CSX Corporation — FY2010 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2010. CSX’s fiscal year had 53 weeks, including a 14-week fourth quarter; FY2009 had 52 weeks. The extra week contributed approximately $171 million of FY2010 revenue, so reported comparisons are not fully period-aligned.
Business context
CSX provides rail freight and intermodal transportation, principally through CSX Transportation’s approximately 21,000-route-mile network across the eastern United States and parts of Canada. FY2010 revenue mix was merchandise 54%, coal 31%, intermodal 12%, and other 3%. CSX merged its intermodal subsidiary into CSXT during 2010 and began the UMAX domestic interline container program with Union Pacific.
Financial and operating results
| Metric | FY2010 | FY2009 | Change |
|---|---|---|---|
| Revenue | $10.636 billion | $9.041 billion | +18% |
| Operating income | $3.071 billion | $2.270 billion | +35% |
| Operating ratio | 71.1% | 74.9% | Improved 380 basis points |
| Net earnings | $1.563 billion | $1.143 billion | +37% |
| Diluted EPS | $4.06 | $2.89 | +40% |
| Cash from operating activities | $3.246 billion | $2.040 billion | +$1.206 billion |
| Property additions | $1.825 billion | $1.427 billion | +$398 million |
| Free cash flow before dividends, non-GAAP | $1.490 billion | $667 million | +$823 million |
FY2010 revenue gains reflected a 10% increase in volume, pricing gains above rail inflation, and higher fuel recovery. Expenses rose 12%, led by labor and fringe costs (+$328 million) and fuel (+$363 million); average diesel fuel price increased from $1.71 to $2.26 per gallon. Operating margin was approximately 28.9% in FY2010, versus 25.1% in FY2009.
Fourth-quarter reported results were revenue $2.816 billion, operating income $846 million, net earnings $430 million, and diluted EPS $1.14, compared with $2.320 billion, $579 million, $303 million, and $0.77, respectively, in FY2009’s fourth quarter. The 2010 quarter included an extra week.
Volume increased 10% overall. Merchandise revenue rose 19%, coal revenue 20%, and intermodal revenue 9%. Automotive and metals were particularly strong. Coal volume was approximately flat, as export growth offset weaker utility shipments. Intermodal revenue per unit fell 7%, largely reflecting the shift to UMAX from a purchased-transportation arrangement.
Balance sheet, debt and liquidity
- Cash, cash equivalents and short-term investments totaled $1.346 billion at year-end; working capital was a $318 million surplus, down from $705 million.
- Total debt, including current maturities, was $8.664 billion, compared with $8.008 billion in 2009; long-term debt excluding current maturities was $8.051 billion. The company issued $800 million of long-term debt in 2010.
- CSX had an undrawn $1.25 billion revolving credit facility, potentially expandable to $1.75 billion, and an undrawn $250 million receivables securitization facility. Management described liquidity as adequate.
- Capital expenditures were $1.825 billion. CSX paid $372 million in dividends and repurchased $1.452 billion of shares during the year. Approximately $298 million remained on its $3 billion repurchase authorization at year-end.
Outlook, commentary and significant matters
- Management planned $2.0 billion of capital spending in 2011, including approximately $260 million for required regulatory projects, including Positive Train Control (PTC). CSX estimated total multi-year PTC implementation costs of at least $1.2 billion.
- CSX expected to ship approximately 35–40 million tons of export coal in 2011 and projected higher utility coal volume. No specific overall earnings or revenue guidance is provided in the supplied filing text.
- The National Gateway infrastructure initiative was estimated to cost $850 million, with CSX expecting to contribute about $400 million. The Northwest Ohio intermodal terminal was scheduled to open in the first half of 2011.
- Safety improved: the FRA personal injury rate fell 16% to 1.01 and the train accident rate fell 9% to 2.68. Service measures weakened as volume rose: on-time originations fell to 75% from 81%, on-time arrivals to 69% from 80%, and train velocity to 21.0 mph from 21.8 mph; dwell time increased to 25.0 hours from 24.1.
- A $49 million reduction in casualty reserves benefited FY2010 earnings; the filing reports an after-tax benefit of $30 million, or $0.08 per share. A Massachusetts property transaction generated a $30 million pretax book loss, alongside $50 million in cash proceeds.
- CSX identified approximately 247 environmentally impaired sites and recorded $107 million in environmental reserves. Management said reserves were adequate but noted that additional exposure at some sites could not yet be estimated.
- Fuel-surcharge antitrust class actions seek unquantified treble damages. CSX said it believed its practices lawful and did not expect a material adverse effect, while acknowledging an adverse outcome could be material. Management similarly judged other pending legal matters not expected to be material.
- Proposed STB legislation could increase regulation of pricing, service and network access. Other identified risks include economic weakness, competition, fuel costs, labor negotiations, capacity constraints, climate regulation, hazardous-material incidents, severe weather, technology disruptions, and insurance availability.
- The 2010 rail-grinding accounting policy change was applied retrospectively and was described as not material to the periods presented. The independent auditor gave an unqualified opinion on the financial statements and internal controls.
Important facts for investors to verify
- Assess how much FY2010 growth and fourth-quarter comparisons reflect the extra fiscal week, versus sustainable volume, pricing and yield trends.
- Track whether weaker service metrics recover as traffic grows, and whether service performance affects pricing and customer retention.
- Verify the sustainability of coal and intermodal trends, including export demand, utility shipments, UMAX economics and revenue per unit.
- Monitor execution and funding of the $2.0 billion 2011 capital plan, PTC costs, and the National Gateway contribution.
- Review debt maturities, borrowing needs, share repurchases and dividend commitments against operating cash flow and capital spending.
- Follow the fuel-surcharge litigation, proposed rail regulation, environmental exposures and casualty reserves for developments that could change the company’s stated risk assessments.