CSX CORPORATION Exhibit 99.3
INDEX to June 30, 2000 Restated Financial
Statements and Related Information
Page Number
PART I. FINANCIAL INFORMATION
Item 1:
Financial Statements
1. Consolidated Statement of Earnings-
Quarters and Six Months Ended June 30, 2000 and July 2, 1999 3
2. Consolidated Statement of Cash Flows-
Six Months Ended June 30, 2000 and July 2, 1999 4
3. Consolidated Statement of Financial Position-
At June 30, 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 Unaudited
Quarters Ended Six Months Ended
----------------------------------------------------------------
June 30, 2000 July 2, 1999 June 30, 2000 July 2, 1999
-------------- ------------- -------------- ------------
Operating Income
Operating Revenue $ 2,071 $ 2,509 $ 4,105 $ 4,942
Operating Expense 1,882 2,246 3,742 4,411
--------------- -------------- -------------- ------------
Operating Income 189 263 363 531
Other Income and Expense
Other Income 24 23 19 (12)
Interest Expense 139 127 273 260
--------------- -------------- -------------- ------------
Earnings
Earnings from Continuing Operations Before
Income Taxes 74 159 109 259
Income Tax Expense 26 52 36 82
--------------- -------------- -------------- ------------
Earnings before Discontinued Operations and
Cumulative Effect of Accounting Change 48 107 73 177
Earnings from Discontinued Operations, Net
of Tax 7 7 11 12
--------------- -------------- -------------- ------------
Earnings before Cumulative Effect of
Accounting Change 55 114 84 189
Cumulative Effect on Prior Years of
Accounting Change for Insurance-Related
Assessments, Net of Tax - - - (49)
--------------- -------------- -------------- ------------
Net Earnings $ 55 $ 114 $ 84 $ 140
=============== ============== ============== ============
Per Common Share
Earnings Per Share:
Before Discontinued Operations and
Cumulative Effect of Accounting Change $ 0.23 $ 0.51 $ 0.35 $ 0.84
Earnings from Discontinued Operations 0.03 0.03 0.05 0.06
Cumulative Effect of Accounting Change - - - (0.24)
--------------- -------------- -------------- ------------
Including Discontinued Operations and
Cumulative Effect of Accounting Change $ 0.26 $ 0.54 $ 0.40 $ 0.66
=============== ============== ============== ============
Earnings Per Share, Assuming Dilution:
Before Discontinued Operations and
Cumulative Effect of Accounting Change $ 0.23 $ 0.50 $ 0.35 $ 0.83
Earnings from Discontinued Operations 0.03 0.03 0.05 0.06
Cumulative Effect of Accounting Change - - - (0.23)
--------------- -------------- -------------- ------------
Including Discontinued Operations and
Cumulative Effect of Accounting Change $ 0.26 $ 0.53 $ 0.40 $ 0.66
=============== ============== ============== ============
Average Common Shares Outstanding
(Thousands) 211,016 210,517 211,104 210,321
=============== ============== ============== ============
Average Common Shares Outstanding,
Assuming Dilution (Thousands) 211,211 213,157 211,588 212,407
=============== ============== ============== ============
Dividends Paid Per Common Share $ 0.30 $ 0.30 $ 0.60 $ 0.60
=============== ============== ============== ============
See accompanying Notes to Consolidated Financial Statements.
-2-
CSX CORPORATION AND SUBSIDIARIES
Consolidated Statement of Cash Flows
(Millions of Dollars)
(Unaudited)
Six Months Ended
-----------------------------------
June 30, July 2,
2000 1999
---------------- ---------------
OPERATING ACTIVITIES
Net Earnings $ 84 $ 140
Adjustments to Reconcile Net Earnings to Net Cash Provided:
Cumulative Effect of Accounting Change - 49
Depreciation 293 335
Deferred Income Taxes 31 45
Equity in Conrail Earnings - Net (4) (22)
Other Operating Activities 52 (67)
Changes in Operating Assets and Liabilities
Accounts Receivable 68 (255)
Other Current Assets (80) -
Accounts Payable (161) (109)
Other Current Liabilities (287) 39
-------------- -------------
Net Cash Provided by Operating Activities (4) 155
-------------- -------------
INVESTING ACTIVITIES
Property Additions (422) (562)
Short-Term Investments - Net 99 71
Other Investing Activities (13) 35
-------------- -------------
Net Cash Used by Investing Activities (336) (456)
-------------- -------------
FINANCING ACTIVITIES
Short-Term Debt - Net (105) 383
Long-Term Debt Issued 187 195
Long-Term Debt Repaid (72) (60)
Cash Dividends Paid (131) (130)
Other Financing Activities (37) -
-------------- -------------
Net Cash Provided by Financing Activities (158) 388
-------------- -------------
Net Increase (Decrease) in Cash and Cash Equivalents (498) 87
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 128 192
Short-Term Investments at End of Period 267 357
-------------- -------------
Cash, Cash Equivalents and Short-Term
Investments at End of Period $ 395 $ 549
============== =============
See accompanying Notes to Consolidated Financial Statements.
-3-
CSX CORPORATION AND SUBSIDIARIES
Consolidated Statement of Financial Position
(Millions of Dollars)
(Unaudited)
June 30, December 31,
2000 1999
----------- -----------
ASSETS
Current Assets
Cash, Cash Equivalents and Short-Term Investments $ 395 $ 974
Accounts Receivable 1,135 1,135
Materials and Supplies 278 220
Deferred Income Taxes 127 135
Other Current Assets 144 99
-------------- -------------
Total Current Assets 2,079 2,563
Properties 17,750 17,526
Accumulated Depreciation (5,360) (5,269)
-------------- -------------
Properties-Net 12,390 12,257
Investment in Conrail 4,667 4,663
Affiliates and Other Companies 407 410
Other Long-Term Assets 831 827
-------------- -------------
Total Assets $ 20,374 $ 20,720
============== =============
LIABILITIES
Current Liabilities
Accounts Payable $ 1,051 $ 1,197
Labor and Fringe Benefits Payable 425 436
Current Portion of Casualty, Environmental and
Other Reserves 249 271
Current Maturities of Long-Term Debt 364 349
Short-Term Debt 469 574
Other Current Liabilities 465 646
-------------- -------------
Total Current Liabilities 3,023 3,473
Casualty, Environmental and Other Reserves 781 767
Long-Term Debt 6,296 6,196
Deferred Income Taxes 3,251 3,227
Other Long-Term Liabilities 1,329 1,301
-------------- -------------
Total Liabilities 14,680 14,964
-------------- -------------
SHAREHOLDERS' EQUITY
Common Stock, $1 Par Value 218 218
Other Capital 1,510 1,525
Retained Earnings 3,987 4,034
Accumulated Other Comprehensive Loss (21) (21)
-------------- -------------
Total Shareholders' Equity 5,694 5,756
-------------- -------------
Total Liabilities and Shareholders' Equity $ 20,374 $ 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 June 30,
2000 and December 31, 1999, and the results of its operations and its cash flows
for the quarters and six months ended June 30, 2000 and July 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 quarters ended June 30, 2000 and July 2, 1999, the 26-week period ended
June 30, 2000, the 27-week period ended July 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), Continued
(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 and six months ended June
30, 2000 and July 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
June 30, 2000 and July 2, 1999, potential common shares that were dilutive
totaled .2 million and 2.6 million, respectively. For the six months ended June
30, 2000 and July 2, 1999, potentially dilutive shares totaled .5 million and
2.1 million.
Certain potential common shares outstanding at June 30, 2000 and July 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 26.2 million at a weighted-average exercise
price of $40.07 per share at June 30, 2000 and 7.0 million with a weighted-
average exercise price of $50.79 per share at July 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.
- 6 -
CSX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited), Continued
(All Tables in Millions of Dollars, Except Per Share Amounts)
NOTE 4. INVESTMENT IN AND INTEGRATED RAIL OPERATIONS WITH CONRAIL, Continued
Conrail Financial Information
- -----------------------------
Summary financial information for Conrail for its fiscal periods ended June
30, 2000 and 1999, and at December 31, 1999, is as follows:
Quarters Ended Six Months Ended
June 30, June 30,
------------------------ ------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
Income Statement Information:
Revenues $246 $737 $505 $1,653
Income (Loss) From Operations 52 (61) 112 85
Net Income (Loss) 30 (63) 96 13
As Of
-------------------------------------
June 30, December 31,
2000 1999
-------------- -----------------
Balance Sheet Information:
Current Assets $ 509 $ 669
Property and Equipment and Other Assets 7,596 7,714
Total Assets 8,105 8,383
Current Liabilities 529 863
Long-Term Debt 1,273 1,302
Total Liabilities 4,191 4,564
Stockholders' Equity 3,914 3,819
Comparisons of Conrail's operating results for the quarters ended June
30, 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 two months of the 1999 quarter and five months of the
1999 six-month period were derived principally from freight linehaul operations
over the entire Conrail network. Results for the 2000-quarter and six months
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's results for the six months ended June 30, 2000 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. Conrail's
operating results for the quarter and six months ended June 30, 1999 included
non-recurring expenses totaling $173 million, $117 million after-tax, related to
the integration with CSX and Norfolk Southern. These expenses included employee
training expenses, costs to discontinue certain activities, an adjustment to
reflect an increase in a state property tax rate, and an increase in casualty
reserves, principally to reflect the method of settlement of certain casualty
liabilities based on the agreement between CSX, Norfolk Southern, and Conrail.
The increase in Conrail's casualty reserves was considered by the joint
acquisition entity in its fair value allocation of Conrail's assets and
liabilities and, accordingly, was excluded in determining the equity in
Conrail's net income recorded by CSX.
- 7 -
CSX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited), Continued
(All Tables in Millions of Dollars, Except Per Share Amounts)
NOTE 4. INVESTMENT IN AND INTEGRATED RAIL OPERATIONS WITH CONRAIL, Continued
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 additional 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.
At June 30, 2000 and December 31, 1999, CSX had $9 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 June 30, 2000 and December 31, 1999, Conrail had advanced $34 million and $93
million, respectively, to CSX under this arrangement at interest rates of 6.4%
and 5.6%, respectively. CSX also had amounts payable to Conrail of $90 million
and $105 million at June 30, 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 change in
working capital, as defined in the agreement, between June 25, 1999, and
December 10, 1999. The loss recorded includes the estimated costs to terminate
various contractual obligations of the company. These matters will affect the
determination of the final loss on sale. The company is in discussions about
these matters with Maersk and also has commenced third-party arbitration to
resolve certain of the issues. Management is not yet in a position to assess
fully the likely outcome of this process but believes it will prevail in the
arbitration.
- 8 -
CSX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited), Continued
(All Tables in Millions of Dollars, Except Per Share Amounts)
NOTE 5. SALE OF INTERNATIONAL CONTAINER-SHIPPING ASSETS, Continued
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 has revised its
disclosures under FASB Statement No. 131, "Disclosures about Segments of an
Enterprise and Related Information," for fiscal year 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 June 30, 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 June 30, 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 and $16 million for the
quarter and six months ended June 30, 2000, respectively, and $7 million and $15
million for the quarter and six months ended July 2, 1999, respectively.
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 Six Months Ended
------------------------------- ------------------------------
June 30, July 2, June 30, July 2,
2000 1999 2000 1999
--------------- ------------- ------------- -------------
Labor and Fringe Benefits $ 714 $ 806 $ 1,441 $ 1,587
Materials, Supplies and Other 499 645 972 1,265
Conrail Operating Fee, Rent and Services 101 46 196 46
Building and Equipment Rent 183 268 371 562
Inland Transportation 100 227 183 450
Depreciation 134 156 272 320
Fuel 151 98 307 181
---------------- ------------ ------------- -------------
Total $ 1,882 $ 2,246 $ 3,742 $ 4,411
================ ============ ============= =============
-9-
CSX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited), Continued
(All Tables in Millions of Dollars, Except Per Share Amounts)
NOTE 8. OTHER INCOME (EXPENSE)
Quarters Ended Six Months Ended
-------------------------- --------------------------
June 30, July 2, June 30, July 2,
2000 1999 2000 1999
------------- ---------- ------------ -----------
Interest Income $ 12 $ 10 $ 28 $ 24
Income from Real Estate and Resort
Operations/1/ 33 17 34 10
Net Investment Gain - 27 - 27
Net Losses from Accounts Receivable Sold (8) (7) (16) (15)
Minority Interest (12) (10) (20) (19)
Income (Loss) from Investment in Conrail - Net - (14) - (42)
Miscellaneous (1) - (7) 3
------------ ---------- ------------ ------------
Total $ 24 $ 23 $ 19 $ (12)
============ ========== ============ ===========
/(1)/ Gross revenue from real estate and resort operations was $68 million and
$97 million for the quarter and six months ended June 30, 2000,
respectively, and $52 million and $71 million for the quarter and six
months ended July 2, 1999, respectively.
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.
-10-
CSX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited), Continued
(All Tables in Millions of Dollars, Except Per Share Amounts)
NOTE 9. COMMITMENTS AND CONTINGENCIES, 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.
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 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 110 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 240 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.
-11-
CSX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited), Continued
(All Tables in Millions of Dollars, Except Per Share Amounts)
NOTE 9. COMMITMENTS AND CONTINGENCIES, Continued
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 June
30, 2000, and December 31, 1999, were $45 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 June 30, 2000 environmental liability
is expected to be paid out over the next five to seven years, funded by cash
generated from operations.
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.
-12-
CSX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited), Continued
(All Tables in Millions of Dollars, Except Per Share Amounts)
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). Intersegment sales and transfers
are generally accounted for as if the sales or transfers were to third parties,
that is, at current market prices.
Business segment information for the quarters and six months ended June 30,
2000 and July 2, 1999 is as follows:
Quarter ended June 30, 2000:
- ---------------------------
Marine Services*
----------------------------------
Surface Transportation Domestic
------------------------------- Container International
Rail Intermodal Total Shipping Terminals Total Totals
-----------------------------------------------------------------------------
Revenues from external customers $ 1,548 $286 $1,834 $162 $75 $237 $2,071
Intersegment revenues - 5 5 - 1 1 6
Segment operating income 138 20 158 4 18 22 180
Assets 13,140 393 13,533 367 745 1,112 14,645
-13-
CSX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited), Continued
(All Tables in Millions of Dollars, Except Per Share Amounts)
NOTE 10. BUSINESS SEGMENTS, Continued
Quarter ended July 2, 1999:
- --------------------------
Surface Transportation
------------------------------------- Marine
Rail Intermodal Total Services Totals
----------------------------------------------------------------
Revenues from external customers $ 1,334 $199 $ 1,533 $ 976 $ 2,509
Intersegment revenues - 8 8 - 8
Segment operating income 208 16 224 30 254
Assets 12,457 228 12,685 2,428 15,113
Six Months ended June 30, 2000:
- ------------------------------
Marine Services*
----------------------------------
Surface Transportation Domestic
-------------------------------- Container International
Rail Intermodal Total Shipping Terminals Total Totals
-----------------------------------------------------------------------------
Revenues from external customers $ 3,063 $569 $ 3,632 $324 $149 $ 473 $ 4,105
Intersegment revenues - 10 10 - 1 1 11
Segment operating income 285 33 318 3 32 35 353
Assets 13,140 393 13,533 367 745 1,112 14,645
Six Months ended July 2, 1999:
- -----------------------------
Surface Transportation
------------------------------------- Marine
Rail Intermodal Total Services Totals
----------------------------------------------------------------
Revenues from external customers $ 2,631 $362 $ 2,993 $1,949 $ 4,942
Intersegment revenues - 14 14 - 14
Segment operating income 474 23 497 18 515
Assets 12,457 228 12,685 2,428 15,113
* 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 Domestic Container Shipping and International
Terminals 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.
-14-
CSX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited), Continued
(All Tables in Millions of Dollars, Except Per Share Amounts)
NOTE 10. BUSINESS SEGMENTS, Continued
A reconciliation of the totals reported for the business segments to the
applicable line items in the consolidated financial statements is as follows:
Quarters Ended Six Months Ended
---------------------------- -------------------------
June 30, July 2, June 30, July 2,
2000 1999 2000 1999
------------- ------------- ----------- ------------
Revenues:
- --------
Total external revenues for business segments $ 2,071 $ 2,509 $ 4,105 $ 4,942
Intersegment revenues for business segments 6 8 11 14
Elimination of intersegment revenues (6) (8) (11) (14)
------------- ------------- ----------- ------------
Total consolidated revenues $ 2,071 $ 2,509 $ 4,105 $ 4,942
============= ============= =========== ===========
Operating Income:
- ----------------
Total operating income for business segments $ 180 $ 254 $ 353 $ 515
Reclassification of minority interest expense for
International terminals segment 12 10 20 19
Unallocated corporate expenses (3) (1) (10) (3)
------------- ------------- ----------- ------------
Total consolidated operating income $ 189 $ 263 $ 363 $ 531
============= ============= =========== ===========
June 30, July 2,
2000 1999
------------- -------------
Assets:
- ------
Assets for business segments $ 14,645 $ 15,113
Investment in Conrail 4,667 4,820
Elimination of intercompany receivables (162) (187)
Non-segment assets 1,224 1,181
------------- -------------
Total consolidated assets $ 20,374 $ 20,927
============= =============
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 June 30, 2000 and July 2, 1999 were $131 million
and $117 million, respectively. Revenues from the contract logistics segment for
the six-months ended June 30, 2000 and July 2, 1999 were $257 million and $237
million, respectively. CSX recorded a gain of $570 million before tax, $365
million after tax, $1.73 per share, on the sale.
-15-
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 quarters ended June 30,
1999 and July 2, 1999 consisted of 13 weeks. The six-month period ended June 30,
2000 consisted of 26 weeks, while the six-month period ended July 2, 1999
consisted of 27 weeks.
Second Quarter 2000 Compared with 1999
- --------------------------------------
CSX reported net earnings of $55 million, 26 cents per share, for the
quarter ended June 30, 2000. In the prior year, the company earned $114 million,
53 cents per share on a diluted basis. Net earnings include the operations of
the Company's wholly owned logistics subsidiary, CTI Logistx, Inc., which was
sold on September 22, 2000 for $650 million. All periods have been restated to
show the logistics segment as a discontinued operation.
Several significant factors affect the comparability of CSX's second
quarter 2000 operating results with the prior year. The company's integration of
Conrail operations took place June 1, 1999 and, accordingly, rail and intermodal
results for the second quarter 1999 include only one month of 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 second quarter 1999 included substantial revenues and expenses from
those operations.
Operating income for the second quarter of 2000 totaled $189 million,
compared with $263 million in the second quarter of 1999. Operating revenue of
$2.07 billion was 17% below the prior year quarter, while operating expense of
$1.88 billion was 16% 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 second quarter of 2000 totaled $138 million,
compared to $208 million in the prior year quarter. Operating revenue totaled
$1.5 billion, an increase of $214 million, or 16%, due to the Conrail
integration and relatively strong demand across most commodity groups. Operating
expense increased $284 million, or 25%, to $1.4 billion. As discussed below,
both revenues and expenses were adversely affected by significant congestion on
key parts of the CSX network and costs incurred to regain network fluidity.
-16-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
RESULTS OF OPERATIONS, Continued
- --------------------------------
Rail, Continued
The following tables provide rail carload and revenue data by service group
and commodity for the quarters and six months ended June 30, 2000 and July 2,
1999:
Carloads Revenue
Quarter Ended Quarter Ended
(Thousands) (Millions of Dollars)
--------------------------- --------------------------
June 30, July 2, June 30, July 2,
2000 1999 2000 1999
------------ ------------ ------------ ------------
Merchandise
Phosphates and Fertilizer 123 128 $ 75 $ 78
Metals 90 78 107 88
Food and Consumer Products 39 35 55 41
Paper and Forest Products 135 121 169 142
Agricultural Products 87 73 117 100
Chemicals 154 129 255 219
Minerals 117 109 104 99
Government 3 3 10 9
------------- ------------ ------------- -----------
Total Merchandise 748 676 892 776
Automotive 158 132 238 177
Coal, Coke and Iron Ore
Coal 409 377 383 344
Coke 12 15 13 13
Iron Ore 13 22 7 13
------------- ------------ ------------- -----------
Total Coal, Coke and Iron Ore 434 414 403 370
Other - - 15 11
------------- ------------ ------------- -----------
Total Rail 1,340 1,222 $ 1,548 $ 1,334
============= ============ ============= ===========
-17-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
RESULTS OF OPERATIONS, Continued
- --------------------------------
Rail, Continued
Carloads Revenue
Six Months Ended Six Months Ended
(Thousands) (Millions of Dollars)
--------------------------- --------------------------
June 30, July 2, June 30, July 2,
2000 1999 2000 1999
------------- ----------- ------------- ------------
Merchandise
Phosphates and Fertilizer 254 276 $ 167 $ 168
Metals 181 150 214 170
Food and Consumer Products 80 69 108 80
Paper and Forest Products 272 242 337 279
Agricultural Products 179 149 239 204
Chemicals 303 250 502 424
Minerals 218 210 199 191
Government 6 6 15 16
------------- ------------ ------------- -----------
Total Merchandise 1,493 1,352 1,781 1,532
Automotive 316 251 465 331
Coal, Coke and Iron Ore
Coal 805 773 754 697
Coke 24 27 25 25
Iron Ore 21 29 14 20
------------- ------------ ------------- -----------
Total Coal, Coke and Iron Ore 850 829 793 742
Other - - 24 26
------------- ------------ ------------- -----------
Total Rail 2,659 2,432 $ 3,063 $ 2,631
============= ============ ============= ===========
As mentioned above, overall freight revenue was significantly higher for
the second quarter and first six months than in 1999 due to the Conrail
integration. The increase in coal revenue was tempered by generally mild winter,
spring, and early summer weather conditions in the East and continuing weakness
in export coal shipments. Merchandise demand was generally 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, the railroad 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 or classification
yards did not show sustainable improvement through the end of the first quarter
of 2000. While significant improvements were realized during the second quarter,
the rail unit experienced lost revenue during the second quarter and first half
of the year as customers diverted traffic to trucks or other carriers. Operating
expenses include significant costs related to the congestion problems, including
lease costs for higher numbers of locomotives and freight cars on the system
-18-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
RESULTS OF OPERATIONS, Continued
- --------------------------------
Rail, Continued
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. As discussed in a later section of Management's
Discussion and Analysis, the railroad undertook various initiatives during the
second quarter to relieve congestion, improve operations, and reduce operating
expenses. With these initiatives in place, substantial progress was made by the
end of the second quarter in restoring network fluidity across the system.
Intermodal
Intermodal operating income totaled $20 million for the second quarter of
2000, compared to $16 million in the prior year quarter. Revenue for the quarter
increased $84 million, or 41%, to $291 million. Operating expense increased $80
million, or 42%, to $271 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 remained
relatively strong during the quarter; however, domestic container revenues
continued to be adversely affected by business lost to trucks and other carriers
as a result of service problems and by 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 second quarter and first six months of
2000 are presented separately for each segment. It is not practicable to provide
results for these segments for the comparable periods 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 $237 million for the second
quarter of 2000, vs. $976 million for the 1999 quarter. Operating expenses
totaled $215 million, compared to $947 million in the prior year. Operating
income for second quarter 2000 was $22 million, compared to $30 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 ratio as the international business operated at a low margin 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.
-19-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
RESULTS OF OPERATIONS, Continued
- --------------------------------
Domestic Container Shipping
The domestic container-shipping unit reported operating income of $4
million for the second quarter of fiscal 2000 on operating revenue of $162
million. Traffic demand was strong in the Alaska and Hawaii-Guam trade lanes,
reflecting seasonal improvement. However, weakness in the Puerto Rico trade due
to competitive pressures and a slower Puerto Rican economy negatively impacted
earnings for the quarter.
International Terminals
The international terminals unit reported operating income of $18 million
for the second quarter on operating revenue of $76 million. International trade
remained robust, with ongoing growth in world trade and the continued rebound of
Asian economies. In addition to strong container traffic through its Hong Kong
terminal, the unit benefited from continued productivity enhancements and
improved capacity utilization at that facility.
First Six Months 2000 Compared with 1999
- ----------------------------------------
For the first six months of the year, earnings for the company totaled $84
million, 40 cents per share on a diluted basis, compared to $140 million, 66
cents per share on a diluted basis for the prior year period. Net earnings
include the discontinued logistics segment sold in September 2000. The 1999
results included a $17 million after-tax gain, or 8 cents per share, on the June
1999 sale of the company's Grand Teton Lodge resort and an after-tax charge of
$49 million, 23 cents per share, in the first quarter of 1999 to record the
cumulative effect of an accounting change. As previously mentioned, the 2000
period covers 26 weeks of results, versus 27 weeks for the 1999 period. The
additional week in 1999 was included in the first quarter.
Operating revenue for the first six months of 2000 totaled $4.1 billion,
compared to $4.9 billion in the prior year. Surface Transportation revenue
increased $635 million, primarily as a result of the Conrail integration, while
Marine Services revenue declined $1.5 billion as a result of the international
liner sale.
Operating income totaled $363 million for the first six months of 2000,
versus $531 million for the comparable 1999 period. The decline in operating
income was attributable to significantly higher rail operating expenses,
including higher wage and benefit costs for the contract workforce,
significantly higher fuel costs, and heavy spending associated with network
congestion and initiatives to restore network fluidity. The impact of fuel price
increases alone was responsible for $117 million in higher rail fuel expense
compared to the first six months of 1999.
-20-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
FINANCIAL CONDITION
- -------------------
Cash, cash equivalents and short-term investments totaled $395 million at
June 30, 2000, a decrease of $579 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 six months ended
June 30, 2000 were normal transportation operations and the issuance of long-
term debt. On a net basis, operations used $4 million of cash for the six-month
period, reflecting the decline in operating income and the utilization of cash
to reduce accounts payable and other accrued liabilities. Primary uses of cash
and cash equivalents 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 June 30, 2000 was $944 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.
Under its normal equipment financing programs, the company's rail unit
closed approximately $140 million in long-term financing on locomotives and
railcars in the second quarter of 2000 and expects to close approximately $70
million in similar financing during the second half of the year. CSX also has
$200 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)
-----------------------------------
June 30, December 31,
2000 1999
----------------- -----------------
Cash, Cash Equivalents and
Short-Term Investments $ 395 $ 974
Commercial Paper and Equivalents -
Short-Term $ 469 $ 574
Commercial Paper -
Long-Term $ 800 $ 800
Working Capital (Deficit) $ (944) $ (910)
Current Ratio .7 .7
Debt Ratio 56 % 54 %
Ratio of Earnings to Fixed Charges 1.4 x 1.1 x
-21-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
OUTLOOK
- -------
CSX's financial performance during the second half of fiscal 2000 will be
largely dependent on its success in maintaining fluidity on the rail network,
improving customer service, and eliminating substantial excess costs
attributable to recent network congestion and service recovery initiatives.
Demand remains strong across most commodity groups, and management is optimistic
that the company will begin recapturing traffic that had moved to alternate
modes of transportation as a result of the recent rail service problems in the
Eastern United States. CSX's rail and intermodal businesses will concentrate on
improving operating performance and service levels heading into the fall traffic
peak. Significant attention is also being focused on reducing and eliminating
excess costs and beginning to achieve a number of the planned merger synergies
associated with the Conrail transaction. However, there can be no assurance that
these objectives will be met, or met within a specified time frame. The company
will also continue its initiative to review and increase prices on rail and
intermodal shipments where appropriate and competitively feasible, particularly
where traffic demand is creating capacity constraints on the system. Fuel
expense is expected to remain at levels significantly higher than the prior
year.
The domestic container shipping business should continue to benefit from
seasonal traffic strength, particularly in the Alaska and Hawaii-Guam trade
lanes, but will likely see a continuation of competitive pressures and economic
slowdown in Puerto Rico that affected that trade lane in the second quarter. The
international terminals business expects container volumes to remain strong in
Hong Kong and other key terminal locations and should see steady or improved
earnings.
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
-22-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
INVESTMENT IN AND INTEGRATED RAIL OPERATIONS WITH CONRAIL, Continued
Accounting and Financial Reporting Effects, Continued
- -----------------------------------------------------
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 were not 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 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 first
quarter.
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. At
that time, the company implemented a 90-day action plan targeting significant
improvements in seventeen key operating and service measures. Most of these
operating goals were met and substantial progress was made by the end of the
second quarter in restoring network fluidity across the system. Financial
results for the first six months of fiscal year 2000 reflect significant costs
attributable to network congestion and the recovery initiatives.
Entering the third quarter of 2000, efforts are being focused on
ensuring that the rail system is well-prepared to handle peak traffic demand in
the fall. To achieve this goal, a 60-day action plan was implemented at the
beginning of the quarter that targets further improvements in most key service
measures. Major initiatives are also being undertaken to identify and eliminate
substantial excess costs associated with the poor network performance. The
company is also continuing its review of pricing policies and implementing rate
increases where competitively appropriate.
Management believes that the trend of operational improvement across
the rail network will be continued and the company will be prepared to handle
the increased fall traffic. Financial results for the rail unit are expected to
improve as the company reduces operating costs, regains business which had been
diverted to other modes of transportation, and begins to realize many of the
synergies envisioned with the Conrail acquisition. However, there can be no
assurance that these objectives will be met, or met within a specified time
frame.
-23-
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
- -------------------------------
Comparisons of Conrail's operating results for the quarters and
six-month periods ended June 30, 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 two months of the 1999
quarter and five months of the 1999 six-month period were derived principally
from freight linehaul operations over the entire Conrail network. Results for
the 2000 quarter and six months 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 $30 million on revenues of $246 million
for the second quarter of 2000, compared to a net loss of $63 million on
revenues of $737 million for the prior year quarter. For the related six-month
periods, Conrail reported net income of $96 million on revenues of $505 million
in 2000 and $13 million on revenues of $1.7 billion in 1999. Conrail's results
for the first six months of 2000 benefited from a non-recurring gain on the sale
of property of $61 million, $37 million after-tax. Conrail's operating results
for the quarter and six months ended June 30, 1999 included non-recurring
expenses totaling $173 million, $117 million after-tax, related to the
integration with CSX and Norfolk Southern. These expenses included employee
training expenses, costs to discontinue certain activities, an adjustment to
reflect an increase in a state property tax rate, and an increase in casualty
reserves, principally to reflect the method of settlement of certain casualty
liabilities based on the agreement between CSX, Norfolk Southern, and Conrail.
Conrail's operating activities required a net use of cash of $1 million
for the first half of 2000, compared with net cash provided by operations of
$267 million for the first half of 1999. The decline in cash provided by
operations reflected lower operating income resulting from Conrail's
post-integration structure and operations, as well as significant payments of
one-time items owed to CSX and Norfolk Southern in the early part of fiscal
2000.
Conrail's working capital deficit was $20 million at June 30, 2000,
compared with $194 million at December 31, 1999. The working capital deficit at
December 31, 1999 included slightly more than $300 million in long-term debt
maturities, the majority of which was paid in the second quarter of 2000 and
required 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 change in
working capital, as defined in the agreement, between June 25, 1999, and
December 10, 1999. The loss recorded includes the estimated costs to terminate
various contractual obligations of the company. These matters will affect the
determination of the final loss on sale. The company is in discussions about
these matters with Maersk and also has commenced third-party arbitration to
resolve certain of the issues. Management is not yet in a position to assess
fully the likely outcome of this process but believes it will prevail in the
arbitration.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
SALE OF INTERNATIONAL CONTAINER-SHIPPING ASSETS, Continued
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," for fiscal 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 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 through 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. CSX estimates that it will incur approximately $20
million to $30 million in additional costs during fiscal year 2000 to address
the issues raised in the audit and the commitments made in the Safety Compliance
Agreement, a portion of which will represent operating expenses for fiscal 2000
and a portion of which 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 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, and to allow the STB time to consider changes in the rules by which
future rail mergers will be evaluated. The STB 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. BNSF
and CN challenged the STB decision in federal appeals court. The court issued a
ruling in July 2000 that upheld the STB moratorium. The moratorium expires in
June 2001.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
OTHER MATTERS, Continued
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.
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.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
OTHER MATTERS, Continued
Litigation, Continued
- ---------------------
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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