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Norfolk Southern reports third-quarter 2018 results

NSC | October 24, 2018

Third-quarter records for operating income, operating ratio, net income and earnings per share

PR Newswire

NORFOLK, Va., Oct. 24, 2018

NORFOLK, Va., Oct. 24, 2018 /PRNewswire/ -- Norfolk Southern Corporation (NYSE: NSC) today reported record third-quarter financial results.

Net income was $702 million, up 39 percent year-over-year, a result of a 14 percent increase in income from railway operations and a lower effective income tax rate. Diluted earnings per share were $2.52, up 44 percent year-over-year and a third-quarter record.

"Norfolk Southern continues to deliver record financial results that reflect our careful and determined pursuit of a balanced and flexible strategy," said James A. Squires, Norfolk Southern chairman, president and CEO. "Our demonstrated progress toward the goals of our strategic plan is significant, and our ongoing pursuit of new initiatives to benefit customers and shareholders will further strengthen our organization."

Third-quarter summary

Railway operating revenues of $2.9 billion increased 10 percent compared with third-quarter 2017, due to higher volumes and an increase in revenue per unit, including higher fuel surcharge revenue as well as increased rates. Overall volumes were up 5 percent reflecting growth in the major commodity categories of intermodal and merchandise, which offset a decline in coal.

Railway operating expenses increased $152 million, or 9 percent, to $1.9 billion compared with the same period last year, driven by higher fuel prices, increases in volume-related expenses, and increased costs associated with overall lower network velocity.

Income from railway operations was $1.0 billion, a 14 percent increase year-over-year, and a third-quarter record. The railway operating ratio, or operating expenses as a percentage of revenues, was 65.4 percent, also a third-quarter record.

About Norfolk Southern
Norfolk Southern Corporation (NYSE: NSC) is one of the nation's premier transportation companies. Its Norfolk Southern Railway Company subsidiary operates approximately 19,500 route miles in 22 states and the District of Columbia, serves every major container port in the eastern United States, and provides efficient connections to other rail carriers. Norfolk Southern operates the most extensive intermodal network in the East and is a major transporter of coal, automotive, and industrial products.

Forward-looking statements
This news release contains forward-looking statements that may be identified by the use of words like "believe," "expect," "anticipate," "estimate," "plan," "consider," "project," and similar references to the future. Forward-looking statements reflect our good-faith evaluation of information currently available. These forward-looking statements are subject to a number of risks and uncertainties, and our actual results may differ materially from those projected. Please refer to our annual and quarterly reports filed with the SEC for a full discussion of those risks and uncertainties we view as most important. Forward-looking statements are not, and should not be relied upon as, a guarantee of future performance or results, nor will they necessarily prove to be accurate indications of the times at or by which any such performance or results will be achieved. As a result, actual outcomes and results may differ materially from those expressed in forward-looking statements. We undertake no obligation to update or revise forward-looking statements.

Norfolk Southern Corporation and Subsidiaries Consolidated Statements of Income (Unaudited)


	Third Quarter				First Nine Months
	2018		2017		2018		2017
	($ in millions, except per share amounts)

Railway operating revenues
Merchandise	$	1,737	$	1,600	$	5,060	$	4,781
Intermodal		746		621		2,138		1,785
Coal		464		449		1,364		1,316
Total railway operating revenues		2,947		2,670		8,562		7,882

Railway operating expenses
Compensation and benefits		725		771		2,168		2,249
Purchased services and rents		450		377		1,281		1,146
Fuel		274		198		812		601
Depreciation		276		265		821		788
Materials and other		202		164		599		574

Total railway operating expenses		1,927		1,775		5,681		5,358

Income from railway operations		1,020		895		2,881		2,524

Other income – net		30		39		67		127
Interest expense on debt		142		134		409		416

Income before income taxes		908		800		2,539		2,235

Income taxes
Current		157		189		437		580
Deferred		49		105		138		219
Total income taxes		206		294		575		799

Net income	$	702	$	506	$	1,964	$	1,436

Earnings per share - diluted	$	2.52	$	1.75	$	6.95	$	4.93

Weighted average shares outstanding - diluted		278.2		289.5		282.6		291.2

See accompanying notes to consolidated financial statements.

Norfolk Southern Corporation and Subsidiaries Consolidated Statements of Comprehensive Income (Unaudited)


	Third Quarter				First Nine Months
	2018		2017		2018		2017
	($ in millions)

Net income	$	702	$	506	$	1,964	$	1,436
Other comprehensive income, before tax:
Pension and other postretirement benefit		8		7		9		21
Other comprehensive income (loss) of
equity investees		—		—		2		(1)
Other comprehensive income, before tax		8		7		11		20

Income tax expense related to items of
other comprehensive income		(2)		(2)		(2)		(8)

Other comprehensive income, net of tax		6		5		9		12

Total comprehensive income	$	708	$	511	$	1,973	$	1,448

See accompanying notes to consolidated financial statements.

Norfolk Southern Corporation and Subsidiaries Consolidated Balance Sheets (Unaudited)

	September 30,		December 31,
	2018		2017
	($ in millions)
Assets
Current assets:
Cash and cash equivalents	$	729	$	690
Accounts receivable – net		1,043		955
Materials and supplies		267		222
Other current assets		70		282
Total current assets		2,109		2,149

Investments		3,109		2,981
Properties less accumulated depreciation of $12,276 and
$11,909, respectively		30,712		30,330
Other assets		392		251

Total assets	$	36,322	$	35,711

Liabilities and stockholders' equity
Current liabilities:
Accounts payable	$	1,394	$	1,401
Short-term debt		—		100
Income and other taxes		230		211
Other current liabilities		317		233
Current maturities of long-term debt		500		600
Total current liabilities		2,441		2,545

Long-term debt		10,635		9,136
Other liabilities		1,302		1,347
Deferred income taxes		6,464		6,324

Total liabilities		20,842		19,352

Stockholders' equity:
Common stock $1.00 per share par value, 1,350,000,000 shares
authorized; outstanding 272,346,940 and 284,157,187 shares,
respectively, net of treasury shares		274		285
Additional paid-in capital		1,996		2,254
Accumulated other comprehensive loss		(435)		(356)
Retained income		13,645		14,176

Total stockholders' equity		15,480		16,359

Total liabilities and stockholders' equity	$	36,322	$	35,711

See accompanying notes to consolidated financial statements.

Norfolk Southern Corporation and Subsidiaries Consolidated Statements of Cash Flows (Unaudited)


	First Nine Months
	2018		2017
	($ in millions)
Cash flows from operating activities
Net income	$	1,964	$	1,436
Reconciliation of net income to net cash provided by operating activities:
Depreciation		822		791
Deferred income taxes		138		219
Gains and losses on properties		(26)		(62)
Changes in assets and liabilities affecting operations:
Accounts receivable		(102)		(59)
Materials and supplies		(45)		12
Other current assets		45		68
Current liabilities other than debt		173		165
Other – net		(85)		(105)

Net cash provided by operating activities		2,884		2,465

Cash flows from investing activities
Property additions		(1,326)		(1,315)
Property sales and other transactions		93		137
Investment purchases		(4)		(4)
Investment sales and other transactions		96		8

Net cash used in investing activities		(1,141)		(1,174)

Cash flows from financing activities
Dividends		(627)		(529)
Common stock transactions		38		75
Purchase and retirement of common stock		(2,300)		(712)
Proceeds from borrowings – net of issuance costs		2,023		293
Debt repayments		(750)		(650)

Net cash used in financing activities		(1,616)		(1,523)

Net increase (decrease) in cash, cash equivalents, and restricted cash		127		(232)

Cash, cash equivalents, and restricted cash
At beginning of year		690		956

At end of period	$	817	$	724

Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest (net of amounts capitalized)	$	327	$	345
Income taxes (net of refunds)		314		594

See accompanying notes to consolidated financial statements.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS:

Pensions and Other Postretirement Benefits
We adopted Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) 2017-07 on January 1, 2018. The retrospective application resulted in the reclassification of $16 million and $48 million of pension and other postretirement benefits from the "Compensation and benefits" line item within "Railway operating expenses" to "Other income – net" on the Consolidated Statements of Income for the third quarter and first nine months of 2017, respectively.
Stock Repurchase Programs
We repurchased and retired 12.8 million shares (5.7 million shares under an accelerated stock repurchase program (ASR) and 7.1 million shares under our ongoing program) and 6.0 million shares of common stock under our stock repurchase programs in the first nine months of 2018 and 2017, respectively, at a cost of $2.1 billion and $712 million, respectively. We entered into an ASR on August 2, 2018 with two third-party financial institutions to repurchase common stock, at which time we made a payment of $1.2 billion to the financial institutions and received an initial delivery of 5.7 million shares valued at $960 million. The remaining balance of $240 million, included in "Additional paid-in capital" on the Consolidated Balance Sheets, will be settled no later than the end of January 2019, with the final number of shares to be delivered by the financial institutions equal to the volume-weighted average price per share of common stock over the ASR term, less a negotiated discount.

Since the beginning of 2006, we have repurchased and retired 181.3 million shares at a total cost of $13.4 billion.
Reclassification of Stranded Tax Effects
In February 2018, the FASB issued ASU 2018-02, "Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income." This update is intended to reclassify the stranded tax effects resulting from the Tax Cuts and Jobs Act that was enacted on December 22, 2017 from accumulated other comprehensive income to retained earnings. In the first quarter of 2018, we adopted the provisions of ASU 2018-02 resulting in an increase to "Accumulated other comprehensive loss" of $88 million and a corresponding increase to "Retained income," with no impact on "Total stockholders' equity."
Restricted Cash
The "Cash, cash equivalents, and restricted cash" line item in the Consolidated Statements of Cash Flows includes restricted cash of $88 million at September 30, 2018 which reflects deposits held by a third party bond agent as collateral for certain debt obligations maturing in 2019. The restricted cash balance is included as part of "Other assets" on the Consolidated Balance Sheets.