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 25,September 24, 2010
OR
( ) | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from __________ to __________
Commission File Number 1-8022 |
|
CSX CORPORATION |
(Exact name of registrant as specified in its charter) |
Virginia | | 62-1051971 |
(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, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (check one)
Large Accelerated Filer (X) Accelerated Filer ( )
Non-accelerated Filer ( ) Smaller Reporting Company ( )
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 379,647,450374,184,621 shares of common stock outstanding on June 25,September 24, 2010 (the latest practicable date that is closest to the filing date).
CSX CORPORATION |
FORM 10-Q |
FOR THE QUARTERLY PERIOD ENDED JUNE 25,SEPTEMBER 24, 2010 |
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PART I. | FINANCIAL INFORMATION | |
Item 1. | Financial Statements | |
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| | 3 |
| | Quarters and SixNine Months Ended June 25,September 24, 2010 | |
| | and June 26,September 25, 2009 | |
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| | 4 |
| | At June 25,September 24, 2010 (Unaudited) and December 25, 2009 | |
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| | 5 |
| | SixNine Months Ended June 25,September 24, 2010 and June 26,September 25, 2009 | |
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| | 6 |
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Item 2. | | 3230 |
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Item 3. | | 4643 |
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Item 4. | | 4643 |
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PART II. | OTHER INFORMATION | |
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Item 1. | | 4643 |
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Item 1A. | | 4644 |
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Item 2. | | 4745 |
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Item 3. | | 4846 |
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Item 4. | | 4846 |
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Item 5. | | 4846 |
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Item 6. | | 4846 |
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| | | 4947 |
CSX CORPORATION
PART I FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
(Dollars in Millions, Except Per Share Amounts)
| | Second Quarters | | | Six Months | | | | Third Quarters | | Nine Months |
| | 2010 | | | 2009 | | | 2010 | | | 2009 | | | | 2010 | 2009 | | 2010 | 2009 |
| | | | | (Adjusted)* | | | | | | (Adjusted)* | | | | | (Adjusted) (a) | | | (Adjusted) (a) |
Revenue | | $ | 2,663 | | | $ | 2,185 | | | $ | 5,154 | | | $ | 4,432 | | Revenue | $2,666 | $2,289 | | $7,820 | $6,721 |
Expense | | | | | | | | | | | | | | | | | Expense | | | | |
Labor and Fringe | | | 721 | | | | 654 | | | | 1,450 | | | | 1,316 | | |
Materials, Supplies and Other (Note 1) | | | 551 | | | | 444 | | | | 1,070 | | | | 982 | | |
Fuel | | | 304 | | | | 185 | | | | 587 | | | | 376 | | |
Depreciation | | | 230 | | | | 227 | | | | 458 | | | | 450 | | |
Equipment and Other Rents | | | 89 | | | | 98 | | | | 189 | | | | 211 | | |
Total Expense | | | 1,895 | | | | 1,608 | | | | 3,754 | | | | 3,335 | | |
| | Labor and Fringe | 731 | 653 | | 2,181 | 1,969 |
| | Materials, Supplies and Other (Note 1) | 509 | 500 | | 1,579 | 1,482 |
| | Fuel | 279 | 223 | | 866 | 599 |
| | Depreciation | 232 | 227 | | 690 | 677 |
| | Equipment and Other Rents | 90 | 92 | | 279 | 303 |
| | Total Expense | 1,841 | 1,695 | | 5,595 | 5,030 |
| | | | | | | | | | | | | | | | | | | | | | |
Operating Income | | | 768 | | | | 577 | | | | 1,400 | | | | 1,097 | | Operating Income | 825 | 594 | | 2,225 | 1,691 |
| | | | | | | | | | | | | | | | | | | | | | |
Interest Expense | | | (135 | ) | | | (139 | ) | | | (277 | ) | | | (280 | ) | Interest Expense | (131) | (140) | | (408) | (420) |
Other Income - Net (Note 8) | | | 9 | | | | 10 | | | | 20 | | | | 13 | | Other Income - Net (Note 8) | 8 | 6 | | 28 | 19 |
Earnings From Continuing Operations | | | | | | | | | | | | | | | | | Earnings From Continuing Operations | | | | |
Before Income Taxes | | | 642 | | | | 448 | | | | 1,143 | | | | 830 | | |
| | Before Income Taxes | 702 | 460 | | 1,845 | 1,290 |
| | | | | | | | | | | | | | | | | | | | | | |
Income Tax Expense (Note 9) | | | (228 | ) | | | (166 | ) | | | (424 | ) | | | (295 | ) | Income Tax Expense (Note 9) | (288) | (170) | | (712) | (465) |
Earnings From Continuing Operations | | | 414 | | | | 282 | | | | 719 | | | | 535 | | Earnings From Continuing Operations | 414 | 290 | | 1,133 | 825 |
| | | | | | | | | | | | | | | | | | | | | | |
Discontinued Operations (Note 10) | | | - | | | | 23 | | | | - | | | | 15 | | Discontinued Operations (Note 10) | - | - | | - | 15 |
Net Earnings | | $ | 414 | | | $ | 305 | | | $ | 719 | | | $ | 550 | | Net Earnings | $414 | $290 | | $1,133 | $840 |
| | | | | | | | | | | | | | | | | | | | | | |
Per Common Share (Note 2) | | | | | | | | | | | | | | | | | Per Common Share (Note 2) | | | | |
Net Earnings Per Share, Basic | | | | | | | | | | | | | | | | | Net Earnings Per Share, Basic | | | | |
Continuing Operations | | $ | 1.08 | | | $ | 0.72 | | | $ | 1.86 | | | $ | 1.36 | | |
Discontinued Operations | | | - | | | | 0.06 | | | | - | | | | 0.04 | | |
Net Earnings | | $ | 1.08 | | | $ | 0.78 | | | $ | 1.86 | | | $ | 1.40 | | |
| | Continuing Operations | $1.09 | $0.74 | | $2.95 | $2.10 |
| | Discontinued Operations | - | - | | - | 0.04 |
| | Net Earnings | $1.09 | $0.74 | | $2.95 | $2.14 |
| | | | | | | | | | | | | | | | | | | | | | |
Net Earnings Per Share, Assuming Dilution | | | | | | | | | | | | | | | | | Net Earnings Per Share, Assuming Dilution | | | | |
Continuing Operations | | $ | 1.07 | | | $ | 0.71 | | | $ | 1.84 | | | $ | 1.35 | | |
Discontinued Operations | | | - | | | | 0.06 | | | | - | | | | 0.04 | | |
Net Earnings | | $ | 1.07 | | | $ | 0.77 | | | $ | 1.84 | | | $ | 1.39 | | |
| | Continuing Operations | $1.08 | $0.73 | | $2.92 | $2.08 |
| | Discontinued Operations | - | - | | - | 0.04 |
| | Net Earnings | $1.08 | $0.73 | | $2.92 | $2.12 |
| | | | | | | | | | | | | | | | | | | | | | |
Average Shares Outstanding (Thousands) | | | 383,164 | | | | 392,027 | | | | 387,121 | | | | 391,594 | | Average Shares Outstanding (Thousands) | 378,050 | 392,352 | | 384,102 | 391,847 |
| | | | | | | | | | | | | | | | | | | | | | |
Average Shares Outstanding, | | | | | | | | | | | | | | | | | Average Shares Outstanding, | | | | |
Assuming Dilution (Thousands) | | | 386,391 | | | | 395,370 | | | | 390,357 | | | | 394,735 | | |
| | Assuming Dilution (Thousands) | 381,822 | 396,333 | | 387,516 | 395,268 |
| | | | | | | | | | | | | | | | | | | | | | |
Cash Dividends Paid Per Common Share | | $ | 0.24 | | | $ | 0.22 | | | $ | 0.48 | | | $ | 0.44 | | Cash Dividends Paid Per Common Share | $0.24 | $0.22 | | $0.72 | $0.66 |
(a) Certain amounts have been adjusted for the retrospective change in accounting principle for rail grinding (see Note 1).
See accompanying notes to consolidated financial statements.
CSX CORPORATION
ITEM 1: FINANCIAL STATEMENTS
(Dollars in Millions)
| | (Unaudited) | | | | | | | (Unaudited) | |
| | June 25, | | | December 25, | | | | September 24, | December 25, |
| | 2010 | | | 2009 | | | | 2010 | 2009 |
| | | | | (Adjusted)* | | | | | (Adjusted) (a) |
ASSETS | ASSETS | | ASSETS |
Current Assets | | | | | | | Current Assets | | | |
Cash and Cash Equivalents | | $ | 633 | | | $ | 1,029 | | |
Short-term Investments | | | 56 | | | | 61 | | |
Accounts Receivable - Net (Note 1) | | | 938 | | | | 995 | | |
Materials and Supplies | | | 223 | | | | 203 | | |
Deferred Income Taxes | | | 185 | | | | 158 | | |
Other Current Assets | | | 108 | | | | 124 | | |
Total Current Assets | | | 2,143 | | | | 2,570 | | |
| | Cash and Cash Equivalents | | $636 | $1,029 |
| | Short-term Investments | | 40 | 61 |
| | Accounts Receivable - Net (Note 1) | 1,001 | 995 |
| | Materials and Supplies | | 225 | 203 |
| | Deferred Income Taxes | | 206 | 158 |
| | Other Current Assets | | 97 | 124 |
| | Total Current Assets | | 2,205 | 2,570 |
| | | | | | | | | | | | |
Properties | | | 31,191 | | | | 30,907 | | Properties | | 31,457 | 30,907 |
Accumulated Depreciation | | | (8,018 | ) | | | (7,843 | ) | Accumulated Depreciation | | (8,123) | (7,843) |
Properties - Net | | | 23,173 | | | | 23,064 | | |
| | Properties - Net | | 23,334 | 23,064 |
| | | | | | | | | | | | |
Investment in Conrail | | | 658 | | | | 650 | | Investment in Conrail | | 660 | 650 |
Affiliates and Other Companies | | | 451 | | | | 438 | | Affiliates and Other Companies | | 466 | 438 |
Other Long-term Assets | | | 319 | | | | 165 | | Other Long-term Assets | | 364 | 165 |
Total Assets | | $ | 26,744 | | | $ | 26,887 | | |
| | Total Assets | | $27,029 | $26,887 |
| | | | | | | | | | | | |
LIABILITIES AND SHAREHOLDERS' EQUITY | LIABILITIES AND SHAREHOLDERS' EQUITY | | LIABILITIES AND SHAREHOLDERS' EQUITY |
| | | | | | | | | | | | |
Current Liabilities | | | | | | | | | Current Liabilities | | | |
Accounts Payable | | $ | 922 | | | $ | 967 | | |
Labor and Fringe Benefits Payable | | | 390 | | | | 383 | | |
Casualty, Environmental and Other Reserves (Note 4) | | | 190 | | | | 190 | | |
Current Maturities of Long-term Debt (Note 7) | | | 614 | | | | 113 | | |
Income and Other Taxes Payable | | | 125 | | | | 112 | | |
Other Current Liabilities | | | 113 | | | | 100 | | |
Total Current Liabilities | | | 2,354 | | | | 1,865 | | |
| | Accounts Payable | | $981 | $967 |
| | Labor and Fringe Benefits Payable | 473 | 383 |
| | Casualty, Environmental and Other Reserves (Note 4) | 187 | 190 |
| | Current Maturities of Long-term Debt (Note 7) | 605 | 113 |
| | Income and Other Taxes Payable | 179 | 112 |
| | Other Current Liabilities | | 115 | 100 |
| | Total Current Liabilities | | 2,540 | 1,865 |
| | | | | | | | | | | | |
Casualty, Environmental and Other Reserves (Note 4) | | | 544 | | | | 547 | | Casualty, Environmental and Other Reserves (Note 4) | 534 | 547 |
Long-term Debt (Note 7) | | | 7,320 | | | | 7,895 | | Long-term Debt (Note 7) | | 7,297 | 7,895 |
Deferred Income Taxes | | | 6,650 | | | | 6,528 | | Deferred Income Taxes | | 6,732 | 6,528 |
Other Long-term Liabilities | | | 1,299 | | | | 1,284 | | Other Long-term Liabilities | | 1,288 | 1,284 |
Total Liabilities | | | 18,167 | | | | 18,119 | | |
| | Total Liabilities | | 18,391 | 18,119 |
| | | | | | | | | | | | |
Common Stock $1 Par Value | | | 380 | | | | 393 | | Common Stock $1 Par Value | | 374 | 393 |
Other Capital | | | - | | | | 80 | | Other Capital | | - | 80 |
Retained Earnings | | | 8,968 | | | | 9,090 | | Retained Earnings | | 9,022 | 9,090 |
Accumulated Other Comprehensive Loss (Note 1) | | | (787 | ) | | | (809 | ) | Accumulated Other Comprehensive Loss (Note 1) | (771) | (809) |
Noncontrolling Interest | | | 16 | | | | 14 | | Noncontrolling Interest | | 13 | 14 |
Total Shareholders' Equity | | | 8,577 | | | | 8,768 | | |
Total Liabilities and Shareholders' Equity | | $ | 26,744 | | | $ | 26,887 | | |
| | Total Shareholders' Equity | | 8,638 | 8,768 |
| | Total Liabilities and Shareholders' Equity | $27,029 | $26,887 |
* (a) Certain amounts have been adjusted for the retrospective change in accounting principle for rail grinding (see Note 1).
See accompanying notes to consolidated financial statements.
CSX CORPORATION
ITEM 1: FINANCIAL STATEMENTS
(Dollars in Millions)
| | Six Months | |
| | 2010 | | | 2009 | |
| | | | | (Adjusted)* | |
OPERATING ACTIVITIES | | | | | | |
Net Earnings | | $ | 719 | | | $ | 550 | |
Adjustments to Reconcile Net Earnings to Net Cash Provided | | | | | |
by Operating Activities: | | | | | | | | |
Depreciation | | | 458 | | | | 451 | |
Deferred Income Taxes | | | 79 | | | | 209 | |
Other Operating Activities | | | 79 | | | | (172 | ) |
Changes in Operating Assets and Liabilities: | | | | | | | | |
Accounts Receivable | | | 57 | | | | 202 | |
Other Current Assets | | | (52 | ) | | | (83 | ) |
Accounts Payable | | | (34 | ) | | | (56 | ) |
Income and Other Taxes Payable | | | 94 | | | | (13 | ) |
Other Current Liabilities | | | 22 | | | | (117 | ) |
Net Cash Provided by Operating Activities | | | 1,422 | | | | 971 | |
| | | | | | | | |
INVESTING ACTIVITIES | | | | | | | | |
Property Additions (Note 1) | | | (687 | ) | | | (657 | ) |
Other Investing Activities | | | 68 | | | | 49 | |
Net Cash Used in Investing Activities | | | (619 | ) | | | (608 | ) |
| | | | | | | | |
FINANCING ACTIVITIES | | | | | | | | |
Long-term Debt Issued (Note 7) | | | - | | | | 500 | |
Long-term Debt Repaid (Note 7) | | | (71 | ) | | | (83 | ) |
Dividends Paid | | | (184 | ) | | | (176 | ) |
Stock Options Exercised (Note 3) | | | 16 | | | | 12 | |
Shares Repurchased | | | (823 | ) | | | - | |
Other Financing Activities (Note 1) | | | (137 | ) | | | (177 | ) |
Net Cash (Used in) Provided by Financing Activities | | | (1,199 | ) | | | 76 | |
| | | | | | | | |
Net (Decrease) Increase in Cash and Cash Equivalents | | | (396 | ) | | | 439 | |
| | | | | | | | |
CASH AND CASH EQUIVALENTS | | | | | | | | |
Cash and Cash Equivalents at Beginning of Period | | | 1,029 | | | | 669 | |
Cash and Cash Equivalents at End of Period | | $ | 633 | | | $ | 1,108 | |
| | | | | Nine Months |
| 2010 | 2009 |
| | | | | | (Adjusted) (a) |
OPERATING ACTIVITIES | | |
| Net Earnings | $1,133 | $840 |
| Adjustments to Reconcile Net Earnings to Net Cash Provided | |
| by Operating Activities: | | |
| Depreciation | 690 | 675 |
| Deferred Income Taxes | 139 | 326 |
| | Contributions to Qualified Pension Plans | - | (166) |
| Other Operating Activities | 80 | (150) |
| Changes in Operating Assets and Liabilities: | | |
| Accounts Receivable | (6) | 159 |
| Other Current Assets | (44) | (50) |
| Accounts Payable | 27 | (4) |
| Income and Other Taxes Payable | 150 | 39 |
| Other Current Liabilities | 97 | (80) |
| | Net Cash Provided by Operating Activities | 2,266 | 1,589 |
| | | | | | |
INVESTING ACTIVITIES | | |
| Property Additions (Note 1) | (1,092) | (1,031) |
| Other Investing Activities | 41 | 51 |
| | Net Cash Used in Investing Activities | (1,051) | (980) |
| | | | | | |
FINANCING ACTIVITIES | | |
| Long-term Debt Issued (Note 7) | - | 500 |
| Long-term Debt Repaid (Note 7) | (103) | (110) |
| Dividends Paid | (275) | (259) |
| Stock Options Exercised (Note 3) | 21 | 19 |
| Shares Repurchased | (1,123) | - |
| Other Financing Activities (Note 1) | (128) | (188) |
| | Net Cash Used in Financing Activities | (1,608) | (38) |
| | | | | | |
| Net (Decrease) Increase in Cash and Cash Equivalents | (393) | 571 |
| | | | | | |
CASH AND CASH EQUIVALENTS | | |
| Cash and Cash Equivalents at Beginning of Period | 1,029 | 669 |
| | Cash and Cash Equivalents at End of Period | $636 | $1,240 |
*(a) Certain amounts have been adjusted for the retrospective change in accounting principle for rail grinding (see Note 1).
See accompanying notes to consolidated financial statements.
CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. Nature of Operations and Significant Accounting Policies
Background
CSX Corporation (“CSX”), and together with its subsidiaries (the “Company”), based in Jacksonville, Florida, is one of the nation's leading transportation suppliers. 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.
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 provides transportationTerminals owns and operates a system of intermodal terminals, predominantly in the eastern United States and arranges drayage services linking customers to railroads via trucks and terminals. for certain CSXT intermodal customers. TDSI serves the automotive industry with distribution centers and storage locations, while Transflo provides logistical solutions for transferring products from rail to trucks. CSX Technology and other subsidiaries provide support services for the Company.
CSX’s other holdings include CSX Real Property, Inc., a subsidiary responsible for the Company’s real estate sales, leasing, acquisition and management and development activities. These activities are classified in other income – net because they are not considered by the Company to be operating activities. Results of these activities fluctuate with the timing of non-operating real estate transactions.
Beginning inCSX Intermodal, Inc. (“Intermodal”) was a subsidiary of CSX until it merged with CSXT on June 26, 2010 (which was the second quarterfirst day of 2010, the third quarter). Prior to the merger, Intermodal was the parent company of CSX Intermodal Terminals, and conducted the sales and marketing activities associated with intermodal transportation service now provided by CSXT, as well as the drayage and trucking dispatch operations now being provided by CSX Intermodal Terminals.
The Company is no longer reflectingreflects the intermodal business as a separate segment. This change iswas a result of the strategic business review and change in CSX’sthe Company’s intermodal service associated with the start of the UMAX program as well as certain management realignments. The UMAX program, which began thisin the second quarter, is a domestic interline container program. CSX’s chairman nowpresident views intermodal similarly to merchandise and coal. Also, Inland Transportationinland transportation expense has been reclassified to Materials, Suppliesmaterials, supplies and Other.other. Intermodal revenue will continue to be viewed as a separate revenue group; however, a separate income statement and operating ratio will no longer be provided and business segment disclosures are no longer required. All prior periods have been revisedrevise d to reflect this change.
CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. Nature of Operations and Significant Accounting Policies, continued
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 quarters and sixnine months ended June 25,September 24, 2010 and June 26,September 25, 2009; |
· | Consolidated balance sheets at June 25,September 24, 2010 and December 25, 2009; and |
· | Consolidated cash flow statements for the sixnine months ended June 25,September 24, 2010 and June 26,September 25, 2009. |
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 Current Reports on Form 8-K.
Fiscal Year
CSX follows a 52/53 week fiscal reporting calendar with the last day of each reporting period ending on a Friday:
· | The secondthird fiscal quarter of 2010 and 2009 consisted of 13 weeks ending on June 25,September 24, 2010 and June 26,September 25, 2009, respectively. |
· | The sixnine month periods of 2010 and 2009 consisted of 2639 weeks ending on June 25,September 24, 2010 and June 26,September 25, 2009, respectively. |
· | Fiscal year 2009 consisted of 52 weeks ending on December 25, 2009. |
· | Please note that fiscalFiscal year 2010 consists of 53 weeks ending on December 31, 2010. Therefore, fourth quarter 2010 will consist of 14 weeks. |
Except as otherwise specified, references to “second“third quarter(s)” or “six“nine months” indicate CSX’s fiscal periods ending June 25,September 24, 2010 and June 26,September 25, 2009, and references to year-end indicate the fiscal year ended December 25, 2009.
CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. Nature of Operations and Significant Accounting Policies, continued
Comprehensive Earnings
CSX reports comprehensive earnings or loss in accordance with the Comprehensive Income Topic in the Accounting Standards Codification (“ASC”) in the Consolidated Statement of Changes in Shareholders' Equity. 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 equals net earnings plus or minus certain reclassifications for pension and other post-retirement liabilities. Total comprehensive earnings represent the activity for a period net of related tax effects and were $424 million$431 m illion and $311$297 million for secondthird quarters 2010 and 2009, respectively, and $741 million$1.2 billion and $556$853 million for sixnine months 2010 and 2009, 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 reclassifications. Overall equity was reduced by $787$771 million and $809 million as of JuneSeptember 2010 and December 2009, respectively, primarily as a result of normal quarterly pension reclassifications. In general, for CSX, AOCI is not materially impacted by other items.
Allowance for Doubtful Accounts
The Company maintains an allowance for doubtful accounts on uncollectible amounts related to freight receivables, public project receivables (work done by the Company on behalf of a government agency), claims for damages and other various receivables. The allowance is based upon the credit worthiness of customers, historical experience, the age of the receivable and current market and economic conditions. Uncollectible amounts are charged against the allowance account. Allowance for doubtful accounts of $43$39 million and $47 million is included in the consolidated balance sheets as of JuneSeptember 2010 and December 2009, respectively.
Capital Expenditures
Property additions, which are classified as investing activities on the consolidated cash flow statements, consisted of $687 million$1.1 billion and $657 million$1 billion for second quartersnine months 2010 and 2009, respectively. Total capital expenditures for the nine months of 2009 included purchases of new assets using seller financing of approximately $160 million, for which payments are included in other financing activities on the consolidated cash flow statements. There were no purchases of new assets using seller financing agreements during second quarterthe nine months of 2010. The Company plans to spend $1.7approximately $1.8 billion for total capital expenditures in 2010.
CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. Nature of Operations and Significant Accounting Policies, continued
New Accounting Pronouncements and Changes in Accounting Policy
Change in Accounting Principle
Effective in the second quarter of 2010, CSX changed the accounting policy for rail grinding costs from a capitalization method, under which the cost of rail grinding was capitalized and then depreciated, to a direct expense method, under which rail grinding costs are expensed as incurred. This represents a change from an acceptable method under GAAP to a preferable method, and is consistent with recent changes in industry practice.
The direct expense method eliminates the subjectivity in determining the period of benefit over which to depreciate the capitalized costs associated with rail grinding. The application of the change in accounting principle is presented retrospectively to all periods presented.
The balance sheet effects of the adjustments through the beginning of fiscal year 2009 resulted in a decrease in net properties, deferred income taxes, and shareholders’ equity by $134 million, $51 million, and $83 million, respectively. The effect of this change is not material to the financial condition, results of operations or liquidity for any of the periods presented.
CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. Nature of Operations and Significant Accounting Policies, continued
The following tables show the effects of the change in policy for rail grinding costs on the consolidated financial statements:statements. The Accounting Changes and Error Corrections Topic in the ASC requires CSX to present both prior period amounts that have been previously reported as well as current period amounts as computed under both the prior method and as reported.
| | | | | | | | |
2010 |
Consolidated Income Statements | | 3rd Quarter | | 9 months |
Dollars in Millions, Except Per Share Amounts | | Computed under Prior Method | Impact of Adjustment | As Reported | | Computed under Prior Method | Impact of Adjustment | As Reported |
Materials, Supplies and Other | | $503 | $6 | $509 | | $1,564 | $15 | $1,579 |
Depreciation | | 234 | (2) | 232 | | 694 | (4) | 690 |
Total Expense | | 1,837 | 4 | 1,841 | | 5,584 | 11 | 5,595 |
Operating Income | | 829 | (4) | 825 | | 2,236 | (11) | 2,225 |
Earnings from Continuing Operations | | | | | | | | |
Before Taxes | | 706 | (4) | 702 | | 1,856 | (11) | 1,845 |
Income Tax Expense | | (289) | 1 | (288) | | (716) | 4 | (712) |
Earnings from Continuing Operations | | 417 | (3) | 414 | | 1,140 | (7) | 1,133 |
Net Earnings | | 417 | (3) | 414 | | 1,140 | (7) | 1,133 |
Net Earnings Per Share, Basic | | | | | | | | |
Continuing Operations | | $1.10 | $(0.01) | $1.09 | | $2.97 | $(0.02) | $2.95 |
Net Earnings | | $1.10 | $(0.01) | $1.09 | | $2.97 | $(0.02) | $2.95 |
Net Earnings Per Share, Assuming Dilution | | | | | | | | |
Continuing Operations | | $1.09 | $(0.01) | $1.08 | | $2.94 | $(0.02) | $2.92 |
Net Earnings | | $1.09 | $(0.01) | $1.08 | | $2.94 | $(0.02) | $2.92 |
| | | | | | | | |
2009 |
Consolidated Income Statements | | 3rd Quarter | | 9 months |
Dollars in Millions, Except Per Share Amounts | | As Previously Reported | Impact of Adjustment | As Adjusted | | As Previously Reported | Impact of Adjustment | As Adjusted |
Materials, Supplies and Other | | $495 | $5 | $500 | | $1,467 | $15 | $1,482 |
Depreciation | | 228 | (1) | 227 | | 681 | (4) | 677 |
Total Expense | | 1,691 | 4 | 1,695 | | 5,019 | 11 | 5,030 |
Operating Income | | 598 | (4) | 594 | | 1,702 | (11) | 1,691 |
Earnings from Continuing Operations | | 464 | (4) | 460 | | 1,301 | (11) | 1,290 |
Before Taxes | | | | | | | | |
Income Tax Expense | | (171) | 1 | (170) | | (469) | 4 | (465) |
Earnings from Continuing Operations | | 293 | (3) | 290 | | 832 | (7) | 825 |
Net Earnings | | 293 | (3) | 290 | | 847 | (7) | 840 |
Net Earnings Per Share, Basic | | | | | | | | |
Continuing Operations | | $0.75 | $(0.01) | $0.74 | | $2.12 | $(0.02) | $2.10 |
Net Earnings | | $0.75 | $(0.01) | $0.74 | | $2.16 | $(0.02) | $2.14 |
Net Earnings Per Share, Assuming Dilution | | | | | | | | |
Continuing Operations | | $0.74 | $(0.01) | $0.73 | | $2.10 | $(0.02) | $2.08 |
Net Earnings | | $0.74 | $(0.01) | $0.73 | | $2.14 | $(0.02) | $2.12 |
2010 | |
Consolidated Income Statements | 1st Quarter | | 2nd Quarter | | 6 months | |
Dollars in Millions, Except Per Share Amounts | As Previously Reported | | Impact of Adjustment | | As Adjusted | | Computed under Prior Method | | Impact of Adjustment | | As Reported | | Computed under Prior Method | | Impact of Adjustment | | As Reported | |
Materials, Supplies and Other | $ | 516 | | $ | 3 | | $ | 519 | | $ | 545 | | $ | 6 | | $ | 551 | | $ | 1,061 | | $ | 9 | | $ | 1,070 | |
Depreciation | | 229 | | | (1 | ) | | 228 | | | 231 | | | (1) | | | 230 | | | 460 | | | (2 | ) | | 458 | |
Total Expense | | 1,857 | | | 2 | | | 1,859 | | | 1,890 | | | 5 | | | 1,895 | | | 3,747 | | | 7 | | | 3,754 | |
Operating Income | | 634 | | | (2 | ) | | 632 | | | 773 | | | (5) | | | 768 | | | 1,407 | | | (7 | ) | | 1,400 | |
Earnings from Continuing Operations Before Taxes | | 503 | | | (2 | ) | | 501 | | | 647 | | | (5) | | | 642 | | | 1,150 | | | (7 | ) | | 1,143 | |
Income Tax Expense | | (197) | | | 1 | | | (196 | ) | | (230) | | | 2 | | | (228) | | | (427 | ) | | 3 | | | (424 | ) |
Earnings from Continuing Operations | | 306 | | | (1 | ) | | 305 | | | 417 | | | (3) | | | 414 | | | 723 | | | (4 | ) | | 719 | |
Net Earnings | | 306 | | | (1 | ) | | 305 | | | 417 | | | (3) | | | 414 | | | 723 | | | (4 | ) | | 719 | |
Earnings Per Share, Basic | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Continuing Operations | $ | 0.78 | | $ | - | | $ | 0.78 | | $ | 1.09 | | $ | (0.01) | | $ | 1.08 | | $ | 1.87 | | $ | (0.01) | | $ | 1.86 | |
Net Earnings | $ | 0.78 | | $ | - | | $ | 0.78 | | $ | 1.09 | | $ | (0.01) | | $ | 1.08 | | $ | 1.87 | | $ | (0.01) | | $ | 1.86 | |
Net Earnings Per Share, Assuming Dilution | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Continuing Operations | $ | 0.78 | | $ | - | | $ | 0.78 | | $ | 1.08 | | $ | (0.01) | | $ | 1.07 | | $ | 1.85 | | $ | (0.01) | | $ | 1.84 | |
Net Earnings | $ | 0.78 | | $ | - | | $ | 0.78 | | $ | 1.08 | | $ | (0.01) | | $ | 1.07 | | $ | 1.85 | | $ | (0.01) | | $ | 1.84 | |
| | | | | | |
2009 | |
Consolidated Income Statements | 1st Quarter | | 2nd Quarter | | 6 months | |
Dollars in Millions, Except Per Share Amounts | As Previously Reported | | Impact of Adjustment | | As Adjusted | | As Previously Reported | | Impact of Adjustment | | As Adjusted | | As Previously Reported | | Impact of Adjustment | | As Adjusted | |
Materials, Supplies and Other | $ | 535 | | $ | 3 | | $ | 538 | | $ | 437 | | $ | 7 | | $ | 444 | | $ | 972 | | $ | 10 | | $ | 982 | |
Depreciation | | 224 | | | (1 | ) | | 223 | | | 229 | | | (2) | | | 227 | | | 453 | | | (3 | ) | | 450 | |
Total Expense | | 1,725 | | | 2 | | | 1,727 | | | 1,603 | | | 5 | | | 1,608 | | | 3,328 | | | 7 | | | 3,335 | |
Operating Income | | 522 | | | (2 | ) | | 520 | | | 582 | | | (5) | | | 577 | | | 1,104 | | | (7 | ) | | 1,097 | |
Earnings from Continuing Operations Before Taxes | | 384 | | | (2 | ) | | 382 | | | 453 | | | (5) | | | 448 | | | 837 | | | (7 | ) | | 830 | |
Income Tax Expense | | (130) | | | 1 | | | (129 | ) | | (168) | | | 2 | | | (166) | | | (298 | ) | | 3 | | | (295 | ) |
Earnings from Continuing Operations | | 254 | | | (1 | ) | | 253 | | | 285 | | | (3) | | | 282 | | | 539 | | | (4 | ) | | 535 | |
Net Earnings | | 246 | | | (1 | ) | | 245 | | | 308 | | | (3) | | | 305 | | | 554 | | | (4 | ) | | 550 | |
Net Earnings Per Share, Basic | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Continuing Operations | $ | 0.65 | | $ | - | | $ | 0.65 | | $ | 0.73 | | $ | (0.01) | | $ | 0.72 | | $ | 1.37 | | $ | (0.01 | ) | $ | 1.36 | |
Net Earnings | $ | 0.63 | | $ | - | | $ | 0.63 | | $ | 0.79 | | $ | (0.01) | | $ | 0.78 | | $ | 1.41 | | $ | (0.01) | | $ | 1.40 | |
Net Earnings Per Share, Assuming Dilution | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Continuing Operations | $ | 0.64 | | $ | - | | $ | 0.64 | | $ | 0.72 | | $ | (0.01) | | $ | 0.71 | | $ | 1.36 | | $ | (0.01) | | $ | 1.35 | |
Net Earnings | $ | 0.62 | | $ | - | | $ | 0.62 | | $ | 0.78 | | $ | (0.01) | | $ | 0.77 | | $ | 1.40 | | $ | (0.01 | ) | $ | 1.39 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Consolidated Balance Sheets | June 2010 | | December 2009 | | | | | | | | | | |
Dollars in Millions | Computed under Prior Method | | Impact of Adjustment | | As Reported | | As Previously Reported | | Impact of Adjustment | | As Adjusted | | | | | | | | | | |
Net Properties | $ | 23,329 | | $ | (156 | ) | $ | 23,173 | | $ | 23,213 | | $ | (149) | | $ | 23,064 | | | | | | | | | | |
Total Assets | | 26,900 | | | (156 | ) | | 26,744 | | | 27,036 | | | (149) | | | 26,887 | | | | | | | | | | |
Deferred Income Taxes | | 6,710 | | | (60 | ) | | 6,650 | | | 6,585 | | | (57) | | | 6,528 | | | | | | | | | | |
Total Liabilities | | 18,227 | | | (60 | ) | | 18,167 | | | 18,176 | | | (57) | | | 18,119 | | | | | | | | | | |
Retained Earnings | | 9,064 | | | (96 | ) | | 8,968 | | | 9,182 | | | (92) | | | 9,090 | | | | | | | | | | |
Total Shareholders' Equity | | 8,673 | | | (96 | ) | | 8,577 | | | 8,860 | | | (92) | | | 8,768 | | | | | | | | | | |
Total Liabilities and Shareholders' Equity | | 26,900 | | | (156 | ) | | 26,744 | | | 27,036 | | | (149) | | | 26,887 | | | | | | | | | | |
Certain prior year data has been reclassified to conform to the current presentation.
CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. Nature of Operations and Significant Accounting Policies, continued
Consolidated Balance Sheets | | | September 2010 | | December 2009 |
Dollars in Millions | | | Computed under Prior Method | Impact of Adjustment | As Reported | | As Previously Reported | Impact of Adjustment | As Adjusted |
Properties - Net | | | $23,494 | $(160) | $23,334 | | $23,213 | $(149) | $23,064 |
Total Assets | | | 27,189 | (160) | 27,029 | | 27,036 | (149) | 26,887 |
Deferred Income Taxes | | | 6,793 | (61) | 6,732 | | 6,585 | (57) | 6,528 |
Total Liabilities | | | 18,452 | (61) | 18,391 | | 18,176 | (57) | 18,119 |
Retained Earnings | | | 9,121 | (99) | 9,022 | | 9,182 | (92) | 9,090 |
Total Shareholders' Equity | | | 8,737 | (99) | 8,638 | | 8,860 | (92) | 8,768 |
Total Liabilities and Shareholders' Equity | | | 27,189 | (160) | 27,029 | | 27,036 | (149) | 26,887 |
| | | | | | | | |
| | | | | | | | |
2010 | 2010 | | 2010 | | | | |
Consolidated Cash Flow Statements | | 3 months | | 6 months | | | 9 months | | | | |
Dollars in Millions | | As Previously Reported | | Impact of Adjustment | | As Adjusted | | Computed under Prior Method | | Impact of Adjustment | | As Reported | | | Computed under Prior Method | Impact of Adjustment | As Reported | | | | |
Net Earnings | | $ | 306 | | $ | (1 | ) | $ | 305 | | $ | 723 | | $ | (4 | ) | $ | 719 | | | $1,140 | $(7) | $1,133 | | | | |
Depreciation | | | 229 | | | (1 | ) | | 228 | | | 460 | | | (2 | ) | | 458 | | | 694 | (4) | 690 | | | | |
Deferred Income Taxes | | | 47 | | | (1 | ) | | 46 | | | 82 | | | (3 | ) | | 79 | | | 143 | (4) | 139 | | | | |
Cash Provided by Operating Activities | | | 747 | | | (3 | ) | | 744 | | | 1,431 | | | (9 | ) | | 1,422 | | |
Net Cash Provided by Operating Activities | | | 2,281 | (15) | 2,266 | | | | |
Property Additions | | | (331 | ) | | 3 | | | (328 | ) | | (696 | ) | | 9 | | | (687 | ) | | (1,107) | 15 | (1,092) | | | | |
Cash Used in Investing Activities | | | (313 | ) | | 3 | | | (310 | ) | | (628 | ) | | 9 | | | (619 | ) | |
Net Cash Used in Investing Activities | | | (1,066) | 15 | (1,051) | | | | |
| | | | | | | | | |
2009 | 2009 | | 2009 | | | | |
Consolidated Cash Flow Statements | | 3 months | | 6 months | | | 9 months | | | | |
Dollars in Millions | | As Previously Reported | | Impact of Adjustment | | As Adjusted | | As Previously Reported | | Impact of Adjustment | | As Adjusted | | | As Previously Reported | Impact of Adjustment | As Adjusted | | | | |
Net Earnings | | $ | 246 | | $ | (1 | ) | $ | 245 | | $ | 554 | | $ | (4 | ) | $ | 550 | | | $847 | $(7) | $840 | | | | |
Depreciation | | | 224 | | | (1 | ) | | 223 | | | 454 | | | (3 | ) | | 451 | | | 679 | (4) | 675 | | | | |
Deferred Income Taxes | | | 79 | | | (1 | ) | | 78 | | | 212 | | | (3 | ) | | 209 | | | 330 | (4) | 326 | | | | |
Cash Provided by Operating Activities | | | 449 | | | (3 | ) | | 446 | | | 981 | | | (10 | ) | | 971 | | |
Net Cash Provided by Operating Activities | | | 1,604 | (15) | 1,589 | | | | |
Property Additions | | | (309 | ) | | 3 | | | (306 | ) | | (667 | ) | | 10 | | | (657 | ) | | (1,046) | 15 | (1,031) | | | | |
Cash Used in Investing Activities | | | (272 | ) | | 3 | | | (269 | ) | | (618 | ) | | 10 | | | (608 | ) | |
Net Cash Used in Investing Activities | | | (995) | 15 | (980) | | | | |
Other Items
Retained Earnings
During secondthird quarter 2010, CSX's other capital balance was reduced to zero as a result of share repurchases. In accordance with the Equity Topic in the ASC, other capital cannot be negative. Therefore, a reclassification of $540$272 million was made between retained earnings and other capital to bring the other capital balance to zero. Generally, retained earnings is only impacted by net earnings and dividends.
Property TransactionDividend Increase
DuringOn September 29, 2010, CSX announced an 8 percent increase to its quarterly cash dividend to 26 cents per share payable on December 15, 2010 to shareholders of record on November 30, 2010. This is the second quarter of 2010, the Company closed an operating property transaction with the Commonwealth of Massachusetts. The Company received $50 million of cash related to this transaction and recordedeighth dividend increase which represents a net book loss of $30 million pre-tax or $0.05 per share. This property is35 percent compounded annual growth rate over a former Conrail acquired property. This loss is reflected in materials, supplies and other.
five-year period.
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 | |
| | 2010 | | | 2009 | | | 2010 | | | 2009 | |
| | | | | (Adjusted)* | | | | | | (Adjusted)* | |
Numerator (Dollars in millions): | | | | | | | | | | | | |
Earnings from Continuing Operations | | $ | 414 | | | $ | 282 | | | $ | 719 | | | $ | 535 | |
Discontinued Operations - Net of Tax (a) | | | - | | | | 23 | | | | - | | | | 15 | |
Net Earnings | | $ | 414 | | | $ | 305 | | | $ | 719 | | | $ | 550 | |
| | | | | | | | | | | | | | | | |
Denominator (Units in thousands): | | | | | | | | | | | | | | | | |
Average Common Shares Outstanding | | | 383,164 | | | | 392,027 | | | | 387,121 | | | | 391,594 | |
Convertible Debt | | | 997 | | | | 1,118 | | | | 1,019 | | | | 1,118 | |
Stock Option Common Stock Equivalents (b) | | | 2,056 | | | | 1,989 | | | | 2,094 | | | | 1,906 | |
Other Potentially Dilutive Common Shares | | | 174 | | | | 236 | | | | 123 | | | | 117 | |
Average Common Shares Outstanding, Assuming Dilution | | | 386,391 | | | | 395,370 | | | | 390,357 | | | | 394,735 | |
| | | | | | | | | | | | | | | | |
Net Earnings Per Share, Basic: | | | | | | | | | | | | | | | | |
Continuing Operations | | $ | 1.08 | | | $ | 0.72 | | | $ | 1.86 | | | $ | 1.36 | |
Discontinued Operations | | | - | | | | 0.06 | | | | - | | | | 0.04 | |
Net Earnings | | $ | 1.08 | | | $ | 0.78 | | | $ | 1.86 | | | $ | 1.40 | |
| | | | | | | | | | | | | | | | |
Net Earnings Per Share, Assuming Dilution: | | | | | | | | | | | | | | | | |
Continuing Operations | | $ | 1.07 | | | $ | 0.71 | | | $ | 1.84 | | | $ | 1.35 | |
Discontinued Operations | | | - | | | | 0.06 | | | | - | | | | 0.04 | |
Net Earnings | | $ | 1.07 | | | $ | 0.77 | | | $ | 1.84 | | | $ | 1.39 | |
* Certain amounts have been adjusted for the retrospective change in accounting principle for rail grinding (See Note 1). | | | Third Quarters | Nine Months |
| | | 2010 | 2009 | 2010 | 2009 |
| | | | (Adjusted) (a) | | (Adjusted) (a) |
Numerator (Dollars in millions): | | | | | |
| Earnings from Continuing Operations | | $414 | $290 | $1,133 | $825 |
| Discontinued Operations - Net of Tax (b) | | - | - | - | 15 |
| Net Earnings | | $414 | $290 | $1,133 | $840 |
| | | | | | |
Denominator (Units in thousands): | | | | | |
| Average Common Shares Outstanding | | 378,050 | 392,352 | 384,102 | 391,847 |
| Convertible Debt | | 987 | 1,116 | 1,008 | 1,117 |
| Stock Option Common Stock Equivalents (c) | | 1,865 | 2,417 | 2,018 | 2,076 |
| Other Potentially Dilutive Common Shares | | 920 | 448 | 388 | 228 |
| Average Common Shares Outstanding, Assuming Dilution | 381,822 | 396,333 | 387,516 | 395,268 |
| | | | | | |
Net Earnings Per Share, Basic: | | | | | |
| Continuing Operations | | $1.09 | $0.74 | $2.95 | $2.10 |
| Discontinued Operations | | - | - | - | 0.04 |
| Net Earnings | | $1.09 | $0.74 | $2.95 | $2.14 |
| | | | | | |
Net Earnings Per Share, Assuming Dilution: | | | | | |
| Continuing Operations | | $1.08 | $0.73 | $2.92 | $2.08 |
| Discontinued Operations | | - | - | - | 0.04 |
| Net Earnings | | $1.08 | $0.73 | $2.92 | $2.12 |
(a) | Certain amounts have been adjusted for the retrospective change in accounting principle for rail grinding (See Note 1). |
(b) | For additional information regarding discontinued operations, see Note 10, Discontinued Operations. |
(b)(c) | When calculating diluted earnings per share for stock option common stock equivalents, the Earnings Per Share Topic in the ASC requires CSX to include the potential shares that would be outstanding if all outstanding stock options were exercised. This is offset by shares CSX could repurchase using the proceeds from these hypothetical exercises to obtain the common stock equivalent. This number is different from outstanding stock options, which is included in Note 3, Share-Based Compensation. All stock options were dilutive for the periods presented; therefore, no stock options were excluded from the diluted earnings per share calculation. |
CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 2. Earnings Per Share, continued
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 outstanding adjusted for the effects of common stock that may be issued as a result of the following types of potentially dilutive instruments:
· | employee stock options; and |
· | other equity awards, which include long-term incentive awards. |
The Earnings Per Share Topic in the 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 represents the number of shares that would be issued if all of the above potentially dilutive instruments were converted into CSX common stock.
As a result, diluted shares outstanding are not impacted when debentures are converted into CSX common stock because those shares were already included in the diluted shares calculation. Shares outstanding for basic earnings per share, however, are impacted on a weighted-average basis when conversions occur. During secondthird quarter 2010, $200,000approximately $300 thousand of face value of convertible debentures were converted into 7,00010 thousand shares of CSX common stock. There were no conversionsDuring third quarter 2009, $275 thousand of face value of convertible debentures during second quarter 2009.were converted into approximately 10 thousand shares of CSX common stock. As of JuneSeptember 2010, approximately $28 million of convertible debentures at face value remained outstanding, which are convertible into approximatelyap proximately 1 million shares of CSX common stock.
NOTE 3. Share-Based Compensation
CSX share-based compensation plans primarily include performance grants, restricted stock awards, stock options and stock plans for directors. CSX has not granted stock options since 2003. Awards granted under the various plans 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 the Company’s non-management directors upon recommendation of the Governance Committee of the Board of Directors.
CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 3. Share-Based Compensation, continued
On May 4,5, 2010, 402,000 target performance units were granted to key members of management under a new long-term incentive plan (LTIP) adopted under the CSX OmnibusStock and Incentive Award Plan. This LTIP plan provides for a three-year cycle ending in fiscal year 2012. Similar to the two existing plans, the financial target upon which payments are based is operating ratio, which is defined as operating expenses divided by operating revenue and is calculated excluding certain non-recurring items. Target grantsGrants were made in performance units, with each unit being equivalent to 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 original target grant based upon CSX’s attainmentsattainment of pre-established operating ratio targets for fiscal year 2012.& #160; Payouts to certain senior executive officers are subject to a reduction of up to 30% at the discretion of the Compensation Committee of the Board of Directors based upon Company performance against certain CSX strategic initiatives.
AsAdditionally, on May 5, 2010, as part of this plan,its overall long-term incentive compensation program, the Company granted 134,000 time-based restricted stock units were granted to key members of management. The restricted stock units vest three years after the date of grant and participants receive cash dividend equivalents on the unvested shares during the restriction period. These awards are not based upon CSX’s attainment of operational targets.
For information related to the Company’s other outstanding long-term incentive plans,compensation, see CSX’s most recent annual reportAnnual Report on Form 10-K.
Total pre-tax expense associated with all share-based compensation and its related income tax benefit is as follows:
| | Second Quarters | | | Six Months | | Third Quarters | | Nine Months |
(Dollars in millions) | | 2010 | | | 2009 | | | 2010 | | | 2009 | | 2010 | 2009 | | 2010 | 2009 |
Share-Based Compensation Expense (a) | | $ | 9 | | | $ | 11 | | | | 32 | | | | 3 | | $13 | $9 | | $46 | $12 |
Income Tax Benefit | | | 3 | | | | 4 | | | | 12 | | | | 1 | | 5 | 3 | | 17 | 4 |
| (a) Share-based compensation expense may fluctuate with estimates of the number of performance-based awards that are expected to be awarded in future periods. |
CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 3. Share-Based Compensation, continued
The following table provides information about stock options exercised.
| Second Quarters | | Six Months | Third Quarters | | Nine Months |
(In thousands) | 2010 | 2009 | | 2010 | 2009 | 2010 | 2009 | | 2010 | 2009 |
| | | | | | |
Number of Stock Options Exercised | 554 | 492 | | 913 | 566 | 280 | 386 | | 1,193 | 952 |
As of December 2009, all outstanding options arewere vested, and therefore, there will be no future expense related to these options. As of JuneSeptember 2010, CSX had approximately 54 million stock options outstanding. However, the impact of options to diluted earnings per share is much smaller (see note (b) to the table in Note 2, Earnings Per Share for more information).
CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 4. Casualty, Environmental and Other Reserves
Casualty, environmental and other reserves were determined to be critical accounting estimates due to the need for significant management judgments. They are provided for in the consolidated balance sheets as follows:
| | June 2010 | | | December 2009 | | | September 2010 | | December 2009 |
(Dollars in millions) | | Current | | | Long-term | | | Total | | | Current | | | Long-term | | | Total | | (Dollars in millions) | Current | Long-term | Total | | Current | Long-term | Total |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Casualty: | | | | | | | | | | | | | | | | | | | Casualty: | | | | | | | |
Personal Injury | | $ | 78 | | | $ | 199 | | | $ | 277 | | | $ | 85 | | | $ | 215 | | | $ | 300 | | |
Occupational | | | 31 | | | | 128 | | | | 159 | | | | 27 | | | | 132 | | | | 159 | | |
Total Casualty | | | 109 | | | | 327 | | | | 436 | | | | 112 | | | | 347 | | | | 459 | | |
| | Personal Injury | $78 | $191 | $269 | | $85 | $215 | $300 |
| | Occupational | 31 | 116 | 147 | | 27 | 132 | 159 |
| | Total Casualty | 109 | 307 | 416 | | 112 | 347 | 459 |
Separation | | | 15 | | | | 51 | | | | 66 | | | | 16 | | | | 57 | | | | 73 | | Separation | 15 | 48 | 63 | | 16 | 57 | 73 |
Environmental | | | 37 | | | | 61 | | | | 98 | | | | 37 | | | | 60 | | | | 97 | | Environmental | 37 | 70 | 107 | | 37 | 60 | 97 |
Other | | | 29 | | | | 105 | | | | 134 | | | | 25 | | | | 83 | | | | 108 | | Other | 26 | 109 | 135 | | 25 | 83 | 108 |
Total | | $ | 190 | | | $ | 544 | | | $ | 734 | | | $ | 190 | | | $ | 547 | | | $ | 737 | | |
| | Total | $187 | $534 | $721 | | $190 | $547 | $737 |
Details with respect to each type of reserve are described below. Actual settlements and claims received could differ. The final outcome of these matters cannot be predicted with certainty. Considering the legal defenses available, the liabilities that have been recorded and other factors, it is the opinion of management that none of these items, when finally resolved, will have a material effect on the Company’s financial condition, results of operations or liquidity. Should a number of these items occur in the same period, however, they could have a material effect on the Company’s financial condition, results of operations or liquidity in that particular period.
CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 4. Casualty, Environmental and Other Reserves, continued
During the second quarter of 2010, the Company reduced casualty reserves by a net $9 million, most of which is related to the reduction in CSXT personal injury reserves of $13 million as noted below. There were no significant adjustments to casualty reserves in the third quarter of 2010.
During the second quarter of 2009, the Company reduced casualty reserves by a net $85 million, or $0.22 per share. The majority of this reduction is related to personal injury and asbestos and is described below. Also included in the net reduction is a write-off of $11 million of reinsurance receivables (expected receivables from outside insurance companies). This receivable write-off is not included in the reserve amounts disclosed above.
CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 4. Casualty, Environmental and Other Reserves, continued
Casualty
Casualty reserves represent accruals for personal injury and occupational injury claims. During the second quarter of 2010 the Company increased its self-insured retention amount for these claims from $25 million to $50 million per injury for claims occurring on or after June 1, 2010. 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,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 independent third-party estimates,estima tes, which are reviewed by management. The 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 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”). In addition to FELA liabilities, employees of other CSX subsidiaries or former subsidiaries are covered by various state workers’ compensation laws, the Federal Longshore and Harbor Workers’ Compensation Program or the Maritime Jones Act.
CSXT retains an independent actuarial firm to assist management in assessing the value of personal injury claims and cases. An analysis is performed by the independent actuarial firm semi-annually and is reviewed by management. The methodology used by the actuary includes a development factor to reflect growth or reduction in the value of these personal injury claims. It is based largely on CSXT’s historical claims and settlement experience. Actual results may vary from estimates due to the number, type and severity of the injury, costs of medical treatments and uncertainties in litigation.
CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 4. Casualty, Environmental and Other Reserves, continued
During second quarters of 2010 and 2009, the Company reduced personal injury reserves by $13 million and $78 million, respectively, based on management’s review of the actuarial analysis performed by an independent actuarial firm. These reductions are a direct result of the Company’s improvement in safety. Claims have shown a continued downward trend in the number of injuries, resulting in a continual reduction of the Company’s FRA personal injury frequency index. Additionally, the trend in the severity of injuries has significantly declined. There were no significant adjustments to personal injury reserves in the third quarter of 2010.
Occupational claims arise from allegations of exposure to certain materials in the workplace, such as asbestos, solvents (which include soaps and chemicals) and diesel fuels or allegations of chronic physical injuries resulting from work conditions, such as repetitive stress injuries, carpal tunnel syndrome and hearing loss.
CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 4. Casualty, Environmental and Other Reserves, continued
An analysis of occupational claims is performed semi-annually by an independent third party and reviewed by management. The methodology used includes estimates of future anticipated incurred but not reported claims based on the Company’s trends in average historical claim filing rates, future anticipated dismissal rates and future settlement rates. Actual claims may vary from these estimates due to the number, type and severity of the injury, costs of medical treatments and uncertainties in litigation.
During second quarter 2009, the Company reduced its asbestos reserves by $18 million. This reserve reduction is related to approximately 1,5001500 claims that were deemed to have no medical merit and, therefore, have been determined to have no value. AsbestosThere were no significant adjustments to asbestos reserves were not adjusted during 2010 as a result of the semi-annual review by the independent third party.in 2010.
Separation
Separation liabilities represent the estimated benefits provided to certain union employees as a result of implementing workforce reductions, improvements in productivity and certain other cost reductions at the Company's major transportation units since 1991. These liabilities are expected to be paid out over the next 10 to 15 years from general corporate funds and may fluctuate depending on the timing of payments and associated taxes.
CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 4. Casualty, Environmental and Other Reserves, continued
Environmental
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 255265 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, or 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 othersothe rs for treatment 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.
CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 4. Casualty, Environmental and Other Reserves, continued
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:
· | the type of clean-up required; |
· | the 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); |
· | the extent of the Company’s alleged connection (e.g., volume of waste sent to the location and other relevant factors); and |
· | the number, connection and financial viability of other named and unnamed potentially responsible parties at the location. |
CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 4. Casualty, Environmental and Other Reserves, continued
Based on the review process, the Company has recorded amounts to cover anticipated contingent future environmental remediation costs with respect to each site to the extent such costs are 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 statement.
Currently, the Company does not possess sufficient information to reasonably estimate the amounts of additional liabilities, if any, related to some sites, and will not possess such information until completion of future environmental studies. In addition, conditions that are currently unknown could, at any given location, result in liabilities, the amount and materiality of which cannot presently be reliably estimated. Based upon information currently available, however, the Company believes its environmental reserves are adequate to fund remedial actions to comply with present laws and regulations, and that the ultimate liability for these matters, if any, will not materially affect its overall financial condition, results of operations or liquidity.
See Item 1, Legal proceedings in Part II of this quarterly report on Form 10-Q for information related to an environmental settlement.
Other
Other reserves include liabilities for various claims, such as longshoremen disability claims primarily associated with former subsidiaries’ activities, freight claims and claims for property, automobile and general liability. These liabilities are accrued at the estimable and probable amount in accordance with the Contingencies Topic in the ASC.
CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 5. Commitments and Contingencies
Insurance
The Company maintains numerous insurance programs with substantial limits for third-party casualty liability and Company property damage and business interruption. A certain amount of risk is retained by the Company on each of the casualty and property programs. For the first event in any given year, the Company has a $25 million deductible for non-catastrophic property programs and a $50 million deductible for casualty and catastrophic property programs.
While the Company’s current insurance coverage is adequate to cover its damages, future claims could exceed existing insurance coverage or insurance may not continue to be available at commercially reasonable rates.
CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 5. Commitments and Contingencies, continued
Guarantees
As of June 2010, the Company wasis no longer liable for the guarantee related to CSX Energy. Additionally, the guarantee for A.P. Moller-Maersk is currently less than $1 million.
Legal Proceedings
There were no material developments duringFor information related to the quarter concerning the fuel surcharge antitrust litigation or theSeminole Electric Cooperative, Inc. rate case.For further details,Company’s legal proceedings, see Note 7, Commitments and Contingencies,Item 1, Legal proceedings in CSX’s most recent Annual ReportPart II of this quarterly report on Form 10-K.10-Q.
In addition to the matters referenced above, 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 environmental matters, FELA claims by employees, other personal injury 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 predicted with certainty, considering, among other things, the legal defenses available and liabilities that have been recorded along with applicable insurance, it is currently the opinion of CSX management that none of these items will 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 a particular quarter or fiscal year.
NOTE 6. Employee Benefit Plans
The Company sponsors defined benefit pension plans principally for salaried, management personnel. The plans provide eligible employees with retirement benefits based predominantly on years of service and compensation rates near retirement. For employees hired after December 31, 2002, benefits are determined based on a cash balance formula, which provides benefits by utilizing interest and pays credits based upon age, service and compensation.
In addition to these plans, the Company sponsors a post-retirement medical plan and a life insurance plan that provide benefits to full-time, salaried, management employees hired on or before December 31, 2002 upon their retirement if certain eligibility requirements are met. The post-retirement medical plan is contributory (partially funded by retirees), with retiree contributions adjusted annually. The life insurance plan is non-contributory.
The Company engages independent, external actuaries to compute the amounts of liabilities and expenses relating to these plans subject to the assumptions that the Company selects. These amounts are reviewed by management. The following table describes the components of expense/(income) related to net periodic benefit cost:
CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 6. Employee Benefit Plans,continued
| | Pension Benefits | |
(Dollars in millions) | | Second Quarters | | | Six Months | |
| | 2010 | | | 2009 | | | 2010 | | | 2009 | |
Service Cost | | $ | 11 | | | $ | 8 | | | $ | 21 | | | $ | 16 | |
Interest Cost | | | 30 | | | | 32 | | | | 61 | | | | 62 | |
Expected Return on Plan Assets | | | (41 | ) | | | (36 | ) | | | (82 | ) | | | (71 | ) |
Amortization of Prior Service Cost | | | (1 | ) | | | - | | | | - | | | | 1 | |
Amortization of Net Loss | | | 14 | | | | 7 | | | | 29 | | | | 13 | |
Net Periodic Benefit Cost | | $ | 13 | | | $ | 11 | | | $ | 29 | | | $ | 21 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | Other Post-retirement Benefits | |
(Dollars in millions) | | Second Quarters | | | Six Months | |
| | | 2010 | | | | 2009 | | | | 2010 | | | | 2009 | |
Service Cost | | $ | 1 | | | $ | 1 | | | $ | 2 | | | $ | 2 | |
Interest Cost | | | 4 | | | | 6 | | | | 9 | | | | 12 | |
Amortization of Net Loss | | | 2 | | | | 1 | | | | 4 | | | | 2 | |
Net Periodic Benefit Cost | | $ | 7 | | | $ | 8 | | | $ | 15 | | | $ | 16 | |
| | Pension Benefits |
(Dollars in millions) | Third Quarters | | Nine Months |
| 2010 | 2009 | | 2010 | 2009 |
Service Cost | $10 | $8 | | $31 | $24 |
Interest Cost | 30 | 32 | | 91 | 94 |
Expected Return on Plan Assets | (42) | (37) | | (124) | (108) |
Amortization of Prior Service Cost | - | 1 | | - | 2 |
Amortization of Net Loss | 15 | 6 | | 44 | 19 |
| Net Periodic Benefit Cost | $13 | $10 | | $42 | $31 |
| | | | | | |
| | | | | | |
| | Other Post-retirement Benefits |
(Dollars in millions) | Third Quarters | | Nine Months |
| 2010 | 2009 | | 2010 | 2009 |
Service Cost | $2 | $2 | | $4 | $4 |
Interest Cost | 5 | 5 | | 14 | 17 |
Amortization of Net Loss | 1 | 1 | | 5 | 3 |
| Net Periodic Benefit Cost | $8 | $8 | | $23 | $24 |
Qualified pension plan obligations are funded in accordance with prescribed regulatory requirements and with an objective of meeting minimum funding requirements necessary to avoid restrictions on flexibility of plan operation and benefit payments. The Company made pension plan contributions of $250 million to its qualified defined benefit pension plans in 2009. At this time, the Company anticipates that no contributions to its qualified pension plans will be required in 2010. For further details, see Note 8, Employee Benefit Plans, in CSX’s most recent Annual Report on Form 10-K.
NOTE 7. Debt and Credit Agreements
Total activity related to long-term debt as of JuneSeptember 2010 was as follows:
(Dollars in millions) | | Current Portion | | | Long-term Portion | | | Total Long-term Debt Activity | | Current Portion | Long-term Portion | Total Long-term Debt Activity |
Total long-term debt at December 2009 | | $ | 113 | | | $ | 7,895 | | | $ | 8,008 | | $113 | $7,895 | $8,008 |
2010 activity: | | | | | | | | | | | | | |
Issued | | | - | | | | - | | | | - | | |
Repaid | | | (71 | ) | | | - | | | | (71 | ) | |
Long-term Debt Issued | | - |
Long-term Debt Repaid | | (103) | - | (103) |
Reclassifications | | | 575 | | | | (575 | ) | | | - | | 598 | (598) | - |
Converted into CSX stock | | | (3 | ) | | | - | | | | (3 | ) | (3) | - | (3) |
Total long-term debt at June 2010 | | $ | 614 | | | $ | 7,320 | | | $ | 7,934 | | |
Discount and premium activity | | - |
Total long-term debt at September 2010 | | $605 | $7,297 | $7,902 |
CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 7. Debt and Credit Agreements, continued
Debt Exchange
On March 24, 2010, CSX exchanged $660 million of notes of multiple series (the “Existing Notes”), bearing interest at an average annual rate of 7.74% with maturities ranging from 2017 to 2038. These Existing Notes were exchanged for $660 million of debt securities (the “New Notes”) bearing interest at an average annual rate of 6.22% and due April 30, 2040. In addition, CSX paid approximately $141 million to the debtholders as cash consideration. CSX also paid the debtholders any accrued and unpaid interest on the Existing Notes. In accordance with the Debt Topic in the ASC, this transaction has been accounted for as a debt exchange. As such, the $141 million of cash consideration paid to the debtholders is includedwas recorded in other long-terml ong-term assets. This cash consideration and the unamortized discount and issue costs from the Existing Notes will beare being amortized as an adjustment of interest expense over the term of the New Notes. There was no gain or loss recognized as a result of this exchange. However, all costs related to the debt exchange and due to parties other than the debtholders were included in interest expense during first quarter 2010. These costs totaled approximately $3 million. There were no additional costs incurred during second quarter 2010.
In JuneJuly 2010, CSX offered to exchangeexchanged the New Notes for substantially identical notes registered under the Securities Act of 1933, as amended, pursuant to a registration rights agreement entered into in connection with the exchange offer. This offer will expire at 5:00 p.m. eastern standard time on July 15, 2010, unless otherwise extended.
For fair value information related to the Company’s long-term debt, see Note 11, Fair Value Measurements.
Revolving Credit Facility
CSX has a $1.25 billion unsecured revolving credit facility with a syndicate of banks. The facility allows borrowings at floating rates based on the London interbank offered rate ("LIBOR"), plus a spread, depending upon CSX’s senior unsecured debt ratings. The facility requires CSX to maintain a ratio of total debt to total capitalization below a prescribed limit. The facility does not require CSX to post collateral under any circumstances. As of JuneSeptember 2010, this facility was not drawn on, and CSX was in compliance with all covenant requirements under the facility. This facility expires in 2012.
CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 7. Debt and Credit Agreements, continued
Receivables Securitization Facility
On June 16, 2010, the Company renewed itsThe Company’s $250 million receivables securitization facility.facility has a 364-day term and expires in June 2011. The purpose of this facility is to provide an alternative to commercial paper and a low cost source of short-term liquidity. This facility has a 364-day term and expires on June 15, 2011. As of the date of this filing, the Company has not drawn on this facility. Under the terms of this facility, CSX Transportation and CSX Intermodal transferredtransfers eligible third-party receivables to CSX Trade Receivables, a bankruptcy-remote special purpose subsidiary. A separate subsidiary of CSX will service the receivables. Upon transfer, the receivables become assets of CSX Trade Receivables and are not available to the creditors of CSX or any of its other subsidiaries. In the event CSX Trade Receivables draws under this facility, the Company will record an equivalentequivalen t amount of debt on its consolidated financial statements.
NOTE 8. Other Income - Net
The Company derives income from items that are not considered operating activities. Income from these items is reported net of related expense. Other income -– net consisted of the following:
| | Second Quarters | | | Six Months | | | Third Quarters | | Nine Months |
(Dollars in millions) | | 2010 | | | 2009 | | | 2010 | | | 2009 | | (Dollars in millions) | 2010 | 2009 | | 2010 | 2009 |
Interest Income | | $ | 2 | | | $ | 3 | | | $ | 3 | | | $ | 7 | | Interest Income | $1 | $2 | | $4 | $9 |
Income from Real Estate | | | 8 | | | | 6 | | | | 15 | | | | 7 | | Income from Real Estate | 5 | 11 | | 20 | 18 |
Miscellaneous Income (Expense) | | | (1 | ) | | | 1 | | | | 2 | | | | (1 | ) | Miscellaneous Income (Expense) | 2 | (7) | | 4 | (8) |
Total Other Income - Net | | $ | 9 | | | $ | 10 | | | $ | 20 | | | $ | 13 | | |
| | Total Other Income - Net | $8 | $6 | | $28 | $19 |
NOTE 9. Income Taxes
During the secondthird quarter of 2010, the Joint CommitteeCompany recorded an income tax charge of Taxation, which is a committee of the United States Congress, approved the refund$22 million or $0.06 per share primarily related to the resolutionmerger of the 2004 – 2006 federal income tax audit. The final issue for this audit cycle related to a dispute over the value of the donation of appreciated property.Company’s former Intermodal subsidiary with CSXT. As a result of this resolution, the Company recorded amerger, CSXT’s effective state tax rate has increased and interest benefit of $19 million. Additionally, there were other tax expense items that partially offset this resultingresulted in a net benefit of $15 million or $0.04 per share in the second quarter of 2010. In addition, the Company has reduced gross unrecognized tax benefits by $32 million. As of June 2010 and December 2009, the Company had approximately $25 million and $50 million, respectively, of total unrecognized tax benefits. Of these total unrecognized tax benefits and after considerationrevaluation of the impact of federaldeferred tax benefits, as of June 2010 and December 2009, $17 million and $41 million, respectively, could favorably affectliabilities. There were no material changes to the effective incomeCompany’s uncertain tax rate.
CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)positions during the quarter.
NOTE 10. Discontinued Operations
The Greenbrier
In the second quarter of 2009, CSX sold the stock of a subsidiary that indirectly owned Greenbrier Hotel Corporation (“The Greenbrier”) to Justice Family Group, LLC for approximately $21 million in cash.LLC. CSX recognized a gain on the sale of $25 million which includes a tax benefit of $3 million. In addition, theThe Greenbrier incurred $2$10 million of losses from operations in the second quarter ofduring nine months 2009.
Previously, all amounts associated with the operations of The Greenbrier were included in other income – net. All prior periods have been reclassified to reflect discontinued operations. The Greenbrier had revenue of $26 million and $33 million and pre-tax income including(including the gain on sale,sale) of $17 million and $5 million during second quarter and six months 2009 through the date of sale, respectively. There was no activity in 2010.
NOTE 11. 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. In addition, disclosureDisclosure of the fair value of pension plan assets is only required annually.
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.
CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 11. Fair Value Measurements, continued
· | 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.) |
· | Level 3 – significant unobservable inputs (including the Company’s own assumptions in determining the fair value of investments) |
The valuation methods described below may produce a fair value calculation that is not 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.
CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 11. Fair Value Measurements, continued
Investments
The Company’s investment assets consist primarily of corporate bonds and are carried at fair value, as determined with the assistance of a third party trustee, on the consolidated balance sheet per the Fair Value Measurements and Disclosures Topic in the ASC. Level 2 inputs were used to determine fair value of the Company’s investment assets. The fair value and amortized cost of these bonds are as follows:
| | | |
(Dollars in Millions) | | | June 2010 | | December 2009 |
Fair Value | | $ | 91 | | $96 |
Amortized Cost | | $ | 87 | | $91 |
| | | | | |
(Dollars in millions) | | | September 2010 | | December 2009 |
| Fair Value | | | $125 | | $96 |
| Amortized Cost | | | $122 | | $91 |
These investments have the following maturities:
(Dollars in millions) | | | | September 2010 |
| Less than 1 year | | | | $22 |
| 1 - 2 years (a) | | | | 81 |
| 2 - 5 years | | | | 17 |
| Greater than 5 years | | | 5 |
| Total | | | | | $125 |
(a) This amount includes approximately $18 million of callable bonds which mature in 1 – 2 years, but are classified as short-term investments on the consolidated balance sheet.
CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 11. Fair Value Measurements, continued
Long-term Debt
Long-term debt is reported at carrying amount on the consolidated balance sheet and isencompasses the Company’s only financial instrument with fair values significantly different from its carrying amounts. The majority of the Company’s long-term debt is valued with the assistance of an independent third party. For those instruments not valued with the assistance of a third party, the fair value has been estimated using discounted cash flow analysis based upon the yields provided by the same independent third party. All inputs used to determine the fair value of the Company’s long-term debt qualify as 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, the value 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 carrying value of a company’s debt fluctuates with payments and/or new debt issuances. The fair value and carrying value of the Company’s long-term debt areis as follows:
| | | |
(Dollars in Millions) | | | June 2010 | | December 2009 |
Long-term Debt Including Current Maturities: | | | | |
Fair Value | | $ | 8,993 | | $8,780 |
Carrying Value | | $ | 7,934 | | $8,008 |
| | | | | | |
(Dollars in millions) | | | | September 2010 | | December 2009 |
Long-term Debt Including Current Maturities: | | | | |
| Fair Value | | | | $9,226 | | $8,780 |
| Carrying Value | | | | $7,902 | | $8,008 |
CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 12. Summarized Consolidating Financial Data
In 2007 and 2008, CSXT sold, in registered public offerings, secured equipment notes maturing in 2023 and 2014, respectively. 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 the parent guarantor, CSX, is as follows:
CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 12. Summarized Consolidating Financial Data, continued
Consolidating Income Statements | Consolidating Income Statements | | Consolidating Income Statements |
(Dollars in Millions) | | |
Quarter Ended June 2010 | | CSX Corporation | | | CSX Transportation | | | Other | | | Eliminations | | | Consolidated | | |
(Dollars in millions) | | (Dollars in millions) |
Quarter Ended September 2010 | | Quarter Ended September 2010 | CSX Corporation | CSX Transportation | Other | Eliminations | Consolidated |
Revenue | | $ | - | | | $ | 2,337 | | | $ | 352 | | | $ | (26 | ) | | $ | 2,663 | | Revenue | $- | $2,650 | $41 | $(25) | $2,666 |
Expense | | | (46 | ) | | | 1,672 | | | | 295 | | | | (26 | ) | | | 1,895 | | Expense | (46) | 1,841 | 71 | (25) | 1,841 |
Operating Income | | | 46 | | | | 665 | | | | 57 | | | | - | | | | 768 | | Operating Income | 46 | 809 | (30) | - | 825 |
| | | | | | | | | | | | | | | | | | | | | | | | |
Equity in Earnings of Subsidiaries | | | 492 | | | | - | | | | - | | | | (492 | ) | | | - | | Equity in Earnings of Subsidiaries | 492 | - | - | (492) | - |
Interest Expense | | | (122 | ) | | | (27 | ) | | | (6 | ) | | | 20 | | | | (135 | ) | Interest Expense | (119) | (22) | (6) | 16 | (131) |
Other Income - Net | | | 4 | | | | 20 | | | | 5 | | | | (20 | ) | | | 9 | | Other Income - Net | 3 | 17 | 4 | (16) | 8 |
| | | | | | | | | | | | | | | | | | | | | | | | |
Earnings From Continuing Operations | | | | | | | | | | | | | | | | | | | | | Earnings From Continuing Operations | | | |
Before Income Taxes | | | 420 | | | | 658 | | | | 56 | | | | (492 | ) | | | 642 | | |
| | Before Income Taxes | 422 | 804 | (32) | (492) | 702 |
Income Tax Benefit (Expense) | | | (6 | ) | | | (236 | ) | | | 14 | | | | - | | | | (228 | ) | Income Tax Benefit (Expense) | (9) | (327) | 48 | - | (288) |
Earnings From Continuing Operations | | | 414 | | | | 422 | | | | 70 | | | | (492 | ) | | | 414 | | Earnings From Continuing Operations | 413 | 477 | 16 | (492) | 414 |
Discontinued Operations | | | - | | | | - | | | | - | | | | - | | | | - | | Discontinued Operations | - | - | - |
Net Earnings | | $ | 414 | | | $ | 422 | | | $ | 70 | | | $ | (492 | ) | | $ | 414 | | Net Earnings | $413 | $477 | $16 | $(492) | $414 |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Quarter Ended June 2009 (Adjusted)* | | CSX Corporation | | | CSX Transportation | | | Other | | | Eliminations | | | Consolidated | | |
Quarter Ended September 2009 (Adjusted) (a) | | Quarter Ended September 2009 (Adjusted) (a) | CSX Corporation | CSX Transportation | Other | Eliminations | Consolidated |
Revenue | | $ | - | | | $ | 1,879 | | | $ | 332 | | | $ | (26 | ) | | $ | 2,185 | | Revenue | $- | $1,971 | $344 | $(26) | $2,289 |
Expense | | | (63 | ) | | | 1,400 | | | | 294 | | | | (23 | ) | | | 1,608 | | Expense | (69) | 1,496 | 291 | (23) | 1,695 |
Operating Income | | | 63 | | | | 479 | | | | 38 | | | | (3 | ) | | | 577 | | Operating Income | 69 | 475 | 53 | (3) | 594 |
| | | | | | | | | | | | | | | | | | | | | | | | |
Equity in Earnings of Subsidiaries | | | 305 | | | | - | | | | - | | | | (305 | ) | | | - | | Equity in Earnings of Subsidiaries | 340 | - | - | (340) | - |
Interest Expense | | | (125 | ) | | | (28 | ) | | | (3 | ) | | | 17 | | | | (139 | ) | Interest Expense | (126) | (29) | (2) | 17 | (140) |
Other Income - Net | | | (22 | ) | | | (3 | ) | | | 49 | | | | (14 | ) | | | 10 | | Other Income - Net | 24 | 10 | (14) | (14) | 6 |
| | | | | | | | | | | | | | | | | | | | | | | | |
Earnings From Continuing Operations | | | | | | | | | | | | | | | | | | | | | Earnings From Continuing Operations | | | |
Before Income Taxes | | | 221 | | | | 448 | | | | 84 | | | | (305 | ) | | | 448 | | |
| | Before Income Taxes | 307 | 456 | 37 | (340) | 460 |
Income Tax Benefit (Expense) | | | 52 | | | | (177 | ) | | | (41 | ) | | | - | | | | (166 | ) | Income Tax Benefit (Expense) | (17) | (168) | 15 | - | (170) |
Earnings From Continuing Operations | | | 273 | | | | 271 | | | | 43 | | | | (305 | ) | | | 282 | | Earnings From Continuing Operations | 290 | 288 | 52 | (340) | 290 |
Discontinued Operations | | | 32 | | | | - | | | | (9 | ) | | | - | | | | 23 | | Discontinued Operations | - | - | - |
Net Earnings | | $ | 305 | | | $ | 271 | | | $ | 34 | | | $ | (305 | ) | | $ | 305 | | Net Earnings | $290 | $288 | $52 | $(340) | $290 |
*
(a) Certain amounts have been adjusted for the retrospective change in accounting principle for rail grinding (See Note 1).
CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 12. Summarized Consolidating Financial Data, continued
Consolidating Income Statements | Consolidating Income Statements | | Consolidating Income Statements |
(Dollars in Millions) | | |
| | | | | | | | | | | | | | | | |
Six Months Ended June 2010 | | CSX Corporation | | | CSX Transportation | | | Other | | | Eliminations | | | Consolidated | | |
(Dollars in millions) | | (Dollars in millions) |
Nine Months Ended September 2010 | | Nine Months Ended September 2010 | CSX Corporation | CSX Transportation | Other | Eliminations | Consolidated |
Revenue | | $ | - | | | $ | 4,489 | | | $ | 717 | | | $ | (52 | ) | | $ | 5,154 | | Revenue | $- | $7,139 | $758 | $(77) | $7,820 |
Expense | | | (83 | ) | | | 3,279 | | | | 610 | | | | (52 | ) | | | 3,754 | | Expense | (129) | 5,120 | 681 | (77) | 5,595 |
Operating Income | | | 83 | | | | 1,210 | | | | 107 | | | | - | | | | 1,400 | | Operating Income | 129 | 2,019 | 77 | - | 2,225 |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Equity in Earnings of Subsidiaries | | | 889 | | | | - | | | | - | | | | (889 | ) | | | - | | Equity in Earnings of Subsidiaries | 1,381 | - | - | (1,381) | - |
Interest Expense | | | (248 | ) | | | (55 | ) | | | (12 | ) | | | 38 | | | | (277 | ) | Interest Expense | (367) | (77) | (18) | 54 | (408) |
Other Income - Net | | | 10 | | | | 38 | | | | 10 | | | | (38 | ) | | | 20 | | Other Income - Net | 13 | 55 | 14 | (54) | 28 |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Earnings From Continuing Operations | | | | | | | | | | | | | | | | | | | | | Earnings From Continuing Operations | | | | | |
Before Income Taxes | | | 734 | | | | 1,193 | | | | 105 | | | | (889 | ) | | | 1,143 | | |
| | Before Income Taxes | 1,156 | 1,997 | 73 | (1,381) | 1,845 |
Income Tax Benefit (Expense) | | | (15 | ) | | | (445 | ) | | | 36 | | | | - | | | | (424 | ) | Income Tax Benefit (Expense) | (23) | (772) | 83 | - | (712) |
Earnings From Continuing Operations | | | 719 | | | | 748 | | | | 141 | | | | (889 | ) | | | 719 | | Earnings From Continuing Operations | 1,133 | 1,225 | 156 | (1,381) | 1,133 |
Discontinued Operations | | | - | | | | - | | | | - | | | | - | | | | - | | Discontinued Operations | - | - | - | - | - |
Net Earnings | | $ | 719 | | | $ | 748 | | | $ | 141 | | | $ | (889 | ) | | $ | 719 | | Net Earnings | $1,133 | $1,225 | $156 | $(1,381) | $1,133 |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Six Months Ended June 2009 (Adjusted)* | | CSX Corporation | | | CSX Transportation | | | Other | | | Eliminations | | | Consolidated | | |
Nine Months Ended September 2009 (Adjusted) (a) | | Nine Months Ended September 2009 (Adjusted) (a) | CSX Corporation | CSX Transportation | Other | Eliminations | Consolidated |
Revenue | | $ | - | | | $ | 3,839 | | | $ | 645 | | | $ | (52 | ) | | $ | 4,432 | | Revenue | $- | $5,810 | $989 | $(78) | $6,721 |
Expense | | | (142 | ) | | | 2,965 | | | | 559 | | | | (47 | ) | | | 3,335 | | Expense | (211) | 4,461 | 850 | (70) | 5,030 |
Operating Income | | | 142 | | | | 874 | | | | 86 | | | | (5 | ) | | | 1,097 | | Operating Income | 211 | 1,349 | 139 | (8) | 1,691 |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Equity in Earnings of Subsidiaries | | | 559 | | | | - | | | | - | | | | (559 | ) | | | - | | Equity in Earnings of Subsidiaries | 899 | - | - | (899) | - |
Interest Expense | | | (249 | ) | | | (59 | ) | | | (4 | ) | | | 32 | | | | (280 | ) | Interest Expense | (375) | (88) | (6) | 49 | (420) |
Other Income - Net | | | 280 | | | | 3 | | | | (243 | ) | | | (27 | ) | | | 13 | | Other Income - Net | 304 | 13 | (257) | (41) | 19 |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Earnings From Continuing Operations | | | | | | | | | | | | | | | | | | | | | Earnings From Continuing Operations | | | | | |
Before Income Taxes | | | 732 | | | | 818 | | | | (161 | ) | | | (559 | ) | | | 830 | | |
| | Before Income Taxes | 1,039 | 1,274 | (124) | (899) | 1,290 |
Income Tax Benefit (Expense) | | | (214 | ) | | | (316 | ) | | | 235 | | | | - | | | | (295 | ) | Income Tax Benefit (Expense) | (231) | (484) | 250 | - | (465) |
Earnings From Continuing Operations | | | 518 | | | | 502 | | | | 74 | | | | (559 | ) | | | 535 | | Earnings From Continuing Operations | 808 | 790 | 126 | (899) | 825 |
Discontinued Operations | | | 32 | | | | - | | | | (17 | ) | | | - | | | | 15 | | Discontinued Operations | 32 | - | (17) | - | 15 |
Net Earnings | | $ | 550 | | | $ | 502 | | | $ | 57 | | | $ | (559 | ) | | $ | 550 | | Net Earnings | $840 | $790 | $109 | $(899) | $840 |
*(a) Certain amounts have been adjusted for the retrospective change in accounting principle for rail grinding (See Note 1).
CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Consolidating Balance Sheet | Consolidating Balance Sheet | | Consolidating Balance Sheet |
(Dollars in Millions) | | |
(Dollars in millions) | | (Dollars in millions) |
| | | | | | | | | | | | | | | | | | CSX | CSX | | | |
| | CSX | | | CSX | | | | | | | | | | | |
As of June 2010 | | Corporation | | | Transportation | | | Other | | | Eliminations | | | Consolidated | | |
As of September 2010 | | As of September 2010 | | Corporation | Transportation | Other | Eliminations | Consolidated |
| | | | | | | | | | | | | | | | | | | | | | |
ASSETS | ASSETS | | ASSETS |
Current Assets | | | | | | | | | | | | | | | | Current Assets | | | | | | |
Cash and Cash Equivalents | | $ | 435 | | | $ | 97 | | | $ | 101 | | | $ | - | | | $ | 633 | | |
Short-term Investments | | | - | | | | - | | | | 56 | | | | - | | | | 56 | | |
Accounts Receivable - Net | | | 4 | | | | 877 | | | | 607 | | | | (550 | ) | | | 938 | | |
Materials and Supplies | | | - | | | | 223 | | | | - | | | | - | | | | 223 | | |
Deferred Income Taxes | | | 15 | | | | 153 | | | | 17 | | | | - | | | | 185 | | |
Other Current Assets | | | 56 | | | | 64 | | | | 29 | | | | (41 | ) | | | 108 | | |
Total Current Assets | | | 510 | | | | 1,414 | | | | 810 | | | | (591 | ) | | | 2,143 | | |
| | Cash and Cash Equivalents | | $463 | $111 | $62 | $- | $636 |
| | Short-term Investments | | - | - | 40 | - | 40 |
| | Accounts Receivable - Net | | 4 | 952 | 677 | (632) | 1,001 |
| | Materials and Supplies | | - | 225 | - | - | 225 |
| | Deferred Income Taxes | | 15 | 184 | 7 | - | 206 |
| | Other Current Assets | | 110 | 54 | (41) | (26) | 97 |
| | Total Current Assets | | 592 | 1,526 | 745 | (658) | 2,205 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Properties | | | 8 | | | | 29,857 | | | | 1,326 | | | | - | | | | 31,191 | | Properties | | 8 | 30,136 | 1,313 | - | 31,457 |
Accumulated Depreciation | | | (8 | ) | | | (7,196 | ) | | | (814 | ) | | | - | | | | (8,018 | ) | Accumulated Depreciation | | (8) | (7,284) | (831) | - | (8,123) |
Properties - Net | | | - | | | | 22,661 | | | | 512 | | | | - | | | | 23,173 | | |
| | Properties - Net | | - | 22,852 | 482 | - | 23,334 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Investments in Conrail | | | - | | | | - | | | | 658 | | | | - | | | | 658 | | Investments in Conrail | | - | - | 660 | - | 660 |
Affiliates and Other Companies | | | - | | | | 581 | | | | (130 | ) | | | - | | | | 451 | | Affiliates and Other Companies | | - | 598 | (132) | - | 466 |
Investments in Consolidated Subsidiaries | | | 15,920 | | | | - | | | | 48 | | | | (15,968 | ) | | | - | | Investments in Consolidated Subsidiaries | 16,245 | - | 50 | (16,295) | - |
Other Long-term Assets | | | 181 | | | | 82 | | | | 100 | | | | (44 | ) | | | 319 | | Other Long-term Assets | | 176 | 104 | 127 | (43) | 364 |
Total Assets | | $ | 16,611 | | | $ | 24,738 | | | $ | 1,998 | | | $ | (16,603 | ) | | $ | 26,744 | | |
| | Total Assets | | $17,013 | $25,080 | $1,932 | $(16,996) | $27,029 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
LIABILITIES AND SHAREHOLDERS' EQUITY | LIABILITIES AND SHAREHOLDERS' EQUITY | | LIABILITIES AND SHAREHOLDERS' EQUITY |
Current Liabilities | | | | | | | | | | | | | | | | | | | | | Current Liabilities | | | | | | |
Accounts Payable | | $ | 117 | | | $ | 761 | | | $ | 44 | | | $ | - | | | $ | 922 | | |
Labor and Fringe Benefits Payable | | | 39 | | | | 314 | | | | 37 | | | | - | | | | 390 | | |
Payable to Affiliates | | | 1,027 | | | | 310 | | | | (787 | ) | | | (550 | ) | | | - | | |
Casualty, Environmental and Other Reserves | | | - | | | | 172 | | | | 18 | | | | - | | | | 190 | | |
Current Maturities of Long-term Debt | | | 507 | | | | 104 | | | | 3 | | | | - | | | | 614 | | |
Income and Other Taxes Payable | | | 86 | | | | 307 | | | | (268 | ) | | | - | | | | 125 | | |
Other Current Liabilities | | | 3 | | | | 100 | | | | 51 | | | | (41 | ) | | | 113 | | |
Total Current Liabilities | | | 1,779 | | | | 2,068 | | | | (902 | ) | | | (591 | ) | | | 2,354 | | |
| | Accounts Payable | | $118 | $840 | $23 | $- | $981 |
| | Labor and Fringe Benefits Payable | 39 | 395 | 39 | - | 473 |
| | Payable to (from) Affiliates | | 1,482 | (188) | (662) | (632) | - |
| | Casualty, Environmental and Other Reserves | - | 172 | 15 | - | 187 |
| | Current Maturities of Long-term Debt | 507 | 95 | 3 | - | 605 |
| | Income and Other Taxes Payable | (2) | 600 | (419) | - | 179 |
| | Other Current Liabilities | 4 | 112 | 25 | (26) | 115 |
| | Total Current Liabilities | | 2,148 | 2,026 | (976) | (658) | 2,540 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Casualty, Environmental and Other Reserves | | | - | | | | 442 | | | | 102 | | | | - | | | | 544 | | Casualty, Environmental and Other Reserves | - | 438 | 96 | - | 534 |
Long-term Debt | | | 6,049 | | | | 1,268 | | | | 3 | | | | - | | | | 7,320 | | Long-term Debt | | 6,049 | 1,245 | 3 | - | 7,297 |
Deferred Income Taxes | | | (302 | ) | | | 6,897 | | | | 55 | | | | - | | | | 6,650 | | Deferred Income Taxes | | (296) | 6,939 | 89 | - | 6,732 |
Long-term Payable to Affiliates | | | - | | | | - | | | | 44 | | | | (44 | ) | | | - | | Long-term Payable to Affiliates | | - | - | 44 | (44) | - |
Other Long-term Liabilities | | | 524 | | | | 513 | | | | 262 | | | | - | | | | 1,299 | | Other Long-term Liabilities | | 487 | 545 | 256 | - | 1,288 |
Total Liabilities | | | 8,050 | | | | 11,188 | | | | (436 | ) | | | (635 | ) | | | 18,167 | | |
| | Total Liabilities | | 8,388 | 11,193 | (488) | (702) | 18,391 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Shareholders' Equity | | | | | | | | | | | | | | | | | | | | | Shareholders' Equity | | | | | | |
Common Stock, $1 Par Value | | | 380 | | | | 181 | | | | - | | | | (181 | ) | | | 380 | | Common Stock, $1 Par Value | | 374 | 181 | - | (181) | 374 |
Other Capital | | | - | | | | 5,575 | | | | 1,968 | | | | (7,543 | ) | | | - | | Other Capital | | - | 5,627 | 2,312 | (7,939) | - |
Retained Earnings | | | 8,968 | | | | 7,844 | | | | 485 | | | | (8,329 | ) | | | 8,968 | | Retained Earnings | | 9,022 | 8,127 | 125 | (8,252) | 9,022 |
Accumulated Other Comprehensive Loss | | | (787 | ) | | | (74 | ) | | | (63 | ) | | | 137 | | | | (787 | ) | Accumulated Other Comprehensive Loss | (771) | (69) | (63) | 132 | (771) |
Noncontrolling Interest | | | - | | | | 24 | | | | 44 | | | | (52 | ) | | | 16 | | Noncontrolling Interest | | - | 21 | 46 | (54) | 13 |
Total Shareholders' Equity | | | 8,561 | | | | 13,550 | | | | 2,434 | | | | (15,968 | ) | | | 8,577 | | |
Total Liabilities and Shareholders' Equity | | $ | 16,611 | | | $ | 24,738 | | | $ | 1,998 | | | $ | (16,603 | ) | | $ | 26,744 | | |
| | Total Shareholders' Equity | | 8,625 | 13,887 | 2,420 | (16,294) | 8,638 |
| | Total Liabilities and Shareholders' Equity | $17,013 | $25,080 | $1,932 | $(16,996) | $27,029 |
CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 12. Summarized Consolidating Financial Data, continued
Consolidating Balance Sheet | Consolidating Balance Sheet | | Consolidating Balance Sheet |
(Dollars in Millions) | | |
(Dollars in millions) | | (Dollars in millions) |
| | | | CSX | CSX | | |
As of December 2009 (Adjusted) (a) | | As of December 2009 (Adjusted) (a) | | Corporation | Transportation | Other | Eliminations | Consolidated |
ASSETS | | ASSETS |
Current Assets | | Current Assets | | | | | |
| | | | | | | | | | | | | | | | Cash and Cash Equivalents | | $918 | $30 | $81 | $- | $1,029 |
| | CSX | | | CSX | | | | | | | | | | | Short-term Investments | | - | - | 61 | - | 61 |
As of December 2009 (Adjusted)* | | Corporation | | | Transportation | | | Other | | | Eliminations | | | Consolidated | | |
| | | Accounts Receivable - Net | | 4 | 888 | 103 | - | 995 |
ASSETS | | |
Current Assets | | | | | | | | | | | | | | | | |
Cash and Cash Equivalents | | $ | 918 | | | $ | 30 | | | $ | 81 | | | $ | - | | | $ | 1,029 | | |
Short-term Investments | | | - | | | | - | | | | 61 | | | | - | | | | 61 | | |
Accounts Receivable - Net | | | 4 | | | | 888 | | | | 103 | | | | - | | | | 995 | | |
Materials and Supplies | | | - | | | | 203 | | | | - | | | | - | | | | 203 | | |
Deferred Income Taxes | | | 13 | | | | 137 | | | | 8 | | | | - | | | | 158 | | |
Other Current Assets | | | 19 | | | | 32 | | | | 533 | | | | (460 | ) | | | 124 | | |
Total Current Assets | | | 954 | | | | 1,290 | | | | 786 | | | | (460 | ) | | | 2,570 | | |
| | Materials and Supplies | | - | 203 | - | - | 203 |
| | Deferred Income Taxes | | 13 | 137 | 8 | - | 158 |
| | Other Current Assets | | 19 | 32 | 533 | (460) | 124 |
| | Total Current Assets | | 954 | 1,290 | 786 | (460) | 2,570 |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Properties | | | 4 | | | | 29,565 | | | | 1,338 | | | | - | | | | 30,907 | | Properties | | 4 | 29,565 | 1,338 | - | 30,907 |
Accumulated Depreciation | | | (6 | ) | | | (7,011 | ) | | | (826 | ) | | | - | | | | (7,843 | ) | Accumulated Depreciation | | (6) | (7,011) | (826) | - | (7,843) |
Properties - Net | | | (2 | ) | | | 22,554 | | | | 512 | | | | - | | | | 23,064 | | |
| | Properties - Net | | (2) | 22,554 | 512 | - | 23,064 |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Investments in Conrail | | | - | | | | - | | | | 650 | | | | - | | | | 650 | | Investments in Conrail | | - | - | 650 | - | 650 |
Affiliates and Other Companies | | | - | | | | 566 | | | | (128 | ) | | | - | | | | 438 | | Affiliates and Other Companies | | - | 566 | (128) | - | 438 |
Investments in Consolidated Subsidiaries | | | 15,382 | | | | - | | | | 139 | | | | (15,521 | ) | | | - | | Investments in Consolidated Subsidiaries | 15,382 | - | 139 | (15,521) | - |
Other Long-term Assets | | | 46 | | | | 75 | | | | 87 | | | | (43 | ) | | | 165 | | Other Long-term Assets | | 46 | 75 | 87 | (43) | 165 |
Total Assets | | $ | 16,380 | | | $ | 24,485 | | | $ | 2,046 | | | $ | (16,024 | ) | | $ | 26,887 | | |
| | Total Assets | | $16,380 | $24,485 | $2,046 | $(16,024) | $26,887 |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
LIABILITIES AND SHAREHOLDERS' EQUITY | LIABILITIES AND SHAREHOLDERS' EQUITY | | LIABILITIES AND SHAREHOLDERS' EQUITY |
Current Liabilities | | | | | | | | | | | | | | | | | | | | | Current Liabilities | | | | | |
Accounts Payable | | $ | 111 | | | $ | 628 | | | $ | 228 | | | $ | - | | | $ | 967 | | |
Labor and Fringe Benefits Payable | | | 37 | | | | 307 | | | | 39 | | | | - | | | | 383 | | |
Payable to Affiliates | | | 625 | | | | 786 | | | | (962 | ) | | | (449 | ) | | | - | | |
Casualty, Environmental and Other Reserves | | | - | | | | 168 | | | | 22 | | | | - | | | | 190 | | |
Current Maturities of Long-term Debt | | | - | | | | 110 | | | | 3 | | | | - | | | | 113 | | |
Income and Other Taxes Payable | | | 32 | | | | 182 | | | | (102 | ) | | | - | | | | 112 | | |
Other Current Liabilities | | | 1 | | | | 97 | | | | 13 | | | | (11 | ) | | | 100 | | |
Total Current Liabilities | | | 806 | | | | 2,278 | | | | (759 | ) | | | (460 | ) | | | 1,865 | | |
| | Accounts Payable | | $111 | $628 | $228 | $- | $967 |
| | Labor and Fringe Benefits Payable | 37 | 307 | 39 | - | 383 |
| | Payable to (from) Affiliates | | 625 | 786 | (962) | (449) | - |
| | Casualty, Environmental and Other Reserves | - | 168 | 22 | - | 190 |
| | Current Maturities of Long-term Debt | - | 110 | 3 | - | 113 |
| | Income and Other Taxes Payable | 32 | 182 | (102) | - | 112 |
| | Other Current Liabilities | 1 | 97 | 13 | (11) | 100 |
| | Total Current Liabilities | | 806 | 2,278 | (759) | (460) | 1,865 |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Casualty, Environmental and Other Reserves | | | - | | | | 449 | | | | 98 | | | | - | | | | 547 | | Casualty, Environmental and Other Reserves | - | 449 | 98 | - | 547 |
Long-term Debt | | | 6,557 | | | | 1,334 | | | | 4 | | | | - | | | | 7,895 | | Long-term Debt | | 6,557 | 1,334 | 4 | - | 7,895 |
Deferred Income Taxes | | | (337 | ) | | | 6,814 | | | | 51 | | | | - | | | | 6,528 | | Deferred Income Taxes | | (337) | 6,814 | 51 | - | 6,528 |
Long-term Payable to Affiliates | | | - | | | | - | | | | 44 | | | | (44 | ) | | | - | | Long-term Payable to Affiliates | | - | - | 44 | (44) | - |
Other Long-term Liabilities | | | 600 | | | | 522 | | | | 162 | | | | - | | | | 1,284 | | Other Long-term Liabilities | | 600 | 522 | 162 | - | 1,284 |
Total Liabilities | | | 7,626 | | | | 11,397 | | | | (400 | ) | | | (504 | ) | | | 18,119 | | |
| | Total Liabilities | | 7,626 | 11,397 | (400) | (504) | 18,119 |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Shareholders' Equity | | | | | | | | | | | | | | | | | | | | | Shareholders' Equity | | | | | |
Common Stock, $1 Par Value | | | 393 | | | | 181 | | | | - | | | | (181 | ) | | | 393 | | Common Stock, $1 Par Value | | 393 | 181 | - | (181) | 393 |
Other Capital | | | 80 | | | | 5,569 | | | | 1,951 | | | | (7,520 | ) | | | 80 | | Other Capital | | 80 | 5,569 | 1,951 | (7,520) | 80 |
Retained Earnings | | | 9,090 | | | | 7,393 | | | | 507 | | | | (7,900 | ) | | | 9,090 | | Retained Earnings | | 9,090 | 7,393 | 507 | (7,900) | 9,090 |
Accumulated Other Comprehensive Loss | | | (809 | ) | | | (77 | ) | | | (54 | ) | | | 131 | | | | (809 | ) | Accumulated Other Comprehensive Loss | (809) | (77) | (54) | 131 | (809) |
Noncontrolling Interest | | | - | | | | 22 | | | | 42 | | | | (50 | ) | | | 14 | | Noncontrolling Interest | | - | 22 | 42 | (50) | 14 |
Total Shareholders' Equity | | | 8,754 | | | | 13,088 | | | | 2,446 | | | | (15,520 | ) | | | 8,768 | | |
Total Liabilities and Shareholders' Equity | | $ | 16,380 | | | $ | 24,485 | | | $ | 2,046 | | | $ | (16,024 | ) | | $ | 26,887 | | |
| | Total Shareholders' Equity | | 8,754 | 13,088 | 2,446 | (15,520) | 8,768 |
| | Total Liabilities and Shareholders' Equity | $16,380 | $24,485 | $2,046 | $(16,024) | $26,887 |
* (a)Certain amounts have been adjusted for the retrospective change in accounting principle for rail grinding (See Note 1).
CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 12. Summarized Consolidating Financial Data, continued
Consolidating Cash Flow Statements | Consolidating Cash Flow Statements | | Consolidating Cash Flow Statements |
(Dollars in Millions) | | |
(Dollars in millions) | | (Dollars in millions) |
| | | | | | | | | | | | | | | | | CSX | CSX | | |
| | CSX | | | CSX | | | | | | | | | | | |
Six Months Ended June 2010 | | Corporation | | | Transportation | | | Other | | | Eliminations | | | Consolidated | | |
Nine Months Ended September 2010 | | Nine Months Ended September 2010 | Corporation | Transportation | Other | Eliminations | Consolidated |
| | | | | | | | | | | | | | | | | | | | |
Operating Activities | | | | | | | | | | | | | | | | Operating Activities | | | | |
Net Cash Provided by Operating Activities | | $ | 283 | | | $ | 1,421 | | | $ | 13 | | | $ | (295 | ) | | $ | 1,422 | | |
| | Net Cash Provided by (Used in) Operating Activities | $242 | $2,450 | $17 | $(443) | $2,266 |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Investing Activities | | | | | | | | | | | | | | | | | | | | | Investing Activities | | | | |
Property Additions | | | - | | | | (648 | ) | | | (39 | ) | | | - | | | | (687 | ) | Property Additions | - | (1,026) | (66) | - | (1,092) |
Other Investing Activities | | | (4 | ) | | | (47 | ) | | | 12 | | | | 107 | | | | 68 | | Other Investing Activities | (17) | (86) | (57) | 201 | 41 |
Net Cash Provided by (Used in) Investing Activities | | | (4 | ) | | | (695 | ) | | | (27 | ) | | | 107 | | | | (619 | ) | |
| | Net Cash (Used in) Provided by Investing Activities | (17) | (1,112) | (123) | 201 | (1,051) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Financing Activities | | | | | | | | | | | | | | | | | | | | | Financing Activities | | | | |
Long-term Debt Repaid | | | - | | | | (69 | ) | | | (2 | ) | | | - | | | | (71 | ) | Long-term Debt Repaid | - | (101) | (2) | - | (103) |
Dividends Paid | | | (188 | ) | | | (295 | ) | | | 4 | | | | 295 | | | | (184 | ) | Dividends Paid | (281) | (443) | 6 | 443 | (275) |
Stock Options Exercised | | | 16 | | | | - | | | | - | | | | - | | | | 16 | | Stock Options Exercised | 21 | - | - | - | 21 |
Shares Repurchased | | | (823 | ) | | | - | | | | - | | | | - | | | | (823 | ) | Shares Repurchased | (1,123) | - | - | - | (1,123) |
Other Financing Activities | | | 233 | | | | (295 | ) | | | 32 | | | | (107 | ) | | | (137 | ) | Other Financing Activities | 703 | (713) | 83 | (201) | (128) |
Net Cash Used in Financing Activities | | | (762 | ) | | | (659 | ) | | | 34 | | | | 188 | | | | (1,199 | ) | |
| | Net Cash (Used in) Provided by Financing Activities | (680) | (1,257) | 87 | 242 | (1,608) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Net Increase (Decrease) in Cash and Cash Equivalents | | | (483 | ) | | | 67 | | | | 20 | | | | - | | | | (396 | ) | Net Increase (Decrease) in Cash and Cash Equivalents | (455) | 81 | (19) | - | (393) |
Cash and Cash Equivalents at Beginning of Period | | | 918 | | | | 30 | | | | 81 | | | | - | | | | 1,029 | | Cash and Cash Equivalents at Beginning of Period | 918 | 30 | 81 | | 1,029 |
Cash and Cash Equivalents at End of Period | | $ | 435 | | | $ | 97 | | | $ | 101 | | | $ | - | | | $ | 633 | | Cash and Cash Equivalents at End of Period | $463 | $111 | $62 | $- | $636 |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | CSX | | | CSX | | | | | | | | | | | | | | | CSX | CSX | | |
Six Months Ended June 2009 (Adjusted)* | | Corporation | | | Transportation | | | Other | | | Eliminations | | | Consolidated | | |
Nine Months Ended September 2009 (Adjusted) (a) | | Nine Months Ended September 2009 (Adjusted) (a) | Corporation | Transportation | Other | Eliminations | Consolidated |
Operating Activities | | | | | | | | | | | | | | | | | | | | | Operating Activities | | | | |
Net Cash Provided by (Used in) Operating Activities | | $ | 53 | | | $ | 1,016 | | | $ | 148 | | | $ | (246 | ) | | $ | 971 | | |
| | Net Cash Provided by (Used in) Operating Activities | $(75) | $1,706 | $323 | $(365) | $1,589 |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Investing Activities | | | | | | | | | | | | | | | | | | | | | Investing Activities | | | | |
Property Additions | | | - | | | | (634 | ) | | | (23 | ) | | | - | | | | (657 | ) | Property Additions | - | (986) | (45) | - | (1,031) |
Other Investing Activities | | | (87 | ) | | | 27 | | | | 23 | | | | 86 | | | | 49 | | Other Investing Activities | (91) | 5 | 48 | 89 | 51 |
Net Cash Provided by (Used in) Investing Activities | | | (87 | ) | | | (607 | ) | | | - | | | | 86 | | | | (608 | ) | |
| | Net Cash (Used in) Provided by Investing Activities | (91) | (981) | 3 | 89 | (980) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Financing Activities | | | | | | | | | | | | | | | | | | | | | Financing Activities | | | | |
Long-term Debt Issued | | | 500 | | | | - | | | | - | | | | - | | | | 500 | | Long-term Debt Issued | 500 | - | - | - | 500 |
Long-term Debt Repaid | | | - | | | | (81 | ) | | | (2 | ) | | | - | | | | (83 | ) | Long-term Debt Repaid | - | (108) | (2) | - | (110) |
Dividends Paid | | | (176 | ) | | | (238 | ) | | | (8 | ) | | | 246 | | | | (176 | ) | Dividends Paid | (264) | (356) | (4) | 365 | (259) |
Stock Options Exercised | | | 12 | | | | - | | | | - | | | | - | | | | 12 | | Stock Options Exercised | 19 | - | - | - | 19 |
Other Financing Activities | | | 107 | | | | (69 | ) | | | (129 | ) | | | (86 | ) | | | (177 | ) | Other Financing Activities | 449 | (242) | (306) | (89) | (188) |
Net Cash Provided by (Used in) Financing Activities | | | 443 | | | | (388 | ) | | | (139 | ) | | | 160 | | | | 76 | | |
| | Net Cash Provided by (Used in) Financing Activities | 704 | (706) | (312) | 276 | (38) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Net Increase (Decrease) in Cash and Cash Equivalents | | | 409 | | | | 21 | | | | 9 | | | | - | | | | 439 | | Net Increase (Decrease) in Cash and Cash Equivalents | 538 | 19 | 14 | - | 571 |
Cash and Cash Equivalents at Beginning of Period | | | 559 | | | | 63 | | | | 47 | | | | - | | | | 669 | | Cash and Cash Equivalents at Beginning of Period | 559 | 63 | 47 | | 669 |
Cash and Cash Equivalents at End of Period | | $ | 968 | | | $ | 84 | | | $ | 56 | | | $ | - | | | $ | 1,108 | | Cash and Cash Equivalents at End of Period | $1,097 | $82 | $61 | $- | $1,240 |
*
(a) Certain amounts have been adjusted for the retrospective change in accounting principle for rail grinding (See Note 1).
CSX CORPORATION
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CSXThe Company and the rail industry provide customers with access to an expansive and interconnected transportation network that plays a key role in North American commerce. CSX’sThe Company’s network is positioned to reach more than two-thirds of Americans, who account for about three-quarters of the nation’s consumption of goods. Through this network, the Company transports a broad portfolio of products, ranging from coal and new energy sources, like biodiesel and ethanol, to automobiles, chemicals, military equipment and consumer products.
InCSX remains highly committed to delivering value to shareholders through a balanced approach that includes investments in infrastructure, dividend improvement and share repurchases. On September 29, 2010, CSX announced an 8 percent increase to its quarterly cash dividend to 26 cents per share. This is the eighth dividend increase which represents a 35 percent compounded annual growth rate over a five-year period. Additionally, CSX expects to deliver strong double-digit earnings per share growth. This expectation is supported by strong volume and revenue growth, including export coal shipments of about 30repurchase an additional $645 million tons this year, and strong operating ratio improvement as well. Our expectations are based on continued, gradual economic growth and can be impactedin shares by the strength and sustainabilityend of the economic recovery.
Additionally,first quarter 2011, representing the remainder of its existing $3 billion share repurchase program. The Company also continues to invest in its network to further enhance safety and improve service and reliability for its customers. The Company plansis now planning to spend appro ximately $1.8 billion in 2010 for total capital expenditures. This increase, from the $1.7 billion the Company had previously disclosed for total capital expenditures in 2010.this year, supports various strategic investments. To continue these types of investments, adequately, the Company must be able to operate in an environment in which it can generate adequate returns and drive shareholder value. CSX will continue to advocate for a fair and balanced regulatory environment to ensure that the value of the Company’s rail service will be reflected in new legislation and policy.
As an example of the Company’s commitment to investing in its network and improving the flow of freight, the Company launched the National Gateway, a multi-year public-private infrastructure initiative which will significantly improve the efficiency of the freight network between the Mid-Atlantic ports and the Midwest. Total project costs are approximately $850 million, of which CSXthe Company expects to contribute approximately $400 million. A portion of the public funds needed to complete the National Gateway has been secured and CSX is working with its state partners to apply for the additional funding needed to complete the project.needed. When completed, the National Gateway is expected to reduce truck traffic and increase intermodal capacity on key corridors without increasing the number of trains. As a result, the Company’s customers will benefit fromfr om improved service and reliability, reduced transport times and expanded access to rail services, and substantial public benefits will be realized as well.
In 2008, Congress enacted the Rail Safety Improvement Act. The legislation includes a mandate that all Class I freight railroads implement Positive Train Control ("PTC"(“PTC”) by December 31, 2015. PTC must be installed on all lines with passenger or commuter operations as well as all main lines with over 5 million annual gross tons which transport toxic-by-inhalation hazardous materials. Significant capital costs are anticipated with the implementation of PTC as well as ongoing operating expenses. Currently, CSX estimates that the total multi-year cost of PTC implementation will be at least $1.2 billion for the Company.
CSX CORPORATION
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SECONDTHIRD QUARTER 2010 HIGHLIGHTS
· | Revenue increased $478$377 million or 22%16% to $2.7 billion driven by increases in volume and core pricing gains. |
· | Expenses increased $287$146 million or 18%9% to $1.9$1.8 billion driven primarily by labor-related costs and higher fuel prices and a lower year over year favorable adjustment in casualty reserves.prices. |
· | Operating income increased $191$231 million or 33%39% to $768$825 million and operating ratio improved to 71.2%69.1%, an all time record.both being all-time records. |
| | Second Quarters | | | Six Months | | Third Quarters | | Nine Months |
(thousands) | | 2010 | | | 2009 | | | 2010 | | | 2009 | | |
Carloads | | | 1,598 | | | | 1,411 | | | | 3,084 | | | | 2,830 | | |
(millions) | | | | | | | | | | | | | | | | | |
(in thousands) | | 2010 | 2009 | | 2010 | 2009 |
Volume | | 1,609 | 1,465 | | 4,693 | 4,295 |
| | | | | | |
(in millions) | | | | | | |
Revenue | | $ | 2,663 | | | $ | 2,185 | | | $ | 5,154 | | | $ | 4,432 | | $2,666 | $2,289 | | $7,820 | $6,721 |
Expense | | | 1,895 | | | | 1,608 | | | | 3,754 | | | | 3,335 | | 1,841 | 1,695 | | 5,595 | 5,030 |
Operating Income | | $ | 768 | | | $ | 577 | | | $ | 1,400 | | | $ | 1,097 | | $825 | $594 | | $2,225 | $1,691 |
CSX secondthird quarter results reflect continued strong year-over-year volume and revenue growth as compareda result of the improving marketplace and in comparison to the level of economic activity last year. Revenue increased 22%16% from the prior year, to nearly $2.7 billion, with gains across mostall of the Company’s markets.markets with particular growth in coal and auto. These gains were driven by a 13%10% increase in volume, pricing gains, and higher fuel recovery associated with the increase in fuel prices.
While revenue increased 22%16%, expenses increased by $287$146 million, or 18%only 9%, versus the prior year. This increase was driven by a rise in fuel costs due to higher fuel prices a lower year-over-year favorable adjustment in casualty reserves, an operating property transaction loss and higher labor-related costs.
Beginning in the second quarter of 2010, the Company is no longer reflecting the intermodal business as a separate segment. This change is a result of the strategic business review and change in CSX’s intermodal service associated with the start of the UMAX program as well as certain management realignments. The UMAX program, which began this quarter, is a domestic interline container program. CSX’s chairman now views intermodal similarly to merchandise and coal. Also, Inland Transportation expense has been reclassified to Materials, Supplies and Other. Intermodal revenue will continue to be viewed as a separate revenue group; however, a separate income statement and operating ratio will no longer be provided and business segment disclosures are no longer required. All prior periods have been revised to reflect this change.
For additional information, refer to Results of Operations discussed on pages 3634 through 38.
37.
CSX CORPORATION
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In addition to the financial highlights described above, the Company measures and reports safety and service performance. The Company strives for continuous improvement in these measures through training, initiatives and investment. For example, the Company’s safety and train accident prevention programs rely on broad employee involvement. The programs utilize operating rules training, compliance measurement, root cause analysis and communication to create a safer environment for employees and the public. Continued capital investment in CompanyCompany’s assets, including track, bridges, signals, equipment and detection technology also supports safety performance.
During secondthird quarter 2010, the Company continued to advance its efforts on safety and operating performance. CSXT delivered the fifthsixth consecutive quarterly year-over-year improvement in Federal Railroad Administration (“FRA”) reportable personal injuries in secondthird quarter 2010. The FRA reportable personal injuries frequency index improved to 1.13, a 14%1.06, an 8% improvement over 2009. ReportedThe reported FRA train accident frequency rate increased 7%decreased 13% to 2.78, but remained at relatively low historical levels.
2.25.
Key service metrics in secondthird quarter improved from first quarter levels, but were mixed compared todeclined slightly versus 2009. On-time train originations and arrivals both declined to 78%77% and 71%69%, respectively. Dwell time improvedincreased to 23.724.8 hours from 24.124.0 hours in same quarter of 2009. Average train velocity declined 4%3% to 20.921.1 miles per hour. The Company strivesWhile these key measures declined, they remain within the ranges experienced over the last several years and continue to sustain key operating measuressupport efficient and service reliability at high levels, while increasing operational efficiency.reliable train operations.
Operating Statistics (Estimated)
| | | Third Quarters |
| | | 2010 | 2009 | Improvement/ (Decline) | % |
| | | | | |
Safety and | FRA Personal Injury Frequency Index | 1.06 | 1.15 | 8 | % |
Service | | | | | | |
Measurements | FRA Train Accident Rate | 2.25 | 2.59 | 13 | % |
| | | | | | |
| On-Time Train Originations | 77% | 82% | (6) | % |
| On-Time Destination Arrivals | 69% | 79% | (13) | % |
| | | | | | |
| Dwell | 24.8 | 24.0 | (3) | % |
| Cars-On-Line | 210,117 | 214,987 | 2 | % |
| | | | | | |
| Train Velocity | 21.1 | 21.8 | (3) | % |
| | | | | | |
| | | | | (Decrease) |
Resources | Route Miles | 21,091 | 21,190 | - | % |
| Locomotives (owned and long-term leased) | 4,068 | 4,092 | (1) | % |
| Freight Cars (owned and long-term leased) | 80,919 | 85,223 | (5) | % |
CSX CORPORATION
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Operating Statistics (Estimated)
| | | Second Quarters |
| | | 2010 | 2009 | Improvement/ (Decline) | % |
| | | | | |
Safety and | FRA Personal Injury Frequency Index | 1.13 | 1.32 | 14 | % |
Service | | | | | | |
Measurements | FRA Train Accident Rate | 2.78 | 2.59 | (7) | % |
| | | | | | |
| On-Time Train Originations | 78% | 83% | (6) | % |
| On-Time Destination Arrivals | 71% | 81% | (12) | % |
| | | | | | |
| Dwell | 23.7 | 24.1 | 2 | % |
| Cars-On-Line | 210,106 | 218,313 | 4 | % |
| | | | | | |
| Train Velocity | 20.9 | 21.7 | (4) | % |
| | | | | | |
| | | | | (Decrease) |
Resources | Route Miles | 21,123 | 21,190 | - | % |
| Locomotives (owned and long-term leased) | 4,067 | 4,108 | (1) | % |
| Freight Cars (owned and long-term leased) | 80,471 | 86,300 | (7) | % |
Key Performance Measures Definitions
FRA Personal Injury Frequency Index – Number of FRA-reportable injuries per 200,000 man-hours.
FRA Train Accident Rate – Number of FRA-reportable train accidents per million train-miles.
On-Time Train Originations – Percent of scheduled road trains that depart the origin yard on-time or ahead of schedule.
On-Time Destination Arrivals – Percent of scheduled road trains that arrive at the destination yard on-time to two hours late (30 minutes for intermodal trains).
Dwell – Average amount of time in hours between car arrival at and departure from the yard. It does not include cars moving through the yard on the same train.
Cars-On-Line – An average count of all cars on the network (does not include locomotives, cabooses, trailers, containers or maintenance equipment).
Train Velocity – Average train speed between terminals in miles per hour (does not include locals, yard jobs, work trains or passenger trains).
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) |
Third Quarters |
| | | | | | | | | | | | | | | |
| Volume | | Revenue | | Revenue Per Unit | |
| 2010 | 2009 | % Change | | 2010 | 2009 | % Change | | 2010 | 2009 | % Change | |
Chemicals | 116 | 110 | 5 | % | | $379 | $332 | 14 | % | $3,267 | $3,018 | 8 | % | |
Phosphates and Fertilizers | 78 | 77 | 1 | | | 107 | 94 | 14 | | | 1,372 | 1,221 | 12 | | |
Automotive | 82 | 57 | 44 | | | 196 | 127 | 54 | | | 2,390 | 2,228 | 7 | | |
Emerging Markets | 113 | 109 | 4 | | | 163 | 159 | 3 | | | 1,442 | 1,459 | (1) | | |
Agricultural Products | 104 | 101 | 3 | | | 246 | 223 | 10 | | | 2,365 | 2,208 | 7 | | |
Forest Products | 67 | 67 | - | | | 150 | 140 | 7 | | | 2,239 | 2,090 | 7 | | |
Metals | 57 | 55 | 4 | | | 125 | 111 | 13 | | | 2,193 | 2,018 | 9 | | |
Food and Consumer | 26 | 26 | - | | | 62 | 57 | 9 | | | 2,385 | 2,192 | 9 | | |
| | | | | | | | | | | | | | | |
Total Merchandise | 643 | 602 | 7 | | | 1,428 | 1,243 | 15 | | | 2,221 | 2,065 | 8 | | |
| | | | | | | | | | | | | | | |
Coal | 392 | 382 | 3 | | | 835 | 680 | 23 | | | 2,130 | 1,780 | 20 | | |
| | | | | | | | | | | | | | | |
Intermodal (a) | 574 | 481 | 19 | | | 318 | 299 | 6 | | | 554 | 622 | (11) | | |
| | | | | | | | | | | | - | | | |
Other | - | - | - | | | 85 | 67 | 27 | | | - | - | - | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Total | 1,609 | 1,465 | 10 | % | | $2,666 | $2,289 | 16 | % | | $1,657 | $1,562 | 6 | % | |
Volume and Revenue (Unaudited) | |
Volume (Thousands of units); Revenue (Dollars in millions); Revenue Per Unit (Dollars) | |
Second Quarters | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Volume | | | Revenue | | | | Revenue Per Unit | |
| | 2010 | | | 2009 | | | % Change | | | 2010 | | | 2009 | | | % Change | | | | 2010 | | | 2009 | | % Change | |
Chemicals | | | 116 | | | | 105 | | | | 10 | % | | $ | 372 | | | $ | 308 | | | | 21 | % | | | $ | 3,207 | | | $ | 2,933 | | | 9 | % |
Phosphates and Fertilizers | | | 80 | | | | 74 | | | | 8 | | | | 109 | | | | 94 | | | | 16 | | | | | 1,363 | | | | 1,270 | | | 7 | |
Automotive | | | 88 | | | | 54 | | | | 63 | | | | 204 | | | | 113 | | | | 81 | | | | | 2,318 | | | | 2,093 | | | 11 | |
Emerging Markets | | | 113 | | | | 106 | | | | 7 | | | | 167 | | | | 147 | | | | 14 | | | | | 1,478 | | | | 1,387 | | | 7 | |
Agricultural Products | | | 107 | | | | 106 | | | | 1 | | | | 255 | | | | 233 | | | | 9 | | | | | 2,383 | | | | 2,198 | | | 8 | |
Forest Products | | | 65 | | | | 64 | | | | 2 | | | | 150 | | | | 133 | | | | 13 | | | | | 2,308 | | | | 2,078 | | | 11 | |
Metals | | | 65 | | | | 45 | | | | 44 | | | | 140 | | | | 87 | | | | 61 | | | | | 2,154 | | | | 1,933 | | | 11 | |
Food and Consumer | | | 25 | | | | 25 | | | | - | | | | 59 | | | | 59 | | | | - | | | | | 2,360 | | | | 2,360 | | | - | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total Merchandise | | | 659 | | | | 579 | | | | 14 | | | | 1,456 | | | | 1,174 | | | | 24 | | | | | 2,209 | | | | 2,028 | | | 9 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Coal | | | 401 | | | | 375 | | | | 7 | | | | 835 | | | | 662 | | | | 26 | | | | | 2,082 | | | | 1,765 | | | 18 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Intermodal | | | 538 | | | | 457 | | | | 18 | | | | 304 | | | | 285 | | | | 7 | | | | | 565 | | | | 624 | | | (9 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | - | | | | |
Other | | | - | | | | - | | | | - | | | | 68 | | | | 64 | | | | 6 | | | | | - | | | | - | | | - | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total | | | 1,598 | | | | 1,411 | | | | 13 | % | | $ | 2,663 | | | $ | 2,185 | | | | 22 | % | | | $ | 1,666 | | | $ | 1,549 | | | 8 | % |
(a) The revenue-per-unit decline was primarily driven by the continued impact of terminating the prior interline agreement. See the explanation for intermodal variances for further information.
Note regarding reclassifications: | Automotive has moved to the Merchandise category. Coal and Intermodal have been stated as single totals, respectively (combined previously reported sub-categories) and Other revenue related to Rail and Intermodal has been combined into one Other line. All prior periods have been revised to reflect these changes. |
SecondThird Quarter 2010 Results of Operations
CSX secondthird quarter results reflect continued strong year-over-year volume and revenue growth as compareda result of the improving marketplace and in comparison to the level of economic activity last year. The greatest volume increases occurred in the automotive metals and intermodal markets. Ongoing emphasis on pricing above rail inflation and yield management, initiative andalong with higher fuel recovery associated with the increase in fuel prices drove revenue-per-unit increases in nearly all markets.
Volume and Revenue
Merchandise
Chemicals – Growth occurred across most chemical markets reflecting the overall improvement in demand for intermediate products used in the automotivemanufacturing automobiles and consumer goods markets.goods.
Phosphates and Fertilizers – This market's growthVolume was drivenrelatively flat as strength in domestic shipments, due to a strong planting season, was mostly offset by increaseda slight moderation in export and domestic phosphate shipments as well as domestic movements of potash to meet the demand from a robust planting season.volume.
Automotive – Strong volume growth was due to an increase in North American light vehicle production driven by higher sales and lower inventory levels.sales.
Emerging Markets – Shipments of aggregates (which include crushed stone, sand and gravel) increased from depressed levels last year due towere flat, however volume growth was primarily driven by new business for the Company.shipments of limestone and cement.
CSX CORPORATION
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Agricultural Products – Volume was relatively flat. Increasedgrew with increased shipments of feed, wheat and ethanol. Domestic shipments of feed and wheat increased due to reduced imports as a result of a worldwide shortage of wheat. Ethanol shipments grew as the amount of ethanol were mostly offset by weaker demand for feed ingredients, soybeans and other processed products. in fuel continued to increase.
Forest Products – GrowthVolume was flat due to continued weakness in building products increased from the depressed levels of 2009, due in part to tax incentives offered for new home purchases that ended during the quarter. Paper products continued to see long-term, gradual volume declines likely resulting from electronic media substitution.construction and paper-related markets.
Metals – GrowthVolume growth was driven by reboundingincreased shipments of sheet steel consumption consistent with the gradual economic recovery. Improved demand from automotivefor auto production and energy markets, combined with low inventories and reduced imports pushed domestic steel production higher.by increases in pipe shipments for energy-related uses.
Food and Consumer – Volume was flat as increased shipments of refrigerated products and canned goodsalcoholic beverages were offset by weakness in demand for appliances and alcoholic beverages.appliances.
Coal
Growth was driven by higher export shipments due to greater Asian demand for U.S. metallurgical coal, partially offset by lower shipments to utility customers as a result ofstockpiles continued high stockpileto moderate to more normal levels. The increase in revenue per unit was driven by improved yield and longer length of haul.
Intermodal
Revenue gains during the quarter were driven by volume growth. International volume increased due to new business, and higher imports as a result of U.S. inventory replenishments.replenishments, and early holiday shipping. Domestic volume continued to grow with truckload conversions and expanded transcontinental service offerings like the new UMAX program, which began this quarter.offerings. The revenue-per-unit decline was driven by the continued impact of switching from a purchased transportation arrangement toterminating the new UMAX domesticprior interline programagreement and was partly offset by increased fuel recovery and an improved pricing environment.
Other
Revenue gains were primarily driven by benefits for contract volume commitments not met as well as increases in intermodal container usage charges.
Expense
Expenses increased $146 million from last year’s third quarter. Significant variances are described below.
Labor and Fringe expense increased $78 million. This increase was primarily driven by inflation, higher incentive compensation, and hiring and other costs.
Materials, Supplies and Other expense increased $9 million due to several items:
· | Inland transportation expense reductions of $44 million were related to continued impact of terminating the prior intermodal interline agreement. |
· | Higher volume-related expenses were $24 million. |
CSX CORPORATION
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Expenses increased $287 million from last year’s second quarter. Significant variances are described below.
Labor and Fringe expense increased $67 million. This increase was primarily driven by inflation and higher incentive compensation costs and a 1% increase in headcount.
Materials, Supplies and Other expense increased $107 million due to several items:
· | As safety trends have continued to improve, benefitsPrior year expense reductions were taken in both years’ second quarters - $9$18 million in 2010 and $85 milliondid not recur in the prior yearcurrent quarter. This resulted in a year over year increase in expense of $76 million. |
· | An operating property transaction with the Commonwealth of Massachusetts closed in the quarter and resulted in a $30 million net book loss. |
· | Inland transportation expenseThese reductions of $43 millionwere primarily related to the new UMAX agreement.legal recoveries and lower bad debt expense due to improved collections. |
· | Various other costs increased as a result of higher volume and other items.that are not expected to repeat. |
As additional information on the property transaction noted above, during the second quarter of 2010, the Company closed an operating property transaction with the Commonwealth of Massachusetts. The Company received $50 million of cash related to this transaction and recorded a net book loss of $30 million pre-tax or $0.05 per share. This property is a former Conrail acquired property. This loss is reflected in materials, supplies and other.
Fuel expense increased $119$56 million primarily due to higher prices andas well as higher volume.
Depreciation expense increased $3$5 million due to a larger asset base related to higher capital spending, partially offset by lower depreciation rates resulting from the previous periodic review of asset useful lives.
Equipment and Other Rents expense decreased $9$2 million primarily due to current quarter’s cost savings associated with improved asset utilization and lower lease expense, partially offset by volume-related increases.
Consolidated Results of Operations
Interest expense decreased $4$9 million to $135$131 million primarily due to lower average debt balances.
CSX CORPORATION
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Other Income - Net
Other income decreased $1 million to $9 million driven primarily by lower average cash and investment balances and a lower average rate of return.
Income Tax Expense
Income tax expense increased $62$118 million to $228$288 million due to higher earnings. The increase in earnings was slightly offset byand a net favorable tax benefitcharge of $15$22 million or $0.06 per share primarily duerelated to the resolutionmerger of prior years’ income tax audit. the Company’s former Intermodal subsidiary with CSXT.
Net Earnings
Net earnings increased $109$124 million to $414 million and earnings per diluted share increased $0.30$0.35 to $1.07$1.08 primarily due to higher revenue partially offset by labor-related costs, higher fuel various other expenses, including laborexpense and fringe andincome taxes.
CSX CORPORATION
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Volume and Revenue (Unaudited) | Volume and Revenue (Unaudited) | | Volume and Revenue (Unaudited) | |
Volume (Thousands of units); Revenue (Dollars in millions); Revenue Per Unit (Dollars) | Volume (Thousands of units); Revenue (Dollars in millions); Revenue Per Unit (Dollars) | | Volume (Thousands of units); Revenue (Dollars in millions); Revenue Per Unit (Dollars) |
Six Months | | |
Nine Months | | Nine Months |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Volume | | | Revenue | | | Revenue Per Unit | | Volume | | Revenue | | Revenue Per Unit | |
| | 2010 | | | 2009 | | | % Change | | | 2010 | | | 2009 | | | % Change | | | 2010 | | | 2009 | | | % Change | | 2010 | 2009 | % Change | | 2010 | 2009 | % Change | | 2010 | 2009 | % Change | |
Chemicals | | | 228 | | | | 210 | | | | 9 | % | | $ | 723 | | | $ | 616 | | | | 17 | % | | $ | 3,171 | | | $ | 2,933 | | | | 8 | % | 344 | 320 | 8 | % | | $1,102 | $948 | 16 | % | $3,203 | $2,963 | 8 | % | |
Phosphates and Fertilizers | | | 159 | | | | 134 | | | | 19 | | | | 232 | | | | 181 | | | | 28 | | | | 1,459 | | | | 1,351 | | | | 8 | | 237 | 211 | 12 | | | 339 | 275 | 23 | | | 1,430 | 1,303 | 10 | | |
Automotive | | | 162 | | | | 99 | | | | 64 | | | | 374 | | | | 208 | | | | 80 | | | | 2,309 | | | | 2,101 | | | | 10 | | 244 | 156 | 56 | | | 570 | 335 | 70 | | | 2,336 | 2,147 | 9 | | |
Emerging Markets | | | 198 | | | | 197 | | | | 1 | | | | 297 | | | | 281 | | | | 6 | | | | 1,500 | | | | 1,426 | | | | 5 | | 311 | 306 | 2 | | | 460 | 440 | 5 | | | 1,479 | 1,438 | 3 | | |
Agricultural Products | | | 221 | | | | 215 | | | | 3 | | | | 522 | | | | 482 | | | | 8 | | | | 2,362 | | | | 2,242 | | | | 5 | | 325 | 316 | 3 | | | 768 | 705 | 9 | | | 2,363 | 2,231 | 6 | | |
Forest Products | | | 128 | | | | 129 | | | | (1 | ) | | | 290 | | | | 273 | | | | 6 | | | | 2,266 | | | | 2,116 | | | | 7 | | 195 | 196 | (1) | | | 440 | 413 | 7 | | | 2,256 | 2,107 | 7 | | |
Metals | | | 126 | | | | 93 | | | | 35 | | | | 268 | | | | 184 | | | | 46 | | | | 2,127 | | | | 1,978 | | | | 8 | | 183 | 148 | 24 | | | 393 | 295 | 33 | | | 2,148 | 1,993 | 8 | | |
Food and Consumer | | | 50 | | | | 50 | | | | - | | | | 118 | | | | 119 | | | | (1 | ) | | | 2,360 | | | | 2,380 | | | | (1 | ) | 76 | 76 | - | | | 180 | 176 | 2 | | | 2,368 | 2,316 | 2 | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total Merchandise | | | 1,272 | | | | 1,127 | | | | 13 | | | | 2,824 | | | | 2,344 | | | | 20 | | | | 2,220 | | | | 2,080 | | | | 7 | | 1,915 | 1,729 | 11 | | | 4,252 | 3,587 | 19 | | | 2,220 | 2,075 | 7 | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Coal | | | 774 | | | | 806 | | | | (4 | ) | | | 1,571 | | | | 1,406 | | | | 12 | | | | 2,030 | | | | 1,744 | | | | 16 | | 1,166 | 1,188 | (2) | | | 2,406 | 2,086 | 15 | | | 2,063 | 1,756 | 17 | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Intermodal | | | 1,038 | | | | 897 | | | | 16 | | | | 623 | | | | 552 | | | | 13 | | | | 600 | | | | 615 | | | | (2 | ) | |
Intermodal (a) | | 1,612 | 1,378 | 17 | | | 941 | 851 | 11 | | | 584 | 618 | (6) | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Other | | | - | | | | - | | | | - | | | | 136 | | | | 130 | | | | 5 | | | | - | | | | - | | | | - | | - | - | - | | | 221 | 197 | 12 | | | - | - | - | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total | | | 3,084 | | | | 2,830 | | | | 9 | % | | $ | 5,154 | | | $ | 4,432 | | | | 16 | % | | $ | 1,671 | | | $ | 1,566 | | | | 7 | % | 4,693 | 4,295 | 9 | % | | $7,820 | $6,721 | 16 | % | | $1,666 | $1,565 | 6 | % | |
(a) The revenue-per-unit decline was primarily driven by the continued impact of terminating the prior interline agreement. See the explanation for intermodal variances for further information.
Note regarding reclassifications: | Automotive has moved to the Merchandise category. Coal and Intermodal have been stated as single totals, respectively (combined previously reported sub-categories) and Other revenue related to Rail and Intermodal has been combined into one Other line. All prior periods have been revised to reflect these changes. |
SixNine Month Results of Operations
Consolidated Results of Operations
Revenue
Revenue increased $722 million to $5.2$1.1 billion as a result of volume increases associated with the gradual economic recovery, ongoing yield management initiatives and higher fuel recovery due to an increase in fuel prices.
Operating Income
Operating income increased $303$534 million to $1.4 billion primarily due to higher revenue partially offset by increased fuel, labor-related costs and labor related costs.various other expenses.
Interest Expense
Interest expense decreased $3$12 million to $277$408 million primarily due to lower average debt balances. This decrease was partially offset by expenses related to the first quarter 2010 debt exchange.
Other Income -– Net
Other income increased $7$9 million to $20$28 million driven by higher incomeprimarily due to non-operating expenses from real estate activities and other miscellaneous items.the prior year that did not repeat.
CSX CORPORATION
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Income Tax Expense
Income tax expense increased $129$247 million to $424$712 million primarily due to higher earnings in 2010. earnings.
Net Earnings
Net earnings increased $169$293 million to $719 million$1.1 billion and earnings per diluted share increased $0.45$0.80 to $1.84$2.92 primarily due to higher revenue partially offset by increased fuel, labor-related costs, various other expenses and labor related costs as well as increased tax expense.income taxes.
LIQUIDITY AND CAPITAL RESOURCES
The following are material changes in the consolidated balance sheets and sources of liquidity and capital, which provide an update to the discussion included in CSX's most recent Annual Report on Form 10-K.
Material Changes in Consolidated Balance Sheets and Significant Cash Flows
Consolidated Balance Sheets
Properties increased $550 million due to capital spending, as CSX continued to invest in its business. Other long-term assets increased $154 million primarily as a result of $141 million inof cash consideration paid in the exchange of debt securities (see Note 7, Debt and Credit Agreements). Stockholder’s equity was reduceddecreased as a result of $823 million$1.1 billion of share repurchases since December 2009.
Consolidated Cash Flow Statements
Cash provided by operating activities increased $451$677 million primarily due to higher pre-tax earnings and lower incentive compensation payouts in 2010.earnings. More cash was used for financing activities due to share repurhasesrepurchases of $823 million$1.1 billion during 2010. Additionally, the Company received $500 million from a debt issuance in 2009. There have been no debt issuances in 2010.
Liquidity and Working Capital
As of the end of the secondthird quarter, CSX had $633$636 million of cash and cash equivalents. CSX also has available a $1.25 billion credit facility with a diverse syndicate of banks that was not drawn on. CSX uses current cash balances for general corporate purposes, which may include capital expenditures, working capital requirements, improvements in productivity, dividend payments to shareholders and repurchases of CSX common stock.
CSX CORPORATION
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
On June 16, 2010, the Company renewed itsThe Company’s $250 million receivables securitization facility.facility has a 364-day term and expires in June 2011. The purpose of this facility is to provide an alternative to commercial paper and a low cost source of short-term liquidity. This facility has a 364-day term and expires on June 15, 2011. As of the date of this filing, the Company has not drawn on this facility. Under the terms of this facility, CSX Transportation and CSX Intermodal transferredtransfers eligible third-party receivables to CSX Trade Receivables, a bankruptcy-remote special purpose subsidiary. A separate subsidiary of CSX will service the receivables. Upon transfer, the receivables become assets of CSX Trade Receivables and are not available to the creditors of CSX or any of its other subsidiaries. In the event CSX Trade Receivables draws under this facility, the Company will record an equivalentequivalen t amount of debt on its consolidated financial statements.
Working capital can also be considered a measure of a company’s ability to meet its short-term needs. CSX had a working capital deficit of $211$335 million as of JuneSeptember 2010 and a working capital surplus of $705 million as of December 2009. The decline since December 2009 is primarily due to a $508 million reclassification from long-term debt to current maturities of long-term debt for amounts due within the next twelve months.
The Company’s working capital balance varies due to factors such as the timing of scheduled debt payments and changes in cash and cash equivalent balances as discussed above. The Company continues to maintain adequate current assets to satisfy current liabilities and maturing obligations when they come due. Furthermore, CSX has sufficient financial capacity, including its revolving credit facility, trade receivable facility and shelf registration statement to manage its day-to-day cash requirements and any anticipated obligations. The Company from time to time accesses the credit markets for additional liquidity.
CRITICAL ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires that management make estimates in reporting the amounts of certain assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and certain revenues and expenses during the reporting period. Actual results may differ from those estimates. These estimates and assumptions are discussed with the Audit Committee of the Board of Directors on a regular basis. Consistent with the prior year, significant estimates using management judgment are made for the following areas:
· casualty, environmental and legal reserves;
· pension and post-retirement medical plan accounting;
· depreciation policies for assets under the group-life method; and
· income taxes.
For further discussion of CSX’s critical accounting estimates, see the Company’s most recent Annual Report on Form 10-K.
CSX CORPORATION
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
Certain statements in this report and in other materials filed with the SEC, as well as information included in oral statements or other written statements made by the Company, are forward-looking statements. The Company intends for all such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and the provisions of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements within the meaning of the Private Securities Litigation Reform Act may contain, among others, statements regarding:
· | projections and estimates of earnings, revenues, volumes, rates, cost-savings, expenses, taxes or other financial items; |
· | expectations as to results of operations and operational initiatives; |
· | expectations as to the effect of claims, lawsuits, environmental costs, commitments, contingent liabilities, labor negotiations or agreements on the Company’s financial condition, results of operations or liquidity; |
· | management’s plans, strategies and objectives for future operations, capital expenditures, proposed new services and other similar expressions concerning matters that are not historical facts, and management’s expectations as to future performance and operations and the time by which objectives will be achieved; and |
· | future economic, industry or market conditions or performance and their effect on the Company’s financial condition, results of operations or liquidity. |
Forward-looking statements are typically identified by words or phrases such as “believe,” “expect,” “anticipate,” “project,” “estimate,” “preliminary” and similar expressions. The Company cautions against placing undue reliance on forward-looking statements, which reflect its good faith beliefs with respect to future events and are based on information currently available to it as of the date the forward-looking statement is made. Forward-looking statements should not be read as a guarantee of future performance or results and will not necessarily be accurate indications of the timing when, or by which, such performance or results will be achieved.
CSX CORPORATION
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-looking statements are subject to a number of risks and uncertainties and actual performance or results could differ materially from those anticipated by any forward-looking statements. The Company undertakes no obligation to update or revise any forward-looking statement. If the Company does update any forward-looking statement, no inference should be drawn that the Company will make additional updates with respect to that statement or any other forward-looking statements. The following important factors, in addition to those discussed in Part II, Item 1A (Risk Factors) of this quarterly report on Form 10-Q and elsewhere in this report, may cause actual results to differ materially from those contemplated by any forward-looking statements:
· | legislative, regulatory or legal developments involving transportation, including rail or intermodal transportation, the environment, hazardous materials, taxation, including the outcome of tax claims and litigation, the potential enactment of initiatives to further regulate the rail industry and the ultimate outcome of shipper and rate claims subject to adjudication; |
· | the outcome of litigation and claims, including, but not limited to, those related to fuel surcharge, environmental contamination, personal injuries and occupational illnesses; |
· | changes in domestic or international economic, political or business conditions, including those affecting the transportation industry (such as the impact of industry competition, conditions, performance and consolidation); |
· | worseningunanticipated conditions in the financial markets that may affect timely access to capital markets and the cost of capital, as well as the cost of capital;management’s decisions regarding share repurchases. |
· | availability of insurance coverage at commercially reasonable rates or insufficient insurance coverage to cover claims or damages; |
· | changes in fuel prices, surcharges for fuel and the availability of fuel; |
· | the impact of increased passenger activities in capacity-constrained areas, including potential effects of high speed rail initiatives, or regulatory changes affecting when CSXT can transport freight or service routes; |
· | natural events such as severe weather conditions, including floods, fire, hurricanes and earthquakes, a pandemic crisis affecting the health of the Company’s employees, its shippers or the consumers of goods, or other unforeseen disruptions of the Company’s operations, systems, property or equipment; |
· | the cost of compliance with laws and regulations that differ from expectations (including those associated with PTC implementation) and costs, penalties and operational impacts associated with noncompliance with applicable laws or regulations; |
CSX CORPORATION
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
· | the inherent business risks associated with safety and security, including the availability and cost of insurance, the availability and vulnerability of information technology, adverse economic or operational effects from actual or threatened war or terrorist activities and any governmental response; |
· | labor and benefit costs and labor difficulties, including stoppages affecting either the Company’s operations or the customers’ ability to deliver goods to the Company for shipment; |
· | competition from other modes of freight transportation, such as trucking and competition and consolidation within the transportation industry generally; |
· | the Company’s success in implementing its strategic, financial and operational initiatives; |
· | changes in operating conditions and costs or commodity concentrations; and |
· | the inherent uncertainty associated with projecting full year 2010 economic and business conditions. |
Other important assumptions and factors that could cause actual results to differ materially from those in the forward-looking statements are specified elsewhere in this report and in CSX’s other SEC reports, accessible on the SEC’s website at www.sec.gov and the Company’s website at www.csx.com. The information on the CSX website is not part of this quarterly report on Form 10-Q.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in market risk from the information provided under Part II, Item 7A (Quantitative and Qualitative Disclosures about Market Risk) of CSX’s most recent Annual Report on Form 10-K.
ITITEM EM 4. CONTROLS AND PROCEDURES
As of June 25,September 24, 2010, under the supervision and with the participation of CSX’s Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), management has evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on that evaluation, the CEO and CFO concluded that, as of June 25,September 24, 2010, the Company’s disclosure controls and procedures were effective at the reasonable assurance level in timely alerting them to material information required to be included in CSX’s periodic SEC reports. There were no changes in the Company’s internal controls over financial reporting during secondthird quarter 2010 that have materially affected, or are reasonably likelyl ikely to materially affect, the Company’s internal control over financial reporting.
PART II OTHER INFORMATION
For information relatingSurface Transportation Board Rate Case
In October 2008, Seminole Electric Cooperative, Inc. (“Seminole”) filed a complaint before the STB contesting CSXT’s tariff rates for movements of coal to Seminole’s power generating facility in Putnam County, Florida. Since CSXT and Seminole were unable to agree upon a new transportation contract, the prior transportation contract expired and CSXT’s tariff rates took effect on January 1, 2009. In September 2010, a settlement was reached and Seminole filed a motion to dismiss the case. The parties have entered into a mutually agreeable transportation contract. These events are not expected to have a material impact on the Company’s legal proceedings,financial condition, results of operations or liquidity.
Fuel Surcharge Antitrust Litigation
There were no material developments during the quarter concerning the fuel surcharge antitrust litigation. For further details, see Note 5,7, Commitments and Contingencies, under Part I, Item 1 (Financial Statements) of this Quarterlyin CSX’s most recent Annual Report on Form 10-Q incorporated herein10-K.
ITEM 1. LEGAL PROCEEDINGS, continued
Environmental Settlement
During the third quarter of 2010, CSXT entered into an agreement in principle with the District of Columbia Department of the Environment (“DDOE”) in settlement of claims pertaining to petroleum impacted groundwater allegedly migrating into the creek leading to the Anacostia River at CSXT’s Benning Yard facility. Although CSXT does not admit to the allegations, CSXT agreed to pay a civil penalty of $500,000. CSXT will also make a $7.5 million payment to a fund to help DDOE finance its cleanup efforts at other private sector and government sites on the Anacostia River. CSXT will be required to reimburse DDOE’s future oversight costs, conduct a site-wide investigation and natural resource damage assessment and clean up Benning Yard. These future costs cannot be estimated at this time. The settlement agreement will be embodied in a consent decree to be negotiated between CSXT and DDOE. The consent decree will be subject to public notice and comment and judicial approval.
Other Legal Proceedings
In addition to the matters referenced above, 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 environmental matters, FELA claims by reference.employees, other personal injury 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 predicted with certainty, considering, among other things, the legal defenses available and liabilities that have been recorded along with applicab le insurance, it is currently the opinion of CSX management that none of these items will 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 a particular quarter or fiscal year.
For information regarding factors that could affect the Company’s results of operations, financial condition and liquidity, see the risk factors discussed under Part II, Item 7 (Management's Discussion and Analysis of Financial Condition and Results of Operations) of CSX’s most recent Annual Report on Form 10-K. See also Part I, Item 2 (Forward-Looking Statements) of this Quarterly Report on Form 10-Q. There have been no material changes from the risk factors previously disclosed in CSX’s most recent Annual Report on Form 10-K.
ITEM 2. 2. CSX Purchases of Equity Securities
CSX is required to disclose any purchases of its common stock for the most recent quarter. The Company purchases shares of CSX common stock to further its goals under the Company’s share repurchase program. Additional shares are purchased to fund the Company’s obligations under a 401(k) plan that covers certain union employees.
During the secondthird quarter 2010, CSX completed $594approximately $300 million of total share repurchases, which includes $576 million of share repurchases under the Company’s share repurchase program. TheSince March 2008, CSX has completed approximately $2.35 billion in share repurchases. Based on market and business conditions, the Company expects to complete the remaining shares$645 million of repurchases under its existing $3 billion share repurchase program by the end of the first quarter of 2011.
| CSX Purchases of Equity Securities for the Quarter | |
Third Quarter | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs |
|
Beginning Balance | | $945,202,448 |
|
July |
(June 26, 2010 - July 23, 2010) | 1,175,900 | $51.02 | 1,175,900 | | 885,203,849 |
| | | | | | |
August |
(July 24, 2010 - August 20, 2010) | - | - | - | | 885,203,849 |
|
September |
(August 21, 2010 - September 24, 2010) | 4,538,300 | 52.88 | 4,538,300 | | 645,208,174 |
| | |
Ending Balance | 5,714,200 | $52.50 | 5,714,200 | | $645,208,174 |
Note: There were purchasedno share repurchases during third quarter 2010 to fund the Company’s contribution to a 401(k) plan that covers certain union employees. Since March 2008, CSX has completed $2 billion in share repurchases and has remaining share repurchase authority of approximately $945 million. Future share repurchases will be based on market and business conditions.
| | CSX Purchases of Equity Securities for the Quarter | | | |
| |
Second Quarter | | Total Number of Shares Purchased | | | Average Price Paid per Share | | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (a) | | | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs | |
| |
Beginning Balance | | | $ | 1,521,108,801 | |
| |
April | |
(March 27, 2010 - April 23, 2010) | | | 2,441,000 | | | $ | 54.57 | | | | 2,114,000 | | | | 1,405,752,106 | |
| | | | | | | | | | | | | | | | |
May | |
(April 24, 2010 - May 21, 2010) | | | 8,151,000 | | | | 56.48 | | | | 8,151,000 | | | | 945,407,748 | |
| |
June | |
(May 22, 2010 - June 25, 2010) | | | - | | | | - | | | | - | | | | 945,407,748 | |
| | | | | |
Ending Balance | | | 10,592,000 | | | $ | 56.04 | | | | 10,265,000 | | | $ | 945,407,748 | |
(a) | The difference of 327,000 shares between the “Total Number of Shares Purchased” and the “Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs” for the quarter represents shares purchased to fund the Company’s contribution to a 401(k) plan that covers certain union employees. |
ITEM 3. 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. (REMOVED AND RESERVED)
None
ITEM 6. EXHIBITS
Exhibits
18 Independent Registered Public Accounting Firm’s Preferability LetterITEM 6. EXHIBITS
Exhibits
31* Rule 13a-14(a) Certifications.
32* Section 1350 Certifications.
| 101* | The following financial information from CSX Corporation’s Quarterly Report on Form 10-Q for the quarter ended June 25,September 24, 2010 filed with the SEC on JulyOctober 15, 2010, formatted in XBRL includes: (i) Consolidated Income Statements for the fiscal periods ended June 25,September 24, 2010 and June 26,September 25, 2009, (ii) Consolidated Balance Sheets at June 25,September 24, 2010 and December 25, 2009, (iii) Consolidated Cash Flow Statements for the fiscal periods ended June 25,September 24, 2010 and June 26,September 25, 2009, and (iv) the Notes to Consolidated Financial Statements, tagged as blocks of text.Statements. |
* Filed herewith
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
CSX CORPORATION
(Registrant)
By: /s/ Carolyn T. Sizemore___
Carolyn T. Sizemore
Vice President and Controller
(Principal Accounting Officer)
Dated: JulyOctober 15, 2010