CSX

CSX Corporation 10-Q Summary: Quarter Ended June 29, 2001

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended June 29, 2001, and the six-month period ended June 29, 2001, for CSX Corporation. CSX operates in four primary segments: Rail, Intermodal, Domestic Container Shipping, and International Terminals. The company utilizes a 52/53-week fiscal calendar; fiscal year 2001 consists of 52 weeks. The report excludes the former logistics subsidiary, CTI Logistx, Inc., which was sold in September 2000 and is reported as a discontinued operation.

Key Financial Metrics

Note: Total Debt calculated as Current Maturities of Long-Term Debt ($937M) + Short-Term Debt ($171M) + Long-Term Debt ($5,770M) as of June 29, 2001.

Material Changes vs. Prior Period

• Profitability Surge: Net earnings from continuing operations increased 125% year-over-year for the quarter ($108M vs. $48M) and 75% for the six-month period ($128M vs. $73M). This was driven by a 40% increase in operating income for the quarter.
• Revenue Stability, Cost Reduction: Operating revenues remained relatively flat compared to the prior year. However, operating expenses decreased by 5% in the quarter and 3% for the six-month period, primarily due to reduced materials, supplies, rent, and Conrail-related expenses.
• Segment Performance:
  • Rail: Operating income rose 59% to $219M. While carload volumes were slightly down, pricing programs offset volume losses. Coal volumes increased, offsetting weakness in merchandise and automotive categories.
  • Intermodal: Operating income increased 15% to $23M despite a 7% revenue decline, driven by an 8% reduction in operating expenses.
  • Marine Services: Domestic Container Shipping income improved to $7M; International Terminals income remained flat at $18M.
• Debt Reclassification: $350 million of commercial paper was reclassified from short-term to long-term debt due to a new 5-year credit agreement. Conversely, $765 million of long-term debt was reclassified to current liabilities as it is due within 12 months.

Guidance, Outlook, and Risks

• Dividend Reduction: Subsequent to the quarter end, the Board of Directors approved a 67% reduction in the quarterly dividend to $0.10 per share, effective immediately.
• Outlook: Management expects full-year 2001 earnings to increase over previous years despite a weak economy. The company anticipates year-over-year volume increases in most rail categories in the second half of 2001.
• Subsequent Event (Baltimore Tunnel Fire): A fire in the Howard Street Tunnel on July 18, 2001, caused service disruptions and rerouting costs. Management believes the impact will not be material to financial position but could be material to Q3 2001 operating results.
• Legal Contingencies:
  • New Orleans Tank Car Fire: A $2.5 billion punitive damages award was reduced to $850 million by the trial court and affirmed by the Court of Appeal. CSX is appealing to the Louisiana Supreme Court. Management cannot currently determine if the resolution will have a material adverse effect.
  • ECT Dispute: A claim of approximately $180 million plus interest from Europe Container Terminals regarding the sale of Sea-Land assets remains unresolved.
  • Environmental: Reserves for environmental costs were $38 million at June 29, 2001.

Investor Verification Checklist

• Verify the impact of the 67% dividend cut on shareholder returns and cash flow preservation.
• Monitor the status of the Baltimore Tunnel Fire litigation and associated Q3 operating cost increases.
• Assess the outcome of the New Orleans Tank Car Fire appeal and the potential $850 million liability exposure.
• Review the sustainability of cost reductions in the Rail segment given the reclassification of debt and working capital deficit of $1.4 billion.
• Confirm the progress of the ECT dispute regarding the Sea-Land terminal sale.