CSX Corporation 10-Q Summary: Quarter Ended July 2, 1999
Business Context and Reporting Period
This Form 10-Q covers the 13-week quarter and 27-week six-month period ended July 2, 1999. CSX Corporation operates in four segments: Rail, Intermodal, Container Shipping, and Contract Logistics. A pivotal event during this period was the formal integration of Conrail operations on June 1, 1999, alongside Norfolk Southern Corporation. Additionally, the company announced an agreement to sell its international container-shipping assets to A.P. Moller-Maersk Line.
Key Financial Metrics
| Metric | Q2 1999 | Q2 1998 | 6 Mo 1999 | 6 Mo 1998 |
|---|---|---|---|---|
| Operating Revenue ($ millions) | $2,616 | $2,490 | $5,157 | $4,952 |
| Operating Income ($ millions) | $274 | $336 | $550 | $614 |
| Net Earnings ($ millions) | $114 | $151 | $140 | $242 |
| Diluted EPS ($) | $0.53 | $0.70 | $0.66 | $1.12 |
| Operating Ratio (%) | 89.5% | 86.5% | 89.3% | 87.6% |
| Cash from Operations ($ millions) | N/A | N/A | $155 | $289 |
| Cash & Equivalents ($ millions) | $192 | N/A | $192 | $90 |
| Total Debt ($ millions) | $7,237 | N/A | $7,237 | $6,619 |
Note: Operating Ratio calculated as Operating Expense / Operating Revenue. Total Debt includes Short-Term Debt ($570M) and Long-Term Debt ($6,555M) plus Current Maturities ($112M) as of July 2, 1999.
Material Changes vs. Prior Period
- Revenue Growth: Operating revenue increased 5% year-over-year in Q2, driven by the inclusion of one month of Conrail traffic and a 14% increase in merchandise revenue. However, coal revenue declined 10% due to reduced overseas demand.
- Profitability Decline: Operating income fell 18% to $274 million, and Net Earnings dropped 25% to $114 million. This was primarily due to a 17% increase in operating expenses related to Conrail integration costs and start-up difficulties.
- Accounting Change: The six-month 1999 results include a non-cash charge of $49 million (after-tax) reflecting the cumulative effect of adopting SOP No. 97-3 for insurance-related assessments. This reduced six-month EPS by $0.24.
- Investment Gain: Q2 1999 included a net investment gain of $27 million from the sale of the Grand Teton Lodge Company.
Outlook, Risks, and Unusual Items
- Asset Sale and Impairment: CSX agreed to sell its international liner business for $800 million. Management expects to record an impairment loss exceeding $300 million in Q3 1999 because the book value of assets exceeds the sales price.
- Conrail Integration: The company anticipates continued higher revenue and expenses in the second half of 1999 due to Conrail integration. Service levels are expected to normalize before the fall traffic peak.
- Litigation: A $2.5 billion punitive damages award from a 1997 New Orleans tank car fire remains in litigation. While a recent trial resulted in a significantly lower award ($8.5 million total for 20 plaintiffs), the company continues to appeal. Management does not expect a material adverse effect on overall financial position.
- Year 2000 Readiness: CSX has incurred $60 million in Y2K costs (76% of estimated total). Substantial completion is expected by Q3 1999, though some Sea-Land systems may not be ready until Q4.
Investor Verification Checklist
- Verify the final impairment loss amount for the Sea-Land international liner business sale in the upcoming Q3 1999 filing.
- Monitor the status of the New Orleans tank car fire litigation and any potential changes to the $6.2 million liability provision.
- Assess the impact of Conrail integration on operating ratios and service levels in Q3 and Q4 1999.
- Review the timeline for the closing of the Maersk transaction and regulatory approvals.
- Confirm the progress of Year 2000 remediation, particularly for Sea-Land's distributed systems.