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CSX 10-Q 2012

Documents found in this filing:

  1. 10-Q
  2. Ex-31
  3. Ex-32
  4. Ex-32
CSX 03.30.2012 10-Q

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

FORM 10-Q
 
(X)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
  
For the quarterly period ended March 30, 2012
 
OR
 
( )
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from __________ to __________
Commission File Number 1-8022
 
 
 
 
 
 
 
 
 
 
 
CSX CORPORATION
(Exact name of registrant as specified in its charter)
Virginia
 
 
 
 
 
 
 
62-1051971
 
 
(State or other jurisdiction of incorporation or organization)
 
 
 
 
 
 
 
(I.R.S. Employer Identification No.)
 
 
 
 
 
 
 
 
 
 
 
 
 
500 Water Street, 15th Floor, Jacksonville, FL
 
 
 
 
 
32202
 
(904) 359-3200
 
 
(Address of principal executive offices)
 
 
 
 
 
(Zip Code)
 
(Telephone number, including area code)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
No Change
 
 
 
 
 
 
(Former name, former address and former fiscal year, if changed since last report.)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes (X) No ( )
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes (X) No ( )
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer", "accelerated filer” and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (check one)
Large Accelerated Filer (X)
 
Accelerated Filer ( )
Non-accelerated Filer ( )
 
Smaller Reporting Company ( )
 
Indicate by a check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ( ) No (X)
There were 1,039,158,062 shares of common stock outstanding on March 30, 2012 (the latest practicable date that is closest to the filing date).

1



CSX CORPORATION
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 30, 2012
INDEX

 
 
 
Page
PART I.
FINANCIAL INFORMATION
 
 
Item 1.
 
 
 
 
 
 
Consolidated Income Statements (Unaudited) - Quarters Ended March 30, 2012 and April 1, 2011
 
 
 
 
 
 
Consolidated Comprehensive Income Statements (Unaudited) - Quarters Ended March 30, 2012 and April 1, 2011
 
 
 
 
 
 
Consolidated Balance Sheets - At March 30, 2012 (Unaudited) and December 30, 2011
 
 
 
 
 
 
Consolidated Cash Flow Statements (Unaudited) - Three Months Ended March 30, 2012 and April 1, 2011
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
 
 
Item 3.
 
 
 
 
 
Item 4.
 
 
 
 
 
PART II.
OTHER INFORMATION
 
 
Item 1.
 
 
 
 
 
Item 1A.
 
 
 
 
 
Item 2.
 
 
 
 
 
Item 3.
 
 
 
 
 
Item 4.
 
 
 
 
 
Item 5.
 
 
 
 
 
Item 6.
 
 
 
 
 
 
 


2


CSX CORPORATION

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED INCOME STATEMENTS (Unaudited)  
(Dollars in millions, except per share amounts)
 
 First Quarters
 
2012
2011
 
 
 
Revenue
$
2,966

$
2,810

Expense
 
 
Labor and Fringe
770

765

Materials, Supplies and Other
542

530

Fuel
444

402

Depreciation
257

243

Equipment and Other Rents
97

97

Total Expense
2,110

2,037

 
 
 
Operating Income
856

773

 
 
 
Interest Expense
(144
)
(140
)
Other Income - Net (Note 8)
4

5

Earnings Before Income Taxes
716

638

 
 
 
Income Tax Expense
(267
)
(243
)
Net Earnings
$
449

$
395

 
 
 
Per Common Share (Note 2)
 
 
Net Earnings Per Share, Basic
$
0.43

$
0.36

Net Earnings Per Share, Assuming Dilution
$
0.43

$
0.35

 
 
 
 
 
 
Average Shares Outstanding (In millions)
1,047

1,108

Average Shares Outstanding, Assuming Dilution (In millions)
1,049

1,115

 
 
 
 
 
 
Cash Dividends Paid Per Common Share
$
0.12

$
0.09





CONSOLIDATED COMPREHENSIVE INCOME STATEMENTS  

Total Comprehensive Earnings (Note 1)
$
458

$
406




See accompanying notes to consolidated financial statements.

3

CSX CORPORATION
ITEM 1. FINANCIAL STATEMENTS

CONSOLIDATED BALANCE SHEETS
(Dollars in millions, except per share amounts)
 
(Unaudited)
 
 
March 30,
2012
December 30,
2011
ASSETS
Current Assets
 
 
Cash and Cash Equivalents
$
627

$
783

Short-term Investments
139

523

Accounts Receivable - Net (Note 1)
1,161

1,129

Materials and Supplies
251

240

Deferred Income Taxes
178

182

Other Current Assets
112

78

  Total Current Assets
2,468

2,935

 
 
 
Properties
34,002

33,704

Accumulated Depreciation
(8,861
)
(8,730
)
  Properties - Net
25,141

24,974

 
 
 
Investment in Conrail
683

678

Affiliates and Other Companies
495

493

Other Long-term Assets
399

393

  Total Assets
$
29,186

$
29,473

 
 
 
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
 
 
Accounts Payable
$
1,205

$
1,147

Labor and Fringe Benefits Payable
392

541

Casualty, Environmental and Other Reserves (Note 4)
168

167

Current Maturities of Long-term Debt (Note 7)
502

507

Income and Other Taxes Payable
134

129

Other Current Liabilities
192

196

  Total Current Liabilities
2,593

2,687

 
 
 
Casualty, Environmental and Other Reserves (Note 4)
337

352

Long-term Debt (Note 7)
8,623

8,734

Deferred Income Taxes
7,799

7,601

Other Long-term Liabilities
1,330

1,631

  Total Liabilities
20,682

21,005

 
 
 
Common Stock $1 Par Value
1,039

1,049

Other Capital
5

6

Retained Earnings
8,313

8,275

Accumulated Other Comprehensive Loss (Note 1)
(866
)
(875
)
Noncontrolling Interest
13

13

Total Shareholders' Equity
8,504

8,468

Total Liabilities and Shareholders' Equity
$
29,186

$
29,473


Certain prior year data has been reclassified to conform to the current presentation.

See accompanying notes to consolidated financial statements.

4

CSX CORPORATION
ITEM 1. FINANCIAL STATEMENTS

CONSOLIDATED CASH FLOW STATEMENTS (Unaudited)
(Dollars in millions)
 
 First Quarters
 
2012
2011
 
 
 
OPERATING ACTIVITIES
 
 
Net Earnings
$
449

$
395

Adjustments to Reconcile Net Earnings to Net Cash Provided by Operating Activities:
 
 
Depreciation
257

243

Deferred Income Taxes
195

137

Other Operating Activities
(56
)
(1
)
Changes in Operating Assets and Liabilities:
 
 
Contributions to Qualified Pension Plans
(275
)

Accounts Receivable
(22
)
(86
)
Other Current Assets
(52
)
(35
)
Accounts Payable
69

(17
)
Income and Other Taxes Payable
30

40

Other Current Liabilities
(151
)
(181
)
Net Cash Provided by Operating Activities
444

495

 
 
 
INVESTING ACTIVITIES
 
 
Property Additions
(469
)
(379
)
Purchase of Short-term Investments
(53
)
(8
)
Proceeds from Sales of Short-term Investments
437

20

Other Investing Activities
8

2

Net Cash Used in Investing Activities
(77
)
(365
)
 
 
 
FINANCING ACTIVITIES
 
 
Long-term Debt Issued (Note 7)
300


Long-term Debt Repaid (Note 7)
(413
)
(524
)
Dividends Paid
(125
)
(96
)
Stock Options Exercised (Note 3)
8

19

Shares Repurchased
(300
)
(300
)
Other Financing Activities
7

13

Net Cash Used in Financing Activities
(523
)
(888
)
 
 
 
Net Decrease in Cash and Cash Equivalents
(156
)
(758
)
 
 
 
CASH AND CASH EQUIVALENTS
 
 
Cash and Cash Equivalents at Beginning of Period
783

1,292

Cash and Cash Equivalents at End of Period
$
627

$
534


Certain amounts have been reclassified to conform to the current year presentation.

See accompanying notes to consolidated financial statements.

5


CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 1.
Nature of Operations and Significant Accounting Policies

Background

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

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

Other entities

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

Basis of Presentation

In the opinion of management, the accompanying consolidated financial statements contain all normal, recurring adjustments necessary to fairly present the following:
  
Consolidated income statements for the quarters ended March 30, 2012 and April 1, 2011;
Consolidated balance sheets at March 30, 2012 and December 30, 2011; and
Consolidated cash flow statements for the quarters ended March 30, 2012 and April 1, 2011.

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


6

CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

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

Fiscal Year

CSX follows a 52/53 week fiscal reporting calendar with the last day of each reporting period ending on a Friday:
 
The first fiscal quarters of 2012 and 2011 consisted of 13 weeks ending on March 30, 2012 and April 1, 2011, respectively.
Fiscal year 2012 and 2011 will each consist of 52 weeks ending on December 28, 2012 and December 30, 2011, respectively.
    
Except as otherwise specified, references to “first quarter(s)” or “three months” indicate CSX's fiscal periods ending March 30, 2012 and April 1, 2011, and references to year-end indicate the fiscal year ended December 30, 2011.

Comprehensive Earnings

CSX reports comprehensive earnings or loss in accordance with the Comprehensive Income Topic in the Accounting Standards Codification (“ASC”). Total comprehensive earnings are defined as all changes in shareholders' equity during a period, other than those resulting from investments by and distributions to shareholders (e.g., issuance of equity securities and dividends).  Generally, for CSX, total comprehensive earnings equals net earnings plus or minus adjustments for pension and other post-retirement liabilities. Total comprehensive earnings represent the activity for a period net of tax and were $458 million and $406 million for first quarters 2012 and 2011, respectively.

While total comprehensive earnings is the activity in a period and is largely driven by net earnings in that period, accumulated other comprehensive income or loss (“AOCI”) represents the cumulative balance of other comprehensive income or loss, net of tax, as of the balance sheet date.  For CSX, AOCI is primarily the cumulative balance related to pension and other post-retirement adjustments and reduced overall equity by $866 million and $875 million as of the end of first quarter 2012 and December 2011, respectively.

See the New Accounting Pronouncements section below for information related to the change in presentation requirements.

Allowance for Doubtful Accounts

The Company maintains an allowance for doubtful accounts on uncollectible amounts related to freight receivables, government reimbursement receivables, claims for damages and other various receivables. The allowance is based upon the credit worthiness of customers, historical experience, the age of the receivable and current market and economic conditions. Uncollectible amounts are charged against the allowance account. Allowance for doubtful accounts of $42 million and $43 million is included in the consolidated balance sheets as of the end of first quarter 2012 and December 2011, respectively.


7

CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

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

New Accounting Pronouncements

In 2011, the Financial Accounting Standards Board ("FASB") issued an Accounting Standards Update to the Comprehensive Income Topic in the ASC aimed at increasing the prominence of items reported in other comprehensive income in the financial statements. This update requires companies to present comprehensive income in a single statement below net income or in a separate statement of comprehensive income immediately following the income statement. This requirement became effective for CSX beginning with the first quarter 2012 10-Q filing. This update will require retrospective application for all periods presented.

Other Items
Share Repurchases
In first quarter 2012, CSX repurchased $300 million in shares. In accordance with the Equity Topic in the ASC, the excess of repurchase price over par value is recorded in retained earnings. Generally, retained earnings is only impacted by net earnings and dividends.
Amortization of Gain from Property Disposition
In November 2011, the Company sold approximately 61 miles of operating rail corridor to the Florida Department of Transportation. As part of the transaction, the Company received $173 million in proceeds and will receive up to $259 million in government grants for a total of $432 million. This agreement also obligated the Company to invest a total of $500 million in routine capital expenditures and maintenance related to transportation capacity, facilities or equipment in Florida, including diversion and relocation costs related to this transaction within the eight year period following the transaction.
    
In accordance with the Real Estate Sales Topic in the ASC, the sale of real estate resulted in a deferred gain of $146 million upon conveyance. The deferred gain is recognized into income ratably as the investment obligation is fulfilled. The Company recognized a gain of $19 million in the first quarter 2012. This gain is included in materials, supplies and other in the consolidated income statements. The deferred gain balance included in the consolidated balance sheets is in the table below.
 
 
Deferred gain as of
(Dollars in Millions)
 
March 2012
 December 2011
Current portion, included in Other Current Liabilities
 
$
95

$
95

Long term portion, included in Other Long-Term Liabilities

 
18

37

Total
 
$
113

$
132




8

CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 2.    Earnings Per Share

The following table sets forth the computation of basic earnings per share and earnings per share, assuming dilution:
 
 First Quarters
 
2012
2011
Numerator (Dollars in millions):
 
 
Net Earnings
$
449

$
395

 
 
 
Denominator (Units in millions):
 
 
Average Common Shares Outstanding
1,047

1,108

Other Potentially Dilutive Common Shares (a)
2

7

Average Common Shares Outstanding, Assuming Dilution
1,049

1,115

 
 
 
Net Earnings Per Share, Basic
$
0.43

$
0.36

Net Earnings Per Share, Assuming Dilution
$
0.43

$
0.35


(a)
Other potentially dilutive common shares include convertible debt, stock options, common stock equivalents and performance units granted under a long-term management incentive compensation plan.

Basic earnings per share is based on the weighted-average number of shares of common stock outstanding. Earnings per share, assuming dilution, is based on the weighted-average number of shares of common stock outstanding adjusted for the effects of common stock that may be issued as a result of the following types of potentially dilutive instruments:

convertible debt;
employee stock options; and
other equity awards, which include long-term incentive awards.

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


9

CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 2.    Earnings Per Share, continued

When calculating diluted earnings per share, the Earnings Per Share Topic in the ASC requires CSX to include the potential shares that would be outstanding if all outstanding stock options were exercised. This is offset by shares CSX could repurchase using the proceeds from these hypothetical exercises to obtain the common stock equivalent. This number is different from outstanding stock options, which is included in Note 3, Share-Based Compensation. All stock options were dilutive for the periods presented; therefore, no stock options were excluded from the diluted earnings per share calculation.

Diluted shares outstanding are not impacted when debentures are converted into CSX common stock because those shares were already included in the diluted shares calculation. Shares outstanding for basic earnings per share, however, are impacted on a weighted-average basis when conversions occur.  During first quarters 2012 and 2011, approximately $110 thousand and $55 thousand of face value convertible debentures were converted into 12 thousand and 6 thousand shares of CSX common stock, respectively. As of the end of first quarter 2012, approximately $3.7 million of convertible debentures at face value remained outstanding, which are convertible into approximately 389 thousand shares of CSX common stock.

NOTE 3.
Share-Based Compensation

Under CSX's share-based compensation plans, awards primarily consist of performance grants, restricted stock awards, restricted stock units, stock options and stock grants for directors. CSX has not granted stock options since 2003. Awards granted under the various programs are determined and approved by the Compensation Committee of the Board of Directors or, in certain circumstances, by the Chief Executive Officer for awards to management employees other than senior executives. The Board of Directors approves awards granted to the Company's non-management directors upon recommendation of the Governance Committee.

    Total pre-tax expense associated with all share-based compensation and its related income tax benefit for 2012 is zero driven by lower anticipated payouts on long-term incentive compensation. Details are as follows:
 
 First Quarters
(Dollars in millions)
2012
2011
 
 
 
Share-Based Compensation Expense
$

$
12

Income Tax Benefit

4

    
The following table provides information about stock options exercised and expired.
 
 First Quarters
(In thousands)
2012
2011
 
 
 
Number of Stock Options Exercised
1,299

3,278

Number of Stock Options Expired
15



As of December 2009, all outstanding options were vested, and therefore, there will be no future expense related to these options.  As of the end of first quarter 2012, CSX had approximately 3 million stock options outstanding. 


10

CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 4.
Casualty, Environmental and Other Reserves
Casualty, environmental and other reserves are considered critical accounting estimates due to the need for significant management judgments. They are provided for in the consolidated balance sheets as follows:
 
March 30, 2012
 
December 30, 2011
(Dollars in millions)
Current
Long-term
Total
 
Current
Long-term
Total
 
 
 
 
 
 
 
 
Casualty:
 
 
 
 
 
 
 
Personal Injury
$
93

$
156

$
249

 
$
93

$
168

$
261

Occupational
6

34

40

 
6

37

43

Asbestos
11

53

64

 
11

57

68

     Total Casualty
110

243

353

 
110

262

372

Environmental
31

51

82

 
31

52

83

Other(a)
27

43

70

 
26

38

64

     Total
$
168

$
337

$
505

 
$
167

$
352

$
519

(a) Separation liabilities and freight rate dispute reserves have been reclassified to other current and long-term liabilities.
 
These liabilities are accrued when estimable and probable in accordance with the Contingencies Topic in the ASC. Actual settlements and claims received could differ. The final outcome of these matters cannot be predicted with certainty. Considering the legal defenses currently available, the liabilities that have been recorded and other factors, it is the opinion of management that none of these items, when finally resolved, will have a material effect on the Company's financial condition, results of operations or liquidity. Should a number of these items occur in the same period, however, they could have a material effect on the Company's financial condition, results of operations or liquidity in that particular period.
  
Casualty
 
Casualty reserves represent accruals for personal injury, occupational injury and asbestos claims. During 2010, the Company increased its self-insured retention amount for these claims from $25 million to $50 million per injury for claims occurring on or after June 1, 2010. Currently, no individual claim is expected to exceed the self-insured retention amount. In accordance with the Contingencies Topic in the ASC, to the extent the value of an individual claim exceeds the self-insured retention amount, the Company would present the liability on a gross basis with a corresponding receivable for insurance recoveries. These reserves fluctuate based upon the timing of payments as well as changes in independent third-party estimates, which are reviewed by management. Actual results may vary from estimates due to the number, type and severity of the injury, costs of medical treatments and uncertainties in litigation. Most of the claims relate to CSXT unless otherwise noted below. Defense and processing costs, which historically have been insignificant and are anticipated to be insignificant in the future, are not included in the recorded liabilities.
 
Personal Injury
Personal injury reserves represent liabilities for employee work-related and third-party injuries. Work-related injuries for CSXT employees are primarily subject to the Federal Employers’ Liability Act (“FELA”). In addition to FELA liabilities, current or former 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.
    

11

CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 4.    Casualty, Environmental and Other Reserves, continued
    
CSXT retains an independent actuarial firm to assist management in assessing the value of personal injury claims. An analysis is performed by the independent actuarial firm quarterly and is reviewed by management. The methodology used by the actuary includes a development factor to reflect growth or reduction in the value of these personal injury claims. It is based largely on CSXT's historical claims and settlement experience.

Occupational and Asbestos
Occupational claims arise from allegations of exposures to certain materials in the workplace, such as solvents, soaps, chemicals (collectively referred to as “irritants”) and diesel fuels (like exhaust fumes) or allegations of chronic physical injuries resulting from work conditions, such as repetitive stress injuries, carpal tunnel syndrome and hearing loss. The Company is also party to a number of asbestos claims by current or former employees alleging exposure to asbestos in the workplace.
    
An analysis of occupational claims is performed quarterly by an independent third-party actuarial firm and reviewed by management. Management performs a quarterly review of asserted asbestos claims, and an analysis is performed annually by an independent third-party specialist and reviewed by management. The objective of the occupational and asbestos claims analyses performed by the third-party actuarial firm and specialist (the "third-party specialists") is to determine the number of incurred but not reported (“IBNR”) claims. The third party specialists analyze CSXT's historical claim filings, settlement amounts, and dismissal rates to determine future anticipated claim filing rates and average settlement values for occupational and asbestos claims reserves. The potentially exposed population is estimated by using CSX's employment records and industry data. From this analysis, the third-party specialists provide an estimate of the IBNR claims liability.

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 252 environmentally impaired sites. Many of these are, or may be, subject to remedial action under the federal Comprehensive Environmental Response, Compensation and Liability Act of 1980, 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. A number of these proceedings, however, are based on allegations that the Company, or its predecessors, sent hazardous substances to facilities owned or operated by others for treatment, recycling or disposal. In addition, some of the Company's land holdings were leased to others for commercial or industrial uses that may have resulted in releases of hazardous substances or other regulated materials onto the property and could give rise to proceedings against the Company.

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


12

CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 4.    Casualty, Environmental and Other Reserves, continued

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

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

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

Other

Other reserves include liabilities for various claims, such as longshoremen disability claims, and claims for property, automobile and general liability. Separation liabilities and freight rate dispute reserves have been reclassified to other current and long-term liabilities.


NOTE 5.    Commitments and Contingencies

Insurance

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

13

CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


NOTE 5.    Commitments and Contingencies, continued

Legal
 
The Company is involved in litigation incidental to its business and is a party to a number of legal actions and claims, various governmental proceedings and private civil lawsuits, including, but not limited to, those related to environmental and hazardous material exposure 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 reasonably determined, considering, among other things, the legal defenses available and liabilities that have been recorded along with applicable insurance, it is currently the opinion of CSX management that none of these pending items will have a material adverse effect on the Company's financial condition, results of operations or liquidity. An unexpected adverse resolution of one or more of these items, however, could have a material adverse effect on the Company's financial condition, results of operations or liquidity in that particular period.
The Company is able to estimate a range of possible loss for certain legal proceedings for which a loss is reasonably possible in excess of reserves established. The Company has estimated this range to be $3 million to approximately $17 million in aggregate at March 30, 2012. This estimated aggregate range is based upon currently available information and is subject to significant judgment and a variety of assumptions. Accordingly, the Company's estimate will change from time to time, and actual losses may vary significantly from the current estimate.
    
For additional information on legal proceedings, see Item 1. Legal Proceedings.

NOTE 6.    Employee Benefit Plans

The Company sponsors defined benefit pension plans principally for salaried, management personnel.  For employees hired on or before December 31, 2002, the plans provide eligible employees with retirement benefits based predominantly on years of service and compensation rates near retirement.  For employees hired in 2003 or thereafter, benefits are determined based on a cash balance formula, which provides benefits by utilizing interest and pay credits based upon age, service and compensation. 

In addition to these plans, the Company sponsors a self-insured, post-retirement medical plan and a life insurance plan that provide benefits to full-time, salaried, management employees, hired prior to January 1, 2003, upon their retirement if certain eligibility requirements are met.  Medicare-eligible retirees are covered by a health reimbursement arrangement, which is an employer-funded account that can be used for reimbursement of eligible medical expenses. Non-Medicare eligible retirees will continue to be covered by the existing self-insured program.  The life insurance plan is non-contributory.


14

CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 6.    Employee Benefit Plans, continued

The Company engages independent actuaries to compute the amounts of liabilities and expenses relating to these plans subject to the assumptions that the Company selects.  These amounts are reviewed by management.  The following table describes the components of expense / (income) related to net benefit expense:
 
Pension Benefits
 
Other Post-retirement Benefits
(Dollars in millions)
 First Quarters
 
 First Quarters
 
2012
2011
 
2012
2011
Service Cost
$
11

$
10

 
$
1

$
1

Interest Cost
31

30

 
4

3

Expected Return on Plan Assets
(39
)
(39
)
 


Amortization of Net Loss
20

18

 
2

1

Total Expense
$
23

$
19

 
$
7

$
5


Qualified pension plan obligations are funded in accordance with prescribed regulatory requirements and with an objective of meeting minimum funding requirements necessary to avoid restrictions on flexibility of plan operation and benefit payments.  During the quarter, the Company made a contribution of $275 million to its qualified pension plans, of which $25 million was the required minimum contribution. At this time, the Company anticipates that no further contributions to its qualified pension plans will be required in 2012. For further details, see Note 8, Employee Benefit Plans, in CSX's most recent annual report on Form 10-K.

NOTE 7.    Debt and Credit Agreements

Total activity related to long-term debt as of the end of first quarter 2012 was as follows:

(Dollars in millions)
Current Portion
Long-term Portion
Total
Long-term debt as of December 2011
$
507

$
8,734

$
9,241

2012 activity:
 
 
 
Long-term debt issued

300

300

Long-term debt repaid
(413
)

(413
)
Reclassifications
408

(408
)

Debt conversions to CSX stock



Discount and premium activity

(3
)
(3
)
Long-term debt as of the end of first quarter 2012
$
502

$
8,623

$
9,125

 
For fair value information related to the Company's long-term debt, see Note 9, Fair Value Measurements.


15

CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 7.    Debt and Credit Agreements, continued

Debt Issuance

In February 2012, CSX issued $300 million of 4.4% notes due 2043. These notes are included in the consolidated balance sheets under long-term debt and may be redeemed by the Company at any time. The net proceeds from the issuance were used primarily in connection with a $275 million contribution to the Company's qualified pension plan.

Credit Facility
    
CSX has a $1 billion unsecured, revolving credit facility backed by a diverse syndicate of banks. This facility expires in September 2016, and as of the date of this filing, the Company has no outstanding balances under this facility. The facility allows borrowings at floating (LIBOR-based) interest rates, plus a spread, depending upon CSX's senior unsecured debt ratings. LIBOR is the London Interbank Offered Rate which is a daily reference rate based on the interest rates at which banks offer to lend unsecured funds. As of first quarter 2012, CSX was in compliance with all covenant requirements under this facility.

Receivables Securitization Facility

The Company's $250 million receivables securitization facility has a 364-day term and expires in December 2012. The Company plans to renew this facility prior to its expiration. The purpose of this facility is to provide an alternative to commercial paper and a low cost source of short-term liquidity. As of the date of this filing, the Company has no outstanding balances under this facility.

NOTE 8.    Other Income - Net

The Company derives income from items that are not considered operating activities. Income from these items is reported net of related expense. Other income - net consisted of the following:
 
 First Quarters
(Dollars in millions)
2012
2011
Interest Income
$
2

$
1

Income from Real Estate
6

3

Miscellaneous Income (Expense)
(4
)
1

Total Other Income - Net
$
4

$
5




16

CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 9.    Fair Value Measurements

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

Various inputs are considered when determining the value of the Company's investments, pension plan assets and long-term debt. The inputs or methodologies used for valuing securities are not necessarily an indication of the risk associated with investing in these securities. These inputs are summarized in the three broad levels listed below.
 
Level 1 - observable market inputs that are unadjusted quoted prices for identical assets or liabilities in active markets

Level 2 - other significant observable inputs (including quoted prices for similar securities, interest rates, credit risk, etc.)

Level 3 - significant unobservable inputs (including the Company's own assumptions in determining the fair value of investments)
 
The valuation methods described below may produce a fair value calculation that is not indicative of net realizable value or reflective of future fair values. Furthermore, while the Company believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date.

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

Certificates of Deposit (Level 2): Valued by discounting the related cash flows based on current yields of similar instruments with comparable durations.
Corporate Bonds and U.S. Treasury Obligations (Level 2): Valued using price evaluations reflecting the bid and/or ask sides of the market for a similar investment as of the last day of the fiscal year.
Auction Rate Securities (Level 3): Valued using a discounted cash flow model, because there is currently no active market for trading.
    

17

CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 9.    Fair Value Measurements, continued

The amortized cost basis of investments was $268 million and $643 million as of March 30, 2012 and December 30, 2011, respectively. The following is a summary of the fair value of the Company's investment assets:
 
March 2012
 
December 2011
(Dollars in Millions)
Level 1
Level 2
Level 3
Total
 
Level 1
Level 2
Level 3
Total
Certificates of Deposit
$

$
100

$

$
100

 
$

$
477

$

$
477

Corporate Bonds

112


112

 

98


98

U.S. Treasury Obligations

43


43

 

53


53

Auction Rate Securities


15

15

 


15

15

Total investments at fair value
$

$
255

$
15

$
270

 
$

$
628

$
15

$
643


These investments have the following maturities:
(Dollars in millions)
March 30,
2012
 
December 30, 2011
Less than 1 year
$
139

 
$
523

1 - 2 years
42

 
32

2 - 5 years
74

 
73

Greater than 5 years
15

 
15

Total
$
270

 
$
643


Long-term Debt

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

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

    

18

CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 9.    Fair Value Measurements, continued

The fair value and carrying value of the Company's long-term debt is as follows:

(Dollars in millions)
March 30,
2012
 
December 30, 2011
Long-term Debt Including
Current Maturities:
 
 
 
Fair Value
$
10,412

 
$
10,708

Carrying Value
$
9,125

 
$
9,241


NOTE 10.    Summarized Consolidating Financial Data

In 2007, CSXT sold secured equipment notes maturing in 2023, and in 2008, CSXT sold additional secured equipment notes maturing in 2014 in registered public offerings. CSX has fully and unconditionally guaranteed the notes. In connection with the notes, the Company is providing the following condensed consolidating financial information in accordance with SEC disclosure requirements. Each entity in the consolidating financial information follows the same accounting policies as described in the consolidated financial statements, except for the use of the equity method of accounting to reflect ownership interests in subsidiaries which are eliminated upon consolidation and the allocation of certain expenses of CSX incurred for the benefit of its subsidiaries.
Condensed consolidating financial information for the obligor, CSXT, and parent guarantor, CSX, is as follows:


19

CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


NOTE 10.    Summarized Consolidating Financial Data, continued

 Consolidating Income Statements
 (Dollars in millions)
First Quarter 2012
 CSX Corporation
 CSX Transportation
 Eliminations and Other
 Consolidated
 Revenue
$

$
2,950

$
16

$
2,966

 Expense
(87
)
2,229

(32
)
2,110

 Operating Income
87

721

48

856

 
 
 
 
 
 Equity in Earnings of Subsidiaries
477

(1
)
(476
)

 Interest (Expense) / Benefit
(130
)
(19
)
5

(144
)
 Other Income - Net
(1
)
3

2

4

 
 
 
 
 
 Earnings Before Income Taxes
433

704

(421
)
716

 Income Tax (Expense) / Benefit
16

(263
)
(20
)
(267
)
 Net Earnings
$
449

$
441

$
(441
)
$
449

 
 
 
 
 
Total Comprehensive Earnings
$
458

$
438

$
(438
)
$
458

First Quarter 2011
 CSX Corporation
 CSX Transportation
 Eliminations and Other
 Consolidated
 Revenue
$

$
2,794

$
16

$
2,810

 Expense
(65
)
2,142

(40
)
2,037

 Operating Income
65

652

56

773

 
 
 
 
 
 Equity in Earnings of Subsidiaries
432

1

(433
)

 Interest (Expense) / Benefit
(126
)
(23
)
9

(140
)
 Other Income - Net
2

2

1

5

 
 
 
 
 
 Earnings Before Income Taxes
373

632

(367
)
638

 Income Tax (Expense) / Benefit
22

(241
)
(24
)
(243
)
 Net Earnings
$
395

$
391

$
(391
)
$
395

 
 
 
 
 
Total Comprehensive Earnings
$
406

$
392

$
(392
)
$
406



20

CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 10.    Summarized Consolidating Financial Data, continued

 Consolidating Balance Sheet
 (Dollars in millions)
As of First Quarter 2012
 CSX Corporation
 CSX Transportation
 Eliminations and Other
 Consolidated
 
 
 
 
 
 ASSETS
 Current Assets
 
 
 
 
 Cash and Cash Equivalents
$
385

$
159

$
83

$
627

 Short-term Investments
100


39

139

 Accounts Receivable - Net
6

468

687

1,161

 Receivable from Affiliates
1,365

1,936

(3,301
)

 Materials and Supplies

251


251

 Deferred Income Taxes
13

166

(1
)
178

 Other Current Assets
15

97


112

   Total Current Assets
1,884

3,077

(2,493
)
2,468

 
 
 
 
 
 Properties
8

32,222

1,772

34,002

 Accumulated Depreciation
(8
)
(7,901
)
(952
)
(8,861
)
 Properties - Net

24,321

820

25,141

 
 
 
 
 
 Investments in Conrail


683

683

 Affiliates and Other Companies
(39
)
576

(42
)
495

 Investments in Consolidated Subsidiaries
17,830


(17,830
)

 Other Long-term Assets
176

290

(67
)
399

   Total Assets
$
19,851

$
28,264

$
(18,929
)
$
29,186

 
 
 
 
 
 LIABILITIES AND SHAREHOLDERS' EQUITY
 Current Liabilities
 
 
 
 
 Accounts Payable
$
156

$
1,019

$
30

$
1,205

 Labor and Fringe Benefits Payable
37

335

20

392

 Payable to Affiliates
2,705

703

(3,408
)

 Casualty, Environmental and Other Reserves

152

16

168

 Current Maturities of Long-term Debt
400

100

2

502

 Income and Other Taxes Payable
(75
)
201

8

134

 Other Current Liabilities
(1
)
191

2

192

   Total Current Liabilities
3,222

2,701

(3,330
)
2,593

 
 
 
 
 
 Casualty, Environmental and Other Reserves

266

71

337

 Long-term Debt
7,508

1,115


8,623

 Deferred Income Taxes
(149
)
7,884

64

7,799

 Other Long-term Liabilities
779

632

(81
)
1,330

   Total Liabilities
$
11,360

$
12,598

$
(3,276
)
$
20,682

 
 
 
 
 
 Shareholders' Equity
 
 
 
 
 Common Stock, $1 Par Value
1,039

181

(181
)
1,039

 Other Capital
5

5,666

(5,666
)
5

 Retained Earnings
8,313

9,880

(9,880
)
8,313

 Accumulated Other Comprehensive Loss
(866
)
(82
)
82

(866
)
 Noncontrolling Interest

21

(8
)
13

 Total Shareholders' Equity
8,491

15,666

(15,653
)
8,504

 Total Liabilities and Shareholders' Equity
$
19,851

$
28,264

$
(18,929
)
$
29,186


21

CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


NOTE 10.    Summarized Consolidating Financial Data, continued
Consolidating Balance Sheet
(Dollars in millions)
As of December 2011
 CSX Corporation
 CSX Transportation
Eliminations and Other
 Consolidated
 ASSETS
 Current Assets
 
 
 
 
 Cash and Cash Equivalents
$
549

$
154

$
80

$
783

 Short-term Investments
475


48

523

 Accounts Receivable - Net
4

468

657

1,129

 Receivable from Affiliates
1,025

1,772

(2,797
)

 Materials and Supplies

240


240

 Deferred Income Taxes
10

173

(1
)
182

 Other Current Assets
17

64

(3
)
78

   Total Current Assets
2,080

2,871

(2,016
)
2,935

 
 
 
 
 
 Properties
8

31,958

1,738

33,704

 Accumulated Depreciation
(8
)
(7,795
)
(927
)
(8,730
)
 Properties - Net

24,163

811

24,974

 
 
 
 
 
 Investments in Conrail


678

678

 Affiliates and Other Companies
(39
)
574

(42
)
493

 Investment in Consolidated Subsidiaries
17,519


(17,519
)

 Other Long-term Assets
176

109

108

393

   Total Assets
$
19,736

$
27,717

$
(17,980
)
$
29,473

 
 
 
 
 
 LIABILITIES AND SHAREHOLDERS' EQUITY
 Current Liabilities
 
 
 
 
 Accounts Payable
$
114

$
978

$
55

$
1,147

 Labor and Fringe Benefits Payable
41

458

42

541

 Payable to Affiliates
2,566

374

(2,940
)

 Casualty, Environmental and Other Reserves

151

16

167

 Current Maturities of Long-term Debt
400

105

2

507

 Income and Other Taxes Payable
(60
)
189


129

 Other Current Liabilities
(1
)
194

3

196

   Total Current Liabilities
3,060

2,449

(2,822
)
2,687

 
 
 
 
 
 Casualty, Environmental and Other Reserves

284

68

352

 Long-term Debt
7,609

1,124

1

8,734

 Deferred Income Taxes
(246
)
7,800

47

7,601

 Other Long-term Liabilities
858

667

106

1,631

   Total Liabilities
$
11,281

$
12,324

$
(2,600
)
$
21,005

 
 
 
 
 
 Shareholders' Equity
 
 
 
 
 Common Stock, $1 Par Value
1,049

181

(181
)
1,049

 Other Capital
6

5,652

(5,652
)
6

 Retained Earnings
8,275

9,618

(9,618
)
8,275

 Accumulated Other Comprehensive Loss
(875
)
(79
)
79

(875
)
 Noncontrolling Minority Interest

21

(8
)
13

   Total Shareholders' Equity
8,455

15,393

(15,380
)
8,468

   Total Liabilities and Shareholders' Equity
$
19,736

$
27,717

$
(17,980
)
$
29,473


22

CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 10.    Summarized Consolidating Financial Data, continued
Consolidating Cash Flow Statements
(Dollars in millions)
First Quarter 2012
CSX
Corporation
CSX
Transportation
Eliminations and Other
Consolidated
Operating Activities
 
 
 
 
Net Cash Provided by (Used in) Operating Activities
$
(23
)
$
641

$
(174
)
$
444

Investing Activities
 
 
 
 
Property Additions

(435
)
(34
)
(469
)
Purchases of Short-term Investments
(50
)

(3
)
(53
)
Proceeds from Sales of Short-term Investments
425


12

437

Other Investing Activities
1

(13
)
20

8

Net Cash Provided by (Used in) Investing Activities
376

(448
)
(5
)
(77
)
Financing Activities
 
 
 
 
Long-term Debt Issued
300



300

Long-term Debt Repaid
(400
)
(13
)

(413
)
Dividends Paid
(125
)
(179
)
179

(125
)
Stock Options Exercised
8



8

Shares Repurchased
(300
)


(300
)
Other Financing Activities

4

3

7

Net Cash Provided by (Used in) Financing Activities
(517
)
(188
)
182

(523
)
Net Increase (Decrease) in Cash and Cash Equivalents
(164
)
5

3

(156
)
Cash and Cash Equivalents at Beginning of Period
549

154

80

783

Cash and Cash Equivalents at End of Period
$
385

$
159

$
83

$
627




23

CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 10.    Summarized Consolidating Financial Data, continued

Consolidating Cash Flow Statements
(Dollars in millions)
First Quarter 2011
 CSX
Corporation
CSX
Transportation
Eliminations and Other
Consolidated
Operating Activities
 
 
 
 
Net Cash Provided by (Used in) Operating Activities
$
196

$
541

$
(242
)
$
495

Investing Activities
 
 
 
 
Property Additions

(344
)
(35
)
(379
)
Purchases of Short-term Investments


(8
)
(8
)
Proceeds from Sales of Short-term Investments


20

20

Other Investing Activities
(13
)
(85
)
100

2

Net Cash Provided by (Used in) Investing Activities
(13
)
(429
)
77

(365
)
Financing Activities
 
 
 
 
Long-term Debt Repaid
(507
)
(16
)
(1
)
(524
)
Dividends Paid
(96
)
(170
)
170

(96
)
Stock Options Exercised
19



19

Shares Repurchased
(300
)


(300
)
Other Financing Activities
22


(9
)
13

Net Cash Provided by (Used in) Financing Activities
(862
)
(186
)
160

(888
)
Net Decrease in Cash and Cash Equivalents
(679
)
(74
)
(5
)
(758
)
Cash and Cash Equivalents at Beginning of Period
1,100

118

74

1,292

Cash and Cash Equivalents at End of Period
$
421

$
44

$
69

$
534



24


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

STRATEGIC OVERVIEW
CSX provides rail-based freight transportation services including traditional rail service and the transport of intermodal containers and trailers. The Company and the rail industry provide customers with access to an expansive and interconnected transportation network that plays a key role in North American commerce and is critical to the economic success and global competitiveness of the United States. America is once again poised for a period of growth in manufacturing, as the economy continues to recover. The U.S. demand to move more goods by rail is expected to rise along with the need to reduce highway congestion and greenhouse gas emissions. CSX and freight railroads are the best way to meet this demand while reducing environmental impacts. CSX can move a ton of freight almost 500 miles on one gallon of fuel and, on average, over three times more fuel efficiently than trucks. Also, one rail car can move the equivalent of 3 truckloads which aids in alleviating highway congestion.
 
CSX's network is positioned to reach nearly two-thirds of Americans, who account for the majority of the nation's consumption of goods. Through this network, the Company transports a diverse portfolio of products and commodities to meet the country's needs. These products range from energy sources like coal and ethanol, to automobiles, chemicals, building materials, paper, metals, grains and consumer products. The Company categorizes these products into three primary lines of business: merchandise, coal and intermodal. CSX's transportation solutions connect industries across the United States with each other and with global markets by meeting the transportation needs of port facilities, energy producers, manufacturers, industrial producers, construction companies, farmers and feed mills, wholesalers and retailers and the United States armed forces.

CSX services are delivered by dedicated employees whose jobs cannot be exported overseas. Railroad jobs are among some of the nation's highest paying. In 2011, CSX continued its job creation efforts by hiring more than 4,000 new employees, which was comprised primarily of operations employees, that will carry forward with this legacy.

Strategic Growth Initiatives

As CSX continues to strengthen its core business, the Company is focusing on three key strategic growth initiatives related to intermodal, export coal and an initiative to enhance customer service quality also known to CSX as Total Service Integration. The Company believes these initiatives will allow it to capture additional domestic and international volume, while improving service offerings to its customers in a cost-effective manner.

Intermodal

The Company's intermodal business is an economical, environmentally-friendly alternative to transporting freight on highways via truck. CSX is capitalizing on this opportunity by building new terminals and increasing network capacity. Construction of a new intermodal terminal in Louisville, Kentucky and major terminal expansion projects in Worcester, Massachusetts and Columbus, Ohio are currently underway. These investments are in addition to the Company's new Northwest Ohio intermodal terminal that became operational a year ago. This high-capacity terminal, which is part of CSX's National Gateway initiative discussed below, expands service offerings to customers as well as improves market access to and from east coast ports.

25


Export Coal     

Although low natural gas prices and high coal stockpiles recently had and will continue to have a significant impact on domestic utility coal volume, U.S. export coal volume continues to show strength and will partially offset the current weakness in utility coal volume. Rapid economic growth in developing countries has generated an expected long term growth cycle in export coal demand. As a result of the increase in global steel production, demand for U.S. coal is expected to remain strong. Demand for coal used in developing countries for electric power generation is also expected to remain high due to rising consumption as they become more urbanized. These increases in global coal demand are expected to largely be met by export shipments with a portion originating from the U.S. In addition to the Company's ready access to large U.S. coal suppliers and multiple port facilities, CSX continues to enhance the capacity and operating efficiency of its export coal network, which favorably positions the Company to capitalize on this market growth.

Total Service Integration
    
CSX's Total Service Integration (“TSI”) initiative, which was launched in 2006, supports growth by improving service, optimizing train size, and increasing asset utilization for unit train shipments from origin to destination. CSX is now advancing this initiative to enhance service quality for customers who ship by the carload. This program, TSI Carload, focuses where the customer is impacted most - during the first and last mile of service. These enhancements aim to improve service levels and reliability of rail transportation over other modes of transportation. These improvements to operational processes, customer communication and service will better align the Company's operating capabilities with customers' needs.

Balanced Approach to Capital Deployment

CSX remains highly committed to delivering value to shareholders through a balanced approach to deploying capital that includes investments in infrastructure, dividend growth and share repurchases. In 2011, the Company invested $2.3 billion to further enhance the capacity, quality, safety and flexibility of its network. Included in this amount is approximately $100 million of investments related to reimbursable public-private partnerships where reimbursements may not be fully received in a given year. In addition, CSX continues to return value to its shareholders in the form of dividends and share repurchases. The Company has increased its quarterly cash dividend nine times over the last six years which represents a 36 percent compounded annual growth rate. Also during 2011, CSX announced a new $2 billion share repurchase authority expected to be completed by the end of 2012 based on market and business conditions. While delivering shareholder value through this balanced approach to capital deployment, the Company remains committed to an improving investment grade credit profile.

Public-Private Partnerships

Expanding capacity on U.S. rail networks will provide substantial public benefits including job creation, increased business activity at U.S. ports, reduced highway congestion and lower air emissions. Therefore, CSX and its government partners are working jointly to invest in multi-year rail infrastructure projects such as the National Gateway. This initiative is a public-private partnership which will increase intermodal capacity on key corridors between Mid-Atlantic ports and the Midwest. Current projects related to the National Gateway include the expansion of the Virginia Avenue Tunnel in Washington, D.C. and construction for double-stack train clearances in Ohio, West Virginia, Pennsylvania, Maryland and the District of Columbia.
    

26


CSX is engaged in another major partnership initiative with the Commonwealth of Massachusetts to expand freight and commuter rail service. Currently, CSX provides service to and from New England. To further improve that service offering to customers, CSX is expanding its intermodal terminal footprint in Worcester, Massachusetts and, with the Commonwealth, is clearing the route from Worcester to the New York state line for double-stack intermodal service. As part of this initiative, CSX intends to sell the Commonwealth its corridor between Boston and Worcester.  The Commonwealth intends to expand commuter rail serve in the greater Boston area. 

Additionally, CSX has entered into a transaction with the state of Florida to help alleviate highway congestion through a new commuter rail operation known as SunRail. CSX sold the state a portion of its track for its new commuter rail and will invest the proceeds in additional freight rail capacity and infrastructure within the state. This includes a new automotive and intermodal facility in central Florida.

In summary, these long-term investments discussed above provide a foundation for volume growth and productivity improvement, enhanced customer service and continued advancements in the safety and reliability of operations. To continue these types of investments, the Company must be able to operate in an environment in which it can generate adequate returns and drive shareholder value. CSX will continue to advocate for a fair and balanced regulatory environment to ensure that the value of the Company's rail service would be reflected in any potential new legislation or policies.






27

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


FIRST QUARTER 2012 HIGHLIGHTS

Revenue increased $156 million or 6% to nearly $3.0 billion, a first quarter record.

Expenses increased $73 million or 4% to $2.1 billion.

Operating income increased $83 million or 11% to $856 million, a first quarter record.

Operating ratio was 71.1%, a first quarter record.

 
 First Quarters
(In thousands)
2012
2011
Volume
1,602

1,592

 
 
 
(In millions)
 
 
Revenue
$
2,966

$
2,810

Expense
2,110

2,037

Operating Income
$
856

$
773

 
 
 
Operating Ratio
71.1
%
72.5
%

Although utility coal is challenged by low natural gas prices and high stock piles, the Company achieved year-over-year revenue growth in nearly all markets. Additionally, there was an overall increase in volume led by intermodal and merchandise markets. Revenue increased 6% from prior year driven by the ongoing emphasis on pricing above rail inflation and higher fuel recovery associated with the increase in fuel prices.

Expenses increased 4% versus the prior year driven by higher fuel costs as a result of higher fuel prices. Depreciation expense increased as a result of an overall increase in asset base. Material, supplies and other expenses increased primarily as a result of inflation, volume-related and other expenses partially offset by the amortization of gain recognized from the Company's 2011 sale of operating rail corridor to the state of Florida.

For additional information, refer to Results of Operations discussed on pages 31 through 34.


28

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



In addition to the financial highlights described above, the Company measures and reports safety and service performance. The Company strives for continuous improvement in these measures through training, initiatives and investment. For example, the Company's safety and train accident prevention programs rely on broad employee involvement. The programs utilize operating rules training, compliance measurement, root cause analysis and communication that are intended to create a safer environment for employees and the public. Continued capital investment in the Company's assets, including track, bridges, signals, equipment and detection technology also supports safety performance.

The Company routinely collaborates with the FRA and industry organizations as well as federal, state and local governments on the development and implementation of safety programs and initiatives. For example, CSX, Operation Lifesaver, Inc., the U.S. Department of Transportation and other major railroads from across the country have partnered in the Common Sense campaign to reduce the number of injuries and deaths around tracks and trains. In addition to these initiatives, CSXT also has an ongoing public safety program to clear-cut trees and vegetation at public passive highway-rail intersections (crossings with no flashing lights or gates) to improve the public's ability to discern rail hazards.

The Company continued to advance its efforts on safety during first quarter 2012.  While the FRA reportable personal injuries frequency index of 0.78 improved slightly, the reported FRA train accident frequency rate improved 24% year over year to 2.01.

Network reliability and service were strong during the first quarter 2012. On-time originations improved from 66 percent to 89 percent, and on-time arrivals improved from 59 percent to 77 percent. Average train velocity increased 9 percent to 22.3 miles per hour, while dwell improved 10 percent to 24.0 hours.





29

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


Operating Statistics (Estimated)

 
 
 First Quarters
 
 
2012
2011
Improvement/
(Decline)
 
 
 
 
 
Safety and Service Measurements
FRA Personal Injury Frequency Index
0.78

0.79

1%
 
FRA Train Accident Rate
2.01

2.64

24%
 
 
 
 
 
 
On-Time Train Originations
89
%
66
%
35%
 
On-Time Destination Arrivals
77
%
59
%
31%
 
 
 
 
 
 
Dwell
24

26.6

10%
 
Cars-On-Line
194,454

212,418

8%
 
 
 
 
 
 
Train Velocity
22.3

20.5

9%
 
 
 
 
 
 
 
 
 
Increase/(Decrease)
Resources
Route Miles
21,000

21,050

—%
 
Locomotives (owned and long-term leased)
4,114

4,076

1%
 
Freight Cars (owned and long-term leased)
68,635

67,979

1%


Key Performance Measures Definitions

FRA Personal Injury 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 - Average percent of scheduled road trains that depart the origin yard on-time or ahead of schedule.

On-Time Destination Arrivals - Average percent of scheduled road trains that arrive at the destination yard on-time to two hours late (30 minutes for intermodal trains).

Dwell - Average amount of time in hours between car arrival at and departure from the yard. It does not include cars moving through the yard on the same train.

Cars-On-Line - An average count of all cars on the network (does not include locomotives, cabooses, trailers, containers or maintenance equipment).

Train Velocity - Average train speed between terminals in miles per hour (does not include locals, yard jobs, work trains or passenger trains).


30

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


FINANCIAL RESULTS OF OPERATIONS
 
 First Quarters
 
2012
2011
 
$ Change