Norfolk Southern reports fourth-quarter and full-year 2018 results

Jan 25, 2019

NORFOLK, Va., Jan. 24, 2019 /PRNewswire/ -- Norfolk Southern Corporation (NYSE: NSC) today reported fourth-quarter and 2018 financial results.

Net income was $702 million and diluted earnings per share were $2.57 for the fourth quarter and $2,666 million and $9.51, respectively, for the full year.

"Norfolk Southern's financial results in 2018 clearly demonstrate improved financial performance and our commitment to delivering shareholder value," said James A. Squires, chairman, president and CEO. "Our confidence to deliver improved value to our shareholders – as underscored by our recently announced dividend increase – is heightened by NS' momentum heading into 2019 and by an array of initiatives to serve customers better and operate more efficiently."

The 2017 results for the fourth quarter and full year included the effects of remeasurement of net deferred tax liabilities ("2017 tax adjustments") resulting from the enactment of the Tax Cuts and Jobs Act of 2017, which added $3,482 million to net income in both periods and increased diluted earnings per share by $12.10 for the fourth quarter and $12.00 for the full year. Fourth-quarter 2018 net income decreased by $3,266 million and diluted earnings per share decreased by $11.22 compared to 2017. For the full year, net income in 2018 decreased by $2,738 million and diluted earnings per share decreased by $9.10 compared to 2017.

Absent the 2017 tax adjustments to the 2017 results, fourth-quarter 2018 net income increased $216 million, or 44 percent, and diluted earnings per share increased by $0.88, or 52 percent, while full-year 2018 net income increased by $744 million, or 39 percent, and diluted earnings per share increased by $2.90, or 44 percent.

Fourth-quarter summary

Railway operating revenues of $2.9 billion increased 9 percent, due to an increase in revenue per unit, including increased rates, higher fuel-surcharge revenue, and higher volumes. Overall volumes were up 3 percent, reflecting growth in the major commodity categories of intermodal and coal, while merchandise was relatively flat.
Railway operating expenses increased $147 million, or 9 percent, to $1.8 billion. Prior year expenses were impacted by the 2017 tax adjustments, which decreased railway operating expenses by $151 million. Excluding the 2017 tax adjustments, railway operating expenses compared with last year's results were $4 million lower, driven by higher property sales, which were primarily offset by higher inflation-driven costs and increased volume-related expenses.
Income from railway operations was $1.1 billion, an 8 percent increase year-over-year, and an all-time record. Income from railway operations compared to prior year's results, excluding $151 million in the 2017 tax adjustments, increased $231 million, or 27 percent. The railway operating ratio, or operating expenses as a percentage of revenues, was 62.8 percent.

2018 summary

Railway operating revenues of $11.5 billion increased 9 percent compared with 2017, due to an increase in revenue per unit, including increased rates as well as higher fuel surcharge revenue and higher volumes. Overall volumes were up 4 percent, reflecting growth in the major commodity categories of intermodal and merchandise, which offset a decline in coal.
Railway operating expenses of $7.5 billion increased $470 million, or 7 percent, compared with last year. Prior year expenses were impacted by the 2017 tax adjustments, which decreased railway operating expenses by $151 million. Railway operating expenses compared with last year's results, excluding the 2017 tax adjustments, were higher by $319 million, or 4 percent, due to higher diesel fuel prices, volume-related expenses, and increased costs associated with overall lower network velocity. These expenses were partially offset by higher property sales.
Income from railway operations was $4 billion, a 12 percent increase year-over-year, and an all-time record. Income from railway operations compared to prior year's results excluding $151 million in the 2017 tax adjustments, increased $588 million, or 17 percent.
The railway operating ratio was a record 65.4 percent.

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 is a major transporter of industrial products, including chemicals, agriculture, and metals and construction materials. In addition, the railroad operates the most extensive intermodal network in the East and is a principal carrier of coal, automobiles, and automotive parts.

Non-GAAP Financial Measures
This news release includes certain non-GAAP financial measures. Reconciliation of these non-GAAP financial measures is provided in the table below, entitled "Reconciliation of Non-GAAP Financial Measures."

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.

http://www.norfolksouthern.com

Reconciliation of Non-GAAP Financial Measures
Information included within this press release includes non-GAAP financial measures, as defined by SEC Regulation G. Non-GAAP financial measures should be considered in addition to, not as a substitute for, the financial measures reported in accordance with U.S. generally accepted accounting principles (GAAP).

The following table adjusts the 2017 GAAP results to exclude the effects of remeasurement of net deferred tax liabilities related to the reduction of the federal tax rate from 35 percent to 21 percent (2017 tax adjustments).

The Company uses these non-GAAP financial measures internally and believes this information provides useful supplemental information to investors to facilitate making period-to-period comparisons by excluding the effects of 2017 tax adjustments. While the Company believes that these non-GAAP financial measures are useful in evaluating the Company's business, this information should be considered as supplemental in nature and is not meant to be considered in isolation or as a substitute for the related financial information prepared in accordance with GAAP. In addition, these non-GAAP financial measures may not be the same as similar measures presented by other companies.

($ in millions except per share amounts)		Fourth- Quarter 2017		Year-Ended Dec. 31, 2017

Railway operating expenses	$	1,671)	$	7,029)
Effect of 2017 tax adjustments		151)		151)
Adjusted railway operating expenses	$	1,822)	$	7,180)

Income from railway operations	$	998)	$	3,522)
Effect of 2017 tax adjustments		(151)		(151)
Adjusted income from railway operations	$	847)	$	3,371)

Net income	$	3,968)	$	5,404)
Effect of 2017 tax adjustments		(3,482)		(3,482)
Adjusted net income	$	486)	$	1,922)

Diluted earnings per share	$	13.79)	$	18.61)
Effect of 2017 tax adjustments		(12.10)		(12.00)
Adjusted diluted earnings per share	$	1.69)	$	6.61)

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

	Fourth Quarter				Years Ended December 31,
	2018		2017		2018		2017
	($ in millions, except per share amounts)

Railway operating revenues
Merchandise	$	1,684	$	1,576	$	6,744	$	6,357
Intermodal		755 457		667		2,893		2,452
Coal		755 457		426		1,821		1,742
Total railway operating revenues		2,896		2,669		11,458		10,551

Railway operating expenses
Compensation and benefits		757		730 268		2,925		2,979
Purchased services and rents		449		730 268		1,730		1,414
Fuel		275 281		239		1,087		840
Depreciation		275 281		267		1,102		1,055
Materials and other		56		167		655		741
Total railway operating expenses		1,818		1,671		7,499		7,029

Income from railway operations		1,078		998		3,959		3,522

Other income – net		—		29		67		156
Interest expense on debt		148		134		557		550

Income before income taxes		930		893		3,469		3,128

Income taxes
Current		193		3		630		583
Deferred		35		(3,078)		173		(2,859)
Total income taxes		228		(3,075)		803		(2,276)

Net income	$	702	$	3,968	$	2,666	$	5,404

Earnings per share – diluted	$	2.57	$	13.79	$	9.51	$	18.61

Weighted average shares outstanding – diluted		273.5		287.8		280.2		290.3

See accompanying notes to consolidated financial statements.

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

	Fourth Quarter				Years Ended December 31,
	2018		2017		2018		2017
	($ in millions)

Net income	$	702	$	3,968	$	2,666	$	5,404
Other comprehensive income (loss), before tax:
Pension and other postretirement benefits		(157)		134		(148)		155
Other comprehensive income (loss) of
equity investees		(11)		20		(9)		19
Other comprehensive income (loss), before tax		(168)		154		(157)		174

Income tax benefit (expense) related to items of
other comprehensive income (loss)		40		(35)		38		(43)

Other comprehensive income (loss), net of tax		(128)		119		(119)		131

Total comprehensive income	$	574	$	4,087	$	2,547	$	5,535

See accompanying notes to consolidated financial statements.

Norfolk Southern Corporation and Subsidiaries
Consolidated Balance Sheets
(Unaudited)

	At December 31,
	2018		2017
	($ in millions)
Assets
Current assets:
Cash and cash equivalents	$	358	$	690
Accounts receivable – net		1,009		955
Materials and supplies		207		222
Other current assets		288		282
Total current assets		1,862		2,149

Investments		3,109		2,981
Properties less accumulated depreciation of $12,374 and
$11,909, respectively		31,091		30,330
Other assets		177		251

Total assets	$	36,239	$	35,711

Liabilities and stockholders' equity
Current liabilities:
Accounts payable	$	1,505	$	1,401
Short-term debt		—		100
Income and other taxes		255		211
Other current liabilities		246		233
Current maturities of long-term debt		585		600
Total current liabilities		2,591		2,545

Long-term debt		10,560		9,136
Other liabilities		1,266		1,347
Deferred income taxes		6,460		6,324

Total liabilities		20,877		19,352

Stockholders' equity:
Common stock $1.00 per share par value, 1,350,000,000 shares
authorized; outstanding 268,098,472 and 284,157,187 shares,
respectively, net of treasury shares		269		285
Additional paid-in capital		2,216		2,254
Accumulated other comprehensive loss		(563)		(356)
Retained income		13,440		14,176

Total stockholders' equity		15,362		16,359

Total liabilities and stockholders' equity	$	36,239	$	35,711

See accompanying notes to consolidated financial statements.

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

	Years Ended December 31,
	2018		2017
	($ in millions)
Cash flows from operating activities
Net income	$	2,666	$	5,404
Reconciliation of net income to net cash provided by operating activities:
Depreciation		1,104		1,059
Deferred income taxes		173		(2,859)
Gains and losses on properties		(171)		(92)
Changes in assets and liabilities affecting operations:
Accounts receivable		(70)		(41)
Materials and supplies		15		35
Other current assets		(46)		(71)
Current liabilities other than debt		223		135
Other – net		(168)		(317)

Net cash provided by operating activities		3,726		3,253

Cash flows from investing activities
Property additions		(1,951)		(1,723)
Property sales and other transactions		204		202
Investment purchases		(10)		(7)
Investment sales and other transactions		99		47

Net cash used in investing activities		(1,658)		(1,481)

Cash flows from financing activities
Dividends		(844)		(703)
Common stock transactions		40		89
Purchase and retirement of common stock		(2,781)		(1,012)
Proceeds from borrowings – net of issuance costs		2,023		290
Debt repayments		(750)		(702)

Net cash used in financing activities		(2,312)		(2,038)

Net decrease in cash, cash equivalents, and restricted cash		(244)		(266)

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

At end of year	$	446	$	690

Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest (net of amounts capitalized)	$	496	$	528
Income taxes (net of refunds)		519		705

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, "Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost," on January 1, 2018. The retrospective application resulted in the reclassification of $16 million and $64 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 fourth quarter 2017 and for the year 2017, respectively, with no impact on "Net income."
Tax Reform
As a result of the enactment of the Tax Cuts and Jobs Act ("tax reform") signed into law on December 22, 2017, the Consolidated Statements of Income included a $151 million benefit in "Purchased services and rents" and a $3,331 million benefit in "Total income taxes," which added $3,482 million to "Net income" and $12.10 and $12.00 to "Earnings per share – diluted" in the fourth quarter 2017 and for the year 2017, respectively.
Stock Repurchase Programs
We repurchased and retired 17.1 million shares (7.0 million shares under an accelerated stock repurchase program (ASR) and 10.1 million shares under our ongoing program) and 8.2 million shares of common stock under our stock repurchase programs in 2018 and 2017, respectively, at a cost of $2.8 billion and $1.0 billion, respectively. We entered into an ASR on August 2, 2018 with two 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 ASR was settled during the fourth quarter of 2018.

Since the beginning of 2006, we have repurchased and retired 185.6 million shares at a total cost of $14.1 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 tax reform 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" on the Consolidated Balance Sheets.
Restricted Cash
The "Cash, cash equivalents, and restricted cash" line item on the Consolidated Statements of Cash Flows includes restricted cash of $88 million at December 31, 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 current assets" on the Consolidated Balance Sheets.