CSX Corporation — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019; the filing also reports unaudited fourth-quarter results. CSX provides rail freight, intermodal and related transportation services, primarily across the eastern United States and parts of Canada.
Financial and operating results
- FY 2019: Revenue was $11.937 billion, down 3% from $12.250 billion. Expenses fell 6% to $6.972 billion; operating income rose 2% to $4.965 billion. The operating ratio improved to 58.4% from 60.3%.
- Net earnings were $3.331 billion, up 1%; diluted EPS increased 9% to $4.17, helped by a lower average share count from repurchases. Interest expense rose 15% to $737 million, mainly on higher average debt.
- Q4 2019: Revenue was $2.885 billion versus $3.143 billion in Q4 2018; operating income was $1.154 billion versus $1.249 billion; net earnings were $771 million versus $843 million; diluted EPS was $0.99 versus $1.01.
- Operating cash flow was $4.850 billion, up from $4.641 billion. Capital expenditures were $1.657 billion. Management-defined free cash flow before dividends was $3.478 billion, compared with $3.188 billion.
- At year-end, cash and cash equivalents were $958 million and short-term investments were $996 million. Working capital was a $1.1 billion surplus. Total debt, including current maturities, was $16.238 billion, versus $14.757 billion; shareholders’ equity was $11.863 billion.
- CSX issued $2.0 billion of long-term debt, repaid $518 million, repurchased $3.373 billion of shares and paid $763 million in dividends. The annual dividend per share increased to $0.96 from $0.88.
- Merchandise revenue increased 1% to $7.589 billion; coal revenue fell 8% to $2.070 billion; intermodal revenue fell 9% to $1.760 billion. Total volume declined 4%. Operating measures improved: train velocity rose to 20.5 mph from 18.0, and dwell fell to 8.6 hours from 9.5.
Changes and management commentary
Lower freight volumes, reduced fuel recovery and lower other revenue drove the revenue decline. Merchandise pricing and favorable mix partly offset these factors. Coal and intermodal were the principal revenue headwinds, while merchandise revenue grew modestly. Expense reductions reflected operating efficiencies, lower headcount and crew starts, lower fuel prices and improved fuel efficiency. Management said service performance improved and reported record-low FRA-reportable injuries and train accidents for 2019.
The company adopted the lease accounting standard in 2019, recognizing a $532 million right-of-use asset and $550 million lease liability at year-end; management said adoption did not materially affect operating results or liquidity. A 2019 equipment depreciation study is expected to add approximately $30 million to 2020 depreciation expense. There were no 2019 adjustments for the non-GAAP items used in the filing’s historical adjusted-results comparisons; 2017 results included tax-reform and restructuring effects.
Outlook, risks and contingencies
- CSX expected 2020 capital investment of $1.6 billion to $1.7 billion, primarily to sustain infrastructure. It expected to fund investment from operating cash flow. No formal earnings or revenue guidance is stated in the provided filing text.
- Management said CSX remained on track to make Positive Train Control fully operational by December 31, 2020. Estimated total PTC implementation cost was approximately $2.4 billion, with $2.3 billion invested through 2019.
- On February 12, 2020, the board authorized an 8% increase in the quarterly dividend to $0.26 per share. The company stated its aim to return cash to shareholders while maintaining an investment-grade credit profile.
- Key risks include economic and trade weakness, declining coal demand from natural-gas competition and changing energy markets, competition from trucking and other modes, regulation, hazardous-material incidents, cybersecurity, severe weather and climate-related effects, network constraints, supplier or labor disruptions, and access to capital markets.
- Environmental reserves were $74 million; CSX had been identified as a potentially responsible party at approximately 220 environmentally impaired sites. The company cautioned that additional exposure may not yet be estimable. For certain legal proceedings with reasonably possible losses above reserves, the estimated aggregate range was $1 million to $29 million. Management said an adverse resolution of one or more matters could materially affect a particular period.
- National labor negotiations began in 2019 for the next bargaining round; existing agreements remain in place pending negotiations. The filing reports BBB+ (Stable) from S&P and Baa1 (Stable) from Moody’s, both investment grade.
- CSX repurchased $319 million of shares from Mantle Ridge in October 2019; a CSX director founded and controls Mantle Ridge. The filing also identifies depreciation estimates for group-life assets as a critical audit matter. The auditor issued unqualified opinions on the financial statements and internal control over financial reporting.
Investor verification priorities
- Check whether merchandise strength can offset continued weakness in coal and intermodal volumes and revenue.
- Track operating cash generation against planned capital spending, dividends, repurchases and the higher debt balance.
- Verify PTC completion, remaining cost and compliance by the December 31, 2020 deadline.
- Review developments in environmental remediation, fuel-surcharge litigation and other claims, including exposure beyond recorded reserves.
- Monitor labor negotiations, operating safety and service performance, and the effect of the equipment depreciation study on 2020 costs.