CSX Corporation — 2017 Form 10-K Summary
Business context and reporting period
CSX provides freight rail, intermodal and related transportation services across the eastern United States and parts of Canada. Its principal business lines are merchandise, coal and intermodal. This annual report covers the year ended December 31, 2017; it is not a standalone fourth-quarter filing. CSX shifted to a calendar-year reporting schedule during 2017. The 2017 year had 366 days versus 371 days in 2016, and fourth-quarter 2017 had 92 days versus 98 days in fourth-quarter 2016.
Financial and operating performance
| Metric | 2017 | 2016 |
|---|---|---|
| Revenue | $11.408 billion | $11.069 billion |
| Operating income (GAAP) | $3.667 billion | $3.389 billion |
| Operating ratio (lower is better) | 67.9% | 69.4% |
| Net earnings (GAAP) | $5.471 billion | $1.714 billion |
| Diluted EPS (GAAP) | $5.99 | $1.81 |
| Operating cash flow | $3.472 billion | $3.041 billion |
| Capital expenditures | $2.040 billion | $2.705 billion |
| Free cash flow before dividends (non-GAAP) | $1.566 billion | $847 million |
| Year-end cash and short-term investments | $419 million | $1.020 billion |
| Total debt, including current maturities | $11.809 billion | $11.293 billion |
| Shareholders’ equity | $14.721 billion | $11.694 billion |
Reported 2017 net earnings included a $3.6 billion net tax-reform benefit, principally a non-cash deferred-tax revaluation. Excluding that benefit and the restructuring charge, adjusted net earnings were $2.097 billion and adjusted diluted EPS was $2.30; adjusted operating income was $3.850 billion and adjusted operating ratio was 66.3% (all non-GAAP). Fourth-quarter revenue was $2.863 billion, operating income $1.121 billion and net earnings $4.140 billion; the quarter’s reported earnings included the tax benefit.
Revenue rose 3%, while reported operating expenses rose 1%; operating income increased 8%. Merchandise revenue was $7.068 billion, coal $2.107 billion and intermodal $1.799 billion. Merchandise volumes declined 4%; coal volumes rose 2%, with export coal up 42%; intermodal volumes increased 1%. Increased export coal, pricing and fuel recovery supported revenue, while lower merchandise volumes and the extra 2016 fiscal week affected comparison. The operating ratio improvement reflects reported results; the adjusted ratio excludes specified unusual items.
Material changes, outlook and management commentary
- CSX began transitioning to scheduled railroading in 2017, aiming to improve service, asset use and costs. Management cited network-fluidity challenges during the third quarter, followed by improvement from implementation of the operating plan. Full-year on-time originations were 80% versus 84% in 2016; on-time arrivals were 56% versus 55%. Reported injury and train-accident frequency measures deteriorated year over year.
- Management expected approximately $200 million of annual pre-tax savings from the 2017 restructuring program. The program generated a $325 million charge, including workforce reductions, executive-related costs and transition advisory expenses. The management workforce was reduced by about 950 employees.
- Planned 2018 capital investment was approximately $1.6 billion, including about $200 million for positive train control (PTC). CSX estimated total PTC implementation costs of $2.4 billion, with $2.0 billion invested through 2017.
- Following federal tax reform, CSX expected an effective federal and state tax rate of approximately 25% beginning in 2018. The company also noted that tax-reform estimates could be adjusted as implementation guidance and tax filings were completed.
- Liquidity included a $1 billion undrawn revolving credit facility, expiring in May 2020, and an available receivables facility of up to $200 million, subject to eligible receivables. Working capital was a $21 million surplus. The company issued $850 million of long-term debt in 2017 and spent $1.970 billion on share repurchases and $708 million on dividends.
Risks, contingencies and unusual items
- Key risks include execution of scheduled railroading and potential service disruption, network or labor constraints, competition from trucking and other railroads, and shifts in demand for coal, including the effects of natural-gas prices and export-market conditions.
- Regulatory and safety exposures include PTC implementation costs and deadlines, regulation of rail rates and competitive access, hazardous-material transportation, and environmental requirements. The company estimated PTC hardware installation was due by the end of 2018 and, subject to conditions, full operation by the end of 2020.
- CSX reported $374 million in casualty, environmental and other reserves, including $90 million of environmental reserves, and identified itself as potentially responsible at approximately 214 environmentally impaired sites. Management cautioned that additional exposure at some sites could not be reasonably estimated.
- Pending legal matters include fuel-surcharge antitrust litigation and environmental proceedings. The estimated aggregate range of reasonably possible losses above recorded reserves for certain legal proceedings was $2 million to $117 million; actual outcomes may differ. CSX did not expect the cited Mount Carbon derailment penalty matter to materially affect its financial position, results or liquidity.
- Other material items include the $3.6 billion tax-reform benefit, the $325 million restructuring charge and a $58 million customer settlement included in other revenue. CEO E. Hunter Harrison died in December 2017; James M. Foote became CEO, with additional operations leadership changes around year-end and in January 2018.
Important facts for investors to verify
- Reconcile reported earnings and EPS to adjusted figures, especially the one-time tax benefit, affiliate tax benefit and restructuring costs; assess the future effective tax rate.
- Track whether scheduled railroading delivers sustained service improvements, efficiency savings and safety performance, rather than relying only on management’s targets.
- Assess 2018 capital spending, PTC completion and related costs against the stated estimates and regulatory timetable.
- Review cash generation and capital allocation alongside debt maturities, share repurchases, dividends and remaining liquidity.
- Monitor coal and merchandise demand, fuel prices and recovery, legal proceedings, environmental exposures and unresolved labor negotiations.
- Account for the extra week in 2016 when comparing year-over-year results. The filing reports unqualified audit opinions on the financial statements and internal control over financial reporting.