CSX Corporation 10-Q Summary: Quarter Ended September 27, 2002
Business Context and Reporting Period
This Form 10-Q covers the 13-week quarter and 39-week period ended September 27, 2002. CSX Corporation operates in four segments: Rail, Intermodal, Domestic Container Shipping, and International Terminals. The company follows a 52/53-week fiscal calendar. As of the reporting date, there were 213,030,402 shares of common stock outstanding.
Key Financial Metrics
| Metric (Millions) | Q3 2002 | Q3 2001 | 9M 2002 | 9M 2001 |
|---|---|---|---|---|
| Operating Revenue | $2,055 | $2,019 | $6,092 | $6,101 |
| Operating Income | $276 | $282 | $809 | $736 |
| Net Earnings | $127 | $100 | $287 | $228 |
| Earnings Per Share (Diluted) | $0.60 | $0.47 | $1.35 | $1.07 |
| Operating Cash Flow (9M) | $693 (2002) vs $439 (2001) | |||
| Capital Expenditures (9M) | $743 (2002) vs $628 (2001) | |||
| Long-Term Debt | $6,434 (Sep 27, 2002) vs $5,839 (Dec 28, 2001) | |||
| Cash & Equivalents | $120 (Sep 27, 2002) vs $133 (Sep 28, 2001) |
Operating Ratios (Q3 2002): Surface Transportation: 87.3%; Marine Services: 85.7%.
Material Changes vs. Prior Period
- Earnings Growth: Net earnings increased 27% in Q3 2002 compared to Q3 2001, driven by real estate gains in "Other Income" and a 16% reduction in interest expense due to refinancing and interest rate swaps.
- Operating Income: Consolidated operating income decreased 2% in Q3 2002 ($276M vs $282M) due to a decline in Surface Transportation income, specifically lower coal revenue. However, for the nine-month period, operating income increased 10% ($809M vs $736M).
- Accounting Change: The nine-month 2002 results include a one-time after-tax charge of $43 million ($0.20 per share) related to the adoption of SFAS No. 142 regarding goodwill and indefinite-lived intangible assets (Alaska pipeline permits).
- Segment Performance:
- Rail: Revenue declined 1% due to weak coal demand (down 8% in revenue), offset by gains in merchandise and automotive.
- Intermodal: Revenue increased 9% driven by volume growth in domestic and international markets.
- Marine Services: Revenue increased 17% in Q3, led by market share gains in Hawaii and Puerto Rico trade lanes.
Outlook, Risks, and Contingencies
- Outlook: Management expects the West Coast port labor situation to negatively impact both revenue and expenses in the fourth quarter for Intermodal and CSX Lines.
- Liquidity: The company reported a working capital deficit of $838 million, which management states is not unusual and does not indicate a lack of liquidity. The company maintains $1.3 billion in available credit lines and $1.1 billion in shelf registration capacity.
- Legal Contingencies:
- Sea-Land Sale Disputes: Ongoing arbitration regarding a $70 million working capital adjustment with Maersk and a $180 million claim from Europe Container Terminals (ECT). A ruling on liability for the ECT claim is expected in December 2002.
- New Orleans Tank Car Fire: A $220 million settlement was paid in Q3 2002, with $135 million funded by insurers.
- Environmental: Reserves for environmental costs were $34 million. The company is a potentially responsible party at 89 Superfund sites.
- Market Risks: Exposure to interest rate fluctuations (hedged via swaps on $1.4 billion of debt) and diesel fuel price volatility (approx. 50% of needs hedged for the next three months).
Investor Verification Checklist
- Verify the impact of the West Coast port labor dispute on Q4 Intermodal volumes and revenue.
- Monitor the December 2002 arbitration ruling regarding the $180 million ECT claim and the $70 million Maersk dispute.
- Assess the sustainability of coal revenue recovery given the reported decline in export and industrial coal demand.
- Review the company's ability to maintain liquidity given the working capital deficit and high capital expenditure requirements ($743M in 9 months).
- Confirm the status of the $43 million one-time accounting charge and ensure it does not recur in future periods.