CSX

CSX Corporation 10-Q Summary: Quarter Ended March 30, 2007

Business Context and Reporting Period

CSX Corporation, a leading transportation company operating the largest railroad in the eastern United States, reported results for its first fiscal quarter ended March 30, 2007. The company operates primarily through two segments: Rail and Intermodal. The quarter included 13 weeks of operations. CSX is a large accelerated filer with 437.2 million shares of common stock outstanding as of the reporting date.

Key Financial Metrics

*Calculated as Operating Cash Flow less Property Additions ($428M).

Material Changes vs. Prior Period

• Revenue Growth: Operating revenue increased 4% ($91 million) driven by an 8% increase in revenue per unit, which offset a 4% decline in volume. Pricing gains were the primary driver.
• Expense Increases: Total operating expenses rose 5% ($99 million). Key drivers included derailment-related costs, inflation, and higher labor costs. Materials, Supplies, and Other expenses increased $81 million.
• Insurance Gains: The company recognized an $18 million gain on insurance recoveries related to Hurricane Katrina, partially offsetting expense increases.
• Segment Performance: Rail operating income increased to $438 million from $425 million. Intermodal operating income decreased to $49 million from $62 million due to volume declines and mix changes.
• Share Repurchases: CSX repurchased 3.5 million shares for $179 million under a new $2.0 billion program announced in February 2007.

Guidance, Outlook, and Risks

Outlook: Management expects 2007 financial performance to be consistent with long-term targets of double-digit compounded annual growth rates for Surface Transportation operating income, consolidated EPS, and free cash flow through 2010. The outlook anticipates strong revenue growth driven by a robust pricing environment and modest volume growth.

Capital Allocation: CSX plans to issue up to $1 billion in unsecured notes in Q2 2007 to refinance maturing debt and fund general corporate purposes, including share repurchases and capital expenditures.

Risks and Contingencies:

• Operational Disruptions: Several high-profile train derailments occurred in Q1, leading to increased costs and FRA investigations. However, personal injury frequency declined 6% and FRA reportable accidents declined 23% year-over-year.
• Volume Weakness: Merchandise markets declined due to weaknesses in housing construction. Automotive, coal, and intermodal volumes also faced declines.
• Legal and Environmental: The company maintains $950 million in reserves for casualty, environmental, and other liabilities. An IRS examination of the 2005 tax return is ongoing, though management anticipates a favorable resolution.
• Market Risk: Exposure to fuel price fluctuations remains, though the fuel hedging program has no outstanding contracts as of Q1 2007.

Investor Verification Checklist

• Derailment Impact: Verify the specific financial impact of Q1 derailments on future insurance premiums and operational efficiency.
• Volume Trends: Monitor housing construction and automotive production data to assess the sustainability of volume declines in merchandise and automotive sectors.
• Debt Refinancing: Confirm the successful issuance of the planned $1 billion in unsecured notes in Q2 2007 and the associated interest rates.
• Share Repurchase Execution: Track the pace of the $2.0 billion share repurchase program and its impact on diluted EPS.
• Tax Resolution: Follow the status of the IRS examination regarding the 2005 tax return and potential adjustments to unrecognized tax benefits.