CSX Corporation — Q1 2015 Form 10-Q
Business context and reporting period
CSX provides rail transportation, intermodal and related services, primarily across the eastern United States. This unaudited quarter ended March 27, 2015 and covered 13 weeks; the comparable quarter ended March 28, 2014.
Key financial metrics
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Revenue | $3.027 billion | $3.012 billion | Up $15 million; approximately 0.5% |
| Operating income | $843 million | $739 million | Up 14% |
| Operating ratio | 72.2% | 75.5% | Improved 330 basis points |
| Net earnings | $442 million | $398 million | Up approximately 11% |
| Diluted EPS | $0.45 | $0.40 | Up 13% |
| Cash from operations | $690 million | $599 million | Up $91 million |
| Capital expenditures / property additions | $598 million | $475 million | Up $123 million |
| Cash and short-term investments at quarter-end | $818 million | — | $561 million cash plus $257 million short-term investments |
| Long-term debt, including current maturities | $9.741 billion | $9.742 billion at year-end 2014 | Essentially unchanged |
Operating margin was approximately 27.8%, versus 24.5% in the prior-year quarter. Cash and cash equivalents decreased $108 million during the quarter. Working capital was a $419 million surplus, down from $465 million at year-end 2014.
Material changes and management commentary
- Revenue growth reflected higher volumes, price gains and other revenue, mostly offset by lower fuel surcharge recoveries. Total volume rose 1% to 1.635 million units.
- Expenses declined 4% to $2.184 billion, chiefly because locomotive fuel prices fell 41%, reducing fuel expense by $169 million. Labor and fringe expense rose $65 million, including wage inflation, volume-related costs and workforce-reduction charges.
- Merchandise revenue increased 1%; coal revenue declined 4%, and intermodal revenue declined 1%. Chemical and minerals volumes grew, while export coal remained pressured by global oversupply and a strong U.S. dollar. Lower natural gas prices weighed on domestic utility coal.
- Safety measures improved year over year: the FRA personal injury frequency index improved 19% and the train accident rate improved 34%. Service measures weakened: on-time originations fell to 50% from 63%, and on-time arrivals to 41% from 51%. Management expected service improvement from infrastructure investment and additional locomotives.
Outlook, liquidity, risks and unusual items
- Management planned approximately $2.5 billion of 2015 capital investment, including about $300 million for Positive Train Control (PTC); the company expected to fund investment with operating cash. Estimated total multi-year PTC cost was at least $1.9 billion, with $1.2 billion spent through March 2015.
- No specific earnings or revenue guidance was provided in the supplied filing text. CSX reported adequate liquidity, with no outstanding balance on its $1 billion revolving credit facility or its receivables securitization facility, which can provide up to $250 million subject to eligible receivables.
- On April 14, 2015, after quarter-end, CSX announced a 13% quarterly dividend increase to $0.18 per share and a new $2 billion repurchase program expected to be completed over 24 months. It had completed the prior $1 billion repurchase program.
- Fuel-surcharge antitrust litigation remained pending; CSX disputed the claims. The company estimated aggregate possible losses above established reserves of $3 million to $46 million for certain legal proceedings, subject to significant uncertainty. Environmental and casualty exposures include approximately 250 identified potentially impaired sites; recorded environmental reserves were $94 million.
- CSX recorded $7 million in special pension termination benefits tied to a workforce reduction program completed in Q1. A prior-year $21 million state tax benefit did not recur, contributing to higher year-over-year tax expense. The company also disclosed a $361,000 environmental penalty related to a 2014 derailment.
- Key risks include litigation and environmental liabilities, severe weather and operating disruptions, fuel and commodity-market changes, competition, labor and benefit costs, insurance availability, regulation and PTC implementation costs.
Important facts for investors to verify
- Whether lower fuel costs and operating-ratio improvement are sustainable as fuel prices and surcharge recoveries change.
- Progress in restoring service reliability and the effect of planned capital spending and locomotive additions.
- Actual 2015 capital spending, PTC costs and funding needs compared with management’s plans.
- Developments in the fuel-surcharge litigation, environmental matters and other contingent liabilities.
- Execution and funding of the announced dividend increase and $2 billion share-repurchase program.