CSX Corporation — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. CSX provides rail freight, intermodal, trucking and related transportation services, primarily across the eastern United States.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $3.699B | $3.815B | $7.405B | $7.228B |
| Operating income | $1.482B | $1.703B | $2.946B | $2.985B |
| Operating ratio | 59.9% | 55.4% | 60.2% | 58.7% |
| Net earnings | $996M | $1.178B | $1.983B | $2.037B |
| Diluted EPS | $0.49 | $0.54 | $0.97 | $0.94 |
| Operating cash flow | Not presented quarterly | Not presented quarterly | $2.483B | $2.530B |
Q2 expenses increased 5% to $2.217B, while revenue fell 3%; operating income declined 13%. For the six months, revenue rose 2%, but expenses rose 5% and operating income slipped 1%. Six-month diluted EPS increased 3% despite lower net earnings, alongside lower average shares outstanding.
Q2 revenue softness reflected lower fuel recovery, intermodal volumes, other revenue and export-coal pricing. Merchandise revenue increased 5%, led by automotive, minerals, metals and equipment. Intermodal revenue fell 18%; coal revenue fell 2%. Fuel expense declined $134M, but inflation, operating support costs, depreciation and lower property-sale gains weighed on results. Q2 2022 included a $122M gain on Virginia property rights; Q2 2023 gains on property dispositions were $12M.
Six-month free cash flow before dividends, a non-GAAP measure, was $1.503B versus $1.748B. Operating cash flow included $238M of retroactive wages and bonuses related to finalized labor agreements. Property additions were $1.015B, compared with $811M in the prior-year period.
Balance sheet and liquidity
- At June 30, 2023, cash and cash equivalents were $956M, down from $1.958B at year-end 2022; short-term investments were $78M.
- Total debt was $17.908B, nearly unchanged from $18.047B at year-end; long-term debt was $17.898B. Interest expense rose $30M in Q2 and $52M for the six months, primarily due to higher average debt and interest rates.
- Working capital surplus was $856M, down from $1.4B at year-end. Management said liquidity was adequate.
- CSX had no borrowings under its $1.2B revolving credit facility, which expires in February 2028, and no commercial paper outstanding. The commercial paper program permits up to $1.0B outstanding.
- During the first half, CSX paid $448M in dividends and repurchased $1.930B of shares. Remaining authorization under its $5B repurchase program was approximately $1.3B at June 30.
Outlook, commentary and risks
- No specific revenue, earnings or margin guidance is provided in the filing. Planned 2023 capital investment is approximately $2.3B, with about 75% expected to support core infrastructure and operating equipment; management expects to fund investment primarily from operating cash flow.
- Management reported improved Q2 service measures: train velocity increased 16%, dwell improved 21%, carload trip-plan performance rose to 84% from 59%, and intermodal trip-plan performance reached 96% from 90%. The FRA train accident rate declined 16% year over year in Q2; the personal injury frequency index declined 24%.
- Key uncertainties include economic and freight-demand conditions, competition, fuel prices and recovery, inflation, labor costs and disruptions, severe weather and operational interruptions, safety and hazardous-material risks, insurance availability, and access to capital markets.
- Environmental reserves were $160M. CSX was identified as a potentially responsible party at approximately 240 environmentally impaired sites; some potential additional costs cannot currently be reasonably estimated. Management stated the recorded reserves reflect currently estimable and probable remediation costs.
- For certain legal proceedings where a loss is reasonably possible in excess of established reserves, the estimated aggregate range was $3M–$23M. The filing also discusses fuel-surcharge antitrust litigation and the Lower Passaic River remediation matters; outcomes could differ materially from estimates.
- Management reported effective disclosure controls as of June 30, 2023, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether weaker intermodal demand, lower fuel recovery and coal pricing continue to offset merchandise growth.
- Whether cost inflation and higher interest expense continue to pressure the operating ratio and earnings.
- Execution and funding of the approximately $2.3B 2023 capital-investment plan while maintaining liquidity and the investment-grade credit profile.
- Future share repurchases, dividend policy and the pace of cash returns relative to cash generation and debt.
- Developments in environmental remediation and legal matters, including the fuel-surcharge litigation and Lower Passaic River proceedings.