Business context and reporting period
CSX Corporation provides rail freight, intermodal and related transportation services, primarily through CSX Transportation. This unaudited Form 10-Q covers the 13-week second quarter and six months ended June 29, 2012; comparable periods ended July 1, 2011. Financial amounts are in millions of dollars unless noted.
Financial performance
| Metric | Second quarter 2012 | Second quarter 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Revenue | $3,012 | $3,019 | $5,978 | $5,829 |
| Operating income | $943 | $926 | $1,799 | $1,699 |
| Operating ratio | 68.7% | 69.3% | 69.9% | 70.9% |
| Net earnings | $512 | $506 | $961 | $901 |
| Diluted EPS | $0.49 | $0.46 | $0.92 | $0.81 |
| Operating cash flow | Not reported by quarter in the provided filing text | $1,291 | $1,585 |
Second-quarter revenue was nearly flat year over year, while operating income rose 2% and net earnings rose 1%. The operating ratio improved by 60 basis points to a reported record. For the six months, revenue increased 3%, operating income 6%, net earnings 7%, and diluted EPS 14%; the operating ratio improved by 100 basis points.
Six-month operating cash flow declined $294 million, mainly reflecting a $275 million pension contribution. Property additions were $1,223 million, versus $945 million in the prior-year period. Cash and cash equivalents were $642 million at quarter-end; short-term investments were $41 million, for combined cash and investments of $683 million. The company reported a $203 million working capital deficit, compared with a $248 million surplus at year-end, and said the deficit is not unusual for the business and does not indicate a lack of liquidity.
Long-term debt, including current maturities, was $9,089 million, down from $9,241 million at December 30, 2011. The company issued $300 million of 4.4% notes due 2043 and repaid $455 million of debt during the six months. Its $1 billion revolving credit facility and $250 million receivables securitization facility had no outstanding balances at the filing date.
Material changes and operating drivers
- Second-quarter freight volume was 1.640 million units, down slightly from 1.646 million. Coal volume fell 14%, principally due to low natural-gas prices and elevated utility stockpiles; coal revenue also fell 14%.
- Intermodal volume rose 8% and revenue 10%; automotive volume rose 27% and revenue 34%. Higher yields and fuel recovery supported revenue in most markets.
- Second-quarter expenses declined $24 million. Lower labor costs, fuel expense and other costs more than offset higher depreciation. The Florida rail-corridor sale contributed $20 million of deferred gain recognition in the quarter and $39 million for the six months.
- Six-month cash and short-term investments declined from $1,306 million at year-end to $683 million. The filing attributes the working-capital decrease primarily to property additions, share repurchases, pension contributions and dividends.
Outlook, management commentary and risks
Management planned $2.25 billion of capital investments in 2012, excluding reimbursable public-private partnership investments, and expected to fund capital investments from operating cash generation. CSX estimated total multi-year Positive Train Control implementation costs of at least $1.7 billion; approximately $320 million had been spent through 2011. No specific earnings or revenue guidance is provided in the filing text.
Management highlighted intermodal growth, export coal and improved customer service as strategic priorities. It expected long-term export coal opportunity but cautioned that volumes could be volatile and that domestic utility coal remained challenged. Management reported improved second-quarter safety and service measures, including on-time originations of 89% versus 68% and on-time arrivals of 78% versus 56%.
CSX had $434 million remaining under its $2 billion share-repurchase authorization and expected to complete purchases by year-end 2012, subject to sound market and business conditions; it repurchased no shares in the second quarter. The company also said it anticipated no further qualified pension-plan contributions in 2012.
Material contingencies include fuel-surcharge antitrust litigation: a court certified a class on June 21, 2012, a decision on class status rather than the merits; the railroads sought appellate review. CSX said it intended to defend the case, while warning an adverse merits decision could be material. The company estimated an aggregate $2 million to approximately $14 million range of possible loss for certain legal proceedings in excess of established reserves. It was identified as a potentially responsible party at approximately 263 environmentally impaired sites; additional exposure at some sites could not then be reliably estimated. Management considered recorded environmental reserves adequate based on available information.
Other risks cited include economic and commodity demand, natural-gas prices affecting coal, fuel costs and availability, weather and operational disruptions, competition, regulation, PTC costs, labor and benefit costs, insurance availability, and litigation. Management reported no material changes to previously disclosed risk factors and concluded disclosure controls were effective as of June 29, 2012.
Important facts for investors to verify
- Whether coal weakness continues and whether export coal, intermodal and automotive growth can offset it.
- Cash generation after pension contributions and the planned $2.25 billion capital program, including the eventual cost and schedule for PTC.
- Progress on the fuel-surcharge antitrust case, environmental matters and other claims, including changes to reserves or estimated exposure.
- Debt maturities, renewal of the receivables securitization facility before its June 2013 expiry, and execution of the remaining share-repurchase authorization.
- Whether the operating-ratio improvement and service gains are sustained, and the extent to which results benefited from deferred Florida-sale gain recognition and the $9 million second-quarter tax benefit.