10-Q 1 csx0626201510-q.htm FORM 10-Q CSX 06.26.2015 10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q
 
(X)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 26, 2015
OR
( )    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
    For the transition period from __________ to __________
Commission File Number 1-8022
CSX CORPORATION
(Exact name of registrant as specified in its charter)
Virginia
 
 
 
 
 
 
 
62-1051971
 
 
(State or other jurisdiction of incorporation or organization)
 
 
 
 
 
 
 
(I.R.S. Employer Identification No.)
 
 
 
 
 
 
 
 
 
 
 
 
 
500 Water Street, 15th Floor, Jacksonville, FL
 
 
 
 
 
32202
 
(904) 359-3200
 
 
(Address of principal executive offices)
 
 
 
 
 
(Zip Code)
 
(Telephone number, including area code)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
No Change
 
 
 
 
 
 
(Former name, former address and former fiscal year, if changed since last report.)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes (X) No ( )
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes (X) No ( )
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer", "accelerated filer” and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (check one)
Large Accelerated Filer (X)
 
Accelerated Filer ( )
Non-accelerated Filer ( )
 
Smaller Reporting Company ( )
Indicate by a check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ( ) No (X)
There were 983,737,246 shares of common stock outstanding on June 26, 2015 (the latest practicable date that is closest to the filing date).

1



CSX CORPORATION
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 26, 2015
INDEX

 
 
 
Page
PART I.
FINANCIAL INFORMATION
 
 
Item 1.
 
 
 
 
 
 
Quarters Ended June 26, 2015 and June 27, 2014
 
 
 
 
 
 
Quarters Ended June 26, 2015 and June 27, 2014
 
 
 
 
 
 
At June 26, 2015 (Unaudited) and December 26, 2014
 
 
 
 
 
 
Six Months Ended June 26, 2015 and June 27, 2014

 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
 
 
Item 3.
 
 
 
 
 
Item 4.
 
 
 
 
 
PART II.
OTHER INFORMATION
 
 
Item 1.
 
 
 
 
 
Item 1A.
 
 
 
 
 
Item 2.
 
 
 
 
 
Item 3.
 
 
 
 
 
Item 4.
 
 
 
 
 
Item 5.
 
 
 
 
 
Item 6.
 
 
 
 
 
 
 


2


CSX CORPORATION

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED INCOME STATEMENTS (Unaudited)  
(Dollars in millions, except per share amounts)
 
Second Quarters
 
Six Months
 
2015
2014
 
2015
2014
 
 
 
 
 
 
Revenue
$
3,064

$
3,244

 
$
6,091

$
6,256

Expense
 
 
 
 
 
Labor and Fringe
825

809

 
1,704

1,623

Materials, Supplies and Other
559

621

 
1,186

1,250

Fuel
263

416

 
533

862

Depreciation
299

287

 
594

570

Equipment and Other Rents
101

114

 
214

215

Total Expense
2,047

2,247

 
4,231

4,520

 
 
 
 
 
 
Operating Income
1,017

997

 
1,860

1,736

 
 
 
 
 
 
Interest Expense
(134
)
(135
)
 
(268
)
(275
)
Other Income - Net
4

(12
)
 
6

(5
)
Earnings Before Income Taxes
887

850

 
1,598

1,456

 
 
 
 
 
 
Income Tax Expense
(334
)
(321
)
 
(603
)
(529
)
Net Earnings
$
553

$
529

 
$
995

$
927

 
 
 
 
 
 
Per Common Share (Note 2)
 
 
 
 
 
Net Earnings Per Share, Basic
$
0.56

$
0.53

 
$
1.01

$
0.92

Net Earnings Per Share, Assuming Dilution
$
0.56

$
0.53

 
$
1.00

$
0.92

 
 
 
 
 
 
 
 
 
 
 
 
Average Shares Outstanding (In millions)
988

1,003

 
989

1,005

Average Shares Outstanding, Assuming Dilution (In millions)
989

1,003

 
990

1,006

 
 
 
 
 
 
 
 
 
 
 
 
Cash Dividends Paid Per Common Share
$
0.18

$
0.16

 
$
0.34

$
0.31



CONSOLIDATED COMPREHENSIVE INCOME STATEMENTS (Unaudited)  
(Dollars in millions, except per share amounts)
 
Second Quarters
 
Six Months
 
2015
2014
 
2015
2014
Total Comprehensive Earnings (Note 10)
$
565

$
544

 
$
1,005

$
958


See accompanying notes to consolidated financial statements.

3

CSX CORPORATION
ITEM 1. FINANCIAL STATEMENTS

CONSOLIDATED BALANCE SHEETS
(Dollars in millions)
 
(Unaudited)
 
 
June 26,
2015
December 26,
2014
ASSETS
Current Assets:
 
 
Cash and Cash Equivalents
$
438

$
669

Short-term Investments
680

292

Accounts Receivable - Net (Note 1)
1,022

1,129

Materials and Supplies
295

273

Deferred Income Taxes
132

141

Other Current Assets
102

68

  Total Current Assets
2,669

2,572

 
 
 
Properties
40,313

39,343

Accumulated Depreciation
(11,063
)
(10,759
)
  Properties - Net
29,250

28,584

 
 
 
Investment in Conrail
787

779

Affiliates and Other Companies
579

577

Other Long-term Assets
492

541

  Total Assets
$
33,777

$
33,053

 
 
 
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
 
 
Accounts Payable
$
772

$
845

Labor and Fringe Benefits Payable
480

613

Casualty, Environmental and Other Reserves (Note 4)
146

142

Current Maturities of Long-term Debt (Note 7)
18

228

Income and Other Taxes Payable
243

163

Other Current Liabilities
119

116

  Total Current Liabilities
1,778

2,107

 
 
 
Casualty, Environmental and Other Reserves (Note 4)
280

276

Long-term Debt (Note 7)
10,107

9,514

Deferred Income Taxes
8,897

8,858

Other Long-term Liabilities
1,138

1,122

  Total Liabilities
22,200

21,877

 
 
 
Shareholders' Equity:
 
 
Common Stock, $1 Par Value
984

992

Other Capital
118

92

Retained Earnings
11,117

10,734

Accumulated Other Comprehensive Loss (Note 10)
(656
)
(666
)
Noncontrolling Interest
14

24

Total Shareholders' Equity
11,577

11,176

Total Liabilities and Shareholders' Equity
$
33,777

$
33,053


See accompanying notes to consolidated financial statements.

4

CSX CORPORATION
ITEM 1. FINANCIAL STATEMENTS

CONSOLIDATED CASH FLOW STATEMENTS (Unaudited)
(Dollars in millions)
 
Six Months
 
2015
2014
 
 
 
OPERATING ACTIVITIES
 
 
Net Earnings
$
995

$
927

Adjustments to Reconcile Net Earnings to Net Cash Provided by Operating Activities:
 
 
Depreciation
594

570

Deferred Income Taxes
33

86

Gain on Property Dispositions
(19
)
(4
)
Other Operating Activities
65

1

Changes in Operating Assets and Liabilities:
 
 
Accounts Receivable
101

(60
)
Other Current Assets
(52
)
(60
)
Accounts Payable
(68
)
(50
)
Income and Other Taxes Payable
78

114

Other Current Liabilities
(145
)
(79
)
Net Cash Provided by Operating Activities
1,582

1,445

 
 
 
INVESTING ACTIVITIES
 
 
Property Additions
(1,288
)
(956
)
Purchase of Short-term Investments
(775
)
(360
)
Proceeds from Sales of Short-term Investments
390

646

Proceeds from Property Dispositions
47

37

Other Investing Activities
52

(17
)
Net Cash Used in Investing Activities
(1,574
)
(650
)
 
 
 
FINANCING ACTIVITIES
 
 
Long-term Debt Issued (Note 7)
600


Long-term Debt Repaid (Note 7)
(210
)
(244
)
Dividends Paid
(336
)
(311
)
Shares Repurchased
(284
)
(257
)
Other Financing Activities
(9
)
(2
)
Net Cash Used in Financing Activities
(239
)
(814
)
 
 
 
Net Decrease in Cash and Cash Equivalents
(231
)
(19
)
 
 
 
CASH AND CASH EQUIVALENTS
 
 
Cash and Cash Equivalents at Beginning of Period
669

592

Cash and Cash Equivalents at End of Period
$
438

$
573

 
 
 

See accompanying notes to consolidated financial statements.





5

CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 1.
Nature of Operations and Significant Accounting Policies

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

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

Other entities
In addition to CSXT, the Company’s subsidiaries include CSX Intermodal Terminals, Inc. (“CSX Intermodal Terminals”), Total Distribution Services, Inc. (“TDSI”), Transflo Terminal Services, Inc. (“Transflo”), CSX Technology, Inc. (“CSX Technology”) and other subsidiaries. CSX Intermodal Terminals owns and operates a system of intermodal terminals, predominantly in the eastern United States and also performs drayage services (the pickup and delivery of intermodal shipments) for certain CSXT customers and trucking dispatch operations. TDSI serves the automotive industry with distribution centers and storage locations. Transflo connects non-rail served customers to the many benefits of rail by transferring products from rail to trucks. Today, the biggest Transflo markets are chemicals and agriculture, which include shipments of plastics and ethanol. CSX Technology and other subsidiaries provide support services for the Company.
    
CSX’s other holdings include CSX Real Property, Inc., a subsidiary responsible for the Company’s real estate sales, leasing, acquisition and management and development activities. These activities are classified in other income - net because they are not considered to be operating activities of the Company. Results of these activities fluctuate with the timing of real estate transactions.

Basis of Presentation
In the opinion of management, the accompanying consolidated financial statements contain all normal, recurring adjustments necessary to fairly present the following:
  
Consolidated income statements for the quarters and six months ended June 26, 2015 and June 27, 2014;
Consolidated comprehensive income statements for the quarters and six months ended June 26, 2015 and June 27, 2014;
Consolidated balance sheets at June 26, 2015 and December 26, 2014; and
Consolidated cash flow statements for the six months ended June 26, 2015 and June 27, 2014.

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


6

CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

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

Fiscal Year
CSX follows a 52/53 week fiscal reporting calendar with the last day of each reporting period ending on a Friday:
The second fiscal quarters of 2015 and 2014 consisted of 13 weeks ending on June 26, 2015 and June 27, 2014, respectively.
Fiscal year 2015 and 2014 will each consist of 52 weeks ending on December 25, 2015 and December 26, 2014, respectively.
    
Except as otherwise specified, references to “second quarter(s)” or “six months” indicate CSX's fiscal periods ending June 26, 2015 and June 27, 2014, and references to "year-end" indicate the fiscal year ended December 26, 2014.

Allowance for Doubtful Accounts
The Company maintains an allowance for doubtful accounts on uncollectible amounts related to freight receivables, government reimbursement receivables, claims for damages and other various receivables. The allowance is based upon the credit worthiness of customers, historical experience, the age of the receivable and current market and economic conditions. Uncollectible amounts are charged against the allowance account. Allowance for doubtful accounts of $37 million and $41 million is included in the consolidated balance sheets as of the end of second quarter 2015 and December 2014, respectively.

New Accounting Pronouncements
On April 7, 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update, Interest - Imputation of Interest, which changes the financial statement presentation of debt issuance costs to be a direct reduction to long-term debt, rather than presented as a long-term asset. The amortization of debt issuance costs will continue to be included in interest expense. This standard is effective for annual reporting periods beginning after December 15, 2015 and will not have a material effect on the Company's financial condition, results of operations or liquidity.

On July 9, 2015, the FASB approved a one-year deferral of the effective date of the Accounting Standards Update, Revenue from Contracts with Customers. This standard will now become effective for CSX beginning with the first quarter 2018 and can be adopted either retrospectively to each prior reporting period presented or as a cumulative effect adjustment as of the date of adoption. The Company is currently evaluating the impact of adopting this new guidance on the consolidated financial statements.



7

CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 1.    Nature of Operations and Significant Accounting Policies, continued
 
Other items
Share Repurchases
In April 2015, the Company announced a new $2 billion share repurchase program, which is expected to be completed by April 2017. During the second quarter of 2015 and 2014, the Company repurchased approximately $157 million, or four million shares, and $130 million, or four million shares, respectively. During the six months of 2015 and 2014, the Company repurchased $284 million, or eight million shares, and $257 million, or nine million shares, respectively. Management's assessment of market conditions and other factors guides the timing and volume of repurchases. Future share repurchases are expected to be funded by cash on hand, cash generated from operations and debt issuances. In accordance with the Equity Topic in the FASB's Accounting Standards Codification ("ASC"), the excess of repurchase price over par value is recorded in retained earnings. Generally, retained earnings is only impacted by net earnings and dividends.

NOTE 2.    Earnings Per Share

The following table sets forth the computation of basic earnings per share and earnings per share, assuming dilution:
 
Second Quarters
 
Six Months
 
2015
2014
 
2015
2014
Numerator (Dollars in millions):
 
 
 
 
 
Net Earnings
$
553

$
529

 
$
995

$
927

 
 
 
 
 
 
Denominator (Units in millions):
 
 
 
 
 
Average Common Shares Outstanding
988

1,003

 
989

1,005

Other Potentially Dilutive Common Shares
1


 
1

1

Average Common Shares Outstanding,
Assuming Dilution
989

1,003

 
990

1,006

 
 
 
 
 
 
Net Earnings Per Share, Basic
$
0.56

$
0.53

 
$
1.01

$
0.92

Net Earnings Per Share, Assuming Dilution
$
0.56

$
0.53

 
$
1.00

$
0.92


Basic earnings per share is based on the weighted-average number of shares of common stock outstanding. Earnings per share, assuming dilution, is based on the weighted-average number of shares of common stock equivalents outstanding adjusted for the effects of common stock that may be issued as a result of potentially dilutive instruments. CSX's potentially dilutive instruments are made up of equity awards, which include long-term incentive awards.

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








8

CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 3.     Share-Based Compensation

Under CSX's share-based compensation plans, awards primarily consist of performance grants, restricted stock awards, restricted stock units and stock grants for directors. Awards granted under the various programs are determined and approved by the Compensation Committee of the Board of Directors or, in certain circumstances, by the Chief Executive Officer for awards to management employees other than senior executives. The Board of Directors approves awards granted to the Company's non-management directors upon recommendation of the Governance Committee.

In February 2015, approximately 1 million performance units were granted to certain employees under a new long-term incentive plan ("2015-2017 LTIP") adopted under the CSX Stock and Incentive Award Plan. Payouts of performance units for the cycle ending with fiscal year 2017 will be based on the achievement of goals related to both operating ratio and return on assets in each case excluding non-recurring items as disclosed in the Company's financial statements. The cumulative operating ratio and average return on assets over the plan period will each comprise 50% of the payout and will be measured independently of the other.

Grants were made in performance units, with each unit representing the right to receive one share of CSX common stock, and payouts will be made in CSX common stock. The payout range for participants will be between 0% and 200% of the target awards depending on Company performance against predetermined goals. Payouts for certain executive officers are subject to downward adjustment by up to 30% based upon total shareholder return relative to specified comparable groups.

Additionally, as part of the new 2015-2017 LTIP, the Company granted approximately 312 thousand restricted stock units to certain employees in February 2015. The restricted stock units vest three years after the date of grant. Participants receive cash dividend equivalents on the unvested shares during the restriction period. These awards are time-based and are not based upon attainment of performance goals.

Both performance units and restricted stock units require participants to be employed through the final day of the respective vesting period except in the case of death, disability or retirement. For information related to the Company's other outstanding long-term incentive compensation, see CSX's most recent annual report on Form 10-K.

Total pre-tax expense associated with all share-based compensation and the related income tax benefit are as follows:
 
Second Quarters
 
Six Months
(Dollars in millions)
2015
2014
 
2015
2014
 
 
 
 
 
 
Share-Based Compensation Expense
$
10

$
6

 
$
18

$
11

Income Tax Benefit
4

2

 
7

4













9

CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 4.
Casualty, Environmental and Other Reserves
Casualty, environmental and other reserves are considered critical accounting estimates due to the need for significant management judgment. They are provided for in the consolidated balance sheets as follows:
 
June 26,
2015
 
December 26,
2014
(Dollars in millions)
Current
Long-term
Total
 
Current
Long-term
Total
 
 
 
 
 
 
 
 
Casualty:
 
 
 
 
 
 
 
Personal Injury
$
58

$
147

$
205

 
$
68

$
123

$
191

Occupational
3

14

17

 
3

15

18

Asbestos
5

50

55

 
5

51

56

     Total Casualty
66

211

277

 
76

189

265

Environmental
58

37

95

 
48

46

94

Other
22

32

54

 
18

41

59

     Total
$
146

$
280

$
426

 
$
142

$
276

$
418


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

Casualty
Casualty reserves of $277 million as of the end of second quarter 2015 represent accruals for personal injury, occupational injury and asbestos claims. The Company's self-insured retention amount for these claims is $50 million per occurrence. Currently, no individual claim is expected to exceed the self-insured retention amount. In accordance with the Contingencies Topic in the ASC, to the extent the value of an individual claim exceeds the self-insured retention amount, the Company would present the liability on a gross basis with a corresponding receivable for insurance recoveries. These reserves fluctuate based upon the timing of payments as well as changes in independent third-party estimates, which are reviewed by management. Actual results may vary from estimates due to the number, type and severity of the injury, costs of medical treatments and uncertainties in litigation. Most of the Company's casualty claims relate to CSXT unless otherwise noted below. Defense and processing costs, which historically have been insignificant and are anticipated to be insignificant in the future, are not included in the recorded liabilities.
 
Personal Injury
    Personal injury reserves represent liabilities for employee work-related and third-party injuries. Work-related injuries for CSXT employees are primarily subject to the Federal Employers’ Liability Act (“FELA”). In addition to FELA liabilities, employees of other CSX subsidiaries are covered by various state workers’ compensation laws, the Federal Longshore and Harbor Workers’ Compensation Program or the Maritime Jones Act.
        

10

CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 4.    Casualty, Environmental and Other Reserves, continued

CSXT retains an independent actuary to assist management in assessing the value of personal injury claims. An analysis is performed by the actuary quarterly and is reviewed by management. The methodology used by the actuary includes a development factor to reflect growth or reduction in the value of these personal injury claims. It is based largely on CSXT's historical claims and settlement experience.

Occupational & Asbestos
Occupational claims arise from allegations of exposures to certain materials in the workplace, such as solvents, soaps, chemicals (collectively referred to as “irritants”) and diesel fuels (like exhaust fumes) or allegations of chronic physical injuries resulting from work conditions, such as repetitive stress injuries, carpal tunnel syndrome and hearing loss. The Company is also party to a number of asbestos claims by employees alleging exposure to asbestos in the workplace.
    
Occupational and asbestos claims are analyzed by an independent actuary or specialist, respectively, in order to determine the number of unasserted, or incurred but not reported (“IBNR”), claims. Occupational claims analyses are performed by the actuary quarterly and are reviewed by management. Since exposure to asbestos has been substantially eliminated, management reviews asserted asbestos claims quarterly and the review by the specialist is completed annually.
    
The actuary and specialist analyze CSXT’s historical claim filings, settlement amounts, and dismissal rates to determine future anticipated claim filing rates and average settlement values for occupational and asbestos claims reserves. The potentially exposed population is estimated by using CSXT’s employment records and industry data. From this analysis, the actuary and specialist provide estimates of the IBNR claims liabilities.

Environmental
Environmental reserves were $95 million as of the end of second quarter 2015. The Company is a party to various proceedings related to environmental issues, including administrative and judicial proceedings involving private parties and regulatory agencies. The Company has been identified as a potentially responsible party at approximately 254 environmentally impaired sites. Many of these are, or may be, subject to remedial action under the federal Comprehensive Environmental Response, Compensation and Liability Act of 1980 ("CERCLA"), also known as the Superfund Law, or similar state statutes. Most of these proceedings arose from environmental conditions on properties used for ongoing or discontinued railroad operations. A number of these proceedings, however, are based on allegations that the Company, or its predecessors, sent hazardous substances to facilities owned or operated by others for treatment, recycling or disposal. In addition, some of the Company's land holdings were leased to others for commercial or industrial uses that may have resulted in releases of hazardous substances or other regulated materials onto the property and could give rise to proceedings against the Company.

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


    

11

CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 4.    Casualty, Environmental and Other Reserves, continued

In accordance with the Asset Retirement and Environmental Obligations Topic in the ASC, the Company reviews its role with respect to each site identified at least quarterly, giving consideration to a number of factors such as:
type of clean-up required;
nature of the Company's alleged connection to the location (e.g., generator of waste sent to the site or owner or operator of the site);
extent of the Company's alleged connection (e.g., volume of waste sent to the location and other relevant factors); and
number, connection and financial viability of other named and unnamed potentially responsible parties at the location.

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

Currently, the Company does not possess sufficient information to reasonably estimate the amounts of additional liabilities, if any, on some sites until completion of future environmental studies. In addition, conditions that are currently unknown could, at any given location, result in additional exposure, the amount and materiality of which cannot presently be reasonably estimated. Based upon information currently available, however, the Company believes its environmental reserves accurately reflect the cost of remedial actions currently required.

Other
Other reserves of $54 million as of the end of second quarter 2015 include liabilities for various claims, such as property, automobile and general liability. Also included in other reserves are longshoremen disability claims related to a previously owned international shipping business (these claims are in runoff) as well as claims for current port employees.

NOTE 5.    Commitments and Contingencies

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


12

CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 5.    Commitments and Contingencies, continued

Legal
    The Company is involved in litigation incidental to its business and is a party to a number of legal actions and claims, various governmental proceedings and private civil lawsuits, including, but not limited to, those related to fuel surcharge practices, environmental and hazardous material exposure matters, FELA claims by employees, other personal injury or property claims and disputes and complaints involving certain transportation rates and charges. Some of the legal proceedings include claims for compensatory as well as punitive damages and others are, or are purported to be, class actions. While the final outcome of these matters cannot be reasonably determined, considering, among other things, the legal defenses available and liabilities that have been recorded along with applicable insurance, it is currently the opinion of CSX management that none of these pending items is likely to have a material adverse effect on the Company's financial condition, results of operations or liquidity. An unexpected adverse resolution of one or more of these items, however, could have a material adverse effect on the Company's financial condition, results of operations or liquidity in that particular period.
The Company is able to estimate a range of possible loss for certain legal proceedings for which a loss is reasonably possible in excess of reserves established. The Company has estimated this range to be $3 million to $49 million in aggregate at June 26, 2015. This estimated aggregate range is based upon currently available information and is subject to significant judgment and a variety of assumptions. Accordingly, the Company's estimate will change from time to time, and actual losses may vary significantly from the current estimate.

Fuel Surcharge Antitrust Litigation
In May 2007, class action lawsuits were filed against CSXT and three other U.S.-based Class I railroads alleging that the defendants' fuel surcharge practices relating to contract and unregulated traffic resulted from an illegal conspiracy in violation of antitrust laws. In November 2007, the class action lawsuits were consolidated in federal court in the District of Columbia, where they are now pending. The suit seeks treble damages allegedly sustained by purported class members as well as attorneys' fees and other relief. Plaintiffs are expected to allege damages at least equal to the fuel surcharges at issue.

In June 2012, the District Court certified the case as a class action. The decision was not a ruling on the merits of plaintiffs' claims, but rather a decision to allow the plaintiffs to seek to prove the case as a class. The defendant railroads petitioned the U.S. Court of Appeals for the D.C. Circuit for permission to appeal the District Court's class certification decision. In August 2013, the D.C. Circuit issued a decision vacating the class certification decision and remanded the case to the District Court to reconsider its class certification decision. The District Court remand proceedings are underway and a class certification hearing has been scheduled for early November 2015. The District Court has delayed proceedings on the merits of the case pending the outcome of the class certification remand proceedings.

CSXT believes that its fuel surcharge practices were arrived at and applied lawfully and that the case is without merit. Accordingly, the Company intends to defend itself vigorously. However, penalties for violating antitrust laws can be severe, and an unexpected adverse decision on the merits could have a material adverse effect on the Company's financial condition, results of operations or liquidity in that particular period or for the full year.


13

CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 5.    Commitments and Contingencies, continued

Environmental
CSXT has indemnified Pharmacia LLC (formerly known as Monsanto Company) for certain liabilities associated with real estate located in Kearny, New Jersey along the Lower Passaic River (the “Property”). The Property, which was formerly owned by Pharmacia, is now owned by CSXT. The indemnification and defense duties arise with respect to several matters. CSXT, on behalf of Pharmacia, is conducting a Remedial Investigation and Feasibility Study of the 17-mile Lower Passaic River Study Area with approximately 60 other parties pursuant to an Administrative Settlement Agreement and Order on Consent with the U.S. Environmental Protection Agency ("EPA"). The EPA, using its CERCLA authority, seeks cleanup and removal costs and other damages associated with the presence of hazardous substances in the Lower Passaic River. In April 2014, the EPA announced its proposed plan to remediate the lower eight miles of the Lower Passaic River. The proposed plan, based on a Focused Feasibility Study, informs the public of EPA’s preferred remedial alternative. EPA’s proposed plan solicited public comments, which were due in August 2014. After review of comments, EPA is expected to issue its final cleanup plan in 2015. CSXT is also defending and indemnifying Pharmacia in a cooperative natural resource damages assessment process related to the Property. Based on currently available information, the Company does not believe any remediation costs potentially allocable to CSXT would be material to the Company's financial condition, results of operations or liquidity.

NOTE 6.    Employee Benefit Plans

The Company sponsors defined benefit pension plans principally for salaried, management personnel.  For employees hired prior to January 1, 2003, the plans provide eligible employees with retirement benefits based predominantly on years of service and compensation rates near retirement.  For employees hired in 2003 or thereafter, benefits are determined based on a cash balance formula, which provides benefits by utilizing interest and pay credits based upon age, service and compensation. 

In addition to these plans, the Company sponsors a post-retirement medical plan and a life insurance plan that provide benefits to full-time, salaried, management employees, hired prior to January 1, 2003, upon their retirement if certain eligibility requirements are met.  Eligible retirees who are age 65 years or older (Medicare-eligible) are covered by a health reimbursement arrangement, which is an employer-funded account that can be used for reimbursement of eligible medical expenses. Eligible retirees younger than 65 years (non-Medicare eligible) are covered by a self-insured program partially funded by participating retirees.  The life insurance plan is non-contributory.

The Company engages independent actuaries to compute the amounts of liabilities and expenses relating to these plans subject to the assumptions that the Company selects.  These amounts are reviewed by management.  The following table describes the components of expense / (income) related to net benefit expense recorded in labor and fringe on the income statement.


14

CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 6.    Employee Benefit Plans, continued

 
Pension Benefits
(Dollars in millions)
Second Quarters
 
Six Months
 
2015
2014
 
2015
2014
Service Cost
$
11

$
11

 
$
22

$
22

Interest Cost
29

31

 
58

62

Expected Return on Plan Assets
(41
)
(42
)
 
(81
)
(83
)
Amortization of Net Loss
18

14

 
35

28

Net Periodic Benefit Cost
17

14

 
34

29

Special Termination Employee Benefits(a)


 
7


Total Expense
$
17

$
14

 
$
41

$
29

 
 
 
 
 
 
 
 
 
 
 
 
 
Other Post-retirement Benefits
(Dollars in millions)
Second Quarters
 
Six Months
 
2015
2014
 
2015
2014
Service Cost
$

$

 
$
1

$
1

Interest Cost
3

4

 
7

7

Amortization of Net Loss
1

2

 
2

3

Amortization of Prior Service Costs

(1
)
 

(1
)
Total Expense
$
4

$
5

 
$
10

$
10


(a) These charges result from a management workforce reduction program that was initiated in 2014 and was completed during the first quarter 2015.

Qualified pension plan obligations are funded in accordance with regulatory requirements and with an objective of meeting minimum funding requirements necessary to avoid restrictions on flexibility of plan operation and benefit payments.  No significant contributions to the Company's qualified pension plans are expected in 2015.

NOTE 7.    Debt and Credit Agreements

Total activity related to long-term debt as of the end of second quarter 2015 is shown in the table below. For fair value information related to the Company's long-term debt, see Note 9, Fair Value Measurements.
(Dollars in millions)
Current Portion
Long-term Portion
Total
Long-term debt as of December 2014
$
228

$
9,514

$
9,742

2015 activity:
 
 
 
Long-term debt issued

600

600

Long-term debt repaid
(210
)

(210
)
Discount, premium and other activity

(7
)
(7
)
Long-term debt as of second quarter 2015
$
18

$
10,107

$
10,125



15

CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 7.    Debt and Credit Agreements, continued

Debt Issuance
On April 21, 2015, CSX issued $600 million of 3.95% notes due 2050. These notes are included in the consolidated balance sheets under long-term debt and may be redeemed by the Company at any time. The net proceeds may be used for general corporate purposes, which may include repurchases of CSX's common stock, capital investment, working capital requirements, improvement in productivity and other cost reduction initiatives.

Credit Facility
On May 21, 2015, CSX replaced its existing $1 billion unsecured, revolving credit facility backed by a diverse syndicate of banks which was set to expire in September 2016. This new facility expires in May 2020, and as of the date of this filing, the Company has no outstanding balances under this facility. The facility allows borrowings at floating (LIBOR-based) interest rates, plus a spread, depending upon CSX's senior unsecured debt ratings. LIBOR is the London Interbank Offered Rate which is a daily reference rate based on the interest rates at which banks offer to lend unsecured funds. As of second quarter 2015, CSX was in compliance with all covenant requirements under this facility.

Receivables Securitization Facility
The Company has a receivables securitization facility with a three-year term expiring in June 2017. The purpose of this facility is to provide an alternative to commercial paper and a low cost source of short-term liquidity of up to $250 million, depending on eligible receivables balances. As of the date of this filing, the Company has no outstanding balances under this facility.

NOTE 8.    Income Taxes

There have been no material changes to the balance of unrecognized tax benefits on the consolidated balance sheet during second quarters 2015 and 2014.

NOTE 9.    Fair Value Measurements

The Financial Instruments Topic in the ASC requires disclosures about fair value of financial instruments in annual reports as well as in quarterly reports. For CSX, this statement applies to certain investments and long-term debt. Disclosure of the fair value of pension plan assets is only required annually. Also, this rule clarifies the definition of fair value for financial reporting, establishes a framework for measuring fair value and requires additional disclosures about the use of fair value measurements.

Various inputs are considered when determining the value of the Company's investments, pension plan assets and long-term debt. The inputs or methodologies used for valuing securities are not necessarily an indication of the risk associated with investing in these securities. These inputs are summarized in the three broad levels listed below.
Level 1 - observable market inputs that are unadjusted quoted prices for identical assets or liabilities in active markets
Level 2 - other significant observable inputs (including quoted prices for similar securities, interest rates, credit risk, etc.)
Level 3 - significant unobservable inputs (including the Company's own assumptions about the assumptions market participants would use in determining the fair value of investments)
 

16

CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 9.    Fair Value Measurements, continued

The valuation methods described below may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while the Company believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date.

Investments
The Company's investment assets, valued with assistance from a third-party trustee, consist of certificates of deposits, commercial paper, corporate bonds, government securities and auction rate securities and are carried at fair value on the consolidated balance sheet per the Fair Value Measurements and Disclosures Topic in the ASC. There are several valuation methodologies used for those assets as described below.

Certificates of Deposit and Commercial Paper (Level 2): Valued at amortized cost, which approximates fair value.
Corporate Bonds and Government Securities (Level 2): Valued using broker quotes that utilize observable market inputs.
Auction Rate Securities (Level 3): Valued using pricing models for which the assumptions utilize management’s estimates of market participant assumptions, because there is currently no active market for trading.
    
The Company's investment assets are carried at fair value on the consolidated balance sheets as summarized in the table below. Additionally, the amortized cost basis of these investments was $777 million and $453 million as of June 26, 2015 and December 26, 2014, respectively.
 
June 26,
2015
 
December 26,
2014
(Dollars in Millions)
Level 2
Level 3
Total
 
Level 2
Level 3
Total
Certificates of Deposit and Commercial Paper
$
670

$

$
670

 
$
250

$

$
250

Corporate Bonds
71


71

 
141


141

Government Securities
32


32

 
51


51

Auction Rate Securities

4

4

 

11

11

Total investments at fair value
$
773

$
4

$
777

 
$
442

$
11

$
453



These investments have the following maturities:
(Dollars in millions)
June 26,
2015
 
December 26,
2014
Less than 1 year
$
680

 
$
292

1 - 2 years
14

 
45

2 - 5 years
74

 
100

Greater than 5 years
9

 
16

Total
$
777

 
$
453



17

CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 9.    Fair Value Measurements, continued
Long-term Debt
Long-term debt is reported at carrying amount on the consolidated balance sheets and is the Company's only financial instrument with fair values significantly different from their carrying amounts. The majority of the Company's long-term debt is valued with assistance from an independent third party adviser that utilizes closing transactions, market quotes or market values of comparable debt. For those instruments not valued by the independent adviser, the fair value has been estimated by applying market rates of similar instruments to the scheduled contractual debt payments and maturities. These market rates are provided by the same independent adviser. All of the inputs used to determine the fair value of the Company's long-term debt are Level 2 inputs.

The fair value of outstanding debt fluctuates with changes in a number of factors. Such factors include, but are not limited to, interest rates, market conditions, values of similar financial instruments, size of the transaction, cash flow projections and comparable trades. Fair value will exceed carrying value when the current market interest rate is lower than the interest rate at which the debt was originally issued. The fair value of a company's debt is a measure of its current value under present market conditions. It does not impact the financial statements under current accounting rules.

The fair value and carrying value of the Company's long-term debt is as follows:
(Dollars in millions)
June 26,
2015
 
December 26, 2014
Long-term Debt (Including Current Maturities):
 
 
 
Fair Value
$
10,788

 
$
11,042

Carrying Value
10,125

 
9,742


NOTE 10.     Other Comprehensive Income / (Loss)

CSX reports comprehensive earnings or loss in accordance with the Comprehensive Income Topic in the ASC in the Consolidated Comprehensive Income Statement. Total comprehensive earnings are defined as all changes in shareholders' equity during a period, other than those resulting from investments by and distributions to shareholders (e.g. issuance of equity securities and dividends). Generally, for CSX, total comprehensive earnings equal net earnings plus or minus adjustments for pension and other post-retirement liabilities. Total comprehensive earnings represent the activity for a period net of tax and were $565 million and $544 million for second quarters, and $1 billion and $958 million for six months 2015 and 2014, respectively.

While total comprehensive earnings is the activity in a period and is largely driven by net earnings in that period, accumulated other comprehensive income or loss (“AOCI”) represents the cumulative balance of other comprehensive income, net of tax, as of the balance sheet date. For CSX, AOCI is primarily the cumulative balance related to pension and other post-retirement benefit adjustments and CSX's share of AOCI of equity method investees.

Changes in the AOCI balance by component are shown in the table below. Amounts reclassified in pension and other post-employment benefits to net earnings relate to the amortization of actuarial losses and are included in labor and fringe on the consolidated income statements. See Note 6. Employee Benefit Plans for further information. Other primarily represents CSX's share of AOCI of equity method investees. Amounts reclassified in other to net earnings are included in materials, supplies and other on the consolidated income statements.


18

CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 10.     Other Comprehensive Income / (Loss), continued

 
Pension and Other Post-Employment Benefits
Other
Accumulated Other Comprehensive Income (Loss)
(Dollars in millions)
 
 
 
Balance December 26, 2014, Net of Tax
$
(611
)
$
(55
)
$
(666
)
Other Comprehensive Income (Loss)
 
 
 
Loss Before Reclassifications

(11
)
(11
)
Amounts Reclassified to Net Earnings
36


36

Tax Expense
(15
)

(15
)
Total Other Comprehensive Income (Loss)
21

(11
)
10

Balance June 26, 2015, Net of Tax
$
(590
)
$
(66
)
$
(656
)

NOTE 11.    Summarized Consolidating Financial Data

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
























19

CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 11.    Summarized Consolidating Financial Data, continued
 Consolidating Income Statements
 (Dollars in millions)
Second Quarter 2015
 CSX Corporation
 CSX Transportation
 Eliminations and Other
 Consolidated
 Revenue
$

$
3,045

$
19

$
3,064

 Expense
(146
)
2,239

(46
)
2,047

 Operating Income
146

806

65

1,017

 
 
 
 
 
 Equity in Earnings of Subsidiaries
546


(546
)

 Interest (Expense) / Benefit
(132
)
(9
)
7

(134
)
 Other Income / (Expense) - Net
(2
)
7

(1
)
4

 
 
 
 
 
 Earnings Before Income Taxes
558

804

(475
)
887

 Income Tax Benefit / (Expense)
(5
)
(305
)
(24
)
(334
)
 Net Earnings
$
553

$
499

$
(499
)
$
553

 
 
 
 
 
Total Comprehensive Earnings
$
565

$
499

$
(499
)
$
565

 
 
 
 
 
Second Quarter 2014
 CSX Corporation
 CSX Transportation
 Eliminations and Other
 Consolidated
 Revenue
$

$
3,223

$
21

$
3,244

 Expense
(105
)
2,360

(8
)
2,247

 Operating Income
105

863

29

997

 
 
 
 
 
 Equity in Earnings of Subsidiaries
545


(545
)

 Interest (Expense) / Benefit
(126
)
(14
)
5

(135
)
 Other Income / (Expense) - Net
(3
)
(10
)
1

(12
)
 
 
 
 
 
 Earnings Before Income Taxes
521

839

(510
)
850

 Income Tax (Expense) / Benefit
8

(318
)
(11
)
(321
)
 Net Earnings
$
529

$
521

$
(521
)
$
529

 
 
 
 
 
Total Comprehensive Earnings
$
544

$
522

$
(522
)
$
544



20

CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 11.    Summarized Consolidating Financial Data, continued
 Consolidating Income Statements
 (Dollars in millions)
Six Months Ended June 26, 2015
 CSX Corporation
 CSX Transportation
 Eliminations and Other
 Consolidated
 Revenue
$

$
6,052

$
39

$
6,091

 Expense
(294
)
4,583

(58
)
4,231

 Operating Income
294

1,469

97

1,860

 
 
 
 
 
 Equity in Earnings of Subsidiaries
986


(986
)

 Interest (Expense) / Benefit
(265
)
(16
)
13

(268
)
 Other Income / (Expense) - Net
(3
)
13

(4
)
6

 
 
 
 
 
 Earnings Before Income Taxes
1,012

1,466

(880
)
1,598

 Income Tax (Expense) / Benefit
(17
)
(551
)
(35
)
(603
)
 Net Earnings
$
995

$
915

$
(915
)
$
995

 
 
 
 
 
Total Comprehensive Earnings
$
1,005

$
912

$
(912
)
$
1,005

 
 
 
 
 
Six Months Ended June 27, 2014
 CSX Corporation
 CSX Transportation
 Eliminations and Other
 Consolidated
 Revenue
$

$
6,215

$
41

$
6,256

 Expense
(208
)
4,753

(25
)
4,520

 Operating Income
208

1,462

66

1,736

 
 
 
 
 
 Equity in Earnings of Subsidiaries
961


(961
)

 Interest (Expense) / Benefit
(256
)
(28
)
9

(275
)
 Other Income / (Expense) - Net
(5
)
(4
)
4

(5
)
 
 
 
 
 
 Earnings Before Income Taxes
908

1,430

(882
)
1,456

 Income Tax (Expense) / Benefit
19

(522
)
(26
)
(529
)
 Net Earnings
$
927

$
908

$
(908
)
$
927

 
 
 
 
 
Total Comprehensive Earnings
$
958

$
915

$
(915
)
$
958

 
 
 
 
 











21

CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 11.    Summarized Consolidating Financial Data, continued
 Consolidating Balance Sheet
 (Dollars in millions)
As of June 2015
 CSX Corporation
 CSX Transportation
 Eliminations and Other
 Consolidated
 
 
 
 
 
ASSETS
 Current Assets
 
 
 
 
 Cash and Cash Equivalents
$
233

$
144

$
61

$
438

 Short-term Investments
670


10

680

 Accounts Receivable - Net
2

175

845

1,022

 Receivable from Affiliates
1,194

2,324

(3,518
)

 Materials and Supplies

295


295

 Deferred Income Taxes
4

129

(1
)
132

 Other Current Assets
5

84

13

102

   Total Current Assets
2,108

3,151

(2,590
)
2,669

 
 
 
 
 
 Properties
1

37,787

2,525

40,313

 Accumulated Depreciation
(1
)
(9,752
)
(1,310
)
(11,063
)
 Properties - Net

28,035

1,215

29,250

 
 
 
 
 
 Investments in Conrail


787

787

 Affiliates and Other Companies
(39
)
646

(28
)
579

 Investments in Consolidated Subsidiaries
22,157


(22,157
)

 Other Long-term Assets
174

399

(81
)
492

   Total Assets
$
24,400

$
32,231

$
(22,854
)
$
33,777

 
 
 
 
 
LIABILITIES AND SHAREHOLDERS' EQUITY
 
 
 Current Liabilities
 
 
 
 
 Accounts Payable
$
108

$
638

$
26

$
772

 Labor and Fringe Benefits Payable
34

411

35

480

 Payable to Affiliates
3,125

495

(3,620
)

 Casualty, Environmental and Other Reserves

131

15

146

 Current Maturities of Long-term Debt

18


18

 Income and Other Taxes Payable
(320
)
535

28

243

 Other Current Liabilities

108

11

119

   Total Current Liabilities
2,947

2,336

(3,505
)
1,778

 
 
 
 
 
 Casualty, Environmental and Other Reserves

224

56

280

 Long-term Debt
9,301

806


10,107

 Deferred Income Taxes
(164
)
8,852

209

8,897

 Other Long-term Liabilities
753

502

(117
)
1,138

   Total Liabilities
$
12,837

$
12,720

$
(3,357
)
$
22,200

 
 
 
 
 
 Shareholders' Equity
 
 
 
 
 Common Stock, $1 Par Value
$
984

$
181

$
(181
)
$
984

 Other Capital
118

5,089

(5,089
)
118

 Retained Earnings
11,117

14,257

(14,257
)
11,117

 Accumulated Other Comprehensive Loss
(656
)
(34
)
34

(656
)
 Noncontrolling Interest

18

(4
)
14

 Total Shareholders' Equity
$
11,563

$
19,511

$
(19,497
)
$
11,577

 Total Liabilities and Shareholders' Equity
$
24,400

$
32,231

$
(22,854
)
$
33,777


22

CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 11.    Summarized Consolidating Financial Data, continued
Consolidating Balance Sheet
(Dollars in millions)
As of December 2014
 CSX Corporation
 CSX Transportation
Eliminations and Other
 Consolidated
ASSETS
 Current Assets
 
 
 
 
 Cash and Cash Equivalents
$
510

$
100

$
59

$
669

 Short-term Investments
250


42

292

 Accounts Receivable - Net
2

206

921

1,129

 Receivable from Affiliates
1,211

2,418

(3,629
)

 Materials and Supplies

272

1

273

 Deferred Income Taxes
3

139

(1
)
141

 Other Current Assets

61

7

68

   Total Current Assets
1,976

3,196

(2,600
)
2,572

 
 
 
 
 
 Properties
1

36,888

2,454

39,343

 Accumulated Depreciation
(1
)
(9,516
)
(1,242
)
(10,759
)
 Properties - Net

27,372

1,212

28,584

 
 
 
 
 
 Investments in Conrail


779

779

 Affiliates and Other Companies
(39
)
644

(28
)
577

 Investment in Consolidated Subsidiaries
21,570


(21,570
)

 Other Long-term Assets
178

387

(24
)
541

   Total Assets
$
23,685

$
31,599

$
(22,231
)
$
33,053

 
 
 
 
 
LIABILITIES AND SHAREHOLDERS' EQUITY
 
 
 Current Liabilities
 
 
 
 
 Accounts Payable
$
106

$
707

$
32

$
845

 Labor and Fringe Benefits Payable
38

511

64

613

 Payable to Affiliates
3,053

514

(3,567
)

 Casualty, Environmental and Other Reserves

126

16

142

 Current Maturities of Long-term Debt
200

29

(1
)
228

 Income and Other Taxes Payable
(150
)
293

20

163

 Other Current Liabilities

111

5

116

   Total Current Liabilities
3,247

2,291

(3,431
)
2,107

 
 
 
 
 
 Casualty, Environmental and Other Reserves

213

63

276

 Long-term Debt
8,705

809


9,514

 Deferred Income Taxes
(172
)
8,827

203

8,858

 Other Long-term Liabilities
753

487

(118
)
1,122

   Total Liabilities
$
12,533

$
12,627

$
(3,283
)
$
21,877

 
 
 
 
 
 Shareholders' Equity
 
 
 
 
 Common Stock, $1 Par Value
$
992

$
181

$
(181
)
$
992

 Other Capital
92

5,077

(5,077
)
92

 Retained Earnings
10,734

13,717

(13,717
)
10,734

 Accumulated Other Comprehensive Loss
(666
)
(31
)
31

(666
)
 Noncontrolling Minority Interest

28

(4
)
24

   Total Shareholders' Equity
$
11,152

$
18,972

$
(18,948
)
$
11,176

   Total Liabilities and Shareholders' Equity
$
23,685

$
31,599

$
(22,231
)
$
33,053


23

CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 11.    Summarized Consolidating Financial Data, continued
Consolidating Cash Flow Statements
(Dollars in millions)
Six months ended June 26, 2015
CSX
Corporation
CSX
Transportation
Eliminations and Other
Consolidated
Operating Activities
 
 
 
 
Net Cash Provided by (Used in) Operating Activities
$
367

$
1,530

$
(315
)
$
1,582

Investing Activities
 

 
 
Property Additions

(1,215
)
(73
)
(1,288
)
Purchases of Short-term Investments
(775
)


(775
)
Proceeds from Sales of Short-term Investments
355


35

390

Proceeds from Property Dispositions

46

1

47

Other Investing Activities
(11
)
72

(9
)
52

Net Cash Provided by (Used in) Investing Activities
(431
)
(1,097
)
(46
)
(1,574
)
Financing Activities
 
 
 
 
Long-term Debt Issued
600



600

Long-term Debt Repaid
(200
)
(10
)

(210
)
Dividends Paid
(336
)
(375
)
375

(336
)
Shares Repurchased
(284
)


(284
)
Other Financing Activities
7

(4
)
(12
)
(9
)
Net Cash Provided by (Used in) Financing Activities
(213
)
(389
)
363

(239
)
Net Increase (Decrease) in Cash and Cash Equivalents
(277
)
44

2

(231
)
Cash and Cash Equivalents at Beginning of Period
510

100

59

669

Cash and Cash Equivalents at End of Period
$
233

$
144

$
61

$
438




24

CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 11.    Summarized Consolidating Financial Data, continued
Consolidating Cash Flow Statements
(Dollars in millions)
Six months ended June 27, 2014
 CSX
Corporation
CSX
Transportation
Eliminations and Other
Consolidated
Operating Activities
 
 
 
 
Net Cash Provided by (Used in) Operating Activities
$
453

$
1,276

$
(284
)
$
1,445

Investing Activities
 
 
 
 
Property Additions

(867
)
(89
)
(956
)
Purchases of Short-term Investments
(360
)


(360
)
Proceeds from Sales of Short-term Investments
637


9

646

Proceeds from Property Dispositions

37


37

Other Investing Activities

(95
)
78

(17
)
Net Cash Provided by (Used in) Investing Activities
277

(925
)
(2
)
(650
)
Financing Activities
 
 
 
 
Long-term Debt Repaid
(200
)
(44
)

(244
)
Dividends Paid
(311
)
(285
)
285

(311
)
Shares Repurchased
(257
)


(257
)
Other Financing Activities
6

(10
)
2

(2
)
Net Cash Provided by (Used in) Financing Activities
(762
)
(339
)
287

(814
)
Net Increase (Decrease) in Cash and Cash Equivalents
(32
)
12

1

(19
)
Cash and Cash Equivalents at Beginning of Period
439

91

62

592

Cash and Cash Equivalents at End of Period
$
407

$
103

$
63

$
573



25


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

SECOND QUARTER 2015 HIGHLIGHTS

Revenue declined $180 million to $3.1 billion from the prior year's second quarter reflecting lower fuel surcharge recoveries of $183 million. Excluding this impact, revenue was relatively flat as continued pricing gains were offset with a slight volume decline and negative portfolio mix.

Expenses of $2.0 billion decreased $200 million or 9% year over year primarily driven by lower fuel costs of $153 million. Also included in the quarter were efficiency savings and lower volume-related costs.

Operating income exceeded $1.0 billion for the first time in a quarter in the Company's history, representing an increase of $20 million or 2% year over year.

Operating ratio of 66.8% improved 250 basis points.

Earnings per share of $0.56 increased $0.03 or 6% year over year.

 
Second Quarters
 
Six Months
 
2015
2014
Fav /
(Unfav)
% Change
 
2015
2014
Fav /
(Unfav)
% Change
Volume (in thousands)
1,759

1,781

(22
)
(1)%
 
3,394

3,401

(7
)
—%
 
 
 
 
 
 
 
 
 
 
(in millions)
 
 
 
 
 
 
 
 
 
Revenue
$
3,064

$
3,244

$
(180
)
(6)%
 
$
6,091

$
6,256

$
(165
)
(3)%
Expense
2,047

2,247

200

9%
 
4,231

4,520

289

6%
Operating Income
$
1,017

$
997

$
20

2%
 
$
1,860

$
1,736

$
124

7%
 
 
 
 
 
 
 
 
 
 
Operating Ratio
66.8
%
69.3
%
250

 bps
 
69.5
%
72.3
%
280

 bps
 
 
 
 
 
 
 
 
 
 
Earnings Per Diluted Share
$
0.56

$
0.53

$
0.03

6%
 
$
1.00

$
0.92

$
0.08

9%

For additional information, refer to Results of Operations discussed on pages 27 through 30.


















26

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



RESULTS OF OPERATIONS
Volume and Revenue (Unaudited)
Volume (Thousands of units); Revenue (Dollars in Millions); Revenue Per Unit (Dollars)
Second Quarters
 
Volume
 
Revenue
 
Revenue Per Unit
 
2015
 
2014
 
% Change
 
2015
 
2014
 
% Change
 
2015
 
2014
 
% Change
Agricultural
 
 
 
 
 
 
 
 
 
Agricultural Products
101

 
105

 
(4
)%
 
$
266

 
$
285

 
(7
)%
 
$
2,634

 
$
2,714

 
(3
)%
Phosphates and Fertilizers
78

 
86

 
(9
)
 
122

 
143

 
(15
)
 
1,564

 
1,663

 
(6
)
Food and Consumer
24

 
25

 
(4
)
 
68

 
70

 
(3
)
 
2,833

 
2,800

 
1

Industrial
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Chemicals
158

 
157

 
1

 
530

 
556

 
(5
)
 
3,354

 
3,541

 
(5
)
Automotive
120

 
114

 
5

 
313

 
321

 
(2
)
 
2,608

 
2,816

 
(7
)
Metals
61

 
74

 
(18
)
 
156

 
184

 
(15
)
 
2,557

 
2,486

 
3

Housing and Construction
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Forest Products
74

 
79

 
(6
)
 
202

 
210

 
(4
)
 
2,730

 
2,658

 
3

Minerals
84

 
80

 
5

 
123

 
123

 

 
1,464

 
1,538

 
(5
)
Waste and Equipment
41

 
40

 
3

 
78

 
79

 
(1
)
 
1,902

 
1,975

 
(4
)
Total Merchandise
741

 
760

 
(3
)
 
1,858

 
1,971

 
(6
)
 
2,507

 
2,593

 
(3
)
Coal
295

 
330

 
(11
)
 
630

 
744

 
(15
)
 
2,136

 
2,255

 
(5
)
Intermodal
723

 
691

 
5

 
450

 
449

 

 
622

 
650

 
(4
)
Other

 

 

 
126

 
80

 
58

 

 

 

Total
1,759

 
1,781

 
(1
)%
 
$
3,064

 
$
3,244

 
(6
)%
 
$
1,742

 
$
1,821

 
(4
)%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Six Months
 
Volume
 
Revenue
 
Revenue Per Unit
 
2015
 
2014
 
% Change
 
2015
 
2014
 
% Change
 
2015
 
2014
 
% Change
Agricultural
 
 
 
 
 
 
 
 
 
Agricultural Products
210

 
211

 
 %