CSX Corporation — Q2 2015 Form 10-Q
Business and reporting period. CSX operates a rail-based transportation network, including merchandise, coal and intermodal services. This unaudited report covers the 13 weeks ended June 26, 2015, compared with the quarter ended June 27, 2014, and the six months ended on those dates. Balance-sheet comparisons are with December 26, 2014. Dollar amounts are in millions unless noted.
Financial performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $3,064 | $3,244 | $6,091 | $6,256 |
| Operating expense | $2,047 | $2,247 | $4,231 | $4,520 |
| Operating income | $1,017 | $997 | $1,860 | $1,736 |
| Operating ratio | 66.8% | 69.3% | 69.5% | 72.3% |
| Net earnings | $553 | $529 | $995 | $927 |
| Diluted EPS | $0.56 | $0.53 | $1.00 | $0.92 |
- Revenue and mix: Q2 revenue fell 6%; total volume declined 1%. Lower fuel surcharge recoveries reduced quarterly revenue by $183 million. Excluding that impact, revenue was described as relatively flat: pricing gains were offset by slightly lower volume and negative portfolio mix. For the six months, revenue declined 3% on flat volume, including $273 million in lower fuel surcharge recoveries.
- Costs and margins: Q2 expense fell 9%, led by $153 million in lower fuel costs; locomotive fuel price was down 35%. Efficiency savings and lower volume-related costs also contributed. Operating ratio improved 250 basis points in Q2 and 280 basis points for the six months.
- Cash flow and investment: Six-month operating cash flow was $1,582 million, investing cash outflow $1,574 million, and financing cash outflow $239 million. Property additions were $1,288 million. Cash and cash equivalents ended at $438 million, down from $669 million at year-end.
- Debt and liquidity: Long-term debt, including current maturities, was $10,125 million, versus $9,742 million at year-end. CSX issued $600 million of 3.95% notes due 2050 and repaid $210 million of debt during the six months. Cash, cash equivalents and short-term investments totaled approximately $1.1 billion; working capital was a surplus of $891 million. CSX reported no outstanding balance under its $1 billion revolving credit facility or its receivables securitization facility, which can provide up to $250 million subject to eligible receivables.
- Shareholder returns: Dividends paid were $336 million for the six months; repurchases totaled $284 million. The company announced a new $2 billion repurchase program in April 2015, expected to be completed by April 2017.
Material changes and operating trends
- Q2 operating income rose 2% and diluted EPS rose 6% year over year despite lower revenue; for the six months, operating income rose 7% and diluted EPS rose 9%.
- Quarterly merchandise revenue declined 6%, coal revenue 15%, and intermodal revenue was essentially flat. Intermodal volume rose 5%, including 9% growth in domestic intermodal; coal volume fell 11%. Management cited weak global coal markets, low natural-gas prices and high stockpiles as factors affecting coal.
- Q2 labor and fringe expense increased $16 million, while materials, supplies and other expense declined $62 million. The latter included a $17 million gain on sale of an operating rail corridor. A locomotive-maintenance agreement shifted some costs between these expense lines without changing total expense.
- CSX reported improved Q2 safety and service measures: the personal injury frequency index improved 22% and train accident rate improved 17% year over year. On-time originations were 66%, up from 56%; on-time arrivals were 48%, up from 42%.
Outlook, risks and unusual items
- CSX planned approximately $2.5 billion of 2015 capital investment, including approximately $300 million for Positive Train Control (PTC). About half was expected to support core infrastructure. Management said it intended to fund capital investment from operating cash flow.
- The company estimated total multi-year PTC implementation costs of at least $1.9 billion; spending through June 2015 was $1.3 billion. Management said it expected to sustain or improve Q2 service performance while pursuing further service gains and productivity savings. The filing provides no explicit full-year revenue or earnings guidance.
- Casualty, environmental and other reserves totaled $426 million, including $95 million for environmental matters. CSX was identified as a potentially responsible party at approximately 254 environmentally impaired sites; some potential additional liabilities could not yet be reasonably estimated.
- For certain legal proceedings with reasonably possible losses above established reserves, CSX estimated an aggregate range of $3 million to $49 million. The fuel-surcharge antitrust case remained pending, with a class-certification hearing scheduled for November 2015. Management said an unexpected adverse outcome could materially affect results or liquidity in a period.
- Other notable items included $16 million of higher other income in Q2, primarily because prior-year environmental cleanup costs related to non-operating activities did not recur, and a $7 million first-half pension charge related to a completed management workforce reduction program.
- Forward-looking results remain exposed to economic and commodity demand, fuel and natural-gas prices, competition, weather and other disruptions, safety and hazardous-material risks, regulation and PTC costs, labor costs, insurance availability, and litigation and environmental contingencies. Management reported no material change in previously disclosed risk factors.
Important facts for investors to verify
- Whether pricing, efficiency and service improvements can offset lower fuel surcharge revenue and weakness in coal and other freight markets.
- Execution and funding of the $2.5 billion 2015 capital plan and the estimated PTC program cost of at least $1.9 billion.
- Debt growth, cash generation and the pace and funding of the $2 billion share repurchase program.
- Developments in the fuel-surcharge antitrust litigation, environmental sites and other claims, including whether exposures exceed recorded reserves.
- Whether improved Q2 service measures persist; six-month on-time originations and arrivals remained slightly below prior-year levels.