CSX

CSX Corporation: Q1 2003 Financial Summary

Business Context and Reporting Period

This Form 10-Q covers the 13-week quarter ended March 28, 2003. CSX Corporation operates in three primary segments: Rail, Intermodal, and International Terminals. The reporting period was significantly impacted by the divestiture of the majority interest in its domestic container-shipping subsidiary, CSX Lines (renamed Horizon Lines), and the adoption of new accounting standards (SFAS 143 and SFAS 123).

Key Financial Metrics

Note: Net Earnings for Q1 2003 include a one-time after-tax gain of $57 million ($0.26 per share) from the cumulative effect of adopting SFAS 143. Earnings before this accounting change were $42 million ($0.20 per share).

Material Changes vs. Prior Period

• Revenue Growth: Operating revenue increased 2.6% ($52 million) year-over-year, driven by a $85 million increase in Surface Transportation revenue, partially offset by the divestiture of CSX Lines.
• Operating Income Decline: Operating income decreased 16.5% ($35 million) to $177 million. This was primarily due to a $57 million increase in fuel costs, operational inefficiencies from severe winter weather, and $16 million in expenses related to the retirement of former CEO John Snow.
• Net Earnings Surge: Reported net earnings increased significantly to $99 million from $25 million. This increase is largely attributable to the $57 million non-cash accounting gain from SFAS 143 adoption. Excluding this item, core earnings declined.
• Cash Flow: Net cash provided by operating activities dropped to $44 million from $160 million, impacted by changes in working capital (specifically accounts receivable and other current liabilities).
• Divestiture: CSX sold most of its interest in CSX Lines for approximately $300 million (net cash proceeds of $214 million), which improved investing cash flow significantly compared to the prior year.

Outlook, Risks, and Management Commentary

• Divestiture Impact: The sale of CSX Lines to a Carlyle Group venture resulted in a deferred pretax gain of $127 million to be recognized over 12 years. CSX retains a 7-year security investment with a preferred return feature.
• Accounting Changes: Adoption of SFAS 143 reversed accrued liabilities for crosstie removal costs, boosting current earnings but increasing future labor and materials expenses while reducing depreciation. Adoption of SFAS 123 requires future stock-based compensation to be expensed using the fair value method.
• Legal Contingencies:
  • ECT Claim: Europe Container Terminals bv (ECT) claims approximately $180 million plus interest regarding a breach of contract from the 1999 sale of Sea-Land assets. An arbitration panel ruled CSX was in breach of the agreement; damages are yet to be determined. CSX disputes the claim and seeks indemnification from Maersk.
  • Maersk Dispute: A $70 million receivable related to a post-closing working capital adjustment with Maersk is currently in dispute and under arbitration.
• Market Risks: CSX is exposed to fuel price volatility (a 1-cent/gallon change impacts annual expense by ~$6 million) and interest rate fluctuations on $790 million of floating-rate debt.
• Liquidity: Despite a working capital deficit of $620 million, management asserts the company maintains adequate liquidity to meet obligations, supported by cash from operations and the recent divestiture proceeds.

Investor Verification Checklist

• Verify the sustainability of earnings by excluding the $57 million one-time accounting gain from SFAS 143.
• Monitor the resolution of the $180 million ECT arbitration claim and the $70 million Maersk working capital dispute.
• Assess the impact of rising fuel costs on future operating margins, as fuel expenses increased by $50 million in Q1 2003.
• Review the deferred gain recognition schedule ($127 million over 12 years) from the CSX Lines divestiture.
• Confirm the company's ability to manage its working capital deficit and debt maturities given the current cash position.