CSX 10-Q 2021-09-30

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(☒) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2021

OR

(☐) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________ to __________

Commission File Number 1-8022

CSX CORPORATION

(Exact name of registrant as specified in its charter)
Virginia																											62-1051971
																											(I.R.S. Employer Identification No.)
500 Water Street			15th Floor			Jacksonville			FL												32202						904			359-3200
(Address of principal executive offices)																					(Zip Code)						(Telephone number, including area code)
															No Change
(Former name, former address and former fiscal year, if changed since last report.)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class															Trading Symbol(s)												Name of exchange on which registered
Common Stock, $1 Par Value															CSX												Nasdaq Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes (X) No ( )

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes (X) No ( )

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company (as defined in Exchange Act Rule 12b-2).

Large Accelerated Filer (X) Accelerated Filer ( ) Non-accelerated Filer ( ) Smaller Reporting Company (☐) Emerging growth company (☐)

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ( )

Indicate by a check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes (☐) No (X)

There were 2,217,983,411 shares of common stock outstanding on September 30, 2021 (the latest practicable date that is closest to the filing date).

CSX Q3 2021 Form 10-Q p.1

CSX CORPORATION

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2021

INDEX

									Page
PART I.			FINANCIAL INFORMATION
Item 1.			Financial Statements						3
			Consolidated Income Statements (Unaudited) - Quarters and Nine Months Ended September 30, 2021 and September 30, 2020						3
			Condensed Consolidated Comprehensive Income Statements (Unaudited) - Quarters and Nine Months Ended September 30, 2021 and September 30, 2020						3
			Consolidated Balance Sheets - At September 30, 2021 (Unaudited) and December 31, 2020						4
			Consolidated Cash Flow Statements (Unaudited) - Nine Months Ended September 30, 2021 and September 30, 2020						5
			Consolidated Statement of Changes in Shareholders' Equity (Unaudited) - Quarters and Nine Months Ended September 30, 2021 and September 30, 2020						6
			Notes to Consolidated Financial Statements (Unaudited)						8
Item 2.			Management's Discussion and Analysis of Financial Condition and Results of Operations						30
Item 3.			Quantitative and Qualitative Disclosures about Market Risk						44
Item 4.			Controls and Procedures						44
PART II.			OTHER INFORMATION
Item 1.			Legal Proceedings						45
Item 1A.			Risk Factors						45
Item 2.			CSX Purchases of Equity Securities						45
Item 3.			Defaults upon Senior Securities						45
Item 4.			Mine Safety Disclosures						45
Item 5.			Other Information						45
Item 6.			Exhibits						46
Signature									47

CSX Q3 2021 Form 10-Q p.2

CSX CORPORATION

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CONSOLIDATED INCOME STATEMENTS (Unaudited)

(Dollars in millions, except per share amounts)

			Third Quarters									Nine Months
			2021			2020						2021			2020
Revenue			$	3,292		$	2,648					$	9,095		$	7,758
Expense
Labor and Fringe			631			574						1,847			1,687
Purchased Services and Other			577			382						1,490			1,272
Depreciation			367			348						1,060			1,036
Fuel			247			119						631			402
Equipment and Other Rents			94			88						269			247
Gains on Property Dispositions			(60)			(4)						(430)			(33)
Total Expense			1,856			1,507						4,867			4,611
Operating Income			1,436			1,141						4,228			3,147
Interest Expense			(177)			(187)						(542)			(565)
Other Income - Net			20			14						60			51
Earnings Before Income Taxes			1,279			968						3,746			2,633
Income Tax Expense			(311)			(232)						(899)			(628)
Net Earnings			$	968		$	736					$	2,847		$	2,005
Per Common Share (Note 2)
Net Earnings Per Share, Basic			$	0.43		$	0.32					$	1.26		$	0.87
Net Earnings Per Share, Assuming Dilution			$	0.43		$	0.32					$	1.26		$	0.87
Average Shares Outstanding (In millions)			2,237			2,295						2,263			2,302
Average Shares Outstanding, Assuming Dilution (In millions)			2,242			2,300						2,268			2,307

Beginning third quarter 2021, the Company changed the name of Materials, Supplies and Other expense to Purchased Services and Other, which better describes the composition of this expense amount. This change in naming convention does not impact previously reported results.

All prior period share and per share data has been retroactively adjusted to reflect the stock split effective June 28, 2021. Certain prior year data has been reclassified to conform to the current presentation.

CONDENSED CONSOLIDATED COMPREHENSIVE INCOME STATEMENTS (Unaudited)

(Dollars in millions)

			Third Quarters									Nine Months
			2021			2020						2021			2020
Total Comprehensive Earnings (Note 11)			$	985		$	770					$	2,911		$	2,062

See accompanying notes to consolidated financial statements.

CSX Q3 2021 Form 10-Q p.3

CSX CORPORATION

ITEM 1. FINANCIAL STATEMENTS

CONSOLIDATED BALANCE SHEETS

(Dollars in millions)

			(Unaudited)
			September 30, 2021			December 31, 2020
ASSETS
Current Assets:
Cash and Cash Equivalents			$	2,179		$	3,129
Accounts Receivable - Net (Note 8)			1,326			912
Materials and Supplies			303			302
Other Current Assets			89			98
Total Current Assets			3,897			4,441
Properties			46,226			45,530
Accumulated Depreciation			(13,412)			(13,086)
Properties - Net			32,814			32,444
Investment in Affiliates and Other Companies			2,059			1,985
Right-of-Use Lease Asset			508			472
Goodwill and Other Intangible Assets - Net			451			63
Other Long-term Assets			400			388
Total Assets			$	40,129		$	39,793
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts Payable			$	972		$	809
Labor and Fringe Benefits Payable			548			482
Casualty, Environmental and Other Reserves (Note 4)			117			90
Current Maturities of Long-term Debt (Note 7)			211			401
Income and Other Taxes Payable			238			73
Other Current Liabilities			182			164
Total Current Liabilities			2,268			2,019
Casualty, Environmental and Other Reserves (Note 4)			252			224
Long-term Debt (Note 7)			16,182			16,304
Deferred Income Taxes - Net			7,298			7,168
Long-term Lease Liability			482			455
Other Long-term Liabilities			475			513
Total Liabilities			26,957			26,683
Shareholders' Equity:
Common Stock, $1 Par Value			2,218			2,288
Other Capital			24			152
Retained Earnings			11,455			11,259
Accumulated Other Comprehensive Loss (Note 11)			(534)			(598)
Non-controlling Minority Interest			9			9
Total Shareholders' Equity			13,172			13,110
Total Liabilities and Shareholders' Equity			$	40,129		$	39,793

Certain prior year data has been retroactively adjusted to reflect the stock split effective June 28, 2021 or reclassified to conform to the current presentation. See accompanying notes to consolidated financial statements.

CSX Q3 2021 Form 10-Q p.4

CSX CORPORATION

ITEM 1. FINANCIAL STATEMENTS

CONSOLIDATED CASH FLOW STATEMENTS (Unaudited)

(Dollars in millions)

			Nine Months
			2021			2020
OPERATING ACTIVITIES
Net Earnings			$	2,847		$	2,005
Adjustments to Reconcile Net Earnings to Net Cash Provided by Operating Activities:
Depreciation			1,060			1,036
Deferred Income Taxes			109			117
Gains on Property Dispositions			(430)			(33)
Other Operating Activities			10			(30)
Changes in Operating Assets and Liabilities:
Accounts Receivable			(153)			12
Other Current Assets			(4)			(37)
Accounts Payable			132			(6)
Income and Other Taxes Payable			174			98
Other Current Liabilities			74			(34)
Net Cash Provided by Operating Activities			3,819			3,128
INVESTING ACTIVITIES
Property Additions			(1,220)			(1,209)
Proceeds from Property Dispositions			297			51
Purchases of Short-term Investments			—			(426)
Proceeds from Sales of Short-term Investments			3			1,423
Business Acquisition, Net of Cash Acquired			(543)			—
Other Investing Activities			—			(32)
Net Cash Used In Investing Activities			(1,463)			(193)
FINANCING ACTIVITIES
Shares Repurchased			(2,316)			(664)
Dividends Paid			(633)			(599)
Long-term Debt Repaid (Note 7)			(390)			(245)
Long-term Debt Issued (Note 7)			—			500
Other Financing Activities			33			13
Net Cash Used in Financing Activities			(3,306)			(995)
Net (Decrease)/Increase in Cash and Cash Equivalents			(950)			1,940
CASH AND CASH EQUIVALENTS
Cash and Cash Equivalents at Beginning of Period			3,129			958
Cash and Cash Equivalents at End of Period			$	2,179		$	2,898

See accompanying notes to consolidated financial statements.

CSX Q3 2021 Form 10-Q p.5

CSX CORPORATION

ITEM 1. FINANCIAL STATEMENTS

CONSOLIDATED STATEMENTS OF CHANGES

IN SHAREHOLDERS' EQUITY (Unaudited)

(Dollars in millions)

Nine Months 2021			Common Shares Outstanding (Thousands)			Common Stock and Other Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss)****(a)			Non-controlling Minority Interest			Total Shareholders' Equity
Balance December 31, 2020			2,287,587			$	2,440		$	11,259		$	(598)		$	9		$	13,110
Comprehensive Earnings:
Net Earnings			—			—			706			—			—			706
Other Comprehensive Income			—			—			—			68			—			68
Total Comprehensive Earnings																		774
Common stock dividends, $0.093 per share			—			—			(213)			—			—			(213)
Share Repurchases			(18,389)			(18)			(533)			—			—			(551)
Stock Option Exercises and Other			3,003			37			3			—			—			40
Balance March 31, 2021			2,272,201			$	2,459		$	11,222		$	(530)		$	9		$	13,160
Comprehensive Earnings:
Net Earnings						—			1,173			—			—			1,173
Other Comprehensive Loss						—			—			(21)			—			(21)
Total Comprehensive Earnings																		1,152
Common stock dividends, $0.093 per share						—			(212)			—			—			(212)
Share Repurchases			(18,345)			(19)			(682)			—			—			(701)
Bond Conversions						—			—			—			—			—
Stock Option Exercises and Other			640			(186)			222			—			(1)			35
Balance June 30, 2021			2,254,496			$	2,254		$	11,723		$	(551)		$	8		$	13,434
Comprehensive Earnings:
Net Earnings			—			—			968			—			—			968
Other Comprehensive Income (Note 11)			—			—			—			17			—			17
Total Comprehensive Earnings																		985
Common stock dividends, $0.093 per share			—			—			(209)			—			—			(209)
Share Repurchases			(37,217)			(37)			(1,027)			—			—			(1,064)
Bond Conversions			—			—			—			—			—			—
Stock Option Exercises and Other			704			25			—			—			1			26
Balance September 30, 2021			2,217,983			$	2,242		$	11,455		$	(534)		$	9		$	13,172

a) Accumulated Other Comprehensive Loss balances shown above are net of tax. The associated taxes were $137 million, $142 million, and $136 million as of first, second, and third quarters 2021, respectively. For additional information, see Note 11, Other Comprehensive Income.

All prior period share and per share data along with certain other prior period data has been retroactively adjusted to reflect the stock split effective June 28, 2021. See accompanying notes to consolidated financial statements.

CSX Q3 2021 Form 10-Q p.6

CSX CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES

IN SHAREHOLDERS' EQUITY (Unaudited)

(Dollars in millions)

Nine Months 2020			Common Shares Outstanding (Thousands)			Common Stock and Other Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss)****(a)			Non-controlling Minority Interest			Total Shareholders' Equity
Balance December 31, 2019			2,320,414			$	2,412		$	10,111		$	(675)		$	15		11,863
Comprehensive Earnings:
Net Earnings			—			—			770			—			—			770
Other Comprehensive Income			—			—			—			3			—			3
Total Comprehensive Earnings																		773
Common stock dividends, $0.087 per share			—			—			(201)			—			—			(201)
Share Repurchases			(26,718)			(27)			(550)			—			—			(577)
Stock Option Exercises and Other			2,680			21			7			—			2			30
Balance March 31, 2020			2,296,376			2,406			10,137			(672)			17			11,888
Comprehensive Earnings:
Net Earnings			—			—			499			—			—			499
Other Comprehensive Income			—			—			—			20			—			20
Total Comprehensive Earnings																		519
Common stock dividends, $0.087 per share			—			—			(199)			—			—			(199)
Share Repurchases			(1,739)			(2)			(37)			—			—			(39)
Bond Conversions			—			—			—			—			—			—
Stock Option Exercises and Other			522			(4)			2			—			(4)			(6)
Balance June 30, 2020			2,295,159			2,400			10,402			(652)			13			12,163
Comprehensive Earnings:
Net Earnings			—			—			736			—			—			736
Other Comprehensive Income (Note 11)			—			—			—			34			—			34
Total Comprehensive Earnings																		770
Common stock dividends, $0.087 per share			—			—			(199)			—			—			(199)
Share Repurchases			(2,115)			(2)			(46)			—			—			(48)
Bond Conversions			—			—			—			—			—			—
Stock Option Exercises and Other			1,281			40			—			—			1			41
Balance September 30, 2020			2,294,325			$	2,438		$	10,893		$	(618)		$	14		$	12,727

a) Accumulated Other Comprehensive Loss balances shown above are net of tax. The associated taxes were $183 million, $178 million, and $165 million as of first, second, and third quarters 2020, respectively. For additional information, see Note 11, Other Comprehensive Income.

All prior period share and per share data along with certain other prior period data has been retroactively adjusted to reflect the stock split effective June 28, 2021. See accompanying notes to consolidated financial statements.

CSX Q3 2021 Form 10-Q p.7

CSX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1. Nature of Operations and Significant Accounting Policies

Background

CSX Corporation together with its subsidiaries ("CSX" or the “Company”), based in Jacksonville, Florida, is one of the nation's leading transportation companies. The Company provides rail-based transportation services including traditional rail service, the transport of intermodal containers and trailers, as well as other transportation services such as rail-to-truck transfers and bulk commodity operations.

CSX's principal operating subsidiary, CSX Transportation, Inc. (“CSXT”), provides an important link to the transportation supply chain through its approximately 19,500 route mile rail network, which serves major population centers in 23 states east of the Mississippi River, the District of Columbia and the Canadian provinces of Ontario and Quebec. The Company's intermodal business links customers to railroads via trucks and terminals.

CSXT is also responsible for the Company's real estate sales, leasing, acquisition and management and development activities. Substantially all of these activities are focused on supporting railroad operations.

Other entities

In addition to CSXT, the Company’s subsidiaries include Quality Carriers, Inc. ("Quality Carriers"), CSX Intermodal Terminals, Inc. (“CSX Intermodal Terminals”), Total Distribution Services, Inc. (“TDSI”), Transflo Terminal Services, Inc. (“Transflo”), CSX Technology, Inc. (“CSX Technology”) and other subsidiaries. Effective July 1, 2021, CSX acquired Quality Carriers, the largest provider of bulk liquid chemicals truck transportation in North America, from Quality Distribution, Inc. For further details, refer to Note 12, Business Combinations. CSX Intermodal Terminals owns and operates a system of intermodal terminals, predominantly in the eastern United States and also performs drayage services (the pickup and delivery of intermodal shipments) for certain customers. TDSI serves the automotive industry with distribution centers and storage locations. Transflo connects non-rail served customers to the many benefits of rail by transferring products from rail to trucks. The biggest Transflo markets are chemicals and agriculture, which includes shipments of plastics and ethanol. CSX Technology and other subsidiaries provide support services for the Company.

Sale of Property Rights to the Commonwealth of Virginia

On March 26, 2021, the Company entered into a comprehensive agreement to sell certain property rights in three CSX-owned line segments to the Commonwealth of Virginia (“Commonwealth”) over three phases for a total of $525 million.

In April 2021, in the first phase of

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Volume and Revenue (Unaudited)
Volume (Thousands of units); Revenue (Dollars in Millions); Revenue Per Unit (Dollars)
Third Quarters
			Volume																		Revenue																		Revenue Per Unit
			2021						2020						% Change						2021						2020						% Change						2021						2020						% Change
Chemicals			166						165						1		%				$	624					$	566					10		%				$	3,759					$	3,430					10		%
Agricultural and Food Products			109						115						(5)						343						335						2						3,147						2,913						8
Minerals			90						86						5						162						144						13						1,800						1,674						8
Automotive			75						102						(26)						209						271						(23)						2,787						2,657						5
Forest Products*(a)*			75						70						7						231						209						11						3,080						2,986						3
Metals and Equipment			70						58						21						206						159						30						2,943						2,741						7
Fertilizers*(a)*			54						54						—						106						93						14						1,963						1,722						14
Total Merchandise			639						650						(2)						1,881						1,777						6						2,944						2,734						8
Intermodal			744						717						4						509						445						14						684						621						10
Coal			180						155						16						460						330						39						2,556						2,129						20
Trucking**(b)**			—						—						—						200						—						NM						—						—						—
Other			—						—						—						242						96						152						—						—						—
Total			1,563						1,522						3		%				$	3,292					$	2,648					24		%				$	2,106					$	1,740					21		%
Nine Months
			Volume																		Revenue																		Revenue Per Unit
			2021						2020						% Change						2021						2020						% Change						2021						2020						% Change
Chemicals			496						495						—		%				$	1,810					$	1,723					5		%				$	3,649					$	3,481					5		%
Agricultural and Food Products			342						338						1						1,062						1,011						5						3,105						2,991						4
Minerals			244						243						—						439						405						8						1,799						1,667						8
Automotive			239						241						(1)						661						645						2						2,766						2,676						3
Forest Products*(a)*			223						209						7						684						625						9						3,067						2,990						3
Metals and Equipment			209						173						21						596						500						19						2,852						2,890						(1)
Fertilizers*(a)*			173						168						3						350						303						16						2,023						1,804						12
Total Merchandise			1,926						1,867						3						5,602						5,212						7						2,909						2,792						4
Intermodal			2,222						1,963						13						1,488						1,226						21						670						625						7
Coal			535						463						16						1,267						1,022						24						2,368						2,207						7
Trucking**(b)**			—						—						—						200						—						NM						—						—						—
Other			—						—						—						538						298						81						—						—						—
Total			4,683						4,293						9		%				$	9,095					$	7,758					17		%				$	1,942					$	1,807					7		%

NM - not meaningful

(a) Effective 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.

(b) Effective third quarter 2021, Trucking revenue is comprised of revenue from the operations of Quality Carriers, which was acquired by CSX effective July 1, 2021.

CSX Q3 2021 Form 10-Q p.31

CSX CORPORATION

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Third Quarter 2021

Revenue

Total revenue increased 24% in third quarter 2021 when compared to third quarter 2020 due to the inclusion of Quality Carriers' results, increases in other revenue, higher fuel recovery, pricing gains and volume growth.

Merchandise Volume

Chemicals - Increased due to higher shipments of plastics, sand, waste, and other core chemicals, partially offset by lower shipments of crude oil.

Agricultural and Food Products - Decreased as a result of lower shipments of export grain and ethanol.

Minerals - Increased as a result of higher shipments of aggregates, cement, lime and limestone.

Automotive - Decreased due to lower North American vehicle production, which continues to be impacted by shortages of semi-conductors and other parts.

Forest Products - Increased primarily due to higher shipments of pulpboard, woodpulp and building products.

Metals and Equipment - Increased as growth across the metals markets was partially offset by reduced equipment shipments.

Fertilizers - Increased long-haul fertilizer shipments were offset by declines in short-haul phosphate shipments.

Intermodal Volume

Increased due to higher international shipments as a result of strong demand, inventory replenishments and growth in rail volumes from east coast ports.

Coal Volume

Domestic coal increased due to higher shipments of utility coal as well as higher steel and industrial shipments. The increase in export coal was driven by higher international shipments of both thermal and metallurgical coal.

Trucking Revenue

Trucking revenue increased $200 million versus prior year due to the inclusion of Quality Carriers' results.

Other Revenue

Other revenue increased $146 million versus prior year due to increases in revenue for intermodal storage and equipment usage as well as higher demurrage and affiliate revenue.

CSX Q3 2021 Form 10-Q p.32

CSX CORPORATION

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Expenses

Expenses of $1.9 billion increased $349 million, or 23%, in third quarter 2021 when compared to third quarter 2020.

Labor and Fringe expense increased $57 million due to the following:

• The acquisition of Quality Carriers resulted in increased costs of $30 million.

• Inflation and higher volume resulted in $23 million of increased expenses.

• Other expenses increased $4 million primarily driven by $16 million in costs for hiring and retention programs, partially offset by other non-significant items.

Purchased Services and Other expense increased $195 million due to the following:

• The inclusion of Quality Carriers' operations drove $126 million of additional costs.

• Higher operating support costs, primarily due to an increased locomotive fleet, as well as higher intermodal terminal costs drove an increase of $31 million.

• Other costs increased $38 million due to $14 million of acquisition-related costs, inflation and other non-significant items.

Depreciation expense increased $19 million primarily due to a larger asset base, which includes Quality Carriers' assets.

Fuel expense increased $128 million primarily resulting from a 77% increase in locomotive fuel prices and the inclusion of non-locomotive fuel used for trucking.

Equipment and Other Rents expense was $6 million higher primarily due to the addition of Quality Carriers' costs as increased car hire was offset by other items.

Gains on Property Dispositions increased to $60 million in 2021 from $4 million in 2020.

Interest Expense

Interest expense decreased $10 million primarily due to lower average interest rates.

Other Income - Net

Other income - net increased $6 million primarily due to an increase in net pension benefit credits.

Income Tax Expense

Income tax expense increased $79 million primarily due to higher earnings before income taxes.

CSX Q3 2021 Form 10-Q p.33

CSX CORPORATION

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Nine Months Results of Operations

Revenue increased $1.3 billion primarily due to volume growth, increases in other revenue driven by intermodal storage and equipment usage, trucking revenue from the acquisition of Quality Carriers, pricing gains across all markets, and higher fuel recovery.

Total expense increased $256 million primarily driven by rising fuel prices, the inclusion of Quality Carriers' operations, higher volume-related costs and increased incentive compensation, partially offset by higher gains on property dispositions.

Interest expense decreased $23 million primarily as a result of lower average interest rates.

Other income - net increased $9 million primarily due to an increase in net pension benefit credits, partially offset by lower interest income.

Income tax expense increased $271 million primarily due to higher earnings before income taxes.

CSX Q3 2021 Form 10-Q p.34

CSX CORPORATION

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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 $958 million is primarily due to higher cash from operating activities and increased proceeds from property dispositions. For the nine months 2021, other investing activities include $200 million of proceeds related to the conveyance of a permanent land easement to the Commonwealth of Virginia.

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

			Nine Months
(Dollars in millions)			2021			2020
Net cash provided by operating activities			$	3,819		$	3,128
Property Additions			(1,220)			(1,209)
Other Investing Activities			297			19
Free Cash Flow (before payment of dividends)			$	2,896		$	1,938

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 third quarter 2021, velocity decreased by 10% and dwell increased by 8% versus prior year. Both metrics were consistent with second quarter 2021 levels. Intermodal trip plan performance remained strong at 88% and carload trip plan performance of 68% was consistent with second quarter 2021 levels. CSX expects both network fluidity and trip plan performance to improve commensurate with ongoing hiring efforts and actions being taken to offset the current supply chain challenges.

CSX Q3 2021 Form 10-Q p.35

CSX CORPORATION

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The FRA train accident rate of 3.09 in third quarter 2021 improved 7% year over year. The personal injury frequency index of 0.85 degraded 12% versus the prior year. 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.

			Third Quarters												Nine Months
			2021			2020			Improvement/ (Deterioration)						2021			2020			Improvement/ (Deterioration)
Operations Performance
Train Velocity (Miles per hour)**(a)			17.7			19.6			(10)		%				18.1			20.7			(13)		%
Dwell (Hours)**(a)			10.5			9.7			(8)		%				10.6			9.0			(18)		%
Cars Online*(a)*			130,841			115,823			(13)		%				130,273			108,437			(20)		%
On-Time Originations			71		%	85		%	(16)		%				76		%	88		%	(14)		%
On-Time Arrivals			62		%	71		%	(13)		%				66		%	80		%	(18)		%
Carload Trip Plan Performance			68		%	73		%	(7)		%				68		%	78		%	(13)		%
Intermodal Trip Plan Performance			88		%	87		%	1		%				87		%	92		%	(5)		%
Fuel Efficiency			0.92			0.93			1		%				0.96			0.97			1		%
Revenue Ton-Miles (Billions)
Merchandise			30.8			31.0			(1)		%				94.2			91.9			3		%
Coal			8.9			7.1			25		%				26.9			21.7			24		%
Intermodal			7.8			7.4			5		%				23.6			20.3			16		%
Total Revenue Ton-Miles			47.5			45.5			4		%				144.7			133.9			8		%
Total Gross Ton-Miles (Billions)			92.9			90.3			3		%				282.3			262.6			8		%
Safety
FRA Personal Injury Frequency Index			0.85			0.76			(12)		%				0.94			0.84			(12)		%
FRA Train Accident Rate			3.09			3.31			7		%				2.81			2.83			1		%

(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.

CSX Q3 2021 Form 10-Q p.36

CSX CORPORATION

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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 $950 million and net increase of $1.9 billion in cash and cash equivalents for nine months ended 2021 and 2020, respectively.

• Cash provided by operating activities increased $691 million primarily driven by higher cash-generating income and higher net favorable working capital.

• Cash used in investing activities increased $1.3 billion primarily as a result of decreased net sales of short-term investments and net cash paid to acquire Quality Carriers, partially offset by higher proceeds from property dispositions.

• Cash used in financing activities increased $2.3 billion driven by higher share repurchases, lower proceeds from debt issuances and increased long-term debt repayments.

Sources of Cash and Liquidity and Uses of Cash

As of the end of third quarter 2021, CSX had nearly $2.2 billion of cash, cash equivalents and short-term investments. CSX uses current cash balances for general corporate purposes, which may include capital expenditures, working capital requirements, reduction or refinancing of outstanding indebtedness, redemptions and repurchases of CSX common stock, dividends to shareholders, acquisitions and other business opportunities, and contributions to the Company's qualified pension plan. 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 the nine months ended 2021, CSX did not issue any new long-term debt.

CSX Q3 2021 Form 10-Q p.37

CSX CORPORATION

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

CSX has a $1.2 billion unsecured, revolving credit facility backed by a diverse syndicate of banks that expires in March 2024. At September 30, 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 September 30, 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 increased $336 million from year end primarily due to a $414 million increase in accounts receivable, the recognition of $390 million of goodwill and intangible assets related to the acquisition of Quality Carriers and net property increases of $370 million, partially offset by the $950 million decrease in cash described above. The increase in accounts receivable was driven by the Virginia easement conveyance and increased trade accounts receivable commensurate with higher revenue, including trucking. Of the increase in net property, $225 million was the result of consolidating Quality Carriers' properties. See Note 12, Business Combinations, for more details on purchase accounting.

Total liabilities increased $274 million from year end primarily due to an increase in income and other taxes payable of $165 million driven by the timing of estimated income tax payments, an increase in accounts payable of $163 million and a $130 million increase in deferred tax liabilities primarily driven by accelerated tax depreciation. These increases were offset by debt repayments of $390 million. Total shareholders' equity increased $62 million from year end primarily driven by total comprehensive earnings of $2.9 billion, mostly offset by share repurchases of $2.3 billion and dividends paid of $633 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 $1.6 billion as of September 30, 2021 and $2.4 billion as of December 31, 2020, a decrease of $793 million since year end. The decrease in current assets was primarily due to the $950 million decrease in cash, partially offset by a $414 million increase in accounts receivable described above. The increase in current liabilities was primarily the result of a $165 million increase in income and other taxes payable and a $163 million increase in accounts payable, partially offset by $190 million decrease in current maturities of long term debt. 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.

CSX Q3 2021 Form 10-Q p.38

CSX CORPORATION

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Completed and Pending Transactions

Acquisition of Quality Carriers, Inc.

On July 1, 2021, CSX acquired Quality Carriers, Inc. from Quality Distribution, Inc. for a purchase price of $546 million in cash, subject to certain customary purchase price adjustments. This transaction was funded by cash on hand. For further details, please refer to Note 12, Business Combinations.

Proposed Acquisition of Pan Am Systems, Inc.

On November 30, 2020, CSX signed a definitive agreement to acquire Pan Am Systems, Inc. (“Pan Am”) which is the parent company of Pan Am Railways, Inc. who jointly owns Pan Am Southern, LLC with a subsidiary of Norfolk Southern Corporation. Pan Am owns and operates a highly integrated, nearly 1,200-mile rail network and has a joint interest in the more than 600-mile Pan Am Southern system. This acquisition, if approved, will expand CSX’s reach in the Northeastern United States. Assets and facilities to be acquired as part of the proposed transaction include road and track assets, work equipment, land, buildings and other assets. On February 25, 2021, the Company began the process of seeking approval from the STB with a decision expected by April 1, 2022. This proposed acquisition is not expected to be material with respect to the Company's financial statements when reviewed under the quantitative and qualitative considerations of Regulation S-X Article 11 and ASC 805, Business Combinations.

Sale of Property Rights to the Commonwealth of Virginia

On March 26, 2021, the Company entered into a comprehensive agreement to sell certain property rights in three CSX-owned line segments to the Commonwealth of Virginia (“Commonwealth”) over three phases for a total of $525 million.

In April 2021, in the first phase of the transaction, the Company closed on the conveyance of a permanent land easement for passenger rail operations, resulting in a $349 million gain recognized in gains on property dispositions on the consolidated income statement. Upon closing of the first phase, cash proceeds of $200 million were received and a receivable was recorded in the amount of $168 million. The Company expects to collect proceeds of $200 million in fourth quarter 2021, partly attributable to the first phase with the remainder towards the next phase. Additional future proceeds and related gains attributable to this conveyance are subject to state funding.

The Company anticipates closing on the remaining conveyances by the end of 2022, which will result in future cash proceeds and gains. The timing of future gain recognition is dependent upon the timing of future conveyances as well as collectability. As of September 30, 2021, the carrying values of the remaining assets subject to this transaction were not material.

CSX Q3 2021 Form 10-Q p.39

CSX CORPORATION

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Guaranteed Notes Issued By CSXT

In 2007, CSXT, a wholly-owned subsidiary of CSX Corporation, issued in a registered public offering $381 million of secured equipment notes maturing in 2023. 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. As of September 30, 2021, the principal balance of these secured equipment notes was $149 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 20,500 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.

CSX Q3 2021 Form 10-Q p.40

CSX CORPORATION

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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.

CSX Q3 2021 Form 10-Q p.41

CSX CORPORATION

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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;

CSX Q3 2021 Form 10-Q p.42

CSX CORPORATION

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

• 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, including acquisitions;

• 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 and the Company's website at www.csx.com. The information on the CSX website is not part of this quarterly report on Form 10-Q.

CSX Q3 2021 Form 10-Q p.43

CSX CORPORATION

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK