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EX-31 - EXHIBIT 31 - CSX CORPcsx033118ex31.htm
EX-32 - EXHIBIT 32 - CSX CORPcsx033118ex32.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q
 
(X)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2018
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
csxlogoa10.jpg
CSX CORPORATION
(Exact name of registrant as specified in its charter)
Virginia
 
 
 
 
 
 
 
62-1051971
 
 
(State or other jurisdiction of incorporation or organization)
 
 
 
 
 
 
 
(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.)

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 and posted on its corporate Web site, if any, 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 and post such files).
Yes (X) No ( )
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer", "accelerated filer” and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (check one)
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 875,353,546 shares of common stock outstanding on March 31, 2018 (the latest practicable date that is closest to the filing date).

                    
 
CSX Q1 2018 Form 10-Q p.1







CSX CORPORATION
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2018
INDEX

 
 
 
Page
PART I.
FINANCIAL INFORMATION
 
 
Item 1.
 
 
 
 
 
 
Quarters Ended March 31, 2018 and March 31, 2017
 
 
 
 
 
 
Quarters Ended March 31, 2018 and March 31, 2017
 
 
 
 
 
 
At March 31, 2018 (Unaudited) and December 31, 2017
 
 
 
 
 
 
Three Months Ended March 31, 2018 and March 31, 2017
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
 
 
Item 3.
 
 
 
 
 
Item 4.
 
 
 
 
 
PART II.
OTHER INFORMATION
 
 
Item 1.
 
 
 
 
 
Item 1A.
 
 
 
 
 
Item 2.
 
 
 
 
 
Item 3.
 
 
 
 
 
Item 4.
 
 
 
 
 
Item 5.
 
 
 
 
 
Item 6.
 
 
 
 
 
 
 


                    
 
CSX Q1 2018 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)
 
First Quarters
 
2018
2017
 
 
 
Revenue
$
2,876

$
2,869

Expense
 
 
Labor and Fringe
696

795

Materials, Supplies and Other
482

571

Depreciation
323

320

Fuel
255

218

Equipment and Other Rents
101

99

Restructuring Charge (Note 1)

110

Equity Earnings of Affiliates
(25
)
(13
)
Total Expense
1,832

2,100

 
 
 
Operating Income
1,044

769

 
 
 
Interest Expense
(149
)
(137
)
Restructuring Charge - Non-Operating (Note 1)

(63
)
Other Income - Net
17

13

Earnings Before Income Taxes
912

582

 
 
 
Income Tax Expense
(217
)
(220
)
Net Earnings
$
695

$
362

 
 
 
Per Common Share (Note 2)
 
 
Net Earnings Per Share, Basic
$
0.78

$
0.39

Net Earnings Per Share, Assuming Dilution
$
0.78

$
0.39

 
 
 
 
 
 
Average Shares Outstanding (In millions)
885

927

Average Shares Outstanding, Assuming Dilution (In millions)
888

929

 
 
 
 
 
 
Cash Dividends Paid Per Common Share
$
0.22

$
0.18


Certain prior year data has been reclassified to conform to the current presentation
CONSOLIDATED COMPREHENSIVE INCOME STATEMENTS (Unaudited)  
(Dollars in millions, except per share amounts)
 
First Quarters
 
2018
2017
Total Comprehensive Earnings (Note 10)
$
596

$
368


See accompanying notes to consolidated financial statements.


                    
 
CSX Q1 2018 Form 10-Q p.3





CSX CORPORATION
ITEM 1. FINANCIAL STATEMENTS

CONSOLIDATED BALANCE SHEETS
(Dollars in millions)
 
(Unaudited)
 
 
March 31,
2018
December 31,
2017
ASSETS
Current Assets:
 
 
Cash and Cash Equivalents
$
1,980

$
401

Short-term Investments
10

18

Accounts Receivable - Net (Note 11)
1,045

970

Materials and Supplies
369

372

Other Current Assets
138

154

  Total Current Assets
3,542

1,915

 
 
 
Properties
44,103

44,324

Accumulated Depreciation
(12,355
)
(12,560
)
  Properties - Net
31,748

31,764

 
 
 
Investment in Conrail
918

907

Affiliates and Other Companies
796

779

Other Long-term Assets
435

374

  Total Assets
$
37,439

$
35,739

 
 
 
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
 
 
Accounts Payable
$
905

$
847

Labor and Fringe Benefits Payable
443

602

Casualty, Environmental and Other Reserves (Note 4)
106

108

Current Maturities of Long-term Debt (Note 7)
19

19

Income and Other Taxes Payable
274

157

Other Current Liabilities
144

161

  Total Current Liabilities
1,891

1,894

 
 
 
Casualty, Environmental and Other Reserves (Note 4)
258

266

Long-term Debt (Note 7)
13,768

11,790

Deferred Income Taxes - Net
6,485

6,418

Other Long-term Liabilities
646

650

  Total Liabilities
23,048

21,018

 
 
 
Shareholders' Equity:
 
 
Common Stock, $1 Par Value
875

890

Other Capital
215

217

Retained Earnings
13,873

14,084

Accumulated Other Comprehensive Loss (Note 10)
(585
)
(486
)
Noncontrolling Interest
13

16

Total Shareholders' Equity
14,391

14,721

Total Liabilities and Shareholders' Equity
$
37,439

$
35,739


See accompanying notes to consolidated financial statements.

                    
 
CSX Q1 2018 Form 10-Q p.4





CSX CORPORATION
ITEM 1. FINANCIAL STATEMENTS

CONSOLIDATED CASH FLOW STATEMENTS (Unaudited)
(Dollars in millions)
 
Three Months
 
2018
2017
 
 
 
OPERATING ACTIVITIES
 
 
Net Earnings
$
695

$
362

Adjustments to Reconcile Net Earnings to Net Cash Provided by Operating Activities:
 
 
Depreciation
323

320

Deferred Income Taxes
54

59

Gain on Property Dispositions
(32
)
(2
)
Equity Earnings of Affiliates
(25
)
(13
)
Restructuring Charge

173

Cash Payments for Restructuring Charge
(12
)
(12
)
Other Operating Activities
6

17

Changes in Operating Assets and Liabilities:
 
 
Accounts Receivable
(50
)
(30
)
Other Current Assets
(19
)
33

Accounts Payable
64

91

Income and Other Taxes Payable
127

162

Other Current Liabilities
(165
)
(117
)
Net Cash Provided by Operating Activities
966

1,043

 
 
 
INVESTING ACTIVITIES
 
 
Property Additions
(368
)
(441
)
Proceeds from Property Dispositions
52

13

Purchase of Short-term Investments

(75
)
Proceeds from Sales of Short-term Investments
8

205

Other Investing Activities
(8
)
12

Net Cash Used In Investing Activities
(316
)
(286
)
 
 
 
FINANCING ACTIVITIES
 
 
Long-term Debt Issued (Note 7)
2,000


Dividends Paid
(194
)
(166
)
Shares Repurchased
(836
)
(258
)
Other Financing Activities
(41
)
(6
)
Net Cash Provided By (Used in) Financing Activities
929

(430
)
 
 
 
Net Increase in Cash and Cash Equivalents
1,579

327

 
 
 
CASH AND CASH EQUIVALENTS
 
 
Cash and Cash Equivalents at Beginning of Period
401

603

Cash and Cash Equivalents at End of Period
$
1,980

$
930

 
 
 

See accompanying notes to consolidated financial statements.

                    
 
CSX Q1 2018 Form 10-Q p.5





CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


NOTE 1.Nature of Operations and Significant Accounting Policies

Background
CSX Corporation (“CSX”), together with its subsidiaries (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 and the transport of intermodal containers and trailers.

CSX's principal operating subsidiary, CSX Transportation, Inc. (“CSXT”), provides an important link to the transportation supply chain through its approximately 21,000 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.

After a merger on July 1, 2017 with CSX Real Property, Inc., a former wholly-owned CSX subsidiary, CSXT is now responsible for the Company's real estate sales, leasing, acquisition and management and development activities. In addition, as substantially all real estate sales, leasing, acquisition and management and development activities are focused on supporting railroad operations, all results of these activities are included in operating income beginning in 2017. Previously, the results of these activities were classified as operating or non-operating based on the nature of the activity and were not material for any periods presented.

Other entities
In addition to CSXT, the Company’s subsidiaries include 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. 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 and trucking dispatch operations. 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 include shipments of plastics and ethanol. CSX Technology and other subsidiaries provide support services for the Company.
    
Basis of Presentation
In the opinion of management, the accompanying consolidated financial statements contain all normal, recurring adjustments necessary to fairly present the following:
  
Consolidated income statements for the three months ended March 31, 2018 and March 31, 2017;
Consolidated comprehensive income statements for the three months ended March 31, 2018 and March 31, 2017;
Consolidated balance sheets at March 31, 2018 and December 31, 2017; and
Consolidated cash flow statements for the three months ended March 31, 2018 and March 31, 2017.

Pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”), certain information and disclosures normally included in the notes to the annual financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been omitted from these interim financial statements. CSX suggests that these financial statements be read in conjunction with the audited financial statements and the notes included in CSX's most recent annual report on Form 10-K and any subsequently filed current reports on Form 8-K.

                    
 
CSX Q1 2018 Form 10-Q p.6





CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 1.    Nature of Operations and Significant Accounting Policies, continued

Fiscal Year
Through the second quarter 2017, CSX followed a 52/53 week fiscal reporting calendar with the last day of each reporting period ending on a Friday. On July 7, 2017 the Board of Directors of CSX approved a change in the fiscal reporting calendar from a 52/53 week year ending on the last Friday of December to a calendar year ending on December 31 each year, effective beginning with fiscal third quarter 2017. Related to the change in the fiscal calendar:

Fiscal year 2018 (January 1, 2018 through December 31, 2018) will contain 365 days, and fiscal year 2017 (December 31, 2016 through December 31, 2017) contained 366 days
Fiscal first quarter 2018 (January 1, 2018 through March 31, 2018) contained 90 days, and fiscal first quarter 2017 (December 31, 2016 through March 31, 2017) contained 91 days

This change did not materially impact the comparability of the Company’s financial results. Accordingly, the change to a calendar fiscal year was made on a prospective basis and operating results for prior periods were not adjusted. The Company was not required to file a transition report because this change was not deemed a change in fiscal year for purposes of reporting subject to Rule 13a-10 or Rule 15d-10 of the Securities Exchange Act of 1934 as the new fiscal year commenced with the end of the prior fiscal year end and within seven days of the prior fiscal year end.

Except as otherwise specified, references to “first quarter(s)” or “three months” indicate CSX's fiscal periods ending March 31, 2018 and March 31, 2017, and references to "year-end" indicate the fiscal year ended December 31, 2017.

New Accounting Pronouncements
In February 2018, the FASB issued Accounting Standard Update ("ASU") Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which permits entities to reclassify tax effects stranded in accumulated other comprehensive income as a result of tax reform to retained earnings. Companies that elect to reclassify these amounts must reclassify stranded tax effects for all items accounted for in accumulated other comprehensive income. The Company adopted this standard update in first quarter 2018 and applied it prospectively. Adoption resulted in the reclassification of $107 million in tax effects related to employee benefit plans from accumulated other comprehensive loss, increasing retained earnings by the same amount.

In January 2018, the FASB issued ASU Leases - Land Easement Practical Expedient, which permits entities to forgo the evaluation of existing land easement arrangements to determine if they contain a lease as part of the adoption of the Leases ASU issued in February 2016. Accordingly, the Company’s accounting treatment of existing land easements will not change. CSX will adopt this standard update concurrently with the Leases ASU issued in February 2016. New land easement arrangements, or modifications to existing arrangements, after the adoption of the standard update will still be evaluated to determine if they meet the definition of a lease.

                    
 
CSX Q1 2018 Form 10-Q p.7





CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 1.    Nature of Operations and Significant Accounting Policies, continued

In March 2017, the FASB issued ASU Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, which requires that only the service cost component of net periodic benefit costs be recorded as compensation cost in operating expense on the consolidated income statement. All other components of net periodic benefit cost (interest cost, expected return on plan assets, amortization of net loss, special termination benefits and settlement and curtailment effects) should be presented as non-operating charges on the consolidated income statement. These non-operating charges are presented as restructuring charge - non-operating, if related to prior year restructuring activities, or as other income - net as appropriate. The Company adopted the provisions of this standard during first quarter 2018 and applied them retrospectively. The retrospective impact of adoption for first quarter 2017 is shown in the following table.

 
First Quarter 2017
(Dollars in millions)
As Previously Reported
Reclassification
As Reclassified
Operating Expense:
 
 
 
Labor and Fringe
$
789

$
6

$
795

Restructuring Charge
173

(63
)
110

Non-Operating Income (Expense):
 
 
 
Restructuring Charge - Non-Operating
$

$
(63
)
$
(63
)
Other Income - Net
7

6

13


In May 2014, the FASB issued ASU Revenue from Contracts with Customers, which supersedes previous revenue recognition guidance. The new standard requires that a company recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration the company expects to receive in exchange for those goods or services. In-depth reviews of commercial contracts were completed and changes to processes and internal controls to meet the standard’s reporting and disclosure requirements were implemented. The Company adopted the guidance effective January 1, 2018 using the modified retrospective approach. The adoption did not affect the Company’s financial condition, results of operations or liquidity. Disclosures related to the nature, amount and timing of revenue and cash flows arising from contracts with customers are included in Note 11, Revenues.

In February 2016, the FASB issued ASU, Leases, which will require lessees to recognize most leases on their balance sheets as a right-of-use asset with a corresponding lease liability, and lessors to recognize a net lease investment. Additional qualitative and quantitative disclosures will also be required. This standard update is effective for CSX beginning with the first quarter 2019 and will be adopted using a modified retrospective method. Changes to processes and internal controls to meet the standard’s reporting and disclosure requirements have been identified and are being implemented. Software has been implemented that will assist in the recognition of additional assets and liabilities to be included on the balance sheet related to leases currently classified as operating leases with durations greater than twelve months, with certain allowable exceptions. The Company continues to evaluate the expected impact of this standard update on disclosures, but does not anticipate any material changes to operating results or liquidity.

                    
 
CSX Q1 2018 Form 10-Q p.8





CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 1.    Nature of Operations and Significant Accounting Policies, continued

In March 2017, the FASB issued ASU Simplifying the Test for Goodwill Impairment, which eliminates step two, the calculation of the implied fair value of goodwill, from the goodwill impairment test. Impairment will be quantified in step one of the test as the amount by which the carrying amount exceeds the fair value. This standard update is effective beginning first quarter 2020 and must be applied prospectively. The Company does not believe this standard update will have a material effect on its financial condition, results of operations or liquidity.

Restructuring Charge
The prior year restructuring charge includes costs related to the management workforce reduction program completed in 2017, reimbursement arrangements with MR Argent Advisor LLC (“Mantle Ridge”) and the Company’s former President and Chief Executive Officer, E. Hunter Harrison, the proration of equity awards and other advisory costs related to the leadership transition. Payments related to the 2017 restructuring charge were substantially complete as of March 31, 2018. For further details on the charge, see the Company's most recent annual report on Form 10-K. Expenses related to the management workforce reduction and other costs are shown in the following table.

 
First Quarter 2017
(Dollars in millions)
As Previously Reported
 
Operating Restructuring Charge
 
Non-Operating Restructuring Charge
Severance and Pension
$
131

 
$
81

 
$
50

Other Post-Retirement Benefits Curtailment
13

 

 
13

Employee Equity Awards Proration and Other
11

 
11

 

Subtotal Management Workforce Reduction
$
155

 
$
92

 
$
63

Executive Equity Awards Proration
8

 
8

 

Advisory Fees Related to Shareholder Matters
10

 
10

 

Total Restructuring Charge
$
173

 
$
110

 
$
63


                    
 
CSX Q1 2018 Form 10-Q p.9





CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 2.    Earnings Per Share

The following table sets forth the computation of basic earnings per share and earnings per share, assuming dilution:
 
First Quarters
 
2018
2017
Numerator (Dollars in millions):
 
 
Net Earnings
$
695

$
362

 
 
 
Denominator (Units in millions):
 
 
Average Common Shares Outstanding
885

927

Other Potentially Dilutive Common Shares
3

2

Average Common Shares Outstanding, Assuming Dilution
888

929

 
 
 
Net Earnings Per Share, Basic
$
0.78

$
0.39

Net Earnings Per Share, Assuming Dilution
$
0.78

$
0.39


Basic earnings per share is based on the weighted-average number of shares of common stock outstanding. Earnings per share, assuming dilution, is based on the weighted-average number of shares of common stock equivalents outstanding adjusted for the effects of common stock that may be issued as a result of potentially dilutive instruments. CSX's potentially dilutive instruments are made up of equity awards, which include long-term incentive awards and employee stock options.

The Earnings Per Share Topic in the FASB's ASC requires CSX to include additional shares in the computation of earnings per share, assuming dilution. The additional shares included in diluted earnings per share represent the number of shares that would be issued if all of the above potentially dilutive instruments were converted into CSX common stock.

When calculating diluted earnings per share, this rule requires CSX to include the potential shares that would be outstanding if all outstanding stock options were exercised. This number is different from outstanding stock options because it is offset by shares CSX could repurchase using the proceeds from these hypothetical exercises to obtain the common stock equivalent. Approximately 800 thousand and 3.4 million of total average outstanding stock options for the first quarters ended March 31, 2018 and March 31, 2017, respectively, were excluded from the diluted earnings per share calculation because their effect was antidilutive.

Share Repurchases and Dividend Increase    
On January 19, 2018, the Company entered into an accelerated share repurchase agreement to repurchase shares of the Company’s common stock. Under this agreement, the Company made a prepayment of $150 million to a financial institution and received an initial delivery of shares valued at $120 million. The remaining balance of $30 million was settled through receipt of additional shares on February 22, 2018 with the final net number of shares calculated based on the volume-weighted average price of the Company's common stock over the term of the agreement, less a discount. Total shares repurchased under the agreement were approximately 2.7 million shares, at an average purchase price of $55.02 per share.

    

                    
 
CSX Q1 2018 Form 10-Q p.10





CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 2.    Earnings Per Share, continued

On February 12, 2018, the Company announced an increase to the $1.5 billion share repurchase program first announced in October 2017, bringing the total authorized to $5 billion. This program is expected to be completed by the end of first quarter 2019. During the first quarters of 2018 and 2017, the Company repurchased approximately $836 million, or 15 million shares, and $258 million, or 6 million shares, respectively.

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. Shares are retired immediately upon repurchase. In accordance with the Equity Topic in the ASC, the excess of repurchase price over par value is recorded in retained earnings. Generally, retained earnings is only impacted by net earnings and dividends.

On February 12, 2018, the Company also announced a 10 percent increase in the quarterly dividend from $0.20 per share of common stock to $0.22 per share of common stock, payable on March 15, 2018 to shareholders of record at the close of business on March 1, 2018.


NOTE 3.     Share-Based Compensation

Under CSX's share-based compensation plans, awards consist of performance units, restricted stock awards, restricted stock units and stock options for management and stock grants for directors. Awards granted under the various programs are determined and approved by the Compensation Committee of the Board of Directors or, in certain circumstances, by the Chief Executive Officer for awards to management employees other than senior executives. The Board of Directors approves awards granted to CSX's non-management directors upon recommendation of the Governance Committee.

Share-based compensation expense is measured using the fair value of the award on the grant date and is recognized on a straight-line basis over the service period of the respective award. Total pre-tax expense associated with share-based compensation and its related income tax benefit is shown in the table below. The year over year decrease in expense related to performance units, stock options and restricted stock units and awards is primarily due to modifications to the terms of awards in 2017 (see Equity Award Modifications below), the reduction of management headcount in 2017 and adjustments to reflect changes in the expected award payouts on existing plans for each year. Additionally, the 9 million stock options granted in February 2017 to former President and CEO E. Hunter Harrison were forfeited upon his death in December 2017.
 
 
First Quarters
(Dollars in millions)
2018
2017
 
 
 
Share-Based Compensation Expense:
 
 
Performance Units
$
6

$
20

Stock Options
4

12

Restricted Stock Units and Awards
1

4

Stock Awards for Directors
2

2

Total Share-Based Compensation Expense
$
13

$
38

Income Tax Benefit
$
3

$
13



                    
 
CSX Q1 2018 Form 10-Q p.11





CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 3.     Share-Based Compensation, continued

Long-term Incentive Plan
On February 6, 2018, the Company granted approximately 350 thousand performance units to certain employees under a new long-term incentive plan ("LTIP") for the years 2018 through 2020, which was adopted under the CSX Stock and Incentive Award Plan. Payouts of performance units for the cycle ending with fiscal year 2020 will be based on the achievement of goals related to both operating ratio and free cash flow, in each case excluding non-recurring items as disclosed in the Company's financial statements. The final year operating ratio and cumulative free cash flow over the plan period will each comprise 50% of the payout and will be measured independently of the other.

Grants were made in performance units, with each unit representing the right to receive one share of CSX common stock, and payouts will be made in CSX common stock. The payout range for participants will be between 0% and 200% of the target awards depending on Company performance against predetermined goals. Payouts for certain executive officers are subject to upward or downward adjustment by up to 25%, capped at an overall payout of 200%, based upon the Company's total shareholder return relative to specified comparable groups over the performance period. The fair value of these performance units was calculated using a Monte-Carlo simulation model.

The following weighted-average assumptions were used in the Monte-Carlo simulation for this award:

 
First Quarter
 
2018
Weighted-average assumptions used:
 
Annual dividend yield
1.6
%
Risk-free interest rate
2.3
%
Annualized volatility
29.15
%
Expected life (in years)
2.9


Stock Options
Also, on February 6, 2018, the Company granted approximately 950 thousand stock options along with the corresponding LTIP. The fair value of stock options on the date of grant was $14.55 per option which was calculated using the Black-Scholes valuation model. Stock options have been granted with ten-year terms and vest three years after the date of grant. The exercise price for stock options granted equals the closing market price of the underlying stock on the date of grant. These awards are time-based and are not based upon attainment of performance goals.


                    
 
CSX Q1 2018 Form 10-Q p.12





CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 3.     Share-Based Compensation, continued

The fair values of all stock option awards during the first quarters ended March 31, 2018 and March 31, 2017 were estimated at the grant date with the following weighted average assumptions:
 
First Quarters
 
2018
2017
Weighted-average grant date fair value
$14.62
$12.83
 
 
 
Stock options valuation assumptions:
 
 
Annual dividend yield
1.5%
1.5%
Risk-free interest rate
2.6%
2.2%
Annualized volatility
27.0%
27.1%
Expected life (in years)
6.5
6.3
 
 
 
Other pricing model inputs:
 
 
Weighted-average grant-date market price of CSX stock (strike price)
$54.07
$49.61

Restricted Stock Units
Finally, on February 6, 2018, the Company granted approximately 85 thousand restricted stock units along with the corresponding LTIP. The restricted stock units vest three years after the date of grant. Participants receive cash dividend equivalents on the unvested shares during the restriction period. These awards are time-based and are not based upon attainment of performance goals. Restricted stock units were not granted to certain executive officers under the new LTIP. For information related to the Company's other outstanding long-term incentive compensation, see CSX's most recent annual report on Form 10-K.

Equity Award Modifications    
In 2017, as part of an enhanced severance benefit under the management streamlining and realignment initiative discussed in Note 1, unvested performance units, restricted stock units and stock options for separated employees not eligible for retirement were permitted to vest on a pro-rata basis. Additionally, the terms of unvested equity awards for the former Chief Executive Officer, Michael J. Ward, and President, Clarence W. Gooden, were modified prior to their retirements on March 6, 2017 to permit prorated vesting through May 31, 2018.
    
The award modifications noted above impacted 58 employees and resulted in an increase to share-based compensation expense for revaluation of the affected awards of $12 million for the three months ended March 31, 2017. No significant award modifications took place in first quarter 2018.


                    
 
CSX Q1 2018 Form 10-Q p.13





CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 4.    Casualty, Environmental and Other Reserves

Personal injury and environmental reserves are considered critical accounting estimates due to the need for significant management judgment. Casualty, environmental and other reserves are provided for in the consolidated balance sheets as shown in the table below.
 
March 31,
2018
 
December 31,
2017
(Dollars in millions)
Current
Long-term
Total
 
Current
Long-term
Total
 
 
 
 
 
 
 
 
Casualty:
 
 
 
 
 
 
 
Personal Injury
$
42

$
120

$
162

 
$
43

$
125

$
168

Occupational
7

53

60

 
6

54

60

     Total Casualty
49

173

222

 
49

179

228

Environmental
31

58

89

 
31

59

90

Other
26

27

53

 
28

28

56

     Total
$
106

$
258

$
364

 
$
108

$
266

$
374


These liabilities are accrued when reasonably estimable and probable in accordance with the Contingencies Topic in the ASC. Actual settlements and claims received could differ, and final outcomes of these matters cannot be predicted with certainty. Considering the legal defenses currently available, the liabilities that have been recorded and other factors, it is the opinion of management that none of these items individually, when finally resolved, will have a material adverse effect on the Company's financial condition, results of operations or liquidity. Should a number of these items occur in the same period, however, their combined effect could be material in that particular period.

Casualty
Casualty reserves of $222 million and $228 million as of March 31, 2018 and December 31, 2017, respectively, represent accruals for personal injury, occupational disease and occupational injury claims. The Company's self-insured retention amount for these claims is $50 million per occurrence. Currently, no individual claim is expected to exceed the self-insured retention amount. In accordance with the Contingencies Topic in the ASC, to the extent the value of an individual claim exceeds the self-insured retention amount, the Company would present the liability on a gross basis with a corresponding receivable for insurance recoveries. These reserves fluctuate based upon the timing of payments as well as changes in estimate. Actual results may vary from estimates due to the number, type and severity of the injury, costs of medical treatments and uncertainties in litigation. Most of the Company's casualty claims relate to CSXT unless otherwise noted below. Defense and processing costs, which historically have been insignificant and are anticipated to be insignificant in the future, are not included in the recorded liabilities.

Personal Injury
    Personal injury reserves represent liabilities for employee work-related and third-party injuries. Work-related injuries for CSXT employees are primarily subject to the Federal Employers’ Liability Act (“FELA”). CSXT retains an independent actuary to assist management in assessing the value of personal injury claims. An analysis is performed by the actuary quarterly and is reviewed by management. This analysis for the quarter resulted in an immaterial adjustment to the personal injury reserve. 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.


                    
 
CSX Q1 2018 Form 10-Q p.14





CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 4.    Casualty, Environmental and Other Reserves, continued

Occupational
Occupational reserves represent liabilities for occupational disease and injury claims. Occupational disease claims arise primarily from allegations of exposure to asbestos in the workplace. Occupational injury claims arise from allegations of exposure to certain other materials in the workplace, such as solvents, soaps, chemicals (collectively referred to as “irritants”) and diesel fuels (like exhaust fumes) or allegations of chronic physical injuries resulting from work conditions, such as repetitive stress injuries.

Environmental
Environmental reserves were $89 million and $90 million as of March 31, 2018 and December 31, 2017, 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 221 environmentally impaired sites. Many of these are, or may be, subject to remedial action under the federal Comprehensive Environmental Response, Compensation and Liability Act of 1980 ("CERCLA"), also known as the Superfund Law, or similar state statutes. Most of these proceedings arose from environmental conditions on properties used for ongoing or discontinued railroad operations. A number of these proceedings, however, are based on allegations that the Company, or its predecessors, sent hazardous substances to facilities owned or operated by others for treatment, recycling or disposal. In addition, some of the Company's land holdings were leased to others for commercial or industrial uses that may have resulted in releases of hazardous substances or other regulated materials onto the property and could give rise to proceedings against the Company.

In any such proceedings, the Company is subject to environmental clean-up and enforcement actions under the Superfund Law, as well as similar state laws that may impose joint and several liability for clean-up and enforcement costs on current and former owners and operators of a site without regard to fault or the legality of the original conduct. These costs could be substantial.

In accordance with the Asset Retirement and Environmental Obligations Topic in the ASC, the Company reviews its role with respect to each site identified at least quarterly, 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.

Based on the review process, the Company has recorded amounts to cover contingent anticipated future environmental remediation costs with respect to each site to the extent such costs are reasonably estimable and probable. The recorded liabilities for estimated future environmental costs are undiscounted. The liability includes future costs for remediation and restoration of sites as well as any significant ongoing monitoring costs, but excludes any anticipated insurance recoveries. Payments related to these liabilities are expected to be made over the next several years. Environmental remediation costs are included in materials, supplies and other on the consolidated income statements.


                    
 
CSX Q1 2018 Form 10-Q p.15





CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 4.    Casualty, Environmental and Other Reserves, continued

Currently, the Company does not possess sufficient information to reasonably estimate the amounts of additional liabilities, if any, on some sites until completion of future environmental studies. In addition, 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. Based upon information currently available, however, the Company believes its environmental reserves accurately reflect the estimated cost of remedial actions currently required.

Other
Other reserves of $53 million and $56 million as of March 31, 2018 and December 31, 2017, respectively, include liabilities for various claims, such as property, automobile and general liability. Also included in other reserves are longshoremen disability claims related to a previously owned international shipping business (these claims are in runoff) as well as claims for current port employees.


NOTE 5.    Commitments and Contingencies

Insurance
The Company maintains numerous insurance programs with substantial limits for property damage (which includes business interruption) and third-party liability.  A certain amount of risk is retained by the Company on each of the property and liability programs. The Company has a $25 million retention per occurrence for the non-catastrophic property program (such as a derailment) and a $50 million retention per occurrence for the liability and catastrophic property programs (such as hurricanes and floods). While the Company believes its insurance coverage is adequate, future claims could exceed existing insurance coverage or insurance may not continue to be available at commercially reasonable rates.

Legal
    The Company is involved in litigation incidental to its business and is a party to a number of legal actions and claims, various governmental proceedings and private civil lawsuits, including, but not limited to, those related to fuel surcharge practices, tax matters, environmental and hazardous material exposure matters, FELA and labor claims by current or former employees, other personal injury or property claims and disputes and complaints involving certain transportation rates and charges. Some of the legal proceedings include claims for compensatory as well as punitive damages and others are, or are purported to be, class actions. While the final outcome of these matters cannot be reasonably determined, considering, among other things, the legal defenses available and liabilities that have been recorded along with applicable insurance, it is currently the opinion of management that none of these pending items is likely to have a material adverse effect on the Company's financial condition, results of operations or liquidity. An unexpected adverse resolution of one or more of these items, however, could have a material adverse effect on the Company's financial condition, results of operations or liquidity in that particular period.
The Company is able to estimate a range of possible loss for certain legal proceedings for which a loss is reasonably possible in excess of reserves established. The Company has estimated this range to be $2 million to $115 million in aggregate at March 31, 2018. This estimated aggregate range is based upon currently available information and is subject to significant judgment and a variety of assumptions. Accordingly, the Company's estimate will change from time to time, and actual losses may vary significantly from the current estimate.


                    
 
CSX Q1 2018 Form 10-Q p.16





CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 5.    Commitments and Contingencies, continued

Fuel Surcharge Antitrust Litigation
In May 2007, class action lawsuits were filed against CSXT and three other U.S.-based Class I railroads alleging that the defendants' fuel surcharge practices relating to contract and unregulated traffic resulted from an illegal conspiracy in violation of antitrust laws. In November 2007, the class action lawsuits were consolidated in federal court in the District of Columbia, where they are now pending. The suit seeks treble damages allegedly sustained by purported class members as well as attorneys' fees and other relief. Plaintiffs are expected to allege damages at least equal to the fuel surcharges at issue.

In June 2012, the District Court certified the case as a class action. The decision was not a ruling on the merits of plaintiffs' claims, but rather a decision to allow the plaintiffs to seek to prove the case as a class. The defendant railroads petitioned the U.S. Court of Appeals for the D.C. Circuit for permission to appeal the District Court's class certification decision. In August 2013, the D.C. Circuit issued a decision vacating the class certification decision and remanded the case to the District Court to reconsider its class certification decision. On October 10, 2017, the District Court issued an order denying class certification. The D.C. Circuit is reviewing the court's denial of class certification. The District Court had delayed proceedings on the merits of the case pending the outcome of the class certification remand proceedings, and has not yet issued a further schedule in light of the order denying class certification and the related appeal.

CSXT believes that its fuel surcharge practices were arrived at and applied lawfully and that the case is without merit. Accordingly, the Company intends to defend itself vigorously. However, penalties for violating antitrust laws can be severe, and resolution of this matter or an unexpected adverse decision on the merits could have a material adverse effect on the Company's financial condition, results of operations or liquidity in that particular period.

Environmental
CSXT is indemnifying Pharmacia LLC (formerly known as Monsanto Company) for certain liabilities associated with real estate located in Kearny, New Jersey along the Lower Passaic River (the “Property”). The Property, which was formerly owned by Pharmacia, is now owned by CSXT. CSXT's indemnification and defense duties arise with respect to several matters. The U.S. Environmental Protection Agency ("EPA"), using its CERCLA authority, seeks cleanup and removal costs and other damages associated with the presence of hazardous substances in the 17-mile Lower Passaic River Study Area (the "Study Area”). CSXT, on behalf of Pharmacia, and a significant number of other potentially responsible parties are together conducting a Remedial Investigation and Feasibility Study of the Study Area pursuant to an Administrative Settlement Agreement and Order on Consent with the EPA.

In March 2016, EPA issued its Record of Decision detailing the agency’s mandated remedial process for the lower 8 miles of the Study Area. Approximately 80 parties, including Pharmacia, are participating in an EPA-directed allocation process to assign responsibility for costs to be incurred implementing the remedy selected for the lower 8 miles of the Study Area. CSXT is participating in the allocation process on behalf of Pharmacia. At a later date, EPA will select a remedy for the remainder of the Study Area and is expected to again seek the participation of private parties to implement the selected remedy using EPA’s CERCLA authority to compel such participation, if necessary.

CSXT is also defending and indemnifying Pharmacia in a cooperative natural resource damages assessment process related to the Property. Based on currently available information, the Company does not believe any indemnification or remediation costs potentially allocable to CSXT with respect to the Property and the Study Area would be material to the Company's financial condition, results of operations or liquidity.


                    
 
CSX Q1 2018 Form 10-Q p.17





CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 6.    Employee Benefit Plans

The Company sponsors defined benefit pension plans principally for salaried, management personnel. CSX also sponsors a post-retirement medical plan and a life insurance plan that provide certain benefits to eligible employees hired prior to January 1, 2003. Independent actuaries 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.

Only the service cost component of net periodic benefit costs is included in labor and fringe expense on the consolidated income statement. All other components of net periodic benefit cost are included in other income - net or, if related to prior year restructuring activities, as restructuring charge - non-operating.
 
Pension Benefits
(Dollars in millions)
First Quarters
 
2018
2017
Service Cost Included in Labor and Fringe
$
9

$
11

 
 
 
Interest Cost
23

23

Expected Return on Plan Assets
(44
)
(42
)
Amortization of Net Loss
10

11

Total Income Included in Other Income - Net
$
(11
)
$
(8
)
 
 
 
Net Periodic Benefit Cost
$
(2
)
$
3

 
 
 
Restructuring Charges - Non Operating (a)

50

Total (Income) Expense
$
(2
)
$
53

 
 
 
 
Other Post-retirement Benefits
(Dollars in millions)
First Quarters
 
2018
2017
Interest Cost
$
2

$
2

Amortization of Net Loss


Total Expense Included in Other Income - Net
$
2

$
2

 
 
 
Net Periodic Benefit Cost
$
2

$
2

 
 
 
Restructuring Charges - Non Operating  (a)

13

Total Expense
$
2

$
15

(a) Charges related to special termination benefits and curtailment costs were the result of the management workforce reductions in first quarter 2017. See Management Workforce Reductions in Note 1. Nature of Operations and Significant Accounting Policies.

Qualified pension plan obligations are funded in accordance with regulatory requirements and with an objective of meeting or exceeding minimum funding requirements necessary to avoid restrictions on flexibility of plan operation and benefit payments. No contributions to the Company's qualified pension plans are expected in 2018.


                    
 
CSX Q1 2018 Form 10-Q p.18





CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 7.    Debt and Credit Agreements

Total activity related to long-term debt as of the end of first quarter 2018 is shown in the table below. For fair value information related to the Company's long-term debt, see Note 9, Fair Value Measurements.

(Dollars in millions)
Current Portion
Long-term Portion
Total
Long-term debt as of December 31, 2017
$
19

$
11,790

$
11,809

2018 activity:
 
 
 
Long-term debt issued

2,000

2,000

Discount, premium and other activity

(22
)
(22
)
Long-term debt as of March 31, 2018
$
19

$
13,768

$
13,787


Debt Issuance
    On February 20, 2018, CSX issued $800 million of 3.80% notes due 2028, $850 million of 4.30% notes due 2048, and $350 million of 4.65% notes due 2068. These notes are included in the consolidated balance sheets under long-term debt and may be redeemed by the Company at any time. The net proceeds will be used for general corporate purposes, which may include repurchases of CSX's common stock, capital investment, working capital requirements, improvements in productivity and other cost reductions at the Company’s major transportation units.

Credit Facility
CSX has a $1 billion unsecured, revolving credit facility backed by a diverse syndicate of banks. This facility expires in May 2020, and as of the date of this filing, the Company has no outstanding balances under this facility. The facility allows borrowings at floating (LIBOR-based) interest rates, plus a spread, depending upon CSX's senior unsecured debt ratings. LIBOR is the London Interbank Offered Rate which is a daily reference rate based on the interest rates at which banks offer to lend unsecured funds.

Commitment fees and interest rates payable under the facility were similar to fees and rates available to comparably rated investment-grade borrowers. As of first quarter 2018, CSX was in compliance with all covenant requirements under this facility.

Receivables Securitization Facility
The Company has a receivables securitization facility with a three-year term scheduled to expire in September 2019. The purpose of this facility is to provide an alternative to commercial paper and a low cost source of short-term liquidity of up to $200 million, depending on eligible receivables balances. As of the date of this filing, the Company has no outstanding balances under this facility.


                    
 
CSX Q1 2018 Form 10-Q p.19





CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 8.    Income Taxes

The effective tax rate decreased to 23.8% from 37.8% for the first quarters ended March 31, 2018 and March 31, 2017, respectively, primarily as a result of the significant reduction in the federal corporate income tax rate effective January 1, 2018. In its initial analysis of the impacts of the Tax Cuts and Job Act (the “Act” or “tax reform”), the Company made certain estimates that may be adjusted in future periods as required. The Act has significant complexity and implementation guidance from the Internal Revenue Service, clarifications of state tax law and the completion of the Company’s 2017 tax return filings could all impact these estimates. The Company does not believe potential adjustments in future periods would materially impact the Company's financial condition or results of operations.

There have been no material changes to the balance of unrecognized tax benefits reported at December 31, 2017.


NOTE 9.    Fair Value Measurements

The Financial Instruments Topic in the ASC requires disclosures about fair value of financial instruments in annual reports as well as in quarterly reports. For CSX, this statement applies to certain investments and long-term debt. Disclosure of the fair value of pension plan assets is only required annually. Also, this rule clarifies the definition of fair value for financial reporting, establishes a framework for measuring fair value and requires additional disclosures about the use of fair value measurements.

Various inputs are considered when determining the value of the Company's investments, pension plan assets and long-term debt. The inputs or methodologies used for valuing securities are not necessarily an indication of the risk associated with investing in these securities. These inputs are summarized in the three broad levels listed below.

Level 1 - observable market inputs that are unadjusted quoted prices for identical assets or liabilities in active markets;
Level 2 - other significant observable inputs (including quoted prices for similar securities, interest rates, credit risk, etc.); and
Level 3 - significant unobservable inputs (including the Company's own assumptions about the assumptions market participants would use in determining the fair value of investments).

The valuation methods described below may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while the Company believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date.

Investments
The Company's investment assets, valued with assistance from a third-party trustee, consist of certificates of deposits, commercial paper, corporate bonds and government securities and are carried at fair value on the consolidated balance sheet per the Fair Value Measurements and Disclosures Topic in the ASC. There are several valuation methodologies used for those assets as described below.

Certificates of Deposit and Commercial Paper (Level 2): Valued at amortized cost, which approximates fair value; and
Corporate Bonds and Government Securities (Level 2): Valued using broker quotes that utilize observable market inputs.

                    
 
CSX Q1 2018 Form 10-Q p.20





CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 9.    Fair Value Measurements, continued

The Company's investment assets are carried at fair value on the consolidated balance sheets as summarized in the following table. All of the inputs used to determine the fair value of the Company's investments are Level 2 inputs. The amortized cost basis of these investments was $92 million and $95 million as of March 31, 2018 and December 31, 2017, respectively.
(Dollars in Millions)
March 31,
2018
 
December 31,
2017
 
Level 2
 
Level 2
Certificates of Deposit and Commercial Paper
$

 
$

Corporate Bonds
58

 
61

Government Securities
36

 
34

Auction Rate Securities

 

Total investments at fair value
$
94

 
$
95


These investments have the following maturities:
(Dollars in millions)
March 31,
2018
 
December 31,
2017
Less than 1 year
$
10

 
$
18

1 - 5 years
17

 
11

5 - 10 years
25

 
26

Greater than 10 years
42

 
40

Total investments at fair value
$
94

 
$
95


Long-term Debt
Long-term debt is reported at carrying amount on the consolidated balance sheets and is the Company's only financial instrument with fair values significantly different from their carrying amounts. The majority of the Company's long-term debt is valued with assistance from an independent third party adviser that utilizes closing transactions, market quotes or market values of comparable debt. For those instruments not valued by the independent adviser, the fair value has been estimated by applying market rates of similar instruments to the scheduled contractual debt payments and maturities. These market rates are provided by the same independent adviser. All of the inputs used to determine the fair value of the Company's long-term debt are Level 2 inputs.

The fair value of outstanding debt fluctuates with changes in a number of factors. Such factors include, but are not limited to, interest rates, market conditions, credit ratings, values of similar financial instruments, size of the transaction, cash flow projections and comparable trades. Fair value will exceed carrying value when the current market interest rate is lower than the interest rate at which the debt was originally issued. The fair value of a company's debt is a measure of its current value under present market conditions. It does not impact the financial statements under current accounting rules.


                    
 
CSX Q1 2018 Form 10-Q p.21





CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 9.    Fair Value Measurements, continued

The fair value and carrying value of the Company's long-term debt is as follows:
(Dollars in millions)
March 31,
2018
 
December 31, 2017
Long-term Debt (Including Current Maturities):
 
 
 
Fair Value
$
14,487

 
$
13,220

Carrying Value
13,787

 
11,809



NOTE 10.     Other Comprehensive Income (Loss)

CSX reports comprehensive earnings or loss in accordance with the Comprehensive Income Topic in the ASC in the Consolidated Comprehensive Income Statement. Total comprehensive earnings are defined as all changes in shareholders' equity during a period, other than those resulting from investments by and distributions to shareholders (e.g. issuance of equity securities and dividends). Generally, for CSX, total comprehensive earnings equal net earnings plus or minus adjustments for pension and other post-retirement liabilities. Total comprehensive earnings represent the activity for a period net of tax and were $596 million and $368 million for first quarters 2018 and 2017, respectively.

While total comprehensive earnings is the activity in a period and is largely driven by net earnings in that period, accumulated other comprehensive income or loss (“AOCI”) represents the cumulative balance of other comprehensive income, net of tax, as of the balance sheet date. For CSX, AOCI is primarily the cumulative balance related to pension and other post-retirement benefit adjustments and CSX's share of AOCI of equity method investees.

Changes in the AOCI balance by component are shown in the table below. Amounts reclassified in pension and other post-employment benefits to net earnings relate to the amortization of actuarial losses and are included in labor and fringe on the consolidated income statements. See Note 6, Employee Benefit Plans, for further information. Other primarily represents CSX's share of AOCI of equity method investees. Amounts reclassified in other to net earnings are included in equity earnings of affiliates on the consolidated income statements.
 
Pension and Other Post-Employment Benefits
Other
Accumulated Other Comprehensive Income (Loss)
(Dollars in millions)
 
 
 
Balance December 31, 2017, Net of Tax
$
(440
)
$
(46
)
$
(486
)
Other Comprehensive Income (Loss)
 
 
 
Income Before Reclassifications

1

1

Amounts Reclassified to Net Earnings
10

(2
)
8

Tax (Expense) Benefit
(2
)
1

(1
)
Reclassification of Stranded Tax Effects
(108
)
1

(107
)
Total Other Comprehensive Income
(100
)
1

(99
)
Balance March 31, 2018, Net of Tax
$
(540
)
$
(45
)
$
(585
)


                    
 
CSX Q1 2018 Form 10-Q p.22





CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 11.     Revenues

The Company’s revenues are primarily derived from the transportation of freight as performance obligations that arise from its contracts with customers are satisfied. The following table presents the Company’s revenues disaggregated by lines of business as they best depict how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors:
 
First Quarters
(Dollars in millions)
2018
2017
 
 
 
Chemicals
$
557

$
566

Agricultural and Food Products
307

332

Automotive
304

316

Forest Products
195

192

Metals and Equipment
186

190

Fertilizers
116

129

Minerals
114

114

Total Merchandise
1,779

1,839

 
 
 
Domestic Coal
272

330

Export Coal
231

192

Total Coal
503

522

 
 
 
Domestic Intermodal
294

291

International Intermodal
155

143

Total Intermodal
449

434

 
 
 
Other
145

74

 
 
 
Total
$
2,876

$
2,869


Revenue Recognition
The Company generates revenue from freight billings under contracts with customers generally on a rate per carload, container or ton-basis based on origin to destination and commodities carried. The Company’s performance obligation arises when it receives a bill of lading (“BOL”) to transport a customer's commodities based on a negotiated price contained in a transportation services agreement or a publicly disclosed tariff rate. Once a BOL is received, a contract is formed whereby the parties are committed to perform, collectability of consideration is probable and the rights of the parties, shipping terms and conditions, and payment terms are identified. A customer may submit several BOLs for transportation services at various times throughout a service agreement term but each shipment represents a distinct service that is a separately identified performance obligation. The average transit time to complete a shipment is between 3 to 8 days and payments for transportation services are normally billed once a BOL is received and are generally due within 15 days after the invoice date. The Company recognizes revenue over transit time of freight as it moves from origin to destination. Revenue for services started but not completed at the reporting date is allocated based on the relative transit time in each reporting period, with the portion allocated for services subsequent to the reporting date considered remaining performance obligations.

                    
 
CSX Q1 2018 Form 10-Q p.23





CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 11.     Revenues, continued

The certain key estimates included in the recognition and measurement of revenue and related accounts receivable are as follows:

Revenue associated with shipments in transit is recognized ratably over transit time and is based on average cycle times to move commodities and products from their origin to their final destination or interchange;
Adjustments to revenue for billing corrections and billing discounts;
Adjustments to revenue for overcharge claims filed by customers, which are based on historical payments to customers for rate overcharges as a percentage of total billing;
Incentive-based refunds to customers, which are primarily volume-related, are recorded as a reduction to revenue on the basis of the projected liability (this estimate is based on historical activity, current volume levels and forecasted future volume).

Revenue related to interline transportation services that involve the services of another party, such as another railroad, is reported on a net basis. The portion of the gross amount billed to customers that is remitted by the Company to another party is not reflected as revenue.

Other revenue, which includes revenue from regional subsidiary railroads, demurrage, switching and other incidental charges, is recorded upon completion of the service and accounted for 5% of the Company’s total revenue in the first quarter of 2018. Revenue from regional railroads includes shipments by railroads that the Company does not directly operate. Demurrage represents charges assessed when freight cars are held beyond a specified period of time. Switching revenue is primarily generated when the Company switches cars for a customer or another railroad.

During the first quarters of 2018 and 2017, revenue recognized from performance obligations related to prior periods (for example, due to changes in transaction price), was not material.

Remaining Performance Obligations
Remaining performance obligations represent the transaction price allocated to future reporting periods for freight services started but not completed at the reporting date. This includes the unearned portion of billed and unbilled amounts for cancellable freight shipments in transit that the Company expects to recognize as revenue in the period subsequent to the reporting date, which is on average less than one week. As of March 31, 2018, the Company had no material remaining performance obligations.

Contract Balances and Accounts Receivable
The timing of revenue recognition, billings and cash collections results in accounts receivable and customer advances and deposits (contract liabilities) on the consolidated balance sheets. The Company had no material contract assets, contract liabilities or deferred contract costs recorded on the consolidated balance sheets as of March 31, 2018.

                    
 
CSX Q1 2018 Form 10-Q p.24





CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 11.     Revenues, continued

The Company’s accounts receivable - net consists of freight and non-freight receivables, reduced by an allowance for doubtful accounts.

(Dollars in millions)
March 31, 2018
December 31, 2017
 
 
 
Freight Receivables
$
855

$
810

Freight Allowance for Doubtful Accounts
(18
)
(17
)
Freight Receivables, net
837

793

 
 
 
Non-Freight Receivables
218

186

Non-Freight Allowance for Doubtful Accounts
(10
)
(9
)
Non-Freight Receivables, net
208

177

 
 
 
Total Accounts Receivable, net
$
1,045

$
970


Freight receivables include amounts earned, billed and unbilled, and currently due from customers for transportation-related services. Non-freight receivables include amounts billed and unbilled and currently due related to government reimbursement receivables and other non-revenue receivables. The Company maintains an allowance for doubtful accounts to provide for the estimated amount of receivables that will not be collected. The allowance is based upon an assessment of customer creditworthiness, historical payment experience, the age of outstanding receivables and economic conditions. Impairment losses recognized on the Company’s accounts receivable were not material in the first quarters of 2018 and 2017.


NOTE 12.    Summarized Consolidating Financial Data

In 2007, CSXT, a wholly-owned subsidiary of CSX Corporation, sold secured equipment notes maturing in 2023 in a registered public offering. CSX has fully and unconditionally guaranteed the notes. In connection with the notes, the Company is providing the following condensed consolidating financial information in accordance with SEC disclosure requirements. Each entity in the consolidating financial information follows the same accounting policies as described in the consolidated financial statements, except for the use of the equity method of accounting to reflect ownership interests in subsidiaries which are eliminated upon consolidation and the allocation of certain expenses of CSX incurred for the benefit of its subsidiaries. Condensed consolidating financial information for the obligor, CSXT, and parent guarantor, CSX, is shown in the following tables.

                    
 
CSX Q1 2018 Form 10-Q p.25





CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 12.    Summarized Consolidating Financial Data, continued

 Consolidating Income Statements
 (Dollars in millions)
First Quarter 2018
 CSX Corporation
 CSX Transportation
 Eliminations and Other
 Consolidated
 Revenue
$

$
2,857

$
19

$
2,876

 Expense
(78
)
1,943

(33
)
1,832

 Operating Income
78

914

52

1,044

 
 
 
 
 
 Equity in Earnings of Subsidiaries
758


(758
)

 Interest (Expense) / Benefit
(164
)
(9
)
24

(149
)
 Other Income / (Expense) - Net
4

23

(10
)
17

 
 
 
 
 
 Earnings Before Income Taxes
676

928

(692
)
912

 Income Tax Benefit / (Expense)
19

(224
)
(12
)
(217
)
 Net Earnings
$
695

$
704

$
(704
)
$
695

 
 
 
 
 
Total Comprehensive Earnings
$
596

$
700

$
(700
)
$
596

 
 
 
 
 
First Quarter 2017
 CSX Corporation
 CSX Transportation
 Eliminations and Other
 Consolidated
 Revenue
$

$
2,851

$
18

$
2,869

 Expense
(48
)
2,228

(80
)
2,100

 Operating Income
48

623

98

769

 
 
 
 
 
 Equity in Earnings of Subsidiaries
422


(422
)

 Interest (Expense) / Benefit
(142
)
(10
)
15

(137
)
 Other Income / (Expense) - Net
3

11

(64
)
(50
)
 
 
 
 
 
 Earnings Before Income Taxes
331

624

(373
)
582

 Income Tax Benefit / (Expense)
31

(235
)
(16
)
(220
)
 Net Earnings
$
362

$
389

$
(389
)
$
362

 
 
 
 
 
Total Comprehensive Earnings
$
368

$
387

$
(387
)
$
368


                    
 
CSX Q1 2018 Form 10-Q p.26





CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 12.    Summarized Consolidating Financial Data, continued

 Consolidating Balance Sheet
 (Dollars in millions)
March 31, 2018
 CSX Corporation
 CSX Transportation
 Eliminations and Other
 Consolidated
 
 
 
 
 
ASSETS
 Current Assets
 
 
 
 
 Cash and Cash Equivalents
$
1,894

$
81

$
5

$
1,980

 Short-term Investments


10

10

 Accounts Receivable - Net
2

253

790

1,045

 Receivable from Affiliates
991

3,647

(4,638
)

 Materials and Supplies

369


369

 Other Current Assets
(1
)
127

12

138

   Total Current Assets
2,886

4,477

(3,821
)
3,542

 
 
 
 
 
 Properties
1

41,230

2,872

44,103

 Accumulated Depreciation
(1
)
(10,772
)
(1,582
)
(12,355
)
 Properties - Net

30,458

1,290

31,748

 
 
 
 
 
 Investments in Conrail


918

918

 Affiliates and Other Companies
(39
)
817

18

796

 Investments in Consolidated Subsidiaries
29,915


(29,915
)

 Other Long-term Assets
52

629

(246
)
435

   Total Assets
$
32,814

$
36,381

$
(31,756
)
$
37,439

 
 
 
 
 
LIABILITIES AND SHAREHOLDERS' EQUITY
 
 
 Current Liabilities
 
 
 
 
 Accounts Payable
$
195

$
674

$
36

$
905

 Labor and Fringe Benefits Payable
37

384

22

443

 Payable to Affiliates
4,763

366

(5,129
)

 Casualty, Environmental and Other Reserves

93

13

106

 Current Maturities of Long-term Debt

18

1

19

 Income and Other Taxes Payable
(126
)
381

19

274

 Other Current Liabilities
2

142


144

   Total Current Liabilities
4,871

2,058

(5,038
)
1,891

 
 
 
 
 
 Casualty, Environmental and Other Reserves

215

43

258

 Long-term Debt
13,036

732


13,768

 Deferred Income Taxes - Net
(113
)
6,389

209

6,485

 Other Long-term Liabilities
642

313

(309
)
646

   Total Liabilities
$
18,436

$
9,707

$
(5,095
)
$
23,048

 
 
 
 
 
 Shareholders' Equity
 
 
 
 
 Common Stock, $1 Par Value
$
875

$
181

$
(181
)
$
875

 Other Capital
215

5,097

(5,097
)
215

 Retained Earnings
13,873

21,392

(21,392
)
13,873

 Accumulated Other Comprehensive Loss
(585
)
(9
)
9

(585
)
 Noncontrolling Interest

13


13

 Total Shareholders' Equity
$
14,378

$
26,674

$
(26,661
)
$
14,391

 Total Liabilities and Shareholders' Equity
$
32,814

$
36,381

$
(31,756
)
$
37,439




                    
 
CSX Q1 2018 Form 10-Q p.27





CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 12.    Summarized Consolidating Financial Data, continued

Consolidating Balance Sheet
(Dollars in millions)
December 31, 2017
 CSX Corporation
 CSX Transportation
Eliminations and Other
 Consolidated
ASSETS
 Current Assets
 
 
 
 
 Cash and Cash Equivalents
$
274

$
121

$
6

$
401

 Short-term Investments


18

18

 Accounts Receivable - Net
(1
)
301

670

970

 Receivable from Affiliates
1,226

3,517

(4,743
)

 Materials and Supplies

372


372

 Other Current Assets
(1
)
145

10

154

   Total Current Assets
1,498

4,456

(4,039
)
1,915

 
 
 
 
 
 Properties
1

41,479

2,844

44,324

 Accumulated Depreciation
(1
)
(11,017
)
(1,542
)
(12,560
)
 Properties - Net

30,462

1,302

31,764

 
 
 
 
 
 Investments in Conrail


907

907

 Affiliates and Other Companies
(39
)
800

18

779

 Investment in Consolidated Subsidiaries
29,405


(29,405
)

 Other Long-term Assets
39

596

(261
)
374

   Total Assets
$
30,903

$
36,314

$
(31,478
)
$
35,739

 
 
 
 
 
LIABILITIES AND SHAREHOLDERS' EQUITY
 
 
 Current Liabilities
 
 
 
 
 Accounts Payable
$
105

$
708

$
34

$
847

 Labor and Fringe Benefits Payable
52

494

56

602

 Payable to Affiliates
4,792

552

(5,344
)

 Casualty, Environmental and Other Reserves

95

13

108

 Current Maturities of Long-term Debt

19


19

 Income and Other Taxes Payable
(326
)
455

28

157

 Other Current Liabilities
5

153

3

161

   Total Current Liabilities
4,628

2,476

(5,210
)
1,894

 
 
 
 
 
 Casualty, Environmental and Other Reserves

222

44

266

 Long-term Debt
11,056

733

1

11,790

 Deferred Income Taxes - Net
(130
)
6,342

206

6,418

 Other Long-term Liabilities
644

320

(314
)
650

   Total Liabilities
$
16,198

$
10,093

$
(5,273
)
$
21,018

 
 
 
 
 
 Shareholders' Equity
 
 
 
 
 Common Stock, $1 Par Value
$
890

$
181

$
(181
)
$
890

 Other Capital
217

5,096

(5,096
)
217

 Retained Earnings
14,084

20,933

(20,933
)
14,084

 Accumulated Other Comprehensive Loss
(486
)
(5
)
5

(486
)
 Noncontrolling Minority Interest

16


16

   Total Shareholders' Equity
$
14,705

$
26,221

$
(26,205
)
$
14,721

   Total Liabilities and Shareholders' Equity
$
30,903

$
36,314

$
(31,478
)
$
35,739



                    
 
CSX Q1 2018 Form 10-Q p.28





CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 12.    Summarized Consolidating Financial Data, continued

Consolidating Cash Flow Statements
(Dollars in millions)
Three Months 2018
CSX
Corporation
CSX
Transportation
Eliminations and Other
Consolidated
Operating Activities
 
 
 
 
Net Cash Provided by (Used in) Operating Activities
$
691

$
621

$
(346
)
$
966

Investing Activities
 

 
 
Property Additions

(339
)
(29
)
(368
)
Proceeds from Property Dispositions

52


52

Purchases of Short-term Investments




Proceeds from Sales of Short-term Investments


8

8

Other Investing Activities
(1
)
(120
)
113

(8
)
Net Cash Provided by (Used in) Investing Activities
(1
)
(407
)
92

(316
)
Financing Activities
 
 
 
 
Long-term Debt Issued
2,000



2,000

Long-term Debt Repaid




Dividends Paid
(194
)
(250
)
250

(194
)
Shares Repurchased
(836
)


(836
)
Other Financing Activities
(40
)
(4
)
3

(41
)
Net Cash Provided by (Used in) Financing Activities
930

(254
)
253

929

Net Increase (Decrease) in Cash and Cash Equivalents
1,620

(40
)
(1
)
1,579

Cash and Cash Equivalents at Beginning of Period
274

121

6

401

Cash and Cash Equivalents at End of Period
$
1,894

$
81

$
5

$
1,980




                    
 
CSX Q1 2018 Form 10-Q p.29





CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 12.    Summarized Consolidating Financial Data, continued

Consolidating Cash Flow Statements
(Dollars in millions)
Three Months 2017
 CSX
Corporation
CSX
Transportation
Eliminations and Other
Consolidated
Operating Activities
 
 
 
 
Net Cash Provided by (Used in) Operating Activities
$
644

$
566

$
(167
)
$
1,043

Investing Activities
 
 
 
 
Property Additions

(397
)
(44
)
(441
)
Proceeds from Property Dispositions

5

8

13

Purchases of Short-term Investments
(75
)


(75
)
Proceeds from Sales of Short-term Investments
205



205

Other Investing Activities
(1
)
(29
)
42

12

Net Cash Provided by (Used in) Investing Activities
129

(421
)
6

(286
)
Financing Activities
 
 
 
 
Dividends Paid
(166
)
(150
)
150

(166
)
Shares Repurchased
(258
)


(258
)
Other Financing Activities
(6
)
(4
)
4

(6
)
Net Cash Provided by (Used in) Financing Activities
(430
)
(154
)
154

(430
)
Net Increase (Decrease) in Cash and Cash Equivalents
343

(9
)
(7
)
327

Cash and Cash Equivalents at Beginning of Period
305

281

17

603

Cash and Cash Equivalents at End of Period
$
648

$
272

$
10

$
930


                    
 
CSX Q1 2018 Form 10-Q p.30






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

FIRST QUARTER 2018 HIGHLIGHTS
Revenue increased $7 million to $2.9 billion.
Expenses decreased $268 million to $1.8 billion, or 13% year over year.
Operating income of $1,044 million increased $275 million, or 36% year over year.
Operating ratio of 63.7% improved 950 basis points versus last year's quarter.
Earnings per share of $0.78 increased $0.39, or 100 percent year over year.

    
 
First Quarters
 
2018
2017
Fav /
(Unfav)
% Change
Volume (in thousands)
1,532

1,592

(60
)
(4)%
 
 
 
 
 
(in millions)
 
 
 
 
Revenue
$
2,876

$
2,869

$
7

—%
Expense
1,832

2,100

268

13%
Operating Income
$
1,044

$
769

$
275

36%
 
 
 
 
 
Operating Ratio
63.7
%
73.2
%
950

 bps
 
 
 
 
 
Earnings Per Diluted Share
$
0.78

$
0.39

$
0.39

100%

    



                    
 
CSX Q1 2018 Form 10-Q p.31





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


Volume and Revenue (Unaudited)
Volume (Thousands of units); Revenue (Dollars in Millions); Revenue Per Unit (Dollars)
First Quarters
 
Volume
 
Revenue
 
Revenue Per Unit
 
2018
 
2017
 
% Change
 
2018
 
2017
 
% Change
 
2018
 
2017
 
% Change
Chemicals
162

 
175

 
(7
)%
 
$
557

 
$
566

 
(2
)%
 
$
3,438

 
$
3,234

 
6
 %
Automotive
112

 
119

 
(6
)
 
304

 
316

 
(4
)
 
2,714

 
2,655

 
2

Agricultural and Food Products
107

 
121

 
(12
)
 
307

 
332

 
(8
)
 
2,869

 
2,744

 
5

Forest Products
67

 
67

 

 
195

 
192

 
2

 
2,910

 
2,866

 
2

Minerals
66

 
70

 
(6
)
 
114

 
114

 

 
1,727

 
1,629

 
6

Metals and Equipment
64

 
70

 
(9
)
 
186

 
190

 
(2
)
 
2,906

 
2,714

 
7

Fertilizers
64

 
77

 
(17
)
 
116

 
129

 
(10
)
 
1,813

 
1,675

 
8

Total Merchandise
642

 
699

 
(8
)
 
1,779

 
1,839

 
(3
)
 
2,771

 
2,631

 
5

Coal
201

 
205

 
(2
)
 
503

 
522

 
(4
)
 
2,502

 
2,546

 
(2
)
Intermodal
689

 
688

 

 
449

 
434

 
3

 
652

 
631

 
3

Other

 

 

 
145

 
74

 
96

 

 

 

Total
1,532

 
1,592

 
(4
)%
 
$
2,876

 
$
2,869

 
 %
 
$
1,877