Norfolk Southern reports second-quarter 2016 results

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Jul 27, 2016, 08:00 ET

NORFOLK, Va., July 27, 2016 /PRNewswire/ --

Second-quarter 2016 results

Diluted earnings per share were $1.36.
Operating ratio improved to 68.6 percent, reflecting an 11 percent reduction in operating expenses coupled with a 10 percent decline in operating revenues.

Norfolk Southern Corporation (NYSE: NSC) today reported financial results for second-quarter 2016. Net income was $405 million, compared with $433 million during the same period of 2015. Diluted earnings per share were $1.36, 4 percent lower compared with $1.41 per diluted share earned in the second quarter last year.

"Our second-quarter results reflect our unwavering focus on cost-control, steadfast commitment to customer service, and significant improvements in network performance," said Chairman, President, and CEO James A. Squires. "We are on track to achieve productivity savings of at least $200 million for 2016, and our record first half operating ratio of 69.4 percent gives us confidence we'll achieve a full-year operating ratio below 70 percent. Through the continued execution of our strategic plan, we remain confident in our ability to drive superior shareholder value through excellent customer service that positions us for future revenue growth, combined with network efficiency and asset utilization."

Second-quarter summary

Railway operating revenues were $2.5 billion, down 10 percent compared with second-quarter 2015, due to reduced volumes and lower fuel surcharge revenues. Overall volume declined 7 percent to 1.8 million units for the quarter.
Merchandise revenues were $1.6 billion, 3 percent lower than the same period last year. Volume declined 3 percent, largely due to fewer chemicals shipments resulting from continued low oil prices. The five merchandise commodity groups reported the following year-over-year revenue results:
- Chemicals: $426 million, down 6 percent
- Agriculture: $383 million, up 1 percent
- Metals/Construction: $334 million, down 3 percent
- Automotive: $248 million, down 2 percent
- Paper/Forest: $186 million, down 5 percent
Intermodal revenues were $538 million, 15 percent lower compared with second-quarter 2015. Volume declined 5 percent primarily due to the restructuring of the company's Triple Crown Services subsidiary.
Coal revenues were $339 million, 25 percent lower compared with second-quarter 2015. High stockpiles, limited coal burn due to mild winter weather, and sustained low natural gas prices combined to decrease volume by 24 percent.
Railway operating expenses declined 11 percent to $1.7 billion, primarily due to cost reduction initiatives as well as lower fuel costs, compared with the same period of 2015.
Income from railway operations was $770 million, 5 percent lower compared with second-quarter 2015.
The composite service metric improved 13 percent in the quarter and 18 percent for the first six months of 2016, compared with the same periods last year.
The operating ratio, or operating expenses as a percentage of revenue, was 68.6 percent, a 140 basis point improvement compared with 70.0 percent in the second quarter of last year.

About Norfolk Southern
Norfolk Southern Corporation is one of the nation's premier transportation companies. Its Norfolk Southern Railway 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.

http://www.norfolksouthern.com

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

	Second Quarter				First Six Months
	2016		2015		2016		2015
	($ in millions, except per share amounts)

Railway operating revenues
Merchandise	$	1,577	$	1,627	$	3,126	$	3,147
Intermodal		538		633		1,060		1,225
Coal		339		453		688		908
Total railway operating revenues		2,454		2,713		4,874		5,280

Railway operating expenses
Compensation and benefits		667		724		1,390		1,507
Purchased services and rents		384		438		763		861
Fuel		174		255		323		519
Depreciation		257		247		509		492
Materials and other		202		235		396		481

Total railway operating expenses		1,684		1,899		3,381		3,860

Income from railway operations		770		814		1,493		1,420

Other income – net		4		19		20		40
Interest expense on debt		138		134		277		266

Income before income taxes		636		699		1,236		1,194

Provision for income taxes
Current		174		243		343		416
Deferred		57		23		101		35
Total income taxes		231		266		444		451

Net income	$	405	$	433	$	792	$	743

Earnings per share
Basic	$	1.37	$	1.43	$	2.67	$	2.43
Diluted		1.36		1.41		2.65		2.41

Weighted average shares outstanding (note 1)
Basic		294.7		302.9		296.0		304.8
Diluted		296.6		305.5		297.7		307.5

See accompanying notes to consolidated financial statements.

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

	Second Quarter				First Six Months
	2016		2015		2016		2015
	($ in millions)

Net income	$	405	$	433	$	792	$	743
Other comprehensive income, before tax:
Pension and other postretirement benefits		6		11		13		21
Other comprehensive income (loss) of
equity investees		1		—		—		(4)

Other comprehensive income, before tax		7		11		13		17
Income tax expense related to items of other
comprehensive income		(2)		(5)		(5)		(8)

Other comprehensive income, net of tax		5		6		8		9

Total comprehensive income	$	410	$	439	$	800	$	752

See accompanying notes to consolidated financial statements.

Norfolk Southern Corporation and Subsidiaries
Consolidated Balance Sheets
(Unaudited)

	June 30,		December 31,
	2016		2015
	($ in millions)
Assets
Current assets:
Cash and cash equivalents	$	866	$	1,101
Accounts receivable – net		985		946
Materials and supplies		306		271
Other current assets		82		194
Total current assets (note 2)		2,239		2,512

Investments		2,639		2,572
Properties less accumulated depreciation of $11,586 and
$11,478, respectively		29,387		28,992
Other assets		69		63

Total assets	$	34,334	$	34,139

Liabilities and stockholders' equity
Current liabilities:
Accounts payable	$	1,085	$	1,091
Short-term debt		—		200
Income and other taxes		205		203
Other current liabilities		267		237
Current maturities of long-term debt		550		500
Total current liabilities		2,107		2,231

Long-term debt		9,549		9,393
Other liabilities		1,358		1,385
Deferred income taxes (note 2)		9,047		8,942

Total liabilities		22,061		21,951

Stockholders' equity:
Common stock $1.00 per share par value, 1,350,000,000 shares
authorized; outstanding 293,549,767 and 297,795,016 shares,
respectively, net of treasury shares		295		299
Additional paid-in capital		2,146		2,143
Accumulated other comprehensive loss		(437)		(445)
Retained income		10,269		10,191

Total stockholders' equity		12,273		12,188

Total liabilities and stockholders' equity	$	34,334	$	34,139

See accompanying notes to consolidated financial statements.

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

	First Six Months
	2016		2015
	($ in millions)
Cash flows from operating activities
Net income	$	792	$	743
Reconciliation of net income to net cash provided by operating activities:
Depreciation		511		494
Deferred income taxes		101		35
Gains and losses on properties		(7)		(18)
Changes in assets and liabilities affecting operations:
Accounts receivable		(17)		—
Materials and supplies		(35)		(41)
Other current assets		103		282
Current liabilities other than debt (note 3)		25		27
Other – net		(41)		(21)

Net cash provided by operating activities		1,432		1,501

Cash flows from investing activities
Property additions		(932)		(886)
Property sales and other transactions		40		32
Investment purchases		(23)		(3)
Investment sales and other transactions		3		5

Net cash used in investing activities		(912)		(852)

Cash flows from financing activities
Dividends		(350)		(360)
Common stock transactions (note 3)		1		—
Purchase and retirement of common stock (note 1)		(400)		(765)
Proceeds from borrowings – net		594		494
Debt repayments		(600)		(102)

Net cash used in financing activities		(755)		(733)

Net decrease in cash and cash equivalents		(235)		(84)

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

At end of period	$	866	$	889

Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest (net of amounts capitalized)	$	260	$	249
Income taxes (net of refunds)		251		55

See accompanying notes to consolidated financial statements.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS:

Stock Repurchase Program
We repurchased and retired 5.0 million and 7.4 million shares of common stock under our stock repurchase program in the first six months of 2016 and 2015, respectively, at a cost of $400 million and $765 million, respectively. 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 156.1 million shares at a total cost of $9.9 billion.
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 adopted the provisions of this ASU during the first quarter of 2016 and applied it retrospectively. The adoption of ASU 2015-17 resulted in the presentation of $110 million of current deferred income tax assets as a reduction of "Deferred income taxes" in the long-term liabilities section of the Consolidated Balance Sheet at June 30, 2016. We retrospectively presented the December 31, 2015, Consolidated Balance Sheet and related disclosures to reflect the reclassification of $121 million of deferred income tax assets from "Deferred income taxes" in the current assets section of the balance sheet 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 affects 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 $6 million recognized in the "Provision for income taxes" line item for the six months ended June 30, 2016. The classification requirements on the Consolidated Statements of Cash Flows for the adoption of ASU 2016-09 resulted in a $23 million increase in "Current liabilities other than debt" within the operating activities section and a corresponding decrease in "Common stock transactions" within the financing activities section for the first six months of 2016. We retrospectively presented the Consolidated Statements of Cash Flows for the first six months of 2015 to reflect a $28 million increase in "Current liabilities other than debt" within the operating activities section and a corresponding decrease in "Common stock transactions" within the financing activities section.