) | | | — | | | | 371 | | | | — | | | | (221 | ) |
Cash and Cash Equivalents at Beginning of Period | | | 816 | | | | 46 | | | | (340 | ) | | | — | | | | 522 | |
| | | | | | | | | | | | | | | |
Cash and Cash Equivalents at End of Period | | $ | 224 | | | $ | 46 | | | $ | 31 | | | $ | — | | | $ | 301 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | CSX | | Vessel | | | | | | | |
| | CSX Corporation | | CSX Vessel Leasing | | Other | | Eliminations | | Consolidated | | | Corporation | | Leasing | | Other | | Eliminations | | Consolidated | |
Six Months Ended June 25, 2004 | | |
Nine Months Ended September 24, 2004 | | |
Operating Activities | | |
Net Cash Provided (Used) by Operating Activities | | $ | 10 | | $ | — | | $ | 610 | | $ | (101 | ) | | $ | 519 | | |
Net Cash Provided by (Used in) Operating Activities | | | $ | 31 | | $ | — | | $ | 983 | | $ | (149 | ) | | $ | 865 | |
| | | | | | | | | | | | | | | | | | | | | | |
| | |
Investing Activities | | | | | | | | | | | | | | | |
Property Additions | | — | | — | | | (484 | ) | | — | | | (484 | ) | | — | | — | | | (734 | ) | | — | | | (734 | ) |
Proceeds from Divestitures | | | — | | — | | 55 | | — | | 55 | |
Purchases of Short-term Investments | | | (82 | ) | | | (637 | ) | | — | | | (719 | ) | | | (1,253 | ) | | — | | | (32 | ) | | — | | | (1,285 | ) |
Proceeds from Sales of Short-term Investments | | — | | — | | 644 | | — | | 644 | | | 927 | | — | | 9 | | — | | 936 | |
Other Investing Activities | | | (4 | ) | | — | | | (23 | ) | | | (10 | ) | | | (37 | ) | | | (3 | ) | | — | | | (11 | ) | | | (10 | ) | | | (24 | ) |
| | | | | | | | | | | | | | | | | | | | | | |
Net Cash Provided (Used) by Investing Activities | | | (86 | ) | | — | | | (500 | ) | | | (10 | ) | | | (596 | ) | |
Net Cash Provided by (Used in) Investing Activities | | | | (329 | ) | | — | | | (713 | ) | | | (10 | ) | | | (1,052 | ) |
| | | | | | | | | | | | | | | | | | | | | | |
| | |
Financing Activities | | | | | | | | | | | | |
Short-term Debt — Net | | 701 | | — | | 1 | | — | | 702 | | | 100 | | — | | 1 | | — | | 101 | |
Long-term Debt Issued | | 62 | | — | | — | | — | | 62 | | | 412 | | — | | — | | — | | 412 | |
Long-term Debt Repaid | | | (300 | ) | | — | | | (79 | ) | | — | | | (379 | ) | | | (300 | ) | | — | | | (85 | ) | | — | | | (385 | ) |
Dividends Paid | | | (43 | ) | | — | | | (99 | ) | | 99 | | | (43 | ) | | | (66 | ) | | — | | | (147 | ) | | 149 | | | (64 | ) |
Other Financing Activities | | 6 | | 1 | | | (16 | ) | | 12 | | 3 | | | 27 | | 1 | | | (20 | ) | | 10 | | 18 | |
| | | | | | | | | | | | | | | | | | | | | | |
Net Cash Provided (Used) by Financing Activities | | 426 | | 1 | | | (193 | ) | | 111 | | 345 | | |
Net Cash Provided by (Used in) Financing Activities | | | 173 | | 1 | | | (251 | ) | | 159 | | 82 | |
| | |
Net Increase (Decrease) in Cash and Cash Equivalents | | 350 | | 1 | | | (83 | ) | | — | | 268 | | |
Net (Decrease) Increase in Cash and Cash Equivalents | | | | (125 | ) | | 1 | | 19 | | — | | | (105 | ) |
Cash and Cash Equivalents at Beginning of Period | | 1,163 | | 45 | | | (912 | ) | | — | | 296 | | | 1,163 | | 45 | | | (912 | ) | | — | | 296 | |
| | | | | | | | | | | | | | | | | | | | | | |
Cash and Cash Equivalents at End of Period | | $ | 1,513 | | $ | 46 | | $ | (995 | ) | | $ | — | | $ | 564 | | | $ | 1,038 | | $ | 46 | | $ | (893 | ) | | $ | — | | $ | 191 | |
| | | | | | | | | | | | | | | | | | | | | | |
27
CSX CORPORATION
PART I: FINANCIAL INFORMATION
ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
EXECUTIVE SUMMARY
2005 Surface Transportation Highlights and Challenges
Revenue
The secondthird quarter of 2005 marked the 13th14th consecutive quarter of year-over-year revenue growth. Revenue increased 8%9% or $169$182 million compared to the secondthird quarter of 2004. Coal, coke and iron ore continued to experience significant revenue gains of 17% as demand for transportation services was driven by higher electricity generation and rebuilding of utility stockpile inventories. Additionally, the coal pricing environment continues to be favorable. Merchandise revenue increased 7%8% through continued yield management efforts and the Company’s fuel surcharge program. Within the merchandise market, all lines of business posted year-over-year revenue growth led by strong gains in metalsagricultural products and food and consumer products. Automotive revenue declinedincreased by 8% due to a reduction in production levels, primarily by traditional domestic manufacturers. Price increaseshigher volume, price and fuel surcharges in automotive helped to partially offset the lower demand for rail services. Coal experienced the most significant revenue gains as demand for transportation services was driven by higher electricity generation and rebuilding of utility stockpile inventories.surcharge increases. Intermodal revenue was up slightly favorable as revenue per unit increases largely offset the year-over-year volume decline. The Company estimates that Hurricane Katrina adversely affected revenues in the quarter by approximately $17 million primarily related to the chemicals and Intermodal markets.
Volume
Overall volume during the secondthird quarter of 2005 decreased 2%was flat versus the prior year comparable quarter. Volume growth in coal could not overcomeand automotive overcame volume declines in the other markets. MerchandiseOverall, merchandise carloads fell 2%slightly versus the prior year comparable quarter. Automotive volume levels declinedincreased primarily due to lower production levels by traditionalthe success of the domestic manufacturers and diversions related to service problems.manufacturer’s employee discount pricing promotion. In addition, Intermodal experienced overall volume declines primarily attributable tovolumes declined as the Network Simplification Initiative (“NSI”). In an effort to concentrate on more profitable business, Intermodal eliminated 26 weekly train starts in July 2004 through NSI creating an unfavorable year-over-year volume comparison.Company continued its yield management efforts.
Fuel Costs and Fuel Surcharge Program
Fuel expenses increased 17%16% to $176$188 million in the secondthird quarter, net of $63$77 million in fuel hedging benefits, due principally to the rising price per gallon of diesel fuel. The average price per gallon of diesel fuel, including benefits from CSX’sthe fuel hedging program, was $1.1905$1.34 in the secondthird quarter of 2005 versus $1.0410$1.14 in the secondthird quarter of 2004. In addition, theThe fuel surcharge programsprogram within Surface Transportation and contractual cost escalation clauses used in most multi-year customer contracts partially offset a significant portion of fuel cost increases.
28
CSX CORPORATION
PART I: FINANCIAL INFORMATION
ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
Operations
As illustrated in the table below, key measures of network performance were mixed versus prior year. Management believes these measures are good indicators of relative performance, encompassing drivers of both service reliability and operating efficiency.
RAIL OPERATING STATISTICS(a)
| | | | | | | | | | | | | | |
| | | | Second Quarter | |
| | | | | | | | | | | | % | |
| | | | | | | | | | | | Improvement/ | |
| | | | 2005 | | | 2004 | | | (Decline) | |
|
Service Measurements | | Average Velocity, All Trains (Miles Per Hour) | | | 19.1 | | | | 19.5 | | | | (2) | % |
| | Average System Dwell Time (Hours) | | | 30.4 | | | | 29.3 | | | | (4) | |
| | Average Total Cars-On-Line | | | 235,819 | | | | 235,688 | | | | (0) | |
| | On-Time Originations | | | 47.7 | % | | | 39.3 | % | | | 21 | |
| | On-Time Arrivals | | | 36.2 | % | | | 34.1 | % | | | 6 | |
| | Average Recrews (Per Day) | | | 67 | | | | 73 | | | | 8 | % |
|
| | | | | | | | | | | | | | |
| | | | Third Quarter |
| | | | | | | | | | | | % |
| | | | | | | | | | | | Improvement |
| | | | 2005 | | 2004 | | (Decline) |
|
Service Measurements | | Personal Injury Frequency Index (Per 100 Employees) | | | 1.91 | | | | 2.42 | | | | 21 | % |
| | FRA Train Accidents Frequency (Per Million Train Miles) | | | 3.85 | | | | 4.43 | | | | 13 | |
| | Average Velocity, All Trains (Miles Per Hour) | | | 19.7 | | | | 20.1 | | | | (2 | ) |
| | Average System Dwell Time (Hours)(b) | | | 29.0 | | | | 28.8 | | | | (1 | ) |
| | Average Total Cars-On-Line | | | 232,324 | | | | 233,469 | | | — |
| | On -Time Originations | | | 51.1 | % | | | 50.9 | % | | — |
| | On -Time Arrivals | | | 43.1 | % | | | 40.6 | % | | | 6 | |
| | Average Recrews (Per Day) | | | 63 | | | | 62 | | | | (2 | ) |
|
Resources | | Route Miles | | | 21,687 | | | | 22,316 | | | | (3 | ) |
| | Locomotives (c) | | | 3,759 | | | | 3,702 | | | | 2 | |
| | Freight Cars (c) | | | 103,308 | | | | 104,446 | | | | (1 | )% |
|
| | |
(a) | | Amounts for 2005 are estimated. |
|
(b) | | Amounts represent the Company’s historical method for calculating average system dwell time. Beginning October 1, 2005, CSX adopted a new dwell calculation in response to AAR efforts to standardize reporting across U.S. railroads. |
|
(c) | | Represents a combination of owned and long-term leased assets |
The Company isCompany’s Surface Transportation businesses are focused on producing continuous improvement through several key initiatives. In the third quarter of 2004, CSXCSXT instituted a new network operating plan called the ONE Plan. The ONE Plan, which defines CSX’sCSXT’s scheduled train network and is designed to improve service reliability and efficiency. Although anticipated benefits have not been fully realized on a sustained basis, CSXCSXT believes the benefits will be obtained and remains committed to the ONE Plan.this initiative. Efforts are ongoing to improve plan execution and to refine the operating plan and raise the level of execution are ongoing. Adjustments are made as required to reflect changing traffic volumes, operating capabilities, and operating capabilities.service requirements.
In addition, CSX is working to improve itsCSXT began implementing a new locomotive planning process.plan in the third quarter of 2005. Locomotive availability and reliability is critical to the ONE Planplan execution. The CompanyCSXT is also working to improve the performance of its major terminals and rail yards in 2005. The Standardized Terminal Processes (“STP”) initiative seeks to improve the process capability of CSX’s major terminals by documenting and analyzing terminal sub-processes. Primary activities in CSXCSXT terminals include switching rail cars to and from trains, fueling and servicing locomotives, and inspecting and repairing rail cars. Employee roles and responsibilities will behave been clearly documenteddefined and aligned across functional departments. These initiatives, combined with increased focus on training and development of operating managers, seek to develop a CSX culture that drives toward higher levels of plan execution.
29
CSX CORPORATION
PART I: FINANCIAL INFORMATION
ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
Operations, Continued
CSXT is continuing freight transportation service to customers outside of the storm-affected area by rerouting rail traffic through well-established western gateways, including East St. Louis, IL, Memphis, TN, Birmingham, AL, Mobile, AL, and Montgomery, AL. Service to customers within the affected area is expected to be restored by year-end. All repairs are expected to be completed by the end of the first quarter of 2006 with most expected to be finished by year-end 2005. The rerouted trains are expected to be returned to their original gateway of New Orleans when all major repairs are completed.
Capital Investment
CSXCSXT continues to invest in its rail infrastructure, locomotives, freight cars and technology to accommodate safe, efficient and reliable train operations. In anticipation of future volume growth in key corridors, the Company will continueplans to make strategic infrastructure investments to increase its capacity as profitability targets are met. Investments under consideration include locomotives, and track and terminal infrastructure expansion.expansion such as the Southeastern corridor between Chicago and Florida and the River Line from Albany to New York City. Investments in the Southeastern corridor are intended among other things to support Western coal sourcing from the Colorado, Illinois and Powder River basins as well as consumer goods shipments from West Coast ports and merchandise and automobile shipments. Investments in the River Line are designed to increase long-term capacity for the I-90 corridor between Chicago and New York.
As a result of these investments and the ongoing needs of the business, the Company expects incremental 2006 and 2007 capital spending of approximately $300 million to $400 million, excluding the impact of Hurricane Katrina, above its recent annual averages of approximately $1.0 billion.
2930
CSX CORPORATION
PART I: FINANCIAL INFORMATION
ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
2005 Expectations
Revenue
RevenueDespite the affects of Hurricane Katrina, revenue growth is expected to continue to outpace volume growth through 2005 due to a continued strong transportation demand, as well as CSX’s emphasis on price, fuel surcharge coverage and fuel surcharge.service improvement. Lower contributory traffic is either being re-priced or replaced by longer haul, more profitable business. The amount of any revenue and volume increase depends on several factors:
Economy:Favorable economic conditions are expected based on the forecasts for key economic indicators such as the gross domestic product, industrial production and overall import levels. Generally, CSX’sthe Company’s revenue is fairly diversified and a large portion is relatively insensitiveless sensitive to significant fluctuations in the general economy. However, changesChanges, however, in the macro economic environment do impact overall revenue growth.
Operational Performance:Service is expected to improve with more consistent execution of the ONE Plan,network operating plan, which should result in improved average velocity and a more reliable service product.service. Consequently, additional volume may be captured as freight car availability increases due to improved asset utilization and reduced transit times. If service does not improve, volume growth could be flat to slightly negative.
Fuel Prices:Because of the fuel surcharge program and cost escalation clauses in long-term contracts, which include a fuel element, a portion of CSX’sthe Company’s revenue varies with the price of fuel.
Operations
The CompanyCSXT expects key operating measurements to show consistent improvement through the second halffourth quarter of 2005.2005 and into 2006. In addition to the success of the initiatives outlined above, availability of resources can affect overall network performance and service levels. Locomotive and train and engine (“T&E”) employee availability are critical to operating plan execution. Management believes current resource plans, which include the hiring of significant numbers of train and engineapproximately 2,000 T&E employees and the acquisition of 100 new locomotives in the second half of 2005, will be sufficient to support improved plan execution.
3031
CSX CORPORATION
PART I: FINANCIAL INFORMATION
ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
Risk FactorsRISK FACTORS
Competition
The Company experiences competition from other transportation providers including railroads and motor carriers that operate similar routes across its service area, and to a less significant extent barges, ships and pipelines. Transportation providers such as motor carriers and barges utilize public rights-of-way that are built and maintained by governmental entities while CSXCSXT and other railroads must build and maintain rail networks through the utilization ofusing internal resources. If the scope and quality of these alternative methods of transportation are materially increased, or if legislation is passed providing materially greater opportunity for motor carriers with respect to size or weight restrictions, there could be a material adverse effect on the Company’s results of operations, financial condition and liquidity.
Employees and Labor Union Relationships
The CompanyCSXT considers employee relations with most of its unions generally to be good. Most of CSXT’s employees are represented by labor unions and are covered by collective bargaining agreements. The bargaining agreements contain a moratorium clause that precludes serving new bargaining demands until a certain date. These agreements, which usually are bargained nationally by the National Railway Labor Conference, normally contain the same moratorium date so all bargaining on agreement changes generally begins at approximately the same time. A round of bargaining started in 2000 when the moratorium provisions expired. Agreements have been reached with all but one of the unions. The Company has recently reached a tentative agreement with the union representing machinists, which awaits ratification by the union members.
Also, the agreements which were concluded in the 2000 bargaining round are now open for renegotiation. The process of renegotiating these agreements commenced in early November 2004 when the parties were free to serve their bargaining demands. Negotiations with eight of thirteen unions are in mediation. The outcome of the 2004 round of negotiations is uncertain at this time.
In the rail industry, negotiations have generally taken place over a number of years and previously have not resulted in any extended work stoppages. The existing agreements continue to remain in effect until new agreements are reached. The parties are not permitted to either strike or lockout until the Railway Labor Act’s lengthy procedures (which include mediation, cooling-off periods, and the possibility of Presidential intervention) are exhausted.
3132
CSX CORPORATION
PART I: FINANCIAL INFORMATION
ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
RISK FACTORS, Continued
Environmental Laws and Regulation
The Company’s operations are subject to wide-ranging federal, state and local environmental laws and regulations concerning, among other things, emissions to the air, discharges to water and the handling, storage, transportation and disposal of waste and other materials and cleanup of hazardous material or petroleum releases. The Company generates and transports hazardous and non-hazardous waste and materials in its current operations, and it has done so in its former operations. In certain circumstances, environmental liability can extend to formerly owned or operated properties, leased properties and properties owned by third parties, as well as to properties currently owned and used by the Company. Environmental liabilities have arisen and may also arise from claims asserted by adjacent landowners or other third parties in toxic tort litigation. The Company has been and may be subject to allegations or findings to the effect that it has violated, or is strictly liable under, environmental laws or regulations, and such violations can result in the CompanyCompany’s incurring fines, penalties or costs relating to the cleanup of environmental contamination. Although the Company believes it has appropriately recorded current and long-term liabilities for known future environmental costs, it could incur significant costs as a result of any of the foregoing, and may be required to incur significant expenses to investigate and remediate known, unknown or future environmental contamination, which could have a material adverse effect on results of operations, financial condition and liquidity.
Fuel Costs
Fuel costs represent a significant expense of the Company’s Surface Transportation operations. Fuel prices can vary significantly from period to period and significant increases may have a material adverse effect on the Company’s operating results.results of operations. Furthermore, fuel prices and supply are influenced considerably by international political and economic circumstances. The Company hasA fuel surcharge revenue programsprogram is in place with a considerable number of customers. These programs haveThis program has historically permitted the CompanyCompany’s Surface Transportation businesses to recover a significant portion of increased fuel costs. Despite the Company’s fuel surcharge programs,program, if a fuel supply shortage arose from OPEC production restrictions, lower refinery outputs, a disruption of oil imports or otherwise, fuel shortages, higher fuel prices and any subsequent price increases could materially adversely affect our operating results of operations, financial condition and liquidity.
Future Acts of Terrorism or War
Terrorist attacks, such as those that occurred onin the United States in September 11, 2001, in Madrid, Spain in March 2004, or in London, England in July 2005, and any government response thereto or war may adversely affect results of operations, financial condition and liquidity. The Company’s rail lines and physical plant may be direct targets or indirect casualties of acts of terror, which could cause significant business interruption and result in increased costs and liabilities and decreased revenues and have a material adverse effect on operating results of operations, financial condition or liquidity. In addition, insurance premiums charged for some or all of the coverage currently maintained by the Company could increase dramatically or the coverage may no longer be available.
3233
CSX CORPORATION
PART I: FINANCIAL INFORMATION
ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
RISK FACTORS, Continued
Regulation and Legislation
The Company is subject to thevarious regulatory jurisdiction ofjurisdictions, including the Surface Transportation Board (“STB”) of the United States Department of Transportation (“DOT”), the Federal Railroad Administration of DOT and other state and federal regulatory agencies for a variety of economic, health, safety, labor, environmental, tax, legal and other matters. Legislation passed by Congress or regulations issued by these agencies can significantly affect the revenues, costs and profitability of the Company’s business. Moreover, the failure to comply with applicable laws and regulations could have a material adverse effect on the Company. In addition, Congressional efforts to reduce or eliminate funding for Amtrak, if successful, could result in significant costs to the Company,CSXT, including, but not limited to: loss of revenue from trackage rights; uncertainty relating to operating agreements; loss of other contractual rights, such as indemnification; adverse network implications, such as potential coordination with numerous state commuter rail agencies; and increased payments into the Railroad Retirement system to supplement lost contributions from Amtrak and its employees.
In response to the heightened threat of terrorism in the wake of the September 11, 2001 attacks, federal, state and local governmental bodies are proposing and beginning to adopt various legislation and regulations relating to security issues that affect the transportation industry, including rules and regulations that affect the transportation of hazardous materials. For instance, the District of Columbia recently enacted legislation that prohibits rail carriers, including CSXT, from transporting certain hazardous materials through the city. The Company,CSXT, supported by the United States, is currently challenging the validity of this legislation in the federal courts. Although the CompanyCSXT and the Federal Government have secured favorable rulings from the US Court of Appeals for the District of Columbia Circuit and the Surface Transportation Board,STB, legal proceedings continue and the ultimate outcome is uncertain. The extent to which other governmental bodies will ultimately take similar or related steps is also uncertain. Any legislation, regulations, or rules enacted by federal, state or local governmental bodies relating to security issues that affect rail and intermodal transportation have the potential to materially adversely affect the Company’s operations and costs.costs and thus its results of operations, financial condition and liquidity.
Safety
The Company faces inherent business risk of exposure to property damage and personal injury claims in the event of train accidents, including derailments. The Company is also subject to exposure to occupational injury claims. While the Company is working diligently to enhance its safety programs and to continue to raise the awareness levels of its employees concerning safety, the Company cannot ensure that it will not experience any material property damage or personal or occupational claims in the future or that it will not incur significant costs to defend such claims. Additionally, the Company cannot ensure that existing claims will not suffer adverse development not currently reflected in reserve estimates, as the ultimate outcome of existing claims is subject to numerous factors outside of the Company’s control. The Company engages outside parties to assist with the evaluation of certain of the occupational and personal injury claims, and believes that it is adequately reserved to cover all potential claims. However, finalFinal amounts determined to be due, however, on any outstanding matters may differ materially from the recorded reserves.
3334
CSX CORPORATION
PART I: FINANCIAL INFORMATION
ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
RISK FACTORS, Continued
Severe Weather
The Company may face severe weather conditions and other natural occurrences, including floods, fires, hurricanes and earthquakes which may cause significant disruptions to the Company’s operations, and result in increased costs and liabilities and decreased revenues which could have a material adverse effect on operating results of operations, financial condition and liquidity. For information on insurance issues resulting from the effects of Hurricane Katrina on the Company’s operations and assets, see Note 11. Hurricane Katrina.
RESULTS OF OPERATIONS
Quarter Ended July 1,September 30, 2005 Compared to Quarter Ended June 25,September 24, 2004
CSXThe Company follows a 52/53 week fiscal reporting calendar. Fiscal year 2005 consists of 52 weeks ending on December 30, 2005. Fiscal year 2004 consisted of a 53-week year53 weeks ending on December 31, 2004. The financial statements presented are for the 13-week quarters ended July 1,September 30, 2005 and June 25,September 24, 2004, the 26-week39-week periods ended July 1,September 30, 2005 and June 25,September 24, 2004 and as of December 31, 2004. In 2004, the fourth quarter ending December 31, 2004, consisted of 14 weeks.
| | | | | | | | | | | | | | | | | | | | | | | | |
| | CONSOLIDATED(a)(b) | | | CONSOLIDATED(a)(b) | |
| | July 1, | | June 25, | | $ | | | Sept. 30, | | Sept. 24, | | $ | |
(Dollars in Millions) | | 2005 | | 2004 | | Change | | | 2005 | | 2004 | | Change | |
| | (Unaudited) | | | (Unaudited) | |
Operating Revenue | | $ | 2,166 | | $ | 1,997 | | $ | 169 | | | $ | 2,125 | | $ | 1,943 | | $ | 182 | |
Operating Expense | | |
Labor and Fringe | | 707 | | 665 | | 42 | | | 727 | | 671 | | 56 | |
Materials, Supplies and Other | | 438 | | 435 | | 3 | | | 462 | | 410 | | 52 | |
Depreciation | | 205 | | 159 | | 46 | | | 207 | | 172 | | 35 | |
Fuel | | 176 | | 151 | | 25 | | | 188 | | 162 | | 26 | |
Building and Equipment Rent | | 127 | | 140 | | | (13 | ) | | 124 | | 140 | | | (16 | ) |
Inland Transportation | | 64 | | 70 | | | (6 | ) | | 55 | | 72 | | | (17 | ) |
Conrail Rents, Fees & Services | | 19 | | 82 | | | (63 | ) | | 9 | | 63 | | | (54 | ) |
Restructuring Charge | | — | | 15 | | | (15 | ) | | — | | 3 | | | (3 | ) |
Miscellaneous | | | (1 | ) | | | (2 | ) | | 1 | | |
| | | | | | | | |
| | | | | | | | |
Total Operating Expense | | 1,735 | | 1,715 | | 20 | | | 1,772 | | 1,693 | | 79 | |
| | | | | | | | | | | | | | |
| | |
Operating Income | | $ | 431 | | $ | 282 | | $ | 149 | | | $ | 353 | | $ | 250 | | $ | 103 | |
| | | | | | | | | | | | | | |
| | |
(a) | | Prior periods have been reclassified to conform to the current presentation. |
|
(b) | | Consolidated operating income includes the operating results of operations of Surface Transportation illustratedshown on page 3637 and other operating income. Other operating income includesresults include the gain amortization on the CSX Lines conveyance, net sublease income from assets formerly included in the Company’s Marine Services segment, and other items andwhich amounted to $9a loss of ($8) million and $2income of $3 million for the quarters ended July 1,September 30, 2005 and June 25,September 24, 2004, respectively. |
3435
CSX CORPORATION
PART I: FINANCIAL INFORMATION
ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
RESULTS OF OPERATIONS, Continued
Consolidated Operating Revenue
The quarter ended July 1, 2005 demonstrated revenue growth increasing 8%Revenue increased 9% or $169$182 million compared to the prior year comparable quarter as efforts to increase price, asset prioritization and utilization and fuel surcharge customer coverage continuecontinued across all lines of business.
Consolidated Operating Income
Consolidated operating expenses increased slightly5% or $79 million due to higher incentive compensation and fuel expenses partially offset by the net positive effect of the Conrail spin-off transaction and the absence of restructuring charges.transaction. Overall consolidated operating income increased $149$103 million or 53%41% compared to the prior year quarter.
Additionally, the Company estimates results of operations for the quarter ended September 30, 2005 were negatively affected by $19 million as a result of Hurricane Katrina which includes business interruption lost profits of $14 million and $5 million from the application of insurance deductibles related to other expenses incurred.
Interest Expense
Interest expense remained relatively consistent withdecreased $6 million compared to the prior year comparable quarter.quarter as a result of the repurchase of $1.0 billion of the Company’s publicly-traded notes in June 2005 offset by a reduced benefit from the Company’s interest rate swaps.
Income Tax Expense
The incomeIncome tax expense for the quarter ended July 1,September 30, 2005 decreased $66 million. The decrease wasincreased $38 million, primarily driven by a net incomeincreased pretax earnings. The effective tax benefit of $71 million resulting from Ohiorate for the quarter ended September 24, 2004 was lower than the Company’s historical effective tax legislation changes enacted during the second quarter of 2005, partially offset byrate due to an increase in the overall effective state income tax rate.pretax earnings attributable to Conrail.
Net Earnings
CSXThe Company’s consolidated net earnings for the quarter ended July 1,September 30, 2005 increased $46$41 million compared to the prior year comparable quarter as increases in consolidated operating revenue and tax benefits derived from Ohio tax legislation changes were offset by debt repurchase expense.corresponding increases in operating and income tax expenses.
3536
CSX CORPORATION
PART I: FINANCIAL INFORMATION
ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
RESULTS OF OPERATIONS, Continued
The following table provides detail of operating revenue and expense by segment:
CSX Corporation and Subsidiaries
BUSINESS SEGMENTS (Unaudited)
(Dollars in Millions)
Quarters Ended July 1,September 30, 2005, and June 25,September 24, 2004
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Surface | | | | | Surface | |
| | Rail | | Intermodal | | Transportation | | | Rail | | Intermodal | | | | Transportation | |
| | 2005 | | 2004 | | Change | | 2005 | | 2004 | | Change | | 2005 | | 2004 | | Change | | | 2005 | | 2004 | | Change | | 2005 | | 2004 | | Change | | | 2005 | | 2004 | | Change | |
| | | | | | | | |
Operating Revenue | | $ | 1,836 | | $ | 1,672 | | $ | 164 | | $ | 330 | | $ | 325 | | $ | 5 | | $ | 2,166 | | $ | 1,997 | | $ | 169 | | | $ | 1,788 | | $ | 1,616 | | $ | 172 | | $ | 337 | | $ | 327 | | $ | 10 | | | | $ | 2,125 | | $ | 1,943 | | $ | 182 | | |
Operating Expense | | | | | |
Labor and Fringe | | 687 | | 646 | | 41 | | 19 | | 18 | | 1 | | 706 | | 664 | | 42 | | | 705 | | 652 | | 53 | | 20 | | 19 | | 1 | | | | 725 | | 671 | | 54 | | |
Materials, Supplies and Other | | 394 | | 382 | | 12 | | 45 | | 52 | | | (7 | ) | | 439 | | 434 | | 5 | | | 408 | | 359 | | 49 | | 46 | | 53 | | | (7 | ) | | | 454 | | 412 | | 42 | | |
Depreciation | | 193 | | 148 | | 45 | | 10 | | 9 | | 1 | | 203 | | 157 | | 46 | | | 195 | | 161 | | 34 | | 9 | | 9 | | — | | | | 204 | | 170 | | 34 | | |
Fuel | | 176 | | 151 | | 25 | | — | | — | | — | | 176 | | 151 | | 25 | | | 188 | | 162 | | 26 | | — | | — | | — | | | | 188 | | 162 | | 26 | | |
Building and Equipment Rent | | 104 | | 103 | | 1 | | 33 | | 41 | | | (8 | ) | | 137 | | 144 | | | (7 | ) | | 99 | | 104 | | | (5 | ) | | 30 | | 39 | | | (9 | ) | | | 129 | | 143 | | | (14 | ) | |
Inland Transportation | | | (104 | ) | | | (103 | ) | | | (1 | ) | | 168 | | 173 | | | (5 | ) | | 64 | | 70 | | | (6 | ) | | | (109 | ) | | | (104 | ) | | | (5 | ) | | 164 | | 176 | | | (12 | ) | | | 55 | | 72 | | | (17 | ) | |
Conrail Rents, Fees and Services | | 19 | | 82 | | | (63 | ) | | — | | — | | — | | 19 | | 82 | | | (63 | ) | | 9 | | 63 | | | (54 | ) | | — | | — | | — | | | | 9 | | 63 | | | (54 | ) | |
Restructuring Charge | | — | | 14 | | | (14 | ) | | — | | 1 | | | (1 | ) | | — | | 15 | | | (15 | ) | | — | | 3 | | | (3 | ) | | — | | — | | — | | | | — | | 3 | | | (3 | ) | |
| | | | | | | | |
Total Operating Expense | | 1,469 | | 1,423 | | 46 | | 275 | | 294 | | | (19 | ) | | 1,744 | | 1,717 | | 27 | | | 1,495 | | 1,400 | | 95 | | 269 | | 296 | | | (27 | ) | | | 1,764 | | 1,696 | | 68 | | |
| | | | | | | | |
Operating Income | | $ | 367 | | $ | 249 | | $ | 118 | | $ | 55 | | $ | 31 | | $ | 24 | | $ | 422 | | $ | 280 | | $ | 142 | | | $ | 293 | | $ | 216 | | $ | 77 | | $ | 68 | | $ | 31 | | $ | 37 | | | | $ | 361 | | $ | 247 | | $ | 114 | | |
| | | | | | | | |
| | | | | |
Operating Ratio | | | 80.0 | % | | | 85.1 | % | | 83.3 | % | | 90.5 | % | | | | | 80.5 | % | | 86.0 | % | | | | | | 83.6 | % | | | 86.6 | % | | | 79.8 | % | | | 90.5 | % | | | | | 83.0 | % | | | 87.3 | % | | |
| | | | | |
|
Prior periods have been reclassified to conform to the current presentation. |
3637
CSX CORPORATION
PART I: FINANCIAL INFORMATION
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 carloadvolume, revenue and revenue dataper unit by service group and commodity:
SURFACE TRANSPORTATION TRAFFIC AND REVENUE
LoadsVolume (Thousands); Revenue (Dollars in Millions), Revenue Per Unit (Dollars)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Second Quarter Loads | | Second Quarter Revenue | | | Volume | | Revenue | | Revenue Per Unit |
| | 2005 | | 2004 | | % Change | | 2005 | | 2004 | | % Change | | |
| | | | | |
Third Quarter | | | 2005 | | 2004 | | % Change | | 2005 | | 2004 | | % Change | | 2005 | | 2004 | | % Change |
Merchandise | | |
Phosphates and Fertilizers | | 117 | | 121 | | | (3 | )% | | $ | 91 | | $ | 88 | | | 3 | % | | 111 | | 107 | | | 4 | % | | $ | 83 | | $ | 75 | | | 11 | % | | $ | 748 | | $ | 701 | | 7 | |
Metals | | 92 | | 95 | | | (3 | ) | | 140 | | 125 | | 12 | | | 88 | | 95 | | | (7 | ) | | 142 | | 129 | | 10 | | 1,614 | | 1,358 | | 19 | |
Forest Products | | 113 | | 115 | | | (2 | ) | | 181 | | 166 | | 9 | | | 107 | | 115 | | | (7 | ) | | 177 | | 171 | | 4 | | 1,654 | | 1,487 | | 11 | |
Food and Consumer | | 63 | | 61 | | 3 | | 109 | | 92 | | 18 | | | 62 | | 59 | | 5 | | 110 | | 93 | | 18 | | 1,774 | | 1,576 | | 13 | |
Agricultural Products | | 87 | | 89 | | | (2 | ) | | 133 | | 127 | | 5 | | | 88 | | 82 | | 7 | | 133 | | 117 | | 14 | | 1,511 | | 1,427 | | 6 | |
Chemicals | | 135 | | 140 | | | (4 | ) | | 270 | | 264 | | 2 | | | 131 | | 139 | | | (6 | ) | | 269 | | 266 | | 1 | | 2,053 | | 1,914 | | 7 | |
Emerging Markets | | 136 | | 134 | | 1 | | 137 | | 129 | | 6 | | | 132 | | 126 | | 5 | | 135 | | 120 | | 13 | | 1,023 | | 952 | | 7 | |
| | | | | | | | | | |
Total Merchandise | | 743 | | 755 | | | (2 | ) | | 1,061 | | 991 | | 7 | | | 719 | | 723 | | | (1 | ) | | 1,049 | | 971 | | 8 | | 1,459 | | 1,343 | | 9 | |
| |
Automotive | | 124 | | 135 | | | (8 | ) | | 211 | | 220 | | | (4 | ) | | 114 | | 112 | | 2 | | 200 | | 185 | | 8 | | 1,754 | | 1,652 | | 6 | |
| |
Coal, Coke and Iron Ore | | |
Coal | | 438 | | 410 | | 7 | | 519 | | 426 | | 22 | | | 422 | | 406 | | 4 | | 491 | | 423 | | 16 | | 1,164 | | 1,042 | | 12 | |
Coke and Iron Ore | | 21 | | 17 | | 24 | | 22 | | 16 | | 38 | | | 20 | | 17 | | 18 | | 21 | | 15 | | 40 | | 1,050 | | 882 | | 19 | |
| | | | | | | | | | |
Total Coal, Coke and Iron Ore | | 459 | | 427 | | 7 | | 541 | | 442 | | 22 | | | 442 | | 423 | | 4 | | 512 | | 438 | | 17 | | 1,158 | | 1,035 | | 12 | |
Other | | — | | — | | — | | 23 | | 19 | | 21 | | | — | | — | | — | | 27 | | 22 | | 23 | | — | | — | | — | |
| | | | | | | | | | |
| |
Total Rail | | 1,326 | | 1,317 | | 1 | | 1,836 | | 1,672 | | 10 | | | 1,275 | | 1,258 | | 1 | | 1,788 | | 1,616 | | 11 | | 1,402 | | 1,285 | | 9 | |
| | | | | | | | | | |
| |
Intermodal | | |
Domestic | | 223 | | 267 | | | (16 | ) | | 185 | | 199 | | | (7 | ) | | 216 | | 239 | | | (10 | ) | | 180 | | 184 | | | (2 | ) | | 833 | | 770 | | 8 | |
International | | 320 | | 322 | | | (1 | ) | | 124 | | 124 | | — | | | 328 | | 320 | | 3 | | 130 | | 127 | | 2 | | 396 | | 397 | | — | |
Other | | — | | — | | — | | 21 | | 2 | | NM | | — | | — | | — | | 27 | | 16 | | 69 | | — | | — | | — | |
| | | | | | | | | | |
Total Intermodal | | 543 | | 589 | | | (8 | ) | | 330 | | 325 | | 2 | | | 544 | | 559 | | | (3 | ) | | 337 | | 327 | | 3 | | 619 | | 585 | | 6 | |
| | | | | | | | | | |
Total Surface Transportation | | 1,869 | | 1,906 | | | (2 | )% | | $ | 2,166 | | $ | 1,997 | | | 8 | % | | 1,819 | | 1,817 | | | — | % | | $ | 2,125 | | $ | 1,943 | | | 9 | % | | $ | 1,168 | | $ | 1,069 | | 9 | |
| | |
|
Prior periods have been reclassified to conform to the current presentation.
NM — Not Meaningful |
3738
CSX CORPORATION
PART I: FINANCIAL INFORMATION
ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
RESULTS OF OPERATIONS, Continued
Rail
The following discussion compares the 13-week quarters ended September 30, 2005 and September 24, 2004.
Rail Operating Revenue
Merchandise
The secondThird quarter of 2005 representsresults represent the 1314th consecutive quarter of year-over-year merchandise revenue growth as well as record revenue-per-carrevenue-per-unit results. All markets experienced quarter-over-quarter revenue and revenue-per-carrevenue-per-unit gains as a result of continued traffic re-pricing and the fuel surcharge program.
Merchandise
Phosphates and Fertilizers – Volume grew by 4% as a result of strong export phosphate demand from India and Pakistan. Rail service improvements in central Florida also contributed to volume growth. In addition, demand improved for shipments of ammonia, nitrogen, and potash.
Metals – Despite a 7% decline in volume, revenue grew 10%, predominantly due to yield management and fuel surcharges. Effortsefforts to increase allocation of railcars from short to longer-haul traffic. These efforts and general price and fuel surcharge customer coverage continue across all linesincreases resulted in revenue-per-unit increases of business. CSX experienced slight volume declines in five19%, the highest percent increase of seventhe merchandise markets. However emerging markets and food and consumer, both of which include new business opportunities, delivered quarter-over-quarter volume growth.
AgriculturalForest Products — The large corn crop harvested– Volume was unfavorable 7% due to continued decline in 2004 continuesnewsprint demand and a buildup in lumber and panel inventories. Yield management emphasis, which includes re-pricing of low margin traffic, contributed to allow feed mills in the east to draw on local supplies, resulting in reduced traffic. Agricultural exports and ethanol shipments continued to show quarter-over-quarter strength.revenue-per-unit gains of 11%.
Food and Consumer —– Volume was favorable quarter over quarter5% due to strength in the movement of transportation equipment such as new freight cars, alcoholic beverages and canned goods. Aggressive yield management resulted in significant revenue per car increases.
Forest Products — A quarter-over-quarter drop in newsprint demand, from conversion to electronic media and the use of lighter papers,This strength more than offset the favorable impact from the continued strong housing market.
Metals — Overall demand was unfavorable quarter over quartera decline in volume due to weakness in scrap and sheet metal resulting from high inventories in both markets.the hurricane impact.
Agricultural Products– Volume was favorable quarter over quarter in semi-finished productsup 7% based on strength of export grain, soybeans, feed ingredients and structural steel. Price increases coupled with asset prioritization focus resulted in revenue-per-car increasesethanol. An anticipated strong 2005 harvest encouraged farmers to sell larger amounts of 16%.soybeans to forward processors during July and August.
Chemicals – Unfavorable volume versus 2004 was driven by high raw materials inventory, high energy prices, and hurricane impacts. Several chemical plants along the Mississippi coast remain closed.
Emerging Markets —– Volume was favorable quarter over quarter5% due to strong demand for shipmentscontinued growth in waste, lime, wastefly ash and aggregates lines of business. Military shipments were down quarter over quarter due to fewer military equipment deployments.
Chemicals — Unfavorable quarter-over-quarter volume was driven by high raw materials inventories and energy prices. Reduced automotive production has unfavorably impacted raw material shipments for tires, specialty plastic and automotive glass.
Phosphate and Fertilizer — Volume fell as a result of lower rail shipments of export and domestic phosphate and potash. Reduced fertilizer application lowered domestic phosphate demand by nearly 10%. International phosphate producer inventories were at a 10-year high at the end of March, which led to lower export phosphate shipments in April and early May.
3839
CSX CORPORATION
PART I: FINANCIAL INFORMATION
ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
RESULTS OF OPERATIONS, Continued
Automotive
North American light vehicle production was favorable by 1%, primarily driven by the success of the domestic manufacturer’s employee discount pricing promotion. In addition, reduction in downtime at CSXT-served plants also contributed to an overall 2% increase in volumes.
Coal, Coke and Iron Ore
Record revenueRevenue was up 17% and revenue-per-car levels were achieved for the quarter. Strongvolume was up 4% on strong demand continues across coal sub-markets, with a mild softening noted only in steel related traffic.markets. Utility inventories remain below target levels, intensifyingcontinuing the high demand for coal shipments. The Company reached a settlement agreement in a rate case that resulted in an additional $17 million of revenue in the second quarter of 2005.
Automotive
Volume was down 8% as vehicle production by traditional domestic manufacturers was unfavorable by 10% quarter over quarter. Overall, North American light vehicle production was unfavorable by 1% quarter over quarter. Field inventory levels were down 14 days quarter over quarter to 58 days, which remains at or slightly above target levels. Volume declines from GM permanently closing three plants served by CSX were partially offset by rail shipments beginning at the CSX-served Montgomery, AL, Hyundai plant.
Rail Operating Expense
Labor and Fringeexpenses increased $41 million or 6% for the quarter ended July 1, 2005 compared to the quarter ended June 25, 2004.$53 million. Higher incentive compensation costs are the primary driver of the higher expenseincreased labor and fringe expenses as well as the effects of inflation.
Materials, Supplies and Otherexpenses increased $12$49 million or 3% for the quarter ended July 1, 2005 compared to the quarter ended June 25, 2004which is primarily dueattributable to inflation related expenses, higher reserve requirements for uncollectible accounts, property taxes, and increased legal fees which were mostly offset by a supplier cost reimbursement.deductibles for hurricane losses.
Depreciationincreased $45$34 million, or 30% for the quarter ended July 1, 2005 compared to the quarter ended June 25, 2004,which is mainly attributable to the Conrail spin-off transaction completed in the third quarter of 2004, as assets previously leased from Conrail are now owned directly by CSXT, as well as higher expenses resulting from an increase in the asset base.
Fuelincreased $25$26 million, or 17% for the quarter ended July 1, 2005 compared to the quarter ended June 25, 2004, due to higher fuel prices, net of hedging benefits. Also, recoveries in the second quarter of 2004 associated with foreign line fuel billing settlements were not repeated. Lowerbenefits, which was partially offset by lower volume and efficiency gains partially offset this change.gains.
Building and Equipment Rentdecreased $5 million primarily due to a reduction in railcar and locomotive leases.
Conrail Rents, Fees and Servicesdecreased $63$54 million for the quarter versus the prior year comparable quarter due to the Conrail spin-off transaction completed in the third quarter of 2004. This transaction decreased rents paid to Conrail, as assets previously leased from Conrail are now owned directly by CSXT. During the third quarter Conrail received a tax benefit from the resolution of various federal income tax audit adjustments, which increases CSX’s equity earnings and offsets Conrail Rents, Fees and Services.
Restructuring Chargeof $14$3 million represents the 2004 charge for separation expenses related to the management restructuring announced in November 2003 at the Company’s Surface Transportation units.
3940
CSX CORPORATION
PART I: FINANCIAL INFORMATION
ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
RESULTS OF OPERATIONS, Continued
Rail Operating Income
Operating income was $367$293 million for the quarter ended July 1,September 30, 2005 compared to $249$216 million for the quarter ended June 25,September 24, 2004.
Intermodal
The following discussion compares the 13-week quarters ended September 30, 2005 and September 24, 2004.
Intermodal Operating Revenue
Domestic- The Network Simplification Initiative (“NSI”), which led to overall service improvements across the network and reduced unprofitable traffic, resulted — Continued emphasis on longer hauls in lower volume. The quarter ended July 1, 2005 is the last quarter of period over period variancehigher density lanes coupled with sustained strength in pricing increased revenue per unit by 8%. Volumes were down due to NSI as the Company has cycled through the impacts of this initiative. Continued re-pricing and improved cargo selection coupled with tight capacity across all modes of transportation partially offset volume reduction.a steady focus on yield management efforts.
International- Second quarter volumes remained essentially flat due to sustained focus on eliminating less profitable traffic. Price— Volumes were up 3%. Revenue per car declined as a result of rate increases were offset byonly partially offsetting unfavorable traffic mix changes.
Other —- Higher fuel surcharge rates and increased customer coverage, terminal storage chargecontinued emphasis on multiple ancillary charges, including premise use increases, and a reduction in volume refund incentives all drove favorable quarter over quarterother revenue comparisons.increases.
Intermodal Operating Expense
Intermodal operating expense decreased $19$27 million, or 6%, compared to the prior year quarter as a result of reduced volumewhich is primarily attributable to NSI.a decrease in western network traffic, and is reflected in Inland Transportation expense.
Intermodal Operating Income
Intermodal operating income increased $24$37 million, or 77%119%, compared to the prior year quarter due to higher fuel surcharge, rates and increased customer coverage, reduction of volume incentive refund programs, increases in terminal storageper diem and supplemental charges relatingrelated to equipment,asset utilization, and expense savings from NSI.decreased volume and improved terminal productivity.
4041
CSX CORPORATION
PART I: FINANCIAL INFORMATION
ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
RESULTS OF OPERATIONS, Continued
SixNine Months Ended July 1,September 30, 2005 Compared to SixNine Months Ended June 25,September 24, 2004
| | | | | | | | | | | | | | | | | | | | | | | | |
| | CONSOLIDATED(a)(b) | | | CONSOLIDATED (a)(b) | |
| | July 1, | | June 25, | | $ | | | Sept. 30, | | Sept. 24, | | $ | |
(Dollars in Millions) | | 2005 | | 2004 | | Change | | | 2005 | | 2004 | | Change | |
| |
| | (Unaudited)
| |
| | | (Unaudited) | |
Operating Revenue | | $ | 4,274 | | $ | 3,917 | | $ | 357 | | | $ | 6,399 | | $ | 5,860 | | $ | 539 | |
Operating Expense | | |
Labor and Fringe | | 1,403 | | 1,343 | | 60 | | | 2,130 | | 2,014 | | 116 | |
Materials, Supplies and Other | | 907 | | 859 | | 48 | | | 1,365 | | 1,266 | | 99 | |
Depreciation | | 410 | | 321 | | 89 | | | 617 | | 493 | | 124 | |
Fuel | | 355 | | 305 | | 50 | | | 543 | | 467 | | 76 | |
Building and Equipment Rent | | 259 | | 277 | | | (18 | ) | | 383 | | 417 | | | (34 | ) |
Inland Transportation | | 120 | | 144 | | | (24 | ) | | 175 | | 216 | | | (41 | ) |
Conrail Rents, Fees & Services | | 39 | | 169 | | | (130 | ) | | 48 | | 232 | | | (184 | ) |
Restructuring Charge | | — | | 68 | | | (68 | ) | | — | | 71 | | | (71 | ) |
Miscellaneous | | | (4 | ) | | | (3 | ) | | | (1 | ) | |
| | | | | | | | |
| | | | | | | | |
Total Operating Expense | | 3,489 | | 3,483 | | 6 | | | 5,261 | | 5,176 | | 85 | |
| | | | | | | | | | | | | | |
| | |
Operating Income | | $ | 785 | | $ | 434 | | $ | 351 | | | $ | 1,138 | | $ | 684 | | $ | 454 | |
| | | | | | | | | | | | | | |
| | |
(a) | | Prior periods have been reclassified to conform to the current presentation. |
|
(b) | | Consolidated operating income includes the operating results of operations of Surface Transportation illustratedshown on page 3643 and other operating income. Other operating income includes the gain amortization on the CSX Lines conveyance, net sublease income from assets formerly included in the Company’s Marine Services segment, and other items andwhich amounted to $12$4 million and $3$6 million for the sixnine months ended July 1,September 30, 2005 and June 25,September 24, 2004, respectively. |
Consolidated Operating Revenue
The sixnine months ended July 1,September 30, 2005 demonstrated revenue growth increasing 9% or $357$539 million compared to the prior year comparable period primarily driven by continued yield management success and the Company’s fuel surcharge program.
Consolidated Operating Income
Consolidated operating expenses for the sixnine months ended July 1,September 30, 2005 remained relatively consistent withincreased 2% compared to the prior year comparable period. Overall consolidated operating income increased $351$454 million or 81%66% primarily derived from increases in operating revenue.
Interest Expense
Interest expense increased $7 million compared toremained relatively consistent with the prior year comparable period due to the higher interest rate applicable to the Conrail debt included in the Consolidated Balance Sheets as a result of the Conrail asset transfer in August 2004 combined with rising short-term interest rates and decreased benefit from the Company’s interest rate swaps.period.
4142
CSX CORPORATION
PART I: FINANCIAL INFORMATION
ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
RESULTS OF OPERATIONS, Continued
Income Tax Expense
The income tax expense for the six-monthnine-month period ended July 1,September 30, 2005 increased $5$43 million compared to the prior year comparable period. The principal elements of the $5 million variancethis increase are: (i) the income tax impact of increased pretax earnings, (ii) an increase in the overall effective state income tax rate, and (iii) offset by
| (a) | | the income tax impact of increased pretax earnings,
|
|
| (b) | | an increase in the overall effective state income tax rate, and offset by |
|
| (c) | | a $71 million net income tax benefit resulting from Ohio tax legislation changes enacted during the second quarter of 2005. |
Net Earnings
CSX consolidated net earnings for the six-monthnine-month period ended July 1,September 30, 2005 increased $595$636 million compared to the prior year comparable period as the Company recognized income of $428 million after tax as a result of the sale of its International Terminals business. Otherwise, increases in consolidated operating revenue and income tax benefits derived from Ohio tax legislation changes wherewere offset by debt repurchase expense.
42
CSX CORPORATION
PART I: FINANCIAL INFORMATION
ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
RESULTS OF OPERATIONS, Continued
The following table provideprovides detail of operating revenue and expense by segment:
CSX Corporation and Subsidiaries
BUSINESS SEGMENTS (Unaudited)
(Dollars in Millions)
SixNIne Months Ended July 1,September 30, 2005, and June 25,September 24, 2004
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Surface | | | | Surface | |
| | Rail | | Intermodal | | Transportation | | Rail | | Intermodal | | | | Transportation | |
| | 2005 | | 2004 | | Change | | 2005 | | 2004 | | Change | | 2005 | | 2004 | | Change | | 2005 | | 2004 | | Change | | 2005 | | 2004 | | Change | | | 2005 | | 2004 | | Change | |
| | | | | | | | |
Operating Revenue | | $ | 3,615 | | $ | 3,277 | | $ | 338 | | $ | 659 | | $ | 640 | | $ | 19 | | $ | 4,274 | | $ | 3,917 | | $ | 357 | | | $ | 5,403 | | $ | 4,893 | | $ | 510 | | $ | 996 | | $ | 967 | | $ | 29 | | | | $ | 6,399 | | $ | 5,860 | | $ | 539 | | |
Operating Expense | | | | | |
Labor and Fringe | | 1,361 | | 1,304 | | 57 | | 39 | | 37 | | 2 | | 1,400 | | 1,341 | | 59 | | | 2,066 | | 1,956 | | 110 | | 59 | | 56 | | 3 | | | | 2,125 | | 2,012 | | 113 | | |
Materials, Supplies and Other | | 812 | | 755 | | 57 | | 97 | | 103 | | | (6 | ) | | 909 | | 858 | | 51 | | | 1,220 | | 1,114 | | 106 | | 143 | | 156 | | | (13 | ) | | | 1,363 | | 1,270 | | 93 | | |
Depreciation | | 386 | | 298 | | 88 | | 20 | | 19 | | 1 | | 406 | | 317 | | 89 | | | 581 | | 459 | | 122 | | 29 | | 28 | | 1 | | | | 610 | | 487 | | 123 | | |
Fuel | | 355 | | 305 | | 50 | | — | | — | | — | | 355 | | 305 | | 50 | | | 543 | | 467 | | 76 | | — | | — | | — | | | | 543 | | 467 | | 76 | | |
Building and Equipment Rent | | 205 | | 205 | | — | | 67 | | 79 | | | (12 | ) | | 272 | | 284 | | | (12 | ) | | 304 | | 309 | | | (5 | ) | | 97 | | 118 | | | (21 | ) | | | 401 | | 427 | | | (26 | ) | |
Inland Transportation | | | (209 | ) | | | (204 | ) | | | (5 | ) | | 329 | | 348 | | | (19 | ) | | 120 | | 144 | | | (24 | ) | | | (318 | ) | | | (308 | ) | | | (10 | ) | | 493 | | 524 | | | (31 | ) | | | 175 | | 216 | | | (41 | ) | |
Conrail Rents, Fees and Services | | 39 | | 169 | | | (130 | ) | | — | | — | | — | | 39 | | 169 | | | (130 | ) | | 48 | | 232 | | | (184 | ) | | — | | — | | — | | | | 48 | | 232 | | | (184 | ) | |
Restructuring Charge | | — | | 64 | | | (64 | ) | | — | | 4 | | | (4 | ) | | — | | 68 | | | (68 | ) | | — | | 67 | | | (67 | ) | | — | | 4 | | | (4 | ) | | | — | | 71 | | | (71 | ) | |
| | | | | | | | |
Total Operating Expense | | 2,949 | | 2,896 | | 53 | | 552 | | 590 | | | (38 | ) | | 3,501 | | 3,486 | | 15 | | | 4,444 | | 4,296 | | 148 | | 821 | | 886 | | | (65 | ) | | | 5,265 | | 5,182 | | 83 | | |
| | | | | | | | |
Operating Income | | $ | 666 | | $ | 381 | | $ | 285 | | $ | 107 | | $ | 50 | | $ | 57 | | $ | 773 | | $ | 431 | | $ | 342 | | | $ | 959 | | $ | 597 | | $ | 362 | | $ | 175 | | $ | 81 | | $ | 94 | | | | $ | 1,134 | | $ | 678 | | $ | 456 | | |
| | | | | | | | |
| | | | | |
Operating Ratio | | | 81.6 | % | | | 88.4 | % | | | 83.8 | % | | | 92.2 | % | | | 81.9 | % | | | 89.0 | % | | | | 82.3 | % | | | 87.8 | % | | | 82.4 | % | | | 91.6 | % | | | | | 82.3 | % | | | 88.4 | % | | |
| | | | | |
Prior periods have been reclassified to conform to the current presentation.
43
CSX CORPORATION
PART I: FINANCIAL INFORMATION
ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
RESULTS OF OPERATIONS, Continued
Surface Transportation Results, Continued
The following table provides Surface Transportation volume, revenue and revenue per unit by service group and commodity:
SURFACE TRANSPORTATION TRAFFIC AND REVENUE
LoadsVolume (Thousands); Revenue (Dollars in Millions), Revenue Per Unit (Dollars)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Six Months Loads | | Six Months Revenue | | Volume | | Revenue | | Revenue Per Unit | |
| | 2005 | | 2004 | | % Change | | 2005 | | 2004 | | % Change | |
Nine Months | | | 2005 | | 2004 | | % Change | | 2005 | | 2004 | | % Change | | 2005 | | 2004 | | % Change | |
| | | | | | | | | | |
Merchandise | | |
Phosphates and Fertilizers | | 234 | | 241 | | | (3 | )% | | $ | 181 | | $ | 177 | | | 2 | % | | 345 | | 348 | | | (1 | )% | | $ | 264 | | $ | 252 | | | 5 | % | | $ | 765 | | $ | 724 | | | 6 | % |
Metals | | 185 | | 189 | | | (2 | ) | | 278 | | 244 | | 14 | | | 273 | | 284 | | | (4 | ) | | 420 | | 373 | | 13 | | 1,538 | | 1,313 | | 17 | |
Forest Products | | 226 | | 229 | | | (1 | ) | | 357 | | 325 | | 10 | | | 333 | | 344 | | | (3 | ) | | 534 | | 496 | | 8 | | 1,604 | | 1,442 | | 11 | |
Food and Consumer | | 126 | | 120 | | 5 | | 213 | | 179 | | 19 | | | 188 | | 179 | | 5 | | 323 | | 272 | | 19 | | 1,718 | | 1,520 | | 13 | |
Agricultural Products | | 179 | | 181 | | | (1 | ) | | 270 | | 258 | | 5 | | | 267 | | 263 | | 2 | | 403 | | 375 | | 7 | | 1,509 | | 1,426 | | 6 | |
Chemicals | | 275 | | 279 | | | (1 | ) | | 546 | | 520 | | 5 | | | 406 | | 418 | | | (3 | ) | | 815 | | 786 | | 4 | | 2,007 | | 1,880 | | 7 | |
Emerging Markets | | 251 | | 246 | | 2 | | 254 | | 246 | | 3 | | | 383 | | 372 | | 3 | | 389 | | 366 | | 6 | | 1,016 | | 984 | | 3 | |
| | | | | | | | | | |
Total Merchandise | | 1,476 | | 1,485 | | | (1 | ) | | 2,099 | | 1,949 | | 8 | | | 2,195 | | 2,208 | | | (1 | ) | | 3,148 | | 2,920 | | 8 | | 1,434 | | 1,322 | | 8 | |
| | |
Automotive | | 249 | | 260 | | | (4 | ) | | 419 | | 422 | | | (1 | ) | | 363 | | 372 | | | (2 | ) | | 619 | | 607 | | 2 | | 1,705 | | 1,632 | | 4 | |
| | |
Coal, Coke and Iron Ore | | |
Coal | | 875 | | 813 | | 8 | | 1,001 | | 831 | | 20 | | | 1,297 | | 1,219 | | 6 | | 1,492 | | 1,254 | | 19 | | 1,150 | | 1,029 | | 12 | |
Coke and Iron Ore | | 42 | | 34 | | 24 | | 46 | | 33 | | 39 | | | 62 | | 51 | | 22 | | 67 | | 48 | | 40 | | 1,081 | | 941 | | 15 | |
| | | | | | | | | | |
Total Coal, Coke and Iron Ore | | 917 | | 847 | | 8 | | 1,047 | | 864 | | 21 | | | 1,359 | | 1,270 | | 7 | | 1,559 | | 1,302 | | 20 | | 1,147 | | 1,025 | | 12 | |
Other | | — | | — | | — | | 50 | | 42 | | 19 | | | — | | — | | — | | 77 | | 64 | | 20 | | — | | — | | — | |
| | | | | | | | | | |
| | |
Total Rail | | 2,642 | | 2,592 | | 2 | | 3,615 | | 3,277 | | 10 | | | 3,917 | | 3,850 | | 2 | | 5,403 | | 4,893 | | 10 | | 1,379 | | 1,271 | | 8 | |
| | | | | | | | | | |
| | |
Intermodal | | |
Domestic | | 435 | | 521 | | | (17 | ) | | 352 | | 391 | | | (10 | ) | | 651 | | 760 | | | (14 | ) | | 532 | | 575 | | | (7 | ) | | 817 | | 757 | | 8 | |
International | | 636 | | 617 | | 3 | | 247 | | 241 | | 2 | | | 964 | | 937 | | 3 | | 378 | | 368 | | 3 | | 392 | | 393 | | — | |
Other | | — | | — | | — | | 60 | | 8 | | NM | | — | | — | | — | | 86 | | 24 | | NM | | — | | — | | — | |
| | | | | | | | | | |
Total Intermodal | | 1,071 | | 1,138 | | | (6 | ) | | 659 | | 640 | | 3 | | | 1,615 | | 1,697 | | | (5 | ) | | 996 | | 967 | | 3 | | 617 | | 570 | | 8 | |
| | | | | | | | | | |
Total Surface Transportation | | 3,713 | | 3,730 | | | (0 | )% | | $ | 4,274 | | $ | 3,917 | | | 9 | % | | 5,532 | | 5,547 | | | — | % | | $ | 6,399 | | $ | 5,860 | | | 9 | % | | $ | 1,157 | | $ | 1,056 | | | 10 | % |
|
Prior periods have been reclassified to conform to the current presentation.
NM — Not Meaningful
44
CSX CORPORATION
PART I: FINANCIAL INFORMATION
ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and short-term investments decreased $346$269 million to $513$590 million at July 1,September 30, 2005, from $859 million at December 31, 2004. Net cash proceeds from the disposition of the Company’s International Terminals business waswere the primary source of cash and cash equivalents used to repurchase approximately $1 billion of publicly-traded notes.
Other current assets increased $95$82 million to $252$239 million as of July 1,September 30, 2005 as rising fuel prices continue to increase the fair value of the Company’s fuel hedge swap asset.
As of July 1,September 30, 2005, CSX’s long-term unsecured debt obligations were rated BBB and Baa2 by Standard and Poor’s and Moody’s Investor Service, respectively. In May 2005, Standard and Poor’s raised the Company’sCSX’s short-term rating from A-3 to A-2 and revised the outlook from negative to stable. In July 2004, Moody’s Investor Service reaffirmed the Company’sCSX’s short and long-term unsecured debt ratings, but adjusted the outlook from stable to negative. The Company’sCSX’s short-term commercial paper program is rated A-2 and P-2 by Standard and Poor’s and Moody’s Investor Service, respectively. If CSX’s long-term unsecured bond ratings were reduced to BBB- and Baa3, the Company’sits undrawn borrowing costs under the $1.2 billion and $400 million revolving credit facilities would not materially increase. If CSX’s short-term commercial paper ratings were reduced to A-3 and P-3, it would increase the Company’sCSX’s borrowing costs in the commercial paper market and reduce the Company’sits access to this source of funds because of the more limited demand for lower rated commercial paper.
The Company CSX had no commercial paper outstanding at July 1,September 30, 2005 or December 31, 2004.
CSX’s working capital at July 1,September 30, 2005 was a deficit of $305$693 million, compared to a deficit of $330$314 million at December 31, 2004, primarily driven by a reduction of debt due within one year offset by lowerin cash, cash equivalents and short-term investments.investments combined with the absence of net assets from the Company’s former International Terminals business. A working capital deficit is not unusual for the CompanyCSX and other companies in the industryrailroads 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 anticipated obligations arising from legal, tax and other regulatory rulings.
See Note 4.5. Debt and Credit Agreements, for discussion of the Company’s revolving credit facilities and repurchase of debt.
Shelf Registration Statements
CSX currently has $900 million of capacity under an effective shelf registration that may be used, subject to market conditions and board authorization, to issue debt or equity securities at the Company’sCSX’s discretion. The CompanyCSX presently intends to use the proceeds from the sale of any securities issued under its shelf registration statement to finance cash requirements, including refinancing existing debt as it matures. While the CompanyCSX seeks to give itself flexibility with respect to meeting such needs, there can be no assurance that market conditions would permit the CompanyCSX to sell such securities on acceptable terms at any given time, or at all.
45
CSX CORPORATION
PART I: FINANCIAL INFORMATION
ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES, Continued
As of September 30, 2005, CSXT’s long-term unsecured debt obligations were rated BBB and Baa2 by Standard and Poor’s and Moody’s Investor Service, respectively, and CSXT’s long-term secured debt obligations were rated A and A1, respectively. Selected financial data for CSXT is as follows:
CSX Transportation, Inc.
| | | | | | | | | |
(Dollars in Millions) | | Periods Ended | |
| |
| | Sept. 30 | | | Dec. 31, | |
| | 2005 | | | 2004 | |
| | | | | | |
Current Maturities of Long-term Debt | | | | | | | | |
| Unsecured | | $ | 1 | | | $ | — | |
| Secured | | | 105 | | | | 121 | |
| | | | | | |
| Total | | $ | 106 | | | $ | 121 | |
| | | | | | |
|
Long-term Debt | | | | | | | | |
| Unsecured | | $ | 454 | | | $ | 431 | |
| Secured | | | 615 | | | | 711 | |
| | | | | | |
| Total | | $ | 1,069 | | | $ | 1,142 | |
| | | | | | |
|
Shareholder’s Equity | | $ | 10,115 | | | $ | 9,765 | |
|
| | | | | | | | | | | | | | | | |
(Dollars-in-Millions) | | Quarters-Ended | | Nine-Months Ended |
| |
| | Sept. 30, | | | Sept. 24, | | | Sept. 30, | | | Sept. 24, | |
| | 2005 | | | 2004 | | | 2005 | | | 2004 | |
| | | | | | | | | | | | |
Depreciation Expense | | $ | 187 | | | $ | 153 | | | $ | 559 | | | $ | 435 | |
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. Significant estimates using management judgment are made for the following areas:
| • | | Casualty, Environmental and Legal Reserves |
|
| • | | Pension and Postretirement Medical Plan Accounting |
|
| • | | Depreciation Policies for Assets Under the Group-Life Method |
|
| • | | Income Taxes |
These estimates and assumptions are discussed with the Audit Committee of the Board of Directors on a regular basis.
46
CSX CORPORATION
PART I: FINANCIAL INFORMATION
ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
FORWARD LOOKINGFORWARD-LOOKING STATEMENTS
Certain statements in this report and in other materials filed with the Securities and Exchange Commission,SEC, as well as information included in oral statements or other written statements made by the Company, are forward-looking statements within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934. These forward-looking statements include, among others, statements regarding:
| • | | Expectations as to operating results of operations and operational improvements; |
|
| • | | Expectations as to the effect of claims, lawsuits, environmental costs, commitments, contingent liabilities, labor negotiations or agreements on our financial condition; |
|
| • | | Management’s plans, goals, strategies and objectives for future operations and other similar expressions concerning matters that are not historical facts, and management’s expectations as to future performance and operations and the time by which objectives will be achieved; and |
|
| • | | 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. The Company cautions against placing undue reliance on forward-looking statements, which reflect its good faith beliefs with respect to future events and are based on information currently available to it as of the date the forward-looking statement is made.Forward-lookingmade. Forward-looking statements should not be read as a guarantee of future performance or results, and will not necessarily be accurate indications of the times that, or by which, such performance or results will be achieved.
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. 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. The following important factors, in addition to those discussed elsewhere, may cause actual results to differ materially from those contemplated by these forward-looking statements:
| • | | The Company’s success in implementing its operational objectives and improving Surface Transportation operating efficiency; |
|
| • | | Changes in operating conditions and costs or commodity concentrations; |
|
| • | | Material changes in domestic or international economic or business conditions, including those affecting the rail industry such as customer demand, effects of adverse economic conditions affecting shippers, and adverse economic conditions in the industries and geographic areas that consume and produce freight; |
|
| • | | Labor costs and labor difficulties, including stoppages affecting either the Company’s operations or the customers’ ability to deliver goods to the Company for shipment; |
|
| • | | The inherent risks associated with safety and security, including adverse economic or operational effects from terrorist activities and any governmental response; |
|
| • | | Changes in fuel prices; |
47
CSX CORPORATION
PART I: FINANCIAL INFORMATION
ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
FORWARD LOOKING STATEMENTS, Continued
| • | | Legislative, regulatory, or legal developments involving taxation, including the outcome of tax claims and litigation; the potential enactment of initiatives to re-regulate the rail industry and the ultimate outcome of shipper and rate claims subject to adjudication; |
|
| • | | Competition from other modes of freight transportation such as trucking and competition and consolidation within the transportation industry generally; |
|
| • | | Natural events such as extremesevere weather conditions, including floods, fire, floods,hurricanes and earthquakes, or other unforeseen disruptions of the Company’s operations, systems, property or equipment; and |
|
| • | | The outcome of litigation and claims, including those related to environmental contamination, personal injuries and occupational illnesses. |
Additionally, important factors resulting from Hurricane Katrina that may cause actual results to differ materially from those contemplated by these forward-looking statements include: the ability to restore service in affected areas of CSXT’s rail network; further assessments of the extent of storm-related losses; the price and availability of continued supplies of fuel; the effect of inefficiencies in Company operations and increased operating expenses resulting from storm-related disruptions; loss of customers to competitors that have not been affected by the storm to the same degree in the same locales; and the extent of insurance coverage for the Company’s losses. 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’s website atwww.sec.gov and the Company’s website atwww.csx.com.
48
CSX CORPORATION
PART I: FINANCIAL INFORMATION
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
CSXThe Company addresses market risk exposure to fluctuations 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 CompanyCSX addresses its exposure to interest rate market risk through a controlled program of risk management that includes the use of interest rate swap agreements. The table below illustrates ourCSX’s long-term interest rate swap position as of July 1,September 30, 2005.
(Dollars in Millions)
| | | | | |
(Dollars in Millions) | | | |
| | July 1, | | | Sept. 30, |
| | 2005 | | | 2005 |
Interest Rate Swap Agreements | | $ | 694 | | | $ | 600 | |
Effect of 1% Increase or Decrease in LIBOR Interest Rate | | $ | 7 | | | 6 | |
| | | | | | |
During 2003, the Company began a program to hedge its exposure to fuel price volatility through swap transactions. As of July 1,September 30, 2005, CSX had hedged approximately 43%37% and 9% of fuel purchases for 2005 and 2006, respectively. At July 1,September 30, 2005, a 1% change in fuel prices would result in an increase or decrease in the asset related to the swaps of approximately $2$1 million. The Company’sCSXT’s rail unit average annual fuel consumption is approximately 606600 million gallons. A one-cent change in the price per gallon of fuel would affect fuel expense by approximately $4 million annually.
The CompanyCSX is exposed to loss in the event of non-performance by any counter-party to the interest rate swap or fuel hedging agreements. The CompanyCSX does not anticipate non-performance by such counter-parties, and no material loss would be expected from non-performance.
The following table highlights our floating rate debt outstanding exclusive of derivative contracts that swap fixed interest rate notes to floating interest rates.
(Dollars in Millions)
| | | | | |
(Dollars in Millions) | | | |
| | July 1, | | | Sept. 30, |
| | 2005 | | | 2005 |
Floating Rate Debt Outstanding | | $ | 370 | | | $ | 364 | |
Effect of 1% Variance in Interest Rates | | $ | 4 | | | 4 | |
| | | | | | |
49
CSX CORPORATION
PART I: FINANCIAL INFORMATION
ITEM 4: CONTROLS AND PROCEDURES
As of July 1,September 30, 2005, under the supervision and with the participation of the Company’sCSX’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 July 1,September 30, 2005. There were no changes in the Company’s internal controls over financial reporting during the fiscal quarter covered by this quarterly report that have materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting.
50
CSX CORPORATION
CSX CORPORATION
PART II: OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
For information relating to CSX’sthe Company’s settlements and other legal proceedings, see Note 12.14.
ITEM 2: UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3: DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
| (a) | | Annual meeting held May 4, 2005 |
|
| (b) | | Not applicable |
|
| (c) | | There were 215,916,402 shares of CSX common stock outstanding as of March 4, 2005, the record date for the 2005 annual meeting of shareholders. A total of 188,595,880 shares were voted. All of the nominees for directors of the corporation were elected with the following vote: |
| | | | |
| | Votes | | Votes |
Nominee | | For | | Withheld |
|
Elizabeth E. Bailey | | 182,339,153 | | 6,256,727 |
John B. Breaux | | 183,232,590 | | 5,363,290 |
Edward J. Kelly III | | 179,489,361 | | 9,106,519 |
Robert D. Kunisch | | 182,270,542 | | 6,325,338 |
Southwood J. Morcott | | 182,252,294 | | 6,343,586 |
David M. Ratcliffe | | 181,422,683 | | 7,173,197 |
Charles E. Rice | | 181,596,295 | | 6,999,585 |
William C. Richardson | | 182,264,510 | | 6,331,370 |
Frank S. Royal | | 181,717,480 | | 6,878,400 |
Donald J. Shepard | | 183,657,178 | | 4,938,702 |
Michael J. Ward | | 182,234,468 | | 6,361,412 |
The appointment of Ernst & Young LLP as independent auditors to audit and report on CSX’s financial statements for the year 2005 was ratified by the shareholders with the following vote:
| | | | | | | | | | | | |
| | Votes | | | | | | Broker |
Votes For | | Against | | Abstentions | | Non-Votes |
|
183,383,311 | | | 3,670,429 | | | | 1,542,140 | | | | — | |
51
CSX CORPORATION
PART II: OTHER INFORMATION
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS, CONTINUED
The shareholder proposal regarding non-deductible executive compensation was declined with the following vote:
| | | | | | | | | | | | |
| | Votes | | | | | | Broker |
Votes For | | Against | | Abstentions | | Non-Votes |
|
12,808,601 | | | 152,114,061 | | | | 2,560,640 | | | | 21,112,578 | |
The shareholder proposal regarding majority vote was approved with the following vote: | | | | | | | | | | | | |
| | Votes | | | | | | Broker |
Votes For | | Against | | Abstentions | | Non-Votes |
|
125,425,384 | | | 39,507,833 | | | | 2,550,085 | | | | 21,112,578 | |
None.ITEM 5: OTHER INFORMATION
CSX Corporation’sThe Board of Directors (“Board”) has adopted, upon recommendation from the Governance Committeeapproved a dividend of the Board, Stock Ownership Guidelines to further ensure alignment of the interests of non-employee directors (“Director”) with the interests of stockholders. This action reflects the growing trend among large, publicly-held companies to require directors to hold prescribed amounts of company stock. In addition, the Board requires that each Director receive 50 percent of his or her respective annual retainer in the form of Company stock.
These guidelines require that all Directors own shares of common stock in CSX Corporation. Within five years of election to the Board of Directors, a Director must acquire and hold an amount$0.13 per outstanding share of CSX common stock, equal in valuepayable December 15, 2005 to five timesholders of record as of November 25, 2005. This represents a 30% increase over the amount of such Director’s annual retainer. The minimum number oflast dividend CSX shares to be held by Directors will be calculatedpaid on June 1 of each calendar year based on the average of the high and low price of CSXits common stock on the New York Stock Exchange (“NYSE”) on that date. In the event that June 1 is not a day on which the NYSE is open for trading, this calculation will occur on the first trading day immediately following June 1. Any subsequent change in the value of the shares will not affect the amount of stock Directors must hold during that year. In the event the annual retainer increases, the Directors will have five years from the time of the increase to acquire any additional shares needed to meet these guidelines.stock.
5251
CSX CORPORATION
PART II: OTHER INFORMATION
ITEM 6. EXHIBITS
Exhibits | | |
31.1* | | | Principal Executive Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| | |
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. |
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | | | | | |
| | CSX CORPORATION
(Registrant) |
| By: | /s/ CAROLYN T. SIZEMORE | |
| | Carolyn T. Sizemore | | CSX CORPORATION (Registrant) | | |
| | | | | | |
| | By: | | /s/ CAROLYN T. SIZEMORE | | |
| | | | | | |
| | | | Carolyn T. Sizemore Vice President and Controller (Principal Accounting Officer) | | |
| | | | | | |
Dated: October 26, 2005 | | | | | | |
Dated: August 1, 2005
5352