CSX Corporation — Q1 2021 Form 10-Q
Business and period: CSX provides rail freight, intermodal and related transportation services across a network serving 23 states and parts of Canada. This unaudited report covers the quarter ended March 31, 2021; comparisons are with Q1 2020 unless noted. Dollar amounts are in millions except per-share data.
Financial performance
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Revenue | $2,813 | $2,855 | Down 1% |
| Operating expense | $1,712 | $1,677 | Up 2% |
| Operating income | $1,101 | $1,178 | Down 7% |
| Operating ratio | 60.9% | 58.7% | Up 220 basis points |
| Net earnings | $706 | $770 | Down 8% |
| Diluted EPS | $0.93 | $1.00 | Down 7% |
| Operating cash flow | $1,232 | $1,178 | Up $54 |
| Free cash flow before dividends | $934 | $812 | Up $122 |
Revenue was pressured by lower merchandise volume and fuel recovery, partly offset by intermodal growth, pricing gains and higher other revenue. Total volume rose 1%, but revenue per unit fell 2%. Intermodal revenue increased 11%; merchandise revenue fell 6%, and coal revenue fell 5%. Higher incentive compensation, inflation and lower gains on real estate sales contributed to expense growth. Fuel expense was nearly flat, reflecting improved fuel efficiency offset by higher fuel prices.
Cash, debt and liquidity
At March 31, cash and cash equivalents were $2,955, down from $3,129 at year-end 2020. Long-term debt, including current maturities, was $16,347, versus $16,705 at year-end after $360 of debt repayment. Cash flow from operations was $1,232; property additions were $306. Financing uses included $551 of share repurchases and $213 of dividends. Working capital surplus was $2.5 billion, and management said liquidity was adequate.
CSX reported no borrowings under its $1.2 billion revolving credit facility or $1.0 billion commercial-paper program. The revolver expires in March 2024; the company reported compliance with its covenants. Planned 2021 capital investment is $1.7–$1.8 billion, expected to be funded from operating cash flow.
Outlook, developments and risks
- Management said demand had improved from the sharp declines in early 2020, while COVID-19 continued to disrupt manufacturing, supply chains and consumer spending. It said the pandemic’s duration and effects remained uncertain.
- Winter weather and lingering COVID-related crew availability issues impaired operations. Train velocity was 18.9 mph versus 21.2, dwell was 10.8 hours versus 8.3, and on-time arrivals were 69% versus 84%. Management expected operating measures to improve during the year; no earnings or revenue forecast was provided.
- Reported safety measures deteriorated year over year: the FRA train accident rate rose to 2.92 from 2.24, and the personal injury frequency index rose to 1.02 from 0.61.
- CSX is seeking Surface Transportation Board approval to acquire Pan Am Systems; the approval process may take a year or more. The proposed acquisition would expand its northeastern network.
- CSX agreed to sell interests in three Virginia line segments for $525. The first-phase easement sale closed April 14, 2021; the gain was expected to be recognized in Q2. Remaining conveyances are anticipated over the next two years, with part of the transaction funding subject to approval.
- Recorded casualty, environmental and other reserves totaled $318. Management said no individual recorded matter was expected to materially affect the company, but combined matters or unexpected legal outcomes could be material in a period. The estimated aggregate range of reasonably possible legal losses above reserves was $1–$20.
- Material risks include pandemic and economic conditions, severe weather, labor negotiations, safety and hazardous-material incidents, fuel and coal-market changes, litigation and environmental exposure, and access to capital markets. About 15,500 employees were union members; national bargaining was underway.
Important facts to verify
- Whether intermodal strength and pricing can offset continued weakness in merchandise, coal and fuel-recovery revenue.
- Whether service reliability and safety metrics improve after weather and crew-availability disruptions.
- Progress and approval conditions for the Pan Am acquisition and Virginia line-segment sale, including the amount and timing of sale proceeds and gains.
- Actual 2021 capital spending versus the $1.7–$1.8 billion plan, and the sustainability of free cash flow alongside dividends, repurchases and debt reduction.
- Developments in environmental and legal claims, especially the fuel-surcharge litigation and Lower Passaic River matters.