CSX Corporation — Q3 2010 Form 10-Q
Business context and period. CSX provides rail and intermodal transportation, principally through CSX Transportation, serving a network of approximately 21,000 route miles. This unaudited filing covers the 13-week quarter and 39 weeks ended September 24, 2010; comparisons are to the corresponding 2009 periods. Dollar amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Revenue | $2,666 | $2,289 | $7,820 | $6,721 |
| Operating income | $825 | $594 | $2,225 | $1,691 |
| Operating margin | 31.0% | 26.0% | 28.5% | 25.2% |
| Net earnings | $414 | $290 | $1,133 | $840 |
| Diluted EPS | $1.08 | $0.73 | $2.92 | $2.12 |
| Operating cash flow | Not presented by quarter | Not presented by quarter | $2,266 | $1,589 |
- Q3 revenue rose 16%, reflecting 10% higher volume, pricing gains and increased fuel recovery. Operating expenses rose 9%, to $1,841, mainly because of labor-related costs and higher fuel prices. The operating ratio improved to a record 69.1% from 74.1%.
- For nine months, revenue rose 16% and operating income rose 32%. The filing attributes the gains to economic recovery, yield management and higher fuel recovery; fuel, labor and other expenses partly offset them.
- Nine-month property additions were $1,092, versus $1,031. Operating cash flow less property additions was approximately $1,174. Cash and cash equivalents were $636 at September 24, down from $1,029 at year-end 2009.
- Total debt, including current maturities, was $7,902, versus $8,008 at December 2009. Current maturities increased to $605 from $113, largely reflecting reclassification of debt due within 12 months. The $1.25 billion revolving credit facility and $250 million receivables facility were undrawn; CSX reported compliance with credit covenants.
- Working capital was negative $335, compared with positive $705 at year-end, primarily due to debt reclassification. Management stated that current assets and available financing were adequate for obligations and day-to-day needs.
Changes, outlook and notable items
- CSX repurchased $1.123 billion of shares in the first nine months, reducing shareholders’ equity. It expected to complete approximately $645 million remaining under its existing $3 billion repurchase program by the end of Q1 2011, subject to market and business conditions.
- Management announced an 8% increase in the quarterly dividend to $0.26 per share, payable December 15, 2010. The reported Q3 dividend was $0.24 per share.
- CSX planned approximately $1.8 billion of 2010 capital expenditures, up from its previously disclosed $1.7 billion plan. No specific earnings or revenue guidance was provided in the filing.
- CSX estimated Positive Train Control implementation would cost at least $1.2 billion over multiple years. The National Gateway project was estimated at $850 million total, with CSX expecting to contribute about $400 million; additional public funding was still being pursued.
- Former intermodal subsidiary Intermodal merged with CSXT at the start of Q3. Intermodal ceased to be reported as a separate segment, and prior periods were revised for presentation. CSX also changed rail-grinding accounting retrospectively to expense costs as incurred; the company said the effect was not material.
- Q3 included a $22 million, or $0.06 per share, income-tax charge related primarily to the intermodal merger and revaluation of deferred tax liabilities. A 2010 debt exchange replaced $660 million of notes averaging 7.74% interest with notes at 6.22% due 2040, accompanied by $141 million cash consideration; no gain or loss was recognized.
- Operational indicators were mixed: safety improved, with personal-injury frequency down 8% and train-accident rate down 13%. On-time originations fell to 77% from 82%, on-time arrivals to 69% from 79%, and train velocity declined 3% to 21.1 mph; dwell increased to 24.8 hours from 24.0.
Risks, contingencies and management commentary
- CSX reported reserves of $721 million for casualty, environmental and other matters. Management considered recorded reserves adequate and did not expect the matters individually to materially affect the company, but noted that several matters in one period could have a material effect. Actual claims and outcomes may differ from estimates.
- CSXT reached an agreement in principle concerning the Benning Yard environmental matter: a $0.5 million civil penalty, a $7.5 million payment to a cleanup fund, future oversight-cost reimbursement, investigation and assessment, and site cleanup. Future costs were not estimable; the consent decree remained subject to negotiation, public comment and judicial approval.
- Management identified economic and industry conditions, fuel prices, regulation, labor and benefit costs, litigation, environmental claims, insurance availability, severe weather, safety and security, and PTC compliance costs as factors that could cause results to differ from forward-looking statements. The filing reported no material change in previously disclosed risk factors or market-risk disclosures.
Important facts for investors to verify
- Whether volume, pricing and revenue growth persist, and whether operating costs—especially labor and fuel—remain controlled.
- Whether service metrics recover as volumes grow, and the implications for customer retention and operating efficiency.
- Cash generation and capital needs, including the $1.8 billion 2010 capital plan, PTC costs and National Gateway funding.
- Liquidity and refinancing needs given the increase in current debt maturities, the working-capital deficit and planned share repurchases and dividends.
- Final costs and required actions under the Benning Yard settlement, and developments in other environmental, casualty and legal matters.
- Execution and timing of the remaining repurchase program; the filing’s outlook is conditional on market and business conditions.