Right
Results
Right Way
[PHOTO APPEARS HERE]
2002 ANNUAL REPORT CSX
Tribute to John Snow
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On February 3, 2003, CSX Chairman and Chief Executive Officer John W. Snow
joined President George W. Bush's cabinet as Secretary of the Treasury. As a
result, Mr. Snow has resigned as an officer and board member of CSX Corporation.
CSX takes enormous pride in Mr. Snow's appointment. He is serving our
country at a critical juncture. He is bringing his immense talents to bear on
vital issues and complex problems that directly affect the livelihoods of our
citizens and people throughout the world. We know John Snow well here at CSX and
have every confidence that he will serve with great honor and distinction.
Chairman and chief executive officer since 1991, he changed the strategic
course of the company from a multifaceted transportation conglomerate to a much
more sharply focused rail industry leader. This transition is proving both
timely and judicious. He leaves CSX in a strong position to grow substantially
and capitalize on the tremendous opportunities in our core business.
We wish John all success and thank him deeply for his leadership, many
contributions and for his friendship.
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Contents
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1 Financial Highlights 14 Financial Information
2 Chairman's Message 56 Shareholder Information
6 Review of Operations 59 Corporate Information
10 Community 60 Board of Directors and Officers
Financial Highlights
(Millions of Dollars, Except Per Share Amounts)
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Earnings from Continuing Operations 2002 2001 2000 1999 1998
Operating Revenue $ 8,152 $ 8,110 $ 8,191 $ 10,375 $ 9,490
Operating Expense 7,025 7,153 7,386 9,802 8,359
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Operating Income $ 1,127 $ 957 $ 805 $ 573 $ 1,131
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Net Earnings from Continuing Operations $ 424 $ 293 $ 186 $ 32 $ 520
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Earnings Per Share from Continuing $ 2.00 $ 1.39 $ .88 $ .15 $ 2.47
Operations
Earnings Per Share from Continuing
Operations,
Assuming Dilution $ 1.99 $ 1.38 $ .88 $ .15 $ 2.43
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Financial Position
Cash, Cash Equivalents and Short-term $ 264 $ 618 $ 686 $ 974 $ 533
Investments
Working Capital Deficit $ (665) $ (1,023) $ (1,231) $ (910) $ (616)
Total Assets $ 20,951 $ 20,801 $ 20,548 $ 20,828 $ 20,535
Long-term Debt $ 6,519 $ 5,839 $ 5,896 $ 6,304 $ 6,540
Shareholders' Equity $ 6,241 $ 6,120 $ 6,017 $ 5,756 $ 5,880
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Other Data Per Common Share
Cash Dividends $ .40 $ .80 $ 1.20 $ 1.20 $ 1.20
Book Value $ 29.07 $ 28.64 $ 28.28 $ 26.35 $ 27.08
Market Price
High $ 41.40 $ 41.30 $ 33.44 $ 53.94 $ 60.75
Low $ 25.09 $ 24.81 $ 19.50 $ 28.81 $ 36.50
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Employees-Annual Averages
Rail 33,464 35,014 35,496 31,952 28,358
Other 6,464 6,446 9,955 16,998 17,789
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Total 39,928 41,460 45,451 48,950 46,147
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See accompanying Consolidated Financial Statements (All periods reflect contract
logistics as a discontinued operation).
Significant events include the following:
2002- A charge to write-down indefinite lived intangible assets as a
cumulative effect of accounting change, which reduced earnings $83
million before tax, $43 million after tax and consideration of minority
interest, 20 cents per share (See Note 1, Significant Accounting
Policies).
2001- A charge in the fourth quarter of 2001 to account for the settlement of
the 1987 New Orleans tank car fire litigation. This charge reduced
earnings by $60 million before tax, $37 million after tax, 17 cents per
share.
1999- A loss on the sale of international container-shipping assets net of a
related benefit from discontinuing depreciation of those assets from the
date they were classified as "held for disposition. " The net effect of
the loss and the depreciation benefit reduced earnings by $360 million
before tax, $271 million after tax, $1.27 per share.
- A charge to recognize the cost of a workforce reduction program at the
Company's rail and intermodal units that reduced earnings by $55 million
before tax, $34 million after tax, 16 cents per share.
- A gain on the sale of the Company's Grand Teton Lodge resort subsidiary
that increased earnings by $27 million before tax, $17 million after
tax, 8 cents per share.
1998- A net investment gain, primarily from the conveyance of American
Commercial Lines LLC, the Company's wholly-owned barge subsidiary, to a
joint venture. The gain increased earnings by $154 million before tax,
$90 million after tax, 42 cents per share.
- A restructuring credit to reverse certain separation and labor
protection reserves established by the Company's rail unit as part of a
1995 restructuring charge. The restructuring credit increased earnings
by $30 million before tax, $19 million after tax, 9 cents per share.
CSX 2002 ANNUAL REPORT 1
People
make the
Difference
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2 CSX 2002 ANNUAL REPORT
Chairman's Message
Meaningful, lasting change in a corporation rarely comes from a single
daring act. Rather, it is the product of many steps made possible by the efforts
of thousands of people aligned behind shared principles in support of common
goals. This is precisely the type of progress CSX Corporation demonstrated in
2002.
In a year filled with economic challenges, the nearly 40,000 employees of
CSX improved financial results, while continuing to build our corporation's
foundation for a promising future. We created an organization with a laser-like
focus on serving our customers. We began developing performance measures that
reflect how well we are satisfying our customers' needs. At the same time, we
recognized that well-trained, highly motivated employees are the cornerstone of
a customer-focused culture, and we endeavored to provide them with the support
and direction they need to grow in their careers and contribute to the full
extent of their talents.
As always, safety remains a constant theme in everything we do. Supporting
safety at all levels of our organization is the sincerest statement we can make
of our commitment to our employees, our customers and our communities. It says
that we value our employees as individuals and understand their importance to
their families as well as our company. It says that we embrace our commitment to
deliver our customers' freight safely and consistently, without mishap or delay.
And it says that we appreciate our duty as a corporate citizen to be sensitive
to the needs of the communities in which we operate, communities that our
employees and customers call home.
While infusing our company with these principles in 2002, we also recognized
the urgency of improving our financial and operating results, and our employees
responded admirably. It was a year in which the performance of our core railroad
enterprise continued to improve by every major operating standard. It was a year
in which we continued to reshape CSX to sharpen our focus on our primary
business, rail transportation. And it was a year in which our corporation was
the subject of national attention, when our chairman of 11 years, John W. Snow,
was selected by President Bush for one of the nation's most important policy
leadership posts, Secretary of the Treasury of the United States.
-------------------------------------------------------
As we concentrated on growing revenues and reducing
costs in 2002, the people of CSX continued to
demonstrate a strong commitment to high ethical
standards and integrity.
Michael J. Ward Chairman,
President and CEO
-------------------------------------------------------
2002: A Solid Year in Uncertain Times
CSX delivered a solid financial performance in 2002 despite a weak economy
and serious challenges from weather and industry conditions. For the year, CSX
net income was $424 million, or $1.99 per share, compared to $293 million, or
$1.38 per share in 2001, an increase of 45%. Operating income from all CSX
businesses increased to $1.1 billion, from $1.0 billion in 2001, up 18%. In
addition, we significantly improved the Company's free cash flow in 2002.
Our Surface Transportation business units, CSX Transportation and CSX
Intermodal, generated approximately 88% of the corporation's revenue in 2002.
Their year's results were limited by an economy that failed to produce the
sustained recovery that many were predicting in late 2001. Even with economic
weakness, our Surface Transportation units demonstrated the soundness of their
growth strategies. Excluding coal, which experienced yearlong depressed demand,
CSXT rail revenues were relatively strong. Linehaul revenues for merchandise and
automotive business increased year-to-year by $98 million, or 2%. Intermodal
business was up $68 million, or 6%. In addition, Surface Transportation
operating expenses were down $159 million, or 3%, from 2001.
Also in 2002, we continued to strengthen our focus on Surface
Transportation. We reached an agreement with The Carlyle Group to convey CSX
Lines, the domestic container shipping business, to a newly created venture. CSX
will receive $300 million ($240 million in cash and $60 million of securities
issued by the venture). The transaction enables us to retain an interest in CSX
Lines, a good business with a strong management team, while also generating
significant cash for CSX.
CSX 2002 ANNUAL REPORT 3
Chairman's Message
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CSX Lines, which provides service in domestic lanes to Alaska, Hawaii,
Puerto Rico and Guam, was created following the sale of a major portion of
Sea-Land Service, an international container-shipping line, in 1999. Also
created at that time was CSX World Terminals, which remains a wholly-owned CSX
business unit. We continue to be excited about the prospects for CSX World
Terminals, which contributed to the corporation's success in 2002 and is in an
excellent position to grow as the world economy recovers and trade barriers are
relaxed.
While CSX's determination to become a more rail-based corporation has
enabled us to focus our energies, it has also intensified the railroad's
responsibility to generate financial results that will reward our shareholders'
confidence in this company. In 2002, a year that began with significant promise,
investor confidence was shaken in the third quarter, when we experienced our
first year-over-year decline in operating income in eight quarters. Weak demand
for coal and higher railroad operating costs were the principal factors.
As deeply disappointed as we were by those third-quarter results, we were
equally encouraged by the response of the entire CSXT team to turn around our
performance in the fourth quarter. Solid revenue gains across most freight
classifications more than offset an 8% year-to-year decline in coal, coke and
iron ore revenues. At the same time, we lowered costs and increased efficiency,
all while continuing to implement long-term service-improvement initiatives.
Fourth-quarter performance demonstrated the effectiveness of the business model
that we have embraced to generate sustainable, long-term financial success:
revenue growth combined with stringent cost control.
The Foundation for Revenue Growth
For railroads to prosper, they have to attract customers and grow. That is
what we are doing at CSXT. This section describes some of the ways we are
accomplishing that, but the bottom line is we are getting freight back on the
rails where it belongs.
Since expanding our rail network, with the Conrail merger, to provide fast,
efficient service to the consumer markets, manufacturing centers and ports of
the Northeast, CSXT has been working to deliver on the tremendous growth
opportunities provided by single-line service to every major rail market east of
the Mississippi River. The crucial first step has been to elevate our service to
levels that earn the confidence of our customers and deliver their freight with
speed and reliability.
We believe the transportation products offered by the railroad industry, and
CSX specifically, have never been better. But we will not rest on our laurels,
we will continue to improve our service. In the almost three years since the
current rail management team has been in place, CSXT's train velocity is up 24%;
system dwell, the time that rail cars spend in freight yards, is down 30%; cars
on line, a general indicator of system fluidity, are down 15%; on-time train
departures are up 77%; and on-time train arrivals are up 113%. In addition, CSXT
has formed service alliances with Western railroads to create seamless
transportation products that increase the efficiency and speed of two-line rail
moves.
Customers have taken note of these improvements and have rewarded us with
their business. We have been increasingly successful in attracting market share
from the largest potential source for rail growth, the trucking industry.
Transportation economists, community planners and environmentalists have long
recognized that railroads are a far safer, cost effective, fuel efficient and
environmentally sound mode of freight transportation than trucks. As we have
become increasingly truck-like in our timeliness and reliability, migration to
rail has begun. In 2001 and 2002, we converted 800,000 truckloads of freight to
our railroad. In 2002 alone we attracted 500 new customers. This is just the
beginning.
In 2002, we developed several new initiatives to grow and improve our
service and customer interface which will be implemented in 2003. One of the
initiatives, Shipment Management, is shifting our focus from monitoring our
train movements to adopting the perspective of customers, whose priority is
on-time delivery of their shipments. Another initiative is Event Reporting which
uses handheld data transmission devices to provide more timely and accurate data
on car movements, improving CSXT's ability to increase efficiency, accuracy, and
completeness of data.
We also are making it easier for our customers to do business with us. In
2002, we launched a redesigned and feature-rich Web site, ShipCSX, which enables
customers to obtain instant pricing information, plan their shipments and
conduct e-business transactions quickly and efficiently. We also initiated Zero
Defect Management, a program that closely monitors shipments of new customers to
ensure they receive the highest-quality service from the very beginning of their
rail experience.
We are confident these initiatives will succeed, because they have
succeeded for others. We have undertaken an extensive benchmarking effort to
extract the best ideas from successful companies and put them into action at
CSX. Our programs are based on the excellent service of the Canadian National,
the customer focus of General Electric, the safety excellence of DuPont, and the
data gathering techniques of the Burlington Northern-Santa Fe, Canadian Pacific
and Six Sigma. Our goal is to realize the benefits these companies have realized
- - and more.
Better Service is Cost-effective Service
Cost control was a major emphasis for CSX in 2002, and will be for the long
term. While the cornerstone of our business strategy is to achieve sustainable
financial strength through revenue growth, we recognize that controlling costs
is both a cause and an effect of efficient
4 CSX 2002 ANNUAL REPORT
Chairman's Message
transportation. Doing both well will allow us to better control our destiny.
This "better is cheaper" philosophy was evident in many of our measures in 2002,
including revenue per employee, which increased to almost $205,000 in 2002, from
$181,000 per employee in 2000. Since 2000, our workforce companywide has
decreased by more than 5,000 employees.
We expect to continue to realize labor savings through attrition and
productivity improvements, but also important to our cost structure is the work
being done by our employees through Six Sigma. Using fact-based techniques for
identifying and eliminating waste by improving processes, we have permanently
taken out costs. In addition, as our operating performance improved, effectively
increasing the capacity of our assets, we right-sized our locomotive and cars
fleets and are reviewing options for right-sizing the rail network. We are also
partnering with our suppliers to reduce the cost of purchasing and materials
through a new initiative called IMPACT.
We continued to invest capital - beyond our normal infrastructure
maintenance and improvement programs - in initiatives that showed promise for
improving the quality of our product and the efficiency of our operations.
Technology was the primary focus of these investments. We introduced
remote-control locomotive technology at 48 locations. Those will deliver both
safety and productivity improvements. At the same time, we deployed locomotive
auxiliary power units (APUs), developed by CSXT to both increase fuel efficiency
and reduce emissions.
A Company of Quality
As we concentrated on growing revenues and reducing costs in 2002, the
people of CSX continued to demonstrate a strong commitment to high ethical
standards and integrity.
Providing a safe working environment for our employees and protecting the
public are an important part of our ethical commitment. In 2002, we continued
our safety improvement of recent years. By year end, our personal injury
frequency rate had dropped 23%, in addition to a 21% reduction in 2001.
Similarly, train derailments that are reportable to the Federal Railroad
Administration decreased 18% in 2002, in addition to the 39% reduction achieved
in 2001. To strengthen our momentum, we implemented a Safety Leadership Process
during the year, which we designed following a benchmarking session with DuPont,
a worldwide leader in safety performance.
We also are a company that celebrates diversity and values the talents of
all employees. A strong culture attracts good people, people who actively listen
to each other, trust each other, respect each other's contributions and make
decisions that take into account all data and perspectives. Only by having the
best ideas can we hope to attract and keep customers with the best, most
creative service solutions possible.
As a testament to our management integrity and the ethical practices, CSX
came through the intense scrutiny preceding the confirmation process of our
former chairman, John W. Snow, with an endorsement and affirmation of our
business practices. The public has no tolerance for corporate misconduct in the
wake of recent high-profile scandals, and we are proud of the record that
emerged in the examination of CSX. To ensure that we continue to abide by the
letter and spirit of corporate governance and securities requirements, we
provided more than 900 hours of training to approximately 200 company employees,
who have responsibility for accounting, finance, tax, audit and public
reporting, on the new requirements of the Sarbanes-Oxley Act of 2002.
A Heritage to Build Upon
As I conclude my first letter to shareholders as the newly-elected chairman
of CSX Corporation, I want to recognize the contributions of John Snow during
the 11 years he served as chairman and chief executive officer of CSX. John was
a true leader of our corporation and the entire transportation industry.
I am honored by the opportunity I have been given to follow a person of the
character and vision of John Snow. My promise to him and to every CSX
shareholder, customer, community and employee is that I will do my utmost to
deliver on the opportunities that he helped create. Today, the CSX companies are
positioned better than ever to enter new markets, to convert freight from
highways to the rails, and to provide a level of service excellence that will
delight our customers and reward our shareholders. Some of our opportunities for
revenue growth will be fulfilled this year, other initiatives may take longer.
Of this I am confident: by doing what is right for our customers and our
employees, we are doing what is right for our shareholders.
/s/ Michael J. Ward
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Michael J. Ward
Chairman, President & Chief Executive Officer
CSX 2002 ANNUAL REPORT 5
It Starts
wth the
Customer
[PHOTO APPEARS HERE]
6 CSX 2002 ANNUAL REPORT
Review of Operations
Surface Transportation Continues Performance Improvement
CSX Transportation and CSX Intermodal produced solid operating results despite
unfavorable market conditions in 2002, as they positioned CSX's Surface
Transportation businesses to generate new opportunities for rail and intermodal
and to capitalize on a strengthening economy. With an intense focus on service
enhancement and operating efficiency, the rail and intermodal units
simultaneously drove down costs and grew revenues while increasing the value of
their service products. Surface Transportation accounted for approximately 88%
of CSX Corporation revenue and operating income in 2002.
CSX Transportation
As the largest freight railroad in the Eastern United States, CSX
Transportation Inc., ("CSXT") continued to build momentum toward realizing the
full potential of its 23,000-mile rail network serving 23 states, the District
of Columbia, and two Canadian provinces. Headquartered in Jacksonville, Florida,
CSXT made improvements in all of its major operating measurements in 2002,
delivering higher-quality customer service and providing a safer environment for
employees and the public.
The fluidity of the rail network and its terminals continued to increase,
which was reflected in improved crew and equipment utilization as well as a
higher percentage of on-time train movements. These improvements occurred even
as aggressive cost actions were taken to offset the effects of a sluggish
economy and weak coal demand. These actions included continued workforce
reductions, aggressive management of purchasing and material expenses, and
process changes that drove down CSX's overall cost structure.
Consolidation benefits were evident in 2002. Modal conversions from truck to
rail, enabled by increasingly efficient service, were a significant factor in
the railroad's ability to respond to challenging economic conditions throughout
the year.
Increased operating efficiency had many positive effects on CSXT's cost
performance. For example, improved locomotive productivity allowed the company
to reduce its fleet of leased locomotives, which produced substantial cost
savings. At the same time, improved productivity from the company's fleet of
100,000 railcars further reduced the average expense for each of the 5.0 million
loads that moved on the CSXT system in 2002.
These efficiencies helped CSXT offset continued slowness in the U.S.
economy. They also provided the railroad's team with an increasingly valuable
transportation product to offer customers, who responded positively to several
key marketing initiatives.
Customers shifted 450,000 loads from the nation's strained highway system to
the CSXT rail network in 2002. This came from existing customers as well as more
than 500 new customers who were introduced to the economic efficiency,
convenience and safety of rail freight transportation. Among existing customers,
marketing initiatives were particularly successful with retail businesses that
receive merchandise in large boxcars. Two of the nation's largest home
improvement companies, for example, substantially increased the amount of
freight they ship by rail, and the company expects the trend to continue, with
the opening of new rail-served warehouses.
Another successful marketing initiative in 2002 was continued strengthening
of service alliances with the Western railroads for transporting commodities
ranging from perishable produce to coal. Initiatives with Union Pacific
Railroad, for example, created new opportunities for moving coal from Western
mines across the St. Louis gateway into markets in the East. This helped
mitigate the effects of the weakened coal market in 2002 and provided a good
potential for future revenue growth.
The slow coal market masked significant strength in other rail commodities.
Excluding coal, CSXT's linehaul revenues increased $98 million, or 2% over 2001.
Growth was especially strong in the fourth quarter, when linehaul revenue
excluding coal increased 5.2%.
While these results provide an encouraging backdrop for the start of 2003,
unprecedented winter storms slowed rail operations and created significant
resource demands. The strains created by the storms, combined with increased
fuel costs, is requiring even more aggressive cost actions and rail efficiency
improvements.
As a result, CSXT approaches 2003 with a multi-faceted plan for productivity
improvement. With strategic investments in new technologies and process
improvements driven by Six Sigma, the company started several new initiatives in
2002 - such as remote-control locomotive operation and locomotive auxiliary
power units- to lower costs while improving service.
Surface Transportation Chart
2002 Split of Revenue
Coal, Coke and Iron Ore............ 22%
Intermodal......................... 16%
Chemicals.......................... 13%
Automotive......................... 12%
Forest Products.................... 9%
Agricultural Products.............. 7%
Metals............................. 6%
Emerging Markets................... 5%
Phosphates & Fertilizer............ 5%
Food & Consumer.................... 3%
Minerals........................... 2%
CBX 2002 ANNUAL REPORT 7
Review of Operations
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Event Reporting, an initiative developed in 2002, employs a technology that
benefits both railroad operations and customers. Train crews, using handheld
touchpads, record every car movement as it occurs in the field. Real-time
information is transmitted to CSXT databases over a wireless network. This
permits faster decision-making by the railroad to meet service commitments and
assist customers with logistics and resource planning. Event Reporting will be
implemented systemwide in 2003.
In addition to technology innovations, CSXT is transforming the traditional
railroad perspective of performance as driven by on-time train movements to one
that measures success from the perspective of the customer, consistently meeting
shipment delivery commitments.
At the same time, the CSXT team also improved safety, continuing the
momentum of recent years. Personal injuries declined 23% in 2002, in addition to
a 21% reduction in 2001. At the same, CSXT trained 2,400 managers in its Safety
Leadership Process in 2002, providing them with the skills and knowledge to
effectively convey CSXT's commitment to eliminating injuries.
CSX Intermodal
With 45 modern terminals and 450 purchased dedicated trains per week, CSX
Intermodal Inc., ("CSXI") offers rail transportation for domestic containers and
trailers, premium parcel business and international steamship containers. In
2002, the company demonstrated its value to CSX's Surface Transportation
business as a powerful source of growth.
After a period of strategic capital investments in terminals and equipment
that set the stage for growth, CSXI in 2002 achieved impressive success in
converting truck freight to North America's premier intermodal service network.
For the year, the unit generated 6.1% growth in operating revenue versus 2001,
even as it absorbed the impact of the West Coast port shutdown and lower volumes
in parcel business stemming from the soft economy. CSXI's operating revenues in
2002 accounted for 16% of the CSX Surface Transportation total.
Creative marketing and service initiatives enabled CSXI to provide
increasingly "truck-like" service and to realize the full value of that product
in the marketplace. The company applied its truck conversion strategy - and
leveraged its position as the nation's only rail-based transcontinental
intermodal service provider - in offering branded, single-carrier service to and
from the West Coast in 53-foot containers. To facilitate the service, CSXI
invested in 2,250 53-foot containers, which contributed to a 35% increase in its
container business.
Another new initiative that helped capture shipments was the expansion of
CSXI's Trucking division to service Internet "loadboards," where shippers post
freight in search of transportation between specified origin and destination
pairs. CSXI reorganized its Trucking division and added resources to capitalize
on the opportunity presented by the loadboards. By the end of 2002, the
initiative was adding 700 loads per week and had generated $21 million in new
revenue. CSXI anticipates that the loadboard business will continue to grow
rapidly over the next several years.
Operating efficiency was a key component of CSXI's modal conversion
strategy. CSXI improved equipment utilization 12%. The increase was driven by
proactive positioning of containers at anticipated areas of high demand and by
an aggressive maintenance program to ensure that CSXI containers were in good
repair and ready to load when needed.
For 2003, CSXI plans to expand its strategic successes and increase the pace
of growth generated through modal conversions.
CSX World Terminals
CSX World Terminals LLC, ("CSX World Terminals") is a leader in the
development, operation, management and design of marine container terminals. It
operates businesses in Asia, Europe, Australia, Latin America and the United
States. The company also provides trucking services in Hong Kong and barging
operations on the Rhine River in Europe.
Despite a sluggish global economy in 2002, difficult conditions in the
container-shipping industry, and work stoppages at U.S. West Coast ports,
earnings at CSX World Terminals were slightly below 2001 as a result of cost
reduction programs, productivity improvements and asset sales. Looking forward,
similar initiatives, accompanied by expected growth in global container flows of
approximately 6% to 7% annually during the next five years, provide an
opportunity for earnings growth. This includes both business expansion through
new terminal development and privatization projects, as well as growth in the
company's existing businesses.
In 2002, CSX World Terminals added new businesses in two rapidly growing
economies, South Korea and China. CSX World Terminals acquired a 23.3% equity
stake in a company that is building a large, state-of-the-art container terminal
in Pusan, South Korea.
Pusan is the third largest container port in the world. CSX World Terminals
will be the manager and operator of the terminal that is scheduled to commence
operations by January 2006. In Shanghai, China, a CSX World Terminals subsidiary
established a crane inspection business to capitalize on China's emergence as
one of the largest manufacturers of terminal handling equipment. Also in 2002,
CSX World Terminals expanded its terminal operations in Germersheim, Germany,
permitting more volume and larger barges to be handled at the facility. The
operation is the largest private container terminal on the Rhine River handling
barge, rail and truck volume.
During the year, the company made significant progress on two large terminal
development projects. Construction progressed according to schedule on Asia
Container Terminals' ("ACT") marine facility at the
8 CSX 2002 ANNUAL REPORT
Review of Operations
port of Kwai Chung in Hong Kong. CSX World Terminals is an investor in ACT and
will operate the terminal at the world's largest container port. The facility,
scheduled to open in mid-2004, is well positioned to expand CSX World
Terminals's presence in this important market.
In the Dominican Republic, CSX World Terminals is a shareholder in a company
constructing a large, modern container terminal and free-trade zone facility on
the Caucedo peninsula near Santo Domingo. Construction began in 2002, and the
terminal is expected to start operations in late 2003, with CSX World Terminals
as the terminal operator.
The company developed a terminal management and operating system that is
being installed at each of the company's new terminal developments in South
Korea, Hong Kong and the Dominican Republic. CSX World Terminals management
believes the technology will increase the company's ability to operate more
efficiently, and enhance its competitiveness in the market place.
Other Activities
CSX Lines LLC, ("CSX Lines") is the nation's largest domestic
container-shipping company, accounting for approximately 37% of the total U.S.
marine container shipments from the continental United States to Alaska,
Hawaii/Guam or Puerto Rico. The company operates 17 vessels and approximately
21,500 cargo containers of varying size providing door-to-door or port-to-port
container transportation services to shippers in these three major shipping
lanes. The company operates terminals in Hawaii, Alaska and Puerto Rico,
contracts for terminal services in its seven North American ports as well as
Guam and has long-term access to terminal facilities in every port that its
vessels call. CSX Lines is headquartered in Charlotte, North Carolina, with 17
offices throughout the continental United States, Alaska, Hawaii, Guam and
Puerto Rico.
In December 2002, CSX Corporation reached an agreement to convey CSX Lines
to a venture formed with The Carlyle Group for $300 million ($240 million in
cash and $60 million of securities issued by the venture). CSX expects this
transaction to close in the first quarter of 2003.
In 2002, operating income for CSX Lines reached $38 million, a $6 million
year-over year improvement versus 2001. The improvements came primarily from
continued expense reductions as well as improvement in revenues in the
Hawaii/Guam service and Puerto Rico service.
CSX owns the historic Greenbrier resort in White Sulphur Springs, West
Virginia. World renowned for its cuisine and culinary programs, luxurious
accommodations, impeccable service and conference facilities, The Greenbrier was
awarded the coveted AAA Five-Diamond award for the 27th consecutive year in
2002.
CSX Real Property Inc. ("RPI") creates shareholder value through the
efficient provision of real estate management and real estate services to all
CSX companies. RPI manages CSX's real estate assets to maximize risk adjusted
total return, and recognize, when financially feasible, the value of the surplus
real estate rights and assets. Activities include development, sales, leasing
and management of assets ranging from stand-alone properties to surplus railroad
corridors. RPI is headquartered in Jacksonville, Florida.
CSX Technology provides a wide range of information technology applications.
Applications encompass day-to-day processing including freight scheduling,
tracking, and monitoring, as well as more comprehensive functions such as data
resource management, system architecture and network management. CSX Technology
is headquartered in Jacksonville, Florida
BridgePoint provides logistics information technology tools to help
customers monitor, measure and manage their operations through high-level data
quality and connectivity. BridgePoint's headquarters are located in the Research
Triangle, North Carolina.
CSX 2002 ANNUAL REPORT 9
Safety
is a
Way of Life
[PHOTO APPEARS HERE]
10 CSX 2002 ANNUAL REPORT
Community
CSX is a company on the move. We're redefining the importance of railroading
to American industry - and American communities. As a transportation company, we
know the points along the way are every bit as crucial to the journey's success
as the destination. That's why we are committed to getting the right results,
the right way, in everything we do. For our customers. For our employees. For
the communities we serve.
Our Commitment to Safety
Railroading is a unique industry. Our "plant" is spread over thousands of
miles, through countless cities and towns, many of which provide homes to our
hard-working employees. That's why safety is a way of life at CSXT, where
employees take time every day to remember the importance of working safely for
themselves, their families and their communities.
In 2002, the railroad's Safety Leadership Process ("SLP") trained 2,400
managers and first-line supervisors so they can achieve continuous safety
improvement. SLP is a prevention-based process that emphasizes leadership by
example and attaining objectives through measurement, analysis and development
of specific action plans. The railroad is extending SLP training to
approximately 24,000 contract employees in 2003.
Front-line employees continued to embrace safety initiatives in 2002. CSXT's
culture that seeks good labor-management relations further enhanced the
cooperation. This culture, and the teamwork it creates, has produced innovative
programs for injury prevention, centered on education and training. These
efforts contributed significantly to safety initiatives at all levels of the
railroad that helped drive a 23% decrease in the frequency rate of reportable
personal injuries and an 18% decrease in reportable derailments in 2002.
Aggressive injury- and train accident-reduction goals were established for
2003, as the railroad reiterated its commitment to continuously driving toward
its ultimate goal of zero injuries and zero accidents.
An equally strong safety commitment is evident at our other operating units.
CSX Intermodal's intense focus on safety awareness in 2002 resulted in a 27%
year-over-year reduction in reportable injuries among field employees. At the
same time, CSXI took its safety message to trucking companies whose drivers
operate in CSXI terminals, and that effort produced a 17% reduction in the
number of truck accidents in CSXI terminals in 2002, compared to 2001.
To increase safety awareness among terminal employees, the intermodal
company placed a heavy emphasis on monthly injury and accident reporting,
combined with monthly safety audits. These methods identified deficiencies and
resulted in action plans for safety improvement.
CSXI also enhanced its efficiency testing program to increase employee
awareness of safety rules and conducted weekly safety sessions with employees
and monthly safety meetings that include all vendors in a discussion of
safety-improvement actions.
A primary safety focus at CSXI in 2002 was safe handling of hazardous
materials as part of the company's commitment to minimize spillage and prevent
the exposure of employees and the environment to hazardous chemicals.
Powering Economic Growth
It might surprise you to think of a company with 175-year-old roots as a
growth enterprise. In fact, CSXT plays a vital role in creating jobs and
supporting economic growth in thousands of communities from Miami to Montreal
and from New Orleans to New England. In 2002 alone, we were instrumental in
securing 117 new industry projects and plant expansions in our service
territories - projects such as a Hyundai auto plant in Montgomery, Alabama, and
an expanded Toyota manufacturing facility in Princeton, Indiana. In total, the
CSX-served industrial development projects announced in 2002 will result in
4,100 new jobs and $1.8 billion in economic investment.
Moreover, cost-effective rail transportation and our ability to help
existing rail-served industries expand into new markets through the eastern
United States and Canada - or even across the country on connecting carriers -
enables companies on our 23,000-mile network to compete more vigorously in the
global economy and continue to provide employment opportunities. Our continued
success in this area is, in part, dependent upon the deregulated market created
by the passage of the Staggers Act in 1980. Since the passage of the Staggers
Act, rail rates have declined 58% in constant dollars. However, we now have
revenue adequacy shortfalls, and no railroad is earning its cost of capital.
There is competition in the freight transportation market today. Reregulation
would impose unnecessary limitations on our ability to price competitively and
would further impede the industry's efforts to achieve revenue adequacy and meet
its cost of capital.
CSX provides transportation services on privately owned and financed
infrastructure, unlike competing transportation modes. As a result, we have an
especially acute need to be treated fairly in tax issues that affect the
transportation industry. A priority for our public policy team in 2003 will be
working with Congress to repeal the discriminatory 4.3 cents per gallon fuel
tax. This tax takes $170 million in rail industry revenues every year. Those
revenues could be used to enhance service and support economic growth.
Especially unfair is that the 4.3 cents per gallon fuel tax paid by airlines and
the trucking industry goes directly into the aviation and highway trust funds,
which benefit those industries. Railroads receive no direct benefit from this
tax, and therefore suffer a serious competitive disadvantage.
CSX 2002 ANNUAL REPORT 11
Community
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Public policy makers at the federal and state levels can also play critical
roles in fostering environments that encourage economic development. There is no
better example than New York state's passage of the Rail Infrastructure
Investment Act of 2002. This legislation, signed into law by Governor Pataki in
early 2003, changes the state's method for assessing railroad property. Prior to
the new legislation, New York's rail property tax rate was three times higher
than that of any other state where CSXT operated, encouraging the railroad to
invest its capital elsewhere. The new law brings New York's tax rate closer in
line with other states allowing CSX to invest in the state's rail infrastructure
and increase opportunities for economic growth and expansion.
Another impediment to the United States' competitiveness is a legal system
that encourages a "lawsuit lottery" of liability claims and outrageous awards.
This abuse is breaking big and small companies and hurting their customers,
their employees and the communities in which they operate. CSX will continue to
strongly urge Congress and the states to enact legislation that makes the
litigation system fair to companies of all sizes that are trying to create jobs,
improve services, develop new products and give back to communities.
In 2003, Congress will likely consider legislation to reauthorize the
Transportation Equity Act for the 21st Century, or TEA-21. At CSX, we support
public policies which promote an overall balance of transportation modes for
optimum safety, efficiency and environmental stewardship. The safety and
environmental advantages of rail are well documented and should be prominently
considered in any public transportation policy debate.
The company has joined with the other Class I railroads to push for
modifications and clarifications to certain transportation programs contained in
TEA-21, as well as carefully targeted tax law changes. These changes would allow
railroads to work more effectively with other transportation modes and with
transportation planners to find efficient solutions to our nation's
transportation problems.
Protecting the Public
In addition to our intense employee safety focus, CSXT works to educate the
public about highway crossing safety and to deter trespassing on railroad
property, which often results in tragedy. These efforts were rewarded in 2002
with a 6% decrease in grade-crossing injuries.
CSXT cooperated with local law enforcement agencies to enforce
grade-crossing and trespassing laws, while continually searching for new
engineering solutions for enhanced crossing safety.
Public safety is also a driving factor behind our company's position in
regard to passenger rail. We support passenger rail operations across our system
in many ways, from Amtrak inter-city trains to commuter systems in major
metropolitan areas. We believe the separation of rail and passenger operations
is the most effective and safest method for preserving the efficiency of the
nation's freight rail system while building a passenger rail system that meets
public expectations for safety and performance. Where combined systems are
existent or proposed, careful planning and execution must be prerequisites to
preserving the safety, reliability and efficiency of both freight and passenger
operations.
Environmental Stewardship
Rail transportation is by far the most environmentally efficient choice for
moving freight. A gallon of fuel moves nine times more freight by rail than by
truck, and locomotives are about three times cleaner than trucks. But at CSX,
that's not good enough. We strive continually to improve our environmental
performance because that's the right choice for our customers and for our
communities.
Our leadership in environmental innovation is evident in the Auxiliary Power
Unit that CSXT has designed, patented and made available to the rail industry.
The APU provides power during idling conditions, allowing a locomotive's main
engine to be shut down. In 2002, the company equipped 800 of its more than 2,500
locomotives with APUs. Once the entire fleet is equipped with APUs, the company
expects to conserve an estimated 25 to 30 million gallons of fuel annually,
compared to today's fuel consumption. For developing the APU, we received the
U.S. Environmental Protection Agency's Clean Air Excellence Award.
At CSXI, a primary safety focus in 2002 was safe handling of hazardous
materials as part of the company's commitment to minimize spillage and prevent
the exposure of employees and the environment to hazardous chemicals.
During the year, a record number of fire and emergency medical personnel,
law enforcement officers, school bus drivers and professional drivers received
training and materials on grade crossing safety and hazardous materials handling
through CSXT's efforts.
Beyond ensuring compliance with environmental laws and regulations, CSXT is
committed to promoting excellence in all of its environmental and hazardous
materials operations. In 2002, the railroad showed that it is the safest means
of transporting hazardous materials. Of the more than 440,000 carloads of
hazardous materials transported on CSXT during the year, only eight cars
released any portion of their load as a result of a derailment - a 50 percent
improvement in hazardous materials safety over 2001.
At the same time, CSXT continued to prepare itself and the communities where
it operates for the unlikely occurrence of a hazardous materials incident. In
2002, railroad hazardous materials experts trained more than 5,200 local
emergency responders and 1,100 railroad supervisors in emergency preparedness.
In addition, transportation emergency response plans were developed, bringing
the
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12 CSX 2002 ANNUAL REPORT
Community
total number of terminals with emergency response plans to more than 70.
Additionally, thousands of railroad employees participated in the annual
environmental training and certification program, while Mechanical Shop
Certifications were conducted at locations across the system.
As an industry partner in the American Chemistry Council's Responsible
Care(R) program, CSXT joined with other railroads in 2002 in developing a
plan and model for applying recent amendments to the program. In taking a
leadership role, CSXT demonstrated its ongoing commitment to excellence in
handling, usage and disposal practices.
CSXT's recycling programs, meanwhile, produced outstanding results in 2002,
with approximately 2.7 million gallons of used oil, 522,000 pounds of batteries,
and 1.7 million used crossties recycled.
People, Places...and Progress
At CSX, we want every one of the communities in which we operate to be a
better place because we're there. We demonstrate our commitment to communities
in our safety programs and initiatives, through charitable giving, and
sponsorship of community events. But we know, too, that ultimately our success
comes down to one thing: people. And we believe we have the best in the
business. They show it on the job, and they live it in their communities.
From small farming and coal communities to major cities throughout the East,
CSX employees are actively volunteering to improve the quality of life for all
people, from all walks of life and to share the benefits of their hard work.
Countless thousands of volunteer hours are given to programs directly supported
by CSX, such as partnering with schools in Jacksonville, Florida, that need a
helping hand. In 2002, we entered into a partnership with Sadie Tillis
Elementary School, our third partner school in the city, where our employees
volunteer to tutor reading and math, read aloud to classes, start pen-pal
programs, participate in special events, and host school-wide programs, such as
at-home safety.
CSX employees also devote countless volunteer hours to performing good works
of their choosing. They lead Boy Scout and Girl Scout troops; they build homes
for the needy; they provide emergency services; they coach youth sports teams;
and they contribute in many other ways. In fact, our employees are vital to the
quality of life in many of the communities and neighborhoods where CSX is
present.
By the very nature of our dispersed business operations, CSX is a diverse
company--geographically, culturally and philosophically. But we refuse to take
diversity for granted, because we believe it enhances the quality of our
workforce. We are a leading sponsor of INROADS, the largest minority internship
program in the nation. Our efforts have worked. Recently, we were ranked by
Diversity Inc. magazine as one of the top 50 American companies in workplace
diversity efforts.
Our 10 field-based diversity councils will continue to promote diversity
awareness; our managers will continue to receive diversity training, and we will
continue to recruit minority candidates for our team.
At CSX, we are proud of all of our people and all of the places where we do
business. Most of all, we are proud to be a continuing force for progress for
business and people.
CSX 2002 ANNUAL REPORT 13
Fact-Based
[PHOTO APPEARS HERE]
14 CSX 2002 ANNUAL REPORT
Financial Information
Table of Contents
16 Financial Policy
17 Management's Discussion and Analysis of
Financial Condition and Results of Operations
30 Consolidated Statement of Earnings
31 Consolidated Statement of Cash Flows
32 Consolidated Statement of Financial Position
33 Consolidated Statement of Changes in
Shareholders' Equity
34 Notes to Consolidated Financial Statements
56 Report of Ernst & Young LLP, Independent Auditors
CSX 2002 ANNUAL REPORT 15
Financial Policy
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CSX's Financial Principles
The management of CSX Corporation ("CSX" or the "Company") reports the
Company's financial condition and results of operations in an accurate, timely
manner and consistent with accounting principles generally accepted in the
United States in order to give shareholders the information necessary to make
investment decisions about the Company. In this section of the annual report,
financial information is presented to assist in understanding the sources of
earnings, the financial resources of the Company and the contributions of the
various business units.
The Company's key objective is to increase shareholder value by improving
the return on invested capital and maximizing free cash flow. To achieve these
goals, management uses the following guidelines in conducting the financial
activities of the Company:
o Capital -- CSX business units plan to earn returns in excess of CSX's cost
of capital. The Company's business plans and investments are expected to
generate adequate free cash flow to achieve this goal over an appropriate
period of time.
o Debt Ratings -- CSX strives to maintain its investment grade debt ratings,
which allows more cost-effective access to financial markets. The Company
will manage its business operations in a manner consistent with meeting
this objective, to provide adequate cash to service its debt and fixed
charges.
o Dividends -- The cash dividend is reviewed regularly in the context of
providing the highest value to shareholders. Competitive yield levels, tax
efficiency and financial flexibility are among the factors considered in
such reviews.
Despite its best efforts, CSX cannot guarantee that its goals will be met.
For example, revenue and operating expenses are affected by the state of the
economy and the industries the Company serves. In addition, changes in
regulatory policy can drastically change the cost and feasibility of certain
operations. Factors such as these, along with the uncertainty involved in
predicting future events, should be kept in mind when reading Company
projections or forward-looking statements in this report.
Management's Responsibility for Financial Reporting
The consolidated financial statements of CSX have been prepared by
management, which is responsible for their content and accuracy. The statements
present the results of operations, cash flows and financial position of the
Company in conformity with accounting principles generally accepted in the
United States and, accordingly, include certain amounts based on management's
judgments and estimates.
CSX and its subsidiaries maintain internal controls designed to provide
reasonable assurance that assets are safeguarded and transactions are properly
authorized by management and are recorded in conformity with accounting
principles generally accepted in the United States. Controls include accounting
tests, written policies and procedures and a code of corporate ethics routinely
communicated to all employees. An internal audit staff monitors compliance with,
and the effectiveness of, established policies and procedures.
The Audit Committee of the board of directors, composed solely of outside
directors, meets periodically with management, internal auditors and the
independent auditors to review audit findings, adherence to corporate policies
and other financial matters. The firm of Ernst & Young LLP, independent
auditors, has been engaged to audit and report on the Company's consolidated
financial statements. Its audit was conducted in accordance with auditing
standards generally accepted in the United States and included a review of
internal accounting controls to the extent deemed necessary for the purpose of
its report, which appears on page 56.
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16 CSX 2002 ANNUAL REPORT
Management's Discussion and Analysis of
Financial Condition and Results of Operations
(All references to earnings per share assume dilution)
Description of Business
CSX Corporation ("CSX" or the "Company"), operates one of the largest rail
networks in the United States and also provides intermodal transportation
services across the United States and key markets in Canada and Mexico. Its
marine operations include an international terminal services company and a
domestic container-shipping company. On December 16, 2002, CSX entered into an
agreement to convey most of its interest in its domestic container-shipping
company, CSX Lines LLC, for cash and securities of a new venture, Horizon Lines
LLC ("Horizon"). The Company expects this transaction to close in the first
quarter of 2003.
Surface Transportation
CSX Transportation Inc.
CSX Transportation Inc. ("CSXT") is the largest rail network in the eastern
United States, providing rail freight transportation over a network of more than
23,000 route miles in 23 states, the District of Columbia and two Canadian
provinces. Headquartered in Jacksonville, Florida, CSXT accounted for 74% of
CSX's operating revenue and 76% of operating income in 2002.
CSX Intermodal Inc.
CSX Intermodal Inc. ("CSXI") is the nation's only transcontinental
intermodal transportation service provider, operating a network of dedicated
intermodal facilities across North America. The CSXI network runs approximately
450 purchased dedicated trains between its 45 terminals weekly. CSXI accounted
for 14% of CSX's operating revenue and 13% of operating income in 2002. Its
headquarters are located in Jacksonville, Florida.
Marine Services
CSX Lines LLC
CSX Lines LLC ("CSX Lines") operates a domestic container-shipping business
consisting of a fleet of 17 vessels and approximately 21,500 containers serving
the trade between the continental United States and Alaska, Hawaii / Guam and
Puerto Rico. CSX Lines accounted for 9% of CSX's operating revenues and 3% of
operating income in 2002. CSX Lines is headquartered in Charlotte, North
Carolina. As stated above, in mid-December CSX entered into an agreement to
convey most of its interest in CSX Lines.
CSX World Terminals LLC
CSX World Terminals LLC ("CSX World Terminals") operates container-freight
terminal facilities in Asia, Europe, Australia, Latin America and the United
States. CSX World Terminals accounted for 3% of CSX's operating revenues and 6%
of operating income in 2002. CSX World Terminals is headquartered in Charlotte,
North Carolina.
Non-transportation
Resort holdings include the AAA Five-Diamond hotel, The Greenbrier, in White
Sulphur Springs, West Virginia. CSX Real Property Inc. is responsible for sales,
leasing and development of CSX-owned properties, and is headquartered in
Jacksonville, Florida.
Preparation of the Financial Statements
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires that management make
estimates in reporting the amounts of certain assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amount of certain revenues and expenses during the
reporting period. Actual results may differ from those estimates. Significant
estimates are made for the following areas:
1. Casualty, legal and environmental reserves
2. Pension and postretirement medical plan accounting
3. Depreciation polices for its assets under the group-life method
See pages 26-28 for a further discussion of these critical accounting
estimates.
CSX 2002 ANNUAL REPORT 17
Management's Discussion and Analysis of
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Financial Condition and Results of Operations
Results of Operations
Consolidated Results
2002 vs. 2001
Operating Revenue
CSX follows a 52/53-week fiscal reporting calendar. Fiscal years 2002 and
2001 consisted of 52 weeks ending on December 27, 2002 and December 28, 2001,
respectively. Operating revenue of $8.2 billion in 2002 was slightly higher than
2001, resulting mainly from an increase in revenues at the Company's domestic
container-shipping unit, CSX Lines, which offset a small decrease at the
Company's Surface Transportation units.
[GRAPHIC APPEARS WITH THE FOLLOWING PLOT POINTS:]
Average Return on Assets
1998 1999 2000 2001 2002
- ---- ---- ---- ---- ----
2.7% 0.0% 2.7% 1.4% 2.0%
Operating Expense
Operating expense of $7.0 billion in 2002 was 2% lower due mainly to lower
fuel and labor costs at the Company's Surface Transportation business. The
effect on 2001 of the $60 million New Orleans litigation settlement contributed
to the favorable year-to-year comparison.
Other Income
Other income was up $32 million in 2002 as compared to 2001, due mainly to
reduced losses relating to equity investments and other favorable miscellaneous
items, offset by lower interest income.
Interest Expense
Interest expense was reduced by $73 million in 2002 as compared
[GRAPHIC APPEARS WITH THE FOLLOWING PLOT POINTS:]
Average Return on Equity
1998 1999 2000 2001 2002
- ---- ---- ---- ---- ----
9.2% 0.0% 9.6% 4.9% 6.9%
Operating Income (a)
2002
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Surface Transportation Marine Services
--------------------------------------------------------------------------------------------
Container International Elim./
(millions of dollars) Rail Intermodal Total Shipping Terminals(b) Total Other Total
- ------------------------------------------------------------------------------------------------------------------------------------
Operating Revenue $ 6,003 $1,180 $ 7,183 $ 758 $ 236 $ 994 $ (25) $8,152
--------------------------------------------------------------------------------------------
Operating Expense
Labor and Fringe 2,541 67 2,608 229 57 286 3 2,897
Materials, Supplies and Other 1,201 179 1,380 244 77 321 12 1,713
Conrail Operating Fees, Rents and
Services 322 -- 322 -- -- -- -- 322
Building and Equipment Rent 425 131 556 45 9 54 (9) 601
Inland Transportation (365) 633 268 119 7 126 (24) 370
Depreciation 576 29 605 17 9 26 7 638
Fuel 449 -- 449 66 -- 66 -- 515
Miscellaneous -- -- -- -- 8 8 (39) (31)
New Orleans Litigation Provision -- -- -- -- -- -- -- --
--------------------------------------------------------------------------------------------
Total Expense $ 5,149 $1,039 $ 6,188 $ 720 $ 167 $ 887 $ (50) $7,025
--------------------------------------------------------------------------------------------
Operating Income $ 854 $ 141 $ 995 $ 38 $ 69 $ 107 $ 25 $1,127
--------------------------------------------------------------------------------------------
Operating Ratio 85.8% 88.1% 86.1% 95.0% 70.8% 89.2%
--------------------------------------------------------------------------------------------
Employment-Annual Averages 33,464 1,093 34,557 1,616 1,261 2,877
Property Additions $ 981 $ 29 $ 1,010 $ 19 $ 11 $ 30
(a) Certain prior year amounts have been reclassified to conform to the 2002
presentation.
(b) Marine Services includes minority interest expense which is reclassified to
other income in eliminations and other.
(c) 2001 includes the New Orleans tank car fire litigation charge of $60
million, which negatively impacted rail and Surface Transportation
operating ratios by 1% and .08%, respectively.
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18 CSX 2002 ANNUAL REPORT
Management's Discussion and Analysis of
Financial Condition and Results of Operations
to 2001, due to refinancing fixed-rate maturities at lower interest rates, and
to a greater percentage of outstanding debt during 2002 bearing a floating rate
of interest through the use of interest rate swap agreements.
Net Earnings
The Company reported net earnings for 2002 of $424 million, $1.99 per share,
compared to $293 million, $1.38 per share in 2001. Results for 2002 include the
write-down of indefinite lived intangible assets as a cumulative effect of
accounting change, which reduced net earnings $43 million after tax, or 20 cents
per share. Results for 2001 include a provision to account for the settlement of
the New Orleans tank car fire litigation, which reduced net earnings by $37
million after tax, 17 cents per share. Excluding the cumulative effect of the
accounting change and the New Orleans litigation provision, net earnings were
$467 million for 2002, compared with $330 million for 2001. This increase is the
result of increased operating income on a consolidated basis of $110 million
(excluding the pretax charge of $60 million in 2001 for the New Orleans
litigation provision), higher other income of $32 million and lower interest
expense of $73 million.
2001 vs. 2000
Operating Revenue
Fiscal years 2001 and 2000 consisted of 52 weeks ending on December 28, 2001
and December 29, 2000, respectively. Operating revenue of $8.1 billion in 2001
was slightly lower than 2000, resulting from decreased volume at the Company's
Surface Transportation units associated with the economic downturn.
Operating Expense
Operating expense of $7.2 billion was 3% lower in 2001, due primarily to
cost reductions and lower fuel prices mainly at the Company's Surface
Transportation units. Operating expenses for 2001 also included $60 million for
the New Orleans litigation settlement.
Other Income
Other income was down $13 million in 2001 as compared to 2000, due mainly to
reduced interest income, increased losses from equity investments and other
charges offsetting an increase in real estate gains.
Interest Expense
Interest expense was down $32 million in 2001 as compared to 2000, primarily
from the impact of lower interest rates on floating-rate debt and on fixed-rate
maturities refinanced in 2001.
Net Earnings
The Company reported net earnings for 2001 of $293 million, $1.38 per share,
compared to $565 million, $2.67 per share in 2000. Results for 2001 include a
provision for the settlement of the New Orleans tank car fire litigation. This
charge reduced earnings $37 million after tax, 17 cents per share. Net earnings
for 2000 included the results of the Company's wholly-owned logistics
subsidiary, CTI Logistx Inc. ("CTI"), which was sold in September 2000 for $650
million. The sale resulted in a gain of $570 million before tax, $365 million
after tax, $1.73 per share. CTI contributed $14 million, 6 cents per share to
net earnings until it was sold. The contract logistics segment was reported as a
discontinued operation in 2000. Excluding the New Orleans litigation provision
and the CTI sale, net earnings were $330 million for 2001, compared with $186
million for 2000. The increase resulted from increased operating income
resulting from cost cutting measures and lower fuel prices, and a favorable
interest rate environment.
2001
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Surface Transportation Marine Services
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Container International Elim./
Rail Intermodal Total Shipping Terminals(b) Total Other Total
- ---------------------------------------------------------------------------------------
$ 6,082 $ 1,112 $ 7,194 $ 681 $ 236 $ 917 $ (1) $ 8,110
- ---------------------------------------------------------------------------------------
2,585 65 2,650 213 62 275 9 2,934
1,212 173 1,385 203 70 273 31 1,689
336 -- 336 -- -- -- -- 336
442 123 565 51 9 60 1 626
(371) 616 245 98 7 105 (13) 337
550 31 581 24 8 32 -- 613
525 -- 525 60 -- 60 -- 585
-- -- -- -- 9 9 (36) (27)
60 -- 60 -- -- -- -- 60
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$ 5,339 $ 1,008 $ 6,347 $ 649 $ 165 $ 814 $ (8) $ 7,153
- ---------------------------------------------------------------------------------------
$ 743 $ 104 $ 847 $ 32 $ 71 $ 103 $ 7 $ 957
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87.8% 90.6% 88.2% 95.3% 69.9% 88.7%
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35,014 1,116 36,130 1,602 1,305 2,907
$ 848 $ 12 $ 860 $ 11 $ 19 $ 30
2000
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Surface Transportation Marine Services
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Container International Elim./
Rail Intermodal Total Shipping Terminals(b) Total Other Total
- ---------------------------------------------------------------------------------------
$ 6,075 $ 1,168 $ 7,243 $ 666 $ 270 $ 936 $ 12 $ 8,191
- ---------------------------------------------------------------------------------------
2,567 67 2,634 212 61 273 20 2,927
1,266 195 1,461 222 93 315 21 1,797
377 -- 377 -- -- -- -- 377
540 131 671 45 10 55 -- 726
(387) 648 261 95 9 104 (7) 358
520 29 549 20 7 27 -- 576
577 -- 577 72 -- 72 -- 649
-- -- -- -- 19 19 (43) (24)
-- -- -- -- -- -- -- --
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$ 5,460 $ 1,070 $ 6,530 $ 666 $ 199 $ 865 $ (9) $ 7,386
- ---------------------------------------------------------------------------------------
$ 615 $ 98 $ 713 -- $ 71 $ 71 $ 21 $ 805
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89.9% 91.6% 90.2% 100.0% 73.7% 92.4%
- ---------------------------------------------------------------------------------------
35,496 1,230 36,726 1,618 1,336 2,858
$ 822 $ 18 $ 840 $ 16 $ 8 $ 24
CSX 2002 ANNUAL REPORT 19
Management's Discussion and Analysis of
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Financial Condition and Results of Operations
Rail
2002 vs. 2001
Operating Revenue
CSX categorizes rail revenues in three main areas:
1. Merchandise, which includes the following markets:
Phosphates and Fertilizer Metals
Food and Consumer Agricultural
Paper and Forest Chemicals
Minerals Emerging Markets
2. Automotive
3. Coal, Coke and Iron Ore
Overall rail revenues were down $79 million to $6.0 billion in 2002, with
increases in merchandise and automotive revenues being offset by lower coal
revenues. CSX's pricing programs and product mix helped overcome a 3% decrease
in carloads in 2002.
Merchandise Revenue
Overall merchandise revenues were up 1%, or $47 million in 2002 over 2001.
Improvements in phosphates and fertilizers, chemicals, emerging markets, metals
and paper and forest products more than offset decreases in minerals,
agricultural products and food and consumer products. Pricing programs and
favorable mix helped the Company offset the effect of a small decrease in
merchandise carloads in 2002 as compared to 2001.
Automotive Revenue
Automotive revenues improved 6%, or $51 million in 2002 as a result of yield
improvement driven by favorable mix and extended linehauls. Year-over-year
volume increases were driven by higher light truck production levels and
aggressive manufacturer incentives that stimulated automobile sales during 2002.
[GRAPHIC APPEARS WITH THE FOLLOWING PLOT POINTS:]
Rail Operating Revenue
(millions)
1998 1999 2000 2001 2002
---- ---- ---- ---- ----
$4,956 $5,623 $6,075 $6,082 $6,003
Other Revenue
Other revenue decreased $35 million in 2002 as compared to 2001 primarily
because there were lower fuel surcharges billed to customers.
Coal, Coke and Iron Ore Revenue
Coal revenues had a significant impact on the rail segment's 2002 financial
results. Coal revenue was down 9%, or $143 million from 2001's strong
performance due to reduced volumes. Export carloads were down significantly as a
result of the reduced competitive standing of U.S. coal in the international
market, while metallurgical and industrial markets were down in the second half
of 2002.
Operating Expense
Total rail operating expenses decreased $190 million, or 4% in
Business Segment Results
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Surface Transportation Traffic and Revenue(a)
Carloads Revenue
(Thousands) (Millions of Dollars)
--------------------------------------------------
2002 2001 2000 2002 2001 2000
- ---------------------------------------------------------------------------------------
Rail
Merchandise
Phosphates and Fertilizer 463 441 486 $ 324 $ 306 $ 316
Metals 319 319 344 401 395 407
Food and Consumer 162 163 157 217 218 206
Paper and Forest 477 478 523 637 633 657
Agricultural 358 372 361 489 501 483
Chemicals 500 499 523 907 883 922
Minerals 88 92 101 135 140 154
Emerging Markets 424 435 430 397 384 368
----- ----- ---- ------ ----- ------
Total Merchandise 2,791 2,799 2,925 3,507 3,460 3,513
Automotive 538 516 586 845 794 869
Coal, Coke and Iron Ore
Coal 1,573 1,722 1,660 1,528 1,671 1,546
Coke 34 39 46 49 46 47
Iron Ore 36 38 49 20 22 30
----- ----- ---- ------ ----- ------
Total Coal, Coke and Iron Ore 1,643 1,799 1,755 1,597 1,739 1,623
Other Revenue -- -- -- 54 89 70
----- ----- ---- ------ ----- ------
Total Rail 4,972 5,114 5,266 6,003 6,082 6,075
----- ----- ---- ------ ----- ------
Intermodal
Domestic 982 901 931 696 625 645
International 1,137 1,103 1,121 476 470 492
Other -- -- -- 8 17 31
----- ----- ---- ------ ----- ------
Total Intermodal 2,119 2,004 2,052 1,180 1,112 1,168
----- ----- ----- ----- ------ ------
Total Surface Transportation 7,091 7,118 7,318 $7,183 $7,194 $7,243
- ------------------------------------------------------------------------------------
(a) Certain prior year amounts have been reclassified to conform to the 2002
presentation.
- --------------------------------------------------------------------------------
20 CSX 2002 ANNUAL REPORT
Management's Discussion and Analysis of
Financial Condition and Results of Operations
2002 as compared to 2001. Reductions in most expense categories were somewhat
offset by increases in depreciation and lower inland transportation credits.
Also, 2001 included $60 million relating to the New Orleans litigation
settlement.
[GRAPHIC APPEARS HERE WITH THE FOLLOWING PLOT POINTS:]
Rail Operating Expense
(millions)
1998 1999 2000 2001 2002
---- ---- ---- ---- ----
$3,925 $4,853 $5,460 $5,339 $5,149
Fuel costs decreased $76 million in 2002, of which $69 million is
attributable to lower fuel prices. The net impact on operating income of reduced
fuel price was $44 million since $25 million of fuel surcharge revenue was
discontinued.
Labor and fringe costs decreased $44 million year-over-year including
savings from reductions in overall employment. These savings were offset by
increased labor costs relating to cost of living wage increases. Employee count
was approximately 950 lower at the end of 2002 as compared to 2001.
Building and equipment costs were down $17 million mainly due to continued
reduction in car hire as the railroad took cars offline and ran more
efficiently.
Conrail operating fees, rents and services decreased $14 million in 2002 as
compared to 2001. Decreased costs in operating the shared asset areas, tax
settlements, efficiency improvements and adjustments to reflect lower reserve
requirements for car hire, overcharges, interline and other claims all reduced
this expense.
Materials, supplies and other costs at the rail unit were down $11 million
in 2002, as compared to 2001, due to reduced transportation costs, fewer
accidents as a result of vigorous safety initiatives and adjustments to
estimated state and local tax liabilities to reflect actual assessments. These
decreases were offset by higher legal fees and maintenance costs, and $40
million in favorable insurance settlements received in 2001 that were not
repeated in 2002.
Depreciation expense increased $26 million as compared to 2001, as a result
of a higher depreciable asset base.
Operating Income
Rail operating income increased by $111 million to $854 million in 2002 as
compared to 2001, due to operating expense decreases noted previously and the
New Orleans litigation provision. Excluding the 2001 charge for the New Orleans
litigation provision, operating income was up $51 million or 6% for the year.
2001 vs. 2000
Operating Revenue
Rail operating revenue was flat at $6.1 billion in 2001 and 2000. Decreases
in merchandise and automotive revenues were offset by an increase in coal
revenues.
Merchandise Revenue
Merchandise revenues were lower by $53 million in 2001 as compared to 2000.
The economic downturn in 2001 had a negative effect on most merchandise
categories. Decreases totaling $99 million in chemicals, paper and forest
products, minerals, phosphates and fertilizers and metals reduced total rail
revenues. These decreases were offset partially by increases of $46 million in
agricultural products, food and consumer products, and emerging markets.
Automotive Revenue
Automotive revenues were down $75 million in 2001 as compared to 2000, due
to reduced production by the automobile industry after a high production year in
2000.
Coal, Coke and Iron Ore Revenue
Coal revenues were up $125 million in 2001 from volume increases
predominantly relating to rebuilding of stockpiles that were drawn down in 2000,
and various pricing initiatives.
Operating Expense
Rail operating expenses decreased 2% in 2001. This decrease resulted from
lower costs for materials, supplies and other; Conrail operating fees, rents and
services; building and equipment rent; and fuel. These expense reductions were
offset by the New Orleans litigation provision, and increases in labor and
fringe benefits and depreciation.
Building and equipment rent decreased $98 million primarily due to reduced
car hire as the railroad took cars offline and ran more efficiently.
Materials, supplies and other expenses went down by $54 million in part due
to approximately $40 million in favorable insurance settlements received for
occupational claims, with the remainder being the result of other cost cutting
measures.
Fuel expense was $52 million or 9% lower in 2001 as compared to 2000. A
6-cent decrease in the average price per gallon of fuel resulted in $34 million
of the decrease with $18 million attributable to lower fuel consumption.
Conrail operating fees, rents and services decreased by $41 million due
mostly to continued cost savings.
Labor and fringe benefits increased $18 million as a result of $45 million
of incentive compensation expense in 2001, there being none in 2000. The
incentive compensation was partially offset by reduced personnel costs as the
railroad continued to reduce employment.
Operating Income
CSXT earned $743 million of operating income in 2001 vs. $615 million in
2000. Excluding the New Orleans litigation provision of $60 million, operating
income for 2001 was $803 million.
Intermodal
2002 vs. 2001
Operating Revenue
CSXT reported operating revenue of $1.2 billion in 2002, as compared to $1.1
billion in 2001. The increase was primarily due to continued success in efforts
to convert truck traffic onto the intermodal network.
[GRAPHIC APPEARS HERE WITH THE FOLLOWING PLOT POINTS:]
Intermodal Operating Revenue
(millions)
1998 1999 2000 2001 2002
---- ---- ---- ---- ----
$648 $959 $1,168 $1,112 $1,180
Operating Expense
CSXT operating expense increased $31 million in 2002. This increase was the
result of $32 million in higher inland transportation
- --------------------------------------------------------------------------------
CSX 2002 ANNUAL REPORT 21
Management's Discussion and Analysis of
- --------------------------------------------------------------------------------
Financial Condition and Results of Operations
costs due to increased volumes handled during 2002. Also, due to volume
increases, building and equipment rent increased $8 million, and materials,
supplies and other increased $6 million. The increase was partially offset by a
$15 million positive contract settlement. Other costs were relatively flat
year-over-year.
Operating Income
CSXI operating income was up $37 million in 2002 as compared to 2001, due to
the $68 million increase in revenues, offset by a $31 million increase in
operating expenses. These results were also impacted by the $15 million positive
contract settlement noted above.
2001 vs. 2000
Operating Revenue
CSXI revenues were $1.1 billion in 2001 vs. $1.2 billion in 2000. In
addition to a decrease in volume, shorter haul services and lower supplemental
revenue resulted in a reduction in average revenue per load.
Operating Expense
CSXI operating expenses were $62 million lower in 2001 as compared to 2000.
These decreases were mainly the result of lower volumes, which reduced inland
transportation charges by $32 million. Cost cutting initiatives contributed to
materials, supplies and other expense being down $22 million, and building and
equipment rent being down $8 million. Other costs were relatively flat year over
year.
Operating Income
CSXI reported 2001 operating income of $104 million, compared with $98
million in 2000. Improvements were attributed to continued cost reduction
initiatives in a reduced revenue environment.
International Terminals
2002 vs. 2001
CSX World Terminals' operating revenues were flat at $236 million in 2002
and 2001. Operating expenses were up $2 million in 2002 over 2001 due to lower
earnings from equity investees. Miscellaneous operating expenses in 2002 and
2001 include $6 million and $3 million gains, respectively, from transactions
relating to equity investments. Operating income was $69 million for 2002, a $2
million decrease from $71 million in 2001.
2001 vs. 2000
CSX World Terminals' operating revenues declined $34 million to $236 million
in 2001 from $270 million in 2000. The lower revenue was offset by a decrease in
operating expense to $165 million from $199 million. Continued emphasis on
aggressive cost cutting and productivity gains resulted in an operating ratio
decrease to 69.9% in 2001 from 73.7% in 2000 and operating income of $71 million
in both years.
Domestic Container-Shipping
2002 vs. 2001
CSX Lines reported an increase in operating revenues, primarily attributable
to improvement in Puerto Rico of $77 million to $758 million, as compared to
$681 million in 2001. Volume related operating expenses increased $71 million.
Operating income was $38 million in 2002, compared with $32 million in 2001. On
December 16, 2002, CSX entered into an agreement to convey most of its interest
in CSX Lines for cash and securities of a new venture, Horizon Lines LLC
("Horizon"). CSX expects this transaction to close in the first quarter of 2003.
Once the transaction closes, CSX will no longer report the domestic
container-shipping company as a reporting segment, but will instead have a
preferred interest in the new venture.
2001 vs. 2000
CSX Lines reported an increase in operating revenues of $15 million and a
decrease in operating expenses of $17 million in 2001 and thus reported
operating income of $32 million compared to a breakeven year in 2000. Earnings
improved markedly year-over-year due to volume increases resulting from market
share improvements, price increases, and cost reductions.
Liquidity and Capital Resources
Operating Activities
Cash provided by operations for 2002 totaled $1.1 billion, as compared to
$827 million in 2001, due to higher operating income, lower interest expense and
significant cash flow relating to real estate activities. Cash flow for 2002 was
negatively impacted by $85 million attributable to the New Orleans tank car fire
settlement payment. Cash provided by operations for 2001 totaled $827 million,
up $117 million from 2000, due principally to higher net income from operations,
which was $293 million in 2001, compared to $186 million in 2000.
[GRAPH APPEARS HERE WITH THE FOLLOWING PLOT POINTS:]
Cash Provided By Operations
(millions)
1998 1999 2000 2001 2002
---- ---- ---- ---- ----
$1,000 $1,071 $710 $827 $1,127
Investing Activities
Net cash used by investing activities was $775 million in 2002 compared to
$965 million 2001 and $337 million in 2000. The 2002 decrease resulted from
approximately $150 million of higher capital spending, offset by reductions in
CSXs short-term investment portfolio. Cash used by investing activities in 2001
was higher than 2000 primarily due to cash proceeds, received in September 2000,
of $650 million from the sale of the contract logistics segment.
[GRAPH APPEARS HERE WITH THE FOLLOWING PLOT POINTS:]
Property Additions
(millions)
1998 1999 2000 2001 2002
---- ---- ---- ---- ----
$1,479 $1,517 $913 $930 $1,080
Property additions totaled $1.1 billion in 2002, $930 million in 2001 and
$913 million in 2000. The 2002 increase primarily relates to greater
acquisitions of locomotives in 2002. Consolidated property additions for the
coming fiscal year are expected to be approximately $1 billion, reflecting a
more normalized spending level on the rail and intermodal networks.
Financing Activities
Financing activities required cash of $362 million during 2002,
- --------------------------------------------------------------------------------
22 CSX 2002 ANNUAL REPORT
Management's Discussion and Analysis of
Financial Condition and Results of Operations
compared to providing $15 million in 2001 and the use of $739 million in 2000.
The proceeds from the sale of the international liner business at the end of
1999 and contract logistics segment sale in 2000 were used to pay down debt and
other corporate purposes in 2000.
Debt Issuances and Credit Facilities
During 2002, CSX issued $200 million of 4.88% notes due in 2009 and $400
million of 6.30% notes due in 2012. CSX also increased its borrowings from
Conrail by $146 million during 2002 and extended the term to five years. In May
2002, the Company entered into a $300 million, one-year revolving credit
agreement, which replaced the $500 million, one-year agreement that expired June
2002.
During 2001, CSX issued $500 million of 6.75% notes due in 2011 and $564
million aggregate principal amount at maturity in unsubordinated zero coupon
convertible debentures due in 2021 for an initial offering price of
approximately $462 million. CSX may be required to repay the debentures at the
election of the holders in October 2003. In the event that these debentures are
put to CSX in 2003, CSX has the ability and intent to refinance on a long-term
basis. The proceeds from these transactions were used to pay off commercial
paper balances and other long-term debt. CSX also entered into a five-year, $1
billion line of credit agreement in June 2001.
At December 27, 2002, the total revolving credit facilities of the Company
totalled $1.3 billion. Any borrowings under the five-year line of credit or the
one-year credit agreement would accrue interest at a variable rate based on the
London InterBank Offered Rate ("LIBOR"). At December 27, 2002, CSX had
commercial paper borrowings supported by these credit facilities of $140
million, and none at the end of 2001. The Company pays annual fees to the
participating banks that may range from 0.08% to 0.23% of the total commitment,
depending on CSX's credit rating.
During 2000, CSX issued $400 million of floating rate notes, bearing
interest at rates based on LIBOR and having a two-year maturity. These
financings were intended to supplement the Company's existing commercial paper
program.
[GRAPHIC APPEARS HERE WITH THE FOLLOWING PLOT POINTS:]
Fixed Charge Coverage
1998 1999 2000 2001 2002
- ---- ---- ---- ---- ----
1.7x 1.1x 1.4x 1.7x 2.3x
Debt Repayments
CSX repaid long-term debt of $1.2 billion in 2002, $266 million in 2001, and
$751 million in 2000. In 2002, the primary source for these repayments was cash
from operations, cash on hand and approximately $900 million in borrowings and
commercial paper issuances. Long-term and short-term debt at December 27, 2002
and December 28, 2001, totaled $7.1 billion. The ratio of debt to total
capitalization was 52% at the end of 2002 and 2001. The 2002 ratio is impacted
by the $273 million of accumulated other comprehensive earnings recorded as a
reduction of shareholders' equity relating to minimum pension liabilities.
Working Capital
The Company's working capital deficit at December 27, 2002, was $665
million. A working capital deficit is not unusual for CSX and does not indicate
a lack of liquidity. CSX maintains adequate resources to satisfy current
liabilities and maturing debt obligations when they come due, and has sufficient
financial capacity to manage its day-to-day cash
Schedule of Contractual Obligations and Commercial Commitments
(Millions of Dollars)
The following table sets forth due dates of the Company's contractual
obligations:
Type of Obligations 2003 2004 2005 2006 2007 Thereafter Total
- ----------------------------------------------------------------------------------------------------------------------------
Long-Term Debt (see Note 10) $ 391 $ 460 $ 192 $ 429 $ 992 $4,446 $ 6,910
Operating Leases-Net (see Note 17 )/(a)/ 228 225 164 144 164 796 1,721
Agreements with Conrail (see Note 2)/(b)/ 251 253 245 234 227 3,311 4,521
-----------------------------------------------------------------------------------
Total Contractual Obligations $ 870 $ 938 $ 601 $ 807 $1,383 $8,553 $13,152
-----------------------------------------------------------------------------------
The following table illustrates expirations of the Company's commercial
commitments:
Type of Commitments 2003 2004 2005 2006 2007 Thereafter Total
- -------------------------------------------------------------------------------------------------------------------------------
Commercial Commitments (see Note 17)/(c)/ $ 130 $ 132 138 $ 166 $ 171 $2,036 $ 2,773
Unused Lines of Credit (see Note 10) 300 -- -- 1,000 -- -- 1,300
Guarantees (see Note 17 )/(d)/ 71 77 214 75 73 151 661
Other 41 40 40 8 -- -- 129
-----------------------------------------------------------------------------------
Total Commercial Commitments $ 542 $ 249 392 $1,249 $ 244 $2,187 $ 4,863
-----------------------------------------------------------------------------------
(a) CSX has entered into various operating lease agreements primarily for rail transportation.
(b) See Footnote 2. The payments reflected above represent commitments to pay Conrail per various agreements and are not
reduced by equity in Conrail earnings.
(c) Other commercial commitments consists of a $2.8 million maintenance program which expires in 2026 relating to CSX's fleet
of locomotives. This program replaced an internal maintenance program.
(d) Approximately $511 million of these guarantees relate to certain lease obligations that CSX remains contingently liable
for that were assumed by Maersk. CSX believes that Maersk will fulfill its contractual commitments with respect to such
leases and that CSX will have no further liabilities relating to these obligations. In addition, CSX has collateral liens
on the assets relating to these leases and indemnities provided by Maersk that it will fulfill the commitments.
Approximately $150 million relates to a construction guarantee at one of the Company's equity investments.
- --------------------------------------------------------------------------------
CSX 2002 ANNUAL REPORT 23
Management's Discussion and Analysis of
- --------------------------------------------------------------------------------
Financial Condition and Results of Operations
requirements and any obligations arising from legal, tax and other regulatory
rulings. Under the terms of its existing debt agreements, CSX has no significant
exposure to default or payment acceleration should the company experience a
weakening of its financial performance or a downgrade of its debt ratings.
Shelf Registration Statements
CSX has $900 million of remaining capacity under a shelf registration that
may be used, subject to market conditions, to issue debt or other securities at
the Company's discretion. The Company presently intends to use the proceeds from
the sale of any securities under its shelf registration statements to finance
cash requirements, including refinancing existing debt as it matures. While the
Company seeks to give itself flexibility with respect to meeting such needs,
there can be no assurance that market conditions would permit the Company to
sell such securities on acceptable terms at any given time, or at all.
Off-balance Sheet Arrangements
CSX sells its receivables to a bankruptcy remote (special purpose) entity (See
Note 7, Accounts Receivable).
Dividends
In mid-year 2001, the board of directors announced that the regular
quarterly dividend payable would be reduced to 10 cents per share. CSX had paid
a regular quarterly dividend of 30 cents per share since the fourth quarter of
1997 and did so through June of 2001. Dividends paid in 2002, 2001 and 2000 were
as follows:
Dollars in Millions, except Per Share Amounts
2002 2001 2000
-----------------------------------------------------
Dividend Per Share $0.40 $0.80 $1.20
Total Cash Paid for Dividends $ 86 $ 171 $262
Market Risk
CSX addresses its exposure to the market risk of changes in interest rates
through a controlled program of risk management that includes the use of
interest rate swap agreements on $1.4 billion of fixed-rate obligations. CSX
does not hold or issue derivative financial instruments for trading purposes.
In the event of a 1% change in the LIBOR interest rate, the interest expense
related to these swap agreements would have changed by approximately $14 million
in 2002.
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.
At December 27, 2002 and December 28, 2001, CSX had approximately $709
million and $625 million, respectively, of floating-rate debt outstanding. A 1%
change in interest rates would have impacted annual interest expense on
floating-rate debt by approximately $7 million in 2002 and $6 million in 2001.
The Company is subject to risk relating to changes in the price of diesel
fuel. At the end of 2002, the Company had not entered into any long-term
commitments for forward fuel purchases. The Company's rail unit average annual
fuel consumption is approximately 570 million gallons. A one-cent change in the
price per gallon of fuel would impact fuel expense by approximately $6 million.
While the Company's international terminals segment does business in several
foreign countries, a substantial portion of its revenue and expenses are
transacted in U.S. dollars or currencies with little fluctuation against the
U.S. Dollar. For this reason, CSX does not believe its foreign currency market
risk is significant.
A substantial increase in the fair market value of the Company's stock price
could negatively impact earnings per share due to the dilutive effect of stock
options and convertible debt.
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 throughout 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 operate over allocated portions of the Conrail
lines.
The rail subsidiaries of CSX and Norfolk Southern operate their respective
portions of the Conrail system pursuant to various operating agreements. 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 ("Shared Asset Areas") for the
joint benefit of CSX and Norfolk Southern for which it is compensated on the
basis of usage by the respective railroads.
Accounting and Financial Reporting Effects
CSX's rail and intermodal operating revenue includes revenue from traffic
previously moving on Conrail. Operating expenses include costs incurred to
handle that traffic and operate the former Conrail lines. Rail operating expense
includes an expense category, "Conrail Operating Fees, Rents and Services,"
which reflects:
1. Right of way usage fees and equipment rental payments to Conrail
2. Transportation, switching, and terminal service charges provided by
Conrail in the Shared Asset Areas that Conrail operates for the joint
benefit of CSX and Norfolk Southern
3. Amortization of the fair value write-up arising from the acquisition of
Conrail
4. CSX's 42% share of Conrail's net income or loss recognized
under the equity method of accounting
- --------------------------------------------------------------------------------
24 CSX 2002 ANNUAL REPORT
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Detail of Conrail Operating Fees,
Rents and Services
Fiscal Years Ended
-------------------------
(millions of dollars) 2002 2001 2000
- ------------------------------------------------------------------
Rents and Services $ 346 $ 353 $ 383
Purchase Price Amortization
and other 52 56 65
Equity in Income of Conrail (76) (73) (71)
-------------------------
Total $ 322 $ 336 $ 377
- ------------------------------------------------------------------
Conrail Financial Information
Summarized financial information for Contrail is as follows:
Years Ended Dec. 31
-------------------------
(millions of dollars) 2002 2001 2000
- ------------------------------------------------------------------
Income Statement Information:
Revenues $ 893 $ 903 $ 985
Expenses 623 639 749
-------------------------
Operating Income $ 270 $ 264 $ 236
-------------------------
Net Income $ 180 $ 174 $ 170
- ------------------------------------------------------------------
Dec. 31,
-----------------
(millions of dollars) 2002 2001
- ------------------------------------------------------------------
Balance Sheet Information:
Current Assets $ 300 $ 846
Property and Equipment and Other Assets 7,857 7,236
-----------------
Total Assets $ 8,157 $ 8,082
-----------------
Current Liabilities $ 329 $ 408
Long-term Debt 1,123 1,156
Other Liabilities 2,479 2,413
-----------------
Total Liabilities 3,931 3,977
Stockholders' Equity 4,226 4,105
-----------------
Total Liabilities and Stockholders' Equity $ 8,157 $ 8,082
- ------------------------------------------------------------------
Conrail's Results of Operations
2002 vs. 2001
Conrail reported net income of $180 million in 2002, compared with $174
million in 2001. Operating revenues were down $10 million to $893 million in
2002, while operating expenses were favorable $16 million year-over-year. Lower
costs in the Shared Asset Areas, tax settlements and lower reserve requirements
for car hire, overcharges, interline and other claims helped improve 2002
results.
2001 vs. 2000
Conrail reported net income of $174 million for 2001, compared with $170
million for 2000. Operating revenues were $903 million for 2001 vs. $985 million
for 2000. Conrail 2001 results benefited from lower casualty costs and a
favorable tax settlement, while 2000 results benefited from a non-recurring gain
on the sale of property of $61 million before tax, $37 million after tax.
Operating expense totaled $639 million in 2001, compared with $749 million in
2000.
Financial Condition and Liquidity
Conrail's operating activities provided cash of $423 million in 2002,
compared with $502 million in 2001 and $362 million in 2000. The decrease in
cash provided by operations in 2002 compared to 2001 reflected large payments of
casualty claims. Cash generated from operations is the principal source of
liquidity and is primarily used for debt repayments and capital expenditures.
Debt repayments totaled $59 million, $61 million and $318 million in 2002, 2001
and 2000, respectively. Capital expenditures were $23 million, $47 million and
$220 million in 2002, 2001 and 2000, respectively.
Conrail had a working capital deficit of $29 million at December 27, 2002
and positive working capital of $438 million at December 28, 2001. The reason
for the change in working capital position was the reclassification of notes
receivable from CSX and Norfolk Southern from current to non-current due to the
renegotiation of the notes during the year. A working capital deficit is not an
issue for Conrail, as the operating leases with CSX and Norfolk Southern provide
Conrail with sufficient cash flow to meet its obligations.
Divestitures
Potential Conveyance of Domestic Container-
Shipping Assets to Joint Venture
On December 16, 2002, CSX announced that it had reached an agreement to
convey most of its interest in its domestic container-shipping subsidiary, CSX
Lines to a new venture, Horizon Lines LLC ("Horizon"), for $300 million ($240
million in cash and $60 million in securities of the new venture). CSX will
retain $319 million of vessel and equipment lease obligations that will be
subleased to the new entity through 2014. A deferred pretax gain of
approximately $137 million as a result of the transaction will be recognized
over the 12 year sub-lease term. The $60 million of securities have a term of 7
years and have an annual preferred return of 10%. CSX expects that this
transaction will close during the first quarter of 2003, subject to regulatory
approval. CSX has a preferred interest in the new venture and will account for
the investment under the cost method. The assets and liabilities of CSX Lines
that are to be conveyed under this agreement are classified as assets and
liabilities held for disposition on the statement of financial position as of
December 27, 2002 in accordance with the provisions of SFAS 144 "Accounting for
the Impairment or Disposal of Long-lived Assets."
Sale of Contract Logistics Segment
In September 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 were $335 million for 2000. CSX recorded a gain of $570
million before tax, $365 million after tax, $1.73 per share, on the sale.
- --------------------------------------------------------------------------------
CSX 2002 ANNUAL REPORT 25
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Other Matters
Claims Arising out of Sale of International Container-Shipping Assets
CSX has received a claim amounting to approximately $180 million plus
interest from Europe Container Terminals ("ECT"), owner of the Rotterdam
Container Terminal previously operated by Sea-Land Service Inc. ("Sea-Land").
ECT has claimed that the December 1999 sale of the international liner business
to Maersk resulted in a breach of the Sea-Land terminal agreements with ECT. An
initial arbitration hearing has been held to establish whether CSX is liable on
ECT's claim, and on February 10, 2003 a panel of the Netherlands Arbitration
Institute ruled that CSX was in breach of the terminal agreements. The ruling by
the panel dealt only with the existence of liability for a breach, and did not
address the level of ECT damages, if any, which will be the subject of a second
hearing before the same panel sometime in 2003. CSX disputes this claim and
believes it does not reflect the mitigating benefits ECT gained from its ability
to service other customers at the former Sea-Land facility. Management believes
that valid defenses to this claim exist but cannot estimate what, if any, loss
may result from this matter. CSX believes that Maersk is responsible for any
damages that may result from this dispute and has taken preliminary steps to
initiate an arbitration against Maersk under the purchase and sale agreement
with Maersk.
The purchase and sale agreement with Maersk provides for a postclosing
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 adjustment and this amount is currently in
dispute. This matter, together with other disputed issues relating to the
contractual obligations of the Company, have been submitted to arbitration.
Although management believes CSX will prevail in some or all of the Maersk and
ECT disputes and arbitrations, it can give no assurance in this regard. An
adverse outcome could have a material effect on the determination of the final
loss on sale of Sea-Land's International Liner business and the financial
results and cash flows in future reporting periods.
Critical Accounting Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires that management make
estimates in reporting the amounts of certain assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amount of certain revenues and expenses during the
reporting period. Actual results may differ from those estimates. Significant
estimates using management judgement are made for the following areas:
1. Casualty, legal and environmental reserves
2. Pension and postretirement medical plan accounting
3. Depreciation polices for its assets under the group-life method
These estimates and assumptions are discussed with the Company's Audit
Committee of the board of directors on a regular basis.
1. Casualty, Legal and Environmental Reserves
Casualty Reserve Management
Casualty reserves represent accruals for the uninsured portion of personal
injury, occupational injury (asbestos, carpal tunnel, etc.) and accident claims.
These reserves are recorded upon the first reporting of a claim, and estimates
are updated as information develops. The amount of liability accrued is based on
the type and severity of the claim, and an estimate of future claims development
based on current trends and historical data. The Company believes it has
recorded liabilities in sufficient amounts to cover all identified claims and
estimates of incurred but not reported personal injury and accident claims.
Unreported occupational injuries are not subject to reasonable estimation, thus
no provision is made for incurred but not reported occupational injuries.
Estimates for all of these claims are subject to significant uncertainty
relating to the outcomes of negotiated settlements and other developments. As
facts and circumstances change, the Company may have to change its estimates,
and changes could have a material impact on the Company's financial results. The
Company reviews its reserves quarterly and makes adjustments accordingly.
Adverse verdicts, catastrophic accidents and legal settlements are events that
have caused the Company to revise estimates in the past. Personal injury,
occupational injury and accident liabilities amount to $605 million and $661
million at December 27, 2002 and December 28, 2001, respectively. The net
decrease of this liability in 2002 is the result of cash payments being greater
than expense recorded.
See additional information in Note 9, Casualty, Environmental and Other
Reserves.
Legal Reserves
In accordance with SFAS 5, "Accounting for Contingencies," an accrual for a
loss contingency is established if information available prior to issuance of
the financial statements indicates that it is (1) probable that an asset has
been impaired or a liability has been incurred at the date of the financial
statements, and (2) the amount of loss can be reasonably estimated. If no
accrual is made for a loss contingency because one or both of these conditions
is not met, or if an exposure to loss exists in excess of the amount accrued,
disclosure of the contingency is made when there is at least a reasonable
possibility that a loss or an additional loss may have been incurred. The
Company evaluates all exposures relating to legal liabilities on an ongoing
basis and records reserves when appropriate under the guidance noted above. The
Company increased a reserve in 2001 to account for the impact of the negotiated
settlement of the New Orleans tank car fire. This negotiation resulted in the
Company recording an additional charge of $60 million before tax, $43 million
after tax, 17 cents per share in 2001.
Environmental Management
CSXT is a party to various proceedings involving private parties and
regulatory agencies related to environmental issues. CSXT has been identified as
a potentially responsible party ("PRP") at approximately 94 environmentally
impaired sites that are, or may be subject to, remedial
- --------------------------------------------------------------------------------
26 CSX 2002 ANNUAL REPORT
Management's Discussion and Analysis of
Financial Condition and Results of Operations
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
clean-up, which could be substantial.
CSXT is involved in a number of administrative and judicial proceedings and
other clean-up efforts at approximately 230 sites which include the 94 Superfund
sites where it is participating in the study or clean-up of alleged
environmental contamination. At least once each quarter, CSXT reviews its role,
if any, with respect to each such location, giving consideration to a number of
factors, including the nature of CSXT's alleged connection to the location
(e.g., generator of waste sent to the site, or owner or operator of the site),
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
viability of other named and unnamed PRPs at the location.
Based on the review process, CSXT has recorded reserves to cover estimated
contingent future environmental costs with respect to such sites. The recorded
liabilities for estimated future environmental costs at December 27, 2002 and
December 28, 2001, were $35 million and $32 million, respectively. These
liabilities, which are undiscounted, include amounts representing CSXT's
estimate of unasserted claims, which CSXT believes to be immaterial. The
liability includes future costs for all sites where the Company's obligation is
(1) deemed probable and (2) 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 December 27, 2002, environmental
liability is expected to be paid out over the next 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 on information currently
available, however, the Company believes its environmental reserves are adequate
to accomplish remedial actions to comply with present laws and regulations, and
that the ultimate liability for these matters will not materially affect its
overall results of operations and financial condition. The Company has not had
any material changes in estimates relating to environmental reserves in 2002,
2001 or 2000 and has spent $14 million, $10 million and $12 million,
respectively, in these years.
See additional information at Note 9, Casualty, Environmental and Other
Reserves.
2. Pension and Postretirement Medical Plan Accounting
The Company sponsors defined benefit pension plans, principally for salaried
personnel. The plans provide eligible employees with retirement benefits based
principally on years of service and compensation rates near retirement.
In addition to the defined benefit pension plans, the Company sponsors three
plans that provide medical and life insurance benefits to most full-time
salaried employees upon their retirement. The postretirement medical plans are
contributory (partially funded by retiree), with retiree contributions adjusted
annually. The life insurance plan is non-contributory.
The benefit obligation for these plans represents the liability of the
Company for current and retired employees and is affected primarily by the
following:
1. Service cost (benefits attributed to employee service during the period)
2. Interest cost (interest on the liability due to the passage of time)
3. Actuarial gains/losses (experience during the year different from that
assumed and changes in plan assumptions)
4. Benefits paid to participants
Plan assets are amounts that have been segregated and restricted to provide
benefits, and include amounts contributed by the Company and amounts earned from
investing contributions, less benefits paid. The pension plans are funded at not
less than the minimum funding standards set forth in the Employee Retirement
Income Security Act of 1974. Plan assets consist primarily of common stocks,
corporate bonds and cash and cash equivalents. The Company funds the cost of the
postretirement medical and life insurance benefits on a pay-as-you-go basis.
The accounting for these plans is subject to the guidance provided in SFAS
No. 87, "Employers Accounting for Pensions," and SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other than Pensions." Both of these
statements require that management make certain assumptions relating to the
following:
1. Long-term rate of return of plan assets
2. Discount rates used to measure future obligations and interest expense
3. Salary scale inflation rates
4. Health care cost trend rates and other assumptions.
All of these assumptions and estimates can have a significant impact on the
Company's accounting for these plans and the amount of expense recorded in a
reporting period. These assumptions are made as of the beginning of the year.
The Company uses a plan year of Oct. 1 through Sept. 30 to value its pension and
postretirement plans on an actuarial basis. As permitted by SFAS 87, the Company
has elected to use this fiscal year as it provides for more timely analysis. The
Company engages third-party actuaries to compute the amounts of liabilities and
expenses relating to these plans subject to the assumptions that the Company
selects for its plans. The Company reviews its actuarial assumptions on an
annual basis and makes modifications to the assumptions based on current rates
and trends when appropriate. The effects of such modifications are amortized
over future periods in accordance with proper accounting guidance.
Long-term Rate of Return on Plan Assets
The expected return on the Company's pension plan assets is based on the
Company's expectation of the long-term average rate of return on
CSX 2002 ANNUAL REPORT 27
Management's Discussion and Analysis of
Financial Condition and Results of Operations
assets in the pension funds, which is reflective of the current and projected
asset mix of the funds. As this estimate is long-term, it is not adjusted as
frequently as other assumptions used in pension accounting. However, the impact
of the last few years overall market returns did cause CSX to reevaluate the
rate used in calculating its liability at September 30, 2002 (the end of the
measurement period for 2002) and adjust it from 9.5% to 8.9%. This change will
increase the amount of pension expense reported in future periods. CSX will
continue to evaluate its performance on an ongoing basis and if appropriate will
adjust the long-term rate of return.
Discount Rates
Discount rates are based on comparable rates for long-term liabilities that
reflect a similar time horizon to payments that the Company will make for
pension and postretirement medical payments. This assumption is analyzed every
year and adjusted accordingly. The discount rate impacts the amount of liability
recorded and also the amount of the interest expense component of pension and
postretirement expense. CSX's assumed discount rates used in calculating the
liability at September 30, 2002 and September 30, 2001, respectively, were 6.5%
and 7.25% for the pension liabilities and 5.5% and 7.25% for postretirement
medical benefits. The difference between the rate used for pension vs.
postretirement is due to the different time horizon of future payments.
Salary Scale Inflation
Salary scale inflation rates are based on current trends and historical data
accumulated by the Company. The Company reviews this assumption on a regular
basis and makes adjustments when appropriate. CSX lowered this rate from 4.5% to
3.3% at September 2002 to better reflect actual increases to employee
compensation based on historical data.
Health Care Cost Trend Rates
The health care cost trend rate is based on current trends and historical
data. Due to the increasing costs of providing health care benefits, the Company
increased the inflation assumption for health care costs for the 2002 year. The
current assumed rate is 11 % decreasing gradually until reaching 5% in 2006.
Pension Postretirement
Benefits Benefits
------------------------------------
2002 2001 2002 2001
- ----------------------------------------------------------------
Expected Long-term Return
on Plan Assets:
Benefit Cost for Plan Year 9.50% 9.50% n/a n/a
Benefit Obligation at End
of Plan Year 8.90% 9.50% n/a n/a
Discount Rates:
Benefit Cost for Plan Year 7.25% 7.75% 7.25% 7.75%
Benefit Obligation at End
of Plan Year 6.50% 7.25% 5.50% 7.25%
Salary Scale Inflation 3.30% 4.50% 3.30% 4.50%
- ----------------------------------------------------------------
Other Assumptions Relating to Pensions and Postretirement Benefits
The calculations made by the actuaries also include assumptions relating to
mortality rates, turnover, and retirement age. These assumptions are based on
historical data and are approved by management.
As a result of changes in assumptions for fiscal year 2003, net periodic
pension benefit cost is expected to increase approximately $15 million. The
postretirement net periodic benefit cost is expected to remain flat due to
changes made to benefits provided to retirees.
3. Depreciation Policies Under the Group-Life Method
The Company accounts for its rail assets, including main-line track,
locomotives and freight cars, using the group-life method. These assets are 94%
of the Company's total fixed assets and amount to $12.5 billion on a net basis
at December 27, 2002. Under the group-life method, the useful lives of rail
assets are determined by the performance of a life-study which includes:
o statistical analysis of historical retirements for each group of property
o evaluation of the current operations
o previous assessment of the condition of the assets and outlook for their
continued use
o comparison of assets to the same asset groups with other companies.
The results of the life study process determine the service lives for each
asset group. These studies are conducted by a third party expert and analyzed by
the Company's management. Changes in asset lives due to the results of the life
studies could significantly impact future periods depreciation expense and thus
the Company's results of operations. Events that could cause the Company to
change its estimates relating to the lives of its asset groups could be changes
in historical results, technological improvements and changes in specific
assets. The Company is currently completing life studies on road, track and
equipment and will reflect the results in its 2003 financial statements.
New Accounting Pronouncements and Change in Accounting Policy
New Accounting Pronouncements
In 2001, Statement of Financial Accounting Standard ("SFAS") 142, "Goodwill
and Other Intangible Assets", was issued. Under the provisions of SFAS 142,
goodwill and other indefinite lived intangible assets are no longer amortized,
but are reviewed for impairment on a periodic basis. The Company adopted this
standard for fiscal 2002, and incurred a pretax charge of $83 million, $43
million after tax and minority interest, or 20 cents per share as a cumulative
effect of an accounting change, which represents the difference between book
value and the fair value of indefinite lived intangible assets. These indefinite
lived intangible assets are permits and licenses that the Company holds relating
to a proposed pipeline to transfer natural gas from Alaska's North Slope to the
port in Valdez, Alaska. The fair value was determined using a discount method of
projected future cash flows relating to these assets. The carrying value of
these assets is now approximately $3 million. The adoption of SFAS 142 did not
have a material effect on prior reporting periods, and the Company does not
believe it will have a material effect on future earnings. The Company does not
have any other indefinite lived intangible assets.
- --------------------------------------------------------------------------------
28 CSX 2002 ANNUAL REPORT
Management's Discussion and Analysis of
Financial Condition and Results of Operations
In 2002, SFAS 143, "Accounting for Asset Retirement Obligations" was issued.
This statement addresses financial accounting and reporting for legal
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. CSX is required to adopt this statement for
fiscal year 2003. Under the group-life method the Company accrues removal costs
as part of its depreciation expense. This effectively results in establishing a
liability in accumulated depreciation in excess of any salvage value for cross
ties. The Company is assessing the effect of adopting this statement and expects
that it will record a cumulative effect of accounting change to remove any such
liability accrued to date in the first quarter of 2003. On an ongoing basis,
depreciation expense will be reduced, while materials, supplies and other
expense will be increased. The change in operating income is expected to be
immaterial.
In 2002, SFAS 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets," was issued. This statement requires that long-lived assets to be
disposed of by sale are no longer measured on a net realizable value basis, and
future operating losses are no longer recognized before they occur. In addition,
this statement modifies the reporting requirements for discontinued operations.
Long-lived assets, whether to be held for disposition or held and used, should
be measured at the lower of its carrying amount or fair value less cost to
dispose. The Company is following this statement relating to the accounting for
its wholly-owned subsidiary, CSX Lines, which is being conveyed to a third party
(See Note 3, Divestitures).
In 2002, the FASB issued Financial Accounting Standard Interpretation
("FASI") No. 45, "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others." This
statement requires that certain guarantees entered into be recorded at fair
value on the statement of financial position and additional disclosures be made
about guarantees. CSX is required to adopt the accounting provisions of this
statement in fiscal year 2003, but meets the disclosure requirements for the
year ended December 27, 2002. (See Note 17, Commitments and Contingencies).
Change in Accounting Policy
Beginning in 2003, the Company will begin accounting for stock-based
compensation in accordance with SFAS 123, "Accounting for Stock-Based
Compensation," or the fair value method of accounting for future stock awards on
a prospective basis. Under SFAS 123, discounts on stock purchase plans and the
fair value of restricted stock and options at date of grant are charged to
compensation costs over the vesting or performance period.
Factors Expected to Influence 2003
Fuel expenses fluctuate and are a significant cost of CSX's transportation
businesses. So far in 2003, fuel expenses are significantly higher than in 2002.
For the first quarter of 2003, the net effect of fuel expenses is expected to be
approximately $35 million above the 2002 first quarter. The full year impact of
fuel expenses cannot be estimated with reasonable certainty.
Severe winter storms and flooding in the Northeast during January and
February caused significant service interruptions for Surface Transportation.
While the costs and loss of revenue from these events are still to be
determined, they could have a material impact on the Company's first quarter
earnings.
The conveyance of CSX Lines is expected to close in the first quarter of
2003, whereupon CSX will receive cash proceeds of $240 million. CSX will
maintain a preferred interest in the new company.
The resignation of John W. Snow, chairman and chief executive officer, was
effective on February 3, 2003. Charges associated with his departure, primarily
retirement benefits, total approximately $15 million, which will be expensed in
the first quarter of 2003.
Forward-looking Statements
This Annual Report contains forward-looking statements within the meaning of
the Private Securities Litigation Reform Act with respect to, among other items:
projections and estimates of earnings, revenues, cost-savings, expenses, or
other financial items; statements of management's plans, strategies and
objectives for future operations, and management's expectations as to future
performance and operations and the time by which objectives will be achieved;
statements concerning proposed new products and services; and statements
regarding future economic, industry or market conditions or performance.
Forward-looking statements are typically identified by words or phrases such as
"believe", "expect", "anticipate", "project", and similar expressions.
Forward-looking statements speak only as of the date they are made, and the
Company undertakes no obligation to update or revise any forward-looking
statement. If the Company does update any forward-looking statement, no
inference should be drawn that the Company will make additional updates with
respect to that statement or any other forward-looking statements.
Forward-looking statements are subject to a number of risks and
uncertainties, and actual performance or results could differ materially from
that anticipated by these forward-looking statements. Factors that may cause
actual results to differ materially from those contemplated by these
forward-looking statements include, among others: (i) the Company's success in
implementing its financial and operational initiatives, (ii) changes in domestic
or international economic or business conditions, including those affecting the
rail industry (such as the impact of industry competition, conditions,
performance and consolidation); (iii) legislative or regulatory changes; and
(iv) the outcome of claims and litigation involving or affecting the Company.
Other important assumptions and factors that could cause actual results to
differ materially from those in the forward-looking statements are specified
elsewhere in this Annual Report and in the Company's other SEC reports,
accessible on the SEC's website at www.sec.gov and the Company's website at
www.csx.com.
CSX 2002 ANNUAL REPORT 29
Financial Statements
--------------------
Consolidated Statement of Earnings
(Millions of Dollars, Except Per Share Amounts)
Fiscal Years Ended
-----------------------------------------------------
Dec. 27, 2002 Dec. 28, 2001 Dec. 29, 2000
-----------------------------------------------------
Operating Income
Operating Revenue $ 8,152 $ 8,110 $ 8,191
Operating Expense 7,025 7,153 7,386
-----------------------------------------------------
Operating Income 1,127 957 805
Other Income and Expense
Other Income 41 9 22
Interest Expense 445 518 550
-----------------------------------------------------
Earnings
Earnings from Continuing Operations Before Income Taxes 723 448 277
Income Tax Expense 256 155 91
-----------------------------------------------------
Earnings before Discontinued Operations and
Cumulative Effect of Accounting Change 467 293 186
Earnings from Discontinued Operations, Net of Tax of $10 -- -- 14
Gain on Sale of Discontinued Operations, Net of Tax of $205 -- -- 365
-----------------------------------------------------
Earnings before Cumulative Effect of Accounting Change 467 293 565
Cumulative Effect on Prior Years of Accounting Change for
Indefinite Lived Intangible Assets, Net of Tax of $36 (43) -- --
-----------------------------------------------------
Net Earnings
$ 424 $ 293 $ 565
Per Common Share
Earnings Per Share:
Before Discontinued Operations and
Cumulative Effect of Accounting Change $ 2.20 $ 1.39 $ .88
Earnings from Discontinued Operations -- -- .07
Gain on Sale of Discontinued Operations -- -- 1.73
Cumulative Effect of Accounting Change (0.20) -- --
-----------------------------------------------------
Including Discontinued Operations and
Cumulative Effect of Accounting Change $ 2.00 $ 1.39 $ 2.68
-----------------------------------------------------
Earnings Per Share, Assuming Dilution:
Before Discontinued Operations and
Cumulative Effect of Accounting Change $ 2.19 $ 1.38 $ .88
Earnings from Discontinued Operations -- -- .06
Gain on Sale of Discontinued Operations -- -- 1.73
Cumulative Effect of Accounting Change (0.20) -- --
-----------------------------------------------------
Including Discontinued Operations and
Cumulative Effect of Accounting Change $ 1.99 $ 1.38 $ 2.67
-----------------------------------------------------
Average Common Shares Outstanding (Thousands) 212,729 211,668 210,942
Average Common Shares Outstanding,
Assuming Dilution (Thousands) 213,512 212,409 211,314
Cash Dividends Paid Per Common Share $ .40 $ .80 $ 1.20
- -------------------------------------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements.
- --------------------------------------------------------------------------------
30 CSX 2002 ANNUAL REPORT
Financial Statements
- --------------------------------------------------------------------------------
Consolidated Statement of Cash Flows
- --------------------------------------------------------------------------------
(Millions of Dollars)
Fiscal Years Ended
-------------------------------------------------------
Dec. 27, 2002 Dec. 28, 2001 Dec. 29, 2000
- ---------------------------------------------------------------------------------------------------------------------------
Operating Activities
Net Earnings $ 424 $ 293 $ 565
Adjustments to Reconcile Net Earnings to Net Cash Provided:
Depreciation 649 622 600
Deferred Income Taxes 172 197 152
Cumulative Effect of Accounting Change, Net of Tax 43 -- --
Gain on Sale of Logistics Subsidiary -- -- (365)
Equity in Conrail Earnings - Net (23) (17) (4)
Other Operating Activities (85) 4 (13)
Changes in Operating Assets and Liabilities:
Accounts Receivable 30 7 351
Other Current Assets 23 (17) (93)
Accounts Payable (83) (51) (114)
Other Current Liabilities (23) (211) (369)
-------------------------------------------------------
Net Cash Provided by Operating Activities 1,127 827 710
- ---------------------------------------------------------------------------------------------------------------------------
Investing Activities
Property Additions (1,080) (930) (913)
Short-term Investments - Net 350 (51) (85)
Net Proceeds from Divestitures and Sale of Assets -- -- 650
Other Investing Activities (45) 16 11
-------------------------------------------------------
Net Cash Used by Investing Activities (775) (965) (337)
- ---------------------------------------------------------------------------------------------------------------------------
Financing Activities
Short-term Debt - Net 140 (524) (225)
Long-term Debt Issued 748 962 588
Long-term Debt Repaid (1,159) (266) (751)
Dividends Paid (86) (171) (262)
Common Stock Reacquired -- -- (42)
Other Financing Activities (5) 14 (47)
-------------------------------------------------------
Net Cash (Used) Provided by Financing Activities (362) 15 (739)
- ---------------------------------------------------------------------------------------------------------------------------
Net Decrease in Cash and Cash Equivalents (10) (123) (366)
Cash, Cash Equivalents and Short-term Investments
Cash and Cash Equivalents at Beginning of Year 137 260 626
-------------------------------------------------------
Cash and Cash Equivalents at End of Year 127 137 260
Short-term Investments at End of Year 137 481 426
-------------------------------------------------------
Cash, Cash Equivalents and Short-term Investments at End of Year $ 264 $ 618 $ 686
- ---------------------------------------------------------------------------------------------------------------------------
Supplemental Cash Flow Information
Interest Paid - Net of Amounts Capitalized $ 448 $ 509 $ 553
Income Taxes Paid $ 44 $ 250 $ 14
- ---------------------------------------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements.
- --------------------------------------------------------------------------------
CSX 2002 ANNUAL REPORT 31
Financial Statements
- --------------------------------------------------------------------------------
Consolidated Statement of Financial Position
(Millions of Dollars)
Dec. 27, 2002 Dec. 28, 2001
- --------------------------------------------------------------------------------------------
Assets
Current Assets
Cash, Cash Equivalents and Short-term Investments $ 264 $ 618
Accounts Receivable - Net 799 871
Materials and Supplies 180 191
Deferred Income Taxes 128 162
Assets Held for Disposition 263 244
Other Current Assets 155 198
-------------------------------
Total Current Assets 1,789 2,284
-------------------------------
Properties 18,560 17,760
Accumulated Depreciation 5,274 4,913
-------------------------------
Properties - Net 13,286 12,847
-------------------------------
Investment in Conrail 4,653 4,655
Affiliates and Other Companies 381 297
Other Long-term Assets 842 718
-------------------------------
Total Assets $ 20,951 $ 20,801
- --------------------------------------------------------------------------------------------
Liabilities
Current Liabilities
Accounts Payable $ 802 $ 905
Labor and Fringe Benefits Payable 457 409
Casualty, Environmental and Other Reserves 246 248
Current Maturities of Long-term Debt 391 1,044
Short-term Debt 143 225
Income and Other Taxes Payable 144 100
Liabilities Held for Disposition 104 92
Other Current Liabilities 167 284
-------------------------------
Total Current Liabilities 2,454 3,307
-------------------------------
Casualty, Environmental and Other Reserves 604 687
Long-term Debt 6,519 5,839
Deferred Income Taxes 3,567 3,621
Other Long-term Liabilities 1,566 1,227
-------------------------------
Total Liabilities 14,710 14,681
- --------------------------------------------------------------------------------------------
Shareholders' Equity
Common Stock, $1 Par Value 215 214
Other Capital 1,547 1,492
Retained Earnings 4,797 4,459
Accumulated Other Comprehensive Loss (318) (45)
-------------------------------
Total Shareholders' Equity 6,241 6,120
-------------------------------
Total Liabilities and Shareholders' Equity $ 20,951 $ 20,801
- --------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements.
- --------------------------------------------------------------------------------------------
32 CSX 2002 ANNUAL REPORT
Financial Statements
Consolidated Statement of Changes in Shareholders' Equity
(Millions of Dollars)
Accumulated
Common Stock Other
Outstanding Common Other Retained Comprehensive
(Thousands) Stock Capital Earnings Loss Total
- --------------------------------------------------------------------------------------------------------------------------
Balance Dec. 31, 1999 218,444 $ 218 $ 1,525 $ 4,034 $ (21) $ 5,756
Comprehensive Earnings:
Net Earnings - - - 565 - 565
Adjustment of Minimum Pension Liability,
Net of $8 Income Taxes - - - - 15 15
Other - Net - - - - 6 6
---------
Comprehensive Earnings 586
---------
Dividends - - - (262) - (262)
Stock Purchase and Loan Plan Exchange (5,505) (5) (29) - - (34)
Common Stock Issued (Repurchased) - Net (201) - (29) - - (29)
- --------------------------------------------------------------------------------------------------------------------------
Balance Dec. 29, 2000 212,738 213 1,467 4,337 - 6,017
Comprehensive Earnings:
Net Earnings - - - 293 - 293
Adjustment of Minimum Pension Liability,
Net of $10 Income Taxes - - - - (45) (45)
---------
Comprehensive Earnings 248
---------
Dividends - - - (171) - (171)
Common Stock Issued (Repurchased) - Net 950 1 25 - - 26
- --------------------------------------------------------------------------------------------------------------------------
Balance Dec. 28, 2001 213,688 214 1,492 4,459 (45) 6,120
Comprehensive Earnings:
Net Earnings - - - 424 - 424
Adjustment of Minimum Pension Liability,
Net of $152 Income Taxes - - - - (273) (273)
---------
Comprehensive Earnings 151
---------
Dividends - - - (86) - (86)
Common Stock Issued (Repurchased) - Net 999 1 55 - - 56
- --------------------------------------------------------------------------------------------------------------------------
Balance Dec. 27, 2002 214,687 $ 215 $ 1,547 $ 4,797 $(318) $ 6,241
See accompanying Notes to Consolidated Financial Statements.
CSX 2002 ANNUAL REPORT 33
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Note I. Significant
Accounting Policies
Nature of Operations
CSX Corporation, including its majority-owned subsidiaries (collectively,
"CSX" or "Company"), is a freight transportation company with principal business
units providing rail, intermodal, international terminal and domestic
container-shipping services.
o Rail transportation services are provided principally throughout the
Eastern United States and accounted for 74% of the Company's 2002
operating revenue.
o Intermodal services are provided through a dedicated network of
terminals and facilities across North America and accounted for 14% of
operating revenue in 2002.
o International terminal operations are located in Asia, Europe,
Australia, Latin America and the United States and accounted for 3% of
operating revenues in 2002.
o Domestic container-shipping services trade between ports on the United
States mainland and Alaska, Hawaii/Guam and Puerto Rico and accounted
for 9% of operating revenues in 2002. On December 16, 2002, CSX
entered into an agreement to convey most of its interest in its
domestic container-shipping company, CSX Lines LLC for cash and
securities of a new venture, Horizon Lines LLC ("Horizon") (See Note
3, Divestitures). The Company expects this transaction to close in the
first quarter of 2003.
Rail shipments include merchandise, automotive products and coal, coke and
iron ore. Shipments as a percent of rail revenue are as follows:
Fiscal Years Ended
--------------------
2002 2001
------------------------------------------------------
Merchandise 58% 57%
Automotive 14% 13%
Coal, Coke and Iron Ore 27% 29%
Other 1% 1%
---------------------
Total 100% 100%
------------------------------------------------------
Merchandise traffic includes the following markets:
Phosphates and Fertilizer Metals
Food and Consumer Agricultural
Paper and Forest Chemicals
Minerals Emerging Markets
Coal shipments originate mainly from mining locations in the Eastern United
States and primarily supply domestic utility and export markets.
Principles of Consolidation
The consolidated financial statements include CSX and its majority-owned
subsidiaries. All significant intercompany accounts and transactions have been
eliminated. Investments in companies that are not majority-owned are carried at
cost (if less than 20% owned and the Company has no significant influence) or
equity (if the Company has significant influence).
Fiscal Year
CSX follows a 52/53 week fiscal reporting calendar. Fiscal years 2002, 2001
and 2000 consisted of 52 weeks. A 52-week fiscal year has four 13-week quarters.
A 53-week year occurs periodically with the next one occurring in 2004. Fiscal
years 2002, 2001 and 2000 ended on:
o December 27, 2002
o December 28, 2001
o December 29, 2000
Earnings Per Share
Basic earnings per share is calculated by dividing income available to
common stockholders by the weighted-average number of common shares outstanding
during the period. Earnings per share, assuming dilution, starts with the basic
calculation described above and adjusts the denominator for the effect of
potential dilution of common shares during the period, mainly from employee
stock options. This difference increases the denominator for the additional
common shares that would have been outstanding if these shares had been issued.
Potentially dilutive common shares at CSX include stock options and awards, and
shares that would be issued relating to convertible long-term debt. References
to earnings per share in the Notes to Consolidated Financial Statements assume
dilution.
Cash, Cash Equivalents and Short-term Investments
On a daily basis, cash in excess of current operating requirements is
invested in various highly liquid investments having a maturity of three months
or less at the date of acquisition. These investments are carried at cost, which
approximates market value, and are classified as cash equivalents. At December
28, 2001, short-term investments included $220 million of deposits relating to
the New Orleans litigation settlement that was paid in 2002.
Materials and Supplies
Materials and supplies consist primarily of fuel and items for replacement
and maintenance of track and equipment, and are carried at average cost.
Properties
All properties are stated at cost less an allowance for accumulated
depreciation. Rail assets, including main-line track, locomotives and freight
cars are depreciated using the group-life method. This method pools similar
assets by road and equipment type and then depreciates each group as a whole.
Approximately 94% of the Company's total
- ------------------------------------------------------------------------------
34 C S X 2002 ANNUAL REPORT
Notes to Consolidated Financial Statements
property is accounted for under the group life method. The majority of other
property is depreciated using the straight-line method on a per asset basis.
Regulations enforced by the Surface Transportation Board ("STB") of the U.S.
Department of Transportation require periodic formal studies of ultimate service
lives for all railroad assets. Resulting service life estimates are subject to
review and approval by the STB. Road assets, including main-line track, have
estimated service lives ranging from 7 to 81 years. Equipment assets, including
locomotives and freight cars, have estimated service lives ranging from 5 to 28
years.
For retirements or disposals of depreciable rail assets that occur in the
ordinary course of business, the asset cost (net of salvage value or sales
proceeds) is charged to accumulated depreciation and no gain or loss is
recognized. For retirements or disposals of non-rail depreciable assets,
infrequent disposal of rail assets outside the normal course of business and for
all dispositions of land, the resulting gains or losses are recognized at the
time of disposal. Expenditures that significantly increase asset values or
extend useful lives are capitalized. Repair and maintenance expenditures are
charged to operating expense when the work is performed.
Properties and other long-lived assets are reviewed for impairment whenever
events or business conditions indicate the carrying amount of such assets may
not be fully recoverable. Initial assessments of recoverability are based on
estimates of undiscounted future net cash flows associated with an asset or a
group of assets. Where impairment is indicated, the assets are evaluated, and
their carrying amount is reduced to fair value based on discounted net cash
flows or other estimates of fair value.
Revenue and Expense Recognition
Surface Transportation (rail and intermodal) revenue and expense are
recognized proportionately as freight moves from origin to destination. Marine
transportation (container-shipping) revenue, and a corresponding accrual for the
estimated cost to complete delivery, are recorded when cargo first sails from
its port of origin. All other revenue is recorded upon completion of service.
Environmental Costs
The Company incurs costs for environmental corrective efforts, such as the
study and clean-up of environmental contamination. Environmental costs are
charged to expense when they relate to an existing condition caused by past
operations and do not contribute to current or future revenue generation.
Liabilities for environmental corrective efforts are recorded when CSX's
responsibility is (1) deemed probable and (2) the amount can be reasonably
estimated. Generally, the timing of these accruals coincides with the completion
of a feasibility study or the Company's commitment to a formal plan of action.
Environmental reserves at December 27, 2002 and December 28, 2001 were $35
million and $666 million, respectively.
Casualty Reserves
Casualty reserves represent accruals for the uninsured portion of personal
injury, occupational injury (asbestos, carpal tunnel, etc.) and accident claims.
These reserves are recorded upon the first reporting of a claim, and estimates
are updated as information develops. The amount of liability accrued is based on
the type and severity of the claim and an estimate of future claims development
based on current trends and historical data. The Company believes it has
recorded liabilities in sufficient amounts to cover all identified claims and
estimates of incurred but not reported personal injury and accident claims.
Unreported occupational injuries are not subject to reasonable estimation, thus
no provision is made for incurred but not reported occupational injuries.
Personal injury, occupational injury and accident liabilities amount to $605
million and $666 million at December 27, 2002 and December 28, 2001,
respectively.
Stock-based Compensation
The Company records expense for stock-based compensation in accordance with
the provisions of Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees," and related Interpretations.
Disclosures required with respect to the alternative fair value measurement
and recognition methods prescribed by Statement of Financial Accounting
Standards ("SFAS") No. 123, "Accounting for StockBased Compensation," are
presented in Note 14 - Stock Plans. CSX will adopt the full provisions of SFAS
123 effective with fiscal year 2003. The impact of adopting this standard is
that the Company will record expense over the vesting period for the issuance of
future stock awards. The amount of expense will be the fair value of the awards
using the BlackScholes valuation method.
Comprehensive Earnings
CSX reports comprehensive earnings (loss) in accordance with SFAS 130,
"Reporting Comprehensive Income," in the Consolidated Statement of Changes in
Shareholders' Equity. Comprehensive earnings is defined as all changes in
shareholders' equity during a period, other than those resulting from
investments by and distributions to shareholders (i.e., issuance of equity
securities and dividends). Accumulated other comprehensive loss at December 27,
2002 and December 28, 2001 consists primarily of minimum pension liabilities of
$318 million and $45 million, respectively which includes $55 million and $30
million, respectively of the minimum pension liability at Conrail. This is
included in CSX's shareholders' equity as required by APB Opinion No. 18, "The
Equity Method of Accounting for Investments in Common Stock."
Derivative Financial Instruments
The Company recognizes all derivatives as either assets or liabilities in
the statement of financial position and measures those instruments at fair
value.
CSX 2002 ANNUAL REPORT 35
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
The Company has entered into several interest rate swaps to hedge interest
rate risk exposure. CSX's interest rate swaps are designated and qualify as fair
value hedges under SFAS 133, "Accounting for Derivative Instruments and Hedging
Activities." For derivative instruments that are designated and qualify as a
fair value hedge, the gains and losses 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.
If the change in the value of the hedging instrument offsets the change in the
value of the hedged item, the hedge is considered perfectly effective. 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, the
amount by which the change in the value of the hedge does not exactly offset the
change in the value of the hedged item, is recognized immediately in earnings.
The company's interest rate swaps qualify as perfectly effective fair value
hedges. As such, there is no ineffective portion to the hedge recognized in
earnings. Adjustments to the fair value of the interest rate swap agreements are
recorded in other assets and other liabilities.
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.
New Accounting Pronouncements
In 2001, SFAS 142, "Goodwill and Other Intangible Assets," was issued. Under
the provisions of SFAS 142, goodwill and other indefinite lived intangible
assets are no longer amortized, but are reviewed for impairment on a periodic
basis. The Company adopted this standard for fiscal 2002, and incurred a pretax
charge of $83 million, $43 million after tax and minority interest, or 20 cents
per share as a cumulative effect of an accounting change, which represents the
difference between book value and the fair value of indefinite lived intangible
assets. These indefinite lived intangible assets are permits and licenses that
the Company holds relating to a proposed pipeline to transfer natural gas from
Alaska's North Slope to the port in Valdez, Alaska. The fair value was
determined using a discount method of projected future cash flows relating to
these assets. The carrying value of these assets is now approximately $3
million. The adoption of SFAS 142 did not have a material effect on prior
reporting periods, and the Company does not believe it will have a material
effect on future earnings. The Company does not have any other indefinite lived
intangible assets.
In 2002, SFAS 143, "Accounting for Asset Retirement Obligations," was
issued. This statement addresses financial accounting and reporting for legal
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. CSX is required to adopt this statement for
fiscal year 2003. Under the group-life method, the Company accrues removal costs
as part of its depreciation expense. This effectively results in establishing a
liability in accumulated depreciation in excess of any salvage value for cross
ties. The Company is assessing the effect of adopting this statement and expects
that it will record a cumulative effect of accounting change to remove any such
liability accrued to date in the first quarter of 2003. On an ongoing basis,
depreciation expense will be reduced, while materials, supplies and other
expense will be increased. The change in operating income is expected to be
immaterial.
In 2002, SFAS 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" was issued. This statement requires that long-lived assets to be
disposed of by sale are no longer measured on a net realizable value basis, and
future operating losses are no longer recognized before they occur. In addition,
this statement modifies the reporting requirements for discontinued operations.
Long-lived assets, whether to be held for disposition or held and used, should
be measured at the lower of its carrying amount or fair value less cost to
dispose. The Company is following this statement relating to the accounting for
its wholly-owned subsidiary, CSX Lines, which is being conveyed to a third party
(See Note 3, Divestitures).
In 2002, the FASB issued Financial Accounting Standard Interpretation
("FAST") No. 45, "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others." This
statement requires that certain guarantees be recorded at fair value on the
statement of financial position and additional disclosures be made about
guarantees. CSX is required to adopt the accounting provisions of this statement
in fiscal year 2003, but meets the disclosure requirements for the year ended
December 27, 2002 (See Note 17, Commitments and Contingencies).
Prior-year Data
Certain prior-year data has been reclassified to conform to the 2002
presentation.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires that management make
estimates in reporting the amounts of certain assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amount of certain revenues and expenses during the
reporting period. Actual results may differ from those estimates. Significant
estimates using management judgement are
- -------------------------------------------------------------------------------
36 CSX 2002 ANNUAL REPORT
Notes to Consolidated Financial Statements
made for the following areas:
1. Casualty, legal and environmental reserves
2. Pension and postretirement medical plan accounting
3. Depreciation polices for its assets under the group-life method
Note 2. 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 throughout 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 operate over allocated portions of the Conrail
lines.
The rail subsidiaries of CSX and Norfolk Southern operate their respective
portions of the Conrail system pursuant to various operating agreements. 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 ("Shared Asset Areas") for the
joint benefit of CSX and Norfolk Southern, for which it is compensated on the
basis of usage by the respective railroads.
Accounting and Financial Reporting Effects
CSX's rail and intermodal operating revenue includes revenue from traffic
previously moving on Conrail. Operating expenses include costs incurred to
handle that traffic and operate the former Conrail lines. Rail operating expense
includes an expense category, "Conrail Operating Fees, Rents and Services,"
which reflects:
1. Right of way usage fees and equipment rental payments to Conrail
2. Transportation, switching, and terminal service charges provided by
Conrail in the Shared Asset Areas that Conrail operates for the joint
benefit of CSX and Norfolk Southern
3. Amortization of the fair value write-up arising from the acquisition of
Conrail
4. CSX's 42% share of Conrail's net income or loss recognized under the
equity method of accounting.
Detail of Conrail Operating Fees,
Rents and Services
Fiscal Years Ended
-------------------------------
(millions of dollars) 2002 2001 2000
- ------------------------------------------------------------------
Rents and Services $ 346 $ 353 $ 383
Purchase Price Amortization
and other 52 56 65
Equity in Income of Conrail (76) (73) (71)
-------------------------------
Total $ 322 $ 336 $ 377
- ------------------------------------------------------------------
Conrail Financial Information
Summarized financial information for Conrail as follows:
Years Ended Dec. 31,
------------------------------
(millions of dollars) 2002 2001 2000
- ------------------------------------------------------------------
Income Statement Information:
Revenues $893 $903 $985
Expenses 623 639 749
-------------------------------
Operating Income $270 $264 $236
-------------------------------
Net Income $180 $174 $170
- ------------------------------------------------------------------
Dec.31,
-----------------
(millions of dollars) 2002 2001
- ------------------------------------------------------------------
Balance Sheet Information:
Current Assets $ 300 $ 846
Property and Equipment and Other Assets 7,857 7,236
----------------
Total Assets $8,157 $8,082
----------------
Current Liabilities $ 329 $ 408
Long-term Debt 1,123 1,156
Other Liabilities 2,479 2,413
----------------
Total Liabilities 3,931 3,977
Stockholders' Equity 4,226 4,105
----------------
Total Liabilities and Stockholders'
Equity $8,157 $8,082
- ------------------------------------------------------------------
Conrail's 2002 Results
Conrail reported net income of $180 million in 2002, compared with $174
million in 2001. Operating revenues were down $10 million to $893 million in
2002 while operating expenses were favorable $16 million year-over-year. Lower
costs in the Shared Asset Areas, tax settlements and lower reserve requirements
for car hire, overcharges, interline and other claims helped improve 2002
results.
CSX 2002 ANNUAL REPORT 37
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Transactions with Conrail
As listed below, CSX has amounts payable to Conrail, representing expenses
incurred under the operating, equipment and shared area agreements with Conrail.
Also, Conrail advances its available cash balances to CSX and Norfolk Southern
under variable-rate notes, with CSX's note maturing on March 28, 2007.
Dec. 27, Dec. 28,
(millions of dollars) 2002 2001
- --------------------------------------------------------------------------------
CSX Payable to Conrail $ 69 $ 88
Conrail Advances to CSX $371 $225
Interest Rates on Conrail Advances to CSX 1.82% 2.50%
- --------------------------------------------------------------------------------
Fiscal Years Ended
-------------------------------
(millions of dollars) 2002 2001 2000
- --------------------------------------------------------------------------------
Interest Expense Related To
Conrail Advances $ 8 $ 5 $ 4
- --------------------------------------------------------------------------------
The agreement under which CSXT operates is allocated portion of the Conrail
route system has an initial term of 25 years and may be renewed at CSXT's option
for two five-year terms. Operating fees paid to Conrail under the agreement are
subject to adjustment every six years based on the fair value of the underlying
system. Lease agreements for the Conrail equipment operated by CSXT cover
varying terms. CSXT is responsible for all costs of operating, maintaining, and
improving the routes and equipment under these agreements.
On December 27, 2002, future minimum payments to Conrail under the
operating, equipment and shared area agreements were as follows:
(millions of dollars) Future Minimum Payments
- ------------------------------------------------------------------------
2003 $ 251
2004 253
2005 245
2006 234
2007 227
Thereafter 3,311
------------------------
Total $4,521
- ------------------------------------------------------------------------
Note 3. Divestitures
Potential Conveyance of Domestic Container-
Shipping Assets to Joint Venture
On December 16, 2002, CSX announced that it had reached an agreement to
convey most of its interest in its domestic container-shipping subsidiary, CSX
Lines to a new venture, Horizon Lines LLC ("Horizon"), for $300 million ($240
million in cash and $60 million in securities of the new venture). CSX will
retain $319 million of vessel and equipment lease obligations that will be
subleased to the new entity through 2014. A deferred pretax gain of
approximately $137 million as a result of the transaction will be recognized
over the 12 year sub-lease term. The $60 million of securities have a term of 7
years and have an annual preferred return of 10%. CSX expects that this
transaction will close during the first quarter of 2003, subject to regulatory
approval. CSX has a preferred interest in the new venture and will account for
the investment under the cost method. The assets and liabilities of CSX Lines
that are to be conveyed under this agreement are classified as assets and
liabilities held for disposition on the statement of financial position as of
December 27, 2002 in accordance with the provisions of SFAS 144 "Accounting for
the Impairment or Disposal of Long-lived Assets." Major categories of assets and
liabilities held for disposition are as follows:
Dec. 27, Dec. 28,
(millions of dollars) 2002 2001
- -----------------------------------------------------------------------
Accounts Receivable - Net $ 106 $ 91
Property and Equipment - Net 114 125
Other Assets 43 28
------------------------
Total Assets Held for Disposition $ 263 $ 244
------------------------
Accounts Payable $ 67 $ 61
Other Liabilities 37 31
------------------------
Total Liabilities Held for Disposition $ 104 $ 92
------------------------
Net Assets Held for Disposition $ 159 $ 152
- -----------------------------------------------------------------------
Sale of Contract Logistics Segment
In September 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 were $335 million for 2000. CSX recorded a gain of $570
million before tax, $365 million after tax, $1.73 per share, on the sale.
Note 4. Operating Expense
Operating expense consists of the following:
Fiscal Years Ended
-------------------------------
(millions of dollars) 2002 2001 2000
- ---------------------------------------------------------------------------
Labor and Fringe $2,897 $2,934 $2,927
Materials, Supplies and Other 1,682 1,662 1,773
Conrail Operating Fees, Rents
and Services 322 336 377
Building and Equipment Rent 601 626 726
Inland Transportation 370 337 358
Depreciation 638 613 576
Fuel 515 585 649
New Orleans Litigation Provision -- 60 --
-------------------------------
Total $7,025 $7,153 $7,386
- ---------------------------------------------------------------------------
Selling, General and Administrative
Expenses $ 657 $ 708 $ 612
- ---------------------------------------------------------------------------
38 CSX 2002 ANNUAL REPORT
Notes to Consolidated Financial Statements
Note 5. Other Income
Other income (expense) consists of the following:
Fiscal Years Ended
----------------------------
(millions of dollars) 2002 2001 2000
- ----------------------------------------------------------------------------
Interest Income $ 27 $ 47 $ 60
Income from Real Estate and
Resort Operations 108 101 60
Discount on Sales of
Accounts Receivable (26) (34) (28)
Minority Interest (42) (39) (42)
Equity Losses of
Other Affiliates (3) (27) (7)
Miscellaneous Expense (23) (39) (21)
---- ---- ----
Total $ 41 $ 9 $ 22
- -----------------------------------------------------------------------------
Gross Revenue from Real Estate
and Resort Operations $ 261 $ 254 $ 191
- -----------------------------------------------------------------------------
Note 6. Income Taxes
Earnings from domestic and foreign operations and related income tax
expense are as follows:
Fiscal Years Ended
---------------------
(millions of dollars) 2002 2001 2000
- ------------------------------------------------------------------------------
Net Earnings from Continuing Operations
Before Income Taxes:
Domestic $ 648 $ 379 $ 191
Foreign 75 69 86
-----------------------------------------------------------------------------
Net Earnings from Continuing
Operations before Income Taxes $ 723 $ 448 $ 277
- --------------------------------------------------------------------------------
The significant components of deferred tax assets and liabilities include:
Dec. 27, 2002 Dec. 28, 2001
(millions of dollars) Assets Liabilities Assets Liabilities
- ------------------------------------------------------------------------------
Productivity/Restructuring Charges $ 52 $ -- $ 60 $ --
Employee Benefit Plans 445 -- 248 --
Accelerated Depreciation -- 3,812 -- 3,630
Other 741 865 721 858
-------------------------------------
Total $1,238 $4,677 1,029 $4,488
--------------------------------------
Net Deferred Tax Liabilities $3,439 $3,459
- -----------------------------------------------------------------------------
The primary factors in the change in year-end net deferred income tax
liability balances include:
o Annual provision for deferred income tax expense
o Minimum pension liability
o In 2002, cumulative effect of accounting change
The Company has not recorded domestic deferred or additional foreign income
taxes related to undistributed earnings of foreign subsidiaries that are
considered to be indefinitely reinvested. These earnings amounted to $341
million, $291 million and $229 million at December 27, 2002, December 28, 2001
and December 29, 2000, respectively. These amounts may become taxable upon their
remittance as dividends or upon the sale or liquidation of these foreign
subsidiaries. It is not practical to determine the amount of net additional
income tax that may be payable if such earnings were repatriated.
The Company files a consolidated federal income tax return, which includes
its principal domestic subsidiaries. Examinations of the federal income tax
returns of CSX have been completed through 1993. Tax returns for 1994 through
1998 currently are under examination. Management believes adequate provision has
been made for any adjustments that might be assessed.
The breakdown of income tax expense (benefit) between current and deferred
is as follows:
Fiscal Years Ended
------------------------------------
(millions of dollars) 2002 2001 2000
- ----------------------------------------------------------------------------
Income Tax Expense (Benefit):
Current:
Federal $ 50 $ (64) $ (53)
Foreign 16 15 13
State 17 3 20
------------------------------------
Total Current $ 83 $ (46) $ (20)
Deferred:
Federal $ 154 $ 176 $ 111
Foreign -- 10 (1)
State 19 15 1
------------------------------------
Total Deferred $ 173 $ 201 $ 111
------------------------------------
Total $ 256 $ 155 $ 91
- ----------------------------------------------------------------------------
Income tax expense reconciled to the tax computed at statutory rates is as
follows:
Fiscal Years Ended
---------------------------------------
(millions of dollars) 2002 2001 2000
- -----------------------------------------------------------------------------
Tax at Statutory Rates $253 35% $157 35% $ 97 35%
State Income Taxes 23 3% 12 3% 8 3%
Equity in Conrail Earnings (12) (2)% (10) (2)% (6) (2)%
Foreign Operations (9) (1)% (1) --% (11) (4)%
Other Items 1 --% (3) (1)% 3 1%
-------------------------------------------
Income Tax Expense/Rate $ 256 35% $155 35% $ 91 33%
- ------------------------------------------------------------------------------
39
Notes to Consolidated Financial Statements
------------------------------------------
Note 7. Accounts Receivable
Sale of Accounts Receivable
CSXT sells, generally without recourse, a revolving pool of accounts
receivable to CSX Trade Receivables Corporation ("CTRC"), a bankruptcy-remote
(special purpose) entity wholly-owned by CSX Corporation. CTRC transfers the
accounts receivable to a master trust and causes the trust to issue certificates
representing undivided interests in the receivables, which are sold to investors
for proceeds.
Two series of certificates issued by the trust were outstanding as of
December 27, 2002. One series issued in 1998 for $300 million to the public
matures in June 2003 and bears interest payable to the investors at 6% annually.
A second series in the amount of $200 million was issued to a private special
purpose entity in 2000 that funded its purchase through a bank-supported
commercial paper program. This second series of certificates was issued for a
one-year maturity, and as currently amended matures in June 2003 as well. The
private series of certificates bears interest at a floating rate based upon the
program's commercial paper rates. The yield on the private certificates at
December 27, 2002 was 1.46%. The outstanding amount of the private series was
reduced from $200 million to $80 million in 2002.
(millions of dollars) Dec. 27, 2002 Dec. 28, 2001
- -------------------------------------------------------------------------
Amount Sold under:
Public Series of Certificates $ 300 $ 300
Private Series of Certificates 80 200
---------------------------------
Total $ 380 $ 500
---------------------------------
Retained Interest in Master Trust $ 534 $ 466
- -------------------------------------------------------------------------
The fair value of retained interests approximates book value as the
receivables are collected in approximately one month.
Fiscal Years Ended
- ------------------------------------------------------------------------
(millions of dollars) 2002 2001 2000
- ------------------------------------------------------------------------
Discount on Sales of
Accounts Receivables $ 26 $ 34 $ 28
- ------------------------------------------------------------------------
CSXT has retained responsibility for servicing the accounts receivables held
by the master trust. The average servicing period is less than one month. No
servicing asset or liability has been recorded since the fees CSXT receives
approximate its related costs.
The accounts receivable program is accounted for in accordance with SFAS No.
140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities." Accounts receivable have been reduced by the
amount of the certificates issued by the trust. "Discount on Sales of Accounts
Receivable" is reported as an expense item in other income."
Allowance for Doubtful Accounts
The Company maintains an allowance for doubtful accounts based on the
expected collectibility of all accounts receivable, including receivables
transferred to the master trust that could be subsequently sold to outside
parties with recourse. This amount is included in the statement of position as
follows:
(millions of dollars) Dec. 27, 2002 Dec. 28, 2001
- --------------------------------------------------------------------------
Allowance for Doubtful Accounts $ 125 $ 100
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------------
40 CSX 2000 ANNUAL REPORT
Notes to Consolidated Financial Statements
Note 8. Properties
Properties consist of the following:
Dec. 27, 2002 Dec. 28, 2001
-----------------------------------------------------------------------
Accumulated Accumulated
(millions of dollars) Cost Depreciation Net Cost Depreciation Net
- --------------------------------------------------------------------------------------------------------------------------
Rail
Road $11,541 $2,498 $ 9,043 $11,035 $ 2,343 $ 8,692
Equipment 5,671 2,225 3,446 5,467 2,077 3,390
-----------------------------------------------------------------------
Total Rail 17,212 4,723 12,489 16,502 4,420 12,082
Intermodal 442 173 269 399 145 254
-----------------------------------------------------------------------
Total Surface Transportation 17,654 4,896 12,758 16,901 4,565 12,336
Other 906 378 528 859 348 511
-----------------------------------------------------------------------
Total Properties $18,560 $5,274 $13,286 $17,760 $ 4,913 $12,847
- --------------------------------------------------------------------------------------------------------------------------
Note 9. Casualty, Environmental and Other Reserves
Activity related to casualty, environmental and other reserves is as follows:
Casualty and Separation Environmental
(millions of dollars) Other Reserves Liabilities Reserves Total
- --------------------------------------------------------------------------------------------------------------------------
Balance Dec. 31, 1999 $ 708 $ 270 $ 53 $ 1,031
Charged to Expense 275 - - 275
Payments (285) (14) (12) (311)
- --------------------------------------------------------------------------------------------------------------------------
Balance Dec. 29, 2000 698 256 41 995
Charged to Expense 234 - 1 235
Payments (271) (14) (10) (295)
- --------------------------------------------------------------------------------------------------------------------------
Balance Dec. 28, 2001 661 242 32 935
Charged to Expense 231 - 17 248
Payments (287) (32) (14) (333)
- --------------------------------------------------------------------------------------------------------------------------
Balance Dec. 27, 2002 $ 605 $ 210 $ 35 $ 850
- --------------------------------------------------------------------------------------------------------------------------
Reserve balances are as follows:
(millions of dollars) Dec. 27, 2002 Dec. 28, 2001
- --------------------------------------------------------------------------------------
Current Reserves:
Casualty and Other $ 216 $ 218
Separation 15 15
Environmental 15 15
-------------------------
Total Current Reserves 246 248
Long-term Casualty, Environmental and Other Reserves 604 687
-------------------------
Total Casualty, Environmental and Other Reserves $ 850 $ 935
- --------------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Casualty Reserves
Casualty reserves represent accruals for the uninsured portion of personal
injury, occupational injury (asbestos, carpal tunnel, etc.) and accident claims.
These reserves are recorded upon the first reporting of a claim, and estimates
are updated as information develops. The amount of liability accrued is based on
the type and severity of the claim, and an estimate of future claims development
based on current trends and historical data. The Company believes it has
recorded liabilities in sufficient amounts to cover all identified claims and
estimates of incurred but not reported personal injury and accident claims.
Unreported occupational injuries are not subject to reasonable estimation, thus
no provision is made for incurred but not reported occupational injuries.
Separation Liability
Separation liabilities at December 27, 2002, relate to productivity charges
recorded in 1991 and 1992 to provide for the estimated costs of implementing
workforce reductions, improvements in productivity and other cost reductions at
the Company's major transportation units. The remaining separation liabilities
are expected to be paid out over the next 15 to 20 years.
Environmental Reserves
CSXT is a party to various proceedings involving private parties and
regulatory agencies related to environmental issues. CSXT has been identified as
a potentially responsible party ("PRP") at approximately 94 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 clean-up, which could be
substantial.
CSXT is involved in a number of administrative and judicial proceedings and
other clean-up efforts at approximately 230 sites which include the 94 Superfund
sites noted above where it is participating in the study or clean-up of alleged
environmental contamination. At least once each quarter, CSXT reviews its role,
if any, with respect to each such location, giving consideration to a number of
factors, including the nature of CSXT's alleged connection to the location
(e.g., generator of waste sent to the site, or owner or operator of the site),
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
viability of other named and unnamed PRPs at the location.
Based on the review process, CSXT has recorded reserves to cover estimated
contingent future environmental costs with respect to such sites. The recorded
liabilities for estimated future environmental costs at December 27, 2002 and
December 28, 2001, were $35 million and $32 million, respectively. These
liabilities, which are undiscounted, include amounts representing CSXT's
estimate of unasserted claims, which CSXT believes to be immaterial. The
liability includes future costs for all sites where the Company's obligation is
(1) deemed probable and (2) 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 December 27, 2002, environmental
liability is expected to be paid out over 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 on information currently
available, however, the Company believes its environmental reserves are adequate
to accomplish remedial actions to comply with present laws and regulations, and
that the ultimate liability for these matters will not materially affect its
overall results of operations and financial condition.
- --------------------------------------------------------------------------------
42 CSX 2002 ANNUAL REPORT
Notes to Consolidated Financial Statements
Note 10. Debt and Credit Agreements
Total long-term debt is as follows:
Average Interest Rates
(millions of dollars) Maturity at Dec. 27, 2002 2002 2001
- ---------------------------------------------------------------------------------------------------------------------
Convertible Debentures, net of $97 and $101 discount, 2021 1.00% $ 467 $ 463
respectively
Notes 2003-2032 6.77% 5,285 5,289
Equipment Obligations 2003-2015 7.12% 855 950
Mortgage Bonds 2003 3.16% 55 55
Other Obligations, including Capital Leases 2003-2010 4.85% 248 126
----------------------
Total 6,910 6,883
----------------------
Less Debt Due Within One Year 391 1,044
----------------------
Long Term Debt $6,519 $5,839
- ---------------------------------------------------------------------------------------------------------------------
Debt Issuances
During the year ended December 27, 2002 CSX issued $200 million of 4.88%
notes due in 2009, and $400 million of 6.30% notes due in 2012. During the year
ended December 28, 2001, the Company issued $500 million of 6.75% notes due in
2011.
Credit Facilities
In May 2002, CSX entered into a $300 million, one-year revolving credit
agreement, which replaced the $500 million, one-year agreement that expired June
2002. In June 2001, CSX entered into a five-year, $1 billion line of credit
agreement. Any borrowings under these credit agreements would accrue interest at
a variable rate based on the London InterBank Offered Rate("LIBOR"). CSX pays
annual fees to the participating banks that may range from 0.08% to 0.23% of
total commitment, depending on its credit rating. At December 27, 2002, CSX had
commercial paper borrowings supported by these credit facilities of $140
million, all classified as short-term debt. At December 28, 2001, there were no
commercial paper borrowings.
Convertible Debentures
On October 24, 2001, CSX issued $564 million aggregate principal amount at
maturity in unsubordinated zero coupon convertible debentures due October 30,
2021 for an initial offering price of approximately $463 million. At December
27, 2002, these debentures are included in long-term debt, at a carrying value
of $467 million. These debentures will accrete in value at a yield to maturity
of 1 % per year, which may be reset on October 30, 2007, October 30, 2011, and
October 30, 2016 to a rate based on five-year United States Treasury Notes minus
2.8%. In no event, however, will the yield to maturity be reset below 1 % or
above 3% per annum. Accretion in value on the debentures is recorded for each
period, but will not be paid prior to maturity.
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. CSX has classified the debentures as long-term because in the event
the Company is required to repay the debentures in October 2003, CSX has the
intent and ability to refinance on a long-term basis. 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 is
initially 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 17.75 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.
Shelf Registration Statements
CSX has $900 million of remaining capacity under a shelf registration that
may be used, subject to market conditions, to issue debt or other securities at
the Company's discretion. The Company presently intends to use the proceeds from
the sale of any securities under its shelf registration statements to finance
cash requirements, including refinancing existing debt as it matures. While the
Company seeks to give itself flexibility with respect to meeting such needs,
there can be no
CSX 2002 ANNUAL REPORT 43
Notes to Consolidated Financial Statements
------------------------------------------
assurance that market conditions would permit the Company to sell
such securities on acceptable terms at any given time, or at all.
Short-term Debt Balance and Rates
Dec. 27, Dec. 28,
(millions of dollars) 2002 2001
- -----------------------------------------------------------
Short-term Debt $ 143 $ 225
Weighted Average Interest Rates 1.46% 2.45%
- -----------------------------------------------------------
Long Term Debt Maturities
(millions of dollars)
------------------------------------------------
2003 $ 391
2004 460
2005 192
2006 429
2007 992
2008 and Thereafter 4,446
------
Total $6,910
------------------------------------------------
Certain of CSX's rail unit properties are pledged as security for various
rail-related long-term debt issues. In addition, the Company has approximately
$132 million in assets which are specifically designated to fund an equal amount
of long-term debt.
Note 11. Derivative Financial Instruments
CSX has entered into various interest rate swap agreements on the following
fixed rate notes:
Notional Fixed Variable Rate
Amount Interest Rate Dec. 27, 2002
- -----------------------------------------------------------------
May 1, 2007 $ 450 7.45% 4.82%
May 1, 2004 300 7.25% 4.31%
August 15, 2006 300 9.00% 6.65%
December 1, 2003 150 5.85% 2.96%
May 1, 2032 150 8.30% 3.30%
June 22, 2005 50 6.46% 3.26%
-------
Total/Average Rate $ 1,400 7.62% 4.68%
- -----------------------------------------------------------------
These agreements were entered for interest rate risk exposure management
purposes and mature at the time the related notes are due. Under these
agreements, the Company will pay variable interest based on LIBOR in exchange
for a fixed rate, effectively transforming the debentures to floating rate
obligations. Accordingly, the instruments qualify, and are designated, as fair
value hedges.
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, in this case long-term fixed rate notes,
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 No. 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.
Long-term debt has been increased $78 million and decreased $26 million for the
fair market value of the interest rate swap agreements at December 27, 2002 and
December 28, 2001, respectively.
The differential to be paid or received under these agreements is accrued
based on the terms of 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. In 2002 and 2001, the Company reduced
interest expense by approximately $34 million and $5 million, respectively, 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.
Note 12. Common and Preferred Stock
Common and Preferred Stock consists of (in thousands):
Common Stock, $1 Par Value Dec. 27, 2002
- --------------------------------------------------------------------------------
Common Shares Authorized 300,000
Common Shares Issued and Outstanding 214,687
Additional Potential Shares:
Stock Options 26,022
Convertible Debt 10,000
- --------------------------------------------------------------------------------
Preferred Stock Dec. 27, 2002
- --------------------------------------------------------------------------------
Preferred Shares Authorized 25,000
Preferred Shares Outstanding --
Series A, reserved for issuance
per the Shareholder Rights Plan 250
Series B, reserved for issuance
per the Shareholders Rights Plan 3,000
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
44 CSX 2002 ANNUAL REPORT
Notes to Consolidated Financial Statements
Holders of Common Stock are entitled to one vote on all matters requiring a
vote for each share held. Preferred Stock is senior to common stock for
dividends and liquidation.
On May 29, 1998, the board of directors adopted a Shareholder Rights Plan
("Plan") which was amended on June 27, 2000. The Plan allows each outstanding
share of common stock to be traded for one preferred share purchase right
("right"). A right entitles shareholders to purchase one one-hundredth of a
share of Series B preferred stock at an exercise price of $180 under the
conditions specified in the Plan. Under certain circumstances, a right may also
be exchanged for additional shares of common stock. The rights will expire on
June 8, 2008, unless earlier redeemed by the Company or extended. The rights
would become exercisable within 10 business days following the public
announcement of the acquisition of 10% or more of the Company's outstanding
common stock; or 10 days following the commencement or announcement of an
intention to make a tender offer or exchange offer. The acquisition of shares or
the tender/exchange offer must result in the ownership of outstanding common
stock of greater than 10%. The Company's board of directors may redeem the
rights at a price of one cent per right at any time prior to the acquisition by
a person or group of 20% or more of the outstanding common stock.
Note 13. Earnings Per Share
The following table sets forth the computation of basic earnings per share
and earnings per share, assuming dilution:
(millions of dollars) 2002 2001 2000
- ----------------------------------------------------------------------------------------------------------------------
Numerator:
Net Earnings from Continuing Operations $ 424 $ 293 $ 186
Denominator (thousands):
Average Common Shares Outstanding 212,729 211,668 210,942
Effect of Potentially Dilutive Common Shares, Mainly Employee Stock Options 783 741 372
--------------------------------------
Average Common Shares Outstanding, Assuming Dilution 213,512 212,409 211,314
--------------------------------------
Earnings Per Share, from Continuing Operations $ 2.00 $ 1.39 $ .88
--------------------------------------
Earnings Per Share from Continuing Operations, Assuming Dilution $ 1.99 $ 1.38 $ .88
- ----------------------------------------------------------------------------------------------------------------------
Earnings per share are based on the weighted average number of common shares
outstanding. Earnings per share, assuming dilution, are based on the weighted
average number of common shares outstanding adjusted for the effect of potential
common shares outstanding during the period, mainly arising from the exercise of
employee stock options. Potential common shares at CSX include stock options and
awards and shares that would be issued relating to convertible long-term debt.
During the years ended December 27, 2002 and December 28, 2001, 1.0 million and
0.8 million shares, respectively, were issued for options exercised.
Certain potential common shares for all three years shown were not included
in the computation of earnings per share, assuming dilution, since their
exercise or conversion prices were greater than the average market price of the
common shares during the period and, therefore, their effect is antidilutive.
These potential common shares were as follows:
Fiscal Year
---------------------------------------
2002 2001 2000
- ----------------------------------------------------------------------------
Number of Shares (thousands) 33,800 29,900 18,600
Average Exercise/Conversion Price $ 46.31 $ 47.26 $ 42.23
- ----------------------------------------------------------------------------
A substantial increase in the fair market value of the Company's stock price
could negatively impact earnings per share due to the dilutive effect of stock
options and convertible debt.
CSX 2002 ANNUAL REPORT 45
Notes to Consolidated Financial Statements
------------------------------------------
Note 14. Stock Plans
The Company maintains several stock plans designed to encourage ownership of
its stock and provide incentives for employees to contribute to its success.
Expense for stock-based compensation under these plans is based on the intrinsic
value accounted for under the principles of APB Opinion No. 25 and related
Interpretations. The Company recognized compensation expense of $6 million in
2002, $9 million in 2001 and $12 million in 2000.
Had compensation expense been determined based upon fair values at the date
of grant, consistent with the methods of SFAS No. 123, the Company's net
earnings and earnings per share would have been reduced to the pro forma amounts
indicated below:
(millions of dollars) 2002 2001 2000
- --------------------------------------------------------------------------------
Net Earnings -- As Reported $ 424 $ 293 $ 565
-- Pro Forma $ 399 $ 280 $ 545
Earnings Per Share -- As Reported $2.00 $1.39 $2.68
-- Pro Forma $1.87 $1.32 $2.58
Earnings Per Share, Assuming Dilution -- As Reported $1.99 $1.38 $2.67
-- Pro Forma $1.86 $1.32 $2.58
- --------------------------------------------------------------------------------
Beginning in 2003, the Company will account for stock-based compensation in
accordance with on SFAS 123 or the fair value method of accounting for future
stock awards on a prospective basis. Under SFAS 123, discounts on stock purchase
plans and the fair value of restricted stock and options at date of grant are
charged to compensation costs over the vesting or performance period.
Stock Options and Awards
CSX has various stock option and award plans. These plans currently provide
awards primarily in (1) stock options and (2) restricted stock awards ("RSAs"),
but have previously also awarded Performance Share Awards ("PSA") and Stock
Appreciation Rights ("SARs") to eligible officers and employees. Awards granted
under the various plans are determined by the board of directors based on
financial performance of the Company.
At December 27, 2002, there were 3,565 current or former employees with
grants outstanding under the various plans. A total of approximately 29.8
million shares were reserved for issuance under the plans of which 6.9 were
available for new grants. The remaining shares are assigned to outstanding stock
options and stock awards.
The fair value of options granted in 2002, 2001 and 2000 was estimated as of
the dates of grant using the Black-Scholes option model.
Fiscal Year
--------------------------------
2002 2001 2000
- --------------------------------------------------------------------------------
Black-Scholes Assumptions:
Expected Dividend Yield 1.10% 2.30% 3.20%
Risk-free Interest Rate 4.30% 5.00% 6.60%
Expected Stock Volatility 27% 27% 27%
Expected Term Until Exercise 6 years 6 years 6 years
Average Fair Value of Stock Options Granted $11.76 $10.71 $6.36
- --------------------------------------------------------------------------------
1. Stock Options
The majority of stock options have been granted with 10-year terms. Options
outstanding at December 27, 2002, are generally exercisable three to nine years
after date of grant. The exercise price for options granted equals the market
price of the underlying stock on the date of grant. A summary of the Company's
- --------------------------------------------------------------------------------
46 CSX 2002 ANNUAL REPORT
Notes to Consolidated Financial Statements
stock option activity and related information for the fiscal years ended
December 27, 2002, December 28, 2001 and December 29, 2000 follows:
2002 2001 2000
----------------------------------------------------------------------------------
Shares Weighted-average Shares Weighted-average Shares Weighted-average
(000s) Exercise Price (000s) Exercise Price (000s) Exercise Price
- --------------------------------------------------------------------------------------------------------------------------
Outstanding at Beginning of Year 23,650 $39.49 20,126 $38.69 18,310 $42.57
Granted 3,438 $38.14 5,041 $39.42 2,742 $23.57
Exchanged, Canceled or Expired (46) $44.89 (737) $40.25 (469) $41.16
Exercised (1,020) $31.45 (780) $25.16 (457) $18.47
- --------------------------------------------------------------------------------------------------------------------------
Outstanding at End of Year 26,022 $40.45 23,650 $39.49 20,126 $38.69
- --------------------------------------------------------------------------------------------------------------------------
Exercisable at End of Year 8,513 $41.58 8,426 $40.00 9,405 $38.82
- --------------------------------------------------------------------------------------------------------------------------
The following table summarizes information about stock options outstanding at
December 27, 2002:
Options Outstanding Options Exercisable
- --------------------------------------------------------------------------------------------------------------------
Number Weighted-average Number
Outstanding Remaining Weighted-average Exercisable Weighted-average
Exercise Price (000s) Contractual Life(Years) Exercise Price (000s) Exercise Price
- --------------------------------------------------------------------------------------------------------------------
$20 to $29 2,601 7.3 $23.49 -- --
$30 to $39 11,462 6.6 $38.45 3,127 $37.23
$40 to $49 8,747 4.7 $43.66 4,838 $43.28
$50 to $57 3,212 4.1 $53.82 549 $51.43
-------------------------------------------------------------------------------------------------
Total 26,022 5.7 $40.60 8,514 $41.59
- --------------------------------------------------------------------------------------------------------------------
2. Restricted Stock Awards ("RSAs")
At December 27, 2002 and December 28, 2001, 469,500 and 675,500 RSAs were
outstanding. The RSA's outstanding at December 27, 2002, vest over a three- to
five-year employment period. The weighted-average fair value of RSAs was $34.53
as of the date of grant.
Stock Purchase and Loan Plan
The Stock Purchase and Loan Plan provided for the purchase of common stock
and related rights by eligible officers and key employees of the Company and
entitled them to obtain loans with respect to the shares purchased. There were
no shares issued under the Stock Purchase and Loan Plan in 2002, 2001 or 2000.
In November 2000, substantially all participants of the Stock Purchase and Loan
Plan exchanged their share balances in this plan for forgiveness of their loan
balances and certain participants were issued shares relating to the equity in
their respective accounts. No shares were withdrawn, exchanged or cancelled in
2002 or 2001. Approximately 6.7 million shares were withdrawn or cancelled in
2000 and approximately 0.6 million shares were issued in exchange for the equity
in participant accounts. In conjunction with this transaction, the deferred tax
benefits of approximately $34 million were charged to paid-in-capital. As of
fiscal year end 2002, 2001 and 2000, approximately 70,000 shares were
outstanding under this program.
Stock Purchase and Dividend Reinvestment Plans
1. Stock Purchase Plan
In May 2001, CSX shareholders approved the 2001 Employee Stock Purchase Plan
("ESPP"), which allows eligible employees to purchase CSX common stock at a
discount. Specifically, participating employees are able to purchase CSX stock
at the lower of 85% of fair market value on December 1 (beginning of the annual
offering period) or 85% of fair market value on November 30 of the following
year (end of the annual offering period). In effect, employees receive a
12-month stock option to purchase Company stock. Once purchased, the shares are
unrestricted and may generally be sold or transferred at any time. There are
approximately 570,000 shares subscribed at a market price of $23.49 at December
27, 2002, and approximately 460,000 remaining shares available for issuance
under this plan. Approximately 570,000 shares were purchased by employees under
the terms of this plan during 2002.
The ESPP replaced the 1991 Employee Stock Purchase and Dividend Reinvestment
Plans. Under the 1991 Employee Stock Purchase and Dividend Reinvestment Plan,
eligible employees received a 17.65% matching payment on their contributions in
the form of additional stock purchased by the
CSX 2002 ANNUAL REPORT 47
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Company. Each matching payment of stock was subject to a two-year holding
period. Sales of stock prior to the completion of the holding period resulted in
forfeiture of the matching stock purchase. Officers and key employees who
qualified for the Stock Purchase and Loan Plan were not eligible to participate
in this Plan. Employees purchased 25,565 shares in 2001 and 43,857 shares in
2000, under the plan at weighted-average market prices of $30.43 and $23.46 for
2001 and 2000, respectively.
2. Dividend Reinvestment Plan
The Company maintains the Shareholder Dividend Reinvestment Plan under which
shareholders may purchase additional shares of stock. At December 27, 2002,
there were 4,626,035 shares available for issuance under this plan.
Stock Plan for Directors
The Stock Plan for Directors, approved by the shareholders in 1992, governs
in part the manner in which directors' fees and retainers are paid. A minimum of
40% of the retainers must be paid in common stock of the Company. In addition,
each director may elect to receive up to 100% of the remaining retainer and fees
in the form of common stock of the Company. In 1997, shareholders approved
amendments to the Plan that would permit additional awards of stock or stock
options. In 2002, 45,195 shares of stock were issued to the directors resulting
in $1 million of expense. In 2001, 52,000 stock options were granted with an
exercise price of $35.08. In 2000, 52,000 stock options were granted with an
exercise price of $26.40. The Plan permits each director to elect to transfer
stock into a trust that will hold the shares until the participant's death,
disability, retirement as a director, other cessation of services as a director,
or change in control of the Company. At December 27, 2002, there were 678,411
shares of common stock reserved for issuance under this Plan.
Note 15. Fair Value of
Financial Instruments
Fair values of the Company's financial instruments are estimated by
reference to quoted prices from market sources and financial institutions, as
well as other valuation techniques. Long-term debt is the only financial
instrument of the Company with fair values significantly different from their
carrying amounts. At December 27, 2002, the fair value of longterm debt,
including current maturities, was $7.4 billion, compared with a carrying amount
of $6.9 billion. At December 28, 2001, the fair value of long-term debt,
including current maturities, was $7.2 billion, compared with a carrying amount
of $6.9 billion. The fair value of longterm debt has been estimated using
discounted cash flow analysis based upon the Company's current incremental
borrowing rates for similar types of financing arrangements. The Company's
interest rate swap agreements at December 27, 2002 and December 28, 2001 had a
positive value of $78 and a negative value of $26 million, respectively.
Note 16. Employee Benefit Plans
The Company sponsors defined benefit pension plans, principally for salaried
personnel. The plans provide eligible employees with retirement benefits based
principally on years of service and compensation rates near retirement.
In addition to the defined benefit pension plans, the Company sponsors three
plans that provide medical and life insurance benefits to most full-time
salaried employees upon their retirement. The postretirement medical plans are
contributory (partially funded by retiree), with retiree contributions adjusted
annually. The life insurance plan is non-contributory.
The benefit obligation for these plans represents the liability of the
Company for current and retired employees and is affected primarily by the
following:
1. Service cost (benefits attributed to employee service during the period)
2. Interest cost (interest on the liability due to the passage of time)
3. Actuarial gains/losses (experience during the year different from that
assumed and changes in plan assumptions)
4. Benefits paid to participants
Plan assets are amounts that have been segregated and restricted to provide
benefits, and include amounts contributed by the Company and amounts earned from
investing contributions, less benefits paid. The pension plans are funded at not
less than the minimum funding standards set forth in the Employee Retirement
Income Security Act of 1974. Plan assets consist primarily of common stocks,
corporate bonds and cash and cash equivalents. The Company funds the cost of the
postretirement medical and life insurance benefits on a pay-as-you-go basis.
The Company uses a plan year of October 1 through September 30 to value its
pension and postretirement plans on an actuarial basis.
- --------------------------------------------------------------------------------
48 CSX 2002 ANNUAL REPORT
Notes to Consolidated Financial Statements
The change in benefit obligation and plan assets of the plans is
as follows:
Pension Benefits Postretirement Benefits
--------------------------------------------
(millions of dollars) 2002 2001 2002 2001
- --------------------------------------------------------------------------------------------------
Change in Benefit Obligation:
Benefit Obligation at Beginning of Plan Year $ 1,700 $ 1,610 $ 420 $ 354
Service Cost 40 41 11 9
Interest Cost 119 121 29 26
Impact of Plan Changes/Business Dispositions -- 28 -- --
Plan Participants' Contributions -- -- 10 7
Actuarial Loss 84 55 70 68
Benefits Paid (137) (155) (41) (44)
--------------------------------------------
Benefit Obligation at End of Plan Year $ 1,806 $ 1,700 $ 499 $ 420
--------------------------------------------
Change in Plan Assets:
Fair Value of Plan Assets at Beginning of Plan Year $ 1,493 $ 1,619 $ -- $ --
Actual Return on Plan Assets (48) (13) -- --
Employer Contributions 16 42 31 37
Plan Participants' Contributions -- -- 10 7
Benefits Paid (137) (155) (41) (44)
--------------------------------------------
Fair Value of Plan Assets at End of Plan Year $ 1,324 $ 1,493 $ -- $ --
--------------------------------------------
--------------------------------------------
Funded Status $ (482) $ (207) $ (499) $ (420)
--------------------------------------------
The funded status, or amount by which the benefit obligation exceeds the
fair value of plan assets, represents a liability. For plans with a projected
benefit obligation in excess of plan assets at December 27, 2002, the aggregate
projected benefit obligation was $1.8 billion and the aggregate fair value of
plan assets was $1.3 billion. For plans with an accumulated benefit obligation
in excess of plan assets at December 27, 2002, the aggregate accumulated benefit
obligation was $1.7 million and the aggregate fair value of plan assets was $1.3
million. The following table shows the reconciliation of the funded status of
the plan with the amount recorded in the statement of financial position:
Pension Benefits Postretirement Benefits
(millions of dollars) 2002 2001 2002 2001
- ----------------------------------------------------------------------------------------------------------
Funded Status $(482) $(207) $(499) $(420)
Unrecognized Actuarial Loss 474 181 190 128
Unrecognized Prior Service Cost 40 44 -- (1)
Fourth Quarter Activity:
Employer Contributions to Pension Plans 3 3 -- --
Net Postretirement Benefits Paid -- -- 8 9
-----------------------------------------
Net Amount Recognized in Statement of Financial Position $ 35 $ 21 $(301) $(284)
-----------------------------------------
CSX 2002 ANNUAL REPORT 49
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
A liability is recognized if net periodic pension cost (cost of a pension
plan for a period, including service cost, interest cost, actual return on plan
assets, gain or loss, amortization of unrecognized prior service cost)
recognized exceeds amounts the employer has contributed to the plan. An asset is
recognized if net periodic pension cost is less than amounts the employer has
contributed to the plan. The amount recognized in the statement of financial
position consists of:
Pension Benefits Postretirement Benefits
-------------------------------------------------------
(millions of dollars) 2002 2001 2002 2001
- ----------------------------------------------------------------------------------------------------------------------------
Prepaid Benefit Cost $ - $ 224 $ - $ -
Accrued Benefit Liability (430) (243) (301) (284)
Intangible Asset 40 15 - -
Accumulated Other Comprehensive Loss 425 25 - -
-------------------------------------------------------
Net Amount Recognized in Statement of Financial Position $ 35 $ 21 $(301) $(284)
- ----------------------------------------------------------------------------------------------------------------------------
Components of net periodic pension cost are as follows:
Pension Benefits Postretirement Benefits
----------------------------------------------------------
(millions of dollars) 2002 2001 2000 2002 2001 2000
- ----------------------------------------------------------------------------------------------------------------------------
Service Cost $ 40 $ 41 $ 40 $ 11 $ 9 $ 8
Interest Cost 119 121 119 29 26 23
Expected Return on Plan Assets (152) (150) (145) - - -
Amortization of Prior Service Cost 5 3 2 - (1) (1)
Recognized Net Actuarial (Gain) Loss (9) (11) (9) 8 3 -
----------------------------------------------------------
Net Periodic Benefit Cost 3 4 7 48 37 30
Special Termination Benefits - Workforce Reduction
Program/Curtailments - 10 2 - - 6
----------------------------------------------------------
Net Periodic Benefit Cost Including Special
Termination Benefits $ 3 $ 14 $ 9 $ 48 $ 37 $36
- ----------------------------------------------------------------------------------------------------------------------------
During 2002 and 2001, CSX recorded changes in its minimum pension
liability. These changes did not affect net earnings, but are a component of
accumulated other comprehensive loss on an after-tax basis. In 2002, the minimum
pension liability increased by $398 million, reducing accumulated other
comprehensive income by $248 million after tax. In 2001, the minimum pension
liability increased by $25 million, reducing accumulated other comprehensive
income by $15 million after tax. The Company also recorded a $25 million and $30
million after tax effect to accumulated other comprehensive income, relating to
Conrail's minimum pension liability for December 27, 2002 and December 28, 2001,
respectively.
Weighted-average assumptions used in accounting for the plans are as follows:
Pension Benefits Postretirement Benefits
-------------------------------------------------------
2002 2001 2002 2001
- ----------------------------------------------------------------------------------------------------------------------------
Expected Long-term Return on Plan Assets:
Benefit Cost for Plan Year 9.50% 9.50% n/a n/a
Benefit Obligation at End of Plan Year 8.90% 9.50% n/a n/a
Discount Rates:
Benefit Cost for Plan Year 7.25% 7.75% 7.25% 7.75%
Benefit Obligation at End of Plan Year 6.50% 7.25% 5.50% 7.25%
Salary Scale Inflation 3.30% 4.50% 3.30% 4.50%
- ----------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
50 CSX 2002 ANNUAL REPORT
Notes to Consolidated Financial Statements
The net postretirement benefit obligation was determined using the
assumption that the health care cost trend rate for medical plans was 11% and
12% for 2002 and 2001, respectively, decreasing gradually to 5% by 2006 and
remaining at that level thereafter. A 1% change in the assumed health care cost
trend rate would have the following effects:
1% 1%
(millions of dollars) Increase Decrease
- -------------------------------------------------------------------------------------------------------------
Effect on postretirement benefits service and interest cost $ 3 $ (3)
Effect on postretirement benefit obligation 34 (30)
- -------------------------------------------------------------------------------------------------------------
Other Plans
The Company maintains savings plans for virtually all full-time salaried
employees and certain employees covered by collective bargaining agreements.
Expense associated with these plans was $15 million, $16 million and $14 million
for 2002, 2001 and 2000, respectively.
Under collective bargaining agreements, the Company participates in a
number of union-sponsored, multi-employer benefit plans. Payments to these plans
are made as part of aggregate assessments generally based on number of employees
covered, hours worked, tonnage moved or a combination thereof. Total
contributions of $315 million, $292 million and $250 million were made to these
plans in 2002, 2001 and 2000, respectively.
Note 17. Commitments and Contingencies
Lease Commitments
The Company has various lease agreements with other parties with terms up
to 29 years. Non-cancelable, long-term leases generally include provisions for
maintenance, options to purchase at fair value and options to extend the terms.
Lease arrangements allow the Company to efficiently gain the use of equipment
which it does not wish to own. At December 27, 2002, minimum building and
equipment rentals under these operating leases are as follows:
(millions of dollars) Operating Leases Sublease Income Net Lease Commitments
- -------------------------------------------------------------------------------------------------------------------------
2003 $ 260 $ 32 $ 228
2004 257 32 225
2005 189 25 164
2006 169 25 144
2007 181 17 164
Thereafter 816 20 796
--------------------------------------------------------------
Total $1,872 $ 151 $1,721
- ------------------------------------------------------------------------------------------------------------------------
Rent expense on operating leases totaled $605 million in 2002, $629 million
in 2001 and $730 million in 2000. These amounts include net daily rental charges
on railroad operating equipment of $295 million, $289 million, and $369 million
in 2002, 2001 and 2000, respectively which are not long-term commitments. In
addition to these commitments, the Company also has agreements covering routes
and equipment leased from Conrail. See Note 2, Investment In and Integrated Rail
Operations with Conrail, for a description of these commitments.
As discussed in Note 3, Divestitures, the Company is conveying most of its
interest in CSX Lines to Horizon. Once this transaction closes, $126 million of
operating lease commitments included in the above will be assumed by Horizon.
Another $319 million of leases will be subleased to Horizon, thus increasing
sublease income by this amount. The effect of the lease assumptions and
subleases will be a $445 million reduction in CSX's net lease obligation. CSX
will continue to provide a guarantee of approximately $47 million relating to
the leases assumed by Horizon.
CSX 2002 ANNUAL REPORT 51
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Purchase Commitments
The Company has a commitment under a long-term maintenance program for
approximately 40% of CSXT's fleet of locomotives. The agreement expires in 2026
and totals $2.8 billion. Minimum payments under this agreement are as follows:
Minimum
(millions of dollars) Payments
- ------------------------------------------------------
2003 $130
2004 132
2005 138
2006 166
2007 171
Thereafter 2,036
- ------------------------------------------------------
Total $2,773
- ------------------------------------------------------
The long-term maintenance program assures CSX access to efficient,
high-quality locomotive maintenance services at settled price levels through the
term of the program. Under the program, CSX paid $124 million, $126 million and
$121 million in fiscal years 2002, 2001 and 2000, respectively.
Guarantees
The Company and its subsidiaries are contingently liable individually and
jointly with others as guarantors of obligations principally relating to leased
equipment, joint ventures and joint facilities used by CSX in its business
operations. Utilizing a CSX guarantee for these obligations allows CSX to take
advantage of lower interest rates and obtain other favorable terms when
negotiating leases or financing debt.
Guarantees are contingent commitments issued by the Company that could
require CSX to make payment to the guaranteed party based on another entity's
failure to perform. CSX's guarantees can be segregated into three main
categories:
1. Guarantees of approximately $511 million of lease commitments assumed by
A.P. Moller-Maersk ("Maersk") for which the Company is contingently
liable. CSX believes that Maersk will fulfill its contractual
commitments with respect to such leases and that CSX will have no
further liabilities for those obligations.
2. Guarantees of approximately $150 million relating to a construction
guarantee at one of the Company's international terminals segment's
locations. The non-performance of one of its partners or cost overruns
could cause the Company to have to perform under this guarantee.
The maximum amount of future payments the Company could be required to make
under these guarantees is the amount of the guarantees themselves.
After the close of the conveyance of CSX Lines to Horizon, there will be
approximately $47 million of guarantees relating to leases assumed by Horizon
that CSX will be contingently liable for.
Self-Insurance
The Company obtains substantial amounts of commercial insurance for
potential losses for third-party liability and property damage. Reasonable
levels of risk (up to $35 million for property and $25 million for liability per
occurrence) are also retained on a self-insurance basis. Using a combination of
third party and self-insurance allows the Company to realize savings on
insurance premium costs and preserves flexibility in achieving the best
insurance solutions for various categories of risks.
Claims Arising out of Sale of International Container-Shipping Assets
CSX has received a claim amounting to approximately $180 million plus
interest from Europe Container Terminals ("ECT"), owner of the Rotterdam
Container Terminal previously operated by Sea-Land Service Inc. ("Sea-Land").
ECT has claimed that the December 1999 sale of the international liner business
to Maersk resulted in a breach of the Sea-Land terminal agreements with ECT. An
initial arbitration hearing has been held to establish whether CSX is liable on
ECT's claim, and on February 10, 2003 a panel of the Netherlands Arbitration
Institute ruled that CSX was in breach of the terminal agreements. The ruling by
the panel dealt only with the existence of liability for a breach, and did not
address the level of ECT damages, if any, which will be the subject of a second
hearing before the same panel sometime in 2003. CSX disputes this claim and
believes it does not reflect the mitigating benefits ECT gained from its ability
to service other customers at the former Sea-Land facility. Management believes
that valid defenses to this claim exist but cannot estimate what, if any, loss
may result from this matter. CSX believes that Maersk is responsible for any
damages that may result from this dispute and has taken preliminary steps to
initiate an arbitration against Maersk under the purchase and sale agreement
with Maersk.
The purchase and sale agreement with Maersk provides for a postclosing
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 adjustment and this amount is currently in
dispute. This matter, together with other disputed issues relating to the
contractual obligations of the Company, has been submitted to arbitration.
Although management believes CSX will prevail in some or all of the Maersk
and ECT disputes and arbitrations, it can give no assurance in this regard. An
adverse outcome could have a material effect on the
- --------------------------------------------------------------------------------
52 CSX 2002 ANNUAL REPORT
Notes to Consolidated Financial Statements
determination of the final loss on sale of Sea-Land's International Liner
business and the financial results and cash flows in future reporting periods.
Contract Settlement
In July 2002, the Company received $44 million as the first of two payments
to settle a contract dispute. During 2002, the Company recognized approximately
$7 million of the first payment in other income as this amount related to prior
periods. The remaining $37 million will be recognized over the contract period,
which ends in 2020. The second payment of $23 million was received on January 2,
2003 and will be recognized over the contract period which ends in 2020. The
results of this settlement will provide approximately $3 million in annual
pretax earnings through 2020.
Other Legal Proceedings and Arbitrations
A number of other legal actions are pending against CSX and certain
subsidiaries in which claims are made in substantial amounts. While the ultimate
results of these legal actions cannot be predicted with certainty, management
does not currently expect that resolution of these matters will have a material
adverse effect on CSX'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.
For information regarding environmental proceedings see Note 9, Casualty,
Environmental and Other Reserves.
Note 18. 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 23,000 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 17 ocean vessels and
approximately 21,500 containers serving the trade between ports on the United
States mainland and Alaska, Hawaii/Guam and Puerto Rico. The international
terminals segment operates container freight terminal facilities in Asia,
Europe, Australia, Latin America and the United States. 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 main 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 through eliminations in CSX's
consolidated financial statements to other income. Intersegment sales and
transfers are generally accounted for as if the sales or transfers were to third
parties, that is, at current market prices.
CSX 2002 ANNUAL REPORT 53
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Business segment information for fiscal years 2002, 2001 and 2000 is as
follows:
Surface Transportation Marine Services
-----------------------------------------------------------------------------
Domestic
Container International
(millions of dollars) Rail Intermodal Total Shipping Terminals Total Total
- ----------------------------------------------------------------------------------------------------------------------
2002
Revenue from External Customers $ 6,003 $ 1,156 $ 7,159 $ 758 $ 235 $ 993 $ 8,152
Intersegment Revenues - 24 24 - 1 1 25
Segment Operating Income 854 141 995 38 69 107 1,102
Assets 12,738 537 13,275 309 959 1,268 14,543
Depreciation Expense 576 29 605 17 9 26 631
Property Additions 981 29 1,010 19 11 30 1,040
2001
Revenue from External Customers $ 6,082 $ 1,092 $ 7,174 $ 681 $ 234 $ 915 $ 8,089
Intersegment Revenues - 20 20 - 2 2 22
Segment Operating Income 803 104 907 32 71 103 1,010
Assets 12,948 432 13,380 504 880 1,384 14,764
Depreciation Expense 550 31 581 24 8 32 613
Property Additions 848 12 860 11 19 30 890
2000
Revenue from External Customers $ 6,075 $ 1,148 $ 7,223 $ 666 $ 267 $ 933 $ 8,156
Intersegment Revenues - 20 20 - 3 3 23
Segment Operating Income 615 98 713 - 71 71 784
Assets 12,945 423 13,368 540 781 1,321 14,689
Depreciation Expense 520 29 549 20 7 27 576
Property Additions 822 18 840 16 8 24 864
A reconciliation of the totals reported for the business segments to the
applicable line items in the consolidated financial statements is as follows:
Fiscal Years Ended
--------------------------------------
(millions of dollars) 2002 2001 2000
- ------------------------------------------------------------------------------------------------------------------------
Revenue
Total External Revenues for Business Segments $ 8,152 $ 8,089 $ 8,156
Intersegment Revenues for Business Segments 25 22 23
Elimination of Intersegment Revenue (25) (22) (23)
Other - 21 35
--------------------------------------
Total Consolidated Revenue $ 8,152 $ 8,110 $ 8,191
- ------------------------------------------------------------------------------------------------------------------------
Operating Income
Total Operating Income for Business Segments $ 1,102 $ 1,010 $ 784
Reclassification of Minority Interest Expense for International Terminals
Segment(a) 39 36 42
Other Unallocated Expenses (14) (29) (21)
New Orleans Litigation Provision - (60) -
--------------------------------------
Total Consolidated Operating Income $ 1,127 $ 957 $ 805
- --------------------------------------------------------------------------------
54 CSX 2002 ANNUAL REPORT
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Fiscal Years Ended
--------------------------------------
(millions of dollars) 2002 2001 2000
- ------------------------------------------------------------------------------------------------------------------------
Assets
Assets for Business Segments $14,543 $14,764 $14,689
Investment in Conrail 4,653 4,655 4,668
Elimination of Intercompany Receivables (128) (185) (186)
Non-segment Assets (b) 1,883 1,567 1,377
-----------------------------------
Total Consolidated Assets $20,951 $20,801 $20,548
- ------------------------------------------------------------------------------------------------------------------------
Depreciation Expense
Depreciation Expense for Business Segments $ 631 $ 613 $ 576
Non-segment Depreciation (b) 18 9 24
-----------------------------------
Total Consolidated Depreciation Expense $ 649 $ 622 $ 600
- ------------------------------------------------------------------------------------------------------------------------
Property Additions
Property Additions for Business Segments $ 1,040 $ 890 $ 864
Non-segment Property Additions (b) 40 40 49
-----------------------------------
Total Consolidated Property Additions $ 1,080 $ 930 $ 913
- ------------------------------------------------------------------------------------------------------------------------
(a) Marine Services includes minority interest expense which is reclassified to
other income in consolidation.
(b) Non-segment assets include corporate cash and cash equivalents and assets of
non-transportation businesses and discontinued operations. Non-segment
depreciation and property additions are primarily attributable to
non-transportation businesses and discontinued operations. Principal
non-transportation businesses include real estate and resort operations and
information technology subsidiaries serving multiple segments.
Revenues in the United States comprise more than 95% of total consolidated
revenues. More than 95% of the Company's long-lived assets are located in the
United States. The Company does not have a single external customer that
represents 10% or more of its consolidated revenue.
CSX 2002 ANNUAL REPORT 55
Report of Ernst & Young LLP,
- ---------------------------------------------------------------------
Independent Auditors
To the Shareholders and Board of Directors of CSX Corporation
We have audited the accompanying consolidated statements of financial
position of CSX Corporation and subsidiaries as of December 27, 2002 and
December 28, 2001, and the related consolidated statements of earnings, cash
flows, and changes in shareholders' equity for each of the three fiscal years in
the period ended December 27, 2002. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
CSX Corporation and subsidiaries at December 27, 2002 and December 28, 2001 and
the consolidated results of their operations and their cash flows for each of
the three fiscal years in the period ended December 27, 2002, in conformity with
accounting principles generally accepted in the United States.
As discussed in Note 1 to the Consolidated Financial Statements, in 2002
the Company changed its method of accounting for indefinite lived intangible
assets.
/s/ Ernst & Young LLP
Jacksonville, Florida
February 11, 2003
- --------------------------------------------------------------------------------
56 CSX 2002 ANNUAL REPORT
Quarterly Financial Data (Unaudited)(a)
2002 2001
----------------------------------------------------------------------------
Year
Quarter 1st(b) 2nd 3rd 4th 1st 2nd 3rd 4th(c)
- -------------------------------------------------------------------------------------------------------------------------
Operating Revenue $1,964 $2,073 $2,055 $2,060 $2,025 $2,057 $2,019 $2,009
Operating Expense 1,752 1,752 1,779 1,742 1,836 1,792 1,737 1,788
-----------------------------------------------------------------------
Operating Income 212 321 276 318 189 265 282 221
Other Income (Expense) 9 4 28 - (29) 37 4 (3)
Interest Expense 114 116 108 107 133 135 129 121
-----------------------------------------------------------------------
Earnings Before Income Taxes and
Cumulative Effect of Accounting Change 107 209 196 211 27 167 157 97
Income Tax Expense 39 74 69 74 7 59 57 32
-----------------------------------------------------------------------
Earnings before Cumulative Effect of
Accounting Change 68 135 127 137 20 108 100 65
Cumulative Effect of Accounting Change,
Net of Tax (43) - - - - - - -
-----------------------------------------------------------------------
Net Earnings $ 25 $ 135 $ 127 $ 137 $ 20 $ 108 $ 100 $ 65
- -------------------------------------------------------------------------------------------------------------------------
Per Common Share
Earnings Per Share:
Before Cumulative Effect of Accounting
Change $ .32 $ .63 $ .60 $ .65 $ .10 $ .51 $ .47 $ .31
Cumulative Effect of Accounting Change (.20) - - - - - - -
-----------------------------------------------------------------------
Including Cumulative Effect of Accounting
Change $ .12 $ .63 $ .60 $ .64 $ .10 $ .51 $ .47 $ .31
-----------------------------------------------------------------------
Earnings Per Share, Assuming Dilution:
Before Cumulative Effect of Accounting
Change $ .32 $ .63 $ .60 $ .64 $ .10 $ .51 $ .47 $ .31
Cumulative Effect of Accounting Change (.20) - - - - - - -
Including Cumulative Effect of Accounting
Change $ .12 $ .63 $ .60 $ .64 $ .10 $ .51 $ .47 $ .31
-----------------------------------------------------------------------
Dividends Per Share $ .10 $ .10 $ .10 $ .10 $ .30 $ .30 $ .10 $ .10
-----------------------------------------------------------------------
Market Price
High $41.40 $37.90 $36.77 $30.12 $34.11 $40.20 $41.30 $38.20
Low $34.81 $32.41 $25.75 $25.09 $24.81 $31.60 $25.44 $29.37
(a) Periods presented are 13-week quarters.
(b) Included in the first quarter of 2002 is a charge to write-down indefinite
lived intangible assets as a cumulative effect of accounting change, which
reduced earnings $83 million before tax, $43 million after tax and minority
interest, 20 cents per share.
(c) Included in the fourth quarter of 2001 is a provision to account for the
settlement of the 1987 New Orleans tank car fire litigation. This charge
reduced earnings by $60 million before tax, $37 million after tax, 17 cents
per share.
Shares Outstanding as of January 24, 2003: 214,686,566
Common Stock Shareholders as of January 24, 2003: 58,819
CSX 2002 ANNUAL REPORT 57
Shareholder Information
- --------------------------------------------------------------------------------
Shareholder Services
Shareholders with questions about their accounts should contact the
transfer agent at the address or telephone number shown below.
Transfer Agent, Registrar and Dividend Disbursing Agent
Computershare Investor Services LLC
Attn: Shareholder Communications
2 North LaSalle Street
P.O. Box A3504
Chicago, IL 60690-3504
(800) 521-5571
e-mail: web.queries@computershare.com
General Questions
General questions about CSX or information contained in company
publications should be directed to Corporate Communications at the address or
telephone number shown below.
Daniel J. Murphy, Director-Corporate Communications
CSX Transportation
500 Water Street, J420
Jacksonville, FL 32202
(904) 359-1469
e-mail: Dan Murphy@csx.com
Investor Relations
Security analysts, portfolio managers or other investment community
representatives should contact Investor Relations at the address or telephone
number shown below.
Fredrik J. Eliasson, Managing Director-Investor Relations
CSX Corporation
500 Water Street, C170
Jacksonville, FL 32202
(904) 359-3305
e-mail: Fred Eliasson@csx.com
Shareholder Services
Ines C. Murray, Shareholder Services
CSX Corporation
500 Water Street, C160
Jacksonville, FL 32202
(904) 366-4242
e-mail: Ines_Murray@csx.com
Direct Stock Purchase and Dividend Reinvestment
CSX provides dividend reinvestment and stock purchase plans for
shareholders and potential shareholders as a convenient method of acquiring CSX
shares through direct purchase, dividend reinvestment and optional cash
payments.
CSXDirectInvest(SM) permits the purchase and sale of shares directly though
Computershare, our transfer agent. Through this plan, no service charges or
brokerage commissions apply to share purchases, and sales can be made with
minimal charges and commissions. Initial investment for a non-shareholder is
$500 plus a $10 one-time enrollment fee. You do not need to own shares of CSX
stock to enroll in this plan. However, if you are a current shareholder, the
initial investment and enrollment fee are waived.
Other benefits of CSXDirectInvest(SM) include the ability to:
o Reinvest dividends automatically in CSX common stock without payment
of any brokerage commissions or service charges, or you may receive
dividend payments on some or all of your shares.
o Make optional cash investments with as little as $50 per month, or up
to $10,000 per month, without any charges or commissions.
o Make gifts of CSX shares to others through the plan, and present them
with a gift memento if desired.
To obtain a prospectus or other information regarding CSXDirectInvest(SM),
please call or write the Computershare Dividend Reinvestment Department at the
phone number or address below. Or, if you prefer, please visit the web site at
www.computershare.com.
CSXDirectInvest(sm)
P. 0. Box A3309
Chicago, IL 60690-3309
(800) 521-5571
e-mail: web.queries@computershare.com
Stock Held in Brokerage Accounts
When a broker holds your stock, it is usually registered in the broker's
name, or "street name." We do not know the identity of shareholders holding
stock in this manner. We know only that a broker holds a certain number of
shares that may be for any number of customers. Any stock held in a street-name
account is not eligible to participate in CSXDirectInvest(SM) (see above). For
shares held in a street-name account, you will receive dividend payments, annual
reports and proxy materials through your broker. Please notify your broker, not
Computershare, if you wish to eliminate unwanted, duplicate mailings.
Lost or Stolen Stock Certificates
If your stock certificates are lost, stolen or in some way destroyed,
notify Computershare in writing immediately.
Multiple Dividend Checks and Duplicate Mailings
Some shareholders hold their stock on CSX records in similar but different
names (e.g. John A. Smith and J.A. Smith). When this occurs, we are required to
create separate accounts for each name. Although the mailing addresses are the
same, we are required to mail separate dividend checks to each account.
Consolidating Accounts
If you want to consolidate separate accounts into one account, contact
Computershare for the necessary forms and instructions. When accounts are
consolidated, it may be necessary to reissue the stock certificates.
Dividends
CSX pays quarterly dividends on its common stock on or about the 15th of
March, June, September and December, when declared by the board of directors, to
shareholders of record approximately three weeks earlier. CSX offers direct
deposit of dividends to shareholders that request it. If you are interested,
please contact Computershare at the address or phone number shown above.
Replacing Dividend Checks
If you do not receive your dividend check within 10 business days after the
payment date or if your check is lost or destroyed, notify Computershare so
payment can be stopped and a replacement check issued.
- --------------------------------------------------------------------------------
58 CSX 2002 ANNUAL REPORT
Corporate Information
Headquarters
500 Water Street, 15th floor
Jacksonville, Florida 32202
(904) 359-3100
www.csx.com
Market Information
CSX's common stock is listed on the New York, London and Swiss stock
exchanges and trades with unlisted privileges on the Midwest, Boston,
Cincinnati, Pacific and Philadelphia stock exchanges. The official trading
symbol is "CSX."
Description of Common and Preferred Stocks
A total of 300 million shares of common stock are authorized, of which
214,686,566 shares were outstanding as of Dec. 27, 2002. Each share is entitled
to one vote in all matters requiring a vote of shareholders. There are no
pre-emptive rights. At Dec. 27, 2002, there were 59,085 registered common stock
shareholders.
A total of 25 million shares of preferred stock are authorized. Series A
consists of 250,000 shares of $7 Cumulative Convertible Preferred Stock. All
outstanding shares of Series A Preferred Stock were redeemed as of July 31,
1992.
Series B consists of 3 million shares of Junior Participating Preferred
Stock, none of which has been issued. These shares will become issuable only
when the rights distributed to holders of common stock under the Shareholder
Rights Plan adopted by CSX on May 29, 1998, become exercisable.
Annual Shareholder Meeting
10 a.m., Wednesday, May 7, 2003
The Radisson Airport Hotel & Conference Center
1375 North Cassady Avenue
Columbus, Ohio
1-800-333-3333
Shareholder House Parties at The Greenbrier
Throughout the year, The Greenbrier offers Shareholder House Parties
featuring discounted rates and special activities. Shareholder House Parties in
2003 are scheduled for:
Easter -- April 17-20
Independence Day -- July 3-6
Labor Day -- August 29-September 1
For information on shareholder parties, contact Maryann Sanford,
Reservations Department, The Greenbrier, 300 W. Main Street, White Sulphur
Springs, WV 24986, or phone toll-free (800) 624-6070 or email,
The_Greenbrier@greenbrier.com.
Again in 2003, The Greenbrier is pleased to extend to all shareholders a 10
percent discount on its Modified American Plan rates, applicable to one visit
per year. Reservations will be accepted on a space-available basis. This offer
does not apply during CSX House Parties, when rates are already discounted, or
if a shareholder is attending a conference being held at The Greenbrier.
Form 10-K
A copy of the company's annual report to the Securities and Exchange
Commission (Form 10-K) will be furnished without charge to any shareholder upon
written request to Corporate Communications, CSX Corporation, 500 Water Street,
J420, Jacksonville, FL 32202. The Form 10-K also is available on the company's
web site at www.csx.com.
CSX 2002 ANNUAL REPORT 59
Board of Directors and Officers
- --------------------------------------------------------------------------------
Board of Directors
Elizabeth E. Bailey (1,2,6)
John C. Hower Professor of Public Policy
and Management, The Wharton School,
University of Pennsylvania, Philadelphia, Pa.
Robert L. Burrus Jr. (1,4,5)
Partner and Chairman,
McGuireWoods LLP, Richmond, Va.
Bruce C. Gottwald (1,2,6)
Chairman, Ethyl Corporation, Richmond, Va.
John R. Hall (2,3)
Former Chairman of Arch Coal, Inc.
and Retired Chairman and CEO
Ashland Inc., Ashland, Ky.
Edward J. Kelly III (2,4)
President and CEO,
Mercantile Bankshares Corporation,
Baltimore, Md.
Robert D. Kunisch (1,3,6)
Special Partner ABS Capital Partners Inc.
and Adviser and Former Vice Chairman,
Cendant Corporation, Hunt Valley, Md.
James W. McGlothlin (4,5)
Chairman and CEO,
The United Company, Bristol, Va.
Southwood J. Morcott (4,6)
Retired Chairman and CEO,
Dana Corporation, Toledo, Ohio
David M. Ratcliffe (5,6)
President and CEO, Georgia Power Company
and Executive Vice President,
Southern Company, Atlanta, Ga.
Charles E. Rice (4,6)
Chairman, Mayport Venture Partners LLC
and Retired Vice Chairman Corporate
Development, Bank of America,
Jacksonville, Fla.
William C. Richardson (2,3)
President and CEO,
W.K. Kellogg Foundation, Battle
Creek, Mich.
Frank S. Royal M.D. (1,3,5)
Physician and Health Care Authority,
Richmond, Va.
Donald J. Shepard (2,4)
Chairman, Executive Board and CEO,
AEGON N.V., Netherlands
Michael J. Ward (1)
Chairman, President and CEO,
CSX Corporation
Jacksonville, Fla.
Corporate Officers
Michael J. Ward*
Chairman, President and CEO
Paul R. Goodwin*
Vice Chairman and Chief Financial Officer
Andrew B. Fogarty*
Executive Vice President-Corporate Services
Ellen M. Fitzsimmons*
Senior Vice President-Law
Robert J. Haulter
Senior Vice President-Human Resources
Arnold I. Havens
Senior Vice President-Government Affairs
Lester M. Passa*
Senior Vice President-Strategic Planning
Peter J. Shudtz
Senior Vice President-Regulatory Affairs and
Washington Counsel
David A. Boor
Vice President and Treasurer
Asok K. Chaudhuri
Vice President-Financial Planning
Michael A. Hollingsworth
Vice President-Corporate Communations
Stephen R. Larson
Vice President-General Counsel and
Corporate Secretary
Jeffrey C. McCutcheon
Vice President-Corporate Human Resources
William F. Miller
Vice President-Audit and Advisory Services
James P. Peter
Vice President-Taxes
Michael J. Ruehling
Vice President-State Relations
Carolyn T. Sizemore*
Vice President and Controller
* Executive officers of the corporation.
Unit Officers
CSX Transportation Inc.
Alan F. Crown*
Executive Vice President-Transportation
P Michael Giftos*
Executive Vice President and Chief
Commercial Officer
W. Michael Cantrell
Senior Vice President-Mechanical and
Engineering
James W. Fallon
Senior Vice President-Transportation
Frederick J. Favorite Jr.*
Senior Vice President-Finance
Clarence W. Gooden
Senior Vice President-Merchandise Service
Group
Christopher P. Jenkins
Senior Vice President-Coal Service Group
Howard J. Levy
Senior Vice President-Procurement
Franklin E. Pursley
Senior Vice President-Service Design
Kenneth R. Peifer
Vice President-Labor Relations
CSX Intermodal Inc.
Alan P Blumenfeld, President
CSX Lines LLC
Charles G. Raymond*, President and CEO
CSX World Terminals LLC
Robert J. Grassi*, President and CEO
CSX Technology Inc.
Charles J. 0. Wodehouse Jr., President
The Greenbrier
Ted J. Kleisner
President and Managing Director
* Executive officers of the corporation.
--------------------------------
Key to committees of the Board
1-Executive
2-Audit
3-Compensation
4-Finance
5-Nominating and Organization
6-Public Affairs
--------------------------------
- --------------------------------------------------------------------------------
60 CSX 2002 ANNUAL REPORT
CSX Corporation
500 Water Street, 15th floor
Jacksonville, FL 32202
904/359-3200
www.csx.com
CSX Transportation Inc.
500 Water Street
Jacksonville, FL 32202
904/359-3100
www.csxt.com
CSX Intermodal Inc.
301 West Bay Street
Jacksonville, FL 32202
904/633-1000
www.csxi.com
CSX Lines LLC
2101 Rexford Road
Suite 350 West
Charlotte, NC 28211
704/973-7000
www.csxlines.com
CSX World Terminals LLC
2101 Rexford Road
Suite 250 West
Charlotte, NC 28211
704/973-7200
www.csxworldterminals.com
The Greenbrier
300 West Main Street
White Sulphur Springs, WV 24986
304/536-1110
www.greenbrier.com
CSX
500 Water Street
Jacksonville, FL 32202
WWW.CSX.COM