CSX CORP quarterly report, Q2 FY2002 (NASDAQ:CSX)

This Form 10-Q covers the quarterly period ended June 28, 2002, and the six-month period ended June 28, 2002. CSX Corporation operates in four segments: Rail, Intermodal, Domestic Container Shipping, and International Terminals. The company follows a 52/53-week fiscal calendar; fiscal year 2002 consists of 52 weeks. As of June 28, 2002, there were 212,886,212 shares of common stock outstanding.

Key Financial Metrics

Metric	Q2 2002	Q2 2001	6 Months 2002	6 Months 2001
Operating Revenue	$2,073 million	$2,057 million	$4,037 million	$4,082 million
Operating Income	$321 million	$265 million	$533 million	$454 million
Net Earnings	$135 million	$108 million	$160 million	$128 million
Earnings Per Share (Diluted)	$0.63	$0.51	$0.75	$0.60
Operating Ratio (Surface Trans.)	84.0%	86.8%	86.4%	88.3%
Cash from Operations (6 Mo)	$511 million
Capital Expenditures (6 Mo)	$431 million
Total Debt (Long-term + Current)	$6,664 million
Cash & Short-term Investments	$731 million

Material Changes vs. Prior Period

Profitability: Net earnings increased 25% year-over-year for the quarter ($135M vs. $108M) and 25% for the six months ($160M vs. $128M). Operating income rose 21% in the quarter and 17% for the six months.
Revenue: Operating revenue increased 1% in the quarter but decreased 1% for the six months compared to the prior year.
Expenses: Operating expenses decreased 2% in the quarter and 3% for the six months, driven by lower labor, fuel, and Conrail operating fees.
Accounting Change: The six-month results include a one-time after-tax charge of $43 million ($0.20 per share) due to the adoption of SFAS No. 142 regarding goodwill and indefinite-lived intangible assets (specifically Alaska pipeline permits).
Interest Expense: Interest expense declined to $116 million in Q2 2002 from $135 million in Q2 2001 due to favorable refinancing and lower rates.

Guidance, Outlook, and Risks

Outlook: Management expects financial results to improve in the remainder of 2002 as the industrial sector recovers. Surface Transportation units are expected to post year-over-year earnings improvements even if a full economic recovery is delayed until 2003.
Liquidity: The company reported a working capital deficit of $803 million, down from $1.2 billion at year-end 2001. Management states this is not unusual and does not indicate a lack of liquidity, citing $1.1 billion in shelf registration capacity and $1.3 billion in available credit lines.
Contingencies:
- Sea-Land Disputes: CSX is involved in arbitration regarding the 1999 sale of Sea-Land assets to Maersk (disputed receivable of ~$70M) and a claim from Europe Container Terminals (ECT) for ~$180M plus interest. A ruling on ECT liability is expected in December 2002.
- New Orleans Tank Car Fire: A $220 million settlement ($85M net of insurance) was approved by the court and is fully accrued; payment is expected in 2002.
- Environmental: Reserves for environmental costs were $32 million as of June 28, 2002.
Market Risks: The company uses interest rate swaps to manage exposure on $1.4 billion of debt. A 1% variance in LIBOR would change annual interest expense by $14 million. Fuel price risk is hedged for approximately 50% of 2002 requirements.

Investor Verification Checklist

Verify the impact of the $43 million SFAS 142 accounting charge on the six-month EPS ($0.75 reported vs. $0.95 before the charge).
Monitor the resolution of the Sea-Land/Maersk and ECT arbitrations, which could materially affect future earnings.
Review the sustainability of the Surface Transportation operating ratio improvement (84.0% in Q2) amidst economic weakness.
Assess the company's ability to manage the $803 million working capital deficit while maintaining dividend payments and capital expenditures.
Confirm the status of the $220 million New Orleans Tank Car Fire settlement payment in 2002.