QUARTERLY REPORT
Table of Contents

FORM 10-Q

 

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 


 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarter ended September 26, 2003

 

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

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

500 Water Street, 15th Floor, Jacksonville, FL   32202
(Address of principal executive offices)   (Zip Code)

 

(904) 359-3200

(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 by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).    Yes  x    No  ¨

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of September 26, 2003: 214,018,692 shares.

 



Table of Contents

CSX CORPORATION

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 26, 2003

INDEX

 

          Page Number

PART I:    FINANCIAL INFORMATION     
Item 1:   

Financial Statements

    
    

Consolidated Income Statements (Unaudited) - Quarters and Nine Months Ended September 26, 2003 and September 27, 2002

   3
    

Consolidated Balance Sheets - At September 26, 2003 (Unaudited) and December 27, 2002

   4
    

Consolidated Cash Flow Statements (Unaudited) - Nine Months Ended September 26, 2003 and September 27, 2002

   5
    

Notes to Consolidated Financial Statements (Unaudited)

   6
Item 2:   

Management’s Discussion and Analysis of Results of Operations and Financial Condition

   30
Item 3:   

Quantitative and Qualitative Disclosures About Market Risk

   45
Item 4:   

Disclosure Controls and Procedures

   45
PART II:    OTHER INFORMATION     
Item 1:   

Legal Proceedings

   46
Item 2:   

Changes in Securities and Use of Proceeds

   46
Item 6:   

Exhibits and Reports on Form 8-K

   46

Signature

   48

 

2


Table of Contents

CSX CORPORATION AND SUBSIDIARIES

ITEM I: FINANCIAL STATEMENTS

Consolidated Income Statements

 

     (Unaudited)  

(Dollars in Millions, Except Per Share Amounts)


   Quarter Ended

   Nine Months Ended

 
     September 26,
2003


    September 27,
2002


   September 26,
2003


   September 27,
2002


 

Operating Revenue

   $ 1,882     $ 2,055    $ 5,840    $ 6,092  

Operating Expense

     1,980       1,779      5,476      5,283  
    


 

  

  


Operating Income (Loss)

     (98 )     276      364      809  

Other Income

     21       28      30      41  

Interest Expense

     103       108      311      338  
    


 

  

  


Earnings (Loss) before Income Taxes and Cumulative

                              

Effect of Accounting Change

     (180 )     196      83      512  

Income Tax Expense (Benefit)

     (77 )     69      17      182  
    


 

  

  


Earnings (Loss) before Cumulative Effect of Accounting Change

     (103 )     127      66      330  

Cumulative Effect of Accounting Change - Net of Tax

     —         —        57      (43 )
    


 

  

  


Net Earnings (Loss)

   $ (103 )   $ 127    $ 123    $ 287  
    


 

  

  


Earnings (Loss) Per Share:

                              

Before Cumulative Effect of Accounting Change

   $ (0.48 )   $ 0.60    $ 0.31    $ 1.55  

Cumulative Effect of Accounting Change

     —         —        0.26      (0.20 )
    


 

  

  


Including Cumulative Effect of Accounting Change

   $ (0.48 )   $ 0.60    $ 0.57    $ 1.35  
    


 

  

  


Earnings (Loss) Per Share, Assuming Dilution:

                              

Before Cumulative Effect of Accounting Change

   $ (0.48 )   $ 0.60    $ 0.31    $ 1.55  

Cumulative Effect of Accounting Change

     —         —        0.26      (0.20 )
    


 

  

  


Including Cumulative Effect of Accounting Change

   $ (0.48 )   $ 0.60    $ 0.57    $ 1.35  
    


 

  

  


Average Common Shares Outstanding (Thousands)

     213,955       213,041      213,890      212,548  
    


 

  

  


Average Common Shares Outstanding, Assuming Dilution (Thousands)

     213,955       213,633      214,281      213,453  
    


 

  

  


Cash Dividends Paid Per Common Share

   $ 0.10     $ 0.10    $ 0.30    $ 0.30  
    


 

  

  


 

See accompanying Notes to Consolidated Financial Statements.

 

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CSX CORPORATION AND SUBSIDIARIES

ITEM I: FINANCIAL STATEMENTS

Consolidated Balance Sheets

 

(Dollars in Millions)


   (Unaudited)
September 26,
2003


    December 27,
2002


 

ASSETS

                

Current Assets:

                

Cash, Cash Equivalents and Short-term Investments

   $ 736     $ 264  

Accounts Receivable - Net

     1,250       845  

Materials and Supplies

     168       180  

Deferred Income Taxes

     134       128  

Other Current Assets

     92       155  

Domestic Container-Shipping Assets Held for Disposition

     —         263  
    


 


Total Current Assets

     2,380       1,835  

Properties

     19,050       18,560  

Accumulated Depreciation

     5,436       5,274  
    


 


Properties - Net

     13,614       13,286  

Investment in Conrail

     4,661       4,653  

Affiliates and Other Companies

     488       381  

Other Long-term Assets

     784       807  
    


 


Total Assets

   $ 21,927     $ 20,962  
    


 


LIABILITIES AND SHAREHOLDERS’ EQUITY

                

Current Liabilities:

                

Accounts Payable

   $ 800     $ 802  

Labor and Fringe Benefits Payable

     418       457  

Casualty, Environmental and Other Reserves

     226       246  

Current Maturities of Long-term Debt

     575       391  

Short-term Debt

     729       143  

Income and Other Taxes Payable

     101       144  

Other Current Liabilities

     175       178  

Domestic Container-Shipping Liabilities Held for Disposition

     —         104  
    


 


Total Current Liabilities

     3,024       2,465  

Casualty, Environmental and Other Reserves

     862       604  

Long-term Debt

     6,480       6,519  

Deferred Income Taxes

     3,630       3,567  

Other Long-term Liabilities

     1,619       1,566  
    


 


Total Liabilities

     15,615       14,721  
    


 


Shareholders’ Equity:

                

Common Stock, $1 Par Value

     214       214  

Other Capital

     1,556       1,548  

Retained Earnings

     4,858       4,797  

Accumulated Other Comprehensive Loss

     (316 )     (318 )
    


 


Total Shareholders’ Equity

     6,312       6,241  
    


 


Total Liabilities and Shareholders’ Equity

   $ 21,927     $ 20,962  
    


 


 

See accompanying Notes to Consolidated Financial Statements.

 

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Table of Contents

CSX CORPORATION AND SUBSIDIARIES

ITEM I: FINANCIAL STATEMENTS

Consolidated Cash Flow Statements

 

     (Unaudited)  

(Dollars in Millions)


   Nine Months Ended

 
     September 26,
2003


    September 27,
2002


 

OPERATING ACTIVITIES

                

Net Earnings

   $ 123     $ 287  

Adjustments to Reconcile Net Earnings to Net Cash Provided:

                

Depreciation

     482       477  

Deferred Income Taxes

     22       102  

Cumulative Effect of Accounting Change - Net of Tax

     (57 )     43  

Additional Loss on Sale

     108       —    

Provision for Casualty Reserves

     232       —    

Other Operating Activities

     17       (17 )

Changes in Operating Assets and Liabilities:

                

Accounts Receivable

     (48 )     (13 )

Termination of Sale of Receivables

     (380 )     (120 )

Other Current Assets

     7       (11 )

Accounts Payable

     18       (66 )

Other Current Liabilities

     (120 )     11  
    


 


Net Cash Provided by Operating Activities

     404       693  
    


 


INVESTING ACTIVITIES

                

Property Additions

     (757 )     (743 )

Net Proceeds from Divestitures

     214       —    

Short-term Investments - Net

     (213 )     177  

Other Investing Activities

     (26 )     (58 )
    


 


Net Cash (Used) by Investing Activities

     (782 )     (624 )
    


 


FINANCING ACTIVITIES

                

Short-term Debt – Net

     586       571  

Long-term Debt Issued

     433       519  

Long-term Debt Repaid

     (292 )     (1,113 )

Dividends Paid

     (65 )     (65 )

Other Financing Activities

     (26 )     2  
    


 


Net Cash Provided (Used) by Financing Activities

     636       (86 )
    


 


Net Increase (Decrease) in Cash and Cash Equivalents

     258       (17 )

CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS

                

Cash and Cash Equivalents at Beginning of Period

     127       137  
    


 


Cash and Cash Equivalents at End of Period

     385       120  

Short-term Investments at End of Period

     351       302  
    


 


Cash, Cash Equivalents and Short-term Investments at End of Period

   $ 736     $ 422  
    


 


 

See accompanying Notes to Consolidated Financial Statements.

 

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CSX CORPORATION AND SUBSIDIARIES

ITEM 1: FINANCIAL STATEMENTS

Notes to Consolidated Financial Statements (Unaudited)

 

NOTE 1. BASIS OF PRESENTATION

 

In the opinion of management, the accompanying consolidated financial statements contain all adjustments necessary to fairly present the financial position of CSX Corporation and subsidiaries (“CSX” or the “Company”) at September 26, 2003 and December 27, 2002, the results of its operations for the quarters and nine months ended September 26, 2003 and September 27, 2002, and its cash flows for the nine months ended September 26, 2003 and September 27, 2002, such adjustments being of a normal recurring nature. Certain prior-year data have been reclassified to conform to the 2003 presentation.

 

The Company suggests that these financial statements be read in conjunction with the financial statements and the notes included in the Company’s most recent Annual Report and Form 10-K, 2003 Quarterly Reports on Form 10-Q, and any Current Reports on Form 8-K.

 

CSX follows a 52/53 week fiscal reporting calendar. Fiscal years 2003 and 2002 consist of 52 weeks ending on December 26, 2003 and December 27, 2002, respectively. The financial statements presented are for the 13-week quarters ended September 26, 2003 and September 27, 2002, the 39-week periods ended September 26, 2003 and September 27, 2002, and as of December 27, 2002.

 

Comprehensive income approximates net earnings for all periods presented in the accompanying consolidated income statements.

 

NOTE 2. EARNINGS PER SHARE

 

The following table sets forth the computation of basic earnings (loss) per share and earnings (loss) per share, assuming dilution:

 

     Quarters Ended

   Nine Months Ended

     September 26,
2003


    September 27,
2002


   September 26,
2003


   September 27,
2002


Numerator (Millions):

                            

Net Earnings (Loss) Before Cumulative Effect of Accounting Change

   $ (103 )   $ 127    $ 66    $ 330

Denominator (Thousands):

                            

Average Common Shares Outstanding

     213,955       213,041      213,890      212,548

Effect of Potentially Dilutive Common Shares

     —         592      391      905
    


 

  

  

Average Common Shares Outstanding, Assuming Dilution

     213,955       213,633      214,281      213,453

Earnings (Loss) Per Share:

                            

Before Cumulative Effect of Accounting Change

   $ (0.48 )   $ 0.60    $ 0.31    $ 1.55

Assuming Dilution, Before Cumulative Effect of Accounting Change

   $ (0.48 )   $ 0.60    $ 0.31    $ 1.55

 

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Table of Contents

CSX CORPORATION AND SUBSIDIARIES

ITEM 1: FINANCIAL STATEMENTS

Notes to Consolidated Financial Statements (Unaudited)

 

NOTE 2. EARNINGS PER SHARE, Continued

 

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 potentially dilutive common shares, mainly arising from employee stock options. Potentially dilutive common shares at CSX include stock options and awards, and common stock that would be issued relating to convertible long-term debt. As the Company reported a loss from continuing operations for the quarter ended September 26, 2003, 34 million of potential common shares are excluded from the computation of diluted earnings per share as their effect is antidilutive. During the quarter and nine months ended September 26, 2003, 38,912 and 214,557 options, respectively, were exercised. During the third quarter of 2002, no options were exercised, while 1,020,161 options were exercised for the nine month period ended September 27, 2002.

 

Certain potentially dilutive common shares at September 27, 2002 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 potentially dilutive common shares were as follows:

 

     Quarter Ended

     September 27,
2002


Number of Shares (Thousands)

     33,769

Average Exercise / Conversion Price

   $ 46.32

 

A substantial increase in the fair market value of the Company’s stock price could negatively impact earnings per share if the shares were to become dilutive.

 

NOTE 3. DEBT AND CREDIT AGREEMENTS

 

On August 5, 2003 the Company issued $300 million aggregate principal amount of 5.50% notes due 2013.

 

As of September 26, 2003, the Company has commercial paper borrowings of $729 million with a weighted average rate of 1.8%.

 

On October 2, 2003, CSX Corporation issued a press release announcing its intention to satisfy its obligation to purchase its Zero Coupon Convertible Debentures due October 30, 2021 in the event that the holders of the debentures require CSX to purchase them on October 30, 2003. If any such securities are required to be purchased by CSX, they will be purchased for cash, paid promptly following the later of October 30, 2003, or the book-entry transfer of the Debentures to the trustee of the Debentures. The procedures that holders must follow in electing to have CSX purchase their Debentures are set forth in the Debentures and have been provided in a notice delivered to holders through The Depository Trust Company by the trustee. The Debentures have been classified as long-term debt due to the Company’s ability and intent to refinance the Debentures on a long-term basis.

 

7


Table of Contents

CSX CORPORATION AND SUBSIDIARIES

ITEM 1: FINANCIAL STATEMENTS

Notes to Consolidated Financial Statements (Unaudited)

 

NOTE 4. DIVESTITURES

 

In February 2003, CSX conveyed most of its interest in its domestic container-shipping subsidiary, CSX Lines LLC (“CSX Lines”), to a new venture formed with the Carlyle Group for approximately $300 million (gross cash proceeds of approximately $240 million, $214 million net of transaction costs and $60 million of securities). CSX Lines was subsequently renamed Horizon Lines LLC (“Horizon”). Horizon has subleased vessel and equipment from certain affiliates of CSX covering the primary financial obligations related to $300 million of leases under which CSX or one of its affiliates will remain a lessee / sublessor or guarantor. A deferred pretax gain of approximately $127 million as a result of the transaction will be recognized over the 12-year sub-lease term. Approximately $3 million of this gain was recognized in the third quarter, with $7 million being recognized year to date. The securities have a term of 7 years and a preferred return feature. During the third quarter, CSX received a $15 million payment from Horizon Lines, which included $3 million of interest, in return of a portion of its investment in Horizon and now holds $48 million of securities.

 

NOTE 5. NEW ACCOUNTING PRONOUNCEMENTS AND CUMULATIVE EFFECT OF ACCOUNTING CHANGES

 

Statement of Financial Accounting Standard (“SFAS”) 143, “Accounting for Asset Retirement Obligations” was issued in 2001. This statement addresses financial accounting and reporting for legal obligations associated with the retirement of tangible long-lived assets and the associated retirement costs. In conjunction with the group-life method of accounting for asset costs, the Company historically accrued crosstie removal costs as a component of depreciation, which is not permitted under SFAS 143. With the adoption of SFAS 143 in fiscal year 2003, CSX recorded pretax income of $93 million, $57 million after tax, or 26 cents per share, as a cumulative effect of an accounting change in the first quarter, representing the reversal of the accrued liability for crosstie removal costs. The adoption of SFAS 143 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. On an ongoing basis, depreciation expense will be reduced, while labor and fringe and materials, supplies and other expense will be increased.

 

SFAS 148, “Accounting for Stock-Based Compensation – Transition and Disclosure” was issued in December 2002. SFAS 148 amends SFAS 123, “Accounting for Stock-Based Compensation,” to provide alternative methods of transition to Statement 123’s fair value method of accounting for stock-based employee compensation and require disclosure of the effects of an entity’s accounting policy with respect to stock-based employee compensation. Effective beginning with fiscal year 2003, CSX has voluntarily adopted the fair value recognition provisions of SFAS 123, “Accounting for Stock-Based Compensation,” and adopted the disclosure requirements of SFAS 148, “Accounting for Stock-Based Compensation – Transition and Disclosure – an amendment of SFAS 123.” In accordance with the prospective method of adoption permitted under SFAS 148, stock-based awards issued subsequent to fiscal year 2002 are accounted for under the fair value recognition provisions of SFAS 123 utilizing the Black-Scholes valuation method and, accordingly, are expensed. (See Note 11, Stock Based Compensation)

 

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Table of Contents

CSX CORPORATION AND SUBSIDIARIES

ITEM 1: FINANCIAL STATEMENTS

Notes to Consolidated Financial Statements (Unaudited)

 

NOTE 5. NEW ACCOUNTING PRONOUNCEMENTS AND CUMULATIVE EFFECT OF ACCOUNTING CHANGES, Continued

 

SFAS 142, “Goodwill and Other Intangible Assets,” was issued in 2001. 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 at the beginning of fiscal year 2002, and incurred a pretax charge of $83 million, $43 million after tax and consideration of minority interest, 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 it does not have a material effect on future earnings.

 

NOTE 6. INVESTMENT IN AND INTEGRATED RAIL OPERATIONS WITH CONRAIL

 

Background

 

CSX and Norfolk Southern Corporation (“Norfolk Southern”) acquired 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 each operate separate 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 services 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.

 

In June 2003, CSX, Norfolk Southern and Conrail jointly filed a petition with the Surface Transportation Board (STB) to establish direct ownership and control by their respective subsidiaries, CSX Transportation Inc. (“CSXT”) and Norfolk Southern Railway of their portions of the Conrail system. Conrail would continue to own, manage and operate the Shared Assets Areas as previously approved by the STB. CSX, Norfolk Southern and Conrail also jointly filed a ruling request with the Internal Revenue Service to qualify the transaction as a non-taxable distribution. The proposed transaction is subject to a number of conditions, including, among others, STB approval and a favorable IRS ruling. If all necessary conditions are satisfied, Conrail intends to restructure its existing $800 million of unsecured public debt and seek consents to restructure its operating leases and approximately $348 million of capitalized lease and equipment obligations. It is currently contemplated that guaranteed debt securities of two newly formed subsidiaries of CSXT and Norfolk Southern Railway would be offered in a 42%/58% ratio in exchange for Conrail’s unsecured debentures. The debt securities would be fully and unconditionally guaranteed by CSXT and Norfolk Southern Railway. Upon completion of the proposed transaction, the new debt securities would become direct unsecured obligations of CSXT and Norfolk Southern Railway. Conrail’s secured debt and lease obligations will remain obligations of Conrail and are expected to be supported by new leases and subleases which, upon completion of the proposed transaction, would be the direct lease and sublease obligations of CSXT or Norfolk Southern Railway. This transaction would significantly impact the balance sheet by increasing debt and fixed assets, while reducing the investment in Conrail. There would not be a material impact on earnings per share.

 

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Table of Contents

CSX CORPORATION AND SUBSIDIARIES

ITEM 1: FINANCIAL STATEMENTS

Notes to Consolidated Financial Statements (Unaudited)

 

NOTE 6. INVESTMENT IN AND INTEGRATED RAIL OPERATIONS WITH CONRAIL , Continued

 

Accounting and Financial Reporting Effects

 

CSX’s rail and intermodal operating revenue includes revenue from traffic moving on Conrail property. Operating expenses include costs incurred to handle such traffic and operate the Conrail lines. Rail operating expense includes an expense category, “Conrail Rents, Fees and Services,” which reflects:

 

  1. Right-of-way usage fees to Conrail.

 

  2. Equipment rental payments to Conrail.

 

  3. 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.

 

  4. Amortization of the fair value write-up arising from the acquisition of Conrail and certain other adjustments

 

  5. CSX’s 42% share of Conrail’s net income before cumulative effect of accounting change recognized under the equity method of accounting.

 

Detail of Conrail Rents, Fees and Services

 

(Dollars in Millions)


                        
     Quarters Ended

    Nine Months Ended

 
     September 26,
2003


    September 27,
2002


    September 26,
2003


    September 27,
2002


 

Rents and Services

   $ 90     $ 86     $ 268     $ 260  

Purchase Price Amortization and Other

     14       14       41       39  

Equity in Income of Conrail

     (18 )     (18 )     (50 )     (51 )
    


 


 


 


Total Conrail

   $ 86     $ 82     $ 259     $ 248  
    


 


 


 


 

Conrail Financial Information

 

Summary financial information for Conrail for its fiscal periods ended September 30, 2003 and 2002, and at December 31, 2002, is as follows:

 

(Dollars in Millions)


                   
     Quarters
Ended


   Nine Months
Ended


     2003

   2002

   2003

   2002

Income Statement Information:

                           

Revenues

   $ 228    $ 221    $ 685    $ 668

Expenses

     161      151      489      473
    

  

  

  

Operating Income

   $ 67    $ 70    $ 196    $ 195
    

  

  

  

Net Income Before Cumulative Effect of Accounting Change

   $ 42    $ 44    $ 118    $ 122
    

  

  

  

Cumulative Effect of Accounting Change - Net of Tax

     —        —        40      —  
    

  

  

  

Net Income

   $ 42    $ 44    $ 158    $ 122
    

  

  

  

 

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Table of Contents

CSX CORPORATION AND SUBSIDIARIES

ITEM 1: FINANCIAL STATEMENTS

Notes to Consolidated Financial Statements (Unaudited)

 

NOTE 6. INVESTMENT IN AND INTEGRATED RAIL OPERATIONS WITH CONRAIL, Continued

 

(Dollars in Millions)


         
     September 30,
2003


   December 31,
2002


Balance Sheet Information:

             

Current Assets

   $ 268    $ 300

Property and Equipment and Other Assets

     7,973      7,857
    

  

Total Assets

   $ 8,241    $ 8,157
    

  

Current Liabilities

   $ 342    $ 329

Long-term Debt

     1,090      1,123

Other Long-term Liabilities

     2,425      2,479
    

  

Total Liabilities

     3,857      3,931

Stockholders’ Equity

     4,384      4,226
    

  

Total Liabilities and Stockholders’ Equity

   $ 8,241    $ 8,157
    

  

 

Transactions with Conrail

 

As listed below, CSX has amounts payable to Conrail, representing expenses incurred under the operating, equipment and shared asset area agreements. 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.

 

(Dollars in Millions)


                      
               September 26,
2003


    December 27,
2002


 

CSX Payable to Conrail

                 $ 49     $ 69  

Conrail Advances to CSX

                 $ 490     $ 371  

Interest Rates on Conrail Advances to CSX

                   1.51 %     1.82 %
     Quarters Ended

   Nine Months Ended

 
     September 26,
2003


   September 27,
2002


   September 26,
2003


    September 27,
2002


 

Interest Expense Related to Conrail Advances

   $ 1    $ 2    $ 5     $ 6  

 

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.

 

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CSX CORPORATION AND SUBSIDIARIES

ITEM 1: FINANCIAL STATEMENTS

Notes to Consolidated Financial Statements (Unaudited)

 

NOTE 7. ACCOUNTS RECEIVABLE

 

Sale of Accounts Receivable

 

As of June 27, 2003, CSXT discontinued the sale of accounts receivable, which resulted in a $380 million increase in accounts receivable and increased commercial paper borrowings included in short-term debt. Prior to June 27, 2003, CSXT sold, without recourse, a revolving pool of accounts receivable to CSX Trade Receivables Corporation (“CTRC”), a bankruptcy-remote entity wholly-owned by CSX Corporation. CTRC transferred the accounts receivable to a master trust and caused the trust to issue two series of certificates representing undivided interests in the receivables. The certificates issued by the master trust were sold to investors, and the proceeds from those sales were paid to CSXT.

 

Two series of certificates were outstanding as of December 27, 2002. One series in the amount of $300 million was sold to investors in 1998 and matured in June 2003. A second series was sold to a private entity in 2000 and matured in June 2003 as well. As of December 27, 2002, the amount sold to the private entity was $80 million. Accounts receivable related amounts were as follows:

 

(Dollars in Millions)


         
     September 26,
2003


   December 27,
2002


Amounts sold under:

             

Public Series of Certificates

   $ —      $ 300

Private Series of Certificates

     —        80
    

  

Total

   $ —      $ 380
    

  

Retained Interest in Master Trust

   $ —      $ 534
    

  

 

The fair value of retained interests approximated book value as the receivables were collected in approximately one month.

 

Net losses associated with the sale of receivables are as follows:

 

(Dollars in Millions)


   Quarters Ended

   Nine Months Ended

     September 26,
2003


   September 27,
2002


   September 26,
2003


   September 27,
2002


Discounts on Sales of Accounts Receivable

   $ —      $ 6    $ 10    $ 20

 

CSXT retained responsibility for servicing accounts receivables held by the master trust. The average servicing period was approximately one month. No servicing asset or liability was recorded since the fees CSXT received approximated its related costs.

 

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CSX CORPORATION AND SUBSIDIARIES

ITEM 1: FINANCIAL STATEMENTS

Notes to Consolidated Financial Statements (Unaudited)

 

NOTE 7. ACCOUNTS RECEIVABLE, Continued

 

Allowance for Doubtful Accounts

 

The Company maintains an allowance for doubtful accounts based on the expected collectibility of all accounts receivable. The allowance for doubtful accounts is included in the balance sheet as follows:

 

(Dollars in Millions)


         
     September 26,
2003


   December 27,
2002


Allowance for Doubtful Accounts

   $ 78    $ 125

 

The decrease in the allowance for doubtful accounts was primarily due to the write-off of uncollectible receivables during 2003.

 

NOTE 8. OPERATING EXPENSE

 

Operating expense consists of the following:

 

(Dollars in Millions)


                   
     Quarters Ended

   Nine Months Ended

     September 26,
2003


   September 27,
2002


   September 26,
2003


   September 27,
2002


Labor and Fringe

   $ 666    $ 720    $ 2,082    $ 2,165

Materials, Supplies and Other

     376      421      1,210      1,298

Conrail Rents, Fees and Services

     86      82      259      248

Building and Equipment Rent

     146      161      422      463

Inland Transportation

     76      104      247      267

Depreciation

     158      163      475      470

Fuel

     132      128      441      372

Additional Loss on Sale (See Note 13)

     108      —        108      —  

Provision for Casualty Claims (See Note 12)

     232      —        232      —  
    

  

  

  

Total

   $ 1,980    $ 1,779    $ 5,476    $ 5,283
    

  

  

  

 

Operating expenses include amounts from the Company’s domestic container-shipping subsidiary, CSX Lines for fiscal year 2002 and through February of 2003, when most of CSX’s interest in the entity was conveyed to a new venture. See note 4, “Divestitures.”

 

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Table of Contents

CSX CORPORATION AND SUBSIDIARIES

ITEM 1: FINANCIAL STATEMENTS

Notes to Consolidated Financial Statements (Unaudited)

 

NOTE 9. OTHER INCOME

 

Other income consists of the following:

 

(Dollars in Millions)


                        
     Quarters Ended

    Nine Months Ended

 
     September 26,
2003


    September 27,
2002


    September 26,
2003


    September 27,
2002


 

Interest Income

   $ 8     $ 7     $ 16     $ 22  

Income from Real Estate and Resort Operations

     25       45       58       88  

Discounts on Sales of Accounts Receivable

     —         (6 )     (10 )     (20 )

Minority Interest

     (12 )     (13 )     (32 )     (31 )

Equity Loss of Other Affiliates

     —         —         —         (5 )

Miscellaneous

     —         (5 )     (2 )     (13 )
    


 


 


 


Total

   $ 21     $ 28     $ 30     $ 41  
    


 


 


 


Gross Revenue from Real Estate and Resort Operations Included in Other Income

   $ 74     $ 91     $ 184     $ 205  
    


 


 


 


 

NOTE 10. DERIVATIVE FINANCIAL INSTRUMENTS

 

CSX uses derivative financial instruments to manage its overall exposure to fluctuations in interest rates and fuel costs.

 

Interest Rate Swaps

 

CSX has entered into various interest rate swap agreements on the following fixed rate notes:

 

Maturity Date


   Notional Amount
(Millions)


   Fixed Interest
Rate


 

December 1, 2003

   $ 150    5.85 %

May 1, 2004

     300    7.25 %

June 22, 2005

     50    6.46 %

August 15, 2006

     300    9.00 %

May 1, 2007

     450    7.45 %

May 1, 2032

     150    8.30 %
    

      

Total/Average

   $ 1,400    7.62 %

 

Under these agreements, the Company will pay variable interest based on LIBOR in exchange for a fixed rate, effectively transforming the notes to floating rate obligations. The instruments qualify, and are designated, as fair value hedges.

 

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Table of Contents

CSX CORPORATION AND SUBSIDIARIES

ITEM 1: FINANCIAL STATEMENTS

Notes to Consolidated Financial Statements (Unaudited)

 

NOTE 10. DERIVATIVE FINANCIAL INSTRUMENTS, Continued

 

The interest rate swap agreements are designated and qualify as fair value hedges and the gain or loss on the derivative instrument, as well as the offsetting gain or loss on the fixed rate note attributable to the hedged risk, are recognized in current earnings during the period of change in fair values. Hedge effectiveness is measured at least quarterly based on the relative change in fair value of the derivative contract in comparison with changes over time in the fair value of the fixed rate notes. Any change in fair value resulting from ineffectiveness, as defined by SFAS 133, “Accounting For Derivative Instruments and Hedging Activities,” 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 current or prior year periods. Long-term debt has been increased by $77 million and $78 million for the fair market value of the interest rate swap agreements at September 26, 2003 and December 27, 2002, respectively.

 

The differential to be paid or received under these agreements is accrued based on 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 current liabilities or assets. Cash flows related to interest rate swap agreements are classified as “Operating Activities” in the Consolidated Cash Flow Statement. For the quarter and nine month periods ended September 26, 2003, the Company reduced interest expense by approximately $11 million and $33 million, respectively, as a result of the interest rate swap agreements that were in place during that period. For the quarter and nine month periods ended September 27, 2002, the Company reduced interest expense by approximately $8 million and $24 million, respectively.

 

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.

 

Fuel Hedging

 

In the third quarter of 2003, CSX began a program to hedge a portion of its 2004 and 2005 locomotive fuel purchases. This program was established to manage exposure to fuel price fluctuations. In order to minimize this risk, CSX has entered into a series of swaps in order to fix the price of a portion of its estimated future fuel purchases.

 

Following is a summary of fuel swaps executed during the quarter:

 

     September 26, 2003

Approximate Gallons Hedged (Millions)

   118

Average Price Per Gallon

   $0.69

Swap Maturities

   Feb. 2004 - Sept. 2005

 

     2004

    2005

 

Estimated % of Future Fuel Consumption Hedged at September 26, 2003

   11 %   9 %

 

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Table of Contents

CSX CORPORATION AND SUBSIDIARIES

ITEM 1: FINANCIAL STATEMENTS

Notes to Consolidated Financial Statements (Unaudited)

 

NOTE 10. DERIVATIVE FINANCIAL INSTRUMENTS, Continued

 

The program limits fuel hedges to a 24 month duration and a maximum of 80% of CSX’s average monthly fuel purchased for any month within the 24 month period, and places the hedges among selected counterparties. Fuel hedging activity did not have a material affect on fuel expense for the quarter and nine months ended September 26, 2003. Ineffectiveness, or the extent to which changes in the fair values of the fuel swaps did not offset changes in the fair values of the expected fuel purchases, was immaterial.

 

These instruments qualify, and are designated by management, as cash-flow hedges of variability in expected future cash flows attributable to fluctuations in fuel prices. The fair values of fuel derivative instruments are determined based upon current fair market values as quoted by third party dealers and are recorded on the balance sheet with offsetting adjustments to Accumulated Other Comprehensive Income, a component of Shareholders’ Equity. These amounts are immaterial as of September 26, 2003. Fair value adjustments are noncash transactions, and accordingly, are excluded from the Cash Flow Statement.

 

The Company is exposed to credit loss in the event of nonperformance by other parties to fuel swap agreements. However, the Company does not anticipate nonperformance by the counterparties.

 

NOTE 11. STOCK-BASED COMPENSATION

 

Effective beginning with fiscal year 2003, CSX has voluntarily adopted the fair value recognition provisions of SFAS 123, “Accounting for Stock-Based Compensation,” and adopted the disclosure requirements of SFAS 148, “Accounting for Stock-Based Compensation – Transition and Disclosure – an amendment of SFAS 123.” In accordance with the prospective method of adoption permitted under SFAS 148, the Company has adopted the fair value recognition provisions on a prospective basis and accordingly, expense of $2 million and $3 million, respectively, was recognized in the quarter and nine months ended September 26, 2003 for stock options granted in May 2003.

 

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Table of Contents

CSX CORPORATION AND SUBSIDIARIES

ITEM 1: FINANCIAL STATEMENTS

Notes to Consolidated Financial Statements (Unaudited)

 

NOTE 11. STOCK BASED COMPENSATION, Continued

 

The following table illustrates the pro forma effect on net income and earnings per share as if the fair value based method had been applied to all outstanding and unvested awards in each period:

 

(Dollars in Millions, Except Per Share Amounts)


                        
     Quarters Ended

    Nine Months Ended

 
     September 26,
2003


    September 27,
2002


    September 26,
2003


    September 27,
2002


 

Net Earnings (Loss) - As Reported

   $ (103 )   $ 127     $ 123     $ 287  

Add: Stock Based Employee Compensation Expense Included in Reported Net Income - Net of Related Tax Effects

     2       1       1       3  

Deduct: Total Stock Based Employee Compensation Expense Determined Under the Fair Value Based Method For all Awards - Net of Related Tax Effects

     (12 )     (8 )     (26 )     (23 )
    


 


 


 


Pro Forma Net Earnings

   $ (113 )   $ 120     $ 98     $ 267  
    


 


 


 


Earnings (Loss) Per Share:

                                

Basic - As Reported

   $ (0.48 )   $ 0.60     $ 0.57     $ 1.35  

Basic - Pro Forma

   $ (0.53 )   $ 0.56     $ 0.46     $ 1.25  

Diluted - As Reported

   $ (0.48 )   $ 0.60     $ 0.57     $ 1.35  

Diluted - Pro Forma

   $ (0.53 )   $ 0.56     $ 0.46     $ 1.25  

 

NOTE 12. CASUALTY, ENVIRONMENTAL AND OTHER RESERVES

 

Casualty, environmental and other reserves are provided for in the balance sheet as follows:

 

(Dollars in Millions)


                             
     September 26, 2003

   December 27, 2002

     Current

   Long-term

   Total

   Current

   Long-term

   Total

Casualty and Other

   $ 196    $ 656    $ 852    $ 216    $ 389    $ 605

Separation

     15      185      200      15      195      210

Environmental

     15      21      36      15      20      35
    

  

  

  

  

  

Total

   $ 226    $ 862    $ 1,088    $ 246    $ 604    $ 850
    

  

  

  

  

  

 

17


Table of Contents

CSX CORPORATION AND SUBSIDIARIES

ITEM 1: FINANCIAL STATEMENTS

Notes to Consolidated Financial Statements (Unaudited)

 

NOTE 12. CASUALTY, ENVIRONMENTAL AND OTHER RESERVES, Continued

 

Casualty Reserves

 

Casualty reserves represent accruals for the uninsured portion of occupational injury and personal injury claims. In the third quarter of 2003, the Company changed its estimate of casualty reserves to include an estimate of incurred but not reported claims for asbestos and other occupational injuries to be received over the next seven years. Other occupational claims include allegations of exposure to certain materials in the work place, such as solvents and diesel fuel, or alleged physical injuries, such as carpal tunnel syndrome or hearing loss.

 

In conjunction with the change in estimate, the Company recorded a charge of $232 million ($145 million after tax, 68 cents per share) in the third quarter of 2003 to increase its provision for these claims. Approximately $141 million relates to asbestos claims.

 

Asbestos and Other Occupational Injuries

 

During the third quarter of 2003, the Company retained third party professionals to work with it to project the number of asbestos and other occupational injury claims to be received over the next seven years and the related costs. Based on this analysis, the Company established reserves for the probable and reasonably estimable asbestos and other occupational injury liabilities.

 

The methodology used by the third party to project future occupational injury claims was based largely on CSX’s recent experience, including claim-filing and settlement rates, injury and disease mix, open claims and claim settlement costs. However, projecting future occupational injury claims and settlements costs is subject to numerous variables that are difficult to predict. In addition to the significant uncertainties surrounding the number of claims that might be received, other variables, including the type and severity of the injury or disease alleged by each claimant, the long latency period associated with exposure, dismissal rates, costs of medical treatment, uncertainties surrounding the litigation process from jurisdiction to jurisdiction and from case to case and the impact of changes in legislative or judicial standards, may cause actual results to differ significantly from estimates. Furthermore, predictions with respect to these variables are subject to greater uncertainty as the projection period lengthens. In light of these uncertainties, CSX believes that seven years is the most reasonable period for estimating future claims, and that claims received after that period are not reasonably estimable.

 

CSX increased its reserve for asbestos and other occupational claims by a net $206 million to cover the estimate of incurred but not reported claims to be filed during the next seven years. Reflecting the additional provisions, CSX’s reserve for asbestos and other occupational claims on an undiscounted basis amounted to $350 million at September 26, 2003, compared to $171 million at December 27, 2002.

 

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Table of Contents

CSX CORPORATION AND SUBSIDIARIES

ITEM 1: FINANCIAL STATEMENTS

Notes to Consolidated Financial Statements (Unaudited)

 

NOTE 12. CASUALTY, ENVIRONMENTAL AND OTHER RESERVES, Continued

 

Casualty Reserves, Continued

 

A summary of existing claims activity is as follows:

 

     Nine Months Ended
September 26, 2003


    Fiscal Year Ended
December 27, 2002


 

Asserted Claims:

            

Open Claims - Beginning of Period

   14,278     15,369  

New Claims Filed

   2,111     2,091  

Claims Settled

   (2,582 )   (2,877 )

Claims Dismissed

   (222 )   (305 )
    

 

Open Claims - End of Period

   13,585     14,278  
    

 

 

Approximately 5,500 of the open claims above are asbestos claims against the Company’s previously owned international container-shipping business, Sea-Land. Because the Sea-Land claims are claims against multiple vessel owners, the Company’s reserves reflect its portion of those claims. The remaining open claims have been asserted against CSX Transportation. At September 26, 2003 and December 27, 2002, the Company had approximately $13 million and $10 million reserved for the Sea-Land claims.

 

Personal Injury

 

During the third quarter of 2003, CSX retained an independent actuarial firm to assess the value of CSX’s personal injury portfolio. This firm’s methods and procedures yielded a slightly higher valuation for personal injury claims than previously recognized by CSX due to a higher estimated cost for adverse development. Utilizing the analysis provided, CSX increased its reserves for alleged personal injury claims by $26 million.

 

Environmental Reserves

 

CSX is a party to various proceedings involving private parties and regulatory agencies related to environmental issues. CSXT has been identified as a potentially responsible party (“PRP”) at approximately 100 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.

 

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Table of Contents

CSX CORPORATION AND SUBSIDIARIES

ITEM 1: FINANCIAL STATEMENTS

Notes to Consolidated Financial Statements (Unaudited)

 

NOTE 12. CASUALTY, ENVIRONMENTAL AND OTHER RESERVES, Continued

 

Environmental Reserves, Continued

 

CSXT is involved in administrative and judicial proceedings, and other clean-up efforts at approximately 224 sites, which include the 100 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 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 September 26, 2003, and December 27, 2002 were $36 million and $35 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 September 26, 2003 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 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, if any, will not materially affect its overall results of operations and financial condition.

 

NOTE 13. COMMITMENTS AND CONTINGENCIES

 

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 approximates $3.1 billion. The long-term maintenance program is intended to provide CSX access to efficient, high-quality locomotive maintenance services at fixed price levels through the term of the program. Under the program, CSX paid $32 million and $98 million in the quarter and nine month periods ended September 26, 2003. In the quarter and nine month periods ended September 27, 2002, $31 million and $93 million, respectively was paid.

 

20


Table of Contents

CSX CORPORATION AND SUBSIDIARIES

ITEM 1: FINANCIAL STATEMENTS

Notes to Consolidated Financial Statements (Unaudited)

 

NOTE 13. COMMITMENTS AND CONTINGENCIES, Continued

 

Purchase Commitments, Continued

 

The Company has entered into fuel purchase agreements for approximately 14% of its fuel requirements over the next five months. These agreements amount to approximately 88 million gallons in commitments at a weighted average of 75 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.

 

Self-Insurance

 

The Company obtains substantial amounts of commercial insurance for potential losses for third-party liability and property damages. Specified levels of risk (up to $35 million for property and $25 million for liability per occurrence) are retained on a self-insurance basis. The Company uses a combination of third-party and self-insurance to realize savings on insurance premium costs.

 

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 or one of its affiliates to make payment or to perform certain actions 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 $116 million relating to construction and cash deficiency support guarantees at several of the Company’s international terminal locations under development. The non-performance of one of its partners, cost overruns or non-compliance with financing loan covenants could cause the Company to have to perform under these guarantees.

 

  3. CSX guarantees of approximately $47 million relating to leases assumed as part of CSX’s conveyance of its interest in CSX Lines in February 2003, as discussed in Note 4, Divestitures.

 

The maximum amount of future payments the Company could be required to make under these guarantees is the amount of the guarantees themselves.

 

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Table of Contents

CSX CORPORATION AND SUBSIDIARIES

ITEM 1: FINANCIAL STATEMENTS

Notes to Consolidated Financial Statements (Unaudited)

 

NOTE 13. COMMITMENTS AND CONTINGENCIES, Continued

 

Matters Arising Out of Sale of International Container-Shipping Assets

 

CSX has entered into two settlement agreements with Maersk which resolve all material disputes pending between the companies arising out of the 1999 sale of the international container-shipping assets. On September 17, 2003, CSX entered into a final settlement agreement with Maersk allocating responsibility between the two companies for third party claims and litigation relating to the assets acquired by Maersk

 

On October 20, 2003, CSX entered into a conditional settlement agreement with Maersk designed to settle all the remaining material disputes pending between the companies. The agreement settles the two major disputes arising out of the Maersk transaction. The first dispute involves a post-closing working capital adjustment to the sale price for which the Company had recorded a receivable of approximately $70 million. The second dispute involves a claim of 425 million Dutch Guilders plus interest (amounting to approximately $180 million plus interest under then prevailing currency exchange rates) received from Europe Container Terminals bv (“ECT”) alleging certain breaches by the Company at the Rotterdam container terminal facility owned by ECT. The settlement is subject to certain conditions which the Company believes it is probable will be met. Accordingly, the Company has recorded a charge relating to this settlement. The charge set forth below primarily includes the write-off of the receivable recorded for the working capital adjustment as well as a net cash payment. If the conditions are not satisfied, then CSX will not be bound by the settlement agreement and will proceed with litigation of the disputed matters. The effect of the two settlements is to reduce the Company’s earnings by $108 million pretax, $67 million after tax, or 31 cents per share. This charge is reflected in the financial statements as the additional loss on sale of the international container-shipping assets. Neither settlement is expected to have a material impact on future cash flows.

 

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 effect on CSX’s consolidated balance sheet, income statement 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.

 

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Table of Contents

CSX CORPORATION AND SUBSIDIARIES

ITEM 1: FINANCIAL STATEMENTS

Notes to Consolidated Financial Statements (Unaudited)

 

NOTE 14. BUSINESS SEGMENTS

 

The Company operates in three business segments: rail, intermodal, 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 international terminals segment operates container freight terminal facilities and related businesses 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.

 

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) in the CSX Annual Report on Form 10-K, 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, at current market prices.

 

Business segment information for the quarters and nine months ended September 26, 2003 and September 27, 2002 is as follows:

 

(Dollars in Millions)


                               
     Surface Transportation

         
     Rail

    Intermodal

   Total

    International
Terminals


   Other (1)

   Total

Quarter Ended September 26, 2003

                                           

Revenues from external customers

   $ 1,510     $ 313    $ 1,823     $ 59    $  —      $ 1,882

Intersegment revenues

     —         —        —         —        —        —  

Segment operating income (Loss)

     (45 )     29      (16 )     20      —        4

Assets

     12,549       594      13,143       1,006      —        14,149

Quarter Ended September 27,2002

                                           

Revenues from external customers

   $ 1,473     $ 306    $ 1,779     $ 64    $ 215    $ 2,058

Intersegment revenues

     —         7      7       —        —        7

Segment operating income

     188       39      227       18      22      267

Assets

     12,657       520      13,177       949      303      14,429

 

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Table of Contents

CSX CORPORATION AND SUBSIDIARIES

ITEM 1: FINANCIAL STATEMENTS

Notes to Consolidated Financial Statements (Unaudited)

 

NOTE 14. BUSINESS SEGMENTS, Continued

 

(Dollars in Millions)


                             
     Surface Transportation

   International
Terminals


   Other (1)

   Total

   Rail

   Intermodal

   Total

        

Nine Months Ended September 26, 2003

                                         

Revenues from external customers

   $ 4,614    $ 929    $ 5,543    $ 169    $ 128    $ 5,840

Intersegment revenues

     —        4      4      —        —        4

Segment operating income

     334      78      412      52      1      465

Assets

     12,549      594      13,143      1,006      —        14,149

Nine Months Ended September 27, 2002

                                         

Revenues from external customers

   $ 4,497    $ 851    $ 5,348    $ 179    $ 565    $ 6,092

Intersegment revenues

     —        20      20      1      —        21

Segment operating income

     609      105      714      45      32      791

Assets

     12,657      520      13,177      949      303      14,429

(1) Prior to the conveyance of CSX Lines, it was a segment of CSX and was presented with international terminals on a combined basis, as the Marine Services operations of the Company. Results for CSX Lines are now presented in the other column.

 

A reconciliation of the totals reported for the business segments to the applicable line items in the consolidated financial statements is as follows:

 

(Dollars in Millions)


                        
     Quarters Ended

    Nine Months Ended

 
     September 26,
2003


    September 27,
2002


    September 26,
2003


    September 27,
2002


 

Revenues:

                                

Total external revenues for business segments

   $ 1,882     $ 2,058     $ 5,840     $ 6,092  

Intersegment revenues for business segments

     —         7       4       21  

Elimination of intersegment revenues

     —         (7 )     (4 )     (21 )

Other

     —         (3 )     —         —    
    


 


 


 


Total consolidated revenues

   $ 1,882     $ 2,055     $ 5,840     $ 6,092  
    


 


 


 


Operating Income (Loss):

                                

Total operating income for business segments

   $ 4     $ 267     $ 465     $ 791  

Reclassification of minority interest expense for International Terminals segment

     9       12       28       29  

Unallocated corporate expenses

     (3 )     (3 )     (21 )     (11 )

Additional Loss on Sale (See Note 13)

     (108 )     —         (108 )     —    
    


 


 


 


Total consolidated operating income (loss)

   $ (98 )   $ 276     $ 364     $ 809  
    


 


 


 


     September 26,
2003


    September 27,
2002


             

Assets:

                                

Assets for Business Segments

   $ 14,149     $ 14,429                  

Investment in Conrail

     4,661       4,667                  

Elimination of intersegment receivables

     (132 )     (222 )                

Non-segment assets

     3,249       2,151                  
    


 


               

Total consolidated assets

   $ 21,927     $ 21,025                  
    


 


               

 

24


Table of Contents

CSX CORPORATION AND SUBSIDIARIES

ITEM 1: FINANCIAL STATEMENTS

Notes to Consolidated Financial Statements (Unaudited)

 

NOTE 15. SUMMARIZED CONSOLIDATING FINANCIAL DATA

 

During 1987, the predecessor company to 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 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”). On February 27, 2003, CSX conveyed most of its interest in CSX Lines to a new venture. A newly formed CSX subsidiary, CSX Vessel Leasing, will retain certain vessel obligations, with CSX remaining as the guarantor. These vessels have been subleased to Horizon. CSX believes that Horizon will fulfill its contractual commitments with respect to such leases and that CSX will have no further liabilities for these obligations. The September 26, 2003 consolidating schedules reflect CSX Vessel Leasing as the obligor, while the September 27, 2002, and December 27, 2002 consolidating schedules reflect CSX Lines as the obligor. In accordance with SEC disclosure requirements, consolidating financial information for the parent and obligor are as follows:

 

Consolidating Income Statement

 

(Dollars in Millions)


  

CSX

Corporation


   

CSX Vessel

Leasing


   Other

    Eliminations

    Consolidated

 

Quarter ended September 26, 2003

                                       

Operating Revenue

   $ —       $ —      $ 1,896     $ (14 )   $ 1,882  

Operating Expense

     (42 )     —        2,033       (11 )     1,980  
    


 

  


 


 


Operating Income (Loss)

     42       —        (137 )     (3 )     (98 )

Other Income (Expense)

     (98 )     1      30       88       21  

Interest Expense

     91       —        19       (7 )     103  
    


 

  


 


 


Earnings (Loss) before Income Taxes

     (147 )     1      (126 )     92       (180 )

Income Tax Expense (Benefit)

     (17 )     —        (60 )     —         (77 )
    


 

  


 


 


Net Earnings (Loss)

   $ (130 )   $ 1    $ (66 )   $ 92     $ (103 )
    


 

  


 


 


     CSX
Corporation


    CSX Lines

   Other

    Eliminations

    Consolidated

 

Quarter ended September 27, 2002

                                       

Operating Revenue

   $ —       $ 215    $ 1,903     $ (63 )   $ 2,055  

Operating Expense

     (58 )     193      1,704       (60 )     1,779  
    


 

  


 


 


Operating Income (Loss)

     58       22      199       (3 )     276  

Other Income (Expense)

     161       1      43       (177 )     28  

Interest Expense

     97       1      23       (13 )     108  
    


 

  


 


 


Earnings (Loss) before Income Taxes

     122       22      219       (167 )     196  

Income Tax Expense (Benefit)

     13       8      48       —         69  
    


 

  


 


 


Net Earnings (Loss)

   $ 109     $ 14    $ 171     $ (167 )   $ 127  
    


 

  


 


 


 

 

25


Table of Contents

CSX CORPORATION AND SUBSIDIARIES

ITEM 1: FINANCIAL STATEMENTS

Notes to Consolidated Financial Statements (Unaudited)

 

NOTE 15. SUMMARIZED CONSOLIDATING FINANCIAL DATA, Continued

 

Consolidating Income Statement

 

(Dollars in Millions)


   CSX
Corporation


    CSX Vessel
Leasing


   Other

    Eliminations

    Consolidated

 

Nine Months ended September 26, 2003

                                       

Operating Revenue

   $ —       $ —      $ 5,899     $ (59 )   $ 5,840  

Operating Expense

     (119 )     —        5,647       (52 )     5,476  
    


 

  


 


 


Operating Income (Loss)

     119       —        252       (7 )     364  

Other Income (Expense)

     216       2      63       (251 )     30  

Interest Expense

     274       —        61       (24 )     311  
    


 

  


 


 


Earnings before Income Taxes and Cumulative Effect of Accounting Change

     61       2      254       (234 )     83  

Income Tax Expense (Benefit)

     (53 )     —        70       —         17  
    


 

  


 


 


Earnings Before Cumulative Effect of Accounting Change

     114       2      184       (234 )     66  

Cumulative Effect of Accounting Change - Net of Tax

     —         —        57       —         57  
    


 

  


 


 


Net Earnings

   $ 114     $ 2    $ 241     $ (234 )   $ 123  
    


 

  


 


 


     CSX
Corporation


    CSX Lines

   Other

    Eliminations

    Consolidated

 

Nine Months ended September 27, 2002

                                       

Operating Revenue

   $ —       $ 565    $ 5,691     $ (164 )   $ 6,092  

Operating Expense

     (194 )     533      5,100       (156 )     5,283  
    


 

  


 


 


Operating Income (Loss)

     194       32      591       (8 )     809  

Other Income (Expense)

     378       5      83       (425 )     41  

Interest Expense

     299       6      73       (40 )     338  
    


 

  


 


 


Earnings before Income Taxes and Cumulative Effect of Accounting Change

     273       31      601       (393 )     512  

Income Tax Expense

     34       12      136       —         182  
    


 

  


 


 


Earnings Before Cumulative Effect of Accounting Change

     239       19      465       (393 )     330  

Cumulative Effect of Accounting Change - Net of Tax

     —         —        (43 )     —         (43 )
    


 

  


 


 


Net Earnings

   $ 239     $ 19    $ 422     $ (393 )   $ 287  
    


 

  


 


 


 

26


Table of Contents

CSX CORPORATION AND SUBSIDIARIES

ITEM 1: FINANCIAL STATEMENTS

Notes to Consolidated Financial Statements (Unaudited)

 

NOTE 15. SUMMARIZED CONSOLIDATING FINANCIAL DATA, Continued

 

Consolidating Balance Sheet

 

(Dollars in Millions)


   CSX Corporation

    CSX Vessel
Leasing


   Other

    Eliminations

    Consolidated

 

September 26, 2003

                                       

ASSETS

                                       

Current Assets

                                       

Cash, Cash Equivalents and Short-term Investments

   $ 1,658     $ 45    $ (967 )   $ —       $ 736  

Accounts Receivable - Net

     44       9      1,333       (136 )     1,250  

Materials and Supplies

     —         —        168       —         168  

Deferred Income Taxes

     —         —        134       —         134  

Other Current Assets

     5       —        223       (136 )     92  
    


 

  


 


 


Total Current Assets

     1,707       54      891       (272 )     2,380  

Properties

     29       —        19,021       —         19,050  

Accumulated Depreciation

     25       —        5,411       —         5,436  
    


 

  


 


 


Properties - Net

     4       —        13,610       —         13,614  

Investment in Conrail

     334       —        4,327       —         4,661  

Affiliates and Other Companies

     12,409       —        916       (12,837 )     488  

Investment in Consolidated Subsidiaries

     —         —        —         —         —    

Other Long-term Assets

     1,400       —        30       (646 )     784  
    


 

  


 


 


Total Assets

   $ 15,854     $ 54    $ 19,774     $ (13,755 )   $ 21,927  
    


 

  


 


 


LIABILITIES

                                       

Current Liabilities

                                       

Accounts Payable

   $ 104     $ —      $ 829     $ (133 )   $ 800  

Labor and Fringe Benefits Payable

     17       —        401       —         418  

Payable to Affiliates

     —         —        137       (137 )     —    

Casualty, Environmental and Other Reserves

     —         —        226       —         226  

Current Maturities of Long-term Debt

     450       —        125       —         575  

Short-term Debt

     725       —        4       —         729  

Income and Other Taxes Payable

     1,472       —        (1,371 )     —         101  

Other Current Liabilities

     30       8      139       (2 )     175  
    


 

  


 


 


Total Current Liabilities

     2,798       8      490       (272 )     3,024  

Long-term Debt

     5,645       —        835       —         6,480  

Deferred Income Taxes

     (24 )     —        3,654       —         3,630  

Casualty, Environmental and Other reserves

     —         —        862       —         862  

Long-term Payable to Affiliates

     396       —        147       (543 )     —    

Other Long-term Liabilities

     733       42      955       (111 )     1,619  
    


 

  


 


 


Total Liabilities

     9,548       50      6,943       (926 )     15,615  
    


 

  


 


 


SHAREHOLDER’S EQUITY

                                       

Preferred Stock

     —         —        —         —         —    

Common Stock

     214       —        209       (209 )     214  

Other Capital

     1,556       1      8,052       (8,053 )     1,556  

Retained Earnings

     4,858       3      4,564       (4,567 )     4,858  

Accumulated Other Comprehensive Loss

     (331 )     —        15       —         (316 )
    


 

  


 


 


Total Shareholders’ Equity

     6,297       4      12,840       (12,829 )     6,312  
    


 

  


 


 


Total Liabilities and Shareholders’ Equity

   $ 15,845     $ 54    $ 19,783     $ (13,755 )   $ 21,927  
    


 

  


 


 


 

27


Table of Contents

CSX CORPORATION AND SUBSIDIARIES

ITEM 1: FINANCIAL STATEMENTS

Notes to Consolidated Financial Statements (Unaudited)

 

NOTE 15. SUMMARIZED CONSOLIDATING FINANCIAL DATA, Continued

 

(Dollars in Millions)


   CSX
Corporation


    CSX
Lines


    Other

    Eliminations

    Consolidated

 

December 27, 2002

                                        

ASSETS

                                        

Current Assets

                                        

Cash, Cash Equivalents and Short-term Investments

   $ 379     $ 37     $ (152 )   $ —       $ 264  

Accounts Receivable - Net

     43       —         948       (146 )     845  

Materials and Supplies

     —         —         180       —         180  

Deferred Income Taxes

     —         —         128       —         128  

Domestic Container-Shipping Assets Held For Disposition

     —         263       —         —         263  

Other Current Assets

     5       —         287       (137 )     155  
    


 


 


 


 


Total Current Assets

     427       300       1,391       (283 )     1,835  

Properties

     33       11       18,516       —         18,560  

Accumulated Depreciation

     (29 )     (2 )     (5,243 )     —         (5,274 )
    


 


 


 


 


Properties - Net

     4       9       13,273       —         13,286  

Investment in Conrail

     342       —         4,311       —         4,653  

Affiliates and Other Companies

     —         —         414       (33 )     381  

Investment in Consolidated Subsidiaries

     12,761       —         396       (13,157 )     —    

Other Long-term Assets

     1,192       —         238       (623 )     807  
    


 


 


 


 


Total Assets

   $ 14,726     $ 309     $ 20,023     $ (14,096 )   $ 20,962  
    


 


 


 


 


LIABILITIES AND SHAREHOLDERS’ EQUITY

                                        

Current Liabilities:

                                        

Accounts Payable

   $ 77     $ 20     $ 848     $ (143 )   $ 802  

Labor and Fringe Benefits Payable

     49       11       397       —         457  

Payable to Affiliates

     —         —         137       (137 )     —    

Casualty, Environmental and Other Reserves

     1       —         245       —         246  

Current Maturities of Long-term Debt

     150       —         241       —         391  

Short-term Debt

     140       —         3       —         143  

Income and Other Taxes Payable

     1,458       9       (1,284 )     (39 )     144  

Other Current Liabilities

     28       4       110       36       178  

Domestic Container-Shipping Liabilities Held For Disposition

     —         104       —         —         104  
    


 


 


 


 


Total Current Liabilities

     1,903       148       697       (283 )     2,465  

Casualty, Environmental and Other reserves

     4       1       599       —         604  

Long-term Debt

     5,510       —         1,009       —         6,519  

Deferred Income Taxes

     —         3       3,564       —         3,567  

Long-term Payable to Affiliates

     396       —         148       (544 )     —    

Other Long-term Liabilities

     685       49       925       (93 )     1,566  
    


 


 


 


 


Total Liabilities

     8,498       201       6,942       (920 )     14,721  
    


 


 


 


 


Shareholders’ Equity

                                        

Preferred Stock

     —         —         396       (396 )     —    

Common Stock

     214       —         209       (209 )     214  

Other Capital

     1,548       73       8,238       (8,311 )     1,548  

Retained Earnings

     4,797       35       4,225       (4,260 )     4,797  

Accumulated Other Comprehensive Loss

     (331 )     —         13               (318 )
    


 


 


 


 


Total Shareholders’ Equity

     6,228       108       13,081       (13,176 )     6,241  
    


 


 


 


 


Total Liabilities and Shareholders’ Equity

   $ 14,726     $ 309     $ 20,023     $ (14,096 )   $ 20,962  
    


 


 


 


 


 

28


Table of Contents

CSX CORPORATION AND SUBSIDIARIES

ITEM 1: FINANCIAL STATEMENTS

Notes to Consolidated Financial Statements (Unaudited)

 

NOTE 15. SUMMARIZED CONSOLIDATING FINANCIAL DATA, Continued

 

Consolidating Cash Flow Statements

 

(Dollars in Millions)


                              
     CSX
Corporation


    CSX
Vessel Leasing


    Other

    Eliminations

    Consolidated

 

Nine Months Ended September 26, 2003

                                        

Operating Activities

                                        

Net Cash Provided (Used) by Operating Activities

   $ 69     $ —       $ 516     $ (181 )   $ 404  
    


 


 


 


 


Investing Activities

                                        

Property Additions

     —         —         (757 )     —         (757 )

Net Proceeds from Divestitures

     —         —         214       —         214  

Short-term Investments

     (190 )     —         (23 )     —         (213 )

Other Investing Activities

     241       —         (6 )     (261 )     (26 )
    


 


 


 


 


Net Cash Provided (Used) by Investing Activities

     51       —         (572 )     (261 )     (782 )
    


 


 


 


 


Financing Activities

                                        

Short-term Debt-Net

     585       —         1       —         586  

Long-term Debt Issued

     433       —         —         —         433  

Long-term Debt Repaid

     —         —         (292 )     —         (292 )

Cash Dividends Paid

     (66 )     —         (179 )     180       (65 )

Other Financing Activities

     17       45       (350 )     262       (26 )
    


 


 


 


 


Net Cash Provided (Used) by Financing Activities

     969       45       (820 )     442       636  

Net Increase (Decrease) in Cash and Cash Equivalents

     1,089       45       (876 )     —         258  

Cash and Cash Equivalents at Beginning of Period

     264       —         (137 )     —         127  
    


 


 


 


 


Cash and Cash Equivalents at End of Period

   $ 1,353     $ 45     $ (1,013 )   $ —       $ 385  
    


 


 


 


 


     CSX
Corporation


    CSX Lines

    Other

    Eliminations

    Consolidated

 

Nine Months Ended September 27, 2002

                                        

Operating Activities

                                        

Net Cash Provided (Used) by Operating Activities

   $ 257     $ (3 )   $ 620     $ (181 )   $ 693  
    


 


 


 


 


Investing Activities

                                        

Property Additions

     (4 )     (16 )     (723 )     —         (743 )

Short-term Investments-net

     (17 )     (26 )     220       —         177  

Other Investing Activities

     (25 )     18       (64 )     13       (58 )
    


 


 


 


 


Net Cash Provided (Used) by Investing Activities

     (46 )     (24 )     (567 )     13       (624 )
    


 


 


 


 


Financing Activities

                                        

Short-term Debt - Net

     570       —         1       —         571  

Long-term Debt Issued

     518       —         1       —         519  

Long-term Debt Repaid

     (950 )     —         (163 )     —         (1,113 )

Dividends Paid

     (65 )     —         (157 )     157       (65 )

Other Financing Activities

     25       —         (34 )     11       2  
    


 


 


 


 


Net Cash Provided (Used) by Financing Activities

     98       —         (352 )     168       (86 )

Net Increase (Decrease) in Cash and Cash Equivalents

     309       (27 )     (299 )     —         (17 )

Cash and Cash Equivalents at Beginning of Period

     156       52       (71 )     —         137  
    


 


 


 


 


Cash and Cash Equivalents at End of Period

   $ 465     $ 25     $ (370 )   $ —       $ 120  
    


 


 


 


 


 

29


Table of Contents

CSX CORPORATION AND SUBSIDIARIES

ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS

OF OPERATIONS AND FINANCIAL CONDITION

 

RESULTS OF OPERATIONS

 

CSX follows a 52/53-week fiscal reporting calendar. Fiscal years 2003 and 2002 consist of 52 weeks ending on December 26, 2003 and December 27, 2002, respectively. The financial statements presented are for the 13-week quarters and nine months ended September 26, 2003 and September 27, 2002, and as of December 27, 2002.

 

Quarter ended September 26, 2003 Compared to September 27, 2002

 

Consolidated Results

 

Operating Revenue

 

Operating revenue decreased $173 million to $1,882 million in the quarter ended September 26, 2003, as compared to the 2002 quarter. Surface Transportation revenue increased $37 million quarter-over-quarter, but was offset by the elimination of $215 million in revenue from the domestic container-shipping business as a majority of CSX’s interest in CSX Lines was conveyed during the first quarter of 2003 (See Note 4, Divestitures).

 

Operating Income

 

Operating income for the quarter ended September 26, 2003 was down $374 million to a loss of $98 million, compared to income of $276 million in the 2002 quarter.

 

The decline is primarily the result of the Company recording a charge in conjunction with changing its estimate of casualty reserves to include an estimate of incurred but not reported claims for asbestos and other occupational injuries to be received over the next seven years. The Company recorded a charge of $232 million in the third quarter of 2003 to increase its provision for casualty reserves. (See Note 12, Casualty, Environmental, and Other Reserves).

 

Additionally, in the third quarter of 2003, CSX entered into one final settlement agreement and another conditional settlement agreement, which together resolve all material outstanding disputes with Maersk. This decreased operating income by $108 million, and is reflected in operating expense as the additional loss on sale of international container-shipping assets (See Note 13, Commitments and Contingencies).

 

The remaining decline in operating income is due to a $22 million decrease in operating income from the sale of a majority of CSX’s interest in CSX Lines during the first quarter of 2003 as previously discussed, and increased operating expenses at the Surface Transportation Segment, primarily due to increased materials, supplies and other costs and labor and fringe benefit expense.

 

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Table of Contents

CSX CORPORATION AND SUBSIDIARIES

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS

OF OPERATIONS AND FINANCIAL CONDITION

 

Consolidated Results, Continued

 

Other Income

 

Other income decreased $7 million in the third quarter of 2003, as compared to the same period of the prior year. The decrease is primarily the result of decreased income from real estate and resort operations, offset by the elimination of costs resulting from the discontinuance of the sale of accounts receivable program.

 

Interest Expense

 

Interest expense decreased $5 million in the quarter ended September 26, 2003, as compared to the prior year quarter. Lower interest rates on floating rate debt and the favorable impact of interest rate swaps (see Note 10, Derivative Financial Instruments) continue to benefit the Company.

 

Net Earnings

 

CSX’s net loss was $103 million, or 48 cents per share, in the quarter ended September 26, 2003, compared to earnings of $127 million or 60 cents per share for the same period of the prior year. The decrease is a result of the previously mentioned items.

 

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Table of Contents

CSX CORPORATION AND SUBSIDIARIES

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS

OF OPERATIONS AND FINANCIAL CONDITION

 

Segment Results

 

The following tables provide a detail of operating revenue and expense by segment:

 

(Dollars in Millions) (Unaudited) (1)


                                                                        

Quarters Ended September 26, 2003 and September 27, 2002


 
     Rail

    Intermodal

    Surface
Transportation


    International
Terminals


    Eliminations/
Other (2)


    Total

 
     2003

    2002

    2003

    2002

    2003

    2002

    2003

    2002

    2003

    2002

    2003

    2002

 

Operating Revenue

   $ 1,510     $ 1,473     $ 313     $ 313     $ 1,823     $ 1,786     $ 59     $ 64     $ —       $ 205     $ 1,882     $ 2,055  

Operating Expense

                                                                                                

Labor and Fringe

     636       627       17       16       653       643       12       14       1       61       666       718  

Materials, Supplies and Other

     318       297       48       46       366       343       20       19       1       68       387       430  

Conrail Rents, Fees & Services

     86       82       —         —         86       82       —         —         —         —         86       82  

Building and Equipment Rent

     109       117       38       34       147       151       2       3       (3 )     7       146       161  

Inland Transportation

     (100 )     (93 )     174       171       74       78       2       3       —         23       76       104  

Depreciation

     145       146       7       7       152       153       3       3       3       7       158       163  

Fuel

     132       109       —         —         132       109       —         —         —         19       132       128  

Miscellaneous

     —         —         —         —         —         —         —         4       (11 )     (11 )     (11 )     (7 )

Provision for Casualty Claims (3)

     229       —         —         —         229       —         —         —         3       —         232       —    

Additional Loss on Sale (4)

     —         —         —         —         —         —         —         —         108       —         108       —    
    


 


 


 


 


 


 


 


 


 


 


 


Total Operating Expense

     1,555       1,285       284       274       1,839       1,559       39       46       102       174       1,980       1,779  
    


 


 


 


 


 


 


 


 


 


 


 


Operating Income (Loss)

   $ (45 )   $ 188     $ 29     $ 39     $ (16 )   $ 227     $ 20     $ 18     $ (102 )   $ 31     $ (98 )   $ 276  
    


 


 


 


 


 


 


 


 


 


 


 


Operating Ratio

     103.0 %     87.2 %     90.7 %     87.5 %     100.9 %     87.3 %     66.1 %     71.9 %                                

Nine Months Ended September 26, 2003 and September 27, 2002


 
     Rail

    Intermodal

    Surface
Transportation


    International
Terminals


    Eliminations/
Other (2)


    Total

 
     2003

    2002

    2003

    2002

    2003

    2002

    2003

    2002

    2003

    2002

    2003

    2002

 

Operating Revenue

   $ 4,614     $ 4,497     $ 929     $ 871     $ 5,543     $ 5,368     $ 169     $ 180     $ 128     $ 544     $ 5,840     $ 6,092  

Operating Expense

                                                                                                

Labor and Fringe

     1,929       1,892       54       49       1,983       1,941       38       45       61       171       2,082       2,157  

Materials, Supplies and Other

     988       946       144       131       1,132       1,077       55       59       50       187       1,237       1,323  

Conrail Rents, Fees & Services

     259       248       —         —         259       248       —         —         —         —         259       248  

Building and Equipment Rent

     308       326       108       98       416       424       6       7       —         32       422       463  

Inland Transportation

     (297 )     (271 )     522       466       225       195       6       6       16       66       247       267  

Depreciation

     438       422       23       22       461       444       7       7       7       19       475       470  

Fuel

     426       325       —         —         426       325       —         —         15       47       441       372  

Miscellaneous

     —         —         —         —         —         —         5       11       (32 )     (28 )     (27 )     (17 )

Provision for Casualty Claims (3)

     229       —         —         —         229       —         —         —         3       —         232       —    

Additional Loss on Sale (4)

     —         —         —         —         —         —         —         —         108       —         108       —    
    


 


 


 


 


 


 


 


 


 


 


 


Total Operating Expense

     4,280       3,888       851       766       5,131       4,654       117       135       228       494       5,476       5,283  
    


 


 


 


 


 


 


 


 


 


 


 


Operating Income (Loss)

   $ 334     $ 609     $ 78     $ 105     $ 412     $ 714     $ 52     $ 45     $ (100 )   $ 50     $ 364     $ 809  
    


 


 


 


 


 


 


 


 


 


 


 


Operating Ratio

     92.8 %     86.5 %     91.6 %     87.9 %     92.6 %     86.7 %     69.2 %     75.0 %                                

(1) Prior periods have been reclassified to conform to the current presentation.
(2) Eliminations / Other consists of the following:
  (a) Charge incurred upon entering into settlement agreements with Maersk
  (b) Reclassification of International Terminals minority interest expense
  (c) Operations of CSX Lines and gain amortization
  (d) Expenses related to the 2003 retirement of the Company’s former Chairman and Chief Executive Officer
  (e) Other items
(3) Represents charge recorded during the third quarter of 2003 in connection with the Company’s change in estimating casualty reserves (See Note 12, Casualty, Environmental and Other Reserves).
(4) Represents the charge incurred upon entering into settlement agreements with Maersk (See Note 13, Commitments and Contingencies)

 

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Table of Contents

CSX CORPORATION AND SUBSIDIARIES

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS

OF OPERATIONS AND FINANCIAL CONDITION

 

Surface Transportation Results

 

The following tables provide Surface Transportation carload and revenue data by service group and commodity:

 

Quarters ended September 26, 2003 and September 27, 2002

 

    

Carloads

(Thousands)


   

Revenue

(Dollars in Millions)


 
     2003

   2002

   % Change

    2003

    2002

   % Change

 

Merchandise

                                     

Phosphates and Fertilizer

   114    113    1 %   $ 74     $ 73    1 %

Metals

   85    83    2       107       104    3  

Forest and Industrial Products

   153    151    1       205       195    5  

Agricultural and Food

   111    109    2       157       154    2  

Chemicals

   136    134    1       249       239    4  

Emerging Markets

   130    115    13       125       106