CSX Corp: Form 10-Q for the period ended Mar 31, 2021

(a) In first quarter 2021, changes were made in the categorization of certain lines of business, impacting Forest Products and Fertilizers. The impacts were not material and prior periods have been reclassified to conform to the current presentation.

First Quarter 2021

Revenue

Total revenue decreased 1% in first quarter 2021 when compared to first quarter 2020 due to lower merchandise volume and decreases in fuel recovery that were partially offset by increases in other revenue, higher intermodal volume and pricing gains. Volume was unfavorably impacted by challenging weather conditions in first quarter 2021.

Merchandise Volume

Chemicals - Decreased primarily due to lower shipments within the energy-related markets, specifically crude oil and frac sand, partially offset by higher shipments of plastics.

Agricultural and Food Products - Decreased as a result of lower shipments of ethanol, food and consumer products, and domestic grain.

Automotive - Declined primarily due to lower North American vehicle production, including the impact of increased plant downtime as a result of materials shortages.

Forest Products - Increased shipments of building products and pulpboard were offset by declines in printing paper.

Metals and Equipment - Increased due to higher steel shipments, mostly offset by reduced equipment shipments.

Minerals - Decreased as a result of lower shipments of aggregates, partially offset by higher shipments of limestone and salt.

Fertilizers - Increased due to higher long-haul fertilizer shipments, partially offset by lower short-haul phosphate shipments.

Intermodal Volume

Increases in both domestic and international shipments resulted from tight truck capacity, inventory replenishments and growth in rail volumes from east coast ports.

Coal Volume

The decline in export coal was primarily driven by reduced international shipments of thermal coal. Domestic coal increased as higher shipments of utility coal were partially offset by lower steel and industrial shipments.

Other Revenue

Other revenue increased $42 million versus prior year due to increases in revenue for storage at intermodal facilities and higher payments from customers that did not meet volume commitments.

Expenses

Expenses of $1.7 billion increased $35 million, or 2% in first quarter 2021 when compared to first quarter 2020.

Labor and Fringe expense increased $14 million due to the following:

• Total incentive compensation increased $29 million primarily due to higher expected annual incentive award payouts.
• Other costs increased $14 million primarily due to inflation.
• Partially offsetting these increases, savings of $29 million were primarily attributable to efficiencies from changes to the train plan that resulted in reduced crew starts and lower headcount across operating departments.

Materials, Supplies and Other expense increased $15 million due to the following:

• Gains from real estate sales of $3 million in 2021 were lower than gains of $18 million in 2020.
• Other costs increased $12 million primarily driven by inflation and other non-significant items.
• Partially offsetting these increases, savings of $12 million primarily resulted from increased efficiency within asset maintenance and operating support functions, despite challenging weather.

Depreciation expense increased $1 million primarily due to a larger asset base, partially offset by the impacts of the 2020 road and track depreciation study.

Fuel expense decreased $2 million primarily resulting from record first quarter fuel efficiency and lower ton-miles, partially offset by a 4% increase in fuel prices.

Equipment and Other Rents expense increased $7 million as higher days per load resulted in increased car hire costs, which were partially offset by higher net earnings at TTX.

Interest Expense

Interest expense decreased $3 million primarily due to lower average interest rates, partially offset by higher average debt balances.

Other Income - Net

Other income - net decreased $2 million primarily due to lower interest income, partially offset by an increase in net pension benefit credits.

Income Tax Expense

Income tax expense decreased $12 million primarily due to lower earnings before income taxes, partially offset by the impacts of an unfavorable state legislative change.

Non-GAAP Measures - Unaudited

CSX reports its financial results in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP). CSX also uses certain non-GAAP measures that fall within the meaning of Securities and Exchange Commission Regulation G and Regulation S-K Item 10(e), which may provide users of the financial information with additional meaningful comparison to prior reported results. Non-GAAP measures do not have standardized definitions and are not defined by U.S. GAAP. Therefore, CSX’s non-GAAP measures are unlikely to be comparable to similar measures presented by other companies. The presentation of these non-GAAP measures should not be considered in isolation from, as a substitute for, or as superior to the financial information presented in accordance with GAAP. Reconciliations of non-GAAP measures to corresponding GAAP measures are below.

Free Cash Flow

Management believes that free cash flow is supplemental information useful to investors as it is important in evaluating the Company’s financial performance. More specifically, free cash flow measures cash generated by the business after reinvestment. This measure represents cash available for both equity and bond investors to be used for dividends, share repurchases or principal reduction on outstanding debt. Free cash flow is calculated by using net cash from operations and adjusting for property additions and certain other investing activities, which includes proceeds from property dispositions. Free cash flow should be considered in addition to, rather than a substitute for, cash provided by operating activities. The increase in free cash flow before dividends from the prior year of $122 million is primarily due to lower property additions and higher cash from net favorable working capital activities, despite lower net earnings.

The following table reconciles cash provided by operating activities (GAAP measure) to free cash flow, before dividends (non-GAAP measure).

(Dollars in millions)

Operating Statistics (Estimated)

The Company is committed to continuous improvement in safety and service performance through training, innovation and investment. Training and safety programs are designed to prevent incidents that can adversely impact employees, customers and communities. Technological innovations that can detect and avoid many types of human factor incidents are designed to serve as an additional layer of protection for the Company's employees. Continued capital investment in the Company's assets, including track, bridges, signals, equipment and detection technology also supports safety performance.

In first quarter 2021, operations were unfavorably impacted by challenging winter weather conditions and lingering impacts of the COVID-19 pandemic on crew availability. Train velocity and car dwell remained similar to fourth quarter 2020 levels, but these impacts resulted in degradation of train velocity and dwell compared to the pre-pandemic conditions of first quarter 2020. CSX expects these measures to improve throughout the year and is taking the necessary steps to provide customers increased reliability and faster transit times in the improving demand environment.

The FRA train accident rate of 2.92 in first quarter 2021 increased compared to prior year results due to a higher number of train accidents combined with a reduction in train miles. The personal injury frequency index of 1.02 increased versus the prior year's record low first quarter results due to an increased number of injuries as well as lower hours worked. Safety remains a top priority at CSX, and the Company is committed to reducing risk and enhancing the overall safety of its employees, customers and communities in which the Company operates.

(a) The methodologies for calculating train velocity, dwell and cars online differ from those prescribed by the STB as the Company believes these numbers more accurately reflect railroad performance. CSXT will continue to report these metrics, using the prescribed methodology, to the STB on a weekly basis. See additional discussion on the Company's website.

Certain operating statistics are estimated and can continue to be updated as actuals settle.

Key Performance Measures Definitions

Train Velocity - Average train speed between origin and destination in miles per hour (does not include locals, yard jobs, work trains or passenger trains). Train velocity measures the profiled schedule of trains (from departure to arrival and all interim time), and train profiles are periodically updated to align with a changing operation.

Dwell - Average amount of time in hours between car arrival to and departure from the yard.

Cars Online - Average number of active freight rail cars on lines operated by CSX, excluding rail cars that are being repaired, in storage, those that have been sold, or private cars dwelling at a customer location more than one day.

On-Time Originations - Percent of scheduled road trains that depart the origin yard on-time or ahead of schedule.

On-Time Arrivals - Percent of scheduled road trains that arrive at the destination yard on-time to within two hours of scheduled arrival. Carload Trip Plan Performance - Percent of measured cars destined for a customer that arrive at or ahead of the original estimated time of arrival, notification or interchange (as applicable).

Intermodal Trip Plan Performance - Percent of measured containers destined for a customer that arrive at or ahead of the original estimated time of arrival, notification or interchange (as applicable).

Fuel Efficiency - Gallons of locomotive fuel per 1,000 gross ton-miles.

Revenue Ton-Miles (RTM's) - The movement of one revenue-producing ton of freight over a distance of one mile.

Gross Ton-Miles (GTM's) - The movement of one ton of train weight over one mile. GTM's are calculated by multiplying total train weight by distance the train moved. Total train weight is comprised of the weight of the freight cars and their contents.

FRA Personal Injury Frequency Index - Number of FRA-reportable injuries per 200,000 man-hours.

FRA Train Accident Rate - Number of FRA-reportable train accidents per million train-miles.

LIQUIDITY AND CAPITAL RESOURCES

The following are material changes in the significant cash flows, sources of cash and liquidity, capital investments, consolidated balance sheets and working capital, which provide an update to the discussion included in CSX's most recent annual report on Form 10-K.

Material Changes in Significant Cash Flows

Significant Cash Flows

The following chart highlights the operating, investing and financing components of the net decrease of $174 million and net increase of $1.0 billion in cash and cash equivalents for three months ended 2021 and 2020, respectively.

• Despite lower net earnings, cash provided by operating activities increased $54 million primarily driven by higher cash from net favorable working capital activities, none of which were individually significant.
• Cash used in investing activities was $297 million in first quarter 2021 compared to cash from investing activities of $144 million in first quarter 2020. This change was primarily driven by decreased net sales of short-term investments.
• Cash used in financing activities increased $824 million driven by lower proceeds from debt issuances and higher long-term debt repayments.

Sources of Cash and Liquidity and Uses of Cash

As of the end of first quarter 2021, CSX had approximately $3.0 billion of cash, cash equivalents and short-term investments. CSX uses current cash balances for general corporate purposes, which may include reduction or refinancing of outstanding indebtedness, capital expenditures, working capital requirements, contributions to the Company's qualified pension plan, redemptions and repurchases of CSX common stock and dividends to shareholders. See Note 7, Debt and Credit Agreements.

The Company has multiple sources of liquidity, including cash generated from operations and financing sources. The Company filed a shelf registration statement with the SEC on February 12, 2019, which is unlimited as to amount and may be used to issue debt or equity securities at CSX’s discretion, subject to market conditions and CSX Board authorization. While CSX seeks to give itself flexibility with respect to cash requirements, there can be no assurance that market conditions would permit CSX to sell such securities on acceptable terms at any given time, or at all. During three months ended 2021, CSX did not issue any new long-term debt.

CSX has a $1.2 billion unsecured, revolving credit facility backed by a diverse syndicate of banks that expires in March 2024. At March 31, 2021, the Company had no outstanding balances under this facility. The Company also has a commercial paper program, backed by the revolving credit facility, under which the Company may issue unsecured commercial paper notes up to a maximum aggregate principal amount of $1.0 billion outstanding at any one time. At March 31, 2021, the Company had no outstanding debt under the commercial paper program.

Planned capital investments for 2021 are expected to be between $1.7 billion and $1.8 billion. Of the total 2021 investment, the majority will be used to sustain the core infrastructure and the remaining amounts will be allocated to projects supporting service enhancements, productivity initiatives and profitable growth. CSX intends to fund capital investments through cash generated from operations.

Material Changes in the Consolidated Balance Sheets and Working Capital

Consolidated Balance Sheets

Total assets decreased $101 million from year end primarily due to the net decrease in cash of $174 million. This decrease was driven by cash from operations of $1.2 billion, partially offset by share repurchases of $551 million, debt repayments of $360 million, property additions of $306 million and dividends paid of $213 million.

Total liabilities decreased $151 million from year end primarily due to debt repayments of $360 million, partially offset by an increase in income and other taxes payable of $164 million. Total shareholders' equity increased $50 million from year end primarily driven by comprehensive earnings of $774 million, mostly offset by share repurchases of $551 million and dividends paid of $213 million.

Working capital is considered a measure of a company's ability to meet its short-term needs. CSX had a working capital surplus of $2.5 billion and $2.4 billion as of March 31, 2021 and December 31, 2020, respectively. The increase in working capital since year end of $83 million was primarily driven by a decrease in current maturities of long-term debt of $360 million, partially offset by a $174 million net reduction of cash and cash equivalents described above and an increase in income and other taxes payable of $164 million. The Company's working capital balance varies due to factors such as the timing of scheduled debt payments and changes in cash and cash equivalent balances as discussed above. The Company continues to maintain adequate liquidity to satisfy current liabilities and maturing obligations when they come due. CSX has sufficient financial capacity, including its revolving credit facility, commercial paper program and shelf registration statement to manage its day-to-day cash requirements and any anticipated obligations. The Company from time to time accesses the credit markets for additional liquidity.

CSX is committed to returning cash to shareholders and maintaining an investment-grade credit profile. Capital structure, capital investments and cash distributions, including dividends and share repurchases, are reviewed at least annually by the Board of Directors. Management's assessment of market conditions and other factors guides the timing and volume of repurchases. Future share repurchases are expected to be funded by cash on hand, cash generated from operations and debt issuances.

Pending Transactions

On November 30, 2020, CSX signed a definitive agreement to acquire Pan Am Systems, Inc. (“Pan Am”) and certain of its subsidiaries and affiliates, which own and operate a highly integrated, nearly 1,200-mile rail network and have a partial interest in the more than 600-mile Pan Am Southern system. This acquisition, if approved, will expand CSX’s reach in Connecticut, New York and Massachusetts while adding Vermont, New Hampshire and Maine to its existing network. On February 25, 2021, the Company began the process, which can take up to a year or more, of seeking approval from the Surface Transportation Board.

On March 26, 2021, the Company entered into a comprehensive rail agreement to sell certain interests in three CSX-owned line segments to the Commonwealth of Virginia (“Commonwealth”) over three phases for a total of $525 million. On April 14, 2021, in the first phase of the transaction, the Company closed on the sale of a permanent land easement for passenger rail operations. In second quarter 2021, the gain on this sale will be recognized in materials, supplies and other on the consolidated income statement. The Company anticipates closing on the remaining sales over the next two years. Funding for a portion of the transaction price remains subject to approval by the Virginia General Assembly and the Commonwealth.

Guaranteed Notes Issued By CSXT

In 2007, CSXT, a wholly-owned subsidiary of CSX Corporation, issued $381 million of secured equipment notes maturing in 2023 in a registered public offering. CSX Corporation has fully and unconditionally guaranteed the notes. At CSXT’s option, CSXT may redeem any or all of the notes, in whole or in part, at any time, at the redemption price including premium. In the case of loss or destruction of any item of equipment securing the notes, if CSXT does not substitute another item of equipment for the item suffering such loss or destruction, CSXT will be required to redeem the notes in part at par. The guarantee of the notes will rank equally in right of payment with all existing and future senior obligations of CSX Corporation and will be effectively subordinated to all future secured indebtedness of CSX Corporation to the extent of the assets securing such indebtedness. The guarantee is subject to release in limited circumstances only upon the occurrence of certain customary conditions. At March 31, 2021, the principal balance of these secured equipment notes was $160 million.

In accordance with SEC rules, including amendments adopted in 2020, CSX is not required to present separate condensed consolidating financial information for wholly-owned subsidiaries who issued or guaranteed notes. Additionally, presentation of combined summary financial information regarding subsidiary issuers and guarantors is not required because the assets, liabilities and results of operations of the combined issuers and guarantors of the notes are not materially different from the corresponding amounts presented in the consolidated financial statements.

LABOR AGREEMENTS

Approximately 15,500 of the Company's approximately 19,000 employees are members of a labor union. For the 13 rail unions that participate in national bargaining, a round of negotiations for benefits, wages and work rules is underway. Typically, these negotiations take several years. Current agreements remain in place until modified by new agreements.

CRITICAL ACCOUNTING ESTIMATES

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires that management make estimates in reporting the amounts of certain assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and certain revenues and expenses during the reporting period. Actual results may differ from those estimates. These estimates and assumptions are discussed with the Audit Committee of the Board of Directors on a regular basis. Consistent with the prior year, significant estimates using management judgment are made for the areas below. For further discussion of CSX's critical accounting estimates, see the Company's most recent annual report on Form 10-K.

• personal injury, environmental and legal reserves;
• pension and post-retirement medical plan accounting; and
• depreciation policies for assets under the group-life method.

FORWARD-LOOKING STATEMENTS

Certain statements in this report and in other materials filed with the Securities and Exchange Commission, as well as information included in oral statements or other written statements made by the Company, are forward-looking statements. The Company intends for all such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and the provisions of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements within the meaning of the Private Securities Litigation Reform Act may contain, among others, statements regarding:

• projections and estimates of earnings, revenues, margins, volumes, rates, cost-savings, expenses, taxes or other financial items;
• expectations as to results of operations and operational initiatives;
• expectations as to the effect of claims, lawsuits, environmental costs, commitments, contingent liabilities, labor negotiations or agreements on the Company's financial condition, results of operations or liquidity;
• management's plans, strategies and objectives for future operations, capital expenditures, workforce levels, dividends, share repurchases, safety and service performance, proposed new services and other matters that are not historical facts, and management's expectations as to future performance and operations and the time by which objectives will be achieved; and
• future economic, industry or market conditions or performance and their effect on the Company's financial condition, results of operations or liquidity.

Forward-looking statements are typically identified by words or phrases such as "will," "should," “believe,” “expect,” “anticipate,” “project,” “estimate,” “preliminary” and similar expressions. The Company cautions against placing undue reliance on forward-looking statements, which reflect its good faith beliefs with respect to future events and are based on information currently available to it as of the date the forward-looking statement is made. Forward-looking statements should not be read as a guarantee of future performance or results and will not necessarily be accurate indications of the timing when, or by which, such performance or results will be achieved.

Forward-looking statements are subject to a number of risks and uncertainties and actual performance or results could differ materially from those anticipated by any forward-looking statements. The Company undertakes no obligation to update or revise any forward-looking statement. If the Company does update any forward-looking statement, no inference should be drawn that the Company will make additional updates with respect to that statement or any other forward-looking statements. The following important factors, in addition to those discussed in Part I, Item 1A Risk Factors of CSX's most recent annual report on Form 10-K and elsewhere in this report, may cause actual results to differ materially from those contemplated by any forward-looking statements:

• legislative, regulatory or legal developments involving transportation, including rail or intermodal transportation, the environment, hazardous materials, taxation, international trade and initiatives to further regulate the rail industry;
• the outcome of litigation, claims and other contingent liabilities, including, but not limited to, those related to fuel surcharge, environmental matters, taxes, shipper and rate claims subject to adjudication, personal injuries and occupational illnesses;
• changes in domestic or international economic, political or business conditions, including those affecting the transportation industry (such as the impact of industry competition, conditions, performance and consolidation) and the level of demand for products carried by CSXT;
• natural events such as severe weather conditions, including floods, fire, hurricanes and earthquakes, a pandemic crisis, including the outbreak of COVID-19, affecting the health of the Company's employees, its shippers or the consumers of goods, or other unforeseen disruptions of the Company's operations, systems, property, equipment or supply chain;
• competition from other modes of freight transportation, such as trucking and competition and consolidation or financial distress within the transportation industry generally;
• the cost of compliance with laws and regulations that differ from expectations as well as costs, penalties and operational and liquidity impacts associated with noncompliance with applicable laws or regulations;
• the impact of increased passenger activities in capacity-constrained areas, including potential effects of high speed rail initiatives, or regulatory changes affecting when CSXT can transport freight or service routes;
• unanticipated conditions in the financial markets that may affect timely access to capital markets and the cost of capital, as well as management's decisions regarding share repurchases;
• changes in fuel prices, surcharges for fuel and the availability of fuel;
• the impact of natural gas prices on coal-fired electricity generation;
• the impact of global supply and price of seaborne coal on CSXT's export coal market;
• availability of insurance coverage at commercially reasonable rates or insufficient insurance coverage to cover claims or damages;
• the inherent business risks associated with safety and security, including the transportation of hazardous materials or a cybersecurity attack which would threaten the availability and vulnerability of information technology;
• adverse economic or operational effects from actual or threatened war or terrorist activities and any governmental response;
• loss of key personnel or the inability to hire and retain qualified employees;
• labor and benefit costs and labor difficulties, including stoppages affecting either the Company's operations or customers' ability to deliver goods to the Company for shipment;
• the Company's success in implementing its strategic, financial and operational initiatives;
• the impact of conditions in the real estate market on the Company's ability to sell assets;
• changes in operating conditions and costs or commodity concentrations;
• the continued and uncertain impact of the COVID-19 pandemic; and
• the inherent uncertainty associated with projecting economic and business conditions.

Other important assumptions and factors that could cause actual results to differ materially from those in the forward-looking statements are specified elsewhere in this report and in CSX's other SEC reports, which are accessible on the SEC's website at www.sec.gov (http://www.sec.gov) and the Company's website at www.csx.com (http://www.csx.com). The information on the CSX website is not part of this quarterly report on Form 10-Q.

There have been no material changes in market risk from the information provided under Part II, Item 7A (Quantitative and Qualitative Disclosures about Market Risk) of CSX's most recent annual report on Form 10-K.

As of March 31, 2021, under the supervision and with the participation of CSX's Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), management has evaluated the effectiveness of the design and operation of the Company's disclosure controls and procedures. Based on that evaluation, the CEO and CFO concluded that, as of March 31, 2021, the Company's disclosure controls and procedures were effective at the reasonable assurance level in timely alerting them to material information required to be included in CSX's periodic SEC reports. There were no changes in the Company's internal controls over financial reporting during the first quarter of 2021 that have materially affected or are reasonably likely to materially affect the Company's internal control over financial reporting.

For information regarding factors that could affect the Company's results of operations, financial condition and liquidity, see the risk factors discussed under Part I, Item 1A (Risk Factors) of CSX's most recent annual report on Form 10-K. See also Part I, Item 2 (Forward-Looking Statements) of this quarterly report on Form 10-Q.