# CSX CORP (CSX) FY 2021 MD&A

Verbatim Item 7 Management's Discussion and Analysis from CSX CORP's 10-K for fiscal year 2021.

SEC filing source: https://www.sec.gov/Archives/edgar/data/277948/000027794822000009/csx-20211231.htm
Accession: 0000277948-22-000009
Filing date: 2022-02-16
Report date: 2021-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/CSX/
All MD&A years: /company/CSX/mda/
Next year: /company/CSX/mda/fy2022/ (FY 2022)

Item 7.  Management's Discussion and Analysis of Financial Condition and Results of Operations

TERMS USED BY CSX

    When used in this report, unless otherwise indicated by the context, these terms are used to mean the following:

Car hire - A charge paid by one railroad for its use of cars belonging to another railroad or car owner.

Class I freight railroad - One of the largest line haul freight railroads as determined based on operating revenue; the exact revenue required to be in each class is periodically adjusted for inflation by the Surface Transportation Board. Smaller railroads are classified as Class II or Class III.

Common carrier mandate - A federal mandate that requires U.S. railroads to accommodate reasonable requests from shippers to carry any freight, including hazardous materials.

Demurrage - A charge assessed by railroads for the use of rail cars by shippers or receivers of freight beyond a specified free time.

Department of Transportation ("DOT") - A U.S. government agency with jurisdiction over matters of all modes of transportation.

Depreciation study - Conducted by a third-party specialist and analyzed by management, a periodic statistical analysis of fixed asset service lives, salvage values, accumulated depreciation, and other factors for group assets along with a comparison of similar asset groups at other companies.

Double-stack - Stacking containers two-high on specially equipped cars.

Environmental Protection Agency (“EPA”) - A U.S. government agency that has regulatory authority with respect to environmental law.

Federal Railroad Administration ("FRA") - The branch of the DOT that is responsible for developing and enforcing railroad safety regulations, including safety standards for rail infrastructure and equipment.

Free cash flow - The calculation of a non-GAAP measure by using net cash provided by operating activities and adjusting for property additions and certain other investing activities. Free cash flow is a measure of cash available for paying dividends, share repurchases and principal reduction on outstanding debt.

Group-life depreciation - A type of depreciation in which assets with similar useful lives and characteristics are aggregated into groups. Instead of calculating depreciation for individual assets, depreciation is calculated as a whole for each group.

Incidental charges - Charges for switching, demurrage, storage, etc.

Intermodal - A flexible way of transporting freight over highway, rail and water without being removed from the original transportation equipment, namely a container or trailer.

Mainline - The main track thoroughfare, exclusive of terminals, yards, sidings and turnouts.

CSX 2021 Form 10-K p.22

CSX CORPORATION

PART II

Pipeline and Hazardous Materials Safety Administration (“PHMSA”) - An agency within the DOT that, together with the FRA, has broad jurisdiction over railroad operating standards and practices, including hazardous materials requirements. 

Positive Train Control ("PTC") - An interoperable train control system designed to prevent train-to-train collisions, over-speed derailments, incursions into established work-zone limits, and train diversions onto another set of tracks.

Revenue adequacy - The achievement of a rate of return on investment at least equal to the industry cost of investment capital, as measured by the STB.

Shipper - A customer shipping freight via rail.

Siding - Track adjacent to the mainline used for passing trains.

Staggers Act of 1980 - Congressional law that significantly deregulated the rail industry, replacing the regulatory structure in existence since the 1887 Interstate Commerce Act. Where previously rates were controlled by the Interstate Commerce Commission, the Staggers Act allowed railroads to establish their own rates for shipments, enhancing their ability to compete with other modes of transportation.

Surface Transportation Board ("STB") - An independent governmental adjudicatory body administratively housed within the DOT, responsible for the economic regulation of interstate surface transportation within the United States.

Switching - Putting cars in a specific order, placing cars for loading, retrieving empty cars or adding or removing cars from a train at an intermediate point. 

Terminal - A facility, typically owned by a railroad, for the handling of freight and for the breaking up, making up, forwarding and servicing of trains.

Transportation Security Administration (“TSA”) - A component of the Department of Homeland Security with broad authority over railroad operating practices that may have homeland security implications.

TTX Company ("TTX") - A company that provides its owner-railroads with standardized fleets of intermodal, automotive and general use railcars at time and mileage rates. CSX owns about 20 percent of TTX's common stock, and the remainder is owned by the other leading North American railroads and their affiliates.

Turnout - A track that diverts trains from one track to another. 

Yard - A system of tracks, other than main tracks and sidings, used for making up trains, storing cars and other purposes.

CSX 2021 Form 10-K p.23

CSX CORPORATION

PART II

2021 HIGHLIGHTS

• Revenue of $12.5 billion increased $1.9 billion or 18% versus the prior year.

• Expenses of $6.9 billion increased $707 million or 11% year over year.

• Operating income of $5.6 billion increased $1.2 billion or 28% year over year.

• Operating ratio of 55.3% improved 350 basis points from 58.8%.

• Earnings per diluted share of $1.68 increased $0.48 or 40% year over year.

RESULTS OF OPERATIONS

The following section generally discusses the Company's results of operations and financial condition for the year ended December 31, 2021, compared to the year ended December 31, 2020. A discussion regarding results of operations and financial condition for the year ended December 31, 2020, compared to the year ended December 31, 2019, except as provided herein, can be found in Part II, Item 7 of CSX's Annual Report on Form 10-K for fiscal year 2020, filed with the Securities and Exchange Commission on February 10, 2021.

2021 vs. 2020 Results of Operations

[[GREPCENT_TABLE]]
[["","Fiscal Years"],["","2021","","2020","","$ Change","","% Change"],["(Dollars in Millions)"],["Revenue","$","12,522","","","$","10,583","","","$","1,939","","","18","%"],["Expense"],["Labor and Fringe","2,550","","","2,275","","","(275)","","","(12)"],["Purchased Services and Other(a)","2,135","","","1,719","","","(416)","","","(24)"],["Depreciation","1,420","","","1,383","","","(37)","","","(3)"],["Fuel","913","","","541","","","(372)","","","(69)"],["Equipment and Other Rents","364","","","338","","","(26)","","","(8)"],["Gains on Property Dispositions","(454)","","","(35)","","","419","","","NM"],["Total Expense","6,928","","","6,221","","","(707)","","","(11)"],["Operating Income","5,594","","","4,362","","","1,232","","","28"],["Interest Expense","(722)","","","(754)","","","32","","","4"],["Other Income - Net","79","","","19","","","60","","","316"],["Income Tax Expense","(1,170)","","","(862)","","","(308)","","","(36)"],["Net Earnings","$","3,781","","","$","2,765","","","$","1,016","","","37"],["Earnings Per Diluted Share(b)","$","1.68","","","$","1.20","","","$","0.48","","","40","%"],["Operating Ratio","55.3","%","","58.8","%","","","","350","","bps"]]
[[/GREPCENT_TABLE]]

(a) 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.

(b) 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.

CSX 2021 Form 10-K p.24

CSX CORPORATION

PART II

Acquisition of Quality Carriers, Inc.

On July 1, 2021, CSX acquired Quality Carriers, Inc. from Quality Distribution, Inc. for a purchase price of $544 million in cash, which is presented on the statement of cash flows net of $3 million cash acquired. This transaction was funded by cash on hand. For further details, refer to Note 17, Business Combinations.

COVID-19 Update

Demand for rail services has improved from steep declines in the first half of 2020, but the effects of the disruption of global manufacturing, supply chains and consumer spending as a result of the COVID-19 global pandemic are ongoing. Future impacts of the pandemic on the Company’s financial and operating results will be determined by its duration, effects on the demand for the Company’s transportation services and the supply chain, as well as the effect of governmental regulations imposed and legislative stimulus packages passed in response to the pandemic. The duration of the pandemic is dependent on several factors, including the impacts of virus mutations and case resurgences across the country.

CSX employees that provide efficient and reliable rail service are essential to keeping supply chains fluid in response to this challenge. Accordingly, business operations have been modified to ensure the safety of employees across the network while continuing to provide a high level of service to customers. The Company is strongly encouraging employees to get vaccinated. A cross-functional task force continues to monitor and coordinate the Company’s response to COVID-19.

CSX 2021 Form 10-K p.25

CSX CORPORATION

PART II

[[GREPCENT_TABLE]]
[["Volume and Revenue (Unaudited)"],["Volume (Thousands of units); Revenue (Dollars in Millions); Revenue Per Unit (Dollars)"],["","Volume","","Revenue","","Revenue Per Unit"],["","2021","","2020","","% Change","","2021","","2020","","% Change","","2021","","2020","","% Change"],["Chemicals","659","","","664","","","(1)","%","","$","2,421","","","$","2,309","","","5","%","","$","3,674","","","$","3,477","","","6","%"],["Agricultural and Food Products","467","","","463","","","1","%","","1,461","","","1,386","","","5","%","","3,128","","","2,994","","","4","%"],["Minerals","325","","","321","","","1","%","","587","","","538","","","9","%","","1,806","","","1,676","","","8","%"],["Automotive","318","","","344","","","(8)","%","","886","","","920","","","(4)","%","","2,786","","","2,674","","","4","%"],["Forest Products (a)","296","","","278","","","6","%","","918","","","834","","","10","%","","3,101","","","3,000","","","3","%"],["Metals and Equipment","277","","","239","","","16","%","","796","","","675","","","18","%","","2,874","","","2,824","","","2","%"],["Fertilizers (a)","229","","","226","","","1","%","","470","","","414","","","14","%","","2,052","","","1,832","","","12","%"],["Total Merchandise","2,571","","","2,535","","","1","%","","7,539","","","7,076","","","7","%","","2,932","","","2,791","","","5","%"],["Intermodal","2,976","","","2,720","","","9","%","","2,039","","","1,702","","","20","%","","685","","","626","","","9","%"],["Coal","706","","","637","","","11","%","","1,790","","","1,397","","","28","%","","2,535","","","2,193","","","16","%"],["Trucking (b)","\u2014","","","\u2014","","","\u2014","%","","410","","","\u2014","","","NM","","\u2014","","","\u2014","","","\u2014","%"],["Other","\u2014","","","\u2014","","","\u2014","%","","744","","","408","","","82","%","","\u2014","","","\u2014","","","\u2014","%"],["Total","6,253","","","5,892","","","6","%","","$","12,522","","","$","10,583","","","18","%","","$","2,003","","","$","1,796","","","12","%"]]
[[/GREPCENT_TABLE]]

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 2021 Form 10-K p.26

CSX CORPORATION

PART II

Revenue

    Total revenue increased $1.9 billion in 2021, or 18%, when compared to the previous year due to higher volume, the inclusion of Quality Carriers' results, pricing gains, increases in other revenue and higher fuel recovery.

Merchandise Volume

Chemicals - Decreased due to lower shipments of crude oil and other energy-related commodities, partially offset by higher shipments of core chemicals and waste.

Agricultural and Food Products - Increased as a result of higher shipments of vegetable oils, ethanol, and food and consumer products.

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

Automotive - Decreased due to lower vehicle production at plants served by CSX, which were impacted by shortages of semiconductors 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 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 strong demand, tight truck capacity, inventory replenishments and growth in rail volumes from east coast ports.

Coal Volume

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

Trucking Revenue

Trucking revenue increased $410 million versus prior year due to the inclusion of Quality Carriers' results.

Other

Other revenue increased $336 million versus prior year due to increases in revenue for intermodal storage and equipment usage as well as higher affiliate and demurrage revenue.

CSX 2021 Form 10-K p.27

CSX CORPORATION

PART II

Expense

    In 2021, total expenses increased $707 million, or 11%, compared to prior year. Descriptions of each expense category as well as significant year-over-year changes are described below.

Labor and Fringe expenses include employee wages and related payroll taxes, health and welfare costs, pension, other post-retirement benefits and incentive compensation. These expenses increased $275 million due to the following items:

•Inflation and higher volume resulted in $133 million of increased expenses.

•Incentive compensation increased $123 million primarily due to higher expected payouts in the current year, including accelerated expense for certain employees.

•The acquisition of Quality Carriers resulted in increased costs of $61 million.

•Other costs decreased $42 million primarily due to efficiency savings, lower severance expenses and other non-significant items, partially offset by expenses related to increased hiring and new retention programs of $38 million.

Purchased Services and Other expenses consist primarily of contracted services to maintain infrastructure and equipment, terminal and pier services, purchased trucking and other transportation, and professional services. This category also includes costs related to materials, travel, casualty claims, environmental remediation, train accidents, property and sales tax, utilities and other items. Total purchased services and other expenses increased $416 million driven by the following:

•The inclusion of Quality Carriers' operations drove $257 million of additional costs.

•Higher operating support costs, primarily due to an increased active locomotive fleet, as well as higher intermodal terminal costs drove an increase of $80 million.

•All other costs increased $79 million primarily due to inflation and other non-significant costs, including $17 million in expenses related to the acquisition of Quality Carriers.

Depreciation expense primarily relates to recognizing the costs of capital assets, such as locomotives, railcars and track structure, over their respective useful lives, which are reviewed periodically as part of depreciation studies. This expense is impacted primarily by the capital expenditures made each year. Depreciation expense increased $37 million primarily due to a larger net asset base, which includes Quality Carriers' assets, partially offset by the impacts of the 2020 road and track depreciation study.

Fuel expense includes locomotive diesel fuel as well as non-locomotive fuel. This expense is largely driven by the market price and locomotive consumption of diesel fuel. Fuel expense increased $372 million primarily due to a 55% price increase in locomotive fuel prices and the inclusion of non-locomotive fuel used for trucking.

Equipment and Other Rents expense includes rent paid for freight cars owned by other railroads or private companies, net of rents received by CSXT for use of its equipment. This category of expenses also includes expenses for short-term and long-term leases of locomotives, railcars, containers, tractors and trailers, offices and other rentals. These expenses increased $26 million primarily due to increased car hire costs driven by higher days per load and the addition of Quality Carriers' costs, partially offset by other non-significant items.

Gains on Property Dispositions increased to $454 million in 2021 from $35 million in 2020 primarily due to the conveyance of a permanent land easement to the Commonwealth of Virginia that resulted in a $349 million gain in April 2021 as well as other property dispositions throughout 2021.

CSX 2021 Form 10-K p.28

CSX CORPORATION

PART II

Interest Expense

Interest Expense includes interest on long-term debt, equipment obligations and finance leases. Interest expense decreased $32 million as a result of lower average interest rates and a lower average debt balance.

Other Income - Net

Other Income - Net includes investment gains, losses and interest income, as well as components of net periodic pension and post-retirement benefit cost and other non-operating activities. Other income increased $60 million primarily due to $48 million debt repurchase expense in the prior year and an increase in net pension benefit credits during 2021, partially offset by lower interest income.

Income Tax Expense

Income Tax Expense increased $308 million primarily due to higher earnings before income taxes, partially offset by favorable state legislative changes and adjustments to deferred taxes as a result of filing of the 2020 state tax returns.

Net Earnings and Earnings per Diluted Share

Net Earnings increased $1 billion to $3.8 billion, and earnings per diluted share increased $0.48 to $1.68, due to the factors mentioned above. Average shares outstanding was lower as a result of share repurchase activity during the year and had a favorable impact on earnings per diluted share.

CSX 2021 Form 10-K p.29

CSX CORPORATION

PART II

2020 vs. 2019 Results of Operations

    See below for discussion regarding operating expenses and earnings per share for the year ended December 31, 2020, compared to the year ended December 31, 2019. These discussion items have been updated to conform to the current presentation due to the reclassification of gains on property dispositions from the Purchased Services and Other caption to Gain on Property Dispositions, which had no impact on operating income, as well as the three-for-one stock split effective June 28, 2021.

Expense

    In 2020, total expenses decreased $751 million, or 11%, compared to 2019. Descriptions of each expense category as well as significant year-over-year changes are described below.

Labor and Fringe expenses include employee wages and related payroll taxes, health and welfare costs, pension, other post-retirement benefits and incentive compensation. These expenses decreased $341 million due to the following items:

•Efficiency and volume savings of $288 million primarily resulted from structural changes to the train plan that resulted in reduced crew starts as well as lower headcount.

•Incentive compensation decreased $86 million primarily due to lower expected annual incentive payouts as well as higher prior year accelerated stock compensation expense for certain retirement-eligible employees.

•Other costs increased $33 million primarily due to inflation and several other non-significant items, including severance costs.

Purchased Services and Other expenses consist primarily of contracted services to maintain infrastructure and equipment, terminal and pier services and professional services. This category also includes costs related to materials, travel, casualty claims, environmental remediation, train accidents, property and sales tax, utilities and other items. Total purchased services and other expenses decreased $181 million driven by the following:

•Efficiency and volume savings of $185 million primarily resulted from lower operating support costs, lower terminal costs as a result of record productivity levels at intermodal terminals, and reduced equipment maintenance expenses.

•All other costs increased $4 million primarily due to inflation and other non-significant costs that were mostly offset by a $22 million non-railroad asset impairment in the prior year related to an intermodal terminal sale agreement.

Depreciation expense primarily relates to recognizing the costs of capital assets, such as locomotives, railcars and track structure, over their respective useful lives, which are reviewed periodically as part of depreciation studies. This expense is impacted primarily by the capital expenditures made each year. Depreciation expense increased $34 million primarily due to the impacts of the 2019 equipment depreciation study as well as a larger net asset base.

CSX 2021 Form 10-K p.30

CSX CORPORATION

PART II

Fuel expense includes locomotive diesel fuel as well as non-locomotive fuel. This expense is largely driven by the market price and locomotive consumption of diesel fuel. Fuel expense decreased $365 million primarily due to a 31% price decrease that drove savings of $243 million, volume savings and a 5% improvement in fuel efficiency.

Equipment and Other Rents expense includes rent paid for freight cars owned by other railroads or private companies, net of rents received by CSXT for use of its equipment. This category of expenses also includes expenses for short-term and long-term leases of locomotives, railcars, containers, tractors and trailers, offices and other rentals. These expenses decreased $14 million primarily due to volume savings, partially offset by higher days per load for automotive and other merchandise markets that resulted in increased car hire costs.

Gains on Property Dispositions decreased to $35 million in 2020 from $151 million in 2019.

Net Earnings and Earnings per Diluted Share

Net Earnings decreased $566 million to $2.8 billion, and earnings per diluted share decreased $0.19 to $1.20. Average shares outstanding was lower as a result of share repurchase activity during the year and had a favorable impact on earnings per diluted share.

CSX 2021 Form 10-K p.31

CSX CORPORATION

PART II

NON-GAAP MEASURES (Unaudited)

    CSX reports its financial results in accordance with United States generally accepted accounting principles ("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 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 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. This measure should be considered in addition to, rather than a substitute for, cash provided by operating activities. Free cash flow before dividends increased $1.2 billion year-over-year to $3.8 billion primarily due to higher net cash provided by operating activities and higher proceeds and advances from property dispositions, including $400 million of proceeds related to the conveyance of a permanent land easement to the Commonwealth of Virginia in 2021. These increases were partially offset by higher property additions.

    The following table reconciles cash provided by operating activities (GAAP measure) to free cash flow and adjusted free cash flow (both non-GAAP measures).

[[GREPCENT_TABLE]]
[["","Fiscal Years"],["","2021","","2020"],["(Dollars in Millions)"],["Net cash provided by operating activities (a)","$","5,099","","","$","4,263"],["Property additions","(1,791)","","","(1,626)"],["Other investing activities (b)","525","","","9"],["Free Cash Flow, before dividends (non-GAAP)","$","3,833","","","$","2,646"]]
[[/GREPCENT_TABLE]]

(a) Net cash provided by operating activities for the year ended December 31, 2020, includes the impact of $21 million paid to settle a liability for non-controlling interest in an affiliate.

(b) For the year ended December 31, 2020, certain other investing activities used in the calculation of free cash flow do not include the impact of a $30 million deposit paid by the Company related to its signed definitive agreement to acquire Pan Am Railways, Inc. This transaction remains subject to regulatory review and approval by the Surface Transportation Board. This deposit is included in the other investing activities total on the consolidated cash flow statement for the year ended December 31, 2020.

CSX 2021 Form 10-K p.32

CSX CORPORATION

PART II

OPERATING STATISTICS (Estimated)

[[GREPCENT_TABLE]]
[["","Fiscal Years"],["","2021","","2020","","Improvement/ (Deterioration)"],["Operations Performance"],["Train Velocity (Miles per hour)(a)","17.9","","","20.2","","","(11)","%"],["Dwell (Hours)(a)","10.7","","","9.3","","","(15)","%"],["Cars Online(a)","131,564","","","112,718","","","(17)","%"],["On-Time Originations","75","%","","87","%","","(14)","%"],["On-Time Arrivals","66","%","","77","%","","(14)","%"],["Carload Trip Plan Performance","69","%","","77","%","","(10)","%"],["Intermodal Trip Plan Performance","87","%","","90","%","","(3)","%"],["Fuel Efficiency","0.96","","","0.96","","","\u2014","%"],["Revenue Ton-Miles (Billions)"],["Merchandise","126.3","","","124.4","","","2","%"],["Coal","35.4","","","30.1","","","18","%"],["Intermodal","31.5","","","28.1","","","12","%"],["Total Revenue Ton-Miles","193.2","","","182.6","","","6","%"],["Total Gross Ton-Miles (Billions)","376.0","","","358.3","","","5","%"],["Safety"],["FRA Personal Injury Frequency Index","0.92","","","0.82","","","(12)","%"],["FRA Train Accident Rate","2.90","","","3.16","","","8","%"]]
[[/GREPCENT_TABLE]]

(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 2021 Form 10-K p.33

CSX CORPORATION

PART II

    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.

    Despite the operating challenges presented by global supply disruptions and the ongoing COVID-19 pandemic, the Company remained focused on safety, service, and controlling costs. Train velocity declined 11% relative to 2020. Dwell increased by 15% and cars online increased 17% in 2021. Compared to 2020, carload and intermodal trip plan performance decreased 10% and 3%, respectively. CSX expects network fluidity to improve commensurate with ongoing hiring efforts and a return to more normal supply chain conditions.

From a safety perspective, the FRA personal injury index increased by 12% while the train-accident rate improved by 8% from 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.

LIQUIDITY AND CAPITAL RESOURCES

    Liquidity is a company’s ability to generate adequate amounts of cash to meet both current and future needs for obligations as they mature and to provide for planned capital expenditures, including those to address regulatory and legislative requirements. To have a complete picture of a company’s liquidity, its sources and uses of cash, balance sheet and external factors should be reviewed.

Significant Cash Flows

    The following charts highlight the operating, investing and financing components of the change in cash and cash equivalents for operating, investing and financing activities for full years 2021 and 2020.

    In 2021, the Company generated $5.1 billion of cash from by operating activities, which was $836 million higher than prior year primarily driven by higher cash-generating income and favorable working capital activities. Net cash used in investing activities was $1.9 billion, an increase in net spend of $1.2 billion from the prior year primarily as a result of decreased net sales of short-term investments and cash paid to acquire Quality Carriers, partially offset by higher proceeds and advances from property dispositions. Net cash used in financing activities was $4.1 billion, which represents an increase in net spend of $2.7 billion from the prior year primarily driven by higher share repurchases and lower proceeds from debt issuances, partially offset by lower debt repayments.

CSX 2021 Form 10-K p.34

CSX CORPORATION

PART II

Sources of Cash and Liquidity

    The Company has multiple sources of liquidity, including cash generated from operations and financing sources. Simultaneous with the filing of this Form 10-K, the Company intends to file a new shelf registration statement, which 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. In 2021, CSX did not issue any new long-term debt.

    CSX has access to a $1.2 billion five-year unsecured revolving credit facility backed by a diverse syndicate of banks that expires in March 2024. As of December 31, 2021, the Company had no outstanding balances under this facility. See Note 10, Debt and Credit Agreements for more information. 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. As of December 31, 2021, the Company had no outstanding debt under the commercial paper program.

Uses of Cash

    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.

    In 2021, CSX continued to invest in its business to create long-term value for shareholders. The Company is committed to maintaining and improving its existing infrastructure and to positioning itself for long-term, profitable growth through optimizing network and terminal capacity. Funds used for property additions are further described below.

[[GREPCENT_TABLE]]
[["","Fiscal Years"],["Capital Expenditures (Dollars in Millions)","2021","","2020"],["Track","$","876","","","$","858"],["Bridges, Signals and Other","567","","","508"],["Total Infrastructure","1,443","","","1,366"],["Strategic Projects and Commercial Facilities","194","","","143"],["Locomotives","89","","","57"],["Regulatory (including PTC)","36","","","39"],["Freight Cars","29","","","21"],["Total Capital Expenditures","$","1,791","","","1,626"]]
[[/GREPCENT_TABLE]]

Planned capital investments for 2022 are expected to be approximately $2.0 billion. Of the 2022 investment, over 80% is expected to be used to sustain the core infrastructure and operating equipment. The remaining amounts will be used to promote profitable growth, including projects supporting service enhancements and productivity initiatives. CSX intends to fund capital investments through cash generated from operations.

    CSX is continually evaluating market and regulatory conditions that could affect the Company’s ability to generate sufficient returns on capital investments. CSX may revise its future estimates for capital spending as a result of changes in business conditions, tax legislation or the enactment of new laws or regulations, which could have a material adverse effect on the Company’s operations and financial performance in the future (see Risk Factors under Item 1A of this Form 10-K).

CSX 2021 Form 10-K p.35

CSX CORPORATION

PART II

CSX is committed to returning cash to shareholders. Capital structure, capital investments and cash distributions, including dividends and share repurchases, are reviewed at least annually by the Board of Directors. On February 16, 2022, the Company's Board of Directors authorized a 7% increase in the quarterly cash dividend to $0.10 per common share effective March 2022. 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.

Material Changes in the Consolidated Balance Sheets and Working Capital

    CSX's balance sheet reflects its strong capital base and the impact of CSX's balanced approach in deploying capital for the benefit of its shareholders, which includes investments in infrastructure, dividend payments and share repurchases. Further, CSX is well positioned from a liquidity standpoint. The Company ended the year with $2.3 billion of cash, cash equivalents and short-term investments.

    Total assets as well as total liabilities and shareholders' equity increased $738 million from prior year end. The increase in total assets was primarily due to a net increase in property of $571 million attributable to capital expenditures and the consolidation of Quality Carrier's properties, the recognition of $393 million of goodwill and intangible assets related to the acquisition of Quality Carriers, a $236 million increase in accounts receivable commensurate with higher revenue and a $226 million increase in net assets for qualified pension plans primarily driven by favorable discount rates. These increases were partially offset by the $890 million decrease in cash described above.

Total liabilities increased $348 million from year end primarily due to an increase in deferred tax liabilities of $215 million driven by accelerated tax depreciation, an increase in accounts payable of $154 million due to the timing of payments, an increase in labor and fringe benefit payable of $148 million partly due higher expected incentive compensation payouts, the assumption of $68 million in debt as a result of the acquisition of Quality Carriers, and an increase in income and other taxes payable of $61 million. These and other increases were offset by debt repayments of $426 million. Total shareholders' equity increased $390 million from year end primarily driven by net earnings of nearly $3.8 billion, mostly offset by share repurchases of $2.9 billion and dividends paid of $839 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 at December 2021 and $2.4 billion at December 2020, a decrease of $782 million. The decrease in current assets was primarily driven by the net decrease in cash described above, partially offset by the increase in accounts receivable. The increase in current liabilities was due to higher accounts payable and labor and fringe payable, partially offset by lower 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. Although the Company currently has a surplus, a working capital deficit is not unusual for CSX or other companies in the industry and does not indicate a lack of liquidity. The Company continues to maintain adequate current assets to satisfy current liabilities and maturing obligations when they come due. Furthermore, 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 2021 Form 10-K p.36

CSX CORPORATION

PART II

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 $544 million in cash, which is presented on the statement of cash flows net of $3 million cash acquired. This transaction was funded by cash on hand. For further details, refer to Note 17, 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. On January 13 and 14, 2022, the Company participated in a hearing before the STB to discuss the proposed transaction and a decision is expected by mid-April 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. The timing and amount of gains recognized are based on the allocation of fair value to each conveyance, the timing of future conveyances and collectability. In April 2021, upon closing of the first phase of the agreement, the Company collected $200 million in proceeds and recognized a $349 million gain. In fourth quarter 2021, the Company collected additional proceeds of $200 million, a portion of which was attributable to the first phase with the remaining attributable to the second phase. There was no gain recognized in fourth quarter 2021 related to this agreement. As the second phase closed on January 10, 2022, the resulting $20 million gain will be recognized in first quarter 2022.

The Company anticipates closing on the remaining conveyances by the end of 2022, which will result in future cash proceeds and gains. As of December 31, 2021, the carrying values of the remaining assets subject to this transaction were not material.

CSX 2021 Form 10-K p.37

CSX CORPORATION

PART II

Credit Ratings

    Credit ratings reflect an independent agency’s judgment on the likelihood that a borrower will repay a debt obligation at maturity. The ratings reflect many considerations, such as the nature of the borrower’s industry and its competitive position, the size of the company, its liquidity and access to capital and the sensitivity of a company’s cash flows to changes in the economy. The two largest rating agencies, Standard & Poor’s Ratings Services (“S&P”) and Moody’s Investors Service (“Moody’s”), use alphanumeric codes to designate their ratings. The highest quality rating for long-term credit obligations is AAA and Aaa for S&P and Moody’s, respectively. A credit rating is not a recommendation to buy, sell or hold securities and may be subject to revision or withdrawal at any time by the assigning rating agency.

    The cost and availability of unsecured financing are materially affected by CSX's long-term credit ratings. CSX's credit ratings remained stable during 2021. As of December 2021 and December 2020, S&P's long-term rating on CSX was BBB+ (Stable), and Moody's was Baa1 (Stable). Ratings of BBB- and Baa3 or better by S&P and Moody’s, respectively, reflect ratings on debt obligations that fall within a band of credit quality considered to be investment grade. If CSX's credit ratings were to decline to below investment-grade levels, the Company could experience significant increases in its interest cost for new debt. In addition, a decline in CSX’s credit ratings to below investment grade levels could adversely affect the market’s demand, and thus the Company’s ability to readily issue new debt. The Company is committed to maintaining an investment-grade credit profile.

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 December 31, 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.

CSX 2021 Form 10-K p.38

CSX CORPORATION

PART II

CONTRACTUAL OBLIGATIONS, OTHER COMMITMENTS AND OFF-BALANCE SHEET ARRANGEMENTS

Contractual Obligations

CSX is party to contractual arrangements that obligate the Company to make future cash payments. These obligations impact the Company’s liquidity and capital resource needs. The Company’s contractual obligations primarily consist of long-term debt and related interest payments, purchase commitments, leases, other-post employment benefits and agreements with Conrail.

•As of December 31, 2021, the Company had outstanding fixed-rate notes with varying maturities. See Note 10, Debt and Credit Agreements, for additional information related to future debt payments. Future interest payments associated with outstanding debt total $13.5 billion, with $699 million payable in 2022.

•Purchase commitments consist of CSX’s long-term locomotive maintenance program and other commitments to purchase technology, communications, railcar maintenance and other services. See Note 8, Commitments and Contingencies, for additional information about future payments related to purchase commitments.

•The Company’s leases include property, equipment, and line leases. See Note 7, Leases, for additional information about future payments related to leases.

•Other post-employment benefits include estimated other post-retirement medical and life insurance payments and payments under non-qualified pension plans that are unfunded. See Note 9, Employee Benefit Plans, for additional information about future payments under such plans.

•Conrail owns rail infrastructure and operates for the joint benefit of CSX and NS. This is known as the shared asset area. Conrail charges fees for right-of-way usage, equipment rentals and transportation, switching and terminal service charges in the shared asset area. See Note 15, Investment in Affiliates and Related-Party Transactions, for additional information about future payments related to agreements with Conrail.

Other Commitments and Off-Balance Sheet Arrangements

Other commitments total $153 million and primarily consist of guarantees, letters of credit and surety bonds, none of which are individually significant. These off-balance sheet arrangements are not reasonably likely to have a material effect on the Company's financial condition, results of operations or liquidity.

CSX 2021 Form 10-K p.39

CSX CORPORATION

PART II

LABOR AGREEMENTS

    Approximately 16,500 of the Company's over 20,900 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. Significant estimates using management judgment are made for the following areas:

•personal injury and environmental reserves;

•pension and post-retirement medical plan accounting;

•depreciation policies for assets under the group-life method; and

•goodwill and other intangible assets.

Personal Injury and Environmental Reserves

Personal Injury

    Personal Injury reserves of $118 million and $131 million for 2021 and 2020, respectively, represent liabilities for employee work-related and third-party injuries. CSXT retains an independent actuary to assist management in assessing the value of personal injury claims. The methodology used by the actuary includes a development factor to reflect growth or reduction in the value of these personal injury claims. It is based largely on CSXT's historical claims and settlement experience. Actual results may vary from estimates due to the number, type and severity of the injury, costs of medical treatments and uncertainties in litigation. For additional details, including a description of our related accounting policies, see Note 5, Casualty, Environmental and Other Reserves, in the consolidated financial statements.

Environmental

    Environmental reserves were $108 million and $76 million in 2021 and 2020, respectively. The Company is a party to various proceedings related to environmental issues, including administrative and judicial proceedings involving private parties and regulatory agencies. The Company has been identified as a potentially responsible party at approximately 220 environmentally impaired sites. The Company reviews its potential liability with respect to each site identified, giving consideration to a number of factors such as:

•type of clean-up required;

•nature of the Company’s alleged connection to the location (e.g., generator of waste sent to the site or owner or operator of the site);

•extent of the Company’s alleged connection (e.g., volume of waste sent to the location and other relevant factors); and

•number, connection and financial viability of other named and unnamed potentially responsible parties at the location.

CSX 2021 Form 10-K p.40

CSX CORPORATION

PART II

Critical Accounting Estimates, continued    

Conditions that are currently unknown could, at any given location, result in additional exposure, the amount and materiality of which cannot presently be reasonably estimated. For additional details, including a description of our related accounting policies, see Note 5, Casualty, Environmental and Other Reserves, in the consolidated financial statements.

Pension and Post-retirement Medical Plan Accounting

    The Company sponsors defined benefit pension plans principally for salaried, management personnel. For employees hired prior to 2003, the plans provide eligible employees with retirement benefits based predominantly on years of service and compensation rates near retirement. For employees hired between 2003 and 2019, benefits are determined based on a cash balance formula, which provides benefits by utilizing interest and pay credits based upon age, service and compensation. Beginning in 2020, the CSX Pension Plan was closed to new participants. As of December 2021, the projected benefit obligation for the Company’s pension plans was $3.0 billion.

In addition to these plans, the Company sponsors a post-retirement medical plan and a life insurance plan that provide certain benefits to full-time, salaried, management employees hired prior to 2003 upon their retirement if certain eligibility requirements are met. Beginning in 2019, both the life insurance benefit for eligible active management employees and health savings account contributions made by the Company to eligible retirees younger than 65 were eliminated. Beginning in 2020, the employer-funded health reimbursement arrangements for eligible retirees 65 years or older were eliminated. As of December 2021, the projected benefit obligation for the Company’s other post-retirement benefit plans was $81 million.

For information related to the funded status of the Company's pension and other post-retirement benefit plans, see Note 9, Employee Benefit Plans.

    The accounting for these plans is subject to the guidance provided in the Compensation-Retirement Benefits Topic in the ASC. This rule requires that management make certain assumptions relating to the following:

•discount rates used to measure future obligations and interest expense;

•long-term rate of return on plan assets;

•salary scale inflation rates; and

•other assumptions.

    The Company engages independent actuaries to compute the amounts of liabilities and expenses relating to these plans subject to the assumptions that the Company determines are appropriate based on historical trends, current market rates and future projections. These amounts are reviewed by management.

CSX 2021 Form 10-K p.41

CSX CORPORATION

PART II

Critical Accounting Estimates, continued

Discount Rates

    Discount rates affect the amount of liability recorded and the service and interest cost components of pension and post-retirement expense. Discount rates reflect the rates at which pension and other post-retirement benefits could be effectively settled, or in other words, how much it would cost the Company to buy enough high quality bonds to generate cash flow equal to the Company's expected future benefit payments. The Company determines the discount rate based on the market yield as of year-end for high quality corporate bonds whose maturities match the plans' expected benefit payments.

    The Company measures the service and interest cost components of the net pension and post-retirement benefits expense by using individual spot rates matched with separate cash flows for each future year. Under the spot rate approach, individual spot discount rates along the same high quality corporate bonds yield curve used to measure the pension and post-retirement benefit liabilities are applied to the relevant projected cash flows at the relevant maturity.

The weighted average discount rates used by the Company to value its 2021 pension and post-retirement obligations are 2.78% and 2.51%, respectively. For 2020, the weighted average discount rates used by the Company to value its pension and post-retirement obligations were 2.43% and 2.07%, respectively. Discount rates may differ for pension and post-retirement benefits due to varying duration of the liabilities for projected payments for each plan. As of December 2021, the estimated duration of pensions and post-retirement benefits is approximately 12 years and 8 years, respectively.

    Each year, these discount rates are reevaluated and adjusted using the current market interest rates for high quality corporate bonds to reflect the best estimate of the current effective settlement rates. In general, if interest rates decline or rise, the assumed discount rates will change.

Long-term Rate of Return on Plan Assets

    The expected long-term average rate of return on plan assets reflects the average rate of earnings expected on the funds invested, or to be invested, to provide for benefits included in the projected benefit obligation. In estimating that rate, the Company gives appropriate consideration to the returns being earned by the plan assets in the funds and the rates of return expected to be available for reinvestment as well as the current and projected asset mix of the funds. Management, with the assistance of an outsourced investment manager, balances market expectations obtained from various investment managers with both market and actual plan historical returns to develop a reasonable estimate of the expected long-term rate of return on assets. As this assumption is long term, the annual review may result in less frequent adjustment than other assumptions used in pension accounting. The long-term rate of return on plan assets used by the Company to value its benefit cost for the subsequent plan year was 6.75% in both 2021 and 2020.

Salary Scale Inflation Rates

    Salary scale inflation rates are based on current trends and historical data accumulated by the Company. The Company reviews recent wage increases and management incentive compensation payments over the past five years in its assessment of salary scale inflation rates. The Company used a salary scale rate of 4.60% in both 2021 and 2020 to value its pension obligations.

Other Assumptions

    The calculations made by the actuaries also include assumptions relating to health care cost trend rates, mortality rates, turnover and retirement age. These assumptions are based upon historical data, recent plan experience and industry trends and are determined by management.

CSX 2021 Form 10-K p.42

CSX CORPORATION

PART II

Critical Accounting Estimates, continued

2022 Estimated Pension and Post-retirement Expense

    Net periodic pension and post-retirement benefits expenses for 2022 are expected to be credits of $42 million and $5 million, respectively. Net periodic pension and post-retirement benefits expenses for 2022 are expected to include service cost expense of $32 million and $1 million, respectively. Service cost expense is included in labor and fringe on the consolidated income statement and all other components of net pension expense and post-retirement benefits expense are included in other income - net. Net periodic pension expense and post-retirement benefits expense in 2021 were credits of $17 million and $5 million, respectively. The net increase in the expected credit is primarily due to impacts from the increase in discount rates and recent favorable pension asset experience.

The following sensitivity analysis illustrates the effects of a 1% change in certain assumptions like discount rates, long-term rate of return and salaries on the 2022 estimated pension and post-retirement expense:

[[GREPCENT_TABLE]]
[["(Dollars in Millions)","","Pension Expense","","Post-Retirement Expense"],["Discount Rate","","$","20","","","$","1"],["Long-term Rate of Return","","$","28","","","N/A"],["Salary Inflation","","$","4","","","N/A"]]
[[/GREPCENT_TABLE]]

Depreciation Policies for Assets Utilizing the Group-Life Method

    The depreciable assets of the Company are depreciated using either the group-life or straight-line method of accounting, which are both acceptable depreciation methods in accordance with GAAP. The Company depreciates its railroad assets, including main-line track, locomotives and freight cars, using the group-life method of accounting. Assets depreciated under the group-life method comprise 86% of total fixed assets of $46.5 billion on a gross basis at December 31, 2021. The remaining depreciable assets of the Company, including non-railroad assets and assets under finance leases, are depreciated using the straight-line method on a per asset basis. Land is not depreciated.

    Management performs a review of depreciation expense and useful lives on a regular basis. Under the group-life method, the service lives and salvage values for each group of assets are determined by completing periodic depreciation studies and applying management’s methods to determine the service lives of its properties. There are several factors taken into account during the depreciation study and they include:

•statistical analysis of historical life and salvage data for each group of property;

•statistical analysis of historical retirements for each group of property;

•evaluation of current operations;

•evaluation of technological advances and maintenance schedules;

•previous assessment of the condition of the assets;

•management's outlook on the future use of certain asset groups;

•expected net salvage to be received upon retirement; and

•comparison of assets to the same asset groups with other companies.

CSX 2021 Form 10-K p.43

CSX CORPORATION

PART II

Critical Accounting Estimates, continued    

The STB requires depreciation studies be performed every three years for equipment assets (e.g., locomotives and freight cars) and every six years for road and track assets (e.g., bridges, signals, rail, ties, and ballast). The Company completed a depreciation study for its road and track assets in 2020 and for equipment assets in 2019, both of which resulted in changes to accumulated depreciation, service lives, salvage values, and other related factors for certain assets. Recent experience with depreciation studies has resulted in changes to accumulated depreciation and depreciation rates that did not materially affect the Company's depreciation expense of $1.4 billion, $1.4 billion and $1.3 billion for 2021, 2020 and 2019, respectively. A 1% change in the average estimated useful life of all group-life assets would result in an approximate $12 million change to the Company’s annual depreciation expense. For additional details, including a more detailed description of our related accounting policies, see Note 6, Properties, in the consolidated financial statements.

Goodwill and Intangible Assets

As of December 2021, the Company had $451 million of Goodwill and Other Intangibles - Net. CSX recognized $213 million of goodwill and $180 million of intangible assets as a result of the Quality Carriers acquisition effective July 1, 2021.

In applying the acquisition method of accounting for business combinations, management must determine the fair value of assets acquired and liabilities assumed in order to properly allocate purchase price consideration between depreciable and amortizable assets and goodwill. The fair values assigned to tangible and intangible assets acquired and liabilities assumed are based on management’s estimates and assumptions, as well as other information compiled by management, including valuations that utilize customary valuation procedures and techniques. Estimates and assumptions include, but are not limited to, the cash flows that an asset is expected to generate in the future and the appropriate weighted-average cost of capital.

CSX evaluates goodwill and intangible assets for impairment on an annual basis, or sooner if indicators of impairment exist. In performing the qualitative impairment assessment, CSX considers relevant events and conditions, including but not limited to: macroeconomic trends, industry and market conditions, overall financial performance, company-specific events, and legal and regulatory factors. If the qualitative assessments indicate that it is more likely than not that the fair value of the reporting unit or intangible assets are less than their carrying amounts, the Company would perform a quantitative impairment test. If the carrying amount of the reporting unit's goodwill or intangible asset exceeded the fair value under the quantitative test, an impairment loss would be recorded. Measurement of the fair value of a reporting unit could be based on one or more of the following fair value measures: amounts at which the unit as a whole could be bought or sold in a current transaction between willing parties, present value techniques of estimated future cash flows, valuation techniques based on multiples of earnings or revenue, or a similar performance measure.

New Accounting Pronouncements and Changes in Accounting Policy

    See Note 1, Nature of Operations and Significant Accounting Policies under the caption “New Accounting Pronouncements and Changes in Accounting Policy.”

CSX 2021 Form 10-K p.44

CSX CORPORATION

PART II

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 II, Item 1A. Risk Factors 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, as well as the impact of international trade agreements and tariffs) and the level of demand for products carried by CSXT;

CSX 2021 Form 10-K p.45

CSX CORPORATION

PART II

•natural events such as severe weather conditions, including floods, fire, hurricanes and earthquakes, a pandemic crisis 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 CSX'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, 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 annual report on Form 10-K.

CSX 2021 Form 10-K p.46

CSX CORPORATION