CSX Corporation — Q1 2017 Form 10-Q
Business and period. CSX provides rail and intermodal transportation, primarily in the eastern United States. This unaudited report covers the 13 weeks ended March 31, 2017; the comparable quarter ended March 25, 2016 also comprised 13 weeks.
Financial results and liquidity
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Revenue | $2.869 billion | $2.618 billion | +10% |
| Operating expense | $2.157 billion | $1.914 billion | +13% |
| Operating income | $712 million | $704 million | +1% |
| Operating ratio | 75.2% | 73.1% | +210 bps |
| Net earnings | $362 million | $356 million | +2% |
| Diluted EPS | $0.39 | $0.37 | +5% |
| Cash from operations | $1.043 billion | $754 million | +$289 million |
Revenue rose on volume growth, pricing gains and higher fuel surcharges. Volumes increased 3%; coal revenue rose 31%, merchandise revenue 6%, and intermodal revenue 7%. Expense growth reflected a $173 million restructuring charge and higher fuel costs; fuel expense increased $68 million as fuel prices rose 45%. Labor and other efficiency savings partly offset cost pressures.
Management’s non-GAAP adjusted results excluded the restructuring charge: operating income was $885 million, operating ratio 69.2%, net earnings $470 million and diluted EPS $0.51. Free cash flow before dividends was $627 million, versus $360 million; adjusted free cash flow before dividends was $634 million versus $360 million.
Property additions were $441 million. Cash and cash equivalents were $930 million, short-term investments $287 million, and working capital surplus $383 million at quarter-end. Long-term debt, including current maturities, was $11.294 billion, versus $11.293 billion at year-end. The $1 billion revolving credit facility and $200 million receivables facility had no outstanding borrowings.
Material changes and management commentary
- CEO E. Hunter Harrison was appointed March 6, 2017, and CSX began implementing Precision Scheduled Railroading, emphasizing customer service, cost control, safety, workforce development and asset utilization.
- CSX reduced its management workforce by 765 employees. The $173 million restructuring charge included severance and pension costs, benefit curtailment, equity award modifications and advisory fees. Approximately $90 million of cash expenditures were expected, mostly in Q2 2017; further program costs were anticipated.
- Operating performance was mixed: on-time originations held at 81%, while on-time arrivals fell to 61% from 64%; train velocity declined to 20.2 mph from 21.1 mph. The train accident rate improved 25%; the personal injury frequency index deteriorated 9%.
- Cash from operations benefited from collections and the timing of tax, payroll and interest payments; the filing cautions that these timing factors contributed to the increase.
Outlook, capital allocation and risks
- Projected 2017 capital investment was approximately $2.1 billion, including about $270 million for Positive Train Control (PTC); more than half was intended for core infrastructure. Estimated total multiyear PTC cost was $2.4 billion, with $1.8 billion spent through March 2017. No earnings or revenue guidance is provided in the supplied filing text.
- After quarter-end, CSX announced an 11% quarterly dividend increase to $0.20 per share and a new $1 billion repurchase program expected to be completed over 12 months. The prior $2 billion repurchase program was completed April 5, 2017.
- Significant risks include execution of the new operating strategy, rail and truck competition, economic and commodity-demand shifts, fuel-price movements, weather and operating disruptions, safety and hazardous-material incidents, PTC compliance costs, and access to capital.
- Legal matters include fuel-surcharge antitrust litigation and environmental proceedings. Management estimated a $6 million–$129 million aggregate range of reasonably possible losses above established reserves for certain legal proceedings; actual losses could differ materially. CSX was identified as a potentially responsible party at approximately 222 environmental sites. Management said additional exposure at some sites could not yet be reasonably estimated.
- Management reported disclosure controls were effective as of March 31, 2017, with no material change in internal control over financial reporting during the quarter.
Investor verification priorities
- Assess the underlying operating trend excluding the $173 million restructuring charge, and whether the efficiency savings and adjusted results are sustainable.
- Track service and safety measures as Precision Scheduled Railroading is implemented, especially on-time arrivals, velocity and injury performance.
- Verify delivery and funding of the $2.1 billion capital plan and the stated PTC cost and schedule.
- Monitor cash generation, working capital, debt and planned dividends and buybacks, including the expected funding mix for repurchases.
- Follow developments in the fuel-surcharge litigation and environmental liabilities, where outcomes and potential exposure remain uncertain.