CSX Corporation — Q2 2013 Form 10-Q
Business and period: CSX provides rail-based freight transportation, including merchandise, coal and intermodal services. This unaudited report covers the 13 weeks ended June 28, 2013, and the six months ended that date; comparisons are with the periods ended June 29, 2012.
Financial performance
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Revenue | $3.069B | $3.012B | $6.027B | $5.978B |
| Operating income | $963M | $943M | $1.838B | $1.799B |
| Net earnings | $535M | $512M | $994M | $961M |
| Diluted EPS | $0.52 | $0.49 | $0.97 | $0.92 |
| Operating ratio | 68.6% | 68.7% | 69.5% | 69.9% |
Q2 revenue and operating income each rose 2%; net earnings increased about 4% and diluted EPS 6%. Six-month revenue rose 1%, operating income 2%, and diluted EPS 5%. Q2 volume grew 1% as merchandise and intermodal growth outweighed lower coal shipments. Management cited pricing gains across most markets.
For the quarter, operating expenses increased 2% to $2.106B, primarily from inflation and higher incentive compensation, partly offset by efficiency savings, lower fuel costs and gains on operating properties. Fuel expense fell $13M; labor and fringe expense rose $33M. Q2 income tax expense was $297M, unchanged year over year; the company recorded a $17M tax benefit, or $0.02 per share, from a deferred tax adjustment, resolution of tax matters and state tax legislation.
Cash flow, balance sheet and liquidity
- Six-month operating cash flow was $1.579B, versus $1.291B. Property additions were $1.085B, versus $1.223B.
- Cash and cash equivalents were $614M at June 28, down from $784M at year-end; short-term investments were $403M. Cash, cash equivalents and short-term investments totaled $1.017B.
- Total debt, including current maturities, was $9.375B, down from $9.832B at year-end. Six-month debt repayments were $455M; no debt was issued. Interest expense was $140M for Q2 and $287M for six months.
- Working capital was a $71M surplus, down from $174M at year-end. CSX reported no borrowings on its $1B revolving credit facility or its $250M receivables securitization facility; it said it remained in compliance with credit-facility covenants.
- Six-month dividends were $296M and share repurchases were $95M. Q2 dividends were $0.15 per share.
Outlook, commentary and material items
- Planned 2013 capital investment was $2.3B, including approximately $325M for Positive Train Control (PTC); CSX intended to fund investments from operating cash flow. Estimated multi-year PTC implementation cost was at least $1.7B, with $713M spent through June 2013.
- In April 2013, CSX announced a new $1B share-repurchase program, expected to be completed by April 2015. Approximately $905M remained available at quarter-end.
- The investment obligation associated with the 2011 SunRail corridor sale was fulfilled in Q2. CSX said no further material gains from that deferred gain were expected. Q2 also included a $22M gain from a non-monetary exchange of easements and rail assets.
- Coal revenue declined 6% in Q2, mainly from lower U.S. thermal coal shipments to Europe amid global oversupply and competition. Chemical shipments grew 11%, supported by energy-related traffic; intermodal revenue rose 4%.
- Service measures improved year over year, including on-time arrivals, train velocity and dwell. The FRA personal-injury frequency index worsened 43% to 0.93, while the train-accident rate improved 7% to 1.81.
- Key uncertainties include the fuel-surcharge antitrust class action, environmental remediation at approximately 245 identified sites, personal-injury and other claims, insurance availability and coverage, fuel and coal-market conditions, economic demand, regulation and PTC costs. The D.C. Circuit had not ruled on the railroads’ appeal of class certification; CSX said it intended to defend the case. Management estimated $4M–$24M in aggregate reasonably possible losses above established reserves for certain legal proceedings, excluding matters for which a range could not be estimated.
Important facts for investors to verify
- Whether revenue and pricing gains can offset continued coal weakness, cost inflation and incentive compensation.
- Progress and spending against the $2.3B 2013 capital plan and the at-least-$1.7B PTC estimate.
- Developments in the fuel-surcharge antitrust litigation and the adequacy of casualty, environmental and legal reserves.
- Cash generation, debt maturities and liquidity after capital expenditures, dividends and repurchases.
- Whether improved service and train-accident measures persist, and whether the personal-injury frequency increase reverses.