FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarter ended March 29, 2002
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number 1-8022
CSX CORPORATION
(Exact name of registrant as specified in its charter)
Virginia 62-1051971
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
901 East Cary Street, Richmond, Virginia 23219-4031
(Address of principal executive offices) (Zip Code)
(804) 782-1400
(Registrant's telephone number, including area code)
No Change
(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes (X) No ( )
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of March 29, 2002: 212,362,201 shares.
-1-
CSX CORPORATION
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 29, 2002
INDEX
Page Number
PART I. FINANCIAL INFORMATION
Item 1: Financial Statements
Consolidated Statement of Earnings (Unaudited) -
Quarters Ended March 29, 2002 and March 30, 2001 3
Consolidated Statement of Cash Flows (Unaudited) -
Quarters Ended March 29, 2002 and March 30, 2001 4
Consolidated Statement of Financial Position-
At March 29, 2002 (Unaudited) and December 28, 2001 5
Notes to Consolidated Financial Statements (Unaudited) 6
Item 2: Management's Discussion and Analysis of Results of Operations
and Financial Condition 22
Item 3: Quantitative and Qualitative Disclosures About Market Risk 31
PART II. OTHER INFORMATION
Item 6: Exhibits and Reports on Form 8-K 32
Signature 32
-2-
CSX CORPORATION AND SUBSIDIARIES
Consolidated Statement of Earnings
(Millions of Dollars, Except Per Share Amounts)
(Unaudited)
Quarters Ended
----------------------
March 29, March 30,
2002 2001
--------- ---------
Operating Revenue $ 1,964 $ 2,025
Operating Expense 1,752 1,836
--------- ---------
Operating Income 212 189
Other Income (Expense) 9 (29)
Interest Expense 114 133
--------- ---------
Earnings before Income Taxes and Cumulative Effect of Accounting Change 107 27
Income Tax Expense 39 7
--------- ---------
Earnings before Cumulative Effect of Accounting Change 68 20
Cumulative Effect of Accounting Change - Net of tax (43) --
--------- ---------
Net Earnings $ 25 $ 20
========= =========
Earnings Per Share:
Before Cumulative Effect of Accounting Change $ 0.32 $ 0.10
Cumulative Effect of Accounting Change (0.20) --
--------- ---------
Including Cumulative Effect of Accounting Change $ 0.12 $ 0.10
========= =========
Earnings Per Share, Assuming Dilution:
Before Cumulative Effect of Accounting Change $ 0.32 $ 0.10
Cumulative Effect of Accounting Change (0.20) --
--------- ---------
Including Cumulative Effect of Accounting Change $ 0.12 $ 0.10
========= =========
Average Common Shares Outstanding (Thousands) 212,053 211,299
========= =========
Average Common Shares Outstanding, Assuming Dilution (Thousands) 213,190 211,897
========= =========
Cash Dividends Paid Per Common Share $ 0.10 $ 0.30
========= =========
See accompanying Notes to Consolidated Financial Statements.
-3-
CSX CORPORATION AND SUBSIDIARIES
Consolidated Statement of Cash Flows
(Millions of Dollars)
(Unaudited)
Quarters Ended
----------------------
March 29, March 30,
2002 2001
--------- ---------
OPERATING ACTIVITIES
Net Earnings $ 25 $ 20
Adjustments to Reconcile Net Earnings to Net Cash Provided:
Cumulative Effect of Accounting Change 43 --
Depreciation 155 157
Deferred Income Taxes 20 4
Equity in Conrail Earnings - Net (1) (5)
Other Operating Activities 6 1
Changes in Operating Assets and Liabilities:
Accounts Receivable 34 10
Other Current Assets (43) (18)
Accounts Payable (26) (22)
Other Current Liabilities (53) (147)
--------- ---------
Net Cash Provided by Operating Activities 160 --
--------- ---------
INVESTING ACTIVITIES
Property Additions (162) (183)
Short-term Investments - Net (158) (77)
Other Investing Activities (11) (5)
--------- ---------
Net Cash Used by Investing Activities (331) (265)
--------- ---------
FINANCING ACTIVITIES
Short-term Debt - Net -- (271)
Long-term Debt Issued 450 500
Long-term Debt Repaid (267) (48)
Cash Dividends Paid (21) (64)
Other Financing Activities 12 8
--------- ---------
Net Cash Provided by Financing Activities 174 125
--------- ---------
Net Increase (Decrease) in Cash and Cash Equivalents 3 (140)
CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
Cash and Cash Equivalents at Beginning of Period 137 261
--------- ---------
Cash and Cash Equivalents at End of Period 140 121
Short-term Investments at End of Period 641 500
--------- ---------
Cash, Cash Equivalents and Short-term
Investments at End of Period $ 781 $ 621
========= =========
See accompanying Notes to Consolidated Financial Statements.
-4-
CSX CORPORATION AND SUBSIDIARIES
Consolidated Statement of Financial Position
(Millions of Dollars)
(Unaudited)
March 29, December 28,
2002 2001
------------ ------------
ASSETS
Current Assets
Cash, Cash Equivalents and Short-Term Investments $ 781 $ 618
Accounts Receivable, Net 809 878
Materials and Supplies 223 206
Deferred Income Taxes 131 162
Other Current Assets 232 210
------------ -----------
Total Current Assets 2,176 2,074
Properties 18,261 18,151
Accumulated Depreciation (5,282) (5,179)
------------ -----------
Properties-Net 12,979 12,972
Investment in Conrail 4,656 4,655
Affiliates and Other Companies 388 382
Other Long-term Assets 643 718
------------ -----------
Total Assets $ 20,842 $ 20,801
============ ===========
LIABILITIES
Current Liabilities
Accounts Payable $ 912 $ 966
Labor and Fringe Benefits Payable 396 418
Casualty, Environmental and Other Reserves 247 250
Current Maturities of Long-term Debt 952 1,044
Short-term Debt - 225
Income and Other Taxes Payable 116 101
Other Current Liabilities 238 299
------------ -----------
Total Current Liabilities 2,861 3,303
Casualty, Environmental and Other Reserves 678 690
Long-term Debt 6,361 5,839
Deferred Income Taxes 3,575 3,621
Other Long-term Liabilities 1,223 1,228
------------ -----------
Total Liabilities 14,698 14,681
------------ -----------
SHAREHOLDERS' EQUITY
Common Stock, $1 Par Value 214 214
Other Capital 1,511 1,492
Retained Earnings 4,463 4,459
Accumulated Other Comprehensive Loss (44) (45)
------------ -----------
Total Shareholders' Equity 6,144 6,120
------------ -----------
Total Liabilities and Shareholders' Equity $ 20,842 $ 20,801
============ ===========
See accompanying Notes to Consolidated Financial Statements.
-5-
CSX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
(All Tables in Millions of Dollars, Except Per Share Amounts)
NOTE 1. BASIS OF PRESENTATION
In the opinion of management, the accompanying consolidated financial
statements contain all adjustments necessary to present fairly the financial
position of CSX Corporation and subsidiaries ("CSX" or the "Company") at March
29, 2002 and December 28, 2001, and the results of its operations and cash flows
for the three months ended March 29, 2002 and March 30, 2001, such adjustments
being of a normal recurring nature. Certain prior-year data have been
reclassified to conform to the 2002 presentation.
While the Company believes that the disclosures presented are adequate
to make the information not misleading, it is suggested that these financial
statements be read in conjunction with the financial statements and the notes
included in the Company's latest Annual Report and Form 10-K.
CSX follows a 52/53 week fiscal reporting calendar. Fiscal years 2002
and 2001 consist of 52 weeks ending on December 27, 2002 and December 28, 2001,
respectively. The financial statements presented are for the 13-week quarters
ended March 29, 2002 and March 30, 2001, and as of December 28, 2001.
Comprehensive income approximates net earnings for all periods
presented in the accompanying consolidated statement of earnings.
NOTE 2. EARNINGS PER SHARE
Earnings per share are based on the weighted average number of common
shares outstanding for the fiscal quarters ended March 29, 2002 and March 30,
2001. 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, principally arising from employee stock
plans. For the fiscal quarters ended March 29, 2002 and March 30, 2001,
potential common shares that were dilutive totaled 1.1 million and 0.6 million,
respectively.
Certain potential common shares outstanding at March 29, 2002 and March
30, 2001 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, accordingly,
their effect is antidilutive. These shares totaled 30.0 million at a
weighted-average exercise price of $47.32 per share at March 29, 2002 and 17.0
million with a weighted-average exercise price of $43.76 per share at March 30,
2001.
NOTE 3. NEW ACCOUNTING PRONOUNCEMENTS
In 2001, Statement of Financial Accounting Standard No. 142 (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 in the first quarter of 2002 and incurred a pre-tax charge
of $83 million, after-tax charge of $43 million, 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.
-6-
CSX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited), Continued
(All Tables in Millions of Dollars, Except Per Share Amounts)
NOTE 4. INVESTMENT IN AND INTEGRATED RAIL OPERATIONS WITH CONRAIL
Background
----------
CSX and Norfolk Southern Corporation ("Norfolk Southern") completed the
acquisition of Conrail Inc. ("Conrail") in May 1997. Conrail owns the primary
freight railroad system serving the northeastern United States, and its rail
network extends into several midwestern states and into Canada. CSX and Norfolk
Southern, through a jointly owned acquisition entity, hold economic interests in
Conrail of 42% and 58%, respectively, and voting interests of 50% each. CSX and
Norfolk Southern 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.
Conrail Financial Information
-----------------------------
Summary financial information for Conrail for its fiscal periods ended
March 31, 2002 and 2001, and at December 31, 2001, is as follows:
Quarters Ended
-----------------------------------
March 31, March 31,
2002 2001
-------------- -------------
Income Statement Information:
Revenues $ 225 $ 233
Income from Operations 61 64
Net Income 36 45
As Of
-----------------------------------
March 31, December 31,
2002 2001
-------------- -------------
Balance Sheet Information:
Current Assets $ 325 $ 846
Property and Equipment and Other Assets 7,788 7,236
Total Assets 8,113 8,082
Current Liabilities 449 408
Long-Term Debt 1,144 1,156
Total Liabilities 3,972 3,977
Stockholders' Equity 4,141 4,105
-7-
CSX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited), Continued
(All Tables in Millions of Dollars, Except Per Share Amounts)
NOTE 4. INVESTMENT IN AND INTEGRATED RAIL OPERATIONS WITH CONRAIL, Continued
CSX's Accounting for Its Investment in and Integrated Rail Operations with
--------------------------------------------------------------------------
Conrail
-------
Upon integration, substantially all of Conrail's customer freight
contracts were assumed by CSX and Norfolk Southern. As a result, CSX's rail and
intermodal operating revenue includes revenue from traffic previously moving on
Conrail. Operating expenses reflect corresponding increases for costs incurred
to handle the new traffic and operate the former Conrail lines. Rail operating
expenses includes an expense category, "Conrail Operating Fee, Rent and
Services," which reflects payments to Conrail for the use of right-of-way and
equipment, as well as charges for transportation, switching, and terminal
services in the Shared Asset Areas that Conrail operates for the joint benefit
of CSX and Norfolk Southern. This expense category also includes amortization of
the fair value write-up arising from the acquisition of Conrail, as well as
CSX's proportionate share of Conrail's net income or loss recognized under the
equity method of accounting.
Transactions with Conrail
-------------------------
The agreement under which CSX operates its allocated portion of the
Conrail route system has an initial term of 25 years and may be renewed at CSX's
option for two five-year terms. Operating fees paid to Conrail under the
agreement are subject to adjustment every six years based on the fair value of
the underlying system. Lease agreements for the Conrail equipment operated by
CSX cover varying terms. CSX is responsible for all costs of operating,
maintaining, and improving the routes and equipment under these agreements.
At March 29, 2002, CSX had no amounts receivable from Conrail, while at
December 28, 2001, amounts receivable from Conrail totaled $3 million,
principally for reimbursement of certain capital improvement costs. Conrail
advances its available cash balances to CSX and Norfolk Southern under a
variable-rate note, maturing on March 28, 2007. At March 29, 2002 and December
28, 2001, Conrail had advanced $275 million and $225 million, respectively, to
CSX under this arrangement at interest rates of 2.75% and 2.5%, respectively.
CSX also had amounts payable to Conrail of $78 million and $88 million at March
29, 2002 and December 28, 2001, respectively, representing expenses incurred
under the operating, equipment, and shared area agreements with Conrail.
-8-
CSX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited), Continued
(All Tables in Millions of Dollars, Except Per Share Amounts)
NOTE 5. ACCOUNTS RECEIVABLE
The Company sells revolving interests in its rail accounts receivable
to public investors through a securitization program and to financial
institutions through commercial paper conduit programs. The accounts receivable
are sold, without recourse, to a wholly-owned, special-purpose subsidiary, which
then transfers the receivables, with recourse, to a master trust. The
securitization and conduit programs are accounted for as sales in accordance
with SFAS 140 "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities." Receivables sold under these arrangements are
excluded from accounts receivable in the consolidated statement of financial
position. At March 29, 2002, the agreements provide for the sale of up to $350
million in receivables through the securitization program and $200 million
through the conduit programs.
At March 29, 2002 and December 28, 2001, the Company had sold $500
million of accounts receivable; $300 million through the securitization program
and $200 million through the conduit programs. The certificates issued under the
securitization program bear interest at 6% annually and mature in June 2003.
Receivables sold under the conduit programs require yield payments based on
prevailing commercial paper rates (2.06% at March 29, 2002) plus incremental
fees. The Company's retained interest in the receivables in the master trust
were approximately $430 million and $466 million at March 29, 2002 and December
28, 2001, respectively, and are included in accounts receivable. Losses
recognized on the sale of accounts receivable totaled $8 million and $12 million
for the quarters ended March 29, 2002 and March 30, 2001, respectively.
The Company has retained the responsibility for servicing accounts
receivable transferred to the master trust. The average servicing period is
approximately one month. No servicing asset or liability has been recorded since
fees the Company receives for servicing the receivables approximate the related
costs.
The Company maintains an allowance for doubtful accounts based upon the
expected collectibility of accounts receivable including receivables transferred
to the master trust. Allowances for doubtful accounts of $99 million and $100
million have been applied as a reduction of accounts receivable at March 29,
2002, and December 28, 2001, respectively.
-9-
CSX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited), Continued
(All Tables in Millions of Dollars, Except Per Share Amounts)
NOTE 6. OPERATING EXPENSE
Quarters Ended
------------------------
March 29, March 30,
2002 2001
---------- ----------
Labor and Fringe Benefits $ 733 $ 756
Materials, Supplies and Other 430 424
Conrail Operating Fee, Rent & Services 87 83
Building and Equipment Rent 148 163
Inland Transportation 86 85
Depreciation 152 155
Fuel 116 170
---------- ----------
Total $ 1,752 $ 1,836
========== ==========
NOTE 7. OTHER INCOME (EXPENSE)
Quarters Ended
-------------------------
March 29, March 30,
2002 2001
---------- ----------
Interest Income $ 7 $ 13
Income (Loss) from Real Estate and Resort
Operations/(1)/ 32 (3)
Net Losses from Accounts Receivable Sold (8) (12)
Minority Interest (8) (8)
Equity Losses in Other Affiliates/(2)/ (6) (16)
Miscellaneous (8) (3)
---------- ----------
Total $ 9 $ (29)
========== ==========
/(1)/ Gross revenue from real estate and resort operations was $63 million and
$25 million for the quarters ended March 29, 2002 and March 30, 2001,
respectively. A $36 million pre-tax gain from a property sale had a
favorable impact on other income in 2002.
/(2)/ Included in equity losses in other affiliates was the $14 million
write-off of an investment in a non-rail affiliate, during the quarter
ended March 30, 2001.
NOTE 8. DEBT AND CREDIT AGREEMENTS
During the quarter ended March 29, 2002, the Company issued $400
million aggregate principal amount of 6.30% notes due 2012. Proceeds of the
notes will be used to refinance other debt coming due in the second quarter of
2002.
During the quarter ended March 29, 2002, the Company exchanged
$225 million of notes payable to Conrail for a new long-term note. Additionally,
the note payable was increased by $50 million, for a total of $275 million. The
note matures on March 28, 2007, and has been appropriately classified as
long-term debt. (See Note 4)
-10-
CSX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited), Continued
(All Tables in Millions of Dollars, Except Per Share Amounts)
NOTE 9. DERIVATIVE FINANCIAL INSTRUMENTS
On March 20, 2002, CSX entered into an interest rate swap agreement on
its $150 million, 8.30% notes due May 1, 2032, in addition to its already
outstanding interest rate swap agreements on its $300 million, 7.25% notes due
May 1, 2004, $150 million, 5.85% notes due December 1, 2003, $50 million, 6.46%
notes due June 22, 2005, $300 million, 9% notes due August 15, 2006 and $450
million, 7.45% notes due May 1, 2007. 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 fixed rate payments (on March 29, 2002 the variable and
fixed rate weighted averages were 5.07% and 7.62%, respectively), effectively
transforming the notes 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 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 Statement of Financial Accounting Standards No. 133, "Accounting For
Derivative Instruments and Hedging Activities" ("SFAS 133"), is recognized
immediately in earnings. The Company's interest rate swaps qualify as perfectly
effective fair value hedges, as defined by SFAS 133. As such, there was no
ineffective portion to the hedge recognized in earnings during the period.
Long-term debt has been decreased $27 million and $26 million for the fair
market value of the interest rate swap agreements at March 29, 2002 and December
28, 2001, respectively.
The differential to be paid or received under these agreements is
accrued consistently with the terms of the agreements and is recognized in
interest expense over the term of the related debt. The related amounts payable
to or receivable from counterparties are included in other liabilities or
assets. Cash flows related to interest rate swap agreements are classified as
"Operating activities" in the Consolidated Statements of Cash Flows. For the
three months ended March 29, 2001, the Company reduced interest expense by
approximately $7.3 million as a result of the interest rate swap agreements that
were in place during that period. There were no interest rate swaps in place
during the quarter ended March 31, 2001.
The Company is exposed to credit loss in the event of nonperformance
by the other parties to the interest rate swap agreements. However, the Company
does not anticipate nonperformance by the counterparties.
-11-
CSX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited), Continued
(All Tables in Millions of Dollars, Except Per Share Amounts)
NOTE 10. COMMITMENTS AND CONTINGENCIES
Purchase Commitments
--------------------
The Company has entered into fuel purchase agreements for approximately
50% of its fuel requirements over the next nine months. These agreements amount
to approximately 220 million gallons in commitments at a weighted average of 77
cents per gallon. These contracts require the Company to take monthly delivery
of specified quantities of fuel at a fixed price. These contracts cannot be net
settled.
The Company also has a commitment under a long-term maintenance program
for approximately 40% of CSXT's fleet of locomotives. The agreement expires in
2024 and totals $2.7 billion.
Contingencies
-------------
Self-Insurance
Although the Company obtains substantial amounts of commercial insurance
for potential losses for third-party liability and property damage, reasonable
levels of risk are retained on a self-insurance basis. A portion of the
insurance coverage, $25 million limit above $100 million per occurrence from
rail and certain other operations, is provided by a company partially owned by
CSX.
Environmental
CSXT is a party to various proceedings involving private parties and
regulatory agencies related to environmental issues. CSXT has been identified as
a potentially responsible party (PRP) at 92 environmentally impaired sites that
are or may be subject to remedial action under the Federal Superfund statute
("Superfund") or similar state statutes. A number of these proceedings are based
on allegations that CSXT, or its railroad predecessors, sent hazardous
substances to the facilities in question for disposal. Such proceedings arising
under Superfund or similar state statutes can involve numerous other waste
generators and disposal companies and seek to allocate or recover costs
associated with site investigation and cleanup, which could be substantial.
CSXT is involved in a number of administrative and judicial proceedings
and other clean-up efforts at 220 sites, including the sites addressed under
Superfund or similar state statutes, where it is participating in the study
and/or clean-up of alleged environmental contamination. The assessment of the
required response and remedial costs associated with most sites is extremely
complex. Cost estimates are based on information available for each site,
financial viability of other PRPs, where available, and existing technology,
laws and regulations. CSXT's best estimates of the allocation method and
percentage of liability when other PRPs are involved are based on assessments by
consultants, agreements among PRPs, or determinations by the U.S. Environmental
Protection Agency or other regulatory agencies.
-12-
CSX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited), Continued
(All Tables in Millions of Dollars, Except Per Share Amounts)
NOTE 10. COMMITMENTS AND CONTINGENCIES, Continued
Environmental, Continued
At least once each quarter, CSXT reviews its role, if any, with respect
to each such location, giving consideration to the nature of CSXT's alleged
connection to the location (e.g., generator, owner or operator), the extent of
CSXT's alleged connection (e.g., volume of waste sent to the location and other
relevant factors), the accuracy and strength of evidence connecting CSXT to the
location, and the number, connection and financial position of other named and
unnamed PRPs at the location. The ultimate liability for remediation can be
difficult to determine with certainty because of the number and creditworthiness
of PRPs involved. Through the assessment process, CSXT monitors the
creditworthiness of such PRPs in determining ultimate liability.
Based upon such reviews and updates of the sites with which it is
involved, CSXT has recorded, and reviews at least quarterly for adequacy,
reserves to cover estimated contingent future environmental costs with respect
to such sites. The recorded liabilities for estimated future environmental costs
at March 29, 2002 and December 28, 2001 were $34 million and $32 million,
respectively. These recorded liabilities, which are undiscounted, include
amounts representing CSXT's estimate of unasserted claims, which CSXT believes
to be immaterial. The liability has been accrued for future costs for all sites
where the Company's obligation is probable and where such costs can be
reasonably estimated. The liability includes future costs for remediation and
restoration of sites as well as any significant ongoing monitoring costs, but
excludes any anticipated insurance recoveries. The majority of the March 29,
2002 environmental liability is expected to be paid out over the next five to
seven years, funded by cash generated from operations.
The Company does not currently possess sufficient information to
reasonably estimate the amounts of additional liabilities, if any, on some sites
until completion of future environmental studies. In addition, latent conditions
at any given location could result in exposure, the amount and materiality of
which cannot presently be reliably estimated. Based upon information currently
available, however, the Company believes 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.
STB Proceeding
In December 2001 Duke Energy Corporation ("Duke") filed a complaint
before the U.S. Surface Transportation Board alleging that certain CSXT common
carrier coal rates are unreasonably high. A similar complaint was filed by Duke
against Norfolk Southern. The outcome of the ongoing proceeding against CSXT is
uncertain and would only apply to billings subsequent to December 2001. CSXT is
pursuing an aggressive legal strategy in its defense against this complaint. An
unfavorable outcome to this complaint would not have a material effect on the
Company.
Sale of International Container-Shipping Assets
In December 1999, CSX sold certain assets comprising Sea-Land's
international liner business to A. P. Moller-Maersk Line (Maersk). Maersk
acquired vessels, containers, certain terminal facilities and various other
assets and related liabilities of the international liner business. The
agreement with Maersk provides for a post-closing working capital adjustment to
the sales price based on the change in working capital, as defined in the
agreement, between June 25, 1999, and December 10, 1999. The Company has
recorded a receivable of approximately $70 million in connection with the
post-closing working capital adjustment and this amount is currently in dispute.
This matter, together with other issues relating to the contractual obligations
of the Company, has been submitted to arbitration.
-13-
CSX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited), Continued
(All Tables in Millions of Dollars, Except Per Share Amounts)
NOTE 10. COMMITMENTS AND CONTINGENCIES, Continued
In addition to the disputes relating to the sale of the international
container shipping assets, CSX has received a claim amounting to approximately
$180 million plus interest from Europe Container Terminals bv (ECT), owner of
the Rotterdam Container Terminal previously operated by Sea-Land prior to its
sale to Maersk. ECT has claimed that the sale of the international liner
business to Maersk resulted in a breach of the Sea-Land terminal agreements. ECT
has refused to accept containers at the former Sea-Land facility tendered by
Maersk Sea-Land and is seeking compensation from CSX related to the alleged
breach. CSX has also advised Maersk that CSX will hold them responsible for any
damages that may result from this dispute. A final ruling on ECT's claim, which
has advanced to formal binding arbitration in Rotterdam, is not expected before
late summer of 2002. Management believes that valid defenses to this claim
exist.
Although management believes it 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 in future reporting periods.
New Orleans Tank Car Fire
In September 1997 a state court jury in New Orleans, Louisiana returned a
$2.5 billion punitive damages award against CSXT. The award was made in a
class-action lawsuit against a group of nine companies based on personal
injuries alleged to have arisen from a 1987 tank car fire. In October 1997 the
Louisiana Supreme Court set aside the punitive damages judgment, ruling the
judgment should not have been entered until all liability issues were resolved.
Six of the nine defendants settled with the plaintiffs' representatives in 1999.
On November 5, 1999, the trial court granted CSXT's motion for judgment
notwithstanding the verdict, and effectively reduced the amount of the punitive
damages verdict from $2.5 billion to $850 million.
A judgment reflecting the $850 million punitive award has been entered
against CSXT. In June 2001 the Louisiana Court of Appeal for the Fourth Circuit
affirmed the judgment of the trial court, which reduced the punitive damages
verdict from $2.5 billion to $850 million. CSXT then filed with the Louisiana
Supreme Court an application that the court take jurisdiction over and reverse
the 1997 punitive damages award.
In November 2001 CSXT announced that it had reached a proposed settlement
of the litigation, subject to a fairness hearing and court approval. The amount
to be paid by CSXT under the settlement is $220 million, to resolve all claims
arising out of the 1987 fire and evacuation (whether or not included in the
present class-action lawsuit). CSXT incurred a charge of $60 million before tax,
$37 million after tax, 17 cents per share in the fourth quarter of 2001 to
account for the expense of the settlement, net of insurance recoveries.
In April 2002 the trial court held a fairness hearing respecting the
proposed CSXT settlement. The same day, the trial court issued an order that,
among other things, (1) gave final approval to the settlement; (2) provided that
any and all liability of CSXT pursuant to any of the judgments previously
entered in the litigation was satisfied; and (3) determined that upon the "final
settlement date" as defined in the preliminary settlement agreement between CSXT
and the plaintiffs' representatives, the case will be finally dismissed against
CSXT. The "final settlement date" is defined as the date by which the April 2002
order becomes final and non-appealable (calculated as June 10, 2002, if no
appeals from the order are taken) or all appeals from the order are finally
resolved, and the date by which certain other events must occur as provided in
the preliminary settlement agreement.
-14-
CSX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited), Continued
(All Tables in Millions of Dollars, Except Per Share Amounts)
NOTE 10. COMMITMENTS AND CONTINGENCIES, Continued
Other Legal Proceedings
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 the 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.
NOTE 11. 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 16 ocean vessels
and 22,000 containers serving the trade between ports on the United States
mainland and Alaska, Guam, Hawaii and Puerto Rico. The International Terminals
segment operates container freight terminal facilities in Hong Kong, China,
Australia, Europe, Russia and Latin America. The Company's segments are
strategic business units that offer different services and are managed
separately based on the differences in these services. Because of their close
interrelationship, the Rail and Intermodal segments are viewed on a combined
basis as Surface Transportation operations and the Domestic Container Shipping
and International Terminals segments are viewed on a combined basis as Marine
Services operations.
The Company evaluates performance and allocates resources based on
several factors, of which the primary financial measure is business segment
operating income, defined as income from operations, excluding the effects of
non-recurring charges and gains. The accounting policies of the segments are the
same as those described in the summary of significant accounting policies (Note
1), except that for segment reporting purposes, CSX includes minority interest
expense on the International Terminals segment's joint venture businesses in
operating expense. These amounts are reclassified in CSX's consolidated
financial statements to other expense. Intersegment sales and transfers are
generally accounted for as if the sales or transfers were to third parties, that
is, at current market prices.
Business segment information for the quarters ended March 29, 2002 and
March 30, 2001 is as follows: Quarter ended March 29, 2002:
-----------------------------
Marine Services
-----------------------------------
Surface Transportation Domestic
--------------------------------- Container International
Rail Intermodal Total Shipping Terminals Total Total
------------------------------------------------------------------------------------
Revenues from external customers $ 1,486 $257 $ 1,743 $161 $ 60 $ 221 $ 1,964
Intersegment revenues - 5 5 - 1 1 6
Segment operating income 177 17 194 1 11 12 206
Assets 12,734 437 13,171 482 895 1,377 14,548
-15-
CSX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited), Continued
(All Tables in Millions of Dollars, Except Per Share Amounts)
NOTE 11. BUSINESS SEGMENTS, Continued
Quarter ended March 30, 2001:
----------------------------
Marine Services
--------------------------------
Surface Transportation Domestic
---------------------------------
Container International
Rail Intermodal Total Shipping Terminals Total Total
---------------------------------------------------------------------------------
Revenues from external customers $ 1,532 $265 $ 1,797 $161 $ 67 $ 228 $ 2,025
Intersegment revenues - 5 5 - 1 1 6
Segment operating income 166 16 182 (3) 12 9 191
Assets 12,911 418 13,329 299 795 1,094 14,423
A reconciliation of the totals reported for the business segments to
the applicable line items in the consolidated financial statements is as
follows:
March 29, March 30,
2002 2001
----------- -----------
Revenues:
--------
Total external revenues for business segments $ 1,964 $ 2,025
Intersegment revenues for business segments 6 6
Elimination of intersegment revenues (6) (6)
----------- -----------
Total consolidated revenues $ 1,964 $ 2,025
=========== ===========
Operating Income:
----------------
Total operating income for business segments $ 206 $ 191
Reclassification of minority interest expense for
International Terminals segment 8 8
Unallocated corporate expenses (2) (10)
----------- -----------
Total consolidated operating income $ 212 $ 189
=========== ===========
Assets:
------
Assets for Business Segments $ 14,548 $ 14,423
Investment in Conrail 4,656 4,673
Elimination of intercompany receivables (231) 180
Non-segment assets 1,869 1,162
----------- -----------
Total consolidated assets $ 20,842 $ 20,438
=========== ===========
-16-
CSX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited), Continued
(All Tables in Millions of Dollars, except Per Share Amounts)
NOTE 12. SUMMARIZED CONSOLIDATING FINANCIAL DATA- CSX LINES
During 1987, CSX Lines entered into agreements to sell and lease back by charter
three new U.S. -built, U.S. -flag, D-7 class container ships. CSX has guaranteed
the obligations of CSX Lines pursuant to the related charters which, along with
the container ships, serve as collateral for debt securities registered with the
Securities and Exchange Commission ("SEC"). The March 29, 2002, March 30, 2001,
and December 28, 2001, consolidating schedules reflect CSX Lines as the obligor.
In accordance with SEC disclosure requirements, consolidating financial
information for the parent and guarantors are as follows (amounts in millions):
Consolidating Statements of Financial Position
March 29, 2002
CSX Corporate CSX Lines Other Eliminations Consolidated
--------------- --------- --------- ------------ ------------
ASSETS
Current Assets
Cash, Cash Equivalents and Short-term Investments $ 578 $ 39 $ 164 $ -- $ 781
Accounts Receivable - Net 53 40 970 (254) 809
Materials and Supplies -- 15 208 -- 223
Deferred Income Taxes -- -- 131 -- 131
Other Current Assets 4 33 330 (135) 232
--------- ------- --------- -------- --------
Total Current Assets 635 127 1,803 (389) 2,176
Properties 29 405 17,827 -- 18,261
Accumulated Depreciation (27) (269) (4,986) -- (5,282)
--------- ------- --------- -------- --------
Properties, net 2 136 12,841 -- 12,979
Investment in Conrail 350 -- 4,306 -- 4,656
Affiliates and Other Companies 2 84 334 (32) 388
Investment in Consolidated Subsidiaries 12,625 -- 396 (13,021) --
Other Long-term assets 834 135 239 (565) 643
--------- ------- --------- -------- --------
Total Assets $ 14,448 $ 482 $ 19,919 $(14,007) $ 20,842
========= ======= ========= ======== ========
LIABILITIES
Current Liabilities
Accounts Payable $ 117 $ 64 $ 918 $ (187) $ 912
Labor and Fringe Benefits Payable 21 13 362 -- 396
Payable to Affiliates -- -- 135 (135) --
Casualty, Environmental and Other Reserves 1 3 243 -- 247
Current Maturities of Long-term Debt 750 21 181 -- 952
Short-term Debt -- -- -- -- --
Income and Other Taxes Payable 1,337 27 (1,248) -- 116
Other Current Liabilities 36 18 251 (67) 238
--------- ------- --------- -------- --------
Total Current Liabilities 2,262 146 842 (389) 2,861
Casualty, Environmental and Other reserves 3 4 671 -- 678
Long-term Debt 5,254 132 975 -- 6,361
Deferred Income Taxes -- 70 3,505 -- 3,575
Long-term Payable to Affiliates 396 -- 170 (566) --
Other Long-term Liabilities 358 48 847 (30) 1,223
--------- ------- --------- -------- --------
Total Liabilities 8,273 400 7,010 (985) 14,698
--------- ------- --------- -------- --------
SHAREHOLDER'S EQUITY
Preferred Stock -- -- 396 (396) --
Common Stock 214 -- 209 (209) 214
Other Capital 1,511 69 8,231 (8,300) 1,511
Retained Earnings 4,463 13 4,104 (4,117) 4,463
Accumulated Other Comprehensive Loss (13) -- (31) -- (44)
--------- ------- --------- -------- --------
Total Shareholders' Equity 6,175 82 12,909 (13,022) 6,144
--------- ------- --------- -------- --------
Total Liabilities and Shareholders' Equity $ 14,448 $ 482 $ 19,919 $(14,007) $ 20,842
========= ======= ========= ======== ========
-17-
CSX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited), Continued
(All Tables in Millions of Dollars, Except Per Share Amounts
NOTE 12. SUMMARIZED CONSOLIDATING FINANCIAL DATA - CSX LINES, Continued
Consolidating Statement of Financial Position
December 28, 2001
CSX Corporate CSX Lines Other Eliminations Consolidated
--------------- ----------- ------- -------------- ---------------
ASSETS
Current Assets
Cash, Cash Equivalents and Short-term Investments $ 225 $ 55 $ 339 $ (1) $ 618
Accounts Receivable - Net 58 8 1,036 (224) 878
Materials and Supplies - 14 192 - 206
Deferred Income Taxes - - 162 - 162
Other Current Assets 4 36 295 (125) 210
-------- -------- -------- -------- --------
Total Current Assets 287 113 2,024 (350) 2,074
Properties 29 453 17,669 - 18,151
Accumulated Depreciation (27) (286) (4,866) - (5,179)
-------- -------- -------- -------- --------
Properties, net 2 167 12,803 - 12,972
Investment in Conrail 353 - 4,302 - 4,655
Affiliates and Other Companies 2 85 326 (31) 382
Investment in Consolidated Subsidiaries 12,641 - 396 (13,037) -
Other Long-term assets 825 137 344 (588) 718
-------- -------- -------- -------- --------
Total Assets $ 14,110 $ 502 $ 20,195 $(14,006) $ 20,801
======== ======== ======== ======== ========
LIABILITIES
Current Liabilities
Accounts Payable $ 86 $ 81 $ 965 $ (166) $ 966
Labor and Fringe Benefits Payable 17 13 388 - 418
Payable to Affilitates - 2 123 (125) -
Casuality, Environmental and Other Reserves 1 3 246 - 250
Current Maturities of Long-term Debt 850 21 173 - 1,044
Short-term Debt 225 - - - 225
Income and Other Taxes Payable 1,296 25 (1,220) - 101
Other Current Liabilities 38 20 300 (59) 299
-------- -------- -------- -------- --------
Total Current Liabilities 2,513 165 975 (350) 3,303
Casuality, Environmental and Other Reserves 4 4 682 - 690
Long-term Debt 4,680 132 1,027 - 5,839
Deferred Income Taxes - 83 3,538 - 3,621
Long-term Payable to Affiliates 396 - 192 (588) -
Other Long-term Liabilities 365 48 845 (30) 1,228
-------- -------- -------- -------- --------
Total Liabilities 7,958 432 7,259 (968) 14,681
-------- -------- -------- -------- --------
SHAREHOLDER'S EQUITY
Preferred Stock - - 396 (396) -
Common Stock 214 - 209 (209) 214
Other Capital 1,492 57 8,243 (8,300) 1,492
Retained Earnings 4,459 13 4,120 (4,133) 4,459
Accumulated Other Comprehensive Loss (13) - (32) - (45)
-------- -------- -------- -------- --------
Total Shareholder's Equity 6,152 70 12,936 (13,038) 6,120
-------- -------- -------- -------- --------
Total Liabilities and Shareholder's Equity $ 14,110 $ 502 $ 20,195 $(14,006) $ 20,801
======== ======== ======== ======== ========
-18-
CSX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited), Continued
(All Tables in Millions of Dollars, Except Per Share Amounts)
NOTE 12. SUMMARIZED CONSOLIDATING FINANCIAL DATA - CSX LINES, Continued
Consolidating Statement of Earnings
Quarter ended March 29, 2002
CSX
Corporate CSX Lines Other Eliminations Consolidated
--------- --------- ----- ------------ ------------
Operating Revenue $ - $ 161 $ 1,916 $ (113) $ 1,964
Operating Expense (67) 160 1,769 (110) 1,752
--------- --------- ------- ------------ ------------
Operating Income (Loss) 67 1 147 (3) 212
Other Income (Expense) 48 2 24 (65) 9
Interest Expense 100 2 27 (15) 114
--------- --------- ------- ------------ ------------
Earnings before Income Taxes and Cumulative Effect of Accounting Change 15 1 144 (53) 107
Income Tax Expense (Benefit) (1) 1 39 - 39
--------- --------- ------- ------------ ------------
Earnings Before Cumulative Effect of Accounting Change 16 - 105 (53) 68
Cumulative Effect of Accounting Change - - (43) - (43)
--------- --------- ------- ------------ ------------
--------- --------- ------- ------------ ------------
Net Earnings $ 16 $ - $ 62 $ (53) $ 25
========= ========= ======= ============ ============
Consolidating Statement of Earnings
Quarter ended March 31, 2001
CSX
Corporate CSX Lines Other Eliminations Consolidated
--------- --------- ----- ------------ ------------
Operating Revenue $ - $ 161 $ 1,974 $ (110) $ 2,025
Operating Expense (46) 164 1,827 (109) 1,836
--------- --------- ------- ------------ ------------
Operating Income (Loss) 46 (3) 147 (1) 189
Other Income (Expense) 78 2 12 (121) (29)
Interest Expense 134 4 38 (43) 133
--------- --------- ------- ------------ ------------
Earnings before Income Taxes (10) (5) 121 (79) 27
Income Tax Expense (Benefit) (1) (2) 10 - 7
--------- --------- ------- ------------ ------------
Net Earnings (Loss) $ (9) $ (3) $ 111 $ (79) $ 20
========= ========= ======= ============ ============
-19-
CSX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited), Continued
(All Tables in Millions of Dollars, Except Per Share Amounts)
NOTE 12. SUMMARIZED CONSOLIDATING FINANCIAL DATA - CSX LINES, Continued
Consolidating Statement of Cash Flows
Three Months Ended March 29, 2002
CSX CSX
Corporate Lines Other Eliminations Consolidated
--------- ----- ----- ------------ ------------
Operating Activities
Net Cash Provided (Used) by Operating Activities $ 103 $ (9) $ 127 $ (61) $ 160
--------- ----- ------- ------------ ------------
Investing Activities
Property Additions - (6) (156) - (162)
Short-term Investments-net (288) (3) 133 - (158)
Other Investing Activities 3 (1) (1) (12) (11)
--------- ----- ------- ------------ ------------
Net Cash Used by Investing Activities (285) (10) (24) (12) (331)
--------- ----- ------- ------------ ------------
Financing Activities
Short-term Debt-Net - - - - -
Long-term Debt Issued 450 - - - 450
Long-term Debt Repaid (200) - (67) - (267)
Cash Dividends Paid (22) - (52) 53 (21)
Other Financing Activities 20 - (28) 20 12
--------- ----- ------- ------------ ------------
Net Cash Provided (Used) by Financing Activities 248 - (147) 73 174
Net Increase (Decrease) in Cash and Cash Equivalents 66 (19) (44) - 3
Cash and Cash Equivalents at Beginning of Period 156 52 (71) - 137
--------- ----- ------- ------------ ------------
Cash and Cash Equivalents at End of Period $ 222 $ 33 $ (115) $ - $ 140
========= ===== ======= ============ ============
-20-
CSX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited), Continued
(All Tables in Millions of Dollars, Except Per Share Amounts
NOTE 12. SUMMARIZED CONSOLIDATING FINANCIAL DATA - CSX LINES, Continued
Consolidating Statement of Cash Flows
Three Months Ended March 31, 2001
CSX CSX
Corporate Lines Other Eliminations Consolidated
----------- ------- ------- -------------- --------------
Operating Activities
Net Cash Provided (Used) by Operating Activities $ (78) $ - $ 142 $ (64) $ -
----------- ------- ------- -------------- --------------
Investing Activities
Property Additions - 1 (184) - (183)
Short-term Investments-net (76) - (1) - (77)
Other Investing Activities 8 - (71) 58 (5)
----------- ------- ------- -------------- --------------
Net Cash Provided (Used) by Investing Activities (68) 1 (256) 58 (265)
----------- ------- ------- -------------- --------------
Financing Activities
Short-term Debt-Net (271) - - - (271)
Long-term Debt Issued 500 - - - 500
Long-term Debt Repaid - - (48) - (48)
Cash Dividends Paid (66) - (54) 56 (64)
Other Financing Activities (12) - 70 (50) 8
----------- ------- ------- -------------- --------------
Net Cash Provided (Used) by Financing Activities 151 - (32) 6 125
Net Increase (Decrease) in Cash and Cash Equivalents 5 1 (146) - (140)
Cash and Cash Equivalents at Beginning of Period 47 (94) 308 - 261
----------- ------- ------- -------------- --------------
Cash and Cash Equivalents at End of Period $ 52 $ (93) $ 162 $ - $ 121
=========== ======= ======= ============== ==============
-21-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
RESULTS OF OPERATIONS
CSX follows a 52/53-week fiscal calendar. Fiscal years 2002 and 2001
consist of 52 weeks. The quarters ended March 29, 2002 and March 30, 2001
consisted of 13 weeks.
Consolidated Results
--------------------
First Quarter 2002 Compared with 2001
-------------------------------------
CSX reported net earnings for the quarter ended March 29, 2002 of $25
million, 12 cents per share, compared with $20 million, 10 cents per share in
the quarter ended March 30, 2001. Current period results include a cumulative
effect of accounting change relating to the adoption of Statement of Financial
Accounting Standard No. 142 (SFAS 142), "Goodwill and Other Intangible Assets."
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 in the first quarter of 2002 and
incurred a pre-tax charge of $83 million, after-tax charge of $43 million, 20
cents per share as a cumulative effect of an accounting change relating to
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 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.
Before the cumulative effect of accounting change in the current
period, earnings were $68 million, 32 cents per share. The increase in earnings
over the prior year period is a result of increases in operating income and
other income, and a decrease in interest expense. Operating income increased 12%
from $189 million in the first quarter of 2001 to $212 in the first quarter of
2002 as a result of a decline in the Surface Transportation operating ratio.
Operating revenue decreased 3% to $1.96 billion in the first quarter of 2002
from $2.03 billion in the prior year period. However, operating expenses
decreased 5% to $1.75 billion in the current period, from $1.84 billion in the
prior year. Interest expense benefited from favorable interest rates and a $36
million pre-tax gain from a property sale had a favorable impact on other
income.
Surface Transportation Results
------------------------------
Rail
CSX Transportation ("CSXT") earned $177 million in operating income for
the quarter ended March 29, 2002, up $11 million, or 7 percent, from the $166
million reported in the first quarter of 2001. Operating revenue decreased to
$1.49 billion in the current period from $1.53 in the prior year. Volumes in the
first quarter were down 6 percent year-over-year while revenue was down only 3
percent due to the continued success of CSXT's yield improvement program. Only
volumes for the automotive sector increased year-over-year. Volume decreases
were offset by revenue increases in the food and consumer products and coke
markets, reflecting various pricing initiatives. Further offsetting volume
decreases were increased automotive revenue, resulting from the increase in
volume as well as price increases.
-22-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION, CONTINUED
RESULTS OF OPERATIONS, Continued
Surface Transportation Results, Continued
-----------------------------------------
Rail, Continued
The operating ratio decreased to 88.1% for the quarter ended March 29,
2002 from 89.2% for the quarter ended March 30, 2001. Operating expenses
decreased from $1.37 billion for the quarter ended March 30, 2001 to $1.31
billion for the quarter ended March 29, 2002. The $57 million decrease resulted
primarily from decreases in labor and fringe benefits and fuel, offset by
increases in materials, supplies and other, and Conrail operations. Labor and
fringe expense decreased $20 million primarily resulting from headcount
reductions of approximately 2,600 from prior year quarter as part of a continued
effort by management to eliminate inefficiencies. This was somewhat offset by
inflation and health and welfare charges. Operating expenses were further
reduced as compared to the prior year due to a $50 million decrease in fuel
expenses, of which approximately $40 million is the result of a favorable
year-to-year price variance. The remaining decrease is primarily attributed to
the corresponding decrease in carload volumes.
These operating expense decreases were partially offset by increases in
materials, supplies, and other, and Conrail operations. The increase in
materials, supplies and other is due partially to higher expenses related to
casualty losses and property taxes. The unfavorable variance in Conrail's 2002
first quarter operating results was a consequence of a favorable state tax
settlement which enhanced Conrail's 2001 first quarter results.
General merchandise volumes were down 4 percent for the quarter. While
phosphate and fertilizer and food and consumer products volumes were flat for
the quarter, all other markets were down year-over-year. Agricultural products
were down 8 percent due to a decline in export grain shipments. All other
merchandise markets were down 4 to 5 percent. With the exception of minerals and
phosphates and fertilizers, all other merchandise commodity groups showed
improved revenue yield as CSXT's pricing program continued to show significant
vibrancy.
Automotive volumes were up 2 percent versus last year, reflecting a 3
percent increase in North American auto production and continuing aggressive
dealer incentive programs. Actual vehicle sales were in line with production, so
dealer inventory levels continue to be at or close to normal.
Coal, Coke & Iron Ore volumes in the first quarter were 11 percent
below last year, due to generally mild weather conditions and the lack of the
inventory build-up that was occurring during the first quarter of 2001. Yield
improvements helped offset some of the volume shortfall.
-23-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION, CONTINUED
RESULTS OF OPERATIONS, Continued
Surface Transportation Results, Continued
-----------------------------------------
Rail, Continued
The following table provides rail carload and revenue data by service
group and commodity for the quarters ended March 29, 2002 and March 30, 2001:
Carloads Revenue
(Thousands) (Millions of Dollars)
----------------------------- -----------------------------
March 29, March 30, March 29, March 30,
2002 2001 2002 2001
------------- -------------- ------------- --------------
Merchandise
Phosphates and Fertilizer 119 119 $ 89 $ 89
Metals 77 81 97 99
Food and Consumer Products 39 39 53 52
Paper and Forest Products 116 122 156 160
Agricultural Products 92 100 127 134
Chemicals 125 130 224 232
Minerals 22 23 34 36
Emerging Markets 93 97 88 88
------------- -------------- ------------- --------------
Total Merchandise 683 711 868 890
Automotive 129 127 200 194
Coal, Coke & Iron Ore
Coal 393 439 381 416
Coke 8 10 13 11
Iron Ore 4 5 3 3
------------- -------------- ------------- --------------
Total Coal, Coke & Iron Ore 405 454 397 430
Other - - 21 18
------------- -------------- ------------- --------------
Total Rail 1,217 1,292 1,486 1,532
------------- -------------- ------------- --------------
Intermodal
Domestic 220 202 152 143
International 261 279 110 123
Other - - - 4
------------- ------------ ------------- --------------
Total Intermodal 481 481 262 270
------------- ------------ ------------- --------------
Total Surface Transportation 1,698 1,773 $ 1,748 $ 1,802
============= ============ ============= ==============
-24-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION, CONTINUED
RESULTS OF OPERATIONS, Continued
Surface Transportation Results, Continued
-----------------------------------------
Intermodal
CSX Intermodal reported first quarter 2002 operating income of $17
million, compared with $16 million in 2001. Revenue was $262 million for the
quarter ended March 29, 2002, compared to $270 million for the quarter ended
March 30, 2001. The revenue decline is attributable to decreased volume in
international markets, partially offset by increases in the domestic market.
Domestic shipments recorded a 9 percent increase, driven by strong domestic
container traffic and diversion of Mexican auto parts traffic from the highway.
The international container business reflected worldwide economic conditions,
with volumes declining 6 percent. The loss of three customers had a negative
impact on revenue. Operating expense decreased to $245 million for the quarter
ended March 29, 2002 from $254 for the quarter ended March 30, 2001.
Improvements in the operating ratio of 93.5% in 2002, compared to 94.1% in 2001
are attributable to continued cost reduction initiatives.
Marine Services Results
-----------------------
Domestic Container Shipping
CSX Lines reported operating income of $1 million for the quarter ended
March 29, 2002, compared to a loss of $3 million for the quarter ended March 30,
2001. Revenue remained flat between years at $161 million. Market share gains in
Hawaii/Guam and Puerto Rico were offset by overall market declines from the
impact of the September 11th tragedy on the tourism-reliant Hawaii/Guam trade.
Operating expenses decreased from $164 million in the first quarter of 2001 to
$160 million for the first quarter of 2002, primarily related to reduced fuel
costs as well as various cost reduction initiatives implemented in the second
half of 2001.
International Terminals
CSX World Terminals' operating income was $11 million for the quarter
ended March 29, 2002, compared with $12 million for the quarter ended March 30,
2001. Revenue declined to $61 million in the first quarter of 2002 from $68 in
the prior year due to weakness in the Latin America sector and the slow recovery
in the Hong Kong economy. The revenue decrease was partially offset by a
decrease in the operating expenses to $50 million in 2002 from $56 million in
2001. This improvement is attributed to cost cutting and productivity gains. The
operating ratio decrease from 82.4% in the first quarter of 2001 to 82.0% in the
first quarter of 2002 is also a result of continued cost cutting and
productivity gains.
-25-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION, CONTINUED
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and short-term investments totaled $781 million
at March 29, 2002, an increase of $163 million since December 28, 2001.
Primary sources of cash and cash equivalents during the three months
ended March 29, 2002 were the normal transportation operations and the issuance
of $450 million of long-term debt. Primary uses of cash and cash equivalents
were property additions, repayments of long-term debt, and the payment of
dividends. The quarterly dividend for the current period was 10 cents per share,
compared to 30 cents per share in the prior year.
CSX's working capital deficit at March 29, 2002 was $685 million, down
from $1.2 billion at December 28, 2001. This decrease is partially attributable
to $225 million in notes due to Conrail being reclassified from short-term to
long-term due to the renegotiation of the notes to a long-term basis. At March
29, 2002, CSX had $450 million of debentures that will be maturing in May 2002.
CSX has the intent and ability to retire the entire amount at that time.
A working capital deficit is not unusual for the Company and does not
indicate a lack of liquidity. The Company continues to maintain adequate current
assets to satisfy current liabilities and maturing obligations when they come
due and has sufficient financial capacity to manage its day-to-day cash
requirements and any obligations arising from legal, tax and other regulatory
rulings. CSX also has $1.1 billion of remaining capacity under a shelf
registration that may be used to issue debt or other securities at the Company's
discretion.
During the quarter ended March 29, 2002, the Company issued $400
million aggregate principal amount of 6.30% notes due 2012. Proceeds of the
notes will be used to refinance other debt that comes due in the second quarter
of 2002.
-26-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION, CONTINUED
FINANCIAL DATA
(Millions of Dollars)
-------------------------
March 29, December 28,
2002 2001
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Cash, Cash Equivalents and
Short-Term Investments $ 781 $ 618
Working Capital (Deficit) $ (685) $ (1,229)
Current Ratio 0.8 0.6
Debt Ratio 52 % 51 %
Ratio of Earnings to Fixed Charges 1.8 x 1.7 x
OUTLOOK
During the remainder of 2002, CSX expects that financial performance
should improve significantly when the industrial sector recovers from the
current economic slowdown. CSX believes that its Surface Transportation units
are ready to capitalize and benefit significantly from an economic recovery
through the inherent operating leverage that these units possess. Even if an
economic recovery does not materialize until 2003, CSX still anticipates that
the Surface Transportation units will post quarterly year-over-year improvements
in earnings throughout the remainder of the year.
The Marine Services units continue to contribute operating income to
CSX and the expectation is that these units will experience earnings greater
than in 2001 should the economic recovery occur as expected in the second half
of 2002. CSX Lines has successfully cut costs and continues to have quarter over
quarter improvements in earnings. CSX World Terminals continues to successfully
manage costs through a slowdown in international containerized volume and
expects to keep operating income at a level consistent with prior year.
INVESTMENT IN AND INTEGRATED RAIL OPERATIONS WITH CONRAIL
Background
----------
CSX and Norfolk Southern Corporation (Norfolk Southern) completed the
acquisition of Conrail Inc. (Conrail) in May 1997. Conrail owns the primary
freight railroad system serving the northeastern United States, and its rail
network extends into several midwestern states and into Canada. CSX and Norfolk
Southern, through a jointly owned acquisition entity, hold economic interests in
Conrail of 42% and 58%, respectively, and voting interests of 50% each. CSX and
Norfolk Southern 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.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION, CONTINUED
INVESTMENT IN AND INTEGRATED RAIL OPERATIONS WITH CONRAIL, CONTINUED
Accounting and Financial Reporting Effects
------------------------------------------
Upon integration, substantially all of Conrail's customer freight
contracts were assumed by CSX and Norfolk Southern. As a result, CSX's rail and
intermodal operating revenue includes revenue from traffic previously moving on
Conrail. Operating expenses reflect corresponding increases for costs incurred
to handle the new traffic and operate the former Conrail lines. Rail operating
expenses includes an expense category, "Conrail Operating Fee, Rent and
Services," which reflects payments to Conrail for the use of right-of-way and
equipment, as well as charges for transportation, switching, and terminal
services in the Shared Asset Areas Conrail operates for the joint benefit of CSX
and Norfolk Southern. This expense category also includes amortization of the
fair value write-up arising from the acquisition of Conrail, as well as CSX's
proportionate share of Conrail's net income or loss recognized under the equity
method of accounting.
Conrail's Results of Operations
-------------------------------
Conrail reported net income of $36 million for the first quarter of
2002, compared to net income of $45 million for the same period last year. The
decline reflects a decrease in revenue and a favorable state tax settlement
during the first quarter of 2001.
Conrail's first-quarter operating revenues were $225 million, compared
to $233 in the same prior-year period. The decrease is attributed to lower
operating fees, largely a result of reduced operating costs in the Shared Assets
Areas and lower revenues at Conrail's Indiana Harbor Belt subsidiary.
Conrail reported operating expenses of $164 million for the first
quarter of 2002, down from $169 million in the prior year period. The decrease
is a result of the reduction in expenses associated with the revenue decline.
Conrail's working capital deficit was $124 million at March 31, 2002,
compared with working capital of $438 million at December 31, 2001. The change
is largely the result of the exchange of the demand notes receivable from NS and
CSX for new longer-term notes. Conrail is expected to have sufficient cash flow
to meet its ongoing obligations.
OTHER MATTERS
Sale of International Container-Shipping Assets
In December 1999, CSX sold certain assets comprising Sea-Land's
international liner business to A. P. Moller-Maersk Line (Maersk). Maersk
acquired vessels, containers, certain terminal facilities and various other
assets and related liabilities of the international liner business. The
agreement with Maersk provides for a post-closing working capital adjustment to
the sales price based on the change in working capital, as defined in the
agreement, between June 25, 1999, and December 10, 1999. The Company has
recorded a receivable of approximately $70 million in connection with the
post-closing working capital adjustment and this amount is currently in dispute.
This matter, together with other issues relating to the contractual obligations
of the Company, has been submitted to arbitration.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION, CONTINUED
OTHER MATTERS, CONTINUED
Sale of International Container-Shipping Assets, Continued
In addition to the disputes relating to the sale of the international
container shipping assets, CSX has received a claim amounting to approximately
$180 million plus interest from Europe Container Terminals bv (ECT), owner of
the Rotterdam Container Terminal previously operated by Sea-Land prior to its
sale to Maersk. ECT has claimed that the sale of the international liner
business to Maersk resulted in a breach of the Sea-Land terminal agreements. ECT
has refused to accept containers at the former Sea-Land facility tendered by
Maersk Sea-Land and is seeking compensation from CSX related to the alleged
breach. CSX has also advised Maersk that CSX will hold them responsible for any
damages that may result from this dispute. A final ruling on ECT's claim, which
has advanced to formal binding arbitration in Rotterdam, is not expected before
late summer of 2002. Management believes that valid defenses to this claim
exist.
Although management believes it 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 in future reporting periods.
New Orleans Tank Car Fire Litigation
------------------------------------
In September 1997 a state court jury in New Orleans, Louisiana
returned a $2.5 billion punitive damages award against CSXT. The award was made
in a class-action lawsuit against a group of nine companies based on personal
injuries alleged to have arisen from a 1987 tank car fire. In October 1997 the
Louisiana Supreme Court set aside the punitive damages judgment, ruling the
judgment should not have been entered until all liability issues were resolved.
Six of the nine defendants settled with the plaintiffs' representatives in 1999.
On November 5, 1999, the trial court granted CSXT's motion for judgment
notwithstanding the verdict, and effectively reduced the amount of the punitive
damages verdict from $2.5 billion to $850 million.
A judgment reflecting the $850 million punitive award has been
entered against CSXT. In June 2001 the Louisiana Court of Appeal for the Fourth
Circuit affirmed the judgment of the trial court, which reduced the punitive
damages verdict from $2.5 billion to $850 million. CSXT then filed with the
Louisiana Supreme Court an application that the court take jurisdiction over and
reverse the 1997 punitive damages award.
In November 2001 CSXT announced that it had reached a proposed
settlement of the litigation, subject to a fairness hearing and court approval.
The amount to be paid by CSXT under the settlement is $220 million, to resolve
all claims arising out of the 1987 fire and evacuation (whether or not included
in the present class-action lawsuit). CSXT incurred a charge of $60 million
before tax, $37 million after tax, 17 cents per share in the fourth quarter of
2001 to account for the expense of the settlement, net of insurance recoveries.
In April 2002 the trial court held a fairness hearing respecting the
proposed CSXT settlement. The same day, the trial court issued an order that,
among other things, (1) gave final approval to the settlement; (2) provided that
any and all liability of CSXT pursuant to any of the judgments previously
entered in the litigation was satisfied; and (3) determined that upon the "final
settlement date" as defined in the preliminary settlement agreement between CSXT
and the plaintiffs' representatives, the case will be finally dismissed against
CSXT. The "final settlement date" is defined as the date by which the April 2002
order becomes final and non-appealable (calculated as June 10, 2002, if no
appeals from the order are taken) or all appeals from the order are finally
resolved, and the date by which certain other events must occur as provided in
the preliminary settlement agreement.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION, CONTINUED
FORWARD LOOKING STATEMENTS
Estimates and forecasts in Management's Discussion and Analysis and in
other sections of this Quarterly Report are based on many assumptions about
complex economic and operating factors with respect to industry performance,
general business and economic conditions and other matters that cannot be
predicted accurately and that are subject to contingencies over which the
Company has no control. Such forward-looking statements are subject to
uncertainties and other factors that may cause actual results to differ
materially from the views, beliefs, and projections expressed in such
statements. The words "believe", "expect", "anticipate", "project", and similar
expressions signify forward-looking statements. Readers are cautioned not to
place undue reliance on any forward-looking statements made by or on behalf of
the Company. Any such statement speaks only as of the date the statement was
made. The Company undertakes no obligation to update or revise any
forward-looking statement.
Factors that may cause actual results to differ materially from those
contemplated by these forward-looking statements include, among others, the
following possibilities: (i) general economic or business conditions, either
nationally or internationally, an increase in fuel prices, a tightening of the
labor market or changes in demands of organized labor resulting in higher wages,
or increased benefits or other costs or disruption of operations may adversely
affect the businesses of the Company; (ii)) legislative or regulatory changes,
including possible enactment of initiatives to reregulate the rail industry, may
adversely affect the businesses of the Company; (iii) possible additional
consolidation of the rail industry in the near future may adversely affect the
operations and businesses of the Company; and (iv) changes may occur in the
securities and capital markets.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We address our exposure to market risks, principally the market risk of
changes in interest rates, through a controlled program of risk management that
includes the use of interest rate swap agreements. We do not hold or issue
derivative financial instruments for trading purposes.
In the event of a 1% increase or decrease in the LIBOR interest rate,
the interest expense related to these agreements would increase or decrease $14
million on an annual basis.
The Company is exposed to credit loss in the event of non-performance
by any counter-party to the interest rate swap agreements. The Company does not
anticipate non-performance by such counter-parties, and no material loss would
be expected from non-performance.
At March 29, 2002 and December 28, 2001, CSX had approximately $475
million and $625 million, respectively, of floating rate debt outstanding. A 1%
variance in interest rates would have a $4.8 million affect on annual interest
expense.
The Company is subject to risk relating to changes in the price of
diesel fuel. Forward purchase agreements have been entered into with various
suppliers for approximately 220 million gallons of fuel, which is approximately
50% of the remaining 2002 requirement, at a weighted average price of 77 cents
per gallon. The Company is subject to fluctuations in prices for the remainder
of its 2002 needs. A one cent change in the price per gallon of fuel would
impact fuel expense by approximately $2 million.
While the Company's container-shipping terminal management subsidiary
does business in several foreign countries, a substantial portion of its revenue
and expenses are transacted in U.S. dollars. 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.
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PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3.2* Bylaws of the Registrant, amended as of February 13, 2002
(b) Reports on Form 8-K
Form 8-K filed on 3/5/02 to announce the public offering of
$400,000,000 aggregate principal amount of the Company's 6.30% Notes
due 2012.
* Filed herewith
Signature
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CSX CORPORATION
(Registrant)
By: /s/ CAROLYN T. SIZEMORE
-----------------------
Carolyn T. Sizemore
Vice President and Controller
(Principal Accounting Officer)
Dated: May 3, 2002
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