CSX Corporation — Q2 2010 Form 10-Q
Business context and reporting period
CSX provides rail and related transportation services across a roughly 21,000-mile network. This unaudited filing covers the 13 weeks and six months ended June 25, 2010; comparisons are to the corresponding 2009 periods. All dollar figures below are in millions unless stated otherwise.
Financial performance and liquidity
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Revenue | $2,663 | $2,185 | $5,154 | $4,432 |
| Operating income | $768 | $577 | $1,400 | $1,097 |
| Net earnings | $414 | $305 | $719 | $550 |
| Diluted EPS | $1.07 | $0.77 | $1.84 | $1.39 |
| Operating ratio | 71.2% | Not clearly stated | Not stated | Not stated |
Q2 revenue rose 22%, with volume up 13%; operating income increased 33%. The 71.2% operating ratio was reported as an all-time record. Six-month revenue rose 16% and operating income rose 28%. Q2 earnings from continuing operations were $414 million versus $282 million; prior-year net earnings also included $23 million from discontinued operations.
For the first six months, operating cash flow was $1,422 million, compared with $971 million. Property additions were $687 million versus $657 million; operating cash flow less property additions was approximately $735 million, versus $314 million. Cash declined to $633 million from $1,029 million at year-end 2009, in part reflecting $823 million of share repurchases. Dividends paid were $184 million.
At June 25, total debt was $7,934 million ($614 million current and $7,320 million long-term), down from $8,008 million at year-end. Current assets were $2,143 million and current liabilities $2,354 million, a $211 million working-capital deficit; the filing attributes the deterioration primarily to reclassifying debt due within 12 months as current. CSX reported an undrawn $1.25 billion revolving facility and an undrawn $250 million receivables facility. Management said liquidity was adequate and the company was in compliance with credit-facility covenants.
Material changes and notable items
- Growth reflected broad volume recovery, pricing gains and increased fuel recovery. Q2 carloads increased 13%. Automotive, metals and intermodal had particularly strong volume growth; coal revenue increased 26%, despite a 7% volume increase, supported by export shipments and improved yield.
- Expenses rose 18% in Q2. Fuel expense increased $119 million; labor and fringe costs rose $67 million. Materials, supplies and other increased $107 million, including the comparison with a much larger prior-year casualty-reserve reduction.
- A Massachusetts property transaction generated $50 million cash but a $30 million pretax book loss, included in materials, supplies and other. The quarter also included a net $15 million tax benefit, or $0.04 per share, following resolution of a prior federal tax audit.
- CSX exchanged $660 million of notes bearing an average 7.74% rate for notes bearing 6.22% and due in 2040, and paid holders approximately $141 million in cash consideration. No gain or loss was recognized. The company repurchased $823 million of shares in the first half; $945 million of authorization remained at quarter-end.
- Effective Q2, rail-grinding costs are expensed as incurred rather than capitalized and depreciated; prior periods were retrospectively adjusted. The company said the change was not material. Intermodal ceased to be a separately reported segment following management and service changes, including the launch of the UMAX program.
Outlook, commentary and risks
Management expected strong double-digit EPS growth in 2010, supported by volume and revenue growth, about 30 million tons of export coal shipments, and operating-ratio improvement. The outlook depended on continued gradual economic growth and the strength and durability of the recovery. Planned 2010 capital expenditures were $1.7 billion. The National Gateway project was estimated at $850 million, with CSX expecting to contribute about $400 million; additional public funding was still being pursued. CSX estimated PTC implementation would cost at least $1.2 billion over multiple years.
Service performance was mixed: Q2 on-time originations were 78% versus 83% and destination arrivals 71% versus 81%; train velocity declined 4% to 20.9 mph, while dwell improved to 23.7 hours from 24.1. The personal-injury frequency index improved 14%, but the train-accident rate increased 7%. Key risks include economic conditions, fuel prices, regulation and PTC costs, litigation and environmental liabilities, insurance availability, labor costs, safety and service disruptions. Casualty, environmental and other reserves totaled $734 million; management considered reserves adequate, but noted multiple matters arising in one period could have a material effect. CSX was identified as a potentially responsible party at approximately 255 environmental sites.
Important facts for investors to verify
- Whether the expected 2010 double-digit EPS growth and export-coal outlook remained achievable as economic conditions evolved.
- Whether revenue growth translated into sustained margin improvement, given higher fuel and labor costs and the Q2 property loss and tax benefit.
- Whether weaker on-time performance and train velocity affected service reliability, customer retention or costs.
- How planned capital spending, PTC obligations, debt maturities and share repurchases affected cash and liquidity; the quarter-end working-capital deficit was $211 million.
- Developments in environmental, personal-injury, rate and other litigation claims, and the funding and timing of the National Gateway project.