CSX 07.01.2011 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q
 
(X)    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
  
For the quarterly period ended July 1, 2011
 
OR
 
( )    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from __________ to __________
Commission File Number 1-8022
 
 
 
 
 
 
 
 
 
 
 
CSX CORPORATION
(Exact name of registrant as specified in its charter)
Virginia
 
 
 
 
 
 
 
62-1051971
 
 
(State or other jurisdiction of incorporation or organization)
 
 
 
 
 
 
 
(I.R.S. Employer Identification No.)
 
 
 
 
 
 
 
 
 
 
 
 
 
500 Water Street, 15th Floor, Jacksonville, FL
 
 
 
 
 
32202
 
(904) 359-3200
 
 
(Address of principal executive offices)
 
 
 
 
 
(Zip Code)
 
(Telephone number, including area code)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
No Change
 
 
 
 
 
 
(Former name, former address and former fiscal year, if changed since last report.)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes (X) No ( )
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes (X) No ( )
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (check one)
Large Accelerated Filer (X)
 
Accelerated Filer ( )
Non-accelerated Filer ( )
 
Smaller Reporting Company ( )
 
Indicate by a check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ( ) No (X)
There were 1,095,281,506 shares of common stock outstanding on July 1, 2011 (the latest practicable date that is closest to the filing date).

1

CSX CORPORATION
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JULY 1, 2011
INDEX

 
 
 
Page
PART I.
FINANCIAL INFORMATION
 
 
Item 1.
 
 
 
 
 
 
Consolidated Income Statements (Unaudited) - Quarters and Six Months Ended July 1, 2011 and June 25, 2010
 
 
 
 
 
 
Consolidated Balance Sheets - At July 1, 2011 (Unaudited) and December 31, 2010
 
 
 
 
 
 
Consolidated Cash Flow Statements (Unaudited) - Six Months Ended July 1, 2011 and June 25, 2010
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
 
 
Item 3.
 
 
 
 
 
Item 4.
 
 
 
 
 
PART II.
OTHER INFORMATION
 
 
Item 1.
 
 
 
 
 
Item 1A.
 
 
 
 
 
Item 2.
 
 
 
 
 
Item 3.
 
 
 
 
 
Item 4.
 
 
 
 
 
Item 5.
 
 
 
 
 
Item 6.
 
 
 
 
 
 
 


2
Table of Contents

CSX CORPORATION

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CONSOLIDATED INCOME STATEMENTS (Unaudited)  
(Dollars in millions, except per share amounts)

 
Second Quarters
 
Six Months
 
2011
2010
 
2011
2010
 
 
 
 
 
 
Revenue
$
3,019

$
2,663

 
$
5,829

$
5,154

Expense
 
 
 
 
 
Labor and Fringe
764

721

 
1,529

1,450

Materials, Supplies and Other
557

551

 
1,087

1,070

Fuel
431

304

 
833

587

Depreciation
246

230

 
489

458

Equipment and Other Rents
95

89

 
192

189

Total Expense
2,093

1,895

 
4,130

3,754

 
 
 
 
 
 
Operating Income
926

768

 
1,699

1,400

 
 
 
 
 
 
Interest Expense
(134
)
(135
)
 
(274
)
(277
)
Other Income - Net (Note 8)
—

9

 
5

20

Earnings Before Income Taxes
792

642

 
1,430

1,143

 
 
 
 
 
 
Income Tax Expense (Note 9)
(286
)
(228
)
 
(529
)
(424
)
Net Earnings
$
506

$
414

 
$
901

$
719

 
 
 
 
 
 
Per Common Share (Note 2)
 
 
 
 
 
Net Earnings Per Share, Basic
$
0.46

$
0.36

 
$
0.81

$
0.62

Net Earnings Per Share, Assuming Dilution
$
0.46

$
0.36

 
$
0.81

$
0.61

 
 
 
 
 
 
 
 
 
 
 
 
Average Shares Outstanding (In millions)
1,102

1,149

 
1,105

1,161

Average Shares Outstanding, Assuming Dilution (In millions)
1,109

1,159

 
1,112

1,171

 
 
 
 
 
 
 
 
 
 
 
 
Cash Dividends Paid Per Common Share
$
0.12

$
0.08

 
$
0.21

$
0.16


All share and per share data were retroactively restated to reflect the stock split effective May 31, 2011.

See accompanying notes to consolidated financial statements.


3
Table of Contents
CSX CORPORATION
ITEM 1. FINANCIAL STATEMENTS

CONSOLIDATED BALANCE SHEETS
(Dollars in millions, except per share amounts)

 
(Unaudited)
 
 
July 1,
2011
December 31,
2010
 
 
 
ASSETS
Current Assets
 
 
Cash and Cash Equivalents
$
1,252

$
1,292

Short-term Investments
43

54

Accounts Receivable - Net (Note 1)
1,112

993

Materials and Supplies
251

218

Deferred Income Taxes
186

192

Other Current Assets
123

106

  Total Current Assets
2,967

2,855

 
 
 
Properties
32,777

32,065

Accumulated Depreciation
(8,575
)
(8,266
)
  Properties - Net
24,202

23,799

 
 
 
Investment in Conrail
681

673

Affiliates and Other Companies
477

461

Other Long-term Assets
378

353

  Total Assets
$
28,705

$
28,141

 
 
 
LIABILITIES AND SHAREHOLDERS' EQUITY
 
 
 
Current Liabilities
 
 
Accounts Payable
$
1,076

$
1,046

Labor and Fringe Benefits Payable
430

520

Casualty, Environmental and Other Reserves (Note 4)
180

176

Current Maturities of Long-term Debt (Note 7)
494

613

Income and Other Taxes Payable
137

85

Other Current Liabilities
168

97

  Total Current Liabilities
2,485

2,537

 
 
 
Casualty, Environmental and Other Reserves (Note 4)
468

502

Long-term Debt (Note 7)
8,186

8,051

Deferred Income Taxes
7,340

7,053

Other Long-term Liabilities
1,285

1,298

  Total Liabilities
19,764

19,441

 
 
 
Common Stock $1 Par Value
1,095

370

Other Capital (Note 1)
—

—

Retained Earnings
8,582

9,087

Accumulated Other Comprehensive Loss (Note 1)
(747
)
(771
)
Noncontrolling Interest
11

14

Total Shareholders' Equity
8,941

8,700

Total Liabilities and Shareholders' Equity
$
28,705

$
28,141


See accompanying notes to consolidated financial statements.

4
Table of Contents
CSX CORPORATION
ITEM 1. FINANCIAL STATEMENTS

CONSOLIDATED CASH FLOW STATEMENTS (Unaudited)
(Dollars in millions)
 
Six Months
 
2011
2010
 
 
 
OPERATING ACTIVITIES
 
 
Net Earnings
$
901

$
719

Adjustments to Reconcile Net Earnings to Net Cash Provided by Operating Activities:
 
 
Depreciation
489

458

Deferred Income Taxes
280

79

Other Operating Activities
(10
)
79

Changes in Operating Assets and Liabilities:
 
 
Accounts Receivable
(119
)
57

Other Current Assets
(64
)
(52
)
Accounts Payable
35

(34
)
Income and Other Taxes Payable
76

94

Other Current Liabilities
(1
)
22

Net Cash Provided by Operating Activities
1,587

1,422

 
 
 
INVESTING ACTIVITIES
 
 
Property Additions
(947
)
(687
)
Other Investing Activities
16

68

Net Cash Used in Investing Activities
(931
)
(619
)
 
 
 
FINANCING ACTIVITIES
 
 
Long-term Debt Issued (Note 7)
600

—

Long-term Debt Repaid (Note 7)
(570
)
(71
)
Dividends Paid
(228
)
(184
)
Stock Options Exercised (Note 3)
24

16

Shares Repurchased
(528
)
(823
)
Other Financing Activities
6

(137
)
Net Cash Used in Financing Activities
(696
)
(1,199
)
 
 
 
Net Decrease in Cash and Cash Equivalents
(40
)
(396
)
 
 
 
CASH AND CASH EQUIVALENTS
 
 
Cash and Cash Equivalents at Beginning of Period
1,292

1,029

Cash and Cash Equivalents at End of Period
$
1,252

$
633


See accompanying notes to consolidated financial statements.


5
Table of Contents

CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 1.
Nature of Operations and Significant Accounting Policies

Background

CSX Corporation (“CSX”), and together with its subsidiaries (the “Company”), based in Jacksonville, Florida, is one of the nation's leading transportation companies. The Company provides rail-based transportation services including traditional rail service and the transport of intermodal containers and trailers.

CSX's principal operating subsidiary, CSX Transportation, Inc. (“CSXT”), provides an important link to the transportation supply chain through its approximately 21,000 route mile rail network, which serves major population centers in 23 states east of the Mississippi River, the District of Columbia and the Canadian provinces of Ontario and Quebec. The Company's intermodal business links customers to railroads via trucks and terminals.

Other entities

In addition to CSXT, the Company's subsidiaries include CSX Intermodal Terminals, Inc. (“CSX Intermodal Terminals”), Total Distribution Services, Inc. (“TDSI”), Transflo Terminal Services, Inc. (“Transflo”), CSX Technology, Inc. (“CSX Technology”) and other subsidiaries.  CSX Intermodal Terminals owns and operates a system of intermodal terminals, predominantly in the eastern United States and also performs drayage services (the door to door pickup and delivery of intermodal shipments) and trucking dispatch operations. TDSI serves the automotive industry with distribution centers and storage locations, while Transflo provides logistical solutions for transferring products from rail to trucks.  CSX Technology and other subsidiaries provide support services for the Company.

CSX's other holdings include CSX Real Property, Inc., a subsidiary responsible for the Company's real estate sales, leasing, acquisition and management and development activities.  These activities are classified in other income - net because they are not considered to be operating activities by the Company. Results of these activities fluctuate with the timing of non-operating real estate transactions.

Basis of Presentation

In the opinion of management, the accompanying consolidated financial statements contain all normal, recurring adjustments necessary to fairly present the following:
  
•
Consolidated income statements for the quarter and six months ended July 1, 2011 and June 25, 2010;
•
Consolidated balance sheets at July 1, 2011 and December 31, 2010; and
•
Consolidated cash flow statements for the six months ended July 1, 2011 and June 25, 2010.


6
Table of Contents
CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)



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

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

Fiscal Year

CSX follows a 52/53 week fiscal reporting calendar with the last day of each reporting period ending on a Friday:
 
•
The second fiscal quarter of 2011 and 2010 consisted of 13 weeks ending on July 1, 2011 and June 25, 2010, respectively.
•
The six month periods of 2011 and 2010 consisted of 26 weeks ending on July 1, 2011 and June 25, 2010, respectively.
•
Fiscal year 2010 consisted of 53 weeks ending on December 31, 2010. Therefore, fourth quarter 2010 consisted of 14 weeks.
•
Fiscal year 2011 will consist of 52 weeks ending on December 30, 2011.        
Except as otherwise specified, references to “second quarter(s)” or “six months” indicate CSX's fiscal periods ending July 1, 2011 and June 25, 2010, and references to year-end indicate the fiscal year ended December 31, 2010.

Comprehensive Earnings

CSX reports comprehensive earnings or loss in accordance with the Comprehensive Income Topic in the Accounting Standards Codification (“ASC”) in the Consolidated Statement of Changes in Shareholders' Equity. Total comprehensive earnings are defined as all changes in shareholders' equity during a period, other than those resulting from investments by and distributions to shareholders (e.g., issuance of equity securities and dividends).  Generally, for CSX, total comprehensive earnings equals net earnings plus or minus adjustments for pension and other post-retirement liabilities. Total comprehensive earnings represent the activity for a period net of tax and were $519 million and $424 million for second quarters 2011 and 2010, respectively, and $925 million and $741 million for six months 2011 and 2010, respectively.

While total comprehensive earnings is the activity in a period and is largely driven by net earnings in that period, accumulated other comprehensive income or loss (“AOCI”) represents the cumulative balance of other comprehensive income, net of tax, as of the balance sheet date.  For CSX, AOCI is primarily the cumulative balance related to pension and other post-retirement adjustments and reduced overall equity by $747 million and $771 million as of the end of second quarter 2011 and December 2010, respectively.

Beginning in first quarter 2012, the Comprehensive Income Topic in the ASC will require comprehensive income to be presented in a single continuous statement following net income or in two consecutive statements reporting net income and other comprehensive income. See the New Accounting Pronouncements section of Note 1, Nature of Operations and Significant Accounting Policies for further information.

7
Table of Contents
CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)



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

Allowance for Doubtful Accounts

The Company maintains an allowance for doubtful accounts on uncollectible amounts related to freight receivables, government reimbursement receivables, claims for damages and other various receivables. The allowance is based upon the credit worthiness of customers, historical experience, the age of the receivable and current market and economic conditions. Uncollectible amounts are charged against the allowance account. Allowance for doubtful accounts of $43 million and $38 million is included in the consolidated balance sheets as of the end of second quarter 2011 and December 2010, respectively.

New Accounting Pronouncements

In June 2011, the Financial Accounting Standards Board issued an Accounting Standards Update to the Comprehensive Income Topic in the ASC aimed at increasing the prominence of items reported in other comprehensive income in the financial statements. This update requires companies to present comprehensive income in a single statement below net income or in a separate statement of comprehensive income immediately following the income statement. Companies will no longer be allowed to present comprehensive income on the statement of changes in shareholders' equity. In both options, companies must present the components of net income, total net income, the components of other comprehensive income, total other comprehensive income and total comprehensive income. This update does not change which items are reported in other comprehensive income or the requirement to report reclassifications of items from other comprehensive income to net income. This requirement will become effective for CSX beginning with the first quarter 2012 10-Q filing and will require retrospective application for all periods presented.

Other Items

Stock Split

In May 2011, CSX announced a three-for-one split of its common stock. All shareholders of record on May 31, 2011 received two additional shares of CSX common stock that were distributed on June 15, 2011. See Note 2, Earnings Per Share.

Dividend Increase and Share Repurchases

During the quarter, the Company increased its quarterly cash dividend 38% to $0.12 per share on a post-split basis. In addition, CSX announced a new $2 billion share repurchase program expected to be completed by the end of 2012.

Other Capital

During second quarter 2011, CSX's other capital balance was reduced to zero as a result of share repurchases and the stock split. In accordance with the Equity Topic in the ASC, other capital cannot be negative. Therefore, a reclassification of $929 million was made between retained earnings and other capital to bring the other capital balance to zero. Generally, retained earnings is only impacted by net earnings and dividends.


8
Table of Contents
CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)



NOTE 2.
Earnings Per Share

In May 2011, CSX announced a three-for-one split of its common stock. All shareholders of record on May 31, 2011 received two additional shares of CSX common stock that were distributed on June 15, 2011. Pursuant to the Earnings Per Share Topic in the ASC, all share and per share disclosures have been retroactively restated to reflect the stock split.

The following table sets forth the computation of basic earnings per share and earnings per share, assuming dilution:
 
Second Quarters
Six Months
 
2011
2010
2011
2010
Numerator (Dollars in millions):
 
 
 
 
Net Earnings
$
506

$
414

$
901

$
719

 
 
 
 
 
Denominator (Units in millions):
 
 
 
 
Average Common Shares Outstanding
1,102

1,149

1,105

1,161

Other Potentially Dilutive Common Shares (a)
7

10

7

10

Average Common Shares Outstanding, Assuming Dilution
1,109

1,159

1,112

1,171

 
 
 
 
 
Net Earnings Per Share, Basic
$
0.46

$
0.36

$
0.81

$
0.62

Net Earnings Per Share, Assuming Dilution
$
0.46

$
0.36

$
0.81

$
0.61


(a)
Other potentially dilutive common shares include convertible debt, stock options, common stock equivalents and performance units granted under a management incentive compensation plan.

Basic earnings per share is based on the weighted-average number of shares of common stock outstanding. Earnings per share, assuming dilution, is based on the weighted-average number of shares of common stock outstanding adjusted for the effects of common stock that may be issued as a result of the following types of potentially dilutive instruments:

•
convertible debt;
•
employee stock options; and
•
other equity awards, which include long-term incentive awards.

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

Other potentially dilutive common shares include convertible debt, stock options, stock option common stock equivalents and performance units granted under a management incentive compensation plan. When calculating diluted earnings per share for stock option common stock equivalents, the Earnings Per Share Topic in the ASC requires CSX to include the potential shares that would be outstanding if all outstanding stock options were exercised. This is offset by shares CSX could repurchase using the proceeds from these hypothetical exercises to obtain the common stock equivalent. This number is different from outstanding stock options, which is included in Note 3, Share-Based Compensation. All stock options were dilutive for the periods presented; therefore, no stock options were excluded from the diluted earnings per share calculation.

9
Table of Contents
CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)



NOTE 2.
Earnings Per Share, continued

As a result, diluted shares outstanding are not impacted when debentures are converted into CSX common stock because those shares were already included in the diluted shares calculation. Shares outstanding for basic earnings per share, however, are impacted on a weighted-average basis when conversions occur.  During second quarters 2011 and 2010, approximately $5 million and $200 thousand of face value of convertible debentures were converted into 178 thousand and 7 thousand shares of CSX common stock, respectively. As of the end of the second quarter 2011, approximately $5 million of convertible debentures at face value remained outstanding, which are convertible into approximately 542 thousand shares of CSX common stock.

NOTE 3.
Share-Based Compensation

Under CSX share-based compensation plans, awards primarily consist of performance grants, restricted stock awards, restricted stock units, stock options and stock grants for directors. CSX has not granted stock options since 2003. Awards granted under the various plans are determined and approved by the Compensation Committee of the Board of Directors or, in certain circumstances, by the Chief Executive Officer for awards to management employees other than senior executives. The Board of Directors approves awards granted to the Company's non-management directors upon recommendation of the Governance Committee.

In May 2011, approximately 1.1 million performance units (post-split) were granted to key members of management under a new long-term incentive plan ("LTIP") adopted under the CSX Stock and Incentive Award Plan.  This LTIP plan provides for a three-year cycle ending in fiscal year 2013.  Similar to the two existing plans, the financial target upon which payments are based is operating ratio, which is defined as operating expenses divided by operating revenue and is calculated excluding certain non-recurring items.  Grants were made in performance units, with each unit being equivalent to one share of CSX common stock, and payouts will be made in CSX common stock.  The payout range for participants will be between 0% and 200% of the original grant based upon CSX's attainment of pre-established operating ratio targets for fiscal year 2013.  Payouts to certain senior executive officers are subject to a reduction of up to 30% at the discretion of the Compensation Committee of the Board of Directors based upon Company performance against certain CSX strategic initiatives.
 
Additionally, as part of this plan, the Company granted approximately 360 thousand time-based restricted stock units (post-split) to key members of management.  The restricted stock units vest three years after the date of grant and participants receive cash dividend equivalents on the unvested shares during the restriction period.  These awards are time-based and support retention objectives.
 
     For information related to the Company's other outstanding long-term incentive compensation, see CSX's most recent annual report on Form 10-K.

Total pre-tax expense associated with all share-based compensation and its related income tax benefit is as follows:
 
Second Quarters
 
Six Months
(Dollars in millions)
2011
2010
 
2011
2010
 
 
 
 
 
 
Share-Based Compensation Expense
$
11

$
9

 
$
22

$
32

Income Tax Benefit
4

3

 
8

12

 

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Table of Contents
CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


    
NOTE 3.
Share-Based Compensation, continued

The following table provides information about stock options exercised and expired.
 
Second Quarters
 
Six Months
(In thousands)
2011
2010
 
2011
2010
 
 
 
 
 
 
Number of Stock Options Exercised
675

1,662

 
3,954

2,739

Number of Stock Options Expired
21

—

 
21

—


As of December 2009, all outstanding options were vested, and therefore, there will be no future expense related to these options.  As of the end of second quarter 2011, CSX had approximately 5 million stock options outstanding. 

NOTE 4.
Casualty, Environmental and Other Reserves

Casualty, environmental and other reserves are considered critical accounting estimates that involve significant management judgments. They are provided for in the consolidated balance sheets as follows:
 
July 1, 2011
 
December 31, 2010
(Dollars in millions)
Current
Long-term
Total
 
Current
Long-term
Total
 
 
 
 
 
 
 
 
Casualty:
 
 
 
 
 
 
 
Personal Injury
$
78

$
178

$
256

 
$
78

$
176

$
254

Occupational
10

32

42

 
10

30

40

Asbestos
9

61

70

 
9

72

81

     Total Casualty
97

271

368

 
97

278

375

Separation
16

38

54

 
16

44

60

Environmental
37

56

93

 
37

70

107

Other
30

103

133

 
26

110

136

     Total
$
180

$
468

$
648

 
$
176

$
502

$
678


Actual settlements and claims received could differ. The final outcome of these matters cannot be predicted with certainty. Considering the legal defenses available, the liabilities that have been recorded and other factors, it is the opinion of management that none of these items, when finally resolved, will have a material effect on the Company's financial condition, results of operations or liquidity. Should a number of these items occur in the same period, however, they could have a material effect on the Company's financial condition, results of operations or liquidity in that particular period.
  
Casualty

Casualty reserves represent accruals for personal injury, occupational injury claims and asbestos. During 2010 the Company increased its self-insured retention amount for these claims from $25 million to $50 million per injury for claims occurring on or after June 1, 2010. Currently, no individual claim is expected to exceed the self-insured retention amount. In accordance with the Contingencies Topic in the ASC, to the extent the value of an individual claim exceeds the self-insured retention amount; the Company would present the liability on a gross basis with a corresponding receivable for insurance recoveries. These reserves fluctuate based upon the timing of payments as well as changes in independent third-party estimates, which are reviewed by management. Most of the claims relate to CSXT unless otherwise noted below. Defense and processing costs, which historically have been insignificant and are anticipated to be insignificant in the future, are not included in the recorded liabilities.

11
Table of Contents
CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)



NOTE 4.
Casualty, Environmental and Other Reserves, continued

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 Workers' Compensation Program or the Maritime Jones Act.

CSXT retains an independent actuarial firm to assist management in assessing the value of personal injury claims.  An analysis is performed by the independent actuarial firm quarterly and is reviewed by management. The methodology used by the actuary includes a development factor to reflect growth or reduction in the value of these personal injury claims. It is based largely on CSXT's historical claims and settlement experience. Actual results may vary from estimates due to the number, type and severity of the injury, costs of medical treatments and uncertainties in litigation.

Occupational & Asbestos

Occupational claims arise from allegations of exposure to certain materials in the workplace, such as solvents, soaps, chemicals (collectively referred to as “irritants”) and diesel fuels (exhaust fumes) or allegations of chronic physical injuries resulting from work conditions, such as repetitive stress injuries, carpal tunnel syndrome and hearing loss. Also, asbestos claims are from employees alleging exposure to asbestos in the workplace.

An analysis of occupational claims is performed quarterly by an independent actuarial firm and reviewed by management. The methodology used includes estimates of future anticipated incurred but not reported claims based on the Company's trends in average historical claim filing rates, future anticipated dismissal rates and future settlement rates.

Asbestos claims are reviewed quarterly by management, and analyzed annually by a third party expert. The methodology used includes estimates of future anticipated incurred but not reported claims based on the Company's trends in average historical claim filing rates, future anticipated dismissal rates and future settlement rates. For both occupational and asbestos, actual claims may vary from these estimates due to the number, type and severity of the injury, costs of medical treatments and uncertainties in litigation.

Separation
 
Separation liabilities represent the estimated benefits provided to certain union employees as a result of implementing workforce reductions, improvements in productivity and certain other cost reductions at the Company's major transportation units since 1991. These liabilities are expected to be paid out over the next 10 to 15 years from general corporate funds and may fluctuate depending on the timing of payments and associated taxes.

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CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)



NOTE 4.
Casualty, Environmental and Other Reserves, continued

Environmental

The Company is a party to various proceedings related to environmental issues, including administrative and judicial proceedings involving private parties and regulatory agencies. The Company has been identified as a potentially responsible party at approximately 258 environmentally impaired sites. Many of these are, or may be, subject to remedial action under the federal Comprehensive Environmental Response, Compensation and Liability Act of 1980, or CERCLA, also known as the Superfund Law, or similar state statutes. Most of these proceedings arose from environmental conditions on properties used for ongoing or discontinued railroad operations. A number of these proceedings, however, are based on allegations that the Company, or its predecessors, sent hazardous substances to facilities owned or operated by others for treatment, recycling or disposal. In addition, some of the Company's land holdings were leased to others for commercial or industrial uses that may have resulted in releases of hazardous substances or other regulated materials onto the property and could give rise to proceedings against the Company.

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

In accordance with the Asset Retirement and Environmental Obligations Topic in the ASC, the Company reviews its role with respect to each site identified at least quarterly, giving consideration to a number of factors such as:

•
type of clean-up required;
•
nature of the Company's alleged connection to the location (e.g., generator of waste sent to the site or owner or operator of the site);
•
extent of the Company's alleged connection (e.g., volume of waste sent to the location and other relevant factors); and
•
number, connection and financial viability of other named and unnamed potentially responsible parties at the location.

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

Currently, the Company does not possess sufficient information to reasonably estimate the amounts of additional liabilities, if any, on some sites until completion of future environmental studies. In addition, conditions that are currently unknown could, at any given location, result in additional exposure, the amount and materiality of which cannot presently be reliably estimated. Based upon information currently available, however, the Company believes its environmental reserves are adequate to fund remedial actions to comply with present laws and regulations, and that the ultimate liability for these matters, if any, will not materially affect its overall financial condition, results of operations or liquidity.

13
Table of Contents
CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)



NOTE 4.
Casualty, Environmental and Other Reserves, continued

Other

Other reserves include liabilities for various claims, such as longshoremen disability claims, freight claims and claims for property, automobile and general liability. These liabilities are accrued at the estimable and probable amount in accordance with the Contingencies Topic in the ASC.

NOTE 5.
Commitments and Contingencies

Insurance

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

Legal Proceedings

For information related to the Company's legal proceedings, see Item 1, Legal proceedings in Part II of this quarterly report on Form 10-Q.

NOTE 6.
Employee Benefit Plans

The Company sponsors defined benefit pension plans principally for salaried, management personnel.  The plans provide eligible employees with retirement benefits based predominantly on years of service and compensation rates near retirement.  For employees hired after December 31, 2002, benefits are determined based on a cash balance formula, which provides benefits by utilizing interest and pays credits based upon age, service and compensation.  In addition to these plans, the Company sponsors a self-insured post-retirement medical plan and a life insurance plan that provide benefits to full-time, salaried, management employees, hired prior to January 1, 2003, upon their retirement if certain eligibility requirements are met.  Prior to 2011, the post-retirement medical plan was partially funded by all participating retirees, with retiree contributions adjusted annually.  Beginning in 2011, Medicare-eligible retirees will be covered by a health reimbursement arrangement, which is an employer-funded account that can be used for reimbursement of eligible medical expenses. Non-Medicare eligible retirees will continue to be covered by the existing self-insured program.  The life insurance plan is non-contributory.


14
Table of Contents
CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)



NOTE 6.
Employee Benefit Plans, continued

The Company engages independent actuaries to compute the amounts of liabilities and expenses relating to these plans subject to the assumptions that the Company selects.  These amounts are reviewed by management.  The following table describes the components of expense/ (income) related to net benefit expense:
 
Pension Benefits
(Dollars in millions)
Second Quarters
 
Six Months
 
2011
2010
 
2011
2010
Service Cost
$
10

$
11

 
$
20

$
21

Interest Cost
30

30

 
60

61

Expected Return on Plan Assets
(40
)
(41
)
 
(79
)
(82
)
Amortization of Net Loss
18

14

 
36

29

Amortization of Prior Service Cost
—

(1
)
 
—

—

Total Expense
$
18

$
13

 
$
37

$
29

 
 
 
 
 
 
 
 
 
 
 
 
 
Other Post-retirement Benefits
(Dollars in millions)
Second Quarters
 
Six Months
 
2011
2010
 
2011
2010
Service Cost
$
1

$
1

 
$
2

$
2

Interest Cost
3

4

 
6

9

Amortization of Net Loss
2

2

 
3

4

Amortization of Prior Service Cost
(1
)
—

 
(1
)
—

Total Expense
$
5

$
7

 
$
10

$
15


Qualified pension plan obligations are funded in accordance with prescribed regulatory requirements and with an objective of meeting minimum funding requirements necessary to avoid restrictions on flexibility of plan operation and benefit payments.  At this time, the Company anticipates that no contributions to its qualified pension plans will be required in 2011.  For further details, see Note 8, Employee Benefit Plans, in CSX's most recent annual report on Form 10-K.

NOTE 7.
Debt and Credit Agreements

Total activity related to long-term debt as of the end of second quarter 2011 was as follows:
(Dollars in millions)
Current Portion
Long-term Portion
Total
Long-term debt as of December 2010
$
613

$
8,051

$
8,664

2011 activity:
 
 
 
Long-term debt issued
—

600

600

Long-term debt repaid
(570
)
—

(570
)
Reclassifications
456

(456
)
—

Debt conversions to CSX stock
(5
)
—

(5
)
Discount and premium activity
—

(9
)
(9
)
Long-term debt as of the end of second quarter 2011
$
494

$
8,186

$
8,680

 
For fair value information related to the Company's long-term debt, see Note 10, Fair Value Measurements.

15
Table of Contents
CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)



NOTE 7.
Debt and Credit Agreements, continued

Debt Issuance

In May 2011, CSX issued $350 million of 4.25% notes due June 2021 and $250 million of 5.50% notes due April 2041. These notes are included in the consolidated balance sheets under long-term debt and may be redeemed by the Company at any time. The net proceeds from the sale of the notes will be used for general corporate purposes, which may include debt repayments from time to time, repurchases of CSX common stock, capital expenditures, working capital requirements, improvements in productivity and other cost reductions.

Revolving Credit Facility
    
CSX has a $1.25 billion unsecured revolving credit facility with a syndicate of banks. With the approval of the lending banks, CSX may increase its total borrowing capacity under the $1.25 billion facility by $500 million, or up to $1.75 billion. The facility allows borrowings at floating (LIBOR-based) interest rates, plus a spread, depending upon CSX's senior unsecured debt ratings. LIBOR is the London Interbank Offered Rate which is a daily reference rate based on the interest rates at which banks offer to lend unsecured funds. As of the end of second quarter 2011, this facility was not drawn on, and CSX was in compliance with all covenant requirements under the facility.  The current facility expires in May 2012 and the Company plans to renew or replace this facility prior to its expiration.

Receivables Securitization Facility

During the quarter, the Company renewed its $250 million receivables securitization facility through June 2012. This facility has a 364-day term. The purpose of this facility is to provide an alternative to commercial paper and a low cost source of short-term liquidity. As of the date of this filing, the Company has no outstanding balances under this facility. Under the terms of this facility, CSX Transportation transfers eligible third-party receivables to CSX Trade Receivables, a bankruptcy-remote special purpose subsidiary. A separate subsidiary of CSX will service the receivables. Upon transfer, the receivables become assets of CSX Trade Receivables and are not available to the creditors of CSX or any of its other subsidiaries. In the event CSX Trade Receivables draws under this facility, the Company will record an equivalent amount of debt on its consolidated financial statements.


NOTE 8.
Other Income - Net

The Company derives income from items that are not considered operating activities. Income from these items is reported net of related expense. Other income - net consisted of the following:
 
Second Quarters
 
Six Months
(Dollars in millions)
2011
2010
 
2011
2010
Interest Income
$
1

$
2

 
$
2

$
3

Income from Real Estate
5

8

 
8

15

Miscellaneous Income (Expense)
(6
)
(1
)
 
(5
)
2

Total Other Income - Net
$
—

$
9

 
$
5

$
20


16
Table of Contents
CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)



NOTE 9.
Income Taxes

During the second quarter of 2011, several state legislative changes resulted in the recognition of a net income tax benefit of $14 million, or $0.01 per share. This benefit is primarily attributable to Indiana legislation reducing the corporate income tax rate.

During the second quarter of 2010, the Joint Committee of Taxation, which is a committee of the United States Congress, approved the refund related to the resolution of the 2004-2006 federal income tax audit. The final issue for this audit cycle related to a dispute over the value of the donation of appreciated property. The Company recorded a net tax and interest benefit of $15 million, or $0.01 per share, primarily related to the resolution of this audit in the second quarter of 2010.

There have been no material changes to the balance of unrecognized tax benefits during second quarter 2011.

NOTE 10.
Fair Value Measurements

The Financial Instruments Topic in the ASC requires disclosures about fair value of financial instruments in annual reports as well as in quarterly reports. For CSX, this statement applies to certain investments and long-term debt. Disclosure of the fair value of pension plan assets is only required annually.

Various inputs are considered when determining the value of the Company's investments, pension plan assets and long-term debt. The inputs or methodologies used for valuing securities are not necessarily an indication of the risk associated with investing in these securities. These inputs are summarized in the three broad levels listed below.
 
•
Level 1 - observable market inputs that are unadjusted quoted prices for identical assets or liabilities in active markets

•
Level 2 - other significant observable inputs (including quoted prices for similar securities, interest rates, credit risk, etc.)

•
Level 3 - significant unobservable inputs (including the Company's own assumptions in determining the fair value of investments)
 
The valuation methods described below may produce a fair value calculation that is not indicative of net realizable value or reflective of future fair values. Furthermore, while the Company believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date.



17
Table of Contents
CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)



NOTE 10.
Fair Value Measurements, continued

Investments
 
The Company's investment assets, valued by a third-party trustee, consist primarily of corporate bonds and are carried at fair value, on the consolidated balance sheet per the Fair Value Measurements and Disclosures Topic in the ASC. Level 1 inputs were used to determine fair value of the Company's investment assets. The fair value and amortized cost of these bonds are as follows:
(Dollars in millions)
July 1,
2011
 
December 31, 2010
Fair Value
$
151

 
$
123

Amortized Cost
$
150

 
$
121


These investments have the following maturities:
(Dollars in millions)
July 1,
2011
 
December 31, 2010
Less than 1 year
$
30

 
$
44

1 - 2 years (a)
59

 
45

2 - 5 years (a)
62

 
31

Greater than 5 years
—

 
3

Total
$
151

 
$
123


(a)
The 1-2 year category and the 2-5 year category include callable bonds of approximately $5 million for both 2011 and 2010, which are classified as short-term investments on the consolidated balance sheet.

Long-term Debt

Long-term debt is reported at carrying amount on the consolidated balance sheet and is the Company's only financial instrument with fair values significantly different from their carrying amounts.  The majority of the Company's long-term debt is valued by an independent third party. For those instruments not valued by the third party, the fair value has been estimated by applying market rates of similar instruments to the scheduled contractual debt payments and maturities. These market rates are provided by the same third party. All of the inputs used to determine the fair value of the Company's long-term debt are Level 2 inputs.
 
The fair value of outstanding debt fluctuates with changes in a number of factors. Such factors include, but are not limited to, interest rates, market conditions, values of similar financial instruments, size of the transaction, cash flow projections and comparable trades. Fair value will exceed carrying value when the current market interest rate is lower than the interest rate at which the debt was originally issued. The fair value of a company's debt is a measure of its current value under present market conditions. It does not impact the financial statements under current accounting rules.


18
Table of Contents
CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)



NOTE 10.
Fair Value Measurements, continued

The fair value and carrying value of the Company's long-term debt is as follows:

(Dollars in millions)
July 1,
2011
 
December 31, 2010
Long-term Debt Including
Current Maturities:
 
 
 
Fair Value
$
9,632

 
$
9,624

Carrying Value
$
8,680

 
$
8,664


NOTE 11.    Summarized Consolidating Financial Data

In 2007, CSXT sold secured equipment notes maturing in 2023 and in 2008, CSXT sold additional secured equipment notes maturing in 2014 in registered public offerings. CSX has fully and unconditionally guaranteed the notes. In connection with the notes, the Company is providing the following condensed consolidating financial information in accordance with SEC disclosure requirements. Each entity in the consolidating financial information follows the same accounting policies as described in the consolidated financial statements, except for the use of the equity method of accounting to reflect ownership interests in subsidiaries which are eliminated upon consolidation and the allocation of certain expenses of CSX incurred for the benefit of its subsidiaries.
Condensed consolidating financial information for the obligor, CSXT, and parent guarantor, CSX, is as follows:


19
Table of Contents
CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)



NOTE 11.    Summarized Consolidating Financial Data, continued

 Consolidating Income Statements
 (Dollars in millions)
 Second Quarter 2011
 CSX Corporation
 CSX Transportation
 Eliminations and Other
 Consolidated
 Revenue
$
—

$
3,003

$
16

$
3,019

 Expense
(67
)
2,222

(62
)
2,093

 Operating Income
67

781

78

926

 
 
 
 
 
 Equity in Earnings of Subsidiaries
540

2

(542
)
—

 Interest (Expense) / Benefit
(121
)
(22
)
9

(134
)
 Other Income - Net
4

—

(4
)
—

 
 
 
 
 
 Earnings Before Income Taxes
490

761

(459
)
792

 Income Tax (Expense) / Benefit
16

(275
)
(27
)
(286
)
 Net Earnings
$
506

$
486

$
(486
)
$
506

 
 
 
 
 
 Second Quarter 2010
 CSX Corporation
 CSX Transportation
 Eliminations and Other
 Consolidated
 Revenue
$
—

$
2,337

$
326

$
2,663

 Expense
(46
)
1,672

269

1,895

 Operating Income
46

665

57

768

 
 
 
 
 
 Equity in Earnings of Subsidiaries
492

—

(492
)
—

 Interest (Expense) / Benefit
(122
)
(27
)
14

(135
)
 Other Income - Net
4

20

(15
)
9

 
 
 
 
 
 Earnings Before Income Taxes
420

658

(436
)
642

 Income Tax (Expense) / Benefit
(6
)
(236
)
14

(228
)
 Net Earnings
$
414

$
422

$
(422
)
$
414



20
Table of Contents
CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)



NOTE 11.    Summarized Consolidating Financial Data, continued

 Consolidating Income Statements
 (Dollars in millions)
Six Months Ended July 1, 2011
 CSX Corporation
 CSX Transportation
 Eliminations and Other
 Consolidated
 Revenue
$
—

$
5,797

$
32

$
5,829

 Expense
(133
)
4,364

(101
)
4,130

 Operating Income
133

1,433

133

1,699

 
 
 
 
 
 Equity in Earnings of Subsidiaries
972

3

(975
)
—

 Interest (Expense) / Benefit
(247
)
(45
)
18

(274
)
 Other Income - Net
8

2

(5
)
5

 
 
 
 
 
 Earnings Before Income Taxes
866

1,393

(829
)
1,430

 Income Tax (Expense) / Benefit
35

(516
)
(48
)
(529
)
 Net Earnings
$
901

$
877

$
(877
)
$
901

 
 
 
 
 
Six Months Ended June 25, 2010
 CSX Corporation
 CSX Transportation
 Eliminations and Other
 Consolidated
 Revenue
$
—

$
4,489

$
665

$
5,154

 Expense
(83
)
3,279

558

3,754

 Operating Income
83

1,210

107

1,400

 
 
 
 
 
 Equity in Earnings of Subsidiaries
889

—

(889
)
—

 Interest (Expense) / Benefit
(248
)
(55
)
26

(277
)
 Other Income - Net
10

38

(28
)
20

 
 
 
 
 
 Earnings Before Income Taxes
734

1,193

(784
)
1,143

 Income Tax (Expense) / Benefit
(15
)
(445
)
36

(424
)
 Net Earnings
$
719

$
748

$
(748
)
$
719




21
Table of Contents
CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)



NOTE 11.    Summarized Consolidating Financial Data, continued
 Consolidating Balance Sheet
 (Dollars in millions)
As of July 1, 2011
 CSX Corporation
 CSX Transportation
 Eliminations and Other
 Consolidated
 
 
 
 
 
 ASSETS
 Current Assets
 
 
 
 
 Cash and Cash Equivalents
$
988

$
190

$
74

$
1,252

 Short-term Investments
—

—

43

43

 Accounts Receivable - Net
5

428

679

1,112

 Receivable from Affiliates
1,158

1,443

(2,601
)
—

 Materials and Supplies
—

251

—

251

 Deferred Income Taxes
—

181

5

186

 Other Current Assets
76

67

(20
)
123

   Total Current Assets
2,227

2,560

(1,820
)
2,967

 
 
 
 
 
 Properties
8

31,206

1,563

32,777

 Accumulated Depreciation
(8
)
(7,683
)
(884
)
(8,575
)
 Properties - Net
—

23,523

679

24,202

 
 
 
 
 
 Investments in Conrail
—

—

681

681

 Affiliates and Other Companies
—

558

(81
)
477

 Investments in Consolidated Subsidiaries
16,926

—

(16,926
)
—

 Other Long-term Assets
167

108

103

378

   Total Assets
$
19,320

$
26,749

$
(17,364
)
$
28,705

 
 
 
 
 
 LIABILITIES AND SHAREHOLDERS' EQUITY
 Current Liabilities
 
 
 
 
 Accounts Payable
$
107

$
938

$
31

$
1,076

 Labor and Fringe Benefits Payable
34

373

23

430

 Payable to Affiliates
2,251

568

(2,819
)
—

 Casualty, Environmental and Other Reserves
—

165

15

180

 Current Maturities of Long-term Debt
405

87

2

494

 Income and Other Taxes Payable
465

126

(454
)
137

 Other Current Liabilities
—

167

1

168

   Total Current Liabilities
3,262

2,424

(3,201
)
2,485

 
 
 
 
 
 Casualty, Environmental and Other Reserves
—

383

85

468

 Long-term Debt
7,008

1,178

—

8,186

 Deferred Income Taxes
(572
)
7,485

427

7,340

 Other Long-term Liabilities
693

515

77

1,285

   Total Liabilities
$
10,391

$
11,985

$
(2,612
)
$
19,764

 
 
 
 
 
 Shareholders' Equity
 
 
 
 
 Common Stock, $1 Par Value
1,095

181

(181
)
1,095

 Other Capital
—

5,648

(5,648
)
—

 Retained Earnings
8,582

8,980

(8,980
)
8,582

 Accumulated Other Comprehensive Loss
(748
)
(64
)
65

(747
)
 Noncontrolling Interest
—

19

(8
)
11

 Total Shareholders' Equity
8,929

14,764

(14,752
)
8,941

 Total Liabilities and Shareholders' Equity
$
19,320

$
26,749

$
(17,364
)
$
28,705


22
Table of Contents
CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)



NOTE 11.    Summarized Consolidating Financial Data, continued
Consolidating Balance Sheet
(Dollars in millions)
 As of December 31, 2010
 CSX Corporation
 CSX Transportation
Eliminations and Other
 Consolidated
 ASSETS
 Current Assets
 
 
 
 
 Cash and Cash Equivalents
$
1,100

$
118

$
74

$
1,292

 Short-term Investments
—

—

54

54

 Accounts Receivable - Net
5

447

541

993

 Receivable from Affiliates
1,048

943

(1,991
)
—

 Materials and Supplies
—

218

—

218

 Deferred Income Taxes
15

171

6

192

 Other Current Assets
46

56

4

106

   Total Current Assets
2,214

1,953

(1,312
)
2,855

 
 
 
 
 
 Properties
8

30,557

1,500

32,065

 Accumulated Depreciation
(8
)
(7,405
)
(853
)
(8,266
)
 Properties - Net
—

23,152

647

23,799

 
 
 
 
 
 Investments in Conrail
—

—

673

673

 Affiliates and Other Companies
—

595

(134
)
461

 Investment in Consolidated Subsidiaries
16,278

—

(16,278
)
—

 Other Long-term Assets
174

110

69

353

   Total Assets
$
18,666

$
25,810

$
(16,335
)
$
28,141

 
 
 
 
 
 LIABILITIES AND SHAREHOLDERS' EQUITY
 Current Liabilities
 
 
 
 
 Accounts Payable
$
116

$
904

$
26

$
1,046

 Labor and Fringe Benefits Payable
42

431

47

520

 Payable to Affiliates
1,942

401

(2,343
)
—

 Casualty, Environmental and Other Reserves
—

161

15

176

 Current Maturities of Long-term Debt
517

94

2

613

 Income and Other Taxes Payable
378

109

(402
)
85

 Other Current Liabilities
—

96

1

97

   Total Current Liabilities
2,995

2,196

(2,654
)
2,537

 
 
 
 
 
 Casualty, Environmental and Other Reserves
—

411

91

502

 Long-term Debt
6,815

1,235

1

8,051

 Deferred Income Taxes
(526
)
7,228

351

7,053

 Other Long-term Liabilities
696

525

77

1,298

   Total Liabilities
$
9,980

$
11,595

$
(2,134
)
$
19,441

 
 
 
 
 
 Shareholders' Equity
 
 
 
 
 Common Stock, $1 Par Value
370

181

(181
)
370

 Other Capital
—

5,634

(5,634
)
—

 Retained Earnings
9,087

8,443

(8,443
)
9,087

 Accumulated Other Comprehensive Loss
(771
)
(65
)
65

(771
)
 Noncontrolling Minority Interest
—

22

(8
)
14

   Total Shareholders' Equity
8,686

14,215

(14,201
)
8,700

   Total Liabilities and Shareholders' Equity
$
18,666

$
25,810

$
(16,335
)
$
28,141


23
Table of Contents
CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)



NOTE 11.    Summarized Consolidating Financial Data, continued
Consolidating Cash Flow Statements
(Dollars in millions)
Six months ended July 1, 2011
CSX
Corporation
CSX
Transportation
Eliminations and Other
Consolidated
Operating Activities
 
 
 
 
Net Cash Provided by (Used in) Operating Activities
$
300

$
1,662

$
(375
)
$
1,587

 
 
 
 
 
Investing Activities
 
 
 
 
Property Additions
—

(866
)
(81
)
(947
)
Other Investing Activities
(16
)
(95
)
127

16

Net Cash Used in Investing Activities
(16
)
(961
)
46

(931
)
 
 
 
 
 
Financing Activities
 
 
 
 
Long-term Debt Issued
600

—

—

600

Long-term Debt Repaid
(507
)
(61
)
(2
)
(570
)
Dividends Paid
(233
)
(170
)
175

(228
)
Stock Options Exercised
24

—

—

24

Shares Repurchased
(528
)
—

—

(528
)
Other Financing Activities
248

(398
)
156

6

Net Cash (Used in) Provided by Financing Activities
(396
)
(629
)
329

(696
)
 
 
 
 
 
Net Decrease in Cash and Cash Equivalents
(112
)
72

—

(40
)
Cash and Cash Equivalents at Beginning of Period
1,100

118

74

1,292

Cash and Cash Equivalents at End of Period
$
988

$
190

$
74

$
1,252

 
 
 
 
 
 
 
 
 
 
Six months ended June 25, 2010
 CSX
Corporation
CSX
Transportation
Eliminations and Other
Consolidated
Operating Activities
 
 
 
 
Net Cash Provided by Operating Activities
$
283

$
1,421

$
(282
)
$
1,422

 
 
 
 
 
Investing Activities
 
 
 
 
Property Additions
—

(648
)
(39
)
(687
)
Other Investing Activities
(4
)
(47
)
119

68

Net Cash Used in Investing Activities
(4
)
(695
)
80

(619
)
 
 
 
 
 
Financing Activities
 
 
 
 
Long-term Debt Repaid
—

(69
)
(2
)
(71
)
Dividends Paid
(188
)
(295
)
299

(184
)
Stock Options Exercised
16

—

—

16

Shares Repurchased
(823
)
—

—

(823
)
Other Financing Activities
233

(295
)
(75
)
(137
)
Net Cash (Used in) Provided by Financing Activities
(762
)
(659
)
222

(1,199
)
 
 
 
 
 
Net Increase (Decrease) in Cash and Cash Equivalents
(483
)
67

20

(396
)
Cash and Cash Equivalents at Beginning of Period
918

30

81

1,029

Cash and Cash Equivalents at End of Period
$
435

$
97

$
101

$
633


24
Table of Contents

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

STRATEGIC OVERVIEW

The Company and the rail industry provide customers with access to an expansive and interconnected transportation network that plays a key role in North American commerce. CSX's network is positioned to reach nearly two-thirds of Americans, who account for the majority of the nation's consumption of goods. Through this network, the Company transports a broad portfolio of products, ranging from coal and new energy sources, like biodiesel and ethanol, to automobiles, chemicals, and consumer products.

Balanced Approach to Capital Deployment

CSX remains highly committed to delivering value to shareholders through a balanced approach to deploying capital that includes investments in infrastructure, dividend improvements and share repurchases. In 2011, the Company plans to invest approximately $2.2 billion, up from the previously announced $2 billion, to further enhance the capacity, quality and flexibility of its rail network. In addition, CSX continues to return value to its shareholders in the form of dividends and share repurchases. The Company has increased its quarterly cash dividend nine times over the last five years including the recently announced 38% increase to $0.12 per share on a post-split basis. During the quarter, CSX also announced a new $2 billion share repurchase authority expected to be completed by the end of 2012 based on market and business conditions. CSX completed its previous $3 billion share repurchase program in first quarter 2011. These actual repurchases along with the new authorization of $2 billion equal $5 billion expected to be repurchased through 2012.

Public-Private Partnerships

Key terminal expansions and infrastructure projects are important components of CSX's investment strategy. Strategic investments through public-private partnerships, including the National Gateway initiative, will provide enhanced transit times and improved service for customers. The National Gateway is a multi-year infrastructure initiative which will increase intermodal capacity on key corridors between Mid-Atlantic ports and the Midwest. Total project costs are approximately $850 million, of which the Company has already committed approximately $575 million. A key component of this initiative is the Company's new Northwest Ohio intermodal terminal that became operational during first quarter 2011. This high-capacity terminal expands service offerings to customers as well as improves market access to and from east coast ports. In addition, this terminal utilizes environmentally-friendly technology to further enhance the benefits freight rail provides. Other related projects include the expansion of the Virginia Avenue Tunnel in Washington, D.C. and construction for double-stack train clearances in Maryland, West Virginia and the District of Columbia.

CSX has entered into a transaction with the state of Florida to help alleviate congestion through a new commuter rail operation known as SunRail. CSX will sell the state a portion of its track for the new commuter rail and will invest all these funds for additional freight rail capacity and infrastructure within the state. This includes a new automotive and intermodal facility in central Florida. This transaction is projected to be cash neutral.
These long-term investments provide a foundation for volume growth and productivity improvement, enhanced customer service and safe and reliable operations. To continue these types of investments, the Company must be able to operate in an environment in which it can generate adequate returns and drive shareholder value.  CSX will continue to advocate for a fair and balanced regulatory environment to ensure that the value of the Company's rail service would be reflected in any potential new legislation or policies.



25
Table of Contents
CSX CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

SECOND QUARTER 2011 HIGHLIGHTS

•
Revenue increased $356 million or 13% to $3 billion, an all-time quarterly record, primarily driven by pricing above rail inflation, higher fuel recovery and increases in volume.

•
Expenses increased $198 million or 10% to $2.1 billion driven mostly by higher fuel prices and also labor-related costs.

•
Operating income increased $158 million or 21% to $926 million, an all-time quarterly record, and operating ratio improved to 69.3%, a second quarter record.

 
Second Quarters
 
Six Months
(In thousands)
2011
2010
 
2011
2010
Volume
1,646

1,598

 
3,238

3,084

 
 
 
 
 
 
(In millions)
 
 
 
 
 
Revenue
$
3,019

$
2,663

 
$
5,829

$
5,154

Expense
2,093

1,895

 
4,130

3,754

Operating Income
$
926

$
768

 
$
1,699

$
1,400

 
 
 
 
 
 
Operating Ratio
69.3
%
71.2
%
 
70.9
%
72.8
%

CSX second quarter results reflect continued year-over-year volume and revenue growth as demand for rail service increased in the markets CSX serves. Revenue increased 13% from the prior year with volume higher in almost all markets with the greatest increases in intermodal, forest products, food & consumer and metals. Overall coal volume decreased due to weakness in utility coal partially offset by strong export demand. The volume gain of 3% along with ongoing emphasis on pricing above rail inflation and higher fuel recovery associated with the increase in fuel prices drove revenue-per-unit increases in all markets. 

While revenue grew 13%, expenses increased only 10%, versus the prior year quarter.  Total fuel costs increased $127 million primarily due to higher fuel prices. Labor-related costs increased primarily due to inflation and volume-related expenses. Included in these costs are hiring and training costs for new train and engine employees.  Excluding the rise in total fuel costs, total expenses only increased 4% year over year.

For additional information, refer to Results of Operations discussed on pages 30 through 33.

26
Table of Contents
CSX CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS


In addition to the financial highlights described above, the Company measures and reports safety and service performance.  The Company strives for continuous improvement in these measures through training, initiatives and investment. For example, the Company's safety and train accident prevention programs rely on broad employee involvement. The programs utilize operating rules training, compliance measurement, root cause analysis and communication that is intended to create a safer environment for employees and the public. Continued capital investment in the Company's assets, including track, bridges, signals, equipment and detection technology also supports safety performance.

The Company continued to advance its efforts on safety during second quarter 2011. The FRA reportable personal injuries frequency index improved to a company second quarter best of 0.89, a 22% improvement over 2010. The reported FRA train accident frequency rate improved 16% to 2.37.

Overall, network reliability and service improved from first quarter lows during the second quarter of 2011. However, key service measures in second quarter 2011 declined versus 2010. On-time train originations and arrivals declined to 68% and 56%, respectively.  Dwell time increased to 26.0 hours from 23.7 hours in second quarter 2010. Average train velocity declined 5% to 19.8 miles per hour.

The Company has taken steps to improve this performance, including increasing its workforce and adding locomotive resources to the system. These efforts have had favorable results as seen sequentially from the end of first quarter to the end of second quarter 2011. On-time train originations improved 15% to 68%, on-time arrivals improved 11% to 56%, train velocity improved 1% to 19.7 miles per hour, and dwell decreased 7% to 25.3 hours.



27
Table of Contents
CSX CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

Operating Statistics (Estimated)

 
 
Second Quarters
 
 
2011
2010
Improvement/
(Decline)
 
 
 
 
 
Safety and Service Measurements
FRA Personal Injury Frequency Index
0.89

1.14

22%
 
FRA Train Accident Rate
2.37

2.83

16%
 
 
 
 
 
 
On-Time Train Originations
68
%
78
%
(13)%
 
On-Time Destination Arrivals
56
%
71
%
(21)%
 
 
 
 
 
 
Dwell
26

23.7

(10)%
 
Cars-On-Line
208,572

210,106

1%
 
 
 
 
 
 
Train Velocity
19.8

20.9

(5)%
 
 
 
 
 
 
 
 
 
Increase/(Decrease)
Resources
Route Miles
21,046

21,123

—%
 
Locomotives (owned and long-term leased)
4,073

4,067

—%
 
Freight Cars (owned and long-term leased)
77,599

80,471

(4)%


Key Performance Measures Definitions

FRA Personal Injury Frequency Index - Number of FRA-reportable injuries per 200,000 man-hours.

FRA Train Accident Rate - Number of FRA-reportable train accidents per million train-miles.

On-Time Train Originations - Average percent of scheduled road trains that depart the origin yard on-time or ahead of schedule.

On-Time Destination Arrivals - Average percent of scheduled road trains that arrive at the destination yard on-time to two hours late (30 minutes for intermodal trains).

Dwell - Average amount of time in hours between car arrival at and departure from the yard. It does not include cars moving through the yard on the same train.

Cars-On-Line - An average count of all cars on the network (does not include locomotives, cabooses, trailers, containers or maintenance equipment).

Train Velocity - Average train speed between terminals in miles per hour (does not include locals, yard jobs, work trains or passenger trains).


28
Table of Contents
CSX CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

FINANCIAL RESULTS OF OPERATIONS
 
Second Quarters
 
Six Months
 
2011
2010
 
$ Change
% Change
 
2011
2010
 
$ Change
% Change
 
 
 
 
 
 
 
 
 
 
 
 
Revenue
$
3,019

$
2,663

 
$
356

13
 %
 
$
5,829

$
5,154

 
$
675

13
 %
Expense
 
 
 
 
 
 
 
 
 
 
 
Labor and Fringe
764

721

 
43

6
 %
 
1,529

1,450

 
79

5
 %
Materials, Supplies and Other
557

551

 
6

1
 %
 
1,087

1,070

 
17

2
 %
Fuel
431

304

 
127

42
 %
 
833

587

 
246

42
 %
Depreciation
246

230

 
16

7
 %
 
489

458

 
31

7
 %
Equipment and Other Rents
95

89

 
6

7
 %
 
192

189

 
3

2
 %
Total Expense
2,093

1,895

 
198

10
 %
 
4,130

3,754

 
376

10
 %
Operating Income
$
926

$
768

 
$
158

21
 %
 
$
1,699

$
1,400

 
$
299

21
 %
Interest Expense
(134
)
(135
)
 
1

(1
)%
 
(274
)
(277
)
 
3

(1
)%
Other Income - Net
—

9

 
(9
)
(100
)%
 
5

20

 
(15
)
(75
)%
Income Tax Expense
(286
)
(228
)
 
(58
)
25
 %
 
(529
)
(424
)
 
(105
)
25
 %
Net Earnings
$
506

$
414

 
$
92

22
 %
 
$
901

$
719

 
$
182

25
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Earnings Per Diluted Share(a)
0.46

$
0.36

 
$
0.10

28
 %
 
0.81

$
0.61

 
$
0.20

33
 %
 
 
 
 
 
 
 
 
 
 
 
 
Operating Ratio
69.3%
71.2
%
 
190

 bps
 
70.9%
72.8
%
 
190

 bps
 
(a) All share and per-share data have been retroactively restated for the stock split which was effective May 31, 2011.

Volume and Revenue (Unaudited)
Volume (Thousands of units); Revenue (Dollars in millions); Revenue Per Unit (Dollars)
Second Quarters
 
 
 
 
 
 
 
Volume
 
Revenue
 
Revenue Per Unit
 
2011
2010
% Change
 
2011
2010
% Change
 
2011
2010
% Change
Agricultural
 
 
 
 
 
 
 
 
 
 
 
Agricultural Products
109

107

2
 %
 
$
273

$
255

7
%
 
$
2,505

$
2,383

5%
Phosphates and Fertilizers
80

80

—
 %
 
119

109

9
%
 
1,488

1,363

9%
Food and Consumer
27

25

8
 %
 
70

59

19
%
 
2,593

2,360

10%
Industrial


 
 


 
 



 
Chemicals
119

116

3
 %
 
413

372

11
%
 
3,471

3,207

8%
Automotive
87

88

(1
)%
 
226

204

11
%
 
2,598

2,318

12%
Metals
68

65

5
 %
 
158

140

13
%
 
2,324