UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-K
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(X)
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For the
fiscal year ended December 28, 2007
OR
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( )
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the transition period from __________ to
__________
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Commission
File Number 1-8022
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CSX
CORPORATION
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(Exact name of registrant as
specified in its charter)
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Virginia
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62-1051971
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(State
or other jurisdiction of incorporation or organization)
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(I.R.S.
Employer Identification No.)
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500
Water Street, 15th Floor, Jacksonville, FL
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32202
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(904)
359-3200
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(Address
of principal executive offices)
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(Zip
Code)
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(Telephone
number, including area code)
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Securities
registered pursuant to Section 12(b) of the Act:
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Title
of each class
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Name
of exchange on which registered
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Common
Stock, $1 Par Value
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New
York Stock Exchange
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Securities
registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the
registrant is a well-known seasoned issuer (as defined in Rule 405 of the
Securities Act).
Yes (X)
No ( )
Indicate by check mark if the
registrant is not required to file reports pursuant to Section 13 or Section
15(d) of the Act.
Yes
( ) No (X)
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 if disclosure of
delinquent filers pursuant to Item 405 of Regulation S-K is not contained
herein, and will not be contained, to the best of the registrant’s knowledge, in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K. (
)
Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer or a
non-accelerated filer (as defined in Exchange Act Rule 12b-2).
Large
Accelerated Filer
(X) Accelerated
Filer
( ) Non-accelerated
Filer ( )
Indicate by check mark whether the
registrant is a shell company (as defined in Exchange Act Rule
12b-2).
Yes
( ) No (X)
On June 29, 2007 (which is the last day
of the second quarter and the required date to use), the aggregate market value
of the Registrant’s voting stock held by non-affiliates was approximately $19.7
billion (based on the New York Stock Exchange closing price on such
date).
There were 403,363,273 shares of Common
Stock outstanding on February 15, 2008 (the latest practicable date that is
closest to the filing date).
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of the Registrant’s Definitive
Proxy Statement (the “Proxy Statement”) to be filed not later than April 25,
2008 with respect to its 2008 annual meeting of shareholders.
1
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CSX CORPORATION
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FORM
10-K
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TABLE
OF CONTENTS
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Item No.
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Page
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PART
I
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1.
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3
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8
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12
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2.
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12
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3.
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17
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4.
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18
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PART
II
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5.
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21
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6.
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24
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7.
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26
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26
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27
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30
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33
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35
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48
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50
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51
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51
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7A.
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61
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8.
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64
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9.
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131
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9A.
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131
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9B.
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134
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PART
III
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10.
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135
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11.
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135
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12.
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135
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13.
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135
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14.
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135
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PART
IV
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15.
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136
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142
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Item 1. Business by Segment
CSX
Corporation (“CSX” and together with its subsidiaries, 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.
Rail
CSX’s
principal operating company, CSX Transportation, Inc. (“CSXT”), provides a
crucial link to the transportation supply chain through its approximately 21,000
route mile rail network, which serves every major population center in 23 states
east of the Mississippi River, the District of Columbia, and the Canadian
provinces of Ontario and Quebec. It serves 70 ocean, river and lake
ports along the Atlantic and Gulf Coasts, the Mississippi River, the Great Lakes
and the St. Lawrence Seaway. CSXT also serves thousands of production
and distribution facilities through track connections to more than 230
short-line and regional railroads.
Other
Entities
In
addition to CSXT, the rail segment includes Total Distribution Services, Inc.
(“TDSI”), Transflo Terminal Services, Inc. (“Transflo”), CSX Technology, Inc.
(“CSX Technology”) and other subsidiaries. TDSI serves the automotive
industry with distribution centers and storage locations, while Transflo
provides logistical solutions for transferring products from rail to
trucks. Technology and other support services are provided by CSX
Technology and other subsidiaries.
Intermodal
CSX
Intermodal, Inc. (“Intermodal”), one of the nation’s largest coast-to-coast
intermodal transportation providers, is a stand-alone,
integrated intermodal company linking customers to railroads via trucks and
terminals. Containers and trailers are loaded and unloaded from
trains, and trucks provide the link between intermodal terminals and the
customer.
Surface
Transportation Businesses
The rail
and intermodal segments are designated by the Company on a combined basis as
Surface Transportation businesses. Together, they generated $10
billion of revenue during 2007 and served four primary lines of
business:
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·
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The
merchandise business is the most diverse market with nearly 2.7 million
carloads per year of aggregates, which includes crushed stone, sand and
gravel, metal, phosphate, fertilizer, food, consumer, agricultural, paper
and chemical products. The merchandise business generated
approximately 50% of the Company’s revenue in 2007 and 38% of
volume.
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·
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Coal,
which delivered approximately 1.9 million carloads of coal, coke and iron
ore to electricity generating power plants, ocean, river and lake piers
and terminals, steel makers and industrial plants, accounted for
approximately 26% of the Company’s revenue and volume in 2007. The
Company transports almost one-third of every ton of coal used for
generating electricity in the areas served by
CSX.
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·
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Automotive,
which delivers both finished vehicles and auto parts, generated 8% of the
Company’s revenue and 6% of the Company’s volume in 2007. The
Company delivers approximately one-third of North America’s light
vehicles, serving both traditional manufacturers and the increasing number
of global manufacturers.
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·
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Intermodal
offers a competitive cost advantage over long-haul trucking by combining
the superior economics of rail transportation with the short-haul
flexibility of trucks. Through its network of more than 50
terminals, Intermodal serves all major markets east of the Mississippi
River and transports mainly manufactured consumer goods in containers,
providing customers with truck-like service for longer
shipments. For 2007, Intermodal accounted for approximately 14%
of the Company’s total revenue and 30% of
volume.
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Other revenue, which includes revenue
from regional railroads (that are partially owned by CSX), demurrage, switching
and other incidental charges, accounted for 2% of the Company’s total 2007
revenue. Revenue from regional railroads includes shipments by
railroads that CSX does not directly operate. Demurrage represents
charges assessed by railroads when shippers or receivers of freight hold
railcars beyond a specified period of time. Switching revenue is
generated when CSXT switches cars between trains for a customer or another
railroad.
Other
Businesses
CSX’s
other holdings include CSX Real Property, Inc., a subsidiary responsible for the
Company’s real estate sales, leasing, acquisition and management and development
activities, and CSX Hotels, Inc., a resort doing business as The Greenbrier,
located in White Sulphur Springs, West Virginia. Pretax earnings of
$42 million, $24 million and $85 million for 2007, 2006 and 2005, respectively,
from these activities are classified as a component of other
income. These items are classified in other income because they are
not considered by the Company to be operating activities and may fluctuate with
the timing of real estate sales and resort seasonality.
The
Company also has certain residual activities from formerly owned companies that
include leasing of equipment and vessels. These results are included
in consolidated operating income and totaled $5 million, $12 million and $1
million in 2007, 2006 and 2005, respectively.
Financial
Information about Operating Segments
See Item
7. Management’s Discussion and Analysis of Financial Condition and Results of
Operations for operating revenue, operating income and total assets by segment
for each of the last three fiscal years.
Company
History
A leader
in freight rail transportation for 180 years, the Company’s roots date back to
the early nineteenth century when the Baltimore and Ohio Railroad (“B&O”) –
the nation’s first common carrier – was chartered in 1827. Since that time, CSX
has built on the foundation laid by early pioneers who had a vision to create a
railroad that safely and reliably services the ever-increasing demands of a
growing nation.
In those 180 years, numerous railroads
have combined with the former B&O through merger and consolidation to create
what has become CSX. Each of the railroads that combined into the CSX
family brought to CSX unique and valuable geographical reach to new markets,
gateways, cities, ports and transportation corridors.
CSX was
incorporated in 1978, under the laws of the Commonwealth of Virginia. In 1980,
the Company completed the merger of the Chessie System (“Chessie”) and Seaboard
Coast Line Industries (“Seaboard”) into CSX. The merger allowed CSX
to connect northern population centers and Appalachian coal fields to growing
southeastern markets. In 1986, the Chessie and Seaboard operating entities were
transferred to the rail entity CSXT, which was created through the
merger. Intermodal was originally formed in 1986 in order to provide
nationwide, door-to-door intermodal service.
In 1997,
CSXT and Norfolk Southern jointly acquired the rights to operate Conrail, Inc.
(“Conrail”) and then in 2004, CSXT acquired an allocated portion of Conrail’s
assets, which CSXT operated. Conrail was formed in 1976 from several
financially troubled northeast railroads to restructure and revive the region’s
railroads. CSX’s acquisition of key portions of Conrail allowed CSXT
to link the northeast, including New England and the New York metropolitan area,
with Chicago, Midwest markets and the growing areas in the southeast that were
already served by CSXT. This current rail network allows the Company
to directly serve every major market in the eastern United States with
dependable, environmentally friendly and fuel efficient freight transportation
and intermodal service.
Regulatory
Environment
The
Company's operations are subject to a variety of federal, state and local laws
and regulations, generally applicable to many businesses in the United
States. The railroad operations conducted by the Company's subsidiaries,
including CSXT, are subject in many respects to the regulatory jurisdiction of
the Surface Transportation Board (“STB”) and the Federal Railroad Administration
(“FRA”), which are both part of the Department of Transportation
(“DOT”). Additionally, the Transportation Security Administration
(“TSA”), a component of the Department of Homeland Security (“DHS”), has the
authority to issue regulations and other directives that may also affect
railroad operations. In some cases, state and local laws and regulations can be
preempted in their application to railroads by the operation of these and other
federal authorities.
Although
the Staggers Act of 1980 significantly deregulated rail rates and much of the
rail traffic of the Company's subsidiaries is currently exempt from rate
regulation by agency decision, the STB has broad jurisdiction over railroad
commercial practices. This includes jurisdiction over freight car
rent, the transfer, extension or abandonment of rail lines, rates charged on
certain regulated rail traffic and any acquisition of control over rail common
carriers. In 2007, for example, the STB issued decisions changing its
long-standing policy on fuel surcharges, its rules for large freight rate cases
and a new process for rate cases where smaller amounts are at
issue.
The FRA
and its sister agency within the DOT, the Pipeline and Hazardous Materials
Administration, have broad jurisdiction over railroad operating standards and
practices, including track, freight cars and locomotives, and hazardous
materials requirements. The TSA has broad authority over railroad
operating practices that may have homeland security implications. The
TSA has proposed regulations that would apply to the transportation of certain
kinds of highly hazardous materials. Decisions of these and other
agencies can affect the profitability of the Company’s business. For
further discussion on regulatory risks to the Company, see Item 1A. Risk Factors
beginning on page 8.
Competition
The business environment in which the
Company operates is highly competitive. Shippers typically select
transportation providers that offer the most compelling combination of service
and price. Service requirements, both in terms of transit time and
reliability, vary by shipper and commodity. As a result, the Company’s primary
competition varies by commodity, geographic location and mode of available
transportation.
CSX’s primary rail competitor is the
Norfolk Southern, which operates throughout much of CSX’s territory.
Other railroads also operate in parts of the territory. Depending on
the specific market, competing railroads and deregulated motor carriers may
exert pressure on price and service levels. For further discussion on
the risk of competition to the Company, see Item 1A. Risk Factors beginning on
page 8.
Other
Information
CSX makes available on its website
www.csx.com,
free of charge, its annual reports on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K and all amendments to those reports as soon as
reasonably practicable after such reports are filed with or furnished to the
Securities and Exchange Commission (“SEC”). Additionally, the Company has posted
its code of ethics on its website, which is also available to any shareholder
who requests it. This Form 10-K and other SEC filings are also
accessible through the SEC’s website at www.sec.gov.
CSX has included the certifications of
its Chief Executive Officer (“CEO”) and the Chief Financial Officer (“CFO”)
regarding the Company’s public disclosure required by Section 302 of the
Sarbanes-Oxley Act of 2002 (“the Act”) as Exhibits 31.1 and 31.2, as well as
Section 906 of the Act as Exhibits 32.1 and 32.2 to this Form 10-K report.
Additionally, on May 31, 2007, CSX filed its annual CEO certification with the
New York Stock Exchange (“NYSE”) confirming the Company’s compliance with the
NYSE Corporate Governance Listing Standards. The CEO was not aware of
any violations of these standards by the Company as of January 31, 2008 (the
latest practicable date that is closest to the filing of this Form
10-K).
The
Company’s annual average number of employees was approximately 35,000 in 2007,
which includes approximately 29,000 union employees. Most of the
Company’s employees provide or support transportation services. The
information set forth in Item 6. Selected Financial Data is incorporated herein
by reference.
For
additional information concerning business conducted by the Company during 2007,
see Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations and Item 8. Financial Statements and Supplementary Data -
Note 15, Business Segments.
Item 1A. Risk Factors
The
following risk factors could have a materially adverse effect on the Company’s
results of operations, financial condition and liquidity, and could cause those
results to differ materially from those expressed or implied in the Company’s
forward-looking statements. Although the risks described below are
those that management believes are the most significant, these are not the only
risks facing the Company. Additional risks and uncertainties not
currently known to the Company or that the Company currently does not deem to be
material also may materially impact the Company’s financial position, results of
operations and liquidity.
New
legislation or regulatory changes could impact the Company’s earnings or
regulate its ability to independently negotiate prices.
The
Company is subject to the jurisdiction of various regulatory agencies, including
the STB, the FRA and other state and federal regulatory agencies for a variety
of economic, health, safety, labor, environmental, tax, legal and other
matters. Legislation passed by Congress or regulations issued by
these agencies can significantly affect the revenues, costs and profitability of
the Company’s business. For example, regulations imposing price
constraints or affecting rail-to-rail competition could adversely affect the
Company’s profitability. Also, additional regulations related to
environmental matters such as greenhouse gas emissions or legislative changes
impacting hours of service requirements could adversely affect the Company’s
financial position, results of operations and liquidity.
CSXT,
as a common carrier by rail, is required by law to transport hazardous
materials, which could expose the Company to significant costs and
claims.
Under federal regulations, CSXT is
required to transport hazardous materials under its common carrier
obligation. A train accident involving the transport of hazardous
materials could result in significant claims arising from personal injury,
property damage, and environmental penalties and remediation. CSXT is
also required to comply with regulations regarding the handling of hazardous
materials. Failure to comply with these regulations can subject the
Company to significant penalties and could be a factor in litigation arising out
of a train accident. Finally, legislation preventing the transport of
hazardous materials through certain cities could result in network congestion
and increase the length of haul for hazardous substances.
The
Company is subject to environmental laws and regulations that may result in
significant costs.
The Company’s operations are subject to
wide-ranging federal, state and local environmental laws and regulations
concerning, among other things, emissions into the air, discharges into water,
the handling, storage, transportation and disposal of waste and other materials
and clean-up of hazardous material or petroleum releases. In certain
circumstances, environmental liability can extend to formerly owned or operated
properties, leased properties, adjacent properties and properties owned by third
parties or Company predecessors, as well as to properties currently owned and
used by the Company.
The
Company has been, and may be subject to, allegations or findings to the effect
that it has violated, or is strictly liable under, environmental laws or
regulations, and such violations can result in the Company’s incurring fines,
penalties or costs relating to the clean-up of environmental contamination. Although the Company
believes it has appropriately recorded current and long-term liabilities for
known future environmental costs, it could incur significant costs as a result
of any of the foregoing and may be required to incur significant expenses to
investigate and remediate known, unknown or future environmental
contamination.
General
economic, geo-political and compliance risks may affect the Company’s operations
and financial results.
Changes
in general economic conditions that affect demand for rail or intermodal
services could adversely affect the Company’s financial position, results of
operations and liquidity. In addition, abrupt political change or
terrorist activity poses a risk of general economic disruption and could require
changes in the operations and security arrangements, thus increasing the
operating costs. These conditions may lend additional uncertainty to
the timing and purchasing decisions by the Company’s customers.
Fuel
prices and supply are influenced by international political and economic
circumstances. Although a fuel recovery program is in place with a
considerable number of customers, the Company could be negatively impacted if it
were unable to realize fuel surcharges. Additionally, if a fuel
supply shortage were to arise, whether due to the Organization of the Petroleum
Exporting Countries (OPEC) or other production restrictions, lower refinery
outputs, a disruption of oil imports or otherwise, the Company would be
negatively impacted.
The FRA
regulates several of the Company’s core operations including track and
mechanical equipment standards, signaling systems, inspection of grade crossing
warning devices, locomotive engineer certifications and employee injury
reporting, among other areas. The Company’s unintentional failure to
comply with applicable laws or regulations could erode public confidence in
CSX. In addition, a change in these regulations could have a material
adverse effect on the Company’s financial position, results of operations and
liquidity.
Network
congestion, caused by unanticipated increases in freight or passenger activity,
could have a negative impact on service and operating efficiency.
The
Company may experience rail network difficulties related to network capacity,
unplanned increases in demand for rail service, increased passenger activities
in capacity-constrained areas or regulatory changes impacting when CSXT can
transport freight or its service routes that could have a negative effect on the
Company’s operational fluidity, leading to deterioration of service, asset
utilization and overall efficiency. In addition, the Company may face
external factors such as severe weather and other natural occurrences, including
floods, fires, hurricanes and earthquakes, which may disrupt the Company’s
operations.
Increases
in the number and magnitude of property damage and personal injury claims could
adversely affect the Company’s operating results.
The Company faces inherent business
risk from exposure to property damage, occupational injury claims, and personal
injury claims resulting from train accidents, worker injury claims under FELA
and claims from outside parties resulting from the Company’s operations.
Although the Company is working diligently to enhance its safety programs and to
continue to raise the awareness levels of its employees concerning safety, the
Company could experience material property damage, personal injury or
occupational claims in the future and it may incur significant costs to defend
such claims.
Existing claims may suffer adverse
developments not currently reflected in reserve estimates, as the ultimate
outcome of existing claims is subject to numerous factors outside of the
Company’s control. The Company establishes reserves to cover all of these types
of claims. However, final amounts determined to be due on any
outstanding matters may differ materially from the recorded
reserves.
The
Company may be subject to various claims and lawsuits that could result in
significant expenditures.
The Company is subject to various
existing lawsuits and potential unknown litigation. The Company may
experience material judgments or incur significant costs to defend any such
lawsuits. Additionally, existing litigation may suffer adverse
development not currently reflected in the Company’s reserve estimates as the
ultimate outcome of existing litigation is subject to numerous factors outside
of the Company’s control. While the Company uses its best efforts to
evaluate existing litigation, the final judgments may differ materially from the
recorded reserves.
Future
acts of terrorism, war or regulatory changes to combat the risk of terrorism may
cause significant disruptions in the Company’s operations.
Terrorist attacks, such as those that occurred in the United States in September
2001, in Spain in March 2004, in England in July 2005, and in India in July
2006, along with any government response to those attacks, may adversely affect
the Company’s financial position, results of operations and
liquidity. CSXT’s rail lines or other key infrastructure may be
direct targets or indirect casualties of acts of terror or war. This
could cause significant business interruption and result in increased costs and
liabilities and decreased revenues. In addition, insurance premiums
charged for some or all of the coverage currently maintained by the Company
could increase dramatically or the coverage may no longer be
available.
Furthermore,
in response to the heightened risk of terrorism, federal, state and local
governmental bodies are proposing and beginning to adopt various legislation and
regulations relating to security issues that impact the transportation
industry. For example, the DHS proposed regulations that would
require freight railroads to implement additional security protocols when
transporting hazardous materials.
Failure
to complete negotiations on collective bargaining agreements could result in
strikes and/or work stoppages.
Most of CSXT's employees are
represented by labor unions and are covered by collective bargaining agreements.
Generally speaking, these agreements are bargained nationally by the National
Carriers Committee. In the rail industry, negotiations have generally
taken place over a number of years and previously have not resulted in any
extended work stoppages. Over the last 30 years, there were only six
days of work stoppage related to labor disputes over national
handling. If the Company is unable to negotiate acceptable
agreements, it could result in strikes by the affected workers, loss of business
and increased operating costs as a result of higher wages or benefits paid to
union members, any of which could have an adverse effect on the Company’s
financial position, results of operations and liquidity. Under the
Railway Labor Act’s procedures (which include mediation, cooling-off periods and
the possibility of Presidential intervention), neither party may exercise
self-help until the procedures are exhausted.
The
Company relies on the stability and availability of its technology systems to
operate its business.
The
Company relies on information technology in all aspects of its
business. A significant disruption or failure of our information
technology systems, including computer hardware, software and communications
equipment, could result in a service interruption, safety failure, security
breach or other operational difficulties. While the Company has taken
steps to mitigate these risks, the performance and reliability of its technology
systems are critical to its ability to compete effectively.
The
Company faces competition from rail carriers and other transportation
providers.
The
Company experiences competition in the form of pricing, service, reliability and
other factors from other transportation providers including railroads and motor
carriers that operate similar routes across its service area and, to a less
significant extent, barges, ships and pipelines. Transportation providers such
as motor carriers and barges utilize public rights-of-way that are built and
maintained by governmental entities while CSXT and other railroads must build
and maintain rail networks using largely internal resources. Any future
improvements or expenditures materially increasing the quality or reducing the
cost of alternative modes of transportation, or legislation providing for less
stringent size or weight restrictions on trucks, could negatively impact the
Company’s financial position, results of operations and liquidity.
Item 1B. Unresolved Staff
Comments
None.
Item 2. Properties by
Segment
Rail
Property
CSXT’s properties primarily consist of
track and its related infrastructure, locomotives and freight
cars. These categories and the geography of the network are described
below.
Track
and Infrastructure
Serving
23 states, the District of Columbia, and the Canadian provinces of Ontario and
Quebec, the CSXT rail network serves, among other markets, New York,
Philadelphia and Boston in the northeast and mid-Atlantic, the southeast markets
of Atlanta, Miami and New Orleans, and the Midwestern cities of St. Louis,
Memphis and Chicago.
CSXT’s
track structure includes main thoroughfares connecting terminals and yards
(known as mainline track); track within terminals and switching yards; track
adjacent to the mainlines used for passing trains; track connecting the mainline
track to customer locations; and track that
diverts trains from one track to another known as turnouts. Total
track miles are greater than the Company’s approximately 21,000 route miles,
which reflect the size of CSX’s rail network that connects markets, customers
and western railroads. At December 2007, the breakdown of track miles
was as follows:
|
Track
|
|
|
Miles
|
|
|
Mainline
track
|
26,712
|
|
Terminals
and switching yards
|
9,626
|
|
Passing
sidings and turnouts
|
1,037
|
|
Total
|
37,375
|
In
addition to its physical track structure, CSXT operates numerous yards and
terminals. These serve as the hubs between CSXT and its local customers
and as sorting facilities where rail cars often are received, re-sorted and
placed onto new outbound trains.
The
following 36 yards are identified as key to the CSXT system (listed in
alphabetical order by state):
|
Rail
Yards or Terminals
|
|
|
Birmingham,
AL
|
Detroit,
MI
|
|
Mobile,
AL
|
Hamlet,
NC
|
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Montgomery,
AL
|
Rocky
Mount, NC
|
|
Baldwin,
FL
|
Buffalo,
NY
|
|
Moncrief
(Jacksonville), FL
|
Selkirk,
NY
|
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Tampa,
FL
|
Syracuse,
NY
|
|
Atlanta,
GA
|
Cincinnati,
OH
|
|
East
Savannah, GA
|
Cleveland,
OH
|
|
Waycross,
GA
|
Columbus,
OH
|
|
Avon
(Indianapolis), IN
|
Stanley
(Toledo), OH
|
|
Chicago,
IL
|
Walbridge
(Toledo), OH
|
|
Evansville,
IN
|
Willard,
OH
|
|
Louisville,
KY
|
Greenwich
(Philadelphia), PA
|
|
Russell,
KY
|
Charleston,
SC
|
|
New
Orleans, LA
|
Florence,
SC
|
|
Cumberland,
MD
|
Erwin,
TN
|
|
Curtis
Bay (Baltimore), MD
|
Nashville,
TN
|
|
Locust
Point (Baltimore), MD
|
Richmond,
VA
|
For a
list of Intermodal’s terminals, see page 16.
Network
Geography
CSXT’s
train operations are primarily focused around the following four major
transportation networks, which are defined geographically or by line of business
and are described below.
Coal Network – Coal
is used to generate more than half of the electricity in the United
States. The CSXT coal network connects mining operations in nine
states with industrial areas in the northeast and mid-Atlantic, as well as many
river, lake and seaport facilities. This network also supports the
strong, growing utility market in the southeast.
Southeastern
Corridor – This section of
the network runs from the western gateways of Chicago, Memphis and St. Louis
through the growing cities of Nashville, Birmingham and Atlanta and into the
expanding markets in the southeast. CSXT’s capacity investment in this
corridor clearly strengthens this route and makes it the premier rail route
connecting these key cities and gateways with the growing southeast. The
corridor extends through the coal reserves of the southern Illinois basin and
provides direct rail service between these coal sources and the increasing
demand for coal in the southeast. The increase in capacity on this
corridor positions CSXT well to handle the
projected traffic volumes of intermodal, coal, automotive and general
merchandise traffic.
Interstate 90 (I-90)
Corridor – Chicago and metropolitan areas in New York and New England are
linked by CSXT’s I-90 Corridor. Much of this route has two lanes of
track side-by-side (referred to as double mainline track) supporting high-speed
intermodal and automotive services. The I-90 Corridor is also a
primary route for import traffic moving across the country, through Chicago and
into the population centers in the northeast. Continued growth in
consumption in the east and northeast makes this corridor a critical element in
the Company’s overall system.
Interstate 95 (I-95)
Corridor – Charleston, Jacksonville, Miami and many other cities
throughout the growing southeast are connected to the heavily populated
northeastern cities of Baltimore, Philadelphia and New York along CSXT’s I-95
Corridor. This route is primarily used to ship food and consumer
products, as well as metals and chemicals. It is the only rail
corridor along the east coast south of Washington, D.C., and provides access to
all the major eastern ports.
Locomotives
CSXT focuses on maximum use of its
fleet and prudent investment in new units to drive the rail
network. Better locomotive management helps CSXT move freight more
efficiently, while continued investment in CSXT’s power source means CSXT is
operating more locomotives better.
CSXT
operates more than 4,000 locomotives, of which over 95% are owned by
CSXT. Freight locomotives are the power source used primarily to pull
rail cars. Switching locomotives are used in yards to sort railcars
so that the right railcar gets attached to the right train in order to get it to
its final destination. Auxiliary units are typically used to provide
extra traction for heavy trains in hilly terrain. At December 2007,
CSXT’s owned and long-term leased locomotives consisted of the
following:
|
Locomotives
|
%
|
||
|
Freight
|
3,495
|
87%
|
|
|
Switching
|
324
|
8%
|
|
|
Auxiliary
Units
|
188
|
5%
|
|
|
Total
|
4,007
|
100%
|
|
Freight
Car Fleet
The
average daily fleet of cars-on-line consists of approximately 222,000 cars, but
at any point in time, over half of the railcars on the CSXT system are not owned
or leased by CSXT. Examples of these are: railcars owned by other
railroads (which are utilized by CSXT), shipper-furnished or private cars (which
are generally used only in that shipper’s service) and multi-level
railcars.
CSXT’s
freight car fleet consists of six main types of cars:
Gondolas – Support
CSXT’s metals markets and provide transport for woodchips and other bulk
commodities. Some gondolas are equipped with special hoods for
protecting products like coil and sheet steel.
Open-top hoppers –
Transport heavy dry bulk commodities such as coal, coke, stone, sand, ores and
gravel that are resistant to weather conditions.
Box cars – Include a
variety of tonnages, sizes, door configurations and heights to accommodate a
wide range of finished products, including paper, auto parts, appliances and
building materials. Insulated box cars deliver food products, canned
goods, beer and wine.
Covered hoppers –
Have a permanent roof and are segregated based upon commodity
density. Lighter bulk commodities such as grain, fertilizer, flour,
salt, sugar, clay and lime are shipped in large cars called jumbo covered
hoppers. Heavier commodities like cement, ground limestone and glass
sand are shipped in small cube covered hoppers.
Multi-level flat cars
– Transport finished automobiles and are differentiated by the number of levels:
bi-levels for large vehicles such as pickup trucks and SUVs and tri-levels for
sedans and smaller automobiles.
Flat cars – Used for
shipping intermodal containers and trailers or bulk and finished goods, such as
lumber, pipe, plywood, drywall and pulpwood.
Other
cars owned or leased on the network include, but are not limited to, center beam
cars for transporting lumber and building products.
CSXT
owns more than 60% of its freight cars. At December 2007, CSXT’s
owned and long-term leased freight car fleet consisted of the
following:
|
Freight
Cars
|
%
|
||
|
Gondolas
|
26,490
|
28%
|
|
|
Open-top
hoppers
|
19,604
|
21%
|
|
|
Box
cars
|
13,911
|
15%
|
|
|
Covered
hoppers
|
13,555
|
14%
|
|
|
Multi-level
flat cars
|
12,340
|
13%
|
|
|
Flat
cars
|
7,189
|
8%
|
|
|
Other
cars
|
1,275
|
1%
|
|
|
Total
|
94,364
|
100%
|
|
Intermodal
Property
Infrastructure
Intermodal serves 51 terminals in 22
states. These terminals serve as a transfer point between rail and trucks. If
the city has more than one terminal, it is indicated by the number next to
it.
|
Intermodal
Terminals
|
|
|
Mobile,
AL
|
Kansas
City, MO
|
|
Lathrop,
CA
|
Charlotte,
NC
|
|
Los
Angeles/Long Beach, CA (3)
|
North
Bergen, NJ
|
|
Oakland,
CA
|
Blasdell,
NY
|
|
Jacksonville,
FL (2)
|
Syracuse,
NY
|
|
Orlando,
FL
|
New
York, NY/NJ (5)
|
|
Tampa,
FL
|
Cincinnati,
OH
|
|
Atlanta,
GA (2)
|
Cleveland,
OH
|
|
Savannah,
GA (2)
|
Columbus,
OH (2)
|
|
Chicago,
IL (2)
|
Marion,
OH
|
|
East
St. Louis, IL
|
Portland,
OR
|
|
Avon,
IN
|
Chambersburg,
PA
|
|
Evansville,
IN
|
Philadelphia,
PA
|
|
New
Orleans, LA
|
Charleston,
SC
|
|
Boston,
MA
|
Memphis,
TN
|
|
Springfield,
MA
|
Nashville,
TN
|
|
Worcester,
MA (3)
|
Mesquite,
TX
|
|
Baltimore,
MD
|
Portsmouth,
VA
|
|
Detroit,
MI
|
Seattle,
WA
|
Equipment
Intermodal
equipment consists primarily of containers, chassis and other equipment (such as
lift equipment). Containers are weather-proof boxes used for bulk
shipment of freight, and chassis are the wheeled support framework for a
container that allows it to be attached to a tractor. All of
Intermodal’s chassis are leased. Intermodal also has other types of
equipment such as doublestack railcars, which are railcars that allow for two
containers to be mounted one above the other.
At
December 28, 2007, Intermodal owned or long-term leased equipment consisted of
the following:
|
Equipment
|
%
|
||
|
Chassis
|
25,980
|
67%
|
|
|
Containers
|
12,503
|
32%
|
|
|
Other
|
433
|
1%
|
|
|
Total
|
38,916
|
100%
|
Item 3. Legal Proceedings
The Company is subject to various legal
proceedings and claims that arise in the ordinary course of
business. For more information on legal proceedings, see Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of
Operations under the caption “Critical Accounting Estimates – Casualty,
Environmental and Legal Reserves” and Item 8. Financial Statements and
Supplementary Data - Note 7, Commitments and Contingencies under the
caption “Other Legal Proceedings.”
Item 4. Submission of Matters to a Vote
of Security Holders
There were no matters submitted to a
vote of security holders in the fourth quarter of 2007.
Executive
Officers of the Registrant
Executive officers of CSX are elected
by the CSX Board of Directors and generally hold office until the next annual
election of officers. There are no family relationships or any
arrangement or understanding between any officer and any other person pursuant
to which such officer was elected. As of December 2007, the executive
officers are:
|
Name and Age
|
Business Experience During Past 5
Years
|
|
Michael
J. Ward, 57
Chairman,
President and Chief Executive Officer
|
A
30-year veteran of the Company, Ward has served as Chairman, President and
Chief Executive Officer since January 2003. In 2000, he was
named President of CSXT, and he was later appointed President of CSX and
elected to the Board of Directors in 2002.
His
distinguished railroad career has included key executive positions in
nearly all aspects of the Company’s business, including sales and
marketing, operations and finance.
|
|
Oscar
Munoz, 48
Executive
Vice President and Chief Financial Officer
|
Munoz
has served as Executive Vice President and Chief Financial Officer of CSX
and CSXT since May 2003 and is responsible for management and oversight of
all financial, strategic planning, information technology, purchasing and
real estate activities of CSX.
He
brings to the Company years of experience from a variety of
industries. Before joining CSX in 2003, Munoz served as Chief
Financial Officer and Vice President of AT&T Consumer
Services. He has also held key executive positions within the
telecommunication and beverage
industries.
|
|
Name and Age
|
Business Experience During Past 5
Years
|
|
Tony
L. Ingram, 61
Executive
Vice President and Chief Operating Officer
|
Ingram
has served as Executive Vice President and Chief Operating Officer of CSXT
since March 2004 and manages all aspects of the Company’s operations
across its 21,000-mile network, including transportation, service design,
customer service, engineering and mechanical.
Prior
to joining CSX in 2004, Ingram spent more than 30 years at Norfolk
Southern where he served as Senior Vice President – Transportation,
Network and Mechanical from February 2003 to March 2004 and Vice
President, Transportation – Operations from March 2000 to February
2003.
|
|
Clarence
W. Gooden, 56
Executive
Vice President of Sales and Marketing
and
Chief Commercial Officer
|
Gooden
has been the Executive Vice President and Chief Commercial Officer of CSX
and CSXT since April 2004 and is responsible for generating customer
revenue, forecasting business trends and developing CSX’s model for future
revenue growth.
A
member of the CSX family for more than 35 years, Gooden has held key
executive positions in both operations and sales and marketing, including
being appointed President of CSX Intermodal in 2001 and Senior Vice
President of the Merchandise Service Group in 2002.
|
|
Ellen
M. Fitzsimmons, 47
Senior
Vice President of Law and Public Affairs,
General
Counsel and Corporate Secretary
|
Fitzsimmons
has been the Senior Vice President of Law and Public Affairs, General
Counsel, and Corporate Secretary since December 2003. She
serves as the Company’s chief legal officer and oversees all government
relations and public affairs activities.
During
her 16-year tenure with the Company, her broad responsibilities have
included key roles in major risk and corporate governance-related areas
such as Senior Vice President – Law and Corporate Secretary from May to
December 2003 and as Senior Vice President – Law from February 2001 to May
2003.
|
|
Name and Age
|
Business Experience During Past 5
Years
|
|
Robert
J. Haulter, 54
Senior
Vice President of Human Resources and Labor Relations
|
Haulter
has served as Senior Vice President – Human Resources and Labor Relations
of CSX and CSXT since December 2003 and is responsible for employee
compensation and benefits, labor relations, organizational development and
transformation, recruitment, training and various administrative
activities.
His
30-year career with the Company has included key executive positions in
operations, finance and human resources before being appointed Vice
President of Human Resources in 2000.
|
|
Carolyn
T. Sizemore, 44
Vice
President and Controller
|
Sizemore
has served as Vice President and Controller of CSX and CSXT since April
2002 and is responsible for financial and regulatory reporting, paying the
Company’s 35,000 employees, accounts payable and billing and collections
for outside party expenditures along with various other accounting
processes.
Her
responsibilities during her 18-year tenure with the Company have included
roles in finance and audit-related areas including a variety of positions
in accounting, finance strategies, budgets and performance
analysis.
|
Item 5. Market for Registrant’s Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity Securities
Market
Information
CSX’s common stock is listed on the NYSE, which is its principal trading
market, and is traded over-the-counter and on exchanges
nationwide. The official trading symbol is “CSX.”
Description
of Common and Preferred Stock
A total of 600 million shares of common
stock is authorized, of which 407,864,394 shares were outstanding as of December
28, 2007. Each share is entitled to one vote in all matters requiring
a vote of shareholders. There are no pre-emptive
rights. At January 31, 2008, the latest practicable date, there were
46,749 common stock shareholders of record. The weighted average of
common shares outstanding, which was used in the calculation of diluted earnings
per share, was approximately 448 million as of December 28,
2007. (See Note 2, Earnings Per Share.)
A total of 25 million shares of
preferred stock is authorized, none of which is currently
outstanding.
The following table sets forth, for the
quarters indicated, the dividends declared and the high and low share prices of
CSX common stock as required by SEC Regulation S-K.
|
Quarter
|
||||||||
|
1st
|
2nd
|
3rd
|
4th
|
Year
|
||||
|
2007
|
||||||||
|
Dividends
|
$0.12
|
$0.12
|
$0.15
|
$0.15
|
$0.54
|
|||
|
Common
Stock Price
|
||||||||
|
High
|
$42.53
|
$47.38
|
$51.88
|
$46.49
|
$51.88
|
|||
|
Low
|
$33.50
|
$39.36
|
$38.09
|
$40.17
|
$33.50
|
|||
|
2006
|
||||||||
|
Dividends
|
$0.065
|
$0.065
|
$0.10
|
$0.10
|
$0.33
|
|||
|
Common
Stock Price
|
||||||||
|
High
|
$30.20
|
$37.33
|
$35.58
|
$38.30
|
$38.30
|
|||
|
Low
|
$24.29
|
$30.05
|
$28.60
|
$32.51
|
$24.29
|
|||
Stock
Performance Graph
The cumulative shareholder returns,
assuming reinvestment of dividends, on $100 invested at December 31, 2002 is
illustrated on the graph below. The Company references the Standard
& Poor 500 Stock Index (“S&P 500”) and the Dow Jones U.S. Transportation
Average Index, which provide comparisons to a broad-based market index and other
companies in the transportation industry. As shown in the graph,
CSX’s five-year stock returns significantly outpaced those of the S&P
500. Additionally the Company’s stock has increased 120% over the
past three years under the direction of the current management
team.
* The S&P 500 is a registered
trademark of the McGraw-Hill Companies, Inc.
CSX
Purchases of Equity Securities
CSX is required to disclose any purchases of its own common stock for the most
recent quarter. CSX purchases its own shares for two primary reasons: to
further the goals under its share repurchase program and to fund the Company’s
contribution required to be paid in CSX common stock under 401(k) plans which
cover certain union employees.
Currently, CSX has purchased $2.1
billion of its outstanding common stock, which represents 50 million shares or
about 70% of the $3 billion share repurchase program that was authorized in
2007. CSX intends to complete this repurchase program during
2008. The timing, method, amount of repurchase transactions and the
sources of funds to affect 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 could be suspended
or discontinued at any time.
Share repurchase activity for fourth
quarter 2007 was as follows:
|
CSX
Purchases of Equity Securities
for
the Quarter
|
||||||
|
Fourth
Quarter
|
Total
Number of Shares Purchased
|
Average
Price Paid per Share
|
Total
Number of Shares Purchased as Part of Publicly Announced Plans or
Programs
|
Approximate
Dollar Value of Shares that May Yet Be Purchased Under the Plans or
Programs
|
||
|
Beginning
Fourth Quarter Balance
|
$
1,439,716,780
|
|||||
|
October
|
||||||
|
(September
29, 2007 - October 26, 2007)
|
5,724,300
|
$ 43.11
|
5,724,300
|
$
1,192,930,945
|
||
|
November
|
||||||
|
(October
27, 2007 - November 23, 2007)
|
4,933,700
|
$ 43.60
|
4,933,700
|
$ 977,804,729
|
||
|
December
|
||||||
|
(November
24, 2007 - December 28, 2007)
|
2,510,900
|
$ 41.20
|
2,510,900
|
$ 874,363,982
|
||
|
Total/Ending
Balance
|
13,168,900
|
$ 42.93
|
13,168,900
|
$ 874,363,982
|
||
Including previous share repurchase
programs, CSX has purchased over $2.6 billion of its outstanding common stock
over the past two years.
Item 6. Selected Financial Data
Selected financial data and significant
events related to the Company’s financial results for the last five fiscal years
are listed below.
|
Fiscal
Years
|
||||||
|
(Dollars
in Millions, Except Per Share Amounts)
|
2007
|
2006
|
2005
|
2004
|
2003
|
|
|
Earnings
From Continuing Operations
|
||||||
|
Operating
Revenue
|
$ 10,030
|
$
9,566
|
$
8,618
|
$
8,040
|
$
7,573
|
|
|
Operating
Expense
|
7,774
|
7,428
|
7,068
|
7,040
|
7,053
|
|
|
Operating
Income
|
$
2,256
|
$
2,138
|
$
1,550
|
$
1,000
|
$ 520
|
|
|
Earnings
from Continuing Operations
|
$ 1,226
|
$ 1,310
|
$
720
|
$ 418
|
$ 137
|
|
|
Earnings
Per Share:
|
||||||
|
From
Continuing Operations
|
$ 2.85
|
$ 2.98
|
$
1.67
|
$
0.97
|
$ 0.32
|
|
|
From
Continuing Operations, Assuming Dilution
|
2.74
|
2.82
|
1.59
|
0.94
|
0.31
|
|
|
Financial
Position
|
||||||
|
Cash,
Cash Equivalents and Short-term Investments
|
$
714
|
$ 900
|
$ 602
|
$ 859
|
$ 368
|
|
|
Total
Assets
|
25,534
|
25,129
|
24,232
|
24,605
|
21,760
|
|
|
Long-term
Debt
|
6,470
|
5,362
|
5,093
|
6,248
|
6,886
|
|
|
Shareholders'
Equity
|
8,685
|
8,942
|
7,954
|
6,811
|
6,448
|
|
|
Other
Data Per Common Share
|
||||||
|
Dividend
Per Share
|
$ .54
|
$ 0.33
|
$ 0.215
|
$ 0.20
|
$ 0.20
|
|
|
Employees
-- Annual Averages
|
||||||
|
Rail
|
32,477
|
32,987
|
32,033
|
32,074
|
32,892
|
|
|
Other
|
2,966
|
3,018
|
3,076
|
3,833
|
4,624
|
|
|
Total
|
35,443
|
36,005
|
35,109
|
35,907
|
37,516
|
|
Significant
Events
|
|
2007
|
--
|
Recognized
gains of $27 million before tax, or $17 million after tax, on insurance
recoveries from claims related to Hurricane Katrina. (See Note
5, Hurricane Katrina.)
|
|
|
2006
|
--
|
Two-for-one
split of the Company’s common stock effective 2006. All periods
have been retroactively restated to reflect the stock
split.
|
|
|
--
|
Recognized
gains of $168 million before tax, or $104 million after tax, on insurance
recoveries from claims related to Hurricane Katrina. (See Note
5, Hurricane Katrina.)
|
|
|
--
|
Recognized
an income tax benefit of $151 million primarily related to the resolution
of certain tax matters, including resolution of ordinary course
federal income tax audits for 1994 –
1998.
|
|
|
--
|
Recognized
a $26 million after-tax non-cash gain on additional Conrail property
received.
|
|
Significant
events, continued:
|
|
|
2005
|
--
|
Recognized
a charge of $192 million pretax, $123 million after tax, to repurchase
$1.0 billion of outstanding debt, for costs of the increase in current
market value above original issue value. (See Note 9, Debt and
Credit Agreements.)
|
|
|
--
|
Recognized
an income tax benefit of $71 million for the Ohio legislative change to
gradually eliminate its corporate franchise
tax.
|
|
|
2004
|
--
|
Recognized
a charge of $71 million pretax, $44 million after tax, for separation
expenses related to management
restructuring.
|
|
|
--
|
Recognized
a $16 million after-tax non-cash gain on the Conrail spin-off
transaction.
|
|
|
--
|
Completed
a corporate reorganization of Conrail that resulted in the direct
ownership of certain Conrail assets by CSXT and caused a significant
increase in total assets.
|
|
|
2003
|
--
|
Recognized
a charge of $232 million pretax, $145 million after tax, in conjunction
with the change in estimate of casualty reserves to include an estimate of
incurred but not reported claims for asbestos and other occupational
injuries to be received over the next seven
years.
|
|
|
--
|
Recognized
a charge of $108 million pretax, $67 million after tax, for two settlement
agreements with Maersk that resolved all material disputes pending between
the companies arising out of the 1999 sale of the international
container-shipping assets.
|
|
|
--
|
Recognized
a net charge of $22 million pretax, $13 million after tax. This
includes a charge of $44 million pretax, $26 million after tax, which is
comprised of the initial charge for separation expenses related to the
management restructuring announced in 2003 of $34 million pretax and an
additional separation charge of $10 million pretax included in the
Company’s third quarter results. These amounts were offset by a
net credit of $22 million pretax, $13 million after tax, related to
revised estimates for railroad retirement taxes and the amount of benefits
that will be paid to individuals under the 1991 and 1992 separation
plans.
|
Item 7. Management's
Discussion and Analysis of Financial Condition and Results of
Operations
STRATEGIC
OVERVIEW
The
Company provides customers access to a modern transportation network that
connects ports, production and distribution centers to markets in the Northeast,
Midwest and the rapidly growing southern states. The Company
transports a diversified portfolio of products, from domestically abundant coal
to new energy sources such as ethanol, from automobiles produced by traditional
American manufacturers to “new domestic” factories owned by European, Japanese
and Korean companies, and from life-essential chemicals to life-enriching
consumer electronics. Additionally, the Company serves every major market in the
eastern United States and has direct access to all Atlantic and Gulf Coast
ports, as well as the Mississippi River, The Great Lakes and the St. Lawrence
Seaway. Furthermore, the Company has access to Pacific ports through
alliances with western railroads. Overall, the Company’s transportation network
encompasses approximately 21,000 route miles of track in 23 states, the District
of Columbia and the Canadian provinces of Ontario and Quebec.
As the
nation consumes increasingly higher quantities of imported goods, those products
must be transported across the country in a way that minimizes the impact on the
environment, takes traffic off an already congested highway system and minimizes
fuel consumption and transportation costs. The Company’s
transportation network, located in the largest and fastest-growing population
centers in the nation, is well-positioned to capitalize on consumption growth
trends. In this regard, more than two-thirds of Americans live within
the Company’s service territory, accounting for about three-quarters of the
nation’s consumption.
The
Company has made substantial strides in operating performance in order to
capitalize on these consumption growth trends. In 2004, the Company
implemented the ONE Plan, which continues to focus on optimizing the train
network and utilizing rail assets more efficiently. Anchored by the
ONE Plan and a variety of other initiatives implemented after the ONE Plan was
introduced, the Company has achieved significant operational improvements that
have enhanced safety, service reliability and productivity. These
strong results include the highest customer satisfaction scores ever achieved by
the Company as measured by independent surveys of its customers.
In
addition to the ONE Plan, the Company recently embarked on a new initiative
called Total Service Integration (“TSI”), which aims to better align the
Company’s capabilities with customer demands. TSI aims to optimize
train size and increase asset utilization while delivering more reliable
service to customers.
These
initiatives delivered strong results for shareholders while higher levels
of customer service have led to improved pricing. These efforts
combined with operational efficiencies have resulted in substantial improvements
in CSX’s operating income and operating ratio.
In
addition to driving better financial results to create value for shareholders,
CSX also employs a balanced approach in deploying its capital for the benefit of
shareholders. This approach includes investments in the future, share
repurchases and dividends. Through this balanced use of financial
resources, CSX will continue to capitalize on an economic environment that is
increasingly favoring rail transportation.
2007 CSX Highlights
Surface
Transportation
|
|
·
|
Revenue
grew $464 million or 5% to over $10
billion.
|
|
|
·
|
Expenses
increased $339 million or 5% to $7.8 billion, which included $141 million
of higher prior year gains on insurance recoveries (which reduced
operating expenses) and $98 million of higher fuel
costs.
|
|
|
·
|
Surface
Transportation Operating Income, which excludes other operating income,
increased $125 million to $2.3
billion.
|
|
|
·
|
Service
and safety measurements improved in all
categories.
|
Leadership, discipline and execution
resulted in excellent 2007 results, which included the lowest Surface
Transportation operating ratio in a decade. Revenue and revenue per
unit increased 5% and 8%, respectively, from a year ago reflecting the improving
value CSX provides its customers through better service. The Company
was able to achieve substantial pricing gains predominantly due to CSXT service
improvements and the overall cost advantages that the Company’s rail-based
solutions provide to customers versus other modes of
transportation.
The strong results in revenue were
achieved despite volume declines in all of the Company’s four major lines of
business. The overall 3% volume decrease versus last year was
primarily driven by continued weakness in the merchandise market relating to
housing construction and associated markets, as well as lower automotive
production.
Expenses
were higher due to the effects of rising fuel prices and higher prior year gains
on insurance recoveries, which were recorded as a reduction to operating
expenses. Lower 2007 volume and better productivity from improved
operations partially offset the effects of inflation for certain expense
categories.
For
additional information, refer to Rail and Intermodal Results of Operations
discussed on pages 40 through 43.
The
Company’s continued focus on safety and operating plan execution helped all
service measurements improve compared to last year. Within the
service measures, CSX achieved
record performance on both of its key safety measures (FRA Personal Injuries
Frequency Index and FRA Train Accident Rate) in 2007 despite some costly train
accidents. Improved safety is the result of the safety leadership and train
accident prevention processes. Both of these use training, awareness, compliance
measurement and root cause analysis to prevent incidents and create a safer work
environment.
In
addition, CSX continues to improve its train operations with gains of 4% and 12%
in On-Time Train Originations and On-Time Destination Arrivals,
respectively. Velocity, a measure of overall network fluidity,
increased 5% in 2007. More important was the consistent week-to-week
velocity, which indicates more reliable service to
customers. Improved network operations also drove increased asset
utilization, including an improvement of 8% in Dwell, which is the average time
cars spend in terminals when being switched. The table below shows these key
measurements and resources.
|
RAIL
OPERATING STATISTICS (Estimated)
|
Fiscal
Years
|
||||
|
2007
|
2006
|
Improvement
|
%
|
||
|
Service
|
|||||
|
Measurements
|
FRA
Personal Injuries Frequency Index
|
1.21
|
1.46
|
17
|
%
|
|
FRA
Train Accident Rate
|
2.83
|
3.54
|
20
|
||
|
On-Time
Train Originations
|
79.3%
|
76.0%
|
4
|
||
|
On-Time
Destination Arrivals
|
70.4%
|
62.7%
|
12
|
||
|
Dwell
(hours)
|
23.2
|
25.1
|
8
|
||
|
Cars-On-Line
|
221,943
|
224,680
|
1
|
||
|
System
Train Velocity (miles per hour)
|
20.8
|
19.9
|
5
|
||
|
Recrews
(per day)
|
57
|
59
|
3
|
%
|
|
|
Increase/
|
|||||
|
(Decrease)
|
|||||
|
Resources
|
Route
Miles
|
21,166
|
21,114
|
-
|
%
|
|
Locomotives
(owned and long-term leased)
|
4,007
|
3,851
|
4
|
||
|
Freight
Cars (owned and long-term leased)
|
94,364
|
101,602
|
(7)
|
%
|
|
Key
Performance Measures Definitions
FRA Personal Injuries
Frequency Index – Number of FRA-reportable injuries per 200,000
man-hours
FRA Train Accident
Rate – Number of FRA-reportable train accidents per million
train-miles
On-Time Train
Originations – Percent of scheduled road trains that depart the origin
yard on-time or ahead of schedule per the ONE Plan
On-Time Destination
Arrivals – Percent of scheduled trains that arrive at the destination
yard on-time to two hours late (30 minutes for intermodal trains) per the ONE
Plan
Dwell – Measures the
time (in hours) cars spend in each yard (does not include cars moving through
the yard on the same train)
Cars-On-Line – A
count of all cars on the CSX network, including those at customer locations
(does not include locomotives, cabooses, trailers, containers or maintenance
equipment)
System Train Velocity
– Average train speed between terminals in miles per hour (does not include
locals, yard jobs, work trains or passenger trains)
Recrews – Number of
relief crews called, a measure of line of road efficiency in the use of
crews
Other
Highlights
While operating activities generated
higher cash, free cash flow, which includes dividend payments, declined $216
million to $145 million during 2007. The decline was primarily due to
higher capital expenditures and dividends, along with lower insurance recoveries
from claims related to Hurricane Katrina. See page 32 for further
details on the changes in free cash flow during 2007.
Surface Transportation capital
expenditures, which exclude The Greenbrier, were $1.7 billion in
2007. This level of investment highlights the Company’s commitment to
maintain and improve its existing infrastructure and to position itself for
long-term growth through expanding network and terminal capacity. The
increase compared to prior year was largely due to refinancing a portion of its
locomotive capacity by replacing 150 leased units with newly owned
locomotives.
CSX also announced three significant
financial events in 2007. First, CSX increased its quarterly dividend
from $0.10 to $0.12 during the first quarter of 2007. It then
increased the dividend again during the third quarter of 2007 to $0.15, which
represented a 50% increase from the quarterly dividend level at fourth quarter
2006. Finally, CSX announced a total of $3 billion in share
repurchase programs during 2007 and has completed about 70% of the
repurchases. See Note 1, Nature of Operations and Significant
Accounting Policies.
Long-term
Transportation Demand
Transportation demand is based on increases in population and higher consumption
levels, which in turn drive the production of goods domestically and abroad that
must be transported from factories and ports to the markets where they will be
consumed.
Recent census projections estimate that today’s population of 301 million people
will grow to more than 330 million by 2020. Major metropolitan areas in
the southeast, where CSX has a strong presence, are projected to grow at
significantly faster rates. Even in slower-growing areas over the
remainder of the Company’s territory, consumption levels are projected to
increase.
Freight tonnage – domestic and international – is expected to increase nearly
50% by 2020, according to the American Association of State Highway and
Transportation Officials (AASHTO), placing further strain on the transportation
system of America and requiring reliable solutions for shippers
worldwide.
Impact
on CSX
The Company is well positioned to meet the nation’s growing transportation
demand. For example, due to factors such as highway congestion, new
regulations on hours of service and driver shortages in the trucking industry,
trucking companies are beginning to partner with the Company to outsource their
long-haul services and reduce their cost of shipping due to the superior cost
structure of the railroads for long-haul shipments.
Additionally, the need for environmentally sensitive transportation solutions
also favors CSX because railroads are three times more fuel efficient than
highway transportation. A single train can carry the load of more than 280
trucks, reducing highway congestion and pollution while moving goods more
efficiently.
Industry analysts predict that the pricing environment will reflect the
increasing importance of railroads in serving America’s growing transportation
needs and the cost of the infrastructure investments needed to maintain the
safety and security of these networks and to expand them. This will drive
revenue growth as volumes increase. Furthermore, while the market for
transportation services remains competitive, tighter capacity and improved
service levels through initiatives such as the ONE Plan and TSI are expected to
sustain this favorable pricing environment, reflecting the overall value that
CSX provides to its customers.
Forecasts
The Company bases its performance expectations on external forecasts of economic
indicators such as gross domestic product, industrial production and overall
import levels. Although certain markets will remain weak, such as
those that are impacted by the housing and automotive sectors, the indicators
that influence CSX’s businesses are expected to be favorable in 2008.
Considering these and other factors, the Company believes that its business
environment remains strong and will support consistent, continuous financial
improvements for the next several years.
Considering the Company’s solid overall business environment, along with
momentum in its underlying business performance, CSX expects that its financial
performance in 2008 will be consistent with its long-term financial targets,
which include compounded annual growth rates (“CAGR”) as shown
below:
|
Long-term
Financial Targets
|
2008-2010
Targets
|
|
|
·
|
Operating
Income Growth
|
10%
- 12% CAGR
|
|
·
|
Earnings
Per Share Growth
|
15%
- 17% CAGR
|
|
·
|
Operating
Ratio
|
Mid-
to low- 70s by 2010
|
|
·
|
Free
Cash Flow (before the payment of dividends)
|
$800
million to $1 billion in 2010
|
To reinforce its long-term vision, the
Company’s Surface Transportation capital budget is expected to be nearly $5
billion between 2008 and 2010. These investments come at a time when the
return on investment in the railroad industry is improving. Approximately
60% of the Company’s capital is targeted for infrastructure investment to
improve network reliability and recoverability and to drive even better
performance in safety. Another 20% of the Company’s capital will be
invested in its locomotive and freight car fleets. The remaining 20% of
CSX’s capital spending will further expand network terminal capacity, improve
technology and position the Company for long-term growth.
Free
Cash Flow
Free cash flow is considered a non-GAAP
financial measure under SEC Regulation G, Disclosure of Non-GAAP
Measures. Management believes, however, that free cash flow is important
in evaluating the Company’s financial performance and measures an ability to
generate cash without incurring additional external financing. Free cash flow
should be considered in addition to, rather than a substitute for, cash provided
by operating activities.
Free cash flow is calculated by using
net cash from operations and adjusting for property additions, dividends and
certain other investing activities such as insurance proceeds. Also,
added to free cash flow is the Company’s 42% economic interest in Conrail’s free
cash flow which is not consolidated in CSX amounts. Other deposits,
which are included in cash provided by operating activities, are not included in
the Company’s free cash flow because these deposits represent assets that were
set aside for specific debt payments.
The following table reconciles cash
provided by operating activities (GAAP measure) to free cash flow (non-GAAP
measure).
|
Fiscal
Years
|
||||
|
2007
|
2006
|
Change
|
||
|
(Dollars
in Millions)
|
||||
|
Net
cash provided by operating activities
|
$
2,184
|
$
2,058
|
$
126
|
|
|
Property
additions
|
(1,773)
|
(1,639)
|
(134)
|
|
|
Insurance
proceeds within investing activities
|
16
|
147
|
(131)
|
|
|
Other
investing activities
|
(57)
|
4
|
(61)
|
|
|
Dividends
|
(231)
|
(145)
|
(86)
|
|
|
Other
deposits and Conrail free cash flow
|
6
|
(64)
|
70
|
|
|
Free
Cash Flow (after payment of dividends)
|
$
145
|
$
361
|
$ (216)
|
|
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 Expectations on page
30.
|
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;
|
|
|
·
|
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;
|
|
|
·
|
Changes
in fuel prices, surcharges for fuel and the availability of
fuel;
|
|
|
·
|
The
impact of increased passenger activities in capacity-constrained areas or
regulatory changes affecting when CSXT can transport freight or service
routes;
|
|
|
·
|
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;
|
|
|
·
|
An
unintentional failure to comply with applicable laws or
regulations;
|
|
|
·
|
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;
|
|
|
·
|
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;
|
|
|
·
|
Competition
from other modes of freight transportation, such as trucking and
competition and consolidation within the transportation industry
generally;
|
|
|
·
|
The
Company’s success in implementing its strategic plans and operational
objectives and improving Surface Transportation operating efficiency;
and
|
|
|
·
|
Changes
in operating conditions and costs or commodity
concentrations.
|
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.
Financial Results of Operations
2007
vs. 2006 Consolidated Results of Operations
|
CONSOLIDATED(a)
|
|||||||||
|
Includes
Surface Transportation and Other Operating Income
|
|||||||||
|
(Dollars
in Millions)
|
2007
|
2006
|
$
Change
|
%
Change
|
|||||
|
Operating
Revenue
|
$
10,030
|
$ 9,566
|
$ 464
|
5
|
%
|
||||
|
Operating
Expense
|
7,774
|
7,428
|
346
|
5
|
|||||
|
Operating
Income
|
2,256
|
2,138
|
118
|
6
|
|||||
|
Other
Income
|
93
|
95
|
(2)
|
(2)
|
|||||
|
Interest
Expense
|
(417)
|
(392)
|
(25)
|
6
|
|||||
|
Income
Tax Expense
|
(706)
|
(531)
|
(175)
|
33
|
|||||
|
Earnings
from Continuing Operations
|
1,226
|
|
1,310
|
(84)
|
(6)
|
||||
|
Discontinued
Operations
|
110
|
-
|
110
|
NM
|
|||||
|
Net
Earnings
|
$
1,336
|
$ 1,310
|
$ 26
|
2
|
%
|
||||
|
Earnings
Per Diluted Share
|
|||||||||
|
From
Continuing Operations
|
$ 2
.74
|
$ 2.82
|
$ (0.08)
|
(3)
|
%
|
||||
|
Discontinued
Operations
|
0.25
|
-
|
0.25
|
NM
|
|||||
|
Net
Earnings
|
$
2.99
|
$ 2.82
|
$ 0.17
|
6
|
%
|
||||
Prior
periods have been reclassified to conform to the current
presentation.
NM
- not meaningful
(a)
Other operating income was $5 million and $12 million for 2007 and 2006,
respectively.
Operating
Revenue
Operating revenue increased $464
million to over $10 billion in 2007 due to continued pricing efforts and service
improvements. These gains were partially offset by lower volume due
to weakness in housing construction, domestic automobile production and related
markets.
Operating
Income
Operating income increased $118 million
to $2.3 billion in 2007. Improvements in revenue and productivity
from improved operations were partially offset by lower gains on insurance
recoveries and increased fuel costs.
Other
Income
Other income of $93 million in 2007 was
relatively flat compared to the prior year.
Interest Expense
Interest expense increased $25 million
to $417 million in 2007 primarily due to higher average debt
balances.
Income
Tax Expense
Income tax expense increased $175
million to $706 million. This change is primarily due to higher
earnings in 2007 and a prior year income tax benefit of $151 million related to
the resolution of certain tax matters that were not repeated.
Net
Earnings
Consolidated net earnings increased $26
million and totaled $1.3 billion, and earnings per diluted share increased $0.17
to $2.99. The principal elements of these increases are:
|
|
·
|
Operating
income increased $118 million driven by strong Surface Transportation
results. These strong results were more than offset by $151
million of prior year income tax benefits that were not
repeated. The net of these and other items decreased earnings
from continuing operations by $84 million or $.08 per diluted
share.
|
|
|
·
|
The
$110 million or $.25 per diluted share gain in discontinued operations on
the Company’s consolidated income statement in 2007 related to the
resolution of certain tax matters associated with previously discontinued
operations.
|
2006
vs. 2005 Consolidated Results of Operations
|
CONSOLIDATED(a)
|
|||||||||
|
Includes
Surface Transportation and Other Operating Income
|
|||||||||
|
(Dollars
in Millions)
|
2006
|
2005
|
$
Change
|
%
Change
|
|||||
|
Operating
Revenue
|
$ 9,566
|
$ 8,618
|
$ 948
|
11
|
%
|
||||
|
Operating
Expense
|
7,428
|
7,068
|
360
|
5
|
|||||
|
Operating
Income
|
2,138
|
1,550
|
588
|
38
|
|||||
|
Other
Income
|
95
|
101
|
(6)
|
(6)
|
|||||
|
Debt
Repurchase
|
-
|
(192)
|
192
|
(100)
|
|||||
|
Interest
Expense
|
(392)
|
(423)
|
31
|
(7)
|
|||||
|
Income
Tax Expense
|
(531)
|
(316)
|
(215)
|
68
|
|||||
|
Earnings
from Continuing Operations
|
1,310
|
|
720
|
590
|
82
|
||||
|
Discontinued
Operations - Net of Tax
|
-
|
425
|
(425)
|
(100)
|
|||||
|
Net
Earnings
|
$ 1,310
|
$ 1,145
|
$ 165
|
14
|
%
|
||||
|
Earnings
Per Diluted Share
|
|||||||||
|
From
Continuing Operations
|
$ 2.82
|
$ 1.59
|
$ 1.23
|
77
|
%
|
||||
|
Discontinued
Operations
|
-
|
0.93
|
(0.93)
|
(100)
|
|||||
|
Net
Earnings
|
$ 2.82
|
$ 2.52
|
$ 0.30
|
12
|
%
|
||||
Prior
periods have been reclassified to conform to the current
presentation.
|
(a)
|
Other
operating income was $12 million and $1 million in 2006 and 2005,
respectively.
|
Operating
Revenue
Operating revenue increased $948
million in 2006 to $9.6 billion, compared to $8.6 billion for the prior
year. The primary components of the revenue gain were continued yield
management and the Company’s fuel surcharge program, which drove revenue per
unit across all major markets.
Operating
Income
Operating income increased $588 million
to $2.1 billion in 2006, which was driven by increased operating
revenues. These revenue gains and gains on insurance proceeds from
Hurricane Katrina were partially offset by increases in fuel expense caused by
higher fuel prices and lower hedge benefits.
Other
Income
Other income decreased $6 million to
$95 million in 2006. This change was driven primarily by lower real
estate sales, which was partially offset by an after-tax non-cash gain on
additional Conrail property value received in connection with the 2004 Conrail
spin-off transaction.
Interest Expense
Interest expense decreased $31 million
to $392 million in 2006 compared to the prior year. There was lower
interest expense from lower average debt balances for 2006 (due to a $1.0
billion debt repurchase in mid-2005). However, this savings was
partially offset by higher variable interest rates.
Income
Tax Expense
Income tax expense increased $215
million to $531 million in 2006 as a result of higher earnings. This
increase was partially offset by the net impact of favorable resolutions of
certain tax matters in 2006 that were higher than benefits in 2005.
Net
Earnings
Net earnings for 2006 increased $165
million to $1.3 billion, with earnings per share up $.30 to $2.82 per diluted
share from the prior year. This increase was primarily due to the
following factors:
|
|
·
|
Driven
by Surface Transportation results, earnings from continuing operations
were up $590 million, or $1.23 per diluted
share;
|
|
|
·
|
Offsetting
this increase was income from discontinued operations, net of tax, of $425
million, or $.93 per diluted share, as a result of the sale of CSX’s
International Terminals business in
2005.
|
2007
vs. 2006 Surface Transportation Results of Operations
|
SURFACE TRANSPORTATION
DETAIL
(Unaudited)
|
||||||||||
|
(Dollars
in Millions)
|
||||||||||
|
Fiscal
Year
|
||||||||||
|
Surface
|
||||||||||
|
Rail
|
Intermodal
|
Transportation
|
||||||||
|
2007
|
2006
|
2007
|
2006
|
2007
|
2006
|
$
Change
|
||||
|
Revenue
|
$ 8,674
|
$ 8,154
|
$ 1,356
|
$ 1,412
|
$ 10,030
|
$ 9,566
|
$ 464
|
|||
|
Operating
Expense:
|
||||||||||
|
Labor
and Fringe
|
2,897
|
2,840
|
81
|
82
|
2,978
|
2,922
|
(56)
|
|||
|
Materials,
Supplies and Other
|
1,857
|
1,772
|
183
|
192
|
2,040
|
1,964
|
(76)
|
|||
|
Fuel
|
1,210
|
1,112
|
-
|
-
|
1,210
|
1,112
|
(98)
|
|||
|
Depreciation
|
848
|
818
|
34
|
38
|
882
|
856
|
(26)
|
|||
|
Equipment
and Other Rents
|
346
|
382
|
110
|
130
|
456
|
512
|
56
|
|||
|
Inland
Transportation
|
(448)
|
(462)
|
688
|
704
|
240
|
242
|
2
|
|||
|
Gain
on Insurance Recoveries
|
(27)
|
(166)
|
-
|
(2)
|
(27)
|
(168)
|
(141)
|
|||
|
Total
Expense
|
6,683
|
6,296
|
1,096
|
1,144
|
7,779
|
7,440
|
(339)
|
|||
|
Operating
Income
|
$ 1,991
|
$ 1,858
|
$ 260
|
$ 268
|
$ 2,251
|
$ 2,126
|
$ 125
|
|||
|
Operating
Ratio
|
77.0%
|
77.2%
|
80.8%
|
81.0%
|
77.6%
|
77.8%
|
||||
|
Total
Assets
|
$
24,179
|
$
24,077
|
$
283
|
$
276
|
||||||
_____________________________________________________________________________________________________________________________________________
|
Volume
(Thousands); Revenue (Dollars in Millions); Revenue Per Unit
(Dollars)
|
|||||||||||||||
|
Fiscal
Year
|
|||||||||||||||
|
Volume
|
Revenue
|
Revenue
Per Unit
|
|||||||||||||
|
2007
|
2006
|
%
Change
|
2007
|
2006
|
%
Change
|
2007
|
2006
|
%
Change
|
|||||||
|
Chemicals
|
522
|
528
|
(1)
|
%
|
$ 1,313
|
$ 1,210
|
9
|
%
|
$ 2,515
|
$ 2,292
|
10
|
%
|
|||
|
Emerging
Markets
|
491
|
524
|
(6)
|
605
|
580
|
4
|
1,232
|
1,107
|
11
|
||||||
|
Forest
Products
|
352
|
404
|
(13)
|
722
|
773
|
(7)
|
2,051
|
1,913
|
7
|
||||||
|
Agricultural
Products
|
410
|
397
|
3
|
786
|
681
|
15
|
1,917
|
1,715
|
12
|
||||||
|
Metals
|
355
|
364
|
(2)
|
702
|
673
|
4
|
1,977
|
1,849
|
7
|
||||||
|
Phosphates
and Fertilizers
|
362
|
362
|
-
|
421
|
354
|
19
|
1,163
|
978
|
19
|
||||||
|
Food
and Consumer
|
212
|
245
|
(13)
|
441
|
477
|
(8)
|
2,080
|
1,947
|
7
|
||||||
|
Total
Merchandise
|
2,704
|
2,824
|
(4)
|
4,990
|
4,748
|
5
|
1,845
|
1,681
|
10
|
||||||
|
Coal
|
1,771
|
1,798
|
(2)
|
2,483
|
2,259
|
10
|
1,402
|
1,256
|
12
|
||||||
|
Coke
and Iron Ore
|
91
|
94
|
(3)
|
120
|
119
|
1
|
1,319
|
1,266
|
4
|
||||||
|
Total
Coal
|
1,862
|
1,892
|
(2)
|
2,603
|
2,378
|
9
|
1,398
|
1,257
|
11
|
||||||
|
Automotive
|
439
|
463
|
(5)
|
839
|
847
|
(1)
|
1,911
|
1,829
|
4
|
||||||
|
Other
|
-
|
-
|
-
|
242
|
181
|
34
|
-
|
-
|
-
|
||||||
|
Total
Rail
|
5,005
|
5,179
|
(3)
|
8,674
|
8,154
|
6
|
1,733
|
1,574
|
10
|
||||||
|
International
|
1,132
|
1,281
|
(12)
|
525
|
580
|
(9)
|
464
|
453
|
2
|
||||||
|
Domestic
|
979
|
898
|
9
|
807
|
786
|
3
|
824
|
875
|
(6)
|
||||||
|
Other
|
-
|
-
|
-
|
24
|
46
|
(48)
|
-
|
-
|
-
|
||||||
|
Total
Intermodal
|
2,111
|
2,179
|
(3)
|
1,356
|
1,412
|
(4)
|
642
|
648
|
(1)
|
||||||
|
Total
Surface Transportation
|
7,116
|
7,358
|
(3)
|
%
|
$ 10,030
|
$ 9,566
|
5
|
%
|
$ 1,409
|
$ 1,300
|
8
|
%
|
|||
For
both tables, prior periods have been reclassified to conform to the current
presentation.
2007
vs. 2006 Rail Results of Operations
Rail
Operating Revenue
Rail
revenue is categorized by three main lines of business: merchandise, coal and
automotive. Revenue increased $520 million, or 6%, to $8.7 billion in 2007
as compared to prior year. CSXT was able to achieve continued pricing
gains predominantly due to the overall cost and service advantages that the
Company’s rail based solutions provide to customers versus other modes of
transportation. These pricing gains more than offset volume weakness in housing
construction, domestic automobile production and related markets.
Merchandise
Chemicals – Revenue
and revenue per unit improved due to a continued favorable pricing
environment. Overall volume declined slightly driven by reduced
chlorine shipments and weakness in propane demand due to a milder winter in
2007.
Emerging Markets –
Revenue and revenue per unit grew due to continued yield management
efforts. Volume was down as a result of declines in aggregate
shipments, such as crushed stone, sand and gravel, caused by a continued
weakness in residential construction.
Forest Products –
Revenue and volume declined as shipments of building products and paper slowed
due to the decline in residential housing starts and electronic media
substitution.
Agriculture Products
– Strong domestic demand in feed ingredients and soybean shipments supported
growth in volume and revenue. Ethanol volumes also increased as a
result of expanded use in the Northeast. Revenue per unit grew as a
result of continued focus on yield management.
Metals – Revenue and
revenue per unit increased due to continued pricing actions. Lower demand
for steel due to weakness in housing construction and domestic automobile
production resulted in volume declines.
Phosphates and
Fertilizers – Volume was flat as higher domestic demand was offset by a
decrease in export shipments. Favorable mix driven by these volume
changes coupled with price increases resulted in significantly improved revenue
and revenue per unit.
Food and Consumer –
Revenue and volume declines were driven by decreased demand for building
products, appliances and roofing granules, which are used to make
shingles.
Coal
Favorable
pricing positively influenced revenue and revenue per unit. Overall tonnage was
flat even though carloads slightly declined due to the use of higher capacity
cars allowing the movement of more tons with fewer cars. Strength in
the export market was offset by weakness in utility shipments as stockpiles
remain at record high levels.
Automotive
Volume
declined due to a reduction in light vehicle production, several plant closures,
and lower vehicle sales driven by the slowing economy and tight credit
environment. Consistent with the overall automotive market, volumes
continued to shift to foreign brands produced domestically.
Other
Rail Revenue
The
change is primarily due to increased shipments by the Company’s regional
railroads and more transloading activities associated with ethanol
shipments.
Rail
Operating Expense
Total
rail operating expenses for 2007 increased $387 million to $6.7 billion compared
to the prior year. The description of what is included in each
category as well as significant year over year changes is described
below.
Labor and Fringe expenses
include employee compensation and benefit programs. These expenses
are primarily affected by inflation, headcount, wage rates, incentives earned,
healthcare plan costs, and pension and other post-retirement plan
expenses. These expenses increased $57 million primarily due to wage
and benefit inflation, which was partially offset by improved productivity and
reduced staffing levels.
Materials, Supplies and
Other expenses
consist primarily of materials and contracted services to maintain
infrastructure and equipment and for terminal services at intermodal and
automotive facilities. This category also includes costs related to
personal injury claims, environmental remediation, train accidents, utilities,
non-locomotive fuel, property and sales taxes and professional
services. Overall, materials, supplies and other expenses increased
by $85 million in 2007 primarily due to inflation, higher train accident related
costs and higher environmental costs. These costs were partially
offset by $99 million of favorable personal injury reserve adjustments during
the year, which were based on management’s review of the actuarial analyses
performed by an independent actuarial firm. This was
due to a trend of significant decreases in the number and severity of
work-related injuries for CSXT employees since 2003.
Depreciation expense
primarily relates to recognizing the cost of a capital asset, such as
locomotives, railcars and track structure, over its useful life. This
expense is impacted primarily by the capital expenditures made each
year. This expense increased $30 million primarily due to a larger
asset base as a result of higher capital spending partially offset by lower
depreciation rates resulting from periodic asset life studies.
Fuel expense
includes locomotive diesel fuel. This expense is driven by the market
price and locomotive consumption of diesel fuel offset by the effects of any
hedging activities. This expense increased $98 million primarily due
to higher fuel prices and prior year hedge benefits that were not repeated
during 2007 due to the expiration of the fuel hedge program.
Equipment and Other
Rents primarily includes
rent paid for freight cars owned by other railroads or private companies, net of
rents received by CSXT for use of CSXT equipment. This category of
expenses also includes lease expenses primarily for locomotives, railcars,
containers and trailers, office and other rentals. These expenses decreased $36
million due mainly to lower volume and fewer locomotive leases.
Inland
Transportation expense
included in the rail segment is for amounts paid to CSXT from Intermodal for
shipments on CSXT’s network. These intercompany charges are
eliminated in consolidated results.
Gain on Insurance
Recoveries includes gains on insurance recoveries related to Hurricane
Katrina. While gains were recognized in both years, the $139 million
decrease for 2007 was due to higher cash receipts for lost profits and
replacement value of property compared to the value of the property that was
damaged in 2006 versus 2007.
2007
vs. 2006 Intermodal Results of Operations
Intermodal
operating income declined 3% or $8 million versus last year on 4% lower revenue,
partially offset by volume related cost savings. Revenue and volume
decreases reflect losses of several International customers, the slowing of
Asian imports throughout the year and mix impact related to growth in new
short-haul domestic traffic. Other revenue declined $22 million from
the termination of an agreement relating to the storage of containers as well as
lower general business levels. Revenue per unit declined slightly with yield
gains in the international market being offset by mix changes related to the new
short-haul domestic traffic.
Despite
rising fuel costs, Intermodal operating expense declined $48 million or 4%
driven by lower car hire expense related to volume and improved operational
efficiency. Additionally, depreciation decreased based on the results
of a periodic review of asset useful lives.
2006
vs. 2005 Surface Transportation Results of Operations
|
SURFACE TRANSPORTATION
DETAIL
(Unaudited)
|
||||||||||
|
(Dollars
in Millions)
|
||||||||||
|
Fiscal
Year
|
||||||||||
|
Surface
|
||||||||||
|
Rail
|
Intermodal
|
Transportation
|
||||||||
|
2006
|
2005
|
2006
|
2005
|
2006
|
2005
|
$
Change
|
||||
|
Revenue
|
$ 8,154
|
$ 7,256
|
$ 1,412
|
$ 1,362
|
$ 9,566
|
$ 8,618
|
$ 948
|
|||
|
Operating
Expense:
|
||||||||||
|
Labor
and Fringe
|
2,840
|
2,777
|
82
|
79
|
2,922
|
2,856
|
(66)
|
|||
|
Materials,
Supplies and Other
|
1,772
|
1,649
|
192
|
200
|
1,964
|
1,849
|
(115)
|
|||
|
Fuel
|
1,112
|
783
|
-
|
-
|
1,112
|
783
|
(329)
|
|||
|
Depreciation
|
818
|
779
|
38
|
39
|
856
|
818
|
(38)
|
|||
|
Equipment
and Other Rents
|
382
|
400
|
130
|
133
|
512
|
533
|
21
|
|||
|
Inland
Transportation
|
(462)
|
(433)
|
704
|
663
|
242
|
230
|
(12)
|
|||
|
Gain
on Insurance Recoveries
|
(166)
|
-
|
(2)
|
-
|
(168)
|
-
|
168
|
|||
|
Total
Expense
|
6,296
|
5,955
|
1,144
|
1,114
|
7,440
|
7,069
|
(371)
|
|||
|
Operating
Income
|
$ 1,858
|
$ 1,301
|
$ 268
|
$ 248
|
$ 2,126
|
$ 1,549
|
$ 577
|
|||
|
Operating
Ratio
|
77.2%
|
82.1%
|
81.0%
|
81.8%
|
77.8%
|
82.0%
|
||||
|
Total
Assets
|
$
24,077
|
$
23,182
|
$
276
|
$
305
|
||||||
_____________________________________________________________________________________________________________________________________________
|
SURFACE TRANSPORTATION VOLUME
AND REVENUE (Unaudited)
|
|||||||||||||||
|
Volume
(Thousands); Revenue (Dollars in Millions); Revenue Per Unit
(Dollars)
|
|||||||||||||||
|
Fiscal
Year
|
|||||||||||||||
|
Volume
|
Revenue
|
Revenue
Per Unit
|
|||||||||||||
|
2006
|
2005
|
%
Change
|
2006
|
2005
|
%
Change
|
2006
|
2005
|
%
Change
|
|||||||
|
Chemicals
|
528
|
533
|
(1)
|
%
|
$ 1,210
|
$ 1,089
|
11
|
%
|
$
2,292
|
$ 2,043
|
12
|
%
|
|||
|
Emerging
Markets
|
524
|
505
|
4
|
580
|
513
|
13
|
1,107
|
1,016
|
9
|
||||||
|
Forest
Products
|
404
|
439
|
(8)
|
773
|
717
|
8
|
1,913
|
1,633
|
17
|
||||||
|
Agricultural
Products
|
397
|
357
|
11
|
681
|
550
|
24
|
1,715
|
1,541
|
11
|
||||||
|
Metals
|
364
|
361
|
1
|
673
|
570
|
18
|
1,849
|
1,579
|
17
|
||||||
|
Phosphates
and Fertilizers
|
362
|
444
|
(18)
|
354
|
351
|
1
|
978
|
791
|
24
|
||||||
|
Food
and Consumer
|
245
|
249
|
(2)
|
477
|
438
|
9
|
1,947
|
1,759
|
11
|
||||||
|
Total
Merchandise
|
2,824
|
2,888
|
(2)
|
4,748
|
4,228
|
12
|
1,681
|
1,464
|
15
|
||||||
|
Coal
|
1,798
|
1,726
|
4
|
2,259
|
1,992
|
13
|
1,256
|
1,154
|
9
|
||||||
|
Coke
and Iron Ore
|
94
|
83
|
13
|
119
|
88
|
35
|
1,266
|
1,060
|
19
|
||||||
|
Total
Coal
|
1,892
|
1,809
|
5
|
2,378
|
2,080
|
14
|
1,257
|
1,150
|
9
|
||||||
|
Automotive
|
463
|
488
|
(5)
|
847
|
844
|
-
|
1,829
|
1,730
|
6
|
||||||
|
Other
|
-
|
-
|
-
|
181
|
104
|
74
|
-
|
-
|
-
|
||||||
|
Total
Rail
|
5,179
|
5,185
|
-
|
8,154
|
7,256
|
12
|
1,574
|
1,399
|
13
|
||||||
|
International
|
1,281
|
1,274
|
1
|
580
|
545
|
6
|
453
|
428
|
6
|
||||||
|
Domestic
|
898
|
891
|
1
|
786
|
766
|
3
|
875
|
860
|
2
|
||||||
|
Other
|
-
|
-
|
-
|
46
|
51
|
(10)
|
-
|
-
|
-
|
||||||
|
Total
Intermodal
|
2,179
|
2,165
|
1
|
1,412
|
1,362
|
4
|
648
|
629
|
3
|
||||||
|
Total
Surface Transportation
|
7,358
|
7,350
|
-
|
%
|
$ 9,566
|
$ 8,618
|
11
|
%
|
$
1,300
|
$ 1,173
|
11
|
%
|
|||
For
both tables, prior periods have been reclassified to conform to the current
presentation.
2006
vs. 2005 Rail Results of Operations
Rail
Operating Revenue
CSXT
categorizes rail revenue in three main lines of business: merchandise, coal and
automotive. Revenue for CSXT increased $898 million, or 12%, to $8.2
billion in 2006 from a year ago. Continued yield management and fuel
surcharge were the primary drivers of revenue per unit gains.
Merchandise
Chemicals – Revenue
and revenue per unit improved by capitalizing on a continued strong pricing
environment. Overall volume was down slightly because high raw
material costs continued to negatively affect the U.S. chemical industry’s
competitiveness and in turn, CSXT volumes.
Emerging Markets –
Growth was driven by increased shipments of municipal waste, military, and
aggregate products (which include rocks and sand). Revenue per unit also
improved due to strong pricing actions.
Forest Products –
Shipment of building products and printing paper slowed due to the decline in
residential housing starts and electronic media conversion. However,
revenue and revenue per unit improved due to a favorable pricing
environment.
Agriculture Products
– Strong domestic demand in feed grain, soybean, ethanol, and export shipments
supported volume and revenue per unit. In addition, strong export demand for
grain and increased shipments of beans helped volume growth.
Metals – Revenue and
revenue per unit increased due to continued pricing gains and fuel surcharge
coverage. Volume increased slightly driven by strong steel demand in the
energy and non-residential construction end-markets. These gains were
partially offset by lower demand for steel in the automotive
sector.
Phosphates and
Fertilizers – Volume declined from lower export shipments due to
increased international phosphate production which caused several domestic
phosphate plants to close. Favorable mix coupled with price increases
resulted in significantly improved revenue per unit.
Food and Consumer –
Volume growth in alcoholic beverages, canned goods, and rice and beans was
offset by softness in building products, perishables, and the appliance
markets. Strong pricing actions, and a focus on longer, more
profitable shipments increased revenue and revenue per unit.
Coal
Revenue
and volume improvements were due to increased shipments of utility and export
coal. Utility companies built up their inventories which was a major
contributor to CSX’s volume growth. Revenue per unit increased due to
the continued favorable pricing environment and increased fuel surcharge
coverage.
Automotive
Volume
declined due to a reduction in North American light vehicle
production. Consistent with the overall automotive market, CSXT’s
volumes continued to shift from the Big 3 to foreign brands produced
domestically. Revenue per unit was favorable due to price increases
and fuel surcharge.
Rail
Operating Expense
Total
rail operating expenses for 2006 increased $341 million, or 6%, to $6.3 billion
compared to the prior year. The description of what is included in
each category as well as significant year over year changes is described
below.
Labor and Fringe increased
$63 million primarily due to wage and benefit inflation and increased staffing
in rail operations.
Materials, Supplies and
Other expenses
increased by $113 million in 2006 primarily due to materials inflation, along
with prior year casualty favorable adjustments and supplier reimbursements that
were not repeated. These costs were partially offset by productivity
gains from improved operations, such as efficient use of
locomotives.
Depreciation expense
increased $39 million due to a larger asset base related to higher capital
spending.
Fuel expense
increased $329 million primarily due to reduced hedge benefit from the
expiration of the fuel hedge program as well as higher fuel prices.
Equipment and Other
Rents expense
decreased $18 million due mainly to improvement in operational fluidity, which
drove improvements in asset utilization.
Gain on Insurance
Recoveries was $166 million for 2006, which represented cash received for
lost profits and higher replacement value of property compared to the value of
the property that was damaged, after consideration of the Company’s insurance
deductible expensed in 2005.
2006
vs. 2005 Intermodal Results of Operations
Intermodal
operating income increased 8% or $20 million versus last year driven by revenue
gains of $50 million along with expense containment. The increase in
revenue and revenue per unit was driven by the continued yield management
emphasis which was partially offset by mix of traffic. Volume increased slightly
due to continued growth of imported consumer goods from Asia as well as the
strength in the truckload market offset by weaker demand in services sold to
transportation brokers (known as wholesale markets).
Intermodal
operating expense increased $30 million primarily driven by an increase in fuel
costs that are reflected in inland transportation expense. Fuel costs
were higher due to rising market prices. Partially offsetting the
increase in fuel were efficiency gains related to equipment
utilization.
Liquidity and Capital Resources
Liquidity is a company’s ability to
generate adequate amounts of cash to meet both current and future needs for
obligations as they mature and to provide for planned operational
growth. In order to have a complete picture of a company’s liquidity,
its balance sheet, sources and uses of cash flow and external factors should be
reviewed.
Material
Changes in the Consolidated Balance Sheets
CSX’s
balance sheet reflects its strong capital base and the impact of CSX’s balanced
approach in deploying its capital for the benefit of its shareholders, which
includes reinvestment in the Company’s existing infrastructure, investments in
the future, share repurchases and dividends.
Long-term
debt increased $1.1 billion to $6.5 billion due to debt issuances in 2007 of
$2.4 billion partially offset by the conversion of a portion of convertible debt
into CSX common stock and the reclassification of debt from long-term to
current. See the Schedule of Contractual Obligations and Commercial
Commitments on page 50 and Note 9, Debt and Credit Agreements, for additional
details.
Other
capital decreased $1.4 billion to $37 million as a result of significant share
repurchase activity partially offset by stock option exercises and the
conversion of a portion of convertible debt into CSX common
stock. For additional information on the Company’s share repurchase
activity, see Note 1, Nature of Operations and Significant Accounting
Policies.
Sources
and Uses of Cash
CSX has
multiple sources of cash. First, the Company generates cash from
operations. In 2007, CSX generated $2.2 billion of cash from
operating activities, which represented a $126 million increase from the prior
year. Second, CSX has numerous financing sources including access to
the capital markets and a $1.25 billion five-year unsecured revolving credit
facility that expires in May 2012. This facility can be increased by
an additional $500 million to $1.75 billion with the approval of the lending
banks. See Note 9, Debt and Credit Agreements for more
information.
CSX also
has an effective shelf registration statement on file with the SEC that is
unlimited as to amount and may be used, subject to market conditions and CSX
Board authorization, to issue debt or equity securities at CSX’s discretion.
While CSX seeks to give itself flexibility with respect to cash requirements,
there can be no assurance that market conditions would permit CSX to sell such
debt securities on acceptable terms at any given time, or at all.
Among
other things, CSX uses cash for significant annual reinvestment in
infrastructure and equipment, share repurchases and scheduled payments of debt
and leases with manageable near-term maturities. The Company’s cash
requirements also include dividends to shareholders.
During
2007, net cash used by investing activities was $1.7 billion. This
use of funds was predominately driven by property additions and capital
expansion projects made by the Company. Net cash used in financing
activities was $584 million due to over $2 billion of cash used for share
repurchases during 2007, largely offset by a net increase in long-term debt
issued versus long-term debt repaid.
Dividend
payments are another use of cash. The Company paid dividends of $231
million in 2007, which was $86 million more than prior year. The
increase in 2007 was primarily due to the Company increasing quarterly dividends
to $0.15 per share.
Working
Capital
Working
capital can be considered a measure of a company’s ability to meet its
short-term needs. CSX had a working capital deficit at December 2007
of $180 million compared to a surplus of $150 million last year driven by lower
cash and higher current debt balances in 2007. The larger current
debt balance includes a reclassification of outstanding convertible debt with a
face value of $174 million from long-term to current during 2007. This
reflects bondholders’ rights under the convertible debt to require CSX to
purchase the debentures in October 2008 in lieu of the later maturity
date.
A working
capital deficit is not unusual for CSX or other companies in the industry and
does not indicate a lack of liquidity. The Company continues to maintain
adequate current assets to satisfy current liabilities and maturing obligations
when they come due. CSX has sufficient financial capacity, including
the revolving line of credit and shelf registration, to manage its day-to-day
cash requirements and any anticipated obligations.
Credit
Ratings
Credit
ratings reflect an independent agency’s judgment on the likelihood that a
borrower will repay a debt obligation at maturity. The ratings
reflect many considerations, such as the nature of the borrower’s industry and
its competitive position, the size of the company, its liquidity and access to
capital and the sensitivity of a company’s cash flows to changes in the
economy. The two largest rating agencies, Standard & Poor’s
(“S&P”) and Moody’s Investors Service (“Moody’s”), use alphanumeric 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.
Long-term
ratings of BBB- and Baa3 or better by S&P and Moody’s, respectively, reflect
ratings on debt obligations that fall within a band of credit quality considered
to be “investment grade.” 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 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. This was due to the Company’s announcement in second
quarter 2007 of a plan to repurchase an additional $1 billion of CSX stock in
addition to the $2 billion repurchase plan announced earlier in 2007. Both
of these agencies indicate their outlook is “Stable” and these ratings continue
to be investment grade. CSX maintained these credit ratings through
December 2007 and does not expect that this reduction in credit ratings will
materially increase its borrowing costs or 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. In addition, the market’s demand, and thus the Company’s
ability to readily issue new debt, could become further influenced by the
economic and credit market environment.
Schedule of Contractual Obligations and Commercial
Commitments
The
following tables set forth maturities of the Company's contractual obligations
and other commitments:
|
Type
of Obligation
|
2008
|
2009
|
2010
|
2011
|
2012
|
Thereafter
|
Total
|
|
|
(Dollars
in Millions) (Unaudited)
|
||||||||
|
Contractual Obligations:
|
||||||||
|
Long-term
Debt (See Note 9)
|
$
785
|
$
305
|
$
92
|
$
591
|
$
493
|
$
4,989
|
$ 7,255
|
|
|
Operating
Leases - Net (See Note 7)
|
98
|
90
|
79
|
69
|
51
|
181
|
568
|
|
|
Agreements
with Conrail (a)
|
14
|
13
|
9
|
4
|
3
|
9
|
52
|
|
|
Purchase
Obligations (See Note 7)
|
621
|
549
|
326
|
285
|
288
|
4,773
|
6,842
|
|
|
Total
Contractual Obligations
|
$ 1,518
|
$ 957
|
$ 506
|
$ 949
|
$ 835
|
$ 9,952
|
$ 14,717
|
|
| Other Commitments: | ||||||||
|
Guarantees
(See Note 7)
|
15
|
16
|
16
|
13
|
12
|
-
|
72
|
|
|
Other
|
53
|
2
|
-
|
-
|
-
|
41
|
96
|
|
|
Total
Other Commitments
|
$ 68
|
$ 18
|
$ 16
|
$ 13
|
$ 12
|
$ 41
|
$ 168
|
|
|
(a) Represents minimum future
lease payments for freight cars and locomotives and is included in total
lease commitments disclosed in Note 7, Commitments and
Contingencies.
|
Off-Balance Sheet Arrangements
For
detailed information about the Company’s guarantees, operating leases and
purchase obligations, see Note 7, Commitments and Contingencies.
There are no off-balance sheet
arrangements that are reasonably likely to have a material effect on the
Company’s results of operations, financial condition and liquidity.
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;
and
|
|
|
·
|
income taxes
|
Casualty, Environmental and Legal Reserves
Casualty
Casualty
reserves represent accruals for personal injury and occupational injury
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, and are offset by the timing
of payments. Most of the claims were related to CSXT unless otherwise
noted.
Defense
and processing costs, which historically have been insignificant and are
anticipated to be insignificant in the future, are not included in the recorded
liabilities. The Company is presently self-insured for personal injury and
occupational-related claims.
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
value 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 the actuarial analyses performed by an independent
actuarial firm, the Company reduced personal injury reserves by $99 million
during 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. The analyses further indicated an absence of large
catastrophic claims since 2003, which also was determined to be a
trend. These reductions were included in materials, supplies and
other in the consolidated income statements.
Occupational
Occupational
claims arise from allegations of exposures to certain materials in the
workplace, such as asbestos, solvents (which include soaps and chemicals) and
diesel fuels or allegations of chronic physical injuries resulting from work
conditions, such as repetitive stress injuries, carpal tunnel syndrome and
hearing loss.
Asbestos
The
Company is party to a number of occupational claims by employees alleging
exposure to asbestos in the workplace. The heaviest possible exposure
for employees was due to work conducted in and around steam locomotive engines
that were largely phased out beginning around the 1950s. However, other types of
exposures, including exposure from locomotive component parts and building
materials, continued until it was substantially eliminated by
1985. Additionally, the Company has retained liability for asbestos
claims filed against the previously owned international container shipping
business.
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 objective
of the analysis is to determine the number of estimated incurred but not
reported (“IBNR”) claims and the estimated average cost per claim to be received
over the next seven years. Seven years was determined by management
to be the time period in which probable claim filings and claim values could be
estimated with more certainty.
The
Company, with the assistance of the third party specialist, determines its
potentially exposed population and it is then able to derive the estimated
number of IBNR claims. The estimated average cost per claim is then determined
utilizing recent actual average cost per claim data and national industry data.
Key elements of the assessment include the following:
|
|
·
|
An
estimate is computed using a ratio of Company employee data to national
employment for select years during the period 1938-2001. The
Company uses railroad industry historical census data because it does not
have detailed employment records in order to compute the population of
potentially exposed employees.
|
|
|
·
|
The
projected incidence of disease is estimated based on epidemiological
studies using employees’ age and the duration and intensity of potential
exposure while employed. Epidemiology is the medical science
that deals with the incidence, distribution and control of diseases in a
population.
|
|
|
·
|
An
estimate of the future anticipated claims filing rate by type of disease
(non-malignant, cancer and mesothelioma) is computed using the Company’s
average historical claim filing rates for a three-year calibration period,
excluding a surge in claims originating in West Virginia. In
2006, the Company received 852 asbestos claims in West Virginia in which
the claimants were neither exposed in West Virginia nor residents of the
state. CSX believes these claims will not have merit as
no medical evidence has been provided to substantiate the claims and
therefore CSX has excluded them from the calibration
period. Claim levels in 2007 returned to expected levels and
management feels this calibration period represents the best estimate of
future filing rates.
|
|
|
·
|
An
estimate of the future anticipated dismissal rate by type of claim is
computed using the Company’s historical average dismissal rates observed
during the current calibration period noted
above.
|
|
|
·
|
An
estimate of the future anticipated settlement by type of disease is
computed using the Company’s historical average of dollars paid per claim
for pending and future claims using the average settlement by type of
incident observed during the current calibration period noted
above.
|
From
these assumptions, the Company projects the incidence of each type of disease to
the estimated population to determine the total estimated number of employees
that could potentially assert a claim. Historical claim filing rates are applied
for each type of disease to the total number of employees that could potentially
assert a claim to determine the total number of anticipated claim filings by
disease type. Historical dismissal rates, which represented claims that were
closed without payment, were deducted to calculate the number of future claims
by disease type that would likely require payment by the Company. Finally, the
number of such claims was multiplied by the average settlement value to estimate
the Company’s future liability for IBNR asbestos claims.
The
estimated future filing rates and estimated average claim values are the most
sensitive assumptions for this reserve. A 1% increase or decrease in
either the forecasted number of IBNR claims or the average claim values would
result in an approximate $1 million increase or decrease in the liability
recorded for unasserted asbestos claims.
Other
Occupational
The
Company retains a third party specialist with extensive experience in performing
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. Similar to the asbestos
liability estimation process, the key elements of the assessment include the
following:
|
|
·
|
An
estimate of the potentially exposed population for other occupational
diseases is calculated by projecting active versus retired workforce from
2002 to 2010 using a growth rate projection for overall railroad
employment made by the Railroad Retirement Board in its June 2003
report.
|
|
|
·
|
An
estimate of the future anticipated claims filing rate by type of injury,
employee type, and active versus retired employee is computed using the
Company’s average historical claim filing rates for the calibration
periods management felt were representative of future filing
rates. For carpal tunnel and repetitive stress injuries, the
current calibration period is a 1-year average of claim
filings. Hearing loss uses a 3-year calibration period, and all
other diseases or injuries use a 2-year calibration period. An
estimate is made to forecast future claims by using the filing rates by
disease and the active and retired CSX population each
year.
|
|
|
·
|
An
estimate of the future anticipated settlement by type of injury is
computed using the Company’s historical average of dollars paid per claim
for pending and future claims using the average settlement by type of
injury observed during a period that management feels is representative of
future settlement amounts.
|
The
estimated future filing rates and estimated average claim values are the most
sensitive assumptions for this reserve. A 1% increase or decrease in
either the forecasted number of IBNR claims or the average claim values would
not result in a material increase or decrease in the liability recorded for
unasserted other occupational claims.
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 (“PRP”) at approximately 247 environmentally impaired sites,
many of which were, 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 or disposal. In
addition, some of the Company’s land holdings were leased to others for
commercial or industrial uses that may have resulted in releases of hazardous
substances or other regulated materials onto the property and could give rise to
proceedings against the Company.
In any
such proceedings, the Company is subject to environmental clean-up and
enforcement actions under the Superfund Law, as well as similar state laws that
may impose joint and several liability for clean-up and enforcement costs on
current and former owners and operators of a site without regard to fault or the
legality of the original conduct. These costs could be
substantial.
In
accordance with Statement of Position 96-1, Environmental Remediation
Liabilities, the Company reviews its role with respect to each site
identified at least once a quarter, giving consideration to a number of factors
such as:
|
|
·
|
type
of clean-up required;
|
|
|
·
|
nature
of the Company’s alleged connection to the location (e.g. generator of
waste sent to the site or owner or operator of the
site);
|
|
|
·
|
extent
of the Company’s alleged connection (e.g. volume of waste sent to the
location and other relevant factors);
and
|
|
|
·
|
number,
connection and financial viability of other named and unnamed PRPs at the
location.
|
Based on
the review process, the Company has recorded amounts to cover 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.
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 fund 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 and liquidity.
Legal
In
accordance with SFAS 5, an accrual for a loss contingency is established if
information available prior to issuance of the financial statements indicates
that it is probable that an asset has been impaired or a liability
has been incurred at the date of the financial statements, and the amount of
loss can be reasonably estimated. If no accrual is made for a loss
contingency because one or both of these conditions are not met, or if an
exposure to loss exists in excess of the amount accrued, disclosure of the
contingency is made when there is at least a reasonable possibility that a loss
or an additional loss may have been incurred.
The
Company evaluates all exposures relating to legal liabilities at least quarterly
and adjusts reserves when appropriate under the guidance noted
above. The amount of a particular reserve may be influenced by
factors that include official rulings, newly discovered or developed evidence,
or changes in laws, regulations, and evidentiary standards.
Pension
and Post-retirement Medical Plan Accounting
The
Company sponsors defined benefit pension plans principally for salaried,
management personnel. The plans provide eligible employees with
retirement benefits based predominantly on 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 pension plan contributions of $266 million to
its qualified defined benefit pension plans in 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
accounting for these plans is subject to the guidance provided in SFAS 158,
Employers’ Accounting for
Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB
Statements No. 87, 88, 106, and 132 (R) (“SFAS 158”), SFAS 87, Employers Accounting for Pensions
(“SFAS 87”), and SFAS 106, Employers' Accounting for
Postretirement Benefits Other than Pension (“SFAS 106”).
SFAS 87 requires that management make
certain assumptions relating to the following:
|
|
·
|
long-term
rate of return on plan assets;
|
|
|
·
|
discount
rates used to measure future obligations and interest
expense;
|
|
|
·
|
salary
scale inflation rates;
|
|
|
·
|
health
care cost trend rates; and
|
|
|
·
|
other
assumptions.
|
These
assumptions are determined as of the beginning of the year. As
permitted by SFAS 87, the Company has elected to use a plan measurement date of
September 30 to actuarially value its pension and post-retirement
plans. As required by SFAS 158, CSX will change its measurement date
to the fiscal year end in 2008 and does not expect the impact to be material.
The Company engages independent, external actuaries to compute the amounts of
liabilities and expenses relating to these plans subject to the assumptions that
the Company selects. The Company reviews the long-term rate of return, discount,
salary scale inflation and health care cost trend rates on an annual basis and
makes modifications to the assumptions based on current rates and trends as
appropriate.
Long-term
Rate of Return on Plan Assets
The
expected long-term average rate of return on plan assets reflects the average
rate of earnings expected on the funds invested, or to be invested, to provide
for benefits included in the projected benefit obligation. In estimating that
rate, the Company gives appropriate
consideration to the returns being earned by the plan assets in the funds and
the rates of return expected to be available for reinvestment.
The
Company's expected long-term average rate of return on assets considers the
current and projected asset mix of the funds. Management balances
market expectations obtained from various investment managers and economists
with both market and actual plan historical returns to develop a reasonable
estimate of the expected long-term rate of return on assets. As this
assumption is long-term, it is adjusted less frequently than other assumptions
used in pension accounting. The long-term rate of return on plan
assets used by the Company to value its 2007 pension obligation was
8.5%.
Discount
Rates
Discount
rates affect the amount of liability recorded and the interest expense component
of pension and post-retirement expense. Discount rates reflect the
rates at which pension and other post-retirement benefits could be effectively
settled, or in other words, how much it would cost the Company to buy enough
high quality bonds to generate cash flow equal to the Company’s expected future
benefit payments. The Company determines the discount rate based on a
hypothetical portfolio of high quality bonds with cash flows matching the plans’
expected benefit payments.
The
discount rates used by the Company to value its 2007 pension and post-retirement
obligations are 6% and 5.75%, respectively. The Company uses a
different discount rate for pension and post-retirement benefits due to the
different time horizons of future payments for each of the plans. For
pensions, the time horizon is approximately 12 years, while for post-retirement,
the time horizon is approximately 8 years.
Each year these discount rates are
reevaluated and adjusted to reflect the best estimate of the current effective
settlement rates. If interest rates generally decline or rise, the
assumed discount rates will change.
Salary Scale Inflation
Rates
Salary
scale inflation rates are based on current trends and historical data
accumulated by the Company. The Company reviews recent wage increases
and management incentive compensation payments over the past five years in its
assessment of salary scale inflation rates. The Company used a salary
scale rate of 4.1% to value its 2007 pension obligation.
Health
Care Cost Trend Rates
Health
care cost trend rates are based on recent plan experience and industry
trends. The Company uses actuarial data to substantiate the inflation
assumption for health care costs, representing increases in total plan costs
(which include claims and administrative fee cost components). The
current assumed health care cost trend rate is 10% for Medicare-eligible
participants and 9% for non-Medicare-eligible participants and is expected to
decrease gradually until reaching 4.75% in 2014, based upon current actuarial
projections.
Other
Assumptions
The
calculations made by the actuaries also include assumptions relating to
mortality rates, turnover and retirement age. These assumptions are
based upon historical data and are approved by management.
2007
Estimated Pension and Post-retirement Expense
Net
periodic pension and post-retirement benefits expense for 2008 is expected to be
approximately $34 million and $28 million, respectively, compared to $64 million
and $25 million, respectively in 2007.
The following sensitivity analysis
illustrates the effect of changes in certain assumptions like discount rates,
salaries and health care costs on the 2008 estimated pension and post-retirement
expense:
|
(Dollars
in Millions)
|
Pension
|
OPEB
|
|
|
Discount
Rate 0.25% change
|
$ 4
|
$ 1
|
|
|
Salary
Inflation 0.25% change
|
2
|
-
|
|
|
Health
Care Cost 1% change
|
N/A
|
2
|
|
Depreciation
Policies for Assets Under the Group-Life Method
CSXT
accounts for its rail assets, including main-line track, locomotives and freight
cars, using the group-life method. The group-life method pools
similar assets by type and then depreciates each group as a
whole. Under the group-life method, the service lives for each group
of rail assets are determined by completing periodic life studies and applying
management's assumptions concerning the service lives of its
properties. These life studies are conducted by a third party expert,
analyzed by the Company's management and approved by the STB. Life
studies for equipment assets are required every three years, whereas road and
track life studies are required every six years by the STB.
Changes
in asset lives due to the results of the life studies could significantly impact
future periods’ depreciation expense, and thus, the Company's results of
operations. Factors taken into account during the life study
include:
|
|
·
|
Statistical
analysis of historical retirements for each group of
property;
|
|
|
·
|
Evaluation
of current operations;
|
|
|
·
|
Evaluation
of technological advances and maintenance
schedules;
|
|
|
·
|
Previous
assessment of the condition of the assets and outlook for their continued
use;
|
|
|
·
|
Expected
net salvage to be received upon retirement;
and
|
|
|
·
|
Comparison
of assets to the same asset groups with other
companies.
|
The life
studies may also indicate that the recorded amount of accumulated depreciation
is deficient (or in excess) of the appropriate amount indicated by the study.
Any such deficiency (or excess) is amortized as a component of depreciation
expense over the remaining useful life of the asset group until the next
required life study.
In 2007,
CSXT completed life studies for all of its equipment, road and track assets and
also completed an analysis of the assets received in the Conrail reorganization,
which resulted in a reduction in depreciation expense for equipment and road
assets and an increase in depreciation expense for track assets. The
combination of these adjustments reduced depreciation expense by $21 million in
2007. Also in 2007, the Company reviewed the useful lives of
Intermodal terminal assets, as well as lift equipment and
containers. A $4 million reduction in depreciation expense was
recognized as a result of this periodic review.
Assets
depreciated under the group-life method comprise 91% of CSXT's total fixed
assets of $21 billion on a net basis at December 28, 2007. The Company’s
depreciation expense for the year ended December 28, 2007 amounted to $883
million. A one percent change in the average life of all group-life
assets would result in an $8 million change to the Company’s annual depreciation
expense.
Income
Taxes
In 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 and
liquidity.
CSX files a consolidated federal income
tax return, which includes its principal domestic
subsidiaries. Examinations of the federal income tax returns of CSX
have been completed through 2003. Federal income tax returns for 2004
through 2007 currently are under examination. Management believes
adequate provision has been made for any adjustments that might be
assessed. While the final outcome of these matters cannot be
predicted with certainty, it is the opinion of CSX management that none of these
items will have a materially adverse effect on the results of operations,
financial condition and liquidity of CSX. An unexpected adverse
resolution of one or more of these items, however, could have a materially
adverse effect on the results of operations, financial condition and liquidity
in a particular fiscal quarter or fiscal year. Also, the Company is
party to a number of legal and administrative proceedings, the resolution of
which could result in gain realization in amounts that could be material to
results of operations, financial condition and liquidity in a particular fiscal
quarter or fiscal year.
New
Accounting Pronouncements and Change in Accounting Policy
See Note
1, Nature of Operations and Significant Accounting Policies under the caption,
“New Accounting Pronouncements and Changes in Accounting Policy.”
Item 7A. Quantitative and Qualitative Disclosures
about Market Risk
CSX does
not hold or issue derivative financial instruments for trading
purposes. Historically, the Company has used derivative financial
instruments to address market risk exposure to fluctuations in interest rates
and the risk of volatility in its fuel costs, but as of December 2007, the
Company did not have a significant position in derivative financial
instruments.
At
December 2007, CSX had $106 million of outstanding floating rate debt
obligations outstanding. A 1% fluctuation in interest rates on these
notes would cause a $1 million change in interest expense.
|
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
|
||||
|
Page
|
||||
|
63
|
||||
|
CSX
Corporation
|
||||
|
Consolidated
Financial Statements and Notes to Consolidated Financial
Statements
|
||||
|
Herewith:
|
||||
|
64
|
||||
|
December
28, 2007
|
||||
|
December
29, 2006
|
||||
|
December
30, 2005
|
||||
|
65
|
||||
|
December
28, 2007
|
||||
|
December
29, 2006
|
||||
|
66
|
||||
|
December
28, 2007
|
||||
|
December
29, 2006
|
||||
|
December
30, 2005
|
||||
|
67
|
||||
|
December
28, 2007
|
||||
|
December
29, 2006
|
||||
|
December
30, 2005
|
||||
|
68
|
||||
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
To the
Shareholders and Board of Directors of CSX Corporation
We
have audited the accompanying consolidated balance sheets of CSX Corporation and
subsidiaries as of December 28, 2007 and December 29, 2006, and the related
consolidated statements of income, cash flows, and changes in shareholders'
equity for each of the three fiscal years in the period ended December 28, 2007.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of CSX Corporation and
subsidiaries at December 28, 2007 and December 29, 2006, and the consolidated
results of their operations and their cash flows for each of the three fiscal
years in the period ended December 28, 2007, in conformity with U.S. generally
accepted accounting principles.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), CSX Corporation’s internal control over
financial reporting as of December 28, 2007, based on criteria established in
Internal Control – Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission and our report dated February 15, 2008
expressed an unqualified opinion thereon.
/s/ Ernst
& Young LLP
Independent
Certified Public Accountants
Jacksonville,
Florida
February
15, 2008
CONSOLIDATED INCOME STATEMENTS
(Dollars
in Millions, Except Per Share Amounts)
|
Fiscal
Years
|
||||||
|
2007
|
2006
|
2005
|
||||
|
Operating
Revenue
|
$
10,030
|
$
9,566
|
$
8,618
|
|||
|
Operating
Expense
|
||||||
|
Labor
and Fringe
|
2,986
|
2,930
|
2,864
|
|||
|
Materials,
Supplies and Other
|
2,031
|
1,948
|
1,855
|
|||
|
Fuel
|
1,210
|
1,112
|
783
|
|||
|
Depreciation
|
883
|
857
|
826
|
|||
|
Equipment
and Other Rents
|
451
|
507
|
510
|
|||
|
Inland
Transportation
|
240
|
242
|
230
|
|||
|
Gain
on Insurance Recoveries (Note 5)
|
(27)
|
(168)
|
-
|
|||
|
Total
Operating Expense
|
7,774
|
7,428
|
7,068
|
|||
|
Operating
Income
|
2,256
|
2,138
|
1,550
|
|||
|
Other
Income and Expense
|
||||||
|
Other
Income - Net (Note 10)
|
93
|
95
|
101
|
|||
|
Debt
Repurchase Expense (Note 9)
|
-
|
-
|
(192)
|
|||
|
Interest
Expense
|
(417)
|
(392)
|
(423)
|
|||
|
Earnings
From Continuing Operations before Income Taxes
|
1,932
|
1,841
|
1,036
|
|||
|
Income
Tax Expense (Note 13)
|
(706)
|
(531)
|
(316)
|
|||
|
Earnings
From Continuing Operations
|
1,226
|
1,310
|
720
|
|||
|
Discontinued
Operations (Note 17)
|
110
|
-
|
425
|
|||
|
Net
Earnings
|
$
1,336
|
$
1,310
|
$
1,145
|
|||
|
Per
Common Share (Note 2)
|
||||||
|
Basic
Earnings Per Share
|
||||||
|
From
Continuing Operations
|
$
2.85
|
$
2.98
|
$
1.67
|
|||
|
Discontinued
Operations
|
0.26
|
-
|
0.98
|
|||
|
Net
Earnings
|
$
3.11
|
$ 2.98
|
$
2.65
|
|||
|
Earnings
Per Common Share, Assuming Dilution
|
||||||
|
From
Continuing Operations
|
$
2.74
|
$ 2.82
|
$
1.59
|
|||
|
Discontinued
Operations
|
0.25
|
-
|
0.93
|
|||
|
Net
Earnings
|
$
2.99
|
$
2.82
|
$
2.52
|
|||
|
Average
Common Shares Outstanding (Thousands)
|
430,270
|
440,084
|
432,851
|
|||
|
Average
Common Shares Outstanding,
|
448,280
|
465,934
|
456,047
|
|||
|
Assuming
Dilution (Thousands)
|
||||||
|
Cash
Dividends Paid Per Common Share
|
$
0.54
|
$
0.33
|
$
0.215
|
|||
See
accompanying Notes to Consolidated Financial Statements
|
|
||||
|
December
28,
|
December
29,
|
|||
|
2007
|
2006
|
|||
|
ASSETS
|
||||
|
Current
Assets:
|
||||
|
Cash
and Cash Equivalents (Note 1)
|
$
368
|
$ 461
|
||
|
Short-term
Investments
|
346
|
439
|
||
|
Accounts
Receivable, net of allowance for doubtful
|
||||
|
accounts
of $74 and $82, respectively
|
1,174
|
1,174
|
||
|
Materials
and Supplies
|
240
|
204
|
||
|
Deferred
Income Taxes
|
254
|
251
|
||
|
Other
Current Assets
|
109
|
143
|
||
|
Total
Current Assets
|
2,491
|
2,672
|
||
|
Properties
|
28,999
|
27,715
|
||
|
Accumulated
Depreciation
|
(7,219)
|
(6,792)
|
||
|
Properties
- Net (Note 11)
|
21,780
|
20,923
|
||
|
Investment
in Conrail (Note 16)
|
639
|
607
|
||
|
Affiliates
and Other Companies
|
365
|
336
|
||
|
Other
Long-term Assets (Note 12)
|
259
|
591
|
||
|
Total
Assets
|
$ 25,534
|
$ 25,129
|
||
|
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
||||
|
Current
Liabilities:
|
||||
|
Accounts
Payable
|
$ 976
|
$ 974
|
||
|
Labor
and Fringe Benefits Payable
|
461
|
495
|
||
|
Casualty,
Environmental and Other Reserves (Note 6)
|
247
|
253
|
||
|
Current
Maturities of Long-term Debt (Note 9)
|
785
|
592
|
||
|
Short-term
Debt (Note 9)
|
2
|
8
|
||
|
Income
and Other Taxes Payable
|
113
|
114
|
||
|
Other
Current Liabilities
|
87
|
86
|
||
|
Total
Current Liabilities
|
2,671
|
2,522
|
||
|
Casualty,
Environmental and Other Reserves (Note 6)
|
624
|
668
|
||
|
Long-term
Debt (Note 9)
|
6,470
|
5,362
|
||
|
Deferred
Income Taxes
|
6,096
|
6,110
|
||
|
Other
Long-term Liabilities (Note 12)
|
988
|
1,525
|
||
|
Total
Liabilities
|
16,849
|
16,187
|
||
|
Shareholders'
Equity:
|
||||
|
Common
Stock, $1 Par Value (Note 3)
|
408
|
438
|
||
|
Other
Capital
|
37
|
1,469
|
||
|
Retained
Earnings (Note 13)
|
8,565
|
7,427
|
||
|
Accumulated
Other Comprehensive Loss
|
(325)
|
(392)
|
||
|
Total
Shareholders' Equity
|
8,685
|
8,942
|
||
|
Total
Liabilities and Shareholders' Equity
|
$
25,534
|
$
25,129
|
||
See accompanying Notes to Consolidated
Financial Statements
CONSOLIDATED CASH FLOW STATEMENTS
(Dollars
in Millions)
|
Fiscal
Years
|
|||||||
|
2007
|
2006
|
2005
|
|||||
|
OPERATING
ACTIVITIES
|
|||||||
|
Net
Earnings
|
$
1,336
|
$ 1,310
|
$ 1,145
|
||||
|
Adjustments
to Reconcile Net Earnings to Net Cash Provided
|
|||||||
|
by
Operating Activities:
|
|||||||
|
Depreciation
|
890
|
867
|
833
|
||||
|
Deferred
Income Taxes
|
272
|
42
|
(46)
|
||||
|
Gain
on Sale of International Terminals - Net of Tax (Note 17)
|
-
|
-
|
(428)
|
||||
|
Non-cash
Discontinued Operations (Note 17)
|
(110)
|
-
|
-
|
||||
|
Gain
on Insurance Recoveries (Note 5)
|
(27)
|
(168)
|
-
|
||||
|
Insurance
Proceeds (Note 5)
|
13
|
121
|
29
|
||||
|
Net
Gain on Conrail spin-off - after tax
|
-
|
(26)
|
-
|
||||
|
Contributions
to Qualified Pension Plans (Note 8)
|
(266)
|
(28)
|
(3)
|
||||
|
Other
Operating Activities
|
(77)
|
33
|
(138)
|
||||
|
Changes
in Operating Assets and Liabilities:
|
|||||||
|
Accounts
Receivable
|
(50)
|
(33)
|
(44)
|
||||
|
Other
Current Assets
|
(41)
|
96
|
(29)
|
||||
|
Accounts
Payable
|
48
|
51
|
54
|
||||
|
Income
and Other Taxes Payable
|
234
|
(103)
|
(402)
|
||||
|
Other
Current Liabilities
|
(38)
|
(104)
|
139
|
||||
|
Net
Cash Provided by Operating Activities
|
2,184
|
2,058
|
1,110
|
||||
|
INVESTING
ACTIVITIES
|
|||||||
|
Property
Additions
|
(1,773)
|
(1,639)
|
(1,136)
|
||||
|
Insurance
Proceeds (Note 5)
|
16
|
147
|
41
|
||||
|
Net
Proceeds from Sale of International Terminals (Note 17)
|
-
|
-
|
1,108
|
||||
|
Purchase
of Minority Interest in an International Terminals'
|
|||||||
|
Subsidiary
(Note 17)
|
-
|
-
|
(110)
|
||||
|
Purchases
of Short-term Investments
|
(2,338)
|
(1,412)
|
(2,601)
|
||||
|
Proceeds
from Sales of Short-term Investments
|
2,459
|
1,290
|
2,634
|
||||
|
Other
Investing Activities
|
(57)
|
4
|
28
|
||||
|
Net
Cash Used in Investing Activities
|
(1,693)
|
(1,610)
|
(36)
|
||||
|
FINANCING
ACTIVITIES
|
|||||||
|
Short-term
Debt - Net
|
(6)
|
7
|
(99)
|
||||
|
Long-term
Debt Issued (Note 9)
|
2,381
|
471
|
105
|
||||
|
Long-term
Debt Repaid (Note 9)
|
(785)
|
(546)
|
(1,283)
|
||||
|
Dividends
Paid
|
(231)
|
(145)
|
(93)
|
||||
|
Stock
Options Exercised (Note 4)
|
153
|
319
|
98
|
||||
|
Shares
Repurchased (Note 1)
|
(2,174)
|
(465)
|
-
|
||||
|
Other
Financing Activities
|
78
|
63
|
(15)
|
||||
|
Net
Cash Used in Financing Activities
|
(584)
|
(296)
|
(1,287)
|
||||
|
Net
(Decrease) Increase in Cash and Cash Equivalents
|
(93)
|
152
|
(213)
|
||||
|
CASH
AND CASH EQUIVALENTS
|
|||||||
|
Cash
and Cash Equivalents at Beginning of Period
|
461
|
309
|
522
|
||||
|
Cash
and Cash Equivalents at End of Period
|
$
368
|
$ 461
|
$ 309
|
||||
|
SUPPLEMENTAL
CASH FLOW INFORMATION
|
|||||||
|
Interest
Paid - Net of Amounts Capitalized
|
$
411
|
$ 387
|
$ 444
|
||||
|
Income
Taxes Paid
|
$
235
|
$ 531
|
$ 798
|
||||
See
accompanying Notes to Consolidated Financial Statements
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’
EQUITY
(Dollars
in Millions)
|
Accumulated
Other
|
|||||||||||
|
Common
|
Comprehensive
Income (Loss)
|
||||||||||
|
Shares
|
Pension
|
||||||||||
|
Outstanding
|
Common
|
Other
|
Retained
|
and
OPEB
|
Fuel
|
||||||
|
(Thousands)
|
Stock
|
Capital
|
Earnings
|
Adjustments(a)
|
Hedge(b)
|
Other
|
Total
|
||||
|
Balance
December 31, 2004
|
431,058
|
$ 431
|
$ 1,390
|
$ 5,210
|
$ (292)
|
$ 72
|
$ -
|
$ 6,811
|
|||
|
Comprehensive
Earnings:
|
|||||||||||
|
Net
Earnings
|
-
|
-
|
-
|
1,145
|
-
|
-
|
-
|
1,145
|
|||
|
Other
Comprehensive Income
|
|||||||||||
|
(Loss)
|
-
|
-
|
-
|
-
|
(15)
|
(42)
|
-
|
(57)
|
|||
|
Comprehensive
Earnings
|
1,088
|
||||||||||
|
Dividends
|
-
|
-
|
-
|
(93)
|
-
|
-
|
-
|
(93)
|
|||
|
Stock
Option Exercises and Other
|
5,348
|
5
|
143
|
-
|
-
|
-
|
-
|
148
|
|||
|
Balance
December 30, 2005
|
436,406
|
436
|
1,533
|
6,262
|
(307)
|
30
|
-
|
7,954
|
|||
|
Comprehensive
Earnings:
|
|||||||||||
|
Net
Earnings
|
-
|
-
|
-
|
1,310
|
-
|
-
|
-
|
1,310
|
|||
|
Other
Comprehensive Income
|
|||||||||||
|
(Loss)
|
-
|
-
|
-
|
-
|
(2)
|
(30)
|
- |
(32)
|
|||
|
Comprehensive
Earnings
|
1,278
|
||||||||||
|
Adjustment
for Initial Adoption
|
|||||||||||
|
of
SFAS 158, net of tax(c)
|
-
|
-
|
-
|
-
|
(83)
|
-
|
-
|
(83)
|
|||
|
Dividends
|
-
|
-
|
-
|
(145)
|
-
|
-
|
-
|
(145)
|
|||
|
Share
Repurchases
|
(14,533)
|
(14)
|
(451)
|
-
|
-
|
-
|
-
|
(465)
|
|||
|
Stock
Option Exercises and Other
|
15,891
|
16
|
387
|
-
|
-
|
-
|
-
|
403
|
|||
|
Balance
December 29, 2006
|
437,764
|
438
|
1,469
|
7,427
|
(392)
|
-
|
-
|
8,942
|
|||
|
Comprehensive
Earnings:
|
|||||||||||
|
Net
Earnings
|
-
|
-
|
-
|
1,336
|
-
|
-
|
-
|
1,336
|
|||
|
Other
Comprehensive Income
|
|||||||||||
|
(Loss)
|
-
|
-
|
-
|
-
|
63
|
- |
4
|
67
|
|||
|
Comprehensive
Earnings
|
1,403
|
||||||||||
|
Adjustment
for Initial Adoption
|
|||||||||||
|
of
FIN 48(d)
|
-
|
-
|
-
|
33
|
-
|
-
|
-
|
33
|
|||
|
Dividends
|
-
|
-
|
-
|
(231)
|
-
|
-
|
-
|
(231)
|
|||
|
Share
Repurchases (e)
|
(50,917)
|
(51)
|
(2,123)
|
-
|
-
|
-
|
-
|
(2,174)
|
|||
|
Bond
Conversions(f)
|
13,296
|
13
|
339
|
-
|
-
|
-
|
-
|
352
|
|||
|
Subsidiary
Equity Restructuring(g)
|
-
|
-
|
72
|
-
|
-
|
-
|
-
|
72
|
|||
|
Stock
Option Exercises and Other
|
7,721
|
8
|
280
|
-
|
-
|
-
|
-
|
288
|
|||
|
Balance
December 28, 2007
|
407,864
|
$ 408
|
$ 37
|
$ 8,565
|
$ (329)
|
$ -
|
$ 4
|
$ 8,685
|
|||
|
(a)
|
Pension
and Other Postretirement Benefits balances are net of taxes of $146
million, $197 million and $166 million for 2005, 2006 and 2007,
respectively.
|
|
(b)
|
Fuel
hedge activity is net of taxes of $21 million for 2005 and
2006.
|
|
(c)
|
See
Note 1, Nature of Operations and Significant Accounting Policies under
caption New Accounting Pronouncements and Changes in Accounting
Policy.
|
|
(d)
|
See
Note 13, Income Taxes.
|
|
(e)
|
See
Note 1, Nature of Operations and Significant Accounting Policies under
caption Other Items – Share
Repurchases.
|
|
(f)
|
See
Note 2, Earnings Per Share and Note 9, Debt and Credit
Agreements.
|
|
(g)
|
See
Note 12, Other Long-term Assets and Other Long-term
Liabilities.
|
See
accompanying Notes to Consolidated Financial Statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1. Nature of Operations and Significant Accounting
Policies
Nature
of Operations
CSX
Corporation (“CSX” and together with its subsidiaries, 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.
Rail
CSX’s
principal operating company, CSX Transportation, Inc. (“CSXT”), provides a
crucial link to the transportation supply chain through its approximately 21,000
route mile rail network, which serves every major population center in 23 states
east of the Mississippi River, the District of Columbia and the Canadian
provinces of Ontario and Quebec. It serves 70 ocean, river and lake ports
along the Atlantic and Gulf Coasts, the Mississippi River, the Great Lakes and
the St. Lawrence Seaway. CSXT also serves thousands of production and
distribution facilities through track connections to more than 230 short-line
and regional railroads.
Other
Entities
In
addition to CSXT, the rail segment includes Total Distribution Services, Inc.
(“TDSI”), Transflo Terminal Services, Inc. (“Transflo”), CSX Technology, Inc.
(“CSX Technology”) and other subsidiaries. TDSI serves the automotive
industry with distribution centers and storage locations, while Transflo
provides logistical solutions for transferring products from rail to
trucks. Technology and other support services are provided by CSX
Technology and other subsidiaries.
Intermodal
CSX
Intermodal, Inc. (“Intermodal”), one of the nation’s largest coast-to-coast
intermodal transportation providers, is a stand-alone,
integrated intermodal company linking customers to railroads via trucks and
terminals. Containers and trailers are loaded and unloaded from
trains, and trucks provide the link between intermodal terminals and the
customer.
Surface
Transportation Businesses
The rail
and intermodal segments are designated by the Company on a combined basis as
Surface Transportation businesses. Together, they generated $10
billion of revenue during 2007 and served four primary lines of business, which
are as follows:
NOTE
1. Nature of Operations and Significant Accounting Policies,
continued
|
|
·
|
The
merchandise business is the most diverse market with nearly 2.7 million
carloads per year of aggregate, which includes crushed stone, sand and
gravel, metal, phosphate, fertilizer, food, consumer, agricultural, paper
and chemical products. The merchandise business generated
approximately 50% of the Company’s revenue in 2007 and 38% of
volume.
|
|
|
·
|
Coal,
which delivered approximately 1.9 million carloads of coal, coke and iron
ore to electricity generating power plants, ocean, river and lake piers
and terminals, steel makers and industrial plants, accounted for
approximately 26% of the Company’s revenue and volume in
2007. The Company transports almost one-third of every ton of
coal used for generating electricity in the areas served by
CSX.
|
|
|
·
|
Automotive,
which delivers both finished vehicles and auto parts, generated 8% of the
Company’s revenue in 2007 and 6% of the Company’s volume. The
Company delivers approximately one-third of North America’s light
vehicles, serving both traditional manufacturers and the increasing number
of global manufacturers.
|
|
|
·
|
Intermodal
offers a competitive cost advantage over long-haul trucking by combining
the superior economics of rail transportation with the short-haul
flexibility of trucks. Through its network of more than 50
terminals, Intermodal serves all major markets east of the Mississippi and
transports mainly manufactured consumer goods in containers, providing
customers with truck-like service for longer shipments. For
2007, Intermodal accounted for approximately 14% of the Company’s total
revenue and 30% of volume.
|
Other revenue, which includes revenue
from regional railroads (that are partially owned by CSX), demurrage, switching
and other incidental charges, accounted for 2% of the Company’s total 2007
revenue. Revenue from regional railroads includes shipments by
railroads that CSX does not directly operate. Demurrage represents
charges assessed by railroads when shippers or receivers of freight hold
railcars beyond a specified period of time. Switching revenue is
generated when CSXT switches cars between trains for a customer or another
railroad.
Other
Businesses
CSX’s
other holdings include CSX Real Property, Inc., a subsidiary responsible for the
Company’s real estate sales, leasing, acquisition and management and development
activities, and CSX Hotels, Inc., a resort doing business as The Greenbrier,
located in White Sulphur Springs, West Virginia. Pretax earnings of
$42 million, $24 million and $85 million for 2007, 2006 and 2005, respectively,
from these activities are classified as a component of other
income. These items are classified in other income because they are
not considered by the Company to be operating activities and may fluctuate with
the timing of real estate sales and resort seasonality.
NOTE
1. Nature of Operations and Significant Accounting Policies,
continued
The
Company also has certain residual activities from formerly owned companies that
include leasing of equipment and vessels. These results are included
in consolidated operating income and totaled $5 million, $12 million and $1
million in 2007, 2006 and 2005, respectively.
Basis
of Presentation
In the
opinion of management, the accompanying consolidated financial statements
contain all normal, recurring adjustments necessary to fairly present the
financial position of CSX and its subsidiaries at December 2007 and December
2006, and the Consolidated Statements of Income, Cash Flows and
Changes in Shareholders’ Equity for fiscal years 2007, 2006 and
2005. Certain prior-year data have been reclassified to conform to
the 2007 presentation.
Fiscal
Year
CSX
follows a 52/53 week fiscal reporting calendar. This fiscal calendar
allows every quarter to consistently end on a Friday and to be of equal duration
(13 weeks). However, to maintain this type of reporting calendar,
every sixth or seventh year (depending on the Gregorian calendar and when leap
year falls), an extra week will be included in one quarter (a 14-week fiscal
quarter) and, therefore, the full fiscal year will have 53 weeks.
Fiscal years 2007, 2006 and 2005 each
consisted of 52 weeks ending on December 28, 2007, December 29, 2006 and
December 30, 2005, respectively. Except as otherwise specified,
references to full year indicate CSX’s fiscal periods ended on these
dates.
Principles
of Consolidation
The
consolidated financial statements include results of operations of CSX and its
majority-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated. Most investments in companies that were not
majority-owned were carried at cost (if less than 20% owned and the Company has
no significant influence) or equity (if the Company has significant
influence).
Cash,
Cash Equivalents and Short-term Investments
On a
daily basis, cash in excess of current operating requirements is invested in
various highly liquid investments having a typical maturity date of three months
or less at the date of acquisition. These investments were carried at cost,
which approximated market value, and were classified as cash equivalents.
Investments in instruments with maturities greater than three months but less
than one year were classified as short-term investments.
NOTE
1. Nature of Operations and Significant Accounting Policies,
continued
CSX holds $270 million and $391 million
of auction rate securities and classifies these investments as available for
sale as of December 2007 and 2006, respectively. Accordingly, these
investments were included in current assets as Short-term Investments on the
Consolidated Balance Sheets. On the Consolidated Cash Flow
Statements, purchases and sales of these assets were classified within Investing
Activities.
Allowance
for Doubtful Accounts
The Company maintains an allowance for
doubtful accounts for the estimated probable losses on uncollectible accounts
and other receivables. The allowance is based upon the credit worthiness of
customers, historical experience, the age of the receivable and current market
and economic conditions, as well as any known trends or uncertainties related to
customer billing and account collectibility. Uncollectible amounts were charged
against the allowance account. The allowance for doubtful accounts is netted
against accounts receivable.
Materials
and Supplies
Materials and Supplies in the
Consolidated Balance Sheets were carried at average costs and consist primarily
of fuel and parts used in the repair and maintenance of CSXT’s freight car and
locomotive fleets, equipment and track structure.
Properties
All
properties were stated at historical cost less an allowance for accumulated
depreciation. Rail assets, including main-line track, locomotives and freight
cars, were depreciated using the group-life method. Under this
method, CSXT pools similar assets by road and equipment type and then
depreciates each group as a whole. Regulations enforced by the
Surface Transportation Board (“STB”) of the U.S. Department of Transportation
require periodic formal studies of ultimate service lives (“life studies”) for
all railroad assets. Factors taken into account during a life study
include:
|
|
·
|
statistical
analysis of historical retirements for each group of
property;
|
|
|
·
|
evaluation
of current operations;
|
|
|
·
|
evaluation
of technological advances and maintenance
schedules;
|
|
|
·
|
previous
assessment of the condition of the assets and outlook for their continued
use;
|
|
|
·
|
net
salvage expected to be received upon retirement;
and
|
|
|
·
|
comparison
of assets to the same asset groups with other
companies.
|
NOTE
1. Nature of Operations and Significant Accounting Policies,
continued
The
results of the life study process determine the service lives for each asset
group under the group-life method. These studies are conducted by a third party
expert and are analyzed by the Company's management. Resulting changes in
service life estimates are subject to review and approval by the STB. Road
assets, including main-line track, have estimated service lives ranging from six
years for system roadway machinery to 80 years for grading. Equipment assets,
including locomotives and freight cars, have estimated service lives ranging
from six years for motor vehicles to 35 years for work equipment.
Changes in asset lives due to the
results of the life studies are applied at the completion of the life study and
continue until the next required life study. The life studies may also indicate
that the recorded amount of accumulated depreciation is deficient (or in excess)
of the amount indicated by the study. Any such deficiency (or excess) amount is
amortized as a component of depreciation expense over the remaining useful life
of the asset group until the next required life study.
The
majority of non-rail property is depreciated using the straight-line method on a
per asset basis. The depreciable lives of non-rail property is
periodically reviewed by the Company and any changes are applied on a
prospective basis. Amortization expense recorded under capital leases
is included in depreciation expense on the Consolidated Income
Statements.
For
retirements or disposals of depreciable rail assets that occur in the ordinary
course of business, the asset cost (net of salvage value or sales proceeds) is
charged to accumulated depreciation and no gain or loss is recognized. For
retirements or disposals of non-rail depreciable assets, infrequent disposal of
rail assets outside the normal course of business and all dispositions of land,
the resulting gains or losses are recognized at the time of disposal.
Expenditures that significantly increase asset values or extend useful lives are
capitalized. Repair and maintenance expenditures are charged to operating
expense when the work is performed.
Properties and other long-lived assets
are reviewed for impairment whenever events or business conditions indicate the
carrying amount of such assets may not be fully recoverable. Initial assessments
of recoverability are based on estimates of undiscounted future net cash flows
associated with an asset or a group of assets in accordance with Statement of
Financial Accounting Standards (“SFAS”) 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. Where impairment is indicated,
the assets are evaluated and their carrying amount is reduced to fair value
based on undiscounted net cash flows or other estimates of fair
value.
Revenue
and Expense Recognition
The Company recognizes freight revenue
using Free-On-Board (“FOB”) Origin pursuant to Emerging Issues Task Force
(“EITF”) 91-9, Revenue and
Expense Recognition for Freight Services in Process. The
Company uses method (5) in the EITF, which provides for the allocation of
revenue between reporting periods based on relative transit time in each
reporting period. Expenses are recognized as incurred.
NOTE
1. Nature of Operations and Significant Accounting Policies,
continued
The
certain key estimates included in the recognition and measurement of revenue and
related accounts receivable under the policies described above are as
follows:
|
|
·
|
revenue
associated with shipments in transit, which are based on historical
freight car movement data as well as average cycle times to move
commodities from their origin to their final destination or
interchange;
|
|
|
·
|
future
adjustments to revenue or accounts receivable for billing corrections,
billing discounts, bad debts and allowances for doubtful
accounts;
|
|
|
·
|
future
adjustments to revenue for overcharge claims filed by customers, which are
based on historical cash paid to customers for rate overcharges as a
percentage of total billing; and
|
|
|
·
|
incentive-based
refunds to customers, which are primarily based on customers achieving
certain volume thresholds and are recorded as a reduction to revenue on
the basis of management’s best estimate of the projected
liability. This estimate is based on historical activity,
current volume levels and a forecast of future
volume.
|
The Company regularly updates the
estimates described above based on historical experience. All other
revenue, such as demurrage, switching and other incidental charges are recorded
upon completion of the service.
Comprehensive
Earnings
CSX
reports comprehensive earnings (loss) in accordance with SFAS 130, Reporting Comprehensive
Income, in the Consolidated Statement of Changes in Shareholders'
Equity. Comprehensive earnings is defined as all changes in
shareholders' equity during a period, other than those resulting from
investments by and distributions to shareholders (i.e. issuance of equity
securities and dividends). At December 2007 and 2006, Accumulated
Other Comprehensive Loss consisted primarily of adjustments for pension and
other post-retirement liabilities. (See Note 8, Employee Benefit
Plans.)
Derivative
Financial Instruments
CSX
recognizes all derivatives as either assets or liabilities in the Consolidated
Balance Sheets and measures those instruments at fair value. (See
Note 14, Derivative Financial Instruments.)
NOTE
1. Nature of Operations and Significant Accounting Policies,
continued
New
Accounting Pronouncements and Changes in Accounting Policy
CSX
adopted FASB Interpretation 48, Accounting for Uncertainty in Income
Taxes (“FIN 48”), at the beginning of fiscal year 2007. FIN 48
addressed the determination of how tax benefits claimed or expected to be
claimed on an income 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 upon examination by the taxing authorities, based on
the technical merits of the position. These tax benefits recognized
in the financial statements are measured based on the largest benefit that has a
greater than fifty percent likelihood of being realized upon ultimate
resolution. The impact of the Company’s reassessment of its tax
positions in accordance with FIN 48 did not have a material impact on the
results of operations, financial condition and liquidity. (See Note
13, Income Taxes.)
In
September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS
158, Employers’ Accounting for
Defined Benefit Pension and Other Postretirement Plans, an Amendment of FASB
Statements No. 87, 88, 106, and 132 (R) (“SFAS 158”), which changed the
accounting rules for reporting and disclosures related to pensions and other
post-retirement benefit plans. Companies were required to reflect the funded
status of retirement and other post-retirement benefit plans on the balance
sheet. This change was effective for the Company for fiscal year end
2006. The decrease in equity did not have any significant impact on
the Company’s credit ratios or financing covenants. Pursuant to SFAS 158,
the Company will be required to change its September measurement date for the
Company’s pension and other postretirement benefit plans’ assets and obligations
to its fiscal year end effective in 2008.
Effective
fiscal year 2006, the Company adopted the fair value recognition provisions of
SFAS 123(R), Share-Based
Payment (“SFAS 123(R)”) using the modified-prospective-transition
method. Under this method, compensation costs recognized in 2006 and
forward include all unvested share-based payments as of the beginning of
2006. Share-based compensation at CSX may include stock options,
restricted stock awards, stock issued to CSX directors and CSX’s Long-term
Incentive Plans. The amount of compensation costs recognized is based
upon the estimated grant date fair value method under the Black-Scholes-Merton
formula and resulted in the recognition of additional compensation cost from the
unvested portion of stock options granted prior to 2003.
The
adoption of SFAS 123(R) did not result in a material impact to the Company’s
Consolidated Income Statement or earnings per share. The Company
recorded $3 million in 2006 of additional compensation expense for unvested
stock options granted prior to 2003. Compensation costs for all other
types of share-based payments were consistently reported for all periods
presented.
NOTE
1. Nature of Operations and Significant Accounting Policies,
continued
In 2007,
the FASB issued SFAS No. 157, Fair Value Measurements
(“SFAS 157”), and the Statement of Financial Accounting Standards No.
159, The Fair Value Option for
Financial Assets and Financial Liabilities (“SFAS 159”). These
statements define fair value, provide guidance on fair value measurement and
give companies the option to report financial instruments and certain other
items at fair value. CSX does not expect to be materially impacted by
these statements.
In 2007,
the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements- An amendment of ARB No. 51 (“SFAS 160”). This statement
clarifies that minority interest should be reported as equity on the balance
sheet. Additionally, it requires disclosure of consolidated net
income attributable to the parent and to the noncontrolling interest on the
face of the income statement. For CSX, SFAS 160 is effective beginning fiscal
year 2009 and the Company does not expect to be materially impacted by this
statement.
Use
of Estimates
The preparation of financial statements
in conformity with accounting principles generally accepted in the United States
requires that management make estimates in reporting the amounts of certain
assets and liabilities, the disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amount of certain revenues
and expenses during the reporting period. Actual results may differ
from those estimates. Critical accounting estimates using management
judgment are made for the following areas:
|
|
·
|
casualty,
environmental and legal reserves (see Note 6, Casualty, Environmental and
Other Reserves);
|
|
|
·
|
pension
and post-retirement medical plan accounting (see Note 8, Employee Benefit
Plans);
|
|
|
·
|
depreciation
policies for assets under the group-life method (see “Properties” in this
note); and
|
|
|
·
|
income
taxes (see Note 13, Income Taxes).
|
Other
Items – Share Repurchases
Currently, CSX has purchased $2.1
billion of its outstanding common stock, which represents 50 million shares or
about 70% of the $3 billion share repurchase program that was authorized in
2007. CSX intends to complete this repurchase program during
2008. The timing, method, amount of repurchase transactions and the
sources of funds to affect 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 could be suspended
or discontinued at any time.
NOTE 1. Nature of
Operations and Significant Accounting Policies, continued
Total share repurchases under all
publicly announced plans was as follows:
|
(In
Millions)
|
2007
|
2006
|
|
|
Number
of Shares Repurchased
|
51
|
15
|
|
|
Value
of Shares Repurchased
|
$ 2,174
|
$ 465
|
NOTE
2. Earnings Per Share
The following table sets forth the
computation of basic earnings per share and earnings per share, assuming
dilution:
|
Fiscal
Years
|
||||
|
2007
|
2006
|
2005
|
||
|
Numerator
(Millions):
|
||||
|
Earnings
from Continuing Operations
|
$ 1,226
|
$ 1,310
|
$ 720
|
|
|
Interest
Expense on Convertible Debt - Net of Tax
|
2
|
4
|
4
|
|
|
Net
Earnings from Continuing Operations, If-Converted
|
1,228
|
1,314
|
724
|
|
|
Discontinued
Operations - Net of Tax
|
110
|
-
|
425
|
|
|
Net
Earnings, If-Converted
|
1,338
|
1,314
|
1,149
|
|
|
Interest
Expense on Convertible Debt - Net of Tax
|
(2)
|
(4)
|
(4)
|
|
|
Net
Earnings
|
$ 1,336
|
$ 1,310
|
$ 1,145
|
|
|
Denominator
(Thousands):
|
||||
|
Average
Common Shares Outstanding
|
430,270
|
440,084
|
432,851
|
|
|
Convertible
Debt
|
11,469
|
19,456
|
19,456
|
|
|
Stock
Options
(a)
|
5,010
|
6,057
|
2,811
|
|
|
Other
Potentially Dilutive Common Shares
|
1,531
|
337
|
929
|
|
|
Average
Common Shares Outstanding, Assuming Dilution
|
448,280
|
465,934
|
456,047
|
|
|
Earnings
Per Share:
|
||||
|
Income
from Continuing Operations
|
$ 2.85
|
$ 2.98
|
$ 1.67
|
|
|
Discontinued
Operations
|
0.26
|
-
|
0.98
|
|
|
Net
Earnings
|
$ 3.11
|
$ 2.98
|
$ 2.65
|
|
|
Earnings
Per Share, Assuming Dilution:
|
||||
|
Income
from Continuing Operations
|
$ 2.74
|
$ 2.82
|
$ 1.59
|
|
|
Discontinued
Operations
|
0.25
|
-
|
0.93
|
|
| Net Earnings |
$
2.99
|
$
2.82
|
$
2.52
|
|
|
(a)
|
In calculating diluted
earnings per share, SFAS 128, Earnings Per Share requires the Company to
include the potential shares that would be outstanding if all outstanding
stock options were exercised. This is offset by shares the
Company could repurchase using the proceeds from these hypothetical
exercises. This number is different from outstanding stock
options, which is included in Note 4, Stock Plans and Share-Based
Compensation.
|
NOTE
2. Earnings Per Share, continued
Basic
earnings per share was based on the weighted-average number of common shares
outstanding. Earnings per share, assuming dilution, was based on the
weighted-average number of common shares outstanding adjusted for the effect of
the following types of potentially dilutive common shares:
|
|
·
|
convertible
debt;
|
|
|
·
|
employee
stock options; and
|
|
|
·
|
other
equity awards, which include unvested restricted stock and long-term
incentive awards.
|
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 into CSX common stock.
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 on a weighted average basis. During 2007, $375 million of face value
convertible debentures were converted into 13 million shares of CSX common
stock. No material conversions occurred during 2006. At
December 2007, $174 million face value remained outstanding, convertible into 6
million shares.
In 2005,
4.4 million stock options with an average exercise price of $26.55 were excluded
from the computation of earnings per share, assuming dilution, since their
related option exercise prices were greater than the average market price of the
common shares during the period. In 2006 and 2007, no stock options
were excluded from the calculation as all stock options were dilutive at that
time.
NOTE
3. Shareholders’ Equity
Common
and Preferred Stock consists of the following:
|
December
28,
|
||
|
Common
Stock, $1 Par Value
|
2007
|
|
|
(in
Thousands)
|
||
|
Common
shares authorized
|
600,000
|
|
|
Common
shares issued and outstanding
|
407,864
|
|
|
Preferred
Stock
|
||
|
Preferred
shares authorized
|
25,000
|
|
|
Preferred
shares issued and outstanding
|
-
|
|
Holders
of common stock are entitled to one vote on all matters requiring a vote for
each share held. Preferred stock is senior to common stock with
respect to dividends and upon liquidation of CSX.
NOTE
4. Stock Plans and 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.
As of December 2007, there were 2,393
current or former employees with stock option grants outstanding under the
various plans. Most new stock awards were granted under the
authorization provided in the CSX Omnibus Incentive Plan. As of December
2007, an additional 12 million shares of stock could be issued under this
plan.
SFAS 123(R) requires the cash flows
resulting from income tax deductions in excess of compensation costs to be
classified as financing cash flows. This requirement resulted in
reduced net operating cash flows and increased net financing cash flows of
approximately $60 million and $59 million for fiscal years 2007 and 2006,
respectively. Prior to the adoption of SFAS 123(R), CSX presented all
income tax benefits from deductions resulting from compensation costs as
operating cash flows in the Consolidated Cash Flow Statements.
Total
pre-tax expense associated with share-based compensation and its related income
tax benefit is as follows:
|
Fiscal
Years
|
||||
|
(Dollars
in Millions)
|
2007
|
2006
|
2005
|
|
|
Share-Based
Compensation Expense
|
$ 73
|
$ 45
|
$ 39
|
|
|
Income
Tax Benefit
|
27
|
17
|
14
|
|
NOTE
4. Stock Plans and Share-Based Compensation, continued
The
following table illustrates the pro forma effect on net earnings and earnings
per share prior to the adoption of SFAS 123(R). This table only shows
2005 pro forma amounts since the Company adopted the fair value recognition
provisions of SFAS 123(R) in the first quarter of 2006. Therefore,
expenses were recognized in the Consolidated Income Statement for all unvested
share-based compensation in 2006 and 2007.
|
Fiscal
Year
|
||
|
(Dollars
in Millions, Except Per Share Amounts)
|
2005
|
|
|
Net
Earnings - As Reported
|
$ 1,145
|
|
|
Add: Stock-Based
Employee Compensation Expense
|
||
|
Included
in Reported Net Income - Net of Tax
|
25
|
|
|
Deduct: Total
Stock-Based Employee Compensation
|
||
|
Expense
Determined under the Fair Value Based Method
|
||
|
for
all Awards - Net of Tax
|
(29)
|
|
|
Pro
Forma Net Earnings
|
$ 1,141
|
|
|
Interest
Expense on Convertible Debt - Net of Tax
|
4
|
|
|
Pro
Forma Net Earnings, If-Converted
|
$ 1,145
|
|
|
Earnings
Per Share:
|
||
|
Basic
- As Reported
|
$ 2.65
|
|
|
Basic
- Pro Forma
|
$ 2.64
|
|
|
Diluted
- As Reported
|
$ 2.52
|
|
|
Diluted
- Pro Forma
|
$ 2.51
|
|
Stock
Options
Stock
options were granted with 10-year terms. Options outstanding at
December 2007 are generally exercisable three to ten years after date of
grant. The exercise price for options granted equals the market price
of the underlying stock on the grant date. A summary of CSX's stock
option activity and related information for the fiscal years 2007, 2006 and 2005
is as follows:
|
Fiscal
Years
|
|||||||||||
|
2007
|
2006
|
2005
|
|||||||||
|
Weighted-
|
Weighted-
|
Weighted- | |||||||||
|
Options
|
Average
|
Options
|
Average
|
Options
|
Average
|
||||||
|
Outstanding
|
Exercise
|
Outstanding
|
Exercise
|
Outstanding
|
Exercise
|
||||||
|
(000s)
|
Price
|
(000s)
|
Price
|
(000s)
|
Price
|
||||||
|
Outstanding
at Beginning of
Year
|
19,420
|
$ 18.96
|
34,151
|
$ 20.13
|
41,445
|
$ 19.81
|
|||||
|
Granted
|
-
|
$ -
|
-
|
$
-
|
-
|
$
-
|
|||||
|
Expired
or Canceled
|
(44)
|
$ 18.05
|
(101)
|
$ 21.71
|
(1,766)
|
$ 19.99
|
|||||
|
Exercised
|
(7,605)
|
$ 20.08
|
(14,630)
|
$ 21.76
|
(5,528)
|
$ 17.78
|
|||||
|
Outstanding
at End of Year
|
11,771
|
$ 18.25
|
19,420
|
$ 18.96
|
34,151
|
$ 20.13
|
|||||
|
Exercisable
at End of Year
|
9,612
|
$ 18.73
|
12,670
|
$ 19.78
|
15,746
|
$ 21.00
|
|||||
NOTE
4. Stock Plans and Share-Based Compensation, continued
The
following table summarizes information about stock options outstanding at
December 2007:
|
Weighted-
|
|||||||
|
Average
|
Weighted-
|
Aggregate
|
|||||
|
Number
|
Remaining
|
Average
|
Intrinsic
|
||||
|
Outstanding
|
Contractual
|
Exercise
|
Value(a)
|
||||
|
Exercise
Price
|
(000s)
|
Life
(Years)
|
Price
|
(Millions)
|
|||
|
Options
Outstanding:
|
|||||||
|
$10
to $15
|
526
|
2.31
|
$ 12.47
|
$ 16
|
|||
|
$15
to $20(b)
|
9,359
|
4.54
|
$ 17.78
|
$ 240
|
|||
|
$20
to $25
|
1,789
|
1.26
|
$ 21.92
|
$ 38
|
|||
|
$25
to $30
|
97
|
0.33
|
$ 26.33
|
$ 2
|
|||
|
Total
|
11,771
|
3.90
|
$ 18.25
|
$ 296
|
|||
|
Options
Exercisable:
|
|||||||
|
$10
to $15
|
526
|
2.31
|
$ 12.47
|
$ 16
|
|||
|
$15
to $20(b)
|
7,200
|
4.29
|
$ 18.30
|
$ 181
|
|||
|
$20
to $25
|
1,789
|
1.26
|
$ 21.92
|
$ 38
|
|||
|
$25
to $30
|
97
|
0.33
|
$ 26.33
|
$ 2
|
|||
| Total |
9,612
|
3.58
|
$ 18.73 | $ 237 |
|
(a)
Aggregate intrinsic value represents the amount employees would have
received if the options were exercised as of December
2007.
|
|
(b)
The difference between options outstanding and options exercisable is that
a portion of options granted in 2003 have not yet
vested.
|
The total
intrinsic value of options exercised, which represents the value paid to current
and former employees who exercised options for fiscal years ended 2007, 2006 and
2005, was $163 million, $147 million and $24 million, respectively.
Restricted
Stock Awards
Restricted
stock awards vest over an employment period of up to five years. The
following table provides information about outstanding restricted stock
awards.
|
Fiscal
Years
|
|||
|
2007
|
2006
|
2005
|
|
|
Number
of Restricted Stock Awards Outstanding (Thousands)
|
92
|
220
|
550
|
|
Weighted
Average Fair Value at Grant Date
|
$ 24.26
|
$ 19.44
|
$ 16.36
|
|
Restricted
Stock Award Expense (Millions)
|
$ 1
|
$ 2
|
$
2
|
NOTE
4. Stock Plans and Share-Based Compensation, continued
Long-term
Incentive Plans
The CSX
Long-term Incentive Plans were adopted under the CSX Omnibus Incentive Plan. The
objective of these long-term incentive plans is to motivate and reward key
members of management and executives for achieving and exceeding certain
strategic initiatives.
In 2007,
performance units were granted to certain layers of management 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. 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. Grants were 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. Units in the plan have a weighted average grant date
fair value of $43.33, which includes the value of both the initial grant and
subsequent, smaller grants issued at different prices based on grant date fair
value to new or promoted employees not previously included.
In 2006,
grants under two long-term incentive plans were made in the form of performance
units. One of the plans provided for a two-year cycle ending in
fiscal year 2007 and the other plan provided for a three-year cycle ending in
fiscal year 2008. The terms for these plans are substantially
similar to the 2007 plan. Units in the plans have a weighted average
grant date fair value of $36.86, which includes the value of both the initial
grant and subsequent, smaller grants at different prices to new or promoted
employees not previously included. One of the 2006 plans ended on
December 28, 2007, and CSX issued 1.4 million net shares in 2008 as a result of
the achievement of performance targets for the two preceding fiscal years, which
had a net market value of $58 million.
CSX also issued 1.5 million shares in
2006 related to the expiration of the 2004/2005 long-term incentive plan. The
objective of the 2004/2005 plan was to motivate and reward key members of
management and executives for achieving and exceeding a two-year modified free
cash flow goal, and the award was paid in cash and CSX common
stock.
NOTE
4. Stock Plans and Share-Based Compensation, continued
Total
expense incurred due to long-term incentive plans was as follows:
|
Fiscal
Years
|
|||
|
2007
|
2006
|
2005
|
|
|
Long-term
Incentive Plan Compensation Expense
|
$ 67
|
$ 35
|
$ 75
|
As of
December 2007, there was $29 million of total unrecognized compensation cost
related to these plans that is expected to be recognized over a weighted-average
period of approximately 1.5 years. The activity related to each of
the outstanding long-term incentive plans is summarized as follows:
|
2006
- 2008
|
2007
- 2009
|
|
|
Plan
Units
|
Plan
Units
|
|
|
Outstanding
|
Outstanding
|
|
|
(000s)
|
(000s)
|
|
|
Unvested
at December 30, 2005
|
-
|
-
|
|
Granted
in 2006
|
697
|
-
|
|
Forfeited
in 2006
|
(7)
|
-
|
|
Unvested
at December 29, 2006
|
690
|
-
|
|
Granted
in 2007
|
26
|
526
|
|
Forfeited
in 2007
|
(25)
|
(11)
|
|
Unvested
at December 28, 2007
|
691
|
515
|
NOTE 4. Stock Plans and
Share-Based Compensation, continued
Stock
Plan for Directors
The Stock
Plan for Directors, approved by the shareholders in 1992, governs in part the
manner in which directors' fees and retainers were paid. At the end
of 2007, the minimum retainer to be paid in CSX common stock was 50% of the
annual retainer, but each director may elect to receive the entire retainer and
fees in CSX common stock. In addition, each director receives an
annual payment made entirely in CSX common stock. The following table provides
information about shares issued to directors.
|
Fiscal
Years
|
||||
|
2007
|
2006
|
2005
|
||
|
Shares
Issued to Directors (Thousands)
|
68
|
70
|
74
|
|
|
Expense
(Millions)
|
$ 3
|
$ 3
|
$ 2
|
|
The Plan permits each director, in
accordance with Internal Revenue Code Section 409A, to defer receipt of
fees. Deferred cash amounts were credited to an account and invested
in a choice of eight investment selections, including a CSX common stock
equivalent fund. Distributions were made in accordance with elections
made by the directors, consistent with the terms of the Plan. At
December 2007, there were 1 million shares of common stock reserved for issuance
under this Plan.
Shareholder
Dividend Reinvestment Plan
CSX
maintains the Shareholder Dividend Reinvestment Plan under which shareholders
may use dividends paid on CSX common stock held in the plan to purchase
additional shares of stock. The following table provides information
about shares available for issuance under this plan at the end of fiscal years
2007, 2006 and 2005.
|
Fiscal
Years
|
||||
|
2007
|
2006
|
2005
|
||
|
Number
of Shares Available for Issuance (Thousands)
|
10,906
|
10,642
|
10,295
|
|
NOTE
5. 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 the first quarter of 2006.
In order
to determine the proper accounting treatment for the damage, the Company
reviewed EITF 01-10, Accounting for the Impact of the
Terrorist Attacks of September 11, 2001, specifically Issue 3, of that
consensus, in which the Task Force concluded that insurance recoveries in
connection with property and casualty losses should be recognized when
realization of the claim for recovery of a loss recognized in the financial
statements is deemed probable. Information regarding the Company’s
insurance coverage at that time, damage estimates and the allocation of the
insurance deductible is as follows:
Insurance
Coverage
In 2005,
the Company had insurance coverage of $535 million, after a $25 million
deductible (per occurrence), for the following types of losses:
|
|
·
|
Fixed Assets
Damages - CSX is entitled to the current replacement cost of the
damaged assets. The Company’s bridges and track damaged by
Hurricane Katrina comprised the majority of these types of
losses.
|
|
|
·
|
Business
Interruption - The Company is entitled to recover the increased
costs incurred to allow the Company to continue operations and to minimize
the overall business impact to the Company during the period of
indemnity. These increased costs include rerouting and other
costs.
|
|
|
·
|
Lost Profit -
The Company is entitled to recover lost profits, net of associated
expenses, during the period of indemnity. The period of indemnity is
defined in the relevant policies of insurance and extends not only through
the date upon which the railroad network was restored to its original
operations, but for such additional time as may be required to
restore revenue to the same level as would have existed had no loss
occurred.
|
The Company’s insurance policies do not
prioritize coverage based on types of losses. As claims were
submitted to the insurance companies, they were reviewed and preliminary
payments were received until all losses were incurred and
documented. A final payment will be received once the Company and its
insurers agree on the total value of the claim.
|
NOTE 5. Hurricane
Katrina, continued
|
Damage
Estimates
Management’s
current loss estimate is approximately $450 million. Damages are
categorized as follows:
|
|
·
|
Fixed Asset
Damages - The cost estimate was based on the replacement value of
approximately 39 miles of continuous track, six major bridges, numerous
small bridges, signal and communication damage, locomotive repair and
facilities damaged throughout the
region.
|
|
|
·
|
Incremental
Expenses - The Company’s incremental expenses relate primarily to
rerouting and other costs. Rerouting costs are costs to move
traffic either through alternative locations on the Company’s network or
on other railroad lines. Other costs include debris removal,
maintenance on equipment damaged by water, supplies, environmental
expenses, maintenance labor and other various
items.
|
|
|
·
|
Lost Profit -
The Company estimated the impact on revenue at a location and
customer-specific level.
|
Allocation
of Deductible
The Company’s insurance policies
required its participation in the first $25 million of each loss event, without
regard to the category of the covered losses. Because the Company’s
insurance policies do not specifically apply the deductible by the types of
losses covered, CSX believes it is inconsistent with the form and economic
substance of the Company’s policies to attribute the entire deductible to a
single component of covered losses. Therefore, the Company allocated
the $25 million self-insured deductible among the above three categories of
losses in proportion to the best estimate of the total ultimate losses eligible
for recovery under the Company’s insurance policies.
NOTE
5. Hurricane Katrina, continued
Gain
on Insurance Recoveries
As of
December 2007, the Company has collected $367 million of insurance proceeds and
recognized $195 million of pre-tax gains for claims related to Hurricane
Katrina. 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.
Details
of how the gain was calculated are as follows:
|
Fiscal
Years
|
||||
|
(Dollars
in Millions)
|
2007
|
2006
|
2005
|
|
|
Total
Insurance Proceeds
|
$ 29
|
$ 268
|
$ 70
|
|
|
Less
Recoverable Losses:
|
||||
|
Net
book value of fixed asset damage
|
-
|
1
|
41
|
|
|
Incremental
expense
|
2
|
56
|
72
|
|
|
Prior
year receivable
|
-
|
43
|
-
|
|
|
Gain/(Receivable)
|
$ 27
|
$ 168
|
$ (43)
|
|
Gain
contingencies subject to FIN 30, Accounting for Involuntary
Conversions of Nonmonetary Assets to Monetary Assets and SFAS 5, Accounting for Contingencies
(“SFAS 5”), were not recognized until the period in which all
contingencies were resolved or cash proceeds were received. The
insurance recovery for the replacement cost of property damage in excess of book
value and the recovery of lost profits were considered to be gain
contingencies. Therefore the net gain (after applying the insurance
deductible) was deferred until the cash proceeds are/were received.
In
measuring the losses incurred in 2005 attributed to Hurricane Katrina, the
Company considered the actual losses reflected in the financial statements and
the allocable deductible (based on expected total recoveries from insured
losses), and recorded a receivable for the difference based on probable
insurance recoveries at December 30, 2005. No receivables were
recorded at the end of fiscal year 2007 or 2006 because cash proceeds exceeded
the net book value of fixed asset damage and incremental expenses that were
paid.
NOTE
5. Hurricane Katrina, continued
Cash
Flows
Cash
proceeds from the insurers are not specific to the types of losses and so, for
cash flow presentation, the Company allocated the proceeds ratably among the
three types of losses mentioned above. Allocated cash proceeds for
lost profits and incremental expenses were classified as operating activities
since they related directly to revenue and expenses from operations and were $13
million, $121 million and $29 million for 2007, 2006 and 2005,
respectively. Allocated cash proceeds for fixed asset damage were
classified as investing activities since these proceeds had a direct
relationship to money the Company spent on property additions to repair the
hurricane-damaged assets that were recorded in the same
category. Cash proceeds for fixed asset damage were $16 million, $147
million and $41 million for 2007, 2006 and 2005, respectively.
NOTE
6. Casualty, Environmental and Other Reserves
Activity related to casualty,
environmental and other reserves is as follows:
|
Casualty
|
Separation
|
Environmental
|
Other
|
||
|
(Dollars
in Millions)
|
Reserves
|
Liabilities
|
Reserves
|
Reserves
|
Total
|
|
Balance
December 31, 2004
|
$ 705
|
$ 155
|
$ 59
|
$ 128
|
$ 1,047
|
|
Charged
to Expense
|
181
|
-
|
32
|
47
|
260
|
|
Change
in Estimate
|
(38)
|
-
|
-
|
-
|
(38)
|
|
Payments
|
(173)
|
(34)
|
(20)
|
(78)
|
(305)
|
|
Balance
December 30, 2005
|
$ 675
|
$ 121
|
$ 71
|
$ 97
|
$ 964
|
|
Charged
to Expense
|
143
|
-
|
20
|
48
|
211
|
|
Payments
|
(181)
|
(16)
|
(20)
|
(52)
|
(269)
|
|
Reclassifications(a)
|
-
|
15
|
-
|
-
|
15
|
|
Balance
December 29, 2006
|
$ 637
|
$ 120
|
$ 71
|
$ 93
|
$ 921
|
|
Charged
to Expense(b)
|
141
|
-
|
76
|
79
|
296
|
|
Change
in Estimate
|
(99)
|
-
|
-
|
-
|
(99)
|
|
Payments(b)
|
(133)
|
(17)
|
(47)
|
(50)
|
(247)
|
|
Balance
December 28, 2007
|
$ 546
|
$ 103
|
$ 100
|
$ 122
|
$ 871
|
|
(a)
|
The
reclassifications in 2006 were reclassified from Labor and Fringe Benefits
Payable.
|
|
(b)
|
Charges
to expense and payments for environmental reserves were higher in 2007
primarily due to clean-up costs associated with an increase in significant
train accidents.
|
NOTE
6. Casualty, Environmental and Other Reserves, continued
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:
|
December
28, 2007
|
December
29, 2006
|
|||||||
|
(Dollars
in Millions)
|
Current
|
Long-term
|
Total
|
Current
|
Long-term
|
Total
|
||
|
Casualty
|
$ 157
|
$ 389
|
$ 546
|
$ 172
|
$ 465
|
$ 637
|
||
|
Separation
|
16
|
87
|
103
|
20
|
100
|
120
|
||
|
Environmental
|
42
|
58
|
100
|
26
|
45
|
71
|
||
|
Other
|
32
|
90
|
122
|
35
|
58
|
93
|
||
|
Total
|
$ 247
|
$ 624
|
$ 871
|
$ 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 and
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 and liquidity in a particular quarter or fiscal
year.
Casualty
Casualty reserves represent accruals
for personal injury and occupational injury claims. Currently, no
individual claim is expected to exceed the Company’s self-insured retention
amount of $25 million. 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. These reserves fluctuate
with independent third party estimates, which are reviewed by management, and
the timing of payments. Most of the claims were related to CSXT
unless otherwise noted.
Defense
and processing costs, which historically have been insignificant and are
anticipated to be insignificant in the future, are not included in the recorded
liabilities. The Company is presently self-insured for personal injury and
occupational-related claims.
NOTE
6. 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 Workers’
Compensation Program or the Maritime Jones Act.
CSXT
retains an independent actuarial firm to assist management in assessing the
value 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. Reserves
for personal injury claims were $338 million and $424 million at December 2007
and December 2006, respectively.
During
2007, the Company reduced personal injury reserves by $99 million based on
management’s review of the actuarial analyses performed by an independent
actuarial firm. This reduction is due to a trend of significant
decreases in the number and severity of work-related injuries for CSXT employees
since 2003. The analyses further indicated a reduction of large
catastrophic claims since 2003, which also was determined to be a
trend. These reductions were included in materials, supplies and
other in the Consolidated Income Statements.
Occupational
Occupational
claims arise from allegations of exposures to certain materials in the
workplace, such as asbestos, solvents (which include soaps and chemicals) and
diesel fuels or allegations of chronic physical injuries resulting from work
conditions, such as repetitive stress injuries, carpal tunnel syndrome and
hearing loss.
Reserves for asbestos related claims
were $129 million and $121 million at December 2007 and December 2006,
respectively. Reserves for all other occupational claims were $79
million and $92 million at December 2007 and December 2006,
respectively.
NOTE
6. Casualty, Environmental and Other Reserves, continued
Asbestos
The Company is party to a number of
occupational claims by employees alleging exposure to asbestos in the
workplace. The heaviest possible exposure for employees was due to
work conducted in and around steam locomotive engines that were largely phased
out beginning around the 1950s. However, other types of exposures, including
exposure from locomotive component parts and building materials, continued until
it was substantially eliminated by 1985. Additionally, the Company
has retained liability for asbestos claims filed against its previously owned
international container shipping business.
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 objective
of the analysis is to determine the number of estimated incurred but not
reported (“IBNR”) claims and the estimated average cost per claim to be received
over the next seven years. Seven years was determined by management
to be the time period in which probable claim filings and claim values could be
estimated with more certainty.
The
Company, with the assistance of the third party specialist, determines its
potentially exposed population and is then able to calculate the estimated
number of IBNR claims. The estimated average cost per claim is then determined
utilizing recent actual average cost per claim data and national industry data.
Key elements of the assessment include the following:
|
|
·
|
An
estimate is computed using a ratio of Company employee data to national
employment for select years during the period 1938-2001. The
Company uses railroad industry historical census data because it does not
have detailed employment records in order to compute the population of
potentially exposed employees.
|
|
|
·
|
The
projected incidence of disease is estimated based on epidemiological
studies using employees’ age and the duration and intensity of potential
exposure while employed. Epidemiology is the medical science
that deals with the incidence, distribution and control of diseases in a
population.
|
NOTE
6. Casualty, Environmental and Other Reserves, continued
|
|
·
|
An
estimate of the future anticipated claims filing rate by type of disease
(non-malignant, cancer and mesothelioma) is computed using the Company’s
average historical claim filing rates for a three-year calibration period,
excluding a surge in claims originating in West Virginia. In
2006, the Company received 852 asbestos claims in West Virginia in which
the claimants were neither exposed in West Virginia nor residents of the
state. CSX believes these claims will not have merit as
no medical evidence has been provided to substantiate the claims and
therefore CSX has excluded them from the calibration
period. Claim levels in 2007 returned to expected levels and
management feels this calibration period represents the best estimate of
future filing rates.
|
|
|
·
|
An
estimate of the future anticipated dismissal rate by type of claim is
computed using the Company’s historical average dismissal rates observed
during the current calibration period noted
above.
|
|
|
·
|
An
estimate of the future anticipated settlement by type of disease is
computed using the Company’s historical average of dollars paid per claim
for pending and future claims using the average settlement by type of
incident observed during the current calibration period noted
above.
|
From
these assumptions, the Company projects the incidence of each type of disease to
the estimated population to determine the total estimated number of employees
that could potentially assert a claim. Historical claim filing rates were
applied for each type of disease to the total number of employees that could
potentially assert a claim to determine the total number of anticipated claim
filings by disease type. Historical dismissal rates, which represented claims
that were closed without payment, were deducted to calculate the number of
future claims by disease type that would likely require payment by the Company.
Finally, the number of such claims was multiplied by the average settlement
value to estimate the Company’s future liability for IBNR asbestos
claims.
The
estimated future filing rates and estimated average claim values were the most
sensitive assumptions for this reserve. A 1% increase or decrease in
either the forecasted number of IBNR claims or the average claim values would
result in an approximate $1 million increase or decrease in the liability
recorded for unasserted asbestos claims.
Undiscounted liabilities recorded
related to asbestos claims were as follows:
|
December
28,
|
December
29,
|
||
|
(Dollars
in Millions)
|
2007
|
2006
|
|
|
Asbestos:
|
|||
|
Incurred
but not reported claims
|
54
|
52
|
|
|
Asserted
claims
|
75
|
69
|
|
|
Total
liability
|
129
|
121
|
|
|
Current
liability
|
15
|
30
|
NOTE
6. Casualty, Environmental and Other Reserves, continued
In 2005, management updated its
estimate of the IBNR liability exposure with the assistance of the third party
specialists, which resulted in recognition of a $48 million favorable change
associated with asbestos liabilities (a net $38 million favorable change for all
occupational liabilities). During 2004 and 2005, asbestos related
disease claims filed against the Company dropped substantially, particularly
bulk claims filed by certain law firms. In 2003, the Company received
a significant number of filings. The Company believes the high 2003
number was attributable to an attempt to file before a new, more restrictive
venue law took effect in West Virginia in mid-2003. As a result,
management reassessed the calibration period from a four-year average to a
three-year average in 2005, excluding the surge in claims originating in West
Virginia. Management believes this calibration period represents the
best estimate of future filing rates. There have been no changes to
the number of years used in the calibration period since 2005.
Other
Occupational
The
Company retains a third party specialist with extensive experience in performing
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. Similar to the asbestos
liability estimation process, the key elements of the assessment include the
following:
|
|
·
|
An
estimate of the potentially exposed population for other occupational
diseases is calculated by projecting active versus retired workforce from
2002 to 2010 using a growth rate projection for overall railroad
employment made by the Railroad Retirement Board in its June 2003
report.
|
|
|
·
|
An
estimate of the future anticipated claims filing rate by type of injury,
employee type and active versus retired employee is computed using the
Company’s average historical claim filing rates for the calibration
periods management felt were representative of future filing
rates. For carpal tunnel and repetitive stress injuries, the
current calibration period is a 1-year average of claim
filings. Hearing loss uses a 3-year calibration period, and all
other diseases or injuries use a 2-year calibration period. An
estimate is made to forecast future claims by using the filing rates by
disease and the active and retired Company population each
year.
|
NOTE
6. Casualty, Environmental and Other Reserves, continued
|
|
·
|
An
estimate of the future anticipated settlement by type of injury is
computed using the Company’s historical average of dollars paid per claim
for pending and future claims using the average settlement by type of
injury observed during a period that management feels is representative of
future settlement amounts.
|
The
estimated future filing rates and estimated average claim values were the most
sensitive assumptions for this reserve. A 1% increase or decrease in
either the forecasted number of IBNR claims or the average claim values would
not result in a material increase or decrease in the liability recorded for
unasserted other occupational claims.
Undiscounted
recorded liabilities related to other occupational claims were as
follows:
|
December
28,
|
December
29,
|
||
|
(Dollars
in Millions)
|
2007
|
2006
|
|
|
Other
Occupational:
|
|||
|
Incurred
but not reported claims
|
47
|
53
|
|
|
Asserted
claims
|
32
|
39
|
|
|
Total
liability
|
79
|
92
|
|
|
Current
liability
|
29
|
30
|
Summary
A summary
of asbestos and other occupational claims activity is as follows:
|
Fiscal
Years
|
||
|
2007
|
2006
|
|
|
Asserted
Claims
|
||
|
Open
Claims - Beginning of Year
|
11,116
|
10,639
|
|
New
Claims Filed
|
930
|
1,504
|
|
Claims
Settled
|
(553)
|
(767)
|
|
Claims
Dismissed
|
(505)
|
(260)
|
|
Open
Claims - End of Year
|
10,988
|
11,116
|
NOTE
6. Casualty, Environmental and Other Reserves, continued
Approximately 6,000 of the open claims
at December 2007 were asbestos claims against CSX’s previously owned
international container shipping business. Because these claims were
against multiple vessel owners, the Company’s reserves reflect its portion of
those claims. The Company had approximately $9 million reserved for
these shipping business claims at December 2007 and 2006. The
remaining open claims were asserted against CSXT.
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 247 environmentally impaired sites, many of
which were, 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 or disposal. In
addition, some of the Company’s land holdings were leased to others for
commercial or industrial uses that may have resulted in releases of hazardous
substances or other regulated materials onto the property and could give rise to
proceedings against the Company.
In any
such proceedings, the Company is subject to environmental clean-up and
enforcement actions under the Superfund Law, as well as similar state laws that
may impose joint and several liability for clean-up and enforcement costs on
current and former owners and operators of a site without regard to fault or the
legality of the original conduct. These costs could be
substantial.
NOTE
6. Casualty, Environmental and Other Reserves, continued
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 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. Payments related to these
liabilities are expected to be made over the next several years.
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 fund 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 and liquidity.
Other
Other reserves of $122 million and $93
million for 2007 and 2006, respectively, 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.
Longshoremen
disability claims represent liability for assessments under Section 8f of the
United States Longshore and Harbor Workers’ Compensation
Program. These reserves have amounts accrued for second injury fund
liabilities, which represent the non-medical portion of employee claims which
are paid by the United States Department of Labor and are attributed to an
earlier injury to the same employee.
Freight claims represent claims for
both freight loss and damage and freight rate disputes. Freight loss
and damage claims are liabilities that resulted from the loss or damage of
customer freight while being handled by the Company’s transportation
services. Freight rate disputes represent liabilities for customer
claims regarding the rate charged by the Company for its transportation
services. Liabilities for freight rate disputes are recorded as a
reduction of revenue.
NOTE
6. Casualty, Environmental and Other Reserves, continued
The
Company accrues for claims related to property, automobile and general liability
as noted above. The Company is also required to maintain primary and
state mandated coverage for Company property and vehicle
fleets. General liability is coverage for liability arising from
operations of non-rail CSX subsidiaries.
NOTE
7. Commitments and Contingencies
Lease
Commitments
The Company has various lease
agreements with other parties with terms up to 30 years. Non-cancelable,
long-term leases generally include provisions for maintenance, options to
purchase and options to extend the terms.
At December 2007, minimum building and
equipment rentals and commitments for vessels under these operating leases were
as follows:
|
(Dollars
in millions)
|
|||
|
Operating
|
Sublease
|
Net
Lease
|
|
|
Years
|
Leases
|
Income
|
Commitments
|
|
2008
|
$ 160
|
$ 48
|
$ 112
|
|
2009
|
140
|
37
|
103
|
|
2010
|
119
|
31
|
88
|
|
2011
|
90
|
17
|
73
|
|
2012
|
75
|
21
|
54
|
|
Thereafter
|
264
|
74
|
190
|
|
Total
|
$ 848
|
$ 228
|
$ 620
|
Operating leases and an equal portion
of sublease income include approximately $171 million relating to ongoing
operating lease commitments for vessels and equipment, which have been subleased
to Horizon Lines, Inc. (“Horizon”), a former subsidiary previously named CSX
Lines. CSX believes Horizon will fulfill its contractual commitments
with respect to such leases and CSX will have no further liability for those
obligations.
In addition to the commitments in the
table, the Company also has agreements covering equipment leased from Conrail
Inc. (“Conrail”).
|
Fiscal
Years
|
|||
|
(Dollars
in Millions)
|
2007
|
2006
|
2005
|
|
Rent
Expense on Operating Leases
|
$ 451
|
$ 514
|
$ 523
|
Rent expense on operating leases
included $310 million, $355 million and $384 million of net daily rental charges
on railroad operating equipment in 2007, 2006 and 2005, respectively, which are
not long-term commitments. The Company uses the straight-line method
to recognize rent expense associated with operating leases that include
escalations over their terms.
NOTE
7. Commitments and Contingencies, continued
Purchase
Commitments
CSXT has a commitment under a long-term
maintenance program that currently covers 43% of CSXT’s fleet of
locomotives. The agreement is based on the maintenance cycle for each
locomotive. Under CSXT’s current obligations, the agreement will
expire no earlier than 2028 and may last until 2031 depending upon when certain
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 schedules are
revised. 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:
|
Fiscal
Years
|
|||
|
(Dollars
in Millions)
|
2007
|
2006
|
2005
|
|
Amounts
Paid
|
$ 217
|
$ 183
|
$ 170
|
As
a result of agreements executed in August 2005 and February 2006, CSXT has
purchase obligations related to a multi-year plan to acquire additional
locomotives between 2006 and 2011. The amount of the ultimate purchase
commitment depends upon the model of locomotive acquired and the timing of
delivery. Annual payments related to the locomotive purchase
obligations, including amounts that would be payable under the long-term
maintenance program were estimated as follows:
|
Payments
|
|
|
(Dollars
in Millions)
|
|
|
2008
|
446
|
|
2009
|
423
|
|
2010
|
258
|
|
2011
|
266
|
|
2012
|
275
|
|
Thereafter
|
4,773
|
|
Total
|
$ 6,441
|
NOTE
7. Commitments and Contingencies, continued
Additionally,
the Company has various other commitments to purchase technology,
communications, railcar maintenance and other services from various
suppliers. Total annual payments under all of these additional
purchase commitments were estimated as follows:
|
Payments
|
|
|
(Dollars
in Millions)
|
|
|
2008
|
$ 175
|
|
2009
|
126
|
|
2010
|
68
|
|
2011
|
19
|
|
2012
|
13
|
|
2013
- 2031
|
-
|
|
Total
|
$ 401
|
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 is retained by the Company on each of
the casualty and property programs. Specifically, the Company has a $25
million deductible for each of the casualty and non-catastrophic property
programs and a $50 million deductible for the catastrophic property
program. This deductible only applies to the first event. If an
event occurs in excess of the Company’s deductible and the Company does not
elect to purchase additional insurance coverage, then the deductible for the
second covered event will equal the amount of the claim in the first
event.
Guarantees
CSX and certain of its subsidiaries are
contingently liable, individually and jointly with others, as guarantors of
approximately $72 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 to 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.
NOTE
7. Commitments and Contingencies, continued
At
December 2007, the Company’s guarantees primarily related to the
following:
|
|
·
|
Guarantee
of approximately $61 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 for 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 liability for those
obligations. CSX’s obligation under this guarantee will be
completed in 2011.
|
As of December 2007, the Company had
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 28 putative class action suits were filed 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. The suits seek unquantified treble damages (three
times the amount of actual damages) allegedly sustained by purported class
members, attorneys’ fees and other relief. All but three of the lawsuits
purport 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 that were assessed fuel
surcharges. Three of the lawsuits purport to be on behalf of indirect
purchasers of rail services.
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.
NOTE
7. Commitments and Contingencies, continued
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 this
litigation. CSXT has not accrued any liability for an adverse outcome
in the litigation. If a material 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.
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 and 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 and liquidity
in a particular quarter or fiscal year.
NOTE
8. Employee Benefit Plans
General
The
Company sponsors defined benefit pension plans principally for salaried,
management personnel. The plans provide eligible employees with
retirement benefits based predominantly on 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.
In
addition to these plans, CSX sponsors a post-retirement medical plan and a life
insurance plan that provide benefits to full-time, salaried, management
employees hired on or before December 31, 2002 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.
|
Summary
of Participants
|
|||
|
as
of January 1, 2007
|
|||
|
Pension
Plans
|
Post-retirement
Medical Plan
|
||
|
Active
Employees
|
7,228
|
3,675
|
|
|
Retirees
and Beneficiaries
|
10,943
|
10,412
|
|
|
Other(a)
|
5,182
|
270
|
|
|
Total
|
23,353
|
14,357
|
|
|
|
(a)
For pension plans, the other category consists of terminated but vested
former employees. For post-retirement plans, the other category
consists of employees on long-term disability that have not yet
retired.
|
As
currently permitted by SFAS 87, Employers Accounting for
Pensions, the Company has elected to use a plan measurement date of
September 30 to actuarially value its pension and post-retirement
plans. Effective fiscal year 2008, under the provisions of SFAS 158,
CSX will be required to change the measurement date for pension and
post-retirement benefit plans from September 30 to the last day of the Company’s
fiscal year.
The
Company engages independent, external actuaries to compute the amounts of
liabilities and expenses relating to these plans subject to the assumptions that
the Company selects.
NOTE 8. Employee Benefit
Plans, continued
The
benefit obligation for these plans represents the liability of the Company for
current and retired employees and is affected primarily by the
following:
|
|
·
|
service
cost (benefits attributed to employee service during the
period);
|
|
|
·
|
interest
cost (interest on the liability due to the passage of
time);
|
|
|
·
|
actuarial
gains/losses (experience during the year different from that assumed and
changes in plan assumptions); and
|
|
|
·
|
benefits
paid to participants.
|
Cash
Flows
Plan
assets are amounts that have been segregated and restricted to provide benefits
and include amounts contributed by the Company and amounts earned from invested
contributions, net of benefits paid. The Company funds the cost of the
post-retirement medical and life insurance benefits on a pay-as-you go basis.
CSX does not expect to make cash contributions to its qualified defined benefit
pension plans in 2008.
Future expected benefit payments are as
follows:
|
Expected
Cash Flows
|
|||
|
(Dollars
in Millions)
|
Pension Benefits
|
Post-retirement
Benefits(a)
|
|
|
2008
|
$
146
|
$
45
|
|
|
2009
|
145
|
44
|
|
|
2010
|
148
|
42
|
|
|
2011
|
150
|
41
|
|
|
2012
|
152
|
39
|
|
|
Thereafter
|
789
|
169
|
|
|
Total
|
$
1,530
|
$
380
|
|
|
(a)
The post-retirement benefit payments include an estimated annual reduction
of $6 million due to the Medicare Part D
Subsidy.
|
NOTE
8. Employee Benefit Plans, continued
Plan
Assets
The CSX
Investment Committee (“the Investment Committee”), whose members were selected
by the CFO and approved by the CEO, is responsible for managing pension plan
assets. The Investment Committee utilizes an asset allocation
strategy that was developed using asset return simulation in conjunction with
projected plan liabilities. The allocation seeks maximization of
returns within the constraints of acceptable risks considering the long-term
investment horizon. A target allocation of 60% equity and 40% fixed
income investments was established.
The
distribution of pension plan assets as of the measurement date is as
follows:
|
September
30, 2007
|
September
30, 2006
|
||||||
|
Percent
of
|
Percent
of
|
||||||
|
(Dollars
in Millions)
|
Amount
|
Total
Assets
|
Amount
|
Total
Assets
|
|||
|
Common
Stocks
|
$ 964
|
60
|
%
|
$ 900
|
60
|
%
|
|
|
Fixed
Income
|
626
|
39
|
598
|
39
|
|||
|
Cash
and Cash Equivalents
|
17
|
1
|
13
|
1
|
|||
|
Total
|
$ 1,607
|
100
|
%
|
$ 1,511
|
100
|
%
|
|
The
Investment Committee provides investment guidelines to both the plan’s fixed
income and equity fund managers. Within the broad asset classes that
comprise the plan’s investments, common stocks were diversified based on
allocations to domestic and foreign stocks. Allocations were
maintained within 3% of targets. The U.S. stock segment includes
style diversification among managers of large and small capitalization
stocks. The Investment Committee limits investment by industry
sectors, outlines individual stock issuer concentration and monitors the use of
derivatives and CSX securities.
Fixed
income securities were diversified across fund managers with differing
investment styles and were benchmarked to a long duration index. The
Investment Committee specifies the types of allowable investments, such as
government, corporate and asset-backed bonds, and limits diversification between
domestic and foreign investments and the use of
derivatives. Additionally, it stipulates minimum credit quality
constraints and any prohibited securities.
Individual
investments or fund managers were selected in accordance with standards of
prudence applicable to asset diversification and investment
suitability. Fund investment performance is continuously
monitored. Acceptable performance is determined in the context of the
long-term return objectives of the fund and appropriate asset class
benchmarks.
NOTE
8. Employee Benefit Plans, continued
Benefit
Obligation, Plan Assets and Funded Status
Changes
in benefit obligation and the fair value of plan assets for the plan year
(October 1, 2006 through September 30, 2007) are as follows:
|
Pension
Benefits
|
Post-retirement
Benefits
|
|||||
|
Plan
Year
|
Plan
Year
|
Plan
Year
|
Plan
Year
|
|||
|
(Dollars
in Millions)
|
2007
|
2006
|
2007
|
2006
|
||
|
Actuarial
Present Value of Benefit Obligation
|
||||||
|
Accumulated
Benefit Obligation
|
$ 1,935
|
$ 1,946
|
N/A
|
N/A
|
||
|
Projected
Benefit Obligation
|
2,067
|
2,078
|
$ 404
|
$ 398
|
||
|
Change
in Projected Benefit Obligation
|
||||||
|
Projected
Benefit Obligation at Beginning of the
Plan Year
|
$ 2078 | $ 2082 | $ 398 | $ 444 | ||
|
Service
Cost
|
33
|
36
|
6
|
7
|
||
|
Interest
Cost
|
115
|
105
|
21
|
21
|
||
|
Plan
Participants' Contributions
|
-
|
-
|
16
|
16
|
||
|
Actuarial
(Gain)/Loss
|
(13)
|
1
|
22
|
(35)
|
||
|
Benefits
Paid
|
(146)
|
(146)
|
(59)
|
(55)
|
||
|
Benefit
Obligation at End of Plan Year
|
$ 2,067
|
$ 2,078
|
$ 404
|
$ 398
|
||
|
Change
in Plan Assets:
|
||||||
|
Fair
Value of Plan Assets at Beginning of the Plan Year
|
$ 1,511 | $ 1,536 | $ - | $ - | ||
|
Actual
Return on Plan Assets
|
186
|
99
|
-
|
-
|
||
|
Qualified
Employer Contributions
|
42
|
9
|
-
|
-
|
||
|
Non-qualified
Employer Contributions
|
14
|
13
|
43
|
39
|
||
|
Plan
Participants' Contributions
|
-
|
-
|
16
|
16
|
||
|
Benefits
Paid
|
(146)
|
(146)
|
(59)
|
(55)
|
||
|
Fair
Value of Plan Assets at End of Plan Year
|
$ 1,607
|
$ 1,511
|
$
-
|
$ -
|
||
|
|
||||||
|
Funded
Status at September 30, 2007
|
$
(460)
|
$ (567)
|
$
(404)
|
$
(398)
|
||
NOTE
8. Employee Benefit Plans, continued
Employer contributions and net
post-retirement benefits paid during the fourth quarter to arrive at the net
funded status of qualified and non-qualified benefit plans as of the end of the
Company’s fiscal year are as follows:
|
Pension
Benefits
|
Post-retirement
Benefits
|
|||||
|
December
28,
|
December
29,
|
December
28,
|
December
29,
|
|||
|
(Dollars
in Millions)
|
2007
|
2006
|
2007
|
2006
|
||
|
Funded
Status at September 30, 2007
|
$ (460)
|
$ (567)
|
$ (404)
|
$ (398)
|
||
|
Fourth
Quarter Activity:
|
||||||
|
Qualified
Employer Contributions (a)
|
245
|
21
|
-
|
-
|
||
|
Non-qualified
Employer Contributions
|
4
|
3
|
-
|
-
|
||
|
Net
Post-retirement Benefits Paid
|
-
|
-
|
10
|
10
|
||
|
Ending
Net Funded Status
|
$ (211)
|
$ (543)
|
$ (394)
|
$ (388)
|
||
|
(a)
|
During
fiscal 2007, CSX made contributions of $266 million to its qualified
defined benefit pension plans. The components of this include
the $245 million of contributions made in fourth quarter 2007 plus $42
million of contributions made during the 2007 plan year (October 1, 2006
through September 30, 2007) as noted on page 104 less $21 million of
contributions made during fourth quarter
2006.
|
Amounts related to pension and
post-retirement benefits are recorded on the balance sheet are as
follows:
|
Pension
Benefits
|
Post-retirement
Benefits
|
|||||
|
December
28,
|
December
29,
|
December
28,
|
December
29,
|
|||
|
(Dollars
in Millions)
|
2007
|
2006
|
2007
|
2006
|
||
|
Amounts
Recorded in Consolidated Balance Sheets:
|
||||||
|
Pension
Assets
|
$ 4
|
$ -
|
$ -
|
$ -
|
||
|
Current
Liability
|
(12)
|
(14)
|
(45)
|
(43)
|
||
|
Long-term
Liability
|
(203)
|
(529)
|
(349)
|
(345)
|
||
|
Net
Amount Recognized in
|
||||||
|
Consolidated
Balance Sheet
|
$ (211)
|
$ (543)
|
$ (394)
|
$ (388)
|
||
The
funded status, or amount by which the benefit obligation exceeds the fair value
of plan assets, represents a liability. At December 2007, the status of CSX
plans was as follows:
|
Aggregate
|
Aggregate
|
|
|
Fair
Value
|
Projected
|
|
|
Benefit
Obligations in Excess of Plan Assets
|
of
Plan Assets
|
Benefit
Obligation
|
|
Projected
benefit obligation
|
$1.8
billion
|
($2
billion)
|
|
Accumulated
benefit obligation
|
$51
million
|
($219
million)
|
NOTE 8. Employee Benefit
Plans, continued
Net
Periodic Benefit Expense
The
following table describes the components of net periodic benefit
expense.
|
Pension
Benefits
|
Post-retirement
Benefits
|
||||||
|
Fiscal
Years
|
Fiscal
Years
|
||||||
|
(Dollars
in Millions)
|
2007
|
2006
|
2005
|
2007
|
2006
|
2005
|
|
|
Service
Cost
|
$ 33
|
$ 36
|
$ 34
|
$ 6
|
$ 7
|
$ 8
|
|
|
Interest
Cost
|
115
|
105
|
107
|
21
|
21
|
24
|
|
|
Expected
Return on Plan Assets
|
(118)
|
(117)
|
(120)
|
-
|
-
|
-
|
|
|
Amortization
of Prior Service Cost
|
3
|
4
|
4
|
(5)
|
(5)
|
(5)
|
|
|
Amortization
of Net Loss
|
31
|
34
|
21
|
3
|
7
|
13
|
|
|
Net
Periodic Benefit Expense
|
$ 64
|
$ 62
|
$ 46
|
$ 25
|
$ 30
|
$ 40
|
|
Pension
and Other Post-Employment Benefits Adjustments
The
following table shows the pre-tax change in other comprehensive income (loss)
attributable to the components of net expense and the change in benefit
obligation for CSX for pension and other post-employment benefits.
|
Pension
Benefits
|
Post-retirement
Benefits
|
||||||||
|
Components
of Other
|
December
|
December
|
December
|
December
|
|||||
|
Comprehensive
Income (Loss)
|
2007
|
2006
|
2007
|
2006
|
|||||
|
(Dollars
in Millions)
|
|||||||||
|
Recognized
in the balance sheet
|
|||||||||
|
Gains
(Losses) (a)
|
$ 111
|
$ (62)
|
$ (18)
|
$ (71)
|
|||||
|
Prior
service costs
|
4
|
19
|
5
|
(8)
|
|||||
|
(Income)
Expense recognized in the income statement
|
|||||||||
|
Amortization
of net loss (b)
|
31
|
34
|
3
|
7
|
|||||
|
Amortization
of prior service cost
(c)
|
3
|
4
|
(5)
|
(5)
|
|||||
|
(a)
|
Prior
year losses are primarily due to the adoption of SFAS 158. For
additional information, see Note 1, Nature of Operations and Significant
Accounting Policies.
|
|
(b)
|
The
estimated amount to be expensed for 2008 is $23 million and $6 million for
pension benefits and post- retirement benefits,
respectively.
|
|
(c)
|
The
estimated amount to be expensed for prior service costs for 2008 is $3
million and $(3) million for pension benefits and post-retirement
benefits, respectively.
|
NOTE 8. Employee Benefit
Plans, continued
At
December 2007, the balances of pre-tax amounts to be amortized that are included
in accumulated other comprehensive income (a component of shareholders’ Equity)
are as follows:
|
Post-retirement
|
|||
|
Pension
Benefits
|
Benefits
|
||
|
(Gains)/Losses
|
$ 351
|
$ 89
|
|
|
Prior
Service Costs
|
16
|
(3)
|
|
|
Total
|
$ 367
|
$ 86
|
Assumptions
Weighted-average
assumptions used in accounting for the plans were as follows:
|
Pension
Benefits
|
Post-retirement
Benefits
|
|||||
|
2007
|
2006
|
2007
|
2006
|
|||
|
Expected
Long-term Return on Plan Assets:
|
||||||
|
Benefit
Cost for Plan Year
|
8.50%
|
8.50%
|
N/A
|
N/A
|
||
|
Benefit
Obligation at End of Plan Year
|
8.50%
|
8.50%
|
N/A
|
N/A
|
||
|
Discount
Rates:
|
||||||
|
Benefit
Cost for Plan Year
|
5.75%
|
5.25%
|
5.50%
|
5.00%
|
||
|
Benefit
Obligation at End of Plan Year
|
6.00%
|
5.75%
|
5.75%
|
5.50%
|
||
|
Salary
Scale Inflation
|
4.10%
|
4.10%
|
4.10%
|
4.10%
|
||
The net
post-retirement benefit obligation was determined using the following
assumptions for the health care cost trend rate for medical plans. The rate is
assumed to gradually decrease to 4.75% by 2014. Additionally, there are cost
differentials between Medicare and Non-Medicare eligible individuals which are
reflected below.
|
Post-retirement
Benefits
|
||||
|
2007
|
2006
|
|||
|
Health
Care Cost Trend Rate
|
||||
|
Components
of Benefit Cost: Non-Medicare Eligible
|
10%
|
11%
|
||
|
Components
of Benefit Cost: Medicare Eligible
|
11%
|
12%
|
||
|
Benefit
Obligations: Non-Medicare Eligible
|
9%
|
10%
|
||
|
Benefit
Obligations: Medicare Eligible
|
10%
|
11%
|
||
For every
1% change in the assumed health care cost trend rate, service and interest cost
will change $1 million (consolidated income statement impact). For every 1%
increase in the health care cost trend rate the Company’s benefit obligation
will increase by $15 million, and for every 1% decrease the Company’s benefit
obligation will decrease by $13 million (consolidated balance sheet
impact). An increase in rates has a greater effect on the Company’s
benefit obligation due to the impact of compounding on future
years.
NOTE
8. Employee Benefit Plans, continued
Medicare
Prescription Drug, Improvement and Modernization Act of 2003
As
required by the Medicare Prescription Drug, Improvement and Modernization Act of
2003 (the “Act”), CSX has determined that its medical plan’s prescription drug
benefit qualifies as actuarially equivalent to the benefit that would be paid
under the Act. CSX has received $4 million in tax free federal
reimbursement for prescription drug claims in both 2007 and 2006.
Other
Plans
Under
collective bargaining agreements, the Company participates in a multi-employer
benefit plan, which provides certain post-retirement health care and life
insurance benefits to eligible contract employees. Premiums under this plan are
expensed as incurred and amounted to $31 million, $30 million and $30 million in
2007, 2006 and 2005, respectively.
The
Company maintains savings plans for virtually all full-time salaried employees
and certain employees covered by collective bargaining
agreements. Expense associated with these plans was $24 million, $18
million and $19 million for 2007, 2006 and 2005, respectively. The
increase in 2007 is primarily driven by new labor agreements that increased the
Company’s 401(k) match for certain plans.
NOTE
9. Debt and Credit Agreements
Debt was as follows:
|
Average
|
|||||
|
Interest
|
|||||
|
Rates
at
|
|||||
|
December
28,
|
December
28,
|
December
29,
|
|||
|
(Dollars
in Millions)
|
Maturity
|
2007
|
2007
|
2006
|
|
|
Notes
|
2008-2043
|
6.5%
|
$ 6,291
|
$ 4,924
|
|
|
Convertible
Debentures, net of $23 and
|
|||||
|
$75
discount, respectively
|
2021
|
2.1%
|
151
|
473
|
|
|
Equipment
Obligations
|
2008-2023
|
6.6%
|
738
|
446
|
|
|
Other
Obligations, Including Capital Leases
|
2008-2015
|
6.4%
|
75
|
111
|
|
|
Total
Long-term Debt (including current portion)
|
7,255
|
5,954
|
|||
|
Less
Debt Due within One Year
|
(785)
|
(592)
|
|||
|
Total
Long-term Debt (excluding current portion)
|
$ 6,470
|
$ 5,362
|
|||
Early
Redemption of Long-term Debt
In 2007, CSX called $150 million of
notes due in 2032. CSX recognized a $10 million reduction to Other
Income for an early redemption premium and the write-off of debt issuance costs
related to the $150 million of note repayments.
NOTE
9. Debt and Credit Agreements, continued
In 2005,
CSX repurchased $1.0 billion of its publicly-traded notes. The
consideration paid for these notes totaled $1.2 billion, including a pre-tax
charge of $192 million for costs to repurchase the debt which primarily reflects
the market value above original issue value. CSX used net cash
proceeds from the disposition of its International Terminals business in 2005,
along with cash on hand, to finance this repurchase.
Debt
Issuance
CSX issued a total of $2.4 billion in
debt during 2007 as follows:
|
Notes
|
Principal
Amount Issued
|
|
(Dollars
in Millions)
|
|
|
CSXT
6.251% Notes due 2023 (See Note 19) (a)
|
$
381
|
|
CSX
5.75% Notes due 2013
|
400
|
|
CSX
6.25% Notes due 2018
|
600
|
|
CSX
5.60% Notes due 2017
|
300
|
|
CSX
6.15% Notes due 2037
|
700
|
|
$
2,381
|
(a) The
CSXT notes are secured by a security interest in certain railroad
equipment.
These
notes were included in the Consolidated Balance Sheets under Long-term Debt and
may be redeemed by the Company at any time. The net proceeds from the
sale of the notes will be used for general corporate purposes, which may include
repurchases of CSX common stock, capital expenditures, working capital
requirements, improvements in productivity and other cost reductions at the
Company's major transportation units.
Convertible
Debentures
In
October 2001, CSX issued $564 million aggregate principal amount at maturity in
unsubordinated zero coupon convertible debentures (the "debentures") due October
30, 2021 for an initial offering price of approximately $462
million. The carrying value of outstanding debentures was $174
million and $473 million, at December 2007 and December 2006,
respectively. From their date of issuance, these debentures had
accreted (increased) in value at a yield to maturity of 1% per
year. On October 30, 2007, the accretion rate was reset to
2.1%. The accretion rate may be reset again in October 2011 and
October 2016 to a rate based on five-year United States Treasury Notes minus
2.8%. In no event, however, will the yield to maturity be reset below
1% or above 3% per annum. Accretion in value on the debentures is
recorded for each period, but will not be paid prior to maturity.
NOTE
9. Debt and Credit Agreements, continued
The
debentures allow holders to require CSX to purchase their debentures in October
2008, October 2011 and October 2016, at a purchase price equal to the accreted
value of the debentures at the time. CSX may redeem the debentures
for cash at any time on or after October 30, 2008, at a redemption price equal
to the accreted value of the debentures. Therefore, at December 2007,
the debentures were classified in current maturities of long-term debt in the
Consolidated Balance Sheets.
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. During 2007, $375 million face value of debentures
were converted into 13 million shares of CSX common stock. No
material conversions occurred during 2006. At December 2007, $174
million face value debentures remained outstanding convertible into 6 million
shares.
Short-term
Debt Balances and Rates
|
December
|
December
|
|||
|
(Dollars
in Millions)
|
2007
|
2006
|
||
|
Short-term
Debt
|
$
2
|
$
8
|
||
|
Weighted
Average Interest Rates
|
5.57%
|
6.07%
|
Long-term
Debt Maturities
|
Maturities
as
|
||||
|
(Dollars
in Millions)
|
of
December
|
|||
|
Fiscal Years Ending
|
2007
|
|||
|
2008
|
$ 785
|
|||
|
2009
|
305
|
|||
|
2010
|
92
|
|||
|
2011
|
591
|
|||
|
2012
|
493
|
|||
|
2013
and Thereafter
|
4,989
|
|||
|
Total
Long-term Debt Maturities (including current portion)
|
$ 7,255
|
|||
NOTE
9. Debt and Credit Agreements, continued
Credit
Facilities
In 2006,
the Company entered into a $1.25 billion five-year unsecured revolving credit
facility and a $15 million secured revolving credit facility expiring in
2011. In 2007, with the consent of the lenders and in accordance with
the facility’s terms, CSX extended the maturity date of the $1.25 billion
facility an additional year, to 2012. CSX also has an $18.5 million
364-day unsecured revolving credit facility expiring in August
2008.
Additionally,
with the approval of the lending banks, CSX may increase its total borrowing
capacity under the $1.25 billion facility by $500 million, from $1.25 billion to
up to $1.75 billion. The facility was not
drawn on as of December 2007. Commitment fees and interest rates
payable under the facility were similar to fees and rates available to
comparably rated investment-grade borrowers.
In 2007,
CSX paid approximately $2 million in total fees associated with the undrawn
facilities. These credit facilities allow for borrowings at floating
(LIBOR-based) interest rates, plus a spread, depending upon CSX’s senior
unsecured debt ratings. LIBOR is the London Interbank Offered Rate which is a
daily reference rate based on the interest rates at which banks offer to lend
unsecured funds. At December 2007, CSX was in compliance with all covenant
requirements under the facilities.
Fair
Value of Financial Instruments
Fair
values of CSX’s financial instruments were estimated by reference to quoted
prices from market sources and financial institutions as well as other valuation
techniques. Long-term debt is the only financial instrument of CSX with fair
values significantly different from their carrying amounts. The fair
value of long-term debt has been estimated using discounted cash flow analysis
based upon CSX's current incremental borrowing rates for similar types of
financing arrangements.
|
December
28,
|
December
29,
|
|||||||
|
(Dollars
in Billions)
|
2007
|
2006
|
||||||
|
Long-term
Debt Including Current Maturities:
|
||||||||
|
Fair
Value
|
$ 7.4
|
$ 6.6
|
||||||
|
Carrying
Value
|
$ 7.3
|
$ 6.0
|
||||||
NOTE
10. Other Income - Net and Supplemental Data
Other
Income - Net consists of the following:
|
Fiscal
Years
|
||||
|
(Dollars
in Millions)
|
2007
|
2006
|
2005
|
|
|
Interest
Income(a)
|
$ 55
|
$ 41
|
$ 38
|
|
|
Income
from Real Estate and Resort Operations (b)
|
42
|
24
|
85
|
|
|
Gain
on Conrail Property (After Tax) (c)
|
-
|
26
|
-
|
|
|
Miscellaneous
(d)
|
(4)
|
4
|
(22)
|
|
|
Total
Other Income - Net
|
$ 93
|
$ 95
|
$ 101
|
|
|
Gross
revenue from Real Estate and Resort
|
||||
|
Operations
included above
|
$ 211
|
$ 193
|
$ 262
|
|
|
(a)
|
Interest
income includes amounts earned from CSX’s cash, cash equivalents and
short-term investments.
|
|
(b)
|
Income
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. Results of these operations may
fluctuate as a function of timing of real estate sales and resort
seasonality.
|
|
(c)
|
Gain
on Conrail property represents a non-cash gain on additional Conrail
property value received in 2006.
|
|
(d)
|
Miscellaneous
income is comprised of equity earnings, minority interest, investment
gains and losses and other non-operating
activities.
|
Supplemental data consists of the
following:
Operating
expense of $7.8 billion, $7.4 billion and $7.1 billion included selling, general
& administrative expenses of $585 million, $547 million and $552 million for
fiscal years 2007, 2006 and 2005, respectively.
NOTE
11. Properties
The Company’s properties were as
follows:
|
December
28, 2007
|
December
29, 2006
|
||||||
|
Accumulated
|
Accumulated
|
||||||
|
(Dollars
in Millions)
|
Cost
|
Depreciation
|
Net
|
Cost
|
Depreciation
|
Net
|
|
|
Road
|
$ 20,522
|
$ 3,564
|
$ 16,958
|
$ 19,741
|
$ 3,342
|
$ 16,399
|
|
|
Equipment
|
6,951
|
2,829
|
4,122
|
6,567
|
2,666
|
3,901
|
|
|
Intermodal
|
612
|
349
|
263
|
559
|
321
|
238
|
|
|
Other
|
914
|
477
|
437
|
848
|
463
|
385
|
|
|
Total
Properties
|
$ 28,999
|
$ 7,219
|
$ 21,780
|
$ 27,715
|
$ 6,792
|
$ 20,923
|
|
NOTE
12. Other Long-term Assets and Other Long-term
Liabilities
Other
Long-term Assets
Other
Long-term Assets consisted of the following:
|
December
28,
|
December
29,
|
|||
|
(Dollars
in Millions)
|
2007
|
2006
|
||
|
Available
for Sale Securities
(a)
|
$ 75
|
$ 44
|
||
|
Goodwill
(b)
|
64
|
73
|
||
|
Real
Estate Development Costs
|
42
|
39
|
||
|
Other
Long-term Assets
|
39
|
54
|
||
|
Debt
Issuance Costs
|
34
|
30
|
||
|
Pension
Plan Assets
|
4
|
-
|
||
|
Deposits
|
1
|
3
|
||
|
Income
Taxes Receivable
(c)
|
-
|
348
|
||
|
Total
Other Long-term Assets
|
$ 259
|
$ 591
|
||
|
(a)
|
Available
for Sale Securities include investments in marketable
securities.
|
|
(b)
|
Goodwill
represents the purchase price in excess of fair value of identifiable
tangible and intangible assets.
|
|
(c)
|
Income
Taxes Receivable in 2006 included amounts on deposit with the Internal
Revenue Service (“IRS”), bonds and other unpaid claims of income
taxes. In
2007, the decrease was due to the Company applying its amounts on deposit
with the IRS towards its 2007 tax
obligations.
|
NOTE
12. Other Long-term Assets and Other Long-term Liabilities,
continued
Other
Long-term Liabilities
Other
Long-term Liabilities consisted of the following:
|
December
28,
|
December
29,
|
|||
|
(Dollars
in Millions)
|
2007
|
2006
|
||
|
Post-retirement
Benefit Liability (a)
|
$ 349
|
$ 345
|
||
|
Pension
Plan Liability (a)
|
203
|
529
|
||
|
Deferred
Gains
|
181
|
200
|
||
|
Accrued
Deferred Compensation
|
90
|
90
|
||
|
Other
Long-term Liabilities
|
81
|
95
|
||
|
Deferred
Lease Payments
|
40
|
53
|
||
|
Minority
Interest(b)
|
21
|
89
|
||
|
Accrued
Sick Leave
|
16
|
19
|
||
|
Income
Taxes Payable(c)
|
7
|
105
|
||
|
Total
Other Long-term Liabilities
|
$ 988
|
$ 1,525
|
||
|
(a) See
Note 8, Employee Benefit Plans, for a discussion on changes in pension and
post-retirement benefit
liabilities.
|
|
(b)
Minority Interest decreased as a result of a change to a shareholder
agreement at one of CSXT’s partially owned subsidiaries. CSXT
now has greater participation in the subsidiary’s earnings resulting in a
decrease to the minority interest liability and an increase in additional
paid in capital.
|
|
(c) Income
taxes payable decreased primarily due to amounts being reclassified to
current.
|
NOTE
13. Income Taxes
Earnings
from continuing operations before income taxes of $1.9 billion, $1.8 billion and
$1.0 billion for fiscal years 2007, 2006, and 2005, respectively represent
earnings from domestic operations.
The significant components of deferred
tax assets and liabilities include:
|
2007
|
2006
|
|||||
|
(Dollars
in Millions)
|
Assets
|
Liabilities
|
Assets
|
Liabilities
|
||
|
Employee
Benefit Plans
|
$ 404
|
$ -
|
$ 498
|
$ -
|
||
|
Accelerated
Depreciation
|
-
|
6,541
|
-
|
6,464
|
||
|
Other
|
447
|
152
|
580
|
473
|
||
|
Total
|
$ 851
|
$
6,693
|
$ 1,078
|
$ 6,937
|
||
|
Net
Deferred Tax Liabilities
|
$
5,842
|
$ 5,859
|
||||
NOTE
13. Income Taxes, continued
The
primary factors in the change in year-end net deferred income tax liability
balances include:
|
|
·
|
Annual
provision for deferred income tax
expense;
|
|
|
·
|
Accumulated
other comprehensive loss and other capital adjustments;
and
|
|
|
·
|
The
reclassification of income taxes payable balances as required by FIN
48.
|
The
breakdown of income tax expense (benefit) between current and deferred is as
follows:
|
(Dollars
in Millions)
|
Fiscal
Years
|
|||
|
Current:
|
2007
|
2006
|
2005
|
|
|
Federal
|
$ 388
|
$ 458
|
$ 350
|
|
|
State
|
46
|
31
|
12
|
|
|
Total
Current
|
434
|
489
|
362
|
|
|
Deferred:
|
||||
|
Federal
|
237
|
15
|
33
|
|
|
State
|
35
|
27
|
(79)
|
|
|
Total
Current
|
272
|
42
|
(46)
|
|
|
Total
|
$ 706
|
$ 531
|
$ 316
|
|
Income
tax expense reconciled to the tax computed at statutory rates is as
follows:
|
Fiscal
Years
|
||||||||||
|
(Dollars
In Millions)
|
2007
|
2006
|
2005
|
|||||||
|
Federal
Income Taxes
|
$ 676
|
35
|
%
|
$ 644
|
35
|
%
|
$ 362
|
35
|
%
|
|
|
State
Income Taxes
|
50
|
3
|
37
|
2
|
(44)
|
(4)
|
||||
|
Prior
Year Audit Resolutions
|
5
|
-
|
(132)
|
(7)
|
(1)
|
-
|
||||
|
Other
Items (a)
|
(25)
|
( 1)
|
(18)
|
(1)
|
(1)
|
(1)
|
||||
|
Income
Tax Expense/Rate
|
$ 706
|
37
|
%
|
$ 531
|
29
|
%
|
$ 316
|
30
|
%
|
|
|
(a)
Other items primarily include tax impacts from equity in Conrail and other
partially owned subsidiaries’
earnings.
|
The change in the 2007 effective income
tax rate compared to the prior year is primarily attributed to prior year audit
resolutions favorably impacting the 2006 effective rate. The net state income
tax impact of the 2006 resolutions of federal income tax audits of $15 million
is included on the 2006 state income taxes line above. The state
income tax benefit in 2005 is largely due to the recognition of an income tax
benefit of $71 million for the Ohio legislative change to gradually eliminate
its corporate franchise tax.
NOTE
13. Income Taxes, continued
CSX
adopted FIN 48, at the beginning of fiscal year 2007. As a result of the
implementation, the Company recognized a $31 million decrease to reserves for
uncertain tax positions. This decrease, along with a $2 million
reduction for unconsolidated subsidiaries accounted for under the equity method
of accounting, was recorded as a cumulative effect adjustment to the beginning
balance of retained earnings on the balance sheet.
The
change to the total gross unrecognized tax benefits of the Company during the
fiscal year ended December 28, 2007 is reconciled as follows:
|
Uncertain
Tax Positions:
|
Fiscal
Year
|
|
(Dollars
in Millions)
|
2007
|
|
Beginning
Balance
|
$
207
|
|
Additions
based on tax positions related to current year
|
1
|
|
Settlements
with IRS
|
(148)
|
|
Lapse
of statute of limitations
|
(2)
|
|
Balance
at December 28, 2007
|
$
58
|
Of the
total gross reserve for uncertain tax positions listed above, $197 million (of
the beginning balance) and $50 million (of the ending balance) net of federal
benefit on state issues could favorably affect the effective tax
rate. The annual decrease in unrecognized tax benefits primarily
related to settlements with the IRS that resulted in a $110 million discontinued
operations benefit (See Note 17, Discontinued Operations). The
Company estimates that approximately $17 million of the unrecognized tax
benefits as of December 2007 for various state and federal income tax matters
will be resolved over the next 12 months. The final outcome of these
uncertain tax positions, however, is not yet determinable.
The
Company files a consolidated federal income tax return, which includes its
principal domestic subsidiaries. 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 2003 and substantially all
other income tax matters have been concluded for years through
1998. Federal income tax returns for 2004 through 2006 are
currently under examination.
CSX’s
continuing practice is to recognize net interest and penalties related to income
tax matters in income tax expense. Included in the consolidated
income statements are $(8) million, $(79) million, and $43 million for fiscal
years 2007, 2006, and 2005, respectively, of interest and penalties
expense/(benefit) for all prior year tax positions. Benefits for
interest and penalties are due to favorable tax settlements of prior period tax
audits where the Company had previously accrued a liability for interest and
penalties. The Company had $4 million and $52 million accrued for
interest and penalties for 2007 and 2006 respectively, for all prior year tax
positions. The decrease for interest and penalties during both 2007
and 2006 is primarily related to the resolution of federal income tax audits and
payments made to the IRS by the Company.
NOTE
14. Derivative Financial Instruments
CSX uses
derivative financial instruments to manage its overall exposure to fluctuations
in interest rates and has previously used such instruments to manage exposure to
fluctuations in fuel costs.
Interest
Rate Swaps
During
2007, CSX repaid $450 million of debentures that matured and called $150 million
of debentures due in 2032 (See Note 9, Debt and Credit
Agreements). As a result, CSX also settled the interest rate swaps
related to these debentures. CSX had $35 million and $640 million of
outstanding interest rate swaps that impacted interest expense by $2 million for
2007 and 2006. The interest rate swap agreements were designated and
qualified as fair value hedges, and the gain or loss on the derivative
instrument, as well as the offsetting gain or loss on the fixed rate note
attributed to the hedged risk, were recognized in current earnings during the
period of change in fair values. CSX’s interest rate swaps qualified
as perfectly effective fair value hedges, as defined by SFAS 133. As such, there
was no ineffective portion to the hedge recognized in earnings during the
current or prior year periods.
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. Ineffectiveness, or the extent to which changes in the fair
values of the fuel swaps did not offset changes in the fair values of the
expected fuel purchases, was immaterial. CSX suspended entering into
new swaps in its fuel hedge program in 2004 and there are currently no
outstanding contracts.
Fuel hedging activity offset increased
fuel expense for the fiscal years 2006 and 2005 by $55 million and $249 million,
respectively. Since the end of third quarter 2006, there has been no
impact on fuel expense as all contracts expired prior to that time.
NOTE
15. 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, Nature of Operations and Significant Accounting
Policies.
NOTE
15. Business Segments, continued
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, net sublease income from assets formerly included in
the Company’s marine services segment and other items.
Business
segment information for the fiscal years 2007, 2006 and 2005 was as
follows:
|
Fiscal
Years
|
|||||
|
(Dollars
in Millions)
|
2007
|
2006
|
2005
|
||
|
Revenue
from External Customers:
|
|||||
|
Rail
|
$ 8,674
|
$ 8,154
|
$ 7,256
|
||
|
Intermodal
|
1,356
|
1,412
|
1,362
|
||
|
Consolidated
|
$ 10,030
|
$ 9,566
|
$ 8,618
|
||
|
Operating
Income:
|
|||||
|
Rail
|
$ 1,991
|
$ 1,858
|
$ 1,301
|
||
|
Intermodal
|
260
|
268
|
248
|
||
|
Other
|
5
|
12
|
1
|
||
|
Consolidated
|
$ 2,256
|
$ 2,138
|
$ 1,550
|
||
|
Assets:
|
|||||
|
Rail
|
$ 24,179
|
$ 24,077
|
$ 23,182
|
||
|
Intermodal
|
283
|
276
|
305
|
||
|
Other
|
25
|
43
|
123
|
||
|
Investment
in Conrail
|
639
|
607
|
603
|
||
|
Elimination
of Intersegment Payables (Receivables)
|
(62)
|
(78)
|
(77)
|
||
|
Non-segment
Assets
|
470
|
204
|
96
|
||
|
Consolidated
|
$ 25,534
|
$ 25,129
|
$ 24,232
|
||
|
Depreciation
Expense:
|
|||||
|
Rail
|
$ 848
|
$ 818
|
$ 779
|
||
|
Intermodal
|
34
|
38
|
39
|
||
|
Other
|
1
|
1
|
8
|
||
|
Consolidated
|
$ 883
|
$ 857
|
$ 826
|
||
|
Property
Additions:
|
|||||
|
Rail
|
$ 1,678
|
$ 1,592
|
$ 1,091
|
||
|
Intermodal
|
60
|
28
|
25
|
||
|
Other
|
-
|
-
|
5
|
||
|
Non-Segment
|
35
|
19
|
15
|
||
|
Consolidated
|
$ 1,773
|
$ 1,639
|
$ 1,136
|
||
NOTE
16. Related Party Transactions
Through a limited liability company,
CSX and Norfolk Southern Corporation (“NS”) jointly own Conrail. 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. Pursuant to the
Accounting Principle Board (“APB”) Opinion 18, The Equity Method of Accounting for
Investments in Common Stock, CSX applies the equity method of accounting
to its investment in Conrail.
Conrail
owns and operates rail infrastructure for the joint benefit of CSX and
NS. This is known as the shared asset area (“shared asset area”).
Conrail charges fees for right-of way usage, equipment rentals and
transportation, switching and terminal service charges in the shared asset
area. Historically, these expenses were included as an expense
category, Conrail rents, fees and services, in the consolidated income
statements. Beginning in 2007, these amounts have been included in
materials, supplies and other on the consolidated income
statements.
Also
included in materials, supplies and other are CSX’s 42% share of Conrail’s
income and its amortization of the fair value write-up arising from the
acquisition of Conrail and certain other adjustments. The
amortization primarily represents the additional after tax depreciation expense
related to the write-up of Conrail’s fixed assets when the original purchase
price, from the 1997 acquisition of Conrail, was allocated based on fair
value.
The following table details the related
Conrail amounts included in materials, supplies and other in the Company’s
consolidated income statements:
|
Fiscal
Years
|
||||||
|
(Dollars
in Millions)
|
2007
|
2006
|
2005
|
|||
|
Rents,
Fees and Services
|
$ 97
|
$ 91
|
$ 97
|
|||
|
Purchase
Price Amortization and Other
|
4
|
4
|
4
|
|||
|
Equity
in Income of Conrail
|
(35)
|
(20)
|
(36)
|
|||
|
Total
Conrail Rents, Fees and Services
|
$ 66
|
$ 75
|
$ 65
|
|||
NOTE
16. Related Party Transactions, continued
As
required by SFAS 57, Related
Party Disclosures, the Company has identified below amounts owed to
Conrail, or its affiliates, representing liabilities under the operating,
equipment and shared area agreements with Conrail. The Company also
executed two promissory notes with a subsidiary of Conrail which were included
in long-term debt on the consolidated balance sheets.
|
December
28,
|
December
29,
|
|||||
|
2007
|
2006
|
|||||
|
(Dollars
in Millions)
|
||||||
|
Balance
Sheet Information:
|
||||||
|
CSX
Payable to Conrail(a)
|
$ 49
|
$ 48
|
||||
|
Promissory
Notes Payable to Conrail Subsidiary
|
||||||
|
4.40%
CSX Promissory Note due October 2035 (b)
|
$ 73
|
$ 73
|
||||
|
4.52%
CSXT Promissory Note due March 2035 (b)
|
$ 23
|
$ 23
|
||||
|
(a)
Included on the consolidated balance sheet of CSX as accounts
payable
|
||||||
|
(b)
Included on the consolidated balance sheet and Schedule of Contractual
Obligations of CSX as long-term debt
|
||||||
|
Fiscal
Years
|
||||||
|
(Dollars
in Millions)
|
2007
|
2006
|
2005
|
|||
|
Income
Statement Information:
|
||||||
|
Interest
Expense Related to Conrail Notes Payable
|
$ 4
|
$ 4
|
$ 1
|
|||
NOTE
17. Discontinued Operations
In 2005, CSX sold its International
Terminals business, which included the capital stock of SL Services, Inc.
(“SLSI”) to Dubai Ports International FZE (“DPI”) for gross cash consideration
of $1.142 billion. Of the gross proceeds, approximately $110 million was paid
for the purchase of a minority interest in an International Terminals’
subsidiary, which the Company acquired during the first quarter of 2005 and
divested as part of the sale to DPI. Other related cash transaction costs
amounted to approximately $34 million, including resolution of working capital
and long-term debt adjustments.
CSX recognized a gain of $683 million
pre-tax, $428 million after tax, in fiscal year 2005 as a result of the
sale. Consequently, amounts related to this gain and the business
were reported as discontinued operations on the Consolidated Income
Statement.
SLSI also
holds certain residual assets and liabilities as a result of prior divestitures
and discontinuances. A wholly-owned subsidiary of CSX retains the
rights to those assets and indemnifies DPI, SLSI and related entities against
those liabilities pursuant to a separate agreement. CSX guarantees
the obligations of its subsidiary under this separate agreement.
NOTE
17. Discontinued Operations, continued
The following table represents the
results of operations of the Company’s International Terminals
Business.
|
Fiscal
Year
|
||
|
(Dollars
in Millions)
|
2005
|
|
|
Income
Statement Information:
|
||
|
Revenues
|
$ 14
|
|
|
Expenses
|
21
|
|
|
Operating
Income (Loss)
|
$ (7)
|
|
|
Income
Tax Benefit
|
4
|
|
|
Net
Income
|
$ (3)
|
|
In 2007,
the Internal Revenue Service completed its review of the Company’s pre-filing
agreement, which is an early review of specific transactions. The
Company recorded an income tax benefit of $110 million, primarily associated
with the resolution of income tax matters related to former activities of the
marine service businesses, including the International Terminals business
described above. This 2007 benefit was recorded as discontinued
operations as the Company no longer operates in these
businesses. This benefit was associated with tax basis adjustments,
foreign dividends and foreign tax credits from operations over a multi-year
period.
NOTE
18. Quarterly Financial Data (Unaudited)
Pursuant
to Article 3 of the SEC’s Regulation S-X, the following are selected quarterly
financial data:
|
2007
|
||||||
|
Quarters
|
||||||
|
(Dollars
in Millions, Except Per Share Amounts)
|
1st
(a)
|
2nd
|
3rd
(b)
|
4th
(c)
|
Full
Year
|
|
|
Operating
Revenue
|
$ 2,422
|
$ 2,530
|
$ 2,501
|
$ 2,577
|
$ 10,030
|
|
|
Operating
Income
|
488
|
604
|
555
|
609
|
2,256
|
|
|
Earnings
from Continuing Operations
|
240
|
324
|
297
|
365
|
1,226
|
|
|
Discontinued
Operations
|
-
|
-
|
110
|
-
|
110
|
|
|
Net
Earnings
|
$ 240
|
$ 324
|
$ 407
|
$ 365
|
$ 1,336
|
|
|
Earnings
Per Share:
|
||||||
|
From
Continuing Operations
|
$ 0.55
|
$ 0.74
|
$ 0.69
|
$ 0.89
|
$ 2.85
|
|
|
Discontinued
Operations
|
-
|
-
|
0.25
|
-
|
0.26
|
|
|
Net
Earnings
|
$ 0.55
|
$ 0.74
|
$ 0.94
|
$ 0.89
|
$ 3.11
|
|
|
Earnings
Per Share Assuming Dilution:
|
||||||
|
From
Continuing Operations
|
$ 0.52
|
$ 0.71
|
$ 0.67
|
$ 0.86
|
$ 2.74
|
|
|
Discontinued
Operations
|
-
|
-
|
0.24
|
-
|
0.25
|
|
|
Net
Earnings
|
$ 0.52
|
$ 0.71
|
$ 0.91
|
$ 0.86
|
$ 2.99
|
|
|
Dividend
Per Share
|
$ 0.12
|
$ 0.12
|
$ 0.15
|
$ 0.15
|
$ 0.54
|
|
|
2006
|
||||||
|
Quarters
|
||||||
|
(Dollars
in Millions, Except Per Share Amounts)
|
1st
|
2nd
(d)
|
3rd
(e)
|
4th
(f)
|
Full
Year
|
|
|
Operating
Revenue
|
$ 2,331
|
$ 2,421
|
$ 2,418
|
$ 2,396
|
$ 9,566
|
|
|
Operating
Income
|
496
|
646
|
489
|
507
|
2,138
|
|
|
Net
Earnings
|
$ 245
|
$ 390
|
$ 328
|
$ 347
|
$ 1,310
|
|
|
Earnings
Per Share:
|
||||||
|
Net
Earnings
|
$ 0.56
|
$ 0.88
|
$ 0.75
|
$ 0.79
|
$ 2.98
|
|
|
Earnings
Per Share Assuming Dilution:
|
||||||
|
Net
Earnings
|
$ 0.53
|
$ 0.83
|
$ 0.71
|
$ 0.75
|
$ 2.82
|
|
|
Dividend
Per Share
|
$ 0.065
|
$ 0.065
|
$ 0.10
|
$ 0.10
|
$ 0.33
|
|
|
(a)
|
CSX
recognized an $18 million pre-tax benefit on insurance recoveries from
gains related to Hurricane Katrina (See Note 5, Hurricane
Katrina).
|
|
(b)
|
CSX
recognized an income tax benefit of $110 million principally associated
with the resolution of certain tax matters related to former activities of
the container shipping and marine service businesses (See Note 17,
Discontinued Operations). Additionally, CSX recognized a $1
million pre-tax benefit on insurance recoveries from gains related to
Hurricane Katrina.
|
|
(c)
|
CSX
recognized an $8 million pre-tax benefit on insurance recoveries from
gains related to Hurricane Katrina.
|
|
(d)
|
CSX
recognized an income tax benefit of $41 million principally related to the
resolution of certain tax matters. Additionally, CSX recognized
a $126 million pre-tax benefit on insurance recoveries from gains related
to Hurricane Katrina.
|
|
(e)
|
CSX
recognized an income tax benefit of $69 million, principally related to
the resolution of federal income tax audits for 1994 –
1996. Additionally, CSX recognized a $15 million pre-tax
benefit on insurance recoveries from gains related to Hurricane
Katrina.
|
|
(f)
|
CSX
recognized an income tax benefit of $41 million, principally related to
the resolution of federal income tax audits for 1997 -
1998. Additionally, CSX recognized a $27 million pre-tax
benefit on insurance recoveries from gains related to Hurricane Katrina
and a $26 million after-tax non-cash gain on additional Conrail property
received.
|
NOTE
19. Summarized Consolidating Financial Data
In 2007,
CSX announced that CSXT offered $381 million of Secured Equipment Notes due 2023
in a registered public offering pursuant to CSX’s existing automatic shelf
registration statement. CSX will fully and unconditionally guarantee the notes.
In connection with this offering, the Company is providing the following
condensed consolidating financial information in accordance with SEC disclosure
requirements. Each entity in the consolidating financial information follows the
same accounting policies as described in the consolidated financial statements,
except for the use of the equity method of accounting to reflect ownership
interests in subsidiaries which are eliminated upon consolidation and the
allocation of certain expenses of CSX incurred for the benefit of its
subsidiaries.
The
condensed consolidating balance sheets as of December 28, 2007 and
December 29, 2006, and the statements of income and cash flows for each of
the three fiscal years in the period ended December 28, 2007, for the parent and
obligor are as follows:
NOTE
19. Summarized Consolidating Financial Data
Consolidating
Income Statements
(Dollars
in Millions)
|
CSX
|
CSX
|
||||
|
Fiscal
Year Ended December 28, 2007
|
Corporation
|
Transportation
|
Other
|
Eliminations
|
Consolidated
|
|
Operating
Revenue
|
$ -
|
$ 8,591
|
$ 1,546
|
$ (107)
|
$ 10,030
|
|
Operating
Expense
|
(203)
|
6,894
|
1,180
|
(97)
|
7,774
|
|
Operating
Income
|
203
|
1,697
|
366
|
(10)
|
2,256
|
|
Equity
in Earnings of Subsidiaries
|
1,363
|
-
|
-
|
(1,363)
|
-
|
|
Other
Income (Expense)
|
166
|
154
|
198
|
(425)
|
93
|
|
Interest
Expense
|
(568)
|
(238)
|
(46)
|
435
|
(417)
|
|
Earnings
from Continuing Operations before Income Taxes
|
1,164
|
1,613
|
518
|
(1,363)
|
1,932
|
|
Income
Tax Benefit (Expense)
|
62
|
(614)
|
(154)
|
-
|
(706)
|
|
Earnings
from Continuing Operations
|
1,226
|
999
|
364
|
(1,363)
|
1,226
|
|
Discontinued
Operations - Net of Tax
|
110
|
-
|
-
|
-
|
110
|
|
Net
Earnings
|
$ 1,336
|
$ 999
|
$ 364
|
$ (1,363)
|
$ 1,336
|
|
CSX
|
CSX
|
||||
|
Fiscal
Year Ended December 29, 2006
|
Corporation
|
Transportation
|
Other
|
Eliminations
|
Consolidated
|
|
Operating
Revenue
|
$ -
|
$ 8,140
|
$ 1,426
|
$ -
|
$ 9,566
|
|
Operating
Expense
|
(195)
|
6,542
|
1,081
|
-
|
7,428
|
|
Operating
Income
|
195
|
1,598
|
345
|
-
|
2,138
|
|
Equity
in Earnings of Subsidiaries
|
1,281
|
-
|
-
|
(1,281)
|
-
|
|
Other
Income (Expense)
|
283
|
87
|
142
|
(417)
|
95
|
|
Interest
Expense
|
(536)
|
(217)
|
(56)
|
417
|
(392)
|
|
Earnings
from Continuing Operations before Income Taxes
|
1,223
|
1,468
|
431
|
(1,281)
|
1,841
|
|
Income
Tax Benefit (Expense)
|
87
|
(489)
|
(129)
|
-
|
(531)
|
|
Net
Earnings
|
$ 1,310
|
$ 979
|
$ 302
|
$ (1,281)
|
$ 1,310
|
NOTE
19. Summarized Consolidating Financial Data, continued
Consolidating
Income Statements
(Dollars
in Millions)
|
Fiscal
Year Ended December 30, 2005
|
CSX
Corporation
|
CSX
Transportation
|
Other
|
Eliminations
|
Consolidated
|
|
Operating
Revenue
|
$ -
|
$ 7,256
|
$ 1,362
|
$ -
|
$ 8,618
|
|
Operating
Expense
|
(125)
|
6,170
|
1,023
|
-
|
7,068
|
|
Operating
Income
|
125
|
1,086
|
339
|
-
|
1,550
|
|
Equity
in Earnings of Subsidiaries
|
946
|
-
|
-
|
(946)
|
-
|
|
Other
Income (Expense)
|
141
|
56
|
112
|
(208)
|
101
|
|
Debt
Repurchase Expense
|
(192)
|
-
|
-
|
-
|
(192)
|
|
Interest
Expense
|
(430)
|
(166)
|
(35)
|
208
|
(423)
|
|
Earnings
from Continuing Operations before Income Taxes
|
590
|
976
|
416
|
(946)
|
1,036
|
|
Income
Tax Benefit (Expense)
|
127
|
(289)
|
(154)
|
-
|
(316)
|
|
Earnings
from Continuing Operations
|
717
|
687
|
262
|
(946)
|
720
|
|
Discontinued
Operations - Net of Tax
|
428
|
-
|
(3)
|
-
|
425
|
|
Net
Earnings
|
$ 1,145
|
$ 687
|
$ 259
|
$ (946)
|
$ 1,145
|
NOTE
19. Summarized Consolidating Financial Data, continued
Consolidating
Balance Sheets
(Dollars
in Millions)
|
CSX
|
CSX
|
||||||
|
December
28, 2007
|
Corporation
|
Transportation
|
Other
|
Eliminations
|
Consolidated
|
||
|
ASSETS
|
|||||||
|
Current
Assets:
|
|||||||
|
Cash
and Cash Equivalents
|
$ (594)
|
$ 12
|
$ 950
|
$ -
|
$ 368
|
||
|
Short-term
Investments
|
270
|
-
|
76
|
-
|
346
|
||
|
Accounts
Receivable - Net
|
155
|
1,069
|
(25)
|
(25)
|
1,174
|
||
|
Materials
and Supplies
|
-
|
230
|
10
|
-
|
240
|
||
|
Deferred
Income Taxes
|
23
|
232
|
(1)
|
-
|
254
|
||
|
Other
Current Assets
|
25
|
103
|
53
|
(72)
|
109
|
||
|
Total
Current Assets
|
(121)
|
1,646
|
1,063
|
(97)
|
2,491
|
||
|
Properties
|
6
|
27,606
|
1,387
|
-
|
28,999
|
||
|
Accumulated
Depreciation
|
(9)
|
(6,400)
|
(810)
|
-
|
(7,219)
|
||
|
Properties
- Net
|
(3)
|
21,206
|
577
|
-
|
21,780
|
||
|
Investment
in Conrail
|
-
|
-
|
639
|
-
|
639
|
||
|
Affiliates
and Other Companies
|
-
|
470
|
(105)
|
-
|
365
|
||
|
Investment
in Consolidated Subsidiaries
|
14,524
|
-
|
34
|
(14,558)
|
-
|
||
|
Other
Long-term Assets
|
(330)
|
203
|
442
|
(56)
|
259
|
||
|
Total
Assets
|
$ 14,070
|
$ 23,525
|
$ 2,650
|
$ (14,711)
|
$ 25,534
|
||
|
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
|||||||
|
Current
Liabilities:
|
|||||||
|
Accounts
Payable
|
$ 90
|
$ 799
|
$ 112
|
$ (25)
|
$ 976
|
||
|
Labor
and Fringe Benefits Payable
|
36
|
374
|
51
|
-
|
461
|
||
|
Payable
to Affiliates
|
-
|
1,325
|
(1,253)
|
(72)
|
-
|
||
|
Casualty,
Environmental and Other Reserves
|
-
|
226
|
21
|
-
|
247
|
||
|
Current
Maturities of Long-term Debt
|
669
|
111
|
5
|
-
|
785
|
||
|
Short-term
Debt
|
-
|
2
|
-
|
-
|
2
|
||
|
Income
and Other Taxes Payable
|
(761)
|
572
|
302
|
-
|
113
|
||
|
Other
Current Liabilities
|
8
|
72
|
7
|
-
|
87
|
||
|
Total
Current Liabilities
|
42
|
3,481
|
(755)
|
(97)
|
2,671
|
||
|
Casualty,
Environmental and Other Reserves
|
-
|
540
|
84
|
-
|
624
|
||
|
Long-term
Debt
|
5,229
|
1,230
|
11
|
-
|
6,470
|
||
|
Deferred
Income Taxes
|
(176)
|
6,291
|
(19)
|
-
|
6,096
|
||
|
Long-term
Payable to Affiliates
|
-
|
-
|
56
|
(56)
|
-
|
||
|
Other
Long-term Liabilities
|
290
|
541
|
195
|
(38)
|
988
|
||
|
Total
Liabilities
|
5,385
|
12,083
|
(428)
|
(191)
|
16,849
|
||
|
Shareholders'
Equity:
|
|||||||
|
Common
Stock
|
408
|
181
|
-
|
(181)
|
408
|
||
|
Other
Capital
|
37
|
5,525
|
2,705
|
(8,230)
|
37
|
||
|
Retained
Earnings
|
8,565
|
5,768
|
421
|
(6,189)
|
8,565
|
||
|
Accumulated
Other Comprehensive Loss
|
(325)
|
(32)
|
(48)
|
80
|
(325)
|
||
|
Total
Shareholders' Equity
|
8,685
|
11,442
|
3,078
|
(14,520)
|
8,685
|
||
|
Total
Liabilities and Shareholders' Equity
|
$ 14,070
|
$ 23,525
|
$ 2,650
|
$ (14,711)
|
$ 25,534
|
||
NOTE
19. Summarized Consolidating Financial Data, continued
Consolidating
Balance Sheets
(Dollars
in Millions)
|
CSX
|
CSX
|
||||||
|
December
29, 2006
|
Corporation
|
Transportation
|
Other
|
Eliminations
|
Consolidated
|
||
|
ASSETS
|
|||||||
|
Current
Assets:
|
|||||||
|
Cash
and Cash Equivalents
|
$ 419
|
$ 17
|
$ 25
|
$ -
|
$ 461
|
||
|
Short-term
Investments
|
391
|
-
|
48
|
-
|
439
|
||
|
Accounts
Receivable - Net
|
121
|
1,058
|
27
|
(32)
|
1,174
|
||
|
Materials
and Supplies
|
-
|
195
|
9
|
-
|
204
|
||
|
Deferred
Income Taxes
|
(103)
|
225
|
129
|
-
|
251
|
||
|
Other
Current Assets
|
1
|
50
|
204
|
(112)
|
143
|
||
|
Total
Current Assets
|
829
|
1,545
|
442
|
(144)
|
2,672
|
||
|
Properties
|
19
|
26,447
|
1,249
|
-
|
27,715
|
||
|
Accumulated
Depreciation
|
(24)
|
(6,032)
|
(736)
|
-
|
(6,792)
|
||
|
Properties
- Net
|
(5)
|
20,415
|
513
|
-
|
20,923
|
||
|
Investment
in Conrail
|
-
|
-
|
607
|
-
|
607
|
||
|
Affiliates
and Other Companies
|
-
|
434
|
(71)
|
(27)
|
336
|
||
|
Investment
in Consolidated Subsidiaries
|
13,199
|
-
|
-
|
(13,199)
|
-
|
||
|
Other
Long-term Assets
|
2,023
|
415
|
(1,776)
|
(71)
|
591
|
||
|
Total
Assets
|
$ 16,046
|
$ 22,809
|
$ (285)
|
$ (13,441)
|
$ 25,129
|
||
|
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
|||||||
|
Current
Liabilities:
|
|||||||
|
Accounts
Payable
|
$ 78
|
$ 770
|
$ 157
|
$ (31)
|
$ 974
|
||
|
Labor
and Fringe Benefits Payable
|
44
|
396
|
55
|
-
|
495
|
||
|
Payable
to Affiliates
|
-
|
2,019
|
(1,907)
|
(112)
|
-
|
||
|
Casualty,
Environmental and Other Reserves
|
-
|
226
|
27
|
-
|
253
|
||
|
Current
Maturities of Long-term Debt
|
467
|
120
|
5
|
-
|
592
|
||
|
Short-term
Debt
|
-
|
8
|
-
|
-
|
8
|
||
|
Income
and Other Taxes Payable
|
1,308
|
245
|
(1,439)
|
-
|
114
|
||
|
Other
Current Liabilities
|
16
|
62
|
9
|
(1)
|
86
|
||
|
Total
Current Liabilities
|
1,913
|
3,846
|
(3,093)
|
(144)
|
2,522
|
||
|
Casualty,
Environmental and Other Reserves
|
-
|
599
|
69
|
-
|
668
|
||
|
Long-term
Debt
|
4,377
|
970
|
15
|
-
|
5,362
|
||
|
Deferred
Income Taxes
|
(255)
|
6,297
|
68
|
-
|
6,110
|
||
|
Long-term
Payable to Affiliates
|
-
|
-
|
72
|
(72)
|
-
|
||
|
Other
Long-term Liabilities
|
1,069
|
636
|
(150)
|
(30)
|
1,525
|
||
|
Total
Liabilities
|
$ 7,104
|
$ 12,348
|
$ (3,019)
|
$ (246)
|
$ 16,187
|
||
|
Shareholders'
Equity:
|
|||||||
|
Common
Stock
|
438
|
181
|
-
|
(181)
|
438
|
||
|
Other
Capital
|
1,469
|
5,420
|
2,696
|
(8,116)
|
1,469
|
||
|
Retained
Earnings
|
7,427
|
4,879
|
93
|
(4,972)
|
7,427
|
||
|
Accumulated
Other Comprehensive Loss
|
(392)
|
(19)
|
(55)
|
74
|
(392)
|
||
|
Total
Shareholders' Equity
|
8,942
|
10,461
|
2,734
|
(13,195)
|
8,942
|
||
|
Total
Liabilities and Shareholders' Equity
|
$ 16,046
|
$ 22,809
|
$ (285)
|
$ (13,441)
|
$ 25,129
|
||
NOTE
19. Summarized Consolidating Financial Data, continued
Consolidating
Cash Flow Statements
(Dollars
in Millions)
|
CSX
|
CSX
|
|||||
|
Fiscal
Year Ended December 28, 2007
|
Corporation
|
Transportation
|
Other
|
Eliminations
|
Consolidated
|
|
|
Operating
Activities
|
||||||
|
Net
Cash (Used in) Provided by Operating Activities
|
$ (871)
|
$ 2,278
|
$ 930
|
$ (153)
|
$ 2,184
|
|
|
Investing
Activities
|
||||||
|
Property
Additions
|
-
|
(1,632)
|
(141)
|
-
|
(1,773)
|
|
|
Insurance
Proceeds
|
-
|
16
|
-
|
-
|
16
|
|
|
Purchases
of Short-term Investments
|
(2,338)
|
-
|
-
|
-
|
(2,338)
|
|
|
Proceeds
from Sales of Short-term Investments
|
2,459
|
-
|
-
|
-
|
2,459
|
|
|
Other
Investing Activities
|
512
|
219
|
(780)
|
(8)
|
(57)
|
|
|
Net
Cash Provided by (Used in) Investing Activities
|
633
|
(1,397)
|
(921)
|
(8)
|
(1,693)
|
|
|
Financing
Activities
|
||||||
|
Short-term
Debt - Net
|
-
|
(6)
|
-
|
-
|
(6)
|
|
|
Long-term
Debt Issued
|
2,000
|
381
|
-
|
-
|
2,381
|
|
|
Long-term
Debt Repaid
|
(617)
|
(142)
|
(26)
|
-
|
(785)
|
|
|
Dividends
Paid
|
(236)
|
(120)
|
(27)
|
152
|
(231)
|
|
|
Stock
Options Exercised
|
153
|
-
|
-
|
-
|
153
|
|
|
Shares
Repurchased
|
(2,174)
|
-
|
(2,174)
|
|||
|
Other
Financing Activities
|
99
|
(999)
|
969
|
9
|
78
|
|
|
Net
Cash (Used in) Provided by Financing Activities
|
(775)
|
(886)
|
916
|
161
|
(584)
|
|
|
Net
(Decrease) Increase in Cash and Cash Equivalents
|
(1,013)
|
(5)
|
925
|
-
|
(93)
|
|
|
Cash
and Cash Equivalents at Beginning of Period
|
419
|
17
|
25
|
-
|
461
|
|
|
Cash
and Cash Equivalents at End of Period
|
$ (594)
|
$ 12
|
$ 950
|
$ -
|
$ 368
|
|
NOTE
19. Summarized Consolidating Financial Data, continued
Consolidating
Cash Flow Statements
(Dollars
in Millions)
|
CSX
|
CSX
|
|||||
|
Fiscal
Year Ended December 29, 2006
|
Corporation
|
Transportation
|
Other
|
Eliminations
|
Consolidated
|
|
|
Operating
Activities
|
||||||
|
Net
Cash Provided by (Used in) Operating Activities
|
$ 789
|
$ 1,794
|
$ 213
|
$ (738)
|
$ 2,058
|
|
|
Investing
Activities
|
||||||
|
Property
Additions
|
-
|
(1,554)
|
(85)
|
-
|
(1,639)
|
|
|
Insurance
Proceeds
|
-
|
144
|
3
|
-
|
147
|
|
|
Purchases
of Short-term Investments
|
(1,412)
|
-
|
-
|
-
|
(1,412)
|
|
|
Proceeds
from Sales of Short-term Investments
|
1,290
|
-
|
-
|
-
|
1,290
|
|
|
Other
Investing Activities
|
(38)
|
(16)
|
45
|
13
|
4
|
|
|
Net
Cash (Used in) Provided by Investing Activities
|
(160)
|
(1,426)
|
(37)
|
13
|
(1,610)
|
|
|
Financing
Activities
|
||||||
|
Short-term
Debt - Net
|
-
|
8
|
(1)
|
-
|
7
|
|
|
Long-term
Debt Issued
|
400
|
73
|
(2)
|
-
|
471
|
|
|
Long-term
Debt Repaid
|
(351)
|
(128)
|
(67)
|
-
|
(546)
|
|
|
Dividends
Paid
|
(148)
|
(130)
|
(30)
|
163
|
(145)
|
|
|
Stock
Options Exercised
|
319
|
-
|
-
|
-
|
319
|
|
|
Shares
Repurchased
|
(465)
|
-
|
-
|
-
|
(465)
|
|
|
Other
Financing Activities
|
11
|
(174)
|
(336)
|
562
|
63
|
|
|
Net
Cash (Used in) Provided by Financing Activities
|
(234)
|
(351)
|
(436)
|
725
|
(296)
|
|
|
Net
Increase (Decrease) in Cash and Cash Equivalents
|
395
|
17
|
(260)
|
-
|
152
|
|
|
Cash
and Cash Equivalents at Beginning of Period
|
24
|
-
|
285
|
-
|
309
|
|
|
Cash
and Cash Equivalents at End of Period
|
$ 419
|
$ 17
|
$ 25
|
$ -
|
$ 461
|
|
NOTE
19. Summarized Consolidating Financial Data, continued
Consolidating
Cash Flow Statements
(Dollars
in Millions)
|
CSX
|
CSX
|
|||||
|
Fiscal
Year Ended December 30, 2005
|
Corporation
|
Transportation
|
Other
|
Eliminations
|
Consolidated
|
|
|
Operating
Activities
|
||||||
|
Net
Cash (Used in) Provided by Operating Activities
|
$ (637)
|
$ 1,509
|
$ 474
|
$ (236)
|
$ 1,110
|
|
|
Investing
Activities
|
||||||
|
Property
Additions
|
-
|
(1,066)
|
(70)
|
-
|
(1,136)
|
|
|
Insurance
Proceeds
|
-
|
40
|
1
|
-
|
41
|
|
|
Net
Proceeds from Sale of International Terminals
|
-
|
-
|
1,108
|
-
|
1,108
|
|
|
Purchase
of Minority Interest in an International
|
||||||
|
Terminals'
Subsidiary
|
-
|
-
|
(110)
|
-
|
(110)
|
|
|
Purchases
of Short-term Investments
|
(2,601)
|
-
|
-
|
-
|
(2,601)
|
|
|
Proceeds
from Sales of Short-term Investments
|
2,634
|
-
|
-
|
-
|
2,634
|
|
|
Other
Investing Activities
|
1,066
|
(19)
|
(684)
|
(335)
|
28
|
|
|
Net
Cash Provided by (Used in) Investing Activities
|
1,099
|
(1,045)
|
245
|
(335)
|
(36)
|
|
|
Financing
Activities
|
||||||
|
Short-term
Debt - Net
|
(100)
|
-
|
1
|
-
|
(99)
|
|
|
Long-term
Debt Issued
|
73
|
32
|
-
|
-
|
105
|
|
|
Long-term
Debt Repaid
|
(1,125)
|
(135)
|
(23)
|
-
|
(1,283)
|
|
|
Dividends
Paid
|
(95)
|
(200)
|
(33)
|
235
|
(93)
|
|
|
Stock
Options Exercised
|
98
|
-
|
-
|
-
|
98
|
|
|
Other
Financing Activities
|
(105)
|
(180)
|
(66)
|
336
|
(15)
|
|
|
Net
Cash (Used in) Provided by Financing Activities
|
(1,254)
|
(483)
|
(121)
|
571
|
(1,287)
|
|
|
Net
Increase (Decrease) in Cash and Cash Equivalents
|
(792)
|
(19)
|
598
|
-
|
(213)
|
|
|
Cash
and Cash Equivalents at Beginning of Period
|
816
|
19
|
(313)
|
-
|
522
|
|
|
Cash
and Cash Equivalents at End of Period
|
$ 24
|
$ -
|
$ 285
|
$ -
|
$ 309
|
|
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation
of Disclosure Controls and Procedures
As of
December 28, 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 December 28, 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 the fourth quarter of 2007 that have materially affected or are
reasonably likely to materially affect the Company's internal control over
financial reporting.
Management's
Report on Internal Control over Financial Reporting
CSX’s
management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Exchange Act Rules
13a-15(f) and 15d-15(f). Under the supervision and with the participation of the
management of CSX, including CSX’s CEO and CFO, CSX conducted an evaluation of
the effectiveness of the Company’s internal control over financial reporting as
of December 28, 2007 based on the framework in Internal Control – Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission which is also referred to as COSO. Based on that evaluation,
management of CSX concluded that the Company’s internal control over financial
reporting was effective as of December 28, 2007. Management's
assessment of the effectiveness of internal control over financial reporting is
expressed at the level of reasonable assurance because a control system, no
matter how well designed and operated, can provide only reasonable, but not
absolute, assurance that the control system's objectives will be
met.
The
Company’s internal control over financial reporting as of December 28, 2007 has
been audited by Ernst & Young LLP, an independent registered public
accounting firm, as stated in their report which is included elsewhere
herein.
Report
of Independent Registered Public Accounting Firm
The Board
of Directors and Shareholders of CSX Corporation
We have
audited CSX Corporation’s internal control over financial reporting as of
December 28, 2007, based on criteria established in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (the COSO criteria). CSX Corporation’s management is responsible for
maintaining effective internal control over financial reporting, and for its
assessment of the effectiveness of internal control over financial reporting
included in the accompanying Management’s Report on Internal Control over
Financial Reporting. Our responsibility is to express an opinion on the
company’s internal control over financial reporting based on our
audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, testing
and evaluating the design and operating effectiveness of internal control based
on the assessed risk, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
In our
opinion, CSX Corporation maintained, in all material respects, effective
internal control over financial reporting as of December 28, 2007, based on the
COSO criteria.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the 2007 consolidated financial statements of
CSX Corporation and our report dated February 15, 2008 expressed an unqualified
opinion thereon.
/s/ Ernst & Young LLP
Independent Certified Public
Accountants
Jacksonville,
Florida
February
15, 2008
Changes
in Internal Control over Financial Reporting
There
were no material changes in the Company’s internal control over financial
reporting.
Item 9B. Other Information
On
January 24, 2008, CSX received notices from Icahn Masters Fund LP, Icahn
Partners LP, Carl C. Icahn and Icahn Masters Fund II LP stating their intention
to file notifications under the Hart-Scott-Rodino Antitrust Improvements Act of
1976 (“HSR”). The HSR notifications state a collective intent to
acquire at least $418.6 million of CSX common stock and not more than $1.6
billion. The Company is voluntarily furnishing this
information.
Item 10. Directors and Executive Officers of the
Registrant
In
accordance with Instruction G(3) of Form 10-K, the information required by this
item is incorporated herein by reference to the Proxy Statement. The
Proxy Statement will be filed not later than April 25, 2008 with respect to its
2008 annual meeting of shareholders, except for the information regarding the
executive officers of the Company. Information regarding
executive officers is included in Part I of this report under the caption
"Executive Officers of the Registrant."
Item 11. Executive Compensation
In
accordance with Instruction G(3) of Form 10-K, the information required by this
Item is incorporated herein by reference to the Proxy Statement (see Item 10
above).
Item 12. Security Ownership of Certain Beneficial
Owners and Management
In
accordance with Instruction G(3) of Form 10-K, the information required by this
Item is incorporated herein by reference to the Proxy Statement (see Item 10
above).
Item 13. Certain Relationships and Related
Transactions
In
accordance with Instruction G(3) of Form 10-K, the information required by this
Item is incorporated herein by reference to the Proxy Statement (see Item 10
above).
Item 14. Principal Accounting Fees and
Services
In
accordance with Instruction G(3) of Form 10-K, the information required by this
Item is incorporated herein by reference to the Proxy Statement (see Item 10
above).
Item 15. Exhibits and Financial Statement
Schedules
(a)(1)
Financial Statements
See Index
to Consolidated Financial Statements on page 62.
(2) Financial Statement
Schedules
The
information required by Schedule II, Valuation and Qualifying
Accounts, is included in Note 6 to the Consolidated Financial Statements,
Casualty, Environmental and Other Reserves. All other financial
statement schedules are not applicable.
(3)
Exhibits
|
2.1
|
Distribution
Agreement, dated as of July 26, 2004, by and among CSX Corporation, CSX
Transportation, Inc., CSX Rail Holding Corporation, CSX Northeast Holding
Corporation, Norfolk Southern Corporation, Norfolk Southern Railway
Company, CRR Holdings LLC, Green Acquisition Corp., Conrail Inc.,
Consolidated Rail Corporation, New York Central Lines LLC, Pennsylvania
Lines LLC, NYC Newco, Inc. and PRR Newco, Inc. (incorporated herein by
reference to Exhibit 2.1 to the Registrant’s Current Report on Form 8-K
filed with the Commission on September 2,
2004)
|
|
3.1
|
Amended
and Restated Articles of Incorporation of the Registrant (incorporated
herein by reference to Exhibit 3.1 to the Registrant's Current Report on
Form 8-K filed with the Commission on December 14,
2004)
|
|
3.1(a)
|
Articles
of Amendment to CSX Corporation’s Amended and Restated Articles of
Incorporation of the Registrant (incorporated herein by reference to
Exhibit 5.03 to the Registrant's Current Report on Form 8-K filed with the
Commission on July 18, 2006)
|
|
3.2
|
Bylaws
of the Registrant, amended effective as of February 4, 2008 (incorporated
herein by reference to Exhibit 3.2 of the Registrant's Current Report on
Form 8-K filed with the Commission on February 6,
2008)
|
|
4.1(a)
|
Indenture,
dated August 1, 1990, between the Registrant and The Chase Manhattan Bank,
as Trustee (incorporated herein by reference to the Registrant's Form SE,
dated September 7, 1990, filed with the
Commission)
|
|
4.1(b)
|
First
Supplemental Indenture, dated as of June 15, 1991, between the Registrant
and The Chase Manhattan Bank, as Trustee (incorporated herein by reference
to Exhibit 4(c) to the Registrant's Form SE, dated May 28, 1992, filed
with the Commission)
|
|
4.1(c)
|
Second
Supplemental Indenture, dated as of May 6, 1997, between the Registrant
and The Chase Manhattan Bank, as Trustee (incorporated herein by reference
to Exhibit 4.3 to the Registrant's Registration Statement on Form S-4
(Registration No. 333-28523) filed with the Commission on June 5,
1997)
|
|
4.1(d)
|
Third
Supplemental Indenture, dated as of April 22, 1998, between the Registrant
and The Chase Manhattan Bank, as Trustee (incorporated herein by reference
to Exhibit 4.2 to the Registrant's Current Report on Form 8-K filed with
the Commission on May 12, 1998)
|
|
4.1(e)
|
Fourth
Supplemental Indenture, dated as of October 30, 2001, between the
Registrant and The Chase Manhattan Bank, as Trustee (incorporated herein
by reference to Exhibit 4.1 to the Registrant's Report on Form 10-Q filed
with the Commission on November 7,
2001)
|
|
4.1(f)
|
Fifth
Supplemental Indenture, dated as of October 27, 2003 between the
Registrant and The Chase Manhattan Bank, as Trustee (incorporated herein
by reference to Exhibit 4.1 to the Registrant's Report on Form 8-K filed
with the Commission on October 27,
2003)
|
|
4.1(g)
|
Sixth
Supplemental Indenture, dated as of September 23, 2004 between the
Registrant and JP Morgan Chase Bank, formerly The
Chase Manhattan Bank, as Trustee (incorporated herein by
reference to Exhibit 4.1 to the Registrant’s Report on Form 10-Q filed
with the Commission on November 3,
2004)
|
|
4.1(h)
|
Seventh
Supplemental Indenture, dated as of April 25, 2007, between the Registrant
and The Bank of New York (as successor to JP Morgan Chase Bank), as
Trustee (incorporated herein by reference to Exhibit 4.4 to the
Registrant's Report on Form 8-K filed with the Commission on April 26,
2007).
|
Pursuant
to Regulation S-K, Item 601(b)(4)(iii), instruments that define the rights of
holders of the Registrant's long-term debt securities, where the long-term debt
securities authorized under each such instrument do not exceed 10% of the
Registrant's total assets, have been omitted and will be furnished to the
Commission upon request.
|
10.1**
|
CSX
Stock Plan for Directors (as amended through January 1, 2004)
(incorporated herein by reference to Exhibit 10.1 to the Registrant's
Annual Report on Form 10-K filed with the Commission on March 10,
2004)
|
|
10.2*
**
|
CSX
Directors’ Pre-2005 Deferred Compensation Plan (as amended through January
8, 2008)
|
|
10.3*
**
|
CSX
Directors’ Deferred Compensation Plan effective January 1,
2005
|
|
10.4**
|
CSX
Directors' Charitable Gift Plan, as amended (incorporated herein by
reference to Exhibit 10.4 to the Registrant's Annual Report on Form 10-K
filed with the Commission on March 4,
1994)
|
|
10.5**
|
CSX
Directors' Matching Gift Plan (as amended through December 31, 2003)
(incorporated herein by reference to Exhibit 10.5 to the Registrant's
Annual Report on Form 10-K filed with the Commission on March 10,
2004)
|
|
10.6**
|
Railroad
Retirement Benefits Agreement with M. J. Ward (incorporated herein by
reference to Exhibit 10.13 to the Registrant's Report on Form 10-K filed
with the Commission on February 26,
2003)
|
|
10.7**
|
Employment
Agreement with O. Munoz (incorporated herein by reference to Exhibit 10.1
to the Registrant's Report on Form 10-Q filed with the Commission on July
30, 2003)
|
|
10.8**
|
Form
of Employment Agreement with executive officers (incorporated herein by
reference to Exhibit 10.1 of the Registrant's Current Report on Form 8-K
filed with the Commission on January 6,
2005)
|
|
10.9**
|
Form
of Stock Option Agreement (incorporated herein by reference to Exhibit
10.17 of the Registrant's Report on Form 10-K filed with the Commission on
March 4, 2002)
|
|
10.10**
|
1987
Long-term Performance Stock Plan, as Amended and Restated effective April
25, 1996 (as amended through February 7, 2003) (incorporated herein by
reference to Exhibit 10.24 to the Registrant's Annual Report on Form 10-K
filed with the Commission on March 10,
2004)
|
|
10.11**
|
Deferred
Compensation Program for Executives of CSX Corporation and Affiliated
Companies (as amended through January 1, 1998) (incorporated herein by
reference to Exhibit 10.25 to the Registrant's Annual Report on Form 10-K
filed with the Commission on March 10,
2004)
|
|
10.12**
|
2002
Deferred Compensation Plan of CSX Corporation and Affiliated Corporations
(as amended through February 7, 2003) (incorporated herein by reference to
Exhibit 10.26 to the Registrant's Annual Report on Form 10-K filed with
the Commission on March 10, 2004)
|
|
10.13**
|
Supplementary
Savings Plan and Incentive Award Deferral Plan for Eligible Executives of
CSX Corporation and Affiliated Companies (as Amended through February 7,
2003) (incorporated herein by reference to Exhibit 10.27 to the
Registrant's Annual Report on Form 10-K filed with the Commission on March
10, 2004)
|
|
10.14**
|
Special
Retirement Plan of CSX Corporation and Affiliated Companies (as amended
through February 14, 2001) (incorporated herein by reference to Exhibit
10.23 to the Registrant's Report on Form 10-K filed with the Commission on
March 4, 2002)
|
|
10.15**
|
Supplemental
Retirement Benefit Plan of CSX Corporation and Affiliated Companies (as
amended through February 14, 2001) (incorporated herein by reference to
Exhibit 10.24 of the Registrant's Report on Form 10-K filed with the
Commission on March 4, 2002)
|
|
10.16**
|
Senior
Executive Incentive Compensation Plan (incorporated herein by reference to
Appendix B to the Registrant's Definitive Proxy Statement filed with the
Commission on March 17, 2000)
|
|
10.17*
**
|
CSX
Omnibus Incentive Plan (as Amended through December 12,
2007)
|
|
10.18**
|
1990
Stock Award Plan as Amended and Restated Effective February 14, 1996 (as
amended through September 8, 1999) (incorporated herein by reference to
Exhibit 10.24 to the Registrant's Annual Report on Form 10-K filed with
the Commission on March 7, 2000)
|
|
10.19
|
Transaction
Agreement, dated as of June 10, 1997, by and among CSX Corporation, CSX
Transportation, Inc., Norfolk Southern Corporation, Norfolk Southern
Railway Company, Conrail Inc., Consolidated Rail Corporation and CRR
Holdings LLC, with certain schedules thereto (incorporated herein by
reference to Exhibit 10 to the Registrant’s Current Report on Form 8-K
filed with the Commission on July 8,
1997)
|
|
10.20
|
Amendment
No. 1, dated as of August 22, 1998, to the Transaction Agreement, dated as
of June 10, 1997, by and among CSX Corporation, CSX Transportation, Inc.,
Norfolk Southern Corporation, Norfolk Southern Railway Company, Conrail
Inc., Consolidated Rail Corporation and CRR Holdings LLC (incorporated
herein by reference to Exhibit 10.1 to the Registrant's Current Report on
Form 8-K filed with the Commission on June 11,
1999)
|
|
10.21
|
Amendment
No. 2, dated as of June 1, 1999, to the Transaction Agreement, dated as of
June 10, 1997, by and among CSX Corporation, CSX Transportation, Inc.,
Norfolk Southern Corporation, Norfolk Southern Railway Company, Conrail
Inc., Consolidated Rail Corporation and CRR Holdings, LLC (incorporated
herein by reference to Exhibit 10.2 to the Registrant's Current Report on
Form 8-K filed with the Commission on June 11,
1999)
|
|
10.22
|
Shared
Assets Area Operating Agreement for Detroit, dated as of June 1, 1999, by
and among Consolidated Rail Corporation, CSX Transportation, Inc. and
Norfolk Southern Railway Corporation, with exhibit thereto (incorporated
herein by reference to Exhibit 10.6 to the Registrant's Current Report on
Form 8-K filed with the Commission on June 11,
1999)
|
|
10.23
|
Monongahela
Usage Agreement, dated as of June 1, 1999, by and among CSX
Transportation, Inc., Norfolk Southern Railway Company, Pennsylvania Lines
LLC and New York Central Lines LLC, with exhibit thereto (incorporated
herein by reference to Exhibit 10.7 to the Registrant's Current Report on
Form 8-K filed with the Commission on June 11,
1999)
|
|
10.24
|
Tax
Allocation Agreement, dated as of August 27, 2004, by and among CSX
Corporation, Norfolk Southern Corporation, Green Acquisition Corp.,
Conrail Inc., Consolidated Rail Corporation, New York Central Lines LLC
and Pennsylvania Lines LLC (incorporated herein by reference to Exhibit
10.2 to the Registrant's Current Report on Form 8-K filed with the
Commission on September 2, 2004)
|
|
10.25**
|
Employment
Agreement with T. L. Ingram, dated as of March 15, 2004 (incorporated
herein by reference to Exhibit 10.1 to the Registrant's Report on Form
10-Q filed with the Commission on April 30,
2004)
|
|
10.26**
|
Restricted
Stock Award Agreement with T. L. Ingram (incorporated herein by reference
to Exhibit 10.1 to the Registrant's Report on Form 10-Q filed with the
Commission on July 29, 2004)
|
|
10.27**
|
Amendment
No. 1, dated as of December 13, 2004, to Employment Agreement with T. L.
Ingram, dated as of March 15, 2004 (incorporated herein by reference to
Exhibit 10.2 to the Registrant's Current Report on Form 8-K filed with the
Commission on December 14, 2004)
|
|
10.28**
|
Restricted
Stock Award Agreement with Ellen M. Fitzsimmons (incorporated herein by
reference to Exhibit 10.41 of the Registrant's Annual Report on Form 10-K
filed with the Commission on February 24,
2006)
|
|
10.29
|
Revolving
Credit Agreement, dated May 4, 2006 (incorporated herein by reference to
Exhibit 99.1 to the Registrant's Current Report on Form 8-K filed with the
Commission on May 9, 2006)
|
|
10.30
|
Underwriting
agreement, dated April 20, 2007 (incorporated herein by reference to
Exhibit 1.1 to the Registrant's Current Report on Form 8-K filed with the
Commission on April 26, 2007)
|
|
10.31**
|
Long-term
Incentive Plan, dated May 1, 2007 (incorporated herein by reference to
Exhibit 10.1 to the Registrant's Current Report on Form 8-K filed with the
Commission on May 7, 2007)
|
|
10.32
|
Underwriting
agreement dated September 4, 2007 (incorporated herein by reference to
Exhibit 1.1 to the Registrant's Current Report on Form 8-K filed with the
Commission on September 10, 2007)
|
|
10.33
|
Underwriting
agreement dated December 10, 2007 (incorporated herein by reference to
Exhibit 1.1 to the Registrant's Current Report on Form 8-K filed with the
Commission on December 17, 2007)
|
|
21*
|
Subsidiaries
of the Registrant
|
|
23*
|
Consent
of Ernst & Young LLP
|
|
24*
|
Powers
of Attorney
|
|
31.1*
|
Rule 13a-14(a) Certification of Principal
Executive Officer
|
|
31.2*
|
Rule 13a-14(a) Certification of Principal
Financial Officer
|
|
32.1*
|
Rule 13a-14(b) Certification of Principal
Executive Officer
|
|
32.2*
|
Rule 13a-14(b) Certification of Principal
Financial Officer
|
|
|
|
|
* Filed
herewith
|
|
|
**
Management Contract or Compensatory Plan or
Arrangement
|
Pursuant
to the requirements of Section 13 or 15(d) 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:
February
19, 2008
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the
capacities indicated on February
22, 2008.
|
Signature
|
Title
|
|
|
Chairman
of the Board, President,
|
||
|
Chief
Executive Officer and Director
|
||
|
/s/ MICHAEL
J. WARD
|
(Principal
Executive Officer)
|
|
|
Michael
J. Ward
|
||
|
Executive
Vice President and
|
||
|
/s/ OSCAR
MUNOZ
|
Chief
Financial Officer (Principle Financial Officer)
|
|
|
Oscar
Munoz
|
||
|
Vice
President and Controller
|
||
|
/s/ CAROLYN
T. SIZEMORE
|
(Principle
Accounting Officer)
|
|
|
Carolyn
T. Sizemore
|
||
|
Senior
Vice President - Law and Public Affairs
|
||
|
*By: /s/
ELLEN M. FITZSIMMONS
|
*Attorney-in-Fact
|
|
|
Ellen
M. Fitzsimmons
|
|
Signature
|
Title
|
|
|
|
||
|
*
|
Director
|
|
|
Donna
M. Alvarado
|
||
|
*
|
Director
|
|
|
Elizabeth
E. Bailey
|
||
|
*
|
Director
|
|
|
John
B. Breaux
|
||
|
*
|
Director
|
|
|
Steven
T. Halverson
|
||
|
*
|
Director
|
|
|
Edward
J. Kelly III
|
||
|
*
|
Director
|
|
|
Robert
D. Kunisch
|
||
|
*
|
Director
|
|
|
Southwood
J. Morcott
|
||
|
*
|
Director
|
|
|
David
M. Ratcliffe
|
||
|
*
|
Director
|
|
|
William
C. Richardson
|
||
|
*
|
Director
|
|
|
Frank
S. Royal M.D.
|
||
|
*
|
Director
|
|
|
Donald
J. Shepard
|
143