CSX Corporation 10-Q Summary: Quarter Ended June 26, 1998
Business Context and Reporting Period
This Form 10-Q covers the 13-week quarter and 26-week period ended June 26, 1998. CSX Corporation operates diversified freight transportation businesses, primarily through its rail unit (CSX Transportation), container-shipping unit, barge unit, intermodal unit, and contract logistics unit. A significant ongoing event is the joint acquisition of Conrail with Norfolk Southern, pending final regulatory integration expected in late 1998 or early 1999.
Key Financial Metrics
| Metric (Millions) | Q2 1998 | Q2 1997 | 6 Mo 1998 | 6 Mo 1997 |
|---|---|---|---|---|
| Operating Revenue | $2,642 | $2,678 | $5,222 | $5,245 |
| Operating Income | $351 | $433 | $638 | $757 |
| Net Earnings | $151 | $227 | $242 | $378 |
| Diluted EPS | $0.68 | $1.03 | $1.09 | $1.72 |
| Operating Cash Flow (6 Mo) | $299 | $621 | - | - |
| Cash & Equivalents (End Period) | $94 | $182 | - | - |
| Total Debt (Short + Long Term) | $847 | $229 | - | - |
| Working Capital Deficit | ($1,039) | ($532) | - | - |
Note: Debt figures reflect current maturities and short-term debt; long-term debt is $6,138 million. Working capital deficit is typical for the company's capital structure.
Material Changes vs. Prior Period
- Revenue Decline: Operating revenue decreased $36 million (1.4%) in Q2 1998 compared to Q2 1997, driven by a 22% drop in higher-rated export coal volumes.
- Expense Increase: Operating expenses rose $46 million in Q2 1998. The rail unit saw a 5% expense increase due to Year 2000 preparation, litigation costs, casualty claims, and equipment repairs, partially offset by lower fuel costs.
- Conrail Impact: Net earnings were reduced by $36 million (17 cents per share) in Q2 1998 due to the Conrail investment (amortization of excess purchase price, interest on acquisition debt, and transition expenses). Excluding Conrail impacts, Q2 1998 earnings would have been $187 million ($0.85 diluted EPS).
- Unit Performance:
- Rail: Operating income fell 15% to $289 million. Coal revenue declined 2%, while merchandise traffic rose 3% but revenue remained flat due to mix changes.
- Container-Shipping: Operating income dropped to $52 million from $80 million due to the Asian currency crisis reducing traffic to Asia.
- Barge: Operating income declined to $15 million from $17 million due to lower rates.
- Liquidity: Cash and cash equivalents decreased $303 million since year-end 1997. A $500 million portion of long-term commercial paper was reclassified to short-term debt.
Guidance, Outlook, and Risks
- Outlook: Management expects weak export coal demand and the General Motors strike to impact Q3 rail traffic. Container-shipping earnings remain hindered by Asian economic decline. The company anticipates a net investment gain in Q3 1998 from the conveyance of its barge unit to a joint venture.
- Conrail Integration: The Surface Transportation Board (STB) approved the joint control application on July 23, 1998, effective August 22, 1998. Operational integration is expected in late 1998 or early 1999. Management projects the integration will add approximately $1.7 billion (16%) to annual revenue in the first 12 months post-consolidation.
- Year 2000 Compliance: The company is on schedule to resolve Year 2000 issues for mission-critical applications by end of 1998. Total estimated cost is $85 million ($23 million incurred to date). Risks include potential disruptions from third-party service failures.
- Litigation: A $2.5 billion punitive damages award from a 1997 New Orleans fire case was set aside by the Louisiana Supreme Court in October 1997. Management believes any adverse outcome will not be material to overall results, though it could impact a specific quarter.
- Environmental: CSX is a potentially responsible party at approximately 105 Superfund sites. Recorded liabilities for environmental costs were $87 million at June 26, 1998.
Investor Verification Checklist
- Verify the timing and financial impact of the Conrail operational integration (expected late 1998/early 1999) and the associated $1.7 billion revenue projection.
- Monitor the resolution of the New Orleans litigation and any potential quarterly volatility from legal settlements.
- Assess the progress of Year 2000 remediation, specifically regarding third-party dependencies and the $62 million remaining cost estimate.
- Review the impact of the Asian economic crisis on the container-shipping unit's recovery and the General Motors strike on rail volumes.
- Confirm the realization of the net investment gain from the barge unit conveyance in Q3 1998 results.