CSX Corporation 10-Q Summary: Quarter Ended June 27, 2003
Business Context and Reporting Period
This Form 10-Q covers the 13-week quarter and 26-week period ended June 27, 2003, for CSX Corporation, a major freight railroad and logistics company. The reporting period reflects the company's transition following the February 2003 divestiture of most of its domestic container-shipping subsidiary, CSX Lines (renamed Horizon Lines), to a venture with the Carlyle Group. The company operates primarily through Surface Transportation (Rail and Intermodal) and International Terminals segments.
Key Financial Metrics
| Metric (Dollars in Millions) | Q2 2003 | Q2 2002 | 6 Months 2003 | 6 Months 2002 |
|---|---|---|---|---|
| Operating Revenue | $1,942 | $2,073 | $3,958 | $4,037 |
| Operating Income | $285 | $321 | $462 | $533 |
| Net Earnings | $127 | $135 | $226 | $160 |
| Diluted EPS (Including Accounting Change) | $0.59 | $0.63 | $1.05 | $0.75 |
| Operating Ratio | 85.3% | 84.1% | 88.5% | 86.4% |
| Cash & Equivalents (End of Period) | $311 | $251 | $311 | $731 |
| Total Debt (Short-term + Long-term) | $7,494 | $7,053 | $7,494 | $7,053 |
Note: Total Debt calculated as Short-term Debt ($704M) + Current Maturities of Long-term Debt ($586M) + Long-term Debt ($6,204M) as of June 27, 2003.
Material Changes vs. Prior Period
- Revenue Decline: Consolidated operating revenue decreased $131 million (6.3%) in Q2 2003 compared to Q2 2002. This was primarily due to the elimination of revenue from the domestic container-shipping business following the divestiture of CSX Lines. Surface Transportation revenue actually increased $53 million.
- Operating Income Pressure: Operating income fell $36 million to $285 million. The decline was driven by increased operating expenses in Surface Transportation, specifically higher fuel prices and increased labor and fringe benefit costs.
- Accounting Change Impact: Net earnings for the six months ended June 27, 2003, included a $57 million (26 cents per share) benefit from the cumulative effect of adopting SFAS 143 (Asset Retirement Obligations), which reversed accrued liabilities for crosstie removal costs. The prior year period included a $43 million charge related to SFAS 142 (Goodwill).
- Cash Flow Volatility: Net cash used by operating activities was $(35) million for the six months ended June 27, 2003, a significant reversal from the $511 million provided in the prior year. This was largely due to the termination of the sale of accounts receivable program, which resulted in a $380 million increase in accounts receivable and a corresponding increase in short-term debt borrowings.
Guidance, Outlook, and Risks
- Outlook Factors: Management notes that fuel expenses remain a significant variable cost. While a fuel price hedging program is in the implementation stage, the company remains subject to price fluctuations. Economic uncertainty in the industrial sector for the second half of 2003 is also cited as a risk.
- Staffing Reductions: The company announced staffing reductions in mid-July 2003, with approximately $8 million in expenses expected to be recognized in the third quarter.
- Conrail Restructuring: CSX, Norfolk Southern, and Conrail filed a petition with the Surface Transportation Board to establish direct ownership of their respective portions of the Conrail system. This transaction is subject to regulatory approval and could significantly impact the balance sheet by increasing debt and fixed assets while reducing the investment in Conrail.
- Legal Contingencies:
- ECT Dispute: CSX faces a claim from Europe Container Terminals (ECT) regarding the sale of international assets to Maersk. An arbitration panel ruled CSX breached the agreement, but damages are yet to be determined. CSX disputes the claim and seeks indemnification from Maersk.
- Asbestos Claims: New asbestos claims filed in West Virginia during the second quarter contributed to increased casualty reserves and operating expenses.
Investor Verification Checklist
- Divestiture Accounting: Verify the recognition schedule of the $127 million deferred gain from the CSX Lines sale and the ongoing sublease obligations.
- Working Capital Deficit: Review the $888 million working capital deficit and the company's reliance on commercial paper to fund operations following the termination of the accounts receivable sale program.
- Fuel Hedging Effectiveness: Monitor the implementation and results of the new fuel price hedging program given the volatility in diesel prices.
- Conrail Transaction Status: Track the progress of the Surface Transportation Board petition regarding direct ownership of Conrail assets and its impact on future debt levels.
- Legal Exposure: Assess the potential financial impact of the ECT arbitration ruling and the West Virginia asbestos litigation on future reserves.