Norfolk Southern reports third-quarter 2016 results

- Diluted earnings per share were $1.55.

- Operating ratio improved to 67.5 percent, reflecting a 10 percent reduction in operating expenses coupled with a 7 percent decline in operating revenues.

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Norfolk Southern Corporation

Oct 26, 2016, 08:00 ET

NORFOLK, Va., Oct. 26, 2016 /PRNewswire/ -- Norfolk Southern Corporation (NYSE: NSC) today reported financial results for third-quarter 2016. Net income was $460 million, 2 percent higher compared with $452 million during the same period of 2015. Diluted earnings per share were $1.55, 4 percent higher compared with $1.49 per diluted share earned in the third quarter last year.

"Our continued focus on efficiency and asset utilization, balanced with our commitment to customer service, drove an operating ratio of 67.5 percent for the quarter and a record 68.7 percent for the first nine months, setting us well on the way to achieving productivity savings of about $250 million and an operating ratio below 70 percent for the year -- even in the face of economic headwinds," said Chairman, President and CEO James A. Squires. "As we move forward, we are well positioned for growth opportunities longer term and confident in our ability to drive shareholder value."

Third-quarter summary

Railway operating revenues were $2.5 billion, down 7 percent compared with third-quarter 2015, due to reduced volumes and lower fuel surcharge revenues. Overall volume declined 4 percent to 1.9 million units for the quarter.
General merchandise revenues were $1.6 billion, 4 percent lower than the same period last year. Volume declined 4 percent, due to fewer crude oil, vehicles, pulpboard, and feed market shipments. The five merchandise commodity groups reported the following year-over-year revenue results:
- Chemicals: $408 million, down 10 percent
- Agriculture: $380 million, even
- Metals/Construction: $337 million, up 2 percent
- Automotive: $236 million, down 4 percent
- Paper/Forest: $191 million, down 6 percent
Intermodal revenues were $575 million, 7 percent lower compared with third-quarter 2015. Volume declined one percent due to lower Triple Crown Services volume, a result of last year's restructuring. Domestic volume, excluding Triple Crown Services, and International volume were up 8 percent and one percent, respectively.
Coal revenues were $397 million, 18 percent lower compared with the same quarter last year. Above-normal stockpiles and low natural gas prices combined to decrease volume by 15 percent.
Railway operating expenses declined 10 percent to $1.7 billion, primarily due to targeted expense reduction initiatives, reduced fuel expenses, the absence of last year's restructuring costs, and gains from the disposition of operating property. These decreases were partially offset by higher incentive compensation expense related to improved operating results.
Income from railway operations was $820 million, flat compared with third-quarter 2015.
The composite service metric, which measures train performance, terminal operations, and operating plan adherence, improved 8 percent in the quarter, and 14 percent for the first nine months, compared with the same periods last year.
The railway operating ratio, or operating expenses as a percentage of revenue, was 67.5 percent, a 220 basis point improvement compared with 69.7 percent in the third quarter of last year.

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 milesin 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)

	Third Quarter				First Nine Months
	2016		2015		2016		2015
	($ in millions, except per share amounts)

Railway operating revenues
Merchandise	$	1,552	$	1,610	$	4,678	$	4,757
Intermodal		575		621		1,635		1,846
Coal		397		482		1,085		1,390
Total railway operating revenues		2,524		2,713		7,398		7,993

Railway operating expenses
Compensation and benefits		691		702		2,081		2,209
Purchased services and rents		386		451		1,149		1,312
Fuel		181		221		504		740
Depreciation		258		275		767		767
Materials and other		188		242		584		723

Total railway operating expenses		1,704		1,891		5,085		5,751

Income from railway operations		820		822		2,313		2,242

Other income – net		29		39		49		79
Interest expense on debt		144		137		421		403

Income before income taxes		705		724		1,941		1,918

Provision for income taxes
Current		169		251		512		667
Deferred		76		21		177		56
Total income taxes		245		272		689		723

Net income	$	460	$	452	$	1,252	$	1,195

Earnings per share
Basic	$	1.56	$	1.50	$	4.23	$	3.93
Diluted		1.55		1.49		4.21		3.90

Weighted average shares outstanding
Basic		292.7		300.1		294.9		303.2
Diluted		294.7		302.5		296.7		305.8

See accompanying notes to consolidated financial statements.

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

	Third Quarter				First Nine Months
	2016		2015		2016		2015
	($ in millions)

Net income	$	460	$	452	$	1,252	$	1,195
Other comprehensive income, before tax:
Pension and other postretirement benefits		7		10		20		31
Other comprehensive loss of
equity investees		—		—		—		(4)

Other comprehensive income, before tax		7		10		20		27
Income tax expense related to items of other
comprehensive income		(3)		(3)		(8)		(11)

Other comprehensive income, net of tax		4		7		12		16

Total comprehensive income	$	464	$	459	$	1,264	$	1,211

See accompanying notes to consolidated financial statements.

Norfolk Southern Corporation and Subsidiaries Consolidated Balance Sheets (Unaudited)

	September 30,		December 31,
	2016		2015
	($ in millions)
Assets
Current assets:
Cash and cash equivalents	$	984	$	1,101
Accounts receivable – net		960		946
Materials and supplies		301		271
Other current assets		72		194
Total current assets		2,317		2,512

Investments		2,779		2,572
Properties less accumulated depreciation of $11,663 and
$11,478, respectively		29,467		28,992
Other assets		69		63

Total assets	$	34,632	$	34,139

Liabilities and stockholders' equity
Current liabilities:
Accounts payable	$	1,131	$	1,091
Short-term debt		—		200
Income and other taxes		218		203
Other current liabilities		333		237
Current maturities of long-term debt		550		500
Total current liabilities		2,232		2,231

Long-term debt		9,555		9,393
Other liabilities		1,322		1,385
Deferred income taxes		9,127		8,942

Total liabilities		22,236		21,951

Stockholders' equity:
Common stock $1.00 per share par value, 1,350,000,000 shares
authorized; outstanding 291,942,235 and 297,795,016 shares,
respectively, net of treasury shares		293		299
Additional paid-in capital		2,169		2,143
Accumulated other comprehensive loss		(433)		(445)
Retained income		10,367		10,191

Total stockholders' equity		12,396		12,188

Total liabilities and stockholders' equity	$	34,632	$	34,139

See accompanying notes to consolidated financial statements.

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

	First Nine Months
	2016		2015
	($ in millions)
Cash flows from operating activities
Net income	$	1,252	$	1,195
Reconciliation of net income to net cash provided
by operating activities:
Depreciation		770		770
Deferred income taxes		177		56
Gains and losses on properties and investments		(38)		(20)
Changes in assets and liabilities affecting operations:
Accounts receivable		8		(48)
Materials and supplies		(30)		(52)
Other current assets		130		295
Current liabilities other than debt		149		88
Other – net		(106)		(76)

Net cash provided by operating activities		2,312		2,208

Cash flows from investing activities
Property additions		(1,304)		(1,777)
Property sales and other transactions		87		43
Investment purchases		(119)		(5)
Investment sales and other transactions		6		32

Net cash used in investing activities		(1,330)		(1,707)

Cash flows from financing activities
Dividends		(523)		(537)
Common stock transactions		33		1
Purchase and retirement of common stock		(603)		(997)
Proceeds from borrowings – net		594		594
Debt repayments		(600)		(102)

Net cash used in financing activities		(1,099)		(1,041)

Net decrease in cash and cash equivalents		(117)		(540)

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

At end of period	$	984	$	433

Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest (net of amounts capitalized)	$	337	$	320
Income taxes (net of refunds)		409		350

See accompanying notes to consolidated financial statements.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS:

Stock Repurchase Program
We repurchased and retired 7.2 million and 10.3 million shares of common stock under our stock repurchase program in the first nine months of 2016 and 2015, respectively, at a cost of $603 million and $997 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 158.3 million shares at a total cost of $10.1 billion.
Restructuring Costs
Third quarter 2015 operating expenses include $37 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 $23 million, or $0.08 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 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 $121 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 September 30, 2016. We retrospectively presented the December 31, 2015, Consolidated Balance Sheet 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 $12 million recognized in the "Provision for income taxes" line item for the nine months ended September 30, 2016. The classification requirements on the Consolidated Statements of Cash Flows for the adoption of ASU 2016-09 resulted in a $29 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 nine months of 2016. We retrospectively presented the Consolidated Statements of Cash Flows for the first nine months of 2015 to reflect a $29 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.