CSX Corporation — Q3 2022 Form 10-Q
Business context and period: CSX operates rail freight, intermodal, trucking and related transportation businesses, principally in the eastern United States. This filing covers the quarter and nine months ended September 30, 2022; comparisons are with the corresponding 2021 periods. Pan Am Systems has been consolidated from its June 1, 2022 acquisition date.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $3.895B | $3.292B | $11.123B | $9.095B |
| Operating income | $1.579B | $1.436B | $4.564B | $4.228B |
| Operating ratio | 59.5% | 56.4% | 59.0% | 53.5% |
| Net earnings | $1.111B | $968M | $3.148B | $2.847B |
| Diluted EPS | $0.52 | $0.43 | $1.46 | $1.26 |
Q3 revenue grew 18%, while expenses rose 25%; operating income increased 10%, but the operating ratio worsened by 310 basis points. Higher pricing and fuel recovery, export coal rates, volume growth and trucking revenue supported revenue. Fuel expense rose $191M, chiefly reflecting a 71% increase in locomotive fuel prices. Labor expense also reflected inflation and tentative labor agreements, including $42M related to prior periods.
For the first nine months, operating cash flow was $4.255B versus $3.819B. Capital expenditures were $1.437B; the company’s non-GAAP free cash flow before dividends was $2.869B versus $2.896B. Dividends paid were $645M and share repurchases were $3.710B.
Liquidity, debt and capital
At September 30, 2022, cash and cash equivalents were $2.311B and short-term investments were $88M. Working capital was a $1.8B surplus. Long-term debt, including current maturities, was $18.050B, up from $16.366B at year-end 2021; CSX issued $2.0B of notes during the period and repaid $178M. The company reported no borrowings under its $1.2B revolving credit facility or $1.0B commercial-paper program and was in compliance with facility covenants.
CSX expected 2022 capital investments of approximately $2B, with over 80% planned for core infrastructure and operating equipment. It stated that it intends to fund capital investments primarily from operating cash flow. The board approved a new $5B repurchase program in July; $4.3B of authority remained at quarter-end. The quarterly dividend was increased 7% to $0.10 per share in February 2022.
Material changes and notable items
- Revenue growth was broad-based, with particularly strong Q3 increases in coal revenue (36%), automotive (31%) and agricultural and food products (25%). Total Q3 volume increased 2%; nine-month volume was essentially flat.
- Service measures weakened: Q3 velocity fell 11%, dwell worsened 12%, and carload trip-plan performance fell 16%. Intermodal trip-plan performance improved 2%. The FRA train accident rate improved 21%, while the personal injury frequency index worsened 9%. Operating metrics exclude the acquired Pan Am network.
- Pan Am was acquired for $601M, funded with $422M of CSX stock and $179M cash. It adds a rail network in the Northeast; acquisition-related costs were expensed as incurred.
- Virginia property-rights transactions produced $142M of gains in the first nine months of 2022, compared with $349M in 2021; none was recorded in Q3. CSX reported $400M of proceeds collected to date and expected the remaining proceeds to be collected in Q4 2022. Future gains were not expected to be material.
- Labor unions and railroads reached tentative agreements in September. As of the filing, six unions representing about 17% of unionized rail employees had ratified; one union had voted against ratification, and remaining results were pending.
Outlook, risks and contingencies
The filing gives no specific earnings or revenue forecast. Management emphasized hiring and training and efforts to execute the operating plan and improve safe, reliable service. Key risks include labor ratification or disruption, inflation and fuel-price movements, service and workforce constraints, economic and freight-demand conditions, weather and operational disruptions, and access to capital markets.
CSX had $430M in casualty, environmental and other reserves at September 30, 2022, including $156M for environmental matters; the environmental balance includes $32M assumed with Pan Am. The company is involved in numerous environmental proceedings and identified as a potentially responsible party at approximately 230 sites. It said additional exposure at some sites cannot currently be reasonably estimated. Management did not expect recorded casualty or environmental items individually to materially adversely affect the company, but combined matters or an unexpected adverse resolution could be material in a period. The estimated aggregate range of reasonably possible legal losses above reserves was $3M–$22M. Fuel-surcharge antitrust and Lower Passaic River environmental matters remain notable proceedings.
Important facts for investors to verify
- Whether labor agreements were ratified and whether wage and benefit costs or service disruptions differ from current expectations.
- Whether CSX’s service metrics recover, and how service performance affects volumes, costs and customer demand.
- How much of revenue and earnings growth reflects sustainable pricing and volume versus fuel recovery, acquisition contributions and property gains.
- Whether the remaining Virginia proceeds were collected as expected and whether any further material gain was recognized.
- Debt levels, interest costs, capital spending, free cash flow and the pace of repurchases relative to CSX’s investment-grade-credit objective.
- Updates to environmental remediation, litigation and reserve estimates, including matters whose potential costs are not yet reasonably estimable.