CSX Corporation — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; comparisons are with Q1 2021 unless noted. CSX provides freight rail, intermodal, trucking and related transportation services.
Financial results
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Revenue | $3.413 billion | $2.813 billion | +21% |
| Operating expense | $2.131 billion | $1.712 billion | +24% |
| Operating income | $1.282 billion | $1.101 billion | +16% |
| Operating ratio | 62.4% | 60.9% | Worsened 150 bps |
| Net earnings | $859 million | $706 million | +22% |
| Diluted EPS | $0.39 | $0.31 | +26% |
| Operating cash flow | $1.299 billion | $1.232 billion | +$67 million |
| Free cash flow before dividends | $976 million | $934 million | +$42 million |
Revenue growth reflected Quality Carriers, pricing gains (including higher export coal benchmark rates), fuel recovery and higher other revenue. Total volume declined 2% to 1.498 million units. Coal revenue rose 39%, but coal volume fell 10%; intermodal revenue rose 13% while volume declined 1%. Trucking contributed $230 million of revenue following the 2021 Quality Carriers acquisition.
Higher expenses included a $141 million increase in fuel expense, mainly from a 59% rise in locomotive fuel prices and trucking fuel; $203 million more in purchased services and other; and $72 million more in labor and fringe. Management cited acquisition costs, inflation, hiring and retention programs, environmental reserve adjustments, and operating support costs. Operating margin was approximately 37.6%, versus 39.1% in Q1 2021, consistent with the higher operating ratio.
Liquidity, debt and capital allocation
At March 31, 2022, cash and cash equivalents were $1.936 billion, short-term investments were $96 million, and working capital was a $1.2 billion surplus, down from $1.6 billion at year-end 2021. Long-term debt, including current maturities, totaled $16.336 billion, versus $16.366 billion at December 31, 2021. The $1.2 billion revolving credit facility and $1.0 billion commercial paper program had no outstanding balances; CSX reported compliance with credit-facility covenants.
Property additions were $331 million. Cash used in financing was $1.234 billion, including $1.016 billion of share repurchases and $218 million of dividends. The company had approximately $2.0 billion of repurchase authority remaining. The quarterly dividend was increased 7% to $0.10 per share effective March 2022.
Outlook, operating conditions and risks
- Management expected 2022 capital investment of approximately $2.0 billion, with more than 80% directed to core infrastructure and operating equipment, funded from operating cash flow.
- Management expected operating metrics to improve with hiring and training. Q1 service measures were weaker year over year: train velocity fell 15%, dwell rose 4%, on-time originations declined to 65% from 79%, and on-time arrivals to 57% from 69%. Safety measures improved: the train accident rate was 2.75, down 15%, and the personal injury frequency index was 0.78, down 18%.
- COVID-19-related disruption to manufacturing, supply chains and demand remained uncertain. Management also cited inflation, fuel prices, labor availability and negotiations, and operating-service execution as relevant risks. National bargaining involving 13 rail unions was underway; existing agreements remained in place pending new agreements.
- Environmental reserves totaled $128 million, up from $108 million at year-end. CSX had been identified as a potentially responsible party at approximately 220 impaired sites; additional exposure at some sites could not be reasonably estimated. Management said recorded reserves reflected currently estimable and probable remediation costs.
- For certain legal matters with reasonably possible losses above reserves, the estimated aggregate range was $2 million to $22 million. Management said an unexpected adverse resolution of litigation, including fuel-surcharge antitrust claims, could materially affect results in a particular period.
- The Pan Am acquisition received Surface Transportation Board approval on April 14, 2022, after quarter-end; closing was anticipated June 1, 2022. Remaining conveyances under the Virginia property-rights agreement were expected by year-end 2022 and could generate additional proceeds and gains.
Most important facts for investors to verify
- Whether service performance, hiring and training improve as management expected, and whether service constraints affect volumes and costs.
- How much revenue and earnings growth reflects pricing and underlying operations versus the Quality Carriers acquisition and other nonrecurring items; Q1 included a $20 million Virginia conveyance gain.
- Whether fuel, inflation and labor-related costs continue to outpace revenue growth and pressure the operating ratio.
- Progress and final costs for environmental matters, the fuel-surcharge litigation and other contingencies, including any changes to estimated loss ranges or reserves.
- Execution and financial effects of planned capital spending, share repurchases, the Pan Am acquisition and remaining Virginia conveyances.