UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2019
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number 1-8022 | ||||
CSX CORPORATION | ||||||||||
(Exact name of registrant as specified in its charter) | ||||||||||
Virginia | 62-1051971 | |||||||||
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||||
500 Water Street, 15th Floor, Jacksonville, FL | 32202 | (904) 359-3200 | ||||||||
(Address of principal executive offices) | (Zip Code) | (Telephone number, including area code) | ||||||||
No Change | ||||||||||
(Former name, former address and former fiscal year, if changed since last report.) | ||||||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes (X) No ( )
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes (X) No ( )
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer", "accelerated filer” and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (check one)
Large Accelerated Filer (X) Accelerated Filer ( ) Non-accelerated Filer ( ) Smaller Reporting Company ( ) Emerging growth company ( )
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ( )
Indicate by a check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ( ) No (X)
There were 809,163,666 shares of common stock outstanding on March 31, 2019 (the latest practicable date that is closest to the filing date).
CSX Q1 2019 Form 10-Q p.1 | ||
CSX CORPORATION
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2019
INDEX
Page | |||
PART I. | FINANCIAL INFORMATION | ||
Item 1. | |||
Quarters Ended March 31, 2019 and March 31, 2018 | |||
Quarters Ended March 31, 2019 and March 31, 2018 | |||
At March 31, 2019 (Unaudited) and December 31, 2018 | |||
Three Months Ended March 31, 2019 and March 31, 2018 | |||
Three Months Ended March 31, 2019 and March 31, 2018 | |||
Item 2. | |||
Item 3. | |||
Item 4. | |||
PART II. | OTHER INFORMATION | ||
Item 1. | |||
Item 1A. | |||
Item 2. | |||
Item 3. | |||
Item 4. | |||
Item 5. | |||
Item 6. | |||
CSX Q1 2019 Form 10-Q p.2 | ||
CSX CORPORATION
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED INCOME STATEMENTS (Unaudited)
(Dollars in millions, except per share amounts)
First Quarters | ||||||
2019 | 2018 | |||||
Revenue | $ | $ | ||||
Expense | ||||||
Labor and Fringe | ||||||
Materials, Supplies and Other | ||||||
Depreciation | ||||||
Fuel | ||||||
Equipment and Other Rents | ||||||
Equity Earnings of Affiliates | ( | ) | ( | ) | ||
Total Expense | ||||||
Operating Income | ||||||
Interest Expense | ( | ) | ( | ) | ||
Other Income - Net | ||||||
Earnings Before Income Taxes | ||||||
Income Tax Expense | ( | ) | ( | ) | ||
Net Earnings | $ | $ | ||||
Per Common Share (Note 2) | ||||||
Net Earnings Per Share, Basic | $ | $ | ||||
Net Earnings Per Share, Assuming Dilution | $ | $ | ||||
Average Shares Outstanding (In millions) | ||||||
Average Shares Outstanding, Assuming Dilution (In millions) | ||||||
CONDENSED CONSOLIDATED COMPREHENSIVE INCOME STATEMENTS (Unaudited)
(Dollars in millions, except per share amounts)
First Quarters | ||||||
2019 | 2018 | |||||
Total Comprehensive Earnings (Note 12) | $ | $ | ||||
See accompanying notes to consolidated financial statements.
CSX Q1 2019 Form 10-Q p.3 | ||
CONSOLIDATED BALANCE SHEETS
(Dollars in millions)
(Unaudited) | ||||||
March 31, 2019 | December 31, 2018 | |||||
ASSETS | ||||||
Current Assets: | ||||||
Cash and Cash Equivalents | $ | $ | ||||
Short-term Investments | ||||||
Accounts Receivable - Net (Note 9) | ||||||
Materials and Supplies | ||||||
Other Current Assets | ||||||
Total Current Assets | ||||||
Properties | ||||||
Accumulated Depreciation | ( | ) | ( | ) | ||
Properties - Net | ||||||
Investment in Conrail | ||||||
Affiliates and Other Companies | ||||||
Right-of-Use Lease Asset (Note 5) | ||||||
Other Long-term Assets | ||||||
Total Assets | $ | $ | ||||
LIABILITIES AND SHAREHOLDERS' EQUITY | ||||||
Current Liabilities: | ||||||
Accounts Payable | $ | $ | ||||
Labor and Fringe Benefits Payable | ||||||
Casualty, Environmental and Other Reserves (Note 4) | ||||||
Current Maturities of Long-term Debt (Note 8) | ||||||
Income and Other Taxes Payable | ||||||
Other Current Liabilities | ||||||
Total Current Liabilities | ||||||
Casualty, Environmental and Other Reserves (Note 4) | ||||||
Long-term Debt (Note 8) | ||||||
Deferred Income Taxes - Net | ||||||
Long-term Lease Liability (Note 5) | ||||||
Other Long-term Liabilities | ||||||
Total Liabilities | ||||||
Shareholders' Equity: | ||||||
Common Stock, $1 Par Value | ||||||
Other Capital | ||||||
Retained Earnings | ||||||
Accumulated Other Comprehensive Loss (Note 12) | ( | ) | ( | ) | ||
Noncontrolling Interest | ||||||
Total Shareholders' Equity | ||||||
Total Liabilities and Shareholders' Equity | $ | $ | ||||
See accompanying notes to consolidated financial statements.
CSX Q1 2019 Form 10-Q p.4 | ||
CONSOLIDATED CASH FLOW STATEMENTS (Unaudited)
(Dollars in millions)
Three Months | ||||||
2019 | 2018 | |||||
OPERATING ACTIVITIES | ||||||
Net Earnings | $ | $ | ||||
Adjustments to Reconcile Net Earnings to Net Cash Provided by Operating Activities: | ||||||
Depreciation | ||||||
Deferred Income Taxes | ||||||
Gain on Property Dispositions | ( | ) | ( | ) | ||
Equity Earnings of Affiliates | ( | ) | ( | ) | ||
Cash Payments for Restructuring Charge | ( | ) | ||||
Other Operating Activities | ( | ) | ||||
Changes in Operating Assets and Liabilities: | ||||||
Accounts Receivable | ( | ) | ( | ) | ||
Other Current Assets | ( | ) | ||||
Accounts Payable | ||||||
Income and Other Taxes Payable | ||||||
Other Current Liabilities | ( | ) | ( | ) | ||
Net Cash Provided by Operating Activities | ||||||
INVESTING ACTIVITIES | ||||||
Property Additions | ( | ) | ( | ) | ||
Proceeds from Property Dispositions | ||||||
Purchase of Short-term Investments | ( | ) | ||||
Proceeds from Sales of Short-term Investments | ||||||
Other Investing Activities | ( | ) | ( | ) | ||
Net Cash Used In Investing Activities | ( | ) | ( | ) | ||
FINANCING ACTIVITIES | ||||||
Long-term Debt Issued (Note 8) | ||||||
Dividends Paid | ( | ) | ( | ) | ||
Shares Repurchased | ( | ) | ( | ) | ||
Other Financing Activities | ( | ) | ||||
Net Cash Provided by Financing Activities | ||||||
Net Increase in Cash and Cash Equivalents | ||||||
CASH AND CASH EQUIVALENTS | ||||||
Cash and Cash Equivalents at Beginning of Period | ||||||
Cash and Cash Equivalents at End of Period | $ | $ | ||||
See accompanying notes to consolidated financial statements.
CSX Q1 2019 Form 10-Q p.5 | ||
CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS' EQUITY
(Dollars in Millions)
Common Shares Outstanding (Thousands) | Common Stock and Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss)(a) | Non-controlling Interest | Total Shareholders' Equity | ||||||||||||
Balance December 31, 2018 | $ | $ | $ | ( | ) | $ | $ | ||||||||||
Comprehensive Earnings: | |||||||||||||||||
Net Earnings | — | — | — | — | |||||||||||||
Other Comprehensive Income (Note 12) | — | — | — | — | |||||||||||||
Total Comprehensive Earnings | |||||||||||||||||
Common stock dividends, $0.24 per share | — | — | ( | ) | — | — | ( | ) | |||||||||
Share Repurchases | ( | ) | ( | ) | ( | ) | — | — | ( | ) | |||||||
Stock Option Exercises and Other | ( | ) | — | — | |||||||||||||
Balance March 31, 2019 | $ | $ | $ | ( | ) | $ | $ | ||||||||||
Balance December 31, 2017 | $ | $ | $ | ( | ) | $ | $ | ||||||||||
Comprehensive Earnings: | |||||||||||||||||
Net Earnings | — | — | — | — | |||||||||||||
Other Comprehensive Loss (Note 12) | — | — | — | ( | ) | — | ( | ) | |||||||||
Total Comprehensive Earnings | |||||||||||||||||
Common stock dividends, $0.22 per share | — | — | ( | ) | — | — | ( | ) | |||||||||
Share Repurchases | ( | ) | ( | ) | ( | ) | — | — | ( | ) | |||||||
Stock Option Exercises and Other | ( | ) | — | ( | ) | ||||||||||||
Balance March 31, 2018 | $ | $ | $ | ( | ) | $ | $ | ||||||||||
(a) Accumulated Other Comprehensive Loss balances shown above are net of tax. The associated taxes were $179 million and $160 million as of March 31, 2019 and March 31, 2018, respectively. For additional information, see Note 12, Other Comprehensive Income.
See accompanying notes to consolidated financial statements.
CSX Q1 2019 Form 10-Q p.6 | ||
NOTE 1.Nature of Operations and Significant Accounting Policies
Background
CSX Corporation (“CSX”), together with its subsidiaries (the “Company”), based in Jacksonville, Florida, is one of the nation's leading transportation companies. The Company provides rail-based transportation services including traditional rail service and the transport of intermodal containers and trailers.
CSX's principal operating subsidiary, CSX Transportation, Inc. (“CSXT”), provides an important link to the transportation supply chain through its approximately 20,500 route mile rail network, which serves major population centers in 23 states east of the Mississippi River, the District of Columbia and the Canadian provinces of Ontario and Quebec. The Company's intermodal business links customers to railroads via trucks and terminals.
CSXT is also responsible for the Company's real estate sales, leasing, acquisition and management and development activities. In addition, as substantially all real estate sales, leasing, acquisition and management and development activities are focused on supporting railroad operations, all results of these activities are included in operating income.
Other entities
In addition to CSXT, the Company’s subsidiaries include CSX Intermodal Terminals, Inc. (“CSX Intermodal Terminals”), Total Distribution Services, Inc. (“TDSI”), Transflo Terminal Services, Inc. (“Transflo”), CSX Technology, Inc. (“CSX Technology”) and other subsidiaries. CSX Intermodal Terminals owns and operates a system of intermodal terminals, predominantly in the eastern United States and also performs drayage services (the pickup and delivery of intermodal shipments) for certain customers and trucking dispatch operations. TDSI serves the automotive industry with distribution centers and storage locations. Transflo connects non-rail served customers to the many benefits of rail by transferring products from rail to trucks. The biggest Transflo markets are chemicals and agriculture, which include shipments of plastics and ethanol. CSX Technology and other subsidiaries provide support services for the Company.
Basis of Presentation
• | Consolidated income statements for the quarter ended March 31, 2019 and March 31, 2018; |
• | Condensed consolidated comprehensive income statements for the quarter ended March 31, 2019 and March 31, 2018; |
• | Consolidated balance sheets at March 31, 2019 and December 31, 2018; |
• | Consolidated cash flow statements for the three months ended March 31, 2019 and March 31, 2018; and |
• | Consolidated statements of changes in shareholders' equity for the three months ended March 31, 2019 and March 31, 2018. |
CSX Q1 2019 Form 10-Q p.7 | ||
NOTE 1. Nature of Operations and Significant Accounting Policies, continued
Fiscal Year
New Accounting Pronouncements
In February 2016, the FASB issued ASU, Leases, which requires lessees to recognize most leases on their balance sheets as a right-of-use asset with a corresponding lease liability. Lessor accounting under the standard is substantially unchanged. Additional qualitative and quantitative disclosures are also required. CSX adopted the standard effective January 1, 2019 using the cumulative-effect adjustment transition method, which applies the provisions of the standard at the effective date without adjusting the comparative periods presented. The Company adopted the following practical expedients and elected the following accounting policies related to this standard update:
• | Carry forward of historical lease classifications and current accounting treatment for existing land easements; |
• | Short-term lease accounting policy election allowing lessees to not recognize right-of-use assets and liabilities for leases with a term of 12 months or less; and |
• | The option to not separate lease and non-lease components for certain equipment lease asset categories such as freight car, vehicles and work equipment. |
Adoption of this standard resulted in the recognition of operating lease right-of-use assets and corresponding lease liabilities of $534 million on the consolidated balance sheet as of January 1, 2019. This amount is lower than previous estimates due to a lease amendment. The Company’s accounting for finance leases remained substantially unchanged. The standard did not materially impact operating results or liquidity. Disclosures related to the amount, timing and uncertainty of cash flows arising from leases are included in Note 5, Leases.
Pronouncements to be adopted
CSX Q1 2019 Form 10-Q p.8 | ||
NOTE 2. Earnings Per Share
First Quarters | ||||||
2019 | 2018 | |||||
Numerator (Dollars in millions): | ||||||
Net Earnings | $ | $ | ||||
Denominator (Units in millions): | ||||||
Average Common Shares Outstanding | ||||||
Other Potentially Dilutive Common Shares | ||||||
Average Common Shares Outstanding, Assuming Dilution | ||||||
Net Earnings Per Share, Basic | $ | $ | ||||
Net Earnings Per Share, Assuming Dilution | $ | $ | ||||
Basic earnings per share is based on the weighted-average number of shares of common stock outstanding. Earnings per share, assuming dilution, is based on the weighted-average number of shares of common stock outstanding and common stock equivalents adjusted for the effects of common stock that may be issued as a result of potentially dilutive instruments. CSX's potentially dilutive instruments are made up of equity awards, including performance units and employee stock options.
When calculating diluted earnings per share, the potential shares that would be outstanding if all outstanding stock options were exercised are included. This number is different from outstanding stock options because it is offset by shares CSX could repurchase using the proceeds from these hypothetical exercises to obtain the common stock equivalent. Approximately 600 thousand and 800 thousand of total average outstanding stock options for the first quarters ended March 31, 2019 and March 31, 2018, respectively, were excluded from the diluted earnings per share calculation because their effect was antidilutive.
Share Repurchases
In February 2018, the Company announced an increase to the $1.5 billion share repurchase program first announced in October 2017, bringing the total authorized to $5 billion. This program was completed on January 16, 2019. Also on January 16, 2019, the Company announced a new $5 billion share repurchase program. During the first quarters of 2019 and 2018, the Company repurchased approximately $796 million, or 12 million shares, and $836 million, or 15 million shares, respectively.
Under an accelerated share repurchase agreement executed in January 2018, the Company made a prepayment of $150 million to a financial institution and received an initial delivery of shares valued at $120 million. The remaining balance of $30 million was settled through receipt of additional shares in February 2018 with the final net number of shares calculated based on the volume-weighted average price of the Company's common stock over the term of the agreement, less a discount. Approximately 3 million total shares were repurchased under the agreement.
CSX Q1 2019 Form 10-Q p.9 | ||
NOTE 2. Earnings Per Share, continued
Share repurchases may be made through a variety of methods including, but not limited to, open market purchases, purchases pursuant to Rule 10b5-1 plans, accelerated share repurchases and negotiated block purchases. The timing of share repurchases depends upon management's assessment of marketplace conditions and other factors, and the program remains subject to the discretion of the Board of Directors. Future share repurchases are expected to be funded by cash on hand, cash generated from operations and debt issuances. Shares are retired immediately upon repurchase. In accordance with the Equity Topic in the ASC, the excess of repurchase price over par value is recorded in retained earnings.
Dividend Increase
NOTE 3. Share-Based Compensation
Under CSX's share-based compensation plans, awards consist of performance units, restricted stock awards, restricted stock units and stock options for management and stock grants for directors. Awards granted under the various programs are determined and approved by the Compensation Committee of the Board of Directors or, in certain circumstances, by the Chief Executive Officer for awards to management employees other than senior executives. The Board of Directors approves awards granted to CSX's non-management directors upon recommendation of the Governance Committee.
Share-based compensation expense for awards under share-based compensation plans and purchases made as part of the employee stock purchase plan is measured using the fair value of the award on the grant date and is recognized on a straight-line basis over the service period of the respective award. Total pre-tax expense and income tax benefits associated with share-based compensation are shown in the table below. Income tax benefits include impacts from option exercises and the vesting of other equity awards.
First Quarters | ||||||
(Dollars in millions) | 2019 | 2018 | ||||
Share-Based Compensation Expense: | ||||||
Performance Units | $ | $ | ||||
Stock Options | ||||||
Restricted Stock Units and Awards | ||||||
Stock Awards for Directors | ||||||
Employee Stock Purchase Plan | ||||||
Total Share-Based Compensation Expense | $ | $ | ||||
Income Tax Benefit | $ | $ | ||||
CSX Q1 2019 Form 10-Q p.10 | ||
NOTE 3. Share-Based Compensation, continued
Long-term Incentive Plan
On February 6, 2019, the Company granted approximately 300 thousand performance units to certain employees under a new long-term incentive plan ("LTIP") for the years 2019 through 2021, which was adopted under the CSX Stock and Incentive Award Plan. During first quarter 2018, approximately 350 thousand performance units were granted pursuant to the corresponding LTIP.
Payouts of performance units for the cycle ending with fiscal year 2021 will be based on the achievement of goals related to both operating ratio and free cash flow, in each case excluding non-recurring items as disclosed in the Company's financial statements. The cumulative operating ratio and cumulative free cash flow over the plan period will each comprise 50% of the payout and will be measured independently of the other.
Grants were made in performance units, with each unit representing the right to receive one share of CSX common stock, and payouts will be made in CSX common stock. The payout range for participants will be between 0 % and 200 % of the target awards depending on Company performance against predetermined goals. Payouts for certain executive officers are subject to formulaic upward or downward adjustment by up to 25 %, capped at an overall payout of 225 %, based upon the Company's total shareholder return relative to specified comparable groups over the performance period. The fair values of the performance units awarded during the quarters ended March 31, 2019 and March 31, 2018 were calculated using a Monte-Carlo simulation model with the following weighted-average assumptions:
First Quarters | ||||
2019 | 2018 | |||
Weighted-average assumptions used: | ||||
Annual dividend yield | % | % | ||
Risk-free interest rate | % | % | ||
Annualized volatility | % | % | ||
Expected life (in years) | ||||
Stock Options
Also, on February 6, 2019, the Company granted approximately 843 thousand stock options along with the corresponding LTIP. The fair value of stock options on the date of grant was $17.45 per option, which was calculated using the Black-Scholes valuation model. These stock options were granted with ten-year terms and vest over three years in equal installments each year on the anniversary of the grant date. The exercise price for stock options granted equals the closing market price of the underlying stock on the date of grant. These awards are time-based and are not based upon attainment of performance goals. During first quarter 2018, approximately 950 thousand stock options were granted pursuant to the corresponding LTIP.
CSX Q1 2019 Form 10-Q p.11 | ||
NOTE 3. Share-Based Compensation, continued
First Quarters | ||||||
2019 | 2018 | |||||
Weighted-average grant-date fair value | $ | $ | ||||
Stock options valuation assumptions: | ||||||
Annual dividend yield | % | % | ||||
Risk-free interest rate | % | % | ||||
Annualized volatility | % | % | ||||
Expected life (in years) | ||||||
Other pricing model inputs: | ||||||
Weighted-average grant-date market price of CSX stock (strike price) | $ | $ | ||||
Restricted Stock Units
Finally, on February 6, 2019, the Company granted approximately 65 thousand restricted stock units along with the corresponding LTIP. The restricted stock units vest three years after the date of grant. Participants receive cash dividend equivalents on the unvested shares during the restriction period. These awards are time-based and are not based upon CSX's attainment of operational targets. For information related to the Company's other outstanding long-term incentive compensation, see CSX's most recent annual report on Form 10-K. During first quarter 2018, approximately 85 thousand restricted stock units were granted pursuant to the corresponding LTIP. Restricted stock units are paid-out in CSX common stock on a one -for-one basis.
Employee Stock Purchase Plan
CSX Q1 2019 Form 10-Q p.12 | ||
NOTE 4. Casualty, Environmental and Other Reserves
March 31, 2019 | December 31, 2018 | ||||||||||||||||||
(Dollars in millions) | Current | Long-term | Total | Current | Long-term | Total | |||||||||||||
Casualty: | |||||||||||||||||||
Personal Injury | $ | $ | $ | $ | $ | $ | |||||||||||||
Occupational | |||||||||||||||||||
Total Casualty | |||||||||||||||||||
Environmental | |||||||||||||||||||
Other | |||||||||||||||||||
Total | $ | $ | $ | $ | $ | $ | |||||||||||||
These liabilities are accrued when probable and reasonably estimable in accordance with the Contingencies Topic in the ASC. Actual settlements and claims received could differ, and final outcomes of these matters cannot be predicted with certainty. Considering the legal defenses currently available, the liabilities that have been recorded and other factors, it is the opinion of management that none of these items individually, when finally resolved, will have a material adverse effect on the Company's financial condition, results of operations or liquidity. Should a number of these items occur in the same period, however, their combined effect could be material in that particular period.
Casualty
Casualty reserves of $195 million and $199 million as of March 31, 2019 and December 31, 2018, respectively, represent accruals for personal injury, occupational disease and occupational injury claims. During second quarter 2018, the Company increased its self-insured retention amount for these claims from $50 million to $75 million per occurrence for claims occurring on or after June 1, 2018. Currently, no individual claim is expected to exceed the self-insured retention amount. In accordance with the Contingencies Topic in the ASC, to the extent the value of an individual claim exceeds the self-insured retention amount, the Company would present the liability on a gross basis with a corresponding receivable for insurance recoveries. These reserves fluctuate based upon the timing of payments as well as changes in estimate. Actual results may vary from estimates due to the number, type and severity of the injury, costs of medical treatments and uncertainties in litigation. Most of the Company's casualty claims relate to CSXT. Defense and processing costs, which historically have been insignificant and are anticipated to be insignificant in the future, are not included in the recorded liabilities.
CSX Q1 2019 Form 10-Q p.13 | ||
NOTE 4. Casualty, Environmental and Other Reserves, continued
Personal Injury
Personal injury reserves represent liabilities for employee work-related and third-party injuries. Work-related injuries for CSXT employees are primarily subject to the Federal Employers’ Liability Act (“FELA”). CSXT retains an independent actuary to assist management in assessing the value of personal injury claims. An analysis is performed by the actuary quarterly and is reviewed by management. This analysis for the quarter resulted in an immaterial adjustment to the personal injury reserve. The methodology used by the actuary includes a development factor to reflect growth or reduction in the value of these personal injury claims based largely on CSXT's historical claims and settlement experience.
Occupational
Occupational reserves represent liabilities for occupational disease and injury claims. Occupational disease claims arise primarily from allegations of exposure to asbestos in the workplace. Occupational injury claims arise from allegations of exposure to certain other materials in the workplace, such as solvents, soaps, chemicals (collectively referred to as “irritants”) and diesel fuels (like exhaust fumes) or allegations of chronic physical injuries resulting from work conditions, such as repetitive stress injuries.
Environmental
Environmental reserves were $80 million as of each March 31, 2019 and December 31, 2018. The Company is a party to various proceedings related to environmental issues, including administrative and judicial proceedings involving private parties and regulatory agencies. The Company has been identified as a potentially responsible party at approximately 226 environmentally impaired sites. Many of these are, or may be, subject to remedial action under the federal Comprehensive Environmental Response, Compensation and Liability Act of 1980 ("CERCLA"), also known as the Superfund Law, or similar state statutes. Most of these proceedings arose from environmental conditions on properties used for ongoing or discontinued railroad operations. A number of these proceedings, however, are based on allegations that the Company, or its predecessors, sent hazardous substances to facilities owned or operated by others for treatment, recycling or disposal. In addition, some of the Company's land holdings were leased to others for commercial or industrial uses that may have resulted in releases of hazardous substances or other regulated materials onto the property and could give rise to proceedings against the Company.
In any such proceedings, the Company is subject to environmental clean-up and enforcement actions under the Superfund Law, as well as similar state laws that may impose joint and several liability for clean-up and enforcement costs on current and former owners and operators of a site without regard to fault or the legality of the original conduct. These costs could be substantial.
CSX Q1 2019 Form 10-Q p.14 | ||
NOTE 4. Casualty, Environmental and Other Reserves, continued
In accordance with the Asset Retirement and Environmental Obligations Topic in the ASC, the Company reviews its role with respect to each site identified at least quarterly, giving consideration to a number of factors such as:
• | type of clean-up required; |
• | nature of the Company's alleged connection to the location (e.g., generator of waste sent to the site or owner or operator of the site); |
• | extent of the Company's alleged connection (e.g., volume of waste sent to the location and other relevant factors); and |
• | number, connection and financial viability of other named and unnamed potentially responsible parties at the location. |
Based on the review process, the Company has recorded amounts to cover contingent anticipated future environmental remediation costs with respect to each site to the extent such costs are reasonably estimable and probable. The recorded liabilities for estimated future environmental costs are undiscounted. The liability includes future costs for remediation and restoration of sites as well as any significant ongoing
monitoring costs, but excludes any anticipated insurance recoveries. Payments related to these liabilities are expected to be made over the next several years. Environmental remediation costs are included in materials, supplies and other on the consolidated income statements.
Currently, the Company does not possess sufficient information to reasonably estimate the amounts of additional liabilities, if any, on some sites until completion of future environmental studies. In addition, conditions that are currently unknown could, at any given location, result in additional exposure, the amount and materiality of which cannot presently be reasonably estimated. Based upon information currently available, however, the Company believes its environmental reserves accurately reflect the estimated cost of remedial actions currently required.
Other
CSX Q1 2019 Form 10-Q p.15 | ||
NOTE 5. Leases
CSX has various lease agreements with terms up to 50 years, including leases of land, land with integral equipment (e.g. track), buildings and various equipment. Some leases include options to purchase, terminate or extend for one or more years. These options are included in the lease term when it is reasonably certain that the option will be exercised.
At inception, the Company determines if an arrangement contains a lease and whether that lease meets the classification criteria of a finance or operating lease. Some of the Company’s lease arrangements contain lease components (e.g. minimum rent payments) and non-lease components (e.g. maintenance, labor charges, etc.). The Company generally accounts for each component separately based on the estimated standalone price of each component. For certain equipment leases, such as freight car, vehicles and work equipment, the Company accounts for the lease and non-lease components as a single lease component.
Certain of the Company’s lease agreements include rental payments that are adjusted periodically for an index or rate. The leases are initially measured using the projected payments adjusted for the index or rate in effect at the commencement date. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.
Operating Leases
Operating leases are included in right-of-use lease assets, other current liabilities and long-term lease liabilities on the consolidated balance sheets. These assets and liabilities are recognized at the commencement date based on the present value of remaining lease payments over the lease term using the Company’s secured incremental borrowing rates or implicit rates, when readily determinable. Short-term operating leases, which have an initial term of 12 months or less, are not recorded on the balance sheet.
Lease expense for operating leases is recognized on a straight-line basis over the lease term. Variable lease expense is recognized in the period in which the obligation for those payments is incurred. Lease expense is included in equipment and other rents on the consolidated income statements and is reported net of lease income. Lease income is not material to the results of operations for the quarter ended March 2019.
CSX Q1 2019 Form 10-Q p.16 | ||
NOTE 5. Leases, continued
(Dollars in Millions) | March 31, 2019 | ||
Maturity of Lease Liabilities | Lease Payments | ||
2019 (remaining) | $ | ||
2020 | |||
2021 | |||
2022 | |||
2023 | |||
Thereafter | |||
Total undiscounted operating lease payments | $ | ||
Less: Imputed interest | ( | ) | |
Present value of operating lease liabilities | $ | ||
Balance Sheet Classification | |||
Current lease liabilities (recorded in other current liabilities) | $ | ||
Long-term lease liabilities | |||
Total operating lease liabilities | $ | ||
Other Information | |||
Weighted-average remaining lease term for operating leases | |||
Weighted-average discount rate for operating leases | % | ||
Cash Flows
An initial right-of-use asset of $534 million was recognized as a non-cash asset addition with the adoption of the new lease accounting standard. Additional right-of-use assets of $30 million were recognized as non-cash asset additions that resulted from new operating lease liabilities during first quarter 2019. Cash paid for amounts included in the present value of operating lease liabilities was $14 million during first quarter 2019 and is included in operating cash flows.
Operating Lease Costs
Operating lease costs were $18 million during first quarter 2019. These costs are primarily related to long-term operating leases, but also include immaterial amounts for variable leases and short-term leases with terms greater than 30 days.
Finance Leases
CSX Q1 2019 Form 10-Q p.17 | ||
NOTE 6. Commitments and Contingencies
Insurance
The Company maintains insurance programs with substantial limits for property damage (which includes business interruption) and third-party liability. A certain amount of risk is retained by the Company on each of the property and liability programs. The Company has a $50 million per occurrence retention for floods and named windstorms and a $25 million per occurrence retention for property losses other than floods and named windstorms. For claims occurring on or after June 1, 2018, the Company increased its self-insured retention for third-party liability claims from $50 million to $75 million per occurrence. While the Company believes its insurance coverage is adequate, future claims could exceed existing insurance coverage or insurance may not continue to be available at commercially reasonable rates.
Legal
The Company is involved in litigation incidental to its business and is a party to a number of legal actions and claims, various governmental proceedings and private civil lawsuits, including, but not limited to, those related to fuel surcharge practices, tax matters, environmental and hazardous material exposure matters, FELA and labor claims by current or former employees, other personal injury or property claims and disputes and complaints involving certain transportation rates and charges. Some of the legal proceedings include claims for compensatory as well as punitive damages and others are, or are purported to be, class actions. While the final outcome of these matters cannot be reasonably determined, considering, among other things, the legal defenses available and liabilities that have been recorded along with applicable insurance, it is currently the opinion of management that none of these pending items is likely to have a material adverse effect on the Company's financial condition, results of operations or liquidity. An unexpected adverse resolution of one or more of these items, however, could have a material adverse effect on the Company's financial condition, results of operations or liquidity in that particular period.
The Company is able to estimate a range of possible loss for certain legal proceedings for which a loss is reasonably possible in excess of reserves established. The Company has estimated this range to be $4 million to $102 million in aggregate at March 31, 2019. This estimated aggregate range is based upon currently available information and is subject to significant judgment and a variety of assumptions. Accordingly, the Company's estimate will change from time to time, and actual losses may vary significantly from the current estimate.
Fuel Surcharge Antitrust Litigation
In May 2007, class action lawsuits were filed against CSXT and three other U.S.-based Class I railroads alleging that the defendants' fuel surcharge practices relating to contract and unregulated traffic resulted from an illegal conspiracy in violation of antitrust laws. In November 2007, the class action lawsuits were consolidated in federal court in the District of Columbia, where they are now pending. The suit seeks treble damages allegedly sustained by purported class members as well as attorneys' fees and other relief. Plaintiffs are expected to allege damages at least equal to the fuel surcharges at issue.
CSX Q1 2019 Form 10-Q p.18 | ||
NOTE 6. Commitments and Contingencies, continued
In June 2012, the District Court certified the case as a class action. The decision was not a ruling on the merits of plaintiffs' claims, but rather a decision to allow the plaintiffs to seek to prove the case as a class. The defendant railroads petitioned the U.S. Court of Appeals for the D.C. Circuit for permission to appeal the District Court's class certification decision. In August 2013, the D.C. Circuit issued a decision vacating the class certification decision and remanded the case to the District Court to reconsider its class certification decision. On October 10, 2017, the District Court issued an order denying class certification. The U.S. Court of Appeals for the D.C. Circuit is reviewing the District Court's denial of class certification and held oral argument on September 28, 2018, with a decision yet to be issued. The District Court has delayed proceedings on the merits of the case pending the outcome of the class certification proceedings.
CSXT believes that its fuel surcharge practices were arrived at and applied lawfully and that the case is without merit. Accordingly, the Company intends to defend itself vigorously. However, penalties for violating antitrust laws can be severe, and resolution of this matter or an unexpected adverse decision on the merits could have a material adverse effect on the Company's financial condition, results of operations or liquidity in that particular period.
Environmental
CSXT is indemnifying Pharmacia LLC (formerly known as Monsanto Company) for certain liabilities associated with real estate located in Kearny, New Jersey along the Lower Passaic River (the “Property”). The Property, which was formerly owned by Pharmacia, is now owned by CSXT. CSXT's indemnification and defense duties arise with respect to several matters. The U.S. Environmental Protection Agency ("EPA"), using its CERCLA authority, seeks cleanup and removal costs and other damages associated with the presence of hazardous substances in the 17 -mile Lower Passaic River Study Area (the "Study Area”). CSXT, on behalf of Pharmacia, and a significant number of other potentially responsible parties are together conducting a Remedial Investigation and Feasibility Study of the Study Area pursuant to an Administrative Settlement Agreement and Order on Consent with the EPA.
In March 2016, EPA issued its Record of Decision detailing the agency’s mandated remedial process for the lower 8 miles of the Study Area. Approximately 80 parties, including Pharmacia, are participating in an EPA-directed allocation process to assign responsibility for costs to be incurred implementing the remedy selected for the lower 8 miles of the Study Area. CSXT is participating in the allocation process on behalf of Pharmacia. At a later date, EPA will select a remedy for the remainder of the Study Area and is expected to again seek the participation of private parties to implement the selected remedy using EPA’s CERCLA authority to compel such participation, if necessary.
CSX Q1 2019 Form 10-Q p.19 | ||
NOTE 7. Employee Benefit Plans
The Company sponsors defined benefit pension plans principally for salaried, management personnel. CSX also sponsors a non-contributory post-retirement medical plan and a life insurance plan that provide certain benefits to eligible employees hired prior to January 1, 2003. Independent actuaries compute the amounts of liabilities and expenses relating to these plans subject to the assumptions that the Company determines are appropriate based on historical trends, current market rates and future projections. These amounts are reviewed by management.
Only the service cost component of net periodic benefit costs is included in labor and fringe expense on the consolidated income statement. All other components of net periodic benefit cost are included in other income - net.
Pension Benefits | ||||||
(Dollars in millions) | First Quarters | |||||
2019 | 2018 | |||||
Service Cost Included in Labor and Fringe | $ | $ | ||||
Interest Cost | ||||||
Expected Return on Plan Assets | ( | ) | ( | ) | ||
Amortization of Net Loss | ||||||
Total Income Included in Other Income - Net | ( | ) | ( | ) | ||
Net Periodic Benefit Credit | $ | ( | ) | $ | ( | ) |
Other Post-retirement Benefits | ||||||
(Dollars in millions) | First Quarters | |||||
2019 | 2018 | |||||
Service Cost Included in Labor and Fringe | $ | $ | ||||
Interest Cost | ||||||
Amortization of Prior Service Costs | ( | ) | ||||
Total (Income) Expense Included in Other Income - Net | ( | ) | ||||
Net Periodic Benefit (Credit) Cost | $ | ( | ) | $ | ||
CSX Q1 2019 Form 10-Q p.20 | ||
NOTE 8. Debt and Credit Agreements
(Dollars in millions) | Current Portion | Long-term Portion | Total | ||||||
Long-term debt as of December 31, 2018 | $ | $ | $ | ||||||
2019 activity: | |||||||||
Long-term debt issued | |||||||||
Discount, premium and other activity | |||||||||
Long-term debt as of March 31, 2019 | $ | $ | $ | ||||||
Debt Issuance
On February 28, 2019, CSX issued $600 million of 4.25 % notes due 2029, which was a reopening of existing notes originally issued in November 2018, and $400 million of 4.50 % notes due 2049. These notes are included in the consolidated balance sheets under long-term debt and may be redeemed by the Company at any time, subject to payment of certain make-whole premiums. The net proceeds will be used for general corporate purposes, which may include repurchases of CSX's common stock, capital investment, working capital requirements, improvements in productivity and other cost reduction initiatives at the Company’s major transportation units.
Credit Facility
On March 29, 2019, CSX replaced its existing $1.0 billion unsecured, revolving credit facility with a new $1.2 billion unsecured, revolving credit facility backed by a diverse syndicate of banks. The new facility allows same-day borrowings at floating interest rates, based on LIBOR or an agreed-upon replacement, plus a spread that depends upon CSX's senior unsecured debt ratings. LIBOR is the London Interbank Offered Rate which is a daily reference rate based on the interest rates at which banks offer to lend unsecured funds. This facility expires in March 2024, and at March 31, 2019, the Company had no outstanding balances under this facility.
Commitment fees and interest rates payable under the facility were similar to fees and rates available to comparably rated investment-grade borrowers. As of first quarter 2019, CSX was in compliance with all covenant requirements under this facility.
Commercial Paper
CSX Q1 2019 Form 10-Q p.21 | ||
NOTE 9. Revenues
The Company’s revenues are primarily derived from the transportation of freight as performance obligations that arise from its contracts with customers are satisfied. The following table presents the Company’s revenues disaggregated by lines of business as this best depicts how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors:
First Quarters | ||||||
(Dollars in millions) | 2019 | 2018 | ||||
Chemicals | $ | $ | ||||
Agricultural and Food Products | ||||||
Automotive | ||||||
Forest Products | ||||||
Metals and Equipment | ||||||
Minerals | ||||||
Fertilizers | ||||||
Total Merchandise | ||||||
Coal | ||||||
Intermodal | ||||||
Other | ||||||
Total | $ | $ | ||||
Revenue Recognition
The average transit time to complete a shipment is between 3 to 8 days and payments for transportation services are normally billed once a BOL is received and are generally due within 15 days after the invoice date. The Company recognizes revenue over transit time of freight as it moves from origin to destination. Revenue for services started but not completed at the reporting date is allocated based on the relative transit time in each reporting period, with the portion allocated for services subsequent to the reporting date considered remaining performance obligations.
CSX Q1 2019 Form 10-Q p.22 | ||
NOTE 9. Revenues, continued
The certain key estimates included in the recognition and measurement of revenue and related accounts receivable are as follows:
• | Revenue associated with shipments in transit is recognized ratably over transit time and is based on average cycle times to move commodities and products from their origin to their final destination or interchange; |
• | Adjustments to revenue for billing corrections and billing discounts; |
• | Adjustments to revenue for overcharge claims filed by customers, which are based on historical payments to customers for rate overcharges as a percentage of total billing; and |
• | Incentive-based refunds to customers, which are primarily volume-related, are recorded as a reduction to revenue on the basis of the projected liability (this estimate is based on historical activity, current volume levels and forecasted future volume). |
Revenue related to interline transportation services that involve the services of another party, such as another railroad, is reported on a net basis. The portion of the gross amount billed to customers that is remitted by the Company to another party is not reflected as revenue.
Other revenue is comprised of revenue from regional subsidiary railroads and incidental charges, including demurrage and switching. It is recorded upon completion of the service and accounted for 6 % of the Company’s total revenue in the first quarter 2019. Revenue from regional subsidiary railroads includes shipments by railroads that the Company does not directly operate. Demurrage represents charges assessed when freight cars are held by a customer beyond a specified period of time. Switching revenue is primarily generated when the Company switches cars for a customer or another railroad.
During the first quarters 2019 and 2018, revenue recognized from performance obligations related to prior periods (for example, due to changes in transaction price), was not material.
Remaining Performance Obligations
Contract Balances and Accounts Receivable
CSX Q1 2019 Form 10-Q p.23 | ||
NOTE 9. Revenues, continued
(Dollars in millions) | March 31, 2019 | December 31, 2018 | ||||
Freight Receivables | $ | $ | ||||
Freight Allowance for Doubtful Accounts | ( | ) | ( | ) | ||
Freight Receivables, net | ||||||
Non-Freight Receivables | ||||||
Non-Freight Allowance for Doubtful Accounts | ( | ) | ( | ) | ||
Non-Freight Receivables, net | ||||||
Total Accounts Receivable, net | $ | $ | ||||
NOTE 10. Income Taxes
CSX Q1 2019 Form 10-Q p.24 | ||
NOTE 11. Fair Value Measurements
Various inputs are considered when determining the value of the Company's investments, pension plan assets and long-term debt. The inputs or methodologies used for valuing securities are not necessarily an indication of the risk associated with investing in these securities. These inputs are summarized in the three broad levels listed below.
• | Level 1 - observable market inputs that are unadjusted quoted prices for identical assets or liabilities in active markets; |
• | Level 2 - other significant observable inputs (including quoted prices for similar securities, interest rates, credit risk, etc.); and |
• | Level 3 - significant unobservable inputs (including the Company's own assumptions about the assumptions market participants would use in determining the fair value of investments). |
The valuation methods described below may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while the Company believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date.
Investments
The Company's investment assets, valued with assistance from a third-party trustee, consist of certificates of deposits, commercial paper, corporate bonds and government securities and are carried at fair value on the consolidated balance sheet per the Fair Value Measurements and Disclosures Topic in the ASC. There are several valuation methodologies used for those assets as described below.
• | Certificates of Deposit and Commercial Paper (Level 2): Valued at amortized cost, which approximates fair value; and |
• |
(Dollars in Millions) | March 31, 2019 | December 31, 2018 | ||||
Certificates of Deposit and Commercial Paper | $ | $ | ||||
Corporate Bonds | ||||||
Government Securities | ||||||
Total investments at fair value | $ | $ | ||||
CSX Q1 2019 Form 10-Q p.25 | ||
NOTE 11. Fair Value Measurements, continued
(Dollars in millions) | March 31, 2019 | December 31, 2018 | |||||
Less than 1 year | $ | $ | |||||
1 - 5 years | |||||||
5 - 10 years | |||||||
Greater than 10 years | |||||||
Total investments at fair value | $ | $ | |||||
Long-term debt is reported at carrying amount on the consolidated balance sheets and is the Company's only financial instrument with fair values significantly different from their carrying amounts. The majority of the Company's long-term debt is valued with assistance from an independent third party adviser that utilizes closing transactions, market quotes or market values of comparable debt. For those instruments not valued by the independent adviser, the fair value has been estimated by applying market rates of similar instruments to the scheduled contractual debt payments and maturities. These market rates are provided by the same independent adviser. All of the inputs used to determine the fair value of the Company's long-term debt are Level 2 inputs.
(Dollars in millions) | March 31, 2019 | December 31, 2018 | |||||
Long-term Debt (Including Current Maturities): | |||||||
Fair Value | $ | $ | |||||
Carrying Value | |||||||
CSX Q1 2019 Form 10-Q p.26 | ||
NOTE 12. Other Comprehensive Income (Loss)
CSX reports comprehensive earnings or loss in accordance with the Comprehensive Income Topic in the ASC in the Consolidated Comprehensive Income Statement. Total comprehensive earnings are defined as all changes in shareholders' equity during a period, other than those resulting from investments by and distributions to shareholders (e.g. issuance of equity securities and dividends). Generally, for CSX, total comprehensive earnings equal net earnings plus or minus adjustments for pension and other post-retirement liabilities. Total comprehensive earnings represent the activity for a period net of tax and were $836 million and $596 million for first quarters 2019 and 2018, respectively.
While total comprehensive earnings is the activity in a period and is largely driven by net earnings in that period, accumulated other comprehensive income or loss (“AOCI”) represents the cumulative balance of other comprehensive income, net of tax, as of the balance sheet date. For CSX, AOCI is primarily the cumulative balance related to pension and other post-retirement benefit adjustments and CSX's share of AOCI of equity method investees.
Pension and Other Post-Employment Benefits | Other | Accumulated Other Comprehensive Income (Loss) | |||||||||
(Dollars in millions) | |||||||||||
Balance December 31, 2018, Net of Tax | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||
Other Comprehensive Income (Loss) | |||||||||||
Loss Before Reclassifications | ( | ) | ( | ) | |||||||
Amounts Reclassified to Net Earnings | |||||||||||
Tax Expense | ( | ) | ( | ) | ( | ) | |||||
Total Other Comprehensive Income (Loss) | ( | ) | |||||||||
Balance March 31, 2019, Net of Tax | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||
NOTE 13. Summarized Consolidating Financial Data
CSX Q1 2019 Form 10-Q p.27 | ||
NOTE 13. Summarized Consolidating Financial Data, continued
Consolidating Income Statements | ||||||||||||
(Dollars in millions) | ||||||||||||
First Quarter 2019 | CSX Corporation | CSX Transportation | Eliminations and Other | Consolidated | ||||||||
Revenue | $ | $ | $ | $ | ||||||||
Expense | ( | ) | ( | ) | ||||||||
Operating Income | ||||||||||||
Equity in Earnings of Subsidiaries | ( | ) | ||||||||||
Interest (Expense) / Benefit | ( | ) | ( | ) | ( | ) | ||||||
Other Income / (Expense) - Net | ( | ) | ||||||||||
Earnings Before Income Taxes | ( | ) | ||||||||||
Income Tax Benefit / (Expense) | ( | ) | ( | ) | ( | ) | ||||||
Net Earnings | $ | $ | $ | ( | ) | $ | ||||||
Total Comprehensive Earnings | $ | $ | $ | ( | ) | $ | ||||||
First Quarter 2018 | CSX Corporation | CSX Transportation | Eliminations and Other | Consolidated | ||||||||
Revenue | $ | $ | $ | $ | ||||||||
Expense | ( | ) | ( | ) | ||||||||
Operating Income | ||||||||||||
Equity in Earnings of Subsidiaries | ( | ) | ||||||||||
Interest (Expense) / Benefit | ( | ) | ( | ) | ( | ) | ||||||
Other Income / (Expense) - Net | ( | ) | ||||||||||
Earnings Before Income Taxes | ( | ) | ||||||||||
Income Tax Benefit / (Expense) | ( | ) | ( | ) | ( | ) | ||||||
Net Earnings | $ | $ | $ | ( | ) | $ | ||||||
Total Comprehensive Earnings | $ | $ | $ | ( | ) | $ | ||||||
CSX Q1 2019 Form 10-Q p.28 | ||
NOTE 13. Summarized Consolidating Financial Data, continued
Consolidating Balance Sheet | ||||||||||||
(Dollars in millions) | ||||||||||||
March 31, 2019 | CSX Corporation | CSX Transportation | Eliminations and Other | Consolidated | ||||||||
ASSETS | ||||||||||||
Current Assets | ||||||||||||
Cash and Cash Equivalents | $ | $ | $ | $ | ||||||||
Short-term Investments | ||||||||||||
Accounts Receivable - Net | ||||||||||||
Receivable from Affiliates | ( | ) | ||||||||||
Materials and Supplies | ||||||||||||
Other Current Assets | ||||||||||||
Total Current Assets | ( | ) | ||||||||||
Properties | ||||||||||||
Accumulated Depreciation | ( | ) | ( | ) | ( | ) | ( | ) | ||||
Properties - Net | ||||||||||||
Investments in Conrail | ||||||||||||
Affiliates and Other Companies | ( | ) | ||||||||||
Investments in Consolidated Subsidiaries | ( | ) | ||||||||||
Right-of-Use Lease Asset | ||||||||||||
Other Long-term Assets | ( | ) | ||||||||||
Total Assets | $ | $ | $ | ( | ) | $ | ||||||
LIABILITIES AND SHAREHOLDERS' EQUITY | ||||||||||||
Current Liabilities | ||||||||||||
Accounts Payable | $ | $ | $ | $ | ||||||||
Labor and Fringe Benefits Payable | ||||||||||||
Payable to Affiliates | ( | ) | ||||||||||
Casualty, Environmental and Other Reserves | ||||||||||||
Current Maturities of Long-term Debt | ||||||||||||
Income and Other Taxes Payable | ( | ) | ||||||||||
Other Current Liabilities | ||||||||||||
Total Current Liabilities | ( | ) | ||||||||||
Casualty, Environmental and Other Reserves | ||||||||||||
Long-term Debt | ||||||||||||
Deferred Income Taxes - Net | ( | ) | ||||||||||
Long-term Lease Liability | ||||||||||||
Other Long-term Liabilities | ( | ) | ||||||||||
Total Liabilities | $ | $ | $ | ( | ) | $ | ||||||
Shareholders' Equity | ||||||||||||
Common Stock, $1 Par Value | $ | $ | $ | ( | ) | $ | ||||||
Other Capital | ( | ) | ||||||||||
Retained Earnings | ( | ) | ||||||||||
Accumulated Other Comprehensive Loss | ( | ) | ( | ) | ( | ) | ||||||
Noncontrolling Interest | ||||||||||||
Total Shareholders' Equity | $ | $ | $ | ( | ) | $ | ||||||
Total Liabilities and Shareholders' Equity | $ | $ | $ | ( | ) | $ | ||||||
CSX Q1 2019 Form 10-Q p.29 | ||
NOTE 13. Summarized Consolidating Financial Data, continued
Consolidating Balance Sheet (Dollars in millions) | ||||||||||||
December 31, 2018 | CSX Corporation | CSX Transportation | Eliminations and Other | Consolidated | ||||||||
ASSETS | ||||||||||||
Current Assets | ||||||||||||
Cash and Cash Equivalents | $ | $ | $ | $ | ||||||||
Short-term Investments | ||||||||||||
Accounts Receivable - Net | ||||||||||||
Receivable from Affiliates | ( | ) | ||||||||||
Materials and Supplies | ||||||||||||
Other Current Assets | ||||||||||||
Total Current Assets | ( | ) | ||||||||||
Properties | ||||||||||||
Accumulated Depreciation | ( | ) | ( | ) | ( | ) | ( | ) | ||||
Properties - Net | ||||||||||||
Investments in Conrail | ||||||||||||
Affiliates and Other Companies | ( | ) | ||||||||||
Investment in Consolidated Subsidiaries | ( | ) | ||||||||||
Other Long-term Assets | ( | ) | ||||||||||
Total Assets | $ | $ | $ | ( | ) | $ | ||||||
LIABILITIES AND SHAREHOLDERS' EQUITY | ||||||||||||
Current Liabilities | ||||||||||||
Accounts Payable | $ | $ | $ | $ | ||||||||
Labor and Fringe Benefits Payable | ||||||||||||
Payable to Affiliates | ( | ) | ||||||||||
Casualty, Environmental and Other Reserves | ||||||||||||
Current Maturities of Long-term Debt | ||||||||||||
Income and Other Taxes Payable | ( | ) | ||||||||||
Other Current Liabilities | ||||||||||||
Total Current Liabilities | ( | ) | ||||||||||
Casualty, Environmental and Other Reserves | ||||||||||||
Long-term Debt | ||||||||||||
Deferred Income Taxes - Net | ( | ) | ||||||||||
Other Long-term Liabilities | ( | ) | ||||||||||
Total Liabilities | $ | $ | $ | ( | ) | $ | ||||||
Shareholders' Equity | ||||||||||||
Common Stock, $1 Par Value | $ | $ | $ | ( | ) | $ | ||||||
Other Capital | ( | ) | ||||||||||
Retained Earnings | ( | ) | ||||||||||
Accumulated Other Comprehensive Loss | ( | ) | ( | ) | ( | ) | ||||||
Noncontrolling Minority Interest | ||||||||||||
Total Shareholders' Equity | $ | $ | $ | ( | ) | $ | ||||||
Total Liabilities and Shareholders' Equity | $ | $ | $ | ( | ) | $ | ||||||
CSX Q1 2019 Form 10-Q p.30 | ||
NOTE 13. Summarized Consolidating Financial Data, continued
Consolidating Cash Flow Statements | ||||||||||||
(Dollars in millions) | ||||||||||||
Three Months 2019 | CSX Corporation | CSX Transportation | Eliminations and Other | Consolidated | ||||||||
Operating Activities | ||||||||||||
Net Cash Provided by (Used in) Operating Activities | $ | $ | $ | ( | ) | $ | ||||||
Investing Activities | ||||||||||||
Property Additions | ( | ) | ( | ) | ( | ) | ||||||
Proceeds from Property Dispositions | ( | ) | ||||||||||
Purchases of Short-term Investments | ( | ) | ( | ) | ||||||||
Proceeds from Sales of Short-term Investments | ||||||||||||
Other Investing Activities | ( | ) | ( | ) | ( | ) | ||||||
Net Cash Provided by (Used in) Investing Activities | ( | ) | ( | ) | ( | ) | ( | ) | ||||
Financing Activities | ||||||||||||
Long-term Debt Issued | ||||||||||||
Dividends Paid | ( | ) | ( | ) | ( | ) | ||||||
Shares Repurchased | ( | ) | ( | ) | ||||||||
Other Financing Activities | ( | ) | ||||||||||
Net Cash Provided by (Used in) Financing Activities | ( | ) | ||||||||||
Net Increase (Decrease) in Cash and Cash Equivalents | ||||||||||||
Cash and Cash Equivalents at Beginning of Period | ||||||||||||
Cash and Cash Equivalents at End of Period | $ | $ | $ | $ | ||||||||
CSX Q1 2019 Form 10-Q p.31 | ||
NOTE 13. Summarized Consolidating Financial Data, continued
Consolidating Cash Flow Statements | ||||||||||||
(Dollars in millions) | ||||||||||||
Three Months 2018 | CSX Corporation | CSX Transportation | Eliminations and Other | Consolidated | ||||||||
Operating Activities | ||||||||||||
Net Cash Provided by (Used in) Operating Activities | $ | $ | $ | ( | ) | $ | ||||||
Investing Activities | ||||||||||||
Property Additions | ( | ) | ( | ) | ( | ) | ||||||
Proceeds from Property Dispositions | ||||||||||||
Proceeds from Sales of Short-term Investments | ||||||||||||
Other Investing Activities | ( | ) | ( | ) | ( | ) | ||||||
Net Cash (Used in) Provided by Investing Activities | ( | ) | ( | ) | ( | ) | ||||||
Financing Activities | ||||||||||||
Long-term Debt Issued | ||||||||||||
Dividends Paid | ( | ) | ( | ) | ( | ) | ||||||
Shares Repurchased | ( | ) | ( | ) | ||||||||
Other Financing Activities | ( | ) | ( | ) | ( | ) | ||||||
Net Cash Provided by (Used in) Financing Activities | ( | ) | ||||||||||
Net Increase (Decrease) in Cash and Cash Equivalents | ( | ) | ( | ) | ||||||||
Cash and Cash Equivalents at Beginning of Period | ||||||||||||
Cash and Cash Equivalents at End of Period | $ | $ | $ | $ | ||||||||
CSX Q1 2019 Form 10-Q p.32 | ||
CSX CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FIRST QUARTER 2019 HIGHLIGHTS
• | Revenue increased $137 million to $3.0 billion, or 5% year over year. |
• | Expenses decreased $38 million to $1.8 billion, or 2% year over year. |
• | Operating income of $1.2 billion increased $175 million, or 17% year over year. |
• | Operating ratio of 59.5% improved 420 basis points versus first quarter 2018. |
• | Earnings per diluted share of $1.02 increased $0.24, or 31% year over year. |
First Quarters | ||||||||||
2019 | 2018 | Fav / (Unfav) | % Change | |||||||
Volume (in thousands) | 1,531 | 1,532 | (1 | ) | —% | |||||
(in millions) | ||||||||||
Revenue | $ | 3,013 | $ | 2,876 | $ | 137 | 5% | |||
Expense | 1,794 | 1,832 | 38 | 2% | ||||||
Operating Income | $ | 1,219 | $ | 1,044 | $ | 175 | 17% | |||
Operating Ratio | 59.5 | % | 63.7 | % | 420 | bps | ||||
Earnings Per Diluted Share | $ | 1.02 | $ | 0.78 | $ | 0.24 | 31% | |||
CSX Q1 2019 Form 10-Q p.33 | ||
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 | ||||||||||||||||||||||||||||
2019 | 2018 | % Change | 2019 | 2018 | % Change | 2019 | 2018 | % Change | ||||||||||||||||||||||
Chemicals | 167 | 162 | 3 | % | $ | 586 | $ | 557 | 5 | % | $ | 3,509 | $ | 3,438 | 2 | % | ||||||||||||||
Automotive | 115 | 112 | 3 | 311 | 304 | 2 | 2,704 | 2,714 | — | |||||||||||||||||||||
Agricultural and Food Products | 114 | 107 | 7 | 344 | 307 | 12 | 3,018 | 2,869 | 5 | |||||||||||||||||||||
Forest Products | 71 | 67 | 6 | 216 | 195 | 11 | 3,042 | 2,910 | 5 | |||||||||||||||||||||
Minerals | 69 | 66 | 5 | 123 | 114 | 8 | 1,783 | 1,727 | 3 | |||||||||||||||||||||
Metals and Equipment | 64 | 64 | — | 189 | 186 | 2 | 2,953 | 2,906 | 2 | |||||||||||||||||||||
Fertilizers | 62 | 64 | (3 | ) | 110 | 116 | (5 | ) | 1,774 | 1,813 | (2 | ) | ||||||||||||||||||
Total Merchandise | 662 | 642 | 3 | 1,879 | 1,779 | 6 | 2,838 | 2,771 | 2 | |||||||||||||||||||||
Coal | 212 | 201 | 5 | 538 | 503 | 7 | 2,538 | 2,502 | 1 | |||||||||||||||||||||
Intermodal | 657 | 689 | (5 | ) | 428 | 449 | (5 | ) | 651 | 652 | — | |||||||||||||||||||
Other | — | — | — | 168 | 145 | 16 | — | — | — | |||||||||||||||||||||
Total | 1,531 | 1,532 | — | % | $ | 3,013 | $ | 2,876 | 5 | % | $ | 1,968 | $ | 1,877 | 5 | % | ||||||||||||||
CSX Q1 2019 Form 10-Q p.34 | ||
CSX CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
First Quarter 2019
Revenue
Total revenue increased 5 percent for first quarter 2019 when compared to first quarter 2018 due to price increases, favorable mix, higher other revenue and increases in fuel recovery.
Merchandise
Chemicals - Volume increased as stronger waste, core chemicals and energy shipments more than offset reduced natural gas liquids, fly ash, and sand shipments.
Automotive - Volume increased due to higher shipments of trucks and SUVs.
Agricultural and Food Products - Volume increased due to gains in both the domestic and export grain markets, as well as gains in the ethanol market.
Forest Products - Volume increased due to higher export demand for wood pulp and other fiber products as well as stronger building products shipments.
Minerals - Volume increased due to stronger shipments for construction and paving projects.
Metals and Equipment - Volumes were flat as metals shipments increased due to higher domestic steel production while project-based equipment and pipe moves declined.
Fertilizers - Volume declined as winter weather conditions delayed spring fertilizer applications.
Coal
Domestic coke, iron ore and other volume increased primarily driven by higher domestic steel production. Domestic utility coal volume declined slightly reflecting continued strong competition from natural gas. Export volume declined slightly as lower metallurgical coal shipments were partially offset by higher thermal coal exports.
Intermodal
Domestic volume declined as rationalization of low-density lanes more than offset growth with existing customers. International volume increased driven by strong performance with existing customers and new service offerings to inland ports, which more than offset losses from the rationalization of low-density lanes.
Other Revenue
Other revenue increased $23 million versus prior year primarily due to a contract settlement with a customer and higher incidental charges, partially offset by payments in the prior year from customers that did not meet volume commitments.
CSX Q1 2019 Form 10-Q p.35 | ||
CSX CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Expenses
Expenses of $1.8 billion decreased $38 million, or 2 percent year over year, primarily driven by labor efficiencies partially offset by inflation.
Labor and Fringe expense decreased $24 million primarily due to the following:
• | Lower headcount and crew starts drove a $22 million reduction in expense. |
• | Other costs decreased primarily due to the recognition of railroad retirement tax refunds related to past relocation benefits and were mostly offset by inflation. |
Materials, Supplies and Other expense decreased $4 million due to the following:
• | Volume-related savings resulted from intermodal lane rationalizations. |
• | Other costs increased as a result of a prior year favorable personal injury adjustment, inflation and other non-significant items. |
• | Real estate gains were $27 million in 2019 compared to $32 million in 2018. |
Depreciation expense increased $7 million primarily due to a larger asset base.
Fuel expense decreased $22 million primarily due to a 5 percent price decrease and cost savings from fuel efficiency initiatives.
Equipment and Other Rents expense decreased $1 million primarily due to reduced days per load for automotive, other merchandise and intermodal markets, mostly offset by automotive volume-related costs and inflation.
Equity Earnings of Affiliates decreased $6 million primarily due to lower net earnings at TTX and Conrail.
Interest Expense
Interest expense increased $29 million primarily due to higher average debt balances.
Other Income - Net
Other income - net increased $6 million primarily due to increased interest income as a result of higher average investment balances.
Income Tax Expense
Income tax expense increased $13 million primarily due to increased earnings before income taxes, partially offset by a $32 million tax benefit primarily due to impacts from option exercises and the vesting of other equity awards.
CSX Q1 2019 Form 10-Q p.36 | ||
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 in the 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 by U.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.
Adjusted 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. Adjusted free cash flow excludes the impact of cash payments for restructuring charge. Free cash flow and adjusted free cash flow should be considered in addition to, rather than a substitute for, cash provided by operating activities. The increase in adjusted free cash flow before dividends from the prior year of $215 million is primarily due to higher cash-generating income, favorable changes in working capital and lower property additions.
The following table reconciles cash provided by operating activities (GAAP measure) to adjusted free cash flow after restructuring, before dividends (non-GAAP measure). The restructuring charge impact to free cash flow in 2018 was tax effected using the Company's applicable tax rate.
Three Months | ||||||
(Dollars in millions) | 2019 | 2018 | ||||
Net cash provided by operating activities | $ | 1,173 | $ | 966 | ||
Property Additions | (353 | ) | (368 | ) | ||
Other Investing Activities | 46 | 44 | ||||
Free Cash Flow (before payment of dividends) | 866 | 642 | ||||
Add back: Cash Payments for Restructuring Charge (after-tax) (a) | — | 9 | ||||
Adjusted Free Cash Flow Before Dividends (non-GAAP) | $ | 866 | $ | 651 | ||
(a) The Company made cash payments related to the restructuring charge of $12 million in first quarter 2018.
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.
The methodologies used to calculate train velocity and terminal dwell are consistent with the principles of scheduled railroading, but differ from those prescribed by the Surface Transportation Board ("STB"). Train velocity and dwell will continue to be reported, using the prescribed methodology, to the STB on a weekly basis.
CSX Q1 2019 Form 10-Q p.37 | ||
CSX CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Operating performance continued to improve in first quarter 2019, as train velocity and car dwell improved 17 percent and 14 percent, respectively, to all-time record levels. The Company remains focused on executing the operational plan to deliver further service gains, improve transit times and drive asset utilization while controlling costs.
From a safety perspective, the FRA reportable personal injury frequency index of 0.79 for the first quarter 2019 improved 32 percent year over year, driven by a reduction in the number of personal injuries. Similarly, the FRA train accident frequency rate of 2.60 for the quarter improved 35 percent year over year, driven by a significant reduction in train accidents. This improvement continues the positive momentum CSX achieved in the latter half of 2018.
The Company is committed to continuous safety improvement and remains focused on reducing risk and enhancing the overall safety of its employees, customers and the communities in which the Company operates.
First Quarters | ||||||
2019 | 2018 | Improvement/ (Deterioration) | ||||
Operations Performance | ||||||
Train Velocity (Miles per hour)(a) | 20.4 | 17.5 | 17 | % | ||
Dwell (Hours)(a) | 8.9 | 10.4 | 14 | % | ||
Revenue Ton-Miles (Billions) | ||||||
Merchandise | 31.6 | 31.4 | 1 | % | ||
Coal | 10.5 | 10.3 | 2 | % | ||
Intermodal | 6.5 | 7.1 | (8 | )% | ||
Total Revenue Ton-Miles | 48.6 | 48.8 | — | % | ||
Total Gross Ton-Miles (Billions) | 96.7 | 96.3 | — | % | ||
On-Time Originations | 81 | % | 81 | % | — | % |
On-Time Arrivals | 64 | % | 57 | % | 12 | % |
Safety | ||||||
FRA Personal Injury Frequency Index | 0.79 | 1.16 | 32 | % | ||
FRA Train Accident Rate | 2.60 | 3.97 | 35 | % | ||
(a) The methodology for calculating train velocity and dwell differ from that prescribed by the STB. CSXT will continue to report train velocity and dwell, using the prescribed methodology, to the STB on a weekly basis. See additional discussion on the Company's website.
Certain operating statistics are estimated and can continue to be updated as actuals settle.
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.
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.
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 2019 Form 10-Q p.38 | ||
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 $330 million and $1.6 billion in cash and cash equivalents for operating, investing and financing activities for three months ended 2019 and 2018, respectively.
• | Cash provided by operating activities increased $207 million primarily driven by higher cash-generating income and favorable changes to working capital. |
• | Cash used in investing activities increased $554 million primarily driven by an increase in net short-term investment purchases. |
• | Cash used in financing activities decreased $902 million primarily due to lower long-term debt issuances versus the prior year. |
Sources of Cash and Liquidity and Uses of Cash
As of the end of first quarter 2019, CSX had $2.0 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 8, 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 the SEC on February 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 2019, CSX issued a total of $1.0 billion of new long-term debt.
CSX Q1 2019 Form 10-Q p.39 | ||
CSX CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
On March 29, 2019, CSX replaced its existing $1.0 billion unsecured, revolving credit facility with a new $1.2 billion unsecured, revolving credit facility backed by a diverse syndicate of banks. The new facility expires in March 2024 and at March 31, 2019, 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, 2019, the Company had no outstanding debt under the commercial paper program.
Planned capital investments for 2019 are expected to be between $1.6 billion and $1.7 billion, including approximately $100 million for Positive Train Control ("PTC"). Of the 2019 investment, over half will be used to sustain the core infrastructure. 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.
The Company expects to continue incurring capital costs in connection with the implementation of PTC. 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 2019 was $2.3 billion.
Material Changes in the Consolidated Balance Sheets and Working Capital
Consolidated Balance Sheets
Total assets increased $1.4 billion from year end primarily due to the net increase in cash and short-term investments of $899 million and the right-of-use lease asset of $550 million resulting from the adoption of the new lease accounting standard. The increase in cash and short-term investments was primarily the result of cash from operations of $1.2 billion and the issuance of $1.0 billion in long-term debt, partially offset by share repurchases of $796 million, property additions of $353 million and dividends paid of $195 million.
Total liabilities and shareholders' equity combined increased $1.4 billion from year end primarily due to the issuance of $1.0 billion in long-term debt, net earnings of $834 million and the total lease liability of $555 million resulting from the adoption of the new lease accounting standard. These increases were partially offset by share repurchases of $796 million and dividends paid of $195 million.
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 $650 million as of March 31, 2019 and December 31, 2018, respectively. The increase in working capital since year end of $903 million is primarily due to the increase in cash and short-term investments. The increase in cash was driven by cash from operations of $1.2 billion and proceeds from the $1.0 billion issuance of long-term debt, partially offset by share repurchases of $796 million, property additions of $353 million and dividend payments of $195 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 Q1 2019 Form 10-Q p.40 | ||
CSX CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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.
LABOR AGREEMENTS
All 13 rail unions that participate in national bargaining have reached national agreements with the Class I railroads via ratification, executive action or interest arbitration. These agreements are effective January 1, 2015 through December 31, 2019.
CRITICAL ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with accounting principles generally accepted in the 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; |
• | depreciation policies for assets under the group-life method; and |
• | income taxes. |
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; |
• | expectations as to the effect of claims, lawsuits, environmental costs, commitments, contingent liabilities, labor negotiations or agreements on the Company's financial condition, results of operations or liquidity; |
• | management's plans, strategies and objectives for future operations, capital expenditures, workforce levels, dividends, share repurchases, safety and service performance, proposed new services and other matters that are not historical facts, and management's expectations as to future performance and operations and the time by which objectives will be achieved; and |
• | future economic, industry or market conditions or performance and their effect on the Company's financial condition, results of operations or liquidity. |
CSX Q1 2019 Form 10-Q p.41 | ||
CSX CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-looking statements are typically identified by words or phrases such as "will," "should," “believe,” “expect,” “anticipate,” “project,” “estimate,” “preliminary” and similar expressions. The Company cautions against placing undue reliance on forward-looking statements, which reflect its good faith beliefs with respect to future events and are based on information currently available to it as of the date the forward-looking statement is made. Forward-looking statements should not be read as a guarantee of future performance or results and will not necessarily be accurate indications of the timing when, or by which, such performance or results will be achieved.
Forward-looking statements are subject to a number of risks and uncertainties and actual performance or results could differ materially from those anticipated by any forward-looking statements. The Company undertakes no obligation to update or revise any forward-looking statement. If the Company does update any forward-looking statement, no inference should be drawn that the Company will make additional updates with respect to that statement or any other forward-looking statements. The following important factors, in addition to those discussed in Part I, Item 1A Risk Factors of CSX's most recent annual report on Form 10-K and elsewhere in this report, may cause actual results to differ materially from those contemplated by any forward-looking statements:
• | legislative, regulatory or legal developments involving transportation, including rail or intermodal transportation, the environment, hazardous materials, taxation, international trade and initiatives to further regulate the rail industry; |
• | the outcome of litigation, claims and other contingent liabilities, including, but not limited to, those related to fuel surcharge, environmental matters, taxes, shipper and rate claims subject to adjudication, personal injuries and occupational illnesses; |
• | changes in domestic or international economic, political or business conditions, including those affecting the transportation industry (such as the impact of industry competition, conditions, performance and consolidation) and the level of demand for products carried by CSXT; |
• | natural events such as severe weather conditions, including floods, fire, hurricanes and earthquakes, a pandemic crisis affecting the health of the Company's employees, its shippers or the consumers of goods, or other unforeseen disruptions of the Company's operations, systems, property, equipment or supply chain; |
• | competition from other modes of freight transportation, such as trucking and competition and consolidation or financial distress within the transportation industry generally; |
• | the cost of compliance with laws and regulations that differ from expectations (including those associated with PTC implementation) as well as costs, penalties and operational and liquidity impacts associated with noncompliance with applicable laws or regulations; |
• | the impact of increased passenger activities in capacity-constrained areas, including potential effects of high speed rail initiatives, or regulatory changes affecting when CSXT can transport freight or service routes; |
• | unanticipated conditions in the financial markets that may affect timely access to capital markets and the cost of capital, as well as management's decisions regarding share repurchases; |
• | changes in fuel prices, surcharges for fuel and the availability of fuel; |
• | the impact of natural gas prices on coal-fired electricity generation; |
• | the impact of global supply and price of seaborne coal on CSXT's export coal market; |
• | availability of insurance coverage at commercially reasonable rates or insufficient insurance coverage to cover claims or damages; |
CSX Q1 2019 Form 10-Q p.42 | ||
CSX CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
• | the inherent business risks associated with safety and security, including the transportation of hazardous materials or a cybersecurity attack which would threaten the availability and vulnerability of information technology; |
• | adverse economic or operational effects from actual or threatened war or terrorist activities and any governmental response; |
• | loss of key personnel or the inability to hire and retain qualified employees; |
• | labor and benefit costs and labor difficulties, including stoppages affecting either the Company's operations or customers' ability to deliver goods to the Company for shipment; |
• | the Company's success in implementing its strategic, financial and operational initiatives; |
• | the impact of conditions in the real estate market on the Company's ability to sell assets; |
• | changes in operating conditions and costs or commodity concentrations; and |
• | the inherent uncertainty associated with projecting economic and business conditions. |
Other important assumptions and factors that could cause actual results to differ materially from those in the forward-looking statements are specified elsewhere in this report and in CSX's other SEC reports, which are accessible on the SEC's website at www.sec.gov and the Company's website at www.csx.com. The information on the CSX website is not part of this quarterly report on Form 10-Q.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in market risk from the information provided under Part II, Item 7A (Quantitative and Qualitative Disclosures about Market Risk) of CSX's most recent annual report on Form 10-K.
ITEM 4. CONTROLS AND PROCEDURES
As of March 31, 2019, under the supervision and with the participation of CSX's Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), management has evaluated the effectiveness of the design and operation of the Company's disclosure controls and procedures. Based on that evaluation, the CEO and CFO concluded that, as of March 31, 2019, the Company's disclosure controls and procedures were effective at the reasonable assurance level in timely alerting them to material information required to be included in CSX's periodic SEC reports. There were no changes in the Company's internal controls over financial reporting during the first quarter of 2019 that have materially affected or are reasonably likely to materially affect the Company's internal control over financial reporting.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
For further details, please refer to Note 6. Commitments and Contingencies of this quarterly report on Form 10-Q. Also refer to Part I, Item 3. Legal Proceedings in CSX's most recent annual report on Form 10-K.
Item 1A. Risk Factors
For information regarding factors that could affect the Company's results of operations, financial condition and liquidity, see the risk factors discussed under Part I, Item 1A (Risk Factors) of CSX's most recent annual report on Form 10-K. See also Part I, Item 2 (Forward-Looking Statements) of this quarterly report on Form 10-Q.
CSX Q1 2019 Form 10-Q p.43 | ||
Item 2. CSX Purchases of Equity Securities
CSX purchases its own shares for two primary reasons: (1) to further its goals under its share repurchase program and (2) to fund the Company’s contribution required to be paid in CSX common stock under a 401(k) plan that covers certain union employees.
In February 2018, the Company announced an increase to the $1.5 billion share repurchase program first announced in October 2017, bringing the total authorized to $5 billion. This program was completed on January 16, 2019. Also on January 16, 2019, the Company announced a new $5 billion share repurchase program. During the first quarters of 2019 and 2018, the Company repurchased approximately $796 million, or 12 million shares, and $836 million, or 15 million shares, respectively.
Share repurchases may be made through a variety of methods including, but not limited to, open market purchases, purchases pursuant to Rule 10b5-1 plans, accelerated share repurchases and negotiated block purchases. The timing of share repurchases depends upon management's assessment of marketplace conditions and other factors, and the program remains subject to the discretion of the Board of Directors. Future share repurchases are expected to be funded by cash on hand, cash generated from operations and debt issuances. Shares are retired immediately upon repurchase. Share repurchase activity for the first quarter 2019 was as follows:
CSX Purchases of Equity Securities for the Quarter | ||||||||||
Third Quarter | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (a) | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs | ||||||
Beginning Balance | $ | 129,128,793 | ||||||||
January 1 - January 31, 2019 | 3,758,673 | $ | 64.19 | 3,650,748 | 4,895,001,377 | |||||
February 1 - February 28, 2019 | 4,078,567 | 69.88 | 4,078,567 | 4,610,002,040 | ||||||
March 1 - March 31, 2019 | 3,810,493 | 72.78 | 3,810,298 | 4,332,672,444 | ||||||
Ending Balance | 11,647,733 | $ | 68.99 | 11,539,613 | $ | 4,332,672,444 | ||||
(a) The difference of 108,120 shares between the "Total Number of Shares Purchased" and the "Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs" for the quarter represents shares purchased to fund the Company's contribution to a 401(k) plan that covers certain union employees.
CSX Q1 2019 Form 10-Q p.44 | ||
Item 3. Defaults Upon Senior Securities
None
Item 4. Mine Safety Disclosures
Not Applicable
Item 5. Other Information
None
CSX Q1 2019 Form 10-Q p.45 | ||
Item 6. Exhibits
Exhibit designation | Nature of exhibit | Previously filed as exhibit to |
Material contracts: | ||
10.1 | February 12, 2019 Exhibit 10.1, Form 8-K | |
10.2 | February 12, 2019 Exhibit 10.2, Form 8-K | |
10.3 | April 3, 2019 Exhibit 10.1, Form 8-K | |
Officer certifications: | ||
31* | ||
32* | ||
Interactive data files: | ||
101* | The following financial information from CSX Corporation's Quarterly Report on Form 10-Q for the quarter ended March 31, 2019 filed with the SEC on April 16, 2019, formatted in XBRL includes: (i) consolidated income statements for the fiscal periods ended March 31, 2019 and March 31, 2018, (ii) condensed consolidated comprehensive income statements for the fiscal periods ended March 31, 2019 and March 31, 2018, (iii) consolidated balance sheets at March 31, 2019 and December 31, 2018, (iv) consolidated cash flow statements for the fiscal periods ended March 31, 2019 and March 31, 2018, (v) consolidated statement of changes in shareholders' equity for the fiscal periods ended March 31, 2019 and March 31, 2018, and (vi) the notes to consolidated financial statements. | |
* Filed herewith | ||
CSX Q1 2019 Form 10-Q p.46 | ||
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
CSX CORPORATION
(Registrant)
By: /s/ ANGELA C. WILLIAMS
Angela C. Williams
Vice President and Controller
(Principal Accounting Officer)
Dated: April 16, 2019
CSX Q1 2019 Form 10-Q p.47 | ||