PAGE 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarter ended July 1, 1994 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to --------------- ---------------- Commission File Number 1-3359 CSX TRANSPORTATION, INC. (Exact name of registrant as specified in its charter) Virginia 54-6000720 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 500 Water Street, Jacksonville, Florida 32202 (Address of principal executive offices) (Zip Code) (904) 359-3100 (Registrant's telephone number, including area code) No Change (Former name, former address and former fiscal year, if changed since last report.) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes (X) No ( ) Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of July 1, 1994: 9,061,038 shares REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION H (1) (a) AND (b) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM WITH THE REDUCED DISCLOSURE FORMAT. - 1 - PAGE 2 CSX TRANSPORTATION, INC. FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JULY 1, 1994 INDEX PART I. FINANCIAL INFORMATION Page Number Item 1. Financial Statements 1. Consolidated Statement of Earnings - Quarters and Six Months Ended July 1, 1994 and June 30, 1993 3 2. Consolidated Statement of Cash Flows - Six Months Ended July 1, 1994 and June 30, 1993 4 3. Consolidated Statement of Financial Position - At July 1, 1994 and December 31, 1993 5 Notes to Consolidated Financial Statements 6 Item 2. Management's Analysis and Results of Operations 10 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 12 Signature 12 - 2 - PAGE 3 CSX TRANSPORTATION, INC. AND SUBSIDIARIES Consolidated Statement of Earnings (Millions of Dollars) Quarter Ended Six Months Ended ------------------- ------------------ July 1, June 30, July 1, June 30, 1994 1993 1994 1993 ------- ------- -------- -------- OPERATING REVENUE Merchandise $ 786 $ 739 $ 1,544 $ 1,459 Coal 363 354 702 694 Other 26 28 49 54 ------ ------ ------- -------- Transportation 1,175 1,121 2,295 2,207 Non-Transportation 15 13 22 21 ------ ------ ------- -------- Total 1,190 1,134 2,317 2,228 ------ ------ ------- -------- OPERATING EXPENSE Labor and Fringe Benefits 453 442 918 900 Materials, Supplies and Other 248 259 515 523 Equipment Rent 100 99 198 200 Depreciation 93 93 186 186 Fuel 61 63 124 130 ------ ------ ------- -------- Transportation 955 956 1,941 1,939 Non-Transportation 5 6 11 12 ------ ------ ------- -------- Total 960 962 1,952 1,951 ------ ------ ------- -------- OPERATING INCOME 230 172 365 277 Other Income (Expense) (1) 41 (9) 39 Interest Expense 13 15 25 31 ------ ------ ------- -------- EARNINGS BEFORE INCOME TAXES 216 198 331 285 Income Tax Expense 79 67 122 98 ------ ------ ------- -------- NET EARNINGS $ 137 $ 131 $ 209 $ 187 ====== ====== ======= ======== See accompanying Notes to Consolidated Financial Statements. - 3 - PAGE 4 CSX TRANSPORTATION, INC. AND SUBSIDIARIES Consolidated Statement of Cash Flows (Millions of Dollars) Six Months Ended ------------------ July 1, June 30, 1994 1993 ----- ------ OPERATING ACTIVITIES Net Earnings $ 209 $ 187 Adjustments to Reconcile Earnings to Cash Provided Depreciation 186 186 Deferred Income Taxes 73 76 Productivity/Restructuring Charge Payments (56) (46) Other Operating Activities 18 (66) Changes in Operating Assets and Liabilities Accounts Receivable (11) 9 Materials and Supplies (16) (13) Other Current Assets 9 (6) Accounts Payable and Other Current Liabilities (92) 13 ----- ----- Cash Provided by Operating Activities 320 340 ----- ----- INVESTING ACTIVITIES Property Additions (231) (262) Other Investing Activities 32 74 ----- ----- Cash Used by Investing Activities (199) (188) ----- ----- FINANCING ACTIVITIES Long-Term Debt Issued 53 80 Long-Term Debt Repaid (62) (107) Long-Term Debt Repaid to Parent (86) --- Dividends Paid (29) (14) Other Financing Activities (41) (9) ----- ----- Cash Used by Financing Activities (165) (50) ----- ----- CASH AND CASH EQUIVALENTS (Decrease) Increase in Cash and Cash Equivalents (44) 102 Cash and Cash Equivalents at Beginning of Period 272 248 ----- ----- Cash and Cash Equivalents at End of Period $ 228 $ 350 ===== ===== See accompanying Notes to Consolidated Financial Statements. - 4 - PAGE 5 CSX TRANSPORTATION, INC. AND SUBSIDIARIES Consolidated Statement of Financial Position (Millions of Dollars) July 1, December 31, 1994 1993 ------------ ------------ ASSETS Current Assets Cash and Cash Equivalents $ 228 $ 272 Accounts Receivable 111 98 Materials and Supplies 132 116 Deferred Income Taxes 114 103 Other Current Assets 34 43 ------- ------- Total Current Assets 619 632 ------- ------- Properties and Other Assets Properties 12,785 12,704 Less Accumulated Depreciation 4,121 4,073 ------- ------- Properties - Net 8,664 8,631 Affiliates and Other Companies 194 155 Other Assets 253 235 ------- ------- Total Properties and Other Assets 9,111 9,021 ------- ------- Total Assets $ 9,730 $ 9,653 ======= ======= LIABILITIES AND SHAREHOLDER'S EQUITY Current Liabilities Accounts Payable and Other Current Liabilities $ 1,031 $ 1,111 Current Maturities of Long-Term Debt 80 87 Due to Parent Company 22 40 ------- ------- Total Current Liabilities 1,133 1,238 ------- ------- Deferred Income Taxes 2,021 1,937 ------- ------- Long-Term Liabilities and Deferred Gains 1,619 1,631 ------- ------- Long-Term Debt 591 593 ------- ------- Due to Parent Company --- 69 ------- ------- Shareholder's Equity Common Stock 181 181 Other Capital 1,047 1,047 Retained Earnings 3,138 2,957 ------- ------- Total Shareholder's Equity 4,366 4,185 ------- ------- Total Liabilities and Shareholder's Equity $ 9,730 $ 9,653 ======= ======= See accompanying Notes to Consolidated Financial Statements. - 5 - PAGE 6 CSX TRANSPORTATION, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (All Tables in Millions of Dollars) NOTE 1. BASIS OF PRESENTATION. In the opinion of management, the accompanying consolidated financial statements contain all adjustments necessary to present fairly the financial position of CSX Transportation, Inc. ("CSXT") and its majority-owned subsidiaries as of July 1, 1994, and December 31, 1993, and the results of operations for the quarters and six months ended July 1, 1994, and June 30, 1993, and its cash flows for the six months ended July 1, 1994 and June 30, 1993, such adjustments being of a normal recurring nature. CSXT is a wholly- owned subsidiary of CSX Corporation ("CSX"). While management believes that the disclosures presented are adequate to make the information not misleading, it is suggested that these financial statements be read in conjunction with the financial statements and the notes included in CSXT's latest Form 10-K. Certain prior-year data has been reclassified to conform to the 1994 presentation. NOTE 2. CHANGE IN FISCAL REPORTING PERIODS. Effective January 1, 1994, CSXT changed its fiscal reporting periods from four calendar quarters to four 13-week quarters. Fiscal year 1994 began on January 1, 1994, and will include 52 weeks. The four 13-week quarters will end on April 1, July 1, September 30 and December 30, 1994. NOTE 3. ACCOUNTING CHANGE. Effective January 1, 1994, the company adopted Statement of Financial Accounting Standards ("SFAS") No. 112, "Employers' Accounting for Postemployment Benefits." SFAS No. 112 requires that certain benefits provided to former or inactive employees, after employment but before retirement, such as workers' compensation and disability benefits, be accrued if attributable to employees' service already rendered. The financial statement impact of adopting SFAS No. 112 was not significant. NOTE 4. ACCOUNTS RECEIVABLE. CSXT has an ongoing agreement to sell without recourse on a monthly basis, an undivided percentage ownership interest in all freight accounts receivable to CSX Trade Receivables Corporation ("CTRC"), a wholly-owned subsidiary of CSX. At July 1, 1994, and December 31, 1993, accounts receivable sold under this agreement totaled $566 million and $556 million, respectively. In addition, CSXT has a five-year revolving agreement with a financial institution to sell with recourse on a monthly basis, an undivided ownership interest in all miscellaneous accounts receivable. At July 1, 1994 and December 31, 1993, accounts receivable sold under this agreement totaled $46 million and $50 million, respectively. CSXT has retained the collection and servicing responsibility with respect to all accounts receivable sold. - 6 - PAGE 7 CSX TRANSPORTATION, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED (All Tables in Millions of Dollars) NOTE 5. OTHER INCOME (EXPENSE). Quarter Ended Six Months Ended July 1, June 30, July 1, June 30, 1994 1993 1994 1993 ------- -------- ------- ------- Interest Income $ 8 $ 8 $ 15 $ 15 Gain on South Florida Track Sale Transaction 22 20 22 20 Gain (Loss) on Investment Transaction (14) 26 (14) 26 Fees Related to Accounts Receivable Sold (11) (8) (22) (16) Miscellaneous (6) (5) (10) (6) ------ ------ ------ ------ Total $ (1) $ 41 (9) 39 ====== ====== ====== ====== NOTE 6. ACCOUNTS PAYABLE AND OTHER CURRENT LIABILITIES. July 1, December 31, 1994 1993 ------- ------------ Trade Accounts Payable $ 459 $ 457 Labor and Fringe Benefits 330 337 Interest, Taxes and Other 105 180 Casualty Reserves 137 137 ------ ------ Total $1,031 $1,111 ====== ====== NOTE 7. INCOME TAXES. The effective income tax rate for the second quarter and first six months of 1994 reflects the federal statutory rate of 35 percent. The federal statutory rate for the second quarter and first six months of 1993 was 34 percent. NOTE 8. CONTINGENCIES. CSXT is a party to various proceedings brought both by private parties and regulatory agencies related to environmental issues. CSXT has been identified as a potentially responsible party in a number of governmental investigations and actions relating to environmentally impaired sites that are or may be subject to remedial action under the Federal Superfund Statute ("Superfund") or corresponding state statutes. The majority of these proceedings are based on allegations that CSXT, or its railroad predecessors, sent hazardous substances to the facilities in question for disposal. Such proceedings arising under Superfund typically involve numerous other waste generators and disposal companies and seek to allocate or recover costs associated with site investigation and cleanup, which could be substantial. - 7 - PAGE 8 CSX TRANSPORTATION, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED (All Tables in Millions of Dollars) NOTE 8. CONTINGENCIES, Continued The assessment of the required response and remedial costs associated with these sites is extremely complex. Among the variables that management must assess are imprecise and changing remedial cost estimates and continually evolving governmental standards. CSXT frequently reviews its role, if any, with respect to each such location, giving consideration to the nature of CSXT's alleged connection to the location (e.g., generator, owner or operator), the extent of CSXT's alleged connection (e.g., volume of waste sent to the location and other relevant factors), the accuracy and strength of evidence connecting CSXT to the location, and the number, connection and financial position of other named and unnamed potentially responsible parties at the location. Further, CSXT periodically reviews its exposure in all non-Superfund environmental proceedings with which it is involved. Based upon such reviews and updates of the sites with which it is involved, CSXT has recorded, and periodically reviews for adequacy, reserves to cover estimated contingent future environmental costs with respect to such sites. Liabilities are recorded when CSXT's responsibility for environmental remedial efforts is deemed probable, and the costs can be reasonably estimated. Generally, the timing of these accruals coincides with the completion of a feasibility study or CSXT's commitment to a formal plan of action. CSXT 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. Such additional liabilities could be significant to future consolidated results of operations and cash flows. Based upon information currently available, however, CSXT believes that its environmental reserves are adequate to accomplish remedial actions to comply with present laws and regulations. A number of legal actions, other than environmental, are pending against CSXT in which claims are made in substantial amounts. While the ultimate results of environmental investigations, lawsuits and claims involving CSXT cannot be predicted with certainty, management does not currently expect that these matters will have a material adverse effect on the consolidated financial position, results of operations and cash flows of the company. NOTE 9. RELATED PARTIES. Cash and cash equivalents at July 1, 1994 and December 31, 1993, includes $268 million and $336 million, respectively, representing amounts due from CSX for CSXT's participation in the CSX cash management plan. Under this plan, excess cash is advanced to CSX for investment and CSX makes cash funds available to its subsidiaries as needed for use in their operations. CSX is committed to repay all amounts due on demand should circumstances require. The companies are charged for borrowings or compensated for investments based on returns earned by the plan portfolio. - 8 - PAGE 9 CSX TRANSPORTATION, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED (All Tables in Millions of Dollars) NOTE 9. RELATED PARTIES, Continued Effective January 1, 1994, CSXT entered into a loan agreement with Customized Transportation, Inc. ("CTI"), a wholly-owned subsidiary of CSX, whereby CTI borrowed $40 million from CSXT. Interest is due from CTI semi- annually commencing June 30, 1994, with the entire principal amount due on January 1, 2001. Interest income related to the CTI loan for the second quarter 1994 was $1 million. In the second quarter of 1994, CSXT repaid early the remaining formal long-term borrowings from CSX. The balance at December 31, 1993 was $86 million. Interest expense on borrowings from CSX was $2 million for the second quarter of 1994 and 1993. Included in Materials, Supplies and Other expense are amounts related to a management service fee charged by CSX, data processing related charges from CSX Technology, Inc. ("Technology"), and the reimbursement, under an operating agreement, from CSX Intermodal, Inc. ("CSXI"), for costs incurred by CSXT related to intermodal operations. Technology and CSXI are wholly-owned subsidiaries of CSX. Materials, Supplies and Other expense includes net expense of $49 million for the second quarter of 1994 and $55 million for the second quarter of 1993 relating to the above arrangements. CSXT has an operating lease agreement with CSXI for 3,400 rebuilt coal gondola cars. The cars were previously owned and rebuilt by CSXT, and were subsequently sold to CSXI at book value. These cars are presently being leased by CSXT through March 2006. In addition, CSXT is leasing 65 locomotives from CSXI pursuant to a pre-existing operating lease agreement acquired by CSXI from a third party. These locomotives are being leased by CSXT through May 2008. In the second quarter of 1994 and 1993, rent expense includes $5 million associated with the CSXI lease agreements noted above. - 9 - Page 10 ITEM 2. MANAGEMENT'S ANALYSIS AND RESULTS OF OPERATIONS Second Quarter 1994 Compared With 1993 - -------------------------------------- Net earnings for the 1994 second quarter were $137 million versus $131 million for last year's second quarter. Transportation operating income rose $55 million or 33 percent, to $220 million for the second quarter of 1994, from $165 million in the prior- year quarter. The results were driven by a 5 percent increase in revenue, and the continued success of cost-cutting programs. TRANSPORTATION OPERATING INCOME (Millions of Dollars) ------------------------------- Quarter Ended Six Months Ended ------------------ ------------------ July 1, June 30, Percent July 1, June 30, Percent 1994 1993 Change 1994 1993 Change -------- -------- ------- ------- -------- ------- Operating Revenue Merchandise $ 786 $ 739 6% $ 1,544 $ 1,459 6% Coal 363 354 3% 702 694 1% Other 26 28 (7%) 49 54 (9%) ------ ------ ------- -------- Total 1,175 1,121 5% 2,295 2,207 4% Operating Expense 955 956 1% 1,941 1,939 --- ------ ------ ------- -------- Operating Income $ 220 $ 165 33% $ 354 $ 268 32% ====== ====== ======= ======== For the second quarter of 1994, merchandise traffic grew 7 percent, with by gains in metals, minerals, automotive shipments, and food and consumer products. Metals, minerals, automotive shipments and food and consumer products for the second quarter of 1994 jumped 10 percent, 14 percent, 13 percent, and 12 percent respectively, over 1993's second quarter levels. Domestic coal demand offset continued weakness in export coal to raise volume to 38.6 million tons, 2 percent above 1993's second quarter level. Coal shipments to utility, industrial and cogeneration users increased to 35.4 million tons in the second quarter of 1994, up from 33.3 million tons in the second quarter of 1993. Export coal totaled 3.2 million tons for the second quarter of 1994, compared with 4.4 million tons in the prior-year quarter. The decline in export coal was due to decreased foreign demand, more attractive domestic markets and increased foreign competition. - 10 - PAGE 11 ITEM 2. MANAGEMENT'S ANALYSIS AND RESULTS OF OPERATIONS, CONTINUED Second Quarter 1994 Compared With 1993, Continued - ------------------------------------------------- Transportation operating expense was $955 million in the quarter compared to $956 million in the second quarter of 1993. Despite higher traffic levels, transportation operating expense was held nearly flat over the expense level in the prior-year quarter. Labor and fringe benefit expense increased about 2 percent due to the greater number of train crews required to handle the higher traffic as well as a modest wage increase mandated by the Presidential Emergency Board No. 219. First Six Months 1994 Compared to 1993 - -------------------------------------- For the first six months ended July 1, 1994, CSXT reported net earnings of $209 million, up 11.8 percent in comparison to 1993. Continuing cost control efforts held expenses to 1993 levels while the improved domestic economy bolstered traffic and increased revenues 4 percent. OUTLOOK - ------- For the balance of 1994, CSXT anticipates favorable revenue levels compared with 1993. The higher revenue levels are anticipated to result from the strong domestic economy. The company also plans to continue the intense focus on productivity improvements and expense control throughout the company over the next six months. Entering the second half of 1994, CSXT is experiencing solid demand for coal shipments as U.S. utilities rebuild inventories depleted by 1993's United Mine Workers strikes and unusually high demand during severe winter weather. Export coal shipments, however, remain weak, as a result of depressed demand from abroad, foreign competition and the strong domestic market. CSXT merchandise traffic, reflecting the underlying strength of the U.S. industrial sector, is expected to trend with the economy. CSXT experienced only slight interruptions of service and no structural damage during mid-July flooding in the southeastern U.S. CSXT will monitor and be actively involved in industrywide labor contract negotiations which are expected to begin in late 1994. These negotiations have traditionally taken place over a number of months and have not resulted in any extended work stoppages. - 11 - PAGE 12 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (b) Reports on Form 8-K 1. None. 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 TRANSPORTATION, INC. /s/ GREGORY R. WEBER ------------------------ Gregory R. Weber Dated: July 28, 1994 (Principal Accounting Officer) - 12 -