CSX Corporation — Q2 2009 Form 10-Q
Reporting period: Quarter and six months ended June 26, 2009; comparable periods ended June 27, 2008. Unaudited results. CSX operates Rail and Intermodal businesses across North America.
Financial performance
| Metric | Q2 2009 | Q2 2008 | Six months 2009 | Six months 2008 |
|---|---|---|---|---|
| Revenue | $2.185 billion | $2.907 billion | $4.432 billion | $5.620 billion |
| Operating income | $582 million | $717 million | $1.104 billion | $1.343 billion |
| Net earnings | $308 million | $385 million | $554 million | $736 million |
| Diluted EPS | $0.78 | $0.93 | $1.40 | $1.78 |
| Operating ratio | 73.4% | 75.3% | 75.1% | 76.1% |
| Operating cash flow | Not separately stated | Not separately stated | $981 million | $1.343 billion |
| Property additions | Not separately stated | Not separately stated | $667 million | $912 million |
Q2 revenue fell 25%, operating income 19%, and net earnings 20% year over year. Six-month revenue declined 21%, operating income 18%, and net earnings 25%. The operating ratio improved despite lower earnings, reflecting cost reductions and lower fuel costs.
Q2 volume fell 21% overall. Rail revenue declined 25% and Intermodal revenue 24%; segment operating ratios were 71.2% and 87.6%, respectively, compared with 74.6% and 80.3% a year earlier. The filing attributes revenue weakness chiefly to recession-related volume declines and reduced fuel surcharge revenue. Fuel expense fell $352 million in Q2, reflecting lower fuel prices and volume.
Balance sheet and liquidity
- At June 26, 2009, cash and cash equivalents were $1.108 billion and short-term investments were $70 million, totaling approximately $1.2 billion in cash and investments.
- Total debt, including current maturities, was $8.251 billion, up from $7.831 billion at December 26, 2008. The increase included a $500 million debt issuance; $83 million was repaid.
- Current assets were $2.636 billion and current liabilities $1.961 billion, producing working capital of $675 million versus a $13 million deficit at year-end. Management cautioned working capital could return to a deficit.
- CSX had an undrawn $1.25 billion revolving credit facility expiring in 2012 and reported compliance with its covenants. It also noted that adverse credit-market conditions could limit access to capital or raise borrowing costs.
- Six-month operating cash flow decreased to $981 million from $1.343 billion. Property additions were $667 million, down from $912 million. Cash increased $439 million to $1.108 billion during the period.
Material changes, outlook, and notable items
- Management said the recession continued to affect the business and expected rail volume to be lower for full-year 2009. It cited broad weakness, particularly in coal, automotive, construction, and consumer-related markets; coal declines accelerated in Q2. Several other major lines had stabilized since Q1.
- Management planned approximately $1.6 billion of 2009 capital expenditures, subject to revision as business, tax, or regulatory conditions change.
- CSX intended to pre-fund pension contributions of up to $250 million ($160 million after tax) in 2009; estimated required minimum contributions were approximately $5 million.
- CSX sold the company indirectly owning The Greenbrier resort in May 2009 for approximately $21 million cash and recorded a $25 million after-tax gain. Greenbrier results were reclassified as discontinued operations. CSX retained responsibility for certain pre-closing pension obligations but reported no continuing obligation to finance resort operations.
- Q2 casualty reserves were reduced by a net $85 million, including a $78 million personal-injury reserve reduction attributed to improved safety trends and an $18 million asbestos reserve reduction for claims deemed to lack medical merit. The reductions supported expense results; the filing also disclosed an $11 million write-off of reinsurance receivables.
- Safety and service measures improved year over year: FRA personal-injury frequency improved 6%, train-accident rate 16%, on-time originations were 83% versus 75%, and on-time destination arrivals were 81% versus 65%. Dwell increased slightly to 24.1 hours.
- CSX completed $1.25 billion of share repurchases since March 2008, with $1.75 billion of authority remaining, but made no repurchases in Q2. Future repurchases were contingent on improved capital-market and business conditions. Q2 dividends were $0.22 per share versus $0.18.
Risks and contingencies
- Fuel-surcharge antitrust class actions remained at a preliminary stage. Plaintiffs sought unquantified treble damages; CSX said it could not estimate the financial impact, had accrued no liability, and intended to defend the claims.
- Environmental exposure included approximately 257 potentially impaired sites. The company said recorded reserves were adequate based on available information, but additional liabilities at some sites could not yet be estimated.
- Other exposures include personal-injury and occupational claims, environmental matters, rate proceedings, insurance risks, labor issues, fuel-price changes, economic weakness, regulation, weather, and access to capital markets. Management said the ultimate resolution of contingencies could differ from estimates and could materially affect a particular period.
- Management reported no material change in previously disclosed risk factors or market-risk information. Disclosure controls were considered effective, and no material change in internal control over financial reporting was reported.
Investor verification priorities
- Track whether rail volumes and customer demand recover, especially in coal, automotive, construction, and international intermodal traffic, and whether pricing offsets reduced fuel surcharges.
- Assess the durability of expense reductions and the operating-ratio improvement, including the effect of casualty-reserve releases and lower fuel prices.
- Verify cash generation against the $1.6 billion capital-spending plan, pension pre-funding intentions, and debt levels and maturities.
- Monitor developments and possible exposure in fuel-surcharge litigation, environmental sites, and other legal or regulatory proceedings; the filing does not provide a clear estimate for several potential exposures.
- Separate recurring operating performance from the $25 million after-tax Greenbrier gain and review the implications of retained Greenbrier pension obligations.