CSX Corporation — FY2011 Form 10-K
Business context and reporting period
CSX provides freight rail and intermodal transportation, primarily through CSX Transportation, with an approximately 21,000-route-mile network serving 23 states, the District of Columbia, and parts of Canada. Its main businesses are merchandise, coal, and intermodal. Fiscal 2011 ended December 30, 2011, and comprised 52 weeks; fiscal 2010 included 53 weeks, including an extra week in Q4.
Key financial metrics
| Metric | FY2011 | FY2010 | Change |
|---|---|---|---|
| Revenue | $11.743 billion | $10.636 billion | +10% |
| Operating income | $3.418 billion | $3.071 billion | +11% |
| Operating ratio | 70.9% | 71.1% | Improved 20 basis points |
| Net earnings | $1.822 billion | $1.563 billion | +17% |
| Diluted EPS | $1.67 | $1.35 | +24% |
| Cash from operations | $3.491 billion | $3.261 billion | +$230 million |
| Capital expenditures | $2.297 billion | $1.840 billion | +$457 million |
| Free cash flow before dividends | $1.396 billion | $1.490 billion | -$94 million |
| Long-term debt, excluding current maturities | $8.734 billion | $8.051 billion | +$683 million |
Revenue growth reflected pricing above rail inflation, higher fuel recoveries, and growth across merchandise, coal, and intermodal. Volume increased 1% to 6.476 million units. Coal revenue rose 14% despite a 3% volume decline, supported by yield, mix, fuel recovery, and export shipments. Expenses rose 10%, mainly from higher fuel prices, inflation, and labor-related costs; locomotive fuel averaged $3.06 per gallon versus $2.26 in 2010.
At year-end, cash and cash equivalents were $783 million and short-term investments were $523 million, for $1.306 billion combined. Working capital was a $248 million surplus. Total debt including current maturities was $9.241 billion. CSX had an undrawn $1 billion revolving facility due September 2016 and an undrawn $250 million receivables facility due December 2012. Shareholders’ equity was $8.468 billion.
Material changes versus the prior comparable period
- Operating income reached a reported annual record, and the operating ratio improved to 70.9%.
- Net earnings increased $259 million; diluted EPS rose by $0.32. The three-for-one stock split was reflected retrospectively in per-share data.
- Merchandise revenue increased 9%, coal revenue 14%, and intermodal revenue 11%. Coal volume fell as utility shipments weakened, while exports increased.
- Operating cash flow rose, but free cash flow before dividends declined as property additions increased. CSX spent $1.564 billion on share repurchases and paid $480 million in dividends.
- Service measures weakened year over year: on-time originations fell to 72% from 75%, on-time arrivals to 62% from 69%, and dwell rose to 25.9 hours from 25.0. Management said fourth-quarter measures improved markedly. Safety measures improved, including a 10% decline in the personal injury rate and a 14% decline in train accident frequency.
Outlook, management commentary, risks, contingencies, and unusual items
Management highlighted growth investment in intermodal terminals and network capacity, export coal, and Total Service Integration initiatives. It described a balanced capital approach covering infrastructure, dividends, and repurchases. CSX expected to complete the remaining $734 million authorization under its $2 billion repurchase program by the end of 2012, subject to market and business conditions. The filing does not provide a specific consolidated revenue or earnings forecast.
- Industry and operating risks: economic weakness, competition from trucks and other modes, capacity constraints, severe weather, fuel costs, labor negotiations, safety events, hazardous-material exposure, cyber disruption, and equipment supply constraints.
- Regulatory exposure: Positive Train Control is required on specified routes by December 31, 2015. CSX’s prior estimate of at least $1.2 billion in implementation costs was being reevaluated because of upward cost pressure; industry concerns included whether the deadline was achievable. Proposed rail legislation could increase regulation of pricing, service, or network access.
- Coal sensitivity: management cited low natural-gas prices as a headwind to domestic utility coal demand; export coal was exposed to global economic conditions and demand.
- Legal and environmental matters: fuel-surcharge antitrust class actions seek unquantified treble damages; management considered the claims without merit and did not expect a material adverse effect, while acknowledging a materially adverse outcome could have a significant impact. The disclosed aggregate range of reasonably possible legal losses above reserves was $2 million to approximately $65 million. CSX was identified as potentially responsible at about 246 environmentally impaired sites and recorded $83 million in environmental reserves; additional exposure at some sites could not be estimated clearly.
- Unusual item: the Florida SunRail corridor sale generated $173 million of proceeds, including $148 million cash and a $25 million receivable, with up to $259 million in related government grants. A $146 million gain was deferred pending satisfaction of investment obligations; $14 million was recognized in 2011.
- Reporting adjustment: CSX reduced fourth-quarter 2011 intermodal revenue by $18 million to correct first-nine-month revenue for certain interline business; the filing described the adjustment as immaterial to the consolidated financial statements.
Important facts for investors to verify
- Whether stronger pricing and fuel recovery can continue to offset cost inflation, and how fuel prices and surcharge recoveries affect margins.
- Coal demand trends, especially utility coal exposure to natural gas prices, alongside the sustainability of export coal growth.
- Whether service performance continues to recover from FY2011 declines and whether service investments yield measurable operating improvements.
- Updated Positive Train Control cost estimates, implementation timing, and any effect on capital spending or operating costs.
- Progress on the share-repurchase authorization and the effect of buybacks, dividends, and debt issuance on leverage and liquidity.
- Developments in the fuel-surcharge litigation, environmental sites, and other claims relative to recorded reserves and disclosed possible-loss ranges.
- CSX reported unqualified audit opinions on its financial statements and internal controls; investors may also review the underlying statements and notes for pension funding, debt maturities, and the deferred SunRail gain.