CSX Corporation — Q1 2018 Form 10-Q
Business context and period: CSX provides rail freight and intermodal transportation, principally through its approximately 21,000-mile network. This unaudited quarter ended March 31, 2018; the comparable 2017 quarter had 91 days versus 90 days in 2018. The company said the calendar-year reporting change did not materially affect comparability.
Financial performance
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Revenue | $2.876 billion | $2.869 billion | Up $7 million; approximately flat |
| Operating expenses | $1.832 billion | $2.100 billion | Down $268 million |
| Operating income | $1.044 billion | $769 million | Up 36% |
| Operating ratio | 63.7% | 73.2% | Improved 950 basis points |
| Net earnings | $695 million | $362 million | Up 92% |
| Diluted EPS | $0.78 | $0.39 | Up 100% |
| Operating cash flow | $966 million | $1.043 billion | Down $77 million |
| Free cash flow before dividends, non-GAAP | $642 million | $627 million | Up $15 million |
Revenue per unit rose 4% as pricing and fuel recovery, along with higher other revenue, largely offset a 4% decline in total volume. Merchandise revenue fell 3%, coal fell 4%, and intermodal rose 3%; other revenue increased $71 million, including customer payments for unmet volume commitments of $23 million versus $4 million a year earlier.
Expense reductions reflected $157 million of efficiency and volume savings and the absence of $110 million in prior-year operating restructuring charges. Materials, supplies and other expense also benefited from $32 million of property-sale gains versus $2 million in Q1 2017. Fuel expense increased $37 million, including a $48 million impact from a 24% fuel-price increase. Interest expense rose $12 million.
The effective tax rate fell to 23.8% from 37.8%, primarily because of the lower federal corporate tax rate effective January 1, 2018. Q1 2017 included $173 million of total restructuring charges, including $63 million classified as non-operating under the retrospectively applied benefit-cost presentation standard.
Cash, debt and liquidity
- Cash and cash equivalents were $1.980 billion at March 31, up from $401 million at year-end; cash plus short-term investments totaled approximately $2.0 billion.
- Long-term debt, including current maturities, was $13.787 billion, up from $11.809 billion at year-end. CSX issued $2.0 billion of notes: $800 million due 2028 at 3.80%, $850 million due 2048 at 4.30%, and $350 million due 2068 at 4.65%.
- Working capital was a $1.7 billion surplus, versus $21 million at year-end. The increase was substantially funded by debt proceeds and operating cash flow.
- CSX reported a $1 billion revolving credit facility with no outstanding borrowings and a receivables facility of up to $200 million, also undrawn. It reported compliance with credit-facility covenants.
- Property additions were $368 million. Dividends paid were $194 million and share repurchases were $836 million in the quarter.
Outlook, management commentary and risks
- Management said operations improved despite prolonged winter weather: train velocity increased 22% to 17.3 mph and dwell improved 10% to 10.4 hours. On-time arrivals rose to 57% from 52%.
- Safety measures deteriorated: the FRA personal-injury frequency index increased 14% to 1.11, and the train-accident rate increased 19% to 3.66. Management said it would intensify injury and accident prevention efforts.
- The 2018 capital plan projects $1.6 billion of investment, including approximately $200 million for Positive Train Control (PTC). Estimated total multi-year PTC cost is approximately $2.4 billion; $2.1 billion had been spent through March 2018.
- The company authorized $5 billion of share repurchases, with approximately $4.0 billion remaining at quarter-end and completion expected by the end of Q1 2019. The quarterly dividend was increased 10%, to $0.22 per share.
- Management cited economic and commodity demand, competition, fuel prices, severe weather, operating and safety performance, regulation, labor, capital-market access, litigation and environmental obligations among factors that could affect results. No specific earnings or revenue guidance was provided in the supplied filing text.
- Legal proceedings include fuel-surcharge antitrust litigation; the district court denied class certification in October 2017, and an appeal was pending. The company estimated an aggregate possible loss range of $2 million to $115 million for certain legal matters above recorded reserves. It also identified approximately 221 potentially responsible environmental sites; additional exposure at some sites could not be reasonably estimated.
Important facts for investors to verify
- How much of the earnings and operating-ratio improvement reflects recurring operating efficiencies versus the absence of 2017 restructuring charges and higher property-sale gains.
- Whether volume trends, particularly in merchandise and domestic coal, stabilize and whether pricing and fuel recovery continue to offset volume pressure.
- Whether operating improvements are sustained while safety frequency measures, which worsened year over year, improve.
- How debt-funded repurchases, planned capital spending and the announced repurchase timetable affect leverage, liquidity and cash generation.
- Developments in the fuel-surcharge litigation, environmental remediation and other legal contingencies, whose outcomes and ultimate costs remain uncertain.