CSX

CSX Corporation 10-Q Summary: Quarter Ended March 29, 2002

Business Context and Reporting Period

This filing covers the 13-week quarter ended March 29, 2002, for CSX Corporation, a diversified transportation company operating in Surface Transportation (Rail and Intermodal) and Marine Services (Domestic Container Shipping and International Terminals). The company follows a 52/53-week fiscal calendar. A significant accounting event occurred in this period with the adoption of SFAS 142 regarding goodwill and intangible assets.

Key Financial Metrics

Note: Net earnings include a one-time after-tax charge of $43 million ($0.20 per share) due to the adoption of SFAS 142. Excluding this charge, earnings were $68 million ($0.32 per share).

Material Changes vs. Prior Period

• Revenue Decline: Operating revenue decreased 3% to $1.96 billion, driven by a 6% drop in rail volumes, partially offset by yield improvements.
• Operating Income Growth: Despite lower revenue, operating income increased 12% to $212 million. This was achieved through a 5% reduction in operating expenses to $1.75 billion.
• Cost Reductions: Fuel expenses dropped $50 million due to favorable price variances and lower volumes. Labor costs decreased $20 million following headcount reductions of approximately 2,600 employees.
• Accounting Impact: The adoption of SFAS 142 resulted in a $43 million after-tax charge related to the write-down of indefinite-lived intangible assets (Alaska pipeline permits).
• Dividend Reduction: Cash dividends paid per share were reduced to $0.10 from $0.30 in the prior year.

Outlook, Risks, and Contingencies

Management Outlook: CSX anticipates significant financial performance improvement in the remainder of 2002 as the industrial sector recovers. Surface Transportation units are expected to benefit from operating leverage. Marine Services units are projected to post earnings greater than 2001 levels if the economic recovery materializes in the second half of 2002.

Liquidity and Debt: The company maintains a working capital deficit of $685 million, which management states is not unusual and does not indicate a lack of liquidity. CSX has $450 million in debentures maturing in May 2002, which it intends to retire. It recently issued $400 million in 6.30% notes due 2012 to refinance maturing debt.

Material Risks and Contingencies:

• Legal Litigation: A $220 million settlement regarding the 1987 New Orleans tank car fire was approved in April 2002, resolving the matter. A $60 million pre-tax charge was recorded in Q4 2001.
• Sea-Land Disputes: CSX is involved in arbitration regarding the sale of Sea-Land's international liner business. This includes a disputed $70 million receivable from Maersk and a $180 million claim from Europe Container Terminals (ECT). An adverse outcome could materially affect future results.
• Environmental: CSX is a potentially responsible party at 92 Superfund sites. Recorded environmental liabilities were $34 million as of March 29, 2002.
• Market Risk: The company is exposed to interest rate fluctuations on floating-rate debt and diesel fuel price volatility, though it has hedged approximately 50% of its 2002 fuel requirements.

Investor Verification Checklist

• Verify the final status and payment terms of the $220 million New Orleans tank car fire settlement.
• Monitor the arbitration outcomes regarding the Sea-Land sale disputes (Maersk and ECT claims totaling ~$250 million).
• Confirm the company's ability to refinance or repay the $450 million in debt maturing in May 2002.
• Assess the impact of the SFAS 142 adoption on future earnings, specifically regarding the write-down of Alaska pipeline assets.
• Review the trajectory of rail volumes versus yield improvements to determine if revenue growth can be sustained despite volume declines.