CSX Corporation — Q3 2017 Form 10-Q
Reporting period: Quarter ended September 30, 2017; nine months ended September 30, 2017. Comparative periods ended September 23, 2016. The company changed to a calendar-year reporting schedule beginning in Q3 2017; Q3 2017 included one more business day than the prior-year quarter.
Business context and results
CSX provides rail-based freight transportation, including merchandise, coal and intermodal services, primarily across the eastern United States. Management said it continued implementing Precision Scheduled Railroading, emphasizing customer service, cost control, asset utilization and safety.
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $2.743 billion | $2.710 billion | $8.545 billion | $8.032 billion |
| Operating income | $876 million | $841 million | $2.546 billion | $2.385 billion |
| Operating ratio | 68.1% | 69.0% | 70.2% | 70.3% |
| Net earnings | $459 million | $455 million | $1.331 billion | $1.256 billion |
| Diluted EPS | $0.51 | $0.48 | $1.45 | $1.32 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $2.861 billion | $2.488 billion |
Financial position and cash flows
- Q3 revenue rose 1%; operating income rose 4%, and the operating ratio improved 90 basis points. Diluted EPS rose 6%, supported in part by lower average shares outstanding following repurchases.
- For the first nine months, revenue increased 6% and operating income increased 7%. Net cash from operations was $2.861 billion; property additions were $1.462 billion. Company-defined free cash flow before dividends was $1.470 billion, or $1.566 billion adjusted for after-tax restructuring payments.
- At September 30, cash and cash equivalents were $591 million and short-term investments were $113 million. Working capital was a $97 million surplus, down from $447 million at year-end 2016.
- Total debt, including current maturities, was $11.807 billion, up from $11.293 billion at year-end. CSX issued $850 million of 3.25% notes due 2027 and repaid $332 million of debt. It reported no borrowings under its $1 billion revolving facility or its receivables facility, which offers up to $200 million subject to eligible receivables.
- Nine-month dividends were $530 million. Share repurchases were $1.763 billion; the $1.5 billion repurchase authorization was completed by October 2, 2017.
Material changes and unusual items
- Q3 restructuring charges were $1 million; year-to-date charges totaled $296 million, including workforce reductions, executive reimbursement arrangements, equity award modifications and transition-related costs. Management estimated approximately $200 million in annual pre-tax savings from the workforce-reduction program.
- CSX reduced its management workforce by approximately 950 employees. The CEO-related reimbursement arrangements included a $55 million payment to Mantle Ridge and assumed obligations of $29 million plus tax indemnification obligations.
- Nine-month revenue included a $58 million settlement with a customer related to historical volume commitments. The company also integrated real-estate activities into operating income beginning in 2017.
- CSX reduced the locomotive fleet covered by a long-term maintenance agreement from 50% to an estimated 34% beginning August 2018, reducing remaining estimated payments from approximately $5.0 billion to $1.7 billion.
Outlook, management commentary and risks
- Management projected 2017 capital investment of $2.1 billion, including approximately $270 million for Positive Train Control (PTC). Estimated total multi-year PTC implementation cost was $2.4 billion; spending through September 2017 was $2.0 billion.
- Management said Q3 operating performance weakened amid network-fluidity challenges during the new train-plan transition, train accidents and Hurricane Irma, and expected improvement through terminal efficiencies and refinement of the operating plan. Q3 train velocity was 14.0 mph versus 14.9; on-time originations were 74% versus 84%; and the FRA train accident rate was 3.82 versus 2.61.
- Material risks include execution of Precision Scheduled Railroading, service and safety performance, severe weather, competition, fuel and commodity-market conditions, PTC costs, and legal, environmental and personal-injury claims. Management cited an estimated aggregate possible loss range of $2 million to $116 million for certain legal proceedings in excess of established reserves.
- CSX was identified as a potentially responsible party at approximately 219 environmentally impaired sites; environmental reserves were $89 million. Management said additional exposure at some sites could not yet be reasonably estimated.
- In the fuel-surcharge antitrust litigation, the District Court denied class certification on October 10, 2017, after quarter-end. The merits proceedings’ schedule had not been set as of the filing discussion; an adverse outcome could be material.
- No specific revenue, earnings or EPS guidance was provided in the supplied filing text. The company stated it was reviewing its cash-deployment strategy and remained committed to an investment-grade credit profile.
Most important facts for investors to verify
- Whether service, operating efficiency and safety improve as the new rail operating plan is refined.
- Delivery and timing of the estimated $200 million in annual workforce-program savings, and any further restructuring costs.
- Capital spending and PTC implementation costs versus the stated 2017 and multi-year estimates.
- Cash deployment, debt levels and repurchase activity following completion of the $1.5 billion authorization.
- Developments in fuel-surcharge litigation and environmental matters, including potential losses beyond recorded reserves.
- Comparability effects of the fiscal-calendar change and Q3’s additional business day.