SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X)Quarterly report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended September 30,1995
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or
( )Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from to
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Commission file number 1-12184
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CONRAIL INC.
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(Exact name of registrant as specified in its charter)
Pennsylvania 23-2728514
- ----------------------------------- ------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2001 Market Street, Philadelphia, Pennsylvania 19101
- -----------------------------------------------------------------------
(Address of principal executive offices)
(Zip Code)
(215) 209-4000
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(Registrant's telephone number, including area code)
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(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 the latest practicable date.
Number of shares of Conrail Inc. common stock outstanding (as of
October 31, 1995) 82,617,767.
CONRAIL INC.
INDEX
Page Number
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Statements
of Income - Quarters and nine months
ended September 30, 1995 and 1994 3
Condensed Consolidated Balance
Sheets - September 30, 1995 and
December 31, 1994 4
Condensed Consolidated Statements
of Cash Flows - Nine months ended
September 30, 1995 and 1994 5
Notes to Condensed Consolidated
Financial Statements 6
Report of Independent Accountants 8
Item 2. Management's Discussion and
Analysis of Financial Condition
and Results of Operations 9
PART II. OTHER INFORMATION
Item 2. Changes in Securities 14
Item 6. Exhibits and Reports on Form 8-K 14
SIGNATURES 15
2
PART I. FINANCIAL INFORMATION
CONRAIL INC.
Item 1. Financial Statements.
--------------------
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
($ In Millions Except Per Share Data)
Quarters Ended Nine Months Ended
September 30, September 30,
-------------- ----------------
1995 1994 1995 1994
---- ---- ------ ------
Revenues $923 $949 $2,735 $2,747
Operating expenses
Way and structures 117 121 368 386
Equipment 187 204 575 623
Transportation 319 346 992 1,038
General and administrative 92 84 298 265
Early retirement program 84
---- ---- ------ ------
Total operating expenses 715 755 2,233 2,396
---- ---- ------ ------
Income from operations 208 194 502 351
Interest expense (49) (48) (147) (143)
Other income, net 29 28 89 79
---- ---- ------ ------
Income before income taxes 188 174 444 287
Income taxes 72 68 150 112
---- ---- ------ ------
Net income $116 $106 $ 294 $ 175
==== ==== ====== ======
Net income per common share
Primary $1.44 $1.29 $ 3.61 $ 2.07
Fully diluted 1.31 1.17 3.28 1.91
Dividends per common share $.425 $.375 $1.175 $1.025
Weighted average number of shares
used in computing earnings per share
(thousands)
Primary 78,664 79,461 78,837 79,839
Fully diluted 88,525 89,324 88,853 89,747
Ratio of earnings to fixed charges 4.02x 4.04x 3.28x 2.63x
See accompanying notes.
3
CONRAIL INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
($ In Millions) September 30, December 31,
1995 1994
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ASSETS
Current assets
Cash and cash equivalents $ 81 $ 43
Accounts receivable 662 646
Deferred tax assets 249 249
Material and supplies 165 164
Other current assets 30 23
------ ------
Total current assets 1,187 1,125
Property and equipment, net 6,680 6,498
Other assets 816 699
------ ------
Total assets $8,683 $8,322
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Short-term borrowings 174 112
Current maturities of long-term debt 114 130
Accounts payable 166 119
Wages and employee benefits 175 169
Casualty reserves 107 103
Accrued and other current liabilities 502 568
------ ------
Total current liabilities 1,238 1,201
Long-term debt 2,037 1,940
Casualty reserves 208 212
Deferred income taxes 1,329 1,203
Special income tax obligation 459 513
Other liabilities 332 328
------ ------
Total liabilities 5,603 5,397
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Stockholders' equity
Series A ESOP convertible junior
preferred stock 282 283
Unearned ESOP compensation (235) (243)
Common stock 85 80
Additional paid-in capital 2,179 1,848
Employee benefits trust (325)
Retained earnings 1,245 1,056
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3,231 3,024
Treasury stock (151) (99)
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Total stockholders' equity 3,080 2,925
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Total liabilities and
stockholders' equity $8,683 $8,322
====== ======
See accompanying notes.
4
CONRAIL INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
($ In Millions)
Nine Months Ended
September 30,
----------------
1995 1994
----- -----
Cash flows from operating activities $ 515 $ 468
----- -----
Cash flows from investing activities
Property and equipment acquisitions (327) (371)
Net payments for capital lease buyouts (26)
Other (37) (44)
----- -----
Net cash used in investing activities (390) (415)
----- -----
Cash flows from financing activities
Repurchase of common stock (52) (64)
Net proceeds from short-term borrowings 62 107
Proceeds from long-term debt 85 114
Payment of long-term debt (75) (120)
Dividends paid on common stock (94) (81)
Dividends paid on preferred stock (21) (16)
Other 8 14
----- -----
Net cash used in financing activities (87) (46)
----- -----
Increase in cash and cash equivalents 38 7
Cash and cash equivalents
Beginning of period 43 38
----- -----
End of period $ 81 $ 45
===== =====
See accompanying notes.
5
CONRAIL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. The unaudited financial statements contained herein present
the consolidated financial position of Conrail Inc.(the
"Company") as of September 30, 1995 and December 31, 1994, the
consolidated results of operations for the three and nine-month
periods ending September 30, 1995 and 1994 and the consolidated
cash flows for the nine-month periods ended September 30, 1995
and 1994. In the opinion of management, these financial
statements include all adjustments, consisting of normal
recurring adjustments, necessary to present fairly the results
for the interim periods included.
The rules and regulations of the Securities and Exchange
Commission permit certain information and footnote disclosures,
ordinarily required by generally accepted accounting principles,
to be condensed or omitted from interim financial reports.
Accordingly, the financial statements included herein should be
read in conjunction with the audited financial statements and
notes for the year ended December 31, 1994, presented in the
Company's Annual Report on Form 10-K.
2. As a result of a decrease in a state income tax rate enacted
during the second quarter of 1995, income tax expense for the
nine months ended September 30, 1995 was reduced by $21 million
representing the effects of adjusting deferred income taxes and
the special income tax obligation for the rate decrease as
required under SFAS 109, "Accounting for Income Taxes".
3. In June 1995, the Company completed the disposition of the
last of two major waste disposal facilities of Concord Resources,
Inc.("Concord"). The dispositions had no financial statement
impact as the Company's investment in Concord had been reserved
in 1993.
4. During the first quarter of 1994, the Company recorded a
charge of $51 million (after tax benefits of $33 million) for a
non-union employee voluntary early retirement program and related
costs. The majority of the cost of the early retirement program
is being paid from the Company's overfunded pension plan.
6
5. In July 1994, the Board of Directors authorized a $100 million
common stock repurchase program. During the first nine months of
1995, the Company acquired 923,806 shares for approximately $52
million under this program, and at September 30, 1995
approximately $39 million remained available from the
authorization. In April 1995, the Company's Board of Directors
approved an additional $250 million multi-year stock repurchase
program.
6. In June 1995, the Company issued approximately 4.7 million
shares of its common stock to the Conrail Employee Benefits Trust
(the "Trust") in exchange for a promissory note of $250 million
at an interest rate of 6.9%. The Trust will be used to fund
certain employee benefits and other forms of compensation over
its fifteen-year term. The amount representing unearned employee
benefits is recorded as a deduction from stockholders' equity and
is reduced as benefits and compensation are paid through the
release of shares from the Trust. The shares owned by the Trust
are valued at the closing market price as of the end of each
reporting period, with the corresponding changes in the balance
of the Trust reflected in additional paid-in capital. Shares
held by the Trust are not considered outstanding for earnings per
share computations until released by the Trust, but do have
voting and dividend rights.
7. Information regarding contingent liabilities and litigation
was included in Note 12 to Consolidated Financial Statements and
Part I, Item 3 - Legal Proceedings in the Company's Annual Report
on Form 10-K for the year ended December 31, 1994. There have
been no material developments with respect to these matters
during the first nine months of 1995, except as disclosed in the
Annual Report on Form 10-K and the quarterly report on Form 10-Q
for the periods ended June 30, 1995.
7
REPORT OF INDEPENDENT ACCOUNTANTS
The Stockholders and Board of Directors of
Conrail Inc.
We have reviewed the accompanying condensed consolidated balance
sheet of Conrail Inc. and its subsidiaries (the "Company") as of
September 30, 1995 and the related condensed consolidated statements
of income for the three and nine months ended September 30, 1995 and
September 30, 1994 and the condensed consolidated statements of cash
flows for the nine months ended September 30, 1995 and September 30,
1994. This financial information is the responsibility of the
Company's management.
We conducted our review in accordance with standards established by
the American Institute of Certified Public Accountants. A review of
interim financial information consists principally of applying
analytical procedures to financial data and making inquiries of
persons responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken
as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications
that should be made to the accompanying interim financial information
for it to be in conformity with generally accepted accounting
principles.
We previously audited in accordance with generally accepted auditing
standards, the consolidated balance sheet as of December 31, 1994, and
the related consolidated statements of income, of stockholders' equity
and of cash flows for the year then ended (not presented herein), and
in our report dated January 23, 1995 we expressed an unqualified
opinion on those consolidated financial statements and included an
explanatory paragraph describing the Company's change in methods of
accounting for income taxes and postretirement benefits other than
pensions in 1993. In our opinion, the information set forth in the
accompanying condensed consolidated balance sheet as of December 31,
1994, is fairly stated in all material respects in relation to the
consolidated balance sheet from which it has been derived.
PRICE WATERHOUSE LLP
Thirty South Seventeenth Street
Philadelphia, PA 19103
October 18, 1995
8
CONRAIL INC.
Item 2. Management's Discussion and Analysis of Financial
-------------------------------------------------
Condition and Results of Operations.
-----------------------------------
Results of Operations
- ---------------------
Overview
- --------
Net income for Conrail Inc. ("Conrail" or the "Company") was $116
million for the third quarter of 1995 compared with $106 million for the
third quarter of 1994. Net income for the first nine months of 1995 was
$294 million compared with $175 million for the first nine months of
1994. Results for the first nine months of 1995 include recognition of a
$21 million reduction in income taxes related to a decrease in a state
tax rate enacted during the second quarter of 1995 (see Note 2 to the
Condensed Consolidated Financial Statements). Results for 1994 include
a one-time charge of $51 million (net of tax benefits of $33 million)
relating to a non-union early retirement program and related costs that
the Company recorded in the first quarter of 1994 (see Note 4 to the
Condensed Consolidated Financial Statements). Absent the tax benefit
and the one-time charge related to the early retirement program,
Conrail's net income would have been $273 million and $226 million for
the first nine months of 1995 and 1994, respectively.
Net income per common share for the third quarter of 1995 was $1.44 on a
primary basis and $1.31 on a fully diluted basis compared with $1.29 and
$1.17 on the same bases for the third quarter of 1994. Net income per
common share for the nine months of 1995 was $3.61 on a primary basis
and $3.28 on a fully diluted basis compared with $2.07 and $1.91 on the
respective bases for the same nine-month period of 1994. Excluding the
one-time tax benefit for the first nine months of 1995, net income per
common share would have been $3.34 on a primary basis and $3.05 on a
fully diluted basis. Without the one-time charge in the first nine
months of 1994, net income per common share would have been
$2.71 on a primary basis and $2.48 on a fully diluted basis.
Traffic volume continued to decline for both the quarter and nine months
ended September 30, 1995 compared with the same periods in 1994. The
most significant declines were experienced in the Intermodal Service
Group. The Company now projects an overall decline in line haul revenue
of 1.0% to 2.0% for the year. Despite the traffic volume declines
experienced during the first three quarters, the Company has not changed
its goal of achieving a 79.5% operating ratio (operating expenses as a
percent of revenues) for 1995.
The Company continues to evaluate certain portions of its route system
and other operating assets to determine the extent to which they
effectively and economically support its current and expected
operations, with a view toward disposing of those assets that do not.
As of September 30, 1995, the Company had designated 7,800 miles of
lines for such evaluation, which are in various stages of completion. Of
those lines, to date, the Company has identified 1,600 miles that may be
sold and 500 miles to be retained. Certain of the lines to be sold are
the subject of current negotiations, which could conclude in 1995. At
9
this time, the Company is not able to estimate the total number of miles
that may eventually be sold or the potential effect on the Company's
financial statements.
It is possible that the Company's adoption of a formal plan for the
disposition, or the actual disposition, of the assets identified as a
result of such analyses could have a significant adverse effect on the
Company's financial statements in the reporting period in which either
such event occurred.
Third Quarter 1995 compared with Third Quarter 1994
- ---------------------------------------------------
Net income for the third quarter of 1995 was $116 million versus $106
million for the third quarter of 1994.
Operating revenues (primarily freight line haul revenues, but also
including switching, demurrage and incidental revenues) decreased $26
million, or 2.7%, from $949 million in the third quarter of 1994 to $923
million in the third quarter of 1995. A 7.8% decline in traffic volume
in units (freight cars and intermodal trailers and containers) resulted
in a $70 million decrease in revenues, that was partially offset by an
improvement in average revenue per unit which increased revenues by $44
million. The increase in average revenue per unit is attributable to
increases in average rates, $33 million, and a favorable traffic mix,
$11 million.
Operating expenses decreased $40 million, or 5.3%, from $755 million in
the third quarter of 1994 to $715 million in the third quarter of 1995.
The following table sets forth the operating expenses for the two
periods:
Third Quarter
--------------
Increase
($ In Millions) 1995 1994 (Decrease)
---- ---- --------
Compensation and benefits $304 $305 $ (1)
Fuel 38 46 (8)
Material and supplies 35 49 (14)
Equipment rents 91 96 (5)
Depreciation and amortization 74 69 5
Casualties and insurance 47 59 (12)
Other 126 131 (5)
---- ---- ----
$715 $755 $(40)
==== ==== ====
Compensation and benefits as a percent of revenues was 33.0% in the
third quarter of 1995 as compared with 32.2% in the third quarter of
1994.
The decrease in material and supplies expense of $14 million, or 28.6%,
is attributable principally to a lower level of maintenance, primarily
locomotive overhauls, and track and freight car repairs.
10
Casualties and insurance costs decreased $12 million, or 20.3%,
primarily as a result of an unfavorable year-to-date estimated cost per
claim adjustment made in the third quarter of 1994 and fewer employee
claims in the third quarter of 1995 which were partially offset by costs
of several large adverse verdicts in 1995.
Conrail's operating ratio was 77.5% for the third quarter of 1995,
compared with 79.6% for the third quarter of 1994.
First Nine Months of 1995 compared with First Nine Months of 1994
- -----------------------------------------------------------------
Net income for the first nine months of 1995 was $294 million which
included the aforementioned tax benefit of $21 million recorded during
the second quarter (see Note 2 to the Condensed Consolidated Financial
Statements). Net income for the first nine months of 1994 was $175
million and included the one-time after-tax charge of $51 million
related to the early retirement program (see Note 4 to the Condensed
Consolidated Financial Statements).
Operating revenues decreased $12 million, or .4%, to $2,735 million for
the first nine months of 1995 from $2,747 million for the first nine
months of 1994. A 4.7% decrease in traffic volume resulted in a $122
million decrease in revenues that was partially offset by revenue
increases related to higher average rates, $80 million, and favorable
traffic mix, $17 million. Other revenues increased $13 million.
Operating expenses decreased $163 million, or 6.8%, from $2,396
million in the first nine months of 1994, which included the $84
million charge related to the non-union voluntary early retirement
program and related costs, to $2,233 million in the first nine months of
1995. The following table sets forth the operating expenses for the two
periods:
First Nine Months
-----------------
Increase
($ In Millions) 1995 1994 (Decrease)
------ ------ --------
Compensation and benefits $ 958 $ 957 $ 1
Fuel 125 140 (15)
Material and supplies 134 162 (28)
Equipment rents 259 289 (30)
Depreciation and amortization 220 208 12
Casualties and insurance 123 143 (20)
Other 414 413 1
Early retirement program 84 (84)
------ ------ -----
$2,233 $2,396 $(163)
====== ====== ======
Compensation and benefits as a percent of revenues was 35.0% in the
first nine months of 1995 as compared with 34.8% in the first nine
months of 1994.
11
Fuel costs decreased $15 million, or 10.7%, as a result of lower traffic
volume, greater efficiencies and lower average fuel prices.
The decrease of $28 million, or 17.3%, in material and supplies cost was
attributable to a lower level of repair and maintenance expenditures.
Equipment rents decreased $30 million, or 10.4%, primarily as a result
of fewer foreign cars on line and improved equipment utilization.
Casualties and insurance costs decreased $20 million, or 14.0%,
primarily as a result of an unfavorable year-to-date estimated cost per
claim adjustment made in the third quarter of 1994 and fewer employee
personal injury claims in 1995, which were partially offset by several
large adverse verdicts in 1995.
Conrail's operating ratio was 81.7% for the first nine months of 1995,
compared with 87.2% for the first nine months of 1994. Without the $84
million one-time charge for the early retirement program, the operating
ratio for the first nine months of 1994 would have been 84.1%.
Other income, net increased $10 million, or 12.7%, primarily due to the
$8 million gain from a property sale completed during the second quarter
of 1995.
The Company's effective income tax rate for the first nine months
of 1995 was 33.8% compared with 39.0% for the same period of 1994.
The decrease is primarily related to a $21 million reduction in
income taxes as a result of a decrease in a state income tax rate
which was enacted during the second quarter of 1995(see Note 2 to
the Condensed Consolidated Financial Statements).
Liquidity and Capital Resources
- -------------------------------
The Company's cash and cash equivalents increased $38 million in
the first nine months of 1995, from $43 million at December 31,
1994 to $81 million at September 30, 1995. Cash generated from
operations, primarily from its wholly-owned subsidiary,
Consolidated Rail Corporation ("CRC"), and borrowings are the
Company's principal sources of liquidity and are used primarily
for capital expenditures, debt service and dividends. In the
first nine months of 1995, operating activities provided cash of
$515 million and net proceeds from short-term borrowings and long-
term debt provided $72 million. The principal uses of cash were
for property and equipment acquisitions, $327 million; net
payments for capital lease buyouts, $26 million; repurchases of
common stock, $52 million; and cash dividends on common and
preferred stock, $115 million.
A working capital (current assets less current liabilities)
deficiency of $51 million existed at September 30, 1995 as
compared with a deficiency of $76 million at December 31, 1994.
Management believes that the Company's financial position allows
it sufficient access to credit sources on investment grade terms,
and, if necessary, additional intermediate or long-term debt could
be obtained for working capital requirements.
12
During the first nine months of 1995, CRC issued $89 million of
commercial paper and repaid $52 million. At September 30, 1995,
$249 million of commercial paper remained outstanding, of which
$100 million is classified as long-term debt since it is expected
to be refinanced through subsequent issuances of commercial paper
and is supported by a long-term credit facility.
During September 1995, CRC borrowed $25 million under its
uncollateralized bank credit agreement at an interest rate of 6.0%,
which was repaid in October 1995.
In July 1994, the Board of Directors authorized a fourth common
stock repurchase program of up to $100 million. During the first
nine months of 1995, the Company acquired 923,806 shares for $52
million, bringing the total acquired under this program through
September 30, 1995 to 1,099,306 shares at a cost of approximately
$61 million. At September 30, 1995, approximately $39 million
remained from this program. In April 1995, the Board of Directors
approved an additional $250 million multi-year stock repurchase
program.
In response to lower than expected traffic and revenues, the Company
reduced its planned capital expenditures for 1995 from $550 million to
$500 million.
Other Matters
- -------------
On September 20, 1995, the Board of Directors adopted amendments
to the By-laws of the Corporation to require advance written
notice (a "Shareholder's Notice") of (1) any business or proposal
to be brought by any shareholder of the Corporation at an annual
meeting of shareholders (which notice must contain certain
specified information relating to any such business or proposal
and any such shareholder) and (2) any shareholder's intention to
nominate a director at a shareholder meeting (which notice must
contain certain specified information relating to any such
shareholder and any such nominee). The requirements set forth in
the By-laws are in addition to all applicable requirements of the
Securities Exchange Act of 1934, as amended, and the rules and
regulations thereunder with respect to the matters described
above. A copy of the Amended and Restated By-laws of the
Corporation is included as Exhibit 3.1 to this report. To receive
a copy of the Amended and Restated By-laws, please contact the
Office of the Corporate Secretary, 22-C Two Commerce Square, 2001
Market Street, Philadelphia, PA 19101-1422.
Pursuant to the By-laws, with respect to the 1996 Annual Meeting
currently scheduled for May 15, 1996, a Shareholder's Notice must
be delivered to or mailed to, postage prepaid, and received at the
principal executive offices of the Corporation no later than
February 17, 1996 and no earlier than January 18, 1996. A
Shareholder's Notice should be addressed to the Secretary of the
Corporation at the address set forth above.
13
PART II. OTHER INFORMATION
CONRAIL INC.
Item 2. Changes in Securities.
---------------------
On September 20, 1995, the Company amended its Rights Agreement to,
among other things, extend its term and increase the Purchase Price (as
defined in the Rights Agreement) for a share of its common stock from
$105 to $205. In addition, the Rights Agreement was amended to provide
for the declaration of a dividend of one Right for each share of Series
A ESOP Convertible Junior Preferred Stock, without par value, which
dividend was payable on October 2, 1995, and to subject the redemption
of the Rights, amendment of the Rights Agreement and other matters to
the approval of Continuing Directors (as defined in the Rights
Agreement).
Item 6. Exhibits and Reports on Form 8-K.
--------------------------------
(a) Exhibits
3.1 Amended and Restated By-laws of the Registrant.
4.1 Amendment to Rights Agreement of the Registrant
dated as of September 20, 1995, filed as Exhibit
3.4(i)(i) to the Registrant's Form 8-B/A dated as
of September 25, 1995 and incorporated herein by
reference.
10.1 Form of Severance Agreement.
11 Statement of earnings per share
computations.
12 Computations of the ratio of earnings to
fixed charges.
15 Letter re unaudited interim financial
information from Price Waterhouse LLP.
27 Financial data schedule.
(b) Reports on Form 8-K
None
14
SIGNATURES
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.
CONRAIL INC.
Registrant
/S/ Bruce B. Wilson
-------------------------------
Bruce B. Wilson
Senior Vice President - Law
/S/ H. W. Brown
-------------------------------
H. W. Brown
Senior Vice President -
Finance and Administration
(Principal Financial Officer)
Date: November 9, 1995
15
EXHIBIT INDEX
-------------
Exhibit
No.
- -------
3.1 Amended and Restated By-laws of the Registrant.
10.1 Form of Severance Agreement.
11 Statement of earnings per share
computations.
12 Computations of the ratio of earnings to
fixed charges.
15 Letter re unaudited interim financial
information from Price Waterhouse LLP.
27 Financial data schedule.
Exhibit 4.1 is incorporated by reference.