Norfolk Southern reports second-quarter 2018 results

Records for second-quarter operating income, operating ratio, net income and earnings per share

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Jul 25, 2018, 08:00 ET

NORFOLK, Va., July 25, 2018 /PRNewswire/ -- Norfolk Southern Corporation (NYSE: NSC) today reported record second-quarter financial results.

Net income was $710 million, up 43 percent year-over-year, a result of an 18 percent increase in income from railway operations and a lower effective income tax rate. Diluted earnings per share were $2.50, up 46 percent year-over-year and a second-quarter record.

"Our second-quarter results reflect strong growth in our business and our sustained commitment to improving financial performance," said James A. Squires, Norfolk Southern chairman, president and CEO. "We are committed to delivering financial results that benefit our shareholders and service that benefits our customers."

Second-quarter summary

Railway operating revenues of $2.9 billion increased 10 percent compared with second-quarter 2017, as overall volumes were up 6 percent reflecting growth in all three major commodity categories of intermodal, merchandise and coal.

Railway operating expenses increased $107 million, or 6 percent, to $1.9 billion compared with the same period last year largely a result of higher fuel prices, higher incentive compensation, and increased costs associated with overall lower network velocity offset, in part, by refund claims for prior years' employment taxes paid on equity awards.

Income from railway operations was $1.0 billion, an increase of 18 percent year-over-year, a record for any quarter. The railway operating ratio, or operating expenses as a percentage of revenues, was 64.6 percent, a second-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)

	Second Quarter				First Six Months
	2018		2017		2018		2017
	($ in millions, except per share amounts)

Railway operating revenues
Merchandise	$	1,718	$	1,597	$	3,323	$	3,181
Intermodal		714		593		1,392		1,164
Coal		466		447		900		867
Total railway operating revenues		2,898		2,637		5,615		5,212

Railway operating expenses
Compensation and benefits		706		719		1,443		1,478
Purchased services and rents		430		392		831		769
Fuel		272		190		538		403
Depreciation		273		264		545		523
Materials and other		191		200		397		410

Total railway operating expenses		1,872		1,765		3,754		3,583

Income from railway operations		1,026		872		1,861		1,629

Other income – net		29		48		37		88
Interest expense on debt		131		140		267		282

Income before income taxes		924		780		1,631		1,435

Income taxes
Current		170		225		280		391
Deferred		44		58		89		114
Total income taxes		214		283		369		505

Net income	$	710	$	497	$	1,262	$	930

Earnings per share - diluted	$	2.50	$	1.71	$	4.43	$	3.18

Weighted average shares outstanding - diluted		283.7		291.2		284.8		292.0

See accompanying notes to consolidated financial statements.

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

	Second Quarter				First Six Months
	2018		2017		2018		2017
	($ in millions)

Net income	$	710	$	497	$	1,262	$	930
Other comprehensive income, before tax:
Pension and other postretirement benefit		8		7		1		14
Other comprehensive income (loss) of
equity investees		1		1		2		(1)
Other comprehensive income, before tax		9		8		3		13

Income tax expense related to items of
other comprehensive income		(2)		(3)		—		(6)

Other comprehensive income, net of tax		7		5		3		7

Total comprehensive income	$	717	$	502	$	1,265	$	937

See accompanying notes to consolidated financial statements.

Norfolk Southern Corporation and Subsidiaries
Consolidated Balance Sheets
(Unaudited)

	June 30,		December 31,
	2018		2017
	($ in millions)
Assets
Current assets:
Cash and cash equivalents	$	430	$	690
Accounts receivable – net		1,035		955
Materials and supplies		260		222
Other current assets		179		282
Total current assets		1,904		2,149

Investments		3,058		2,981
Properties less accumulated depreciation of $12,175 and
$11,909, respectively		30,540		30,330
Other assets		286		251

Total assets	$	35,788	$	35,711

Liabilities and stockholders' equity
Current liabilities:
Accounts payable	$	1,323	$	1,401
Short-term debt		—		100
Income and other taxes		269		211
Other current liabilities		260		233
Current maturities of long-term debt		500		600
Total current liabilities		2,352		2,545

Long-term debt		9,146		9,136
Other liabilities		1,317		1,347
Deferred income taxes		6,414		6,324

Total liabilities		19,229		19,352

Stockholders' equity:
Common stock $1.00 per share par value, 1,350,000,000 shares
authorized; outstanding 280,029,764 and 284,157,187 shares,
respectively, net of treasury shares		281		285
Additional paid-in capital		2,263		2,254
Accumulated other comprehensive loss		(441)		(356)
Retained income		14,456		14,176

Total stockholders' equity		16,559		16,359

Total liabilities and stockholders' equity	$	35,788	$	35,711

See accompanying notes to consolidated financial statements.

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

	First Six Months
	2018		2017
	($ in millions)
Cash flows from operating activities
Net income	$	1,262	$	930
Reconciliation of net income to net cash provided by operating activities:
Depreciation		546		525
Deferred income taxes		89		114
Gains and losses on properties		(14)		(20)
Changes in assets and liabilities affecting operations:
Accounts receivable		(92)		(12)
Materials and supplies		(38)		(32)
Other current assets		19		48
Current liabilities other than debt		134		93
Other – net		(80)		(70)

Net cash provided by operating activities		1,826		1,576

Cash flows from investing activities
Property additions		(836)		(883)
Property sales and other transactions		48		60
Investment purchases		(4)		(4)
Investment sales and other transactions		6		3

Net cash used in investing activities		(786)		(824)

Cash flows from financing activities
Dividends		(408)		(354)
Common stock transactions		15		42
Purchase and retirement of common stock		(700)		(402)
Proceeds from borrowings – net of issuance costs		543		298
Debt repayments		(750)		(650)

Net cash used in financing activities		(1,300)		(1,066)

Net decrease in cash and cash equivalents		(260)		(314)

Cash and cash equivalents
At beginning of year		690		956

At end of period	$	430	$	642

Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest (net of amounts capitalized)	$	246	$	270
Income taxes (net of refunds)		126		341

See accompanying notes to consolidated financial statements.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS:

Pension 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 $32 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 second quarter and first six months of 2017, respectively.
Stock Repurchase Program
We repurchased and retired 4.8 million and 3.4 million shares of common stock under our stock repurchase program in the first six months of 2018 and 2017, respectively, at a cost of $700 million and $402 million, respectively. Since the beginning of 2006, we have repurchased and retired 173.3 million shares at a total cost of $12.0 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."