CSX Corporation — Q1 2016 Form 10-Q
Business context and reporting period: CSX provides rail-based freight transportation, including merchandise, coal and intermodal services. The unaudited quarter ended March 25, 2016, comprised 13 weeks; the comparable quarter ended March 27, 2015, also comprised 13 weeks. Amounts below are in U.S. dollars.
Financial performance
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Revenue | $2.618 billion | $3.027 billion | Down 14% |
| Operating expense | $1.914 billion | $2.184 billion | Down 12% |
| Operating income | $704 million | $843 million | Down 16% |
| Operating ratio | 73.1% | 72.2% | 90 bps worse |
| Net earnings | $356 million | $442 million | Down 19% |
| Diluted EPS | $0.37 | $0.45 | Down 18% |
| Operating cash flow | $754 million | $690 million | Up $64 million |
Operating margin was approximately 26.9%, versus 27.8% a year earlier; net margin was approximately 13.6%, versus 14.6%. Cash from investing activities was $41 million, compared with $500 million used in the prior-year quarter. Cash used in financing was $692 million, including $249 million of share repurchases and $173 million of dividends. Cash and cash equivalents ended the quarter at $731 million.
At March 25, 2016, total debt was $10.536 billion, nearly unchanged from $10.535 billion at year-end 2015. Current assets were $2.608 billion and current liabilities $1.692 billion, for reported working capital of $916 million. Cash, cash equivalents and short-term investments totaled about $1.106 billion. CSX reported no borrowings on its $1 billion revolving credit facility or its receivables facility at filing date.
Material changes and operating drivers
- Revenue fell $409 million. Management cited lower fuel recovery, a 5% decline in total volume, and a $95 million year-over-year reduction in other revenue tied to customer payments for unmet volume commitments received in 2015. Pricing gains across nearly all markets partly offset these effects.
- Coal was particularly weak: volume declined 31% and revenue 37%, reflecting low natural-gas prices, mild weather, high utility inventories, and global oversupply and a strong U.S. dollar affecting export coal.
- Merchandise revenue declined 4%; intermodal revenue declined 2% despite 4% higher volume, with domestic intermodal volume up 11% and international volume down 7%. Automotive volume increased 12%.
- Expenses declined $270 million, including $133 million of efficiency gains, $64 million of lower volume-related costs and $78 million from lower fuel prices. Locomotive fuel prices were down 36%. Depreciation expense rose $18 million, while interest expense increased $9 million, primarily due to higher average debt.
- Service measures improved: on-time originations rose to 81% from 50%, and on-time arrivals to 64% from 41%. Train velocity improved to 21.1 mph from 20.2 mph and dwell improved to 26.0 hours from 27.7. The personal-injury frequency index was 9% worse year over year; the train accident rate was roughly flat.
Outlook, risks and unusual items
- CSX planned approximately $2.4 billion of 2016 capital investment, including about $300 million for Positive Train Control (PTC); roughly half was expected to sustain core infrastructure. Management intended to fund capital spending from operating cash flow. Total PTC cost was estimated at approximately $2.2 billion, with $1.6 billion spent through March 2016.
- Management expected to sustain or improve the quarter’s service performance while pursuing productivity and resource efficiency. The filing does not provide a clear company-wide earnings or revenue forecast.
- Management attributed the $95 million other-revenue comparison to customer payments received in 2015 for failure to meet volume commitments. The prior-year quarter also included $7 million of special termination-benefit expense; none was recorded in Q1 2016.
- Legal and environmental exposures remain uncertain. The company estimated an aggregate $2 million to $86 million range for certain reasonably possible legal losses above established reserves. Fuel-surcharge antitrust litigation could have a material adverse effect if resolved adversely. CSX was identified as potentially responsible at approximately 232 environmentally impaired sites; it recorded $80 million in environmental reserves. Management said Lower Passaic River costs allocable to CSXT were not expected to be material based on information then available.
- Other stated risks include weak demand in key freight markets, fuel and natural-gas price movements, competition, severe weather, safety and hazardous-material incidents, labor issues, regulation, insurance availability, and PTC implementation costs. Management cautioned that actual outcomes may differ from forward-looking statements.
Important facts for investors to verify
- Whether coal weakness and broader volume declines persist, and whether pricing and domestic intermodal growth can offset them.
- Whether efficiency savings and improved service are sustainable without compromising safety; note the worsening personal-injury frequency index.
- Progress and total costs for the $2.2 billion PTC program and execution of the $2.4 billion 2016 capital plan.
- Developments in fuel-surcharge antitrust litigation, environmental remediation and the reasonably possible legal-loss range.
- Capital allocation and liquidity, including continued buybacks, dividends, debt levels and the ability to fund planned investment from operations.