CSX Corporation — Q1 2012 Form 10-Q
Business context and period. CSX provides rail freight and intermodal transportation, primarily across the eastern United States. This unaudited report covers the 13 weeks ended March 30, 2012; comparisons are with the 13 weeks ended April 1, 2011. Dollar amounts are in millions unless stated otherwise.
Financial and operating results
- Revenue: $2,966, up 6% ($156). Volume rose 1% to 1.602 million units; revenue per unit increased 5%.
- Profitability: Operating income was $856, up 11%; operating ratio improved to 71.1% from 72.5%. Net earnings were $449, up 14%, and diluted EPS was $0.43 versus $0.35.
- Revenue mix: Merchandise revenue rose 10% to $1,675 and intermodal revenue rose 19% to $389. Coal revenue fell 5% to $832, as utility coal weakness outweighed stronger export shipments.
- Expenses: Total expense increased 4% to $2,110. Fuel expense rose $42, mainly reflecting a 10% increase in average locomotive-fuel prices; depreciation increased $14 due to a larger asset base. Labor and fringe expense rose $5.
- Cash flow: Operating cash flow was $444, down from $495. Property additions used $469; cash and cash equivalents declined $156 to $627. The company contributed $275 to qualified pension plans, including a $25 required minimum contribution.
- Liquidity: Cash, cash equivalents and short-term investments totaled $766. Working capital was a deficit of $125, versus a surplus of $248 at year-end; management said this deficit is not unusual for the industry and that liquidity was adequate. CSX had no borrowings under its $1 billion revolving credit facility or $250 million receivables facility.
- Debt: Long-term debt, including current maturities, was $9,125, down from $9,241 at year-end. CSX issued $300 of 4.4% notes due 2043 and repaid $413 of long-term debt.
- Shareholder returns: CSX repurchased $300 of shares and paid $125 of dividends; dividends per share were $0.12 versus $0.09. Average shares outstanding declined to 1,047 million from 1,108 million.
Material changes and management commentary
- Revenue growth reflected pricing above rail inflation and higher fuel recovery, as well as stronger intermodal and merchandise activity. Automotive, metals and forest products were among the stronger merchandise markets.
- Utility coal shipments were pressured by low natural-gas prices, high utility stockpiles and an unusually warm winter. Coal volume overall fell 14%; export shipments partly offset the decline.
- Service measures improved year over year: on-time originations increased to 89% from 66%, on-time arrivals to 77% from 59%, and train velocity to 22.3 from 20.5 miles per hour. The FRA train accident rate improved 24% to 2.01.
- Management planned $2.25 billion of 2012 capital investment, excluding reimbursable public-private partnership spending, and expected to fund investment from operating cash flow. CSX estimated total multi-year Positive Train Control implementation costs of at least $1.7 billion; spending through 2011 was approximately $320.
- Management anticipated no further qualified pension plan contributions in 2012. The company expected to renew its receivables securitization facility before its December 2012 expiration.
- The $2 billion share-repurchase authorization announced in 2011 was expected to be completed by year-end 2012, subject to market and business conditions. Approximately $434 remained available at quarter-end.
Risks, contingencies and unusual items
- Management cited exposure to fuel-price changes, natural-gas-driven coal demand, economic and commodity-market conditions, competition, severe weather and operational disruptions, regulation, labor and benefit costs, and execution of strategic initiatives.
- CSX was identified as a potentially responsible party at approximately 252 environmentally impaired sites. Management considered recorded environmental reserves adequate based on available information, but said additional exposure at some sites could not yet be estimated.
- Recorded casualty, environmental and other reserves totaled $505. For certain legal proceedings with reasonably possible losses above established reserves, the estimated aggregate range was $3 to approximately $17; actual outcomes could differ.
- Management said pending legal matters were not expected to have a material adverse effect, but an unexpected adverse resolution could materially affect a particular period. Insurance may not cover all future claims or remain available at commercially reasonable rates.
- A $19 gain from the 2011 Florida rail-corridor sale was recognized in the quarter. The transaction included a commitment to invest $500 in Florida transportation-related capital and maintenance over eight years; the deferred gain balance was $113.
- The filing reported no material changes in previously disclosed risk factors or market-risk disclosures, and no material developments in the legal proceedings described in the 2011 Form 10-K.
Important facts for investors to verify
- Whether revenue and pricing gains can persist if volume growth slows, and how fuel-price movements affect fuel recovery and margins.
- How low natural-gas prices and utility stockpiles affect coal volumes, and whether export demand continues to offset domestic weakness.
- Actual capital spending and Positive Train Control costs versus plans, including the timing and collection of public-private partnership reimbursements.
- Whether operating cash flow can support planned investment, dividends and repurchases while maintaining liquidity and debt metrics.
- Progress on pension funding, renewal of the receivables facility, and remaining share-repurchase authorization.
- Developments in environmental remediation and legal claims, including whether exposures exceed recorded reserves or the disclosed loss range.