CSX

CSX Corporation: Q3 2006 Financial Summary

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended September 29, 2006, and the nine months ended on that date. CSX Corporation is a leading transportation company operating the largest railroad in the eastern United States (CSX Transportation) and a major intermodal provider (CSX Intermodal). The company operates on a 52/53-week fiscal calendar. As of the reporting date, there were 435,181,651 shares of common stock outstanding.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Q3 revenue increased 14% year-over-year, driven by a 12% increase in revenue per unit (pricing, fuel surcharges, mix) and a 2% volume increase. Coal volumes rose due to utility demand, while automotive volumes declined.
• Expense Increases: Total operating expenses rose $157 million in Q3. Fuel expenses increased $112 million due to higher prices and reduced hedge benefits. Labor and fringe benefits increased $10 million.
• Insurance Gains: The company recognized a $15 million pre-tax gain in Q3 (and $141 million for the nine months) from Hurricane Katrina insurance recoveries, representing recoveries in excess of the book value of losses.
• Tax Benefits: Q3 included a $69 million income tax benefit from the resolution of audits for the 1994-1996 period.
• Discontinued Operations: Net earnings in the prior year (2005) included $425 million from discontinued operations (sale of International Terminals), which is not present in 2006 results.

Guidance, Outlook, and Risks

• Outlook: Management expects strong revenue growth for the remainder of 2006 driven by pricing and modest volume growth. The company targets double-digit annual growth in Surface Transportation operating income, consolidated EPS, and free cash flow through 2010.
• Capital Allocation: CSX repurchased $422 million of common stock in the first nine months of 2006. A new $500 million repurchase authority was authorized in July 2006, with $272 million utilized in Q3. Dividends were increased to $0.10 per share (post-split) in Q3.
• Debt Management: In September 2006, CSX issued $400 million in 30-year notes. The company holds $660 million in cash and short-term investments, sufficient to cover the potential repurchase of $472 million in Zero Coupon Convertible Debentures due in October 2006.
• Risks: Key risks include fuel price volatility, labor costs, economic conditions affecting freight demand, and environmental liabilities. The company is evaluating the impact of new pension accounting rules (SFAS 158) and tax uncertainty rules (FIN 48), which may affect future balance sheet presentation.

Investor Verification Checklist

• Fuel Hedging Status: Verify the expiration of fuel hedge contracts and the resulting exposure to rising fuel costs, which significantly impacted Q3 expenses.
• Insurance Recovery Timing: Confirm the schedule for remaining Hurricane Katrina insurance proceeds and the potential for future gains or adjustments to loss estimates.
• Convertible Debentures: Monitor the October 2006 repurchase of Zero Coupon Convertible Debentures and its impact on cash flow and debt structure.
• Share Repurchase Execution: Track the utilization of the new $500 million share repurchase authority and its impact on diluted EPS.
• Pension Funding: Review the impact of the Pension Protection Act of 2006 on future cash flow requirements, with an estimated 2008 unfunded liability of $200 million.