CSX Corporation — Q2 2020 Form 10-Q
Business and period: CSX operates a rail-based freight transportation network, including merchandise, coal and intermodal services. This unaudited filing covers the quarter and six months ended June 30, 2020; comparisons are with the corresponding 2019 periods. Amounts below are in U.S. dollars.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $2.255B | $3.061B | $5.110B | $6.074B |
| Operating income | $828M | $1.305B | $2.006B | $2.524B |
| Net earnings | $499M | $870M | $1.269B | $1.704B |
| Diluted EPS | $0.65 | $1.08 | $1.65 | $2.10 |
| Operating ratio | 63.3% | 57.4% | 60.7% | 58.4% |
| Operating cash flow | Not separately stated | Not separately stated | $2.184B | $2.267B |
| Free cash flow before dividends (non-GAAP) | Not separately stated | Not separately stated | $1.386B | $1.628B |
Q2 total volume declined 20%; revenue fell 26%, operating income 37%, and diluted EPS 40%. For the first half, revenue declined 16%, operating income 21%, and diluted EPS 21%. The operating ratio worsened by 590 basis points in Q2 and 230 basis points for the six months.
Liquidity, debt and capital
- At June 30, cash and cash equivalents were $2.391B and short-term investments were $203M, or $2.594B combined. Working capital was a $1.4B surplus.
- Total debt, including current maturities, was $16.506B, versus $16.238B at year-end 2019. CSX issued $500M of 3.8% notes due 2050 and repaid $227M of debt during the first half.
- CSX reported no borrowings under its $1.2B revolving credit facility or $1.0B commercial paper program; the revolver expires in March 2024. The company said it remained in compliance with facility covenants.
- First-half cash uses included $801M in property additions, $400M in dividends and $616M in share repurchases. Planned 2020 capital investment was $1.6B–$1.7B, expected to be funded from operating cash flow.
Drivers, outlook and risks
- Management attributed the downturn principally to COVID-19-related disruption to manufacturing, supply chains and consumer spending. Q2 revenue also reflected unfavorable mix, lower fuel recovery, weaker coal pricing and lower other revenue; merchandise and intermodal pricing gains partly offset declines.
- Q2 automotive revenue fell 72%, coal 48%, and intermodal 18%. Expenses declined 19%, helped by lower volumes, efficiency savings and reduced fuel costs; fuel expense was down $143M, while labor expense fell $141M.
- Management said the pandemic’s duration and ultimate effects on demand, supply chains and results were uncertain. The filing gives no specific revenue or earnings forecast. It states the capital-investment range above and says CSX maintained strong liquidity and access to committed and other external funding.
- Operating performance was mixed: train velocity improved 6% year over year, while dwell worsened 2%. The FRA train accident rate deteriorated 9% and the personal injury frequency index deteriorated 40% in Q2; management cited lower train miles and man-hours as contributing factors.
- Recorded casualty, environmental and other reserves totaled $306M. Management estimated an aggregate $1M–$43M range of possible losses on certain legal matters above established reserves, subject to significant uncertainty. The filing discusses fuel-surcharge antitrust litigation and environmental matters, including the Lower Passaic River, and notes that adverse outcomes could be material in a particular period.
- CSX increased its property-insurance retention in Q1 2020. It also reported a $12M share-based compensation benefit in Q2, primarily because lower expected payouts reduced performance-unit expense, and $10M of severance expense.
Important facts for investors to verify
- Whether freight demand and volumes recover, particularly in automotive, coal and intermodal, and how persistent COVID-19 effects prove to be.
- Whether cost reductions and operating efficiencies can offset continued revenue pressure without impairing service or safety.
- Cash generation, planned capital spending, debt maturities and the continuation or pace of dividends and share repurchases.
- Developments in the fuel-surcharge litigation, environmental obligations and other claims, including the uncertainty around potential losses.
- That 2020 capital investment of $1.6B–$1.7B is a stated plan, not earnings guidance; the filing provides no specific full-year financial forecast.