CSX Corporation — Q1 2011 Form 10-Q
Business context and reporting period
CSX provides rail-based freight transportation, primarily through CSX Transportation’s approximately 21,000-mile network in the eastern United States and parts of Canada. The filing covers the 13 weeks ended April 1, 2011; the comparison is the 13 weeks ended March 26, 2010. The company notes that the first week of 2010 included a holiday and is typically a lower-volume week.
Financial and operating performance
| Metric | Q1 2011 | Q1 2010 |
|---|---|---|
| Revenue | $2.810 billion | $2.491 billion |
| Operating income | $773 million | $632 million |
| Operating ratio | 72.5% | 74.6% |
| Net earnings | $395 million | $305 million |
| Diluted EPS | $1.06 | $0.78 |
| Cash from operations | $506 million | $744 million |
| Property additions | $390 million | $328 million |
| Cash dividends per share | $0.26 | $0.24 |
- Revenue rose 13%, reflecting 7% higher volume, pricing gains and increased fuel recovery. Automotive, emerging markets and intermodal had notable volume growth; coal revenue rose 19%, mainly on stronger export shipments.
- Expenses increased 10% to $2.037 billion. Fuel expense rose $119 million, or 42%, principally reflecting a 36% increase in average fuel price per gallon and higher volume. Excluding fuel, expenses increased 4%, according to management.
- Operating income rose 22%; the operating ratio improved by 2.1 percentage points. Net earnings increased 30% and diluted EPS increased 36%, also benefiting from fewer shares outstanding.
- Operating cash flow declined $238 million year over year, which management attributed mainly to the timing of payroll-related payments and higher incentive compensation payouts. Investing used $376 million; financing used $888 million, including $524 million of debt repayment and $300 million of share repurchases. Cash fell $758 million to $534 million.
- At April 1, 2011, total debt was $8.140 billion, including $503 million of current maturities. Debt was $8.664 billion at year-end 2010. Total liabilities were $18.821 billion and shareholders’ equity was $8.756 billion.
- Working capital was negative $51 million, versus positive $318 million at year-end, primarily reflecting capital spending and repurchases. Management said the deficit is not unusual for the industry and stated that liquidity was adequate. The $1.25 billion revolving credit facility was undrawn; a $250 million receivables facility also had no outstanding balance.
Material changes, outlook and risks
- Management planned approximately $2.0 billion of 2011 investment in infrastructure, rolling stock, strategic projects and Positive Train Control. The National Gateway project was estimated to cost approximately $850 million, with about $400 million committed; the Northwest Ohio intermodal terminal became operational during the quarter.
- CSX completed its multi-year $3 billion share repurchase program during Q1; the authority was exhausted. The company continued to emphasize infrastructure investment, dividends and shareholder returns. The filing provides no specific full-year earnings or revenue guidance.
- Safety measures improved: the personal-injury frequency index reached a reported record low of 0.78, and the train-accident rate fell 24%. Service measures weakened, which management attributed primarily to weather impacts in merchandise: on-time originations were 66%, on-time arrivals 59%, dwell time 26.6 hours and train velocity 20.5 mph. CSX said it added labor and locomotive resources to improve service.
- Risks highlighted include economic and freight-demand changes, fuel prices and availability, severe weather and operational disruption, regulation and PTC compliance costs, labor and benefit costs, competition, and litigation and environmental liabilities. Management cautioned that casualty and environmental estimates are uncertain; CSX was identified as a potentially responsible party at approximately 255 environmentally impaired sites.
- During the quarter CSXT agreed in principle to an Ohio environmental settlement, without admitting allegations: a $200,000 civil penalty and a $150,000 payment to an environmental fund, subject to public notice, comment and judicial approval. Management stated recorded reserves were adequate and did not expect the matters discussed to materially affect overall financial condition, results or liquidity, while noting multiple matters in one period could have a material effect.
Important facts for investors to verify
- Whether revenue growth, pricing and volume gains persisted, particularly in automotive, intermodal and export coal, and whether the prior-period holiday-week difference affects comparisons.
- Whether fuel-cost increases were recovered through surcharges and pricing, and how fuel prices affected subsequent margins.
- Whether operating cash flow recovered after the quarter’s payroll and incentive-payment timing effects, alongside planned capital spending and debt maturities.
- Progress on service recovery, the $2.0 billion 2011 investment plan, National Gateway commitments and renewal or replacement of the revolving facility before its May 2012 expiration.
- Developments in environmental, casualty and other claims, including the Ohio consent order and exposures that may not yet be estimable.