Business context and reporting period
CSX Corporation’s 10-K covers the 52-week fiscal year ended December 26, 2014; fiscal 2013 also comprised 52 weeks. CSX provides rail freight and intermodal services, primarily through CSX Transportation, whose network spans about 21,000 route miles in the eastern United States and parts of Canada.
For the fourth quarter, revenue was $3.192 billion, operating income was $901 million, net earnings were $491 million, and diluted EPS was $0.49. The filing’s quarterly table reports fourth-quarter 2013 revenue of $3.032 billion, operating income of $813 million, net earnings of $426 million, and diluted EPS of $0.42.
Financial and operating results
| Metric | FY 2014 | FY 2013 | Change |
|---|---|---|---|
| Revenue | $12.669 billion | $12.026 billion | Up 5% |
| Operating expenses | $9.056 billion | $8.553 billion | Up 6% |
| Operating income | $3.613 billion | $3.473 billion | Up 4% |
| Operating ratio | 71.5% | 71.1% | 40 basis points worse |
| Net earnings | $1.927 billion | $1.864 billion | Up 3% |
| Diluted EPS | $1.92 | $1.83 | Up 5% |
| Operating cash flow | $3.343 billion | $3.267 billion | Up $76 million |
| Free cash flow before dividends (non-GAAP) | $919 million | $895 million | Up $24 million |
Volume rose 6%. Merchandise revenue increased 8%, intermodal revenue increased 5%, while coal revenue declined 2% despite 6% higher coal volume, reflecting lower revenue per unit. Management attributed the overall revenue gain to broad volume growth.
Expense growth outpaced revenue growth, principally due to higher labor and fringe costs, materials and other costs, volume-related spending, inflation, and service-recovery costs. Lower fuel prices and improved fuel efficiency partly offset these increases. Interest expense fell to $545 million from $562 million; other expense was $24 million, including a $16 million early debt-redemption cost and higher estimated environmental cleanup costs.
At year-end, cash, cash equivalents and short-term investments totaled $961 million; working capital was a $465 million surplus. Long-term debt was $9.514 billion, with total debt including current maturities of $9.742 billion. CSX had an unused $1 billion revolving credit facility and an unused $250 million receivables securitization facility. The company generated $3.343 billion in operating cash flow and spent $2.449 billion on property additions. Capital expenditures were funded alongside $629 million in dividends and $517 million in share repurchases.
Material changes versus the prior comparable period
- Revenue growth was supported by volume increases across most markets, including chemicals, agricultural products, and intermodal. Coal revenue fell as export markets softened.
- The operating ratio deteriorated by 40 basis points to 71.5%, notwithstanding higher operating income.
- Network service weakened materially: on-time originations fell to 56% from 89%, on-time arrivals to 45% from 81%, train velocity to 20.1 mph from 23.2 mph, and yard dwell increased to 26.3 hours from 22.2 hours. The FRA train accident rate worsened 12% to 2.22.
- Year-end debt increased, while cash and short-term investments decreased to $961 million from $1.079 billion. Moody’s upgraded CSX to Baa1 from Baa2; S&P maintained BBB+.
- CSX paid a $0.63 annual dividend per share, up from $0.59, and repurchased $517 million of stock under its $1 billion program.
Outlook, management commentary, risks and unusual items
- CSX planned approximately $2.5 billion in 2015 capital investment, including about $300 million for positive train control (PTC). Management expected roughly half of the planned investment to sustain core infrastructure, with the balance directed to equipment, capacity, growth, productivity, and service improvements.
- Management said service was expected to improve gradually as infrastructure, locomotives, and employees came online. This is an operational outlook, not quantified earnings guidance. CSX also described intermodal, energy-related shipments, and chemicals as growth opportunities, while noting uncertainty in coal markets.
- CSX estimated total multi-year PTC implementation costs of at least $1.9 billion and reported $1.2 billion spent through 2014. The statutory implementation deadline was December 31, 2015; the filing noted the industry’s concerns about meeting it and that Congress had not extended it.
- In November 2014, CSX announced a management workforce reduction of about 300 positions. It recorded a $39 million initial charge and estimated total program costs of approximately $45 million; the program extended into the first quarter of 2015.
- Key risks include network capacity and service disruptions, severe weather, safety incidents and hazardous-material transport, environmental obligations, regulatory changes affecting rail pricing or competition, coal demand and global export conditions, fuel and energy-market changes, labor negotiations, cybersecurity, and access to capital.
- CSX was defending a fuel-surcharge antitrust class action; class certification had been vacated and remanded for reconsideration, and proceedings on the merits were delayed. Management said an adverse outcome could materially affect results in a period. The company also reported environmental proceedings and $94 million of environmental reserves, while stating that additional exposure at some sites could not yet be estimated.
Most important facts for investors to verify
- Whether service and safety metrics recovered after the sharp 2014 deterioration, and what recovery required in operating costs and capital.
- Actual 2015 capital spending, especially PTC investment, implementation progress, and any cost or deadline changes.
- Whether volume growth translated into better margins, given 2014 expense growth exceeded revenue growth and the operating ratio worsened.
- Coal shipment and pricing trends, including exposure to low global coal prices, natural gas substitution, and environmental regulation.
- Developments in the fuel-surcharge litigation and environmental matters, including whether recorded reserves remain adequate.
- Debt, cash generation, and shareholder distributions relative to infrastructure needs and the stated commitment to investment-grade credit ratings.