CSX Corporation: Q3 2003 10-Q Summary
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended September 26, 2003, and the nine-month period ended on the same date. CSX Corporation operates in three primary segments: Rail, Intermodal, and International Terminals. The reporting period reflects the company's transition following the divestiture of its domestic container-shipping subsidiary, CSX Lines (renamed Horizon Lines), in February 2003.
Key Financial Metrics
| Metric | Q3 2003 | Q3 2002 | 9M 2003 | 9M 2002 |
|---|---|---|---|---|
| Operating Revenue | $1,882 million | $2,055 million | $5,840 million | $6,092 million |
| Operating Income (Loss) | ($98) million | $276 million | $364 million | $809 million |
| Net Earnings (Loss) | ($103) million | $127 million | $123 million | $287 million |
| Diluted EPS (Including Accounting Change) | ($0.48) | $0.60 | $0.57 | $1.35 |
| Operating Cash Flow (9M) | $404 million (2003) vs $693 million (2002) | |||
| Cash & Equivalents (End of Period) | $736 million | |||
| Total Debt (Short + Long Term) | $7,784 million |
Material Changes vs. Prior Period
- Revenue Decline: Consolidated operating revenue decreased $173 million in Q3 and $252 million for the nine months. This was primarily due to the elimination of revenue from the divested domestic container-shipping business (CSX Lines), which was partially offset by a $37 million increase in Surface Transportation revenue.
- Operating Loss: The company reported an operating loss of $98 million in Q3, a $374 million decline from the prior year's profit. This was driven by two significant non-recurring charges:
- Casualty Reserve Charge: A $232 million charge to increase reserves for asbestos and other occupational injury claims (incurred but not reported).
- Maersk Settlement: A $108 million charge related to settlement agreements resolving disputes with Maersk regarding the 1999 sale of international container-shipping assets.
- Accounting Changes: The nine-month period included a $57 million after-tax benefit from the cumulative effect of adopting SFAS 143 (Asset Retirement Obligations), which reversed previously accrued crosstie removal costs.
- Segment Performance:
- Rail: Revenue increased 3% due to growth in merchandise and chemicals, though coal volumes declined slightly.
- Intermodal: Revenue remained flat; domestic volumes grew while international volumes declined due to port shifts.
Guidance, Outlook, and Risks
- Liquidity Position: Cash and short-term investments increased to $736 million. The company holds significant cash reserves to fund the potential purchase of $470 million in Zero Coupon Convertible Debentures due October 30, 2003, if holders exercise their put option. The company intends to refinance this debt on a long-term basis if purchased.
- Capital Allocation: Primary cash uses included $757 million in property additions and $292 million in long-term debt repayments. The company maintains a working capital deficit of $644 million, which management states is not unusual and does not indicate a lack of liquidity.
- Market Risks:
- Fuel Prices: Fuel costs remain a significant variable. The company initiated a hedging program in Q3 2003, covering approximately 11% of 2004 and 9% of 2005 fuel requirements.
- Interest Rates: The company uses interest rate swaps to manage exposure. A 1% change in LIBOR would impact annual interest expense by approximately $14 million.
- Conrail Transaction: CSX, Norfolk Southern, and Conrail have filed a petition 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.
Investor Verification Checklist
- Casualty Reserve Adequacy: Verify the methodology and assumptions used for the $232 million asbestos and occupational injury reserve increase, as future claims could vary significantly.
- Maersk Settlement Finality: Confirm the status of the conditional settlement with Maersk; if conditions are not met, the $108 million charge may be reversed, but litigation risks remain.
- Convertible Debenture Put Option: Monitor the October 30, 2003, deadline for the $470 million convertible debentures to determine if a cash outflow or refinancing event occurs.
- Conrail Restructuring: Track the progress of the Surface Transportation Board (STB) and IRS approvals for the Conrail direct ownership transaction.
- Fuel Hedging Effectiveness: Assess the impact of rising fuel prices on future margins, given that only a portion of 2004/2005 requirements are currently hedged.