CSX Corporation — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. CSX provides rail freight, intermodal, and related transportation services, primarily across the eastern United States. Unless noted, financial amounts are in U.S. dollars.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $2.990 billion | $2.255 billion | $5.803 billion | $5.110 billion |
| Operating income | $1.691 billion | $828 million | $2.792 billion | $2.006 billion |
| Net earnings | $1.173 billion | $499 million | $1.879 billion | $1.269 billion |
| Diluted EPS | $0.52 | $0.22 | $0.82 | $0.55 |
| Operating ratio | 43.4% | 63.3% | 51.9% | 60.7% |
Q2 revenue rose 33% and operating income rose 104% year over year; diluted EPS increased 136%. Results include a $349 million gain from the first phase of a Virginia property-rights transaction, a significant contributor to reported expense and operating-ratio improvement. Revenue growth also reflected higher volumes, fuel recovery, pricing, and other revenue. The comparison with Q2 2020 was against a period when COVID-19 had sharply reduced volumes.
Six-month cash provided by operations was $2.399 billion, versus $2.184 billion. Property additions were $754 million. Management’s non-GAAP free cash flow before dividends was $1.871 billion, versus $1.386 billion.
Balance sheet, debt, and liquidity
- At June 30, cash and cash equivalents were $2.986 billion; working capital surplus was $2.6 billion.
- Total long-term debt, including current maturities, was $16.351 billion, down from $16.705 billion at year-end 2020. Six-month debt repayments were $360 million.
- 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.
- Six-month financing cash outflow was $2.015 billion, including $1.252 billion of share repurchases and $425 million of dividends. Cash declined $143 million during the period.
Changes, operations, and unusual items
- Q2 volume increased 27%. Growth was broad, with especially strong year-over-year increases in automotive, intermodal, and coal, partly reflecting recovery from pandemic-related weakness in the prior-year quarter.
- Higher volume, fuel prices, and incentive compensation increased costs; efficiency savings and the Virginia property gain more than offset these pressures in reported total expense.
- Service indicators weakened: Q2 train velocity fell 16%, dwell rose 18%, and on-time arrivals fell to 67% from 84%. Management said network fluidity was expected to improve through the year alongside hiring efforts.
- The FRA train accident rate improved 34% to 1.98; the personal injury frequency index improved 13% to 1.00 in Q2.
- CSX completed a three-for-one stock split on June 28, 2021; prior share and per-share figures were retroactively adjusted.
- On July 1, 2021, after quarter-end, CSX closed its $546 million cash acquisition of Quality Carriers, a bulk-liquid-chemicals trucking provider.
Outlook, risks, and contingencies
CSX forecast 2021 capital investment of $1.7 billion to $1.8 billion, principally for infrastructure, with remaining investment supporting service, productivity, and growth initiatives. The filing provides no specific earnings or revenue guidance. Management said COVID-19 and its effects on demand and supply chains remained uncertain.
CSX had begun the regulatory approval process for its proposed Pan Am Systems acquisition; STB review could take a year or more. The Virginia agreement covers three phases and $525 million in total proceeds; the first phase generated the $349 million gain, with further conveyances and gains dependent on timing, funding, and collectability.
Key exposures include personal-injury, environmental, and other claims; CSX was identified as a potentially responsible party at approximately 210 environmentally impaired sites. Management stated recorded reserves were considered adequate based on available information, but additional environmental exposure at some sites could not be reasonably estimated. The estimated aggregate range of reasonably possible legal losses above reserves was $2 million to $23 million. The fuel-surcharge antitrust litigation and other claims could have a material effect in a particular period if resolved adversely. The filing also cites pandemic, labor, fuel-price, service, weather, regulatory, insurance, and capital-market risks.
Important facts for investors to verify
- How much of the Q2 earnings and operating-ratio improvement was attributable to the $349 million Virginia gain versus underlying operating performance.
- Whether service metrics and network fluidity improved after quarter-end, and the effects on costs and customer demand.
- Completion, final purchase accounting, and integration costs for Quality Carriers, and the status of Pan Am regulatory review.
- Timing and collectability of remaining Virginia transaction proceeds and gains.
- Cash generation, planned capital spending, debt levels, and the pace of repurchases and dividends.
- Developments in environmental and legal matters, including the fuel-surcharge litigation and potential losses beyond recorded reserves.