CSX Corporation 10-Q Summary: Quarter Ended June 28, 2002
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended June 28, 2002, and the six-month period ended June 28, 2002. CSX Corporation operates in four segments: Rail, Intermodal, Domestic Container Shipping, and International Terminals. The company follows a 52/53-week fiscal calendar; fiscal year 2002 consists of 52 weeks. As of June 28, 2002, there were 212,886,212 shares of common stock outstanding.
Key Financial Metrics
| Metric | Q2 2002 | Q2 2001 | 6 Months 2002 | 6 Months 2001 |
|---|---|---|---|---|
| Operating Revenue | $2,073 million | $2,057 million | $4,037 million | $4,082 million |
| Operating Income | $321 million | $265 million | $533 million | $454 million |
| Net Earnings | $135 million | $108 million | $160 million | $128 million |
| Earnings Per Share (Diluted) | $0.63 | $0.51 | $0.75 | $0.60 |
| Operating Ratio (Surface Trans.) | 84.0% | 86.8% | 86.4% | 88.3% |
| Cash from Operations (6 Mo) | $511 million | |||
| Capital Expenditures (6 Mo) | $431 million | |||
| Total Debt (Long-term + Current) | $6,664 million | |||
| Cash & Short-term Investments | $731 million |
Material Changes vs. Prior Period
- Profitability: Net earnings increased 25% year-over-year for the quarter ($135M vs. $108M) and 25% for the six months ($160M vs. $128M). Operating income rose 21% in the quarter and 17% for the six months.
- Revenue: Operating revenue increased 1% in the quarter but decreased 1% for the six months compared to the prior year.
- Expenses: Operating expenses decreased 2% in the quarter and 3% for the six months, driven by lower labor, fuel, and Conrail operating fees.
- Accounting Change: The six-month results include a one-time after-tax charge of $43 million ($0.20 per share) due to the adoption of SFAS No. 142 regarding goodwill and indefinite-lived intangible assets (specifically Alaska pipeline permits).
- Interest Expense: Interest expense declined to $116 million in Q2 2002 from $135 million in Q2 2001 due to favorable refinancing and lower rates.
Guidance, Outlook, and Risks
- Outlook: Management expects financial results to improve in the remainder of 2002 as the industrial sector recovers. Surface Transportation units are expected to post year-over-year earnings improvements even if a full economic recovery is delayed until 2003.
- Liquidity: The company reported a working capital deficit of $803 million, down from $1.2 billion at year-end 2001. Management states this is not unusual and does not indicate a lack of liquidity, citing $1.1 billion in shelf registration capacity and $1.3 billion in available credit lines.
- Contingencies:
- Sea-Land Disputes: CSX is involved in arbitration regarding the 1999 sale of Sea-Land assets to Maersk (disputed receivable of ~$70M) and a claim from Europe Container Terminals (ECT) for ~$180M plus interest. A ruling on ECT liability is expected in December 2002.
- New Orleans Tank Car Fire: A $220 million settlement ($85M net of insurance) was approved by the court and is fully accrued; payment is expected in 2002.
- Environmental: Reserves for environmental costs were $32 million as of June 28, 2002.
- Market Risks: The company uses interest rate swaps to manage exposure on $1.4 billion of debt. A 1% variance in LIBOR would change annual interest expense by $14 million. Fuel price risk is hedged for approximately 50% of 2002 requirements.
Investor Verification Checklist
- Verify the impact of the $43 million SFAS 142 accounting charge on the six-month EPS ($0.75 reported vs. $0.95 before the charge).
- Monitor the resolution of the Sea-Land/Maersk and ECT arbitrations, which could materially affect future earnings.
- Review the sustainability of the Surface Transportation operating ratio improvement (84.0% in Q2) amidst economic weakness.
- Assess the company's ability to manage the $803 million working capital deficit while maintaining dividend payments and capital expenditures.
- Confirm the status of the $220 million New Orleans Tank Car Fire settlement payment in 2002.