CSX Corporation — Q3 2019 Form 10-Q
Business and period: CSX provides rail freight, intermodal and related transportation services across an approximately 20,000-route-mile network. This unaudited filing covers the quarter and nine months ended September 30, 2019; comparisons are with the corresponding 2018 periods. Dollar amounts are in millions except per-share data.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $2,978 | $3,129 | $9,052 | $9,107 |
| Operating income | $1,287 | $1,293 | $3,811 | $3,620 |
| Operating ratio | 56.8% | 58.7% | 57.9% | 60.3% |
| Net earnings | $856 | $894 | $2,560 | $2,466 |
| Diluted EPS | $1.08 | $1.05 | $3.18 | $2.83 |
| Interest expense | $186 | $162 | $548 | $468 |
Cash flow and capital allocation: Nine-month operating cash flow was $3,737, versus $3,406. Property additions were $1,191, versus $1,240. Adjusted free cash flow before dividends, a non-GAAP measure, was $2,783, versus $2,426. CSX paid $577 in dividends and repurchased $2,767 of shares during the nine months.
Debt and liquidity: At September 30, cash and cash equivalents were $1,521 and short-term investments were $1,037; management reported $2.6 billion combined. Total debt, including current maturities, was $16,737, compared with $14,757 at December 31, 2018. Working capital was a $1.2 billion surplus. The $1.2 billion revolving facility and $1.0 billion commercial paper program had no outstanding balances; the company reported compliance with facility covenants.
Changes and drivers
- Q3 revenue fell 5%, while operating expenses declined 8%. Operating income was nearly flat, down $6, and the operating ratio improved 190 basis points. Net earnings declined, but diluted EPS rose 3%, with fewer average shares outstanding following substantial repurchases.
- Q3 volume fell 5%. Coal revenue decreased 12% and intermodal revenue decreased 11%; merchandise revenue rose 1%. Pricing gains across nearly all markets and favorable mix partly offset volume weakness.
- For the first nine months, revenue declined 1%, but operating income increased 5% and diluted EPS increased 12%. Management attributed stronger expense performance to efficiency, volume-related savings and lower fuel prices.
- Q3 expense reductions included labor and fringe ($57), materials, supplies and other ($59), and fuel ($45). Fuel expense benefited from a 13% price decline, fuel efficiency and lower volume, partly offset by a $15 net expense related to state fuel tax matters. Materials, supplies and other included a $22 non-railroad asset impairment related to an intermodal terminal sale agreement; real estate and line-sale gains were $65, versus $53.
Outlook, risks and unusual items
- No specific earnings or revenue guidance was provided. Planned 2019 capital investment was $1.6–$1.7 billion, including approximately $100 for Positive Train Control (PTC). Management expected to fund capital investment from operating cash flow.
- Estimated total multi-year PTC implementation cost was approximately $2.4 billion; spending through September 2019 was $2.3 billion. Management said operating performance remained strong: Q3 train velocity improved 13% to record levels and car dwell remained near record levels.
- CSX issued $2.0 billion of long-term debt in the first nine months. The September issuance included $400 of 2.40% notes due 2030 and $600 of 3.35% notes due 2049. On October 15, 2019, after quarter-end, CSX used part of the proceeds to redeem $500 of 3.70% notes originally due in October 2020.
- Adoption of lease accounting in January 2019 added a $539 right-of-use lease asset and $553 of operating lease liabilities at September 30; management said adoption did not materially affect operating results or liquidity.
- Key exposures include coal-market weakness, competition and economic demand, labor negotiations, fuel and weather volatility, safety and cybersecurity risks, environmental remediation, and litigation. Environmental reserves were $78; CSX was identified as a potentially responsible party at approximately 231 sites. Management estimated reasonably possible aggregate legal losses above reserves at $1–$28, while noting actual outcomes could differ. The fuel-surcharge antitrust class-certification denial was affirmed on appeal in August 2019; individual shipper claims may proceed.
- National labor agreements were effective through December 31, 2019, with new bargaining notices expected in November 2019. Management stated that no individual recorded casualty, environmental or other reserve item was expected to materially affect the company, but combined outcomes in a period could be material.
Important facts for investors to verify
- Whether continued declines in coal and intermodal volumes, and broader demand conditions, are offset by pricing, mix and operating efficiencies.
- Whether expense savings and service improvements are sustainable, particularly as inflation, fuel costs and labor negotiations evolve.
- Debt levels, debt-funded capital returns, the post-quarter note redemption and continued share repurchases; the January 2019 $5 billion repurchase program had $2.36 billion remaining at quarter-end.
- Actual capital spending and remaining PTC costs versus management’s estimates, and any operational or compliance impacts.
- Developments in antitrust, environmental and other claims, including the uncertainty of remediation costs and possible legal losses.