CSX CORPORATION FIRST QUARTER 2020 HIGHLIGHTS
• Revenue decreased
• Expenses decreased
• Operating income of
• Operating ratio of 58.7% improved 80 basis points versus last year's quarter.
• Earnings per diluted share of$1.00 decreased$0.02 , or 2% year over year. First Quarters Fav / 2020 2019 (Unfav) % Change Volume (in thousands) 1,514 1,531 (17 ) (1)% (in millions) Revenue$ 2,855 $ 3,013 $ (158 ) (5) Expense 1,677 1,794 117 7 Operating Income$ 1,178 $ 1,219 $ (41 ) (3)% Operating Ratio 58.7 % 59.5 % 80 bps
Earnings Per Diluted Share
Weaker global economic conditions, including the effects of the novel
coronavirus ("COVID-19") global pandemic, have begun impacting the Company's
results of operations. Demand for rail services is impacted by the disruption of
global manufacturing, supply chains and consumer spending as a result of the
COVID-19 pandemic. While operating cash flows may also be impacted by these
economic conditions, the Company maintains a strong cash balance and access to
committed funding sources and other sources of external liquidity if required.
As this is a developing situation, it is difficult to determine the future
impacts of the pandemic. The ultimate magnitude of COVID-19, including the
extent of its impact on the Company's financial and operating results, which
could be material, will be determined by the length of time that the pandemic
continues, its effect on the demand for the Company's transportation services
and the supply chain, as well as the effect of governmental regulations imposed
in response to the pandemic.
CSX will continue to adapt its business operations to ensure safety while
providing a high level of service for customers as efficient and reliable rail
service is essential to keeping supply chains fluid in response to this
challenge. A cross-functional task force has been established to monitor and
coordinate the Company's response to COVID-19. Policies and procedures
established to protect the health and safety of employees and customers and to
safeguard CSX operations include rigorous cleaning regimens for equipment and
facilities, provision of sanitation supplies, distribution of disposable face
coverings, facilitation of social distancing measures and administration of
temperature testing at certain facilities. Additionally, remote work assignments
have been arranged where possible in order to reduce the density of employees in
a single location and backup locations for key functions, such as dispatch, have
been prepared as a precaution.
CSX Q1 2020 Form 10-Q p.30
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CSX CORPORATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Volume and Revenue (Unaudited) Volume (Thousands of units); Revenue (Dollars in
Millions); Revenue Per Unit (Dollars)
First Quarters
Volume Revenue Revenue Per Unit
2020 2019 % Change 2020 2019 % Change 2020 2019 % Change Chemicals(a)
178 167 7 % $ 626 $
588 6 %
365 344 6 3,017 3,018 -
Products
Automotive 104 115 (10 ) 281 311 (10 ) 2,702 2,704 -
Minerals(a) 74 70 6 127 125 2 1,716 1,786 (4 )
Forest Products(a) 71 70 1 217 212 2 3,056 3,029 1 Metals and Equipment(a) 67 64 5
199 189 5 2,970 2,953 1
Fertilizers 58 62 (6 ) 112 110 2 1,931 1,774 9
Total Merchandise 673 662 2 1,927 1,879 3 2,863 2,838 1
Coal 181 212 (15 ) 405 538 (25 ) 2,238 2,538 (12 )
Intermodal 660 657 - 422 428 (1 ) 639 651 (2 )
Other - - - 101 168 (40 ) - - -
Total 1,514 1,531 (1 )% $ 2,855 $ 3,013 (5 )% $ 1,886 $ 1,968 (4 )%
(a) In Q1 2020, changes were made in the categorization of certain lines of business, impacting Chemicals, Forest Products, Metals and Equipment, and Minerals. The impacts were not material and prior periods have been reclassified to conform to the current presentation.
CSX Q1 2020 Form 10-Q p.31
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CSX CORPORATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS First Quarter 2020 Revenue Total revenue decreased 5% in first quarter 2020 when compared to first quarter 2019 due to significant declines in coal, lower other revenue and unfavorable mix. These decreases were partially offset by merchandise growth. Merchandise Volume Chemicals - Increased due to higher shipments of industrial chemicals, energy and plastics.
Agricultural and Food Products - Increased due to gains in ethanol, sweeteners and oils, and grain.
Automotive - Declined due to lower North American vehicle production including automotive plant closures in March due to the COVID-19 pandemic.
Minerals - Increased due to higher shipments for highway construction and paving projects.
Forest Products - Increased due to higher shipments of pulpboard and woodpulp.
Metals and Equipment - Increased due to higher shipments of equipment, scrap metal and aluminum, partially offset by lower shipments for construction and steel markets.
Fertilizers - Declined due to lower short-haul phosphate shipments, which was partially offset by higher long-haul fertilizer shipments.
Coal Volume Domestic coal declined primarily due to lower shipments of utility coal as a result of continued competition from natural gas. Export coal declined due to lower international shipments of thermal and metallurgical coal as a result of lower global benchmark prices.
Intermodal Volume
Increased domestic shipments were offset by lower international shipments
primarily due to extended closures in
Other Revenue
Other revenue decreased
CSX Q1 2020 Form 10-Q p.32
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CSX CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Expenses
Expenses of
Labor and Fringe expense decreased
headcount, less overtime and reduced crew starts.
• Total incentive compensation decreased $14 million primarily due to a
lower expected annual incentive payout, partially offset by theacceleration of stock compensation expense for awards granted this quarter
to certain retirement-eligible employees.
• Other costs increased $10 million primarily due to the recognition ofrailroad retirement tax refunds in the prior year and inflation, partially
offset by other non-significant items.
Materials, Supplies and Other expense decreased
operating support costs, lower terminal costs and reduced equipment
maintenance expenses.
• Gains from real estate and line sales were
• All other costs increased
Depreciation expense increased
Fuel expense decreased
Equipment and Other Rents expense decreased$7 million primarily driven by lower car hire costs due to equipment efficiency and lower volume, partially offset by lower net earnings at TTX.
Interest Expense
Interest expense increased
Other Income - Net Other income - net was essentially flat when compared to prior year. Income Tax Expense Income tax expense increased$13 million primarily due to a lower benefit for the impacts from option exercises and the vesting of other equity awards, partially offset by lower earnings before income taxes. CSX Q1 2020 Form 10-Q p.33
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CSX CORPORATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Non-GAAP Measures - Unaudited CSX reports its financial results in accordance with accounting principles generally accepted inthe United States of America (U.S. GAAP). CSX also uses certain non-GAAP measures that fall within the meaning of Securities and Exchange Commission Regulation G and Regulation S-K Item 10(e), which may provide users of the financial information with additional meaningful comparison to prior reported results. Non-GAAP measures do not have standardized definitions and are not defined byU.S. GAAP. Therefore, CSX's non-GAAP measures are unlikely to be comparable to similar measures presented by other companies. The presentation of these non-GAAP measures should not be considered in isolation from, as a substitute for, or as superior to the financial information presented in accordance with GAAP. Reconciliations of non-GAAP measures to corresponding GAAP measures are below. Free Cash Flow Management believes that free cash flow is supplemental information useful to investors as it is important in evaluating the Company's financial performance. More specifically, free cash flow measures cash generated by the business after reinvestment. This measure represents cash available for both equity and bond investors to be used for dividends, share repurchases or principal reduction on outstanding debt. Free cash flow is calculated by using net cash from operations and adjusting for property additions and certain other investing activities, which includes proceeds from property dispositions. Free cash flow should be considered in addition to, rather than a substitute for, cash provided by operating activities. The decrease in free cash flow before dividends from the prior year of$54 million is primarily due to higher property additions and lower proceeds from property dispositions.
The following table reconciles cash provided by operating activities (GAAP measure) to free cash flow, before dividends (non-GAAP measure).
Three Months
(Dollars in millions) 2020 2019
Net cash provided by operating activities
(381 ) (353 )
Other Investing Activities 15 46
Free Cash Flow (before payment of dividends)
Operating Statistics (Estimated) The Company strives for continuous improvement in safety and service performance through training, innovation and investment. Investment in training and technology also is designed to allow the Company's employees to have an additional layer of protection that can detect and avoid many types of human factor incidents. Safety programs are designed to prevent incidents that can adversely impact employees, customers and communities. Continued capital investment in the Company's assets, including track, bridges, signals, equipment and detection technology also supports safety performance. Train velocity and terminal dwell in the following table are calculated using methodologies that differ from those prescribed by theSurface Transportation Board ("STB") as the Company believes these numbers more accurately reflect railroad performance. Train velocity and dwell will continue to be reported, using the prescribed methodology, to the STB on a weekly basis.
Operating performance continued to improve in first quarter 2020 as train velocity increased 4% to a new first quarter record level while car dwell decreased 3% to a new all-time record level. The Company remains focused on executing the operational plan to deliver further service gains, improve transit times and drive asset utilization while controlling costs.
CSX Q1 2020 Form 10-Q p.34
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CSX CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
From a safety perspective, the FRA train accident frequency rate of 1.85 for the
first quarter 2020 improved 34% year over year, driven by an all-time record low
number of FRA reported train accidents. The FRA reportable personal injury
frequency index of 0.59 for the quarter improved 22% versus the prior year,
setting a first quarter record for injury frequency index and an all-time record
low number of FRA reportable injuries. The Company is committed to continuous
safety improvement and remains focused on reducing risk and enhancing the
overall safety of its employees, customers and communities in which the Company
operates.
First Quarters
Improvement/
2020 2019 (Deterioration)
Operations Performance
Train Velocity (Miles per hour)(a) 21.2 20.4 4 %
Dwell (Hours)(a) 8.3 8.6 3 %
Cars Online(a) 110,801 118,989 7 %
Revenue Ton-Miles (Billions)
Merchandise 33.1 31.6 5 %
Coal 8.6 10.5 (18 )%
Intermodal 6.8 6.5 5 %
Total Revenue Ton-Miles 48.5 48.6 - %
Total Gross Ton-Miles (Billions) 95.3 96.7 (1 )% On-Time Originations
91 % 81 % 12 %
On-Time Arrivals(b) 84 % 80 % 5 %
Safety
FRA Personal Injury Frequency Index 0.59 0.76 22 % FRA Train Accident Rate
1.85 2.80 34 %
Certain operating statistics are estimated and can continue to be updated as
actuals settle.
(a) The methodology for calculating train velocity, dwell and cars online
differs from that prescribed by the STB. CSXT will continue to report these
metrics using the prescribed methodology to the STB on a weekly basis. See
additional discussion on the Company's website.
(b) Beginning in the third quarter 2019, the calculation of on-time arrivals has
changed to consider a train "on time" if it is delivered within two hours of
scheduled arrival. Prior year periods have been restated to conform to this
change.
Key Performance Measures Definitions
Train Velocity - Average train speed between origin and destination in miles per
hour (does not include locals, yard jobs, work trains or passenger trains).
Train velocity measures the profiled schedule of trains (from departure to
arrival and all interim time), and train profiles are periodically updated to
align with a changing operation.
Dwell - Average amount of time in hours between car arrival to and departure
from the yard.
Cars Online - Average number of active freight rail cars on lines operated by
CSX, excluding rail cars that are being repaired, in storage, those that have
been sold, or private cars dwelling at a customer location more than one day.
Revenue Ton-Miles (RTM's) - The movement of one revenue-producing ton of freight
over a distance of one mile.
Gross Ton-Miles (GTM's) - The movement of one ton of train weight over one mile.
GTM's are calculated by multiplying total train weight by distance the train
moved. Total train weight is comprised of the weight of the freight cars and
their contents.
On-Time Originations - Percent of scheduled road trains that depart the origin
yard on-time or ahead of schedule.
On-Time Arrivals - Percent of scheduled road trains that arrive at the
destination yard on-time to within two hours of scheduled arrival.
FRA Personal Injury Frequency Index - Number of FRA-reportable injuries per
200,000 man-hours.
FRA Train Accident Rate - Number of FRA-reportable train accidents per million
train-miles.
CSX Q1 2020 Form 10-Q p.35
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CSX CORPORATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS LIQUIDITY AND CAPITAL RESOURCES The following are material changes in the significant cash flows, sources of cash and liquidity, capital investments, consolidated balance sheets and working capital, which provide an update to the discussion included in CSX's most recent annual report on Form 10-K. Material Changes in Significant Cash Flows Significant Cash Flows The following chart highlights the components of the net increases of$1.0 billion and$330 million in cash and cash equivalents for operating, investing and financing activities for three months ended 2020 and 2019, respectively. [[Image Removed: chart-d21617cd215d5d4d89a.jpg]] [[Image Removed: chart-82eec9f8aded56eeba5.jpg]] [[Image Removed: chart-16137fa0b4825afb973.jpg]] • Cash provided by operating activities was essentially flat compared to the prior year.
• Cash provided by investing activities was
compared to cash used in investing activities of $870 million in first
quarter 2019. This change was primarily driven by an increase in net sales
of short-term investments.
• Cash used in financing activities was
compared to cash provided by financing activities of
quarter 2019. This change was primarily driven by lower proceeds from debt
issuances, partially offset by lower share repurchases.
Sources of Cash and Liquidity and Uses of Cash As of the end of first quarter 2020, CSX had$2.5 billion of cash, cash equivalents and short-term investments. CSX uses current cash balances for general corporate purposes, which may include reduction or refinancing of outstanding indebtedness, capital expenditures, working capital requirements, contributions to the Company's qualified pension plan, redemptions and repurchases of CSX common stock and dividends to shareholders. See Note 7, Debt and Credit Agreements. The Company has multiple sources of liquidity, including cash generated from operations and financing sources. The Company filed a shelf registration statement with theSEC onFebruary 12, 2019 , which is unlimited as to amount and may be used to issue debt or equity securities at CSX's discretion, subject to market conditions and CSX Board authorization. While CSX seeks to give itself flexibility with respect to cash requirements, there can be no assurance that market conditions would permit CSX to sell such securities on acceptable terms at any given time, or at all. In first quarter 2020, CSX issued a total of$500 million of new long-term debt. CSX Q1 2020 Form 10-Q p.36
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CSX CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CSX has a $1.2 billion unsecured, revolving credit facility backed by a diverse
syndicate of banks that expires in March 2024 . At March 31, 2020 , the Company
had no outstanding balances under this facility. The Company also has a
commercial paper program, backed by the revolving credit facility, under which
the Company may issue unsecured commercial paper notes up to a maximum aggregate
principal amount of $1.0 billion outstanding at any one time. At March 31, 2020 ,
the Company had no outstanding debt under the commercial paper program.
Planned capital investments for 2020 are expected to be between $1.6 billion and
$1.7 billion . Of the total 2020 investment, over half will be used to sustain
the core infrastructure and the remaining amounts will be allocated to projects
supporting service enhancements, productivity initiatives and profitable growth.
CSX intends to fund capital investments through cash generated from operations.
Of the total 2020 investment, approximately $50 million is planned to fund
Positive Train Control ("PTC") implementation. CSX estimates that the total
multi-year cost of PTC implementation will be approximately $2.4 billion . This
estimate includes costs for installing the new system along tracks, upgrading
locomotives, adding communication equipment and developing new technologies.
Total PTC spending through March 2020 was $2.3 billion .
Material Changes in the Consolidated Balance Sheets and Working Capital
Consolidated Balance Sheets
Total assets increased $577 million from year end primarily due to the net
increase of $528 million in cash and short-term investments driven by cash from
operations of $1.2 billion and proceeds from the issuance of $500 million of
long-term debt, partially offset by share repurchases of $577 million , property
additions of $381 million and dividends paid of $201 million . Total liabilities
and shareholders' equity combined also increased $577 million from year end
primarily driven by the issuance of $500 million of long-term debt and an
increase in income taxes payable of $200 million , partially offset by a decrease
in labor and fringe benefit payable of $144 million resulting from the payment
of incentive compensation.
Working capital is considered a measure of a company's ability to meet its
short-term needs. CSX had a working capital surplus of $1.6 billion and $1.1
billion as of March 31, 2020 and December 31, 2019 , respectively. The increase
in working capital since year end of $483 million is primarily due to the net
increase of $528 million in cash and short-term investments described above as
well as the decrease in labor and fringe benefit payable of $144 million ,
partially offset by an increase in income taxes payable of $200 million .
The Company's working capital balance varies due to factors such as the timing
of scheduled debt payments and changes in cash and cash equivalent balances as
discussed above. The Company continues to maintain adequate liquidity to satisfy
current liabilities and maturing obligations when they come due. CSX has
sufficient financial capacity, including its revolving credit facility,
commercial paper program and shelf registration statement to manage its
day-to-day cash requirements and any anticipated obligations. The Company from
time to time accesses the credit markets for additional liquidity.
CSX is committed to returning cash to shareholders and maintaining an investment
grade credit profile. Capital structure, capital investments and cash
distributions, including dividends and share repurchases, are reviewed at least
annually by the Board of Directors. Management's assessment of market conditions
and other factors guides the timing and volume of repurchases. Future share
repurchases are expected to be funded by cash on hand, cash generated from
operations and debt issuances.
CSX Q1 2020 Form 10-Q p.37
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CSX CORPORATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS LABOR AGREEMENTS Approximately 16,500 of the Company's nearly 20,500 employees are members of a labor union. InNovember 2019 , notices were served to the 13 rail unions that participate in national bargaining to begin negotiations for benefits, wages and work rules for the next labor bargaining round for 2020. Current agreements remain in place until modified by these negotiations. Typically, such negotiations take several years before agreements are reached. CRITICAL ACCOUNTING ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted inthe United States requires that management make estimates in reporting the amounts of certain assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and certain revenues and expenses during the reporting period. Actual results may differ from those estimates. These estimates and assumptions are discussed with the Audit Committee of the Board of Directors on a regular basis. Consistent with the prior year, significant estimates using management judgment are made for the areas below. For further discussion of CSX's critical accounting estimates, see the Company's most recent annual report on Form 10-K.
• personal injury, environmental and legal reserves;
• pension and post-retirement medical plan accounting; and
• depreciation policies for assets under the group-life method.
FORWARD-LOOKING STATEMENTS
Certain statements in this report and in other materials filed with the
Securities and Exchange Commission , as well as information included in oral
statements or other written statements made by the Company, are forward-looking
statements. The Company intends for all such forward-looking statements to be
covered by the safe harbor provisions for forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995 and the
provisions of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. These forward-looking statements within the
meaning of the Private Securities Litigation Reform Act may contain, among
others, statements regarding:
• projections and estimates of earnings, revenues, margins, volumes,
rates, cost-savings, expenses, taxes or other financial items;
• expectations as to results of operations and operational initiatives;
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