CSX Corporation — Q3 2011 Form 10-Q
Business context and period. CSX provides rail freight and intermodal transportation, with merchandise, coal and intermodal as its primary lines of business. This unaudited filing covers the 13-week quarter ended September 30, 2011, and the 39 weeks ended that date; comparatives ended September 24, 2010. Share and per-share data are restated for the May 2011 three-for-one stock split.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $2.963 billion | $2.666 billion | $8.792 billion | $7.820 billion |
| Operating income | $878 million | $825 million | $2.577 billion | $2.225 billion |
| Operating ratio | 70.4% | 69.1% | 70.7% | 71.5% |
| Net earnings | $464 million | $414 million | $1.365 billion | $1.133 billion |
| Diluted EPS | $0.43 | $0.36 | $1.24 | $0.97 |
| Operating cash flow | Not separately provided for quarter | Not separately provided for quarter | $2.585 billion | $2.277 billion |
| Property additions | Not separately provided for quarter | Not separately provided for quarter | $1.436 billion | $1.103 billion |
Q3 revenue increased 11%, operating income 6%, and net earnings 12% year over year. Nine-month revenue rose 12%, operating income 16%, and net earnings 20%. The operating ratio worsened 130 basis points in Q3 but improved 80 basis points for the nine-month period. Calculated operating margins were approximately 29.6% and 30.9% in Q3 2011 and 2010, respectively, and 29.3% and 28.5% for the nine-month periods.
Revenue growth reflected pricing above rail inflation, increased fuel recovery and volume growth. Q3 volume rose 1%; nine-month volume increased 3%. Nine-month merchandise revenue grew 11%, coal 16% and intermodal 15%. Coal and intermodal revenue gains included higher revenue per unit; coal volume was down 1% for both Q3 and the nine-month period.
Fuel was the largest expense pressure: Q3 fuel expense rose $133 million, or 48%, and nine-month fuel expense rose $379 million, or 44%. Total expenses increased 13% in Q3 and 11% year to date. Management attributed higher costs to fuel prices, inflation, service and training resources, and other volume-related costs.
Cash, debt and liquidity
- Cash and cash equivalents were $580 million at September 30, 2011, down $712 million from year-end 2010. Nine-month operating cash flow was $2.585 billion; investing cash outflow was $1.401 billion and financing cash outflow was $1.896 billion.
- Operating cash flow less property additions was approximately $1.149 billion for the first nine months, compared with $1.174 billion in the prior-year period; this is a simple calculated cash-flow measure, not a company-reported metric.
- Total debt was $8.654 billion, including $494 million of current maturities, versus $8.664 billion at December 31, 2010. The filing reports debt fair value of $10.043 billion. CSX issued $600 million of notes in May 2011, with maturities in 2021 and 2041.
- CSX replaced its $1.25 billion revolving facility with a $1 billion unsecured facility expiring September 2016; it was undrawn, and CSX reported covenant compliance. A $250 million receivables facility expiring June 2012 was also undrawn.
- Working capital was a $267 million deficit, compared with a $318 million surplus at year-end. Management said the deficit is not unusual for the industry and stated that CSX had adequate resources to meet obligations.
Material developments, outlook and risks
CSX repurchased $1.564 billion of shares during the first nine months and paid $354 million in dividends. The Q3 repurchase program bought approximately 46.0 million shares for $1 billion; about $734 million remained under the announced $2 billion authorization. The quarterly dividend increased 38% to $0.12 per share. Management expected the repurchase program to be completed by the end of 2012, subject to market and business conditions.
Management planned approximately $2.2 billion of 2011 investment in rail capacity, quality, safety and flexibility, including intermodal terminals and public-private infrastructure projects. The filing provides no specific earnings or revenue guidance. Management cited strategic opportunities in intermodal, export coal and service integration, while noting that service measures remained weaker year over year despite sequential improvement after adding employees and locomotive resources.
Q3 on-time train originations fell to 72% from 77%, and on-time destination arrivals to 61% from 69%; dwell rose to 25.5 hours from 24.8, and train velocity declined to 20.6 mph from 21.1. The train accident rate improved 26%, while the personal injury frequency index worsened 4%. Key risks identified include economic and shipping demand, competition, fuel prices and availability, service execution, labor costs and disruptions, severe weather, regulation, litigation, environmental remediation, insurance availability and access to capital markets. Management said there were no material changes to previously disclosed risk factors. It reported no material Q3 developments in fuel-surcharge antitrust litigation.
Casualty, environmental and other reserves totaled $634 million, including $86 million for environmental matters. Management considered recorded reserves adequate but noted that additional environmental exposure at some sites cannot presently be estimated. It stated that the ultimate outcome of claims is uncertain and that multiple matters arising in one period could materially affect results or liquidity.
Other notable items include a $978 million reclassification from retained earnings to other capital following share repurchases, and $486 million of deferred tax adjustments in nine-month cash flow. The filing attributes a $482 million increase in deferred tax liabilities largely to bonus depreciation. A $22 million prior-year tax charge related to the former Intermodal subsidiary merger did not recur in Q3 2011.
Important facts for investors to verify
- Whether pricing and fuel-recovery gains can continue to offset fuel, labor and other cost inflation, and whether the operating ratio improves.
- Whether service reliability continues its sequential recovery and improves against the prior-year measures, given Q3 year-over-year declines.
- Progress, spending and expected returns on the approximately $2.2 billion 2011 capital program and strategic growth projects.
- Remaining share-repurchase authorization, actual repurchases and funding needs alongside dividends, capital spending and debt maturities.
- Potential changes to casualty and environmental reserves, litigation outcomes, and liquidity as cash balances and working capital have declined.