CSX Corporation — Form 10-Q Summary
Reporting period: Third fiscal quarter ended September 25, 2015 (13 weeks), with comparisons to the quarter ended September 26, 2014. The filing also reports results for the first nine months of each year. CSX operates a rail-based transportation network, including merchandise, coal and intermodal services.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $2.939 billion | $3.221 billion | $9.030 billion | $9.477 billion |
| Operating income | $933 million | $976 million | $2.793 billion | $2.712 billion |
| Operating ratio | 68.3% | 69.7% | 69.1% | 71.4% |
| Net earnings | $507 million | $509 million | $1.502 billion | $1.436 billion |
| Diluted EPS | $0.52 | $0.51 | $1.52 | $1.43 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $2.512 billion | $2.302 billion |
Q3 expenses were $2.006 billion, down 11%, principally reflecting $170 million lower fuel costs and lower volume-related costs and efficiency savings. Q3 fuel expense fell $170 million; locomotive fuel prices declined 41%. Q3 net earnings were nearly unchanged despite lower revenue, while diluted EPS rose 2%, supported in part by fewer average shares outstanding. For nine months, operating income increased 3% and net earnings increased 5% as expense reductions exceeded the revenue decline.
For the nine months, property additions were $1.909 billion; operating cash flow less property additions was approximately $603 million. Cash and cash equivalents were $541 million at quarter-end, and short-term investments were $425 million. Working capital was a surplus of $580 million. Total debt, including current maturities, was $10.106 billion, compared with $9.742 billion at year-end 2014. CSX issued $600 million of 3.95% notes due 2050 and repaid $228 million of debt.
Changes, operating trends and management commentary
- Q3 revenue declined 9%, reflecting $175 million less fuel surcharge revenue and lower volumes, partly offset by pricing gains. Total volume declined 3%.
- Coal was a major weakness: Q3 volume fell 18% and revenue fell 19%, amid mild weather, high utility stockpiles, low natural gas prices, global oversupply and a strong U.S. dollar. Merchandise revenue declined 6%; intermodal volume increased 6%, including 15% growth in domestic intermodal.
- The operating ratio improved 140 basis points in Q3 and 230 basis points for the nine-month period. Management cited pricing, efficiency savings and lower fuel costs; nine-month savings were partly offset by inflation and other costs.
- Service measures improved year over year, including Q3 on-time originations of 76% and on-time arrivals of 54%. The FRA train accident rate deteriorated 2% in the quarter, while the personal injury frequency index improved 21%.
- Other income improved year over year, partly because prior-year early debt-redemption costs and environmental cleanup costs did not recur. These comparisons affect reported earnings outside operating income.
Liquidity, outlook and risks
- Management planned approximately $2.5 billion of 2015 capital investment, including about $300 million for Positive Train Control (PTC), with roughly half intended to sustain core infrastructure. The filing says CSX expects to fund capital investments with operating cash flow.
- CSX estimated total multi-year PTC implementation costs of at least $1.9 billion and reported $1.4 billion spent through September 2015. Management warned that CSX and most other railroads would not meet the December 31, 2015 statutory deadline. Without an extension, some operations on designated routes could be curtailed or suspended, with potential material financial effects.
- Liquidity included a $1 billion unsecured revolving credit facility expiring in May 2020 and an available receivables securitization facility of up to $250 million, expiring in June 2017. Neither facility had an outstanding balance as of the filing date. CSX reported compliance with credit-facility covenants.
- A new $2 billion share repurchase program, announced in April 2015, was expected to be completed by April 2017. CSX repurchased $546 million of shares in the first nine months and reported $1.584 billion remaining under the program at quarter-end.
- Legal proceedings include a fuel-surcharge antitrust class action; class certification proceedings were pending and merits proceedings delayed. CSX said an adverse outcome could materially affect results. For certain legal matters with reasonably possible losses beyond reserves, the estimated aggregate range was $3 million to $52 million.
- Environmental reserves were $88 million, and CSX had been identified as a potentially responsible party at approximately 253 impaired sites. The company stated that additional exposure at some sites could not yet be reasonably estimated. Total casualty, environmental and other reserves were $416 million.
- Other stated risks include fuel and coal-market changes, economic and volume conditions, regulation, safety and hazardous-material incidents, insurance availability, labor costs, and litigation. Management gave no specific earnings or revenue guidance in the provided filing text.
Important facts for investors to verify
- Whether coal weakness and reduced fuel-surcharge revenue continue, and whether pricing and intermodal growth offset the impact.
- Progress against the $2.5 billion 2015 capital plan and PTC spending, implementation schedule, deadline extensions and potential operating restrictions.
- Whether operating-ratio improvement is sustained as fuel prices, volumes, inflation and efficiency savings change.
- Cash generation relative to capital spending, dividends, share repurchases and debt; the filing reports $512 million of dividends and $546 million of repurchases in the first nine months.
- Developments in the fuel-surcharge litigation and environmental matters, including changes to reserves or reasonably possible loss estimates.