FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarter ended September 28, 2001
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number 1-8022
CSX CORPORATION
(Exact name of registrant as specified in its charter)
Virginia 62-1051971
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
901 East Cary Street, Richmond, Virginia 23219-4031
(Address of principal executive offices) (Zip Code)
(804) 782-1400
(Registrant's telephone number, including area code)
No Change
(Former name, former address and former fiscal year, if changed since
last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes (X) No()
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of September 28, 2001: 213,162,313 shares.
-1-
CSX CORPORATION
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 28, 2001
INDEX
Page Number
PART I. FINANCIAL INFORMATION
Item 1:
Financial Statements
1. Consolidated Statement of Earnings-
Quarters and Nine Months Ended September 28, 2001 and
September 29, 2000 3
2. Consolidated Statement of Cash Flows-
Nine Months Ended September 28, 2001 and September 29, 2000 4
3. Consolidated Statement of Financial Position-
At September 28, 2001 and December 29, 2000 5
Notes to Consolidated Financial Statements 6
Item 2:
Management's Discussion and Analysis of Results of
Operations and Financial Condition 26
Item 3:
Quantitative and Qualitative Disclosures About Market Risk 36
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 37
Signature 37
-2-
CSX CORPORATION AND SUBSIDIARIES
Consolidated Statement of Earnings
(Millions of Dollars, Except Per Share Amounts)
(Unaudited)
Quarters Ended Nine Months Ended
------------------------------- -----------------------------
Sept. 28, Sept. 29, Sept. 28, Sept. 29,
2001 2000 2001 2000
------------ ------------- ----------- -----------
Operating Revenue $ 2,019 $ 2,039 $ 6,101 $ 6,144
Operating Expense 1,737 1,815 5,365 5,557
------------ ------------- ----------- -----------
Operating Income 282 224 736 587
Other Income 1 3 4 22
Interest Expense 126 140 389 413
------------ ------------- ----------- -----------
Earnings before Income Taxes 157 87 351 196
Income Tax Expense 57 28 123 64
------------ ------------- ----------- -----------
Earnings before Discontinued Operations 100 59 228 132
Earnings from Discontinued Operations, Net of Tax - 3 - 14
Gain on Sale of Discontinued Operations, Net of Tax - 365 - 365
------------ ------------- ----------- -----------
Net Earnings $ 100 $ 427 $ 228 $ 511
============ ============= =========== ===========
Earnings Per Share:
Before Discontinued Operations $ 47 $ .28 $ 1.08 $ .62
Earnings from Discontinued Operations - .01 - .07
Gain on Sale of Discontinued Operations - 1.73 - 1.73
------------ ------------- ----------- -----------
Including Discontinued Operations $ .47 $ 2.02 $ 1.08 $ 2.42
============ ============= =========== ===========
Earnings Per Share, Assuming Dilution:
Before Discontinued Operations $ .47 $ .28 $ 1.07 $ .62
Earnings from Discontinued Operations - .01 - .07
Gain on Sale of Discontinued Operations - 1.73 - 1.73
------------ ------------- ----------- -----------
Including Discontinued Operations $ .47 $ 2.02 $ 1.07 $ 2.42
============ ============= =========== ===========
Average Common Shares Outstanding (Thousands) 211,871 210,934 211,618 211,047
============ ============= =========== ===========
Average Common Shares Outstanding,
Assuming Dilution (Thousands) 212,579 211,254 212,312 211,476
============ ============= =========== ===========
Cash Dividends Paid Per Common Share $ .10 $ .30 $ .70 $ .90
============ ============= =========== ===========
See accompanying Notes to Consolidated Financial Statements.
-3-
CSX CORPORATION AND SUBSIDIARIES
Consolidated Statement of Cash Flows
(Millions of Dollars)
(Unaudited)
Nine Months Ended
-------------------------------
Sept. 28, Sept. 29,
2001 2000
----------- -----------
OPERATING ACTIVITIES
Net Earnings $ 228 $ 511
Adjustments to Reconcile Net Earnings to Net Cash Provided:
Depreciation 469 445
Deferred Income Taxes 76 70
Gain on Sale of Contract Logistics Segment - (365)
Equity in Conrail Earnings - Net (10) (4)
Other Operating Activities (61) 35
Changes in Operating Assets and Liabilities
Accounts Receivable 15 299
Other Current Assets (11) (95)
Accounts Payable (74) (58)
Other Current Liabilities (193) (289)
------------ -----------
Net Cash Provided by Operating Activities 439 549
------------ -----------
INVESTING ACTIVITIES
Property Additions (628) (643)
Net Investment Proceeds - 650
Short-Term Investments - Net (35) (44)
Other Investing Activities 52 3
------------ -----------
Net Cash Used by Investing Activities (611) (34)
------------ -----------
FINANCING ACTIVITIES
Short-Term Debt - Net (127) (247)
Long-Term Debt Issued 500 588
Long-Term Debt Repaid (195) (737)
Cash Dividends Paid (149) (197)
Other Financing Activities 15 (56)
------------ -----------
Net Cash Provided (Used) by Financing Activities 44 (649)
------------ -----------
Net Decrease in Cash and Cash Equivalents (128) (134)
CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
Cash and Cash Equivalents at Beginning of Period 261 626
------------ -----------
Cash and Cash Equivalents at End of Period 133 492
Short-Term Investments at End of Period 459 377
------------ -----------
Cash, Cash Equivalents and Short-Term
Investments at End of Period $ 592 $ 869
============ ===========
See accompanying Notes to Consolidated Financial Statements.
-4-
CSX CORPORATION AND SUBSIDIARIES
Consolidated Statement of Financial Position
(Millions of Dollars)
(Unaudited)
Sept. 28, Dec. 29,
2001 2000
------------ -----------
ASSETS
Current Assets
Cash, Cash Equivalents and Short-Term Investments $ 592 $ 684
Accounts Receivable 876 850
Materials and Supplies 266 245
Deferred Income Taxes 141 121
Other Current Assets 144 146
------------ -----------
Total Current Assets 2,019 2,046
Properties 18,279 17,839
Accumulated Depreciation (5,400) (5,197)
------------ -----------
Properties-Net 12,879 12,642
Investment in Conrail 4,677 4,668
Affiliates and Other Companies 360 362
Other Long-Term Assets 671 773
------------ -----------
Total Assets $ 20,606 $ 20,491
============ ===========
LIABILITIES
Current Liabilities
Accounts Payable $ 1,097 $ 1,079
Labor and Fringe Benefits Payable 408 405
Current Portion of Casualty, Environmental and
Other Reserves 254 246
Current Maturities of Long-Term Debt 976 172
Short-Term Debt 272 749
Income Taxes and Other Payables 190 372
Other Current Liabilities 250 257
------------ -----------
Total Current Liabilities 3,447 3,280
Casualty, Environmental and Other Reserves 713 755
Long-Term Debt 5,659 5,810
Deferred Income Taxes 3,482 3,384
Other Long-Term Liabilities 1,192 1,245
------------ -----------
Total Liabilities 14,493 14,474
------------ -----------
SHAREHOLDERS' EQUITY
Common Stock, $1 Par Value 213 213
Other Capital 1,485 1,467
Retained Earnings 4,415 4,337
------------ -----------
Total Shareholders' Equity 6,113 6,017
------------ -----------
Total Liabilities and Shareholders' Equity $ 20,606 $ 20,491
============ ===========
See accompanying Notes to Consolidated Financial Statements.
-5-
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 September
28, 2001 and December 29, 2000, the results of its operations for the quarters
and nine months ended September 28, 2001 and September 29, 2000, and its cash
flows for the nine months ended September 28, 2001 and September 29, 2000, such
adjustments being of a normal recurring nature. Certain prior year data have
been reclassified to conform to the 2001 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 years 2001 and
2000 consist of 52 weeks ending on December 28, 2001 and December 29, 2000,
respectively. The financial statements presented are for the 13-week quarters
ended September 28, 2001 and September 29, 2000, the 39-week periods ended
September 28, 2001 and September 29, 2000, and as of December 29, 2000.
Comprehensive income approximates net earnings for all periods presented in
the accompanying consolidated statement of earnings.
NOTE 2. 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 nine months ended
September 28, 2001 and September 29, 2000. Earnings per share, assuming
dilution, are based on the weighted average of common shares outstanding
adjusted for the effect of dilutive potential common shares outstanding during
the period, principally arising from employee stock plans. For the fiscal
quarters ended September 28, 2001 and September 29, 2000, dilutive potential
common shares totaled 0.7 million and 0.3 million, respectively. For the nine
months ended September 28, 2001 and September 29, 2000, potentially dilutive
shares totaled 0.7 million and 0.4 million.
Certain potential common shares outstanding at September 28, 2001 and
September 29, 2000 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 18.8 million at a weighted-average
exercise price of $43.38 per share at September 28, 2001 and 26.1 million with a
weighted-average exercise price of $40.07 per share at September 29, 2000.
NOTE 3. RECENT ACCOUNTING PRONOUNCEMENTS
In 2001, Statement of Financial Accounting Standard No. 142, Goodwill and
Other Intangible Assets, was issued. Under the provisions of Statement 142,
goodwill and other indefinite lived intangible assets are no longer amortized
but are reviewed for impairment on a periodic basis. The Company will adopt this
standard in the first quarter of 2002 and has yet to determine if it will have a
material affect on its financial statements.
-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
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.
Conrail Financial Information
-----------------------------
Summary financial information for Conrail for its fiscal periods ended
September 30, 2001 and 2000, and at December 31, 2000, is as follows:
Quarters Ended Nine Months Ended
September 30, September 30,
----------------------- ------------------------
2001 2000 2001 2000
-------- ------- ----------- --------
Income Statement Information:
Revenues $223 $243 $685 $748
Income From Operations 58 65 198 177
Net Income 35 35 127 131
As Of
------------------------------
September 30, December 31,
2001 2000
--------------- -----------
Balance Sheet Information:
Current Assets $ 820 $ 520
Property and Equipment and Other Assets 7,323 7,540
Total Assets 8,143 8,060
Current Liabilities 403 435
Long-Term Debt 1,188 1,229
Total Liabilities 4,014 4,078
Stockholders' Equity 4,129 3,982
-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 upon the June 1999 integration date. CSX's rail and
intermodal operating revenue since that date includes revenue from traffic
previously recognized by Conrail. Operating expenses reflect costs incurred to
operate the former Conrail lines. Rail operating expenses 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.
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 December 29, 2000, CSX had $2 million 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 September 28, 2001 and December 29,
2000, Conrail had advanced $192 million and $40 million, respectively, to CSX
under this arrangement at interest rates of 3.8% and 5.9%, respectively. CSX
also had amounts payable to Conrail of $78 million and $127 million at September
28, 2001 and December 29, 2000, respectively, representing billings from Conrail
under the operating, equipment, and shared area agreements.
NOTE 5. DISCONTINUED OPERATIONS
On September 22, 2000, CSX completed the sale of CTI Logistx, Inc., its
wholly-owned logistics subsidiary, for $650 million. The contract logistics
segment is reported as a discontinued operation. Revenues from the contract
logistics segment for the quarter and nine-months ended September 29, 2000 were
$78 million and $335 million, respectively.
-8-
CSX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited), Continued
(All Tables in Millions of Dollars, Except Per Share Amounts)
NOTE 6. 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). 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 working capital
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 Company has
recorded a receivable of approximately $70 million in connection with the post-
closing working capital adjustment and this amount is currently in dispute. This
matter, together with other disputed issues, has been submitted to arbitration.
Management is not yet in a position to assess fully the likely outcome of this
process but believes it will prevail in the arbitrations. During 1999, the
Company recorded a net loss of $360 million, $271 million after-tax, related to
this transaction. Included in this amount were estimated costs to terminate
various contractual obligations of the Company. These matters could affect the
determination of the final loss on sale.
NOTE 7. ACCOUNTS RECEIVABLE
The Company sells revolving interests in its rail accounts receivable to
public investors through a securitization program and to financial institutions
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. 140 "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 September 28, 2001, the agreements provide for the sale of up to
$350 million in receivables through the securitization program and $250 million
through the conduit programs.
At September 28, 2001 and December 29, 2000, the Company had sold $547
million of accounts receivable; $300 million through the securitization program
and $247 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 programs require yield payments based on
prevailing commercial paper rates plus incremental fees. Losses recognized on
the sale of accounts receivable totaled $9 million and $31 million for the
quarter and nine months ended September 28, 2001, respectively, and $8 million
and $24 million for the quarter and nine months ended September 29, 2000,
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.
-9-
CSX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited), Continued
(All Tables in Millions of Dollars, Except Per Share Amounts)
NOTE 8. OPERATING EXPENSE
Quarters Ended Nine Months Ended
------------------------------- -----------------------------
Sept. 28, Sept. 29, Sept. 28, Sept. 29,
2001 2000 2001 2000
------------- ------------- ------------- ------------
Labor and Fringe Benefits $ 711 $ 728 $ 2,210 $ 2,208
Materials, Supplies and Other 413 425 1,259 1,346
Conrail Operating Fee, Rent and Services 83 89 251 285
Building and Equipment Rent 155 176 477 560
Inland Transportation 83 93 252 266
Depreciation 154 148 462 430
Fuel 138 156 454 462
------------- ------------- ------------- ------------
Total $ 1,737 $ 1,815 $ 5,365 $ 5,557
============= ============= ============= ============
NOTE 9. OTHER INCOME (EXPENSE)
Quarters Ended Nine Months Ended
-------------------------- ---------------------------
Sept. 28, Sept. 29, Sept. 28, Sept. 29,
2001 2000 2001 2000
------------- ----------- ------------- ------------
Interest Income $ 8 $ 12 $ 29 $ 40
Income from Real Estate and Resort Operations/(1)/ 24 15 74 49
Net Investment Loss - (1) - (1)
Net Losses from Accounts Receivable Sold (9) (8) (31) (24)
Minority Interest (9) (11) (27) (31)
Equity Losses from Other Affiliates (1) - (20) (5)
Miscellaneous (12) (4) (21) (6)
----------- ---------- ------------ ----------
Total $ 1 $ 3 $ 4 $ 22
============ ========== ============ ==========
/(1)/ Gross revenue from real estate and resort operations was $66 million and
$187 million for the quarter and nine months ended September 28, 2001,
respectively, and $52 million and $148 million for the quarter and nine
months ended September 29, 2000, respectively.
-10-
CSX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited), Continued
(All Tables in Millions of Dollars, Except Per Share Amounts)
NOTE 10. DEBT AND CREDIT AGREEMENTS
During the nine months ended September 28, 2001, the Company issued $500
million of 6.75% notes due 2011 and reclassified $350 million of outstanding
commercial paper to long-term liabilities as it is now supported by a five-year
$1 billion line of credit agreement signed in June of 2001. This
reclassification was based on the Company's ability and intent to maintain this
debt outstanding for more than a year. The Company also entered into a $500
million one-year revolving credit agreement in June of 2001. Borrowings under
both of these credit agreements accrue interest at a variable rate based on
LIBOR. The Company pays annual fees to the participating banks that may range
from 0.01% to 0.23% of total commitment, depending on its credit rating.
NOTE 11. DERIVATIVE FINANCIAL INSTRUMENTS
On August 10, 2001, CSX entered into interest rate swap agreements on its
$300 million 7.25% notes due May 1, 2004, its $150 million 5.85% notes due
December 1, 2003, and its $50 million 6.46% notes due June 22, 2005 for interest
rate risk exposure management purposes. These instruments mature at the time the
related notes expire. Under these agreements, the Company will pay variable
interest based on LIBOR in exchange for fixed rate payments (on September 28,
2001 the variable and fixed rate weighted averages were 5.8% and 6.8%,
respectively), effectively transforming the debentures to floating rate
obligations. Accordingly, the instruments qualify, and are designated, as fair
value hedges. In addition, one of the Company's subsidiaries has an interest
rate swap with a national amount of $45 million.
The Company accounts for derivative instruments under Statement of
Financial Accounting Standard ("SFAS") No. 133, Accounting for Derivative
Instruments and Hedging Activities, and SFAS No. 138, an amendment to SFAS No.
133, which established new accounting and reporting guidelines for derivative
instruments and hedging activities. SFAS No. 133 and SFAS No. 138 are
collectively referred to herein as "SFAS 133." SFAS 133 requires that all
derivative instruments be recognized as assets and liabilities in the financial
statements at fair value. For derivative instruments that are designated and
qualify as a fair value hedge, the gain or loss on the derivative instrument, as
well as the offsetting loss or gain on the hedged item attributable to the
hedged risk, are recognized in current earnings during the period of change in
fair values. The accounting for hedge effectiveness is measured at least
quarterly based on the relative change in fair value between the derivative
contract and the hedged item over time. Any change in fair value resulting from
ineffectiveness, as defined by SFAS 133, is recognized immediately in earnings.
The Company's interest rate swaps qualify as perfectly effective fair value
hedges, as defined by SFAS No. 133. As such, there was no ineffective portion to
the hedge recognized in earnings during the period. The fair value of the
interest rate swap agreements are immaterial to the statement of financial
position.
The differential to be paid or received under these agreements is accrued
consistently with the terms of the agreements and is recognized in interest
expense over the term of the related debt. The related amounts payable to or
receivable from counterparties are included in other liabilities or assets. Cash
flows related to interest rate swap agreements are classified as "Operating
activities" in the Consolidated Statements of Cash Flows. For the three months
ended September 28, 2001, the Company reduced interest expense by approximately
$0.6 million as a result of the interest rate swap agreements that were in place
during that period.
The Company is exposed to credit loss in the event of nonperformance by the
other parties to the interest rate swap agreements. However, the Company does
not anticipate nonperformance by the counterparties.
-11-
CSX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited), Continued
(All Tables in Millions of Dollars, Except Per Share Amounts)
NOTE 12. COMMITMENTS AND CONTINGENCIES
Purchase Commitments
--------------------
The Company has entered into fixed-price forward fuel purchase agreements
for approximately 50% of its fuel requirements over the next fifteen months.
These agreements amount to approximately 360 million gallons in commitments at a
weighted average of 78 cents per gallon.
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.
Environmental
-------------
CSX Transportation, Inc. (CSXT), the wholly-owned rail subsidiary of CSX,
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 106 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 231 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.
-12-
CSX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited), Continued
(All Tables in Millions of Dollars, Except Per Share Amounts)
NOTE 12. 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
September 28, 2001, and December 29, 2000, were $36 million and $41 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 September 28, 2001
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 or financial condition.
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 CSXT. 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.
-13-
CSX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited), Continued
(All Tables in Millions of Dollars, Except Per Share Amounts)
NOTE 12. COMMITMENTS AND CONTINGENCIES, Continued
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, which has allowed 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.
In 1999, six of the nine defendants in the case reached a tentative
settlement with the plaintiffs group. The basis of the settlement is an
agreement that all claims for compensatory and punitive damages against the six
defendants would be compromised for the sum of $215 million. The settlement was
approved by the trial court in early 2000.
In 2000, the City of New Orleans was granted permission by the trial court
to assert an amended claim against CSXT, including a newly asserted claim for
punitive damages. The City's case was originally filed in 1988, and while based
on the 1987 tank car fire, is not considered to be part of the class action.
In April of 2001, a group of approximately 100 New Orleans firefighters and
their spouses brought an action against CSXT and other defendants in the
original tank car fire case, styled Hilda Austin, wife of and Edward F. Austin,
Sr. et al. versus Norfolk Southern Corporation et al., Civil District Court for
the Parish of Orleans (Louisiana), No. 2001-5104. This action purports to be a
claim by the firefighters for injuries allegedly incurred during the September,
1987 tank car fire. The Austin matter has been transferred to the presiding
trial judge in the tank car fire case and consolidated with the main case. A
motion on behalf of the Austin plaintiffs to intervene in the main case is now
pending before the trial judge. CSXT intends to oppose the motion to intervene,
and believes that this claim is not timely brought.
On June 27, 2001, the Louisiana Court of Appeal for the Fourth Circuit
affirmed the judgment of the trial court, which judgment reduced the punitive
damages verdict from $2.5 billion to $850 million. CSXT moved the Louisiana
Fourth Circuit Court for rehearing of certain issues raised in its appeal; that
motion was denied on August 2, 2001.
-14-
CSX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited), Continued
(All Tables in Millions of Dollars, Except Per Share Amounts)
NOTE 12. COMMITMENTS AND CONTINGENCIES, Continued
On August 30, 2001, CSXT filed with the Louisiana Supreme Court an
application that the court take jurisdiction over and reverse the 1997 punitive
damages award. The Louisiana Supreme Court's jurisdiction in this case is
discretionary. Opposing papers were filed by counsel on October 15, 2001. If the
Louisiana Supreme Court takes jurisdiction of the case, an additional round of
briefing and oral argument may precede any decision by the court. If the
Louisiana Supreme Court does not take jurisdiction, or if its resolution of the
issues is unsatisfactory, CSXT intends to seek further review before the United
States Supreme Court.
CSXT continues to pursue an aggressive legal strategy. At the present
time, management is not in a position to determine whether the resolution of
this case will have a material adverse effect on the Company's financial
position or results of operations in any future reporting period.
ECT Dispute
-----------
CSX has received a claim amounting to approximately $180 million plus
interest from Europe Container Terminals bv (ECT), owner of the Rotterdam
Container Terminal previously operated by Sea-Land prior to its sale to Maersk
in December 1999. ECT has claimed that the sale of the international liner
business to Maersk resulted in a breach of the Sea-Land terminal agreements. ECT
has refused to accept containers at the former Sea-Land facility tendered by
Maersk Sea-Land and is seeking compensation from CSX related to the alleged
breach. CSX has also advised Maersk that CSX holds them responsible for any
damages that may result from this case. The claim by ECT has advanced to formal
arbitration in Rotterdam. A final ruling is not expected before late summer of
2002. Management's evaluation of the claim indicates that valid defenses exist,
but at this point management cannot estimate what, if any, losses may result
from this case.
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 these actions 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.
-15-
CSX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited), Continued
(All Tables in Millions of Dollars, Except Per Share Amounts)
NOTE 13. 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. 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 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 nine months ended
September 28, 2001 and September 29, 2000 is as follows:
Quarter ended September 28, 2001:
---------------------------------
Marine Services
----------------------------------
Surface Transportation Domestic
-------------------------------
Container International
Rail Intermodal Total Shipping Terminals Total Total
---------------------------------------------------------------------------------
Revenues from external customers $ 1,495 $ 281 $ 1,776 $ 181 $ 62 $ 243 $ 2,019
Intersegment revenues - 5 5 - - - 5
Segment operating income 200 37 237 17 20 37 274
Assets 12,826 437 13,263 404 868 1,272 14,535
-16-
CSX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited), Continued
(All Tables in Millions of Dollars, Except Per Share Amounts)
NOTE 13. BUSINESS SEGMENTS, Continued
Quarter ended September 29, 2000:
--------------------------------
Marine Services
----------------------------------
Surface Transportation Domestic
----------------------------------
Container International
Rail Intermodal Total Shipping Terminals Total Total
-----------------------------------------------------------------------------------
Revenues from external customers $ 1,500 $ 283 $ 1,783 $ 176 $ 80 $ 256 $ 2,039
Intersegment revenues - 5 5 - 1 1 6
Segment operating income 163 27 190 7 19 26 216
Assets 13,153 416 13,569 355 773 1,128 14,697
Nine Months ended September 28, 2001:
-------------------------------------
Marine Services
----------------------------------
Surface Transportation Domestic
----------------------------------
Container International
Rail Intermodal Total Shipping Terminals Total Total
-----------------------------------------------------------------------------------
Revenues from external customers $ 4,583 $ 812 $ 5,395 $ 510 $ 196 $ 706 $ 6,101
Intersegment revenues - 15 15 - 2 2 17
Segment operating income 585 76 661 21 50 71 732
Assets 12,826 437 13,263 404 868 1,272 14,535
Nine Months ended September 29, 2000:
-------------------------------------
Marine Services
----------------------------------
Surface Transportation Domestic
----------------------------------
Container International
Rail Intermodal Total Shipping Terminals Total Total
-----------------------------------------------------------------------------------
Revenues from external customers $ 4,563 $ 852 $ 5,415 $ 500 $ 229 $ 729 $ 6,144
Intersegment revenues - 15 15 - 2 2 17
Segment operating income 448 60 508 10 51 61 569
Assets 13,153 416 13,569 355 773 1,128 14,697
-17-
CSX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited), Continued
(All Tables in Millions of Dollars, Except Per Share Amounts)
NOTE 13. 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 Nine Months Ended
--------------------------- --------------------------
Sept. 28, Sept. 29, Sept. 28, Sept. 29,
2001 2000 2001 2000
------------ ------------- ----------- -------------
Revenues:
--------
Total external revenues for business segments $ 2,019 $ 2,039 $ 6,101 $ 6,144
Intersegment revenues for business segments 5 6 17 17
Elimination of intersegment revenues (5) (6) (17) (17)
---------- --------- --------- ---------
Total consolidated revenues $ 2,019 $ 2,039 $ 6,101 $ 6,144
========== ========= ========= =========
Operating Income:
----------------
Total operating income for business segments $ 274 $ 216 $ 732 $ 569
Reclassification of minority interest expense for
International terminals segment 8 11 25 31
Unallocated corporate expenses - (3) (21) (13)
---------- --------- --------- ---------
Total consolidated operating income $ 282 $ 224 $ 736 $ 587
========== ========= ========= =========
------------ -------------
Sept. 28, Sept. 29,
2001 2000
------------ -------------
Assets:
------
Assets for business segments $ 14,535 $ 14,697
Investment in Conrail 4,677 4,667
Elimination of intercompany receivables (91) (198)
Non-segment assets 1,485 1,541
---------- -----------
Total consolidated assets $ 20,606 $ 20,707
========== ===========
NOTE 14. SUBSEQUENT EVENT
On October 24, 2001, CSX executed an agreement whereby the Company
issued $563.5 million aggregate principal amount at maturity in unsubordinated
zero coupon convertible debentures due October 30, 2021 for an initial offering
price of approximately $462 million. These debentures will accrete in value at a
yield to maturity of 1% per year, which will be reset on October 30, 2007,
October 30, 2011, and October 30, 2016 to a rate per annum equal to the interest
rate payable 120 days before that reset date on 5-year United States Treasury
Notes minus 2.80%. In no event, however, will the yield to maturity be reset
below 1% or above 3% per annum. Accretion in value on the debentures will be
recorded for each period, but will not be paid prior to maturity.
-18-
CSX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited), Continued
(All Tables in Millions of Dollars, Except Per Share Amounts)
NOTE 14. SUBSEQUENT EVENT, Continued
CSX may redeem the debentures for cash at any time on or after October
30, 2008, at a redemption price equal to the accreted value of the debentures.
Similarly, holders may require the Company to purchase their debentures on
October 30, 2003, October 30, 2006, October 30, 2008, October 30, 2011 and
October 30, 2016, at a purchase price equal to the accreted value of the
debentures. On the first three purchase dates CSX may elect to pay the purchase
price in cash and/or shares of common stock, while CSX may pay the purchase
price only in cash on the last two purchase dates.
Holders may convert debentures into common stock if certain
requirements defined in the debentures and the related indenture are met.
Holders may convert if the closing sale price of CSX common stock for at least
20 of the 30 preceding trading days is more than the applicable percentage
(which will initially be 120% and will decline over the life of the debentures
to 110%) of the accreted conversion price per share of the Company's common
stock. [The "accreted conversion price" per share of common stock is the
quotient of the accreted value of a debenture divided by the number of shares of
common stock issuable upon conversion of that debenture.] Holders may also
convert if the Company's senior long-term unsecured credit ratings are
downgraded by Moody's Investors Service, Inc. to below Ba1 and by Standard &
Poor's Rating Services to below BB+, if the debentures have been called for
redemption, if the Company makes specified distributions to holders of CSX
common stock, or if the Company is a party to specified consolidations, mergers,
or transfers or leases of all or substantially all of the Company's assets. For
each debenture surrendered for conversion, a holder will initially receive
17.7461 shares of CSX common stock, which is equivalent to an initial conversion
price of $46.16 per share. The initial conversion rate will be adjusted for
reasons specified in the indenture, but will not be adjusted for accretion.
Instead, accretion on the debentures will be deemed paid by the common stock
received by the holder on conversion.
It is expected that substantially all of the net proceeds from the sale
of the debentures will be used to redeem $400 million aggregate principal amount
of the Company's floating rate medium-term notes, and/or to refinance a portion
of outstanding commercial paper. The balance, if any, will be used for general
corporate purposes.
NOTE 15. SUMMARIZED CONSOLIDATING FINANCIAL DATA - CSX LINES
During 1987, CSX Lines entered into agreements to sell and lease back
by charter three new U.S.-built, U.S.-flag, D-7 class container ships. CSX has
guaranteed the obligations of CSX Lines pursuant to the related charters which,
along with the container ships, serve as collateral for debt securities
registered with the Securities and Exchange Commission (SEC). The September 28,
2001 and September 29, 2000 consolidating schedules reflect CSX Lines as the
obligor. In accordance with SEC disclosure requirements, consolidating financial
information for the parent and guarantors are as follows: (amounts in millions)
-19-
CSX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited), Continued
(All Tables in Millions of Dollars, Except Per Share Amounts)
NOTE 15. SUMMARIZED CONSOLIDATING FINANCIAL DATA-CSX LINES, Continued
Consolidating Statement of Financial Position
September 28, 2001
CSX Corporate CSX Lines Other Eliminations Consolidated
------------- --------- ------- ------------- ------------
ASSETS
Current Assets
Cash, Cash Equivalents and Short-term Investments $ 144 $ 14 $ 434 $ - $ 592
Accounts Receivable 35 37 920 (116) 876
Materials and Supplies - 15 251 - 266
Deferred Income Taxes - - 141 - 141
Other Current Assets 4 12 273 (145) 144
----------- --------- -------- --------- ----------
Total Current Assets 183 78 2,019 (261) 2,019
Properties 29 458 17,792 - 18,279
Accumulated Depreciation (26) (292) (5,082) - (5,400)
----------- --------- -------- --------- ----------
Properties, net 3 166 12,710 - 12,879
Investment in Conrail 356 - 4,321 - 4,677
Affiliates and Other Companies 2 94 295 (31) 360
Investment in Consolidated Subsidiaries 13,298 - 396 (13,694) -
Other long-term assets 156 67 1,035 (587) 671
----------- --------- -------- --------- ----------
Total Assets $ 13,998 $ 405 $ 20,776 $ (14,573) $ 20,606
=========== ========= ======== ========= ==========
LIABILITIES
Current liabilities
Accounts Payable $ 139 $ 82 $ 940 $ (64) $ 1,097
Labor and Fringe Benefits Payable 12 10 386 - 408
Payable to Affiliates - - 145 (145) -
Casualty, Environmental and Other Reserves 1 2 251 - 254
Current Maturities of Long-term Debt 850 - 126 - 976
Short-term Debt 272 - - - 272
Income and Other Taxes Payable 1,199 25 (1,034) - 190
Other Current Liabilities 37 23 241 (51) 250
----------- --------- -------- --------- ----------
Total Current Liabilities 2,510 142 1,055 (260) 3,447
Casualty, Environmental and Other reserves 1 3 709 - 713
Long-term Debt 4,594 69 996 - 5,659
Deferred Income Taxes 90 (23) 3,415 - 3,482
Long Term Payable to Affiliates 396 - 192 (588) -
Other Long-term Liabilities 325 37 860 (30) 1,192
----------- --------- -------- --------- ----------
Total Liabilities 7,916 228 7,227 (878) 14,493
----------- --------- -------- --------- ----------
SHAREHOLDER'S EQUITY
Preferred Stock - - 396 (396) -
Common Stock 224 - 198 (209) 213
Other Capital 2,181 171 8,127 (8,994) 1,485
Retained Earnings 3,677 6 4,828 (4,096) 4,415
----------- --------- -------- --------- ----------
Total Shareholders' Equity 6,082 177 13,549 (13,695) 6,113
----------- --------- -------- --------- ----------
Total Liabilities and Shareholders' Equity $ 13,998 $ 405 $ 20,776 $ (14,573) $ 20,606
=========== ========= ======== ========= ==========
-20-
CSX CORPORATIONS AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited), Continued
(All Tables in Millions of Dollars, Except Per Share Amounts
NOTE 15. SUMMARIZED CONSOLIDATING FINANCIAL DATA - CSX LINES, Continued
Consolidating Statement of Financial Position
December 29, 2000
CSX Corporate CSX Lines Other Eliminations Consolidated
------------- ---------- ---------- ------------ -------------
ASSETS
Current Assets
Cash, Cash Equivalents and Short-term
Investments $ 285 $ (94) $ 493 $ - $ 684
Accounts Receivable 33 65 926 (174) 850
Materials and Supplies - 15 230 - 245
Deferred Income Taxes - - 121 - 121
Other Current Assets 12 12 248 (126) 146
---------- ---------- --------- ---------- -----------
Total Current Assets 330 (2) 2,018 (300) 2,046
Properties 29 455 17,355 - 17,839
Accumulated Depreciation (25) (276) (4,896) - (5,197)
---------- ---------- --------- ---------- -----------
Properties, net 4 179 12,459 - 12,642
Investment in Conrail 364 - 4,304 - 4,668
Affiliates and Other Companies - 164 227 (29) 362
Investment in Consolidated Subsidiaries 13,184 - 386 (13,570) -
Other Long-term assets (205) - 2,097 (1,119) 773
---------- ---------- -------- ---------- -----------
Total Assets $ 13,677 $ 341 $ 21,491 $ (15,018) $ 20,491
========== ========== ======== ========== ===========
LIABILITIES
Current Liabilities
Accounts Payable $ 102 $ 88 $ 1,036 $ (147) $ 1,079
Labor and Fringe Benefits Payable 5 21 379 - 405
Payable to Affilitates - - 127 (127) -
Casuality, Environmental and Other Reserves 1 3 242 - 246
Current Maturities of Long-term Debt 60 - 112 - 172
Short-term Debt 749 - - - 749
Income and Other Taxes Payable 1,346 12 (986) - 372
Other Current Liabilities 39 25 219 (26) 257
---------- ---------- -------- ---------- -----------
Total Current Liabilities 2,302 149 1,129 (300) 3,280
Casuality, Environmental and Other Reserves - 4 751 - 755
Long-term Debt 4,594 54 1,162 - 5,810
Deferred Income Taxes 118 (16) 3,282 - 3,384
Long Term Payable to Affiliates 396 14 707 (1,117) -
Other Long-term Liabilities 250 43 982 (30) 1,245
---------- ---------- -------- ---------- -----------
Total Liabilities 7,660 248 8,013 (1,447) 14,474
---------- ---------- -------- ---------- -----------
SHAREHOLDER'S EQUITY
Preferred Stock - - 396 (396) -
Common Stock 213 - 209 (209) 213
Other Capital 1,467 98 8,958 (9,056) 1,467
Retained Earnings 4,337 (5) 3,915 (3,910) 4,337
---------- ---------- -------- ---------- -----------
Total Shareholder's Equity 6,017 93 13,478 (13,571) 6,017
---------- ---------- -------- ---------- -----------
Total Liabilities and Shareholder's Equity $ 13,677 $ 341 $ 21,491 $ (15,018) $ 20,491
---------- ---------- -------- ---------- -----------
-21-
CSX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited), Continued
(All Tables in Millions of Dollars, Except Per Share Amounts)
NOTE 15 SUMMARIZED CONSOLIDATING FINANCIAL DATA - CSX LINES, Continued
Consolidating Statement of Earnings
Quarter ended September 28, 2001
CSX Corporate CSX Lines Other Eliminations Consolidated
----------------- ----------------- ----------------- ----------------- -----------------
Operating Revenue $ - $ 182 $ 1,948 $ (111) $ 2,019
Operating Expense (59) 165 1,740 (109) 1,737
----------------- ----------------- ----------------- ----------------- -----------------
Operating Income (Loss) 59 17 208 (2) 282
Other Income (Expense) 152 - 22 (173) 1
Interest Expense 116 1 29 (20) 126
----------------- ----------------- ----------------- ----------------- -----------------
Earnings before Income Taxes 95 16 201 (155) 157
Income Tax Expense (Benefit) (20) 6 71 - 57
----------------- ----------------- ----------------- ----------------- -----------------
Net Earnings (Loss) $ 115 $ 10 $ 130 $ (155) $ 100
================= ================= ================= ================= =================
Consolidating Statement of Earnings
Quarter ended September 28, 2001
CSX Corporate CSX Lines Other Eliminations Consolidated
----------------- ----------------- ----------------- ----------------- -----------------
Operating Revenue $ - $ 176 $ 1,972 $ (109) $ 2,039
Operating Expense (61) 169 1,814 (107) 1,815
----------------- ----------------- ----------------- ----------------- -----------------
Operating Income (Loss) 61 7 158 (2) 224
Other Income (Expense) 487 - 49 (533) 3
Interest Expense 145 2 41 (48) 140
----------------- ----------------- ----------------- ----------------- -----------------
Earnings from Continuing Operations
before Income Taxes 403 5 166 (487) 87
Income Tax Expense (Benefit) (27) 2 53 - 28
----------------- ----------------- ----------------- ----------------- -----------------
Net Earnings (Loss) from Continuing
Operations $ 430 $ 3 $ 113 $ (487) $ 59
================= ================= ================= ================= =================
Discontinued Operations, net of taxes - - 368 - 368
----------------- ----------------- ----------------- ----------------- -----------------
Net Earnings (Loss) $ 430 $ 3 $ 481 $ (487) $ 427
================= ================= ================= ================= =================
-22-
CSX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited ), Continued
(All Tables in Millions of Dollars, Except Per Share Amounts
NOTES 15. SUMMARIZED CONSOLIDATING FINANCIAL DATA - CSX LINES,
Continued
Consolidating Statement of Earnings
Nine Months Ended September 28, 2001
CSX Corporate CSX Lines Other Eliminations Consolidated
--------------- ----------- ------- -------------- --------------
Operating Revenue $ - $ 510 $ 5,920 $ (329) $ 6,101
Operating Expense (150) 489 5,349 (323) 5,365
--------- --------- --------- -------- ---------
Operating Income (Loss) 150 21 571 (6) 736
Other Income (Expense) 389 (2) 75 (458) 4
Interest Expense 360 2 94 (67) 389
--------- --------- --------- -------- ---------
Earnings before Income Taxes 179 17 552 (397) 351
Income Tax Expense (Benefit) (70) 6 187 - 123
--------- --------- --------- -------- ---------
Net Earnings (Loss) $ 249 $ 11 $ 365 $ (397) $ 228
========= ========= ========= ======== =========
Consolidating Statement of Earnings
Nine months ended September 29, 2000
CSX Corporate CSX Lines Other Eliminations Consolidated
--------------- ----------- ------- -------------- --------------
Operating Revenue $ - $ 499 $ 5,987 $ (342) $ 6,144
Operating Expense (171) 490 5,573 (335) 5,557
--------- --------- --------- -------- ---------
Operating Income (Loss) 171 9 414 (7) 587
Other Income (Expense) 663 (1) 140 (780) 22
Interest Expense 422 5 114 (128) 413
--------- --------- --------- -------- ---------
Earnings from Continuing Operations
before Income Taxes 411 3 440 (659) 196
Income Tax Expense (Benefit) (78) 1 141 - 64
--------- --------- --------- -------- ---------
Net Earnings (Loss) from Continuing
Operations 489 2 299 (659) 132
--------- --------- --------- -------- ---------
Discontinued Operations, Net of Taxes - - 379 - 379
--------- --------- --------- -------- ---------
Net Earnings (Loss) $ 489 $ 2 $ 678 $ (659) $ 511
========= ========= ========= ======== =========
-23-
CSX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited), Continued
(All Tables in Millions of Dollars, Except Per Share Amounts)
NOTE 15. SUMMARIZED CONSOLIDATING FINANCIAL DATA - CSX LINES, Continued
Consolidating Statement of Cash Flows
Nine Months Ended September 28, 2001
CSX CSX
Corporate Lines Other Eliminations Consolidated
-------------- ------------- ----------- --------------- --------------
Operating Activities
Net Cash Provided by Operating Activities $ (128) $ 36 $ 557 $ (26) $ 439
-------------- ------------- ----------- --------------- --------------
Investing Activities
Property Additions - (5) (623) - (628)
Short-term Investments-net (35) - - - (35)
Other Investing Activities (885) 1 937 (1) 52
-------------- ------------- ----------- --------------- --------------
Net Cash Used by Investing Activities (920) (4) 314 (1) (611)
-------------- ------------- ----------- --------------- --------------
Financing Activities
Short-term Debt-Net (127) - - - (127)
Long-term Debt Issued 500 - - - 500
Long-term Debt Repaid (60) - (135) - (195)
Cash Dividends Paid (152) - (24) 27 (149)
Other Financing Activities 711 76 (773) 1 15
-------------- ------------- ----------- --------------- --------------
Net Cash Provided (Used) by Financing
Activities 872 76 (932) 28 44
Net Increase (Decrease) in Cash and Cash
Equivalents (176) 108 (61) 1 (128)
Cash and Cash Equivalents at Beginning of
Period (134) (94) 489 - 261
-------------- ------------- ----------- --------------- --------------
Cash and Cash Equivalents at End of Period $ (310) $ 14 $ 428 $ 1 $ 133
============== ============= =========== =============== ==============
-24-
CSX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited), Continued
(All Tables in Millions of Dollars, except Per Share Amounts
NOTE 15. SUMMARIZED CONSOLIDATING FINANCIAL DATA - CSX LINES, Continued
Consolidating Statement of Cash Flows
Nine Months Ended September 29, 2000
CSX CSX
Corporate Lines Other Eliminations Consolidated
--------- ----- ---- ------------ ------------
Operating Activities
Net Cash Provided by Operating Activities $ 151 $ (8) $ 600 $ (194) $ 549
------- ------ --------- ------ ------
Investing Activities
Property Additions - (7) (636) - (643)
Short-term Investments-net (44) - - - (44)
Other Investing Activities 555 - (851) 949 653
------- ------ --------- ------ ------
Net Cash Used by Investing Activities 511 (7) (1,487) 949 (34)
------- ------ --------- ------ ------
Financing Activities
Short-term Debt-Net (247) - - - (247)
Long-term Debt Issued - - 588 - 588
Long-term Debt Repaid (250) - (487) (737)
Cash Dividends Paid (200) - (179) 182 (197)
Other Financing Activities 377 (68) 566 (931) (56)
------- ------ --------- ------ ------
Net Cash Provided (Used) by Financing Activities (320) (68) 488 (749) (649)
Net Increase (Decrease) in Cash and Cash Equivalents 342 (83) (399) 6 (134)
Cash and Cash Equivalents at Beginning of Period (475) 16 1,090 (5) 626
------- ------ --------- ------ ------
Cash and Cash Equivalents at End of Period $ (133) $ (67) $ 691 $ 1 $ 492
======= ====== ========= ====== ======
-25-
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 years 2001 and 2000
consist of 52 weeks. The quarters ended September 28, 2001 and September 29,
2000 consisted of 13 weeks. The nine-month periods ended September 28, 2001 and
September 29, 2000 consisted of 39 weeks.
Consolidated Results
--------------------
Third Quarter 2001 Compared with 2000
-------------------------------------
CSX reported net earnings of $100 million, 47 cents per share for the
quarter ended September 28, 2001, as compared to $427 million, $2.02 per share
in the quarter ended September 29, 2000.
On September 22, 2000, CSX completed the sale of its wholly-owned
logistics subsidiary, CTI Logistx, Inc. to TNT Post Group for $650 million,
realizing a pre-tax gain of $570 million, $365 million after-tax, or $1.73 per
share. The contract logistics segment is reported as a discontinued operation.
CSX had net earnings from continuing operations of $100 million, 47 cents per
share on a diluted basis, for the quarter ended September 28, 2001, versus net
earnings from continuing operations of $59 million, 28 cents per share on a
diluted basis for the period ended September 29, 2000, an increase of 69%.
Operating income was $282 million in the quarter ended September 28,
2001, an increase of 26% over the $224 million reported in the same quarter in
2000. Revenues were consistent between the years at $2.0 billion, but operating
expenses were down 4% at $1.7 billion.
Surface Transportation Results
------------------------------
Rail
Rail operating income was $200 million in the quarter ended September
28, 2001, an increase of 23% over the $163 million reported in the same quarter
in 2000. Volumes were down due to general economic weakness, while revenues were
flat due to offsetting pricing initiatives.
Operating expenses were down 3% compared to the same quarter in the
prior year at $1.3 billion, as management successfully removed costs from the
network and operated a more efficient railroad.
-26-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION, CONTINUED
RESULTS OF OPERATIONS, Continued
Surface Transportation Results, Continued
-----------------------------------------
Rail, Continued
The following tables provide rail carload and revenue data by service
group and commodity for the quarters and nine months ended September 28, 2001
and September 29, 2000:
Carloads Revenue
Quarter Ended Quarter Ended
(Thousands) (Millions of Dollars)
--------------------------- ----------------------------
Sept. 28, Sept. 29, Sept. 28, Sept. 29,
2001 2000 2001 2000
------------- ------------ ------------- -------------
Merchandise
Phosphates and Fertilizer 101 115 $ 63 $ 75
Metals 83 85 105 102
Food and Consumer Products 41 40 59 57
Paper and Forest Products 120 128 161 160
Agricultural Products 88 86 118 116
Chemicals 143 150 236 249
Minerals 115 116 101 104
Government 3 2 9 7
------------- ------------ ------------- -------------
Total Merchandise 694 722 852 870
Automotive 119 132 184 196
Coal, Coke and Iron Ore
Coal 422 433 417 397
Coke 10 12 12 11
Iron Ore 12 14 6 8
------------- ------------ ------------- -------------
Total Coal, Coke and Iron Ore 444 459 435 416
Other - - 24 18
------------- ------------ ------------- -------------
Total Rail 1,257 1,313 $ 1,495 $ 1,500
============= ============ ============= =============
-27-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION, CONTINUED
RESULTS OF OPERATIONS, Continued
Surface Transportation Results, Continued
-----------------------------------------
Rail, Continued
Carloads Revenue
Nine Months Ended Nine Months Ended
(Thousands) (Millions of Dollars)
--------------------------- --------------------------
Sept. 28, Sept. 29, Sept. 28, Sept. 29,
2001 2000 2001 2000
------------- ------------ ------------ ------------
Merchandise
Phosphates and Fertilizer 325 369 $ 227 $ 242
Metals 250 266 312 316
Food and Consumer Products 124 120 180 165
Paper and Forest Products 363 400 482 497
Agricultural Products 280 265 377 355
Chemicals 440 453 730 751
Minerals 322 334 291 303
Government 8 8 24 22
------------- ------------ ------------ ------------
Total Merchandise 2,112 2,215 2,623 2,651
Automotive 385 448 591 661
Coal, Coke and Iron Ore
Coal 1,291 1,238 1,248 1,151
Coke 31 36 36 36
Iron Ore 30 35 17 22
------------- ------------ ------------ ------------
Total Coal, Coke and Iron Ore 1,352 1,309 1,301 1,209
Other - - 68 42
------------- ------------ ------------ ------------
Total Rail 3,849 3,972 $ 4,583 $ 4,563
============= ============ ============ ============
General merchandise volumes were down 4% for the quarter and 5% for the
first nine months compared to 2000. In the third quarter, selective pricing
initiatives, continued success with truck conversions and mix improvements in
the various merchandise commodity groups continued to successfully offset some
of the volume shortfalls, particularly in metals, and paper and forest. For the
first nine months, only volumes for food and consumer, and agricultural products
were up on a year over year basis. Coal volumes in the third quarter were 3%
lower year over year due to unusually low stockpiles at the mines during miners'
vacation in July. Coal revenues increased 5%, reflecting various pricing
initiatives and mix improvements.
Operating expenses decreased by $42 million in the quarter versus the
prior year. Reductions in labor and fringe benefits, building and equipment
rent, and fuel were the primary components. A portion of the reduction is
related to volumes, but it is primarily due to the network operating more
efficiently. The decrease in fuel costs can also be attributed to a 7.8 cent
decline in the average fuel price for the third quarter versus the prior year
quarter. These benefits were partially offset by increases in materials,
supplies and other and depreciation.
-28-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION, CONTINUED
RESULTS OF OPERATIONS, Continued
Surface Transportation Results, Continued
-----------------------------------------
Intermodal
Intermodal operating income was $37 million for the third quarter of
2001, compared to $27 million in the prior year quarter. Intermodal volumes in
the third quarter increased 2% versus 2000 reflecting growth in transcontinental
containerized shipments, while revenues fell due to general economic weakness
and mix deterioration. Operating income was up $10 million or 37% as a result of
decreased operating expenses. These numbers reflect a loss of some of the low
margin international transcontinental freight revenues that intermodal had in
2000 on which the Company incurs a significant amount of other railroad
transportation costs. Inland transportation costs were down $6 million or 4% in
the third quarter of 2001 as compared to the prior year.
Marine Services Results
-----------------------
Domestic Container Shipping
Domestic container shipping operating income was $17 million in the
quarter ended September 28, 2001, up from $7 million in the prior year quarter.
Operating revenue is up by $5 million despite a soft economy, as a result of
increased market share in each trade, cargo mix improvements, and general rate
increases in the Hawaii and Alaska trades. Operating expense is down by $5
million due to continued focus on expense reductions and productivity
improvements.
International Terminals
International terminals operating income was $20 million in the quarter
ended September 28, 2001, an increase of $1 million year over year. Although the
slower than expected market demand continued to impact the operations
negatively, as revenues were down $19 million, aggressive cost reduction
initiatives mitigated some of the revenue short falls while improving the third
quarter net operating income by $1 million over that of the third quarter 2000.
First Nine Months 2001 Compared with 2000
-----------------------------------------
For the first nine months of the year, CSX reported net earnings from
continuing operations of $228 million, $1.07 per share, as compared to $132
million, 62 cents per share in the period ended September 29, 2000.
Operating income was $736 million in the nine months ended September
28, 2001, an increase of 25% over the $587 million reported in the same period
in 2000. Operating revenues were consistent between the years at $6.1 billion,
but operating expenses were down 3% at $5.4 billion.
Other income was $4 million in the nine month period ended September
28, 2001, a decrease of 82% from the $22 million reported in the same period of
2000. This decrease is comprised of a decline in interest income and increases
in net losses from accounts receivable sold and equity losses of other
affiliates, offset by an increase in income from real estate and resort
operations.
-29-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION, CONTINUED
FINANCIAL CONDITION
Cash, cash equivalents and short-term investments totaled $592 million
at September 28, 2001, a decrease of $92 million since December 29, 2000.
Primary sources of cash and cash equivalents during the nine months
ended September 28, 2001 were normal transportation operations and the issuance
of $500 million of long-term debt. On a net basis, operations provided $439
million of cash for the nine-month period, reflecting an increase in operating
income. Primary uses of cash and cash equivalents were property additions,
repayments of short-term and long-term debt, and the payment of dividends. On
July 11, 2001 the Board of Directors announced that the regular quarterly
dividend payable September 14, 2001, would be reduced to 10 cents per share. CSX
had paid a regularly quarterly dividend of 30 cents per share since the fourth
quarter of 1997.
CSX's working capital deficit at September 28, 2001 was $1.4 billion,
up from $1.2 billion at December 29, 2000. The working capital deficit increased
due to $765 million of long-term debt being reclassified to current during the
second quarter as it is due within 12 months. This increase was partially offset
by the reclassification of $350 million in outstanding commercial paper from
short-term debt to long term due to the fact that it is now supported by a new
five-year line of credit agreement signed in June 2001. The commercial paper
balances had been classified as current due to the fact that the Company's old
line of credit agreement was to expire in November of 2001. 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. CSX also has $838 million of
remaining capacity under two shelf registrations that may be used to issue debt
or other securities at the Company's discretion.
On October 24, 2001, CSX executed an agreement whereby the Company
issued $563.5 million aggregate principal amount at maturity in unsubordinated
zero coupon convertible debentures due October 30, 2021 for an initial offering
price of approximately $462 million. It is expected that substantially all of
the net proceeds from the sale of the debentures will be used to redeem $400
million aggregate principal amount of the Company's floating rate medium-term
notes, and/or to refinance a portion of outstanding commercial paper. The
balance, if any, will be used for general corporate purposes.
FINANCIAL DATA
--------------
(Millions of Dollars)
-----------------------------------
September 28, December 29,
2001 2000
----------------- -----------------
Cash, Cash Equivalents and
Short-Term Investments $ 592 $ 684
Commercial Paper Outstanding
Short-Term $ 272 $ 749
Working Capital (Deficit) $ (1,428) $ (1,234)
Current Ratio .6 .6
Debt Ratio 52 % 52 %
Ratio of Earnings to Fixed Charges 1.7 x 1.4 x
-30-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION, CONTINUED
On August 10, 2001, the Company entered into $500 million of interest
rate swap agreements to manage its exposure to interest rate risk. The interest
rate swap agreements hedge the Company's exposure on the fair value of long-term
obligations in the aggregate principal amount of $500 million. The differential
paid or received by the Company on the interest rate swap agreement is
recognized as an adjustment to interest expense in the period incurred. For the
three months ended September 28, 2001, the Company reduced interest expense by
approximately $.6 million as a result of the interest rate swap agreements that
were in place during that period. The Company is exposed to credit loss in the
event of non-performance by any counter-party to the interest rate swap
agreement. The Company does not anticipate non-performance by such
counter-parties, and no material loss would be expected from non-performance.
OUTLOOK
-------
In the remainder of 2001, the challenge will be to continue to improve
the financial performance of the railroad. This is expected to be accomplished
through continued service improvements, which will serve as the catalyst for
sustained yield improvements, aggressive cost cutting initiatives and continued
success in attracting traffic to move from trucks to CSX. Despite a weak
economy, CSX continues to expect to produce full year earnings that will show an
increase from previous years.
The Company has entered into fixed-price forward fuel purchase
agreements for approximately 50% of its fuel requirements over the next fifteen
months. These agreements amount to approximately 360 million gallons in
commitments at a weighted average of 78 cents per gallon.
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.
-31-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION, CONTINUED
Accounting and Financial Reporting Effects
------------------------------------------
CSX and Norfolk Southern have assumed substantially all of Conrail's
former customer freight contracts. CSX's rail and intermodal operating revenue
include revenue from traffic previously recognized by Conrail. Operating
expenses reflect corresponding increases for costs incurred to 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.
Conrail's Results of Operations
-------------------------------
Conrail reported net income of $35 million on revenues of $223 million
for the third quarter of 2001, compared to net income of $35 million on revenues
of $243 million for the prior year quarter. For the related nine-month periods,
Conrail reported net income of $127 million on revenues of $685 million in 2001
and net income of $131 million on revenues of $748 million in 2000.
Conrail's operating activities provided cash of $372 million for the
first nine months of 2001, compared with $85 million for the first nine months
of 2000. The increase in cash provided by operations is primarily due to
significant one-time payments made to CSX and Norfolk Southern in 2000.
Conrail's working capital was $417 million at September 30, 2001,
compared with $85 million at December 31, 2000.
OTHER MATTERS
-------------
Events of September 11, 2001
----------------------------
On September 11, 2001, in cooperation with government authorities and
President Bush's declaration of a national emergency related to the terrorist
attacks and tragic events on that date, all CSXT traffic in and out of greater
New York, Boston and Washington, D.C. was suspended and certain terminals were
closed. CSXT resumed normal operations, and all CSXT facilities were open and
fully operational, on September 12 with the exception of the New York/New Jersey
Port Authority terminal.
In connection with the terrorist attacks of September 11, 2001, CSX is
participating actively in industry task forces to identify and implement
additional security measures. At the same time, the industry is working with
governmental agencies, including the Federal Railroad Administration, and the
Congress to coordinate our security efforts and to identify specific areas that
may justify government participation.
It is not possible to predict the effects of the terrorist attacks and
subsequent developments related to those attacks, particularly their impact on
the United States and international economies, or the impact, if any, on our
future results of operations.
-32-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION, CONTINUED
OTHER MATTERS, Continued
Baltimore Tunnel Fire
---------------------
On July 18, 2001 a CSXT train was involved in a fire inside the Howard
Street Tunnel near downtown Baltimore, Maryland. The fire was not contained
completely until July 23, 2001. The fire's proximity to downtown Baltimore
caused disruptions to a number of businesses. The incident also caused CSXT to
reroute traffic and incur higher operating costs. By the end of July, CSXT and
government officials had inspected the tunnel and determined that it was safe
for normal rail operations. All service through the tunnel was resumed. The
Company incurred approximately $13 million in charges to third quarter operating
income relating to this incident.
New Orleans Tank Fire Litigation
--------------------------------
In September 1997, a state court jury in New Orleans, Louisiana
returned a $2.5 billion punitive damages award against CSXT. 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, which has allowed 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.
-33-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION, CONTINUED
OTHER MATTERS, Continued
New Orleans Tank Car Fire Litigation, Continued
-----------------------------------------------
In 1999, six of the nine defendants in the case reached a tentative
settlement with the plaintiffs group. The basis of the settlement is an
agreement that all claims for compensatory and punitive damages against the six
defendants would be compromised for the sum of $215 million. The settlement was
approved by the trial court in early 2000.
In 2000, the City of New Orleans was granted permission by the trial
court to assert an amended claim against CSXT, including a newly asserted claim
for punitive damages. The City's case was originally filed in 1988, and while
based on the 1987 tank car fire, is not considered to be part of the class
action.
In April of 2001, a group of approximately 100 New Orleans firefighters
and their spouses brought an action against CSXT and other defendants in the
original tank car fire case, styled Hilda Austin, wife of and Edward F. Austin,
Sr. et al. versus Norfolk Southern Corporation et al., Civil District Court for
the Parish of Orleans (Louisiana), No. 2001-5104. This action purports to be a
claim by the firefighters for injuries allegedly incurred during the September,
1987 tank car fire. The Austin matter has been transferred to the presiding
trial judge in the tank car fire case and consolidated with the main case. A
motion on behalf of the Austin plaintiffs to intervene in the main case is now
pending before the trial judge. CSXT intends to oppose the motion to intervene,
and believes that this claim is not timely brought.
On June 27, 2001, the Louisiana Court of Appeal for the Fourth Circuit
affirmed the judgment of the trial court, which judgment reduced the punitive
damages verdict from $2.5 billion to $850 million. CSXT moved the Louisiana
Fourth Circuit Court for rehearing of certain issues raised in its appeal; that
motion was denied on August 2, 2001.
On August 30, 2001, CSXT filed with the Louisiana Supreme Court an
application that the court take jurisdiction over and reverse the 1997 punitive
damages award. The Louisiana Supreme Court's jurisdiction in this case is
discretionary. Opposing papers were filed by counsel on October 15, 2001. If the
Louisiana Supreme Court takes jurisdiction of the case, an additional round of
briefing and oral argument may precede any decision by the court. If the
Louisiana Supreme Court does not take jurisdiction, or if its resolution of the
issues is unsatisfactory, CSXT intends to seek further review before the United
States Supreme Court.
CSXT continues to pursue an aggressive legal strategy. At the present
time, management is not in a position to determine whether the resolution of
this case will have a material adverse effect on the Company's financial
position or results of operations in any future reporting period.
ECT Dispute
-----------
CSX has received a claim amounting to approximately $180 million plus
interest from Europe Container Terminals bv (ECT), owner of the Rotterdam
Container Terminal previously operated by Sea-Land prior to its sale to Maersk
in December 1999. ECT has claimed that the sale of the international liner
business to Maersk resulted in a
-34-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION, CONTINUED
ECT Dispute, Continued
----------------------
breach of the Sea-Land terminal agreements. ECT has refused to accept containers
at the former Sea-Land facility tendered by Maersk Sea-Land and is seeking
compensation from CSX related to the alleged breach. CSX has also advised Maersk
that CSX holds them responsible for any damages that may result from this case.
The claim by ECT has advanced to formal arbitration in Rotterdam. A final ruling
is not expected before late summer of 2002. Management's evaluation of the claim
indicates that valid defense exist, but at this point management cannot estimate
what, if any, losses may result from this case.
Forward Looking Statements
--------------------------
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 businesses of the Company; and (vi) changes may occur in the
securities and capital markets.
-35-
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We address our exposure to market risks, principally the market risk of
changes in interest rates, through a controlled program of risk management that
includes the use of interest rate swap agreements. We do not hold or issue
derivative financial instruments for trading purposes.
In the event of a 1% increase or decrease in the LIBOR interest rate,
the interest expense related to these agreements would increase or decrease $5
million on an annual basis.
The Company is exposed to credit loss in the event of non-performance
by any counter-party to the interest rate swap agreements. The Company does not
anticipate non-performance by such counter-parties, and no material loss would
be expected from non-performance.
-36-
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3.2 Amended Bylaws of CSX Corporation*
4.1 Fourth Supplemental Indenture, dated as of October 30,
2001, between the Company and The Chase Manhattan Bank,
as trustee*
10.1 364-Day Revolving Credit Agreement dated as of June 8,
2001 (incorporated by reference to the Company's Current
Report on Form 8-K filed with the SEC on October 29,
2001 (File No. 002-63273))
10.2 Five-Year Revolving Credit Agreement dated as of June 8,
2001 (incorporated by reference to the Company's Current
Report on Form 8-K filed with the SEC on October 29,
2001 (File No. 002-63273))
10.3 Employment and Consulting Agreement with J. W. Snow*
10.4 Restricted Stock Award Agreement with J. W. Snow*
10.5 Stock Option Agreement with J. W. Snow, effective July
16, 2001*
10.6 Special Employment Agreement with M. J. Ward*
10.7 Restricted Stock Award Agreement with M. J. Ward*
10.8 Special Employment Agreement with M. G. Aron*
*Filed herewith.
(b) Reports on Form 8-K
None
Signature
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CSX CORPORATION
(Registrant)
By: /s/ JAMES L. ROSS
----------------
James L. Ross
Vice President and Controller
(Principal Accounting Officer)
Dated: November 7, 2001
-37-