CSX Corporation — Q1 2009 Form 10-Q
Business context and period: CSX provides rail freight and intermodal transportation across North America. This unaudited 13-week quarter ended March 27, 2009; comparisons are with the 13 weeks ended March 28, 2008. Amounts are in millions of dollars unless stated otherwise.
Financial performance
| Metric | Q1 2009 | Q1 2008 | Change |
|---|---|---|---|
| Revenue | $2,247 | $2,713 | Down $466 (17%) |
| Operating expense | $1,725 | $2,087 | Down $362 (17%) |
| Operating income | $522 | $626 | Down $104 (17%) |
| Operating ratio | 76.8% | 76.9% | Improved 0.1 percentage point |
| Net earnings | $246 | $351 | Down $105 |
| Diluted EPS | $0.62 | $0.85 | Down $0.23 |
| Operating cash flow | $449 | $734 | Down $285 |
| Property additions | $309 | $446 | Down $137 |
Revenue fell as total units declined 17%. Operating expenses also declined 17%, principally reflecting lower fuel prices and volume, cost controls, employee furloughs and reduced overtime. Fuel expense was $191 versus $441. Operating income as a share of revenue was approximately 23.2%, compared with 23.1% in the prior-year quarter.
Rail revenue was $1,977, down 16%, and segment operating income was $498, down from $565; its operating ratio improved to 74.8% from 76.1%. Intermodal revenue was $270, down 22%, and operating income was $24, down from $61; its operating ratio worsened to 91.1% from 82.5%. Revenue per unit across CSX was nearly unchanged at $1,584 versus $1,580.
Financial position and liquidity
- Cash and cash equivalents were $1,056 at quarter-end, versus $669 at December 26, 2008; short-term investments were $73.
- Total debt, including current maturities, was $8,309, up from $7,831 at year-end. CSX issued $500 of 7.375% unsecured notes due February 2019 and repaid $26 of debt.
- Working capital was a $530 surplus, compared with a $13 deficit at year-end. Management attributed the change largely to cash raised from debt issuance and cautioned that working capital could return to deficit.
- CSX reported an undrawn $1.25 billion revolving credit facility, expiring in 2012, and compliance with its covenants. Management reported over $1.1 billion of cash, cash equivalents and short-term investments.
- Cash dividends paid were $0.22 per share, compared with $0.15. No shares were repurchased in the quarter.
Changes, outlook and management commentary
- Management said the global recession continued to reduce demand and that rail volume would be lower for 2009. Weakness was broad, particularly in industrial, housing-related and consumer markets; energy and agriculture were less affected.
- Automotive volume fell 53%, metals 48%, and merchandise units 23%; coal units declined 7%. Management said pricing and yield initiatives helped maintain overall revenue per unit despite reduced fuel surcharge recovery.
- Management planned $1.6 billion of capital spending for 2009, subject to change with business, tax and regulatory conditions. It cited pricing, productivity and network efficiency as positioning the company for an eventual recovery.
- Service measures improved in several areas: on-time originations were 83% versus 79%, destination arrivals 79% versus 69%, and train velocity 21.6 versus 20.8 miles per hour. Dwell increased to 24.1 from 22.7 hours. The filing reported 94 FRA-reportable personal injuries, up 4%, and 71 train accidents, down 9%; accident frequency rose to 3.08 per million train miles from 2.92.
- Interest expense increased to $141 from $119, mainly due to higher debt. Other income/expense shifted to a $9 expense from $55 income, including the absence of prior-year real estate income and a $30 non-cash equity-earnings correction. A $13 tax benefit from tax matters and statute expirations partially offset lower earnings.
Risks, contingencies and unusual items
- Greenbrier Hotel Corporation, a CSX subsidiary, filed for Chapter 11 on March 19, 2009 and agreed to a proposed resort sale to Marriott, subject to court approval, auction and other conditions. CSX agreed to provide up to $19 of bankruptcy financing and contemplated a further $50 of operating funds after a sale. Marriott’s proposed payment to GHC was $60–$130, depending on timing and resort performance. The sale was not assured.
- CSX faced fuel-surcharge antitrust class actions seeking unquantified treble damages. The company said it could not estimate the possible financial impact, had accrued no liability, and intended to defend the suits.
- Rate disputes before the Surface Transportation Board involving Seminole Electric and DuPont remained unresolved; CSX could not assess the possible financial impact of the Seminole matter.
- Environmental, casualty and other reserves totaled $853, including $96 for environmental matters; CSX was identified as a potentially responsible party at approximately 252 sites. Management considered reserves adequate, while acknowledging some potential exposures could not yet be estimated.
- Recent pension asset losses required additional contributions to meet a 94% funding target, payable by September 2009; the filing text does not provide a clear contribution amount.
- Management cited recession-driven demand, access to capital markets and borrowing costs, fuel prices, competition, labor, safety, regulation, litigation and environmental matters among risks. It said no material changes had occurred in previously disclosed risk factors.
Important facts for investors to verify
- Whether demand and volumes continued to weaken, and whether pricing and cost actions sustained margins as fuel prices and fuel surcharge recovery changed.
- The actual 2009 capital spending level and the cash flow available after property additions.
- Debt maturities, borrowing costs, revolver availability and covenant compliance, particularly if capital markets remain difficult.
- The required pension contribution amount and its cash-flow effect.
- Developments in the Greenbrier bankruptcy and sale, including CSX’s funding obligations and any proceeds ultimately received.
- Outcomes or new estimates for the fuel-surcharge litigation, STB rate matters, environmental sites and other claims.