CSX Corporation — Q2 2019 Form 10-Q
Business and period: CSX provides rail freight, intermodal and related transportation services across an approximately 20,000-route-mile network. This unaudited filing covers the quarter and six months ended June 30, 2019, compared with the same 2018 periods; balance-sheet comparisons are against December 31, 2018. Dollar amounts are in millions unless noted.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $3,061 | $3,102 | $6,074 | $5,978 |
| Operating income | $1,305 | $1,283 | $2,524 | $2,327 |
| Operating ratio | 57.4% | 58.6% | 58.4% | 61.1% |
| Net earnings | $870 | $877 | $1,704 | $1,572 |
| Diluted EPS | $1.08 | $1.01 | $2.10 | $1.79 |
| Operating cash flow | Not presented quarterly | Not presented quarterly | $2,267 | $2,009 |
Q2 revenue fell 1% as pricing and mix gains were offset by lower intermodal volumes and other revenue. Expense declined 3%, primarily on efficiency savings and lower fuel costs, lifting operating income 2% and improving the operating ratio by 120 basis points. Q2 net earnings edged down 1%; diluted EPS rose 7%, aided by a lower average share count. For the first half, revenue grew 2%, operating income 8%, and diluted EPS 17%.
Q2 volume declined 4%. Intermodal revenue fell 11% and volume 10%; merchandise revenue rose 2%, while coal revenue declined 2%. For the first six months, adjusted free cash flow before dividends, a company-defined non-GAAP measure, was $1,628, versus $1,329 in 2018.
Cash, debt and capital allocation
- At June 30, cash and cash equivalents were $853 and short-term investments were $878, totaling $1.7 billion. Working capital was a $1.1 billion surplus, versus $650 million at year-end.
- Total debt was $15,767, including $245 current maturities, compared with $14,757 at year-end. Interest expense rose $27 in Q2 and $56 for the first half, primarily due to higher average debt.
- First-half investing cash outflow was $1,256, including $769 of property additions and net purchases of short-term investments. Financing cash outflow was $1,016, including $1,656 of share repurchases and $388 of dividends.
- CSX issued $1.0 billion of notes in February 2019. It had no borrowings under its $1.2 billion revolving credit facility or $1.0 billion commercial-paper program at quarter-end; it reported compliance with facility covenants.
- The company repurchased $1.656 billion of shares in the first half under a new $5 billion program announced in January. The quarterly dividend was $0.24 per share.
Outlook, commentary and risks
- No specific earnings or revenue guidance is provided in the supplied filing text. Planned 2019 capital investment is $1.6–$1.7 billion, including approximately $100 million for Positive Train Control (PTC). Total PTC spending through June was $2.3 billion against an estimated total multi-year cost of approximately $2.4 billion.
- Management said train velocity and car dwell improved 14% and 6%, respectively, to quarterly records. The FRA personal injury frequency index improved 22%, and the train accident rate improved 54%. On-time originations improved, while on-time arrivals declined to 53% from 61%.
- Adoption of the lease accounting standard on January 1, 2019 added a $534 right-of-use asset and corresponding lease liability; at June 30, the balance sheet showed a $550 right-of-use asset and $560 of operating lease liabilities. The company said adoption did not materially affect operating results or liquidity.
- Environmental reserves were $78; total casualty, environmental and other reserves were $309. CSX identified approximately 229 environmentally impaired sites and stated that additional exposure at some sites cannot currently be reasonably estimated.
- Management estimated an aggregate $3–$55 range of reasonably possible losses above established reserves for certain legal proceedings. It said pending matters were not expected to materially adversely affect the company overall, but noted that an unexpected adverse resolution could be material in a particular period. The long-running fuel-surcharge antitrust litigation remains pending; an adverse outcome could have a material effect.
- Other risks highlighted include economic and freight-demand changes, competition, fuel and coal-market conditions, severe weather, safety and cybersecurity, labor and benefit costs, regulation, insurance availability, and access to capital markets. Management said liquidity was adequate to meet current liabilities and maturing obligations.
Most important facts for investors to verify
- Whether intermodal weakness and the 4% Q2 volume decline persist, and whether pricing and mix continue to offset volume pressure.
- Whether operating-ratio improvements and service and safety gains are sustained; note that some operating statistics are estimates and velocity/dwell methodology differs from the STB’s.
- Debt growth, higher interest expense, and the use of debt and operating cash to fund buybacks, dividends and capital investment.
- Actual PTC spending against the estimated $2.4 billion total, and completion of planned 2019 capital investment.
- Developments in fuel-surcharge litigation, environmental matters and other contingencies, including potential losses beyond recorded reserves.