CSX Corporation — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. CSX provides rail, intermodal, trucking and related transportation services. Pan Am Systems was acquired June 1, 2022, expanding the company’s Northeastern network; results include Pan Am only from the acquisition date. Quality Carriers, acquired July 1, 2021, contributes trucking revenue in the current period but not the prior-year comparison.
Financial performance and liquidity
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $3.815 billion | $2.990 billion | $7.228 billion | $5.803 billion |
| Operating income | $1.703 billion | $1.691 billion | $2.985 billion | $2.792 billion |
| Operating ratio | 55.4% | 43.4% | 58.7% | 51.9% |
| Net earnings | $1.178 billion | $1.173 billion | $2.037 billion | $1.879 billion |
| Diluted EPS | $0.54 | $0.52 | $0.94 | $0.82 |
| Operating cash flow | Not presented quarterly in this filing | $2.530 billion | $2.399 billion |
- Q2 revenue rose 28%, while operating income increased 1%; the operating ratio worsened 1,200 basis points. Six-month revenue increased 25% and operating income 7%, while the operating ratio worsened 680 basis points.
- Q2 expenses increased 63%, reflecting higher fuel costs, Quality Carriers costs, inflation and lower property-disposition gains. Locomotive fuel prices were up 92% year over year.
- Six-month free cash flow before dividends, a non-GAAP measure, was $1.748 billion versus $1.871 billion. Cash and short-term investments totaled $812 million at quarter-end; working capital was $391 million.
- Total debt, including current maturities, was $16.210 billion. CSX had no borrowings under its $1.2 billion revolving credit facility or $1.0 billion commercial paper program.
- Six-month financing uses included $2.515 billion of share repurchases and $433 million of dividends. Cash declined $1.515 billion to $724 million, largely reflecting shareholder returns and investing activity.
Material changes and unusual items
- Revenue growth reflected pricing gains, higher fuel recovery, coal revenue, trucking operations acquired with Quality Carriers and other revenue. Total rail volume was essentially flat in Q2 and down 1% for the first half.
- Coal revenue increased 54% in Q2 despite 3% lower volume, reflecting higher revenue per unit. Merchandise revenue rose 10% and intermodal revenue 18%.
- Property-disposition gains were $129 million in Q2 2022 versus $367 million a year earlier. CSX recognized a $122 million Q2 gain under its Virginia property-rights agreement; the related $125 million proceeds were expected upon the final phase closing in Q4 2022.
- Pan Am’s purchase price was $601 million, funded with $422 million in CSX stock and $179 million in cash. Acquisition-related costs totaled approximately $29 million, including $18 million in Q2.
Outlook, risks and contingencies
- Management expected 2022 capital investments of approximately $2.0 billion, with over 80% for core infrastructure and operating equipment, primarily funded by operating cash flow. No specific earnings or revenue guidance is provided in the filing.
- Management expected operating metrics to improve with hiring and training. Q2 train velocity fell 15%, dwell worsened 12%, and carload trip-plan performance declined 14% year over year. The FRA train accident rate increased 29%.
- Management cited continuing supply-chain and COVID-19 uncertainty, inflation, fuel-price and availability changes, hiring and retention, and ongoing rail-union negotiations as risks. Approximately 16,500 employees were union members; national bargaining was underway.
- Casualty, environmental and other reserves totaled $403 million. Environmental reserves were $133 million, and CSX had been identified as a potentially responsible party at approximately 230 sites; additional exposure at some sites could not be reasonably estimated.
- Management said pending legal matters were not expected individually to materially affect the company, but unexpected outcomes could. Estimated reasonably possible losses above reserves for certain legal proceedings were $2 million to $20 million in aggregate. Fuel-surcharge antitrust and environmental matters remain notable contingencies.
- On July 19, 2022, the board approved a new incremental $5 billion share-repurchase program; this followed the existing program, which had $488 million of authority remaining at June 30.
Important facts for investors to verify
- Whether service, staffing and safety performance improve, and whether deterioration affects volumes, costs or customer retention.
- How much revenue and earnings growth reflects pricing and fuel recovery versus acquisitions, and the ongoing contribution and costs of Quality Carriers and Pan Am.
- Timing and collection of the remaining Virginia transaction proceeds and the resulting effect of property gains on comparisons.
- Cash use, debt levels and funding plans as share repurchases continue alongside planned capital investment.
- Potential changes in labor negotiations, environmental remediation estimates and litigation exposure.