CSX Corporation — Q3 2014 Form 10-Q
Reporting period: 13-week fiscal quarter ended September 26, 2014; year-to-date figures cover nine months. Comparative periods ended September 27, 2013. CSX provides rail freight and intermodal transportation, principally across the eastern United States.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $3.221 billion | $2.985 billion | $9.477 billion | $8.994 billion |
| Operating income | $976 million | $840 million | $2.712 billion | $2.660 billion |
| Operating ratio | 69.7% | 71.9% | 71.4% | 70.4% |
| Net earnings | $509 million | $455 million | $1.436 billion | $1.438 billion |
| Diluted EPS | $0.51 | $0.45 | $1.43 | $1.41 |
| Operating cash flow | Not provided for the quarter | Not provided for the quarter | $2.302 billion | $2.499 billion |
Quarterly revenue increased 8%, reflecting 7% volume growth; expenses rose 5% to $2.245 billion, and operating income increased 16%. The operating ratio improved 220 basis points. Year-to-date revenue grew 5%, but operating income rose only 2% as volume-related, network-performance and inflation costs absorbed much of the increase. Net earnings were nearly unchanged year to date.
Q3 volume growth was broad-based, led by chemicals, agriculture and merchandise, with coal and intermodal volumes also higher. Coal revenue was flat in the quarter despite higher volume; year-to-date coal revenue fell 4%, with lower revenue per unit.
Cash, debt and capital
- At September 26, cash and cash equivalents were $479 million and short-term investments were $575 million, totaling $1.054 billion. Working capital was a $445 million surplus.
- Nine-month operating cash flow was $2.302 billion. Investing used $1.620 billion, including $1.557 billion of property additions; financing used $795 million. Cash declined $113 million from year-end.
- Total debt was $9.617 billion, including $230 million current maturities. CSX issued $1 billion of notes in July, including $550 million at 3.4% due 2024 and $450 million at 4.5% due 2054. Proceeds funded redemptions and general corporate purposes; early redemption generated $16 million of expense.
- The $1 billion revolving credit facility and $250 million receivables facility had no outstanding balances at filing. The company reported compliance with credit-facility covenants.
- Nine-month dividends were $470 million and share repurchases were $388 million. The company said its $1 billion repurchase program was expected to be completed by April 2015.
Outlook, operating issues and risks
- CSX raised planned 2014 capital investment from $2.3 billion to $2.4 billion, including approximately $300 million for Positive Train Control (PTC). It estimated total multi-year PTC implementation costs of at least $1.7 billion and reported $1.1 billion spent through September 2014. No broad earnings or revenue guidance is provided in the filing.
- Management said service was stabilizing but remained below prior levels amid significant volume growth. Q3 on-time originations were 54% versus 90% a year earlier, and on-time arrivals were 43% versus 83%. Train velocity declined 13% to 20.2 mph; dwell worsened 21% to 26.3 hours. CSX described adding locomotives and crews, investing in capacity and adjusting operating processes.
- Safety measures deteriorated year over year: the FRA personal injury frequency index worsened 13% to 1.05, and the train accident rate worsened 29% to 2.41. Management said CSX remained an industry leader and described ongoing safety initiatives.
- Other expense included a $26 million increase in estimated environmental cleanup costs and the $16 million debt-redemption expense. Environmental reserves were $107 million; total casualty, environmental and other reserves were $432 million. CSX was identified as a potentially responsible party at 252 environmental sites and said additional liabilities at some sites could not yet be estimated.
- CSX disclosed ongoing fuel-surcharge antitrust litigation. Management said it believed the case lacked merit and intended to defend it; an unexpected adverse outcome could materially affect results or liquidity in a period. The estimated aggregate range of reasonably possible legal losses above established reserves was $3 million to $13 million.
- Other risks identified include demand and competitive conditions, severe weather and operating disruptions, fuel prices, regulation and PTC costs, labor and benefit costs, safety and security, insurance availability, and environmental and legal liabilities.
Most important facts for investors to verify
- Whether service metrics recover and whether network constraints continue to raise costs or limit growth.
- Whether quarterly operating-ratio improvement is sustained; year-to-date operating ratio remained worse than the prior year.
- Actual 2014 capital spending and future PTC costs compared with management’s estimates.
- Developments in the fuel-surcharge litigation and environmental matters, including potential losses beyond recorded reserves.
- Cash generation, debt levels, and the pace and funding of dividends and share repurchases.