CSX Corporation — Q3 2012 Form 10-Q Summary
Reporting period: The 13-week quarter ended September 28, 2012; year-to-date figures cover 39 weeks. Comparisons are with the quarter and nine months ended September 30, 2011. Amounts are in U.S. dollars.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Revenue | $2.894 billion | $2.963 billion | $8.872 billion | $8.792 billion |
| Operating income | $854 million | $878 million | $2.653 billion | $2.577 billion |
| Operating ratio | 70.5% | 70.4% | 70.1% | 70.7% |
| Net earnings | $455 million | $464 million | $1.416 billion | $1.365 billion |
| Diluted EPS | $0.44 | $0.43 | $1.36 | $1.24 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $2.304 billion | $2.585 billion |
Quarterly revenue fell 2%, operating income fell 3%, and net earnings fell 2% year over year. The operating ratio was 10 basis points worse. For the first nine months, revenue increased 1%, operating income increased 3%, and net earnings increased 4%; the operating ratio improved 60 basis points. Interest expense was $138 million for Q3 and $421 million year to date.
Q3 total volume declined 1%. Coal revenue fell 17% as coal volume fell 16%; intermodal revenue increased 10% on 8% volume growth. Merchandise revenue rose 3%, supported by pricing and automotive growth. Management attributed lower overall quarterly revenue to coal weakness and lower fuel surcharge recoveries, partly offset by pricing.
Cash flow, liquidity and capital
- Year-to-date operating cash flow was $2.304 billion, down from $2.585 billion. Property additions were $1.830 billion, versus $1.436 billion; net cash used in investing was $1.325 billion.
- Year-to-date financing included $500 million of share repurchases and $415 million of dividends paid. Cash and cash equivalents declined $90 million to $693 million. Cash plus short-term investments totaled $728 million.
- At September 28, total debt was $9.063 billion, including $806 million current maturities, compared with $9.241 billion at December 2011. CSX issued $300 million of 4.4% notes due 2043 and repaid $481 million of debt during the first nine months.
- CSX reported a $628 million working-capital deficit, versus a $248 million surplus at year-end, and said this was not unusual for the company or industry. Its $1 billion revolving credit facility and $250 million receivables facility had no outstanding balances; the company said it had adequate liquidity.
- Planned 2012 capital investment was $2.25 billion, intended to be funded from operating cash flow. Estimated multi-year Positive Train Control costs were at least $1.7 billion, with about $500 million spent through September 2012.
Business developments, outlook and risks
- Management highlighted continued investment in intermodal capacity, export coal infrastructure and customer-service improvements. It cited weak utility coal demand, associated with low natural-gas prices and high utility stockpiles, while export coal shipments increased.
- The company expected to complete its $2 billion share-repurchase authorization by year-end 2012, subject to market and business conditions. Approximately $234 million remained at quarter-end.
- Q3 expenses declined $45 million, including a $30 million gain recognized from the 2011 SunRail corridor sale, lower casualty and freight-loss expenses, and fuel savings. Depreciation increased $17 million due to a larger asset base. The deferred SunRail gain is recognized as the company fulfills an $500 million Florida investment obligation over eight years.
- Safety and service measures improved year over year: personal-injury frequency improved 35%, train-accident rate 3%, on-time originations reached 90%, and on-time arrivals reached 80%.
- CSX identified economic and freight-demand changes, coal and fuel-market conditions, competition, regulation, severe weather, labor and benefit costs, insurance availability, and execution of strategic initiatives as risks to forward-looking results. Management reported no material change in previously disclosed risk factors.
- Casualty, environmental and other reserves totaled $488 million. CSX was identified as a potentially responsible party at approximately 256 environmental sites; management said recorded environmental reserves were adequate based on currently available information, while some additional exposure could not be estimated.
- Fuel-surcharge antitrust litigation was certified as a class action in June 2012; defendants sought appellate review. CSX said it believed the case lacked merit but warned an adverse decision could materially affect results or liquidity. The company estimated aggregate possible losses in certain other legal matters, above recorded reserves, at $2 million to approximately $20 million.
Important facts for investors to verify
- Whether coal weakness and lower fuel-surcharge recoveries persist, and whether intermodal, automotive and merchandise growth offsets them.
- Progress against the $2.25 billion 2012 capital plan, the at-least-$1.7 billion Positive Train Control estimate, and related funding needs.
- Cash generation and liquidity given the working-capital deficit, current debt maturities, dividends and planned repurchases.
- Developments in the fuel-surcharge antitrust appeal and potential environmental, casualty and other legal exposures.
- Whether reported operating improvements and the SunRail deferred-gain recognition are sustainable or materially affect comparisons.