Nature of Operations and Significant Accounting Policies

Business

CSX Corporation (“CSX”), 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, the transport of intermodal containers and trailers, as well as other transportation services such as rail-to-truck transfers and bulk commodity operations.

CSX Transportation, Inc.

CSX’s principal operating subsidiary, CSX Transportation, Inc. (“CSXT”), provides an important link to the transportation supply chain through its approximately 20,500 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. It has access to over 70 ocean, river and lake port terminals along the Atlantic and Gulf Coasts, the Mississippi River, the Great Lakes and the St. Lawrence Seaway. The Company’s intermodal business links customers to railroads via trucks and terminals. CSXT also serves thousands of production and distribution facilities through track connections to approximately 230 short-line and regional railroads.

CSXT is also responsible for the Company's real estate sales, leasing, acquisition and management and development activities after a merger with CSX Real Property, Inc., a former wholly-owned CSX subsidiary, on July 1, 2017. In addition, as substantially all real estate sales, leasing, acquisition and management and development activities are focused on supporting railroad operations, all results of these activities are included in operating income beginning in 2017. Previously, the results of these activities were classified as operating or non-operating based on the nature of the activity and were not material for any prior periods presented.

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

Lines of Business

During 2018, the Company's services generated $12.3 billion of revenue and served three primary lines of business: merchandise, coal and intermodal.


•	The merchandise business shipped 2.7 million carloads (41 percent of volume) and generated 61 percent of revenue in 2018. The Company’s merchandise business is comprised of shipments in the following diverse markets: chemicals, automotive, agricultural and food products, minerals, fertilizers, forest products, and metals and equipment.

•

The coal business shipped 887 thousand carloads (14 percent of volume) and generated 18 percent of revenue in 2018. The Company transports domestic coal, coke and iron ore to electricity-generating power plants, steel manufacturers and industrial plants as well as export coal to deep-water port facilities. Roughly one-third of export coal and the majority of the domestic coal that the Company transports is used for generating electricity.

•

The intermodal business shipped 2.9 million units (45 percent of volume) and generated 16 percent of revenue in 2018. The intermodal business combines the superior economics of rail transportation with the short-haul flexibility of trucks and offers a cost advantage over long-haul trucking. Through a network of more than 30 terminals, the intermodal business serves all major markets east of the Mississippi River and transports mainly manufactured consumer goods in containers, providing customers with truck-like service for longer shipments.

Other revenue accounted for 5 percent of the Company’s total revenue in 2018. This revenue category includes revenue from regional subsidiary railroads, demurrage, revenue for customer volume commitments not met, switching, other incidental charges and adjustments to revenue reserves. Revenue from regional railroads includes shipments by railroads that the Company does not directly operate. Demurrage represents charges assessed when freight cars or other equipment are held beyond a specified period of time. Switching revenue is primarily generated when CSXT switches cars for a customer or another railroad.

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 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. The biggest Transflo markets are chemicals and agriculture, which includes shipments of plastics and ethanol. CSX Technology and other subsidiaries provide support services for the Company.

Employees

The Company's number of employees was approximately 22,500 as of December 2018, which includes approximately 18,500 union employees. Most of the Company’s employees provide or support transportation services.

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

Basis of Presentation

In the opinion of management, the accompanying consolidated financial statements contain all normal, recurring adjustments necessary to fairly present the financial position of CSX and its subsidiaries at December 31, 2018 and December 31, 2017, and the consolidated statements of income, comprehensive income, cash flows and changes in shareholders’ equity for fiscal years 2018, 2017 and 2016. In addition, management has evaluated and disclosed all material events occurring subsequent to the date of the financial statements up to the date this annual report is filed on Form 10-K.

Fiscal Year

Through the second quarter 2017, CSX followed a 52/53 week fiscal reporting calendar with the last day of each reporting period ending on a Friday. On July 7, 2017, the Board of Directors of CSX approved a change in the fiscal reporting calendar from a 52/53 week year ending on the last Friday of December to a calendar year ending on December 31 each year, effective beginning with fiscal third quarter 2017. Related to the change in the fiscal calendar:


•	Year:


–	2018 contained 365 days (January 1, 2018 through December 31, 2018)


–	2017 contained 366 days (December 31, 2016 through December 31, 2017)


–	2016 contained 371 days (December 26, 2015 through December 30, 2016)


•	First quarter:


–	2018 contained 90 days (January 1, 2018 through March 31, 2018)


–	2017 contained 91 days (December 31, 2016 through March 31, 2017)


–	2016 contained 91 days (December 26, 2015 through March 25, 2016)


•	Second quarter:


–	2018 contained 91 days (April 1, 2018 through June 30, 2018)


–	2017 contained 91 days (April 1, 2017 through June 30, 2017)


–	2016 contained 91 days (March 26, 2016 through June 24, 2016)


•	Third quarter:


–	2018 contained 92 days (July 1, 2018 through September 30, 2018)


–	2017 contained 92 days (July 1, 2017 through September 30, 2017)


–	2016 contained 91 days (June 25, 2016 through September 23, 2016)


•	Fourth quarter:


–	2018 contained 92 days (October 1, 2018 through December 31, 2018)


–	2017 contained 92 days (October 1, 2017 through December 31, 2017)


–	2016 contained 98 days (September 24, 2016 through December 30, 2016)

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

This change did not materially impact comparability of the Company’s financial results for fiscal years 2017 and 2016. Accordingly, the change to a calendar fiscal year was made on a prospective basis and operating results for prior periods were not adjusted. The Company was not required to file a transition report because this change was not deemed a change in fiscal year for purposes of reporting subject to Rule 13a-10 or Rule 15d-10 of the Securities Exchange Act of 1934 as the new fiscal year commenced with the end of the prior fiscal year end and within seven days of the prior fiscal year end. Except as otherwise specified, references to full years indicate CSX’s fiscal years ended on December 31, 2018, December 31, 2017 and December 30, 2016.

Principles of Consolidation

The consolidated financial statements include results of operations of CSX and subsidiaries over which CSX has majority ownership or financial control. All significant intercompany accounts and transactions have been eliminated. Most investments in companies that were not majority-owned were carried at cost (if less than 20% owned and the Company has no significant influence) or were accounted for under the equity method (if the Company has significant influence but does not have control). These investments are reported within Investment in Conrail or Affiliates and Other Companies on the consolidated balance sheets.

Cash and Cash Equivalents

On a daily basis, cash in excess of current operating requirements is invested in various highly liquid investments having a typical maturity date of three months or less at the date of acquisition. These investments are carried at cost, which approximated market value, and are classified as cash equivalents.

Investments

Investments in instruments with original maturities greater than three months that will mature in less than one year are classified as short-term investments. Investments with original maturities of one year or greater are initially classified within other long-term assets, and the classification is re-evaluated at each balance sheet date.

Materials and Supplies

Materials and supplies in the consolidated balance sheets are carried at average costs and consist primarily of fuel and parts used in the repair and maintenance of CSXT’s freight car and locomotive fleets, equipment and track structure.

New Accounting Pronouncements

Pronouncements adopted in 2018

In February 2018, the Financial Accounting Standards Board ("FASB") issued Accounting Standard Update ("ASU") Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which permits entities to reclassify tax effects stranded in accumulated other comprehensive income as a result of tax reform to retained earnings. Companies that elect to reclassify these amounts must reclassify stranded tax effects for all items accounted for in accumulated other comprehensive income. The Company adopted this standard update in first quarter 2018 and applied it prospectively. Adoption resulted in the reclassification of $107 million in tax effects related to employee benefit plans from accumulated other comprehensive loss, increasing retained earnings by the same amount.

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

In March 2017, the FASB issued ASU Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, which requires that only the service cost component of net periodic benefit costs be recorded as compensation cost in operating expense on the consolidated income statement. All other components of net periodic benefit cost (interest cost, expected return on plan assets, amortization of net loss, special termination benefits and settlement and curtailment effects) should be presented as non-operating charges on the consolidated income statement. If these non-operating charges are related to prior year restructuring activities, they are presented as restructuring charge - non-operating. Other non-operating charges are presented as other income - net. The Company adopted the provisions of this standard during first quarter 2018 and applied them retrospectively. The retrospective impact of adoption for fiscal years 2017 and 2016 is shown in the following table.



	Fiscal Year 2017								Fiscal Year 2016
(Dollars in millions)	As Previously Reported		Reclass			As Reclassified			As Previously Reported		Reclass			As Reclassified
Operating Expense:
Labor and Fringe	$	2,914	$	32		$	2,946		$	3,159	$	(24	)	$	3,135
Restructuring Charge	325		(85		)	240			—		—			—
Non-Operating Income (Expense):
Restructuring Charge - Non-Operating	$	—	$	(85	)	$	(85	)	$	—	$	—		$	—
Other Income - Net	21		32			53			46		(24		)	22

In May 2014, the FASB issued ASU Revenue from Contracts with Customers, which supersedes previous revenue recognition guidance. The new standard requires that a company recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration the company expects to receive in exchange for those goods or services. In-depth reviews of commercial contracts were completed and changes to processes and internal controls to meet the standard’s reporting and disclosure requirements were implemented. The Company adopted the guidance effective January 1, 2018 using the modified retrospective approach. The adoption did not affect the Company’s financial condition, results of operations or liquidity. Disclosures related to the nature, amount and timing of revenue and cash flows arising from contracts with customers are included in Note 16, Revenues.

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

Pronouncements to be adopted

In February 2016, the FASB issued ASU, Leases, which will require lessees to recognize most leases on their balance sheets as a right-of-use asset with a corresponding lease liability, and lessors to recognize a net lease investment. Additional qualitative and quantitative disclosures will also be required. This standard update is effective for CSX beginning with the first quarter 2019 and the Company plans to adopt it using the cumulative-effect adjustment transition method approved by the FASB in July 2018. Changes to processes and internal controls to meet the standard’s reporting and disclosure requirements have been identified and are being implemented. Software has been implemented that will assist in the recognition of additional assets and liabilities to be included on the balance sheet related to leases currently classified as operating leases with durations greater than twelve months, with certain allowable exceptions. In addition to lease agreements, service contracts and other agreements have been reviewed to determine if they contain an embedded lease. The Company expects that adoption of this standard update will result in right-of-use assets and corresponding lease liabilities of approximately $650 million being reported on the consolidated balance sheet beginning first quarter 2019, but will not materially impact operating results or liquidity.

In January 2018, the FASB issued ASU Leases - Land Easement Practical Expedient, which permits entities to forgo the evaluation of existing land easement arrangements to determine if they contain a lease as part of the adoption of the Leases ASU issued in February 2016. Accordingly, the Company’s accounting treatment of existing land easements will not change. CSX will adopt this standard update concurrently with the Leases ASU issued in February 2016. New land easement arrangements, or modifications to existing arrangements, after the adoption of the standard update will still be evaluated to determine if they meet the definition of a lease.

Use of 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. Critical accounting estimates using management judgment are made for the following areas:


•	personal injury, environmental and legal reserves (see Note 5, Casualty, Environmental and Other Reserves);


•	pension and post-retirement medical plan accounting (see Note 8, Employee Benefit Plans);


•	depreciation policies for assets under the group-life method (see Note 6, Properties); and


•	income taxes (see Note 11, Income Taxes).

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

Restructuring Charge

Through an involuntary separation program with enhanced benefits to further its strategic objectives, CSX reduced its management workforce by approximately 950 employees during 2017. The Company was focused on driving efficiencies through process improvement and responding to business mix shifts. These management reductions were designed to further streamline general and administrative and operating support functions to speed decision making and further control costs. The involuntary separation program was essentially completed in April 2017.

The prior year restructuring charge includes costs related to the management workforce reduction program, executive retirements, reimbursement arrangements with MR Argent Advisor LLC (“Mantle Ridge”) and the Company’s former President and Chief Executive Officer, E. Hunter Harrison, the proration of equity awards and other advisory costs related to the leadership transition. Payments related to the 2017 restructuring charge were substantially complete as of March 31, 2018.

Expenses related to the management workforce reduction and other restructuring costs during 2017 are shown in the following table.



	Fiscal Year 2017
(Dollars in millions)	As Previously Reported		Operating Restructuring Charge		Non-Operating Restructuring Charge
Severance and Pension	$	154	$	98	$	56
Other Post-Retirement Benefits Curtailment	17		—		17
Employee Equity Awards Proration and Other	23		23		—
Subtotal Management Workforce Reduction	$	194	$	121	$	73
Reimbursement Arrangements	84		84		—
Executive Equity Awards Proration	24		24		—
Pension Settlement Charge	12		—		12
Advisory Fees Related to Shareholder Matters	11		11		—
Total Restructuring Charge	$	325	$	240	$	85