CSX Corporation — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021; comparisons are with the corresponding 2020 periods. Amounts are in millions of dollars except per-share data and percentages. CSX provides rail, intermodal, trucking and related transportation services, principally through its eastern U.S. rail network.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $3,292 | $2,648 | $9,095 | $7,758 |
| Operating expense | $1,856 | $1,507 | $4,867 | $4,611 |
| Operating income | $1,436 | $1,141 | $4,228 | $3,147 |
| Operating ratio | 56.4% | 56.9% | 53.5% | 59.4% |
| Net earnings | $968 | $736 | $2,847 | $2,005 |
| Diluted EPS | $0.43 | $0.32 | $1.26 | $0.87 |
| Interest expense | $177 | $187 | $542 | $565 |
Q3 revenue rose 24%, operating income 26%, and diluted EPS 34% year over year. Revenue increased 17% and operating income 34% over nine months. Q3 volume increased 3%; revenue per unit rose 21%. The operating ratio improved 50 basis points in Q3 and 590 basis points for the nine-month period.
Cash flow and liquidity: Nine-month operating cash flow was $3,819, versus $3,128 in 2020. Property additions were $1,220; company-defined free cash flow before dividends was $2,896, versus $1,938. Investing used $1,463, including $543 net cash for the Quality Carriers acquisition. Financing used $3,306, including $2,316 of repurchases, $633 of dividends and $390 of debt repayments. Cash declined $950 to $2,179. Working capital was a $1.6 billion surplus, down from $2.4 billion at year-end 2020.
Debt: Long-term debt, including current maturities, was $16,393 at September 30, compared with $16,705 at December 31, 2020. CSX had no borrowings under its $1.2 billion revolving credit facility or $1.0 billion commercial paper program; it reported compliance with credit-facility covenants.
Material changes and unusual items
- Revenue growth reflected Quality Carriers, higher fuel recovery and pricing, volume growth, and higher other revenue. Q3 coal revenue rose 39%, intermodal 14%, and merchandise 6%; automotive revenue fell 23%, with vehicle production affected by semiconductor and other parts shortages.
- CSX acquired Quality Carriers on July 1 for $546 million cash. Q3 results include its operations after acquisition, including $200 million of trucking revenue. Acquisition-related costs totaled approximately $16 million through September 30. Purchase accounting remains preliminary.
- Fuel expense increased $128 million in Q3, principally because locomotive fuel prices rose 77% and trucking fuel was included. Purchased services and other expense rose $195 million, including acquired operations and higher support costs.
- Nine-month gains on property dispositions were $430 million versus $33 million a year earlier. This includes a $349 million gain on the first phase of the Virginia easement transaction. The agreement covers property rights for total proceeds of $525 million over three phases; further closings and gains depend on timing, collectability and state funding.
- CSX repurchased $2,316 million of shares during the first nine months, including $1,064 million in Q3. Remaining authorization was approximately $3.6 billion at quarter-end. The quarterly split-adjusted dividend was $0.093 per share, following an 8% increase effective March 2021.
Outlook, commentary and risks
- CSX expected 2021 capital investment of $1.7–$1.8 billion, primarily for core infrastructure, funded from operating cash flow. The filing provides no specific earnings or revenue guidance.
- Management said network performance was pressured by supply-chain challenges and hiring needs. In Q3, velocity fell 10% and dwell time rose 8% year over year; carload trip-plan performance was 68%, while intermodal performance was 88%. CSX expected fluidity and trip-plan performance to improve as hiring and other actions continued.
- COVID-19 effects, supply-chain disruption, fuel prices and availability, labor negotiations and employee retention, weather, demand, competition, and execution of acquisitions are among the cited uncertainties. Approximately 15,500 of roughly 20,500 employees were union members; national bargaining was underway, with existing agreements remaining in effect until modified.
- Environmental reserves were $108 million, and total casualty, environmental and other reserves were $369 million. CSX identified itself as a potentially responsible party at approximately 240 environmentally impaired sites; some additional exposure cannot yet be reasonably estimated. The estimated aggregate range of reasonably possible legal losses above established reserves was $3–$27 million.
- The fuel-surcharge antitrust litigation and Lower Passaic River-related environmental matters remain notable contingencies. Management did not expect currently recorded matters, individually, to have a material adverse effect, but acknowledged that adverse or combined outcomes could be material in a particular period.
Important facts for investors to verify
- How much reported growth and profitability came from acquired Quality Carriers, pricing and fuel recovery versus underlying rail volume and operating performance.
- The sustainability of earnings excluding property-disposition gains, particularly the $349 million Virginia easement gain, and timing and conditions for remaining transaction proceeds.
- Whether operating service metrics recover as management anticipated, and whether hiring, labor negotiations or supply-chain constraints affect costs and service.
- Cash generation after capital investment, dividends and repurchases; the company-defined free-cash-flow calculation includes property-disposition proceeds.
- Developments in environmental, fuel-surcharge and other legal contingencies, for which ultimate outcomes and potential additional exposure remain uncertain.