CSX Corporation — Q1 2010 Form 10-Q
Business context and period. The unaudited 13-week quarter ended March 26, 2010; comparable quarter ended March 27, 2009. CSX operates rail freight and intermodal transportation businesses, primarily across the eastern United States. Unless stated otherwise, financial amounts below are in millions of dollars.
Financial results and liquidity
| Metric | Q1 2010 | Q1 2009 | Change |
|---|---|---|---|
| Revenue | $2,491 | $2,247 | +11% |
| Operating expense | $1,857 | $1,725 | +8% |
| Operating income | $634 | $522 | +21% |
| Operating ratio | 74.5% | 76.8% | Improved 2.3 percentage points |
| Continuing-operations earnings | $306 | $254 | +20% |
| Net earnings | $306 | $246 | +24% |
| Diluted EPS | $0.78 | $0.62 | Continuing-operations EPS was $0.78 vs. $0.64 |
| Cash from operations | $747 | $449 | +$298 |
| Property additions | $331 | $309 | +$22 |
| Total debt, including current maturities | $7,989 | $8,008 at Dec. 25, 2009 | -$19 |
Operating cash flow less property additions was $416 million. Cash and cash equivalents were $993 million at quarter-end, down from $1,029 million at year-end. Working capital was $113 million, versus $705 million at year-end; the decline was primarily due to reclassifying $508 million of debt as current maturities. The $1.25 billion revolving facility and $250 million receivables facility were undrawn. Current maturities of long-term debt rose to $617 million from $113 million.
Rail revenue was $2,168 million, up 10%, and segment operating income was $595 million, up from $498 million. Intermodal revenue was $323 million, up 20%, and operating income was $39 million, up from $24 million. Consolidated revenue growth reflected 5% higher volume and improved revenue per unit; coal volume remained weak, while automotive, intermodal, metals, and fertilizer shipments grew.
Changes, outlook, and management commentary
- Higher fuel prices increased fuel expense by $92 million; labor and fringe expense rose $67 million, partly offset by lower staffing and lower materials, supplies, and other expense. Management cited higher incentive compensation and labor-related inflation.
- Operating cash flow increased partly because of higher pre-tax earnings and lower incentive-compensation payouts for 2009. Financing cash outflow included $229 million of share repurchases and cash paid in a debt exchange.
- CSX exchanged $660 million of notes bearing an average 7.74% rate for notes bearing 6.22%, due in 2040, and paid holders approximately $141 million in cash. The cash consideration is recorded in other long-term assets and amortized over the new notes’ term; no exchange gain or loss was recognized.
- Management expected strong double-digit EPS growth in 2010, supported by volume and revenue growth, operating-ratio improvement, and approximately 30 million tons of export coal shipments. This is a forward-looking expectation, not a guarantee.
- Planned 2010 capital expenditures were $1.7 billion. CSX estimated positive train control implementation would cost at least $1.2 billion over multiple years; $170 million was included in planned 2010 spending. The National Gateway project was estimated at approximately $850 million, with CSX expecting to contribute approximately $400 million; additional public funding was still being pursued.
- The UMAX intermodal agreement, effective in Q2, was expected to reduce quarterly Intermodal revenue by $40 million to $50 million, with a similar reduction in inland transportation expense. Management expected a neutral near-term operating-income effect and a positive long-term effect.
- Safety improved: the personal-injury frequency index was 0.81, 38% better year over year, and the train-accident rate improved 14%. Service measures weakened, which management primarily attributed to more challenging weather: on-time originations were 69% vs. 83%, arrivals 67% vs. 79%, dwell time 25.8 vs. 24.1 hours, and train velocity 20.9 vs. 21.6 mph.
Risks, contingencies, and unusual items
Casualty, environmental, and other reserves totaled $738 million. CSX was identified as a potentially responsible party at approximately 251 environmentally impaired sites; the company said reserves were adequate based on available information, while noting that some potential additional liabilities could not yet be reliably estimated. Management said recorded casualty, environmental, and other matters were not expected to materially affect overall financial condition, results, or liquidity, but multiple or unexpectedly adverse outcomes could have a material effect in a particular period.
Other risks identified include economic and freight-market conditions, fuel prices and recovery, labor and benefit costs, severe weather and operational disruptions, safety, regulation, litigation, environmental obligations, insurance availability, and access to capital markets. The quarter included $7 million of tax expense related to health-care legislation. The prior-year quarter included a $13 million favorable tax adjustment and an $8 million loss from discontinued operations related to The Greenbrier; there was no Greenbrier activity in Q1 2010. CSX reported no material changes to previously disclosed risk factors or market-risk disclosures.
Investor verification points
- Assess whether the 2010 double-digit EPS-growth outlook and export-coal assumptions were achieved, and how subsequent economic and volume trends affected them.
- Verify the effects of UMAX on reported revenue, expense, and operating income beginning in Q2.
- Track debt maturities, liquidity, and the amortization and cash-flow implications of the $141 million debt-exchange payment.
- Compare actual capital spending and funding for positive train control and the National Gateway with stated plans and cost estimates.
- Monitor service reliability, fuel-cost recovery, and the development of environmental, casualty, and litigation exposures.