CSX CORPORATION Exhibit 99.2
INDEX TO MARCH 31, 2000 RESTATED FINANCIAL
STATEMENTS AND RELATED INFORMATION
Page Number
PART I. FINANCIAL INFORMATION
Item 1:
Financial Statements
1. Consolidated Statement of Earnings-
Quarters Ended March 31, 2000 and April 2, 1999
3
2. Consolidated Statement of Cash Flows-
Quarters Ended March 31, 2000 and April 2, 1999 4
3. Consolidated Statement of Financial Position-
At March 31, 2000 and December 31, 1999 5
Notes to Consolidated Financial Statements 6
Item 2:
Management's Discussion and Analysis of Results of
Operations and Financial Condition 17
-1-
CSX CORPORATION AND SUBSIDIARIES
Consolidated Statement of Earnings
(Millions of Dollars, Except Per Share Amounts)
Unaudited
Quarters Ended
---------------------------------
March 31, April 2,
2000 1999
------------ ------------
Operating Income
Operating Revenue $ 2,034 $ 2,433
Operating Expense 1,860 2,165
------------ ------------
Operating Income 174 268
Other Income and Expense
Other Income (expense) (5) (35)
Interest Expense 134 133
------------ ------------
Earnings
Earnings from Continuing Operations Before Income Taxes 35 100
Income Tax Expense 10 30
------------ ------------
Earnings before Discontinued Operations and Cumulative Effect of Accounting 25 70
Change
Earnings from Discontinued Operations, Net of Tax 4 5
------------ ------------
Earnings before Cumulative Effect of Accounting Change 29 75
Cumulative Effect on Prior Years of Accounting Change for Insurance-Related
Assessments, Net of Tax - (49)
------------ ------------
Net Earnings $ 29 $ 26
============ ============
Per Common Share
Earnings Per Share:
Before Discontinued Operations and Cumulative Effect of Accounting Change 0.12 0.34
Earnings from Discontinued Operations 0.02 0.02
Cumulative Effect of Accounting Change - (0.24)
------------ ------------
Including Discontinued Operations and Cumulative Effect of Accounting Change 0.14 0.12
============ ============
Earnings Per Share, Assuming Dilution:
Before Discontinued Operations and Cumulative Effect of Accounting Change 0.12 0.34
Earnings from Discontinued Operations 0.02 0.02
Cumulative Effect of Accounting Change - (0.24)
------------ ------------
Including Discontinued Operations and Cumulative Effect of Accounting Change 0.14 0.12
============ ============
Average Common Shares Outstanding (Thousands) 211,192 210,124
============ ============
Average Common Shares Outstanding, Assuming Dilution (Thousands) 212,015 211,658
============ ============
Cash Dividends Paid Per Common Share $ 0.30 $ 0.30
============ ============
See accompanying Notes to Consolidated Financial Statements.
-2-
CSX CORPORATION AND SUBSIDIARIES
Consolidated Statement of Cash Flows
(Millions of Dollars)
(Unaudited)
Quarters Ended
-----------------------------------
March 31, April 2,
2000 1999
------------ ------------
OPERATING ACTIVITIES
Net Earnings $ 29 $ 26
Adjustments to Reconcile Net Earnings to Net Cash Provided:
Cumulative Effect of Accounting Change - 49
Depreciation 147 169
Deferred Income Taxes 2 39
Equity in Conrail Earnings - Net (6) (13)
Other Operating Activities 33 (7)
Changes in Operating Assets and Liabilities
Accounts Receivable 6 (75)
Other Current Assets (39) 20
Accounts Payable (21) (122)
Other Current Liabilities (152) (86)
------------ ------------
Net Cash Provided by Operating Activities (1) -
------------ ------------
INVESTING ACTIVITIES
Property Additions (107) (190)
Short-Term Investments - Net (23) 32
Other Investing Activities 11 (14)
------------ ------------
Net Cash Used by Investing Activities (119) (172)
------------ ------------
FINANCING ACTIVITIES
Short-Term Debt - Net (81) 250
Long-Term Debt Issued - 79
Long-Term Debt Repaid (34) (32)
Cash Dividends Paid (66) (65)
Other Financing Activities (32) (11)
------------ ------------
Net Cash Provided (Used) by Financing Activities (213) 221
------------ ------------
Net Increase (Decrease) in Cash and Cash Equivalents (333) 49
CASH, CASH EQUIVALENTS AND SHORT-TERM
INVESTMENTS
Cash and Cash Equivalents at Beginning of Period 626 105
------------ ------------
Cash and Cash Equivalents at End of Period 293 154
Short-Term Investments at End of Period 373 396
------------ ------------
Cash, Cash Equivalents and Short-Term
Investments at End of Period $ 666 $ 550
============ ============
See accompanying Notes to Consolidated Financial Statements.
-3-
CSX CORPORATION AND SUBSIDIARIES
Consolidated Statement of Financial Position
(Millions of Dollars)
(Unaudited)
March 31, December 31,
2000 1999
----------------- -----------------
ASSETS
Current Assets
Cash, Cash Equivalents and Short-Term Investments $ 666 $ 974
Accounts Receivable 1,129 1,135
Materials and Supplies 263 220
Deferred Income Taxes 133 135
Other Current Assets 159 99
------------- -------------
Total Current Assets 2,350 2,563
Properties 17,514 17,526
Accumulated Depreciation (5,301) (5,269)
------------- -------------
Properties-Net 12,213 12,257
Investment in Conrail 4,668 4,663
Affiliates and Other Companies 466 410
Other Long-Term Assets 828 827
------------- -------------
Total Assets $ 20,525 $ 20,720
============= =============
LIABILITIES
Current Liabilities
Accounts Payable $ 1,176 $ 1,197
Labor and Fringe Benefits Payable 441 436
Casualty, Environmental and Other Reserves 267 271
Current Maturities of Long-Term Debt 351 349
Short-Term Debt 493 574
Other Current Liabilities 557 646
------------- -------------
Total Current Liabilities 3,285 3,473
Casualty, Environmental and Other Reserves 763 767
Long-Term Debt 6,160 6,196
Deferred Income Taxes 3,228 3,227
Other Long-Term Liabilities 1,382 1,301
------------- -------------
Total Liabilities 14,818 14,964
------------- -------------
SHAREHOLDERS' EQUITY
Common Stock, $1 Par Value 218 218
Other Capital 1,514 1,525
Retained Earnings 3,997 4,034
Accumulated Other Comprehensive Loss (22) (21)
------------- -------------
Total Shareholders' Equity 5,707 5,756
------------- -------------
Total Liabilities and Shareholders' Equity $ 20,525 $ 20,720
============= =============
See accompanying Notes to Consolidated Financial Statements.
-4-
CSX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
(All Tables in Millions of Dollars, Except Per Share Amounts)
NOTE 1. BASIS OF PRESENTATION
In the opinion of management, the accompanying consolidated financial
statements contain all adjustments necessary to present fairly the financial
position of CSX Corporation and subsidiaries (CSX or the "company") at March 31,
2000 and December 31, 1999, the results of its operations and cash flows for the
quarters ended March 31, 2000 and April 2, 1999, such adjustments being of a
normal recurring nature. Certain prior-year data have been reclassified to
conform to the 2000 presentation.
While the company believes that the disclosures presented are adequate to
make the information not misleading, it is suggested that these financial
statements be read in conjunction with the financial statements and the notes
included in the company's latest Annual Report and Form 10-K.
CSX follows a 52/53 week fiscal reporting calendar. Fiscal year 2000
consists of 52 weeks ending on December 29, 2000. Fiscal year 1999 consisted of
53 weeks ended December 31, 1999. The financial statements presented are for
the 13-week quarter ended March 31, 2000, the 14-week quarter ended April 2,
1999, and as of December 31, 1999.
Comprehensive income approximates net earnings for all periods presented in
the accompanying consolidated statement of earnings.
NOTE 2. CHANGE IN METHOD OF ACCOUNTING FOR INSURANCE-RELATED
ASSESSMENTS
CSX adopted the American Institute of Certified Public Accountants'
Statement of Position No. 97-3, "Accounting by Insurance and Other Enterprises
for Insurance-Related Assessments," (SOP No. 97-3) effective as of the beginning
of fiscal year 1999. SOP No. 97-3 requires companies to accrue assessments
related to workers' compensation second injury funds and is applicable to CSX
with respect to certain assessments incurred by Sea-Land Service, Inc. (Sea-
Land), the company's container-shipping unit. The assessments relate to
employees who have experienced second injuries over periods dating back to the
1970's and are receiving a disability type benefit. Previously, the assessments
were charged to expense in the fiscal year they were paid. As a result of
adopting SOP No. 97-3, the company recorded a non-cash charge of $78 million,
$49 million after-tax, 24 cents per share, during the quarter ended April 2,
1999 to reflect the cumulative effect on prior years of the accounting change.
Had the accounting change been applied retroactively, the effect on net earnings
and related per share amounts would not have been material to any period
presented.
The majority of the Sea-Land workforce that could incur second injuries and
become eligible for these disability benefits in future periods transferred
their employment to the purchaser of Sea-Land's international liner business in
December 1999 (see Note 5). The company retained the obligations for second
injury fund assessments for claimants receiving benefits prior to the sale. As
a result of these changes, future expense for second injury fund assessments
associated with the continuing workforce should be minimal, but the company
expects to make annual contributions to the fund for a number of years until the
retained obligations are extinguished.
-5-
CSX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
(All Tables in Millions of Dollars, Except Per Share Amounts)
NOTE 3. EARNINGS PER SHARE
Earnings per share are based on the weighted average of common shares
outstanding, as defined by Financial Accounting Standards Board (FASB) Statement
No. 128, "Earnings per Share," for the fiscal quarters ended March 31, 2000 and
April 2, 1999. Earnings per share, assuming dilution, are based on the weighted
average of common shares outstanding adjusted for the effect of potential common
shares outstanding that were dilutive during the period, principally arising
from employee stock plans. For the fiscal quarters ended March 31, 2000 and
April 2, 1999, potential common shares that were dilutive totaled 0.8 and 1.5
million, respectively.
Certain potential common shares outstanding at March 31, 2000 and April 2,
1999 were not included in the computation of earnings per share, assuming
dilution, since their exercise prices were greater than the average market price
of the common shares during the period and, accordingly, their effect is
antidilutive. These shares totaled 23.9 million at a weighted-average exercise
price of $41.89 per share at March 31, 2000 and 11.4 million with a weighted-
average exercise price of $50.29 per share at April 2, 1999.
NOTE 4. INVESTMENT IN AND INTEGRATED RAIL OPERATIONS WITH CONRAIL
Background
- ----------
CSX and Norfolk Southern Corporation (Norfolk Southern) completed the
acquisition of Conrail Inc. (Conrail) in May 1997. Conrail owns the primary
freight railroad system serving the northeastern United States, and its rail
network extends into several midwestern states and into Canada. CSX and Norfolk
Southern, through a jointly owned acquisition entity, hold economic interests in
Conrail of 42% and 58%, respectively, and voting interests of 50% each. CSX and
Norfolk Southern received regulatory approval from the Surface Transportation
Board (STB) to exercise joint control over Conrail in August 1998 and
subsequently began integrated operations over allocated portions of the Conrail
lines in June 1999.
The rail subsidiaries of CSX and Norfolk Southern operate their respective
portions of the Conrail system pursuant to various operating agreements that
took effect on June 1, 1999. Under these agreements, the railroads pay
operating fees to Conrail for the use of right-of-way and rent for the use of
equipment. Conrail continues to provide rail service in certain shared
geographic areas for the joint benefit of CSX and Norfolk Southern for which it
is compensated on the basis of usage by the respective railroads.
NOTE 4. INVESTMENT IN AND INTEGRATED RAIL OPERATIONS WITH CONRAIL, Continued
Conrail Financial Information
- -----------------------------
Summary financial information for Conrail for its fiscal periods ended
March 31, 2000 and 1999, and at December 31, 1999, is as follows:
Quarters Ended
----------------------------
March 31, March 31,
2000 1999
------------ ------------
Income Statement Information:
Revenues $ 259 $ 916
Income from Operations 60 146
Net Income 65 76
-6-
CSX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
(All Tables in Millions of Dollars, Except Per Share Amounts)
NOTE 4. INVESTMENT IN AND INTEGRATED RAIL OPERATIONS WITH CONRAIL, Continued
As Of
-----------------------------------------
March 31, December 31,
2000 1999
--------------- -------------------
Balance Sheet Information:
Current Assets $ 705 $ 669
Property and Equipment and Other Assets 7,662 7,714
Total Assets 8,367 8,383
Current Liabilities 825 863
Long-Term Debt 1,287 1,302
Total Liabilities 4,483 4,564
Stockholders' Equity 3,884 3,819
Comparisons of Conrail's operating results for the quarters ended March
31, 2000 and 1999 reflect the significant changes in its business that occurred
as a result of the integration with CSX and Norfolk Southern in June 1999.
Revenues and expenses for the 1999 quarter were derived principally from freight
linehaul operations over the entire Conrail network. Results for the 2000
quarter reflect Conrail's post-integration business, with revenues consisting
primarily of operating fees, equipment rents, and shared area usage fees derived
from CSX and Norfolk Southern, and expenses consisting of salaries and wages,
rents, depreciation, and other costs reflective of the new operations. Results
for the 2000 quarter also include a non-recurring gain of $61 million before
tax, $37 million after tax, on the sale of property. To reflect the fair value
write-up arising from the Conrail acquisition, CSX excluded approximately $16
million of the after-tax gain on this transaction in recording its equity in
Conrail's net income .
CSX's Accounting for its Investment in and Integrated Rail Operations with
- --------------------------------------------------------------------------
Conrail
- -------
CSX and Norfolk Southern assumed substantially all of Conrail's customer
freight contracts at the June 1999 integration date. CSX's rail and intermodal
operating revenue since that date include revenue from traffic previously moving
on Conrail. Operating expenses reflect corresponding increases for costs
incurred to handle the new traffic and operate the former Conrail lines. Rail
operating expenses after the integration also include an expense category,
"Conrail Operating Fee, Rent and Services," which reflects payment to Conrail
for the use of right-of-way and equipment, as well as charges for
transportation, switching, and terminal services in the shared areas Conrail
operates for the joint benefit of CSX and Norfolk Southern. This expense
category also includes amortization of the fair value write-up arising from the
acquisition of Conrail, as well as CSX's proportionate share of Conrail's net
income or loss recognized under the equity method of accounting. Prior to
integration, CSX recorded its share of Conrail's net income, less amortization
of the fair value write-up, and acquisition and transition expenses, in other
income (expense) in the Consolidated Statement of Earnings.
Transactions With Conrail
- -------------------------
The agreement under which CSX operates its allocated portion of the
Conrail route system has an initial term of 25 years and may be renewed at CSX's
option for two five-year terms. Operating fees paid to Conrail under the
agreement are subject to adjustment every six years based on the fair value of
the underlying system. Lease agreements for the Conrail equipment operated by
CSX cover varying terms. CSX is responsible for all costs of operating,
maintaining, and improving the routes and equipment under these agreements.
-7-
CSX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
(All Tables in Millions of Dollars, Except Per Share Amounts)
NOTE 4. INVESTMENT IN AND INTEGRATED RAIL OPERATIONS WITH CONRAIL, Continued
At March 31, 2000 and December 31, 1999, CSX had $26 million and $53
million, respectively, in amounts receivable from Conrail, principally for
reimbursement of certain capital improvement costs. Conrail advances its
available cash balances to CSX and Norfolk Southern under variable-rate demand
loan agreements. At March 31, 2000 and December 31, 1999, Conrail had advanced
$87 million and $93 million, respectively, to CSX under this arrangement at
interest rates of 6.3% and 5.6%, respectively. CSX also had amounts payable to
Conrail of $118 million and $105 million at March 31, 2000 and December 31,
1999, respectively, representing expenses incurred under the operating,
equipment, and shared area agreements.
NOTE 5. SALE OF INTERNATIONAL CONTAINER-SHIPPING ASSETS
In December 1999, CSX sold certain assets comprising Sea-Land's
international liner business to A. P. Moller-Maersk Line (Maersk). The
international liner business operated approximately 75 container vessels and
200,000 containers in worldwide trades and comprised a majority of CSX's
container-shipping revenue. In addition to vessels and containers, Maersk
acquired certain terminal facilities and various other assets and related
liabilities of the international liner business. The agreement with Maersk
provides for a post-closing adjustment to the sales price based on the final
amount of working capital conveyed, and the loss includes estimates of costs to
terminate various contractual obligations of the company. These matters will
affect the final determination of the loss on sale. While the Company is in
discussions about these matters with Maersk, it is expected that the parties
ultimately will seek to resolve these issues through third-party arbitration.
Such arbitration is expected to be resolved before year-end. Management is not
yet in a position to assess fully the likely outcome of this process.
CSX retained the container-shipping business serving the U.S. domestic
trade and part of the company's international terminal operations and manages
them separately. Management reporting and performance measures for these
businesses have been developed for fiscal year 2000. The company revised its
disclosures under FASB Statement No. 131, "Disclosures about Segments of an
Enterprise and Related Information," in the first quarter of 2000 to report
these as separate business segments; however, it is not practicable to provide
comparative segment disclosures for the prior year.
NOTE 6. ACCOUNTS RECEIVABLE
The company sells revolving interests in its rail accounts receivable to
public investors through a securitization program and to a financial institution
through commercial paper conduit programs. The accounts receivable are sold,
without recourse, to a wholly-owned, special-purpose subsidiary, which then
transfers the receivables, with recourse, to a master trust. The securitization
and conduit programs are accounted for as sales in accordance with FASB
Statement No. 125 "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities." Receivables sold under these arrangements
are excluded from accounts receivable in the consolidated statement of financial
position. At March 31, 2000, the agreements provide for the sale of up to $350
million in receivables through the securitization program and $50 million
through the conduit programs.
At March 31, 2000 and December 31, 1999, the company had sold $347 million
of accounts receivable; $300 million through the securitization program and $47
million through the conduit programs. The certificates issued under the
securitization program bear interest at 6% annually and mature in June 2003.
Receivables sold under the conduit program require yield payments based on
prevailing commercial paper rates plus incremental fees. Losses recognized on
the sale of accounts receivable totaled $8 million for the quarters ended
March 31, 2000 and April 2, 1999.
-8-
CSX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
(All Tables in Millions of Dollars, Except Per Share Amounts)
NOTE 6. ACCOUNTS RECEIVABLE, Continued
The company has retained the responsibility for servicing accounts
receivable transferred to the master trust. The average servicing period is
approximately one month. No servicing asset or liability has been recorded
since the fees the company receives for servicing the receivables approximate
the related costs.
NOTE 7. OPERATING EXPENSE
Quarters Ended
--------------------------
March 31, April 2,
2000 1999
--------- ---------
Labor and Fringe Benefits $ 727 $ 781
Materials, Supplies and Other 473 620
Conrail Operating Fee, Rent & Services 95 -
Building and Equipment Rent 188 294
Inland Transportation 83 223
Depreciation 138 164
Fuel 156 83
--------- ---------
Total $ 1,860 $ 2,165
========= =========
NOTE 8. OTHER INCOME (EXPENSE)
Quarters Ended
---------------------------------
March 31, April 2,
2000 1999
------------- -------------
Interest Income $ 16 $ 14
Income (Loss) from Real Estate and Resort Operations/(1)/ 1 (7)
Net Losses from Accounts Receivable Sold (8) (8)
Minority Interest (8) (9)
Income (Loss) from Investment in Conrail - Net - (28)
Equity Earnings (Loss) of Other Affiliates (5) 7
Foreign Currency Gain 1 5
Miscellaneous (2) (9)
------------- -------------
Total $ (5) $ (35)
============= =============
/(1)/ Gross revenue from real estate and resort operations was $29 million and
$19 million for the quarters ended March 31, 2000 and April 2, 1999,
respectively.
-9-
CSX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
(All Tables in Millions of Dollars, Except Per Share Amounts)
NOTE 9. COMMITMENTS AND CONTINGENCIES
- --------------------------------------
New Orleans Tank Car Fire
- -------------------------
In September 1997, a state court jury in New Orleans, Louisiana returned a
$2.5 billion punitive damages award against CSX Transportation, Inc. (CSXT), the
wholly-owned rail subsidiary of CSX. The award was made in a class-action
lawsuit against a group of nine companies based on personal injuries alleged to
have arisen from a 1987 fire. The fire was caused by a leaking chemical tank car
parked on CSXT tracks and resulted in the 36-hour evacuation of a New Orleans
neighborhood. In the same case, the court awarded a group of 20 plaintiffs
compensatory damages of approximately $2 million against the defendants,
including CSXT, to which the jury assigned 15 percent of the responsibility for
the incident. CSXT's liability under that compensatory damages award is not
material, and adequate provision has been made for the award.
In October 1997, the Louisiana Supreme Court set aside the punitive damages
judgment, ruling the judgment should not have been entered until all liability
issues were resolved. In February 1999, the Louisiana Supreme Court issued a
further decision, authorizing and instructing the trial court to enter
individual punitive damages judgments in favor of the 20 plaintiffs who had
received awards of compensatory damages, in amounts representing an appropriate
share of the jury's award. The trial court on April 8, 1999 entered judgment
awarding approximately $2 million in compensatory damages and approximately $8.5
million in punitive damages to those 20 plaintiffs. Approximately $6.2 million
of the punitive damages awarded were assessed against CSXT. CSXT then filed
post-trial motions for a new trial and for judgment notwithstanding the verdict
as to the April 8 judgment.
The new trial motion was denied by the trial court in August 1999. On
November 5, 1999, the trial court issued an opinion that granted CSXT's motion
for judgment notwithstanding the verdict and effectively reduced the amount of
the punitive damages verdict from $2.5 billion to $850 million. CSXT believes
that this amount (or any amount of punitive damages) is unwarranted and intends
to pursue its full appellate remedies with respect to the 1997 trial as well as
the trial judge's decision on the motion for judgment notwithstanding the
verdict. The compensatory damages awarded by the jury in the 1997 trial were
also substantially reduced by the trial judge. A judgment reflecting the $850
million punitive award has been entered against CSXT. CSXT has obtained and
posted an appeal bond in the amount of $895 million, which will allow it to
appeal the 1997 compensatory and punitive awards, as reduced by the trial judge.
A trial for the claims of 20 additional plaintiffs for compensatory damages
began on May 24, 1999. In early July, the jury in that trial rendered verdicts
totaling approximately $330 thousand in favor of eighteen of those twenty
plaintiffs. Two plaintiffs received nothing; that is, the jury found that they
had not proved any damages. Management believes that this result, while still
excessive, supports CSXT's contention that the punitive damages award was
unwarranted.
CSXT continues to pursue an aggressive legal strategy. Management believes
that an adverse outcome, if any, is not likely to be material to CSX's or CSXT's
overall results of operations or financial position, although it could be
material to results of operations in a particular quarterly accounting period.
Self-Insurance
- --------------
Although the company obtains substantial amounts of commercial insurance
for potential losses for third-party liability and property damage, reasonable
levels of risk are retained on a self-insurance basis. A
-10-
CSX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
(All Tables in Millions of Dollars, Except Per Share Amounts)
NOTE 9. COMMITMENTS AND CONTINGENCIES, Continued
Self-Insurance, Continued
- -------------------------
portion of the insurance coverage, $25 million limit above $100 million per
occurrence from rail and certain other operations, is provided by a company
partially owned by CSX.
Environmental
- -------------
CSXT is a party to various proceedings involving private parties and
regulatory agencies related to environmental issues. CSXT has been identified as
a potentially responsible party (PRP) at 104 environmentally impaired sites that
are or may be subject to remedial action under the Federal Superfund statute
(Superfund) or similar state statutes. A number of these proceedings are based
on allegations that CSXT, or its railroad predecessors, sent hazardous
substances to the facilities in question for disposal. Such proceedings arising
under Superfund or similar state statutes can involve numerous other waste
generators and disposal companies and seek to allocate or recover costs
associated with site investigation and cleanup, which could be substantial.
CSXT is involved in a number of administrative and judicial proceedings and
other clean-up efforts at 241 sites, including the sites addressed under the
Federal Superfund statute or similar state statutes, where it is participating
in the study and/or clean-up of alleged environmental contamination. The
assessment of the required response and remedial costs associated with most
sites is extremely complex. Cost estimates are based on information available
for each site, financial viability of other PRPs, where available, and existing
technology, laws and regulations. CSXT's best estimates of the allocation method
and percentage of liability when other PRPs are involved are based on
assessments by consultants, agreements among PRPs, or determinations by the U.S.
Environmental Protection Agency or other regulatory agencies.
At least once each quarter, CSXT reviews its role, if any, with respect to
each such location, giving consideration to the nature of CSXT's alleged
connection to the location (e.g., generator, owner or operator), the extent of
CSXT's alleged connection (e.g., volume of waste sent to the location and other
relevant factors), the accuracy and strength of evidence connecting CSXT to the
location, and the number, connection and financial position of other named and
unnamed PRPs at the location. The ultimate liability for remediation can be
difficult to determine with certainty because of the number and creditworthiness
of PRPs involved. Through the assessment process, CSXT monitors the
creditworthiness of such PRPs in determining ultimate liability.
Based upon such reviews and updates of the sites with which it is involved,
CSXT has recorded, and reviews at least quarterly for adequacy, reserves to
cover estimated contingent future environmental costs with respect to such
sites. The recorded liabilities for estimated future environmental costs at
March 31, 2000, and December 31, 1999, were $49 million and $53 million,
respectively. These recorded liabilities, which are undiscounted, include
amounts representing CSXT's estimate of unasserted claims, which CSXT believes
to be immaterial. The liability has been accrued for future costs for all sites
where the company's obligation is probable and where such costs can be
reasonably estimated. The liability includes future costs for remediation and
restoration of sites as well as any significant ongoing monitoring costs, but
excludes any anticipated insurance recoveries. The majority of the March 31,
2000 environmental liability is expected to be paid out over the next five to
seven years, funded by cash generated from operations.
-11-
CSX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
(All Tables in Millions of Dollars, Except Per Share Amounts)
NOTE 9. COMMITMENTS AND CONTINGENCIES, Continued
Environmental, Continued
- ------------------------
The company does not currently possess sufficient information to reasonably
estimate the amounts of additional liabilities, if any, on some sites until
completion of future environmental studies. In addition, latent conditions at
any given location could result in exposure, the amount and materiality of which
cannot presently be reliably estimated. Based upon information currently
available, however, the company believes that its environmental reserves are
adequate to accomplish remedial actions to comply with present laws and
regulations, and that the ultimate liability for these matters will not
materially affect its overall results of operations and financial condition.
Other Legal Proceedings
- -----------------------
A number of legal actions are pending against CSX and certain subsidiaries
in which claims are made in substantial amounts. While the ultimate results of
environmental investigations, lawsuits and claims against the company cannot be
predicted with certainty, management does not currently expect that resolution
of these matters will have a material adverse effect on the company's
consolidated financial position, results of operations or cash flows. The
company is also party to a number of actions, the resolution of which could
result in gain realization in amounts that could be material to results of
operations in the quarter received.
NOTE 10. BUSINESS SEGMENTS
The company operates in four business segments: Rail, Intermodal, Domestic
Container Shipping, and International Terminals. The Rail segment provides rail
freight transportation over a network of more than 23,400 route miles in 23
states, the District of Columbia and two Canadian provinces. The Intermodal
segment provides transcontinental intermodal transportation services and
operates a network of dedicated intermodal facilities across North America. The
Domestic Container Shipping segment consists of a fleet of 16 ocean vessels and
27,000 containers serving the trade between ports on the United States mainland
and Alaska, Guam, Hawaii and Puerto Rico. The International Terminals segment
operates container freight terminal facilities at 12 locations in Hong Kong,
China, Australia, Europe, and the Dominican Republic. Prior to the sale of its
international liner operations in December 1999 (see Note 5), Marine Services
(formerly known as the Container Shipping segment) provided global
transportation services via a fleet of 91 container ships and more than 220,000
containers. The company's segments are strategic business units that offer
different services and are managed separately based on the differences in these
services. Because of their close interrelationship, the Rail and Intermodal
segments are viewed on a combined basis as Surface Transportation operations and
the Domestic Container Shipping and International Terminals segments are viewed
on a combined basis as Marine Services operations.
The company evaluates performance and allocates resources based on several
factors, of which the primary financial measure is business segment operating
income, defined as income from operations, excluding the effects of non-
recurring charges and gains. The accounting policies of the segments are the
same as those described in the summary of significant accounting policies (Note
1), except that for segment reporting purposes, CSX includes minority interest
expense on the international terminals segment's joint venture businesses in
operating expense. These amounts are reclassified in CSX's consolidated
financial statements to other income (expense) to conform to the customary
reporting presentation under generally accepted accounting principles.
Intersegment sales and transfers are generally accounted for as if the sales or
transfers were to third parties, that is, at current market prices.
-12-
CSX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
(All Tables in Millions of Dollars, Except Per Share Amounts)
NOTE 10. BUSINESS SEGMENTS, Continued
Business segment information for the quarters ended March 31, 2000 and
April 2, 1999 is as follows:
Quarter ended March 31, 2000:
- -----------------------------
Marine Services*
-----------------------------------------
Surface Transportation
------------------------------ Domestic
Container International
Rail Intermodal Total Shipping Terminals Total Totals
-------------------------------------------------------------------------------
Revenues from external customers $ 1,515 $283 $ 1,798 $162 $ 74 $ 236 $ 2,034
Intersegment revenues - 5 5 - - - 5
Segment operating income (loss) 147 13 160 (1) 14 13 173
Assets 12,976 389 13,365 338 720 1,058 14,423
Quarter ended April 2, 1999:
- ----------------------------
Surface Transportation
------------------------------------------ Marine
Rail Intermodal Total Services* Totals
--------------------------------------------------------------------------
Revenues from external customers $ 1,297 $163 $ 1,460 $ 973 $ 2,433
Intersegment revenues - 6 6 - 6
Segment operating income (loss) 266 7 273 (12) 261
Assets 11,982 205 12,187 2,344 14,531
* In December 1999, CSX sold the assets comprising the international liner
business of Sea-Land. Operating revenue and expenses related to assets sold are
included in the Marine Services segment in 1999, distorting comparisons to 2000.
The company reports the retained businesses as separate segments starting in the
first quarter of 2000; however, it is not practicable to provide comparative
segment disclosures for the prior year.
A reconciliation of the totals reported for the business segments to the
applicable line items in the consolidated financial statements is as follows:
March 31, April 2,
2000 1999
---------- ----------
Revenues:
- --------
Total external revenues for business segments $ 2,034 $ 2,433
Intersegment revenues for business segments 5 6
Elimination of intersegment revenues (5) (6)
---------- ----------
Total consolidated revenues $ 2,034 $ 2,433
========== ==========
-13-
CSX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
(All Tables in Millions of Dollars, Except Per Share Amounts)
NOTE 10. BUSINESS SEGMENTS, Continued
March 31, April 2,
2000 1999
--------- --------
Operating Income:
- ----------------
Total operating income for business segments $ 173 $ 261
Reclassification of minority interest expense for
international terminals segment 8 9
Unallocated corporate expenses (7) (2)
--------- --------
Total consolidated operating income $ 174 $ 268
========= ========
Assets:
- ------
Assets for Business Segments $ 14,423 $ 14,531
Investment in Conrail 4,668 4,811
Elimination of Intercompany Receivables (289) (151)
Non-segment Assets 1,723 1,358
----------- --------
Total consolidated assets $ 20,525 $ 20,549
=========== ========
NOTE 11. SUBSEQUENT EVENT
On September 22, 2000, CSX completed the sale of CTI Logistx, Inc., its wholly
owned logistics subsidiary, for $650 million. All prior period statements of
earnings have been restated accordingly. Revenues from the contract logistics
segment for the quarters ended March 31, 2000 and April 2, 1999 were $126
million and $120 million, respectively. CSX recorded a gain of $570 million
before tax, $365 million after tax, $1.73 per share, on the sale.
-14-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
RESULTS OF OPERATIONS
CSX follows a 52/53-week fiscal calendar. Fiscal year 2000 consists of 52
weeks, and fiscal year 1999 consisted of 53 weeks. The quarter ended March 31,
2000 consisted of 13 weeks and the quarter ended April 2, 1999 consisted of 14
weeks .
First Quarter 2000 Compared with 1999
- -------------------------------------
CSX reported net earnings of $29 million, 14 cents per share, for the
quarter ended March 31, 2000. In the prior year, the company earned $75 million,
36 cents per share, excluding a one-time, non-cash after-tax charge of $49
million, 24 cents per share, to recognize the cumulative effect of adopting a
new accounting rule related to second-injury fund assessments at its container-
shipping unit. Net earnings include the results of the Company's wholly owned
logistics subsidiary, CTI Logistx, Inc. which was sold on September 22, 2000.
All periods have been restated to reflect the results of the logistics segment
as a discontinued operation. Including the cumulative effect of the accounting
change, earnings for the 1999 quarter were $26 million, 12 cents per share.
Several significant factors affect the comparability of CSX's first quarter
2000 operating results with the prior year. First quarter 1999 preceded the
company's integration with Conrail and, accordingly, rail and intermodal results
for that period do not include revenues and expenses associated with operations
over CSX's allocated portion of the Conrail network. Additionally, CSX sold its
international container-shipping liner business and certain container terminal
facilities in December 1999. Operating results for first quarter 1999 included
substantial revenues and expenses from those operations. Finally, as mentioned
above, under the company's fiscal calendar, first quarter 1999 included an extra
week compared to first quarter 2000.
Operating income for the first quarter of 2000 totaled $174 million,
compared with $268 million in the first quarter of 1999. Operating revenue of
$2.03 billion was 16% below the prior year quarter, while operating expense of
$1.86 billion was 14% lower. The reductions in revenue and expense compared to
1999 result primarily from the business changes created by the Conrail
integration and the international container-shipping sale and are discussed in
more detail in the following analysis of segment results.
Surface Transportation Results
- ------------------------------
Rail
Rail operating income for the first quarter of 2000 totaled $147 million,
compared to $266 million in the prior year quarter. Operating revenue totaled
$1.52 billion, an increase of $218 million, or 17%, due to the Conrail
integration and relatively strong demand across most commodity groups. Operating
expense increased $337 million, or 33%, to $1.37 billion. As discussed below,
both revenues and expenses were adversely affected by significant congestion on
key parts of the CSX network.
-15-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
RESULTS OF OPERATIONS, Continued
Surface Transportation Results, Continued
- -----------------------------------------
Rail, Continued
The following table provides rail carload and revenue data by service group
and commodity for the quarters ended March 31, 2000 and April 2, 1999:
Carloads Revenue
(Thousands) (Millions of Dollars)
------------------------- -------------------------
March 31, April 2, March 31, April 2,
2000 1999 2000 1999
-------- -------- --------- --------
Merchandise
Phosphates and Fertilizer 131 148 $ 92 $ 90
Metals 91 72 107 82
Food and Consumer Products 41 34 53 39
Paper and Forest Products 137 121 168 137
Agricultural Products 92 76 122 104
Chemicals 149 121 247 205
Minerals 101 101 95 92
Government 3 3 5 7
-------- -------- --------- --------
Total Merchandise 745 676 889 756
Automotive 158 119 227 154
Coal, Coke & Iron Ore
Coal 396 396 371 353
Coke 12 12 12 12
Iron Ore 8 7 7 7
-------- -------- --------- --------
Total Coal, Coke & Iron Ore 416 415 390 372
Other - - 9 15
-------- -------- --------- --------
Total Rail 1,319 1,210 $ 1,515 $ 1,297
======== ======== ========= ========
Overall freight revenue was significantly higher than the first quarter of
1999 due to the Conrail integration, although the increase in coal revenue was
tempered by mild winter weather in the East and continuing weakness in export
coal shipments. Merchandise demand was strong, particularly in the chemicals,
metals, food and consumer products, and paper and forest products commodity
groups. Automotive revenue was up significantly, benefiting from the Conrail
integration, continued strength in U.S. vehicle production, and rate increases
on some auto shipments.
Since the integration of Conrail, CSX's rail unit has experienced operating
difficulties and diminished service performance, particularly in high-volume
corridors of its network and during periods of peak traffic demand. Key
performance statistics that track average train velocity, the number of freight
cars on the network, and dwell time for trains in terminals and classification
yards have not shown sustainable improvement. As a result, the unit continued to
experience lost revenues during the first quarter as customers diverted traffic
to trucks or other carriers. Operating expenses include significant costs
related to the
-16-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
RESULTS OF OPERATIONS, Continued
Surface Transportation Results, Continued
- -----------------------------------------
Rail, Continued
congestion problems, including lease costs for higher numbers of locomotives and
freight cars on the system and incremental labor costs for train crews and yard
personnel. Significantly higher fuel prices and cost-of-living increases for
union employees under previously-negotiated contracts also had a substantial
effect on operating expenses for the quarter. The average price per gallon of
diesel fuel was 86 cents vs. 45 cents in the prior year quarter, accounting for
$66 million of the increase in rail operating expense. As discussed in a later
section of Management's Discussion and Analysis, CSX has various initiatives
underway to relieve congestion, improve operations, and reduce operating
expenses.
Intermodal
Intermodal operating income totaled $13 million for the first quarter of
2000, compared to $7 million in the prior year quarter. Revenue for the quarter
increased $119 million, or 70%, to $288 million. Operating expense increased
$113 million, or 70%, to $275 million. These increases reflect the Conrail
integration, as well as new business associated with a contract signed last year
with a major intermodal customer. International container traffic continued to
show strength during the quarter; however, significant domestic container
business was lost to trucks and other carriers due to service problems and price
competition.
Marine Services Results
- -----------------------
Following the sale of its international container-shipping liner business
in 1999, CSX has redefined the retained portions of its container-shipping
business to consist of a Domestic Container Shipping segment and an
International Terminals segment. These segments are being managed as separate
businesses, and operating results for the first quarter of 2000 are presented
separately for each segment. It is not practicable to provide results for these
segments for the comparable period of 1999. For reporting purposes, these
businesses are also viewed in the aggregate as Marine Services. Prior year
results for the Marine Services grouping include the two retained businesses and
the international liner business that was sold. The Domestic Container Shipping
unit operates 16 vessels and 27,000 containers along six service routes between
the continental United States and Alaska, Guam, Hawaii, and Puerto Rico. The
International Terminals unit operates container freight terminals at 12
locations in Hong Kong, China, Australia, Europe, Russia, and Latin America.
Revenue from Marine Services operations totaled $236 million for the first
quarter of 2000, vs. $973 million for the 1999 quarter. Operating expenses
totaled $223 million, compared to $985 million in the prior year. Operating
income for first quarter 2000 was $13 million, compared to a loss of $12 million
in 1999. The significant declines in revenue and expense reflect the
international liner sale. That transaction also accounted for the significant
improvement in operating income as the international business operated at a loss
in the prior year under substantial rate pressure and seasonal traffic weakness.
Prior year results for the Marine Services grouping reflect certain
reclassifications to conform with the presentation for fiscal year 2000.
-17-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
RESULTS OF OPERATIONS, Continued
Marine Services Results, Continued
- ----------------------------------
Domestic Container Shipping, Continued
The domestic container shipping unit reported an operating loss of $1
million for the first quarter of fiscal 2000 on operating revenue of $162
million. The unit's domestic ocean trades are stable environments, with business
growth rates reflective of growth rates of the U.S. economy. The first quarter
is typically seasonally weak, with subsequent quarters steadily growing
stronger. First quarter results were moderately favorable to expectations,
despite the fact that operating expenses were adversely affected by higher fuel
prices.
International Terminals
The international terminals unit reported operating income of $14 million
for the first quarter on operating revenue of $74 million. The business enjoys a
strong market position in the growing global container market and benefited in
particular from strong container traffic through its Hong Kong terminal
locations.
FINANCIAL CONDITION
Cash, cash equivalents and short-term investments totaled $666 million at
March 31, 2000, a decrease of $308 million since December 31, 1999. The balance
at the end of fiscal 1999 was significantly higher than normal, reflecting
planned levels to ensure liquidity over year-end in light of the Year 2000 date
change and the fact that the company had not fully utilized the proceeds from
the sale of its international container-shipping business to reduce short-term
debt.
Primary sources of cash and cash equivalents during the first quarter of
2000 were normal transportation operations and a non-recurring dividend received
on the company's investment in a railcar leasing venture. Operations used $1
million of cash during the quarter, reflecting customary seasonal weakness and
the decline in operating income. The railcar venture dividend totaled $49
million. Approximately half of the dividend related to CSX's direct interest in
the venture and was reported as cash provided by other investing activities. The
remaining half of the dividend related to CSX's allocated interest within
Conrail; that amount was received by Conrail and transferred to CSX through the
related party advance arrangement described in the Notes to the Consolidated
Financial Statements. That portion appears in the Consolidated Statement of Cash
Flows as a reduction of net repayments of short-term debt. Primary uses of cash
and cash equivalents during the quarter were property additions, repayments of
short-term and long-term debt, and the payment of dividends on the company's
outstanding common stock.
CSX's working capital deficit at March 31, 2000 was $935 million, roughly
level with the deficit at December 31, 1999. The working capital deficit at
both dates included approximately $350 million in current maturities of long-
term debt, approximately $250 million of which are scheduled for the third
quarter. A working capital deficit is not unusual for the company and does not
indicate a lack of liquidity. The company continues to maintain adequate
current assets to satisfy current liabilities when they are due and has
sufficient liquidity and financial resources to manage its day-to-day cash
needs.
-18-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
FINANCIAL CONDITION, Continued
Under its normal equipment financing programs, the company's rail unit
expects to close approximately $200 million in long-term financing on
locomotives and railcars in the second and third quarters of 2000. CSX also has
$400 million of remaining capacity under a shelf registration that may be used
to issue debt or other securities at the company's discretion.
FINANCIAL DATA
(Millions of Dollars)
---------------------------
March 31, December 31,
2000 1999
------------ -------------
Cash, Cash Equivalents and
Short-Term Investments $ 666 $ 974
Commercial Paper Outstanding -
Short-Term $ 493 $ 574
Commercial Paper Outstanding -
Long-Term $ 800 $ 800
Working Capital (Deficit) $ (935) $ (910)
Current Ratio .7 .7
Debt Ratio 55% 53%
Ratio of Earnings to Fixed Charges 1.2x 1.1x
OUTLOOK
With the sale of its international container-shipping liner business in the
fourth quarter of 1999, CSX's strategic emphasis is overwhelmingly oriented
toward its core rail and intermodal businesses. Financial performance during
the second quarter and the balance of fiscal 2000 will be largely dependent on
the company's success in achieving operational improvements that restore
fluidity on the rail network, improve customer service, eliminate substantial
excess costs, and allow the realization of planned merger synergies. Management
expects to make steady progress toward these goals as the year progresses.
Entering the second quarter of 2000, merchandise and automotive traffic
remain strong, and coal traffic is showing some signs of strengthening. On the
other hand, domestic intermodal traffic continues to reflect weakness
attributable to service issues and pricing competition. The company expects to
implement price increases on rail and intermodal shipments where appropriate and
competitively feasible, particularly where traffic demand is creating capacity
constraints on the system. Fuel prices have moderated over the past month, but
are expected to remain at levels significantly higher than the prior year.
The domestic container shipping business should move into positive earnings
territory in the second quarter as seasonal traffic demand picks up and the U.S.
economy remains strong. The international terminals business is expected to
report steady or improved earnings as container volumes remain strong in Hong
Kong and other key terminal locations.
-19-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
OUTLOOK, Continued
INVESTMENT IN AND INTEGRATED RAIL OPERATIONS WITH CONRAIL
Background
- ----------
CSX and Norfolk Southern Corporation (Norfolk Southern) completed the
acquisition of Conrail Inc. (Conrail) in May 1997. Conrail owns the primary
freight railroad system serving the northeastern United States, and its rail
network extends into several midwestern states and into Canada. CSX and Norfolk
Southern, through a jointly owned acquisition entity, hold economic interests in
Conrail of 42% and 58%, respectively, and voting interests of 50% each. CSX and
Norfolk Southern received regulatory approval from the Surface Transportation
Board (STB) to exercise joint control over Conrail in August 1998 and
subsequently began integrated operations over allocated portions of the Conrail
lines in June 1999.
The rail subsidiaries of CSX and Norfolk Southern operate their respective
portions of the Conrail system pursuant to various operating agreements that
took effect on June 1, 1999. Under these agreements, the railroads pay
operating fees to Conrail for the use of right-of-way and rent for the use of
equipment. Conrail continues to provide rail service in certain shared
geographic areas for the joint benefit of CSX and Norfolk Southern for which it
is compensated on the basis of usage by the respective railroads.
Accounting and Financial Reporting Effects
- ------------------------------------------
CSX and Norfolk Southern assumed substantially all of Conrail's customer
freight contracts at the June 1999 integration date. CSX's rail and intermodal
operating revenue since that date include revenue from traffic previously moving
on Conrail. Operating expenses reflect corresponding increases for costs
incurred to handle the new traffic and operate the former Conrail lines. Rail
operating expenses after the integration also include an expense category,
"Conrail Operating Fee, Rent and Services," which reflects payment to Conrail
for the use of right-of-way and equipment, as well as charges for
transportation, switching, and terminal services in the shared areas Conrail
operates for the joint benefit of CSX and Norfolk Southern. This expense
category also includes amortization of the fair value write-up arising from the
acquisition of Conrail, as well as CSX's proportionate share of Conrail's net
income or loss recognized under the equity method of accounting. Prior to
integration, CSX recorded its share of Conrail's net income, less amortization
of the fair value write-up, and acquisition and transition expenses, in other
income (expense) in the Consolidated Statement of Earnings.
Operating and Financial Effects
- -------------------------------
The integration of Conrail in June 1999 initially resulted in congestion
and traffic delays on parts of the new CSX network and on the shared areas
operated by Conrail. Although substantial progress was made during the summer
of 1999 in stabilizing post-integration operations and restoring service levels,
these improvements have not been sustained across the CSX system. Network
disruptions created by Hurricane Floyd in September 1999, followed by heavy
seasonal traffic build-up in the fourth quarter, adversely affected rail and
intermodal operating and service recovery efforts. As peak traffic levels
subsided and the company implemented network simplification plans throughout the
system, congestion problems eased and service levels improved in key areas.
During the first quarter
-20-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
INVESTMENT IN AND INTEGRATED RAIL OPERATIONS WITH CONRAIL, Continued
Operating and Financial Effects, Continued
- ------------------------------------------
of 2000, overall operations on the northern portion of the CSX system (generally
the lines allocated to CSX in the Conrail acquisition) improved; however,
operations in the south deteriorated. From a systemwide perspective, key
performance statistics that track average train velocity, the number of freight
cars on the network, and dwell time for trains in terminals and classification
yards did not show sustainable improvement during the quarter. As a result, the
company continued to experience lost rail and intermodal revenue opportunities,
significant incremental operating costs, and delays in realizing merger
synergies.
In April 2000, CSX announced a number of key management changes at its rail
unit aimed at accelerating the pace of operational and service recovery. The
company has a number of initiatives underway to achieve this goal. Although
progress is expected to be gradual, management expects steady improvement over
the coming quarters will result in improved network fluidity across the system
in adequate time to meet peak traffic demand in the fall. In conjunction with
the operational and service improvement initiatives, efforts are being focused
on reducing operating costs and realizing planned merger synergies that will
deliver significant improvements in earnings and cash flow. The company is also
closely reviewing its pricing policies and implementing rate increases where
competitively appropriate.
Management believes that steady improvement across the rail network will be
achieved, leading to increased customer satisfaction, the return of business
which had been diverted to other modes of transportation, and improved financial
performance. However, there can be no assurance that these objectives will be
met, or met within a specified time frame.
Conrail's Results of Operations
- -------------------------------
Comparisons of Conrail's operating results for the quarters ended March 31,
2000 and 1999 reflect the significant changes in its business that occurred as a
result of the integration with CSX and Norfolk Southern in 1999. Revenues and
expenses for the 1999 quarter were derived principally from freight linehaul
operations over the entire Conrail network. Results for the 2000 quarter
reflect Conrail's post-integration business, with revenues consisting primarily
of operating fees, equipment rents, and shared area usage fees derived from CSX
and Norfolk Southern, and expenses consisting of salaries and wages, rents,
depreciation, and other costs reflective of the new operations. Conrail
reported net income of $65 million on revenues of $259 million for the first
quarter of 2000, compared to net income of $76 million on revenues of $916
million for the prior year quarter. Results for the first quarter of 2000
benefited from a non-recurring gain on the sale of property of $61 million, $37
million after-tax.
Conrail's operating activities required a net use of cash of $112 million
in the first quarter of 2000, compared with net cash provided by operations of
$170 million in the first quarter of 1999. The net use of cash in the first
quarter of 2000 resulted primarily from significant payments of one-time items
owed to CSX and Norfolk Southern. The decline in cash provided by operations
also reflected lower operating income resulting from Conrail's post-integration
structure and operations.
-21-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
INVESTMENT IN AND INTEGRATED RAIL OPERATIONS WITH CONRAIL, Continued
Conrail's Results of Operations, Continued
- ------------------------------------------
Conrail's working capital deficit was $120 million at March 31, 2000,
compared with $194 million at December 31, 1999. The working capital deficit at
both dates includes slightly more than $300 million in long-term debt
maturities, the majority of which will be paid in the second quarter and is
expected to require CSX and Norfolk Southern to repay some of their borrowings
from Conrail under the related party advance arrangements. Conrail expects to
have sufficient cash flow to meet its ongoing obligations.
SALE OF INTERNATIONAL CONTAINER-SHIPPING ASSETS
In December 1999, CSX sold certain assets comprising Sea-Land's
international liner business to A. P. Moller-Maersk Line (Maersk). The
international liner business operated approximately 75 container vessels and
200,000 containers in worldwide trades and comprised a majority of CSX's
container-shipping revenue. In addition to vessels and containers, Maersk
acquired certain terminal facilities and various other assets and related
liabilities of the international liner business. The agreement with Maersk
provides for a post-closing adjustment to the sales price based on the final
amount of working capital conveyed, and the loss includes estimates of costs to
terminate various contractual obligations of the company. These matters will
affect the final determination of the loss on sale. While the Company is in
discussions about these matters with Maersk, it is expected that the parties
ultimately will seek to resolve these issues through third-party arbitration.
Such arbitration is expected to be resolved before year-end. Management is not
yet in a position to assess fully the likely outcome of this process.
CSX retained the container-shipping business serving the U.S. domestic
trade and part of the company's international terminal operations and manages
them separately. Management reporting and performance measures for these
businesses have been developed for fiscal year 2000. The company revised its
disclosures under FASB Statement No. 131, "Disclosures about Segments of an
Enterprise and Related Information," in the first quarter of 2000 to report
these as separate business segments; however, it is not practicable to provide
comparative segment disclosures for the prior year.
OTHER MATTERS
Federal Railroad Administration Track Audit
- -------------------------------------------
In March 2000, the Federal Railroad Administration (FRA) released a draft
report of the results of a two-week audit of track conditions on CSX's rail
system. The audit, which began on February 22, identified track defects on
certain portions of the system, the nature of which led the FRA to question the
effectiveness of the quality control procedures in CSX's track maintenance and
inspection programs. CSX responded to the findings immediately by making
necessary track repairs and by restricting train speeds on certain portions of
track until repairs could be completed.
As a result of the audit, CSX and the FRA entered into a Safety Compliance
Agreement in April 2000 that includes measures to improve the railroad's track
inspection and maintenance processes. Under the agreement, which is effective
though May 1, 2001, CSX will increase the frequency of automated track
inspections, enhance management oversight of track inspection and large scale
maintenance operations, and implement a new track inspection procedures manual
developed in a joint effort with the FRA and Brotherhood of Maintenance of Way
Employees.
-22-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
OTHER MATTERS, Continued
Federal Railroad Administration Track Audit, Continued
- ------------------------------------------------------
CSX estimates that it will incur approximately $20 million to $30 million
in additional costs over the remainder of fiscal year 2000 to address the issues
raised in the audit and the commitments made in the Safety Compliance Agreement.
The company is in the process of refining those cost estimates and expects that
a portion will represent operating expenses for fiscal 2000 and a portion will
consist of capital expenditures to be depreciated over the useful life of the
related track improvements.
Surface Transportation Board Moratorium on Rail Merger Applications
- -------------------------------------------------------------------
In March 2000, the Surface Transportation Board (STB) issued a decision
establishing a moratorium on rail merger applications for a 15-month time
period. The moratorium precluded the anticipated filing of an application by the
Burlington Northern Santa Fe (BNSF) and Canadian National (CN) railroads to
combine their respective systems. The moratorium is intended to address the
potential downstream effects that a rail merger might have on the railroad
industry at the present time, given the lingering difficulties and service
issues attributable to recent rail mergers. In the STB's public hearings on the
matter, particular concern was expressed that a combination by BNSF and CN might
precipitate further merger activity among other Class I railroads at an unstable
time in the industry. The STB's decision had the support of CSX and other major
railroads, as well as many shippers and other constituents of the rail industry.
BNSF and CN are currently challenging the STB decision in the federal courts.
Federal Court Decision Affecting Coal Mining Operations
- -------------------------------------------------------
In October 1999, a federal district court judge ruled that certain
mountaintop coal mining practices in West Virginia were in violation of the
federal Clean Water Act and the federal Surface Mining and Control Reclamation
Act. The decision, which is currently under appeal, could adversely affect
CSX's coal traffic and revenues if upheld.
Litigation
- ----------
In September 1997, a state court jury in New Orleans, Louisiana returned a
$2.5 billion punitive damages award against CSX Transportation, Inc. (CSXT), the
wholly-owned rail subsidiary of CSX. The award was made in a class-action
lawsuit against a group of nine companies based on personal injuries alleged to
have arisen from a 1987 fire. The fire was caused by a leaking chemical tank car
parked on CSXT tracks and resulted in the 36-hour evacuation of a New Orleans
neighborhood. In the same case, the court awarded a group of 20 plaintiffs
compensatory damages of approximately $2 million against the defendants,
including CSXT, to which the jury assigned 15 percent of the responsibility for
the incident. CSXT's liability under that compensatory damages award is not
material, and adequate provision has been made for the award.
In October 1997, the Louisiana Supreme Court set aside the punitive damages
judgment, ruling the judgment should not have been entered until all liability
issues were resolved. In February 1999, the Louisiana Supreme Court issued a
further decision, authorizing and instructing the trial court to enter
individual punitive damages judgments in favor of the 20 plaintiffs who had
received awards of compensatory damages, in amounts representing an appropriate
share of the jury's award. The trial court on April 8, 1999 entered judgment
awarding approximately $2 million in compensatory damages and approximately
$8.5 million in punitive damages to those 20 plaintiffs. Approximately $6.2
million of the punitive damages awarded were assessed against CSXT. CSXT then
filed post-trial motions for a new trial and for judgment notwithstanding the
verdict as to the April 8 judgment.
-23-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINAL CONDITION
OTHER MATTERS, Continued
Litigation, Continued
- ---------------------
The new trial motion was denied by the trial court in August 1999. On
November 5, 1999, the trial court issued an opinion that granted CSXT's motion
for judgment notwithstanding the verdict and effectively reduced the amount of
the punitive damages verdict from $2.5 billion to $850 million. CSXT believes
that this amount (or any amount of punitive damages) is unwarranted and intends
to pursue its full appellate remedies with respect to the 1997 trial as well as
the trial judge's decision on the motion for judgment notwithstanding the
verdict. The compensatory damages awarded by the jury in the 1997 trial were
also substantially reduced by the trial judge. A judgment reflecting the $850
million punitive award has been entered against CSXT. CSXT has obtained and
posted an appeal bond in the amount of $895 million, which will allow it to
appeal the 1997 compensatory and punitive awards, as reduced by the trial judge.
A trial for the claims of 20 additional plaintiffs for compensatory damages
began on May 24, 1999. In early July, the jury in that trial rendered verdicts
totaling approximately $330 thousand in favor of eighteen of those twenty
plaintiffs. Two plaintiffs received nothing; that is, the jury found that they
had not proved any damages. Management believes that this result, while still
excessive, supports CSXT's contention that the punitive damages award was
unwarranted.
CSXT continues to pursue an aggressive legal strategy. Management believes
that an adverse outcome, if any, is not likely to be material to CSX's or CSXT's
overall results of operations or financial position, although it could be
material to results of operations in a particular quarterly accounting period.
__________________________________________________
Estimates and forecasts in Management's Discussion and Analysis and in
other sections of this Quarterly Report are based on many assumptions about
complex economic and operating factors with respect to industry performance,
general business and economic conditions and other matters that cannot be
predicted accurately and that are subject to contingencies over which the
company has no control. Such forward-looking statements are subject to
uncertainties and other factors that may cause actual results to differ
materially from the views, beliefs, and projections expressed in such
statements. The words "believe", "expect", "anticipate", "project", and similar
expressions signify forward-looking statements. Readers are cautioned not to
place undue reliance on any forward-looking statements made by or on behalf of
the company. Any such statement speaks only as of the date the statement was
made. The company undertakes no obligation to update or revise any forward-
looking statement.
Factors that may cause actual results to differ materially from those
contemplated by these forward-looking statements include, among others, the
following possibilities: (i) costs and operating difficulties related to the
integration of Conrail may not be eliminated or resolved within the time frame
currently anticipated; (ii) revenue and cost synergies expected from the
integration of Conrail may not be fully realized or realized within the
timeframe anticipated; (iii) general economic or business conditions, either
nationally or internationally, an increase in fuel prices, a tightening of the
labor market or changes in demands of organized labor resulting in higher wages,
or increased benefits or other costs or disruption of operations may adversely
affect the businesses of the company; (iv) legislative or regulatory changes,
including possible enactment of initiatives to reregulate the rail industry, may
adversely affect the businesses of the company; (v) possible additional
consolidation of the rail industry in the near future may adversely affect the
operations and business of the company; and (vi) changes may occur in the
securities and capital markets.
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