CSX Corporation — Form 10-Q Summary
Reporting period: Third quarter and first nine months of fiscal 2009, ended September 25, 2009; comparable periods ended September 26, 2008. Each quarter comprised 13 weeks and each nine-month period 39 weeks. CSX operates Rail and Intermodal transportation businesses.
Financial performance
| Metric | Q3 2009 | Q3 2008 | Nine months 2009 | Nine months 2008 |
|---|---|---|---|---|
| Revenue | $2.289 billion | $2.961 billion | $6.721 billion | $8.581 billion |
| Operating income | $598 million | $733 million | $1.702 billion | $2.076 billion |
| Operating ratio | 73.9% | 75.2% | 74.7% | 75.8% |
| Net earnings | $293 million | $382 million | $847 million | $1.118 billion |
| Diluted EPS | $0.74 | $0.94 | $2.14 | $2.71 |
| Cash from operating activities | Not separately stated | Not separately stated | $1.604 billion | $2.191 billion |
Quarterly operating expenses fell 24% to $1.691 billion, more than offsetting part of the revenue decline. Fuel expense fell substantially with lower fuel prices and volumes; labor and other costs also declined through productivity and resource reductions. Interest expense rose to $140 million for Q3 and $420 million year to date, primarily reflecting higher average debt.
At September 25, cash and cash equivalents were $1.240 billion, short-term investments were $81 million, and working capital was a $694 million surplus. Long-term debt, including current maturities, totaled $8.222 billion, up from $7.831 billion at December 2008. CSX had an undrawn $1.25 billion revolving credit facility and reported compliance with its covenants. Nine-month property additions were $1.046 billion; the company also reported approximately $160 million of assets acquired through seller financing.
Changes and drivers
- Q3 revenue declined 23%, with total volume down 15%; lower volumes and reduced fuel-surcharge revenue outweighed pricing gains. Year-to-date revenue declined 22% and volume declined 18%.
- Weakness was broad-based. Q3 Rail revenue fell 22% and Intermodal revenue fell 24%; domestic intermodal volume increased 2%, while international intermodal volume fell 22%.
- Rail operating ratio improved to 71.9% in Q3 from 75.2%; Intermodal worsened to 87.1% from 75.7%. Consolidated operating ratio reached a third-quarter record 73.9%.
- Operating cash flow declined $587 million year over year, reflecting lower earnings, higher pension contributions, and incentive compensation paid in 2009. Investing outflow was $995 million; financing outflow was $38 million. No shares were repurchased in the first nine months of 2009, versus $1.307 billion of repurchases in the prior-year period.
- Year-to-date earnings included a $25 million after-tax gain from the sale of the subsidiary that indirectly owned The Greenbrier resort. The sale generated approximately $21 million in cash; CSX retained certain pre-closing pension obligations but said it had no continuing obligation to finance resort operations.
Outlook, risks and unusual items
- Management cited the continuing global recession, significant demand weakness, and lower fuel recovery. It said volume declines moderated versus the second quarter and that CSX was positioned to benefit from the early stages of recovery; no specific earnings or revenue guidance was provided.
- Management expected utility coal demand to remain weak well into 2010, citing record utility stockpiles, natural-gas substitution, and lower industrial production.
- CSX planned $1.6 billion of total capital expenditures for 2009. It intended to pre-fund pension contributions up to $250 million pre-tax; $166 million had been contributed through September, with up to $84 million more potentially payable in the rest of 2009.
- On September 28, after quarter-end, CSX established a $250 million, 364-day receivables securitization facility. It was undrawn as of the filing date; proceeds from future receivables monetization would be recorded as debt.
- Casualty, environmental, and other reserves totaled $759 million, down from $879 million at December 2008. Second-quarter reserve reductions included $78 million for personal injury and $18 million for asbestos claims, partly reflecting improved safety and claims reassessment. Management said recorded reserves were adequate, while noting estimates and outcomes remain uncertain.
- Key risks include further economic or freight-demand weakness, fuel-price and surcharge changes, capital-market access and borrowing costs, litigation and environmental claims, safety and operational disruptions, labor issues, regulation, and competition. Management reported no material changes to previously disclosed risk factors and no material market-risk changes.
Important facts for investors to verify
- Whether freight volumes and fuel-surcharge recovery stabilize, particularly in coal, automotive, metals, and international intermodal.
- Whether expense reductions and the improved operating ratio are sustainable, given some Q3 savings were described as nonrecurring.
- Cash generation, debt levels, capital spending, and any use or debt impact of the new receivables facility.
- Actual pension contributions and the effect of pension funding and market conditions on liquidity.
- Developments in casualty, environmental, tax, and other legal contingencies, including retained Greenbrier pension obligations.