CSX Corporation — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. The filing also reports fourth-quarter results; 2017 comparisons reflect CSX’s calendar-year reporting change and include a major tax-reform benefit.
Business context
CSX provides rail freight, intermodal and related transportation services, primarily through CSX Transportation’s approximately 20,500-mile network across the eastern United States and parts of Canada. In 2018, merchandise generated 61% of revenue, coal 18%, intermodal 16% and other revenue 5%. Management continued implementing scheduled railroading, focused on scheduled service, asset utilization and cost control.
Financial and operating performance
- Revenue: $12.25 billion, up 7% from $11.41 billion. Growth reflected fuel recovery, pricing, higher other revenue, volume gains in most markets and favorable mix.
- Operating results: Expenses were $7.38 billion, down 4%; operating income was $4.87 billion, up 31%. The operating ratio improved to 60.3% from 67.4% (710 basis points). Excluding 2017 restructuring and tax-reform-related operating effects, management reported a 620-basis-point improvement from an adjusted 66.5%.
- Net income and EPS: GAAP net earnings were $3.31 billion and diluted EPS was $3.84, down from $5.47 billion and $5.99 in 2017. The 2017 results included a $3.6 billion after-tax tax-reform benefit. On management’s adjusted, non-GAAP basis, 2017 diluted EPS was $2.30 versus $3.84 in 2018, a 67% increase.
- Fourth quarter: Revenue was $3.14 billion, operating income $1.25 billion, net earnings $843 million and diluted EPS $1.01. Fourth-quarter 2017 net earnings and EPS included the tax-reform benefit, limiting GAAP comparability.
- Cash flow and investment: Operating cash flow was $4.64 billion, versus $3.47 billion. Capital expenditures were $1.75 billion, down from $2.04 billion. Free cash flow before dividends, a non-GAAP measure, was $3.19 billion versus $1.57 billion.
- Liquidity and debt: Cash, cash equivalents and short-term investments totaled $1.11 billion; working capital was positive $650 million. Long-term debt, including current maturities, was $14.76 billion, compared with $11.81 billion a year earlier. CSX issued $3.0 billion of long-term debt during 2018. Its $1 billion revolving facility was undrawn at year-end, and it had no commercial paper outstanding.
- Shareholder returns: CSX repurchased $4.67 billion of shares in 2018 and paid $751 million in dividends. The annual dividend per share rose to $0.88 from $0.78. A new $5 billion repurchase authorization was announced in January 2019 after the prior program was completed.
Material changes and management commentary
- Merchandise revenue rose 6%, coal 7% and intermodal 7%; other revenue increased 34%. Merchandise volume was approximately flat, while coal and intermodal volumes increased 4% and 2%, respectively.
- Operating performance improved: train velocity rose to 17.9 mph from 15.1 mph, dwell declined to 9.6 hours from 11.3, and on-time arrivals improved to 60% from 56%.
- Fuel expense increased $182 million, mainly due to a 24% increase in fuel prices, partly offset by efficiency initiatives. Labor and fringe expense declined $208 million, principally from lower headcount and crew starts.
- Property-sale gains were $154 million in 2018, versus $18 million in 2017. The filing also cites these gains as a contributor to expense reduction; investors should distinguish recurring operating improvement from asset-disposition benefits.
- Management expects 2019 capital investment of $1.6 billion to $1.7 billion, including approximately $100 million for positive train control (PTC). More than half is expected to support core infrastructure. CSX estimates total PTC implementation costs of approximately $2.4 billion; $2.2 billion had been invested through 2018. Hardware installation was completed by the statutory 2018 deadline, and the system is required to be fully operational by December 31, 2020.
Risks, contingencies and unusual items
- Principal risks include economic and freight-demand weakness; coal-market pressure from natural gas and export volatility; competition from trucking and other transport modes; network, staffing and severe-weather disruptions; cybersecurity threats; regulatory change; and hazardous-material, environmental, safety and labor liabilities.
- CSX had identified itself as a potentially responsible party at approximately 220 environmentally impaired sites and recorded $80 million in environmental reserves. Management cautions that additional exposure at some sites cannot currently be reasonably estimated.
- The company disclosed an estimated aggregate range of $3 million to $120 million for certain reasonably possible legal losses in excess of reserves. A long-running fuel-surcharge antitrust case remained pending; an adverse outcome could be material in a particular period. CSX also reported paying $2.7 million in penalties in January 2019 relating to the 2015 Mount Carbon, West Virginia derailment.
- In 2018, CSX increased its self-insured retention for third-party liability claims from $50 million to $75 million per occurrence for claims on or after June 1. Insurance may not cover all losses or remain available at commercially reasonable rates.
- Other notable items: 2017 included a $3.5 billion non-cash tax benefit from remeasurement of deferred taxes and $325 million of restructuring charges ($240 million operating and $85 million non-operating). CSX’s 2018 post-retirement plan amendments reduced the related liability by $102 million. Management reported effective disclosure controls and internal control over financial reporting; the auditor gave unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Reconcile the 2017 tax-reform benefit and restructuring charges when comparing earnings, EPS and operating ratio; assess the company’s non-GAAP adjustments alongside GAAP results.
- Evaluate whether revenue and efficiency gains persist after accounting for fuel-price recovery, property-sale gains, market mix and lower staffing.
- Monitor debt growth, interest expense, planned buybacks and dividends against operating cash flow and the investment-grade credit profile.
- Track PTC spending and the path to full operation by 2020, as well as safety trends: the personal-injury frequency index improved, but the FRA train-accident rate worsened 12% year over year.
- Review developments in the fuel-surcharge litigation, environmental remediation and other claims, including potential losses beyond recorded reserves.