CSX Corporation — Q2 2018 Form 10-Q
Business and period. CSX provides rail freight, intermodal and related transportation services across a network serving 23 states east of the Mississippi River, the District of Columbia, Ontario and Quebec. This unaudited filing covers the quarter and six months ended June 30, 2018; comparisons are with the corresponding 2017 periods.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $3.102 billion | $2.933 billion | $5.978 billion | $5.802 billion |
| Operating income | $1.283 billion | $957 million | $2.327 billion | $1.726 billion |
| Operating ratio | 58.6% | 67.4% | 61.1% | 70.3% |
| Net earnings | $877 million | $510 million | $1.572 billion | $872 million |
| Diluted EPS | $1.01 | $0.55 | $1.79 | $0.94 |
- Q2 revenue rose 6%, while expenses fell 8% to $1.819 billion. Excluding the $115 million prior-year restructuring charge, expenses declined 2%, with lower labor and operating costs partly offset by higher fuel costs.
- Q2 total volume increased 2%; revenue per unit rose 4%. Growth in coal, intermodal and several merchandise markets was partly offset by a decline in fertilizers. Six-month volume declined 1% while revenue increased 3%.
- Fuel expense increased $72 million in Q2, including $69 million from a 36% increase in fuel prices. Interest expense rose $20 million in Q2, mainly because of higher average debt.
- Effective tax rate was 23.3% in Q2 versus 38.3% in Q2 2017, and 23.5% for the first half versus 38.1%. Management attributed the decline principally to the federal corporate tax-rate reduction.
Cash, debt and liquidity
- For the first six months, operating cash flow was $2.009 billion, versus $1.566 billion; property additions were $823 million versus $955 million. The company reported non-GAAP adjusted free cash flow before dividends of $1.329 billion, up from $737 million.
- At June 30, cash and cash equivalents were $1.320 billion and short-term investments were $83 million. Working capital was a surplus of $1.1 billion, compared with $21 million at year-end 2017.
- Total debt, including current maturities, was $13.788 billion, up from $11.809 billion at December 31, 2017. CSX issued $2.0 billion of long-term notes in February. The $1 billion revolving facility and up-to-$200 million receivables facility had no outstanding balances; CSX reported compliance with credit-facility covenants.
- First-half dividends paid were $384 million and share repurchases were $1.810 billion. The quarterly dividend was $0.22 per share, versus $0.20 a year earlier. The company had $2.990 billion remaining under its $5 billion repurchase authorization and expected to complete the program by the end of Q1 2019.
Changes, outlook and risks
- Management credited scheduled railroading with lower workforce, crew-start and active-locomotive costs, as well as improved train velocity and dwell. Q2 velocity improved 7% and dwell 11% to record levels. However, on-time originations fell to 85% from 88%, on-time arrivals to 61% from 69%, and the FRA train-accident rate worsened to 3.72 from 2.32. The personal-injury frequency index improved to 0.91 from 1.18.
- The 2017 comparison included restructuring costs of $115 million in Q2 and $225 million for the first half; substantially all related payments were completed by March 31, 2018. Tax reform and lower share count also contributed to the year-over-year EPS increase.
- No specific earnings or revenue guidance is provided in the supplied filing text. The approved 2018 capital plan is $1.6 billion, including about $200 million for Positive Train Control (PTC). Estimated total PTC implementation cost is approximately $2.4 billion, with $2.1 billion spent through June 2018.
- Management said liquidity was adequate for current liabilities and obligations and planned to fund capital investment primarily from operating cash flow. Future repurchases may be funded with cash on hand, operating cash flow and debt issuance. The filing cautions that forward-looking results depend on, among other things, economic and freight demand, competition, fuel prices, weather and disruptions, safety, labor, regulation, capital-market access and successful execution of operating initiatives.
- Legal proceedings include fuel-surcharge antitrust litigation; an appellate argument on class certification was scheduled for September 28, 2018. The company estimated aggregate reasonably possible losses in excess of reserves of $2 million to $117 million, subject to significant uncertainty. Environmental exposures include approximately 218 identified potentially impaired sites; additional liabilities at some sites could not be estimated. Management did not expect the cited matters individually to materially affect the company, but adverse outcomes or combined events could be material in a period.
- The company raised its self-insured retention for certain third-party liability claims from $50 million to $75 million per occurrence for claims on or after June 1, 2018. The remaining union representing about 5% of CSXT employees was still in mediation; management expected a settlement in 2018.
Important facts for investors to verify
- Whether scheduled-railroading cost savings persist without further deterioration in on-time service or train-accident performance.
- Progress and final costs for PTC, and whether the $1.6 billion 2018 capital plan is sufficient for operating and regulatory needs.
- Debt and cash deployment alongside the remaining share-repurchase authorization, including the final settlement of the accelerated repurchase.
- Developments in fuel-surcharge litigation, environmental remediation and other claims, including changes to the stated loss range and reserves.
- Freight volumes, pricing and fuel recovery across coal, intermodal and merchandise markets, and the effect of lower first-half volume.