UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(☒) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2019

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
						(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.)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class				Trading Symbol(s)		Name of exchange on which registered
Common Stock, $1 Par Value				CSX		Nasdaq Global Select Market

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 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 such files).

Yes (X) No ( )

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth 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 (☐) Emerging growth company (☐)

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ( )

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 782,336,546 shares of common stock outstanding on September 30, 2019 (the latest practicable date that is closest to the filing date).

CSX Q3 2019 Form 10-Q p.1

CSX CORPORATION

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2019

INDEX

		Page
PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements	3
	Consolidated Income Statements (Unaudited) - Quarters and Nine Months Ended September 30, 2019 and September 30, 2018	3
	Condensed Consolidated Comprehensive Income Statements (Unaudited) - Quarters and Nine Months Ended September 30, 2019 and September 30, 2018	3
	Consolidated Balance Sheets - At September 30, 2019 (Unaudited) and December 31, 2018	4
	Consolidated Cash Flow Statements (Unaudited) - Nine Months Ended September 30, 2019 and September 30, 2018	5
	Consolidated Statement of Changes in Shareholders' Equity - Quarters and Nine Months Ended September 30, 2019 and September 30, 2018	6
	Notes to Consolidated Financial Statements (Unaudited)	8
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	35
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	46
Item 4.	Controls and Procedures	46
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	46
Item 1A.	Risk Factors	46
Item 2.	CSX Purchases of Equity Securities	47
Item 3.	Defaults upon Senior Securities	47
Item 4.	Mine Safety Disclosures	47
Item 5.	Other Information	47
Item 6.	Exhibits	48
Signature		49

CSX Q3 2019 Form 10-Q p.2

CSX CORPORATION

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CONSOLIDATED INCOME STATEMENTS (Unaudited)  

(Dollars in millions, except per share amounts)

	Third Quarters						Nine Months
	2019			2018			2019			2018
Revenue	$	2,978		$	3,129		$	9,052		$	9,107
Expense
Labor and Fringe	638			695			1,958			2,060
Materials, Supplies and Other	415			474			1,348			1,425
Depreciation	338			334			1,005			986
Fuel	223			268			690			793
Equipment and Other Rents	104			89			307			302
Equity Earnings of Affiliates	(27		)	(24		)	(67		)	(79		)
Total Expense	1,691			1,836			5,241			5,487
Operating Income	1,287			1,293			3,811			3,620
Interest Expense	(186		)	(162		)	(548		)	(468		)
Other Income - Net	24			19			72			54
Earnings Before Income Taxes	1,125			1,150			3,335			3,206
Income Tax Expense	(269		)	(256		)	(775		)	(740		)
Net Earnings	$	856		$	894		$	2,560		$	2,466
Per Common Share (Note 2)
Net Earnings Per Share, Basic	$	1.08		$	1.05		$	3.19		$	2.85
Net Earnings Per Share, Assuming Dilution	$	1.08		$	1.05		$	3.18		$	2.83
Average Shares Outstanding (In millions)	790			850			803			866
Average Shares Outstanding, Assuming Dilution (In millions)	792			854			805			870

CONDENSED CONSOLIDATED COMPREHENSIVE INCOME STATEMENTS (Unaudited)  

(Dollars in millions)

	Third Quarters				Nine Months
	2019		2018		2019		2018
Total Comprehensive Earnings (Note 12)	$	863	$	901	$	2,573	$	2,378

See accompanying notes to consolidated financial statements.

CSX Q3 2019 Form 10-Q p.3

CSX CORPORATION

ITEM 1. FINANCIAL STATEMENTS

CONSOLIDATED BALANCE SHEETS

(Dollars in millions)

	(Unaudited)
	September 30, 2019			December 31, 2018
ASSETS
Current Assets:
Cash and Cash Equivalents	$	1,521		$	858
Short-term Investments	1,037			253
Accounts Receivable - Net (Note 9)	1,101			1,010
Materials and Supplies	235			263
Other Current Assets	66			181
Total Current Assets	3,960			2,565
Properties	45,012			44,805
Accumulated Depreciation	(12,934		)	(12,807		)
Properties - Net	32,078			31,998
Investment in Conrail	969			943
Affiliates and Other Companies	880			836
Right-of-Use Lease Asset (Note 5)	539			—
Other Long-term Assets	369			387
Total Assets	$	38,795		$	36,729
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts Payable	$	1,101		$	949
Labor and Fringe Benefits Payable	486			550
Casualty, Environmental and Other Reserves (Note 4)	110			113
Current Maturities of Long-term Debt (Note 8)	745			18
Income and Other Taxes Payable	155			106
Other Current Liabilities	208			179
Total Current Liabilities	2,805			1,915
Casualty, Environmental and Other Reserves (Note 4)	195			211
Long-term Debt (Note 8)	15,992			14,739
Deferred Income Taxes - Net	6,882			6,690
Long-term Lease Liability (Note 5)	494			—
Other Long-term Liabilities	548			594
Total Liabilities	26,916			24,149
Shareholders' Equity:
Common Stock, $1 Par Value	782			818
Other Capital	314			249
Retained Earnings	11,416			12,157
Accumulated Other Comprehensive Loss (Note 12)	(648		)	(661		)
Noncontrolling Interest	15			17
Total Shareholders' Equity	11,879			12,580
Total Liabilities and Shareholders' Equity	$	38,795		$	36,729

See accompanying notes to consolidated financial statements.

CSX Q3 2019 Form 10-Q p.4

CSX CORPORATION

ITEM 1. FINANCIAL STATEMENTS

CONSOLIDATED CASH FLOW STATEMENTS (Unaudited)

(Dollars in millions)

	Nine Months
	2019			2018
OPERATING ACTIVITIES
Net Earnings	$	2,560		$	2,466
Adjustments to Reconcile Net Earnings to Net Cash Provided by Operating Activities:
Depreciation	1,005			986
Deferred Income Taxes	186			148
Gain on Property Dispositions	(129		)	(122		)
Equity Earnings of Affiliates	(67		)	(79		)
Cash Payments for Restructuring Charge	—			(14		)
Other Operating Activities	(14		)	(13		)
Changes in Operating Assets and Liabilities:
Accounts Receivable	(39		)	(97		)
Other Current Assets	84			70
Accounts Payable	152			140
Income and Other Taxes Payable	114			19
Other Current Liabilities	(115		)	(98		)
Net Cash Provided by Operating Activities	3,737			3,406
INVESTING ACTIVITIES
Property Additions	(1,191		)	(1,240		)
Proceeds from Property Dispositions	218			257
Purchases of Short-term Investments	(2,255		)	(611		)
Proceeds from Sales of Short-term Investments	1,480			15
Other Investing Activities	19			(8		)
Net Cash Used In Investing Activities	(1,729		)	(1,587		)
FINANCING ACTIVITIES
Long-term Debt Issued (Note 8)	2,000			2,000
Long-term Debt Repaid (Note 8)	(18		)	(19		)
Dividends Paid	(577		)	(570		)
Shares Repurchased	(2,767		)	(2,816		)
Accelerated Share Repurchase Pending Final Settlement (Note 2)	—			(100		)
Other Financing Activities	17			(52		)
Net Cash Used in Financing Activities	(1,345		)	(1,557		)
Net Increase in Cash and Cash Equivalents	663			262
CASH AND CASH EQUIVALENTS
Cash and Cash Equivalents at Beginning of Period	858			401
Cash and Cash Equivalents at End of Period	$	1,521		$	663

See accompanying notes to consolidated financial statements.

CSX Q3 2019 Form 10-Q p.5

CSX CORPORATION

ITEM 1. FINANCIAL STATEMENTS

CONSOLIDATED STATEMENTS OF CHANGES

IN SHAREHOLDERS' EQUITY

(Dollars in Millions)

Nine Months 2019	Common Shares Outstanding (Thousands)		Common Stock and Other Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss)(a)			Non-controlling Interest			Total Shareholders' Equity
Balance December 31, 2018	818,180		$	1,067		$	12,157		$	(661	)	$	17		$	12,580
Comprehensive Earnings:
Net Earnings	—		—			834			—			—			834
Other Comprehensive Income (Note 12)	—		—			—			2			—			2
Total Comprehensive Earnings															836
Common stock dividends, $0.24 per share	—		—			(195		)	—			—			(195		)
Share Repurchases	(11,540	)	(12		)	(784		)	—			—			(796		)
Stock Option Exercises and Other	2,524		21			(1		)	—			—			20
Balance March 31, 2019	809,164		$	1,076		$	12,011		$	(659	)	$	17		$	12,445
Comprehensive Earnings:
Net Earnings	—		—			870			—			—			870
Other Comprehensive Income (Note 12)	—		—			—			4			—			4
Total Comprehensive Earnings															874
Common stock dividends, $0.24 per share	—		—			(193		)	—			—			(193		)
Share Repurchases	(11,266	)	(11		)	(849		)	—			—			(860		)
Stock Option Exercises and Other	278		23			4			—			(3		)	24
Balance June 30, 2019	798,176		$	1,088		$	11,843		$	(655	)	$	14		$	12,290
Comprehensive Earnings:
Net Earnings	—		—			856			—			—			856
Other Comprehensive Income (Note 12)	—		—			—			7			—			7
Total Comprehensive Earnings															863
Common stock dividends, $0.24 per share	—		—			(189		)	—			—			(189		)
Share Repurchases	(16,098	)	(16		)	(1,095		)	—			—			(1,111		)
Stock Option Exercises and Other	264		24			1			—			1			26
Balance September 30, 2019	782,342		$	1,096		$	11,416		$	(648	)	$	15		$	11,879

(a) Accumulated Other Comprehensive Loss balances shown above are net of tax. The associated taxes were $179 million, $177 million, and $175 million as of first, second and third quarters 2019, respectively. For additional information, see Note 12, Other Comprehensive Income.

CSX Q3 2019 Form 10-Q p.6

CSX CORPORATION

ITEM 1. FINANCIAL STATEMENTS

CONSOLIDATED STATEMENTS OF CHANGES

IN SHAREHOLDERS' EQUITY

(Dollars in Millions)

Nine Months 2018	Common Shares Outstanding (Thousands)		Common Stock and Other Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss)(a)			Non-controlling Interest			Total Shareholders' Equity
Balance December 31, 2017	889,851		$	1,107		$	14,084		$	(486	)	$	16		$	14,721
Comprehensive Earnings:
Net Earnings	—		—			695			—			—			695
Other Comprehensive Loss	—		—			—			(99		)	—			(99		)
Total Comprehensive Earnings															596
Common stock dividends, $0.22 per share	—		—			(194		)	—			—			(194		)
Share Repurchases	(14,966	)	(15		)	(821		)	—			—			(836		)
Stock Option Exercises and Other	469		(2		)	109			—			(3		)	104
Balance March 31, 2018	875,354		$	1,090		$	13,873		$	(585	)	$	13		$	14,391
Comprehensive Earnings:
Net Earnings	—		—			877			—			—			877
Other Comprehensive Income	—		—			—			4			—			4
Total Comprehensive Earnings															881
Common stock dividends, $0.22 per share	—		—			(190		)	—			—			(190		)
Share Repurchases	(16,386	)	(16		)	(958		)	—			—			(974		)
Stock Option Exercises and Other	(157	)	(88		)	2			—			1			(85		)
Balance June 30, 2018	858,811		$	986		$	13,604		$	(581	)	$	14		$	14,023
Comprehensive Earnings:
Net Earnings	—		—			894			—			—			894
Other Comprehensive Income	—		—			—			7			—			7
Total Comprehensive Earnings															901
Common stock dividends, $0.22 per share	—		—			(186		)	—			—			(186		)
Share Repurchases	(14,341	)	(15		)	(991		)	—			—			(1,006		)
Stock Option Exercises and Other	(50	)	2			(1		)	—			2			3
Balance September 30, 2018	844,420		$	973		$	13,320		$	(574	)	$	16		$	13,735

(a) Accumulated Other Comprehensive Loss balances shown above are net of tax. The associated taxes were $160 million, $158 million, and $156 million as of first, second and third quarters 2018, respectively. For additional information, see Note 12, Other Comprehensive Income.

See accompanying notes to consolidated financial statements.

CSX Q3 2019 Form 10-Q p.7

CSX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1.Nature of Operations and Significant Accounting Policies

Background

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 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 20,000 route mile rail network, which serves major population centers in 23 states east of the Mississippi River, the District of Columbia and the Canadian provinces of Ontario and Quebec. The Company's intermodal business links customers to railroads via trucks and terminals.

CSXT is also responsible for the Company's real estate sales, leasing, acquisition and management and development activities. 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.

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 include shipments of plastics and ethanol. CSX Technology and other subsidiaries provide support services for the Company.

Basis of Presentation

In the opinion of management, the accompanying consolidated financial statements contain all normal, recurring adjustments necessary to fairly present the consolidated financial statements and accompanying notes. 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.

Fiscal Year

The Company's fiscal periods are based upon the calendar year. Except as otherwise specified, references to “third quarter(s)” or “nine months” indicate CSX's fiscal periods ending September 30, 2019 and September 30, 2018, and references to "year-end" indicate the fiscal year ended December 31, 2018.

CSX Q3 2019 Form 10-Q p.8

CSX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

New Accounting Pronouncements

Pronouncements adopted in 2019    

In February 2016, the FASB issued ASU, Leases, which requires lessees to recognize most leases on their balance sheets as a right-of-use asset with a corresponding lease liability. Lessor accounting under the standard is substantially unchanged. Additional qualitative and quantitative disclosures are also required. CSX adopted the standard effective January 1, 2019 using the cumulative-effect adjustment transition method, which applies the provisions of the standard at the effective date without adjusting the comparative periods presented. The Company adopted the following practical expedients and elected the following accounting policies related to this standard update:

• Carry forward of historical lease classifications and current accounting treatment for existing land easements;

• Short-term lease accounting policy election allowing lessees to not recognize right-of-use assets and liabilities for leases with a term of 12 months or less; and

• The option to not separate lease and non-lease components for certain equipment lease asset categories such as freight car, vehicles and work equipment.

Adoption of this standard resulted in the recognition of operating lease right-of-use assets and corresponding lease liabilities of $534 million on the consolidated balance sheet as of January 1, 2019. This amount is lower than previous estimates due to a lease amendment. The Company’s accounting for finance leases remained substantially unchanged. The standard did not materially impact operating results or liquidity. Disclosures related to the amount, timing and uncertainty of cash flows arising from leases are included in Note 5, Leases.

Pronouncements to be adopted    

In June 2016, the FASB issued ASU Measurement of Credit Losses on Financial Instruments, which replaces current methods for evaluating impairment of financial instruments not measured at fair value, including trade accounts receivable and certain debt securities, with a current expected credit loss model. CSX will adopt this new standard update effective January 1, 2020, and does not expect it to have a material effect on the Company's results of operations.

CSX Q3 2019 Form 10-Q p.9

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:

	Third Quarters				Nine Months
	2019		2018		2019		2018
Numerator (Dollars in millions):
Net Earnings	$	856	$	894	$	2,560	$	2,466
Denominator (Units in millions):
Average Common Shares Outstanding	790		850		803		866
Other Potentially Dilutive Common Shares	2		4		2		4
Average Common Shares Outstanding, Assuming Dilution	792		854		805		870
Net Earnings Per Share, Basic	$	1.08	$	1.05	$	3.19	$	2.85
Net Earnings Per Share, Assuming Dilution	$	1.08	$	1.05	$	3.18	$	2.83

Basic earnings per share is based on the weighted-average number of shares of common stock outstanding. Earnings per share, assuming dilution, is based on the weighted-average number of shares of common stock outstanding and common stock equivalents 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, including performance units and employee stock options.

When calculating diluted earnings per share, the potential shares that would be outstanding if all outstanding stock options were exercised are included. This number is different from outstanding stock options because it is offset by shares CSX could repurchase using the proceeds from these hypothetical exercises to obtain the common stock equivalent. Approximately 1 million and 7 thousand of total average outstanding stock options for the quarters ended September 30, 2019 and September 30, 2018, respectively, and 800 thousand and 600 thousand for the nine months ended September 30, 2019 and September 30, 2018, respectively, were excluded from the diluted earnings per share calculation because their effect was antidilutive.

Share Repurchases    

In February 2018, the Company announced an increase to the $1.5 billion share repurchase program first announced in October 2017, bringing the total authorized amount to $5 billion. This program was completed on January 16, 2019. Also on January 16, 2019, the Company announced a new $5 billion share repurchase program. During third quarter and nine months ended 2019 and 2018, the Company engaged in the following repurchase activities:

	Third Quarters				Nine Months
	2019		2018		2019		2018
Shares Repurchased (Millions)	16		15		39		46
Cost of Shares (Dollars in millions)	$	1,111	$	1,006	$	2,767	$	2,816

CSX Q3 2019 Form 10-Q p.10

CSX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 2.    Earnings Per Share, continued

Share repurchases may be made through a variety of methods including, but not limited to, open market purchases, purchases pursuant to Rule 10b5-1 plans, accelerated share repurchases and negotiated block purchases. The timing of share repurchases depends upon management's assessment of marketplace conditions and other factors, and the program remains subject to the discretion of the Board of Directors. Future share repurchases are expected to be funded by cash on hand, cash generated from operations and debt issuances. Shares are retired immediately upon repurchase. In accordance with the Equity Topic in the ASC, the excess of repurchase price over par value is recorded in retained earnings.

On August 8, 2019, the Company entered into an agreement to repurchase shares of the Company’s common stock. Under this agreement, the Company made a prepayment of $250 million to a financial institution and settlement occurred September 10, 2019. At settlement, the Company received approximately 4 million shares, calculated based on the volume-weighted average price of the Company’s common stock over the term of the agreement, less a discount.

On July 19, 2018, the Company entered into an accelerated share repurchase agreement to repurchase shares of the Company’s common stock. Under this agreement, the Company made a prepayment of $500 million to a financial institution and received an initial delivery of 6 million shares valued at $400 million. The remaining balance of $100 million was settled through receipt of additional shares on October 11, 2018, with the final net number of shares calculated based on the volume-weighted average price of the Company's common stock over the term of the agreement, less a discount. Approximately 7 million total shares were repurchased under the agreement.

On April 20, 2018, the Company entered into an accelerated share repurchase agreement to repurchase shares of the Company’s common stock. Under this agreement, the Company made a prepayment of $450 million to a financial institution and received an initial delivery of shares valued at $360 million, or 6 million shares. The remaining balance of $90 million was settled through receipt of additional shares in July 2018, with the final net number of shares calculated based on the volume-weighted average price of the Company's common stock over the term of the agreement, less a discount. Approximately 7 million total shares were repurchased under this agreement. Under a separate accelerated share repurchase agreement in January 2018, the Company paid $150 million to a financial institution and received approximately 3 million total shares in first quarter 2018.

CSX Q3 2019 Form 10-Q p.11

CSX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 3.     Share-Based Compensation

Under CSX's share-based compensation plans, awards consist of performance units, restricted stock awards, restricted stock units and stock options for management 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 full Board for awards to the Chief Executive Officer or by the Chief Executive Officer for awards to management employees other than senior executives. The Board of Directors approves awards granted to CSX's non-management directors upon recommendation of the Governance Committee.

Share-based compensation expense for awards under share-based compensation plans and purchases made as part of the employee stock purchase plan is measured using the fair value of the award on the grant date and is recognized on a straight-line basis over the service period of the respective award. Total pre-tax expense and income tax benefits associated with share-based compensation are shown in the table below. Income tax benefits include impacts from option exercises and the vesting of other equity awards.

	Third Quarters				Nine Months
(Dollars in millions)	2019		2018		2019		2018
Share-Based Compensation Expense:
Performance Units	$	8	$	8	$	23	$	22
Stock Options	2		4		9		10
Restricted Stock Units and Awards	2		1		6		4
Stock Awards for Directors	—		—		2		2
Employee Stock Purchase Plan	1		—		3		—
Total Share-Based Compensation Expense	$	13	$	13	$	43	$	38
Income Tax Benefit	$	6	$	6	$	41	$	23

Long-term Incentive Plan

In February 2019, the Company granted approximately 300 thousand performance units to certain employees under a new long-term incentive plan ("LTIP") for the years 2019 through 2021, which was adopted under the CSX 2010 Stock and Incentive Award Plan. On May 3, 2019, shareholders approved the CSX 2019 Stock and Incentive Award Plan, under which future awards will be granted.

CSX Q3 2019 Form 10-Q p.12

CSX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 3.     Share-Based Compensation, continued

Payouts of performance units for the cycle ending with fiscal year 2021 will be based on the achievement of goals related to both operating ratio and free cash flow, in each case excluding non-recurring items as disclosed in the Company's financial statements. The cumulative operating ratio and cumulative free cash flow 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 formulaic upward or downward adjustment by up to 25%, capped at an overall payout of 225%, based upon the Company's total shareholder return relative to specified comparable groups over the performance period. The fair values of the performance units awarded during the third quarters and nine months 2019 and 2018 were calculated using a Monte-Carlo simulation model with the following weighted-average assumptions:

	Third Quarters			Nine Months
	2019(a)	2018		2019		2018
Weighted-average assumptions used:
Annual dividend yield	N/A	1.2	%	1.4	%	1.6	%
Risk-free interest rate	N/A	2.7	%	2.5	%	2.3	%
Annualized volatility	N/A	27.9	%	27.6	%	29.1	%
Expected life (in years)	N/A	2.3		2.9		2.9

(a) No performance units were awarded in third quarter 2019.

Stock Options

Also, in February 2019, the Company granted approximately 843 thousand stock options along with the corresponding LTIP. The fair value of stock options on the date of grant was $17.45 per option, which was calculated using the Black-Scholes valuation model. These stock options were granted with ten-year terms and vest over three years in equal installments each year on the anniversary of the grant date. The exercise price for stock options granted equals the closing market price of the underlying stock on the date of grant. These awards are time-based and are not based upon attainment of performance goals. During third quarters 2019 and 2018, there were immaterial grants of stock options to certain members of management.

CSX Q3 2019 Form 10-Q p.13

CSX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 3.     Share-Based Compensation, continued

The fair values of all stock option awards during the quarters and nine months ended September 30, 2019 and September 30, 2018 were estimated at the grant date with the following weighted average assumptions:

	Third Quarters						Nine Months
	2019			2018			2019			2018
Weighted-average grant-date fair value	$	15.44		$	20.52		$	17.99		$	14.65
Stock options valuation assumptions:
Annual dividend yield	1.4		%	1.2		%	1.3		%	1.5		%
Risk-free interest rate	1.4		%	2.8		%	2.5		%	2.6		%
Annualized volatility	25.7		%	25.5		%	25.7		%	27.0		%
Expected life (in years)	6.5			6.5			6.1			6.5
Other pricing model inputs:
Weighted-average grant-date market price of CSX stock (strike price)	$	66.35		$	74.84		$	69.96		$	54.19

Restricted Stock Units

Finally, in February 2019, the Company granted approximately 65 thousand restricted stock units along with the corresponding LTIP. 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 CSX's attainment of operational targets. Restricted stock units are paid-out in CSX common stock on a one-for-one basis. For information related to the Company's other outstanding long-term incentive compensation, see CSX's most recent annual report on Form 10-K.

Employee Stock Purchase Plan

In May 2018, shareholders approved the 2018 CSX Employee Stock Purchase Plan (“ESPP”) for the benefit of Company employees. The Company registered 4 million shares of common stock that may be issued pursuant to this plan. Under the ESPP, employees may contribute between 1% and 10% of base compensation, after-tax, to purchase up to $25,000 of CSX common stock per year at 85% of the closing market price on either the grant date or the last day of the six-month offering period, whichever is lower. During third quarter and nine months ended 2019, 144 thousand and 249 thousand shares of CSX stock were issued at a weighted average purchase price of $52.66 and $52.72 per share, respectively.

CSX Q3 2019 Form 10-Q p.14

CSX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 4.    Casualty, Environmental and Other Reserves

Personal injury and environmental reserves are considered critical accounting estimates due to the need for management judgment. Casualty, environmental and other reserves are provided for in the consolidated balance sheets as shown in the table below.

	September 30, 2019						December 31, 2018
(Dollars in millions)	Current		Long-term		Total		Current		Long-term		Total
Casualty:
Personal Injury	$	47	$	78	$	125	$	40	$	103	$	143
Occupational	9		50		59		10		46		56
Total Casualty	56		128		184		50		149		199
Environmental	32		46		78		39		41		80
Other	22		21		43		24		21		45
Total	$	110	$	195	$	305	$	113	$	211	$	324

These liabilities are accrued when probable and reasonably estimable in accordance with the Contingencies Topic in the ASC. Actual settlements and claims received could differ, and final outcomes 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 adverse effect on the Company's financial condition, results of operations or liquidity. Should a number of these items occur in the same period, however, their combined effect could be material in that particular period.

Casualty

Casualty reserves of $184 million and $199 million as of September 30, 2019 and December 31, 2018, respectively, represent accruals for personal injury, occupational disease and occupational injury claims. During second quarter 2018, the Company increased its self-insured retention amount for these claims from $50 million to $75 million per occurrence for claims occurring on or after June 1, 2018. 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 estimate. 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. 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”). 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. This analysis for the quarter did not result in a material adjustment to the personal injury reserve in the quarter ended September 30, 2019 or September 30, 2018. The methodology used by the actuary includes a development factor to reflect growth or reduction in the value of these personal injury claims based largely on CSXT's historical claims and settlement experience.

CSX Q3 2019 Form 10-Q p.15

CSX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 4.    Casualty, Environmental and Other Reserves, continued

Occupational

Occupational reserves represent liabilities for occupational disease and injury claims. Occupational disease claims arise primarily from allegations of exposure to asbestos in the workplace. Occupational injury claims arise from allegations of exposure to certain other 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. The analysis performed by management for the quarter did not result in a material adjustment to the occupational reserve in the quarter ended September 30, 2019 or September 30, 2018.

Environmental

Environmental reserves were $78 million and $80 million as of September 30, 2019 and December 31, 2018, respectively. 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 231 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.

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 reasonably 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 statements.

CSX Q3 2019 Form 10-Q p.16

CSX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 4.    Casualty, Environmental and Other Reserves, continued

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 estimated cost of remedial actions currently required.

Other

Other reserves were $43 million and $45 million as of September 30, 2019 and December 31, 2018, respectively. These reserves 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.     Leases

CSX has various lease agreements with terms up to 50 years, including leases of land, land with integral equipment (e.g. track), buildings and various equipment. Some leases include options to purchase, terminate or extend for one or more years. These options are included in the lease term when it is reasonably certain that the option will be exercised.

At inception, the Company determines if an arrangement contains a lease and whether that lease meets the classification criteria of a finance or operating lease. Some of the Company’s lease arrangements contain lease components (e.g. minimum rent payments) and non-lease components (e.g. maintenance, labor charges, etc.). The Company generally accounts for each component separately based on the estimated standalone price of each component. For certain equipment leases, such as freight car, vehicles and work equipment, the Company accounts for the lease and non-lease components as a single lease component.

Certain of the Company’s lease agreements include rental payments that are adjusted periodically for an index or rate. The leases are initially measured using the projected payments adjusted for the index or rate in effect at the commencement date. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.

Operating Leases

Operating leases are included in right-of-use lease assets, other current liabilities and long-term lease liabilities on the consolidated balance sheets. These assets and liabilities are recognized at the commencement date based on the present value of remaining lease payments over the lease term using the Company’s secured incremental borrowing rates or implicit rates, when readily determinable. Short-term operating leases, which have an initial term of 12 months or less, are not recorded on the balance sheet.

Lease expense for operating leases is recognized on a straight-line basis over the lease term. Variable lease expense is recognized in the period in which the obligation for those payments is incurred. Lease expense is included in equipment and other rents on the consolidated income statements and is reported net of lease income. Lease income is not material to the results of operations for the quarter or nine months ended September 2019.

CSX Q3 2019 Form 10-Q p.17

CSX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 5.     Leases, continued

The following table presents information about the amount, timing and uncertainty of cash flows arising from the Company’s operating leases as of September 30, 2019.

(Dollars in Millions)	September 30, 2019
Maturity of Lease Liabilities	Lease Payments
2019 (remaining)	$	14
2020	61
2021	53
2022	46
2023	38
Thereafter	1,242
Total undiscounted operating lease payments	$	1,454
Less: Imputed interest	(901		)
Present value of operating lease liabilities	$	553
Balance Sheet Classification
Current lease liabilities (recorded in other current liabilities)	$	59
Long-term lease liabilities	494
Total operating lease liabilities	$	553
Other Information
Weighted-average remaining lease term for operating leases	32 years
Weighted-average discount rate for operating leases	5.0		%

Cash Flows

An initial right-of-use asset of $534 million was recognized as a non-cash asset addition with the adoption of the new lease accounting standard. Additional right-of-use assets of $41 million were recognized as non-cash asset additions that resulted from new operating lease liabilities during the nine months ended September 30, 2019. Cash paid for amounts included in the present value of operating lease liabilities was $44 million during the nine months ended September 30, 2019 and is included in operating cash flows.

Operating Lease Costs

Operating lease costs were $21 million during third quarter 2019 and $60 million for the nine months ended September 30, 2019. These costs are primarily related to long-term operating leases, but also include immaterial amounts for variable leases and short-term leases with terms greater than 30 days.

Finance Leases

Finance leases are included in properties-net and long-term debt on the consolidated balance sheets. The associated amortization expense and interest expense are included in depreciation and interest expense, respectively, on the consolidated income statements. These leases are not material to the consolidated financial statements as of September 30, 2019.

CSX Q3 2019 Form 10-Q p.18

CSX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 6.    Commitments and Contingencies

Insurance

The Company maintains 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 $50 million per occurrence retention for floods and named windstorms and a $25 million per occurrence retention for property losses other than floods and named windstorms. For claims occurring on or after June 1, 2018, the Company increased its self-insured retention for third-party liability claims from $50 million to $75 million per occurrence. 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.

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, tax matters, environmental and hazardous material exposure matters, FELA and labor claims by current or former 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 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 $1 million to $28 million in aggregate at September 30, 2019. 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. The class action lawsuits were consolidated in federal court in the District of Columbia. In 2017, the District Court issued its decision denying class certification. On August 16, 2019, the U.S. Court of Appeals for the D.C. Circuit affirmed the District Court’s ruling.

CSX Q3 2019 Form 10-Q p.19

CSX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 6.    Commitments and Contingencies, continued

The District Court had delayed proceedings on the merits of the case pending the outcome of the class certification proceedings. The eight named plaintiffs in the underlying case can now choose whether to proceed with their claims. Because there is no class, other shippers must decide whether to bring an individual claim against one or more railroads. Some individual shipper claims have been filed.

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 resolution of these matters individually or when aggregated could have a material adverse effect on the Company's financial condition, results of operations or liquidity in that particular period.

Environmental

CSXT is indemnifying 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. CSXT's indemnification and defense duties arise with respect to several matters. The U.S. Environmental Protection Agency ("EPA"), using its CERCLA authority, seeks cleanup and removal costs and other damages associated with the presence of hazardous substances in the 17-mile Lower Passaic River Study Area (the "Study Area”). CSXT, on behalf of Pharmacia, and a significant number of other potentially responsible parties are together conducting a Remedial Investigation and Feasibility Study of the Study Area pursuant to an Administrative Settlement Agreement and Order on Consent with the EPA.

In March 2016, EPA issued its Record of Decision detailing the agency’s mandated remedial process for the lower 8 miles of the Study Area. Approximately 80 parties, including Pharmacia, are participating in an EPA-directed allocation process to assign responsibility for costs to be incurred implementing the remedy selected for the lower 8 miles of the Study Area. CSXT is participating in the allocation process on behalf of Pharmacia. At a later date, EPA will select a remedy for the remainder of the Study Area and is expected to again seek the participation of private parties to implement the selected remedy using EPA’s CERCLA authority to compel such participation, if necessary.

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 indemnification or remediation costs potentially allocable to CSXT with respect to the Property and the Study Area would be material to the Company's financial condition, results of operations or liquidity.

CSX Q3 2019 Form 10-Q p.20

CSX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 7.    Employee Benefit Plans

The Company sponsors defined benefit pension plans principally for salaried, management personnel. CSX also sponsors a non-contributory post-retirement medical plan and a life insurance plan that provide certain benefits to eligible employees hired prior to January 1, 2003. Independent actuaries compute the amounts of liabilities and expenses relating to these plans subject to the assumptions that the Company determines are appropriate based on historical trends, current market rates and future projections. These amounts are reviewed by management.

Only the service cost component of net periodic benefit costs is included in labor and fringe expense on the consolidated income statement. All other components of net periodic benefit cost are included in other income - net.

	Pension Benefits Cost
(Dollars in millions)	Third Quarters						Nine Months
	2019			2018			2019			2018
Service Cost Included in Labor and Fringe	$	8		$	8		$	24		$	24
Interest Cost	25			23			77			69
Expected Return on Plan Assets	(43		)	(44		)	(129		)	(131		)
Amortization of Net Loss	8			10			23			30
Total Included in Other Income - Net	(10		)	(11		)	(29		)	(32		)
Net Periodic Benefit Credit	$	(2	)	$	(3	)	$	(