CSX Corporation — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; unaudited results compared with Q1 2019. CSX operates a rail-based freight and intermodal transportation network, primarily in the eastern United States.
Financial and operating results
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Revenue | $2.855 billion | $3.013 billion | Down 5% |
| Operating expense | $1.677 billion | $1.794 billion | Down 7% |
| Operating income | $1.178 billion | $1.219 billion | Down 3% |
| Operating ratio | 58.7% | 59.5% | Improved 80 basis points |
| Net earnings | $770 million | $834 million | Down 8% |
| Diluted EPS | $1.00 | $1.02 | Down 2% |
| Operating cash flow | $1.178 billion | $1.173 billion | Nearly flat |
| Free cash flow before dividends (non-GAAP) | $812 million | $866 million | Down $54 million |
Operating margin was approximately 41.3%, compared with 40.5% in Q1 2019, consistent with the lower operating ratio. CSX attributed expense savings principally to efficiency and volume reductions, lower fuel prices, and lower operating support and maintenance costs. Interest expense rose $9 million to $187 million; income tax expense was $243 million versus $230 million.
Cash and cash equivalents were $1.995 billion at March 31, 2020, and short-term investments were $487 million, for $2.482 billion combined. Working capital was a $1.6 billion surplus, up $483 million from year-end. Total debt, including current maturities, was $16.732 billion, up from $16.238 billion at December 31, 2019. The company issued $500 million of 3.8% notes due 2050. Its $1.2 billion revolving credit facility and $1.0 billion commercial-paper program had no outstanding borrowings.
Property additions were $381 million. Cash dividends paid were $201 million; CSX repurchased $577 million of shares. The quarterly dividend was increased 8% to $0.26 per share. The company reported 1.514 million units of volume, down 1%.
Material changes and management commentary
- Revenue fell primarily because coal revenue declined 25%, other revenue declined 40%, and mix was unfavorable; merchandise revenue increased 3%. Automotive revenue declined 10%, with plant closures in March associated with COVID-19. Intermodal revenue was down 1%, including weaker international shipments amid extended China closures.
- Coal volume declined 15%, reflecting lower utility-coal shipments amid competition from natural gas and weaker export shipments. Total expenses declined faster than revenue, supporting the improved operating ratio despite lower operating income.
- COVID-19 and weaker global economic conditions had begun affecting demand and operations. Management said the ultimate effect was uncertain and could be material, depending on the pandemic’s duration, demand, supply-chain effects, and government responses. CSX described employee and customer safety measures and operational contingency preparations.
- Operating performance improved: train velocity increased 4% to 21.2 mph, dwell decreased 3% to 8.3 hours, and on-time originations rose to 91% from 81%. The filing also reported improved train-accident and personal-injury frequency measures.
- Management expected 2020 capital investments of $1.6–$1.7 billion, with over half directed to core infrastructure. Approximately $50 million was planned for Positive Train Control; cumulative PTC spending through March 2020 was $2.3 billion against an estimated total cost of approximately $2.4 billion. No earnings or revenue guidance was provided in the supplied filing text.
Risks, contingencies, and unusual items
- The filing identifies COVID-19 as an added risk, citing possible effects on freight demand, supply chains, employee availability, and service. The scale and duration of impacts were not yet determinable.
- Environmental reserves totaled $77 million, and CSX had been identified as a potentially responsible party at approximately 220 impaired sites. Management said some possible additional exposure could not yet be reasonably estimated.
- For certain legal matters where losses were reasonably possible in excess of reserves, the estimated aggregate range was $1 million to $38 million. CSX noted that actual losses could differ. Fuel-surcharge antitrust litigation continued; management said an adverse resolution could have a material effect in a particular period.
- During the quarter, CSX increased its retained property-insurance exposure per occurrence: from $50 million to $100 million for floods and named windstorms, and from $25 million to $75 million for other property losses.
- CSX reported compliance with its revolving-credit covenants and effective disclosure controls as of March 31, 2020. It expected no 2020 contributions to its qualified pension plans.
Important facts for investors to verify
- How subsequent COVID-19 effects changed volumes, revenue, costs, service, and liquidity beyond the initial Q1 impact described here.
- Whether the planned $1.6–$1.7 billion capital investment range and approximately $2.4 billion total PTC cost estimate changed.
- Debt levels, cash and short-term investment balances, and use of the revolving facility or commercial-paper program in later reporting periods.
- Developments in fuel-surcharge litigation, environmental remediation obligations, and other legal contingencies, including whether estimated exposures changed.
- Whether share repurchases continued under the program, which had approximately $1.179 billion of authority remaining at March 31, 2020.