CSX Corporation — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; comparisons are with Q1 2018 unless noted. CSX provides rail-based freight transportation, including merchandise, coal and intermodal services. Amounts are in U.S. dollars.
Financial performance
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Revenue | $3.013 billion | $2.876 billion | Up 5% |
| Operating expenses | $1.794 billion | $1.832 billion | Down 2% |
| Operating income | $1.219 billion | $1.044 billion | Up 17% |
| Operating ratio | 59.5% | 63.7% | Improved 420 basis points |
| Net earnings | $834 million | $695 million | Up 20% |
| Diluted EPS | $1.02 | $0.78 | Up 31% |
| Operating cash flow | $1.173 billion | $966 million | Up $207 million |
| Adjusted free cash flow before dividends (non-GAAP) | $866 million | $651 million | Up $215 million |
Revenue growth reflected pricing, favorable mix, higher other revenue and increased fuel recovery. Merchandise revenue rose 6% and coal revenue rose 7%; intermodal revenue declined 5%. Total shipment volume was essentially flat. Expenses fell primarily from labor efficiencies and lower fuel costs; interest expense increased $29 million, mainly due to higher average debt.
Liquidity, debt and capital allocation
- Cash and cash equivalents were $1.188 billion at March 31, 2019; short-term investments were $822 million. Together, these totaled approximately $2.0 billion.
- Working capital surplus was $1.6 billion, up $903 million from year-end 2018.
- Total long-term debt, including current maturities, was $15.766 billion, up from $14.757 billion at December 31, 2018. CSX issued $1.0 billion of notes in February: $600 million of 4.25% notes due 2029 and $400 million of 4.50% notes due 2049.
- CSX replaced its $1.0 billion revolving facility with a $1.2 billion facility expiring in March 2024; there were no borrowings under it or the $1.0 billion commercial paper program at quarter-end.
- Property additions were $353 million. Dividends paid were $195 million; share repurchases totaled $796 million, or approximately 12 million shares. A new $5 billion repurchase authorization was announced in January 2019. The quarterly dividend increased 9% to $0.24 per share.
Material changes and operating performance
- Train velocity improved 17% to 20.4 miles per hour and terminal dwell improved 14% to 8.9 hours; on-time arrivals increased to 64% from 57%.
- Reported safety measures improved year over year: the FRA personal injury frequency index declined 32% to 0.79 and the train accident rate declined 35% to 2.60.
- Merchandise and coal volumes grew, while intermodal volume fell 5%, partly due to rationalization of low-density lanes. Fertilizer volume declined amid winter weather delays.
- Adoption of the new lease accounting standard on January 1, 2019 added operating lease right-of-use assets and liabilities. At March 31, the balance sheet reported a $550 million right-of-use asset and $555 million of operating lease liabilities. The filing states adoption did not materially affect operating results or liquidity.
Outlook, risks and contingencies
- Planned 2019 capital investment was $1.6 billion to $1.7 billion, including approximately $100 million for Positive Train Control (PTC); more than half was expected to support core infrastructure. Management expected to fund investment with operating cash flow.
- CSX estimated total multi-year PTC implementation costs of approximately $2.4 billion and reported $2.3 billion spent through March 2019.
- Management said operations continued to improve and emphasized further service gains, transit-time improvement, asset utilization, cost control and safety. The filing provides no specific full-year earnings or revenue guidance.
- Recorded casualty, environmental and other reserves totaled $319 million. For certain legal proceedings with reasonably possible losses above reserves, the estimated aggregate range was $4 million to $102 million; actual losses could differ significantly. Management did not consider any pending matter likely to have a material adverse effect, but an unexpected adverse resolution could be material in a particular period.
- CSX identified risks including economic and freight-demand changes, competition, severe weather or other disruptions, fuel and coal-market conditions, regulation and PTC costs, litigation and environmental exposure, labor costs or disruptions, insurance availability, and access to capital markets.
Important facts for investors to verify
- Whether revenue growth and the improved operating ratio are sustainable, particularly with flat overall volume and declining intermodal volume.
- How the $1.0 billion debt issuance, continued repurchases and dividend increase affect leverage and cash available for investment.
- Actual 2019 capital spending and PTC costs compared with management’s estimates.
- Developments in the fuel-surcharge antitrust litigation and environmental matters, including whether potential losses exceed recorded reserves.
- Comparability of operating statistics: the company notes its velocity and dwell calculation methods differ from STB-prescribed methods, and certain statistics are estimates.