CSX Corporation — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; comparisons are with Q1 2022 unless otherwise noted. CSX provides rail, intermodal, trucking, and related transportation services, primarily in the eastern United States. Pan Am operations, acquired in June 2022, are included prospectively.
Financial and operating performance
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Revenue | $3.706 billion | $3.413 billion | +9% |
| Operating expense | $2.242 billion | $2.131 billion | +5% |
| Operating income | $1.464 billion | $1.282 billion | +14% |
| Operating ratio | 60.5% | 62.4% | Improved 190 basis points |
| Net earnings | $987 million | $859 million | +15% |
| Diluted EPS | $0.48 | $0.39 | +23% |
| Operating cash flow | $1.251 billion | $1.299 billion | Down $48 million |
| Free cash flow before dividends | $816 million | $976 million | Down $160 million |
Revenue growth reflected higher coal and merchandise volumes, fuel recovery, and pricing gains, partly offset by weaker intermodal volume. Merchandise revenue rose 13%, coal 19%, while intermodal revenue declined 5%. Total volume fell 1%. The $46 million insurance recovery and prior-year environmental reserve adjustments affected the comparison of purchased services and other expense.
Cash and cash equivalents were $1.291 billion at quarter-end, with $178 million of short-term investments. Long-term debt was $17.911 billion, plus $11 million of current maturities. The company reported a $1.0 billion working-capital surplus. Its $1.2 billion revolving credit facility, renewed in February and expiring in 2028, and its $1.0 billion commercial-paper program had no outstanding balances. Cash, cash equivalents, and short-term investments totaled approximately $1.5 billion.
Investing cash outflow was $480 million, including $443 million of property additions. Financing cash outflow was $1.438 billion, including $1.067 billion of share repurchases and $226 million of dividends. The quarterly dividend increased 10% to $0.11 per share. The company repurchased 35.2 million shares; $2.2 billion remained under its $5 billion authorization.
Material changes and management commentary
- Labor and fringe expense increased $31 million, including inflation and higher headcount and training costs; lower incentive compensation partly offset the increases.
- Fuel expense rose $33 million, reflecting a 6% increase in locomotive fuel prices and higher consumption. Depreciation and amortization increased $33 million, while equipment and other rents decreased $18 million.
- Interest expense rose $22 million, primarily because of higher average debt balances and interest rates.
- Operating service measures improved year over year: train velocity rose 16%, dwell improved 20%, and carload and intermodal trip-plan performance improved 34% and 10%, respectively. These measures exclude the Pan Am network.
- Safety measures deteriorated: the FRA train accident rate increased 20% to 3.47 and the personal injury frequency index increased 27% to 1.04, based on the company’s reported methodology.
Outlook, risks, and contingencies
Management expects approximately $2.3 billion of capital investment in 2023, with about 75% directed to sustaining infrastructure and operating equipment; it expects to fund investment primarily from operating cash flow. The filing provides no specific revenue, earnings, or volume forecast.
All 12 participating rail unions were covered by national and CSX-specific agreements through December 31, 2024. Key risks identified include economic and freight-demand changes, competition, fuel and labor costs, service and safety issues, severe weather and operational disruptions, regulation, insurance availability, cybersecurity, and litigation and environmental liabilities.
Environmental reserves were $162 million at March 31, 2023; CSX was identified as a potentially responsible party at approximately 240 sites. Management said recorded reserves reflect currently estimated probable remediation costs, but additional exposure at some sites cannot presently be estimated. The company estimated an aggregate $3 million to $22 million range of reasonably possible legal losses above established reserves. It also disclosed fuel-surcharge antitrust litigation and the Lower Passaic River remediation matter; management stated that the latter was not expected to be material based on information then available. Management cautioned that an unexpected resolution of claims could have a material effect in a particular period.
Operating cash flow included $232 million of retroactive wage and bonus payments. The prior-year quarter included a $20 million gain from the Virginia property-rights transaction, which was completed in 2022. Management reported that disclosure controls were effective and that there were no material changes to internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether revenue growth and the operating-ratio improvement persist as intermodal volumes, broader freight demand, and pricing evolve.
- Whether service improvements continue and safety performance reverses its reported deterioration; note that operating statistics exclude Pan Am.
- Cash generation and capital spending against the approximately $2.3 billion 2023 investment plan, including the effects of working capital and labor-related payments.
- Debt, interest costs, and capital returns, including the pace of repurchases under the remaining authorization and the effect on liquidity.
- Future developments in environmental remediation and litigation, including the Lower Passaic River and fuel-surcharge matters, and whether estimated reserves remain adequate.