documentq2.htm
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 29, 2007
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 is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of
“accelerated filer and large accelerated filer” in Rule 12b-2 of the
Exchange Act. (check one)
Large
Accelerated Filer
(X) Accelerated
Filer
( ) Non-accelerated
Filer ( )
Indicate
by a check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes
( ) No (X)
Indicate
the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date,
June
29,
2007: 439,010,736 shares.
|
FORM
10-Q
|
FOR
THE QUARTERLY PERIOD ENDED JUNE 29, 2007
|
INDEX
|
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|
|
|
|
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|
Page
|
PART
I:
|
FINANCIAL
INFORMATION
|
|
Item
1:
|
|
3
|
|
|
|
|
|
|
3
|
|
|
Quarters
and Six Months Ended June 29, 2007
|
|
|
|
and
June 30, 2006
|
|
|
|
|
|
|
|
4
|
|
|
At
June 29, 2007 (Unaudited) and December 29, 2006
|
|
|
|
|
|
|
|
5
|
|
|
Six
Months Ended June 29, 2007 and June 30, 2006
|
|
|
|
|
|
|
|
6
|
|
|
|
|
Item
2:
|
|
26
|
|
|
|
Item
3:
|
|
42
|
|
|
|
|
Item
4:
|
|
42
|
|
|
|
|
|
|
42
|
|
|
|
|
Item
1:
|
|
42
|
|
|
|
|
Item
1A:
|
|
42
|
|
|
|
|
Item
2:
|
|
43
|
|
|
|
|
Item
3:
|
|
45
|
|
|
|
|
Item
4:
|
|
45
|
|
|
|
|
Item
5:
|
|
46
|
|
|
|
|
Item
6:
|
|
47
|
|
|
|
|
|
|
|
48
|
CSX
CORPORATION
ITEM
1: FINANCIAL STATEMENTS
(Dollars
in Millions, Except Per Share Amounts)
|
|
Second
Quarters
|
|
|
Six
Months
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Operating
Revenue
|
|
$ |
2,530
|
|
|
$ |
2,421
|
|
|
$ |
4,952
|
|
|
$ |
4,752
|
|
Operating
Expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Labor and Fringe |
|
|
743 |
|
|
|
718 |
|
|
|
1,477 |
|
|
|
1,438 |
|
Materials,
Supplies and Other |
|
|
504 |
|
|
|
486 |
|
|
|
1,065 |
|
|
|
959 |
|
Fuel |
|
|
290 |
|
|
|
288 |
|
|
|
549 |
|
|
|
541 |
|
Depreciation |
|
|
222 |
|
|
|
216 |
|
|
|
443 |
|
|
|
427 |
|
Equipment and Other Rents |
|
|
107 |
|
|
|
131 |
|
|
|
227 |
|
|
|
253 |
|
Inland
Transportation |
|
|
60 |
|
|
|
62 |
|
|
|
117 |
|
|
|
118 |
|
Gain
on Insurance Recoveries (Note 8)
|
|
|
-
|
|
|
|
(126 |
) |
|
|
(18 |
) |
|
|
(126 |
) |
Total
Operating Expense |
|
|
1,926 |
|
|
|
1,775 |
|
|
|
3,860 |
|
|
|
3,610 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Income
|
|
|
604
|
|
|
|
646
|
|
|
|
1,092
|
|
|
|
1,142
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Income and Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Income - Net (Note 11)
|
|
|
11
|
|
|
|
11
|
|
|
|
-
|
|
|
|
8
|
|
Interest
Expense
|
|
|
(101 |
) |
|
|
(98 |
) |
|
|
(200 |
) |
|
|
(196 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
before Income Taxes
|
|
|
514
|
|
|
|
559
|
|
|
|
892
|
|
|
|
954
|
|
Income
Tax Expense
|
|
|
(190 |
) |
|
|
(169 |
) |
|
|
(328 |
) |
|
|
(319 |
) |
Net Earnings
|
|
$ |
324
|
|
|
$ |
390
|
|
|
$ |
564
|
|
|
$ |
635
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per
Common Share (Note 2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
Per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Earnings
|
|
$ |
0.74
|
|
|
$ |
0.88
|
|
|
$ |
1.29
|
|
|
$ |
1.44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
Per Share, Assuming Dilution:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Earnings
|
|
$ |
0.71
|
|
|
$ |
0.83
|
|
|
$ |
1.23
|
|
|
$ |
1.36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
Common Shares Outstanding (Thousands)
|
|
|
438,628
|
|
|
|
443,815
|
|
|
|
438,133
|
|
|
|
441,588
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
Common Shares Outstanding, Assuming
Dilution (Thousands)
|
|
|
458,923
|
|
|
|
470,206
|
|
|
|
461,049
|
|
|
|
467,284
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
Dividends Paid Per Common Share
|
|
$ |
0.12
|
|
|
$ |
0.065
|
|
|
$ |
0.24
|
|
|
$ |
0.13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All
share and per share data have been retroactively restated to reflect
the
2006 stock split.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying Notes to Consolidated Financial Statements.
|
|
CSX
CORPORATION
ITEM
1: FINANCIAL STATEMENTS
(Dollars
in Millions)
|
|
(Unaudited)
|
|
|
|
|
|
|
June
29,
|
|
|
December
29,
|
|
|
|
2007
|
|
|
2006
|
|
ASSETS
|
|
Current
Assets:
|
|
|
|
|
|
|
Cash
and Cash Equivalents
|
|
$ |
428
|
|
|
$ |
461
|
|
Short-term
Investments
|
|
|
402
|
|
|
|
439
|
|
Accounts Receivable, net of allowance for doubtful
|
|
|
|
|
|
|
|
|
accounts
of $78 and $82, respectively
|
|
|
1,171
|
|
|
|
1,174
|
|
Materials
and Supplies
|
|
|
238
|
|
|
|
204
|
|
Deferred
Income Taxes
|
|
|
233
|
|
|
|
251
|
|
Other
Current Assets
|
|
|
99
|
|
|
|
143
|
|
Total
Current Assets
|
|
|
2,571
|
|
|
|
2,672
|
|
|
|
|
|
|
|
|
|
|
Properties
|
|
|
28,331
|
|
|
|
27,715
|
|
Accumulated
Depreciation
|
|
|
(7,069 |
) |
|
|
(6,792 |
) |
Properties
- Net
|
|
|
21,262
|
|
|
|
20,923
|
|
|
|
|
|
|
|
|
|
|
Investment
in Conrail (Note 14)
|
|
|
617
|
|
|
|
607
|
|
Affiliates
and Other Companies
|
|
|
348
|
|
|
|
336
|
|
Other
Long-term Assets
|
|
|
273
|
|
|
|
591
|
|
Total
Assets
|
|
$ |
25,071
|
|
|
$ |
25,129
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
|
Current
Liabilities:
|
|
|
|
|
|
|
|
|
Accounts
Payable
|
|
$ |
958
|
|
|
$ |
974
|
|
Labor
and Fringe Benefits Payable
|
|
|
419
|
|
|
|
495
|
|
Casualty, Environmental and Other Reserves (Note 5)
|
|
|
248
|
|
|
|
253
|
|
Current Maturities of Long-term Debt
|
|
|
229
|
|
|
|
592
|
|
Short-term
Debt
|
|
|
9
|
|
|
|
8
|
|
Income
and Other Taxes Payable
|
|
|
240
|
|
|
|
114
|
|
Other
Current Liabilities
|
|
|
87
|
|
|
|
86
|
|
Total
Current Liabilities
|
|
|
2,190
|
|
|
|
2,522
|
|
|
|
|
|
|
|
|
|
|
Casualty,
Environmental and Other Reserves (Note 5)
|
|
|
664
|
|
|
|
668
|
|
Long-term
Debt
|
|
|
5,751
|
|
|
|
5,362
|
|
Deferred
Income Taxes
|
|
|
5,832
|
|
|
|
6,110
|
|
Other
Long-term Liabilities
|
|
|
1,394
|
|
|
|
1,525
|
|
Total
Liabilities
|
|
|
15,831
|
|
|
|
16,187
|
|
|
|
|
|
|
|
|
|
|
Shareholders'
Equity:
|
|
|
|
|
|
|
|
|
Common
Stock, $1 Par Value
|
|
|
439
|
|
|
|
438
|
|
Other
Capital
|
|
|
1,266
|
|
|
|
1,469
|
|
Retained
Earnings (Note 4)
|
|
|
7,919
|
|
|
|
7,427
|
|
Accumulated
Other Comprehensive Loss
|
|
|
(384 |
) |
|
|
(392 |
) |
Total
Shareholders' Equity
|
|
|
9,240
|
|
|
|
8,942
|
|
Total Liabilities and Shareholders' Equity
|
|
$ |
25,071
|
|
|
$ |
25,129
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying Notes to Consolidated Financial Statements.
|
|
|
|
|
|
|
|
|
|
|
CSX
CORPORATION
ITEM
1: FINANCIAL STATEMENTS
CONSOLIDATED
CASH FLOW STATEMENTS
(Unaudited)
(Dollars
in Millions)
|
|
Six
Months
|
|
|
|
2007
|
|
|
2006
|
|
OPERATING
ACTIVITIES
|
|
|
|
|
|
|
Net
Earnings
|
|
$ |
564
|
|
|
$ |
635
|
|
Adjustments
to Reconcile Net Earnings to Net Cash Provided:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
448
|
|
|
|
430
|
|
Deferred
Income Taxes
|
|
|
51
|
|
|
|
6
|
|
Gain
on Insurance Recoveries (Note 8)
|
|
|
(18 |
) |
|
|
(126 |
) |
Insurance
Proceeds (Note 8)
|
|
|
9
|
|
|
|
92
|
|
Other
Operating Activities
|
|
|
52
|
|
|
|
(26 |
) |
Changes
in Operating Assets and Liabilities:
|
|
|
|
|
|
|
|
|
Accounts
Receivable
|
|
|
3
|
|
|
|
(63 |
) |
Other
Current Assets
|
|
|
(79 |
) |
|
|
66
|
|
Accounts
Payable
|
|
|
(9 |
) |
|
|
2
|
|
Income
and Other Taxes Payable
|
|
|
129
|
|
|
|
(21 |
) |
Other
Current Liabilities
|
|
|
(75 |
) |
|
|
(141 |
) |
Net
Cash Provided by Operating Activities
|
|
|
1,075
|
|
|
|
854
|
|
|
|
|
|
|
|
|
|
|
INVESTING
ACTIVITIES
|
|
|
|
|
|
|
|
|
Property
Additions
|
|
|
(824 |
) |
|
|
(879 |
) |
Insurance
Proceeds (Note 8)
|
|
|
10
|
|
|
|
115
|
|
Purchases
of Short-term Investments
|
|
|
(1,445 |
) |
|
|
(761 |
) |
Proceeds
from Sales of Short-term Investments
|
|
|
1,504
|
|
|
|
718
|
|
Other
Investing Activities
|
|
|
(12 |
) |
|
|
(15 |
) |
Net
Cash Used in Investing Activities
|
|
|
(767 |
) |
|
|
(822 |
) |
|
|
|
|
|
|
|
|
|
FINANCING
ACTIVITIES
|
|
|
|
|
|
|
|
|
Short-term
Debt - Net
|
|
|
-
|
|
|
|
2
|
|
Long-term
Debt Issued
|
|
|
1,000
|
|
|
|
63
|
|
Long-term
Debt Repaid
|
|
|
(675 |
) |
|
|
(143 |
) |
Dividends
Paid
|
|
|
(106 |
) |
|
|
(57 |
) |
Stock
Options Exercised (Note 3)
|
|
|
130
|
|
|
|
224
|
|
Shares
Repurchased (Note 1)
|
|
|
(727 |
) |
|
|
(149 |
) |
Other
Financing Activities
|
|
|
37
|
|
|
|
39
|
|
Net
Cash Used in Financing Activities
|
|
|
(341 |
) |
|
|
(21 |
) |
|
|
|
|
|
|
|
|
|
Net
(Decrease) Increase in Cash and Cash Equivalents
|
|
|
(33 |
) |
|
|
11
|
|
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS
|
|
|
|
|
|
|
|
|
Cash
and Cash Equivalents at Beginning of Period
|
|
|
461
|
|
|
|
309
|
|
Cash
and Cash Equivalents at End of Period
|
|
$ |
428
|
|
|
$ |
320
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying Notes to Consolidated Financial Statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CSX
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE
1. Significant
Accounting Policies
Background
CSX
Corporation (and, together with its subsidiaries, “CSX” or the “Company”), based
in Jacksonville, Florida, is one of the nation's leading transportation
companies. Surface Transportation, which includes the Company’s rail
and intermodal businesses, provides rail-based transportation services including
traditional rail service and the transport of intermodal containers and
trailers.
CSX’s
principal operating company, CSX Transportation Inc. (“CSXT”), operates the
largest railroad in the eastern United States with a rail network of
approximately 21,000 route miles, linking markets in 23 states, the District
of
Columbia, and the Canadian provinces of Ontario and Quebec. CSX Intermodal
Inc. (“Intermodal”), one of the nation’s largest coast-to-coast intermodal
transportation providers, is a stand-alone, integrated
company linking customers to railroads via trucks and terminals.
CSX’s
other holdings include CSX
Hotels, Inc., a resort doing business as The Greenbrier, located in White
Sulphur Springs, West Virginia, and CSX Real Property, Inc., an organization
responsible for real estate sales, leasing, acquisition and management and
development activities.
Basis
of Presentation
In
the
opinion of management, the accompanying consolidated financial statements of
CSX
contain all normal, recurring adjustments necessary to fairly present the
following:
·
|
Consolidated
Balance Sheets at June 29, 2007 and December 29,
2006;
|
·
|
Consolidated
Income Statements for the quarters and six months ended June 29,
2007 and
June 30, 2006; and
|
·
|
Consolidated
Cash Flow Statements for the six months ended June 29, 2007 and June
30,
2006.
|
Certain
prior-year data have been reclassified to conform to the 2007
presentation.
CSX
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE
1. Significant
Accounting Policies, continued
Pursuant
to the rules and regulations of the Securities and Exchange Commission (“SEC”),
certain information and disclosures normally included in the notes to the annual
financial statements prepared in accordance with accounting principles generally
accepted in the United States of America 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, prior Quarterly Reports on
Form
10-Q and any Current Reports on Form 8-K.
Fiscal
Year
CSX
follows a 52/53 week fiscal reporting calendar with the last day of each
reporting period ending on a Friday:
·
|
The
second fiscal quarters of 2007 and 2006 consisted of 13 weeks ending
on
June 29, 2007 and June 30, 2006,
respectively.
|
·
|
The
six month periods of 2007 and 2006 consisted of 26 weeks ending on
June
29, 2007 and June 30, 2006,
respectively.
|
Except
as otherwise specified,
references to “second quarter(s)” or “six months” indicate CSX’s fiscal periods
ending June 29, 2007 or June 30, 2006, and comparisons are to the corresponding
period of the prior year.
Other
Items
In
May 2007, CSX announced an increase in its share repurchase program from $2
billion to $3 billion and a 25% increase in the quarterly dividend on CSX’s
common stock to $0.15 per share payable September 14, 2007 to shareholders
of
record on August 31, 2007. CSX intends to complete the $3 billion
repurchase program by the end of 2008 with a bias towards early
repurchases. The timing, method, amount of repurchase transactions
and the source of funds to effect any repurchase will be determined by the
Company's management based on its evaluation of market conditions, share price
and other factors. While it is not management’s intention, the program may be
suspended or discontinued at any time. During the second quarter of 2007,
CSX repurchased 12 million shares valued at $548 million. For the six
months of 2007, CSX repurchased 17 million shares valued at $727 million under
all publicly announced plans.
CSX
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE
2. Earnings
Per
Share
CSX
had a
two-for-one split of its common stock in August 2006. Pursuant to
Statement of Financial Accounting Standards (“SFAS”) 128, Earnings Per
Share, all share and
per share disclosures have been retroactively restated to reflect the stock
split.
The
following table sets forth the
computation of basic earnings per share and earnings per share, assuming
dilution:
|
|
Second
Quarters
|
|
|
Six
Months
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Numerator
(Millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Earnings
|
|
$ |
324
|
|
|
$ |
390
|
|
|
$ |
564
|
|
|
$ |
635
|
|
Interest
Expense on Convertible Debt - Net of Tax
|
|
|
1
|
|
|
|
1
|
|
|
|
2
|
|
|
|
2
|
|
Net
Earnings, If-Converted
|
|
|
325
|
|
|
|
391
|
|
|
|
566
|
|
|
|
637
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator
(Thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
Common Shares Outstanding
|
|
|
438,628
|
|
|
|
443,815
|
|
|
|
438,133
|
|
|
|
441,588
|
|
Convertible
Debt
|
|
|
13,711
|
|
|
|
19,456
|
|
|
|
16,583
|
|
|
|
19,456
|
|
Stock
Options
|
|
|
5,247
|
|
|
|
6,815
|
|
|
|
5,396
|
|
|
|
6,123
|
|
Other
Potentially Dilutive Common Shares
|
|
|
1,337
|
|
|
|
120
|
|
|
|
937
|
|
|
|
117
|
|
Average
Common Shares Outstanding, Assuming Dilution
|
|
|
458,923
|
|
|
|
470,206
|
|
|
|
461,049
|
|
|
|
467,284
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
Earnings Per Share
|
|
$ |
0.74
|
|
|
$ |
0.88
|
|
|
$ |
1.29
|
|
|
$ |
1.44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
Per Share, Assuming Dilution
|
|
$ |
0.71
|
|
|
$ |
0.83
|
|
|
$ |
1.23
|
|
|
$ |
1.36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share is based upon the weighted-average number of common shares
outstanding. Earnings per share, assuming dilution, is based on the
weighted-average number of common shares outstanding adjusted for the effect
of
the following types of potentially dilutive common shares:
·
|
employee
stock options, and
|
·
|
other
equity awards, which include unvested restricted stock and long-term
incentive awards.
|
CSX
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE
2. Earnings
Per
Share, Continued
Emerging
Issues Task Force (EITF) 04-8,
The Effect of Contingently Convertible Debt on Diluted Earnings Per
Share, required CSX to include additional shares in the computation of
earnings per share, assuming dilution. The amount included in diluted
earnings per share represents the number of shares that would be issued if
all
of CSX’s convertible debentures were converted.
When
convertible debentures are
converted into CSX common stock, the newly-issued shares are included in the
calculation of both basic and diluted earnings per share. During the
second quarter, $337 million face value of convertible debentures were converted
into 12 million shares of CSX common stock.
Stock
options are excluded from the computation of earnings per share, assuming
dilution, when option exercise prices are greater than the average market price
of the common shares during the period. In 2007, all stock options were
dilutive. Therefore, no stock options were excluded from the
earnings per share calculation.
CSX
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE
3. Share-Based
Compensation
CSX
share-based compensation plans primarily include long-term incentive plans,
restricted stock awards, stock options and stock plans for
directors. CSX has not granted stock options since
2003. Awards granted under the various plans are determined and
approved by the Compensation Committee of the Board of Directors or, in certain
circumstances, by the Chief Executive Officer for awards to management employees
other than senior executives. The Governance Committee of the Board
of Directors approves awards granted to the Company’s non-management
Directors.
In
May 2007, performance units were granted under a new Long-term Incentive Plan
adopted under the CSX Omnibus Incentive Plan. This plan provides for
a three-year cycle ending in fiscal year 2009. Similar to the two
existing plans, the key financial target is Surface Transportation operating
ratio, which is defined as annual operating expenses divided by revenue of
the
Company’s rail and intermodal businesses and is calculated excluding certain
non-recurring items. Awards will be made in performance units and are
payable in CSX common stock. The payout range for the majority of
participants will be between 0% and 200% of the original grant, with each unit
being equivalent to one share of CSX stock. The payout for certain
senior executive officers is subject to a 20% increase or decrease based upon
certain additional pre-established financial targets. This could
result in a maximum payout of 240% of the original grant. However,
any payout to certain senior executive officers is also subject to a reduction
of up to 30% at the discretion of the Compensation Committee of the Board of
Directors based upon Company performance against certain CSX strategic
initiatives.
Total
pre-tax expense associated with share-based compensation and its related income
tax benefit is as follows:
|
|
Second
Quarters
|
|
|
Six
Months
|
|
(Dollars
in Millions)
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Share-Based
Compensation Expense(a)
|
|
$ |
16
|
|
|
$ |
9
|
|
|
$ |
31
|
|
|
$ |
12
|
|
Income
Tax Benefit
|
|
|
6
|
|
|
|
3
|
|
|
|
12
|
|
|
|
4
|
|
(a) Share-based
compensation expense increased in second quarter 2007 due to a higher
anticipated payout ratio and the addition of the May 2007 long-term
incentive plan. In addition to these factors, share-based
compensation expense increased for six months 2007 since no expense was incurred
in 2006 for long-term incentive programs until the plans were approved in
May
2006.
The
following table provides information about stock options exercised.
|
|
Second
Quarters
|
|
|
Six
Months
|
|
(In
Thousands)
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Number
of Stock Options Exercised
|
|
|
2,156
|
|
|
|
4,564
|
|
|
|
6,474
|
|
|
|
10,296
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
of
June 2007, CSX had approximately 13 million stock options
outstanding.
CSX
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE
4. Income
Taxes
CSX
and
its subsidiaries are subject to U.S. federal income tax as well as income tax
of
multiple state jurisdictions. The Company has substantially concluded
all U.S. federal income tax examinations for years through 1998 and
substantially all material state, local and foreign income tax matters have
been
concluded for years through 1996. Federal income tax returns
for 1999 through 2005 are currently under examination. In
addition, the Company voluntarily sought a pre-filing agreement, which is an
early review by the Internal Revenue Service, in connection with its sale of
the
Company’s International Terminals business and related transactions. The
Internal Revenue Service is scheduled to complete its review of matters covered
by this agreement in 2007.
CSX
adopted FASB Interpretation 48, Accounting for Uncertainty in Income
Taxes (“FIN 48”), at the beginning of fiscal year 2007. As a result of
this implementation the Company recognized a $34 million decrease to reserves
for uncertain tax positions. This decrease has two components of
which amounts directly related to CSX were $31 million and unconsolidated
subsidiaries accounted for under the equity method of accounting were $3
million. This decrease was accounted for as an adjustment to the
beginning balance of retained earnings on the Balance Sheet.
As
adjusted by the cumulative effect decrease, at the beginning of 2007, CSX had
approximately $207 million of total gross unrecognized tax
benefits. Of this total, $197 million (net of the federal
benefit on state issues) represents the amount of unrecognized tax benefits
that, if recognized, would favorably affect CSX’s effective income tax rate in
any future periods. There were no significant changes in these
balances since the adoption of FIN 48 at the beginning of 2007. Approximately
$150 million of the foregoing unrecognized tax benefits relates to matters
that
the Company expects will be resolved during 2007 and relate primarily to the
Company’s gain on the sale of a disposed business in 2005, and foreign tax
credits for the business operations during these periods. Upon
resolution of these matters, the Company anticipates that no adverse change
to
existing reserves will be required, and any favorable adjustment primarily
would
be reported as a reduction to tax expense for discontinued
operations. The final outcome of the impending resolution is not yet
determinable.
CSX’s
continuing practice is to recognize interest and/or penalties related to income
tax matters in income tax expense. As of the beginning of 2007, the
Company had $52 million accrued for interest and $0 accrued for penalties.
In second quarter 2006, the Company recorded an income tax benefit of $41
million principally related to the resolution of certain tax
matters.
CSX
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE
5. Casualty,
Environmental and Other Reserves
Casualty,
environmental and other
reserves were determined to be critical accounting estimates due to the need
for
significant management judgments. They are provided for in the Consolidated
Balance Sheets as follows:
(Dollars
in Millions)
|
|
June
29, 2007
|
|
|
December
29, 2006
|
|
|
|
Current
|
|
|
Long-term
|
|
|
Total
|
|
|
Current
|
|
|
Long-term
|
|
|
Total
|
|
Casualty
|
|
$ |
173
|
|
|
$ |
461
|
|
|
$ |
634
|
|
|
$ |
172
|
|
|
$ |
465
|
|
|
$ |
637
|
|
Separation
|
|
|
15
|
|
|
|
98
|
|
|
|
113
|
|
|
|
20
|
|
|
|
100
|
|
|
|
120
|
|
Environmental
|
|
|
26
|
|
|
|
52
|
|
|
|
78
|
|
|
|
26
|
|
|
|
45
|
|
|
|
71
|
|
Other
|
|
|
34
|
|
|
|
53
|
|
|
|
87
|
|
|
|
35
|
|
|
|
58
|
|
|
|
93
|
|
Total
|
|
$ |
248
|
|
|
$ |
664
|
|
|
$ |
912
|
|
|
$ |
253
|
|
|
$ |
668
|
|
|
$ |
921
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Details
with respect to each type of
reserve are described below. Actual settlements and claims received
could differ. The final outcome of these matters cannot be predicted
with certainty. Considering the legal defenses available, the
liabilities that have been recorded and other factors, it is the opinion of
management that none of these items, when finally resolved, will have a material
effect on the Company’s results of operations, financial condition or
liquidity. However, should a number of these items occur in the same
period, they could have a material effect on the results of operations,
financial condition or liquidity in a particular quarter or fiscal
year.
Casualty
Casualty
reserves represent accruals
for personal injury and occupational claims. Currently, no individual
claim is expected to exceed the Company’s self-insured retention
amount. To the extent the value of an individual claim exceeds the
self-insured retention amount, CSX would present the liability on a gross basis
with a corresponding receivable for insurance recoveries. Personal
injury and occupational claims are presented on a gross basis and in accordance
with SFAS 5, Accounting for Contingencies (“SFAS 5”).
These
reserves fluctuate with estimates
provided by independent third parties reviewed by management, offset by the
timing of individual payments. Most of the claims were related to
CSXT.
CSX
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE
5. Casualty,
Environmental and Other Reserves, continued
Personal
Injury
Personal
injury reserves represent
liabilities for employee work-related and third party injuries.
Work-related injuries for CSXT employees are primarily subject to the Federal
Employers’ Liability Act (“FELA”). In addition to FELA liabilities,
employees of other CSX subsidiaries are covered by various state workers'
compensation laws, the Federal Longshore and Harbor Worker's Compensation
Program or the Maritime Jones Act.
CSXT
retains an independent actuarial
firm to assist management in assessing the likely cost of personal injury claims
and cases. An analysis is performed by the independent actuarial firm
semi-annually and is reviewed by management. The methodology used by the actuary
includes a development factor to reflect growth or reduction in the value of
these personal injury claims. It is based largely on CSXT’s historical claims
and settlement experience. Actual results may vary from estimates due
to the type and severity of the injury, costs of medical treatments, and
uncertainties in litigation.
Based
on management’s review of its semi-annual actuarial analysis performed by an
independent actuarial firm, personal injury reserves were reduced by $30 million
during second quarter 2007. This reduction is due to a trend of
significant decreases in the number and severity of work-related injuries for
CSXT employees since 2003 and was included as a reduction to Materials, Supplies
and Other in the Income Statement.
Occupational
Occupational
claims arise from allegations of exposure to certain materials in the work
place. Examples of exposures would be asbestos, solvents (which include soaps
and chemicals), diesel fuel and alleged chronic physical injuries resulting
from
work conditions. Examples of claims arising from work conditions
would be repetitive stress injuries, carpal tunnel syndrome and hearing
loss.
The
Company retains a third party specialist with extensive experience in performing
asbestos and other occupational studies to assist management in assessing the
value of the Company’s claims and cases. The analysis is performed
by the specialist semi-annually and is reviewed by management. The
methodology used by the specialist includes an estimate of future anticipated
claims based on the Company’s trends in average historical claim filing rates,
future anticipated dismissal rates and settlement rates.
CSX
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE
5. Casualty,
Environmental and Other Reserves, continued
Separation
Separation
liabilities provide for the
estimated costs of implementing workforce reductions, improvements in
productivity and certain other cost reductions at the Company's major
transportation units since 1991. These liabilities are expected to be paid
out
over the next 15 to 20 years from general corporate funds and may fluctuate
depending on the timing of payments and associated taxes.
Environmental
The
Company is a party to various proceedings related to environmental issues,
including administrative and judicial proceedings, involving private parties
and
regulatory agencies. The Company has been identified as a potentially
responsible party at approximately 253 environmentally impaired
sites. Many of those are, or may be, subject to remedial action under
the Federal Comprehensive Environmental Response, Compensation and Liability
Act
of 1980, or CERCLA, also known as the Superfund law, or similar state statutes.
Most of these proceedings arose from environmental conditions on properties
used
for ongoing or discontinued railroad operations. However, a number of
these proceedings are based on allegations that the Company, or its
predecessors, sent hazardous substances to facilities owned or operated by
others for treatment of 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
accordance with Statement of Position 96-1, Environmental
Remediation Liabilities, the Company reviews its role with respect to each
site identified at least once a quarter. Based on the review process,
the Company has recorded amounts to cover anticipated contingent future
environmental remediation costs with respect to each site to the extent such
costs are estimable and probable. The recorded liabilities for
estimated future environmental costs are undiscounted and include amounts
representing the Company's estimate of unasserted claims, which the Company
believes to be immaterial. 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.
CSX
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE
5. 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 exposure, the amount
and materiality of which cannot presently be reliably
estimated. Based upon information currently available, however, the
Company believes its environmental reserves are adequate to accomplish remedial
actions to comply with present laws and regulations and that the ultimate
liability for these matters, if any, will not materially affect its overall
results of operations, financial condition or liquidity.
Other
Other
reserves include
liabilities for various claims, such as longshoremen disability claims, freight
claims and claims for property, automobile and general
liability. These liabilities are accrued at the estimable and
probable amount in accordance with SFAS 5.
NOTE
6. Commitments
and Contingencies
Purchase
Commitments
CSXT
has a commitment under a long-term
maintenance program that currently covers 42% of CSXT’s fleet of
locomotives. The agreement is based upon the maintenance cycle for each
locomotive and is currently predicted to expire no earlier than 2027 and as
late
as 2031, depending upon when additional locomotives are placed in service.
The costs expected to be incurred throughout the duration of the agreement
fluctuate as locomotives are placed into, or removed from, service or as
required maintenance is adjusted. CSXT may terminate the agreement at its
option after 2012, though such action would trigger certain liquidated damages
provisions.
The
following table summarizes CSXT’s
payments under the long-term maintenance program:
|
|
Second
Quarters
|
|
|
Six
Months
|
|
(Dollars
in Millions)
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Amounts
Paid
|
|
$ |
51
|
|
|
$ |
48
|
|
|
$ |
101
|
|
|
$ |
89
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CSX
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE
6. Commitments
and Contingencies, continued
Insurance
The
Company maintains numerous
insurance programs, most notably for third-party casualty liability and for
Company property damage and business interruption with substantial
limits. A specific amount of risk ($25 million per occurrence) is
retained by the Company on each of the casualty and non-catastrophic property
programs. The Company retains $50 million of risk per occurrence for its
catastrophic property coverage. For information on insurance issues
resulting from the effects of Hurricane Katrina on the Company’s operations and
assets, see Note 8, Hurricane Katrina.
Guarantees
CSX
and its subsidiaries are
contingently liable, individually and jointly with others, as guarantors of
approximately $75 million in obligations principally relating to leased
equipment, vessels and joint facilities used by the Company in its current
and
former business operations. Utilizing the Company’s guarantee for
these obligations allows the obligor to take advantage of lower interest rates
and obtain other favorable terms. Guarantees are contingent
commitments issued by the Company that could require CSX or one of its
affiliates to make payment to or to perform certain actions for the beneficiary
of the guarantee based on another entity’s failure to perform.
At
the
end of second quarter 2007, the Company’s guarantees primarily related to the
following:
·
|
Guarantee
of approximately $64 million of obligations of a former subsidiary,
CSX
Energy, in connection with a sale-leaseback transaction. CSX is, in
turn, indemnified by several subsequent owners of the subsidiary
against
payments made with respect to this guarantee. Management
does not expect that the Company will be required to make any payments
under this guarantee for which CSX will not be
reimbursed. CSX’s obligation under this guarantee will be
completed in 2012.
|
·
|
Guarantee
of approximately $11 million of lease commitments assumed by A.P.
Moller-Maersk (“Maersk”) for which CSX is contingently liable. CSX
believes Maersk will fulfill its contractual commitments with respect
to
such lease commitments, and CSX will have no further liabilities
for those
obligations. CSX’s obligation under this guarantee will be
completed in 2011.
|
CSX
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE
6. Commitments
and Contingencies, continued
As
of
second quarter 2007, the Company has not recognized any liabilities in its
financial statements in connection with any guarantee
arrangements. The maximum amount of future payments the Company could
be required to make under these guarantees is the amount of the guarantees
themselves.
Fuel
Surcharge Antitrust Litigation
Since
May 2007, at least 20 putative class action suits have been brought in
various federal district courts against CSXT and the four other U.S.-based
Class
I railroads. The lawsuits contain substantially similar allegations
to the effect that the defendants’ fuel surcharge practices relating to contract
and unregulated traffic resulted from an illegal conspiracy in violation of
antitrust laws and seek unquantified treble damages allegedly sustained by
purported class members, attorneys’ fees and other relief. Each of
the lawsuits purports to be filed on behalf of a class of shippers that
allegedly purchased rail freight transportation services from the defendants
through the use of contracts or through other means exempt from rate regulation
during defined periods commencing as early as June 2003 and were assessed fuel
surcharges.
In
July 2007, CSXT received a grand jury subpoena from the New Jersey Office of
the
Attorney General seeking information related to the same fuel surcharges that
are the subject of the purported class actions. It is possible that
additional federal or state agencies could initiate investigations into similar
matters.
CSXT
believes that its fuel surcharge practices are lawful. Accordingly,
CSXT intends to vigorously defend itself against the purported class actions,
which it believes are without merit. CSXT cannot predict the outcome
of the putative class action lawsuits, which are in their preliminary stages,
or
of any government investigations, charges, or additional litigation that may
be
filed in the future. Penalties for violating antitrust laws can be
severe, involving both potential criminal and civil liability. CSXT
is unable to assess at this time the possible financial impact of
litigation. CSXT has not accrued any liability for an adverse outcome
in the litigation. If an adverse outcome were to occur and be
sustained, it could have a material adverse impact on the Company’s results of
operations, financial condition and liquidity.
CSX
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE
6. Commitments
and Contingencies, continued
Other
Legal Proceedings
In
addition to the matter described
above, 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
environmental matters, FELA claims by employees, other personal injury claims
and disputes and complaints involving certain transportation rates and
charges. Some of the legal proceedings include claims for
compensatory as well as punitive damages and others are, or are purported to
be,
class actions. While the final outcome of these matters cannot be
predicted with certainty, considering, among other things, the meritorious
legal
defenses available and liabilities that have been recorded along with applicable
insurance, it is currently the opinion of CSX management that none of these
items will have a material adverse effect on the Company’s results of
operations, financial condition or liquidity. An unexpected adverse
resolution of one or more of these items, however, could have a material adverse
effect on the Company’s results of operations, financial condition or liquidity
in a particular quarter or fiscal year.
NOTE
7. Debt
and
Credit Agreements
Debt
Issuance
In
April
2007, CSX issued $300 million in one series of unsecured notes, which bear
interest at 5.6% and mature on May 1, 2017, and $700 million in another series
of unsecured notes, which bear interest at 6.15% and mature on May 1,
2037. Each series of notes is included in the Consolidated Balance
Sheets under Long-term Debt and may be redeemed by CSX at any
time. The proceeds from these notes were used and will be used in the
future to fund debt obligations that become due during 2007 and for general
corporate purposes, which may include retirement of other debt, capital
expenditures, working capital requirements, repurchases of CSX common stock,
improvements in productivity and other cost reductions at the Company’s major
transportation units.
Approximately
$450 million of the proceeds above were used to repay debt obligations that
became due during the second quarter of 2007, and an additional $150 million
was
used to call notes due in 2032. CSX recognized a $10 million
reduction to other income during second quarter 2007 for an early redemption
premium and the write-off of debt issuance costs related to the $150 million
note repayment.
CSX
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE
7. Debt
and
Credit Agreements, continued
Convertible
Debentures
In
October 2001, CSX issued approximately $564 million aggregate principal amount
at maturity of zero coupon convertible debentures (the "debentures") due October
30, 2021, for an initial offering price of approximately $462
million.
Holders
currently may convert their
debentures into shares of CSX common stock at a conversion rate of 35.49 common
shares per $1,000 principal amount at maturity of debentures, based upon the
market price of CSX’s common stock. The debentures also would be convertible,
even if the market price of CSX’s common stock were to decline below the
requisite threshold, in the event (i) CSX’s senior unsecured credit ratings are
downgraded by Moody’s Investors Service, Inc. (“Moody’s”) to below Ba1 and by
Standard & Poor’s Rating Services (“S&P”) to below BB+; (ii) CSX calls
the debentures for redemption (which may occur no sooner than October 30, 2008);
or (iii) upon the occurrence of specified corporate transactions.
During
second quarter 2007, $337 million face value of debentures were converted into
12 million shares of CSX common stock. Although holders have been
able to convert their debentures since April 2006, no material conversions
occurred prior to second quarter 2007.
Revolving
Credit Facility
In
May 2006, CSX entered into a $1.25
billion, five-year unsecured revolving credit facility with a group of lending
banks, including JPMorgan Chase Bank, N.A., which is acting as the
administrative agent. With the consent of the lenders, and in
accordance with its terms, in May 2007, CSX extended the maturity date of the
facility an additional year, to May 2012. As of June 29, 2007, the
facility was not drawn on, and CSX was in compliance with all covenant
requirements under the facility.
CSX
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE
8. Hurricane
Katrina
In
August
2005, Hurricane Katrina caused extensive damage to Company assets on the Gulf
Coast, including damage to track infrastructure and
bridges. Operations were returned to pre-hurricane conditions by the
end of first quarter 2006. In 2005, the Company had insurance
coverage of $535 million, after a $25 million deductible (per occurrence),
for
fixed asset replacement, incremental expenses, and lost
profits. Management’s current loss estimate is approximately $450
million.
The
Company’s insurance policies do not prioritize coverage based on types of
losses. As claims are submitted to the insurance companies, they are
reviewed and preliminary payments made until all losses are incurred and
documented. A final payment will be made once the Company and its
insurers agree on the total measurement value of the claim. Through
June 2007, the Company had collected insurance payments of $357
million.
In
second
quarter 2007, CSX did not receive cash proceeds and therefore did not recognize
gains on insurance recoveries from claims related to Hurricane
Katrina. CSX recognized $126 million of gains in the second quarter
of 2006. The gains were attributable to recovering amounts in excess
of the net book value of damaged fixed assets and to recording recoveries
related to lost profits. Additional cash proceeds are expected and
will result in future gain recognition.
Cash
proceeds from the insurers are not specific to the types of losses and so the
Company allocated the proceeds ratably among the three types of losses mentioned
above for cash flow presentation. Allocated cash proceeds for lost
profits and incremental expenses are classified as operating activities and
were
$9 million and $92 million for the six months ended 2007 and 2006, respectively,
since these were related directly to revenue and expenses from
operations. Allocated cash proceeds for fixed asset damage are
classified as investing activities and were $10 million and $115 million for
the
six months ended 2007 and 2006 since they had a direct relationship to money
the
Company spent on property additions to repair the hurricane-damaged assets
and
were recorded in the same category.
Additional
information
about the effects of Hurricane Katrina is included in CSX’s most recent Annual
Report on Form 10-K.
CSX
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE
9. Derivative
Financial Instruments
CSX
uses
derivative financial instruments to manage its overall exposure to fluctuations
in interest rates and fuel costs.
Interest
Rate Swaps
During
second quarter 2007, CSX repaid $450 million of debentures that matured and
called $150 million of debentures due in 2032. As a result, CSX also
settled the interest rate swaps related to these debentures. CSX did
not have any material interest rate swaps outstanding at the end of second
quarter 2007.
Fuel
Hedging
In
2003,
CSX began a program to hedge a portion of CSXT’s future locomotive fuel
purchases. This program was established to manage exposure to fuel price
fluctuations. To minimize this risk, CSX entered into a series of swaps in
order
to fix the price of a portion of CSXT’s estimated future fuel
purchases. CSX suspended entering into new swaps in its fuel hedge
program in the third quarter of 2004 and there are currently no outstanding
contracts.
Fuel
hedging activity reduced fuel
expense for the second quarter and six months of 2006 by $19 million and $54
million, respectively. Since fourth quarter 2006, there has been no
impact on fuel expense because all contracts had expired prior to that
time.
CSX
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE
10. Other
Comprehensive
Income (Loss)
Other
comprehensive income (loss) refers to revenues, expenses, gains and losses
that,
under generally accepted accounting principles, are included in comprehensive
income, a component of Shareholders’ Equity within the Consolidated Balance
Sheets, rather than Net Earnings on the Income Statement. Under existing
accounting standards, other comprehensive income (loss) for CSX may include
unrecognized gains and losses and prior service cost related to pension and
other postretirement benefit plans and activity
related to derivative financial instruments designated as cash flow
hedges.
The
following table provides a reconciliation of net earnings reported in the
Consolidated Income Statements to comprehensive income:
|
|
Second
Quarters
|
|
|
Six
Months
|
|
(Dollars
in Millions)
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Net
Earnings
|
|
$ |
324
|
|
|
$ |
390
|
|
|
$ |
564
|
|
|
$ |
635
|
|
Other
Comprehensive Income (Loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
Value of Fuel Derivatives
|
|
|
-
|
|
|
|
(11 |
) |
|
|
-
|
|
|
|
(30 |
) |
Other
|
|
|
7
|
|
|
|
-
|
|
|
|
9
|
|
|
|
(1 |
) |
Comprehensive
Income
|
|
$ |
331
|
|
|
$ |
379
|
|
|
$ |
573
|
|
|
$ |
604
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive income (loss) has declined over time as a result of a decrease
in
the number of fuel derivative contracts outstanding. CSX suspended
entering into new fuel derivative contracts in the third quarter of 2004 and
there are currently no outstanding fuel derivative contracts. (See
Note 9, Derivative Financial Instruments.)
NOTE
11. Other
Income
(Expense) – Net
Other
Income (Expense) – Net consists
of the following:
|
|
Second
Quarters
|
|
|
Six
Months
|
|
(Dollars
in Millions)
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Interest
Income
|
|
$ |
15
|
|
|
$ |
10
|
|
|
$ |
28
|
|
|
$ |
19
|
|
Income
(Loss) from Real Estate and Resort Operations(a)
|
|
|
2
|
|
|
|
2
|
|
|
|
(14 |
) |
|
|
(7 |
) |
Minority
Interest
|
|
|
(5 |
) |
|
|
(6 |
) |
|
|
(10 |
) |
|
|
(11 |
) |
Miscellaneous(b)
|
|
|
(1 |
) |
|
|
5
|
|
|
|
(4 |
) |
|
|
7
|
|
Other
Income (Expense) - Net
|
|
$ |
11
|
|
|
$ |
11
|
|
|
$ |
-
|
|
|
$ |
8
|
|
(a)
Income (Loss) from Real Estate and Resort Operations includes the results of
operations of the Company’s real estate sales, leasing, acquisition and
management and development activities as well as the results of operations
from
CSX Hotels, Inc., a resort doing business as The Greenbrier, located in White
Sulphur Springs, West Virginia.
(b)
Miscellaneous income is comprised of earnings from certain CSX owned or
partially owned companies, investment gains and losses and
other non-operating activities.
CSX
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE
12. Business
Segments
The
Company operates primarily in two business segments: rail and
intermodal. The rail segment provides rail freight transportation
over a network of approximately 21,000 route miles in 23 states, the District
of
Columbia and the Canadian provinces of Ontario and Quebec. The intermodal
segment provides integrated rail and truck transportation services and operates
a network of dedicated intermodal facilities across North
America. These segments are strategic business units that offer
different services and are managed separately. Performance is
evaluated and resources are allocated based on several factors, of which the
principal financial measures are business segment operating income and operating
ratio. The accounting policies of the segments are the same as those
described in Note 1, Significant Accounting Policies, in CSX’s most recent
Annual Report on Form 10-K.
Consolidated
operating income includes the results of operations of Surface Transportation
and other operating income. Other operating income includes the gain
amortization on the conveyance of CSX Lines, a former Marine Services
subsidiary, net sublease income from assets formerly included in the Company’s
Marine Services segment and other items.
Business
segment information for second quarters 2007 and 2006 is as
follows:
|
|
Surface
Transportation |
|
|
|
|
|
|
|
(Dollars
in Millions)
|
|
Rail
|
|
|
Intermodal
|
|
|
Total
|
|
|
Other
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second
Quarter - 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
from External Customers
|
|
$ |
2,187
|
|
|
$ |
343
|
|
|
$ |
2,530
|
|
|
$ |
-
|
|
|
$ |
2,530
|
|
Segment
Operating Income
|
|
|
532
|
|
|
|
71
|
|
|
|
603
|
|
|
|
1
|
|
|
|
604
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second
Quarter - 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
from External Customers
|
|
$ |
2,065
|
|
|
$ |
356
|
|
|
$ |
2,421
|
|
|
$ |
-
|
|
|
$ |
2,421
|
|
Segment
Operating Income
|
|
|
582
|
|
|
|
63
|
|
|
|
645
|
|
|
|
1
|
|
|
|
646
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six
Months - 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
from External Customers
|
|
$ |
4,291
|
|
|
$ |
661
|
|
|
|
4,952
|
|
|
$ |
-
|
|
|
|
4,952
|
|
Segment
Operating Income
|
|
|
970
|
|
|
|
120
|
|
|
|
1,090
|
|
|
|
2
|
|
|
|
1,092
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six
Months - 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
from External Customers
|
|
$ |
4,062
|
|
|
$ |
690
|
|
|
$ |
4,752
|
|
|
$ |
-
|
|
|
$ |
4,752
|
|
Segment
Operating Income
|
|
|
1,007
|
|
|
|
125
|
|
|
|
1,132
|
|
|
|
10
|
|
|
|
1,142
|
|
CSX
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE
13. Employee
Benefit
Plans
The
Company sponsors defined benefit pension plans principally for salaried,
management personnel. The plans provide eligible employees with
retirement benefits based predominantly upon years of service and compensation
rates near retirement. For employees hired
after December 31, 2002, benefits are determined based on a cash balance
formula, which provides benefits by utilizing interest and pay credits based
upon age, service and compensation. CSX made contributions of $21
million during second quarter 2007 to its defined benefit pension
plans. No additional contributions are expected for the remainder of
2007.
In
addition to these plans, CSX sponsors a post-retirement medical plan and one
life insurance plan that provide benefits to full-time, salaried, management
employees hired prior to January 1, 2003, upon their retirement, if certain
eligibility requirements are met. The post-retirement medical plan is
contributory (partially funded by retirees), with retiree contributions adjusted
annually. The life insurance plan is non-contributory.
The
following table describes the components of net periodic benefit
cost:
|
|
Pension
Benefits
|
|
(Dollars
in Millions)
|
|
Second
Quarters
|
|
|
Six
Months
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Service
Cost
|
|
$ |
9
|
|
|
$ |
9
|
|
|
$ |
17
|
|
|
$ |
18
|
|
Interest
Cost
|
|
|
29
|
|
|
|
27
|
|
|
|
57
|
|
|
|
53
|
|
Expected
Return on Plan Assets
|
|
|
(30 |
) |
|
|
(30 |
) |
|
|
(59 |
) |
|
|
(59 |
) |
Amortization
of Prior Service Cost
|
|
|
1
|
|
|
|
1
|
|
|
|
2
|
|
|
|
2
|
|
Amortization
of Net Loss
|
|
|
7
|
|
|
|
8
|
|
|
|
15
|
|
|
|
17
|
|
Net
Periodic Benefit Cost
|
|
$ |
16
|
|
|
$ |
15
|
|
|
$ |
32
|
|
|
$ |
31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Benefits
|
|
(Dollars
in Millions)
|
|
Second
Quarters
|
|
|
Six
Months
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Service
Cost
|
|
$ |
2
|
|
|
$ |
1
|
|
|
$ |
3
|
|
|
$ |
3
|
|
Interest
Cost
|
|
|
5
|
|
|
|
6
|
|
|
|
10
|
|
|
|
11
|
|
Amortization
of Prior Service Cost
|
|
|
(2 |
) |
|
|
(2 |
) |
|
|
(3 |
) |
|
|
(3 |
) |
Amortization
of Net Loss
|
|
|
1
|
|
|
|
2
|
|
|
|
2
|
|
|
|
4
|
|
Net
Periodic Benefit Cost
|
|
$ |
6
|
|
|
$ |
7
|
|
|
$ |
12
|
|
|
$ |
15
|
|
CSX
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE
14. Related
Party
Transactions
CSX
and
Norfolk Southern Corporation (“NS”) jointly own Conrail Inc. (“Conrail”) through
a limited liability company. CSX has a 42% economic interest and 50%
voting interest in the jointly-owned entity, and NS has the remainder of the
economic and voting interests. CSX applies the equity method of
accounting to its investment in Conrail.
As
required by SFAS 57, Related Party Disclosures, the Company has
identified below amounts owed to Conrail or its affiliates representing expenses
incurred under the operating, equipment and shared area agreements with
Conrail. The Company also executed two promissory notes with a
subsidiary of Conrail which are included in Long-term Debt on the Consolidated
Balance Sheets.
|
|
|
June
29,
|
|
|
December
29,
|
|
|
(Dollars
in Millions)
|
|
|
2007
|
|
|
2006
|
|
|
Balance
Sheet Information:
|
|
|
|
|
|
|
|
|
CSX
Payable to Conrail
|
|
|
$ |
55
|
|
|
$ |
48
|
|
|
Promissory
Notes Payable to Conrail Subsidiary
|
|
|
|
|
|
|
|
|
|
|
4.40%
CSX Promissory Note due October 2035
|
|
|
$ |
73
|
|
|
$ |
73
|
|
|
4.52%
CSXT Promissory Note due March 2035
|
|
|
$ |
23
|
|
|
$ |
23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second
Quarters
|
|
|
Six
Months
|
(Dollars
in Millions)
|
2007
|
|
2006
|
|
|
2007
|
|
2006
|
Income
Statement Information:
|
|
|
|
|
|
|
|
|
|
|
Interest
Expense Related to Conrail
|
$ 1
|
|
$ |
1
|
|
|
$ |
2
|
|
$ 2
|
Conrail
Rents, Fees, and Services (a)
|
$ 23
|
|
$ |
23
|
|
|
$ |
46
|
|
$ 46
|
(a)
Conrail Rents, Fees and Services represent expenses paid to Conrail related
to
right-of-way usage fees, equipment rental, other service related charges and
fair value write-up amortization. Beginning in 2007, these amounts
have been included in Materials, Supplies and Other on the Consolidated Income
Statement. The amounts disclosed above do not include CSX’s 42%
portion of Conrail’s earnings, which is also included in Materials, Supplies and
Other and amounted to $3 million and $2 million for second quarters 2007 and
2006, respectively, and $6 million and $6 million for the six months of 2007
and
2006, respectively.
Additional
information about the
investment in Conrail is included in CSX’s most recent Annual Report on Form
10-K.
CSX
CORPORATION
ITEM
2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND
RESULTS OF OPERATIONS
CSX
Corporation (and, together with its subsidiaries, “CSX” or the “Company”), based
in Jacksonville, Florida, is one of the nation's leading transportation
companies. Surface Transportation, which includes the Company’s rail
and intermodal businesses, provides rail-based transportation services including
traditional rail service and the transport of intermodal containers and
trailers.
CSX’s
principal operating company, CSX Transportation Inc. (“CSXT”), operates the
largest railroad in the eastern United States with a rail network of
approximately 21,000 route miles, linking markets in 23 states, the District
of
Columbia, and the Canadian provinces of Ontario and Quebec. CSX Intermodal
Inc. (“Intermodal”), one of the nation’s largest coast-to-coast intermodal
transportation providers, is a stand-alone, integrated
company linking customers to railroads via trucks and terminals.
CSX’s
other holdings include CSX
Hotels, Inc., a resort doing business as The Greenbrier, located in White
Sulphur Springs, West Virginia, and CSX Real Property, Inc., an organization
responsible for real estate sales, leasing, acquisition and management and
development activities.
SECOND
QUARTER 2007 SURFACE TRANSPORTATION HIGHLIGHTS
Surface
Transportation
·
|
Revenue
grew nearly 5% to $2.5
billion
|
·
|
Expenses
increased $151 million to $1.9
billion
|
·
|
Operating
Income was $603 million versus $645 million in second quarter 2006,
which
benefited from insurance recoveries
|
·
|
Improvements
in service and safety measures
|
Revenue
and revenue per unit increased nearly 5% and 7%, respectively, driven by strong
yield management initiatives on volume declines of 2%. The Company
was able to achieve substantial pricing gains predominantly due to the overall
cost and service advantages that rail-based solutions provide versus other
modes
of transportation.
These
strong results in revenue were
partially offset by volume declines for all four of the Company’s major lines of
business. The overall 2% volume decrease was primarily driven by
continued weakness in housing construction, domestic automobile production
and
related markets.
Expenses
were higher due to significant prior year gains on insurance recoveries of
$126
million, which was recorded as a reduction to operating expenses in 2006, as
well as the overall impact of inflation partially offset by lower personal
injury reserves.
CSX
CORPORATION
ITEM
2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND
RESULTS OF OPERATIONS
For
additional information, refer to Rail and Intermodal Results of Operations
discussed on pages 31 through 33.
Leadership
and focus on CSX’s safety programs, which include training and rules compliance
efforts, yielded the Company’s lowest ever levels in FRA reportable personal
injuries. Personal injury frequency declined 26% and train accident
frequency declined 18% on a year-over-year basis.
In
addition to record safety results, all key operating measures improved during
second quarter 2007, which has led to greater cost
efficiencies. Train performance showed marked improvement, with
on-time originations and arrivals at or near all-time highs. System dwell,
the
average number of hours a rail car spends in a terminal, declined to 24 hours
as
a result of improved train performance and terminal operations. Both
average train velocity and recrews improved, indicating a positive trend in
overall network velocity and fluidity. Train velocity increased 4% to 20.4
miles
per hour, while average recrews, which are the number of relief crews called
per
day, improved by 8% to 58 per day.
RAIL
OPERATING STATISTICS (Estimated)
|
|
Second
Quarters
|
|
|
Improvement
|
|
|
|
|
2007
|
|
|
2006
|
|
|
(Decline)%
|
|
Service
|
Personal
Injury Frequency Index
|
|
|
|
|
|
|
|
|
|
Measurements
|
(Per
200,000 man hours)
|
|
|
1.04
|
|
|
|
1.40
|
|
|
|
26 |
% |
|
FRA
Train Accidents Frequency
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Per
million train miles)
|
|
|
2.85
|
|
|
|
3.49
|
|
|
|
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On-Time
Originations
|
|
|
79.9 |
% |
|
|
76.5 |
% |
|
|
4
|
|
|
On-Time
Arrivals
|
|
|
69.0 |
% |
|
|
60.3 |
% |
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
System Dwell Time (hours) (a)
|
|
|
24.0
|
|
|
|
25.5
|
|
|
|
6
|
|
|
Average
Total Cars-On-Line
|
|
|
223,052
|
|
|
|
223,349
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
Velocity, All Trains (miles per hour)
|
|
|
20.4
|
|
|
|
19.6
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
Recrews (per day)
|
|
|
58
|
|
|
|
63
|
|
|
|
8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase/
|
|
|
|
|
|
|
|
|
|
|
|
|
(Decrease)
|
|
Resources
|
Route
Miles
|
|
|
21,164
|
|
|
|
21,244
|
|
|
|
- |
% |
|
Locomotives
(owned and long-term leased)
|
|
|
3,946
|
|
|
|
3,850
|
|
|
|
2
|
|
|
Freight
Cars (owned and long-term leased)
|
|
|
97,487
|
|
|
|
102,975
|
|
|
|
(5 |
)% |
(a) In October 2005, the Association of American Railroads adopted
a new dwell calculation in an effort to standardize publicly reported dwell
times on the AAR Railroad Performance Measures website. Dwell times in all
public documents represent the Company's historical method for calculating
dwell
for internal management and analysis. Regardless of which method is used,
trends for the two are the same. Dwell times using the AAR
calculation were 23.5 and 24.0 hours for the second quarter and six months of
2007, respectively.
CSX
CORPORATION
ITEM
2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND
RESULTS OF OPERATIONS
2007
EXPECTATIONS
In
August 2005, the Company provided long-term financial targets based on
double-digit growth in earnings and cash flow from a 2005 base year. In
May 2007, based on strong expected results through 2010, CSX updated these
targets to include double-digit growth in operating income and earnings per
share on the improved 2007 base. Additionally, by 2010, CSX also expects to
improve the operating ratio to the mid to low 70’s. Finally, the Company’s free
cash flow expectations continue to use the 2005 base and remain unchanged from
the previous target provided.
FINANCIAL
RESULTS OF OPERATIONS
Second
Quarter Consolidated Results of Operations
The
financial statements presented are
for second quarters 2007 and 2006. Except as otherwise specified,
references to years indicate the Company’s fiscal quarter as noted
previously. (See Note 1, Significant Accounting
Policies.)
|
|
CONSOLIDATED
|
|
|
|
Includes
Surface Transportation and Other Operating Income
|
|
|
|
Second
Quarters
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
$
Change
|
|
|
%
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Revenue
|
|
$ |
2,530
|
|
|
$ |
2,421
|
|
|
$ |
109
|
|
|
|
5 |
% |
Operating
Expense
|
|
|
1,926
|
|
|
|
1,775
|
|
|
|
151
|
|
|
|
9
|
|
Operating
Income
|
|
|
604
|
|
|
|
646
|
|
|
|
(42 |
) |
|
|
(7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Income
|
|
|
11
|
|
|
|
11
|
|
|
|
-
|
|
|
|
-
|
|
Interest
Expense
|
|
|
(101 |
) |
|
|
(98 |
) |
|
|
(3 |
) |
|
|
3
|
|
Income
Tax Expense
|
|
|
(190 |
) |
|
|
(169 |
) |
|
|
(21 |
) |
|
|
12
|
|
Net
Earnings
|
|
$ |
324
|
|
|
$ |
390
|
|
|
$ |
(66 |
) |
|
|
(17 |
)% |
Prior
periods have been reclassified to conform to the current
presentation.
Operating
Revenue
Operating
Revenue increased $109
million to $2.5 billion in second quarter 2007 due to continued pricing efforts
only partially offset by lower volume.
Operating
Income
Operating
Income decreased $42 million
to $604 million in second quarter 2007. Operating revenue gains
during the quarter were offset by significant gains on insurance recoveries
recognized during second quarter last year that were not repeated in second
quarter 2007.
CSX
CORPORATION
ITEM
2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND
RESULTS OF OPERATIONS
Other
Income
Other
Income was $11 in second quarter
2007, which is consistent with the prior year quarter.
Interest
Expense
Interest
Expense increased $3 million to $101 million in second quarter 2007 primarily
related to slightly higher interest rates for variable rate debt.
Income
Tax Expense
Income
Tax Expense increased $21
million to $190 million due to a prior year income tax benefit of $41 million
principally related to the resolution of certain tax matters.
Net
Earnings
Net
Earnings decreased $66 million to $324 million, and Earnings Per Diluted Share
decreased $.12 to $.71. Pricing gains were more than offset by prior
year gains on insurance recoveries and prior year tax benefits.
CSX
CORPORATION
ITEM
2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND
RESULTS OF OPERATIONS
Surface
Transportation Results of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SURFACE
TRANSPORTATION DETAIL (Unaudited)
|
|
(Dollars
in Millions)
|
|
Second
Quarters
|
|
|
|
|
|
|
|
|
|
|
|
|
Surface
|
|
|
|
|
|
Rail
|
|
|
Intermodal
|
|
|
Transportation
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
$
Change
|
|
Operating
Revenue
|
|
$ |
2,187
|
|
|
$ |
2,065
|
|
|
$ |
343
|
|
|
$ |
356
|
|
|
$ |
2,530
|
|
|
$ |
2,421
|
|
$ |
109
|
|
Operating
Expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Labor
and Fringe
|
|
|
721
|
|
|
|
695
|
|
|
|
20
|
|
|
|
20
|
|
|
|
741
|
|
|
|
715
|
|
|
(26 |
) |
Materials,
Supplies and Other
|
|
|
461
|
|
|
|
435
|
|
|
|
46
|
|
|
|
54
|
|
|
|
507
|
|
|
|
489
|
|
|
(18 |
) |
Fuel
|
|
|
289
|
|
|
|
288
|
|
|
|
-
|
|
|
|
-
|
|
|
|
289
|
|
|
|
288
|
|
|
(1 |
) |
Depreciation
|
|
|
212
|
|
|
|
206
|
|
|
|
9
|
|
|
|
10
|
|
|
|
221
|
|
|
|
216
|
|
|
(5 |
) |
Equipment
and Other Rents
|
|
|
82
|
|
|
|
99
|
|
|
|
27
|
|
|
|
33
|
|
|
|
109
|
|
|
|
132
|
|
|
23
|
|
Inland
Transportation
|
|
|
(110 |
) |
|
|
(116 |
) |
|
|
170
|
|
|
|
178
|
|
|
|
60
|
|
|
|
62
|
|
|
2
|
|
Gain
on Insurance Recoveries
|
|
|
-
|
|
|
|
(124 |
) |
|
|
-
|
|
|
|
(2 |
) |
|
|
-
|
|
|
|
(126 |
) |
|
(126 |
) |
Total
Expense
|
|
|
1,655
|
|
|
|
1,483
|
|
|
|
272
|
|
|
|
293
|
|
|
|
1,927
|
|
|
|
1,776
|
|
|
(151 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Income
|
|
$ |
532
|
|
|
$ |
582
|
|
|
$ |
71
|
|
|
$ |
63
|
|
|
$ |
603
|
|
|
$ |
645
|
|
$ |
(42 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Ratio
|
|
|
75.7 |
% |
|
|
71.8 |
% |
|
|
79.3 |
% |
|
|
82.3 |
% |
|
|
76.2 |
% |
|
|
73.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SURFACE
TRANSPORTATION VOLUME AND REVENUE
|
|
|
|
|
Volume
(Thousands); Revenue (Dollars in Millions); Revenue Per Unit
(Dollars)
|
|
|
|
|
Second
Quarters
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Volume
|
|
|
Revenue
|
|
|
Revenue
Per Unit
|
|
|
|
|
2007
|
2006
|
%
Change
|
|
|
2007
|
|
2006
|
%
Change
|
|
|
2007
|
|
2006
|
%
Change
|
|
|
|
|
Chemicals
|
|
134
|
134
|
-
|
%
|
|
$ |
327
|
$ |
305
|
7
|
%
|
$ |
2,440
|
$ |
2,276
|
7
|
%
|
|
|
|
|
Emerging
Markets
|
|
136
|
144
|
(6)
|
|
|
|
164
|
|
158
|
4
|
|
|
|
1,206
|
|
1,097
|
10
|
|
|
|
|
|
Forest
Products
|
|
92
|
103
|
(11)
|
|
|
|
188
|
|
194
|
(3)
|
|
|
|
2,043
|
|
1,883
|
8
|
|
|
|
|
|
Agricultural
Products
|
|
103
|
96
|
7
|
|
|
|
191
|
|
164
|
16
|
|
|
|
1,854
|
|
1,708
|
9
|
|
|
|
|
|
Metals
|
|
94
|
95
|
(1)
|
|
|
|
182
|
|
173
|
5
|
|
|
|
1,936
|
|
1,821
|
6
|
|
|
|
|
|
Phosphates
and Fertilizers
|
89
|
94
|
(5)
|
|
|
|
104
|
|
93
|
12
|
|
|
|
1,169
|
|
989
|
18
|
|
|
|
|
|
Food
and Consumer
|
|
55
|
63
|
(13)
|
|
|
|
112
|
|
120
|
(7)
|
|
|
|
2,036
|
|
1,905
|
7
|
|
|
|
|
|
Total
Merchandise
|
|
703
|
729
|
(4)
|
|
|
|
1,268
|
|
1,207
|
5
|
|
|
|
1,804
|
|
1,656
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Coal
|
|
442
|
446
|
(1)
|
|
|
|
607
|
|
562
|
8
|
|
|
|
1,373
|
|
1,260
|
9
|
|
|
|
|
|
Coke
and Iron Ore
|
|
24
|
24
|
-
|
|
|
|
31
|
|
31
|
-
|
|
|
|
1,292
|
|
1,292
|
-
|
|
|
|
|
|
Total
Coal
|
|
466
|
470
|
(1)
|
|
|
|
638
|
|
593
|
8
|
|
|
|
1,369
|
|
1,262
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Automotive
|
|
119
|
124
|
(4)
|
|
|
|
223
|
|
223
|
-
|
|
|
|
1,874
|
|
1,798
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
-
|
-
|
-
|
|
|
|
58
|
|
42
|
38
|
|
|
|
-
|
|
-
|
-
|
|
|
|
|
|
Total
Rail
|
|
1,288
|
1,323
|
(3)
|
|
|
|
2,187
|
|
2,065
|
6
|
|
|
|
1,698
|
|
1,561
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International
|
|
300
|
326
|
(8)
|
|
|
|
140
|
|
148
|
(5)
|
|
|
|
467
|
|
454
|
3
|
|
|
|
|
|
Domestic
|
|
239
|
221
|
8
|
|
|
|
198
|
|
198
|
-
|
|
|
|
828
|
|
896
|
(8)
|
|
|
|
|
|
Other
|
|
-
|
-
|
-
|
|
|
|
5
|
|
10
|
(50)
|
|
|
|
-
|
|
-
|
-
|
|
|
|
|
|
Total
Intermodal
|
|
539
|
547
|
(1)
|
|
|
|
343
|
|
356
|
(4)
|
|
|
|
636
|
|
651
|
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Surface Transportation
|
1,827
|
1,870
|
(2)
|
%
|
|
$ |
2,530
|
$ |
2,421
|
5
|
%
|
|
$ |
1,385
|
$ |
1,295
|
7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
both tables, prior periods have been reclassified to conform to the current
presentation.
CSX
CORPORATION
ITEM
2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND
RESULTS OF OPERATIONS
Second
Quarter Rail Results of Operations
Rail
Operating Revenue
Second
quarter 2007 Surface Transportation revenue represents more than five years
of
quarter-over-quarter revenue gains. A favorable pricing environment
continued to be the primary driver of revenue gains offsetting weakness in
housing construction, domestic automobile production and related
markets.
Merchandise
Chemicals–
Volumes were flat as gains in inorganic acids used in fertilizer production,
chemicals used in the textile industry, and petroleum products were offset
by
volume declines in chlorine and industrial sand shipments. Revenue
and revenue per unit increased due to pricing gains.
Emerging
Markets – Revenue and revenue per unit improved through positive mix changes
that included an increase in high revenue-per-unit shipments in military moves
and in the cement market due to higher demand. Aggregate shipments, which
include rocks and minerals, declined from continued weakness in residential
construction.
Forest
Products– Volume declines in lumber and panel shipments were driven by
continued weakness in residential construction. Volumes were also
negatively affected by lower paper production and a decrease in domestic
newsprint and printing paper consumption. Strong pricing efforts and
favorable mix changes led to gains in revenue per unit.
Agricultural
Products– Volume increased overall primarily from feed ingredients,
vegetable oil, soybeans, and ethanol contributing to favorable revenue and
revenue per unit gains. Ethanol continued to be a significant growth
driver due to higher demand, while export grain shipments declined due to higher
corn prices.
Metals–
Steel production decreased due to weakness in the automotive and housing
industries, causing a slight decline in shipments. This decline was
partially offset by strength in steel exports. Revenue and revenue
per unit increased due to continued yield management initiatives.
Phosphates
and Fertilizers– While fertilizer shipments rose due in part to higher
demand for corn from ethanol producers, these gains were more than offset by
volume losses related to several phosphate plant closures. Revenue
per unit increased due to yield management initiatives and a reduction in low
revenue-per-unit phosphate shipments.
Food
and Consumer– Volume declines were driven by decreased demand for wallboard,
shingles and other building products as a result of continued weakness in
residential construction. Revenue per unit increased driven by
continued pricing efforts.
CSX
CORPORATION
ITEM
2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND
RESULTS OF OPERATIONS
Coal
Favorable
pricing efforts and fuel surcharge coverage increases positively impacted
revenue and revenue per unit. Volume was down slightly due to declines in
utility shipments which were partially offset by the strong demand for export
coal. Total tons shipped were up due to a continuing trend to ship more coal
per
carload.
Automotive
Revenue
per unit improved as a result of continued focus on yield management. These
gains helped offset volume declines due to continued weakness in automotive
production driven by lower sales of trucks and sport utility
vehicles.
Other
Rail Revenue
The
primary driver of this positive change was the increase in business generated
by
the Company’s short line railroads.
Rail
Operating Expense
Labor
and Fringe expenses increased $26 million primarily due to the effect of
inflation and a newly ratified labor agreement that included performance-based
compensation. The increases were partially offset by productivity gains
from improved operations and lower volume, which resulted in a reduction of
train crews.
Materials,
Supplies and Other expenses increased $26 million. This increase
included higher inflation, allowance for non-freight related receivables, and
various other items. The increases were offset by a favorable $30 million
personal injury reserve adjustment as a result of safety improvements over
the
past several years.
Depreciation
expense increased $6 million. A larger asset base related to higher
capital spending was partially offset by lower depreciation rates generated
by
an asset life study that is required periodically.
Equipment
and Other Rents expense decreased $17 million due to lower volumes in
certain markets, improvement in asset utilization driven by better operations
and the estimation of settlements with other railroads.
Gain
on Insurance Recoveries of $124 million in 2006 was not repeated in the
second quarter of 2007 due to timing of cash receipts.
CSX
CORPORATION
ITEM
2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND
RESULTS OF OPERATIONS
Second
Quarter Intermodal Results of Operations
Intermodal
Operating Revenue
International–
Volumes were lower primarily due to the closing of a facility and losses due
to
select steamship carriers withdrawing from certain markets. Revenue
per unit increased due to continued strength in pricing.
Domestic–
Volumes increased due to a new shorter-haul train service. The
unfavorable mix impact on revenue per unit from this new traffic more than
offset price gains in the remaining domestic business.
Other–
The primary driver of this revenue decrease was from the termination of an
agreement relating to the storage of containers and other ancillary
services.
Intermodal
Operating Expense
Intermodal
operating expenses declined predominantly due to improved productivity as well
as lower volume.
CSX
CORPORATION
ITEM
2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND
RESULTS OF OPERATIONS
Six
Months Consolidated Results
of Operations
The
financial statements presented are for the six months of 2007 and
2006. Except as otherwise specified, references to years indicate the
Company’s fiscal six months as noted previously. (See Note 1,
Significant Accounting Policies.)
|
|
CONSOLIDATED
|
|
|
|
Includes
Surface Transportation and Other Operating Income
|
|
|
|
Six
Months
|
|
|
|
|
|
|
|
(Dollars
in Millions)
|
|
2007
|
|
|
2006
|
|
|
$
Change
|
|
|
%
Change
|
|
|
|
|
|
|
|
|
Operating
Revenue
|
|
$ |
4,952
|
|
|
$ |
4,752
|
|
|
$ |
200
|
|
|
|
4 |
% |
Operating
Expense
|
|
|
3,860
|
|
|
|
3,610
|
|
|
|
250
|
|
|
|
7
|
|
Operating
Income
|
|
|
1,092
|
|
|
|
1,142
|
|
|
|
(50 |
) |
|
|
(4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Income
|
|
|
-
|
|
|
|
8
|
|
|
|
(8 |
) |
|
NM
|
|
Interest
Expense
|
|
|
(200 |
) |
|
|
(196 |
) |
|
|
(4 |
) |
|
|
2
|
|
Income
Tax Expense
|
|
|
(328 |
) |
|
|
(319 |
) |
|
|
(9 |
) |
|
|
3
|
|
Net
Earnings
|
|
$ |
564
|
|
|
$ |
635
|
|
|
$ |
(71 |
) |
|
|
(11 |
)% |
Prior
periods have been reclassified to conform to the current
presentation.
NM
–
not meaningful
Operating
Revenue
Operating
Revenue increased $200
million to nearly $5 billion for the six months ended 2007 due to continued
pricing efforts only partially offset by lower volume.
Operating
Income
Operating
Income decreased $50 million
to $1.1 billion for the six months ended 2007. Operating revenue
gains were offset by significantly lower gains on insurance recoveries
recognized during 2007, along with the increased effects of
inflation.
Other
Income
Other
Income decreased $8 million in
2007 due to lower real estate income.
Interest
Expense
Interest
Expense increased $4 million to $200 million for the six months ended 2007
primarily related to slightly higher interest rates for variable rate
debt.
CSX
CORPORATION
ITEM
2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND
RESULTS OF OPERATIONS
Income
Tax Expense
Income
Tax Expense increased $9 million
to $328 million for the six months ended 2007 due to a prior year income tax
benefit of $41 million principally related to the resolution of certain tax
matters.
Net
Earnings
Net
Earnings decreased $71 million to
$564 million, and Earnings Per Diluted Share decreased $.13 to
$1.23. Pricing gains were more than offset by derailment related and
other expenses as well as prior year gains on insurance recoveries and one-time
tax benefits.
CSX
CORPORATION
ITEM
2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND
RESULTS OF OPERATIONS
Surface
Transportation Results of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SURFACE
TRANSPORTATION DETAIL (Unaudited)
|
|
(Dollars
in Millions)
|
|
Six
Months
|
|
|
|
|
|
|
|
|
|
|
|
|
Surface
|
|
|
|
|
|
|
Rail
|
|
|
Intermodal
|
|
|
Transportation
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
$
Change
|
|
Operating
Revenue
|
|
$ |
4,291
|
|
|
$ |
4,062
|
|
|
$ |
661
|
|
|
$ |
690
|
|
|
$ |
4,952
|
|
|
$ |
4,752
|
|
|
$ |
200
|
|
Operating
Expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Labor
and Fringe
|
|
|
1,433
|
|
|
|
1,393
|
|
|
|
40
|
|
|
|
40
|
|
|
|
1,473
|
|
|
|
1,433
|
|
|
|
(40 |
) |
Materials,
Supplies and Other
|
|
|
980
|
|
|
|
873
|
|
|
|
90
|
|
|
|
98
|
|
|
|
1,070
|
|
|
|
971
|
|
|
|
(99 |
) |
Fuel
|
|
|
548
|
|
|
|
541
|
|
|
|
-
|
|
|
|
-
|
|
|
|
548
|
|
|
|
541
|
|
|
|
(7 |
) |
Depreciation
|
|
|
423
|
|
|
|
407
|
|
|
|
19
|
|
|
|
20
|
|
|
|
442
|
|
|
|
427
|
|
|
|
(15 |
) |
Equipment
and Other Rents
|
|
|
174
|
|
|
|
192
|
|
|
|
56
|
|
|
|
64
|
|
|
|
230
|
|
|
|
256
|
|
|
|
26
|
|
Inland
Transportation
|
|
|
(219 |
) |
|
|
(227 |
) |
|
|
336
|
|
|
|
345
|
|
|
|
117
|
|
|
|
118
|
|
|
|
1
|
|
Gain
on Insurance Recoveries
|
|
|
(18 |
) |
|
|
(124 |
) |
|
|
-
|
|
|
|
(2 |
) |
|
|
(18 |
) |
|
|
(126 |
) |
|
|
(108 |
) |
Total
Expense
|
|
|
3,321
|
|
|
|
3,055
|
|
|
|
541
|
|
|
|
565
|
|
|
|
3,862
|
|
|
|
3,620
|
|
|
|
(242 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Income
|
|
$ |
970
|
|
|
$ |
1,007
|
|
|
$ |
120
|
|
|
$ |
125
|
|
|
$ |
1,090
|
|
|
$ |
1,132
|
|
|
$ |
(42 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Ratio
|
|
|
77.4 |
% |
|
|
75.2 |
% |
|
|
81.8 |
% |
|
|
81.9 |
% |
|
|
78.0 |
% |
|
|
76.2 |
% |
|
|
|
|
SURFACE
TRANSPORTATION VOLUME AND REVENUE
|
|
|
|
|
Volume
(Thousands); Revenue (Dollars in Millions); Revenue Per Unit
(Dollars)
|
|
|
|
|
Six
Months
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Volume
|
|
|
Revenue
|
|
|
Revenue
Per Unit
|
|
|
|
2007
|
2006
|
%
Change
|
|
|
2007
|
|
|
2006
|
%
Change
|
|
|
2007
|
|
|
2006
|
%
Change
|
|
|
|
|
Chemicals
|
267
|
269
|
(1)
|
%
|
|
$ |
644
|
|
$ |
600
|
7
|
%
|
$ |
2,412
|
|
$ |
2,230
|
8
|
%
|
|
|
|
|
Emerging
Markets
|
248
|
268
|
(7)
|
|
|
|
301
|
|
|
292
|
3
|
|
|
|
1,214
|
|
|
1,090
|
11
|
|
|
|
|
|
Forest
Products
|
184
|
209
|
(12)
|
|
|
|
371
|
|
|
385
|
(4)
|
|
|
|
2,016
|
|
|
1,842
|
9
|
|
|
|
|
|
Agricultural
Products
|
200
|
192
|
4
|
|
|
|
370
|
|
|
321
|
15
|
|
|
|
1,850
|
|
|
1,672
|
11
|
|
|
|
|
|
Metals
|
187
|
189
|
(1)
|
|
|
|
358
|
|
|
337
|
6
|
|
|
|
1,914
|
|
|
1,783
|
7
|
|
|
|
|
|
Phosphates
and Fertilizers
|
181
|
182
|
(1)
|
|
|
|
210
|
|
|
183
|
15
|
|
|
|
1,160
|
|
|
1,005
|
15
|
|
|
|
|
|
Food
and Consumer
|
111
|
127
|
(13)
|
|
|
|
223
|
|
|
238
|
(6)
|
|
|
|
2,009
|
|
|
1,874
|
7
|
|
|
|
|
|
Total
Merchandise
|
1,378
|
1,436
|
(4)
|
|
|
|
2,477
|
|
|
2,356
|
5
|
|
|
|
1,798
|
|
|
1,641
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Coal
|
883
|
902
|
(2)
|
|
|
|
1,210
|
|
|
1,114
|
9
|
|
|
|
1,370
|
|
|
1,235
|
11
|
|
|
|
|
|
Coke
and Iron Ore
|
45
|
44
|
2
|
|
|
|
61
|
|
|
58
|
5
|
|
|
|
1,356
|
|
|
1,318
|
3
|
|
|
|
|
|
Total
Coal
|
928
|
946
|
(2)
|
|
|
|
1,271
|
|
|
1,172
|
8
|
|
|
|
1,370
|
|
|
1,239
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Automotive
|
228
|
251
|
(9)
|
|
|
|
426
|
|
|
454
|
(6)
|
|
|
|
1,868
|
|
|
1,809
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
-
|
-
|
-
|
|
|
|
117
|
|
|
80
|
46
|
|
|
|
-
|
|
|
-
|
-
|
|
|
|
|
|
Total
Rail
|
2,534
|
2,633
|
(4)
|
|
|
|
4,291
|
|
|
4,062
|
6
|
|
|
|
1,693
|
|
|
1,543
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International
|
592
|
628
|
(6)
|
|
|
|
273
|
|
|
280
|
(3)
|
|
|
|
461
|
|
|
446
|
3
|
|
|
|
|
|
Domestic
|
456
|
435
|
5
|
|
|
|
378
|
|
|
384
|
(2)
|
|
|
|
829
|
|
|
883
|
(6)
|
|
|
|
|
|
Other
|
-
|
-
|
-
|
|
|
|
10
|
|
|
26
|
(62)
|
|
|
|
-
|
|
|
-
|
-
|
|
|
|
|
|
Total
Intermodal
|
1,048
|
1,063
|
(1)
|
|
|
|
661
|
|
|
690
|
(4)
|
|
|
|
631
|
|
|
649
|
(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Surface Transportation
|
3,582
|
3,696
|
(3)
|
%
|
|
$ |
4,952
|
|
$ |
4,752
|
4
|
%
|
|
$ |
1,382
|
|
$ |
1,286
|
7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CSX
CORPORATION
ITEM
2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND
RESULTS OF OPERATIONS
LIQUIDITY
AND CAPITAL RESOURCES
Material
Changes in Consolidated Balance Sheets
The
following are material changes in the Consolidated Balance Sheets and sources
of
liquidity and capital, which provide an update to the discussion included in
CSX's most recent Annual Report on Form 10-K.
Current
Maturities of Long-term Debt decreased $363 million due primarily to the
repayment of debt that matured in second quarter 2007 partially offset by the
reclassification of Long-term Debt to Current Maturities for amounts owed within
the next twelve months. For additional information, see Note 7, Debt
and Credit Agreements, under Part I, Item 1 of this Quarterly Report on Form
10-Q.
Due
to
the adoption of FASB Interpretation 48, Accounting for Uncertainty in Income
Taxes (“FIN 48”), which required companies to reclassify uncertain tax
positions to Income and Other Taxes Payable, Other Long-term Assets decreased
$318 million and Long-term Deferred Income Taxes decreased $278
million.
Other
Capital decreased $203 million due to significant share repurchase activity
in
2007 partially offset by debt converted into CSX common stock and stock option
exercises.
Significant
Cash Flow Statement Items
Operating
and investing activities for the six months of 2007 and 2006 were higher
primarily due to lower cash payments for federal income taxes in
2007. These increases were partially offset by lower insurance
proceeds related to Hurricane Katrina, which were $19 million and $207 million
for the six months of 2007 and 2006, respectively. The receipts
included in operating activities represent reimbursements for business
interruption related expenses, such as incremental expenses for debris removal
and lost profits. The receipts included in investing activities
included reimbursements for monies the Company spent to repair the
hurricane-damaged assets. For additional information on the impacts
of Hurricane Katrina, see Note 8, Hurricane Katrina.
Financing
activities for six months 2007 used more cash from the $727 million of cash
used
to repurchase shares of CSX’s common stock on the open market. This
change was partially offset by a net increase of $325 million in long-term
debt
issued versus long-term debt repaid. See Part II, Item 2 of this
Quarterly Report on Form 10-Q for additional details on the
repurchases.
Working
Capital
CSX’s
working capital surplus was $381 million at June 2007, compared to a surplus
of
$150 million at December 2006. This increase was primarily due to a
reduction in Current Maturities of Long-term Debt due to significant debt
repurchases in 2007 partially offset by the reclassification of Long-term Debt
to Current Maturities of Long-term Debt.
CSX
CORPORATION
ITEM
2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND
RESULTS OF OPERATIONS
Credit
Ratings
Credit
ratings reflect an independent agency’s judgment on the likelihood that a
borrower will repay an underlying debt obligation at maturity. The
ratings reflect many considerations, among them the nature of the borrower’s
industry and its competitive position, the size of the company, its liquidity
and access to capital, the sensitivity of a company’s cash flows to the economy
or other causes of volatility and the terms and structure of the underlying
debt
obligation. The two largest rating agencies, Standard & Poor’s
(“S&P”) and Moody’s Investors Service (“Moody’s”), use alpha numeric codes
to designate their ratings. The highest quality rating for long-term
credit obligations is AAA+ and Aaa1, for S&P and Moody’s,
respectively. For short-term obligations, such as commercial paper,
the highest quality ratings are A-1 and P-1 for S&P and Moody’s,
respectively.
A
long-term rating of BBB- and Baa3 or higher, by S&P and Moody’s
respectively, reflect ratings on obligations that fall within a band of credit
quality considered to be “investment grade.” At times, capital market
concern for the credit environment, or investors’ portfolio restrictions and
costs may affect the demand for debt obligations, particularly those that are
rated below investment grade (“high yield” obligations). Currently,
the long-term ratings for CSX’s obligations, along with the other large
U.S. Class 1 freight railroads, fall within the investment grade band
of credit quality.
In
the second quarter of 2007, S&P and Moody’s both lowered their ratings of
CSX's long-term unsecured debt obligations from BBB and Baa2, respectively,
to
BBB- and Baa3, respectively, due to the Company’s plan to repurchase an
additional $1 billion in CSX stock. Additionally, they lowered their
short-term ratings on CSX from A-2 and P-2, to A-3 and P-3,
respectively. Both of these agencies indicate their outlook is
“Stable” and these ratings continue to be investment grade. CSX does
not expect the reduction in credit ratings will materially increase its
borrowing costs or will materially affect its liquidity. If CSX's credit ratings
were to decline to lower levels, the Company could experience more significant
increases in its interest cost for new debt, and the market’s demand for new
debt could become further influenced by the economic and credit market
environment.
CSX
CORPORATION
ITEM
2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND
RESULTS OF OPERATIONS
CRITICAL
ACCOUNTING ESTIMATES
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires that management make estimates
in reporting the amounts of certain assets and liabilities, the disclosure
of
contingent assets and liabilities at the date of the financial statements and
certain revenues and expenses during the reporting period. Actual
results may differ from those estimates. These estimates and assumptions are
discussed with the Audit Committee of the Board of Directors on a regular
basis. Consistent with the prior year, significant estimates using
management judgment are made for the following areas:
·
|
Casualty,
environmental and legal reserves
|
·
|
Pension
and post-retirement medical plan
accounting
|
·
|
Depreciation
policies for assets under the group-life
method
|
Except
for income taxes, there have
been no material changes from the methodology applied by management for critical
accounting estimates previously disclosed in CSX’s most recent Annual Report on
Form 10-K. The methodology applied to management’s estimate for
income taxes has changed due to the implementation of a new accounting
pronouncement as described below.
Income
Taxes
In
July
2006, the Financial Accounting Standards Board, issued FIN 48, which became
effective for CSX beginning in 2007. FIN 48 addressed the
determination of how tax benefits claimed or expected to be claimed on a tax
return should be recorded in the financial statements. Under FIN 48,
the Company must recognize the tax benefit from an uncertain tax position only
if it is more likely than not that the tax position will be sustained on
examination by the taxing authorities based on the technical merits of the
position. The tax benefits recognized in the financial statements
from such a position are measured based on the largest benefit that has a
greater than fifty percent likelihood of being realized upon ultimate
resolution. The Company’s reassessment of its tax positions in
accordance with FIN 48 did not have a material impact on the Company’s results
of operations, financial condition or liquidity.
For
additional information regarding the adoption of FIN 48, see Note 4, Income
Taxes. For further discussion of the Company’s critical accounting
estimates related to income taxes, see CSX’s most recent Annual Report on Form
10-K.
CSX
CORPORATION
ITEM
2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND
RESULTS OF OPERATIONS
FORWARD-LOOKING
STATEMENTS
Certain
statements in this report and in other materials filed with the SEC, as well
as
information included in oral statements or other written statements made by
the
Company, are forward-looking statements within the meaning of the Securities
Act
of 1933 and the Securities Exchange Act of 1934. These
forward-looking statements include, among others, statements
regarding:
·
|
Expectations
as to results of operations and operational
improvements;
|
·
|
Expectations
as to the effect of claims, lawsuits, environmental costs, commitments,
contingent liabilities, labor negotiations or agreements on the Company’s
financial condition;
|
·
|
Management’s
plans, goals, strategies and objectives for future operations and
other
similar expressions concerning matters that are not historical facts,
and
management’s expectations as to future performance and operations and the
time by which objectives will be achieved;
and
|
·
|
Future
economic, industry or market conditions or performance, including,
but not
limited to, the discussion regarding 2007 Expectations on page
28.
|
Forward-looking
statements are
typically identified by words or phrases such as “believe,” “expect,”
“anticipate,” “project,” “estimate” and similar expressions. The Company
cautions against placing undue reliance on forward-looking statements, which
reflect its good faith beliefs with respect to future events and are based
on
information currently available to it as of the date the forward-looking
statement is made. Forward-looking statements should not
be read as a guarantee of future performance or results and will not necessarily
be accurate indications of the timing when, or by which, such performance or
results will be achieved.
Forward-looking
statements are subject to a number of risks and uncertainties and actual
performance or results could differ materially from those anticipated by these
forward-looking statements. The Company undertakes no obligation to update
or
revise any forward-looking statement. If the Company does update any
forward-looking statement, no inference should be drawn that the Company will
make additional updates with respect to that statement or any other
forward-looking statements. The following important factors, in
addition to those discussed elsewhere, may cause actual results to differ
materially from those contemplated by these forward-looking
statements:
·
|
Legislative,
regulatory or legal developments involving transportation, including
rail
or intermodal transportation, the environment, hazardous
materials, taxation, including the outcome of tax claims and
litigation, the potential enactment of initiatives to re-regulate
the rail
industry and the ultimate outcome of shipper and rate claims subject
to
adjudication;
|
CSX
CORPORATION
ITEM
2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND
RESULTS OF OPERATIONS
·
|
The
outcome of litigation and claims, including, but not limited to,
those
related to fuel surcharge, environmental contamination, personal
injuries
and occupational illnesses;
|
·
|
Material
changes in domestic or international economic or business conditions,
including those affecting the transportation industry such as access
to
capital markets, ability to revise debt arrangements as contemplated,
customer demand, customer acceptance of price increases, effects
of
adverse economic conditions affecting shippers and adverse economic
conditions in the industries and geographic areas that consume and
produce
freight;
|
·
|
The
inherent risks associated with safety and security, including the
availability and cost of insurance, the availability and vulnerability
of
information technology, adverse economic or operational effects from
actual or threatened war or terrorist activities and any governmental
response;
|
·
|
The
Company’s success in implementing its strategic plans and operational
objectives and improving Surface Transportation operating
efficiency;
|
·
|
Labor
costs and labor difficulties, including stoppages affecting either
the
Company’s operations or the customers’ ability to deliver goods to the
Company for shipment;
|
·
|
Changes
in operating conditions and costs or commodity
concentrations;
|
·
|
Changes
in fuel prices, surcharges for fuel and the availability of
fuel;
|
·
|
Competition
from other modes of freight transportation, such as trucking and
competition and consolidation within the transportation industry
generally; and
|
·
|
Natural
events such as severe weather conditions, including floods, fire,
hurricanes and earthquakes, a pandemic crisis affecting the health
of the
Company’s employees, its shippers or the consumers of goods, or other
unforeseen disruptions of the Company’s operations, systems, property or
equipment.
|
Other
important assumptions and factors that could cause actual results to differ
materially from those in the forward-looking statements are specified elsewhere
in this report and in CSX’s other SEC reports, accessible on the SEC’s website
at www.sec.gov and the Company’s website at
www.csx.com.
ITEM
3: QUANTATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
There
have been no material changes in market risk from the information provided
under
“Quantitative and Qualitative Disclosures about Market Risk” in Item 7A of
CSX’s most recent Annual Report on Form 10-K.
As
of June 29, 2007, under the
supervision and with the participation of CSX’s Chief Executive Officer (“CEO”)
and Chief Financial Officer (“CFO”), management has evaluated the effectiveness
of the design and operation of the Company’s disclosure controls and
procedures. Based on that evaluation, the CEO and CFO concluded that,
as of second quarter 2007, the Company’s disclosure controls and procedures were
effective at the reasonable assurance level in timely alerting them to material
information required to be included in CSX’s periodic SEC
reports. There were no changes in the Company’s internal controls
over financial reporting during second quarter 2007 that have materially
affected, or are reasonably likely to materially affect, the Company’s internal
control over financial reporting.
PART
II
OTHER INFORMATION
ITEM
1: LEGAL PROCEEDINGS
For
information relating to the
Company’s settlements and other legal proceedings, see Note 6, Commitments and
Contingencies under Part I, Item 1 of this Quarterly Report on Form
10-Q.
For
information regarding factors that
could affect the Company’s results of operations, financial condition and
liquidity, see the risk factors discussed under “Management's Discussion and
Analysis of Financial Condition and Results of Operations” in Item 7 of
CSX’s most recent Annual Report on Form 10-K. See also
“Forward-Looking Statements” included in Item 2 of this Quarterly Report on Form
10-Q. There have been no material changes from the risk factors
previously disclosed in CSX’s most recent Annual Report on Form
10-K.
ITEM
2: CSX PURCHASES OF EQUITY
SECURITIES
The
Company is required to disclose any
purchases of its own common stock for the most recent quarter. CSX
purchases its own shares for three primary reasons: (1) to further its goals
under the Company’s share repurchase program; (2) to fund the Company’s
contribution required to be paid in CSX common stock under 401(k) plans which
cover certain union employees; and (3) to satisfy tax withholding obligations
on
the distributions of shares that were formerly deferred or on the vesting of
restricted stock.
During
the first quarter of 2007, CSX bought back shares as part of its share
repurchase program and to meet minimum statutory tax withholding
obligations. In February 2007, the Board of Directors terminated the
unused portion of the $500 million authority granted in July 2006 and replaced
it with a new authority of up to $2.0 billion so that CSX could purchase
additional shares of its common stock. On May 7, 2007, the Board of
Directors further increased CSX’s share repurchase program from $2.0 billion to
$3.0 billion. CSX intends to complete the purchase of shares from
time to time by the end of 2008 with a strong bias towards early
repurchases. The timing, method, amount of repurchase transactions
and the sources of funds to effect any repurchases will be determined by the
Company's management based on their evaluation of market conditions, share
price
and other factors. While it is not management’s intention, the program may be
suspended or discontinued at any time.
Share
repurchase activity for second quarter 2007 was as follows:
ITEM
2: CSX PURCHASES OF EQUITY SECURITIES
|
|
CSX
Purchases of Equity Securities
for
the Quarter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second
Quarter
|
|
Total
Number of Shares Purchased (a)
|
|
|
Average
Price Paid per Share
|
|
|
Total
Number of Shares Purchased as Part of Publicly Announced Plans or
Programs
(a)
|
|
|
Approximate
Dollar Value of Shares that May Yet Be Purchased Under the Plans
or
Programs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
second quarter balance (b)
|
|
|
|
|
|
|
|
|
|
|
$ |
1,869,464,987
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(March
31, 2007 - April 27, 2007)
|
|
|
1,916,933
|
|
|
$ |
42.75
|
|
|
|
1,914,814
|
|
|
$ |
1,787,601,927
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(April
28, 2007 - May 7, 2007)
|
|
|
1,799,200
|
|
|
$ |
43.92
|
|
|
|
1,799,200
|
|
|
$ |
1,708,584,340
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
$1 billion authority granted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2,708,584,340
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(May
8, 2007 - May 25, 2007)
|
|
|
3,318,018
|
|
|
$ |
45.78
|
|
|
|
3,305,100
|
|
|
$ |
2,557,247,890
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(May
26, 2007 - June 29, 2007)
|
|
|
5,247,856
|
|
|
$ |
44.88
|
|
|
|
5,247,856
|
|
|
|
2,321,700,364
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total/Ending
Balance
|
|
|
12,282,007
|
|
|
$ |
44.65
|
|
|
|
12,266,970
|
|
|
$ |
2,321,700,364
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
The difference of 15,037 in the total number of shares purchased versus total
shares purchased as part of publicly
announced plans for the quarter is due to shares purchased to meet minimum
statutory tax obligations.
(b)
The beginning balance for the second quarter of $1.9 billion represents the
original $2 billion authority level (as
granted in February 2007) less the first quarter 2007 repurchases of $131
million under this authority.
None.
ITEM
4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
(a) Annual
Shareholders’ meeting held May 2, 2007
(b) Not
applicable
(c)
|
There
were 438,072,572 shares of CSX common stock outstanding as of March
14,
2007, the record date for the 2007 annual meeting of
shareholders. A total of 352,298,772 shares were
voted. All directors serve one-year terms. All of
the nominees for directors of CSX were elected with the following
vote:
|
Nominee |
Votes
For |
Votes
Withheld |
Donna
Alvarado
|
340,717,748
|
11,581,024
|
Elizabeth
E. Bailey
|
333,030,337
|
19,268,435
|
John
B. Breaux
|
340,230,488
|
12,068,284
|
Steven
T. Halverson
|
340,625,784
|
11,672,988
|
Edward
J. Kelly, III
|
340,781,278
|
11,517,494
|
Robert
D. Kunisch
|
333,058,087
|
19,240,685
|
Southwood
J. Morcott
|
333,139,202
|
19,159,570
|
David
M. Ratcliffe
|
337,338,697
|
14,960,075
|
William
C. Richardson
|
332,983,302
|
19,315,470
|
Frank
S. Royal
|
329,076,368
|
23,222,404
|
Donald
J. Shepard
|
340,345,091
|
11,953,681
|
Michael
J. Ward
|
333,661,928
|
18,636,844
|
The
appointment of Ernst & Young LLP as independent auditors to audit and report
on CSX’s consolidated financial statements for the year 2007 was ratified by the
shareholders with the following vote:
Votes
For
|
Votes
Against
|
Abstentions
|
Broker
Non-Votes
|
339,564,515
|
9,563,593
|
3,170,664
|
-
|
The
shareholder
proposal regarding executive compensation was rejected with the following
vote:
Votes
For
|
Votes
Against
|
Abstentions
|
Broker
Non-Votes
|
24,200,164
|
237,775,492
|
4,984,098
|
85,339,018
|
ITEM
4: SUBMISSION OF MATTERS TO
A VOTE OF SECURITY
HOLDERS, CONTINUED
The
shareholder proposal regarding majority voting was approved with the following
vote:
Votes
For
|
Votes
Against
|
Abstentions
|
Broker
Non-Votes
|
149,741,267
|
112,772,878
|
4,445,609
|
85,339,018
|
The
shareholder
proposal regarding severance agreements was approved with the following
vote:
Votes
For
|
Votes
Against
|
Abstentions
|
Broker
Non-Votes
|
161,412,593
|
101,136,663
|
4,410,498
|
85,339,018
|
The
shareholder
proposal regarding special shareholders meetings was approved with the following
vote:
Votes
For
|
Votes
Against
|
Abstentions
|
Broker
Non-Votes
|
182,361,577
|
79,753,885
|
4,844,292
|
85,339,018
|
(d) None.
ITEM
5: OTHER INFORMATION
On
June 14, 2007, CSX received notice from 3G Fund L.P. stating that it intended
to
file a notification under the Hart-Scott-Rodino Antitrust Improvements Act
of
1976 (“HSR”) regarding its intention to acquire shares of CSX common stock,
which together with shares it currently holds, will be in excess of $500 million
and may cross the 50% reporting threshold under HSR. The Company is
voluntarily furnishing this information.
On
July 11, 2007, the Board of Directors amended the CSX Bylaws to adopt a
majority-voting standard for the election of directors in uncontested elections.
Under the new standard, which went effective immediately, a director nominee
will be elected only if the number of votes cast “for” that nominee exceeds the
number of votes “against.”
In
the case where an incumbent director does not receive a majority of the votes
cast in an uncontested election, the CSX corporate governance guidelines require
the director to tender his or her resignation to the Board. The Board must
decide whether to accept the resignation no later than 90 days after the
shareholder vote certification. In contested elections, the plurality vote
standard will continue to apply.
Exhibits
3.2
|
Bylaws
of the Registrant, amended effective as of July 11, 2007 (incorporated
herein by reference to Exhibit 3.2 of the Registrant's Current
Report on
Form 8-K filed with the Commission on July 12, 2007).
|
|
|
31.1*
|
Principal
Executive Officer Certification Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
|
31.2*
|
Principal
Financial Officer Certification Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
|
32.1*
|
Principal
Executive Officer Certification Pursuant to 18 U.S.C. Section 1350,
as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
|
|
32.2*
|
Principal
Financial Officer Certification Pursuant to 18 U.S.C. Section 1350,
as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
*
Filed herewith
Pursuant
to the requirements of the
Securities Exchange Act of 1934, the registrant has duly caused this report
to
be signed on its behalf by the undersigned thereunto duly
authorized.
CSX
CORPORATION
(Registrant)
By: /s/
CAROLYN T.
SIZEMORE
Carolyn
T. Sizemore
Vice
President and
Controller
(Principal
Accounting
Officer)
Dated: July
24, 2007