CSX Corporation — Q3 2013 Form 10-Q Summary
Business context and reporting period. CSX provides rail-based freight transportation, including merchandise, coal and intermodal services. This unaudited filing covers the 13-week quarter ended September 27, 2013, and the nine months ended that date; comparisons are with the corresponding 2012 periods.
Key financial results
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $2.999 billion | $2.894 billion | $9.026 billion | $8.872 billion |
| Operating income | $854 million | $854 million | $2.692 billion | $2.653 billion |
| Operating ratio | 71.5% | 70.5% | 70.2% | 70.1% |
| Net earnings | $463 million | $455 million | $1.457 billion | $1.416 billion |
| Diluted EPS | $0.46 | $0.44 | $1.43 | $1.36 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $2.499 billion | $2.304 billion |
Q3 operating margin was approximately 28.5%, compared with 29.5% a year earlier, based on the reported operating ratios. Nine-month operating margin was approximately 29.8%, versus 29.9%.
For the first nine months, property additions were $1.687 billion; cash used in investing activities was $1.243 billion, and cash used in financing activities was $1.449 billion. Cash and cash equivalents declined $193 million to $591 million. Cash, cash equivalents and short-term investments totaled $719 million at quarter-end.
At September 27, 2013, total debt was $9.051 billion, including $264 million of current maturities. CSX repaid $779 million of long-term debt during the nine-month period. Total assets were $30.943 billion and shareholders’ equity was $9.868 billion. Working capital was a deficit of $51 million, compared with a $174 million surplus at year-end 2012.
Material changes and operating trends
- Q3 revenue rose 4%, while expenses increased 5%; operating income was unchanged and the operating ratio worsened by 100 basis points.
- Management attributed revenue growth to 3% higher volume and pricing gains across most markets. Merchandise and intermodal growth more than offset lower coal volumes.
- Coal revenue fell 9% in Q3 amid lower domestic electrical generation and utility stockpiles above target, as well as export-market oversupply and lower prices. Intermodal revenue rose 8%, and merchandise revenue rose 7%.
- Higher incentive compensation, inflation and the absence of a prior-year property-sale gain contributed to higher Q3 expenses. Efficiency savings partially offset those pressures. Q3 net earnings benefited from an $11 million tax benefit related primarily to state legislation; the prior-year quarter included an $8 million tax benefit.
- Nine-month revenue increased 2%, operating income increased 1%, and diluted EPS increased 5%. Net cash from operations rose from $2.304 billion to $2.499 billion.
Outlook, risks and unusual items
- CSX planned 2013 capital investment of $2.3 billion, including approximately $325 million for Positive Train Control (PTC), and expected to fund capital investment with operating cash flow. Management estimated total multi-year PTC implementation costs of at least $1.7 billion; spending through September 2013 was $791 million.
- The filing provides no specific earnings or revenue guidance. The $1 billion share repurchase program announced in April 2013 was expected to run through April 2015; $129 million of shares were repurchased in Q3, with approximately $776 million remaining under the program at quarter-end.
- CSX reported improved Q3 train accident and service measures: the FRA train accident rate improved 23%, on-time arrivals rose to 83% from 80%, and train velocity increased to 23.3 mph from 22.6 mph. The personal injury frequency index worsened 3% to 0.78.
- Fuel-surcharge antitrust litigation remained a significant contingent risk. An appeals court vacated class certification in August 2013 and remanded the matter for reconsideration; proceedings on the merits were delayed. CSX said it believed its practices were lawful and intended to defend itself. Management warned an adverse outcome could materially affect results or liquidity in a period.
- Recorded casualty, environmental and other reserves totaled $433 million. CSX was identified as a potentially responsible party at approximately 242 environmentally impaired sites; additional exposure at some sites could not be reasonably estimated. Management said recorded reserves reflected currently required remedial actions.
- Management estimated aggregate possible losses for certain legal proceedings above established reserves at $3 million to $17 million. It stated that no pending item was currently expected to have a material adverse effect, while noting that an unexpected adverse resolution could be material in a particular period.
- The SunRail corridor sale had generated deferred gains recognized as the related Florida investment obligation was fulfilled. That obligation was completed in Q2 2013; no gain was recognized in Q3 2013, and CSX expected no further material gains.
- CSX had no borrowings under its $1 billion revolving credit facility or $250 million receivables securitization facility as of the filing date. The securitization facility was due to expire in June 2014, and CSX intended to renew it. Management said liquidity was adequate despite the working-capital deficit.
Important facts for investors to verify
- Whether coal weakness, pricing, and merchandise/intermodal growth persisted after Q3, and how these trends affected revenue mix and operating ratio.
- Whether expense growth—particularly incentive compensation, inflation and asset-related depreciation—continued to outpace revenue, and whether efficiency savings offset those costs.
- Actual capital spending, PTC implementation costs and schedule, and the extent to which operating cash flow funded investment.
- Developments in the fuel-surcharge antitrust case, environmental matters and casualty claims, including any change in reasonably estimable losses or reserves.
- Liquidity and debt maturities, renewal of the receivables securitization facility, and the pace and price of repurchases under the remaining authorization.