Eventually, every company has to deal with tough times. The successful ones find ways to endure difficult situations and move forward. Yet relatively few businesses have to deal with the type of tragedy that CSX (CSX +1.59%) went through late last year following the death of CEO Hunter Harrison, and the railroad giant has worked hard to ensure that his legacy will endure far into the future.
Coming into Wednesday's fourth-quarter financial report, CSX investors weren't sure entirely what to expect, although they did want to see continued signs of bottom-line strength even in light of difficult conditions that they saw holding back revenues. CSX fell short on the revenue front but delivered solid profits, and shareholders have a better sense now of what's to come.
Image source: CSX.
How CSX did to finish 2017
CSX's Q4 results were mixed. Sales dropped 6% to $2.86 billion, missing analysts' consensus forecast by about $20 million. Yet profits soared due to lower tax rates, and even after taking out that extraordinary one-time item, adjusted net income of $573 million produced earnings of $0.64 per share. That compared favorably to the $0.56 per share that most of those following the stock were expecting to see.
The biggest news was the huge positive impact of the tax overhaul. CSX was able to reduce its deferred tax liabilities by a whopping $3.5 billion as a result of the corporate tax rate being cut from 35% to 21%. That worked out to a benefit of $3.89 per share for the railroad company.
Yet fundamentally, CSX was weaker nearly across the board in terms of shipments. Part of the decline derived from the fact that Q4 2016 included an extra week, which meant a roughly 7% lower baseline for Q4 2017's financials. But even after accounting for that, shipment volume was still down 2%, with the worst performance coming in fertilizers, agricultural and food products, and automotive. Lower U.S. vehicle production was the primary drag on auto segment shipments, while weaknesses in agricultural export markets weighed on food and ag volumes.
Some pockets of strength still showed through. Solid results from forest products, coal, and intermodal transport helped to offset a portion of the other volume declines. A strong global market for coal was helpful, and rising international logistics demand helped push intermodal revenue higher. More favorable pricing on a per-unit basis also cushioned the blow to revenue from lower volumes, especially in areas like fertilizers and chemicals.
Some operational elements worked in CSX's favor, but the railroad struggled on safety issues. Train velocities were up 14% from year-earlier levels, while dwell time at terminals was down by nearly an hour to 10.6 hours. Train lengths rose while employee counts fell, reflecting greater productivity from CSX's employees, but revenue ton-mile figures were down sharply. Personal injury frequency rose 16% despite a 13% drop in the number of train accidents compared to year-ago levels.
How CSX plans to move on
New CEO James Foote did his best to recognize the sorrow that employees feel over the death of his predecessor while indicating that the railroad remains on pace with key initiatives. "CSX's performance continued to strengthen in the fourth quarter," Foote said, "building upon the scheduled railroading model that was instituted by Hunter Harrison." Foote also pointed to recent progress as his team of executives works toward its goals.
For now, CSX looks unlikely to make major changes to its strategy. Foote noted in his guidance for 2018 that he expects revenue to be up slightly, with continued improvement in the railroad's operating ratios, which would reflect its ongoing efforts to improve efficiency. Capital expenditures will be slightly lower, coming in at about $1.6 billion thanks to better asset utilization and a refined approach to its overall network. Investors will have to wait until March 1 -- when the railroad showcases its new leadership team and reveals its longer-term outlook at its investor conference -- to get a broader sense of what's coming for CSX.
Investors weren't entirely satisfied with the results, but the stock's dip was relatively small -- less than 1% at midday following the morning report. Harrison's loss deals a blow to CSX's strategic vision, but the railroad has put the pieces in place to carry on and find new opportunities for growth in 2018 and beyond.
