CSX

CSX Corporation: Q2 2000 10-Q Summary

Business Context and Reporting Period

This report covers the quarterly period ended June 30, 2000 (13 weeks) and the six-month period ended June 30, 2000 (26 weeks). CSX Corporation operates in five segments: Rail, Intermodal, Domestic Container Shipping, International Terminals, and Contract Logistics. The reporting period is significantly impacted by the June 1999 integration of Conrail operations and the December 1999 sale of the international container-shipping liner business (Sea-Land).

Key Financial Metrics

Note: Total Debt includes Current Maturities of Long-Term Debt ($364M) and Long-Term Debt ($6,296M) as of June 30, 2000. Cash from Operations is provided for the six-month period only.

Material Changes vs. Prior Period

• Revenue Decline: Operating revenue decreased 16% in Q2 2000 compared to Q2 1999. This is primarily due to the sale of the international liner business and the fact that Q2 1999 included only one month of Conrail integration revenue, whereas Q2 2000 reflects a full quarter of integrated operations with higher associated costs.
• Operating Expenses: Expenses decreased 15% year-over-year in Q2, driven by the divestiture of the international liner business. However, rail operating expenses increased 25% due to network congestion, higher fuel costs, and labor costs.
• Profitability: Net earnings dropped 52% in Q2 2000. The prior year included a $17 million after-tax gain from the sale of the Grand Teton Lodge resort and was not impacted by the full-year effects of the Conrail integration costs seen in 2000.
• Cash Flow: Net cash provided by operating activities turned negative ($4 million) for the first six months of 2000, compared to $155 million in the prior year, reflecting lower operating income and the use of cash to reduce accounts payable.

Outlook, Risks, and Management Commentary

• Operational Challenges: Management highlights significant network congestion and service disruptions following the Conrail integration. While a 90-day action plan showed progress by the end of Q2, the company incurred substantial excess costs to restore fluidity. A 60-day action plan is underway for Q3 to prepare for fall traffic peaks.
• Cost Pressures: Fuel expenses are expected to remain significantly higher than the prior year. The company is implementing rate increases where feasible to offset costs.
• Legal Contingencies: A $2.5 billion punitive damages award from a 1997 New Orleans tank car fire was reduced to $850 million by a trial judge, but CSX continues to appeal. Management believes an adverse outcome is unlikely to be material to overall financial position but could impact specific quarterly results. An appeal bond of $895 million has been posted.
• Regulatory Issues: The Federal Railroad Administration (FRA) identified track defects in March 2000, leading to a Safety Compliance Agreement. CSX estimates $20 million to $30 million in additional costs for fiscal 2000 to address these issues.
• Arbitration: CSX is engaged in third-party arbitration regarding the final loss on the sale of Sea-Land's international liner business to Maersk. Management believes it will prevail but cannot fully assess the outcome.

Investor Verification Checklist

• Verify the status of the $850 million punitive damages appeal and the potential impact of the $895 million appeal bond on liquidity.
• Monitor the effectiveness of the 60-day action plan in reducing network congestion and excess operating costs in Q3 and Q4.
• Assess the final determination of the loss on the Sea-Land international liner sale pending arbitration resolution.
• Review the impact of the FRA Safety Compliance Agreement on capital expenditures and operating expenses for the remainder of fiscal 2000.
• Confirm the trajectory of fuel costs and the success of rate increases in maintaining operating margins.