CSX Corporation
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2006
OR
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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)
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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) |
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 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 Yes x Accelerated Filer ¨ Non-accelerated Filer ¨
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
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of
the latest practicable date, March 31, 2006: 221,586,156 shares.
CSX CORPORATION
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED March 31, 2006
INDEX
2
PART
1: FINANCIAL INFORMATION
CSX CORPORATION
ITEM 1: FINANCIAL STATEMENTS
CONSOLIDATED INCOME STATEMENTS (Unaudited)
(Dollars in Millions, Except Per Share Amounts)
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First Quarters |
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2006 |
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2005 |
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Operating Revenue |
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$ |
2,331 |
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$ |
2,108 |
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Operating Expense: |
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Labor and Fringe |
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720 |
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696 |
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Materials, Supplies and Other |
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453 |
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468 |
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Depreciation |
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211 |
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205 |
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Fuel |
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253 |
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179 |
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Building and Equipment Rent |
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123 |
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132 |
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Inland Transportation |
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56 |
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54 |
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Conrail Rents, Fees and Services |
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19 |
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20 |
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Total Operating Expense |
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1,835 |
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1,754 |
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Operating Income |
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496 |
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354 |
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Other Income (Expense) Net (Note 8) |
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(3 |
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(2 |
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Interest Expense |
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(98 |
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(114 |
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Earnings from Continuing Operations before Income Taxes |
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395 |
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238 |
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Income Tax Expense |
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(150 |
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(84 |
) |
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Earnings from Continuing Operations |
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245 |
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154 |
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Discontinued Operations Net of Tax (Note 3) |
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425 |
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Net Earnings |
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$ |
245 |
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$ |
579 |
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Earnings Per Common Share |
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Earnings Per Share (Note 2): |
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From Continuing Operations |
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$ |
1.12 |
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$ |
0.72 |
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Discontinued Operations |
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1.97 |
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Net Earnings |
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$ |
1.12 |
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$ |
2.69 |
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Earnings Per Share, Assuming Dilution (Note 2): |
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From Continuing Operations |
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$ |
1.06 |
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$ |
0.68 |
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Discontinued Operations |
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1.88 |
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Net Earnings |
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$ |
1.06 |
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$ |
2.56 |
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Average Common Shares Outstanding (Thousands) |
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219,681 |
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215,356 |
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Average Common Shares Outstanding, Assuming Dilution (Thousands) |
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232,182 |
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226,246 |
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Cash Dividends Paid Per Common Share |
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$ |
0.13 |
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$ |
0.10 |
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See accompanying Notes to Consolidated Financial Statements.
3
CSX CORPORATION
ITEM 1: FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
(Dollars in Millions)
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(Unaudited) |
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March 31, |
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December 30, |
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2006 |
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2005 |
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ASSETS |
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Current Assets: |
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Cash and Cash Equivalents |
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$ |
376 |
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$ |
309 |
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Short-term Investments |
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337 |
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293 |
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Accounts Receivable Net |
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1,202 |
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1,202 |
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(net of allowance for doubtful accounts of
$111 million and $108 million, respectively)
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Materials and Supplies |
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208 |
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199 |
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Deferred Income Taxes |
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217 |
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225 |
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Other Current Assets |
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107 |
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144 |
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Total Current Assets |
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2,447 |
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2,372 |
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Properties |
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26,850 |
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26,538 |
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Accumulated Depreciation |
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(6,565 |
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(6,375 |
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Properties Net |
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20,285 |
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20,163 |
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Investment in Conrail (Note 6) |
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607 |
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603 |
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Affiliates and Other Companies |
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311 |
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304 |
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Other Long-term Assets |
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769 |
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790 |
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Total Assets |
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$ |
24,419 |
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$ |
24,232 |
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LIABILITIES AND SHAREHOLDERS EQUITY |
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Current Liabilities: |
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Accounts Payable |
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$ |
965 |
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$ |
954 |
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Labor and Fringe Benefits Payable |
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433 |
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565 |
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Casualty, Environmental and Other Reserves (Note 10) |
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309 |
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311 |
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Current Maturities of Long-term Debt |
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912 |
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936 |
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Short-term Debt |
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4 |
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1 |
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Income and Other Taxes Payable |
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237 |
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102 |
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Other Current Liabilities |
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94 |
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110 |
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Total Current Liabilities |
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2,954 |
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2,979 |
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Casualty, Environmental and Other Reserves (Note 10) |
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678 |
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653 |
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Long-term Debt |
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5,045 |
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5,093 |
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Deferred Income Taxes |
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6,081 |
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6,082 |
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Other Long-term Liabilities |
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1,386 |
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1,471 |
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Total Liabilities |
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16,144 |
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16,278 |
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Shareholders Equity: |
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Common Stock, $1 Par Value |
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222 |
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218 |
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Other Capital |
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1,871 |
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1,751 |
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Retained Earnings |
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6,479 |
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6,262 |
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Accumulated Other Comprehensive Loss (Note 7) |
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(297 |
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(277 |
) |
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Total Shareholders Equity |
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8,275 |
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7,954 |
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Total Liabilities and Shareholders Equity |
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$ |
24,419 |
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$ |
24,232 |
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See accompanying Notes to Consolidated Financial Statements.
4
CSX CORPORATION
ITEM 1: FINANCIAL STATEMENTS
CONSOLIDATED CASH FLOW STATEMENTS (Unaudited)
(Dollars in Millions)
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First Quarters |
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2006 |
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2005 |
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OPERATING ACTIVITIES |
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Net Earnings |
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$ |
245 |
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$ |
579 |
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Adjustments to Reconcile Net Earnings to Net Cash Provided: |
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Depreciation |
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212 |
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209 |
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Deferred Income Taxes |
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26 |
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8 |
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Gain on Sale of International Terminals Net of Tax (Note 3) |
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(428 |
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Insurance Proceeds |
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50 |
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Other Operating Activities |
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50 |
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(59 |
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Changes in Operating Assets and Liabilities: |
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Accounts Receivable |
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(70 |
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(14 |
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Other Current Assets |
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2 |
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(41 |
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Accounts Payable |
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42 |
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84 |
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Income and Other Taxes Payable |
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39 |
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31 |
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Other Current Liabilities |
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(151 |
) |
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(60 |
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Net Cash Provided by Operating Activities |
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445 |
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309 |
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INVESTING ACTIVITIES |
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Property Additions |
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(367 |
) |
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(167 |
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Net Proceeds from Sale of International Terminals (Note 3) |
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1,108 |
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Purchase of Minority Interest in an International Terminals Subsidiary (Note 3) |
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(110 |
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Purchases of Short-term Investments |
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(416 |
) |
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(1,093 |
) |
Proceeds from Sales of Short-term Investments |
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378 |
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305 |
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Other Investing Activities |
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(15 |
) |
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Net Cash (Used in) Provided by Investing Activities |
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(420 |
) |
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43 |
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FINANCING ACTIVITIES |
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Short-term Debt Net |
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2 |
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(97 |
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Long-term Debt Issued |
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3 |
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26 |
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Long-term Debt Repaid |
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(71 |
) |
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(112 |
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Dividends Paid |
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(29 |
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(22 |
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Stock
Options Exercised |
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129 |
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38 |
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Other Financing Activities |
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8 |
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3 |
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Net Cash Provided by (Used in) Financing Activities |
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42 |
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(164 |
) |
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Net Increase in Cash and Cash Equivalents |
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67 |
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188 |
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CASH AND CASH EQUIVALENTS |
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Cash and Cash Equivalents at Beginning of Period |
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309 |
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522 |
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Cash and Cash Equivalents at End of Period |
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$ |
376 |
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$ |
710 |
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See accompanying Notes to Consolidated Financial Statements.
5
CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. Significant Accounting Policies
Basis of Presentation
In the opinion of management, the accompanying consolidated financial statements contain all
adjustments necessary to fairly present the Consolidated Balance Sheets of CSX Corporation (CSX
and, together with its subsidiaries, the Company) at March 31, 2006, and December 30, 2005, and
the Consolidated Income and Cash Flow Statements for the fiscal quarters ended March 31, 2006, and
April 1, 2005, such adjustments being of a normal, recurring nature. Certain prior-year data have
been reclassified to conform to the 2006 presentation.
CSX suggests that these financial statements be read in conjunction with the audited financial
statements and the notes included in CSXs 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:
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The first fiscal quarter of 2006 consisted of 13 weeks ending on March 31, 2006 |
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The first fiscal quarter of 2005 consisted of 13 weeks ending on April 1, 2005 |
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Fiscal year 2006 consisted of 52 weeks ending on December 29, 2006 |
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Fiscal year 2005 consisted of 52 weeks ending on December 30, 2005 |
Except as otherwise specified, references to quarters indicate CSXs fiscal quarter ending
March 31, 2006, or ending April 1, 2005 of the year referenced and comparisons are to the
corresponding period of the prior year.
6
CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 2. Earnings Per Share
The following table sets forth the computation of basic Earnings Per Share and Earnings Per
Share, Assuming Dilution:
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First Quarters |
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2006 |
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2005 |
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Numerator (Millions): |
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Earnings from Continuing Operations |
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$ |
245 |
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$ |
154 |
|
Interest Expense on Convertible Debt Net of Tax |
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1 |
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|
1 |
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Net Earnings from Continuing Operations, If-Converted |
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|
246 |
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|
155 |
|
Discontinued Operations Net of Tax |
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|
425 |
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|
|
|
|
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|
Net Earnings, If-Converted |
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|
246 |
|
|
|
580 |
|
Interest Expense on Convertible Debt Net of Tax |
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(1 |
) |
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(1 |
) |
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|
|
|
|
|
|
Net Earnings |
|
$ |
245 |
|
|
$ |
579 |
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|
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Denominator (Thousands): |
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Average Common Shares Outstanding |
|
|
219,681 |
|
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|
215,356 |
|
Convertible Debt |
|
|
9,728 |
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|
9,728 |
|
Stock Options |
|
|
2,715 |
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|
|
980 |
|
Other Potentially Dilutive Common Shares |
|
|
58 |
|
|
|
182 |
|
|
|
|
|
|
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|
Average Common Shares Outstanding, Assuming Dilution |
|
|
232,182 |
|
|
|
226,246 |
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|
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Earnings Per Share: |
|
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|
|
|
|
|
|
Income from Continuing Operations |
|
$ |
1.12 |
|
|
$ |
0.72 |
|
Discontinued Operations |
|
|
|
|
|
|
1.97 |
|
|
|
|
|
|
|
|
Net Earnings |
|
$ |
1.12 |
|
|
$ |
2.69 |
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings Per Share, Assuming Dilution: |
|
|
|
|
|
|
|
|
Income from Continuing Operations |
|
$ |
1.06 |
|
|
$ |
0.68 |
|
Discontinued Operations |
|
|
|
|
|
|
1.88 |
|
|
|
|
|
|
|
|
Net Earnings |
|
$ |
1.06 |
|
|
$ |
2.56 |
|
|
|
|
|
|
|
|
Basic Earnings Per Share is based upon the weighted-average number of common shares
outstanding. Earnings Per Share, Assuming Dilution, is based on the weighted-average number of
common shares outstanding adjusted for the effect of potentially dilutive common shares from
convertible debt and employee stock options and awards.
The following table provides information about stock options exercised:
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First Quarters |
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|
|
2006 |
|
|
2005 |
|
Number of Stock Options Exercised (Thousands) |
|
|
2,866 |
|
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|
1,084 |
|
7
CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 2. Earnings Per Share, continued
Certain stock options were excluded from the computation of Earnings Per Share, Assuming
Dilution, since their related option exercise prices were greater than the average market price of
the common shares during the period. The following table presents information about potentially
dilutive common shares excluded from the computation of earnings per share:
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First Quarters |
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|
2006 |
|
|
2005 |
|
Number of Shares (Thousands) |
|
|
620 |
|
|
|
7,431 |
|
Average Exercise / Conversion Price |
|
$ |
57.00 |
|
|
$ |
47.16 |
|
In accordance with the Emerging Issues Task Force Issue No. 04-8, The Effect of Contingently
Convertible Debt on Diluted Earnings Per Share (EITF 04-8), CSX included approximately 10 million
shares underlying its contingently convertible debentures in the computation of Earnings Per Share,
Assuming Dilution.
As a result of the recent increase in the price of CSX common stock, these debentures became
convertible on April 12, 2006. As noted, however, EITF 04-8 required CSX to include the underlying
shares in the computation of Earnings Per Share, Assuming Dilution. Any further dilutive effects
resulting from actual conversion of the debentures would be reflected in the basic earnings per
share calculation upon conversion. If the price of CSX common stock falls, however, these
debentures may no longer meet the conversion requirements.
A
substantial increase in CSXs stock price could cause an
increase in the exercise of stock options, also negatively impacting
basic earnings per share. However, the Board of Directors has
authorized CSX to purchase shares of its common stock from time to
time in an amount up to approximately $150 million in any fiscal
year. CSX has purchased shares pursuant to this authority in the
second quarter of fiscal year 2006.
NOTE 3. Discontinued Operations
In February 2005, CSX sold its International Terminals business, which included the capital
stock of SL Service, Inc. (SLSI) to Dubai Ports International FZE (DPI) for gross cash
consideration of $1.142 billion. Of the gross proceeds, approximately $110 million was paid for the
purchase of a minority interest in an International Terminals subsidiary, which the Company
acquired during the first quarter of 2005 and divested as part of the sale to DPI. Other related
cash transaction costs amounted to approximately $34 million, including resolution of working
capital and long-term debt adjustments.
CSX recognized income of $683 million pretax, $428 million after tax, for the quarter ended
April 1, 2005, as a result of the sale. Consequently, amounts related to this business are
reported as Discontinued Operations on the Consolidated Income Statement for fiscal year 2005.
8
CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 3. Discontinued Operations, continued
SLSI also holds certain residual assets and liabilities as a result of prior divestitures and
discontinuances. A wholly-owned subsidiary of CSX retains the rights to those assets and
indemnifies DPI, SLSI and related entities against those liabilities pursuant to a separate
agreement. CSX guarantees the obligations of its subsidiary under this separate agreement.
Additional information about the sale is included in CSXs Annual Report on Form 10-K for the
year ended December 30, 2005.
NOTE 4. Debt and Credit Agreements
CSX has a $1.2 billion five-year unsecured revolving credit facility expiring in May 2009 and
a $400 million 364-day unsecured revolving credit facility expiring in May 2006. The facilities
were entered into in May 2004 and May 2005, respectively, on terms substantially similar to the
facilities they replaced. Generally, these facilities may be used for general corporate purposes,
to support CSXs commercial paper and for working capital. Neither of the credit facilities was
drawn on as of March 31, 2006. Commitment fees and interest rates payable under the facilities are
similar to fees and rates available to comparably rated investment-grade borrowers. These credit
facilities allow for borrowings at floating (LIBOR-based) interest rates, plus a spread, depending
upon CSXs senior unsecured debt ratings. As of March 31, 2006, CSXs long-term unsecured debt
obligations were rated BBB and Baa2 by Standard and Poors and Moodys Investor Service,
respectively. Commitment fees similarly depend on such ratings and are 15 and 11 basis points per
annum, respectively, under the $1.2 billion and $400 million revolving credit facilities. At March
31, 2006, CSX was in compliance with all covenant requirements under the facilities.
CSX expects to replace both facilities during May 2006 with a single five-year facility of
approximately $1.25 billion and with terms substantially similar to those in the current
facilities.
NOTE 5. Share-Based Compensation
Prior to December 31, 2005, CSX had adopted the fair value recognition provisions of Statement
of Financial Accounting Standards (SFAS) 148, Accounting for Stock-Based Compensation
Transition and Disclosure (SFAS 148), on a prospective basis and accordingly recognized expense
for stock options granted after December 2002. CSX has not granted stock options after 2003.
9
CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 5. Share-Based Compensation, continued
Effective December 31, 2005 (which is the first day of fiscal year 2006), the Company adopted
the fair value recognition provisions of SFAS 123(R), Share-Based Payment (SFAS 123(R)), using
the modified-prospective-transition method. Under that transition method, compensation costs
recognized in the first quarter of 2006 include compensation costs for all share-based payments
granted prior to, but not yet vested, as of December 31, 2005. The amount of compensation costs
recognized is based upon the grant date fair value estimated under the Black-Scholes-Merton formula
in accordance with the original provisions of SFAS 123, Accounting for Stock-Based Compensation
(SFAS 123). This method results in the recognition of additional compensation costs from the
unvested portion of options granted prior to 2003. Results for prior periods have not been
restated, as it is not required, and the adoption of SFAS 123(R) did not result in a material
impact to the Companys Consolidated Income Statement or Earnings Per Share. CSX will recognize
approximately $3 million in additional compensation cost related to nonvested awards as a result of
adopting SFAS 123(R), the majority of which will be recognized in fiscal year 2006.
In addition to stock option expense, stock-based employee compensation expense included in net
income consists of restricted stock awards, stock issued to CSX directors and stock issued to
employees under the Companys Long-term Incentive Program. These awards were accounted for under
the estimated grant date fair value method for both SFAS 123(R) and SFAS 123; therefore,
compensation costs related to these types of awards are consistently reported for all periods
presented. Upon adoption of SFAS 123(R), CSX no longer allows automatic vesting when an employee
becomes retirement eligible.
Prior to the adoption of SFAS 123(R), CSX presented all tax benefits from deductions resulting
from compensation costs as operating cash flows in the Consolidated Cash Flow Statement. SFAS
123(R) requires the cash flows resulting from tax deductions in excess of compensation costs
recognized to be classified as financing cash flows. This requirement resulted in reduced net
operating cash flows and increased net financing cash flows of approximately $16 million for the
first quarter of 2006.
Total pre-tax compensation expense associated with share-based compensation is as follows:
|
|
|
|
|
|
|
|
|
|
|
First Quarters |
|
(Dollars in Millions) |
|
2006 |
|
|
2005 |
|
Share-Based Compensation Expense |
|
$ |
3 |
|
|
$ |
7 |
|
10
CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 5. Share-Based Compensation, continued
The following table illustrates the pro forma effect on Net Earnings and Earnings Per Share
prior to the adoption of
SFAS 123(R). This table only shows last
years first quarter pro forma amounts since in the first
quarter of 2006 the Company adopted the fair value recognition
provisions of SFAS 123(R) and therefore, compensation expenses
are recognized in the Consolidated Income Statement for all
share-based payments granted prior to, but not yet vested as of
December 31, 2005. Consequently, the table below is no longer
required to show pro forma amounts for 2006 and forward.
|
|
|
|
|
|
|
First Quarter |
|
(Dollars in Millions, Except Per Share Amounts) |
|
2005 |
|
Net Earnings As Reported |
|
$ |
579 |
|
Add: Stock-Based Employee Compensation Expense
Included in Reported Net Income Net of Tax |
|
|
4 |
|
Deduct: Total Stock-Based Employee Compensation
Expense Determined under the Fair Value Based Method for
All Awards Net of Tax |
|
|
(6 |
) |
|
|
|
|
|
|
|
|
|
Pro Forma Net Earnings |
|
$ |
577 |
|
Interest Expense on Convertible Debt Net of Tax |
|
|
1 |
|
|
|
|
|
Pro Forma Net Earnings, If-Converted |
|
$ |
578 |
|
|
|
|
|
|
|
|
|
|
Earnings Per Share: |
|
|
|
|
Basic As Reported |
|
$ |
2.69 |
|
Basic Pro Forma |
|
$ |
2.68 |
|
Diluted As Reported |
|
$ |
2.56 |
|
Diluted Pro Forma |
|
$ |
2.55 |
|
11
CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 6. Investment in Conrail
CSX and Norfolk Southern Corporation (NS) jointly own
Conrail Inc. (Conrail) through a limited liability
company. CSX has a 42% economic interest and 50% voting interest in the
jointly-owned entity, and NS has the remainder of the economic and voting interests. CSX applies
the equity method of accounting to its investment in Conrail.
Conrail owns, manages and operates certain properties (the Shared Assets Areas) for the
joint benefit of CSXs wholly-owned rail subsidiary, CSX Transportation, Inc. (CSXT), and NSs
wholly-owned subsidiary, Norfolk Southern Railway (NSR). Operating Expense includes the category
Conrail Rents, Fees and Services which reflects:
|
1. |
|
Transportation, switching and terminal service charges levied by Conrail
in the Shared Assets Areas; and |
|
|
2. |
|
CSXs 42% share of Conrails income, recognized under the equity method
of accounting. |
Transactions with Conrail
As listed below, the Company has amounts owed to Conrail or its affiliates representing
expenses incurred under the operating, equipment and shared area agreements with Conrail. In
exchange for the Conrail advance, the Company has executed two promissory notes with a subsidiary
of Conrail which are included in Long-term Debt on the Consolidated Balance Sheets.
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 30, |
|
(Dollars in Millions) |
|
2006 |
|
|
2005 |
|
Balance
Sheet Information: |
|
|
|
|
|
|
|
|
CSX Payable to Conrail |
|
$ |
32 |
|
|
$ |
40 |
|
Promissory Notes Payable to Conrail Subsidiary |
|
|
|
|
|
|
|
|
4.40% CSX Promissory Note due October 2035 |
|
|
73 |
|
|
|
73 |
|
4.52% CSXT Promissory Note due March 2035 |
|
|
23 |
|
|
|
23 |
|
|
|
|
|
|
|
|
|
|
|
|
First Quarters |
|
(Dollars in Millions) |
|
2006 |
|
|
2005 |
|
Income Statement Information: |
|
|
|
|
|
|
|
|
Interest Expense Related to Conrail Advances |
|
$ |
1 |
|
|
$ |
|
|
Additional information about the Investment in Conrail is included in CSXs Annual Report on
Form 10-K for the year ended December 30, 2005.
12
CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 7. Accumulated Other Comprehensive Loss
Other comprehensive income (loss) refers to revenues, expenses, gains and losses that under
generally accepted accounting principles are included in comprehensive income, which is similar to,
but excluded from net income. Under existing accounting standards, other comprehensive income
includes foreign currency items, minimum pension liability adjustments, unrealized gains and losses
on certain investments in debt and equity securities and accounting for derivative financial
instruments designated as cash flow hedges. Additional classifications, or additional items within
current classifications, may result from future accounting standards.
Accumulated Other Comprehensive Loss represents the total of other comprehensive income (loss)
for a period and is a component of Shareholders Equity within the Consolidated Balance Sheets.
Accumulated Other Comprehensive Loss consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net |
|
|
|
|
|
|
|
|
|
|
After-Tax |
|
|
|
|
(Dollars in Millions) |
|
December 30, 2005 |
|
|
(Loss) |
|
|
March 31, 2006 |
|
Minimum Pension Liability |
|
$ |
(307 |
) |
|
$ |
|
|
|
$ |
(307 |
) |
Fair Value of Fuel Derivatives |
|
|
30 |
|
|
|
(19 |
) |
|
|
11 |
|
Other |
|
|
|
|
|
|
(1 |
) |
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
(277 |
) |
|
$ |
(20 |
) |
|
$ |
(297 |
) |
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss for the first quarter of 2006 resulted from a decrease in the
quantity of fuel derivative contracts outstanding. CSX has suspended entering into new swaps in
its fuel hedge program since the third quarter of 2004. (See Note 9, Derivative Financial
Instruments.)
Other comprehensive income for the first quarter of 2005 was $66 million, after tax. Despite
a decline in the quantity of outstanding fuel hedging contracts, the fair value of these contracts
continued to rise with the price of fuel.
13
CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 8. Other Income (Expense) Net
Other Income (Expense) Net consists of the following:
|
|
|
|
|
|
|
|
|
|
|
First Quarters |
|
(Dollars in Millions) |
|
2006 |
|
|
2005 |
|
Interest Income |
|
$ |
9 |
|
|
$ |
7 |
|
Loss from Real Estate and Resort Operations |
|
|
(9 |
) |
|
|
(8 |
) |
Minority Interest |
|
|
(5 |
) |
|
|
(3 |
) |
Miscellaneous |
|
|
2 |
|
|
|
2 |
|
|
|
|
|
|
|
|
Other Income (Expense) Net |
|
$ |
(3 |
) |
|
$ |
(2 |
) |
|
|
|
|
|
|
|
Loss
from Real Estate and Resort Operations includes the results of
operations from the CSX-owned resort called the Greenbrier, located
in White Sulphur Springs, West Virginia, as well as the results of
the Companys real estate sales, leasing and development
activities.
NOTE 9. Derivative Financial Instruments
CSX uses derivative financial instruments to manage its overall exposure to fluctuations in
interest rates and fuel costs.
Interest Rate Swaps
CSX has entered into various interest rate swap agreements on the following fixed-rate notes:
|
|
|
|
|
|
|
|
|
|
|
Notional |
|
|
Fixed |
|
|
|
Amount |
|
|
Interest |
|
Maturity Date |
|
(Millions) |
|
|
Rate |
|
May 1, 2007 |
|
$ |
450 |
|
|
|
7.45 |
% |
May 1, 2032 |
|
|
150 |
|
|
|
8.30 |
% |
|
|
|
|
|
|
|
|
Total/Average |
|
$ |
600 |
|
|
|
7.66 |
% |
|
|
|
|
|
|
|
|
Under these agreements, CSX will pay variable interest (based on LIBOR) in exchange for a
fixed rate, effectively transforming the notes to floating-rate obligations. The interest rate swap
agreements are designated and qualify as fair value hedges. The gain or loss on the derivative
instrument, as well as the offsetting gain or loss on the fixed-rate note attributable to the
hedged risk, are recognized in current earnings during the period of change in fair values. Hedge
effectiveness is measured at least quarterly based on the relative change in fair value of the
derivative contract in comparison with changes over time in the fair value of the fixed-rate notes.
Any change in fair value resulting from ineffectiveness, as defined by SFAS 133, Accounting For
Derivative Instruments and Hedging Activities (SFAS 133), is recognized immediately in earnings.
14
CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 9. Derivative Financial Instruments, continued
CSXs interest rate swaps qualify as perfectly effective fair value hedges, as defined by SFAS
133. The gain or loss on the interest rate swap exactly offsets the loss or gain on the underlying
fixed-rate notes. As such, there was no ineffective portion to the hedge recognized in earnings
during the current or prior year periods. Long-term debt has been decreased by $3 million for the
fair market value of the interest rate swap agreements based upon quoted market prices at March 31,
2006. Long-term debt has been increased by $1 million for the fair market value of the interest
rate swap agreements based upon quoted market prices at December 30, 2005. Fair value adjustments
are non-cash transactions and accordingly have no cash impact on the Consolidated Cash Flow
Statements.
The differential to be paid or received under these agreements is accrued based upon the terms
of the agreements, and is recognized in interest expense over the term of the related debt. The
related amounts payable to or receivable from counterparties are included in Other Current Assets
or Liabilities.
Cash flows related to interest rate swap agreements are classified as Operating Activities in
the Consolidated Cash Flow Statements. Interest rate swap contracts had no material impact on
interest expense for the quarter ended March 31, 2005. For the quarter ended April 1, 2005, CSX
reduced interest expense by approximately $5 million, as a result of the interest rate swap
agreements that were in place during the period.
The counterparties to the interest rate swap agreements expose CSX to credit loss in the event
of non-performance. CSX does not anticipate non-performance by the counterparties.
Fuel Hedging
In 2003, CSX began a program to hedge a portion of CSXTs future locomotive fuel purchases.
This program was established to manage exposure to fuel price fluctuations. To minimize this risk,
CSX entered into a series of swaps in order to fix the price of a portion of CSXTs estimated
future fuel purchases. The program limits fuel hedges to a 24-month
duration and a maximum of 80% of CSXTs average monthly fuel
purchased for any month within the 24-month period, and places the
hedges among selected counterparties.
CSX suspended entering into new swaps in its fuel hedge program in the third quarter of 2004.
Current swap maturities will expire on July 31, 2006. CSX will continue to monitor and assess the
global fuel marketplace to decide if and when to resume hedging under the program.
15
CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 9. Derivative Financial Instruments, continued
Following is a summary of outstanding fuel swaps:
|
|
|
|
|
|
|
March 31, |
|
|
|
2006 |
|
Remaining Gallons Hedged (Millions) |
|
|
18 |
|
Average Price Per Gallon |
|
$ |
0.85 |
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
|
Q2 |
|
|
|
Q3 |
|
Estimated % of Future Fuel Purchases Hedged |
|
|
12 |
% |
|
|
|
1 |
% |
Fuel hedging activity reduced fuel expense for the first quarters of 2006 and 2005 by $35
million and $51 million, respectively. Ineffectiveness, or the extent to which changes in the fair
values of the fuel swaps did not offset changes in the fair values of the expected fuel purchases,
was immaterial.
These instruments qualify, and are designated by management, as cash-flow hedges of
variability in expected future cash flows attributable to fluctuations in fuel prices. The fair
values of fuel derivative instruments are based upon current fair market values as quoted by
third-party dealers and are recorded on the Consolidated Balance Sheets with offsetting adjustments
to Accumulated Other Comprehensive Loss, a component of Shareholders Equity. (See Note 7,
Accumulated Other Comprehensive Loss.) The fair value of fuel derivative instruments based upon
quoted market prices was $18 million and $51 million as of March 31, 2006, and December 30, 2005,
respectively. Amounts are reclassified from Accumulated Other Comprehensive Loss as the underlying
fuel that was hedged is consumed by rail operations. Fair value adjustments are non-cash
transactions and accordingly have no cash impact on the Consolidated Cash Flow Statements.
The counterparties to the fuel hedge agreements expose CSX to credit loss in the event of
non-performance. CSX does not anticipate non-performance by the counterparties.
16
CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 10. Casualty, Environmental and Other Reserves
Casualty, environmental and other reserves, including separation liabilities, are provided for
in the Consolidated Balance Sheets as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in Millions) |
|
March 31, 2006 |
|
|
December 30, 2005 |
|
|
|
Current |
|
|
Long-term |
|
|
Total |
|
|
Current |
|
|
Long-term |
|
|
Total |
|
Casualty: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personal Injury |
|
$ |
161 |
|
|
$ |
274 |
|
|
$ |
435 |
|
|
$ |
172 |
|
|
$ |
249 |
|
|
$ |
421 |
|
Occupational |
|
|
56 |
|
|
|
186 |
|
|
|
242 |
|
|
|
55 |
|
|
|
199 |
|
|
|
254 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Casualty |
|
|
217 |
|
|
|
460 |
|
|
|
677 |
|
|
|
227 |
|
|
|
448 |
|
|
|
675 |
|
Separation |
|
|
21 |
|
|
|
120 |
|
|
|
141 |
|
|
|
20 |
|
|
|
101 |
|
|
|
121 |
|
Environmental |
|
|
30 |
|
|
|
43 |
|
|
|
73 |
|
|
|
20 |
|
|
|
51 |
|
|
|
71 |
|
Other |
|
|
41 |
|
|
|
55 |
|
|
|
96 |
|
|
|
44 |
|
|
|
53 |
|
|
|
97 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
309 |
|
|
$ |
678 |
|
|
$ |
987 |
|
|
$ |
311 |
|
|
$ |
653 |
|
|
$ |
964 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Casualty
Casualty reserves represent accruals for personal injury and occupational injury claims, which
are described in more detail below. Currently, no individual claim is expected to exceed the
Companys self-insured retention amount. If an individual claim did exceed that amount, insurance
is available as more specifically detailed in Note 12, Commitments and Contingencies. Personal
injury and occupational claims are presented on a gross basis in accordance with SFAS 5, Accounting
for Contingencies
(SFAS 5).
While the final outcome of casualty-related matters cannot be predicted with certainty,
considering among other items the meritorious legal defenses available and the liabilities that
have been recorded, it is the opinion of CSXs management that none of these items, when finally
resolved, will have a materially adverse effect on the Companys results of operations, financial
position or liquidity. However, should a number of these items occur in the same period, they
could have a materially adverse effect on the results of operations, financial condition or
liquidity in a particular quarter or fiscal year.
17
CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 10. Casualty, Environmental and Other Reserves, continued
Personal Injury
Personal injury reserves represent liabilities for employee work-related and third party
injuries. Employee work-related injuries are subject to the Federal Employers Liability Act
(FELA). CSXT retains an independent actuarial firm to assist management in assessing the value
of these 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 in the value of these personal injury claims. This methodology
is based largely on CSXTs historical claims and settlement activity. Actual results may vary from
estimates due to the type and severity of the injury, costs of medical treatments and uncertainties
in litigation.
Occupational
Occupational claims include allegations of exposure to certain materials in the work place,
such as asbestos, solvents and diesel fuel, or alleged physical injuries, such as repetitive stress
injury, carpal tunnel syndrome or hearing loss. The Company retains a third party specialist, who
has extensive experience in performing occupational studies, to assist in assessing the unasserted
liability exposure. The analysis is performed semi-annually. The methodology used by the
specialist includes an estimate of future anticipated claims based on the Companys trends of
average historical claim filing rates, future anticipated dismissal rates and settlement rates.
Projecting future events, such as the number of new claims to be filed each year, the average cost
of disposing of claims, as well as the numerous uncertainties surrounding asbestos and other
occupational litigation in the United States, could cause the actual costs to be higher or lower
than projected.
Separation
Separation liabilities provide for the estimated costs of implementing workforce reductions,
improvements in productivity and other cost reductions at the Companys major transportation units
since 1991. These liabilities are expected to be paid out over the next 15 to 20 years from general
corporate funds.
18
CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 10. Casualty, Environmental and Other Reserves, continued
Environmental
The Company is a party to various proceedings, including administrative and judicial
proceedings, involving private parties and regulatory agencies related to environmental issues. The
Company has been identified as a potentially responsible party (PRP) at approximately 260
environmentally impaired sites, many of which are, or may be, subject to remedial action under the
Federal Comprehensive Environmental Response, Compensation and Liability Act of 1980 (CERCLA),
also known as the Superfund law, or similar state statutes. A number of these proceedings are based
on allegations that CSXT, or its railroad predecessors, sent hazardous substances to the facilities
in question for disposal.
At least once a quarter, the Company reviews its role with respect to each site identified.
Based on the review process, the Company has recorded reserves, excluding anticipated insurance
recoveries, to cover estimated contingent future environmental costs with respect to such sites.
Environmental costs are charged to expense when they relate to an existing condition caused by past
operations and do not contribute to current or future revenue generation. The recorded liabilities
for estimated future environmental costs are undiscounted and include amounts representing the
Companys estimate of unasserted claims, which the Company believes to be immaterial. The
liability includes future costs for all sites where the Companys obligation is deemed probable,
and where such costs can be reasonably estimated.
The Company does not currently possess sufficient information to reasonably estimate the
amount of additional liabilities, if any, on some sites until completion of future environmental
studies. In addition, latent conditions at any given location could result in 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 accomplish
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 results of operations, financial
condition or liquidity.
Other
Other reserves include liabilities for various claims, such as longshoremen disability claims,
freight claims, and claims for property, automobile and general liability. As liabilities become
known, the Company accrues the estimable and probable amount in accordance with SFAS 5.
19
CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 11. Hurricane Katrina
In August 2005, Hurricane Katrina caused extensive damage to Company assets on the Gulf Coast.
The most significant damage was concentrated on CSXTs route between New Orleans, LA and
Pascagoula, MS. The Company has insurance coverage of $535 million, after a $25 million deductible
(per occurrence), for fixed asset replacement and business interruption (which includes incremental
expenses and lost profits).
Managements current loss estimate
is approximately $450 million, which is an increase from earlier
estimates. The Gulf Coast region remains challenged by scarce
resources and massive recovery requirements which have affected the
price and availability of resources to the Company. At this time, the
CSXT route and bridgework is substantially complete and operational,
with remaining work primarily consisting of salvage and debris
removal.
The Companys
insurance policies do not prioritize coverage based on types of losses. As claims are submitted to
the insurance companies, they are reviewed and preliminary payments made until all losses are
incurred and documented. However, no claim payments are guaranteed until cash is received. A
final payment will be made once the Company and its insurers agree on the total measurement value
of the claim. The Company has collected insurance payments of:
|
|
|
|
|
|
|
Amount |
|
(Dollars in Millions) |
|
Collected |
|
Fourth Quarter 2005 |
|
$ |
70 |
|
|
|
|
|
|
First Quarter 2006 |
|
|
50 |
|
Second Quarter 2006 - to date |
|
|
97 |
|
|
|
|
|
|
|
|
|
|
Total Collected to Date |
|
$ |
217 |
|
|
|
|
|
The insurance receivable, net of cash insurance proceeds, amounted to $15 million and $43
million at March 31, 2006, and December 30, 2005, respectively, and is included in Accounts
Receivable Net in the Companys Consolidated Balance Sheets. These receivables were recorded as
a reduction of Labor and Fringe and Materials, Supplies and Other expenses in the Companys Consolidated
Income Statement.
When cash is received in excess of the receivable, the Company will record gains in the income
statement. These gains will be recorded separately as a reduction of operating expenses. The
Company currently estimates cash proceeds in excess of the receivable beginning in the second
quarter of 2006.
In accordance with SFAS 95, Statement of Cash Flows (SFAS 95), cash proceeds received from
insurers will be presented as Insurance Proceeds in either cash flows from operating activities
or cash flows from investing activities based upon the type of cost to which the proceeds relate.
20
CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 12. Commitments and Contingencies
Purchase Commitments
CSXT has a commitment under a long-term maintenance program that currently covers 39% of
CSXTs fleet of locomotives. The agreement is based upon the maintenance cycle for each locomotive
and is currently predicted to expire no earlier than 2026 and as late as 2031, depending upon when
additional locomotives are placed in service. The costs expected to be incurred throughout the
duration of the agreement fluctuate as locomotives are placed into, or removed from, service or as
required maintenance is adjusted. CSXT may terminate the agreement at its option after 2012,
though such action would trigger certain liquidated damages provisions. Under the program, CSXT
paid $41 million for both the first quarters of 2006 and 2005.
Insurance
The Company maintains numerous insurance programs, most notably for third-party casualty
liability and for Company property damage and business interruption with substantial limits. A
specific amount of risk ($25 million per occurrence) is retained by the Company on the casualty
program and non-catastrophic property damage. The Company retains $50 million of risk per
occurrence for its catastrophic property coverage, an increase of
$25 million from the prior year. For information on insurance issues resulting
from the effects of Hurricane Katrina on the Companys results of operations, see Note 11,
Hurricane Katrina.
Guarantees
CSX is contingently liable, individually and jointly with others, as guarantor of
approximately $109 million in obligations principally relating to leased equipment, vessels and
joint facilities used by the Company in its former business operations. Utilizing the Companys
guarantee for these obligations allows the obligor to take advantage of lower interest rates and
obtain other favorable terms. Guarantees are contingent commitments issued by the Company that
could require CSX or one of its affiliates to make payment to, or to perform certain actions for,
the beneficiary of the guarantee based upon another entitys failure to perform. As of March 31,
2006, the Companys guarantees can be summarized as follows:
|
1. |
|
Guarantee of approximately $85 million in obligations expiring in 2012 of a former
subsidiary, CSX Energy, in connection with a sale-leaseback transaction. CSX is, in turn,
indemnified by several subsequent owners of the subsidiary against payments made with
respect to these leases. CSX does not expect that it will be required to make any payments
under this guarantee for which it will not be reimbursed. |
21
CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 12. Commitments and Contingencies, continued
|
2. |
|
Guarantee of approximately $13 million in lease commitments assumed by A.P.
Moller-Maersk (Maersk) for which CSX is contingently liable until 2011. The Company
believes Maersk will fulfill its contractual commitments with respect to these lease
commitments and that CSX will have no further liabilities for those obligations. |
|
|
3. |
|
Guarantee of approximately $8 million relating to leases assumed as part of the
conveyance of CSXs interest in a former subsidiary, CSX Lines. CSX believes the former
subsidiary will fulfill its contractual commitments with respect to these leases, which
expire in 2007, and CSX will have no further liabilities for those obligations. |
As of March 31, 2006, the Company has not recognized any liabilities in its financial
statements in connection with any guarantee arrangements as FASB Interpretation No. 45, Guarantors
Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others does not apply to these obligations. The maximum amount of future payments
CSX could be required to make under these guarantees is the amount of the guarantees themselves.
Other Legal Proceedings
The Company is involved in routine litigation incidental to its business and is a party to a
number of legal actions and claims, various governmental proceedings and private civil lawsuits,
including those related to environmental matters, FELA claims by employees, other personal injury
claims, and disputes and complaints involving certain transportation rates and charges. Some of
the legal proceedings include claims for compensatory as well as punitive damages, and others
purport to be class actions. While the final outcome of these matters cannot be predicted with
certainty considering, among other things, the meritorious legal defenses available and liabilities
that have been recorded along with applicable insurance, it is the opinion of CSX management that
none of these items will have a materially adverse effect on the results of operations, financial
position or liquidity of the Company. An unexpected adverse resolution of one or more of these
items, however, could have a materially adverse effect on the results of operations, financial
condition or liquidity in a particular quarter or fiscal year. The Company is also party to a
number of actions, the resolution of which could result in gain realization in amounts that could
be material to results of operations in the quarters received.
22
CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 13. Business Segments
The Company operates in two business segments: rail and intermodal. Surface Transportation,
which includes the Companys rail and intermodal businesses, provides rail-based transportation
services including traditional rail service and the transport of intermodal containers and
trailers. CSXs principal operating company, CSX Transportation Inc. (CSXT), operates the largest
railroad in the eastern United States with a 21,000-mile rail network linking markets in 23 states,
the District of Columbia, and the Canadian provinces of Ontario and Quebec. CSX Intermodal Inc.
(Intermodal), one of the nations largest coast-to-coast intermodal transportation providers, is
a stand-alone, integrated intermodal company linking customers to railroads via trucks and
terminals.
The Company evaluates performance and allocates resources based on several factors, of which
the primary financial measure is business segment operating income. The accounting policies of the
segments are the same as those described in Note 1. Nature of Operations and Significant
Accounting Policies, in the CSX 2005 Annual Report on Form 10-K.
Consolidated Operating Income includes the results of operations of Surface Transportation and
other operating income. Other operating income includes the gain amortization on the CSX Lines
conveyance, net sublease income from assets formerly included in the Companys Marine Services
segment and other items.
Business segment information for the quarters ended 2006 and 2005 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Surface Transportation |
|
|
|
|
|
|
|
(Dollars in Millions) |
|
Rail |
|
|
Intermodal |
|
|
Total |
|
|
Other |
|
|
Total |
|
Quarter Ended March 31, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from External Customers |
|
$ |
1,997 |
|
|
$ |
334 |
|
|
$ |
2,331 |
|
|
$ |
|
|
|
$ |
2,331 |
|
Segment Operating Income |
|
|
425 |
|
|
|
62 |
|
|
|
487 |
|
|
|
9 |
|
|
|
496 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended April 1, 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from External Customers |
|
$ |
1,779 |
|
|
$ |
329 |
|
|
$ |
2,108 |
|
|
$ |
|
|
|
$ |
2,108 |
|
Segment Operating Income |
|
|
299 |
|
|
|
52 |
|
|
|
351 |
|
|
|
3 |
|
|
|
354 |
|
23
CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 14. 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 upon
years of service and compensation rates near retirement. Employees hired after December 31, 2002
are covered by a cash balance plan. The cash balance plan provides benefits by utilizing interest
and pay credits based upon age, service and compensation.
In addition to the defined benefit pension plans, CSX sponsors one postretirement medical plan
and one 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.
The postretirement medical plan is contributory (partially funded by retirees), with retiree
contributions adjusted annually. The life insurance plan is non-contributory.
The following table presents components of net periodic benefit cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits |
|
|
Other Benefits |
|
(Dollars in Millions) |
|
First Quarters |
|
|
First Quarters |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Service Cost |
|
$ |
9 |
|
|
$ |
8 |
|
|
$ |
2 |
|
|
$ |
2 |
|
Interest Cost |
|
|
26 |
|
|
|
27 |
|
|
|
5 |
|
|
|
6 |
|
Expected Return on Plan Assets |
|
|
(29 |
) |
|
|
(30 |
) |
|
|
|
|
|
|
|
|
Amortization of Prior Service Cost |
|
|
1 |
|
|
|
1 |
|
|
|
(1 |
) |
|
|
(1 |
) |
Amortization of Net Loss |
|
|
9 |
|
|
|
6 |
|
|
|
2 |
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Periodic Benefit Cost |
|
$ |
16 |
|
|
$ |
12 |
|
|
$ |
8 |
|
|
$ |
10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company expects to contribute $8 million to its pension plans in 2006.
Medicare Prescription Drug, Improvement and Modernization Act of 2003
The Company is required to estimate and record the effects of the Medicare Prescription Drug,
Improvement and Modernization Act of 2003 (Medicare Part D). The Company determined that its
retiree medical plans prescription drug benefit will qualify as actuarially equivalent to Medicare
Part D based upon a review by the plans health and welfare actuary of the plans benefit compared
to the benefit that would be paid under Medicare Part D. CSX has applied for the tax-free 28%
federal reimbursement of total prescription drug claims from $250 to $5,000 paid after January 1,
2006. Combining the financial implications of both cash receipts and lower tax-deductible business
expenses resulting from the subsidy, the Company expects after-tax cash flow savings of
approximately $5 million for fiscal year 2006 to begin in the third quarter.
24
CSX CORPORATION
ITEM 2:
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
COMPANY OVERVIEW
CSX Corporation (CSX and, together with its subsidiaries, the Company), based in
Jacksonville, FL, is one of the nations leading transportation companies. Surface Transportation,
which includes the Companys rail and intermodal businesses, provides rail-based transportation
services including traditional rail service and the transport of intermodal containers and
trailers. CSXs principal operating company, CSX Transportation Inc. (CSXT), operates the largest
railroad in the eastern United States with a 21,000-mile rail network linking markets in 23 states,
the District of Columbia, and the Canadian provinces of Ontario and Quebec. CSX Intermodal Inc.
(Intermodal), one of the nations largest coast-to-coast intermodal transportation providers, is
a stand-alone, integrated intermodal company linking customers to railroads via trucks and
terminals.
First Quarter 2006 Surface Transportation Highlights
|
|
|
Revenue grew 11% to $2.3 billion. |
|
|
|
|
Operating income increased 39% to a record $487 million. |
|
|
|
|
Operating ratio improved 4.2 points to 79.1%. |
|
|
|
|
Service and safety measurements improved across the board. |
Revenues increased 11%, driven by a 12% improvement in revenue per unit on slightly lower
volumes. Along with the fuel surcharge program, the increase in
revenue per unit was primarily driven by the Companys continued
pricing efforts and traffic mix, which accounted for approximately
45% and 20% of the increase, respectively. Lower volume was primarily due to the merchandise markets reduction in short-haul
export phosphate volume, resulting from reduced international fertilizer demand, and lower
Intermodal volume, as the Company continued its yield management efforts and focus on profitability.
Partially offsetting these decline were increases in coal volume due
to continued strong utility
demand and in automotive volume due to increased North American light vehicle production.
For additional information, refer to Rail and Intermodal Results of Operations discussions on
pages 30 and 32, respectively.
Operating performance improved significantly during the first quarter, with all key measures
registering solid to significant improvement. Two key measures safety and on-time performance
showed the greatest improvement, with personal injuries and train accidents declining 16% and 28%,
respectively, and with on-time originations and on-time arrivals improving 49% and 63%,
respectively. This performance was driven by the Companys continued focus on safety leadership
and improved execution of the ONE Plan.
25
CSX CORPORATION
ITEM 2: MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RAIL OPERATING STATISTICS (Estimated)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarters |
|
|
|
|
|
|
|
|
|
|
|
|
|
% Increase |
|
|
|
|
|
2006 |
|
|
2005 |
|
|
(Decrease) |
|
Service Measurements |
|
Personal Injury Frequency Index (Per 200,000 Man Hours) |
|
|
1.38 |
|
|
|
1.65 |
|
|
|
16 |
|
|
|
FRA Train Accidents Frequency (Per Million Train Miles) |
|
|
3.61 |
|
|
|
5.02 |
|
|
|
28 |
|
|
|
|
On-Time Originations |
|
|
74.4 |
% |
|
|
49.9 |
% |
|
|
49 |
|
|
|
On-Time Arrivals |
|
|
61.3 |
% |
|
|
37.7 |
% |
|
|
63 |
|
|
|
|
Average
System Dwell Time (Hours) (a) |
|
|
26.6 |
|
|
|
30.0 |
|
|
|
11 |
|
|
|
Average Total Cars-On-Line |
|
|
224,299 |
|
|
|
234,209 |
|
|
|
4 |
|
|
|
Average Velocity, All Trains (Miles Per Hour) |
|
|
20.0 |
|
|
|
19.5 |
|
|
|
3 |
|
|
|
Average Recrews (Per Day) |
|
|
58 |
|
|
|
65 |
|
|
|
11 |
|
|
Resources |
|
Route Miles |
|
|
21,287 |
|
|
|
21,884 |
|
|
|
(3 |
) |
|
|
Locomotives (Owned and Long-term Leased) |
|
|
3,780 |
|
|
|
3,708 |
|
|
|
2 |
|
|
|
Freight Cars (Owned and Long-term Leased) |
|
|
102,794 |
|
|
|
104,735 |
|
|
|
(2 |
) |
(a) Beginning October 2005, the American Association of Railroads adopted a new dwell
calculation in an effort to standardize reporting across U.S. railroads. Beginning in the second
quarter of 2006 and forward, CSX will adopt this new method. If CSX had used this new method in
the first quarter of 2006, average system dwell time would have been 26.1 hours for that period
versus 26.6 hours as shown above.
2006 Surface Transportation Expectations
The Companys performance in 2006 is expected to support its five-year financial targets
of double-digit annual growth in Surface Transportation operating income, earnings and free cash
flow. In 2006, CSX expects strong revenue growth, driven by a continuing robust pricing
environment and volume growth. In addition, lower margin traffic will continue to be re-priced or
replaced by longer haul, more profitable business.
Improvements in service and safety performance combined with planned investments in
locomotives, employees and capacity will build on the momentum established in 2005 and continued in
the first quarter 2006. Management believes current resource plans will support anticipated
business levels and maintain network fluidity. Those plans include hiring new train and engine
employees, which consist of locomotive engineers and conductors, to offset anticipated attrition.
A two-year capacity expansion and infrastructure investment plan is also designed to drive improved
service reliability and volume growth as projects are completed. The first expansion projects will
be completed during 2006, and the remaining projects are on target for
completion during 2007.
26
CSX CORPORATION
ITEM 2: MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FINANCIAL RESULTS OF OPERATIONS
First Quarter Consolidated Results of Operations
The financial statements presented are
for the 13-week fiscal quarters ended March 31, 2006 and April 1, 2005. Except as otherwise specified,
references to years indicate the Companys fiscal quarter ended as noted previously.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONSOLIDATED |
|
|
|
|
First Quarters |
|
|
Increase/ |
|
(Dollars in Millions) |
|
2006 |
|
|
2005 |
|
|
(Decrease) |
|
Operating Revenue |
|
$ |
2,331 |
|
|
$ |
2,108 |
|
|
$ |
223 |
|
Operating Expense: |
|
|
|
|
|
|
|
|
|
|
|
|
Labor and Fringe |
|
|
720 |
|
|
|
696 |
|
|
|
24 |
|
Materials, Supplies and Other |
|
|
453 |
|
|
|
468 |
|
|
|
(15 |
) |
Depreciation |
|
|
211 |
|
|
|
205 |
|
|
|
6 |
|
Fuel |
|
|
253 |
|
|
|
179 |
|
|
|
74 |
|
Building and Equipment Rent |
|
|
123 |
|
|
|
132 |
|
|
|
(9 |
) |
Inland Transportation |
|
|
56 |
|
|
|
54 |
|
|
|
2 |
|
Conrail Rents, Fees & Services |
|
|
19 |
|
|
|
20 |
|
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
Total Operating Expense |
|
|
1,835 |
|
|
|
1,754 |
|
|
|
81 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income |
|
$ |
496 |
|
|
$ |
354 |
|
|
$ |
142 |
|
|
|
|
|
|
|
|
|
|
|
|
Prior periods have been reclassified to conform to the current presentation.
|
Consolidated Operating Revenue
Revenue increases were driven by the Companys continued pricing efforts, the fuel surcharge
program and traffic mix.
Consolidated Operating Income
Improvement in Consolidated Operating Income was driven by increased Operating Revenue,
partially offset by increases in Operating Expenses, primarily as a result of higher fuel prices
and lower fuel hedge benefit.
27
CSX CORPORATION
ITEM 2: MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Interest Expense
Interest Expense decreased compared to the prior year comparable quarter as a result of the
repurchase of $1.0 billion of the Companys publicly-traded notes in June 2005.
Income Tax Expense
Income Tax Expense increased $66 million as a result of higher Consolidated Operating Income
combined with last years first quarter rate reduction stemming from the enactment of state income
tax legislation.
Net Earnings
Consolidated
Net Earnings were higher by $334 million for the first quarter
of 2005, due to
a $428 million after-tax gain from the Companys discontinued operations. Discontinued Operations
for the first quarter of 2005 also included an after-tax loss on operations of $3 million from the
International Terminals business.
28
CSX CORPORATION
ITEM 2: MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
SURFACE
TRANSPORTATION DETAIL (Unaudited)
(Dollars in Millions)
First Quarter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Surface |
|
|
|
|
|
|
Rail |
|
|
Intermodal |
|
|
Transportation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase/ |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
|
(Decrease) |
|
Revenue |
|
$ |
1,997 |
|
|
$ |
1,779 |
|
|
$ |
334 |
|
|
$ |
329 |
|
|
$ |
2,331 |
|
|
$ |
2,108 |
|
|
$ |
223 |
|
Operating Expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Labor and Fringe |
|
|
698 |
|
|
|
674 |
|
|
|
20 |
|
|
|
20 |
|
|
|
718 |
|
|
|
694 |
|
|
|
24 |
|
Materials, Supplies and Other |
|
|
419 |
|
|
|
418 |
|
|
|
44 |
|
|
|
54 |
|
|
|
463 |
|
|
|
472 |
|
|
|
(9 |
) |
Depreciation |
|
|
201 |
|
|
|
193 |
|
|
|
10 |
|
|
|
10 |
|
|
|
211 |
|
|
|
203 |
|
|
|
8 |
|
Fuel |
|
|
253 |
|
|
|
179 |
|
|
|
|
|
|
|
|
|
|
|
253 |
|
|
|
179 |
|
|
|
74 |
|
Building and Equipment Rent |
|
|
93 |
|
|
|
101 |
|
|
|
31 |
|
|
|
34 |
|
|
|
124 |
|
|
|
135 |
|
|
|
(11 |
) |
Inland Transportation |
|
|
(111 |
) |
|
|
(105 |
) |
|
|
167 |
|
|
|
159 |
|
|
|
56 |
|
|
|
54 |
|
|
|
2 |
|
Conrail Rents, Fees and Services |
|
|
19 |
|
|
|
20 |
|
|
|
|
|
|
|
|
|
|
|
19 |
|
|
|
20 |
|
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Expense |
|
|
1,572 |
|
|
|
1,480 |
|
|
|
272 |
|
|
|
277 |
|
|
|
1,844 |
|
|
|
1,757 |
|
|
|
87 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Surface Transportation
Operating Income |
|
$ |
425 |
|
|
$ |
299 |
|
|
$ |
62 |
|
|
$ |
52 |
|
|
$ |
487 |
|
|
$ |
351 |
|
|
$ |
136 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Surface Transportation
Operating Ratio |
|
|
78.7 |
% |
|
|
83.2 |
% |
|
|
81.4 |
% |
|
|
84.2 |
% |
|
|
79.1 |
% |
|
|
83.3 |
% |
|
|
|
|
SURFACE TRANSPORTATION VOLUME AND REVENUE
Volume (Thousands); Revenue (Dollars in Millions); Revenue Per Unit (Dollars)
First Quarter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Volume |
|
|
Revenue |
|
|
Revenue Per Unit |
|
|
|
2006 |
|
|
2005 |
|
|
% Change |
|
|
2006 |
|
|
2005 |
|
|
% Change |
|
|
2006 |
|
|
2005 |
|
|
% Change |
|
Chemicals |
|
|
135 |
|
|
|
140 |
|
|
|
(4 |
)% |
|
$ |
295 |
|
|
$ |
275 |
|
|
|
7 |
% |
|
$ |
2,185 |
|
|
$ |
1,964 |
|
|
|
11 |
% |
Emerging Markets |
|
|
124 |
|
|
|
115 |
|
|
|
8 |
|
|
|
134 |
|
|
|
117 |
|
|
|
15 |
|
|
|
1,081 |
|
|
|
1,017 |
|
|
|
6 |
|
Forest Products |
|
|
106 |
|
|
|
113 |
|
|
|
(6 |
) |
|
|
191 |
|
|
|
176 |
|
|
|
9 |
|
|
|
1,802 |
|
|
|
1,558 |
|
|
|
16 |
|
Agricultural Products |
|
|
96 |
|
|
|
92 |
|
|
|
4 |
|
|
|
157 |
|
|
|
137 |
|
|
|
15 |
|
|
|
1,635 |
|
|
|
1,489 |
|
|
|
10 |
|
Metals |
|
|
94 |
|
|
|
93 |
|
|
|
1 |
|
|
|
164 |
|
|
|
138 |
|
|
|
19 |
|
|
|
1,745 |
|
|
|
1,484 |
|
|
|
18 |
|
Phosphates and Fertilizers |
|
|
88 |
|
|
|
117 |
|
|
|
(25 |
) |
|
|
90 |
|
|
|
90 |
|
|
|
|
|
|
|
1,023 |
|
|
|
769 |
|
|
|
33 |
|
Food and Consumer |
|
|
64 |
|
|
|
63 |
|
|
|
2 |
|
|
|
118 |
|
|
|
105 |
|
|
|
12 |
|
|
|
1,844 |
|
|
|
1,667 |
|
|
|
11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Merchandise |
|
|
707 |
|
|
|
733 |
|
|
|
(4 |
) |
|
|
1,149 |
|
|
|
1,038 |
|
|
|
11 |
|
|
|
1,625 |
|
|
|
1,416 |
|
|
|
15 |
|
Coal |
|
|
456 |
|
|
|
437 |
|
|
|
4 |
|
|
|
552 |
|
|
|
482 |
|
|
|
15 |
|
|
|
1,211 |
|
|
|
1,103 |
|
|
|
10 |
|
Coke and Iron Ore |
|
|
20 |
|
|
|
21 |
|
|
|
(5 |
) |
|
|
27 |
|
|
|
24 |
|
|
|
13 |
|
|
|
1,350 |
|
|
|
1,143 |
|
|
|
18 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Coal |
|
|
476 |
|
|
|
458 |
|
|
|
4 |
|
|
|
579 |
|
|
|
506 |
|
|
|
14 |
|
|
|
1,216 |
|
|
|
1,105 |
|
|
|
10 |
|
Automotive |
|
|
127 |
|
|
|
125 |
|
|
|
2 |
|
|
|
231 |
|
|
|
208 |
|
|
|
11 |
|
|
|
1,819 |
|
|
|
1,664 |
|
|
|
9 |
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38 |
|
|
|
27 |
|
|
|
41 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Rail |
|
|
1,310 |
|
|
|
1,316 |
|
|
|
|
|
|
|
1,997 |
|
|
|
1,779 |
|
|
|
12 |
|
|
|
1,524 |
|
|
|
1,352 |
|
|
|
13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International |
|
|
302 |
|
|
|
316 |
|
|
|
(4 |
) |
|
|
132 |
|
|
|
132 |
|
|
|
|
|
|
|
437 |
|
|
|
418 |
|
|
|
5 |
|
Domestic |
|
|
214 |
|
|
|
212 |
|
|
|
1 |
|
|
|
186 |
|
|
|
173 |
|
|
|
8 |
|
|
|
869 |
|
|
|
816 |
|
|
|
6 |
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16 |
|
|
|
24 |
|
|
|
(33 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Intermodal |
|
|
516 |
|
|
|
528 |
|
|
|
(2 |
) |
|
|
334 |
|
|
|
329 |
|
|
|
2 |
|
|
|
647 |
|
|
|
623 |
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Surface Transportation |
|
|
1,826 |
|
|
|
1,844 |
|
|
|
(1 |
)% |
|
$ |
2,331 |
|
|
$ |
2,108 |
|
|
|
11 |
% |
|
$ |
1,277 |
|
|
$ |
1,143 |
|
|
|
12 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29
CSX CORPORATION
ITEM 2: MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
First Quarter Rail Results of Operations
Rail Operating Revenue
Merchandise
Chemicals Volume largely returned to pre-hurricane levels but was still below the prior
year comparable quarter as high raw material costs continue to be a concern for domestic producers.
Emerging Markets Strong demand for aggregate products, such as rock, salt, and sand, and
movement of municipal waste propelled volume increases partially offset by lower volumes in cement
due to production interruptions.
Forest Products Volume declined due to weakness in the printing market as well as
production downtimes at several brown paper mills. Substitution effects from newsprint to
electronic media continues to reduce the demand for paper. These declines were partially offset by
strength in the lumber market as warm weather helped increase housing starts despite recent signs
of slowing housing activities.
Agricultural Products Both volumes and revenues improved due to increased movements of
soybeans. In addition, volume of ethanol moving into the Northeast increased as there was higher
demand for this fuel additive.
Metals Domestic demand continued to drive strong steel production throughout the quarter.
Slight volume gains, strong pricing actions, and fuel surcharge coverage increases delivered 19%
revenue growth.
Phosphate and Fertilizer Short haul, lower revenue per car, phosphate volume decreased
significantly due to temporary plant shutdowns resulting from lower international demand. The loss
of this short haul traffic, and an increase in longer haul domestic phosphate volume, combined for
a favorable impact on revenue per unit and flat overall revenue.
Food and Consumer Volume in this segment (which includes the transportation of
refrigerated products, canned goods, building products and transportation equipment) increased due
to strong growth of shipments of canned goods, rice, beans, beer and wine and strength in
deliveries of newly finished customer freight cars.
Coal
Revenue and volume were up on strong demand across all markets, except for the export market.
Electricity generation was down 1% in CSXT-served markets due to
warmer weather conditions;
however, volume increased as utilities continued to rebuild inventories.
30
CSX CORPORATION
ITEM 2: MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Automotive North American light vehicle production was favorable. Market share continues to shift
from the Big 3 to the new domestic manufacturers (foreign brands produced domestically).
Automotive revenue per unit increased due to price escalation and fuel surcharge.
Rail Operating Expense
Labor and Fringe expenses increased due to higher staffing levels as well as the impact of
increased inflation. Other labor and fringe expense increases were more than offset by improved
productivity in train operations, as overtime and other crew expenses were reduced with the
improved operational fluidity.
Materials, Supplies and Other expenses were flat as material and other inflation was largely offset
by productivity gains (for instance, as railroad measurements improve locomotives from other
railroads are used less and therefore drive down expense).
Depreciation is higher due to an increase in the asset base.
Fuel increased due to higher fuel prices and less fuel hedge benefit versus the first quarter of
last year.
Building and Equipment Rent decreased due to a reduction in railcar lease expense. This was a
direct result of the improvement in operational fluidity, which drove improvements in shipment
cycle-time and reduced the number of cars-on-line.
31
CSX CORPORATION
ITEM 2: MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
First Quarter Intermodal Results of Operations
Intermodal Operating Revenue
International Although volume improved with several international customers, overall
volume decreased predominantly due to the merger of two key accounts and continued yield management
initiatives. Continued strength in pricing is partially offsetting the loss of higher revenue per
unit traffic in long-haul markets.
Domestic Volume was up due to strength in the truckload market offsetting some known
reductions in the parcel segment. The strong pricing environment continues, resulting in increased
revenue per unit of 6%.
Intermodal Operating Expense
Intermodal Operating Expense decreased as a result of improved terminal operations, efficient
equipment utilization and costs in last years first quarter that were not repeated this quarter
related to sales tax and other items.
LIQUIDITY AND CAPITAL RESOURCES
The following is a summary of material changes in the Consolidated Balance Sheets and sources
of liquidity and capital. This summary provides an update to the discussion included in CSXs most
recent Annual Report on Form 10-K.
Cash, Cash Equivalents and Short-term Investments increased $111 million, or 18%, as a result
of higher cash provided by operations offset by increased property additions.
Labor and Fringe Benefits Payable decreased $132 million, or 23%, due to management incentive
compensation payments in the first quarter of 2006.
Income and Other Taxes Payable increased $135 million, or 132%, due to increases in federal
tax liabilities associated with higher Consolidated Operating Income.
CSXs working capital at March 31, 2006, was a deficit of $507 million, compared to a deficit
of $607 million at December 30, 2005. This change is primarily driven by increases in cash
balances. A working capital deficit is not unusual for the Company (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, and has
sufficient financial capacity, including the Companys revolving
credit agreements, to manage its day-to-day cash requirements and any obligations
arising from legal, tax and other regulatory rulings. (See
Note 4, Debt and Credit Agreements.)
32
CSX CORPORATION
ITEM 2: MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
CSX currently has $1.3 billion of capacity under an effective shelf registration that may be
used, subject to market conditions and board authorization, to issue debt or equity securities at
CSXs discretion. CSX presently intends to use the proceeds from the sale of any securities issued
under its shelf registration statement to finance cash requirements, including refinancing existing
debt as it matures. While CSX seeks to give itself flexibility with respect to meeting such needs,
there can be no assurance that market conditions would permit CSX to sell such securities on
acceptable terms at any given time, or at all.
As previously reported, the Board of Directors has authorized CSX to purchase shares of its
common stock from time to time in an amount up to approximately $150 million in any fiscal year.
CSX has purchased shares pursuant to this authority in the second quarter of
fiscal year 2006.
OTHER MATTERS
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 the reported amount of certain revenues and expenses during the
reporting period. Actual results may differ from those estimates. Consistent with the prior year,
significant estimates using management judgment are made for the following areas:
|
|
|
Casualty, Environmental and Legal Reserves |
|
|
|
|
Pension and Postretirement Medical Plan Accounting |
|
|
|
|
Depreciation Policies for Assets Under the Group-Life Method |
|
|
|
|
Income Taxes |
These estimates and assumptions are discussed with the Audit Committee of the Board of
Directors on a regular basis.
33
CSX CORPORATION
ITEM 2: MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
Certain statements in this report and in other materials filed with the Securities and
Exchange Commission (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
Companys financial condition; |
|
|
|
|
Managements plans, goals, strategies and objectives for future operations and
other similar expressions concerning matters that are not historical facts, and
managements 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. |
Forward-looking statements are typically identified by words or phrases such as believe,
expect, anticipate, project, 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 times
that, 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:
|
|
|
The Companys success in implementing its operational objectives and improving
Surface Transportation operating efficiency; |
|
|
|
|
Changes in operating conditions and costs or commodity concentrations; |
|
|
|
|
Material changes in domestic or international economic or business conditions,
including those affecting the rail 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
|
34
CSX CORPORATION
ITEM 2: MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
conditions affecting shippers, and adverse economic conditions in the industries and
geographic areas that consume and produce freight;
|
|
|
Labor costs and labor difficulties, including stoppages affecting either the
Companys operations or the customers ability to deliver goods to the Company for
shipment; |
|
|
|
|
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; |
|
|
|
|
Changes in fuel prices, surcharges for fuel and the availability of fuel; |
|
|
|
|
Legislative, regulatory or legal developments involving transportation, including
rail or intermodal transportation, the environment, hazardous materials or 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; |
|
|
|
|
Competition from other modes of freight transportation such as trucking and
competition and consolidation within the transportation industry generally; |
|
|
|
|
Natural events such as severe weather conditions, including floods, fire,
hurricanes and earthquakes, or other unforeseen disruptions of the Companys
operations, systems, property or equipment; and |
|
|
|
|
The outcome of litigation and claims, including those related to environmental
contamination, personal injuries and occupational illnesses. |
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 CSXs
other SEC reports, accessible on the SECs website at www.sec.gov and the Companys website
at www.csx.com.
35
CSX CORPORATION
ITEM 3: QUANTATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in market risk from the information provided under
Quantitative and Qualitative Disclosures about Market Risk in Item 7A of CSXs Annual Report on
Form 10-K for the fiscal year ended December 30, 2005.
ITEM 4: CONTROLS AND PROCEDURES
As of March 31, 2006, under the supervision and with the participation of CSXs Chief
Executive Officer (CEO) and the Chief Financial Officer (CFO), management has evaluated the
effectiveness of the design and operation of the Companys disclosure controls and procedures.
Based upon that evaluation, the CEO and CFO concluded that the Companys disclosure controls and
procedures were effective as of March 31, 2006. There were no changes in the Companys internal
controls over financial reporting during the fiscal quarter covered by this quarterly report that
have materially affected, or are reasonably likely to materially affect, the Companys internal
control over financial reporting.
PART
2 OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
For information relating to the Companys settlements and other legal proceedings, see Note
12, Commitments and Contingencies.
ITEM 1A. RISK FACTORS
For information regarding factors that could affect the Companys results of operations,
financial condition and liquidity, see the risk factors discussion provided under Managements
Discussion and Analysis of Financial Condition and Results of Operations in Item 7 of CSXs Annual
Report on Form 10-K for the fiscal year ended December 30, 2005. See also, Forward-Looking
Statements included in Item 2 of this Quarterly Report on Form 10-Q.
36
CSX CORPORATION
ITEM 2: UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
As required by SEC Regulation S-K for the quarter ended March 31, 2006, the following table
summarizes:
|
|
|
Common shares withheld by CSX on behalf of current and retired employees to settle
the employees minimum statutory tax obligation on the distribution of shares that were
formerly deferred or any restricted stock that has vested; and |
|
|
|
|
Common shares purchased on the open market to fund the estimated Company
contribution required to be paid in CSX common stock under the Capital Builder Plan
which covers certain union employees. |
Issuer Purchases of Equity Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(c) Total |
|
|
(d) Maximum |
|
|
|
|
|
|
|
|
|
|
|
Number of |
|
|
Number of |
|
|
|
|
|
|
|
|
|
|
|
Shares |
|
|
Shares that |
|
|
|
|
|
|
|
(b) |
|
|
Purchased as |
|
|
May Yet Be |
|
|
|
(a) Total |
|
|
Average |
|
|
Part of Publicly |
|
|
Purchased |
|
|
|
Number of |
|
|
Price |
|
|
Announced |
|
|
Under the |
|
|
|
Shares |
|
|
Paid per |
|
|
Plans or |
|
|
Plan or |
|
Period |
|
Purchased |
|
|
Share |
|
|
Programs |
|
|
Programs* |
|
January |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(December 31, 2005 -
January 27, 2006) |
|
|
397 |
|
|
$ |
53.28 |
|
|
|
|
|
|
|
|
|
February |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(January 28, 2006 -
February 24, 2006) |
|
|
229,381 |
|
|
$ |
52.16 |
|
|
|
|
|
|
|
|
|
March |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(February 25, 2006 -
March 31, 2006) |
|
|
12,223 |
|
|
$ |
54.51 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
242,001 |
|
|
$ |
52.28 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
As disclosed in its most recent Annual Report on Form 10-K filed on February 24, 2006, CSX
publicly announced that its Board of Directors has authorized the Company to purchase shares of its
common stock from time to time. The dollar amount that can be purchased in any fiscal year is
established by a formula that depends on the Companys common stock dividend rate and the number of
outstanding shares of common stock. Based on information as of March 31, 2006, the Company could
purchase approximately $150 million of its common stock under
this authorization during fiscal year
2006.
|
37
CSX CORPORATION
ITEM 3: DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5: OTHER INFORMATION
None.
ITEM 6: EXHIBITS
Exhibits
|
|
|
31.1*
|
|
Principal Executive Officer Certification Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002. |
31.2*
|
|
Principal Financial Officer Certification Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002. |
32.1*
|
|
Principal Executive Officer Certification Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002. |
32.2*
|
|
Principal Financial Officer Certification Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002. |
* Filed herewith
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
|
CSX CORPORATION
(Registrant)
|
|
|
By: |
/s/ CAROLYN T. SIZEMORE
|
|
|
|
Carolyn T. Sizemore |
|
|
|
Vice President and Controller
(Principal Accounting Officer) |
|
|
Dated: April 25, 2006
38