filings.toolsItem 7A. Quantitative and Qualitative Disclosures about Market Risk
21K characters. Original on sec.gov · Markdown
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Changes in interest rates may impact the cost of future long-term debt issued by the Company, and as a result, represent interest rate risk to the Company. In an effort to manage this risk, CSX may use certain financial instruments such as interest rate forward contracts. The following information, together with information included in Note 10, Debt and Credit Agreements, and Note 13, Fair Value Measurements, describes the key aspects of such contracts and the related market risk to CSX.
Changes in interest rates could impact the fair value of the Company's forward starting interest rate swaps. In 2020, the Company executed two forward starting interest rate swaps with 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 notes due in 2027. In 2022, CSX settled a portion equal to $160 million notional value of the cash flow hedges. In 2023, CSX executed two partial settlements equal to $226 million notional value of the cash flow hedges. As of December 31, 2023, these cash flow hedges had an aggregate notional value of $114 million and an asset value of $48 million. As of December 31, 2023, the potential change in fair value of forward starting interest rate swaps resulting from a hypothetical 10% change in interest rates would not be material.
Changes in interest rates could impact the fair value of the Company's fixed-to-floating interest rate swaps. In 2023, CSX entered into two separate fixed-to-floating interest rate swaps classified as fair value hedges. The swaps are designed to hedge 10 years of interest rate risk associated with market fluctuations attributable to the Secured Overnight Financing Rate ("SOFR") on a cumulative $250 million of fixed rate outstanding notes which are due in 2033. As of December 31, 2023, the cumulative fair value of these swaps was a $19 million asset. In 2022, CSX entered into five separate fixed-to-floating interest rate swaps classified as fair value hedges. The swaps are designed to hedge 10 years of interest rate risk associated with market fluctuations attributable to SOFR on a cumulative $800 million of fixed rate outstanding notes, which are due between 2036 and 2040. As of December 31, 2023, the cumulative fair value of these swaps was a $107 million liability. As of December 31, 2023, the potential change in fair value of fixed-to-floating interest rate swaps resulting from a hypothetical 10% change in interest rates would not be material.
As of December 31, 2023, CSX has no floating rate notes outstanding. However, changes in interest rates could impact the fair value (but not the carrying value) of the Company's fixed rate long-term debt. The potential decrease in fair value of the Company's fixed rate long-term debt resulting from a hypothetical 10% increase in U.S. Treasury rates, or approximately 40 basis points, is estimated to be $730 million as of December 31, 2023, and $709 million as of December 31, 2022. The underlying fair values of the Company's long-term debt were estimated based on quoted market prices or on the current rates offered for debt with similar terms and maturities.
CSX 2023 Form 10-K p.48
CSX CORPORATION
PART II
Item 8. Financial Statements and Supplementary Data
| INDEX TO CONSOLIDATED FINANCIAL STATEMENTS | ||||||||
| Page | ||||||||
| Report of Independent Registered Public Accounting Firm (PCAOB ID: 42) | 50 | |||||||
| CSX Corporation | ||||||||
| Consolidated Financial Statements and Notes to Consolidated Financial Statements | ||||||||
| Herewith: | ||||||||
| Consolidated Income Statements for the Years Ended: | 52 | |||||||
| December 31, 2023 | ||||||||
| December 31, 2022 | ||||||||
| December 31, 2021 | ||||||||
| Consolidated Comprehensive Income Statements for the Years Ended: | 53 | |||||||
| December 31, 2023 | ||||||||
| December 31, 2022 | ||||||||
| December 31, 2021 | ||||||||
| Consolidated Balance Sheets as of: | 54 | |||||||
| December 31, 2023 | ||||||||
| December 31, 2022 | ||||||||
| Consolidated Cash Flow Statements for Years Ended: | 55 | |||||||
| December 31, 2023 | ||||||||
| December 31, 2022 | ||||||||
| December 31, 2021 | ||||||||
| Consolidated Statements of Changes in Shareholders' Equity: | 56 | |||||||
| December 31, 2023 | ||||||||
| December 31, 2022 | ||||||||
| December 31, 2021 | ||||||||
| Notes to Consolidated Financial Statements | 57 |
CSX 2023 Form 10-K p.49
CSX CORPORATION
PART II
Item 8. Financial Statements and Supplementary Data
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of Directors of CSX Corporation
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of CSX Corporation (the Company) as of December 31, 2023 and 2022, the related consolidated statements of income, comprehensive income, changes in shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2023 and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2023, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated February 14, 2024 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosure to which it relates.
CSX 2023 Form 10-K p.50
CSX CORPORATION
PART II
Item 8. Financial Statements and Supplementary Data
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM, continued
| Depreciation Policies for Assets Utilizing the Group-Life Method | |||||||||||
| Description of the Matter | As of December 31, 2023, assets depreciated under the group-life method comprised 84% of total gross fixed assets of $50.3 billion. As discussed in Note 6 of the consolidated financial statements, 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 the group’s recoverable life. The Company utilizes different depreciable asset categories to account for depreciation expense for the railroad assets that are depreciated under the group-life method. Under the group-life method, depreciation studies are conducted by a third-party specialist and analyzed by the Company’s management to review asset service lives, salvage values, accumulated depreciation and other factors related to group assets. Depreciation studies are performed every three years for equipment assets and every six years for road and track assets. In years when depreciation studies are not performed, annual data reviews are conducted by a third-party specialist and analyzed by the Company’s management to review the asset service lives. For road and track assets and equipment assets, the most recent depreciation studies were performed in 2020 and 2022, respectively. These studies were evaluated by the Company’s management in the current year through an annual data review. Auditing depreciation expense for assets subject to the group-life method was complex and required the involvement of specialists due to the nature of the methods used in the depreciation studies to determine the useful service lives and salvage values of the Company’s assets. These methods have a significant effect on depreciation expense. | ||||||||||
| How We Addressed the Matter in Our Audit | We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s process related to the assessment of periodic depreciation studies and annual data reviews of its group-life assets. For example, we tested controls over management’s review of asset activity that could impact the estimated useful lives determined in the most recent depreciation studies of equipment and road and track assets. To test the estimated useful lives and salvage values of the Company’s group-life assets, we performed audit procedures that included, among others: obtaining the periodic depreciation studies and annual data reviews performed by the Company’s third-party specialist and reviewed by management; assessing the completeness and accuracy of the data provided by management to the third-party specialist; and including a specialist on our team to evaluate the methods used by the third-party specialist and reviewed by management in determining if any changes were necessary to the estimated useful lives and salvage values resulting from the annual data reviews. We compared the assumptions used by management to those used throughout the industry and within other depreciation studies. We assessed the historical accuracy of management’s estimates via retrospective review and independently recalculated the current year depreciation rates. |
We have served as the Company’s auditor since 1981.
/s/ Ernst & Young LLP
Jacksonville, Florida
February 14, 2024
CSX 2023 Form 10-K p.51
CSX CORPORATION
PART II
Item 8. Financial Statements and Supplementary Data
CONSOLIDATED INCOME STATEMENTS
(Dollars in Millions, Except Per Share Amounts)
| Years Ended | |||||||||||||||||
| 2023 | 2022 | 2021 | |||||||||||||||
| Revenue | $ | 14,657 | $ | 14,853 | $ | 12,522 | |||||||||||
| Expense | |||||||||||||||||
| Labor and Fringe | 3,024 | 2,861 | 2,550 | ||||||||||||||
| Purchased Services and Other | 2,764 | 2,685 | 2,135 | ||||||||||||||
| Depreciation and Amortization | 1,611 | 1,500 | 1,420 | ||||||||||||||
| Fuel | 1,377 | 1,626 | 913 | ||||||||||||||
| Equipment and Other Rents | 354 | 396 | 364 | ||||||||||||||
| Gains on Property Dispositions | (34) | (238) | (454) | ||||||||||||||
| Total Expense | 9,096 | 8,830 | 6,928 | ||||||||||||||
| Operating Income | 5,561 | 6,023 | 5,594 | ||||||||||||||
| Interest Expense | (809) | (742) | (722) | ||||||||||||||
| Other Income - Net (Note 14) | 139 | 133 | 79 | ||||||||||||||
| Earnings Before Income Taxes | 4,891 | 5,414 | 4,951 | ||||||||||||||
| Income Tax Expense (Note 12) | (1,176) | (1,248) | (1,170) | ||||||||||||||
| Net Earnings | $ | 3,715 | $ | 4,166 | $ | 3,781 | |||||||||||
| Per Common Share (Note 2) | |||||||||||||||||
| Net Earnings Per Share | |||||||||||||||||
| Basic | $ | 1.85 | $ | 1.95 | $ | 1.68 | |||||||||||
| Assuming Dilution | $ | 1.85 | $ | 1.95 | $ | 1.68 | |||||||||||
| Average Common Shares Outstanding (Millions) | |||||||||||||||||
| Basic | 2,008 | 2,136 | 2,250 | ||||||||||||||
| Assuming Dilution | 2,013 | 2,141 | 2,255 |
See accompanying Notes to Consolidated Financial Statements.
CSX 2023 Form 10-K p.52
CSX CORPORATION
PART II
Item 8. Financial Statements and Supplementary Data
CONSOLIDATED COMPREHENSIVE INCOME STATEMENTS
(Dollars in Millions)
| Years Ended | |||||||||||
| 2023 | 2022 | 2021 | |||||||||
| Net Earnings | $ | 3,715 | $ | 4,166 | $ | 3,781 | |||||
| Other Comprehensive Income (Loss) - Net of Tax: | |||||||||||
| Pension and Other Post-Employment Benefits | 74 | (66) | 167 | ||||||||
| Interest Rate Derivatives | — | 80 | 8 | ||||||||
| Other | 2 | 6 | 15 | ||||||||
| Total Other Comprehensive Income (Note 16) | 76 | 20 | 190 | ||||||||
| Comprehensive Earnings | $ | 3,791 | $ | 4,186 | $ | 3,971 |
See accompanying Notes to Consolidated Financial Statements.
CSX 2023 Form 10-K p.53
CSX CORPORATION
PART II
Item 8. Financial Statements and Supplementary Data
CONSOLIDATED BALANCE SHEETS
(Dollars in Millions)
| December | December | ||||||||||
| 2023 | 2022 | ||||||||||
| ASSETS | |||||||||||
| Current Assets: | |||||||||||
| Cash and Cash Equivalents | $ | 1,353 | $ | 1,958 | |||||||
| Short-term Investments | 83 | 129 | |||||||||
| Accounts Receivable - Net (Note 11) | 1,393 | 1,313 | |||||||||
| Materials and Supplies | 446 | 341 | |||||||||
| Other Current Assets | 109 | 108 | |||||||||
| Total Current Assets | 3,384 | 3,849 | |||||||||
| Properties | 50,320 | 48,105 | |||||||||
| Accumulated Depreciation | (15,385) | (13,863) | |||||||||
| Properties - Net (Note 6) | 34,935 | 34,242 | |||||||||
| Investment in Affiliates and Other Companies (Note 15) | 2,397 | 2,292 | |||||||||
| Right of Use Lease Asset (Note 7) | 498 | 505 | |||||||||
| Goodwill and Other Intangible Assets - Net (Note 18) | 506 | 502 | |||||||||
| Other Long-term Assets | 688 | 522 | |||||||||
| Total Assets | $ | 42,408 | $ | 41,912 | |||||||
| LIABILITIES AND SHAREHOLDERS' EQUITY | |||||||||||
| Current Liabilities: | |||||||||||
| Accounts Payable | $ | 1,237 | $ | 1,130 | |||||||
| Labor and Fringe Benefits Payable | 517 | 707 | |||||||||
| Casualty, Environmental and Other Reserves (Note 5) | 144 | 144 | |||||||||
| Current Maturities of Long-term Debt (Note 10) | 558 | 151 | |||||||||
| Income and Other Taxes Payable | 525 | 111 | |||||||||
| Other Current Liabilities | 243 | 228 | |||||||||
| Total Current Liabilities | 3,224 | 2,471 | |||||||||
| Casualty, Environmental and Other Reserves (Note 5) | 296 | 292 | |||||||||
| Long-term Debt (Note 10) | 17,975 | 17,896 | |||||||||
| Deferred Income Taxes - Net (Note 12) | 7,746 | 7,569 | |||||||||
| Long-term Lease Liability (Note 7) | 491 | 488 | |||||||||
| Other Long-term Liabilities | 543 | 571 | |||||||||
| Total Liabilities | 30,275 | 29,287 | |||||||||
| Shareholders' Equity: | |||||||||||
| Common Stock, $1 Par Value (Note 3) | 1,959 | 2,066 | |||||||||
| Other Capital | 691 | 574 | |||||||||
| Retained Earnings | 9,790 | 10,363 | |||||||||
| Accumulated Other Comprehensive Loss (Note 16) | (312) | (388) | |||||||||
| Non-controlling Minority Interest | 5 | 10 | |||||||||
| Total Shareholders' Equity | 12,133 | 12,625 | |||||||||
| Total Liabilities and Shareholders' Equity | $ | 42,408 | $ | 41,912 |
See accompanying Notes to Consolidated Financial Statements.
CSX 2023 Form 10-K p.54
CSX CORPORATION
PART II
Previous: Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations · Next: Item 8. Financial Statements and Supplementary Data