CSX Corporation — Q3 2016 Form 10-Q
Business and period: CSX operates a rail-based transportation network, including merchandise, coal and intermodal services. The third quarter comprised 13 weeks ended September 23, 2016; comparisons are with the 13 weeks ended September 25, 2015. Fiscal 2016 is a 53-week year.
Financial performance
| Metric | Q3 2016 | Q3 2015 | First nine months 2016 | First nine months 2015 |
|---|---|---|---|---|
| Revenue | $2.710 billion | $2.939 billion | $8.032 billion | $9.030 billion |
| Operating income | $841 million | $933 million | $2.385 billion | $2.793 billion |
| Operating ratio | 69.0% | 68.3% | 70.3% | 69.1% |
| Net earnings | $455 million | $507 million | $1.256 billion | $1.502 billion |
| Diluted EPS | $0.48 | $0.52 | $1.32 | $1.52 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $2.488 billion | $2.512 billion |
Q3 revenue fell 8%, operating income 10%, and diluted EPS 8% year over year. The operating ratio worsened 70 basis points. Nine-month revenue declined 11%, operating income 15%, and EPS 13%; the operating ratio worsened 120 basis points. Q3 net margin was approximately 16.8%, versus 17.3% a year earlier.
Management attributed the revenue decline chiefly to lower volumes, lower fuel-surcharge revenue and unfavorable mix, which more than offset pricing gains. Q3 total volume fell 8%. Coal volume fell 21% and intermodal 7%; merchandise volume fell 5%. Automotive volume increased 6%. Expense fell 7% in Q3, supported by efficiency savings and lower volume-related costs, while depreciation rose with the larger asset base. For the first nine months, reported efficiency savings were $341 million and lower volume-related costs were $202 million.
Cash, debt and liquidity
- Cash and cash equivalents were $603 million at September 23, 2016; short-term investments were $152 million, for combined liquidity of $755 million. Cash and investments totaled $1.438 billion at year-end 2015.
- Long-term debt, including current maturities, was $10.519 billion, versus $10.535 billion at year-end. Current maturities increased to $631 million from $20 million. Debt fair value was $12.235 billion; carrying value was $10.519 billion.
- Nine-month cash flow: operating activities provided $2.488 billion; investing activities used $893 million; financing activities used $1.620 billion. Property additions were $1.590 billion, share repurchases $778 million and dividends $513 million. Cash declined $25 million from year-end.
- Working capital shifted to a $100 million deficit from an $888 million surplus at year-end, partly reflecting capital spending, repurchases, dividends and $611 million more debt due within 12 months. Management said liquidity remained adequate.
- CSX had no balance outstanding under its $1 billion revolving credit facility, which expires in May 2020. Its receivables securitization facility was renewed after quarter-end, extending to September 2019 with capacity reduced from $250 million to $200 million; it had no balance outstanding at filing.
Outlook, commentary and risks
- Management projected 2016 capital investment of $2.7 billion, including approximately $300 million for Positive Train Control (PTC), funded with operating cash flow. The estimate excludes certain reimbursable public-private partnership investments. Total estimated multi-year PTC cost was approximately $2.2 billion; $1.7 billion had been spent through September 2016.
- Management expected to sustain or improve Q3 service performance while pursuing productivity and resource efficiency. No specific earnings or revenue guidance was provided in the supplied filing text.
- Service improved year over year: on-time originations were 84% and arrivals 64%. Train accident rate improved 23%, but the personal injury frequency index deteriorated 16% to 1.23; management linked the latter to fewer employee work hours.
- Market pressures included weak coal demand, constrained crude-by-rail economics, steel import competition, and weaker freight conditions. Risks include economic and commodity demand, competition, fuel and natural gas prices, severe weather, safety and hazardous-material incidents, regulation, labor matters, insurance availability, and access to capital.
- Legal and environmental contingencies include fuel-surcharge antitrust litigation, environmental cleanup matters, and other claims. For certain reasonably possible legal losses above reserves, CSX estimated an aggregate range of $6 million to $115 million. Management said individual recorded reserve matters were not expected to be material, but multiple matters or adverse outcomes could affect a period materially.
- Environmental reserves were $79 million; CSX was identified as a potentially responsible party at approximately 225 sites. The filing says additional exposure at some sites cannot yet be reasonably estimated. In the Lower Passaic River matter, EPA issued a cleanup decision for the lower eight miles and estimated the work could take about 10 years; CSX did not expect its allocable costs to be material based on information then available.
Important facts for investors to verify
- Whether volume weakness, especially in coal and intermodal, continues and whether pricing and efficiency savings can offset it.
- The schedule and funding for planned capital investment and remaining PTC implementation costs.
- Near-term debt maturities, working-capital deficit, and liquidity after capital spending, dividends and repurchases.
- Developments in fuel-surcharge class certification and the range and uncertainty of legal and environmental exposures.
- Whether the personal injury measure, service levels and other estimated operating statistics change as final data settles.