CSX Corporation — Q1 2013 Form 10-Q
Reporting period: Fiscal quarter ended March 29, 2013 (13 weeks); compared with the quarter ended March 30, 2012. Amounts are in U.S. dollars unless noted.
Business context and financial results
CSX operates a rail-based freight network, with merchandise, coal and intermodal as its primary business lines. Revenue was essentially flat as pricing gains and other revenue offset lower shipment volume.
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Revenue | $2.958 billion | $2.966 billion | Down $8 million |
| Operating expense | $2.083 billion | $2.110 billion | Down $27 million |
| Operating income | $875 million | $856 million | Up $19 million |
| Operating ratio | 70.4% | 71.1% | Improved 70 basis points |
| Net earnings | $459 million | $449 million | Up $10 million |
| Diluted EPS | $0.45 | $0.43 | Up $0.02 |
| Operating cash flow | $731 million | $444 million | Up $287 million |
Net earnings growth reflected lower expenses and fewer average shares outstanding; diluted EPS increased 5%. Interest expense rose to $147 million from $144 million. Income tax expense was $266 million versus $267 million. Comprehensive earnings were $476 million versus $458 million.
Revenue, costs and operating trends
- Total shipment volume declined 2%. Merchandise volume fell 1%, coal volume fell 10%, and intermodal volume rose 3%.
- Merchandise revenue rose 2% to $1.717 billion, with chemicals up 13% and automotive up 4%; agricultural products revenue fell 12% and metals fell 5%.
- Coal revenue fell 13% to $726 million, reflecting lower volume and revenue per unit. Management cited elevated utility stockpiles, low natural gas prices and weaker European demand for U.S. thermal coal.
- Intermodal revenue rose 4% to $404 million, supported by domestic growth; international volume was flat.
- Expense reductions included efficiency and volume-related savings, and recognized deferred gains. Depreciation increased $13 million due to a larger asset base; fuel expense was flat despite a 3% increase in average locomotive fuel price.
Cash, debt and capital
At March 29, 2013, cash and cash equivalents were $705 million and short-term investments were $367 million. Working capital surplus was $93 million, down from $174 million at year-end 2012. The company reported $731 million of operating cash flow, $491 million of property additions, and $413 million of debt repayments. Cash and cash equivalents declined $79 million during the quarter.
Total debt, including current maturities, was $9.418 billion, down from $9.832 billion at year-end. CSX had no borrowings under its $1 billion revolving credit facility or $250 million receivables securitization facility and stated that it was in compliance with credit-facility covenants. Management said liquidity was adequate to meet current liabilities and obligations.
Planned 2013 capital investment was $2.3 billion, including approximately $325 million for Positive Train Control (PTC). Estimated total multi-year PTC implementation cost was at least $1.7 billion; spending through March 2013 was $643 million. The company expected to fund capital investment with operating cash flow.
Outlook, material developments and risks
- In April 2013, after quarter-end, CSX announced a 7% increase in its quarterly dividend to $0.15 per share and a new $1 billion share repurchase program expected to be completed within 24 months. No shares were repurchased in Q1 2013.
- Management described long-term growth opportunities in intermodal, export coal and customer-service initiatives. Export coal demand and pricing remain volatile and sensitive to global economic conditions and foreign competition; domestic utility coal faces pressure from low natural gas prices and environmental regulation.
- Q1 included a $20 million deferred gain related to a closure arrangement involving a formerly owned company. The company also recognized $29 million of the deferred gain from the 2011 Florida rail-corridor sale, compared with $19 million in Q1 2012.
- Fuel-surcharge antitrust litigation had been certified as a class action; an appeal was scheduled for oral argument in May 2013. CSX disputed the claims, but an adverse decision could materially affect results or liquidity. The filing estimated an aggregate $3 million to approximately $20 million range of possible losses for certain other legal proceedings, in excess of reserves.
- CSX reported $89 million of environmental reserves and identified itself as a potentially responsible party at approximately 250 environmentally impaired sites. Additional exposure at some sites could not be reasonably estimated. Management said recorded reserves and individual pending matters were not expected to have a material adverse effect, while noting that multiple or unexpectedly adverse outcomes could be material in a particular period.
- Safety and service indicators improved year over year: the personal injury frequency index improved 18%, train accident rate 31%, on-time arrivals reached 85% (up from 77%), and average train velocity increased 5%.
Important facts for investors to verify
- Whether the improving operating ratio and expense savings persist as volume, inflation and depreciation change.
- Coal demand, export-market conditions, natural gas prices and the extent to which intermodal and merchandise growth offset coal weakness.
- Execution and funding of the $2.3 billion 2013 capital plan and the multi-year PTC program.
- Developments in the fuel-surcharge class-action appeal and environmental, casualty and other contingencies.
- Implementation and cash implications of the post-quarter dividend increase and $1 billion repurchase authorization.