CSX Corporation — Q2 2011 Form 10-Q
Business context and period: CSX provides rail and intermodal transportation, primarily across the eastern United States. This unaudited report covers the 13-week quarter and six months ended July 1, 2011; comparisons are with the periods ended June 25, 2010. Dollar amounts are in millions unless stated otherwise. Share and per-share data reflect the May 2011 three-for-one stock split.
Financial results and position
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Revenue | $3,019 | $2,663 | $5,829 | $5,154 |
| Operating income | $926 | $768 | $1,699 | $1,400 |
| Operating ratio | 69.3% | 71.2% | 70.9% | 72.8% |
| Net earnings | $506 | $414 | $901 | $719 |
| Diluted EPS | $0.46 | $0.36 | $0.81 | $0.61 |
- Q2 revenue increased 13%, on 3% higher volume; revenue per unit rose 10%. Management cited pricing above rail inflation, increased fuel recovery, and volume growth.
- Fuel expense rose 42% in Q2 to $431, primarily reflecting a 39% increase in average fuel price per gallon and higher volume. Total expenses rose 10%; excluding fuel-cost growth, expenses increased 4% year over year, according to management.
- Q2 operating income increased 21% and net earnings 22%. Six-month operating income increased 21% and net earnings 25%. The operating ratio improved 190 basis points in both comparisons.
- Six-month operating cash flow was $1,587, versus $1,422 a year earlier. Property additions were $947, versus $687; financing used $696, including $528 of share repurchases and $228 of dividends. Cash and equivalents were $1,252 at July 1, down $40 from year-end.
- At July 1, current assets were $2,967 and current liabilities $2,485, producing reported working capital of $482. Long-term debt was $8,186 and current maturities $494, for total debt of $8,680. The $1.25 billion revolving facility was undrawn; the $250 million receivables facility had no outstanding balance.
- Total assets were $28,705 and shareholders’ equity $8,941. The filing reports a $14 million, or $0.01-per-share, Q2 tax benefit from state tax-law changes.
Material changes and operating developments
- Q2 volume increased in most markets, particularly intermodal, forest products, food and consumer, and metals. Coal volume fell 3% as weaker utility shipments more than offset stronger exports. Intermodal revenue rose 24%; coal revenue rose 15%, including higher revenue per unit.
- Service measures were weaker year over year: on-time originations were 68% versus 78%, on-time arrivals 56% versus 71%, dwell time 26.0 hours versus 23.7, and train velocity 19.8 versus 20.9 mph. Management said measures improved sequentially during Q2 after adding employees and locomotive resources.
- Safety improved: the personal injury frequency index fell 22% to 0.89, and the train accident rate improved 16% to 2.37.
- CSX issued $600 million of notes in May: $350 million at 4.25% due 2021 and $250 million at 5.50% due 2041. It repaid $570 million of debt in the first half.
- CSX increased its quarterly dividend 38% to $0.12 per post-split share and authorized a new $2 billion repurchase program, targeted for completion by the end of 2012 subject to market and business conditions. First-half share repurchases totaled $528 million.
Outlook, risks and contingencies
- Management planned approximately $2.2 billion of 2011 capital investment, up from the prior $2 billion plan. The filing gives no specific earnings or revenue guidance.
- Management described liquidity and financial capacity as adequate to meet current needs and obligations. The revolving credit facility expires in May 2012 and the company planned to renew or replace it before expiration; the receivables facility expires in June 2012.
- Key cited risks include economic and shipment-demand changes, competition, fuel prices and availability, labor and benefit costs, severe weather and operational disruptions, regulatory developments, litigation, environmental obligations, and access to capital markets.
- Casualty, environmental and other reserves totaled $648 million. CSX was identified as a potentially responsible party at approximately 258 environmentally impaired sites; management said recorded environmental reserves were adequate based on information available, while acknowledging that additional exposure could not be reliably estimated at some sites. Management did not expect these matters individually to materially affect the company, but a number occurring in one period could have a material effect.
- The filing reports no material developments in the fuel-surcharge antitrust litigation during the quarter and no material changes to previously disclosed risk factors. Recorded reserve outcomes and future insurance availability remain uncertain.
- Other notable items: the stock split was effective in May; a $929 million reclassification between retained earnings and other capital followed the split and share repurchases. A new 2011–2013 management incentive plan ties performance awards partly to operating-ratio targets.
Important facts for investors to verify
- Whether pricing and fuel-recovery increases can continue to offset fuel inflation and other cost pressures.
- Whether service levels recover, given materially weaker year-over-year punctuality, dwell, and velocity measures.
- Execution and funding of the $2.2 billion capital plan, repurchases, and dividend commitments, alongside debt maturities and facility renewals.
- Coal-market trends, including utility demand and export strength, and the durability of growth in intermodal and merchandise traffic.
- Potential changes in casualty, environmental, legal, and insurance exposures, including matters not yet estimable.
- Cash-flow and cash-balance figures: the consolidated cash-flow statement shows cash declining $40 million to $1,252 million, while MD&A separately describes cash as approximately $1.3 billion. Investors should consult the filed statements and underlying disclosures for reconciliation.