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EX-32 - EXHIBIT 32 - CSX CORPcsx063018ex32.htm
EX-31 - EXHIBIT 31 - CSX CORPcsx063018ex31.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 June 30, 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
csxlogo10qa01.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 858,810,557 shares of common stock outstanding on June 30, 2018 (the latest practicable date that is closest to the filing date).

                    
 
CSX Q2 2018 Form 10-Q p.1







CSX CORPORATION
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2018
INDEX

 
 
 
Page
PART I.
FINANCIAL INFORMATION
 
 
Item 1.
 
 
 
 
 
 
Quarters Ended June 30, 2018 and June 30, 2017
 
 
 
 
 
 
Quarters Ended June 30, 2018 and June 30, 2017
 
 
 
 
 
 
At June 30, 2018 (Unaudited) and December 31, 2017
 
 
 
 
 
 
Six Months Ended June 30, 2018 and June 30, 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 Q2 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)
 
Second Quarters
 
Six Months
 
2018
2017
 
2018
2017
 
 
 
 
 
 
Revenue
$
3,102

$
2,933

 
$
5,978

$
5,802

Expense
 
 
 
 
 
Labor and Fringe
669

751

 
1,365

1,546

Materials, Supplies and Other
469

496

 
951

1,067

Depreciation
329

327

 
652

647

Fuel
270

198

 
525

416

Equipment and Other Rents
112

105

 
213

204

Restructuring Charge (Note 1)

115

 

225

Equity Earnings of Affiliates
(30
)
(16
)
 
(55
)
(29
)
Total Expense
1,819

1,976

 
3,651

4,076

 
 
 
 
 
 
Operating Income
1,283

957

 
2,327

1,726

 
 
 
 
 
 
Interest Expense
(157
)
(137
)
 
(306
)
(274
)
Restructuring Charge - Non-Operating (Note 1)

(7
)
 

(70
)
Other Income - Net
18

14

 
35

27

Earnings Before Income Taxes
1,144

827

 
2,056

1,409

 
 
 
 
 
 
Income Tax Expense
(267
)
(317
)
 
(484
)
(537
)
Net Earnings
$
877

$
510

 
$
1,572

$
872

 
 
 
 
 
 
Per Common Share (Note 2)
 
 
 
 
 
Net Earnings Per Share, Basic
$
1.02

$
0.55

 
$
1.80

$
0.94

Net Earnings Per Share, Assuming Dilution
$
1.01

$
0.55

 
$
1.79

$
0.94

 
 
 
 
 
 
 
 
 
 
 
 
Average Shares Outstanding (In millions)
864

920

 
875

923

Average Shares Outstanding, Assuming Dilution (In millions)
868

924

 
878

926

 
 
 
 
 
 
 
 
 
 
 
 
Cash Dividends Paid Per Common Share
$
0.22

$
0.20

 
$
0.44

$
0.38


Certain prior year data has been reclassified to conform to the current presentation.
CONDENSED CONSOLIDATED COMPREHENSIVE INCOME STATEMENTS (Unaudited)  
(Dollars in millions, except per share amounts)
 
Second Quarters
 
Six Months
 
2018
2017
 
2018
2017
Total Comprehensive Earnings (Note 10)
$
881

$
575

 
$
1,477

$
943


See accompanying notes to consolidated financial statements.


                    
 
CSX Q2 2018 Form 10-Q p.3





CSX CORPORATION
ITEM 1. FINANCIAL STATEMENTS

CONSOLIDATED BALANCE SHEETS
(Dollars in millions)
 
(Unaudited)
 
 
June 30,
2018
December 31,
2017
ASSETS
Current Assets:
 
 
Cash and Cash Equivalents
$
1,320

$
401

Short-term Investments
83

18

Accounts Receivable - Net (Note 11)
1,036

970

Materials and Supplies
326

372

Other Current Assets
116

154

  Total Current Assets
2,881

1,915

 
 
 
Properties
44,306

44,324

Accumulated Depreciation
(12,459
)
(12,560
)
  Properties - Net
31,847

31,764

 
 
 
Investment in Conrail
931

907

Affiliates and Other Companies
810

779

Other Long-term Assets
455

374

  Total Assets
$
36,924

$
35,739

 
 
 
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
 
 
Accounts Payable
$
852

$
847

Labor and Fringe Benefits Payable
486

602

Casualty, Environmental and Other Reserves (Note 4)
114

108

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

19

Income and Other Taxes Payable
123

157

Other Current Liabilities
138

161

  Total Current Liabilities
1,732

1,894

 
 
 
Casualty, Environmental and Other Reserves (Note 4)
232

266

Long-term Debt (Note 7)
13,769

11,790

Deferred Income Taxes - Net
6,532

6,418

Other Long-term Liabilities
636

650

  Total Liabilities
22,901

21,018

 
 
 
Shareholders' Equity:
 
 
Common Stock, $1 Par Value
859

890

Other Capital
127

217

Retained Earnings
13,604

14,084

Accumulated Other Comprehensive Loss (Note 10)
(581
)
(486
)
Noncontrolling Interest
14

16

Total Shareholders' Equity
14,023

14,721

Total Liabilities and Shareholders' Equity
$
36,924

$
35,739


See accompanying notes to consolidated financial statements.

                    
 
CSX Q2 2018 Form 10-Q p.4





CSX CORPORATION
ITEM 1. FINANCIAL STATEMENTS

CONSOLIDATED CASH FLOW STATEMENTS (Unaudited)
(Dollars in millions)
 
Six Months
 
2018
2017
 
 
 
OPERATING ACTIVITIES
 
 
Net Earnings
$
1,572

$
872

Adjustments to Reconcile Net Earnings to Net Cash Provided by Operating Activities:
 
 
Depreciation
652

647

Deferred Income Taxes
98

112

Gain on Property Dispositions
(69
)
(4
)
Equity Earnings of Affiliates
(55
)
(29
)
Restructuring Charge

295

Cash Payments for Restructuring Charge
(13
)
(129
)
Other Operating Activities
(15
)
18

Changes in Operating Assets and Liabilities:
 
 
Accounts Receivable
(47
)
(103
)
Other Current Assets
14

12

Accounts Payable
11

6

Income and Other Taxes Payable
(24
)
(46
)
Other Current Liabilities
(115
)
(85
)
Net Cash Provided by Operating Activities
2,009

1,566

 
 
 
INVESTING ACTIVITIES
 
 
Property Additions
(823
)
(955
)
Proceeds from Property Dispositions
141

16

Purchase of Short-term Investments
(77
)
(545
)
Proceeds from Sales of Short-term Investments
12

492

Other Investing Activities
(8
)
25

Net Cash Used In Investing Activities
(755
)
(967
)
 
 
 
FINANCING ACTIVITIES
 
 
Long-term Debt Issued (Note 7)
2,000

850

Long-term Debt Repaid (Note 7)

(313
)
Dividends Paid
(384
)
(350
)
Shares Repurchased
(1,810
)
(757
)
Accelerated Share Repurchase Pending Final Settlement (Note 2)
(90
)

Other Financing Activities
(51
)
(12
)
Net Cash Used in Financing Activities
(335
)
(582
)
 
 
 
Net Increase in Cash and Cash Equivalents
919

17

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

603

Cash and Cash Equivalents at End of Period
$
1,320

$
620

 
 
 
Certain prior year data has been reclassified to conform to the current presentation.
See accompanying notes to consolidated financial statements.

                    
 
CSX Q2 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 quarter and six months ended June 30, 2018 and June 30, 2017;
Condensed consolidated comprehensive income statements for the quarter and six months ended June 30, 2018 and June 30, 2017;
Consolidated balance sheets at June 30, 2018 and December 31, 2017; and
Consolidated cash flow statements for the six months ended June 30, 2018 and June 30, 2017.


                    
 
CSX Q2 2018 Form 10-Q p.6





CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

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

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.

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
Fiscal second quarter 2018 (April 1, 2018 through June 30, 2018) contained 91 days, and fiscal second quarter 2017 (April 1, 2017 through June 30, 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 “second quarter(s)” or “six months” indicate CSX's fiscal periods ending June 30, 2018 and June 30, 2017, and references to "year-end" indicate the fiscal year ended December 31, 2017.

New Accounting Pronouncements
Pronouncements adopted in 2018    
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.


                    
 
CSX Q2 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 second quarter and six months 2017 is shown in the following table.

 
Second Quarter 2017
 
Six Months 2017
(Dollars in millions)
As Previously Reported
Reclass
As Reclassified
 
As Previously Reported
Reclass
As Reclassified
Operating Expense:
 
 
 
 
 
 
 
Labor and Fringe
$
743

$
8

$
751

 
$
1,532

$
14

$
1,546

Restructuring Charge
122

(7
)
115

 
295

(70
)
225

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

$
(7
)
$
(7
)
 
$

$
(70
)
$
(70
)
Other Income - Net
6

8

14

 
13

14

27


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.


                    
 
CSX Q2 2018 Form 10-Q p.8





CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

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

Pronouncements to be adopted    
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 currently requires the use of a modified retrospective adoption approach. In March 2018, the FASB tentatively approved a new, optional transition method that would instead allow companies to adopt using a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The Company plans to elect the cumulative-effect adjustment transition 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. In addition to lease agreements, service contracts and other agreements are also being reviewed to determine if they contain an embedded lease. 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 as a result of right-of-use assets and corresponding lease liabilities that will be recorded.

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.

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.


                    
 
CSX Q2 2018 Form 10-Q p.9





CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

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

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.
 
Second Quarter 2017
(Dollars in millions)
As Previously Reported
 
Operating Restructuring Charge
 
Non-Operating Restructuring Charge
Severance and Pension
$
13

 
$
10

 
$
3

Other Post-Retirement Benefits Curtailment
4

 

 
4

Employee Equity Awards Proration and Other
5

 
5

 

Subtotal Management Workforce Reduction
$
22

 
$
15

 
$
7

Reimbursement Arrangements
84

 
84

 

Executive Equity Awards Proration
16

 
16

 

Total Restructuring Charge
$
122

 
$
115

 
$
7


 
Six Months 2017
(Dollars in millions)
As Previously Reported
 
Operating Restructuring Charge
 
Non-Operating Restructuring Charge
Severance and Pension
$
144

 
$
91

 
$
53

Other Post-Retirement Benefits Curtailment
17

 

 
17

Employee Equity Awards Proration and Other
16

 
16

 

Subtotal Management Workforce Reduction
$
177

 
$
107

 
$
70

Reimbursement Arrangements
84

 
84

 

Executive Equity Awards Proration
24

 
24

 

Advisory Fees Related to Shareholder Matters
10

 
10

 

Total Restructuring Charge
$
295

 
$
225

 
$
70


                    
 
CSX Q2 2018 Form 10-Q p.10





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:
 
Second Quarters
 
Six Months
 
2018
2017
 
2018
2017
Numerator (Dollars in millions):
 
 
 
 
 
Net Earnings
$
877

$
510

 
$
1,572

$
872

 
 
 
 
 
 
Denominator (Units in millions):
 
 
 
 
 
Average Common Shares Outstanding
864

920

 
875

923

Other Potentially Dilutive Common Shares
4

4

 
3

3

Average Common Shares Outstanding, Assuming Dilution
868

924

 
878

926

 
 
 
 
 
 
Net Earnings Per Share, Basic
$
1.02

$
0.55

 
$
1.80

$
0.94

Net Earnings Per Share, Assuming Dilution
$
1.01

$
0.55

 
$
1.79

$
0.94


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 one million and 10 million of total average outstanding stock options for the second quarters ended June 30, 2018 and June 30, 2017, respectively, were excluded from the diluted earnings per share calculation because their effect was antidilutive.

Share Repurchases    
    
In February 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 second quarters of 2018 and 2017, the Company repurchased approximately $974 million, or 16 million shares, and $499 million, or 9 million shares, respectively. During the six months of 2018 and 2017, the Company repurchased $1.8 billion, or 31 million shares, and $757 million, or 15 million shares, respectively.

                    
 
CSX Q2 2018 Form 10-Q p.11





CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 2.    Earnings Per Share, continued

On April 20, 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 $450 million to a financial institution and received an initial delivery of shares valued at $360 million, or 6 million shares. The remaining balance of $90 million was settled through receipt of additional shares on July 17, 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. Approximately 7 million total shares were repurchased under the agreement.

Under an accelerated share repurchase agreement in January 2018, 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 in February 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. Approximately 3 million total shares were repurchased under the agreement.

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.


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) and the prior year expense related to 9 million stock options granted in February 2017 to former President and CEO E. Hunter Harrison which were forfeited upon his death in December 2017.

 
Second Quarters
 
Six Months
(Dollars in millions)
2018
2017
 
2018
2017
 
 
 
 
 
 
Share-Based Compensation Expense:
 
 
 
 
 
Performance Units
$
8

$
18

 
$
14

$
39

Stock Options
2

21

 
6

32

Restricted Stock Units and Awards
2

5

 
3

9

Stock Awards for Directors


 
2

2

Total Share-Based Compensation Expense
$
12

$
44

 
$
25

$
82

Income Tax Benefit
$
9

$
13

 
$
17

$
29


                    
 
CSX Q2 2018 Form 10-Q p.12





CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 3.     Share-Based Compensation, continued

Long-term Incentive Plan
In February 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 awarded in February 2018 was calculated using a Monte-Carlo simulation model with the following weighted-average assumptions:

 
Six Months
 
2018
Weighted-average assumptions used:
 
Annual dividend yield
1.6
%
Risk-free interest rate
2.3
%
Annualized volatility
29.2
%
Expected life (in years)
2.9


Stock Options
Also, in February 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. During second quarters 2018 and 2017, there were immaterial grants of stock options to certain members of management.


                    
 
CSX Q2 2018 Form 10-Q p.13





CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 3.     Share-Based Compensation, continued

The fair values of all stock option awards during the quarters and six months ended June 30, 2018 and June 30, 2017 were estimated at the grant date with the following weighted average assumptions:
 
Second Quarters
 
Six Months
 
2018
2017
 
2018
2017
Weighted-average grant date fair value
$
17.62

$
12.27

 
$
14.64

$
12.83

 
 
 
 
 
 
Stock options valuation assumptions:
 
 
 
 
 
Annual dividend yield
1.3
%
1.5
%
 
1.5
%
1.5
%
Risk-free interest rate
2.8
%
2.1
%
 
2.6
%
2.2
%
Annualized volatility
25.8
%
27.0
%
 
27.0
%
27.1
%
Expected life (in years)
6.5

6.5

 
6.5

6.3

 
 
 
 
 
 
Other pricing model inputs:
 
 
 
 
 
Weighted-average grant-date market price of CSX stock (strike price)
$
65.44

$
47.80

 
$
54.14

$
49.60


Restricted Stock Units
Finally, in 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 former 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 approximately 70 employees and resulted in an increase to share-based compensation expense for revaluation of the affected awards of $19 million for the second quarter and $31 million for the six months ended June 30, 2017. The expense associated with these award modifications was included in the 2017 restructuring charge. There have been no significant award modifications in 2018.


                    
 
CSX Q2 2018 Form 10-Q p.14





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.
 
June 30, 2018
 
December 31, 2017
(Dollars in millions)
Current
Long-term
Total
 
Current
Long-term
Total
 
 
 
 
 
 
 
 
Casualty:
 
 
 
 
 
 
 
Personal Injury
$
42

$
105

$
147

 
$
43

$
125

$
168

Occupational
7

47

54

 
6

54

60

     Total Casualty
49

152

201

 
49

179

228

Environmental
37

54

91

 
31

59

90

Other
28

26

54

 
28

28

56

     Total
$
114

$
232

$
346

 
$
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 $201 million and $228 million as of June 30, 2018 and December 31, 2017, respectively, represent accruals for personal injury, occupational disease and occupational injury claims. During the second quarter the Company increased its self-insured retention amount for these claims from $50 million to $75 million per occurrence for claims occurring on or after June 1, 2018. 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 based largely on CSXT's historical claims and settlement experience.

                    
 
CSX Q2 2018 Form 10-Q p.15





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 $91 million and $90 million as of June 30, 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 218 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 Q2 2018 Form 10-Q p.16





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 $54 million and $56 million as of June 30, 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 $50 million per occurrence retention for floods and named windstorms and a $25 million per occurrence retention for property losses other than floods and named windstorms. For claims occurring on or after June 1, 2018, the Company increased its self-insured retention for third-party liability claims from $50 million to $75 million per occurrence. 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 $117 million in aggregate at June 30, 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 Q2 2018 Form 10-Q p.17





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 U.S. Court of Appeals for the D.C. Circuit is reviewing the District Court's denial of class certification and has scheduled oral argument to take place on September 28, 2018. The District Court has delayed proceedings on the merits of the case pending the outcome of the class certification remand proceedings.

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 Q2 2018 Form 10-Q p.18





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)
Second Quarters
 
Six Months
 
2018
2017
 
2018
2017
Service Cost Included in Labor and Fringe
$
7

$
9

 
$
16

$
20

 
 
 
 
 
 
Interest Cost
23

23

 
46

46

Expected Return on Plan Assets
(43
)
(43
)
 
(87
)
(85
)
Amortization of Net Loss
10

10

 
20

21

Total Income Included in Other Income - Net
(10
)
(10
)
 
(21
)
(18
)
 
 
 
 
 
 
Net Periodic Benefit Cost
$
(3
)
$
(1
)
 
$
(5
)
$
2

 
 
 
 
 
 
Restructuring Charges - Non Operating (a)

7

 

57

Total (Income) Expense
$
(3
)
$
6

 
$
(5
)
$
59

 
 
 
 
 
 
 
Other Post-retirement Benefits
(Dollars in millions)
Second Quarters
 
Six Months
 
2018
2017
 
2018
2017
Service Cost Included in Labor and Fringe
$
1

$
1

 
$
1

$
1

 
 
 
 
 
 
Interest Cost
1

2

 
3

4

Total Expense Included in Other Income - Net
1

2

 
3

4

 
 
 
 
 
 
Net Periodic Benefit Cost
$
2

$
3

 
$
4

$
5

 
 
 
 
 
 
Restructuring Charges - Non Operating  (a)


 

13

Total Expense
$
2

$
3

 
$
4

$
18

(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 required in 2018.


                    
 
CSX Q2 2018 Form 10-Q p.19





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 second 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

(21
)
(21
)
Long-term debt as of June 30, 2018
$
19

$
13,769

$
13,788


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, subject to payment of certain make-whole premiums. 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 second 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 Q2 2018 Form 10-Q p.20





CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 8.    Income Taxes

The effective tax rate decreased to 23.5% from 38.1% for the six months ended June 30, 2018 and June 30, 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, among other things, 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 Q2 2018 Form 10-Q p.21





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 $170 million and $95 million as of June 30, 2018 and December 31, 2017, respectively.
(Dollars in Millions)
June 30,
2018
 
December 31,
2017
Certificates of Deposit and Commercial Paper
$
75

 
$

Corporate Bonds
57

 
61

Government Securities
39

 
34

Total investments at fair value
$
171

 
$
95


These investments have the following maturities:
(Dollars in millions)
June 30,
2018
 
December 31,
2017
Less than 1 year
$
82

 
$
18

1 - 5 years
16

 
11

5 - 10 years
27

 
26

Greater than 10 years
46

 
40

Total investments at fair value
$
171

 
$
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.

The fair value and carrying value of the Company's long-term debt is as follows:
(Dollars in millions)
June 30,
2018
 
December 31,
2017
Long-term Debt (Including Current Maturities):
 
 
 
Fair Value
$
14,069

 
$
13,220

Carrying Value
13,788

 
11,809



                    
 
CSX Q2 2018 Form 10-Q p.22





CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

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 $881 million and $575 million for second quarters and $1.5 billion and $943 million for six months 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)
 
 
 
Loss Before Reclassifications

(1
)
(1
)
Amounts Reclassified to Net Earnings
20

(3
)
17

Tax (Expense) Benefit
(5
)
1

(4
)
Reclassification of Stranded Tax Effects
(108
)
1

(107
)
Total Other Comprehensive Loss
(93
)
(2
)
(95
)
Balance June 30, 2018, Net of Tax
$
(533
)
$
(48
)
$
(581
)


                    
 
CSX Q2 2018 Form 10-Q p.23





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:
 
Second Quarters
 
Six Months
(Dollars in millions)
2018
2017
 
2018
2017
 
 
 
 
 
 
Chemicals
$
588

$
552

 
$
1,145

$
1,118

Automotive
330

307

 
634

623

Agricultural and Food Products
327

321

 
634

653

Forest Products
215

194

 
410

386

Metals and Equipment
198

178

 
384

368

Minerals
137

128

 
251

242

Fertilizers
112

118

 
228

247

Total Merchandise
1,907

1,798

 
3,686

3,637

 
 
 
 
 
 
Domestic Coal
317

350

 
590

680

Export Coal
252

180

 
482

372

Total Coal
569

530

 
1,072

1,052

 
 
 
 
 
 
Domestic Intermodal
323

308

 
617

599

International Intermodal
167

140

 
322

283

Total Intermodal
490

448

 
939

882

 
 
 
 
 
 
Other
136

157

 
281

231

Total
$
3,102

$
2,933

 
$
5,978

$
5,802


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 at 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 Q2 2018 Form 10-Q p.24





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 4% of the Company’s total revenue in the second quarter and 5% for the six months ended June 30, 2018. Revenue from regional subsidiary 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 second 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 June 30, 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 sheet as of June 30, 2018.

                    
 
CSX Q2 2018 Form 10-Q p.25





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)
June 30,
2018
December 31,
2017
 
 
 
Freight Receivables
$
844

$
810

Freight Allowance for Doubtful Accounts
(17
)
(17
)
Freight Receivables, net
827

793

 
 
 
Non-Freight Receivables
218

186

Non-Freight Allowance for Doubtful Accounts
(9
)
(9
)
Non-Freight Receivables, net
209

177

Total Accounts Receivable, net
$
1,036

$
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 second 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 Q2 2018 Form 10-Q p.26





CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 12.    Summarized Consolidating Financial Data, continued

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

$
3,083

$
19

$
3,102

 Expense
(84
)
1,948

(45
)
1,819

 Operating Income
84

1,135

64

1,283

 
 
 
 
 
 Equity in Earnings of Subsidiaries
942


(942
)

 Interest (Expense) / Benefit
(181
)
(8
)
32

(157
)
 Other Income / (Expense) - Net
6

29

(17
)
18

 
 
 
 
 
 Earnings Before Income Taxes
851

1,156

(863
)
1,144

 Income Tax Benefit / (Expense)
26

(274
)
(19
)
(267
)
 Net Earnings
$
877

$
882

$
(882
)
$
877

 
 
 
 
 
Total Comprehensive Earnings
$
881

$
881

$
(881
)
$
881

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

$
2,914

$
19

$
2,933

 Expense
6

2,024

(54
)
1,976

 Operating Income
(6
)
890

73

957

 
 
 
 
 
 Equity in Earnings of Subsidiaries
612


(612
)

 Interest (Expense) / Benefit
(143
)
(8
)
14

(137
)
 Other Income / (Expense) - Net
2

7

(2
)
7

 
 
 
 
 
 Earnings Before Income Taxes
465

889

(527
)
827

 Income Tax Benefit / (Expense)
45

(332
)
(30
)
(317
)
 Net Earnings
$
510

$
557

$
(557
)
$
510

 
 
 
 
 
Total Comprehensive Earnings
$
575

$
558

$
(558
)
$
575


                    
 
CSX Q2 2018 Form 10-Q p.27





CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 12.    Summarized Consolidating Financial Data, continued

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

$
5,940

$
38

$
5,978

 Expense
(162
)
3,891

(78
)
3,651

 Operating Income
162

2,049

116

2,327

 
 
 
 
 
 Equity in Earnings of Subsidiaries
1,700


(1,700
)

 Interest (Expense) / Benefit
(345
)
(17
)
56

(306
)
 Other Income / (Expense) - Net
10

52

(27
)
35

 
 
 
 
 
 Earnings Before Income Taxes
1,527

2,084

(1,555
)
2,056

 Income Tax (Expense) / Benefit
45

(498
)
(31
)
(484
)
 Net Earnings
$
1,572

$
1,586

$
(1,586
)
$
1,572

 
 
 
 
 
Total Comprehensive Earnings
$
1,477

$
1,581

$
(1,581
)
$
1,477

 
 
 
 
 
Six Months 2017
 CSX Corporation
 CSX Transportation
 Eliminations and Other
 Consolidated
 Revenue
$

$
5,765

$
37

$
5,802

 Expense
(42
)
4,194

(76
)
4,076

 Operating Income
42

1,571

113

1,726

 
 
 
 
 
 Equity in Earnings of Subsidiaries
1,034


(1,034
)

 Interest (Expense) / Benefit
(285
)
(18
)
29

(274
)
 Other Income / (Expense) - Net
5

(40
)
(8
)
(43
)
 
 
 
 
 
 Earnings Before Income Taxes
796

1,513

(900
)
1,409

 Income Tax (Expense) / Benefit
76

(567
)
(46
)
(537
)
 Net Earnings
$
872

$
946

$
(946
)
$
872

 
 
 
 
 
Total Comprehensive Earnings
$
943

$
945

$
(945
)
$
943

 
 
 
 
 


                    
 
CSX Q2 2018 Form 10-Q p.28





CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 12.    Summarized Consolidating Financial Data, continued

 Consolidating Balance Sheet
 (Dollars in millions)
June 30, 2018
 CSX Corporation
 CSX Transportation
Eliminations and Other
Consolidated
 
 
 
 
 
ASSETS
 Current Assets
 
 
 
 
 Cash and Cash Equivalents
$
1,172

$
143

$
5

$
1,320

 Short-term Investments
75


8

83

 Accounts Receivable - Net
(6
)
271

771

1,036

 Receivable from Affiliates
1,005

4,360

(5,365
)

 Materials and Supplies

326


326

 Other Current Assets

98

18

116

   Total Current Assets
2,246

5,198

(4,563
)
2,881

 
 
 
 
 
 Properties
1

41,492

2,813

44,306

 Accumulated Depreciation
(1
)
(10,928
)
(1,530
)
(12,459
)
 Properties - Net

30,564

1,283

31,847

 
 
 
 
 
 Investments in Conrail


931

931

 Affiliates and Other Companies
(39
)
832

17

810

 Investments in Consolidated Subsidiaries
30,585


(30,585
)

 Other Long-term Assets
65

630

(240
)
455

   Total Assets
$
32,857

$
37,224

$
(33,157
)
$
36,924

 
 
 
 
 
LIABILITIES AND SHAREHOLDERS' EQUITY
 
 
 Current Liabilities
 
 
 
 
 Accounts Payable
$
93

$
710

$
49

$
852

 Labor and Fringe Benefits Payable
38

381

67

486

 Payable to Affiliates
5,536

441

(5,977
)

 Casualty, Environmental and Other Reserves

101

13

114

 Current Maturities of Long-term Debt

18

1

19

 Income and Other Taxes Payable
(389
)
480

32

123

 Other Current Liabilities
2

126

10

138

   Total Current Liabilities
5,280

2,257

(5,805
)
1,732

 
 
 
 
 
 Casualty, Environmental and Other Reserves

190

42

232

 Long-term Debt
13,039

730


13,769

 Deferred Income Taxes - Net
(109
)
6,436

205

6,532

 Other Long-term Liabilities
638

305

(307
)
636

   Total Liabilities
$
18,848

$
9,918

$
(5,865
)
$
22,901

 
 
 
 
 
 Shareholders' Equity
 
 
 
 
 Common Stock, $1 Par Value
$
859

$
181

$
(181
)
$
859

 Other Capital
127

5,096

(5,096
)
127

 Retained Earnings
13,604

22,025

(22,025
)
13,604

 Accumulated Other Comprehensive Loss
(581
)
(10
)
10

(581
)
 Noncontrolling Interest

14


14

 Total Shareholders' Equity
$
14,009

$
27,306

$
(27,292
)
$
14,023

 Total Liabilities and Shareholders' Equity
$
32,857

$
37,224

$
(33,157
)
$
36,924




                    
 
CSX Q2 2018 Form 10-Q p.29





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
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