UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-K
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(X)
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For the
fiscal year ended December 28, 2007
OR
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( )
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the transition period from __________ to
__________
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Commission
File Number 1-8022
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CSX
CORPORATION
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(Exact name of registrant as
specified in its charter)
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Virginia
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62-1051971
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(State
or other jurisdiction of incorporation or organization)
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(I.R.S.
Employer Identification No.)
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500
Water Street, 15th Floor, Jacksonville, FL
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32202
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(904)
359-3200
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(Address
of principal executive offices)
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(Zip
Code)
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(Telephone
number, including area code)
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Securities
registered pursuant to Section 12(b) of the Act:
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Title
of each class
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Name
of exchange on which registered
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Common
Stock, $1 Par Value
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New
York Stock Exchange
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Securities
registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the
registrant is a well-known seasoned issuer (as defined in Rule 405 of the
Securities Act).
Yes (X)
No ( )
Indicate by check mark if the
registrant is not required to file reports pursuant to Section 13 or Section
15(d) of the Act.
Yes
( ) No (X)
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 if disclosure of
delinquent filers pursuant to Item 405 of Regulation S-K is not contained
herein, and will not be contained, to the best of the registrant’s knowledge, in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K. (
)
Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer or a
non-accelerated filer (as defined in Exchange Act Rule 12b-2).
Large
Accelerated Filer
(X) Accelerated
Filer
( ) Non-accelerated
Filer ( )
Indicate by check mark whether the
registrant is a shell company (as defined in Exchange Act Rule
12b-2).
Yes
( ) No (X)
On June 29, 2007 (which is the last day
of the second quarter and the required date to use), the aggregate market value
of the Registrant’s voting stock held by non-affiliates was approximately $19.7
billion (based on the New York Stock Exchange closing price on such
date).
There were 403,363,273 shares of Common
Stock outstanding on February 15, 2008 (the latest practicable date that is
closest to the filing date).
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of the Registrant’s Definitive
Proxy Statement (the “Proxy Statement”) to be filed not later than April 25,
2008 with respect to its 2008 annual meeting of shareholders.
1
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CSX CORPORATION
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FORM
10-K
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TABLE
OF CONTENTS
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Item No.
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Page
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PART
I
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1.
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3
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8
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12
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2.
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12
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3.
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17
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4.
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18
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PART
II
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5.
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21
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6.
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24
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7.
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26
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26
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27
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30
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33
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35
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48
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50
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51
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51
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7A.
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61
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8.
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64
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9.
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131
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9A.
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131
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9B.
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134
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PART
III
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10.
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135
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11.
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135
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12.
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135
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13.
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135
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14.
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135
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PART
IV
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15.
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136
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142
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Item 1. Business by Segment
CSX
Corporation (“CSX” and together with its subsidiaries, the “Company”), based in
Jacksonville, Florida, is one of the nation's leading transportation
companies. Surface Transportation, which includes the Company’s rail
and intermodal businesses, provides rail-based transportation services including
traditional rail service and the transport of intermodal containers and
trailers.
Rail
CSX’s
principal operating company, CSX Transportation, Inc. (“CSXT”), provides a
crucial link to the transportation supply chain through its approximately 21,000
route mile rail network, which serves every major population center in 23 states
east of the Mississippi River, the District of Columbia, and the Canadian
provinces of Ontario and Quebec. It serves 70 ocean, river and lake
ports along the Atlantic and Gulf Coasts, the Mississippi River, the Great Lakes
and the St. Lawrence Seaway. CSXT also serves thousands of production
and distribution facilities through track connections to more than 230
short-line and regional railroads.
Other
Entities
In
addition to CSXT, the rail segment includes Total Distribution Services, Inc.
(“TDSI”), Transflo Terminal Services, Inc. (“Transflo”), CSX Technology, Inc.
(“CSX Technology”) and other subsidiaries. TDSI serves the automotive
industry with distribution centers and storage locations, while Transflo
provides logistical solutions for transferring products from rail to
trucks. Technology and other support services are provided by CSX
Technology and other subsidiaries.
Intermodal
CSX
Intermodal, Inc. (“Intermodal”), one of the nation’s largest coast-to-coast
intermodal transportation providers, is a stand-alone,
integrated intermodal company linking customers to railroads via trucks and
terminals. Containers and trailers are loaded and unloaded from
trains, and trucks provide the link between intermodal terminals and the
customer.
Surface
Transportation Businesses
The rail
and intermodal segments are designated by the Company on a combined basis as
Surface Transportation businesses. Together, they generated $10
billion of revenue during 2007 and served four primary lines of
business:
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·
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The
merchandise business is the most diverse market with nearly 2.7 million
carloads per year of aggregates, which includes crushed stone, sand and
gravel, metal, phosphate, fertilizer, food, consumer, agricultural, paper
and chemical products. The merchandise business generated
approximately 50% of the Company’s revenue in 2007 and 38% of
volume.
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·
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Coal,
which delivered approximately 1.9 million carloads of coal, coke and iron
ore to electricity generating power plants, ocean, river and lake piers
and terminals, steel makers and industrial plants, accounted for
approximately 26% of the Company’s revenue and volume in 2007. The
Company transports almost one-third of every ton of coal used for
generating electricity in the areas served by
CSX.
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·
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Automotive,
which delivers both finished vehicles and auto parts, generated 8% of the
Company’s revenue and 6% of the Company’s volume in 2007. The
Company delivers approximately one-third of North America’s light
vehicles, serving both traditional manufacturers and the increasing number
of global manufacturers.
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·
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Intermodal
offers a competitive cost advantage over long-haul trucking by combining
the superior economics of rail transportation with the short-haul
flexibility of trucks. Through its network of more than 50
terminals, Intermodal serves all major markets east of the Mississippi
River and transports mainly manufactured consumer goods in containers,
providing customers with truck-like service for longer
shipments. For 2007, Intermodal accounted for approximately 14%
of the Company’s total revenue and 30% of
volume.
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Other revenue, which includes revenue
from regional railroads (that are partially owned by CSX), demurrage, switching
and other incidental charges, accounted for 2% of the Company’s total 2007
revenue. Revenue from regional railroads includes shipments by
railroads that CSX does not directly operate. Demurrage represents
charges assessed by railroads when shippers or receivers of freight hold
railcars beyond a specified period of time. Switching revenue is
generated when CSXT switches cars between trains for a customer or another
railroad.
Other
Businesses
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, and CSX Hotels, Inc., a resort doing business as The Greenbrier,
located in White Sulphur Springs, West Virginia. Pretax earnings of
$42 million, $24 million and $85 million for 2007, 2006 and 2005, respectively,
from these activities are classified as a component of other
income. These items are classified in other income because they are
not considered by the Company to be operating activities and may fluctuate with
the timing of real estate sales and resort seasonality.
The
Company also has certain residual activities from formerly owned companies that
include leasing of equipment and vessels. These results are included
in consolidated operating income and totaled $5 million, $12 million and $1
million in 2007, 2006 and 2005, respectively.
Financial
Information about Operating Segments
See Item
7. Management’s Discussion and Analysis of Financial Condition and Results of
Operations for operating revenue, operating income and total assets by segment
for each of the last three fiscal years.
Company
History
A leader
in freight rail transportation for 180 years, the Company’s roots date back to
the early nineteenth century when the Baltimore and Ohio Railroad (“B&O”) –
the nation’s first common carrier – was chartered in 1827. Since that time, CSX
has built on the foundation laid by early pioneers who had a vision to create a
railroad that safely and reliably services the ever-increasing demands of a
growing nation.
In those 180 years, numerous railroads
have combined with the former B&O through merger and consolidation to create
what has become CSX. Each of the railroads that combined into the CSX
family brought to CSX unique and valuable geographical reach to new markets,
gateways, cities, ports and transportation corridors.
CSX was
incorporated in 1978, under the laws of the Commonwealth of Virginia. In 1980,
the Company completed the merger of the Chessie System (“Chessie”) and Seaboard
Coast Line Industries (“Seaboard”) into CSX. The merger allowed CSX
to connect northern population centers and Appalachian coal fields to growing
southeastern markets. In 1986, the Chessie and Seaboard operating entities were
transferred to the rail entity CSXT, which was created through the
merger. Intermodal was originally formed in 1986 in order to provide
nationwide, door-to-door intermodal service.
In 1997,
CSXT and Norfolk Southern jointly acquired the rights to operate Conrail, Inc.
(“Conrail”) and then in 2004, CSXT acquired an allocated portion of Conrail’s
assets, which CSXT operated. Conrail was formed in 1976 from several
financially troubled northeast railroads to restructure and revive the region’s
railroads. CSX’s acquisition of key portions of Conrail allowed CSXT
to link the northeast, including New England and the New York metropolitan area,
with Chicago, Midwest markets and the growing areas in the southeast that were
already served by CSXT. This current rail network allows the Company
to directly serve every major market in the eastern United States with
dependable, environmentally friendly and fuel efficient freight transportation
and intermodal service.
Regulatory
Environment
The
Company's operations are subject to a variety of federal, state and local laws
and regulations, generally applicable to many businesses in the United
States. The railroad operations conducted by the Company's subsidiaries,
including CSXT, are subject in many respects to the regulatory jurisdiction of
the Surface Transportation Board (“STB”) and the Federal Railroad Administration
(“FRA”), which are both part of the Department of Transportation
(“DOT”). Additionally, the Transportation Security Administration
(“TSA”), a component of the Department of Homeland Security (“DHS”), has the
authority to issue regulations and other directives that may also affect
railroad operations. In some cases, state and local laws and regulations can be
preempted in their application to railroads by the operation of these and other
federal authorities.
Although
the Staggers Act of 1980 significantly deregulated rail rates and much of the
rail traffic of the Company's subsidiaries is currently exempt from rate
regulation by agency decision, the STB has broad jurisdiction over railroad
commercial practices. This includes jurisdiction over freight car
rent, the transfer, extension or abandonment of rail lines, rates charged on
certain regulated rail traffic and any acquisition of control over rail common
carriers. In 2007, for example, the STB issued decisions changing its
long-standing policy on fuel surcharges, its rules for large freight rate cases
and a new process for rate cases where smaller amounts are at
issue.
The FRA
and its sister agency within the DOT, the Pipeline and Hazardous Materials
Administration, have broad jurisdiction over railroad operating standards and
practices, including track, freight cars and locomotives, and hazardous
materials requirements. The TSA has broad authority over railroad
operating practices that may have homeland security implications. The
TSA has proposed regulations that would apply to the transportation of certain
kinds of highly hazardous materials. Decisions of these and other
agencies can affect the profitability of the Company’s business. For
further discussion on regulatory risks to the Company, see Item 1A. Risk Factors
beginning on page 8.
Competition
The business environment in which the
Company operates is highly competitive. Shippers typically select
transportation providers that offer the most compelling combination of service
and price. Service requirements, both in terms of transit time and
reliability, vary by shipper and commodity. As a result, the Company’s primary
competition varies by commodity, geographic location and mode of available
transportation.
CSX’s primary rail competitor is the
Norfolk Southern, which operates throughout much of CSX’s territory.
Other railroads also operate in parts of the territory. Depending on
the specific market, competing railroads and deregulated motor carriers may
exert pressure on price and service levels. For further discussion on
the risk of competition to the Company, see Item 1A. Risk Factors beginning on
page 8.
Other
Information
CSX makes available on its website
www.csx.com,
free of charge, its annual reports on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K and all amendments to those reports as soon as
reasonably practicable after such reports are filed with or furnished to the
Securities and Exchange Commission (“SEC”). Additionally, the Company has posted
its code of ethics on its website, which is also available to any shareholder
who requests it. This Form 10-K and other SEC filings are also
accessible through the SEC’s website at www.sec.gov.
CSX has included the certifications of
its Chief Executive Officer (“CEO”) and the Chief Financial Officer (“CFO”)
regarding the Company’s public disclosure required by Section 302 of the
Sarbanes-Oxley Act of 2002 (“the Act”) as Exhibits 31.1 and 31.2, as well as
Section 906 of the Act as Exhibits 32.1 and 32.2 to this Form 10-K report.
Additionally, on May 31, 2007, CSX filed its annual CEO certification with the
New York Stock Exchange (“NYSE”) confirming the Company’s compliance with the
NYSE Corporate Governance Listing Standards. The CEO was not aware of
any violations of these standards by the Company as of January 31, 2008 (the
latest practicable date that is closest to the filing of this Form
10-K).
The
Company’s annual average number of employees was approximately 35,000 in 2007,
which includes approximately 29,000 union employees. Most of the
Company’s employees provide or support transportation services. The
information set forth in Item 6. Selected Financial Data is incorporated herein
by reference.
For
additional information concerning business conducted by the Company during 2007,
see Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations and Item 8. Financial Statements and Supplementary Data -
Note 15, Business Segments.
Item 1A. Risk Factors
The
following risk factors could have a materially adverse effect on the Company’s
results of operations, financial condition and liquidity, and could cause those
results to differ materially from those expressed or implied in the Company’s
forward-looking statements. Although the risks described below are
those that management believes are the most significant, these are not the only
risks facing the Company. Additional risks and uncertainties not
currently known to the Company or that the Company currently does not deem to be
material also may materially impact the Company’s financial position, results of
operations and liquidity.
New
legislation or regulatory changes could impact the Company’s earnings or
regulate its ability to independently negotiate prices.
The
Company is subject to the jurisdiction of various regulatory agencies, including
the STB, the FRA and other state and federal regulatory agencies for a variety
of economic, health, safety, labor, environmental, tax, legal and other
matters. Legislation passed by Congress or regulations issued by
these agencies can significantly affect the revenues, costs and profitability of
the Company’s business. For example, regulations imposing price
constraints or affecting rail-to-rail competition could adversely affect the
Company’s profitability. Also, additional regulations related to
environmental matters such as greenhouse gas emissions or legislative changes
impacting hours of service requirements could adversely affect the Company’s
financial position, results of operations and liquidity.
CSXT,
as a common carrier by rail, is required by law to transport hazardous
materials, which could expose the Company to significant costs and
claims.
Under federal regulations, CSXT is
required to transport hazardous materials under its common carrier
obligation. A train accident involving the transport of hazardous
materials could result in significant claims arising from personal injury,
property damage, and environmental penalties and remediation. CSXT is
also required to comply with regulations regarding the handling of hazardous
materials. Failure to comply with these regulations can subject the
Company to significant penalties and could be a factor in litigation arising out
of a train accident. Finally, legislation preventing the transport of
hazardous materials through certain cities could result in network congestion
and increase the length of haul for hazardous substances.
The
Company is subject to environmental laws and regulations that may result in
significant costs.
The Company’s operations are subject to
wide-ranging federal, state and local environmental laws and regulations
concerning, among other things, emissions into the air, discharges into water,
the handling, storage, transportation and disposal of waste and other materials
and clean-up of hazardous material or petroleum releases. In certain
circumstances, environmental liability can extend to formerly owned or operated
properties, leased properties, adjacent properties and properties owned by third
parties or Company predecessors, as well as to properties currently owned and
used by the Company.
The
Company has been, and may be subject to, allegations or findings to the effect
that it has violated, or is strictly liable under, environmental laws or
regulations, and such violations can result in the Company’s incurring fines,
penalties or costs relating to the clean-up of environmental contamination. Although the Company
believes it has appropriately recorded current and long-term liabilities for
known future environmental costs, it could incur significant costs as a result
of any of the foregoing and may be required to incur significant expenses to
investigate and remediate known, unknown or future environmental
contamination.
General
economic, geo-political and compliance risks may affect the Company’s operations
and financial results.
Changes
in general economic conditions that affect demand for rail or intermodal
services could adversely affect the Company’s financial position, results of
operations and liquidity. In addition, abrupt political change or
terrorist activity poses a risk of general economic disruption and could require
changes in the operations and security arrangements, thus increasing the
operating costs. These conditions may lend additional uncertainty to
the timing and purchasing decisions by the Company’s customers.
Fuel
prices and supply are influenced by international political and economic
circumstances. Although a fuel recovery program is in place with a
considerable number of customers, the Company could be negatively impacted if it
were unable to realize fuel surcharges. Additionally, if a fuel
supply shortage were to arise, whether due to the Organization of the Petroleum
Exporting Countries (OPEC) or other production restrictions, lower refinery
outputs, a disruption of oil imports or otherwise, the Company would be
negatively impacted.
The FRA
regulates several of the Company’s core operations including track and
mechanical equipment standards, signaling systems, inspection of grade crossing
warning devices, locomotive engineer certifications and employee injury
reporting, among other areas. The Company’s unintentional failure to
comply with applicable laws or regulations could erode public confidence in
CSX. In addition, a change in these regulations could have a material
adverse effect on the Company’s financial position, results of operations and
liquidity.
Network
congestion, caused by unanticipated increases in freight or passenger activity,
could have a negative impact on service and operating efficiency.
The
Company may experience rail network difficulties related to network capacity,
unplanned increases in demand for rail service, increased passenger activities
in capacity-constrained areas or regulatory changes impacting when CSXT can
transport freight or its service routes that could have a negative effect on the
Company’s operational fluidity, leading to deterioration of service, asset
utilization and overall efficiency. In addition, the Company may face
external factors such as severe weather and other natural occurrences, including
floods, fires, hurricanes and earthquakes, which may disrupt the Company’s
operations.
Increases
in the number and magnitude of property damage and personal injury claims could
adversely affect the Company’s operating results.
The Company faces inherent business
risk from exposure to property damage, occupational injury claims, and personal
injury claims resulting from train accidents, worker injury claims under FELA
and claims from outside parties resulting from the Company’s operations.
Although the Company is working diligently to enhance its safety programs and to
continue to raise the awareness levels of its employees concerning safety, the
Company could experience material property damage, personal injury or
occupational claims in the future and it may incur significant costs to defend
such claims.
Existing claims may suffer adverse
developments not currently reflected in reserve estimates, as the ultimate
outcome of existing claims is subject to numerous factors outside of the
Company’s control. The Company establishes reserves to cover all of these types
of claims. However, final amounts determined to be due on any
outstanding matters may differ materially from the recorded
reserves.
The
Company may be subject to various claims and lawsuits that could result in
significant expenditures.
The Company is subject to various
existing lawsuits and potential unknown litigation. The Company may
experience material judgments or incur significant costs to defend any such
lawsuits. Additionally, existing litigation may suffer adverse
development not currently reflected in the Company’s reserve estimates as the
ultimate outcome of existing litigation is subject to numerous factors outside
of the Company’s control. While the Company uses its best efforts to
evaluate existing litigation, the final judgments may differ materially from the
recorded reserves.
Future
acts of terrorism, war or regulatory changes to combat the risk of terrorism may
cause significant disruptions in the Company’s operations.
Terrorist attacks, such as those that occurred in the United States in September
2001, in Spain in March 2004, in England in July 2005, and in India in July
2006, along with any government response to those attacks, may adversely affect
the Company’s financial position, results of operations and
liquidity. CSXT’s rail lines or other key infrastructure may be
direct targets or indirect casualties of acts of terror or war. This
could cause significant business interruption and result in increased costs and
liabilities and decreased revenues. In addition, insurance premiums
charged for some or all of the coverage currently maintained by the Company
could increase dramatically or the coverage may no longer be
available.
Furthermore,
in response to the heightened risk of terrorism, federal, state and local
governmental bodies are proposing and beginning to adopt various legislation and
regulations relating to security issues that impact the transportation
industry. For example, the DHS proposed regulations that would
require freight railroads to implement additional security protocols when
transporting hazardous materials.
Failure
to complete negotiations on collective bargaining agreements could result in
strikes and/or work stoppages.
Most of CSXT's employees are
represented by labor unions and are covered by collective bargaining agreements.
Generally speaking, these agreements are bargained nationally by the National
Carriers Committee. In the rail industry, negotiations have generally
taken place over a number of years and previously have not resulted in any
extended work stoppages. Over the last 30 years, there were only six
days of work stoppage related to labor disputes over national
handling. If the Company is unable to negotiate acceptable
agreements, it could result in strikes by the affected workers, loss of business
and increased operating costs as a result of higher wages or benefits paid to
union members, any of which could have an adverse effect on the Company’s
financial position, results of operations and liquidity. Under the
Railway Labor Act’s procedures (which include mediation, cooling-off periods and
the possibility of Presidential intervention), neither party may exercise
self-help until the procedures are exhausted.
The
Company relies on the stability and availability of its technology systems to
operate its business.
The
Company relies on information technology in all aspects of its
business. A significant disruption or failure of our information
technology systems, including computer hardware, software and communications
equipment, could result in a service interruption, safety failure, security
breach or other operational difficulties. While the Company has taken
steps to mitigate these risks, the performance and reliability of its technology
systems are critical to its ability to compete effectively.
The
Company faces competition from rail carriers and other transportation
providers.
The
Company experiences competition in the form of pricing, service, reliability and
other factors from other transportation providers including railroads and motor
carriers that operate similar routes across its service area and, to a less
significant extent, barges, ships and pipelines. Transportation providers such
as motor carriers and barges utilize public rights-of-way that are built and
maintained by governmental entities while CSXT and other railroads must build
and maintain rail networks using largely internal resources. Any future
improvements or expenditures materially increasing the quality or reducing the
cost of alternative modes of transportation, or legislation providing for less
stringent size or weight restrictions on trucks, could negatively impact the
Company’s financial position, results of operations and liquidity.
Item 1B. Unresolved Staff
Comments
None.
Item 2. Properties by
Segment
Rail
Property
CSXT’s properties primarily consist of
track and its related infrastructure, locomotives and freight
cars. These categories and the geography of the network are described
below.
Track
and Infrastructure
Serving
23 states, the District of Columbia, and the Canadian provinces of Ontario and
Quebec, the CSXT rail network serves, among other markets, New York,
Philadelphia and Boston in the northeast and mid-Atlantic, the southeast markets
of Atlanta, Miami and New Orleans, and the Midwestern cities of St. Louis,
Memphis and Chicago.
CSXT’s
track structure includes main thoroughfares connecting terminals and yards
(known as mainline track); track within terminals and switching yards; track
adjacent to the mainlines used for passing trains; track connecting the mainline
track to customer locations; and track that
diverts trains from one track to another known as turnouts. Total
track miles are greater than the Company’s approximately 21,000 route miles,
which reflect the size of CSX’s rail network that connects markets, customers
and western railroads. At December 2007, the breakdown of track miles
was as follows:
|
Track
|
|
|
Miles
|
|
|
Mainline
track
|
26,712
|
|
Terminals
and switching yards
|
9,626
|
|
Passing
sidings and turnouts
|
1,037
|
|
Total
|
37,375
|
In
addition to its physical track structure, CSXT operates numerous yards and
terminals. These serve as the hubs between CSXT and its local customers
and as sorting facilities where rail cars often are received, re-sorted and
placed onto new outbound trains.
The
following 36 yards are identified as key to the CSXT system (listed in
alphabetical order by state):
|
Rail
Yards or Terminals
|
|
|
Birmingham,
AL
|
Detroit,
MI
|
|
Mobile,
AL
|
Hamlet,
NC
|
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Montgomery,
AL
|
Rocky
Mount, NC
|
|
Baldwin,
FL
|
Buffalo,
NY
|
|
Moncrief
(Jacksonville), FL
|
Selkirk,
NY
|
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Tampa,
FL
|
Syracuse,
NY
|
|
Atlanta,
GA
|
Cincinnati,
OH
|
|
East
Savannah, GA
|
Cleveland,
OH
|
|
Waycross,
GA
|
Columbus,
OH
|
|
Avon
(Indianapolis), IN
|
Stanley
(Toledo), OH
|
|
Chicago,
IL
|
Walbridge
(Toledo), OH
|
|
Evansville,
IN
|
Willard,
OH
|
|
Louisville,
KY
|
Greenwich
(Philadelphia), PA
|
|
Russell,
KY
|
Charleston,
SC
|
|
New
Orleans, LA
|
Florence,
SC
|
|
Cumberland,
MD
|
Erwin,
TN
|
|
Curtis
Bay (Baltimore), MD
|
Nashville,
TN
|
|
Locust
Point (Baltimore), MD
|
Richmond,
VA
|
For a
list of Intermodal’s terminals, see page 16.
Network
Geography
CSXT’s
train operations are primarily focused around the following four major
transportation networks, which are defined geographically or by line of business
and are described below.
Coal Network – Coal
is used to generate more than half of the electricity in the United
States. The CSXT coal network connects mining operations in nine
states with industrial areas in the northeast and mid-Atlantic, as well as many
river, lake and seaport facilities. This network also supports the
strong, growing utility market in the southeast.
Southeastern
Corridor – This section of
the network runs from the western gateways of Chicago, Memphis and St. Louis
through the growing cities of Nashville, Birmingham and Atlanta and into the
expanding markets in the southeast. CSXT’s capacity investment in this
corridor clearly strengthens this route and makes it the premier rail route
connecting these key cities and gateways with the growing southeast. The
corridor extends through the coal reserves of the southern Illinois basin and
provides direct rail service between these coal sources and the increasing
demand for coal in the southeast. The increase in capacity on this
corridor positions CSXT well to handle the
projected traffic volumes of intermodal, coal, automotive and general
merchandise traffic.
Interstate 90 (I-90)
Corridor – Chicago and metropolitan areas in New York and New England are
linked by CSXT’s I-90 Corridor. Much of this route has two lanes of
track side-by-side (referred to as double mainline track) supporting high-speed
intermodal and automotive services. The I-90 Corridor is also a
primary route for import traffic moving across the country, through Chicago and
into the population centers in the northeast. Continued growth in
consumption in the east and northeast makes this corridor a critical element in
the Company’s overall system.
Interstate 95 (I-95)
Corridor – Charleston, Jacksonville, Miami and many other cities
throughout the growing southeast are connected to the heavily populated
northeastern cities of Baltimore, Philadelphia and New York along CSXT’s I-95
Corridor. This route is primarily used to ship food and consumer
products, as well as metals and chemicals. It is the only rail
corridor along the east coast south of Washington, D.C., and provides access to
all the major eastern ports.
Locomotives
CSXT focuses on maximum use of its
fleet and prudent investment in new units to drive the rail
network. Better locomotive management helps CSXT move freight more
efficiently, while continued investment in CSXT’s power source means CSXT is
operating more locomotives better.
CSXT
operates more than 4,000 locomotives, of which over 95% are owned by
CSXT. Freight locomotives are the power source used primarily to pull
rail cars. Switching locomotives are used in yards to sort railcars
so that the right railcar gets attached to the right train in order to get it to
its final destination. Auxiliary units are typically used to provide
extra traction for heavy trains in hilly terrain. At December 2007,
CSXT’s owned and long-term leased locomotives consisted of the
following:
|
Locomotives
|
%
|
||
|
Freight
|
3,495
|
87%
|
|
|
Switching
|
324
|
8%
|
|
|
Auxiliary
Units
|
188
|
5%
|
|
|
Total
|
4,007
|
100%
|
|
Freight
Car Fleet
The
average daily fleet of cars-on-line consists of approximately 222,000 cars, but
at any point in time, over half of the railcars on the CSXT system are not owned
or leased by CSXT. Examples of these are: railcars owned by other
railroads (which are utilized by CSXT), shipper-furnished or private cars (which
are generally used only in that shipper’s service) and multi-level
railcars.
CSXT’s
freight car fleet consists of six main types of cars:
Gondolas – Support
CSXT’s metals markets and provide transport for woodchips and other bulk
commodities. Some gondolas are equipped with special hoods for
protecting products like coil and sheet steel.
Open-top hoppers –
Transport heavy dry bulk commodities such as coal, coke, stone, sand, ores and
gravel that are resistant to weather conditions.
Box cars – Include a
variety of tonnages, sizes, door configurations and heights to accommodate a
wide range of finished products, including paper, auto parts, appliances and
building materials. Insulated box cars deliver food products, canned
goods, beer and wine.
Covered hoppers –
Have a permanent roof and are segregated based upon commodity
density. Lighter bulk commodities such as grain, fertilizer, flour,
salt, sugar, clay and lime are shipped in large cars called jumbo covered
hoppers. Heavier commodities like cement, ground limestone and glass
sand are shipped in small cube covered hoppers.
Multi-level flat cars
– Transport finished automobiles and are differentiated by the number of levels:
bi-levels for large vehicles such as pickup trucks and SUVs and tri-levels for
sedans and smaller automobiles.
Flat cars – Used for
shipping intermodal containers and trailers or bulk and finished goods, such as
lumber, pipe, plywood, drywall and pulpwood.
Other
cars owned or leased on the network include, but are not limited to, center beam
cars for transporting lumber and building products.
CSXT
owns more than 60% of its freight cars. At December 2007, CSXT’s
owned and long-term leased freight car fleet consisted of the
following:
|
Freight
Cars
|
%
|
||
|
Gondolas
|
26,490
|
28%
|
|
|
Open-top
hoppers
|
19,604
|
21%
|
|
|
Box
cars
|
13,911
|
15%
|
|
|
Covered
hoppers
|
13,555
|
14%
|
|
|
Multi-level
flat cars
|
12,340
|
13%
|
|
|
Flat
cars
|
7,189
|
8%
|
|
|
Other
cars
|
1,275
|
1%
|
|
|
Total
|
94,364
|
100%
|
|
Intermodal
Property
Infrastructure
Intermodal serves 51 terminals in 22
states. These terminals serve as a transfer point between rail and trucks. If
the city has more than one terminal, it is indicated by the number next to
it.
|
Intermodal
Terminals
|
|
|
Mobile,
AL
|
Kansas
City, MO
|
|
Lathrop,
CA
|
Charlotte,
NC
|
|
Los
Angeles/Long Beach, CA (3)
|
North
Bergen, NJ
|
|
Oakland,
CA
|
Blasdell,
NY
|
|
Jacksonville,
FL (2)
|
Syracuse,
NY
|
|
Orlando,
FL
|
New
York, NY/NJ (5)
|
|
Tampa,
FL
|
Cincinnati,
OH
|
|
Atlanta,
GA (2)
|
Cleveland,
OH
|
|
Savannah,
GA (2)
|
Columbus,
OH (2)
|
|
Chicago,
IL (2)
|
Marion,
OH
|
|
East
St. Louis, IL
|
Portland,
OR
|
|
Avon,
IN
|
Chambersburg,
PA
|
|
Evansville,
IN
|
Philadelphia,
PA
|
|
New
Orleans, LA
|
Charleston,
SC
|
|
Boston,
MA
|
Memphis,
TN
|
|
Springfield,
MA
|
Nashville,
TN
|
|
Worcester,
MA (3)
|
Mesquite,
TX
|
|
Baltimore,
MD
|
Portsmouth,
VA
|
|
Detroit,
MI
|
Seattle,
WA
|
Equipment
Intermodal
equipment consists primarily of containers, chassis and other equipment (such as
lift equipment). Containers are weather-proof boxes used for bulk
shipment of freight, and chassis are the wheeled support framework for a
container that allows it to be attached to a tractor. All of
Intermodal’s chassis are leased. Intermodal also has other types of
equipment such as doublestack railcars, which are railcars that allow for two
containers to be mounted one above the other.
At
December 28, 2007, Intermodal owned or long-term leased equipment consisted of
the following:
|
Equipment
|
%
|
||
|
Chassis
|
25,980
|
67%
|
|
|
Containers
|
12,503
|
32%
|
|
|
Other
|
433
|
1%
|
|
|
Total
|
38,916
|
100%
|
Item 3. Legal Proceedings
The Company is subject to various legal
proceedings and claims that arise in the ordinary course of
business. For more information on legal proceedings, see Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of
Operations under the caption “Critical Accounting Estimates – Casualty,
Environmental and Legal Reserves” and Item 8. Financial Statements and
Supplementary Data - Note 7, Commitments and Contingencies under the
caption “Other Legal Proceedings.”
Item 4. Submission of Matters to a Vote
of Security Holders
There were no matters submitted to a
vote of security holders in the fourth quarter of 2007.
Executive
Officers of the Registrant
Executive officers of CSX are elected
by the CSX Board of Directors and generally hold office until the next annual
election of officers. There are no family relationships or any
arrangement or understanding between any officer and any other person pursuant
to which such officer was elected. As of December 2007, the executive
officers are:
|
Name and Age
|
Business Experience During Past 5
Years
|
|
Michael
J. Ward, 57
Chairman,
President and Chief Executive Officer
|
A
30-year veteran of the Company, Ward has served as Chairman, President and
Chief Executive Officer since January 2003. In 2000, he was
named President of CSXT, and he was later appointed President of CSX and
elected to the Board of Directors in 2002.
His
distinguished railroad career has included key executive positions in
nearly all aspects of the Company’s business, including sales and
marketing, operations and finance.
|
|
Oscar
Munoz, 48
Executive
Vice President and Chief Financial Officer
|
Munoz
has served as Executive Vice President and Chief Financial Officer of CSX
and CSXT since May 2003 and is responsible for management and oversight of
all financial, strategic planning, information technology, purchasing and
real estate activities of CSX.
He
brings to the Company years of experience from a variety of
industries. Before joining CSX in 2003, Munoz served as Chief
Financial Officer and Vice President of AT&T Consumer
Services. He has also held key executive positions within the
telecommunication and beverage
industries.
|
|
Name and Age
|
Business Experience During Past 5
Years
|
|
Tony
L. Ingram, 61
Executive
Vice President and Chief Operating Officer
|
Ingram
has served as Executive Vice President and Chief Operating Officer of CSXT
since March 2004 and manages all aspects of the Company’s operations
across its 21,000-mile network, including transportation, service design,
customer service, engineering and mechanical.
Prior
to joining CSX in 2004, Ingram spent more than 30 years at Norfolk
Southern where he served as Senior Vice President – Transportation,
Network and Mechanical from February 2003 to March 2004 and Vice
President, Transportation – Operations from March 2000 to February
2003.
|
|
Clarence
W. Gooden, 56
Executive
Vice President of Sales and Marketing
and
Chief Commercial Officer
|
Gooden
has been the Executive Vice President and Chief Commercial Officer of CSX
and CSXT since April 2004 and is responsible for generating customer
revenue, forecasting business trends and developing CSX’s model for future
revenue growth.
A
member of the CSX family for more than 35 years, Gooden has held key
executive positions in both operations and sales and marketing, including
being appointed President of CSX Intermodal in 2001 and Senior Vice
President of the Merchandise Service Group in 2002.
|
|
Ellen
M. Fitzsimmons, 47
Senior
Vice President of Law and Public Affairs,
General
Counsel and Corporate Secretary
|
Fitzsimmons
has been the Senior Vice President of Law and Public Affairs, General
Counsel, and Corporate Secretary since December 2003. She
serves as the Company’s chief legal officer and oversees all government
relations and public affairs activities.
During
her 16-year tenure with the Company, her broad responsibilities have
included key roles in major risk and corporate governance-related areas
such as Senior Vice President – Law and Corporate Secretary from May to
December 2003 and as Senior Vice President – Law from February 2001 to May
2003.
|
|
Name and Age
|
Business Experience During Past 5
Years
|
|
Robert
J. Haulter, 54
Senior
Vice President of Human Resources and Labor Relations
|
Haulter
has served as Senior Vice President – Human Resources and Labor Relations
of CSX and CSXT since December 2003 and is responsible for employee
compensation and benefits, labor relations, organizational development and
transformation, recruitment, training and various administrative
activities.
His
30-year career with the Company has included key executive positions in
operations, finance and human resources before being appointed Vice
President of Human Resources in 2000.
|
|
Carolyn
T. Sizemore, 44
Vice
President and Controller
|
Sizemore
has served as Vice President and Controller of CSX and CSXT since April
2002 and is responsible for financial and regulatory reporting, paying the
Company’s 35,000 employees, accounts payable and billing and collections
for outside party expenditures along with various other accounting
processes.
Her
responsibilities during her 18-year tenure with the Company have included
roles in finance and audit-related areas including a variety of positions
in accounting, finance strategies, budgets and performance
analysis.
|
Item 5. Market for Registrant’s Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity Securities
Market
Information
CSX’s common stock is listed on the NYSE, which is its principal trading
market, and is traded over-the-counter and on exchanges
nationwide. The official trading symbol is “CSX.”
Description
of Common and Preferred Stock
A total of 600 million shares of common
stock is authorized, of which 407,864,394 shares were outstanding as of December
28, 2007. Each share is entitled to one vote in all matters requiring
a vote of shareholders. There are no pre-emptive
rights. At January 31, 2008, the latest practicable date, there were
46,749 common stock shareholders of record. The weighted average of
common shares outstanding, which was used in the calculation of diluted earnings
per share, was approximately 448 million as of December 28,
2007. (See Note 2, Earnings Per Share.)
A total of 25 million shares of
preferred stock is authorized, none of which is currently
outstanding.
The following table sets forth, for the
quarters indicated, the dividends declared and the high and low share prices of
CSX common stock as required by SEC Regulation S-K.
|
Quarter
|
||||||||
|
1st
|
2nd
|
3rd
|
4th
|
Year
|
||||
|
2007
|
||||||||
|
Dividends
|
$0.12
|
$0.12
|
$0.15
|
$0.15
|
$0.54
|
|||
|
Common
Stock Price
|
||||||||
|
High
|
$42.53
|
$47.38
|
$51.88
|
$46.49
|
$51.88
|
|||
|
Low
|
$33.50
|
$39.36
|
$38.09
|
$40.17
|
$33.50
|
|||
|
2006
|
||||||||
|
Dividends
|
$0.065
|
$0.065
|
$0.10
|
$0.10
|
$0.33
|
|||
|
Common
Stock Price
|
||||||||
|
High
|
$30.20
|
$37.33
|
$35.58
|
$38.30
|
$38.30
|
|||
|
Low
|
$24.29
|
$30.05
|
$28.60
|
$32.51
|
$24.29
|
|||
Stock
Performance Graph
The cumulative shareholder returns,
assuming reinvestment of dividends, on $100 invested at December 31, 2002 is
illustrated on the graph below. The Company references the Standard
& Poor 500 Stock Index (“S&P 500”) and the Dow Jones U.S. Transportation
Average Index, which provide comparisons to a broad-based market index and other
companies in the transportation industry. As shown in the graph,
CSX’s five-year stock returns significantly outpaced those of the S&P
500. Additionally the Company’s stock has increased 120% over the
past three years under the direction of the current management
team.
* The S&P 500 is a registered
trademark of the McGraw-Hill Companies, Inc.
CSX
Purchases of Equity Securities
CSX is required to disclose any purchases of its own common stock for the most
recent quarter. CSX purchases its own shares for two primary reasons: to
further the goals under its share repurchase program and to fund the Company’s
contribution required to be paid in CSX common stock under 401(k) plans which
cover certain union employees.
Currently, CSX has purchased $2.1
billion of its outstanding common stock, which represents 50 million shares or
about 70% of the $3 billion share repurchase program that was authorized in
2007. CSX intends to complete this repurchase program during
2008. The timing, method, amount of repurchase transactions and the
sources of funds to affect any repurchases will be determined by the Company's
management based on their evaluation of market conditions, share price and other
factors. While it is not management’s intention, the program could be suspended
or discontinued at any time.
Share repurchase activity for fourth
quarter 2007 was as follows:
|
CSX
Purchases of Equity Securities
for
the Quarter
|
||||||
|
Fourth
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
Fourth Quarter Balance
|
$
1,439,716,780
|
|||||
|
October
|
||||||
|
(September
29, 2007 - October 26, 2007)
|
5,724,300
|
$ 43.11
|
5,724,300
|
$
1,192,930,945
|
||
|
November
|
||||||
|
(October
27, 2007 - November 23, 2007)
|
4,933,700
|
$ 43.60
|
4,933,700
|
$ 977,804,729
|
||
|
December
|
||||||
|
(November
24, 2007 - December 28, 2007)
|
2,510,900
|
$ 41.20
|
2,510,900
|
$ 874,363,982
|
||
|
Total/Ending
Balance
|
13,168,900
|
$ 42.93
|
13,168,900
|
$ 874,363,982
|
||
Including previous share repurchase
programs, CSX has purchased over $2.6 billion of its outstanding common stock
over the past two years.
Item 6. Selected Financial Data
Selected financial data and significant
events related to the Company’s financial results for the last five fiscal years
are listed below.
|
Fiscal
Years
|
||||||
|
(Dollars
in Millions, Except Per Share Amounts)
|
2007
|
2006
|
2005
|
2004
|
2003
|
|
|
Earnings
From Continuing Operations
|
||||||
|
Operating
Revenue
|
$ 10,030
|
$
9,566
|
$
8,618
|
$
8,040
|
$
7,573
|
|
|
Operating
Expense
|
7,774
|
7,428
|
7,068
|
7,040
|
7,053
|
|
|
Operating
Income
|
$
2,256
|
$
2,138
|
$
1,550
|
$
1,000
|
$ 520
|
|
|
Earnings
from Continuing Operations
|
$ 1,226
|
$ 1,310
|
$
720
|
$ 418
|
$ 137
|
|
|
Earnings
Per Share:
|
||||||
|
From
Continuing Operations
|
$ 2.85
|
$ 2.98
|
$
1.67
|
$
0.97
|
$ 0.32
|
|
|
From
Continuing Operations, Assuming Dilution
|
2.74
|
2.82
|
1.59
|
0.94
|
0.31
|
|
|
Financial
Position
|
||||||
|
Cash,
Cash Equivalents and Short-term Investments
|
$
714
|
$ 900
|
$ 602
|
$ 859
|
$ 368
|
|
|
Total
Assets
|
25,534
|
25,129
|
24,232
|
24,605
|
21,760
|
|
|
Long-term
Debt
|
6,470
|
5,362
|
5,093
|
6,248
|
6,886
|
|
|
Shareholders'
Equity
|
8,685
|
8,942
|
7,954
|
6,811
|
6,448
|
|
|
Other
Data Per Common Share
|
||||||
|
Dividend
Per Share
|
$ .54
|
$ 0.33
|
$ 0.215
|
$ 0.20
|
$ 0.20
|
|
|
Employees
-- Annual Averages
|
||||||
|
Rail
|
32,477
|
32,987
|
32,033
|
32,074
|
32,892
|
|
|
Other
|
2,966
|
3,018
|
3,076
|
3,833
|
4,624
|
|
|
Total
|
35,443
|
36,005
|
35,109
|
35,907
|
37,516
|
|
Significant
Events
|
|
2007
|
--
|
Recognized
gains of $27 million before tax, or $17 million after tax, on insurance
recoveries from claims related to Hurricane Katrina. (See Note
5, Hurricane Katrina.)
|
|
|
2006
|
--
|
Two-for-one
split of the Company’s common stock effective 2006. All periods
have been retroactively restated to reflect the stock
split.
|
|
|
--
|
Recognized
gains of $168 million before tax, or $104 million after tax, on insurance
recoveries from claims related to Hurricane Katrina. (See Note
5, Hurricane Katrina.)
|
|
|
--
|
Recognized
an income tax benefit of $151 million primarily related to the resolution
of certain tax matters, including resolution of ordinary course
federal income tax audits for 1994 –
1998.
|
|
|
--
|
Recognized
a $26 million after-tax non-cash gain on additional Conrail property
received.
|
|
Significant
events, continued:
|
|
|
2005
|
--
|
Recognized
a charge of $192 million pretax, $123 million after tax, to repurchase
$1.0 billion of outstanding debt, for costs of the increase in current
market value above original issue value. (See Note 9, Debt and
Credit Agreements.)
|
|
|
--
|
Recognized
an income tax benefit of $71 million for the Ohio legislative change to
gradually eliminate its corporate franchise
tax.
|
|
|
2004
|
--
|
Recognized
a charge of $71 million pretax, $44 million after tax, for separation
expenses related to management
restructuring.
|
|
|
--
|
Recognized
a $16 million after-tax non-cash gain on the Conrail spin-off
transaction.
|
|
|
--
|
Completed
a corporate reorganization of Conrail that resulted in the direct
ownership of certain Conrail assets by CSXT and caused a significant
increase in total assets.
|
|
|
2003
|
--
|
Recognized
a charge of $232 million pretax, $145 million after tax, in conjunction
with the change in estimate of casualty reserves to include an estimate of
incurred but not reported claims for asbestos and other occupational
injuries to be received over the next seven
years.
|
|
|
--
|
Recognized
a charge of $108 million pretax, $67 million after tax, for two settlement
agreements with Maersk that resolved all material disputes pending between
the companies arising out of the 1999 sale of the international
container-shipping assets.
|
|
|
--
|
Recognized
a net charge of $22 million pretax, $13 million after tax. This
includes a charge of $44 million pretax, $26 million after tax, which is
comprised of the initial charge for separation expenses related to the
management restructuring announced in 2003 of $34 million pretax and an
additional separation charge of $10 million pretax included in the
Company’s third quarter results. These amounts were offset by a
net credit of $22 million pretax, $13 million after tax, related to
revised estimates for railroad retirement taxes and the amount of benefits
that will be paid to individuals under the 1991 and 1992 separation
plans.
|
Item 7. Management's
Discussion and Analysis of Financial Condition and Results of
Operations
STRATEGIC
OVERVIEW
The
Company provides customers access to a modern transportation network that
connects ports, production and distribution centers to markets in the Northeast,
Midwest and the rapidly growing southern states. The Company
transports a diversified portfolio of products, from domestically abundant coal
to new energy sources such as ethanol, from automobiles produced by traditional
American manufacturers to “new domestic” factories owned by European, Japanese
and Korean companies, and from life-essential chemicals to life-enriching
consumer electronics. Additionally, the Company serves every major market in the
eastern United States and has direct access to all Atlantic and Gulf Coast
ports, as well as the Mississippi River, The Great Lakes and the St. Lawrence
Seaway. Furthermore, the Company has access to Pacific ports through
alliances with western railroads. Overall, the Company’s transportation network
encompasses approximately 21,000 route miles of track in 23 states, the District
of Columbia and the Canadian provinces of Ontario and Quebec.
As the
nation consumes increasingly higher quantities of imported goods, those products
must be transported across the country in a way that minimizes the impact on the
environment, takes traffic off an already congested highway system and minimizes
fuel consumption and transportation costs. The Company’s
transportation network, located in the largest and fastest-growing population
centers in the nation, is well-positioned to capitalize on consumption growth
trends. In this regard, more than two-thirds of Americans live within
the Company’s service territory, accounting for about three-quarters of the
nation’s consumption.
The
Company has made substantial strides in operating performance in order to
capitalize on these consumption growth trends. In 2004, the Company
implemented the ONE Plan, which continues to focus on optimizing the train
network and utilizing rail assets more efficiently. Anchored by the
ONE Plan and a variety of other initiatives implemented after the ONE Plan was
introduced, the Company has achieved significant operational improvements that
have enhanced safety, service reliability and productivity. These
strong results include the highest customer satisfaction scores ever achieved by
the Company as measured by independent surveys of its customers.
In
addition to the ONE Plan, the Company recently embarked on a new initiative
called Total Service Integration (“TSI”), which aims to better align the
Company’s capabilities with customer demands. TSI aims to optimize
train size and increase asset utilization while delivering more reliable
service to customers.
These
initiatives delivered strong results for shareholders while higher levels
of customer service have led to improved pricing. These efforts
combined with operational efficiencies have resulted in substantial improvements
in CSX’s operating income and operating ratio.
In
addition to driving better financial results to create value for shareholders,
CSX also employs a balanced approach in deploying its capital for the benefit of
shareholders. This approach includes investments in the future, share
repurchases and dividends. Through this balanced use of financial
resources, CSX will continue to capitalize on an economic environment that is
increasingly favoring rail transportation.
2007 CSX Highlights
Surface
Transportation
|
|
·
|
Revenue
grew $464 million or 5% to over $10
billion.
|
|
|
·
|
Expenses
increased $339 million or 5% to $7.8 billion, which included $141 million
of higher prior year gains on insurance recoveries (which reduced
operating expenses) and $98 million of higher fuel
costs.
|
|
|
·
|
Surface
Transportation Operating Income, which excludes other operating income,
increased $125 million to $2.3
billion.
|
|
|
·
|
Service
and safety measurements improved in all
categories.
|
Leadership, discipline and execution
resulted in excellent 2007 results, which included the lowest Surface
Transportation operating ratio in a decade. Revenue and revenue per
unit increased 5% and 8%, respectively, from a year ago reflecting the improving
value CSX provides its customers through better service. The Company
was able to achieve substantial pricing gains predominantly due to CSXT service
improvements and the overall cost advantages that the Company’s rail-based
solutions provide to customers versus other modes of
transportation.
The strong results in revenue were
achieved despite volume declines in all of the Company’s four major lines of
business. The overall 3% volume decrease versus last year was
primarily driven by continued weakness in the merchandise market relating to
housing construction and associated markets, as well as lower automotive
production.
Expenses
were higher due to the effects of rising fuel prices and higher prior year gains
on insurance recoveries, which were recorded as a reduction to operating
expenses. Lower 2007 volume and better productivity from improved
operations partially offset the effects of inflation for certain expense
categories.
For
additional information, refer to Rail and Intermodal Results of Operations
discussed on pages 40 through 43.
The
Company’s continued focus on safety and operating plan execution helped all
service measurements improve compared to last year. Within the
service measures, CSX achieved
record performance on both of its key safety measures (FRA Personal Injuries
Frequency Index and FRA Train Accident Rate) in 2007 despite some costly train
accidents. Improved safety is the result of the safety leadership and train
accident prevention processes. Both of these use training, awareness, compliance
measurement and root cause analysis to prevent incidents and create a safer work
environment.
In
addition, CSX continues to improve its train operations with gains of 4% and 12%
in On-Time Train Originations and On-Time Destination Arrivals,
respectively. Velocity, a measure of overall network fluidity,
increased 5% in 2007. More important was the consistent week-to-week
velocity, which indicates more reliable service to
customers. Improved network operations also drove increased asset
utilization, including an improvement of 8% in Dwell, which is the average time
cars spend in terminals when being switched. The table below shows these key
measurements and resources.
|
RAIL
OPERATING STATISTICS (Estimated)
|
Fiscal
Years
|
||||
|
2007
|
2006
|
Improvement
|
%
|
||
|
Service
|
|||||
|
Measurements
|
FRA
Personal Injuries Frequency Index
|
1.21
|
1.46
|
17
|
%
|
|
FRA
Train Accident Rate
|
2.83
|
3.54
|
20
|
||
|
On-Time
Train Originations
|
79.3%
|
76.0%
|
4
|
||
|
On-Time
Destination Arrivals
|
70.4%
|
62.7%
|
12
|
||
|
Dwell
(hours)
|
23.2
|
25.1
|
8
|
||
|
Cars-On-Line
|
221,943
|
224,680
|
1
|
||
|
System
Train Velocity (miles per hour)
|
20.8
|
19.9
|
5
|
||
|
Recrews
(per day)
|
57
|
59
|
3
|
%
|
|
|
Increase/
|
|||||
|
(Decrease)
|
|||||
|
Resources
|
Route
Miles
|
21,166
|
21,114
|
-
|
%
|
|
Locomotives
(owned and long-term leased)
|
4,007
|
3,851
|
4
|
||
|
Freight
Cars (owned and long-term leased)
|
94,364
|
101,602
|
(7)
|
%
|
|
Key
Performance Measures Definitions
FRA Personal Injuries
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 per the ONE Plan
On-Time Destination
Arrivals – Percent of scheduled trains that arrive at the destination
yard on-time to two hours late (30 minutes for intermodal trains) per the ONE
Plan
Dwell – Measures the
time (in hours) cars spend in each yard (does not include cars moving through
the yard on the same train)
Cars-On-Line – A
count of all cars on the CSX network, including those at customer locations
(does not include locomotives, cabooses, trailers, containers or maintenance
equipment)
System Train Velocity
– Average train speed between terminals in miles per hour (does not include
locals, yard jobs, work trains or passenger trains)
Recrews – Number of
relief crews called, a measure of line of road efficiency in the use of
crews
Other
Highlights
While operating activities generated
higher cash, free cash flow, which includes dividend payments, declined $216
million to $145 million during 2007. The decline was primarily due to
higher capital expenditures and dividends, along with lower insurance recoveries
from claims related to Hurricane Katrina. See page 32 for further
details on the changes in free cash flow during 2007.
Surface Transportation capital
expenditures, which exclude The Greenbrier, were $1.7 billion in
2007. This level of investment highlights the Company’s commitment to
maintain and improve its existing infrastructure and to position itself for
long-term growth through expanding network and terminal capacity. The
increase compared to prior year was largely due to refinancing a portion of its
locomotive capacity by replacing 150 leased units with newly owned
locomotives.
CSX also announced three significant
financial events in 2007. First, CSX increased its quarterly dividend
from $0.10 to $0.12 during the first quarter of 2007. It then
increased the dividend again during the third quarter of 2007 to $0.15, which
represented a 50% increase from the quarterly dividend level at fourth quarter
2006. Finally, CSX announced a total of $3 billion in share
repurchase programs during 2007 and has completed about 70% of the
repurchases. See Note 1, Nature of Operations and Significant
Accounting Policies.
Long-term
Transportation Demand
Transportation demand is based on increases in population and higher consumption
levels, which in turn drive the production of goods domestically and abroad that
must be transported from factories and ports to the markets where they will be
consumed.
Recent census projections estimate that today’s population of 301 million people
will grow to more than 330 million by 2020. Major metropolitan areas in
the southeast, where CSX has a strong presence, are projected to grow at
significantly faster rates. Even in slower-growing areas over the
remainder of the Company’s territory, consumption levels are projected to
increase.
Freight tonnage – domestic and international – is expected to increase nearly
50% by 2020, according to the American Association of State Highway and
Transportation Officials (AASHTO), placing further strain on the transportation
system of America and requiring reliable solutions for shippers
worldwide.
Impact
on CSX
The Company is well positioned to meet the nation’s growing transportation
demand. For example, due to factors such as highway congestion, new
regulations on hours of service and driver shortages in the trucking industry,
trucking companies are beginning to partner with the Company to outsource their
long-haul services and reduce their cost of shipping due to the superior cost
structure of the railroads for long-haul shipments.
Additionally, the need for environmentally sensitive transportation solutions
also favors CSX because railroads are three times more fuel efficient than
highway transportation. A single train can carry the load of more than 280
trucks, reducing highway congestion and pollution while moving goods more
efficiently.
Industry analysts predict that the pricing environment will reflect the
increasing importance of railroads in serving America’s growing transportation
needs and the cost of the infrastructure investments needed to maintain the
safety and security of these networks and to expand them. This will drive
revenue growth as volumes increase. Furthermore, while the market for
transportation services remains competitive, tighter capacity and improved
service levels through initiatives such as the ONE Plan and TSI are expected to
sustain this favorable pricing environment, reflecting the overall value that
CSX provides to its customers.
Forecasts
The Company bases its performance expectations on external forecasts of economic
indicators such as gross domestic product, industrial production and overall
import levels. Although certain markets will remain weak, such as
those that are impacted by the housing and automotive sectors, the indicators
that influence CSX’s businesses are expected to be favorable in 2008.
Considering these and other factors, the Company believes that its business
environment remains strong and will support consistent, continuous financial
improvements for the next several years.
Considering the Company’s solid overall business environment, along with
momentum in its underlying business performance, CSX expects that its financial
performance in 2008 will be consistent with its long-term financial targets,
which include compounded annual growth rates (“CAGR”) as shown
below:
|
Long-term
Financial Targets
|
2008-2010
Targets
|
|
|
·
|
Operating
Income Growth
|
10%
- 12% CAGR
|
|
·
|
Earnings
Per Share Growth
|
15%
- 17% CAGR
|
|
·
|
Operating
Ratio
|
Mid-
to low- 70s by 2010
|
|
·
|
Free
Cash Flow (before the payment of dividends)
|
$800
million to $1 billion in 2010
|
To reinforce its long-term vision, the
Company’s Surface Transportation capital budget is expected to be nearly $5
billion between 2008 and 2010. These investments come at a time when the
return on investment in the railroad industry is improving. Approximately
60% of the Company’s capital is targeted for infrastructure investment to
improve network reliability and recoverability and to drive even better
performance in safety. Another 20% of the Company’s capital will be
invested in its locomotive and freight car fleets. The remaining 20% of
CSX’s capital spending will further expand network terminal capacity, improve
technology and position the Company for long-term growth.
Free
Cash Flow
Free cash flow is considered a non-GAAP
financial measure under SEC Regulation G, Disclosure of Non-GAAP
Measures. Management believes, however, that free cash flow is important
in evaluating the Company’s financial performance and measures an ability to
generate cash without incurring additional external financing. Free cash flow
should be considered in addition to, rather than a substitute for, cash provided
by operating activities.
Free cash flow is calculated by using
net cash from operations and adjusting for property additions, dividends and
certain other investing activities such as insurance proceeds. Also,
added to free cash flow is the Company’s 42% economic interest in Conrail’s free
cash flow which is not consolidated in CSX amounts. Other deposits,
which are included in cash provided by operating activities, are not included in
the Company’s free cash flow because these deposits represent assets that were
set aside for specific debt payments.
The following table reconciles cash
provided by operating activities (GAAP measure) to free cash flow (non-GAAP
measure).
|
Fiscal
Years
|
||||
|
2007
|
2006
|
Change
|
||
|
(Dollars
in Millions)
|
||||
|
Net
cash provided by operating activities
|
$
2,184
|
$
2,058
|
$
126
|
|
|
Property
additions
|
(1,773)
|
(1,639)
|
(134)
|
|
|
Insurance
proceeds within investing activities
|
16
|
147
|
(131)
|
|
|
Other
investing activities
|
(57)
|
4
|
(61)
|
|
|
Dividends
|
(231)
|
(145)
|
(86)
|
|
|
Other
deposits and Conrail free cash flow
|
6
|
(64)
|
70
|
|
|
Free
Cash Flow (after payment of dividends)
|
$
145
|
$
361
|
$ (216)
|
|
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 within the meaning of the Securities Act
of 1933 and the Securities Exchange Act of 1934. These
forward-looking statements include, among others, statements
regarding:
|
|
·
|
Expectations
as to results of operations and operational
improvements;
|
|
|
·
|
Expectations
as to the effect of claims, lawsuits, environmental costs, commitments,
contingent liabilities, labor negotiations or agreements on the Company’s
financial condition;
|
|
|
·
|
Management’s
plans, goals, strategies and objectives for future operations 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, including, but not
limited to, the discussion regarding Expectations on page
30.
|
Forward-looking statements are
typically identified by words or phrases such as “believe,” “expect,”
“anticipate,” “project,” “estimate” and similar expressions. The Company
cautions against placing undue reliance on forward-looking statements, which
reflect its good faith beliefs with respect to future events and are based on
information currently available to it as of the date the forward-looking
statement is made. Forward-looking statements should not
be read as a guarantee of future performance or results and will not necessarily
be accurate indications of the timing when, or by which, such performance or
results will be achieved.
Forward-looking
statements are subject to a number of risks and uncertainties and actual
performance or results could differ materially from those anticipated by these
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 elsewhere, may cause actual results to differ
materially from those contemplated by these 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 re-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;
|
|
|
·
|
Material
changes in domestic or international economic or business conditions,
including those affecting the transportation industry such as access to
capital markets, ability to revise debt arrangements as contemplated,
customer demand, customer acceptance of price increases, effects of
adverse economic conditions affecting shippers and adverse economic
conditions in the industries and geographic areas that consume and produce
freight;
|
|
|
·
|
Changes
in fuel prices, surcharges for fuel and the availability of
fuel;
|
|
|
·
|
The
impact of increased passenger activities in capacity-constrained areas 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;
|
|
|
·
|
An
unintentional failure to comply with applicable laws or
regulations;
|
|
|
·
|
The
inherent 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
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 plans and operational
objectives and improving Surface Transportation operating efficiency;
and
|
|
|
·
|
Changes
in operating conditions and costs or commodity
concentrations.
|
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.
Financial Results of Operations
2007
vs. 2006 Consolidated Results of Operations
|
CONSOLIDATED(a)
|
|||||||||
|
Includes
Surface Transportation and Other Operating Income
|
|||||||||
|
(Dollars
in Millions)
|
2007
|
2006
|
$
Change
|
%
Change
|
|||||
|
Operating
Revenue
|
$
10,030
|
$ 9,566
|
$ 464
|
5
|
%
|
||||
|
Operating
Expense
|
7,774
|
7,428
|
346
|
5
|
|||||
|
Operating
Income
|
2,256
|
2,138
|
118
|
6
|
|||||
|
Other
Income
|
93
|
95
|
(2)
|
(2)
|
|||||
|
Interest
Expense
|
(417)
|
(392)
|
(25)
|
6
|
|||||
|
Income
Tax Expense
|
(706)
|
(531)
|
(175)
|
33
|
|||||
|
Earnings
from Continuing Operations
|
1,226
|
|
1,310
|
(84)
|
(6)
|
||||
|
Discontinued
Operations
|
110
|
-
|
110
|
NM
|
|||||
|
Net
Earnings
|
$
1,336
|
$ 1,310
|
$ 26
|
2
|
%
|
||||
|
Earnings
Per Diluted Share
|
|||||||||
|
From
Continuing Operations
|
$ 2
.74
|
$ 2.82
|
$ (0.08)
|
(3)
|
%
|
||||
|
Discontinued
Operations
|
0.25
|
-
|
0.25
|
NM
|
|||||
|
Net
Earnings
|
$
2.99
|
$ 2.82
|
$ 0.17
|
6
|
%
|
||||
Prior
periods have been reclassified to conform to the current
presentation.
NM
- not meaningful
(a)
Other operating income was $5 million and $12 million for 2007 and 2006,
respectively.
Operating
Revenue
Operating revenue increased $464
million to over $10 billion in 2007 due to continued pricing efforts and service
improvements. These gains were partially offset by lower volume due
to weakness in housing construction, domestic automobile production and related
markets.
Operating
Income
Operating income increased $118 million
to $2.3 billion in 2007. Improvements in revenue and productivity
from improved operations were partially offset by lower gains on insurance
recoveries and increased fuel costs.
Other
Income
Other income of $93 million in 2007 was
relatively flat compared to the prior year.
Interest Expense
Interest expense increased $25 million
to $417 million in 2007 primarily due to higher average debt
balances.
Income
Tax Expense
Income tax expense increased $175
million to $706 million. This change is primarily due to higher
earnings in 2007 and a prior year income tax benefit of $151 million related to
the resolution of certain tax matters that were not repeated.
Net
Earnings
Consolidated net earnings increased $26
million and totaled $1.3 billion, and earnings per diluted share increased $0.17
to $2.99. The principal elements of these increases are:
|
|
·
|
Operating
income increased $118 million driven by strong Surface Transportation
results. These strong results were more than offset by $151
million of prior year income tax benefits that were not
repeated. The net of these and other items decreased earnings
from continuing operations by $84 million or $.08 per diluted
share.
|
|
|
·
|
The
$110 million or $.25 per diluted share gain in discontinued operations on
the Company’s consolidated income statement in 2007 related to the
resolution of certain tax matters associated with previously discontinued
operations.
|
2006
vs. 2005 Consolidated Results of Operations
|
CONSOLIDATED(a)
|
|||||||||
|
Includes
Surface Transportation and Other Operating Income
|
|||||||||
|
(Dollars
in Millions)
|
2006
|
2005
|
$
Change
|
%
Change
|
|||||
|
Operating
Revenue
|
$ 9,566
|
$ 8,618
|
$ 948
|
11
|
%
|
||||
|
Operating
Expense
|
7,428
|
7,068
|
360
|
5
|
|||||
|
Operating
Income
|
2,138
|
1,550
|
588
|
38
|
|||||
|
Other
Income
|
95
|
101
|
(6)
|
(6)
|
|||||
|
Debt
Repurchase
|
-
|
(192)
|
192
|
(100)
|
|||||
|
Interest
Expense
|
(392)
|
(423)
|
31
|
(7)
|
|||||
|
Income
Tax Expense
|
(531)
|
(316)
|
(215)
|
68
|
|||||
|
Earnings
from Continuing Operations
|
1,310
|
|
720
|
590
|
82
|
||||
|
Discontinued
Operations - Net of Tax
|
-
|
425
|
(425)
|
(100)
|
|||||
|
Net
Earnings
|
$ 1,310
|
$ 1,145
|
$ 165
|
14
|
%
|
||||
|
Earnings
Per Diluted Share
|
|||||||||
|
From
Continuing Operations
|
$ 2.82
|
$ 1.59
|
$ 1.23
|
77
|
%
|
||||
|
Discontinued
Operations
|
-
|
0.93
|
(0.93)
|
(100)
|
|||||
|
Net
Earnings
|
$ 2.82
|
$ 2.52
|
$ 0.30
|
12
|
%
|
||||
Prior
periods have been reclassified to conform to the current
presentation.
|
(a)
|
Other
operating income was $12 million and $1 million in 2006 and 2005,
respectively.
|
Operating
Revenue
Operating revenue increased $948
million in 2006 to $9.6 billion, compared to $8.6 billion for the prior
year. The primary components of the revenue gain were continued yield
management and the Company’s fuel surcharge program, which drove revenue per
unit across all major markets.
Operating
Income
Operating income increased $588 million
to $2.1 billion in 2006, which was driven by increased operating
revenues. These revenue gains and gains on insurance proceeds from
Hurricane Katrina were partially offset by increases in fuel expense caused by
higher fuel prices and lower hedge benefits.
Other
Income
Other income decreased $6 million to
$95 million in 2006. This change was driven primarily by lower real
estate sales, which was partially offset by an after-tax non-cash gain on
additional Conrail property value received in connection with the 2004 Conrail
spin-off transaction.
Interest Expense
Interest expense decreased $31 million
to $392 million in 2006 compared to the prior year. There was lower
interest expense from lower average debt balances for 2006 (due to a $1.0
billion debt repurchase in mid-2005). However, this savings was
partially offset by higher variable interest rates.
Income
Tax Expense
Income tax expense increased $215
million to $531 million in 2006 as a result of higher earnings. This
increase was partially offset by the net impact of favorable resolutions of
certain tax matters in 2006 that were higher than benefits in 2005.
Net
Earnings
Net earnings for 2006 increased $165
million to $1.3 billion, with earnings per share up $.30 to $2.82 per diluted
share from the prior year. This increase was primarily due to the
following factors:
|
|
·
|
Driven
by Surface Transportation results, earnings from continuing operations
were up $590 million, or $1.23 per diluted
share;
|
|
|
·
|
Offsetting
this increase was income from discontinued operations, net of tax, of $425
million, or $.93 per diluted share, as a result of the sale of CSX’s
International Terminals business in
2005.
|
2007
vs. 2006 Surface Transportation Results of Operations
|
SURFACE TRANSPORTATION
DETAIL
(Unaudited)
|
||||||||||
|
(Dollars
in Millions)
|
||||||||||
|
Fiscal
Year
|
||||||||||
|
Surface
|
||||||||||
|
Rail
|
Intermodal
|
Transportation
|
||||||||
|
2007
|
2006
|
2007
|
2006
|
2007
|
2006
|
$
Change
|
||||
|
Revenue
|
$ 8,674
|
$ 8,154
|
$ 1,356
|
$ 1,412
|
$ 10,030
|
$ 9,566
|
$ 464
|
|||
|
Operating
Expense:
|
||||||||||
|
Labor
and Fringe
|
2,897
|
2,840
|
81
|
82
|
2,978
|
2,922
|
(56)
|
|||
|
Materials,
Supplies and Other
|
1,857
|
1,772
|
183
|
192
|
2,040
|
1,964
|
(76)
|
|||
|
Fuel
|
1,210
|
1,112
|
-
|
-
|
1,210
|
1,112
|
(98)
|
|||
|
Depreciation
|
848
|
818
|
34
|
38
|
882
|
856
|
(26)
|
|||
|
Equipment
and Other Rents
|
346
|
382
|
110
|
130
|
456
|
512
|
56
|
|||
|
Inland
Transportation
|
(448)
|
(462)
|
688
|
704
|
240
|
242
|
2
|
|||
|
Gain
on Insurance Recoveries
|
(27)
|
(166)
|
-
|
(2)
|
(27)
|
(168)
|
(141)
|
|||
|
Total
Expense
|
6,683
|
6,296
|
1,096
|
1,144
|
7,779
|
7,440
|
(339)
|
|||
|
Operating
Income
|
$ 1,991
|
$ 1,858
|
$ 260
|
$ 268
|
$ 2,251
|
$ 2,126
|
$ 125
|
|||
|
Operating
Ratio
|
77.0%
|
77.2%
|
80.8%
|
81.0%
|
77.6%
|
77.8%
|
||||
|
Total
Assets
|
$
24,179
|
$
24,077
|
$
283
|
$
276
|
||||||
_____________________________________________________________________________________________________________________________________________
|
Volume
(Thousands); Revenue (Dollars in Millions); Revenue Per Unit
(Dollars)
|
|||||||||||||||
|
Fiscal
Year
|
|||||||||||||||
|
Volume
|
Revenue
|
Revenue
Per Unit
|
|||||||||||||
|
2007
|
2006
|
%
Change
|
2007
|
2006
|
%
Change
|
2007
|
2006
|
%
Change
|
|||||||
|
Chemicals
|
522
|
528
|
(1)
|
%
|
$ 1,313
|
$ 1,210
|
9
|
%
|
$ 2,515
|
$ 2,292
|
10
|
%
|
|||
|
Emerging
Markets
|
491
|
524
|
(6)
|
605
|
580
|
4
|
1,232
|
1,107
|
11
|
||||||
|
Forest
Products
|
352
|
404
|
(13)
|
722
|
773
|
(7)
|
2,051
|
1,913
|
7
|
||||||
|
Agricultural
Products
|
410
|
397
|
3
|
786
|
681
|
15
|
1,917
|
1,715
|
12
|
||||||
|
Metals
|
355
|
364
|
(2)
|
702
|
673
|
4
|
1,977
|
1,849
|
7
|
||||||
|
Phosphates
and Fertilizers
|
362
|
362
|
-
|
421
|
354
|
19
|
1,163
|
978
|
19
|
||||||
|
Food
and Consumer
|
212
|
245
|
(13)
|
441
|
477
|
(8)
|
2,080
|
1,947
|
7
|
||||||
|
Total
Merchandise
|
2,704
|
2,824
|
(4)
|
4,990
|
4,748
|
5
|
1,845
|
1,681
|
10
|
||||||
|
Coal
|
1,771
|
1,798
|
(2)
|
2,483
|
2,259
|
10
|
1,402
|
1,256
|
12
|
||||||
|
Coke
and Iron Ore
|
91
|
94
|
(3)
|
120
|
119
|
1
|
1,319
|
1,266
|
4
|
||||||
|
Total
Coal
|
1,862
|
1,892
|
(2)
|
2,603
|
2,378
|
9
|
1,398
|
1,257
|
11
|
||||||
|
Automotive
|
439
|
463
|
(5)
|
839
|
847
|
(1)
|
1,911
|
1,829
|
4
|
||||||
|
Other
|
-
|
-
|
-
|
242
|
181
|
34
|
-
|
-
|
-
|
||||||
|
Total
Rail
|
5,005
|
5,179
|
(3)
|
8,674
|
8,154
|
6
|
1,733
|
1,574
|
10
|
||||||
|
International
|
1,132
|
1,281
|
(12)
|
525
|
580
|
(9)
|
464
|
453
|
2
|
||||||
|
Domestic
|
979
|
898
|
9
|
807
|
786
|
3
|
824
|
875
|
(6)
|
||||||
|
Other
|
-
|
-
|
-
|
24
|
46
|
(48)
|
-
|
-
|
-
|
||||||
|
Total
Intermodal
|
2,111
|
2,179
|
(3)
|
1,356
|
1,412
|
(4)
|
642
|
648
|
(1)
|
||||||
|
Total
Surface Transportation
|
7,116
|
7,358
|
(3)
|
%
|
$ 10,030
|
$ 9,566
|
5
|
%
|
$ 1,409
|
$ 1,300
|
8
|
%
|
|||
For
both tables, prior periods have been reclassified to conform to the current
presentation.
2007
vs. 2006 Rail Results of Operations
Rail
Operating Revenue
Rail
revenue is categorized by three main lines of business: merchandise, coal and
automotive. Revenue increased $520 million, or 6%, to $8.7 billion in 2007
as compared to prior year. CSXT was able to achieve continued pricing
gains predominantly due to the overall cost and service advantages that the
Company’s rail based solutions provide to customers versus other modes of
transportation. These pricing gains more than offset volume weakness in housing
construction, domestic automobile production and related markets.
Merchandise
Chemicals – Revenue
and revenue per unit improved due to a continued favorable pricing
environment. Overall volume declined slightly driven by reduced
chlorine shipments and weakness in propane demand due to a milder winter in
2007.
Emerging Markets –
Revenue and revenue per unit grew due to continued yield management
efforts. Volume was down as a result of declines in aggregate
shipments, such as crushed stone, sand and gravel, caused by a continued
weakness in residential construction.
Forest Products –
Revenue and volume declined as shipments of building products and paper slowed
due to the decline in residential housing starts and electronic media
substitution.
Agriculture Products
– Strong domestic demand in feed ingredients and soybean shipments supported
growth in volume and revenue. Ethanol volumes also increased as a
result of expanded use in the Northeast. Revenue per unit grew as a
result of continued focus on yield management.
Metals – Revenue and
revenue per unit increased due to continued pricing actions. Lower demand
for steel due to weakness in housing construction and domestic automobile
production resulted in volume declines.
Phosphates and
Fertilizers – Volume was flat as higher domestic demand was offset by a
decrease in export shipments. Favorable mix driven by these volume
changes coupled with price increases resulted in significantly improved revenue
and revenue per unit.
Food and Consumer –
Revenue and volume declines were driven by decreased demand for building
products, appliances and roofing granules, which are used to make
shingles.
Coal
Favorable
pricing positively influenced revenue and revenue per unit. Overall tonnage was
flat even though carloads slightly declined due to the use of higher capacity
cars allowing the movement of more tons with fewer cars. Strength in
the export market was offset by weakness in utility shipments as stockpiles
remain at record high levels.
Automotive
Volume
declined due to a reduction in light vehicle production, several plant closures,
and lower vehicle sales driven by the slowing economy and tight credit
environment. Consistent with the overall automotive market, volumes
continued to shift to foreign brands produced domestically.
Other
Rail Revenue
The
change is primarily due to increased shipments by the Company’s regional
railroads and more transloading activities associated with ethanol
shipments.
Rail
Operating Expense
Total
rail operating expenses for 2007 increased $387 million to $6.7 billion compared
to the prior year. The description of what is included in each
category as well as significant year over year changes is described
below.
Labor and Fringe expenses
include employee compensation and benefit programs. These expenses
are primarily affected by inflation, headcount, wage rates, incentives earned,
healthcare plan costs, and pension and other post-retirement plan
expenses. These expenses increased $57 million primarily due to wage
and benefit inflation, which was partially offset by improved productivity and
reduced staffing levels.
Materials, Supplies and
Other expenses
consist primarily of materials and contracted services to maintain
infrastructure and equipment and for terminal services at intermodal and
automotive facilities. This category also includes costs related to
personal injury claims, environmental remediation, train accidents, utilities,
non-locomotive fuel, property and sales taxes and professional
services. Overall, materials, supplies and other expenses increased
by $85 million in 2007 primarily due to inflation, higher train accident related
costs and higher environmental costs. These costs were partially
offset by $99 million of favorable personal injury reserve adjustments during
the year, which were based on management’s review of the actuarial analyses
performed by an independent actuarial firm. This was
due to a trend of significant decreases in the number and severity of
work-related injuries for CSXT employees since 2003.
Depreciation expense
primarily relates to recognizing the cost of a capital asset, such as
locomotives, railcars and track structure, over its useful life. This
expense is impacted primarily by the capital expenditures made each
year. This expense increased $30 million primarily due to a larger
asset base as a result of higher capital spending partially offset by lower
depreciation rates resulting from periodic asset life studies.
Fuel expense
includes locomotive diesel fuel. This expense is driven by the market
price and locomotive consumption of diesel fuel offset by the effects of any
hedging activities. This expense increased $98 million primarily due
to higher fuel prices and prior year hedge benefits that were not repeated
during 2007 due to the expiration of the fuel hedge program.
Equipment and Other
Rents primarily includes
rent paid for freight cars owned by other railroads or private companies, net of
rents received by CSXT for use of CSXT equipment. This category of
expenses also includes lease expenses primarily for locomotives, railcars,
containers and trailers, office and other rentals. These expenses decreased $36
million due mainly to lower volume and fewer locomotive leases.
Inland
Transportation expense
included in the rail segment is for amounts paid to CSXT from Intermodal for
shipments on CSXT’s network. These intercompany charges are
eliminated in consolidated results.
Gain on Insurance
Recoveries includes gains on insurance recoveries related to Hurricane
Katrina. While gains were recognized in both years, the $139 million
decrease for 2007 was due to higher cash receipts for lost profits and
replacement value of property compared to the value of the property that was
damaged in 2006 versus 2007.
2007
vs. 2006 Intermodal Results of Operations
Intermodal
operating income declined 3% or $8 million versus last year on 4% lower revenue,
partially offset by volume related cost savings. Revenue and volume
decreases reflect losses of several International customers, the slowing of
Asian imports throughout the year and mix impact related to growth in new
short-haul domestic traffic. Other revenue declined $22 million from
the termination of an agreement relating to the storage of containers as well as
lower general business levels. Revenue per unit declined slightly with yield
gains in the international market being offset by mix changes related to the new
short-haul domestic traffic.
Despite
rising fuel costs, Intermodal operating expense declined $48 million or 4%
driven by lower car hire expense related to volume and improved operational
efficiency. Additionally, depreciation decreased based on the results
of a periodic review of asset useful lives.
2006
vs. 2005 Surface Transportation Results of Operations
|
SURFACE TRANSPORTATION
DETAIL
(Unaudited)
|
||||||||||
|
(Dollars
in Millions)
|
||||||||||
|
Fiscal
Year
|
||||||||||
|
Surface
|
||||||||||
|
Rail
|
Intermodal
|
Transportation
|
||||||||
|
2006
|
2005
|
2006
|
2005
|
2006
|
2005
|
$
Change
|
||||
|
Revenue
|
$ 8,154
|
$ 7,256
|
$ 1,412
|
$ 1,362
|
$ 9,566
|
$ 8,618
|
$ 948
|
|||
|
Operating
Expense:
|
||||||||||
|
Labor
and Fringe
|
2,840
|
2,777
|
82
|
79
|
2,922
|
2,856
|
(66)
|
|||
|
Materials,
Supplies and Other
|
1,772
|
1,649
|
192
|
200
|
1,964
|
1,849
|
(115)
|
|||
|
Fuel
|
1,112
|
783
|
-
|
-
|
1,112
|
783
|
(329)
|
|||
|
Depreciation
|
818
|
779
|
38
|
39
|
856
|
818
|
(38)
|
|||
|
Equipment
and Other Rents
|
382
|
400
|
130
|
133
|
512
|
533
|
21
|
|||
|
Inland
Transportation
|
(462)
|
(433)
|
704
|
663
|
242
|
230
|
(12)
|
|||
|
Gain
on Insurance Recoveries
|
(166)
|
-
|
(2)
|
-
|
(168)
|
-
|
168
|
|||
|
Total
Expense
|
6,296
|
5,955
|
1,144
|
1,114
|
7,440
|
7,069
|
(371)
|
|||
|
Operating
Income
|
$ 1,858
|
$ 1,301
|
$ 268
|
$ 248
|
$ 2,126
|
$ 1,549
|
$ 577
|
|||
|
Operating
Ratio
|
77.2%
|
82.1%
|
81.0%
|
81.8%
|
77.8%
|
82.0%
|
||||
|
Total
Assets
|
$
24,077
|
$
23,182
|
$
276
|
$
305
|
||||||
_____________________________________________________________________________________________________________________________________________
|
SURFACE TRANSPORTATION VOLUME
AND REVENUE (Unaudited)
|
|||||||||||||||
|
Volume
(Thousands); Revenue (Dollars in Millions); Revenue Per Unit
(Dollars)
|
|||||||||||||||
|
Fiscal
Year
|
|||||||||||||||
|
Volume
|
Revenue
|
Revenue
Per Unit
|
|||||||||||||
|
2006
|
2005
|
%
Change
|
2006
|
2005
|
%
Change
|
2006
|
2005
|
%
Change
|
|||||||
|
Chemicals
|
528
|
533
|
(1)
|
%
|
$ 1,210
|
$ 1,089
|
11
|
%
|
$
2,292
|
$ 2,043
|
12
|
%
|
|||
|
Emerging
Markets
|
524
|
505
|
4
|
580
|
513
|
13
|
1,107
|
1,016
|
9
|
||||||
|
Forest
Products
|
404
|
439
|
(8)
|
773
|
717
|
8
|
1,913
|
1,633
|
17
|
||||||
|
Agricultural
Products
|
397
|
357
|
11
|
681
|
550
|
24
|
1,715
|
1,541
|
11
|
||||||
|
Metals
|
364
|
361
|
1
|
673
|
570
|
18
|
1,849
|
1,579
|
17
|
||||||
|
Phosphates
and Fertilizers
|
362
|
444
|
(18)
|
354
|
351
|
1
|
978
|
791
|
24
|
||||||
|
Food
and Consumer
|
245
|
249
|
(2)
|
477
|
438
|
9
|
1,947
|
1,759
|
11
|
||||||
|
Total
Merchandise
|
2,824
|
2,888
|
(2)
|
4,748
|
4,228
|
12
|
1,681
|
1,464
|
15
|
||||||
|
Coal
|
1,798
|
1,726
|
4
|
2,259
|
1,992
|
13
|
1,256
|
1,154
|
9
|
||||||
|
Coke
and Iron Ore
|
94
|
83
|
13
|
119
|
88
|
35
|
1,266
|
1,060
|
19
|
||||||
|
Total
Coal
|
1,892
|
1,809
|
5
|
2,378
|
2,080
|
14
|
1,257
|
1,150
|
9
|
||||||
|
Automotive
|
463
|
488
|
(5)
|
847
|
844
|
-
|
1,829
|
1,730
|
6
|
||||||
|
Other
|
-
|
-
|
-
|
181
|
104
|
74
|
-
|
-
|
-
|
||||||
|
Total
Rail
|
5,179
|
5,185
|
-
|
8,154
|
7,256
|
12
|
1,574
|
1,399
|
13
|
||||||
|
International
|
1,281
|
1,274
|
1
|
580
|
545
|
6
|
453
|
428
|
6
|
||||||
|
Domestic
|
898
|
891
|
1
|
786
|
766
|
3
|
875
|
860
|
2
|
||||||
|
Other
|
-
|
-
|
-
|
46
|
51
|
(10)
|
-
|
-
|
-
|
||||||
|
Total
Intermodal
|
2,179
|
2,165
|
1
|
1,412
|
1,362
|
4
|
648
|
629
|
3
|
||||||
|
Total
Surface Transportation
|
7,358
|
7,350
|
-
|
%
|
$ 9,566
|
$ 8,618
|
11
|
%
|
$
1,300
|
$ 1,173
|
11
|
%
|
|||
For
both tables, prior periods have been reclassified to conform to the current
presentation.
2006
vs. 2005 Rail Results of Operations
Rail
Operating Revenue
CSXT
categorizes rail revenue in three main lines of business: merchandise, coal and
automotive. Revenue for CSXT increased $898 million, or 12%, to $8.2
billion in 2006 from a year ago. Continued yield management and fuel
surcharge were the primary drivers of revenue per unit gains.
Merchandise
Chemicals – Revenue
and revenue per unit improved by capitalizing on a continued strong pricing
environment. Overall volume was down slightly because high raw
material costs continued to negatively affect the U.S. chemical industry’s
competitiveness and in turn, CSXT volumes.
Emerging Markets –
Growth was driven by increased shipments of municipal waste, military, and
aggregate products (which include rocks and sand). Revenue per unit also
improved due to strong pricing actions.
Forest Products –
Shipment of building products and printing paper slowed due to the decline in
residential housing starts and electronic media conversion. However,
revenue and revenue per unit improved due to a favorable pricing
environment.
Agriculture Products
– Strong domestic demand in feed grain, soybean, ethanol, and export shipments
supported volume and revenue per unit. In addition, strong export demand for
grain and increased shipments of beans helped volume growth.
Metals – Revenue and
revenue per unit increased due to continued pricing gains and fuel surcharge
coverage. Volume increased slightly driven by strong steel demand in the
energy and non-residential construction end-markets. These gains were
partially offset by lower demand for steel in the automotive
sector.
Phosphates and
Fertilizers – Volume declined from lower export shipments due to
increased international phosphate production which caused several domestic
phosphate plants to close. Favorable mix coupled with price increases
resulted in significantly improved revenue per unit.
Food and Consumer –
Volume growth in alcoholic beverages, canned goods, and rice and beans was
offset by softness in building products, perishables, and the appliance
markets. Strong pricing actions, and a focus on longer, more
profitable shipments increased revenue and revenue per unit.
Coal
Revenue
and volume improvements were due to increased shipments of utility and export
coal. Utility companies built up their inventories which was a major
contributor to CSX’s volume growth. Revenue per unit increased due to
the continued favorable pricing environment and increased fuel surcharge
coverage.
Automotive
Volume
declined due to a reduction in North American light vehicle
production. Consistent with the overall automotive market, CSXT’s
volumes continued to shift from the Big 3 to foreign brands produced
domestically. Revenue per unit was favorable due to price increases
and fuel surcharge.
Rail
Operating Expense
Total
rail operating expenses for 2006 increased $341 million, or 6%, to $6.3 billion
compared to the prior year. The description of what is included in
each category as well as significant year over year changes is described
below.
Labor and Fringe increased
$63 million primarily due to wage and benefit inflation and increased staffing
in rail operations.
Materials, Supplies and
Other expenses
increased by $113 million in 2006 primarily due to materials inflation, along
with prior year casualty favorable adjustments and supplier reimbursements that
were not repeated. These costs were partially offset by productivity
gains from improved operations, such as efficient use of
locomotives.
Depreciation expense
increased $39 million due to a larger asset base related to higher capital
spending.
Fuel expense
increased $329 million primarily due to reduced hedge benefit from the
expiration of the fuel hedge program as well as higher fuel prices.
Equipment and Other
Rents expense
decreased $18 million due mainly to improvement in operational fluidity, which
drove improvements in asset utilization.
Gain on Insurance
Recoveries was $166 million for 2006, which represented cash received for
lost profits and higher replacement value of property compared to the value of
the property that was damaged, after consideration of the Company’s insurance
deductible expensed in 2005.
2006
vs. 2005 Intermodal Results of Operations
Intermodal
operating income increased 8% or $20 million versus last year driven by revenue
gains of $50 million along with expense containment. The increase in
revenue and revenue per unit was driven by the continued yield management
emphasis which was partially offset by mix of traffic. Volume increased slightly
due to continued growth of imported consumer goods from Asia as well as the
strength in the truckload market offset by weaker demand in services sold to
transportation brokers (known as wholesale markets).
Intermodal
operating expense increased $30 million primarily driven by an increase in fuel
costs that are reflected in inland transportation expense. Fuel costs
were higher due to rising market prices. Partially offsetting the
increase in fuel were efficiency gains related to equipment
utilization.
Liquidity and Capital Resources
Liquidity is a company’s ability to
generate adequate amounts of cash to meet both current and future needs for
obligations as they mature and to provide for planned operational
growth. In order to have a complete picture of a company’s liquidity,
its balance sheet, sources and uses of cash flow and external factors should be
reviewed.
Material
Changes in the Consolidated Balance Sheets
CSX’s
balance sheet reflects its strong capital base and the impact of CSX’s balanced
approach in deploying its capital for the benefit of its shareholders, which
includes reinvestment in the Company’s existing infrastructure, investments in
the future, share repurchases and dividends.
Long-term
debt increased $1.1 billion to $6.5 billion due to debt issuances in 2007 of
$2.4 billion partially offset by the conversion of a portion of convertible debt
into CSX common stock and the reclassification of debt from long-term to
current. See the Schedule of Contractual Obligations and Commercial
Commitments on page 50 and Note 9, Debt and Credit Agreements, for additional
details.
Other
capital decreased $1.4 billion to $37 million as a result of significant share
repurchase activity partially offset by stock option exercises and the
conversion of a portion of convertible debt into CSX common
stock. For additional information on the Company’s share repurchase
activity, see Note 1, Nature of Operations and Significant Accounting
Policies.
Sources
and Uses of Cash
CSX has
multiple sources of cash. First, the Company generates cash from
operations. In 2007, CSX generated $2.2 billion of cash from
operating activities, which represented a $126 million increase from the prior
year. Second, CSX has numerous financing sources including access to
the capital markets and a $1.25 billion five-year unsecured revolving credit
facility that expires in May 2012. This facility can be increased by
an additional $500 million to $1.75 billion with the approval of the lending
banks. See Note 9, Debt and Credit Agreements for more
information.
CSX also
has an effective shelf registration statement on file with the SEC that is
unlimited as to amount and may be used, subject to market conditions and CSX
Board authorization, to issue debt or equity securities at CSX’s discretion.
While CSX seeks to give itself flexibility with respect to cash requirements,
there can be no assurance that market conditions would permit CSX to sell such
debt securities on acceptable terms at any given time, or at all.
Among
other things, CSX uses cash for significant annual reinvestment in
infrastructure and equipment, share repurchases and scheduled payments of debt
and leases with manageable near-term maturities. The Company’s cash
requirements also include dividends to shareholders.
During
2007, net cash used by investing activities was $1.7 billion. This
use of funds was predominately driven by property additions and capital
expansion projects made by the Company. Net cash used in financing
activities was $584 million due to over $2 billion of cash used for share
repurchases during 2007, largely offset by a net increase in long-term debt
issued versus long-term debt repaid.
Dividend
payments are another use of cash. The Company paid dividends of $231
million in 2007, which was $86 million more than prior year. The
increase in 2007 was primarily due to the Company increasing quarterly dividends
to $0.15 per share.
Working
Capital
Working
capital can be considered a measure of a company’s ability to meet its
short-term needs. CSX had a working capital deficit at December 2007
of $180 million compared to a surplus of $150 million last year driven by lower
cash and higher current debt balances in 2007. The larger current
debt balance includes a reclassification of outstanding convertible debt with a
face value of $174 million from long-term to current during 2007. This
reflects bondholders’ rights under the convertible debt to require CSX to
purchase the debentures in October 2008 in lieu of the later maturity
date.
A working
capital deficit is not unusual for CSX or other companies in the industry and
does not indicate a lack of liquidity. The Company continues to maintain
adequate current assets to satisfy current liabilities and maturing obligations
when they come due. CSX has sufficient financial capacity, including
the revolving line of credit and shelf registration, to manage its day-to-day
cash requirements and any anticipated obligations.
Credit
Ratings
Credit
ratings reflect an independent agency’s judgment on the likelihood that a
borrower will repay a debt obligation at maturity. The ratings
reflect many considerations, such as the nature of the borrower’s industry and
its competitive position, the size of the company, its liquidity and access to
capital and the sensitivity of a company’s cash flows to changes in the
economy. The two largest rating agencies, Standard & Poor’s
(“S&P”) and Moody’s Investors Service (“Moody’s”), use alphanumeric codes to
designate their ratings. The highest quality rating for long-term
credit obligations is AAA+ and Aaa1 for S&P and Moody’s,
respectively.
Long-term
ratings of BBB- and Baa3 or better by S&P and Moody’s, respectively, reflect
ratings on debt obligations that fall within a band of credit quality considered
to be “investment grade.” Currently, the long-term ratings for CSX’s
obligations, along with the other large U.S. Class 1 freight railroads, fall
within the investment grade band of credit quality.
In 2007,
S&P and Moody’s both lowered their ratings of CSX's long-term unsecured debt
obligations from BBB and Baa2, respectively, to BBB- and Baa3,
respectively. This was due to the Company’s announcement in second
quarter 2007 of a plan to repurchase an additional $1 billion of CSX stock in
addition to the $2 billion repurchase plan announced earlier in 2007. Both
of these agencies indicate their outlook is “Stable” and these ratings continue
to be investment grade. CSX maintained these credit ratings through
December 2007 and does not expect that this reduction in credit ratings will
materially increase its borrowing costs or materially affect its
liquidity. If CSX's credit ratings were to decline to lower levels, the
Company could experience more significant increases in its interest cost for new
debt. In addition, the market’s demand, and thus the Company’s
ability to readily issue new debt, could become further influenced by the
economic and credit market environment.
Schedule of Contractual Obligations and Commercial
Commitments
The
following tables set forth maturities of the Company's contractual obligations
and other commitments:
|
Type
of Obligation
|
2008
|
2009
|
2010
|
2011
|
2012
|
Thereafter
|
Total
|
|
|
(Dollars
in Millions) (Unaudited)
|
||||||||
|
Contractual Obligations:
|
||||||||
|
Long-term
Debt (See Note 9)
|
$
785
|
$
305
|
$
92
|
$
591
|
$
493
|
$
4,989
|
$ 7,255
|
|
|
Operating
Leases - Net (See Note 7)
|
98
|
90
|
79
|
69
|
51
|
181
|
568
|
|
|
Agreements
with Conrail (a)
|
14
|
13
|
9
|
4
|
3
|
9
|
52
|
|
|
Purchase
Obligations (See Note 7)
|
621
|
549
|
326
|
285
|
288
|
4,773
|
6,842
|
|
|
Total
Contractual Obligations
|
$ 1,518
|
$ 957
|
$ 506
|
$ 949
|
$ 835
|
$ 9,952
|
$ 14,717
|
|
| Other Commitments: | ||||||||
|
Guarantees
(See Note 7)
|
15
|
16
|
16
|
13
|
12
|
-
|
72
|
|
|
Other
|
53
|
2
|
-
|
-
|
-
|
41
|
96
|
|
|
Total
Other Commitments
|
$ 68
|
$ 18
|
$ 16
|
$ 13
|
$ 12
|
$ 41
|
$ 168
|
|
|
(a) Represents minimum future
lease payments for freight cars and locomotives and is included in total
lease commitments disclosed in Note 7, Commitments and
Contingencies.
|
Off-Balance Sheet Arrangements
For
detailed information about the Company’s guarantees, operating leases and
purchase obligations, see Note 7, Commitments and Contingencies.
There are no off-balance sheet
arrangements that are reasonably likely to have a material effect on the
Company’s results of operations, financial condition and 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
|
Casualty, Environmental and Legal Reserves
Casualty
Casualty
reserves represent accruals for personal injury and occupational injury
claims. Currently, no individual claim is expected to exceed the
Company’s self-insured retention amount. To the extent the value of
an individual claim exceeds the self-insured retention amount, CSX would present
the liability on a gross basis with a corresponding receivable for insurance
recoveries. Personal injury and occupational claims are presented on
a gross basis and in accordance with SFAS 5, Accounting for Contingencies
(“SFAS 5”). These reserves fluctuate with estimates provided by
independent third parties reviewed by management, and are offset by the timing
of payments. Most of the claims were related to CSXT unless otherwise
noted.
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. The Company is presently self-insured for personal injury and
occupational-related claims.
Personal
Injury
Personal
injury reserves represent liabilities for employee work-related and third-party
injuries. Work-related injuries for CSXT employees are primarily
subject to the Federal Employers’ Liability Act (“FELA”). In addition
to FELA liabilities, employees of other CSX subsidiaries are covered by various
state workers’ compensation laws, the Federal Longshore and Harbor Worker’s
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 type and severity of the injury,
costs of medical treatments and uncertainties in litigation.
Based on
management’s review of the actuarial analyses performed by an independent
actuarial firm, the Company reduced personal injury reserves by $99 million
during 2007. This reduction is due to a trend of significant
decreases in the number and severity of work-related injuries for CSXT employees
since 2003. The analyses further indicated an absence of large
catastrophic claims since 2003, which also was determined to be a
trend. These reductions were included in materials, supplies and
other in the consolidated income statements.
Occupational
Occupational
claims arise from allegations of exposures 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.
Asbestos
The
Company is party to a number of occupational claims by employees alleging
exposure to asbestos in the workplace. The heaviest possible exposure
for employees was due to work conducted in and around steam locomotive engines
that were largely phased out beginning around the 1950s. However, other types of
exposures, including exposure from locomotive component parts and building
materials, continued until it was substantially eliminated by
1985. Additionally, the Company has retained liability for asbestos
claims filed against the previously owned international container shipping
business.
The
Company retains a third party specialist with extensive experience in performing
asbestos and other occupational studies to assist management in assessing the
value of the Company’s claims and cases. The analysis is performed by the
specialist semi-annually and is reviewed by management. The objective
of the analysis is to determine the number of estimated incurred but not
reported (“IBNR”) claims and the estimated average cost per claim to be received
over the next seven years. Seven years was determined by management
to be the time period in which probable claim filings and claim values could be
estimated with more certainty.
The
Company, with the assistance of the third party specialist, determines its
potentially exposed population and it is then able to derive the estimated
number of IBNR claims. The estimated average cost per claim is then determined
utilizing recent actual average cost per claim data and national industry data.
Key elements of the assessment include the following:
|
|
·
|
An
estimate is computed using a ratio of Company employee data to national
employment for select years during the period 1938-2001. The
Company uses railroad industry historical census data because it does not
have detailed employment records in order to compute the population of
potentially exposed employees.
|
|
|
·
|
The
projected incidence of disease is estimated based on epidemiological
studies using employees’ age and the duration and intensity of potential
exposure while employed. Epidemiology is the medical science
that deals with the incidence, distribution and control of diseases in a
population.
|
|
|
·
|
An
estimate of the future anticipated claims filing rate by type of disease
(non-malignant, cancer and mesothelioma) is computed using the Company’s
average historical claim filing rates for a three-year calibration period,
excluding a surge in claims originating in West Virginia. In
2006, the Company received 852 asbestos claims in West Virginia in which
the claimants were neither exposed in West Virginia nor residents of the
state. CSX believes these claims will not have merit as
no medical evidence has been provided to substantiate the claims and
therefore CSX has excluded them from the calibration
period. Claim levels in 2007 returned to expected levels and
management feels this calibration period represents the best estimate of
future filing rates.
|
|
|
·
|
An
estimate of the future anticipated dismissal rate by type of claim is
computed using the Company’s historical average dismissal rates observed
during the current calibration period noted
above.
|
|
|
·
|
An
estimate of the future anticipated settlement by type of disease is
computed using the Company’s historical average of dollars paid per claim
for pending and future claims using the average settlement by type of
incident observed during the current calibration period noted
above.
|
From
these assumptions, the Company projects the incidence of each type of disease to
the estimated population to determine the total estimated number of employees
that could potentially assert a claim. Historical claim filing rates are applied
for each type of disease to the total number of employees that could potentially
assert a claim to determine the total number of anticipated claim filings by
disease type. Historical dismissal rates, which represented claims that were
closed without payment, were deducted to calculate the number of future claims
by disease type that would likely require payment by the Company. Finally, the
number of such claims was multiplied by the average settlement value to estimate
the Company’s future liability for IBNR asbestos claims.
The
estimated future filing rates and estimated average claim values are the most
sensitive assumptions for this reserve. A 1% increase or decrease in
either the forecasted number of IBNR claims or the average claim values would
result in an approximate $1 million increase or decrease in the liability
recorded for unasserted asbestos claims.
Other
Occupational
The
Company retains a third party specialist with extensive experience in performing
other occupational studies to assist management in assessing the value of the
Company’s claims and cases. The analysis is performed by the specialist
semi-annually and is reviewed by management. Similar to the asbestos
liability estimation process, the key elements of the assessment include the
following:
|
|
·
|
An
estimate of the potentially exposed population for other occupational
diseases is calculated by projecting active versus retired workforce from
2002 to 2010 using a growth rate projection for overall railroad
employment made by the Railroad Retirement Board in its June 2003
report.
|
|
|
·
|
An
estimate of the future anticipated claims filing rate by type of injury,
employee type, and active versus retired employee is computed using the
Company’s average historical claim filing rates for the calibration
periods management felt were representative of future filing
rates. For carpal tunnel and repetitive stress injuries, the
current calibration period is a 1-year average of claim
filings. Hearing loss uses a 3-year calibration period, and all
other diseases or injuries use a 2-year calibration period. An
estimate is made to forecast future claims by using the filing rates by
disease and the active and retired CSX population each
year.
|
|
|
·
|
An
estimate of the future anticipated settlement by type of injury is
computed using the Company’s historical average of dollars paid per claim
for pending and future claims using the average settlement by type of
injury observed during a period that management feels is representative of
future settlement amounts.
|
The
estimated future filing rates and estimated average claim values are the most
sensitive assumptions for this reserve. A 1% increase or decrease in
either the forecasted number of IBNR claims or the average claim values would
not result in a material increase or decrease in the liability recorded for
unasserted other occupational claims.
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 (“PRP”) at approximately 247 environmentally impaired sites,
many of which were, 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. However, a number of these proceedings are based on
allegations that the Company, or its predecessors, sent hazardous substances to
facilities owned or operated by others 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.
In
accordance with Statement of Position 96-1, Environmental Remediation
Liabilities, the Company reviews its role with respect to each site
identified at least once a quarter, giving consideration to a number of factors
such as:
|
|
·
|
type
of clean-up required;
|
|
|
·
|
nature
of the Company’s alleged connection to the location (e.g. generator of
waste sent to the site or owner or operator of the
site);
|
|
|
·
|
extent
of the Company’s alleged connection (e.g. volume of waste sent to the
location and other relevant factors);
and
|
|
|
·
|
number,
|