CSX Corporation — Q2 2016 Form 10-Q
Business context and reporting period. CSX provides rail freight, intermodal and related transportation services, primarily across the eastern United States. The 13-week quarter ended June 24, 2016; six-month results are through that date. Comparisons are with the quarter and six months ended June 26, 2015.
Financial and operating results
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $2.704 billion | $3.064 billion | $5.322 billion | $6.091 billion |
| Operating income | $840 million | $1.017 billion | $1.544 billion | $1.860 billion |
| Operating ratio | 68.9% | 66.8% | 71.0% | 69.5% |
| Net earnings | $445 million | $553 million | $801 million | $995 million |
| Diluted EPS | $0.47 | $0.56 | $0.84 | $1.00 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $1.592 billion | $1.582 billion |
Q2 expenses fell 9% to $1.864 billion, less than the 12% revenue decline; the operating ratio therefore deteriorated 210 basis points. Six-month expenses declined 11% to $3.778 billion. Management cited efficiency savings and lower volume-related and fuel costs, partly offset by the impact of weaker traffic and higher depreciation.
- Volume and mix: Q2 volume fell 9%; six-month volume fell 7%. Coal was a major drag: Q2 coal volume and revenue each declined 34%. Merchandise revenue declined 5% in Q2, while intermodal revenue declined 7%. Automotive and minerals were relative bright spots.
- Cash flow and investment: Six-month investing cash outflow was $481 million, including $1.066 billion of property additions; financing cash outflow was $1.173 billion. Cash and cash equivalents ended at $566 million. Cash, equivalents and short-term investments totaled $828 million.
- Debt and liquidity: Total debt carrying value was $10.537 billion, including $632 million current maturities; $612 million was reclassified to current debt. The company reported a $54 million working-capital deficit, versus an $888 million surplus at year-end 2015. Its $1 billion revolving facility and up-to-$250 million receivables facility had no outstanding balances; the revolver expires May 2020 and the receivables facility June 2017.
- Balance sheet and shareholder returns: Total assets were $34.550 billion and total liabilities were $22.925 billion. CSX repurchased $515 million of shares and paid $344 million in dividends during the first half.
Material changes, outlook and management commentary
- Revenue fell primarily because of volume declines, lower fuel-surcharge revenue and unfavorable mix, which more than offset pricing gains. Six-month revenue also reflected a $93 million year-over-year decline in other revenue, including prior-year customer payments for unmet volume commitments.
- Management reported improved service measures: Q2 on-time originations were 88% and on-time arrivals 69%; train velocity was 21.1 mph and dwell was 25.0 hours. The FRA personal-injury frequency index worsened 14%, while the train accident rate improved 10%. Management said it expected to sustain or improve service performance while pursuing productivity and resource efficiency.
- 2016 projected capital investment increased by $275 million to $2.7 billion, including approximately $300 million for Positive Train Control (PTC). The increase reflects payments in 2016 for locomotives originally expected to be paid for in 2017. CSX estimated total multi-year PTC costs of approximately $2.2 billion, with $1.6 billion spent through June 2016. Management expects to fund capital investment from operating cash flow.
- No specific earnings or revenue forecast was provided in the supplied filing text. The company said it continued to have adequate liquidity to meet obligations and could use cash, credit facilities and capital markets as needed.
Risks, contingencies and unusual items
- The fuel-surcharge antitrust case remains pending; a class-certification hearing was scheduled for September 2016. CSXT disputes the claims, but an adverse outcome could materially affect results or liquidity in the period resolved.
- At June 24, 2016, CSX identified itself as a potentially responsible party at approximately 232 environmentally impaired sites. Recorded environmental reserves were $84 million; additional exposure at some sites could not be reasonably estimated. Management considered the recorded reserves appropriate based on currently available information.
- For certain legal matters with reasonably possible losses above established reserves, the company estimated an aggregate range of $2 million to $101 million, subject to significant judgment and change. Management said no pending item was currently expected to have a material adverse effect, but an unexpected adverse resolution could be material in a particular period.
- Casualty, environmental and other reserves totaled $379 million. Management noted that multiple matters arising in the same period could have a material effect. Insurance may not remain available at commercially reasonable rates or cover all claims.
- Other stated risks include economic and commodity-market weakness, competition, fuel and natural-gas prices, severe weather or operational disruption, regulation and PTC compliance costs, labor issues, hazardous-material safety, cybersecurity, and access to capital markets.
Important facts for investors to verify
- Whether weak coal and broader freight volumes persist, and how pricing and business mix affect revenue and operating ratio.
- Whether efficiency savings can offset volume pressure without impairing service, safety or network capacity.
- Execution and funding of the $2.7 billion 2016 capital plan and the remaining PTC program.
- Liquidity and refinancing plans, including the $612 million of current debt maturities and renewal or modification of the receivables facility before its June 2017 expiry.
- Developments in the fuel-surcharge litigation, environmental remediation obligations and the estimated legal-loss range.
- Actual share repurchases, dividends and cash generation relative to investment needs and debt obligations.