CSX Corporation — Q2 2014 Form 10-Q
Reporting period: Fiscal quarter ended June 27, 2014 (13 weeks), with six-month comparisons to June 28, 2013. CSX operates a rail network and related intermodal and logistics businesses, principally in the eastern United States.
Financial performance
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $3.244 billion | $3.046 billion | $6.256 billion | $6.009 billion |
| Operating income | $997 million | $940 million | $1.736 billion | $1.820 billion |
| Operating ratio | 69.3% | 69.1% | 72.3% | 69.7% |
| Net earnings | $529 million | $521 million | $927 million | $983 million |
| Diluted EPS | $0.53 | $0.51 | $0.92 | $0.96 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $1.445 billion | $1.579 billion |
Q2 operating margin was approximately 30.7%, versus 30.9% a year earlier; six-month operating margin was approximately 27.7%, versus 30.3%. Q2 revenue rose 7% on 8% volume growth, while expenses also rose 7%. Six-month revenue increased 4%, but operating income fell 5% and diluted EPS fell 4%.
Q2 volume and revenue growth were broad-based. Merchandise revenue rose 11%, intermodal revenue 6%, and coal revenue declined 3%; coal volume increased 6%, but lower yields reduced revenue. For the six months, merchandise revenue increased 7% and intermodal revenue 5%, while coal revenue decreased 6%.
Cash, debt and capital
- At June 27, cash and cash equivalents were $573 million and short-term investments were $216 million, totaling $789 million in cash and short-term investments.
- Total debt was $9.309 billion, including $899 million classified as current maturities, compared with $9.555 billion at year-end 2013. Six-month debt repayments were $244 million.
- Working capital was negative $425 million, compared with positive $178 million at year-end. Management said the deficit was not unusual for CSX or the industry and stated liquidity remained adequate.
- Six-month property additions were $956 million. Operating cash flow of $1.445 billion less property additions was approximately $489 million. Dividends paid were $311 million and share repurchases were $257 million.
- CSX had no outstanding borrowings under its $1 billion revolving credit facility or $250 million receivables securitization facility.
Changes, outlook and risks
- Q2 operating income rose 6% year over year, but the operating ratio deteriorated 20 basis points. Higher volume, network-performance costs and inflation contributed to expense growth; prior-year real estate gains also did not recur. Q2 net earnings benefited from higher operating income, while the prior-year quarter included a $17 million tax benefit that did not repeat.
- Management reported significant service disruption following severe winter weather and strong volume growth. Q2 on-time originations were 56% versus 91% a year earlier, on-time arrivals were 42% versus 82%, train velocity fell to 19.3 mph from 23.0 mph, and dwell increased to 25.9 hours from 21.9 hours. CSX was adding locomotives and crews to support recovery. Safety indicators improved year over year in Q2.
- In July 2014, CSX raised planned 2014 capital investment from $2.3 billion to $2.4 billion, including approximately $300 million for Positive Train Control (PTC). Estimated total multi-year PTC implementation cost was at least $1.7 billion; spending through June 2014 was $1 billion. The filing provides no specific earnings or revenue guidance.
- Material exposures include the fuel-surcharge antitrust litigation, environmental remediation obligations and other casualty/legal claims. The company estimated reasonably possible legal losses above reserves at $3 million to $30 million in aggregate. It identified itself as a potentially responsible party at 257 environmental sites; additional exposure at some sites could not yet be estimated.
- Following an April 2014 derailment in Lynchburg, Virginia, a tank car released less than 30,000 gallons of crude oil into the James River. CSX was cooperating with regulators and did not expect a material financial impact.
- Other stated risks include severe weather and operational disruption, commodity and fuel-market changes, regulation and PTC costs, litigation, labor and benefit costs, insurance availability, competition, and access to capital markets. Management reported no material change in previously disclosed risk factors.
Important facts for investors to verify
- Whether network-service measures and related costs recover, and the timing and effectiveness of added crews and locomotives.
- Whether coal pricing and export demand, and volume/yield trends across other markets, sustain or reverse the reported changes.
- Execution, funding and final cost of the $2.4 billion 2014 capital plan and the multi-year PTC program.
- Developments in the fuel-surcharge litigation, environmental sites and other claims, including any change in estimated losses or reserves.
- Debt maturities, liquidity and cash returned through dividends and repurchases; repurchases under the $1 billion program are subject to management’s assessment of market conditions.
- The six-month earnings comparison includes a prior-year tax benefit and real-estate gains that did not recur; assess results with these comparability factors in mind.