NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. Nature of Operations and Significant Accounting Policies
Business
CSX Corporation together with its subsidiaries ("CSX" or the “Company”), based in Jacksonville, Florida, is one of the nation's leading transportation companies. The Company provides rail-based transportation services including traditional rail service, the transport of intermodal containers and trailers, as well as other transportation services such as rail-to-truck transfers and bulk commodity operations.
CSX Transportation, Inc.
CSX’s principal operating subsidiary, CSX Transportation, Inc. (“CSXT”), provides an important link to the transportation supply chain through its approximately 19,500 route mile rail network, which serves major population centers in 23 states east of the Mississippi River, the District of Columbia and the Canadian provinces of Ontario and Quebec. It has access to over 70 ocean, river and lake port terminals along the Atlantic and Gulf Coasts, the Mississippi River, the Great Lakes and the St. Lawrence Seaway. The Company’s intermodal business links customers to railroads via trucks and terminals. CSXT also serves thousands of production and distribution facilities through track connections to more than 230 short-line and regional railroads.
CSXT is also responsible for the Company's real estate sales, leasing, acquisition and management and development activities. Substantially all of these activities are focused on supporting railroad operations.
Other Entities
In addition to CSXT, the Company’s subsidiaries include Quality Carriers, Inc. ("Quality Carriers"), 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. Effective July 1, 2021, CSX acquired Quality Carriers, the largest provider of bulk liquid chemicals truck transportation in North America, from Quality Distribution, Inc. For further details, refer to Note 17, Business Combinations. CSX Intermodal Terminals owns and operates a system of intermodal terminals, predominantly in the eastern United States, and also provides drayage services (the pickup and delivery of intermodal shipments) for certain customers. TDSI serves the automotive industry with distribution centers and storage locations. Transflo connects non-rail served customers to the many benefits of rail by transferring products from rail to trucks. The biggest Transflo markets are chemicals and agriculture, which include shipments of plastics and ethanol. CSX Technology and other subsidiaries provide support services for the Company.
CSX CORPORATION
PART II
Item 8. Financial Statements and Supplementary Data
NOTE 1. Nature of Operations and Significant Accounting Policies, continued
Lines of Business
During 2021, the Company's services generated $12.5 billion of revenue and served four primary lines of business: merchandise, intermodal, coal and trucking.
•The merchandise business shipped 2.6 million carloads (41% of volume) and generated 60% of revenue in 2021. The Company’s merchandise business is comprised of shipments in the following diverse markets: chemicals, agricultural and food products, minerals, automotive, forest products, metals and equipment, and fertilizers.
•The intermodal business shipped 3.0 million units (48% of volume) and generated 16% of revenue in 2021. The intermodal business combines the superior economics of rail transportation with the flexibility of trucks and offers a cost and environmental advantage over long-haul trucking. Through a network of approximately 30 terminals, the intermodal business serves all major markets east of the Mississippi River and transports mainly manufactured consumer goods in containers, providing customers with truck-like service for longer shipments.
•The coal business shipped 706 thousand carloads (11% of volume) and generated 14% of revenue in 2021. The Company transports domestic coal, coke and iron ore to electricity-generating power plants, steel manufacturers and industrial plants as well as export coal to deep-water port facilities. Approximately one-quarter of export coal and the majority of the domestic coal that the Company transports is used for generating electricity or industrial purposes.
•The trucking business generated 3% of revenue in 2021. Trucking revenue includes revenue from the operations of Quality Carriers, which was acquired by CSX effective July 1, 2021.
Other revenue accounted for 7% of the Company’s total revenue in 2021. This category includes revenue from regional subsidiary railroads and incidental charges, including intermodal storage and equipment usage, demurrage and switching. Revenue from regional subsidiary railroads includes shipments by railroads that the Company does not directly operate. Intermodal storage represents charges for customer storage of containers at an intermodal terminal, ramp facility or offsite location beyond a specified period of time. Demurrage represents charges assessed when freight cars are held by a customer beyond a specified period of time. Switching represents charges assessed when a railroad switches cars for a customer or another railroad.
Employees
The Company's number of employees was more than 20,900 as of December 2021, which includes approximately 16,500 union employees. Most of the Company’s employees provide or support transportation services.
CSX CORPORATION
PART II
Item 8. Financial Statements and Supplementary Data
NOTE 1. Nature of Operations and Significant Accounting Policies, continued
Basis of Presentation
In the opinion of management, the accompanying consolidated financial statements contain all normal, recurring adjustments necessary to fairly present the financial position of CSX and its subsidiaries at December 31, 2021 and December 31, 2020, and the consolidated statements of income, comprehensive income, cash flows and changes in shareholders’ equity for fiscal years 2021, 2020 and 2019. Where applicable, prior year information has been reclassified to conform to current presentation. In addition, management has evaluated and disclosed all material events occurring subsequent to the date of the financial statements up to the date this annual report is filed on Form 10-K.
Common Stock Split
On June 4, 2021, CSX announced a three-for-one split of the Company’s common stock in the form of a stock dividend. Each shareholder of record on June 18, 2021, received two additional shares of common stock for each share held as of this record date. The new shares were distributed after close of trading on June 28, 2021. All prior period share and per share amounts, common stock, other capital, and retained earnings presented herein have been retroactively adjusted to reflect the impact of the stock split. Proportional adjustments were also made to outstanding awards under the Company's stock-based compensation plans.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires that management make estimates in reporting the amounts of certain assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of certain revenues and expenses during the reporting period. Actual results may differ from those estimates. Critical accounting estimates using management judgment are made for the following areas:
•personal injury and environmental reserves (see Note 5, Casualty, Environmental and Other Reserves);
•pension and post-retirement medical plan accounting (see Note 9, Employee Benefit Plans);
•depreciation policies for assets under the group-life method (see Note 6, Properties); and
•goodwill and other intangible assets (see Note 17, Business Combinations and Note 18, Goodwill and Other Intangibles - Net).
Fiscal Year
The Company's fiscal periods are based upon the calendar year. Except as otherwise specified, references to full years indicate CSX’s fiscal years ended on December 31, 2021, December 31, 2020, and December 31, 2019.
Principles of Consolidation
The consolidated financial statements include results of operations of CSX and subsidiaries over which CSX has majority ownership or financial control. All significant intercompany accounts and transactions have been eliminated. Most investments in companies that were not majority-owned were carried at cost (if less than 20% owned and the Company has no significant influence) or were accounted for under the equity method (if the Company has significant influence but does not have control). These investments are reported within Investment in Affiliates and Other Companies on the consolidated balance sheets.
CSX CORPORATION
PART II
Item 8. Financial Statements and Supplementary Data
NOTE 1. Nature of Operations and Significant Accounting Policies, continued
Cash and Cash Equivalents
On a daily basis, cash in excess of current operating requirements is invested in various highly liquid investments having a typical maturity date of three months or less at the date of acquisition. These investments are carried at cost, which approximates market value, and are classified as cash equivalents.
Investments
Investments in instruments with original maturities greater than three months that will mature in less than one year are classified as short-term investments. Investments with original maturities of one year or greater are initially classified within other long-term assets, and the classification is re-evaluated at each balance sheet date.
Materials and Supplies
Materials and supplies in the consolidated balance sheets are carried at average cost and consist primarily of parts used in the repair and maintenance of track structure, equipment, and CSXT’s freight car and locomotive fleets, as well as fuel.
New Accounting Pronouncements
In March 2020, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update 2020-04, Facilitation of the Effects of Reference Rate Reform on Financial Reporting. As the London Interbank Offered Rate ("LIBOR") will no longer be available beginning July 2023, this standard update provides practical expedients for contract modifications made as part of the transition from LIBOR to alternative reference rates. CSX's revolving line of credit currently uses LIBOR as a reference rate. This standard update can be adopted prospectively through December 31, 2022. The Company continues to evaluate the impact of this standard update, but does not anticipate that adoption will have a material impact on the Company's results of operations or financial position.
In November 2021, the FASB issued ASU 2021-10, Disclosure by Business Entities about Government Assistance. This standard update requires annual disclosure of the nature of any government assistance received, accounting policies related to such assistance and the effect of that assistance on the entity’s financial statements. The Company is required to adopt this guidance effective January 2022, though early adoption is permitted. The Company is currently evaluating the impact of these amendments on its disclosures, but this standard update will not impact the Company's results of operations or financial position.
CSX CORPORATION
PART II
Item 8. Financial Statements and Supplementary Data
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 |
| 2021 | | 2020 | | 2019 |
Numerator (Dollars in Millions): | | | |
Net Earnings | $ | 3,781 | | | $ | 2,765 | | | $ | 3,331 | |
Dividend Equivalents on Restricted Stock | — | | | — | | | — | |
Net Earnings, Attributable to Common Shareholders | $ | 3,781 | | | $ | 2,765 | | | $ | 3,331 | |
| | | | | |
Denominator (Units in Millions): | | | | | |
Average Common Shares Outstanding | 2,250 | | | 2,300 | | | 2,389 | |
Other Potentially Dilutive Common Shares | 5 | | | 5 | | | 6 | |
Average Common Shares Outstanding, Assuming Dilution | 2,255 | | | 2,305 | | | 2,395 | |
| | | | | |
Net Earnings Per Share, Basic | $ | 1.68 | | | $ | 1.20 | | | $ | 1.39 | |
Net Earnings Per Share, Assuming Dilution | $ | 1.68 | | | $ | 1.20 | | | $ | 1.39 | |
Basic earnings per share is based on the weighted-average number of shares of common stock outstanding. Earnings per share, assuming dilution, is based on the weighted-average number of shares of common stock outstanding and common stock equivalents adjusted for the effects of common stock that may be issued as a result of potentially dilutive instruments. CSX's potentially dilutive instruments are made up of equity awards including performance units and employee stock options.
When calculating diluted earnings per share, the potential shares that would be outstanding if all outstanding stock options were exercised are included. This number is different from outstanding stock options, which is included in Note 4, Stock Plans and Share-Based Compensation, because it is offset by shares CSX could repurchase using the proceeds from these hypothetical exercises to obtain the common stock equivalent. The total average outstanding equity awards that were excluded from the diluted earnings per share calculation because their effect was antidilutive is in the table below.
| | | | | | | | | | | | | | | | | |
| Fiscal Years |
| 2021 | | 2020 | | 2019 |
Antidilutive stock options excluded from Diluted EPS (in millions) | 2 | | | 6 | | | 3 | |
Share Repurchase Programs
In January 2019, the Company announced a $5 billion share repurchase program ("January 2019 program"). During June 2021, this program was completed, and the Company began repurchasing shares under the $5 billion share repurchase program announced October 21, 2020 (“October 2020 program”). Total repurchase authority remaining as of December 31, 2021, was $3.0 billion. A portion of share repurchases in January 2019 were completed under a previous share repurchase program announced in October 2017.
CSX CORPORATION
PART II
Item 8. Financial Statements and Supplementary Data
NOTE 2. Earnings Per Share, continued
Share repurchases may be made through a variety of methods including, but not limited to, open market purchases, purchases pursuant to Rule 10b5-1 plans, accelerated share repurchases and negotiated block purchases. The timing of share repurchases depends upon management's assessment of marketplace conditions and other factors, and the program remains subject to the discretion of the Board of Directors. Future share repurchases are expected to be funded by cash on hand, cash generated from operations and debt issuances. Shares are retired immediately upon repurchase. In accordance with the Equity Topic in the Accounting Standards Codification ("ASC"), the excess of repurchase price over par value is recorded in retained earnings.
Share Repurchase Activity
During 2021, 2020, and 2019, CSX repurchased the following shares:
| | | | | | | | | | | | | | | | | |
| Fiscal Years |
| 2021 | | 2020 | | 2019 |
Shares Repurchased (Units in Millions) | 90 | | | 38 | | | 144 | |
Cost of Shares (Dollars in Millions) | $ | 2,886 | | | $ | 867 | | | $ | 3,373 | |
Average Price Paid per Share | $ | 31.91 | | | $ | 22.90 | | | $ | 23.51 | |
On October 17, 2019, the Company repurchased 14.1 million (split-adjusted) shares for $319 million from MR Argent Advisor LLC, a CSX shareholder, on behalf of certain limited partners of its affiliated funds (“Mantle Ridge”) under the January 2019 share repurchase program. A member of CSX’s Board of Directors, Paul C. Hilal, founded and controls Mantle Ridge and each of its related entities. Shares purchased from Mantle Ridge are included in the table above.
Periodically, CSX enters into structured agreements for the repurchase of CSX shares. Upon execution of each agreement, the Company pays a fixed amount of cash in exchange for the right to receive either CSX stock or a predetermined amount of cash, including a premium. Shares acquired through these structured share repurchase agreements were recorded in common stock and retained earnings and are included in the share repurchases table above. Premiums received were not material. As a result of entering into and settling structured share repurchase agreements, the Company paid a net total of approximately $378 million and received approximately 12 million shares during the twelve months ended 2021. As of December 31, 2021, no such agreements were outstanding.
Accelerated Share Repurchases
Shares repurchased under accelerated share repurchase agreements are included in the table above. In December 2020, the Company completed an accelerated share repurchase subject to an agreement to repurchase shares of the Company’s stock under the January 2019 program. Under this agreement, the Company paid a total of $100 million and received approximately 3.3 million shares.
In August 2019, the Company entered into an accelerated share repurchase agreement under the January 2019 program. Under this accelerated share repurchase agreement, the Company made a prepayment of $250 million to a financial institution and settlement occurred in September 2019. At settlement, the Company received approximately 11.5 million shares, calculated based on the volume-weighted average price of the Company’s common stock over the term of the agreement, less a discount.
Dividend Increase
On February 16, 2022, the Company's Board of Directors authorized a 7% increase in the quarterly cash dividend to $0.10 per common share effective March 2022.
CSX CORPORATION
PART II
Item 8. Financial Statements and Supplementary Data
NOTE 3. Shareholders’ Equity
Common and preferred stock consists of the following:
| | | | | |
Common Stock, $1 Par Value | December 2021 |
| (Units in Millions) |
Common Shares Authorized | 5,400 | |
Common Shares Issued and Outstanding | 2,202 | |
| |
Preferred Stock | |
Preferred Shares Authorized | 25 | |
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.
Other Capital
As a result of the stock split during second quarter 2021, CSX's common stock balance was increased and its other capital balance was reduced commensurately. Because this adjustment brought the other capital balance below zero, $1.0 billion was reclassified from retained earnings to other capital to bring the other capital balance to zero as of June 30, 2021. Prior period amounts have also been retroactively adjusted as needed to bring the other capital balance to zero.
CSX CORPORATION
PART II
Item 8. Financial Statements and Supplementary Data
NOTE 4. Stock Plans and Share-Based Compensation
Under CSX's share-based compensation plans, awards consist of performance units, stock options, restricted stock units and restricted stock awards for management and stock grants for directors. Awards granted under the various programs are determined and approved by the Compensation and Talent Management Committee of the Board of Directors. Awards to the Chief Executive Officer are approved by the full Board and awards to senior executives are approved by the Compensation and Talent Management Committee. In certain circumstances, the Chief Executive Officer or delegate approves awards to management employees other than senior executives. The Board of Directors approves awards granted to CSX's non-management directors upon recommendation of the Governance and Sustainability Committee.
Share-based compensation expense for awards under share-based compensation plans and purchases made as part of the employee stock purchase plan is measured using the fair value of the award on the grant date and is recognized on a straight-line basis over the service period of the respective award. Alternately, expense is recognized upon death or upon grant date to certain retirement-eligible employees whose agreements allow for continued vesting upon retirement. Forfeitures are recognized as they occur. Total pre-tax expense and income tax benefits associated with share-based compensation are shown in the table below. Income tax benefits include impacts from option exercises and the vesting of other equity awards.
| | | | | | | | | | | |
| Fiscal Years |
(Dollars in Millions) | 2021 | 2020 | 2019 |
Share-Based Compensation Expense | | | |
Performance Units | $ | 71 | | $ | (3) | | $ | 42 | |
Stock Options | 18 | | 19 | | 18 | |
Restricted Stock Units and Awards | 12 | | 6 | | 8 | |
Employee Stock Purchase Plan | 4 | | 5 | | 4 | |
Stock Awards for Directors | 2 | | 2 | | 2 | |
Total Share-based Compensation Expense | $ | 107 | | $ | 29 | | $ | 74 | |
Income Tax Benefit | $ | 23 | | $ | 19 | | $ | 43 | |
Long-term Incentive Plans
The objective of the CSX Long-term Incentive Plans (“LTIP”) is to motivate and reward certain employees for achieving and exceeding certain financial goals. The 2021-2023 and 2020-2022 LTIP were adopted under the 2019 Stock and Incentive Award Plan and the 2019-2021 LTIP was adopted under the 2010 Stock and Incentive Award Plan. Grants were made in performance units, with each unit being equivalent to one share of CSX common stock, and payouts will be made in CSX common stock. The payout range for most participants will be between 0% and 200% of the target awards depending on Company performance against predetermined goals for each three-year cycle.
CSX CORPORATION
PART II
Item 8. Financial Statements and Supplementary Data
NOTE 4. Stock Plans and Share-Based Compensation, continued
In 2021, 2020, and 2019, target performance units were granted to certain employees under three separate LTIP plans covering three-year cycles: the 2021-2023 ("2021-2023 LTIP"), the 2020-2022 ("2020-2022 LTIP") and the 2019-2021 (“2019-2021 LTIP”) plans. Payouts of performance units for the plans will be based on the achievement of certain goals, in each case excluding non-recurring items as disclosed in the Company’s financial statements.
•For the 2021-2023 LTIP plan, the average annual operating income growth percentage and cumulative free cash flow over the plan period will each comprise 50% of the payout and will be measured independently of the other. Participants will receive stock dividend equivalents declared over the performance period based on the number of performance units paid upon vesting.
•For the 2020-2022 LTIP plan, the cumulative operating income and cumulative free cash flow over the plan period will each comprise 50% of the payout and will be measured independently of the other. Participants will receive stock dividend equivalents declared over the performance period based on the number of performance units paid upon vesting.
•For the 2019-2021 LTIP plan, the cumulative operating ratio and cumulative free cash flow over the plan period will each comprise 50% of the payout and will be measured independently of the other.
For these plans, payouts for certain executive officers are subject to formulaic upward or downward adjustment by up to 25%, capped at an overall payout of 250%, based upon the Company’s total shareholder return relative to specified comparable groups over the performance period.
The fair values of the performance units awarded during the years ended December 2021, 2020 and 2019 were calculated primarily using a Monte-Carlo simulation model with the following weighted-average assumptions:
| | | | | | | | | | | |
Weighted-average assumptions used: | 2021 | 2020 | 2019 |
Annual dividend yield | n/a | n/a | 1.4 | % |
Risk-free interest rate | 0.2 | % | 1.4 | % | 2.4 | % |
Annualized volatility | 33.6 | % | 24.5 | % | 27.4 | % |
Expected life (in years) | 2.9 | 2.9 | 2.8 |
Performance unit grant and vesting information is summarized as follows:
| | | | | | | | | | | | | | | | | |
| Fiscal Years |
| 2021 | | 2020 | | 2019 |
Weighted-average grant date fair value | $ | 30.11 | | | $ | 25.39 | | | $ | 22.06 | |
Fair value of units vested in fiscal year ending (in millions) | $ | 19 | | | $ | 18 | | | $ | 17 | |
CSX CORPORATION
PART II
Item 8. Financial Statements and Supplementary Data
NOTE 4. Stock Plans and Share-Based Compensation, continued
The performance unit activity related to the outstanding long-term incentive plans and corresponding fair value is summarized as follows:
| | | | | | | | | | | |
| Performance Units Outstanding (in Thousands) | | Weighted-Average Fair Value at Grant Date |
Unvested at December 31, 2020 | 1,920 | | | $ | 23.86 | |
Granted | 597 | | | 30.11 | |
Forfeited | (59) | | | 24.30 | |
Vested | (882) | | | 22.09 | |
Unvested at December 31, 2021 | 1,576 | | | $ | 27.21 | |
As of December 2021, there was $20 million of total unrecognized compensation cost related to performance units that is expected to be recognized over a weighted-average period of approximately two years.
Stock Options
Stock options in 2021, 2020, and 2019 were primarily granted along with the corresponding LTIP plans. Under this program, an employee receives an award that provides the opportunity in the future to purchase CSX shares at the closing market price of the stock on the date the award is granted (the strike price). Options granted become exercisable in equal installments on the anniversary of the grant date over a vesting period (three-year graded). All options expire 10 years from the grant date if they are not exercised.
The fair value of stock options granted was estimated as of the dates of grant using the Black-Scholes option valuation model, which uses the following assumptions: dividend yield, risk-free interest rate, annualized volatility and expected life. The annual dividend yield is based on the most recent quarterly CSX dividend payment annualized. The risk-free interest rate is based on U.S. Treasury yield curve in effect at the time of grant. The annualized volatility is based on historical volatility of daily CSX stock price returns over a 6.0 year look-back period ending on the grant date. The expected life is calculated using the safe harbor approach due to lack of historical data on CSX options, which is the midpoint between the vesting schedule and contractual term (10 years).
Assumptions and inputs used to estimate fair value of stock options are summarized as follows:
| | | | | | | | | | | |
| Fiscal Years |
| 2021 | 2020 | 2019 |
Weighted-average grant date fair value | $ | 7.94 | | $ | 6.31 | | $ | 5.96 | |
| | | |
| | | |
Stock options valuation assumptions: | | | |
Annual dividend yield | 1.2 | % | 1.2 | % | 1.3 | % |
Risk-free interest rate | 0.7 | % | 1.4 | % | 2.4 | % |
Annualized volatility | 31.2 | % | 26.1 | % | 25.7 | % |
Expected life (in years) | 6.0 | 6.0 | 6.1 |
Other pricing model inputs: | | | |
Weighted-average grant-date market price of CSX stock (strike price) | $ | 29.65 | | $ | 26.53 | | $ | 23.34 | |
CSX CORPORATION
PART II
Item 8. Financial Statements and Supplementary Data
NOTE 4. Stock Plans and Share-Based Compensation, continued
The stock option activity is summarized as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Stock Options Outstanding (in Thousands) | | Weighted-Average Exercise Price | | Weighted-Average Remaining Contractual Life (in Years) | | Aggregate Intrinsic Value (in Millions) |
Outstanding at December 31, 2020 | 12,652 | | | $ | 20.29 | | | | | |
Granted | 2,005 | | | 29.69 | | | | | |
Forfeited | (174) | | | 26.91 | | | | | |
Exercised | (1,971) | | | 15.76 | | | | | |
Outstanding at December 31, 2021 | 12,512 | | | $ | 22.42 | | | 7.2 | | $ | 190 | |
Exercisable at December 31, 2021 | 6,347 | | | $ | 18.16 | | | 6.1 | | $ | 123 | |
Unrecognized compensation expense related to stock options as of December 2021 was $15 million and is expected to be recognized over a weighted-average period of approximately two years. The Company issues new shares upon stock option exercises. Additional information on stock option exercises is summarized as follows:
| | | | | | | | | | | |
(Dollars in Millions) | 2021 | 2020 | 2019 |
Intrinsic value of stock options exercised | $ | 32 | | $ | 30 | | $ | 87 | |
Cash received from option exercises | $ | 31 | | $ | 29 | | $ | 45 | |
Restricted Stock Grants
Restricted stock grants consist of units and awards, each equivalent to one share of CSX stock. Restricted stock units are primarily issued along with corresponding LTIP plans and vest three years after the date of grant. Separately, restricted stock awards generally vest over an employment period of up to five years. These awards are time-based and not based upon CSX’s attainment of operational targets. Participants receive cash or stock dividend equivalents on these shares, depending on the grant. Restricted stock grant and vesting information is summarized as follows:
| | | | | | | | | | | | | | | | | |
| Fiscal Years |
| 2021 | | 2020 | | 2019 |
Weighted-average grant date fair value | $ | 29.84 | | | $ | 26.43 | | | $ | 23.06 | |
Fair value of units and awards vested during fiscal year ended (in millions) | $ | 12 | | | $ | 8 | | | $ | 7 | |
CSX CORPORATION
PART II
Item 8. Financial Statements and Supplementary Data
NOTE 4. Stock Plans and Share-Based Compensation, continued
The restricted stock activity related to the outstanding long-term incentive plans and other awards and corresponding fair value is summarized as follows:
| | | | | | | | | | | |
| Restricted Stock Units and Awards Outstanding (in Thousands) | | Weighted-Average Fair Value at Grant Date |
Unvested at December 31, 2020 | 1,055 | | | $ | 22.36 | |
Granted | 561 | | | 29.84 | |
Forfeited | (50) | | | 27.31 | |
Vested | (543) | | | 21.26 | |
Unvested at December 31, 2021 | 1,023 | | | $ | 27.53 | |
As of December 2021, unrecognized compensation expense for these restricted stock units and awards was approximately $12 million, which will be expensed over a weighted-average remaining period of two years.
Stock Awards for Directors
CSX’s non-management directors receive a base annual retainer of $122,500 to be paid quarterly in cash, unless the director chooses to defer the retainer in the form of cash or CSX common stock. Additionally, non-management directors receive an annual grant of common stock in the amount of approximately $172,500, with the number of shares to be granted based on the average closing price of CSX stock in the months of November, December and January. The independent non-executive Chairman also receives an annual grant of common stock in the amount of approximately $250,000, with the number of shares to be granted based on the average closing price of CSX stock in the months of November, December, and January. These awards are evaluated periodically by the Board of Directors.
Employee Stock Purchase Plan
In May 2018, shareholders approved the 2018 CSX Employee Stock Purchase Plan (“ESPP”) for the benefit of Company employees. The Company registered 12 million (split-adjusted) shares of common stock that may be issued pursuant to this plan. Under the ESPP, employees may contribute between 1% and 10% of base compensation, after-tax, to purchase up to $25,000 of market value CSX common stock per year at 85% of the closing market price on either the grant date or the last day of the six-month offering period, whichever is lower. During 2021, 2020 and 2019, the Company issued the following shares under this program.
| | | | | | | | | | | | | | | | | |
| Fiscal Years |
| 2021 | | 2020 | | 2019 |
Shares issued (in thousands) | 730 | | | 726 | | | 747 | |
Weighted average purchase price per share | $ | 21.90 | | | $ | 20.13 | | | $ | 17.57 | |
CSX CORPORATION
PART II
Item 8. Financial Statements and Supplementary Data
NOTE 5. Casualty, Environmental and Other Reserves
Activity related to casualty, environmental and other reserves is as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Casualty | | Environmental | | Other | | |
(Dollars in Millions) | Reserves | | Reserves | | Reserves | | Total |
December 31, 2018 | $ | 199 | | | $ | 80 | | | $ | 45 | | | $ | 324 | |
Charged to Expense | 56 | | | 17 | | | 34 | | | 107 | |
| | | | | | | |
Payments | (68) | | | (23) | | | (35) | | | (126) | |
December 31, 2019 | 187 | | | 74 | | | 44 | | | 305 | |
Charged to Expense | 55 | | | 20 | | | 32 | | | 107 | |
| | | | | | | |
Payments | (46) | | | (18) | | | (34) | | | (98) | |
December 31, 2020 | 196 | | | 76 | | | 42 | | | 314 | |
Assumed in Acquisition of Quality Carriers | — | | | 29 | | | 33 | | | 62 | |
Charged to Expense | 55 | | | 26 | | | 49 | | | 130 | |
| | | | | | | |
Payments | (71) | | | (23) | | | (44) | | | (138) | |
December 31, 2021 | $ | 180 | | | $ | 108 | | | $ | 80 | | | $ | 368 | |
Personal injury and environmental reserves are considered critical accounting estimates due to the need for management judgment. In the table above, the impacts of changes in estimates are included in the charged to expense amount and were not material in 2021, 2020, or 2019. Casualty, environmental and other reserves are provided for in the consolidated balance sheets as shown in the table below.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 2021 | | December 2020 |
(Dollars in Millions) | Current | | Long-term | | Total | | Current | | Long-term | | Total |
Casualty: | | | | | | | | | | | |
Personal Injury | $ | 37 | | | $ | 81 | | | $ | 118 | | | $ | 38 | | | $ | 93 | | | $ | 131 | |
Occupational | 7 | | | 55 | | | 62 | | | 11 | | | 54 | | | 65 | |
Total Casualty | $ | 44 | | | $ | 136 | | | $ | 180 | | | $ | 49 | | | $ | 147 | | | $ | 196 | |
Environmental | 37 | | | 71 | | | 108 | | | 23 | | | 53 | | | 76 | |
Other | 37 | | | 43 | | | 80 | | | 18 | | | 24 | | | 42 | |
Total | $ | 118 | | | $ | 250 | | | $ | 368 | | | $ | 90 | | | $ | 224 | | | $ | 314 | |
CSX CORPORATION
PART II
Item 8. Financial Statements and Supplementary Data
NOTE 5. Casualty, Environmental and Other Reserves, continued
These liabilities are accrued when probable and reasonably estimable in accordance with the Contingencies Topic in the ASC. Actual settlements and claims received could differ and final outcomes of these matters cannot be predicted with certainty. Considering the legal defenses currently available, the liabilities that have been recorded and other factors, it is the opinion of management that none of these items individually, when finally resolved, will have a material adverse effect on the Company's financial condition, results of operations or liquidity. Should a number of these items occur in the same period, however, their combined effect could be material in that particular period.
Casualty
Casualty reserves of $180 million and $196 million for 2021 and 2020, respectively, represent accruals for personal injury, occupational disease and occupational injury claims primarily related to railroad operations. Beginning June 1, 2021, the Company's self-insured retention amount for these claims increased from $75 million to $100 million per occurrence. Currently, no individual claim is expected to exceed the self-insured retention amount. Most of the Company's casualty claims relate to CSXT. In accordance with the Contingencies Topic in the ASC, to the extent the value of an individual claim exceeds the self-insured retention amount, the Company would present the liability on a gross basis with a corresponding receivable for insurance recoveries.
These reserves fluctuate based upon the timing of payments as well as changes in estimate. Actual results may vary from estimates due to the number, type and severity of the injury, costs of medical treatments and uncertainties in litigation. 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. Changes in casualty reserves are included in purchased services and other on the consolidated income statements.
Personal Injury
Personal injury reserves represent liabilities for employee work-related and third-party injuries. Work-related injuries for CSXT employees are primarily subject to the Federal Employers' Liability Act ("FELA"). CSXT retains an independent actuary to assist management in assessing the value of personal injury claims. An analysis is performed by the actuary quarterly and is reviewed by management. The methodology used by the actuary includes a development factor to reflect growth or reduction in the value of these personal injury claims based largely on CSXT's historical claims and settlement experience. These analyses did not result in a material adjustment to the personal injury reserve in 2021, 2020 or 2019.
CSX CORPORATION
PART II
Item 8. Financial Statements and Supplementary Data
NOTE 5. Casualty, Environmental and Other Reserves, continued
Occupational
Occupational reserves represent liabilities arising from allegations of exposure to certain materials in the workplace (such as solvents, soaps, chemicals and diesel fumes), past exposure to asbestos or allegations of chronic physical injuries resulting from work conditions (such as repetitive stress injuries). Beginning in second quarter 2020, the Company retains an independent actuary to analyze the Company’s historical claims, settlement amounts, and dismissal rates to assist in determining future anticipated claim filing rates and average settlement values. This analysis is performed by the actuary and reviewed by management quarterly. Previously, the quarterly analysis was performed by management. There were no material adjustments to the occupational reserve in 2021, 2020 or 2019.
Environmental
Environmental reserves were $108 million and $76 million for 2021 and 2020, respectively. Environmental reserves as of December 31, 2021, include liabilities assumed as a result of the Company's acquisition of Quality Carriers. 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 220 environmentally impaired sites. Many of these are, or may be, subject to remedial action under the federal Comprehensive Environmental Response, Compensation and Liability Act of 1980 ("CERCLA"), also known as the Superfund Law, or similar state statutes. Most of these proceedings arose from environmental conditions on properties used for ongoing or discontinued railroad operations. A number of these proceedings, however, are based on allegations that the Company, or its predecessors, sent hazardous substances to facilities owned or operated by others for treatment, recycling or disposal. In addition, some of the Company’s land holdings were leased to others for commercial or industrial uses that may have resulted in releases of hazardous substances or other regulated materials onto the property and could give rise to proceedings against the Company.
In any such proceedings, the Company is subject to environmental clean-up and enforcement actions under the Superfund Law, as well as similar state laws that may impose joint and several liability for clean-up and enforcement costs on current and former owners and operators of a site without regard to fault or the legality of the original conduct. These costs could be substantial.
CSX CORPORATION
PART II
Item 8. Financial Statements and Supplementary Data
NOTE 5. 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 management's review process, amounts have been recorded to cover contingent anticipated future environmental remediation costs with respect to each site to the extent such costs are reasonably estimable and probable. The recorded liabilities for estimated future environmental costs are undiscounted. The liability includes future costs for remediation and restoration of sites as well as any significant ongoing monitoring costs, but excludes any anticipated insurance recoveries. Payments related to these liabilities are expected to be made over the next several years. Environmental remediation costs are included in purchased services and other on the consolidated income statements.
Currently, the Company does not possess sufficient information to reasonably estimate the amounts of additional liabilities, if any, on some sites until completion of future environmental studies. In addition, conditions that are currently unknown could, at any given location, result in additional exposure, the amount and materiality of which cannot presently be reasonably estimated. Based upon information currently available, however, the Company believes its environmental reserves accurately reflect the estimated cost of remedial actions currently required.
Other
Other reserves were $80 million and $42 million for 2021 and 2020, respectively. These reserves as of December 31, 2021, include liabilities assumed as a result of the Company's acquisition of Quality Carriers. Other reserves include liabilities for various claims, such as automobile, property, general liability and workers' compensation. Also included in other reserves are longshoremen disability claims related to a previously owned international shipping business (these claims are in runoff) as well as claims for current port employees.
CSX CORPORATION
PART II
Item 8. Financial Statements and Supplementary Data
NOTE 6. Properties
Details of the Company’s net properties are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in Millions) | | | | Accumulated | | Net Book | | Annual Depreciation | | Estimated Useful Life | | Depreciation |
December 2021 | | Cost | | Depreciation | | Value | | Rate | | ( Avg. Years) | | Method |
Road | | | | | | | | | | | | | | |
| | Rail and Other Track Material | | $ | 8,761 | | | $ | (1,835) | | | $ | 6,926 | | | 2.5% | | 41 | | Group Life |
| | Ties | | 6,522 | | | (1,923) | | | 4,599 | | | 3.5% | | 28 | | Group Life |
| | Grading | | 2,751 | | | (624) | | | 2,127 | | | 1.3% | | 75 | | Group Life |
| | Ballast | | 3,289 | | | (1,094) | | | 2,195 | | | 2.6% | | 38 | | Group Life |
| | Bridges, Trestles, and Culverts | | 2,794 | | | (411) | | | 2,383 | | | 1.7% | | 60 | | Group Life |
| | Signals and Interlockers | | 3,266 | | | (1,086) | | | 2,180 | | | 4.1% | | 24 | | Group Life |
| | Buildings | | 1,388 | | | (514) | | | 874 | | | 2.5% | | 40 | | Group Life/ Straight Line (a) |
| | Other | | 5,305 | | | (2,207) | | | 3,098 | | | 4.1% | | 25 | | Group Life/ Straight Line (a) |
Total Road | | 34,076 | | | (9,694) | | | 24,382 | | | | | | | |
Equipment | | | | | | | | | | | | |
| | Locomotive | | 4,912 | | | (1,732) | | | 3,180 | | | 3.6% | | 27 | | Group Life |
| | Freight Cars | | 2,322 | | | (358) | | | 1,964 | | | 2.9% | | 35 | | Group Life |
| | Work Equipment and Other | | 2,891 | | | (1,706) | | | 1,185 | | | 8.2% | | 12 | | Group Life/ Straight Line (a) |
Total Equipment | | 10,125 | | | (3,796) | | | 6,329 | | | | | | | |
Land | | | | 1,885 | | | — | | | 1,885 | | | N/A | | N/A | | N/A |
Construction In Progress | | 419 | | | — | | | 419 | | | N/A | | N/A | | N/A |
| | | | | | | | | | | | | | |
Total Properties | | $ | 46,505 | | | $ | (13,490) | | | $ | 33,015 | | | | | | | |
(a) For depreciation method, certain asset categories contain intermodal terminals, trucking or technology-related assets, which are depreciated using the straight-line method.
CSX CORPORATION
PART II
Item 8. Financial Statements and Supplementary Data
NOTE 6. Properties, continued
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in Millions) | | | | Accumulated | | Net Book | | Annual Depreciation | | Estimated Useful Life | | Depreciation |
December 2020 | | Cost | | Depreciation | | Value | | Rate | | (Avg. Years) | | Method |
Road | | | | | | | | | | | | | | |
| | Rail and Other Track Material | | $ | 8,449 | | | $ | (1,739) | | | $ | 6,710 | | | 2.5% | | 41 | | Group Life |
| | Ties | | 6,284 | | | (1,780) | | | 4,504 | | | 3.5% | | 28 | | Group Life |
| | Grading | | 2,768 | | | (614) | | | 2,154 | | | 1.3% | | 75 | | Group Life |
| | Ballast | | 3,238 | | | (1,051) | | | 2,187 | | | 2.6% | | 38 | | Group Life |
| | Bridges, Trestles, and Culverts | | 2,688 | | | (380) | | | 2,308 | | | 1.7% | | 60 | | Group Life |
| | Signals and Interlockers | | 3,170 | | | (944) | | | 2,226 | | | 4.1% | | 24 | | Group Life |
| | Buildings | | 1,366 | | | (529) | | | 837 | | | 2.5% | | 40 | | Group Life/ Straight Line (a) |
| | Other | | 5,146 | | | (2,101) | | | 3,045 | | | 4.1% | | 25 | | Group Life/ Straight Line (a) |
Total Road | | 33,109 | | | (9,138) | | | 23,971 | | | | | | | |
Equipment | | | | | | | | | | | | |
| | Locomotive | | 5,085 | | | (1,849) | | | 3,236 | | | 3.6% | | 27 | | Group Life |
| | Freight Cars | | 2,557 | | | (540) | | | 2,017 | | | 2.9% | | 35 | | Group Life |
| | Work Equipment and Other | | 2,585 | | | (1,559) | | | 1,026 | | | 8.2% | | 12 | | Group Life/ Straight Line (a) |
Total Equipment | | 10,227 | | | (3,948) | | | 6,279 | | | | | | | |
Land | | | | 1,823 | | | — | | | 1,823 | | | N/A | | N/A | | N/A |
Construction In Progress | | 371 | | | — | | | 371 | | | N/A | | N/A | | N/A |
| | | | | | | | | | | | | | |
Total Properties | | $ | 45,530 | | | $ | (13,086) | | | $ | 32,444 | | | | | | | |
(a) For depreciation method, certain asset categories contain intermodal terminals or technology-related assets, which are depreciated using the straight-line method.
CSX CORPORATION
PART II
Item 8. Financial Statements and Supplementary Data
NOTE 6. Properties, continued
Capital Expenditures
The Company’s capital investment includes purchased and self-constructed assets and property additions that substantially extend the service life or increase the utility of those assets. Indirect costs that can be specifically traced to capital projects are also capitalized. The Company is committed to maintaining and improving its existing infrastructure and expanding its network capacity for long-term growth. Rail operations are capital intensive and CSX accounts for these costs in accordance with GAAP and the Company’s capitalization policy. All properties are stated at historical cost less an allowance for accumulated depreciation.
The Company’s largest category of capital investment is the replacement of track assets and the acquisition or construction of new assets that enable CSX to enhance its operations or provide new capacity offerings to its customers. These construction projects are primarily completed by CSXT employees. Costs for track asset replacement and capacity projects that are capitalized include:
•labor costs, because many of the assets are self-constructed;
•costs to purchase or construct new track or to prepare ground for the laying of track;
•welding (rail, field and plant), which are processes used to connect segments of rail;
•new ballast, which is gravel and crushed stone that holds track in line;
•fuels and lubricants associated with tie, rail and surfacing work, which is the process of raising track to a designated elevation over an extended distance;
•cross, switch and bridge ties, which are the braces that support the rails on a track;
•gauging, which is the process of standardizing the distance between rails;
•handling costs associated with installing rail, ties or ballast;
•usage charge of machinery and equipment utilized in construction or installation; and
•other track materials.
Labor is a significant cost in self-constructed track replacement work. CSXT engineering employees directly charge their labor to the track replacement project (the capitalized depreciable property). In replacing track, these employees concurrently perform deconstruction and installation of track material. Because of this concurrent process, CSX must estimate the amount of labor that is related to deconstruction versus installation. As a component of the depreciation study for road and track assets, management performs an analysis of labor costs related to the self-constructed track replacement work, which includes direct observation of track replacement processes. Through this analysis, CSX determined that approximately 20% of labor costs associated with track replacement is related to the deconstruction of old track, for which certain elements are expensed, and 80% is associated with the installation of new track, which is capitalized.
Capital investment related to locomotives and freight cars comprises the second largest category of the Company’s capital assets. This category includes purchases of locomotives and freight cars as well as certain equipment leases that are considered to be finance leases in accordance with the Leases Topic in the ASC. In addition, costs to modify or rebuild these assets are capitalized if the investment incurred extends the asset’s service life or improves utilization. Improvement projects must meet specified dollar thresholds to be capitalized and are reviewed by management to determine proper accounting treatment. Routine repairs, overhauls and other maintenance costs, for all asset categories, are expensed as incurred.
CSX CORPORATION
PART II
Item 8. Financial Statements and Supplementary Data
NOTE 6. Properties, continued
Depreciation Method
The depreciable assets of the Company are depreciated using either the group-life or straight-line method of accounting, which are both acceptable depreciation methods in accordance with GAAP. The Company depreciates its railroad assets, including main-line track, locomotives and freight cars, using the group-life method. Assets depreciated under the group-life method comprise 86% of total fixed assets of $46.5 billion on a gross basis as of December 2021. The remaining depreciable assets of the Company, including non-railroad assets and assets under finance leases, are depreciated using the straight-line method on a per asset basis. Land is not depreciated.
The group-life method aggregates assets with similar lives and characteristics into groups and depreciates each of these groups as a whole. When using the group-life method, an underlying assumption is that each group of assets, as a whole, is used and depreciated to the end of its group’s recoverable life. The Company currently utilizes different depreciable asset categories to account for depreciation expense for the railroad assets that are depreciated under the group-life method. By utilizing various depreciable categories, the Company can more accurately account for the use of its assets. All assets of the Company are depreciated on a time or life basis.
The group-life method of depreciation closely approximates the straight-line method of depreciation. Additionally, due to the nature of most of its assets (e.g. track is one contiguous, connected asset), the Company believes that this is the most accurate and effective way to properly depreciate its assets.
Estimated Useful Life
Management performs a review of depreciation expense and useful lives on a regular basis. Under the group-life method, the service lives and salvage values for each group of assets are determined by completing periodic depreciation studies and applying management’s methods to determine the service lives of its properties. A depreciation study is the periodic review of asset service lives, salvage values, accumulated depreciation, and other related factors for group assets conducted by a third-party specialist, analyzed by the Company’s management and approved by the STB, the regulatory board that has broad jurisdiction over railroad practices. The STB requires depreciation studies be performed every three years for equipment assets (e.g., locomotives and freight cars) and every six years for road and track assets (e.g., bridges, signals, rail, ties, and ballast). The Company believes the frequency of depreciation studies currently required by the STB, complemented by annual data reviews conducted by a third-party specialist and analyzed by the Company's management, provides adequate review of asset service lives and that a more frequent review would not result in a material change due to the long-lived nature of most of the assets.
The Company completed a depreciation study for its road and track assets in 2020 and for equipment assets in 2019, both of which resulted in changes to accumulated depreciation, service lives, salvage values, and other related factors for certain assets. Recent experience with depreciation studies has resulted in changes to accumulated depreciation and depreciation rates that did not materially affect the Company's depreciation expense of $1.4 billion, $1.4 billion and $1.3 billion for 2021, 2020 and 2019, respectively.
CSX CORPORATION
PART II
Item 8. Financial Statements and Supplementary Data
NOTE 6. Properties, continued
Group-Life Assets Sales and Retirements
Since the rail network is one contiguous, connected network it is impractical to maintain specific identification records for these assets. For track assets (e.g., rail, ties, and ballast), CSX utilizes a first-in, first-out approach to asset retirements. Equipment assets (e.g., locomotives and freight cars) are specifically identified at retirement. When an equipment asset is retired that has been depreciated using the group-life method, the cost is reduced from the cost base and recorded in accumulated depreciation.
For sales or retirements of assets depreciated under the group-life method 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 immediately recognized. This practice is consistent with accounting treatment prescribed under the group-life method. As part of the depreciation study, an assessment of the recorded amount of accumulated depreciation is made to determine if it is deficient (or in excess) of the appropriate amount indicated by the study. Any such deficiency (or excess), including any deferred gains or losses, is amortized as a component of depreciation expense over the remaining service life of the asset group until the next required depreciation study. Since the overall assumption with the group-life method is that the assets within the group on average have the same service life and characteristics, it is therefore concluded that the deferred gains and losses offset over time.
For sales or retirements of assets depreciated under the group-life method that do not occur in the ordinary course of business, a gain or loss may be recognized if the sale or retirement meets each of the following three criteria: (i) it is unusual, (ii) it is material in amount, and (iii) it varies significantly from the retirement profile identified through our depreciation studies. No material gains or losses were recognized on the sale of assets depreciated using the group-life method in 2021, 2020 or 2019, as no sales met the criteria described above.
Land and Straight-line Assets Sales and Retirements
When the Company sells or retires land, land-related easements or assets depreciated under the straight-line method, a gain or loss is recognized in purchased services and other on the consolidated statements of income. Primarily as a result of its initiative to monetize non-core properties, the Company recognized gains on the sale of properties of $454 million, $35 million and $151 million in 2021, 2020 and 2019, respectively.
Sale of Property Rights to the Commonwealth of Virginia
On March 26, 2021, the Company entered into a comprehensive agreement to sell certain property rights in three CSX-owned line segments to the Commonwealth of Virginia (“Commonwealth”) over three phases for a total of $525 million. The timing and amount of gains recognized are based on the allocation of fair value to each conveyance, the timing of future conveyances and collectability. In April 2021, upon closing of the first phase of the agreement, the Company collected $200 million in proceeds and recognized a $349 million gain. In fourth quarter 2021, the Company collected additional proceeds of $200 million, a portion of which was attributable to the first phase with the remaining attributable to the second phase. There was no gain recognized in fourth quarter 2021 related to this agreement. As the second phase closed on January 10, 2022, the resulting $20 million gain will be recognized in first quarter 2022.
The Company anticipates closing on the remaining conveyances by the end of 2022, which will result in future cash proceeds and gains. As of December 31, 2021, the carrying values of the remaining assets subject to this transaction were not material.
CSX CORPORATION
PART II
Item 8. Financial Statements and Supplementary Data
NOTE 6. Properties, continued
Impairment Review
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 the Property, Plant, and Equipment Topic in the ASC. Where impairment is indicated, the assets are evaluated and their carrying amount is reduced to fair value based on discounted net cash flows or other estimates of fair value. Impairment expense of $2 million in 2021 and $8 million in 2020 was primarily due to the discontinuation of certain in-progress projects. In 2019, impairment expense of $22 million was related to an intermodal terminal sale agreement. Impairment expense is recorded in purchased services and other expense on the consolidated income statement.
NOTE 7. Leases
At inception, the Company determines if an arrangement contains a lease and whether that lease meets the classification criteria of a finance or operating lease. Some of the Company’s lease arrangements contain lease components (e.g., minimum rent payments) and non-lease components (e.g., maintenance, labor charges, etc.). The Company generally accounts for each component separately based on the estimated standalone price of each component. For certain equipment leases, such as freight car, vehicles and work equipment, the Company accounts for the lease and non-lease components as a single lease component.
Certain of the Company’s lease agreements include rental payments that are adjusted periodically for an index or rate. The leases are initially measured using the projected payments adjusted for the index or rate in effect at the commencement date. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.
Operating Leases
Operating leases are included in right-of-use lease assets, other current liabilities and long-term lease liabilities on the consolidated balance sheets. These assets and liabilities are recognized at the commencement date based on the present value of remaining lease payments over the lease term using the Company’s secured incremental borrowing rates or implicit rates, when readily determinable. Short-term operating leases, which have an initial term of 12 months or less, are not recorded on the balance sheet.
The Company has various lease agreements with other parties with terms up to 50 years. Non-cancelable, long-term leases may include provisions for maintenance, options to purchase and options to extend the terms. These options are included in the lease term when it is reasonably certain that the option will be exercised. Lease expense for operating leases, including leases with escalations over their terms, is recognized on a straight-line basis over the lease term. Variable lease expense is recognized in the period in which the obligation for those payments is incurred. Lease expense is included in equipment and other rents on the consolidated income statements and is reported net of lease income. Lease income was not material to the results of operations for 2021, 2020 or 2019.
CSX CORPORATION
PART II
Item 8. Financial Statements and Supplementary Data
NOTE 7. Leases, continued
CSX has a significant operating lease with the State of Georgia for approximately 137 miles of right-of-way with integral equipment for a term of 50 years with an annual 2.5% increase. The following table presents information about the amount, timing and uncertainty of cash flows arising from all of the Company’s operating leases as of December 31, 2021.
| | | | | |
(Dollars in Millions) | December 2021 |
Maturity of Lease Liabilities | Lease Payments |
2022 | $ | 66 | |
2023 | 55 | |
2024 | 45 | |
2025 | 40 | |
2026 | 31 | |
Thereafter | 1,153 | |
Total undiscounted operating lease payments | $ | 1,390 | |
Less: Imputed interest | (848) | |
Present value of operating lease liabilities | $ | 542 | |
| |
| | | | | | | | |
(Dollars in Millions) | 2021 | 2020 |
Balance Sheet Classification | | |
Right of use asset | $ | 501 | | $ | 472 | |
| | |
Current lease liabilities (included in other current liabilities) | $ | 64 | | $ | 45 | |
Long-term lease liabilities | 478 | | 455 | |
Total operating lease liabilities | $ | 542 | | $ | 500 | |
| | |
Other Information | | |
Weighted-average remaining lease term for operating leases | 32 years | 35 years |
Weighted-average discount rate for operating leases | 4.9 | % | 5.0 | % |
Cash Flows
As of December 2021 and 2020, the Company's right-of-use asset was valued at $501 million and $472 million, respectively. In 2021, right-of-use assets of $88 million were recognized as non-cash asset additions that resulted from the inclusion of Quality Carriers’ leases and new operating lease liabilities. In 2020, right-of-use assets of $11 million were recognized as non-cash asset additions due to new operating lease liabilities. Cash paid for amounts included in the present value of operating lease liabilities was $60 million and $59 million during the years ended 2021 and 2020, respectively, and is included in operating cash flows.
CSX CORPORATION
PART II
Item 8. Financial Statements and Supplementary Data
NOTE 7. Leases, continued
Operating Lease Costs
These costs are primarily related to long-term operating leases, but also include immaterial amounts for variable leases and short-term leases with terms greater than 30 days. These amounts are shown in the table below.
| | | | | | | | | | | | | | | | | |
| Fiscal Years |
(Dollars in Millions) | 2021 | | 2020 | | 2019 |
Rent Expense on Operating Leases | $ | 89 | | | $ | 82 | | | $ | 84 | |
Finance Leases
Finance leases are included in properties - net and long-term debt on the consolidated balance sheets and were not material as of December 2021 or December 2020. The associated amortization expense and interest expense are included in depreciation and interest expense, respectively, on the consolidated income statements and were not material to the results of operations for 2021, 2020 or 2019.
NOTE 8. Commitments and Contingencies
Purchase Commitments
CSXT's long-term locomotive maintenance program agreement with a third party contains commitments related to specific locomotive rebuilds and a long-term maintenance program that covers a portion of CSXT’s fleet of locomotives. The maintenance program costs are based on the maintenance cycle for each covered locomotive, which is determined by the asset's age and type. Expected future costs may change as required maintenance schedules are revised and locomotives are placed into or removed from service. Under CSXT’s current obligations, the agreement will expire no earlier than 2035.
The following table summarizes the number of locomotives covered and CSXT’s payments under the long-term maintenance program.
| | | | | | | | | | | | | | | | | |
| Fiscal Years |
(Dollars in Millions) | 2021 | | 2020 | | 2019 |
Amounts Paid | $ | 99 | | | $ | 158 | | | $ | 139 | |
Number of Locomotives | 1,863 | | | 1,874 | | | 1,897 | |
CSX CORPORATION
PART II
Item 8. Financial Statements and Supplementary Data
NOTE 8. Commitments and Contingencies, continued
The total of annual payments under the agreement, including those related to locomotive rebuilds and the long-term locomotive maintenance program, are estimated in the table below.
Additionally, the Company has various other commitments to purchase technology, communications, track maintenance services and materials, and other services from various suppliers. Total annual payments under all of these purchase commitments are also estimated in the table below.
| | | | | | | | | | | | | | | | | |
(Dollars in Millions) | Locomotive Maintenance & Rebuild Payments | | Other Commitments | | Total |
2022 | $ | 205 | | | $ | 45 | | | $ | 250 | |
2023 | 231 | | | 35 | | | 266 | |
2024 | 273 | | | 31 | | | 304 | |
2025 | 288 | | | 30 | | | 318 | |
2026 | 218 | | | 13 | | | 231 | |
Thereafter | 1,643 | | | 81 | | | 1,724 | |
Total | $ | 2,858 | | | $ | 235 | | | $ | 3,093 | |
Insurance
The Company maintains insurance programs with substantial limits for property damage, including resulting business interruption, and third-party liability. A certain amount of risk is retained by the Company on each insurance program. Under its property insurance program, the Company retains all risk up to $100 million per occurrence for losses from floods and named windstorms and up to $75 million per occurrence for other property losses. For third-party liability claims, the Company retains all risk up to $100 million per occurrence. As CSX negotiates insurance coverage above its full self-retention amounts, it retains a percentage of risk at various layers of coverage. While the Company believes its insurance coverage is adequate, future claims could exceed existing insurance coverage or insurance may not continue to be available at commercially reasonable rates.
Legal
The Company is involved in litigation incidental to its business and is a party to a number of legal actions and claims, various governmental proceedings and private civil lawsuits, including, but not limited to, those related to fuel surcharge practices, tax matters, environmental and hazardous material exposure matters, FELA and labor claims by current or former employees, other personal injury or property claims and disputes and complaints involving certain transportation rates and charges. Some of the legal proceedings include claims for compensatory as well as punitive damages and others are, or are purported to be, class actions. While the final outcome of these matters cannot be predicted with certainty, considering, among other things, the legal defenses available and liabilities that have been recorded along with applicable insurance, it is currently the opinion of management that none of these pending items 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.
CSX CORPORATION
PART II
Item 8. Financial Statements and Supplementary Data
NOTE 8. Commitments and Contingencies, continued
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 $2 million to $25 million in aggregate as of December 31, 2021. This estimated aggregate range is based upon currently available information and is subject to significant judgment and a variety of assumptions. Accordingly, the Company's estimate will change from time to time, and actual losses may vary significantly from the current estimate.
Fuel Surcharge Antitrust Litigation
In May 2007, class action lawsuits were filed against CSXT and three other U.S.-based Class I railroads alleging that the defendants' fuel surcharge practices relating to contract and unregulated traffic resulted from an illegal conspiracy in violation of antitrust laws. The class action lawsuits were consolidated into one case in federal court in the District of Columbia. In 2017, the District Court issued its decision denying class certification. On August 16, 2019, the U.S. Court of Appeals for the D.C. Circuit affirmed the District Court’s ruling.
The consolidated case is now moving forward without class certification. Although a class was not certified, shippers other than those who brought the original lawsuit in 2007 must decide whether to bring their own individual claim against one or more railroads. Individual shipper claims filed to date have been consolidated into a separate case.
CSXT believes that its fuel surcharge practices were arrived at and applied lawfully and that the case is without merit. Accordingly, the Company intends to defend itself vigorously. However, penalties for violating antitrust laws can be severe, and resolution of these matters individually or when aggregated could have a material adverse effect on the Company's financial condition, results of operations or liquidity in that particular period.
CSX CORPORATION
PART II
Item 8. Financial Statements and Supplementary Data
NOTE 8. Commitments and Contingencies, continued
Environmental
CSXT is indemnifying Pharmacia LLC, formerly known as Monsanto Company, ("Pharmacia") for certain liabilities associated with real estate located in Kearny, New Jersey along the Lower Passaic River (the “Property”). The Property, which was formerly owned by Pharmacia, is now owned by CSXT. CSXT's indemnification and defense duties arise with respect to several matters. The U.S. Environmental Protection Agency ("EPA"), using its CERCLA authority, seeks the investigation and cleanup of hazardous substances in the 17-mile Lower Passaic River Study Area (the "Study Area”). CSXT, on behalf of Pharmacia, and a significant number of other potentially responsible parties are together conducting a Remedial Investigation and Feasibility Study of the Study Area pursuant to an Administrative Settlement Agreement and Order on Consent with the EPA. Pharmacia’s share of responsibility, indemnified by CSXT, for the investigation and cleanup costs of the Study Area may be determined through various mechanisms including (a) an allocation and settlement with EPA; (b) litigation brought by EPA against non-settling parties; or (c) litigation among the responsible parties.
In March 2016, EPA issued its Record of Decision detailing the agency’s mandated remedial process for the lower 8 miles of the Study Area. Approximately 80 parties, including Pharmacia, are participating in an EPA-directed allocation and settlement process to assign responsibility for the remedy selected for the lower 8 miles of the Study Area. CSXT is participating in the EPA-directed allocation and settlement process on behalf of Pharmacia. EPA has also selected an interim remedy for the remainder of the Study Area in a Record of Decision dated September 28, 2021. Settlement discussions are also ongoing for the selected interim remedy.
CSXT is also defending and indemnifying Pharmacia with regard to the Property in litigation filed by Occidental Chemical Corporation, which is seeking to recover various costs. These costs include costs for the remedial design of the lower 8 miles of the Study Area, as well as anticipated costs associated with the future remediation of the lower 8 miles of the Study Area and potentially the entire Study Area. Alternatively, Occidental seeks to compel some, or all of the defendants to participate in the remediation of the Study Area. Pharmacia is one of approximately 110 defendants in this federal lawsuit filed by Occidental on June 30, 2018.
CSXT is also defending and indemnifying Pharmacia in a cooperative natural resource damages assessment process related to the Property. Based on currently available information, the Company does not believe any indemnification or remediation costs potentially allocable to CSXT with respect to the Property and the Study Area would be material to the Company's financial condition, results of operations or liquidity.
CSX CORPORATION
PART II
Item 8. Financial Statements and Supplementary Data
NOTE 9. Employee Benefit Plans
The Company sponsors defined benefit pension plans principally for salaried, management personnel. For employees hired prior to 2003, the plans provide eligible employees with retirement benefits based predominantly on years of service and compensation rates near retirement. For employees hired between 2003 and 2019, benefits are determined based on a cash balance formula, which provides benefits by utilizing interest and pay credits based upon age, service and compensation. Beginning in 2020, the CSX Pension Plan was closed to new participants.
In addition to these plans, the Company sponsors a post-retirement medical plan and a life insurance plan that provide certain benefits to full-time, salaried, management employees hired prior to 2003 upon their retirement if certain eligibility requirements are met. Beginning in 2019, both the life insurance benefit for eligible active management employees and health savings account contributions made by the Company to eligible retirees younger than 65 were eliminated for those retiring on or after January 1, 2019. Beginning in 2020, the employer-funded health reimbursement arrangements and life insurance benefit for eligible retirees 65 years or older were eliminated. These changes did not result in a curtailment loss as there was no material impact to service costs for active plan participants.
The Company engages independent actuaries to compute the amounts of liabilities and expenses relating to these plans subject to the assumptions that the Company determines are appropriate based on historical trends, current market rates and future projections. These amounts are reviewed by management. In order to perform this valuation, the actuaries are provided with the details of the population covered at the beginning of the year, summarized in the table below, and projects that population forward to the end of the year.
| | | | | | | | | | | |
| Summary of Participants as of |
| January 1, 2021 |
| Pension Plans | | Post-retirement Medical Plan |
Active Employees | 3,019 | | | 698 | |
Retirees and Beneficiaries | 11,659 | | | 847 | |
Other(a) | 3,748 | | | — | |
Total | 18,426 | | | 1,545 | |
(a) For pension plans, the other category consists mostly of terminated but vested former employees.
CSX CORPORATION
PART II
Item 8. Financial Statements and Supplementary Data
NOTE 9. 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 qualified pension plan benefits and include amounts contributed by the Company and amounts earned from invested contributions, net of benefits paid. Qualified pension plan obligations are funded in accordance with regulatory requirements and with an objective of meeting or exceeding minimum funding requirements necessary to avoid restrictions on flexibility of plan operation and benefit payments. The Company funds the cost of the post-retirement medical and life insurance benefits as well as nonqualified pension benefits on a pay-as-you-go basis. No qualified pension plan contributions were made during 2021, 2020 and 2019. No contributions to the Company's qualified pension plans are expected in 2022.
Future expected benefit payments are as follows:
| | | | | | | | | | | |
| Expected Cash Flows |
(Dollars in Millions) | Pension Benefits | | Post-retirement Benefits |
2022 | $ | 193 | | | $ | 12 | |
2023 | 187 | | | 9 | |
2024 | 186 | | | 8 | |
2025 | 183 | | | 7 | |
2026 | 181 | | | 7 | |
2027-2031 | 881 | | | 25 | |
Total | $ | 1,811 | | | $ | 68 | |
Plan Assets
During 2020, the Company migrated to an outsourced investment management strategy to manage the pension plan assets. The CSX Investment Committee (the “Investment Committee”), whose members are selected by the Executive Vice President and Chief Financial Officer, is responsible for setting policy and oversight of investment management. The Investment Committee and investment manager utilize an investment asset allocation strategy that is monitored on an ongoing basis and updated periodically in consideration of plan or employee changes, or changing market conditions. Periodic studies provide an extensive modeling of asset investment return in conjunction with projected plan liabilities and seek to evaluate how to maximize return within the constraints of acceptable risk.
CSX CORPORATION
PART II
Item 8. Financial Statements and Supplementary Data
NOTE 9. Employee Benefit Plans, continued
The current asset allocation targets 60% growth-oriented investments and 40% immunizing investments. The growth-oriented portfolio consists of return-seeking investments that are diversified across geography, market capitalization, and asset class. The immunizing portfolio is comprised of a customized mix of fixed income and cash investments designed to reduce liability risk. Allocations are evaluated for levels within 5% of targeted allocations and are adjusted quarterly as necessary.
The distribution of pension plan assets as of the measurement date is shown in the table below, and these assets are reported net of pension liabilities on the balance sheet.
| | | | | | | | | | | | | | | | | | | | | | | |
| December 2021 | | December 2020 |
| | | Percent of | | | | Percent of |
(Dollars in Millions) | Amount | | Total Assets | | Amount | | Total Assets |
Equity | $ | 1,559 | | | 52 | % | | $ | 1,324 | | | 44 | % |
Fixed Income | 204 | | | 7 | | | 271 | | | 9 | |
Cash and Cash Equivalents | 49 | | | 1 | | | 221 | | | 8 | |
Growth-Oriented | $ | 1,812 | | | 60 | % | | $ | 1,816 | | | 61 | % |
Fixed Income | 1,145 | | | 38 | | | 1,018 | | | 34 | |
Cash and Cash Equivalents | 59 | | | 2 | | | 166 | | | 5 | |
Immunizing | $ | 1,204 | | | 40 | % | | $ | 1,184 | | | 39 | % |
Total | $ | 3,016 | | | 100 | % | | $ | 3,000 | | | 100 | % |
Under the supervision of the Investment Committee, the investment manager selects investments or fund managers in accordance with standards of prudence applicable to asset diversification and investment suitability. The Company also selects fund managers with differing investment styles and benchmarks their investment returns against appropriate indices. 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.
Within the Company's equity funds, domestic stock is diversified among large and small capitalization stocks. International stock is diversified in a similar manner as well as in developed versus emerging markets stocks. Guidelines established with individual managers limit investment by industry sectors, individual stock issuer concentration and the use of derivatives and CSX securities.
Fixed income securities guidelines established with individual managers specify the types of allowable investments, such as government, corporate and asset-backed bonds, target certain allocation ranges for domestic and foreign investments and limit the use of certain derivatives. Additionally, guidelines stipulate minimum credit quality constraints and any prohibited securities. For detailed information regarding the fair value of pension assets, see Note 13, Fair Value Measurements.
CSX CORPORATION
PART II
Item 8. Financial Statements and Supplementary Data
NOTE 9. Employee Benefit Plans, continued
Benefit Obligation, Plan Assets and Funded Status
Changes in benefit obligation and the fair value of plan assets for the 2021 and 2020 calendar plan years are as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Pension Benefits | | Post-retirement Benefits |
| Plan Year | | Plan Year | | Plan Year | | Plan Year |
(Dollars in Millions) | 2021 | | 2020 | | 2021 | | 2020 |
Actuarial Present Value of Benefit Obligation | | | | | | | |
Accumulated Benefit Obligation | $ | 2,909 | | | $ | 3,134 | | | N/A | | N/A |
Projected Benefit Obligation | 3,022 | | | 3,257 | | | $ | 81 | | | $ | 96 | |
| | | | | | | |
Change in Projected Benefit Obligation: | | | | | | | |
Projected Benefit Obligation at Beginning of Plan Year | $ | 3,257 | | | $ | 3,122 | | | $ | 96 | | | $ | 117 | |
Service Cost (a) | 45 | | | 46 | | | 1 | | | 1 | |
Interest Cost | 55 | | | 82 | | | 1 | | | 5 | |
Plan Participants' Contributions | — | | | — | | | 4 | | | 6 | |
| | | | | | | |
| | | | | | | |
Actuarial (Gain) Loss | (142) | | | 197 | | | (4) | | | (11) | |
Benefits Paid | (193) | | | (190) | | | (17) | | | (22) | |
Benefit Obligation at End of Plan Year | $ | 3,022 | | | $ | 3,257 | | | $ | 81 | | | $ | 96 | |
| | | | | | | |
Change in Plan Assets: | | | | | | | |
Fair Value of Plan Assets at Beginning of Plan Year | $ | 3,000 | | | $ | 2,825 | | | $ | — | | | $ | — | |
Actual Return on Plan Assets | 187 | | | 345 | | | — | | | — | |
| | | | | | | |
Non-qualified Employer Contributions | 22 | | | 20 | | | 13 | | | 16 | |
Plan Participants' Contributions | — | | | — | | | 4 | | | 6 | |
Benefits Paid | (193) | | | (190) | | | (17) | | | (22) | |
Fair Value of Plan Assets at End of Plan Year | $ | 3,016 | | | $ | 3,000 | | | $ | — | | | $ | — | |
Funded Status at End of Plan Year | $ | (6) | | | $ | (257) | | | $ | (81) | | | $ | (96) | |
(a)Service cost for 2021 and 2020 includes capitalized service costs of $4 million and $3 million, respectively.
The $142 million net actuarial gain for pension benefits in 2021 was driven by a 35 basis points increase in the weighted average discount rate. In 2020, the $197 million net actuarial loss for pension benefits was driven by a 70 basis points decrease in the weighted average discount rate, partially offset by changes to assumptions based on census data.
CSX CORPORATION
PART II
Item 8. Financial Statements and Supplementary Data
NOTE 9. Employee Benefit Plans, continued
For qualified plan funding purposes, assets and discounted liabilities are measured in accordance with the Employee Retirement Income Security Act ("ERISA"), as well as other related provisions of the Internal Revenue Code and related regulations. Under these funding provisions and the alternative measurements available thereunder, the Company estimates its unfunded obligation for qualified plans on an annual basis.
In accordance with Compensation-Retirement Benefits Topic in the ASC, an employer must recognize the funded status of a pension or other post-retirement benefit plan by recording a liability (underfunded plan) or asset (overfunded plan) for the difference between the projected benefit obligation (or the accumulated post-retirement benefit obligation for a post-retirement benefit plan) and the fair value of plan assets at the plan measurement date. Amounts related to pension and post-retirement benefits recorded in other long-term assets, labor and fringe benefits payable and other long-term liabilities on the balance sheet are as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Pension Benefits | | Post-retirement Benefits |
| December | | December | | December | | December |
(Dollars in Millions) | 2021 | | 2020 | | 2021 | | 2020 |
Amounts Recorded in Consolidated | | | | | | | |
Balance Sheets: | | | | | | | |
Long-term Assets (a) | $ | 255 | | | $ | 29 | | | $ | — | | | $ | — | |
Current Liabilities | (17) | | | (16) | | | (12) | | | (17) | |
Long-term Liabilities | (244) | | | (270) | | | (69) | | | (79) | |
Net Amount Recognized in | | | | | | | |
Consolidated Balance Sheets | $ | (6) | | | $ | (257) | | | $ | (81) | | | $ | (96) | |
(a)Long-term assets as of December 2021 and 2020 relate to qualified pension plans where assets exceed projected benefit obligations.
The funded status, or amount by which the benefit obligation exceeds the fair value of plan assets, represents a liability. At December 2021, the status of CSX plans with a net liability only is disclosed below. The total fair value of all plan assets as of December 2021 was $3.0 billion, which includes the qualified pension plans with net assets.
| | | | | | | | |
| Aggregate | |
(Dollars in Millions) | Fair Value | Aggregate |
Benefit Obligations in Excess of Plan Assets | of Plan Assets | Benefit Obligation |
Projected Benefit Obligation | $ | — | | $ | (261) | |
Accumulated Benefit Obligation | — | | (249) | |
CSX CORPORATION
PART II
Item 8. Financial Statements and Supplementary Data
NOTE 9. Employee Benefit Plans, continued
Net Benefit Expense
Only the service cost component of net periodic benefit costs is included in labor and fringe expense on the consolidated income statement. All other components of net periodic benefit cost are included in other income - net. The following table describes the components of expense/(income) related to net benefit expense recorded on the income statement.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Pension Benefits Fiscal Years | | Post-retirement Benefits Fiscal Years |
(Dollars in Millions) | 2021 | | 2020 | | 2019 | | 2021 | | 2020 | | 2019 |
Service Cost Included in Labor and Fringe | $ | 41 | | | $ | 43 | | | $ | 31 | | | $ | 1 | | | $ | 1 | | | $ | 1 | |
| | | | | | | | | | | |
Interest Cost | 55 | | | 82 | | | 103 | | | 1 | | | 5 | | | 2 | |
Expected Return on Plan Assets | (186) | | | (176) | | | (171) | | | — | | | — | | | — | |
Amortization of Net Loss | 73 | | | 54 | | | 30 | | | — | | | 1 | | | — | |
Amortization of Prior Service Cost | — | | | — | | | — | | | (7) | | | (7) | | | (7) | |
Total Income Included in Other Income - Net | $ | (58) | | | $ | (40) | | | $ | (38) | | | $ | (6) | | | $ | (1) | | | $ | (5) | |
Net Periodic Benefit (Credit)/Cost | $ | (17) | | | $ | 3 | | | $ | (7) | | | $ | (5) | | | $ | — | | | $ | (4) | |
| | | | | | | | | | | |
Settlement Gain | — | | | (1) | | | — | | | — | | | — | | | — | |
Total Periodic Benefit (Credit)/Cost | $ | (17) | | | $ | 2 | | | $ | (7) | | | $ | (5) | | | $ | — | | | $ | (4) | |
Pension and Other Post-retirement Benefits Adjustments
The following table shows the pre-tax change in other comprehensive loss (income) attributable to certain components of net benefit expense and the change in benefit obligation for CSX for pension and other post-employment benefits.
| | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in Millions) | Pension Benefits | | Post-retirement Benefits |
Components of Other Comprehensive | December | | December | | December | | December |
Loss (Income) | 2021 | | 2020 | | 2021 | | 2020 |
Recognized in the Balance Sheet | | | | | | | |
(Gains) Losses | $ | (143) | | | $ | 28 | | | $ | (4) | | | $ | (11) | |
Expense (Income) Recognized in the Income Statement | | | | | | | |
Amortization of Net Losses | $ | 73 | | | $ | 54 | | | $ | — | | | $ | 1 | |
Settlement Gain | — | | | (1) | | | — | | | — | |
| | | | | | | |
Amortization of Prior Service Costs | — | | | — | | | (7) | | | (7) | |
As of December 2021, the balances to be amortized related to the Company's pension obligations is a pre-tax loss of $637 million and related to post-retirement obligations is a pre-tax gain of $75 million. These amounts are included in accumulated other comprehensive loss, a component of shareholders’ equity.
CSX CORPORATION
PART II
Item 8. Financial Statements and Supplementary Data
NOTE 9. Employee Benefit Plans, continued
Assumptions
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 as well as the current and projected asset mix of the funds. Management, with the assistance of the outsourced investment manager, balances market expectations obtained from various investment managers with both market and actual plan historical returns to develop a reasonable estimate of the expected long-term rate of return on assets. This assumption is reviewed annually and adjusted as deemed appropriate.
The Company measures the service cost and interest cost components of the net pension and post-retirement benefits expense by using individual spot rates matched with separate cash flows for each future year. The weighted averages of assumptions used by the Company to value its pension and post-retirement obligations were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Pension Benefits | | Post-retirement Benefits |
| 2021 | | 2020 | | 2021 | | 2020 |
Expected Long-term Return on Plan Assets: | | | | | | | |
Benefit Cost for Current Plan Year | 6.75 | % | | 6.75 | % | | N/A | | N/A |
Benefit Cost for Subsequent Plan Year | 6.75 | % | | 6.75 | % | | N/A | | N/A |
| | | | | | | |
Discount Rates: | | | | | | | |
Benefit Cost for Plan Year | | | | | | | |
Service Cost for Plan Year | 2.69 | % | | 3.32 | % | | 1.81 | % | | 2.93 | % |
Interest Cost for Plan Year | 1.70 | % | | 2.69 | % | | 1.27 | % | | 2.43 | % |
Benefit Obligation at End of Plan Year | 2.78 | % | | 2.43 | % | | 2.51 | % | | 2.07 | % |
| | | | | | | |
Salary Scale Inflation | 4.60 | % | | 4.60 | % | | N/A | | N/A |
Cash Balance Plan Interest Credit Rate | 3.75 | % | | 3.75 | % | | N/A | | N/A |
CSX CORPORATION
PART II
Item 8. Financial Statements and Supplementary Data
NOTE 9. Employee Benefit Plans, continued
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 $21 million, $20 million and $26 million in 2021, 2020 and 2019, 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 $29 million, $39 million and $41 million for 2021, 2020 and 2019, respectively, and is included in labor and fringe expense on the consolidated income statement.
Under the terms of collective bargaining agreements that cover union-represented employees, Quality Carriers contributes to three multi-employer pension plans. These plans provide defined benefits to retired participants. All three of these pension plans are in Pension Protection Act zone “red”, meaning they are at least 65% underfunded. Formal rehabilitation plans have been adopted. As of December 31, 2021, based on information provided to the Company from the administrators of these plans, Quality Carriers’ portion of the contingent liability in the case of a full withdrawal or termination from these plans is approximately $334 million, of which $323 million relates to the Central States Southeast and Southwest Areas Pension Plan. The Company does not currently intend to withdraw from any of these multi-employer pension plans. Required monthly contributions to these plans are not material.
CSX CORPORATION
PART II
Item 8. Financial Statements and Supplementary Data
NOTE 10. Debt and Credit Agreements
Debt at December 2021 and December 2020 is shown in the table below. For information regarding the fair value of debt, see Note 13, Fair Value Measurements.
| | | | | | | | | | | | | | |
| Maturity at December | Average Interest Rates at December | December | December |
(Dollars in Millions) | 2021 | 2021 | 2021 | 2020 |
Notes | 2022-2068 | 4.2% | $ | 16,166 | | $ | 16,542 | |
Equipment Obligations(a) | 2022-2024 | 6.2% | 153 | | 160 | |
Finance Leases | 2022-2032 | 6.1% | 47 | | 3 | |
| | | | |
Subtotal Long-term Debt (including current portion) | | | $ | 16,366 | | $ | 16,705 | |
Less Debt Due within One Year | | | (181) | | (401) | |
Long-term Debt (excluding current portion) | | | $ | 16,185 | | $ | 16,304 | |
(a) Equipment obligations are secured by an interest in certain railroad equipment.
Debt Issuance & Early Redemption of Long-term Debt
No debt was issued in 2021. CSX issued the following notes in 2020, which are included in the consolidated balance sheets under long-term debt and may be redeemed by the Company at any time, subject to payment of certain make-whole premiums:
•On December 1, 2020, issued $500 million of 2.50% notes due 2051. On December 30, 2020, the proceeds of the offering were used to fully redeem CSX’s outstanding $500 million of 3.70% notes that otherwise would have matured on November 1, 2023.
•On March 30, 2020, issued $500 million of 3.8% notes due 2050.
The net proceeds from debt issuances will be used for general corporate purposes, which may include debt repayments, repurchases of CSX's common stock, capital investment, working capital requirements, improvements in productivity and other cost reductions. For more information regarding a non-cash debt transaction with a related party, see Note 15, Investment in Affiliates and Related-Party Transactions.
In July 2021, finance lease obligations and debt totaling $68 million were assumed related to the Company's acquisition of Quality Carriers on July 1, 2021. See Note 17, Business Combinations.
CSX CORPORATION
PART II
Item 8. Financial Statements and Supplementary Data
NOTE 10. Debt and Credit Agreements, continued
Long-term Debt Maturities (Net of Discounts, Premiums and Issuance Costs)
| | | | | |
(Dollars in Millions) | Maturities at |
Fiscal Years Ending | December 2021 |
2022 | $ | 181 | |
2023 | 153 | |
2024 | 560 | |
2025 | 605 | |
2026 | 704 | |
Thereafter | 14,163 | |
Total Long-term Debt Maturities, including current portion | $ | 16,366 | |
Interest Rate Derivatives
On both April 29, 2020, and July 9, 2020, the Company executed a forward starting interest rate swap with a notional value of $250 million for an aggregate notional value of $500 million. These swaps were effected to hedge the benchmark interest rate associated with future interest payments related to the anticipated refinancing of $850 million of 3.25% notes due in 2027. In accordance with the Derivatives and Hedging Topic in the ASC, the Company has designated these swaps as cash flow hedges. As of December 31, 2021 and 2020, the asset value of the forward starting interest rate swaps was $91 million and $80 million, respectively, and was recorded in other long-term assets on the consolidated balance sheet.
Unrealized gains or losses associated with changes in the fair value of the hedge are recorded net of tax in accumulated other comprehensive income (“AOCI”) on the consolidated balance sheet. Unless settled early, the swaps will expire in 2027 and the unrealized gain or loss in AOCI will be recognized in earnings as an adjustment to interest expense over the same period during which the hedged transaction affects earnings. Unrealized gains, recorded net of tax in other comprehensive income, related to the hedges were $8 million and $62 million for the years ended December 31, 2021 and 2020, respectively.
Credit Facilities
CSX has a $1.2 billion unsecured, revolving credit facility backed by a diverse syndicate of banks. This facility allows same-day borrowings at floating interest rates, based on LIBOR or an agreed-upon replacement reference rate, plus a spread that depends upon CSX's senior unsecured debt ratings. This facility expires in March 2024, and as of December 31, 2021, the Company had no outstanding balances under this facility.
Commitment fees and interest rates payable under the facility were similar to fees and rates available to comparably rated investment-grade borrowers. As of December 31, 2021, CSX was in compliance with all covenant requirements under the facility.
Commercial Paper
Under its commercial paper program, which is backed by the revolving credit facility, the Company may issue unsecured commercial paper notes up to a maximum aggregate principal amount of $1.0 billion. Proceeds from issuances of the notes are expected to be used for general corporate purposes. At December 31, 2021, the Company had no commercial paper outstanding.
CSX CORPORATION
PART II
Item 8. Financial Statements and Supplementary Data
NOTE 11. Revenues
The Company’s revenues are primarily derived from the transportation of freight as performance obligations that arise from its contracts with customers are satisfied. The following table presents the Company’s revenues disaggregated by market as this best depicts how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors.
| | | | | | | | | | | |
| Fiscal Years |
(Dollars in millions) | 2021 | 2020 | 2019 |
| | | |
Chemicals | $ | 2,421 | | $ | 2,309 | | $ | 2,349 | |
Agricultural and Food Products | 1,461 | | 1,386 | | 1,410 | |
Forest Products(a) | 918 | | 834 | | 870 | |
Automotive | 886 | | 920 | | 1,236 | |
Metals and Equipment | 796 | | 675 | | 742 | |
Minerals | 587 | | 538 | | 559 | |
Fertilizers(a) | 470 | | 414 | | 423 | |
Total Merchandise | 7,539 | | 7,076 | | 7,589 | |
| | | |
| | | |
| | | |
Intermodal | 2,039 | | 1,702 | | 1,760 | |
| | | |
| | | |
| | | |
Coal | 1,790 | | 1,397 | | 2,070 | |
| | | |
Trucking(b) | 410 | | — | | — | |
| | | |
Other | 744 | | 408 | | 518 | |
| | | |
Total | $ | 12,522 | | $ | 10,583 | | $ | 11,937 | |
(a) Effective first quarter 2021, changes were made in the categorization of certain lines of business, impacting Forest Products and Fertilizers. The impacts were not material and prior periods have been reclassified to conform to the current presentation.
(b) Effective third quarter 2021, Trucking revenue is comprised of revenue from the operations of Quality Carriers, which was acquired by CSX effective July 1, 2021.
Revenue Recognition
The Company generates revenue from rail freight billings under contracts with customers generally on a rate per carload, container or ton-basis based on length of haul and commodities carried. The Company’s performance obligation arises when it receives a bill of lading (“BOL”) to transport a customer's commodities at a negotiated price contained in a transportation services agreement or a publicly disclosed tariff rate. Once a BOL is received, a contract is formed whereby the parties are committed to perform, collectability of consideration is probable and the rights of the parties, shipping terms and conditions, and payment terms are identified. A customer may submit several BOLs for transportation services at various times throughout a service agreement term, but each shipment represents a distinct service that is a separately identified performance obligation.
CSX CORPORATION
PART II
Item 8. Financial Statements and Supplementary Data
NOTE 11. Revenues, continued
The average transit time to complete a rail shipment is between 2 to 8 days depending on market. Payments for transportation services are normally billed once a BOL is received and are generally due within 15 days after the invoice date. The Company recognizes revenue over transit time of freight as it moves from origin to destination. Revenue for services started but not completed at the reporting date is allocated based on the relative transit time in each reporting period, with the portion allocated for services subsequent to the reporting date considered remaining performance obligations.
The certain key estimates included in the recognition and measurement of revenue and related accounts receivable are as follows:
•Revenue associated with shipments in transit is recognized ratably over transit time and is based on average cycle times to move commodities and products from their origin to their final destination or interchange;
•Adjustments to revenue for billing corrections and billing discounts;
•Adjustments to revenue for overcharge claims filed by customers, which are based on historical payments to customers for rate overcharges as a percentage of total billing; and
•Incentive-based refunds to customers, which are primarily volume-related, are recorded as a reduction to revenue on the basis of the projected liability (this estimate is based on historical activity, current volume levels and forecasted future volume).
Revenue related to interline transportation services that involve the services of another party, such as another railroad, is reported on a net basis. The portion of the gross amount billed to customers that is remitted by the Company to another party is not reflected as revenue.
Effective third quarter 2021, trucking revenue includes revenue from the operations of Quality Carriers and is mostly comprised of truck shipments of chemicals. A performance obligation arises when Quality Carriers receives a customer order to transport a commodity at a contracted rate. Revenue is recorded on a gross basis ratably over transit time.
Other revenue is recorded upon completion of the service and is comprised of revenue from regional subsidiary railroads and incidental charges, including intermodal storage and equipment usage, demurrage and switching. Revenue from regional subsidiary railroads includes shipments by railroads that the Company does not directly operate. Intermodal storage represents charges for customer storage of containers at an intermodal terminal, ramp facility or offsite location beyond a specified period of time. Demurrage represents charges assessed when freight cars are held by a customer beyond a specified period of time. Switching represents charges assessed when a railroad switches cars for a customer or another railroad.
During 2021, 2020 and 2019, revenue recognized from performance obligations related to prior periods (for example, due to changes in transaction price) was not material.
CSX CORPORATION
PART II
Item 8. Financial Statements and Supplementary Data
NOTE 11. Revenues, continued
Remaining Performance Obligations
Remaining performance obligations represent the transaction price allocated to future reporting periods for freight services started but not completed at the reporting date. This includes the unearned portion of billed and unbilled amounts for cancellable freight shipments in transit. The Company expects to recognize the unearned portion of revenue for freight services in transit within one week of the reporting date. As of December 31, 2021, remaining performance obligations were not material.
Contract Balances and Accounts Receivable
The timing of revenue recognition, billings and cash collections results in accounts receivable and customer advances and deposits (contract liabilities) on the consolidated balance sheets. Contract assets, contract liabilities and deferred contract costs recorded on the consolidated balance sheet as of December 31, 2021 were not material.
The Company’s accounts receivable - net consists of freight and non-freight receivables, reduced by an allowance for credit losses.
| | | | | | | | |
(Dollars in millions) | December 31, 2021 | December 31, 2020 |
| | |
Freight Receivables | $ | 951 | | $ | 716 | |
Freight Allowance for Credit Losses | (14) | | (16) | |
Freight Receivables, net | 937 | | 700 | |
| | |
Non-Freight Receivables | 225 | | 224 | |
Non-Freight Allowance for Credit Losses | (14) | | (12) | |
Non-Freight Receivables, net | 211 | | 212 | |
Total Accounts Receivable, net | $ | 1,148 | | $ | 912 | |
Freight receivables include amounts earned, billed and unbilled, and currently due from customers for transportation-related services. Non-freight receivables include amounts billed and unbilled and currently due related to government reimbursement receivables and other non-revenue receivables. The Company maintains an allowance for credit losses to provide for the estimated amount of receivables that will not be collected. The allowance is based upon an assessment of risk characteristics, historical payment experience, and the age of outstanding receivables adjusted for forward-looking economic conditions as necessary. Credit losses recognized on the Company’s accounts receivable were not material in 2021 and 2020.
CSX CORPORATION
PART II
Item 8. Financial Statements and Supplementary Data
NOTE 12. Income Taxes
Earnings before income taxes of $5.0 billion, $3.6 billion and $4.3 billion for fiscal years 2021, 2020 and 2019, respectively, represent earnings from domestic operations. The breakdown of income tax expense between current and deferred is as follows:
| | | | | | | | | | | | | | | | | |
| Fiscal Years |
(Dollars in Millions) | 2021 | | 2020 | | 2019 |
Current: | | | |
Federal | $ | 827 | | | $ | 559 | | | $ | 608 | |
State | 176 | | | 123 | | | 104 | |
Subtotal Current | $ | 1,003 | | | $ | 682 | | | $ | 712 | |
| | | | | |
Deferred: | | | | | |
Federal | 166 | | | 149 | | | 235 | |
State | 1 | | | 31 | | | 38 | |
Subtotal Deferred | $ | 167 | | | $ | 180 | | | $ | 273 | |
Total Income Tax Expense | $ | 1,170 | | | $ | 862 | | | $ | 985 | |
The Company recorded a 2021 income tax benefit of $48 million primarily as a result of favorable state legislative changes, additional tax benefits associated with the vesting of share-based awards and adjustments to deferred taxes as a result of filing the 2020 state tax returns. In 2020, the Company recorded an income tax benefit of $30 million primarily as a result of the additional tax benefit associated with vesting of share-based awards and the resolution of certain tax matters. The Company recorded a 2019 income tax benefit of $77 million primarily as a result of the additional tax benefit associated with vesting of share-based awards, federal and state legislative changes, and a change in the valuation of deferred taxes as a result of filing the 2018 tax returns.
Income tax expense reconciled to the tax computed at statutory rates is presented in the following table.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fiscal Years |
(Dollars In Millions) | 2021 | | 2020 | | 2019 |
| | | | | |
Federal Income Taxes | $ | 1,040 | | | 21.0 | % | | $ | 762 | | | 21.0 | % | | $ | 906 | | | 21.0 | % |
State Income Taxes | 139 | | | 2.8 | % | | 117 | | | 3.2 | % | | 108 | | | 2.5 | % |
| | | | | | | | | | | |
Other | (9) | | | (0.2) | % | | (17) | | | (0.4) | % | | (29) | | | (0.7) | % |
Income Tax Expense/ Rate | $ | 1,170 | | | 23.6 | % | | $ | 862 | | | 23.8 | % | | $ | 985 | | | 22.8 | % |
CSX CORPORATION
PART II
Item 8. Financial Statements and Supplementary Data
NOTE 12. Income Taxes, continued
The primary factors in the change in year-end net deferred income tax liability balances include the annual provision for deferred income tax expense and accumulated other comprehensive income/loss. The significant components of deferred income tax assets and liabilities include:
| | | | | | | | | | | | | | | | | | | | | | | |
| 2021 | | 2020 |
(Dollars in Millions) | Assets | | Liabilities | | Assets | | Liabilities |
Pension Plans | $ | 2 | | | $ | — | | | $ | 62 | | | $ | — | |
Other Employee Benefit Plans | 106 | | | — | | | 96 | | | — | |
Accelerated Depreciation | — | | | 7,366 | | | — | | | 7,195 | |
Other | 497 | | | 622 | | | 320 | | | 451 | |
Total | $ | 605 | | | $ | 7,988 | | | $ | 478 | | | $ | 7,646 | |
Net Deferred Income Tax Liabilities | | | $ | 7,383 | | | | | $ | 7,168 | |
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. CSX participated in a contemporaneous IRS audit of tax years 2021 and 2020. Federal examinations of original federal income tax returns for all years through 2019 are resolved.
As of December 2021 and 2020, the Company had approximately $18 million and $16 million, respectively, of total unrecognized tax benefits as a result of uncertain tax positions. Net tax benefits of $15 million and $13 million as of December 2021 and 2020, respectively, could favorably impact the effective income tax rate in each year. The Company does not expect that unrecognized tax benefits as of December 2021 for various state and federal income tax matters will significantly change over the next 12 months. The final outcome of these uncertain tax positions is not yet determinable. There were no material changes to the total gross unrecognized tax benefits and prior year audit resolutions of the Company during the fiscal year ended December 2021.
CSX’s continuing practice is to recognize net interest and penalties related to income tax matters in income tax expense. Accrued interest and penalties were not material as of December 2021 or 2020. Additionally, expenses from changes to the reserves for interest and penalties were not material in 2021, 2020 or 2019.
CSX CORPORATION
PART II
Item 8. Financial Statements and Supplementary Data
NOTE 13. 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, pension plan assets, long-term debt and interest rate derivatives. Also, the Fair Value Measurements and Disclosures Topic in the ASC 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, long-term debt and interest rate derivatives. 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.); and
•Level 3 – significant unobservable inputs (including the Company’s own assumptions about the assumptions market participants would use in determining the fair value of investments).
The valuation methods described below may produce a fair value calculation that may not be 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 are carried at fair value on the consolidated balance sheet in accordance with the Fair Value Measurements and Disclosures Topic in the ASC. They are valued with assistance from a third-party trustee and consist of corporate bonds, government securities and fixed income mutual funds. The corporate bonds and government securities are valued using broker quotes that utilize observable market inputs, which are Level 2 inputs. The fixed income mutual funds are valued using unadjusted quoted prices for identical assets in active markets, which are Level 1 inputs.
CSX CORPORATION
PART II
Item 8. Financial Statements and Supplementary Data
NOTE 13. Fair Value Measurements, continued
The Company's investment assets are carried at fair value on the consolidated balance sheets as summarized in the following table.
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Fiscal Years |
| 2021 | | 2020 |
(Dollars in Millions) | Level 1 | Level 2 | | Total | | Level 1 | Level 2 | | Total |
Fixed Income Mutual Funds | $ | 75 | | $ | — | | | $ | 75 | | | $ | — | | $ | — | | | $ | — | |
Corporate Bonds | — | | 63 | | | 63 | | | — | | 68 | | | 68 | |
Government Securities | — | | 26 | | | 26 | | | — | | 33 | | | 33 | |
| | | | | | | | | |
Total investments at fair value | $ | 75 | | $ | 89 | | | $ | 164 | | | $ | — | | $ | 101 | | | $ | 101 | |
| | | | | | | | | |
Total investments at amortized cost | | | | $ | 156 | | | | | | $ | 89 | |
These investments have the following maturities and are represented on the consolidated balance sheet within short-term investments for investments with maturities of less than one year, and other long-term assets for investments with maturities of one year and greater.
| | | | | | | | | | | |
(Dollars in Millions) | December 2021 | | December 2020 |
Less than 1 year | $ | 77 | | | $ | 2 | |
1 - 5 years | 28 | | | 22 | |
5 - 10 years | 12 | | | 23 | |
Greater than 10 years | 47 | | | 54 | |
Total investments at fair value | $ | 164 | | | $ | 101 | |
Long-term Debt
Long-term debt, which includes finance leases, is reported at carrying amount on the consolidated balance sheets 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 with assistance from a third party that 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, credit ratings, 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.
CSX CORPORATION
PART II
Item 8. Financial Statements and Supplementary Data
NOTE 13. Fair Value Measurements, continued
The fair value and carrying value of the Company's long-term debt is as follows:
| | | | | | | | | | | |
(Dollars in Millions) | December 2021 | | December 2020 |
Long-term Debt (Including Current Maturities): | | | |
Fair Value | $ | 19,439 | | | $ | 21,076 | |
Carrying Value | 16,366 | | | 16,705 | |
Interest Rate Derivatives
The Company’s forward starting interest rate swaps are carried at fair value and valued with assistance from a third party based upon pricing models using inputs observed from actively quoted markets. All of the inputs used to determine the fair value of the swaps are Level 2 inputs. The fair value of the Company’s forward starting interest rate swaps asset was $91 million and $80 million at December 31, 2021 and 2020, respectively. See Note 10, Debt and Credit Agreements, for further information.
Pension Plan Assets
Pension plan assets are reported at fair value, net of pension liabilities, on the consolidated balance sheet. The Investment Committee targets an allocation of pension assets to be generally 60% growth-oriented and 40% immunizing. See Note 9, Employee Benefit Plans, for further information. There are several valuation methodologies used for those assets as described below.
Investments in the Fair Value Hierarchy
•Common stock (Level 1): Valued at the closing price reported on the active market on which the individual securities are traded on the last day of the year and classified in Level 1 of the fair value hierarchy.
•Mutual funds (Level 1): Valued at the net asset value of shares held at year end based on quoted market prices determined in an active market. These assets are classified in Level 1 of the fair value hierarchy.
•Cash and cash equivalents (Level 1): Includes cash and short term investments with an original maturity of three months or less. The carrying value of cash and cash equivalents at year end approximates fair value. These assets are classified in Level 1 of the fair value hierarchy.
•Corporate bonds, government securities, asset-backed securities and derivatives (Level 2): Valued using price evaluations reflecting the bid and/or ask sides of the market for a similar investment at year end. Asset-backed securities include commercial mortgage-backed securities and collateralized mortgage obligations. These assets are classified in Level 2 of the fair value hierarchy.
Investments Measured at Net Asset Value
•Partnerships: Net asset value of private equity is based on the fair market values associated with the underlying investments at year end. These funds have redemption restrictions that require advanced notice of 15 business days.
•Commingled and common collective trust funds: This class consists of private funds that invest in corporate equity and debt securities, government securities and various short-term debt instruments and are measured at net asset value to estimate the fair value of the investments. The net asset value of the investments is determined by reference to the fair value of the underlying securities, which are valued primarily through the use of directly or indirectly observable inputs. These funds have redemption restrictions that require advanced notice of up to 30 business days.
CSX CORPORATION
PART II
Item 8. Financial Statements and Supplementary Data
NOTE 13. Fair Value Measurements, continued
The pension plan assets at fair value by level, within the fair value hierarchy, as of calendar plan years 2021 and 2020 are shown in the table below. For additional information related to pension assets, see Note 9, Employee Benefit Plans.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fiscal Years |
| 2021 | | 2020 |
(Dollars in Millions) | Level 1 | | Level 2 | | | | Total | | Level 1 | | Level 2 | | | | Total |
Common Stock | $ | 487 | | | $ | — | | | | | $ | 487 | | | $ | 337 | | | $ | — | | | | | $ | 337 | |
Mutual funds | 14 | | | — | | | | | 14 | | | 21 | | | — | | | | | 21 | |
Cash and cash equivalents | 108 | | | — | | | | | 108 | | | 387 | | | — | | | | | 387 | |
Corporate bonds | — | | | 1,013 | | | | | 1,013 | | | — | | | 1,026 | | | | | 1,026 | |
Government securities | — | | | 173 | | | | | 173 | | | — | | | 164 | | | | | 164 | |
Asset-backed securities, derivatives and other | — | | | 98 | | | | | 98 | | | — | | | 85 | | | | | 85 | |
Total investments in the fair value hierarchy | $ | 609 | | | $ | 1,284 | | | | | $ | 1,893 | | | $ | 745 | | | $ | 1,275 | | | | | $ | 2,020 | |
Investments measured at net asset value (a) | n/a | | n/a | | | | $ | 1,123 | | | n/a | | n/a | | | | $ | 980 | |
Investments at fair value | $ | 609 | | | $ | 1,284 | | | | | $ | 3,016 | | | $ | 745 | | | $ | 1,275 | | | | | $ | 3,000 | |
(a) Investments measured at net asset value represent certain investments that have been measured at net asset value per share (or its equivalent) and thus are not classified in the fair value hierarchy. In accordance with ASC 820, Fair Value Measurements, the fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the pension assets disclosed in Note 9, Employee Benefit Plans.
NOTE 14. 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. All components of net periodic pension and post-retirement benefit costs, excluding service cost, are included in other income - net on the consolidated income statement. Miscellaneous income (expense) may fluctuate due to timing and includes investment gains, losses and interest income as well as other non-operating activities.
For discussion of the drivers of changes in net periodic pension and post-retirement benefit credit from 2020 to 2021 and from 2019 to 2020, refer to Note 9, Employee Benefit Plans. Debt repurchase expense increased from 2019 to 2020 primarily as a result of long-term debt being redeemed earlier relative to maturity date. Other income – net consisted of the following:
| | | | | | | | | | | | | | | | | |
| Fiscal Years |
(Dollars in Millions) | 2021 | | 2020 | | 2019 |
Net Periodic Pension and Post-retirement Benefit Credit (a) | $ | 64 | | | $ | 42 | | | $ | 43 | |
Interest Income | 7 | | | 17 | | | 48 | |
Debt Repurchase Expense | — | | | (48) | | | (10) | |
Miscellaneous Income | 8 | | | 8 | | | 7 | |
Total Other Income - Net | $ | 79 | | | $ | 19 | | | $ | 88 | |
| | | | | |
| | | | | |
(a) Excludes the service cost component of net periodic benefit cost.
CSX CORPORATION
PART II
Item 8. Financial Statements and Supplementary Data
NOTE 15. Investment in Affiliates and Related-Party Transactions
CSX's investments in affiliates are included on the consolidated balance sheet as investments in affiliates and other companies.
| | | | | | | | | | | |
| December | | December |
(Dollars in Millions) | 2021 | | 2020 |
Equity-method investments: | | | |
Conrail | $ | 1,083 | | | $ | 1,025 | |
TTX | 849 | | | 796 | |
Other | 167 | | | 164 | |
Total | $ | 2,099 | | | $ | 1,985 | |
Conrail
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 Investments-Equity Method and Joint Venture Topic in the ASC, CSX applies the equity method of accounting to its investment in Conrail.
Conrail owns rail infrastructure and operates for the joint benefit of CSX and NS. This is known as the 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. These expenses are included in purchased services and other on the consolidated income statements. Future payments due to Conrail under the shared asset area agreements are shown in the table below.
| | | | | |
(Dollars in Millions) | Conrail Shared |
Years | Asset Agreement |
2022 | $ | 31 | |
2023 | 31 | |
2024 | 23 | |
2025 | — | |
2026 | — | |
Thereafter | — | |
Total | $ | 85 | |
Also, included in equity earnings of affiliates are CSX’s 42 percent 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. This write-up of fixed assets resulted in a difference between CSX's investment in Conrail and its share of Conrail's underlying net equity, which is $331 million as of December 2021.
CSX CORPORATION
PART II
Item 8. Financial Statements and Supplementary Data
NOTE 15. Investment in Affiliates and Related-Party Transactions, continued
The following table discloses amounts related to Conrail. All amounts in the table below are included in purchased services and other expenses on the Company’s consolidated income statements.
| | | | | | | | | | | | | | | | | |
| Fiscal Years |
(Dollars in Millions) | 2021 | | 2020 | | 2019 |
| | | | | |
Rents, fees and services | $ | 128 | | | $ | 126 | | | $ | 119 | |
Purchase price amortization and other | 4 | | | 4 | | | 4 | |
Equity earnings of Conrail | (44) | | | (49) | | | (42) | |
Total Conrail Expense | $ | 88 | | | $ | 81 | | | $ | 81 | |
As required by the Related Party Disclosures Topic in the ASC, the Company has disclosed amounts below owed to Conrail, or its subsidiaries, representing liabilities under the operating, equipment and shared area agreements with Conrail. In 2014, the Company executed two promissory notes with a subsidiary of Conrail which were included in long-term debt on the consolidated balance sheets. In December 2020, the Company completed a non-cash conversion of its existing payable balance of approximately $217 million and $224 million, 2.89% notes due 2044 into new notes. The new notes for operation of the shared asset area are $441 million, 1.31% notes due 2050. Interest expense from these promissory notes was $6 million in each 2021, 2020 and 2019.
| | | | | | | | | | | |
| December | | December |
(Dollars in Millions) | 2021 | | 2020 |
Balance Sheet Information: | | | |
CSX accounts payable to Conrail | $ | 100 | | | $ | 50 | |
Promissory notes payable to Conrail subsidiary | | | |
1.31% CSX Promissory Note due December 2050 | 73 | | | 73 | |
1.31% CSXT Promissory Note due December 2050 | 368 | | | 368 | |
| | | |
| | | |
TTX Company
TTX Company ("TTX") is a privately-held corporation engaged in the business of providing its owner-railroads with standardized fleets of intermodal, automotive and general use railcars at time and mileage rates. CSX owns about 20 percent of TTX's common stock, and the remaining is owned by the other leading North American railroads and their affiliates. Pursuant to the Investments-Equity Method topic in the ASC, CSX applies the equity method of accounting to its investment in TTX.
CSX CORPORATION
PART II
Item 8. Financial Statements and Supplementary Data
NOTE 15. Investment in Affiliates and Related-Party Transactions, continued
As required by the Related Party Disclosures Topic in the ASC, the following table discloses amounts related to TTX. Car hire rents and equity earnings are included in equipment and other rents expense on the Company’s consolidated income statement.
| | | | | | | | | | | | | | | | | |
| Fiscal Years |
(Dollars in Millions) | 2021 | | 2020 | | 2019 |
Income statement information: | | | | | |
Car hire rents | $ | 221 | | | $ | 219 | | | $ | 223 | |
Equity earnings of TTX | (52) | | | (51) | | | (56) | |
Total TTX expense | $ | 169 | | | $ | 168 | | | $ | 167 | |
| | | | | |
Also included below is balance sheet information related to CSX's payable to TTX, which represents car rental liabilities.
| | | | | | | | | | | |
| December | | December |
Balance sheet information: | 2021 | | 2020 |
CSX payable to TTX | $ | 35 | | | $ | 40 | |
Other Related Party Transactions
On October 17, 2019, the Company repurchased 14.1 million (split-adjusted) shares for $319 million from MR Argent Advisor LLC, a CSX shareholder on behalf of certain limited partners of its affiliated funds. See additional discussion in Note 2, Earnings Per Share.
NOTE 16. Other Comprehensive Income (Loss)
CSX reports comprehensive earnings or loss in accordance with the Comprehensive Income Topic in the ASC in the consolidated comprehensive income statement. 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 equal net earnings plus or minus adjustments for pension and other post-retirement liabilities as well as other adjustments. Total comprehensive earnings represent the activity for a period net of tax and were $4.0 billion, $2.8 billion and $3.3 billion for 2021, 2020 and 2019, 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, net of tax, as of the balance sheet date. For CSX, AOCI is primarily the cumulative balance related to pension and other post-retirement benefit adjustments, interest rate derivatives and CSX's share of AOCI of equity method investees.
CSX CORPORATION
PART II
Item 8. Financial Statements and Supplementary Data
NOTE 16. Other Comprehensive Income (Loss), continued
Changes in the AOCI balance by component are shown in the following table. Amounts reclassified in pension and other post-employment benefits to net earnings relate to the amortization of actuarial losses and are included in other income-net on the consolidated income statements. See Note 9, Employee Benefit Plans, for further information. Interest rate derivatives consist of forward starting interest rate swaps classified as cash flow hedges. See Note 10, Debt and Credit Agreements, for further information. Items classified as other primarily represent CSX's share of AOCI of equity method investees. Amounts reclassified in other to net earnings are included in purchased services and other or equipment and other rents on the consolidated income statements.
| | | | | | | | | | | | | | |
| Pension and Other Post-Employment Benefits | Interest Rate Derivatives | Other | Accumulated Other Comprehensive Income (Loss) |
(Dollars in millions) | | | | |
Balance December 31, 2018 - Net of Tax | $ | (604) | | $ | — | | $ | (57) | | $ | (661) | |
Other Comprehensive Income (Loss) | | | | |
Loss Before Reclassifications | (43) | | — | | (5) | | (48) | |
Amounts Reclassified to Net Earnings | 23 | | — | | 8 | | 31 | |
Tax Benefit | 5 | | — | | (2) | | 3 | |
Total Other Comprehensive (Loss) Income | $ | (15) | | $ | — | | $ | 1 | | $ | (14) | |
Balance December 31, 2019 - Net of Tax | $ | (619) | | $ | — | | $ | (56) | | $ | (675) | |
Other Comprehensive Income (Loss) | | | | |
| | | | |
Loss Before Reclassifications | (17) | | 80 | | (10) | | 53 | |
Amounts Reclassified to Net Earnings | 47 | | — | | 5 | | 52 | |
Tax Benefit (Expense) | (9) | | (18) | | (1) | | (28) | |
Total Other Comprehensive Income (Loss) | $ | 21 | | $ | 62 | | $ | (6) | | $ | 77 | |
Balance December 31, 2020 - Net of Tax | $ | (598) | | $ | 62 | | $ | (62) | | $ | (598) | |
Other Comprehensive Income (Loss) | | | | |
| | | | |
(Loss) Income Before Reclassifications | 147 | | 11 | | — | | 158 | |
Amounts Reclassified to Net Earnings | 66 | | — | | 15 | | 81 | |
Tax Expense | (46) | | (3) | | — | | (49) | |
Total Other Comprehensive Income | $ | 167 | | $ | 8 | | $ | 15 | | $ | 190 | |
Balance December 31, 2021 - Net of Tax | $ | (431) | | $ | 70 | | $ | (47) | | $ | (408) | |
CSX CORPORATION
PART II
Item 8. Financial Statements and Supplementary Data
NOTE 17. Business Combinations
Acquisition of Quality Carriers, Inc.
On July 1, 2021, the Company completed its acquisition of Quality Carriers, the largest provider of bulk liquid chemicals truck transportation in North America, for $544 million in cash, which is presented on the statement of cash flows net of $3 million cash acquired. Through a network of over 100 company-owned and affiliate terminals and facilities in key locations throughout the United States, Canada and Mexico, Quality Carriers provides transportation services to many of the leading chemical producers and shippers in North America. The results of Quality Carriers' operations and its cash flows were consolidated prospectively.
The Company accounted for the transaction using the acquisition method in accordance with ASC Topic 805, Business Combinations. The purchase price allocation was finalized as of December 31, 2021, and total measurement period adjustments to the preliminary allocation were immaterial. The allocation of total consideration to the fair values of the acquired assets and liabilities of Quality Carriers is summarized in the table below.
| | | | | |
(Dollars in millions) | July 1, 2021 |
Assets Acquired: | |
Cash and Cash Equivalents | $ | 3 | |
Accounts Receivable, net | 113 | |
Properties and Equipment, net | 225 | |
Goodwill | 213 | |
Intangible Assets | 180 | |
Other Assets | 9 | |
Total Assets Acquired | $ | 743 | |
Liabilities Assumed: | |
Accounts Payable and Accrued Liabilities | $ | 48 | |
Finance Lease Obligations and Notes Payable | 68 | |
Casualty, Environmental and Other Reserves | 62 | |
Other Long-term Liabilities | 21 | |
Total Liabilities Assumed | $ | 199 | |
Fair Value of Assets Acquired, Net of Liabilities Assumed: | $ | 544 | |
CSX CORPORATION
PART II
Item 8. Financial Statements and Supplementary Data
NOTE 17. Business Combinations, continued
Cash paid to acquire the business, net of acquired cash and cash equivalents of $3 million, is included in investing activities on the Company's consolidated statement of cash flows. Properties and equipment of $225 million include tractors and trailers, equipment, land, buildings and other assets. For information about Goodwill and intangible assets, see Note 18, Goodwill and Other Intangible Assets.
The Company incurred costs related to this acquisition of approximately $17 million. All acquisition-related costs were expensed as incurred and have been recorded in purchased services and other in the accompanying consolidated income statements.
This acquisition is not material with respect to the Company’s financial statements when reviewed under the quantitative and qualitative considerations of Regulation S-X Article 11 and ASC Topic 805. As the acquisition is not material, CSX has not provided pro forma information relating to the pre-acquisition period.
Proposed Acquisition of Pan Am Systems, Inc.
On November 30, 2020, CSX signed a definitive agreement to acquire Pan Am Systems, Inc. (“Pan Am”) which is the parent company of Pan Am Railways, Inc. who jointly owns Pan Am Southern, LLC with a subsidiary of Norfolk Southern Corporation. Pan Am owns and operates a highly integrated, nearly 1,200-mile rail network and has a joint interest in the more than 600-mile Pan Am Southern system. This acquisition, if approved, will expand CSX’s reach in the Northeastern United States. Assets and facilities to be acquired as part of the proposed transaction include road and track assets, work equipment, land, buildings and other assets. On February 25, 2021, the Company began the process of seeking approval from the STB. On January 13 and 14, 2022, the Company participated in a hearing before the STB to discuss the proposed transaction and a decision is expected by mid-April 2022. This proposed acquisition is not expected to be material with respect to the Company's financial statements when reviewed under the quantitative and qualitative considerations of Regulation S-X Article 11 and ASC Topic 805.
CSX CORPORATION
PART II
Item 8. Financial Statements and Supplementary Data
NOTE 18. Goodwill and Other Intangible Assets
The following table presents goodwill and other intangible asset balances and adjustments to those balances for the years ended December 31, 2021 and 2020:
| | | | | | | | | | | | | | | | | | | | | | | |
| Goodwill | | Intangible Assets | | |
(Dollars in millions) | Net Carrying Amount | | Cost | Accumulated Amortization | Net Carrying Amount | | Total Goodwill and Other Intangible Assets - Net |
Balance at December 31, 2019 | $ | 63 | | | $ | — | | $ | — | | $ | — | | | $ | 63 | |
Additions | — | | | — | | — | | — | | | — | |
Amortization | — | | | — | | — | | — | | | — | |
Balance at December, 31, 2020 | $ | 63 | | | $ | — | | $ | — | | $ | — | | | $ | 63 | |
Additions | 213 | | | 180 | | — | | 180 | | | 393 | |
Amortization | — | | | — | | (5) | | (5) | | | (5) | |
Balance at December, 31, 2021 | $ | 276 | | | $ | 180 | | $ | (5) | | $ | 175 | | | $ | 451 | |
As a result of the acquisition of Quality Carriers, Inc. on July 1, 2021, CSX recognized goodwill and intangible assets. The goodwill of $213 million was calculated as the excess of the consideration paid over the fair value of net assets assumed as of July 1, 2021 and relates primarily to the ability of CSX to extend the reach of its network and gain access to new products, markets, and regions through a unique and competitive multimodal solution that leverages the reach of truck transportation with the cost advantage of rail-based services. Goodwill recognized in the acquisition is deductible for tax purposes. Prior to 2021, the Company's goodwill balance related to affiliates of CSXT, primarily P&L Transportation, Inc.
Intangible assets of $180 million consist of $150 million of customer relationships and $30 million of trade names that will be amortized over a weighted-average period of 20 years and 15 years, respectively.
In fourth quarter 2021, CSX performed its annual evaluation of each reporting unit's goodwill and intangible assets for impairment. No impairment was recorded as a result of this evaluation.
CSX CORPORATION
PART II
Item 8. Financial Statements and Supplementary Data
NOTE 19. Quarterly Financial Data (Unaudited)
The following selected quarterly financial data has been adjusted for the three-for-one stock split effective June 28, 2021.
| | | | | | | | | | | | | | | | | |
Fiscal Year Ended December 2021 | Quarters |
(Dollars in Millions, Except Per Share Amounts) | 1st | 2nd | 3rd | 4th | Full Year |
Revenue | $ | 2,813 | | $ | 2,990 | | $ | 3,292 | | $ | 3,427 | | $ | 12,522 | |
Operating Income | 1,101 | 1,691 | 1,436 | 1,366 | 5,594 |
Net Earnings | 706 | 1,173 | 968 | 934 | 3,781 |
| | | | | |
Net Earnings Per Share, Basic | $ | 0.31 | | $ | 0.52 | | $ | 0.43 | | $ | 0.42 | | $ | 1.68 | |
Net Earnings Per Share, Assuming Dilution | $ | 0.31 | | $ | 0.52 | | $ | 0.43 | | $ | 0.42 | | $ | 1.68 | |
| | | | | |
Fiscal year Ended December 2020 | | | | | |
Revenue | $ | 2,855 | | $ | 2,255 | | $ | 2,648 | | $ | 2,825 | | $ | 10,583 | |
Operating Income | 1,178 | 828 | 1,141 | 1,215 | 4,362 |
Net Earnings | 770 | 499 | 736 | 760 | 2,765 |
| | | | | |
Net Earnings Per Share, Basic | $ | 0.33 | | $ | 0.22 | | $ | 0.32 | | $ | 0.33 | | $ | 1.20 | |
Net Earnings Per Share, Assuming Dilution | $ | 0.33 | | $ | 0.22 | | $ | 0.32 | | $ | 0.33 | | $ | 1.20 | |