CSX Corporation — Q1 2014 Form 10-Q Summary
Reporting period: 13 weeks ended March 28, 2014; comparison is with the 13 weeks ended March 29, 2013. CSX provides rail freight, intermodal and related transportation services, principally through CSX Transportation. Financial statements are unaudited.
Key financial results
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Revenue | $3.012 billion | $2.963 billion | Up 2% |
| Operating expenses | $2.273 billion | $2.083 billion | Up 9% |
| Operating income | $739 million | $880 million | Down 16% |
| Operating ratio | 75.5% | 70.3% | Worsened 520 basis points |
| Net earnings | $398 million | $462 million | Down 14% |
| Diluted EPS | $0.40 | $0.45 | Down 11% |
| Operating cash flow | $599 million | $731 million | Down $132 million |
Revenue growth reflected 3% higher volume and pricing gains across most markets. Merchandise revenue rose 4% and intermodal revenue rose 4%; coal revenue fell 9%, mainly reflecting lower revenue per unit and slightly lower volume. Total revenue per unit declined 1%.
Net margin was approximately 13.2%, compared with 15.6% a year earlier. Cash from operations less property additions was $124 million, versus $240 million in Q1 2013. This is a simple cash-flow comparison, not company-reported free cash flow.
Balance sheet and liquidity
- At March 28, 2014, cash and cash equivalents were $475 million and short-term investments were $248 million, totaling $723 million.
- Total debt, including current maturities, was $9.346 billion, down from $9.555 billion at year-end; the quarter included $209 million of debt repayments.
- Working capital surplus was $77 million, down from $178 million at December 27, 2013. The company reported total assets of $31.680 billion and shareholders’ equity of $10.645 billion.
- CSX had no borrowings under its $1 billion revolving credit facility or $250 million receivables securitization facility as of the filing date. The receivables facility expires in December 2014; CSX expected to renew it or arrange an alternative.
- Capital expenditures were $475 million. Cash declined by $117 million during the quarter to $475 million. Financing uses included $151 million of dividends and $127 million of share repurchases.
Material changes and management commentary
Severe winter weather disrupted the network, reducing service reliability and raising costs. Management attributed much of the expense increase to weather-related overtime, utilities, materials and foreign locomotive costs. Materials, supplies and other expense also reflected the absence of $49 million of prior-year gains from real estate-related items. Train accident costs increased $12 million, and fuel expense was nearly flat as lower prices offset weather-related efficiency losses and higher volume.
Service indicators deteriorated year over year: on-time originations were 63% versus 91%, on-time destination arrivals were 51% versus 85%, train velocity was 20.6 versus 23.4 miles per hour, and dwell was 26.8 versus 22.2 hours. The personal injury frequency index and train accident rate also worsened. CSX said it deployed resources and that service measures had begun a gradual recovery by quarter-end.
Management cited growth in agricultural products, chemicals and intermodal, while severe weather affected multiple markets. Coal shipments were slightly lower, including weaker export demand amid soft global conditions; domestic utility shipments partly offset the decline.
Outlook, capital allocation and unusual items
- CSX planned approximately $2.3 billion of 2014 capital investment, including about $300 million for Positive Train Control (PTC); more than half was intended for core infrastructure. The plan excludes certain reimbursable public-private partnership investments.
- Management estimated total multi-year PTC implementation costs of at least $1.7 billion; cumulative spending through March 2014 was $937 million. CSX expected to fund capital investment with operating cash flow.
- In April 2014, CSX announced a 7% increase in the quarterly dividend to $0.16 per share, payable in June. The company repurchased $127 million of shares in Q1 under its $1 billion program, expected to be completed by April 2015.
- A $21 million income tax benefit was recognized, primarily from Indiana legislation reducing future corporate tax rates and revaluation of deferred tax liabilities.
- The filing gives no specific earnings or revenue guidance. Management’s forward-looking statements are subject to operational, economic, regulatory, weather, fuel, labor, market-access and litigation risks.
Risks, contingencies and other matters
CSX reported $434 million of casualty, environmental and other reserves, including $97 million for environmental matters. It was identified as a potentially responsible party at approximately 256 environmentally impaired sites; additional exposure at some sites could not be reasonably estimated. Management stated that recorded reserves reflected currently required remediation and that individual matters were not expected to materially affect the company, while multiple matters in one period could do so.
Pending litigation includes fuel-surcharge antitrust claims. The class-certification decision had been vacated and remanded for reconsideration; briefing was due by the end of May 2014. CSX said it believed its practices were lawful and would defend the case, but an adverse outcome could materially affect a period’s results or liquidity. The estimated aggregate range of reasonably possible legal losses in excess of reserves was $3 million to $14 million. CSX also described environmental proceedings involving the Lower Passaic River and other claims; it did not expect the identified potential allocation there to be material.
Important facts for investors to verify
- Whether service, safety and operating costs recovered after the severe winter disruptions, and the effect on subsequent-quarter margins.
- Whether revenue growth and pricing continued to offset coal-market weakness and other volume pressures.
- Progress and ultimate cost of PTC implementation versus the estimated minimum $1.7 billion total, and execution of the 2014 capital plan.
- Developments in the fuel-surcharge antitrust litigation, environmental matters and the adequacy of related reserves.
- Renewal or replacement of the $250 million receivables facility before its December 2014 expiry, and liquidity after dividends, repurchases and debt maturities.
- The sustainability of earnings excluding the prior-year real estate gains and the current-quarter state tax benefit.