Norfolk Southern reports fourth-quarter and full-year 2016 results

Achieves record operating ratio of 68.9 percent for the year

News provided by

Jan 25, 2017, 07:00 ET

NORFOLK, Va., Jan. 25, 2017 /PRNewswire/ -- Norfolk Southern Corporation (NYSE: NSC) today reported fourth-quarter and 2016 financial results.

Net income for the quarter was $416 million, a 15 percent increase compared with $361 million during the same period of 2015. Diluted earnings per share were $1.42, up 18 percent compared with $1.20 diluted earnings per share in the fourth quarter last year. Norfolk Southern announced Tuesday that it increased its quarterly dividend to $0.61 per share, reflecting a 2 cent, or 3 percent, increase over the previous quarter's dividend.

For 2016, net income was $1.7 billion, up 7 percent compared with $1.6 billion in 2015. Diluted earnings per share increased 10 percent to $5.62 compared with $5.10 per diluted share in the prior year. Results for 2015 included restructuring expenses that reduced fourth-quarter 2015 net income by $31 million, or $0.10 per diluted share, and lowered 2015 net income by $58 million, or $0.19 per diluted share for the full year.

"2016 was a pivotal year as Norfolk Southern began implementing its new Strategic Plan. We delivered $250 million of productivity savings and recorded our best ever operating ratio, notwithstanding challenging business conditions," said James A. Squires, Norfolk Southern chairman, president and CEO. "With the dedication and support of Norfolk Southern's talented employees, we improved service for customers while positioning the company for further growth in 2017 and beyond. We are poised to continue building on our success and deliver an additional $100 million of productivity savings in 2017 on the way to our goal of $650 million of annual savings by 2020. We remain steadfast in our commitment to delivering superior shareholder value through the execution of our Strategic Plan."

FOURTH-QUARTER SUMMARY

Railway operating revenues of $2.5 billion declined 1 percent compared with fourth-quarter 2015, reflecting lower merchandise and coal traffic volume, as well as reduced fuel surcharges. These declines were offset in part by intermodal volume growth that eclipsed the effects of the 2015 Triple Crown restructuring.
General merchandise revenues were $1.5 billion, 1 percent lower than the same period last year. Volume was 3% lower overall, as growth in steel and agriculture was offset by declines in energy markets, vehicles, and paper and forest products. Norfolk Southern's five merchandise commodity groups reported the following year-over-year revenue results:
- Agriculture: $399 million, up 4 percent
- Chemicals: $395 million, down 7 percent
- Metals/Construction: $296 million, up 6 percent
- Automotive: $237 million, down 5 percent
- Paper/Forest: $177 million, down 5 percent

Intermodal revenues increased to $583 million, a 4 percent gain compared with fourth-quarter 2015. Volumes increased 7 percent, with growth in domestic and international traffic offsetting the Triple Crown restructuring.

Coal revenues declined 7 percent to $403 million compared with fourth-quarter 2015. Volume fell 4 percent with an increase in export coal softening the decline in the utility market.

Railway operating expenses declined $147 million, or 8 percent, to $1.7 billion compared with same period last year due to targeted expense reductions and the absence of last year's restructuring costs.

Income from railway operations was $761 million, an increase of 19 percent compared with fourth-quarter 2015.

The composite service metric, which measures train performance, terminal operations, and operating plan adherence, was 80 percent, a 200 basis point improvement compared with 78 percent in the same quarter last year.

The railway operating ratio, or operating expenses as a percentage of revenues, was 69.4 percent, a 510 basis point improvement compared with 74.5 percent in the fourth quarter of 2015.

2016 SUMMARY

Railway operating revenues were $9.9 billion, 6 percent lower compared with 2015. The decrease was driven by a 3 percent volume decline due to reductions in energy-related markets and the Triple Crown restructuring, as well as reduced fuel surcharges.
General merchandise revenues were $6.2 billion, a 2 percent decrease compared with the prior year. Volume declined 2 percent, primarily due to reduced demand in energy markets, and fuel surcharges were lower.
Intermodal revenues totaled $2.2 billion, 8 percent lower compared with 2015, reflecting the Triple Crown restructuring, as well as reduced fuel surcharges. International and domestic growth more than offset the volume decline from the Triple Crown restructuring.
Coal revenues were $1.5 billion, down 18 percent year-over-year. Reduced utility volumes combined with a weak global export market lowered total volume by 16 percent.
Railway operating expenses declined $813 million, or 11 percent, to $6.8 billion primarily due to targeted expense reduction initiatives, lower fuel expenses, the absence of last year's restructuring cost, and service improvements.
Income from railway operations was $3.1 billion, a 7 percent increase compared with the previous year.
The composite service metric was 80 percent, an 800 basis point improvement compared with 72 percent last year.
The operating ratio for the year was a record 68.9 percent, a 370 basis point improvement compared with 72.6 percent in the prior year.

For 2017, Norfolk Southern plans to invest $1.9 billion to maintain the safety of its rail network, enhance service, improve operational efficiency, and support growth opportunities, which is consistent with Norfolk Southern's total capital investment of $1.9 billion in 2016.

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 20,000 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.

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

	Fourth Quarter				Years Ended December 31,
	2016		2015		2016		2015
	($ in millions, except per share amounts)

Railway operating revenues
Merchandise	$	1,504	$	1,522	$	6,182	$	6,279
Intermodal		583		563		2,218		2,409
Coal		403		433		1,488		1,823
Total railway operating revenues		2,490		2,518		9,888		10,511

Railway operating expenses
Compensation and benefits		662		702		2,743		2,911
Purchased services and rents		399		440		1,548		1,752
Fuel		194		194		698		934
Depreciation		259		287		1,026		1,054
Materials and other		215		253		799		976

Total railway operating expenses		1,729		1,876		6,814		7,627

Income from railway operations		761		642		3,074		2,884

Other income – net		22		24		71		103
Interest expense on debt		142		142		563		545

Income before income taxes		641		524		2,582		2,442

Provision for income taxes
Current		175		(101)		687		566
Deferred		50		264		227		320
Total income taxes		225		163		914		886

Net income	$	416	$	361	$	1,668	$	1,556

Earnings per share
Basic	$	1.43	$	1.21	$	5.66	$	5.13
Diluted		1.42		1.20		5.62		5.10

Weighted average shares outstanding
Basic		291.2		297.9		293.9		301.9
Diluted		293.7		300.4		296.0		304.4

See accompanying notes to consolidated financial statements.

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

	Fourth Quarter				Years Ended December 31,
	2016		2015		2016		2015
	($ in millions)

Net income	$	416	$	361	$	1,668	$	1,556
Other comprehensive loss, before tax:
Pension and other postretirement benefits		(94)		(107)		(74)		(76)
Other comprehensive income (loss) of
equity investees		5		4		5		—

Other comprehensive loss, before tax		(89)		(103)		(69)		(76)
Income tax benefit related to items of other
comprehensive loss		35		40		27		29

Other comprehensive loss, net of tax		(54)		(63)		(42)		(47)

Total comprehensive income	$	362	$	298	$	1,626	$	1,509

See accompanying notes to consolidated financial statements.

Norfolk Southern Corporation and Subsidiaries
Consolidated Balance Sheets
(Unaudited)

	At December 31,
	2016		2015
	($ in millions)
Assets
Current assets:
Cash and cash equivalents	$	956	$	1,101
Accounts receivable – net		945		946
Materials and supplies		257		271
Other current assets		133		194
Total current assets		2,291		2,512

Investments		2,777		2,572
Properties less accumulated depreciation of $11,737 and
$11,478, respectively		29,751		28,992
Other assets		73		63

Total assets	$	34,892	$	34,139

Liabilities and stockholders' equity
Current liabilities:
Accounts payable	$	1,215	$	1,091
Short-term debt		100		200
Income and other taxes		245		203
Other current liabilities		229		237
Current maturities of long-term debt		550		500
Total current liabilities		2,339		2,231

Long-term debt		9,562		9,393
Other liabilities		1,442		1,385
Deferred income taxes		9,140		8,942
Total liabilities		22,483		21,951


Stockholders' equity:
Common stock $1.00 per share par value, 1,350,000,000 shares
authorized; outstanding 290,417,610 and 297,795,016 shares,
respectively, net of treasury shares		292		299
Additional paid-in capital		2,179		2,143
Accumulated other comprehensive loss		(487)		(445)
Retained income		10,425		10,191

Total stockholders' equity		12,409		12,188

Total liabilities and stockholders' equity	$	34,892	$	34,139

See accompanying notes to consolidated financial statements.

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

	Years Ended December 31,
	2016		2015
	($ in millions)
Cash flows from operating activities
Net income	$	1,668	$	1,556
Reconciliation of net income to net cash provided
by operating activities:
Depreciation		1,030		1,059
Deferred income taxes		227		320
Gains and losses on properties and investments		(46)		(30)
Changes in assets and liabilities affecting operations:
Accounts receivable		23		109
Materials and supplies		42		(35)
Other current assets		82		192
Current liabilities other than debt		158		(152)
Other – net		(150)		(111)

Net cash provided by operating activities		3,034		2,908

Cash flows from investing activities
Property additions		(1,887)		(2,385)
Property sales and other transactions		130		63
Investment purchases		(123)		(5)
Investment sales and other transactions		48		240

Net cash used in investing activities		(1,832)		(2,087)

Cash flows from financing activities
Dividends		(695)		(713)
Common stock transactions		57		12
Purchase and retirement of common stock		(803)		(1,075)
Proceeds from borrowings – net		694		1,185
Debt repayments		(600)		(102)

Net cash used in financing activities		(1,347)		(693)

Net increase (decrease) in cash and cash equivalents		(145)		128

Cash and cash equivalents
At beginning of year		1,101		973

At end of year	$	956	$	1,101

Supplemental disclosures of cash flow information
Cash paid during the year for:
Interest (net of amounts capitalized)	$	543	$	518
Income taxes (net of refunds)		593		386


See accompanying notes to consolidated financial statements.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS:

Stock Repurchase Program
We repurchased and retired 9.2 million and 11.3 million shares of common stock under our stock repurchase program in 2016 and 2015, respectively, at a cost of $803 million and $1.1 billion, respectively. On August 1, 2012, our Board of Directors authorized the repurchase of up to an additional 50 million shares of common stock through December 31, 2017, and 14.7 million shares remain under this authority as of December 31, 2016. The timing and volume of purchases is guided by our assessment of market conditions and other pertinent factors. Any near-term share repurchases are expected to be made with internally generated cash, cash on hand, or proceeds from borrowings. Since the beginning of 2006, we have repurchased and retired 160.3 million shares at a total cost of $10.3 billion.
Restructuring Costs
Fourth quarter 2015 operating expenses include $49 million of costs associated with the restructuring of our Triple Crown Services subsidiary and the closure of our Roanoke, Virginia, office which reduced net income by $31 million, or $0.10 per diluted share. For 2015, results include $93 million of such costs, which reduced net income by $58 million, or $0.19 per diluted share.
New Accounting Pronouncement- Deferred Taxes
In November 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2015-17, "Balance Sheet Classification of Deferred Taxes." This update requires that deferred tax liabilities and assets be classified as noncurrent on the balance sheet rather than as separate current and noncurrent amounts. We retrospectively adopted the provisions of this ASU during the first quarter of 2016 and presented the December 31, 2015, Consolidated Balance Sheet to reflect the reclassification of $121 million of deferred income tax assets from current assets to "Deferred income taxes" in the long-term liabilities section of the balance sheet.
New Accounting Pronouncement- Stock-Based Compensation
In March 2016, the FASB issued ASU No. 2016-09, "Improvements to Employee Share-Based Payment Accounting." We adopted the provisions of this ASU during the first quarter of 2016. This update principally affected the recognition of excess tax benefits and deficiencies and the cash flow classification of share-based compensation-related transactions. The requirement to recognize excess tax benefits and deficiencies as income tax expense or benefit in the income statement was applied prospectively, with a benefit of $17 million recognized in the "Provision for income taxes" line item for the year ended December 31, 2016. The classification requirements on the Consolidated Statements of Cash Flows for the adoption of ASU 2016-09 resulted in a $34 million increase in operating activities and a corresponding decrease in financing activities for the year ended December 31, 2016. We retrospectively presented the Consolidated Statements of Cash Flows for the year ended December 31, 2015 to reflect a $31 million increase in operating activities and a corresponding decrease in financing activities.