UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the quarterly period endedMARCH 31, 20182019
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the transition period from ___________ to___________
Commission file number 1-8339
NORFOLK SOUTHERN CORPORATION
(Exact name of registrant as specified in its charter)
|
| |
Virginia | 52-1188014 |
(State or other jurisdiction of incorporation) | 52-1188014
(IRS Employer Identification No.) |
Three Commercial Place Norfolk, Virginia
| 23510-2191 |
(Address of principal executive offices) | 23510-2191
(Zip Code) |
(757) 629-2680 |
(Registrant’s telephone number, including area code) |
No Change (Former name, former address and former fiscal year, if changed since last report) |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer [X] Accelerated filer [ ] Non-accelerated filer [ ] Smaller reporting company [ ] Emerging growth company [ ]
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange ActAct. [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
|
| | | |
Class | | Outstanding at March 31, 20182019 |
Common Stock ($1.00 par value per share) | | 282,541,886 (excluding265,967,039 | (excluding 20,320,777 shares held by the registrant’s |
| | consolidated subsidiaries) |
TABLE OF CONTENTS
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Norfolk Southern Corporation and Subsidiaries
Consolidated Statements of Income
(Unaudited)
| | | First Quarter | | First Quarter |
| 2018 | | 2017 | | 2019 | | 2018 |
| ($ in millions, except per share amounts) | ($ in millions, except per share amounts) |
| | | | | | | |
Railway operating revenues | $ | 2,717 |
| | $ | 2,575 |
| | $ | 2,840 |
| | $ | 2,717 |
|
| | | | | | | |
Railway operating expenses: | |
| | |
| | |
| | |
|
Compensation and benefits | 737 |
| | 759 |
| | 727 |
| | 737 |
|
Purchased services and rents | 401 |
| | 377 |
| | 424 |
| | 401 |
|
Fuel | 266 |
| | 213 |
| | 250 |
| | 266 |
|
Depreciation | 272 |
| | 259 |
| | 283 |
| | 272 |
|
Materials and other | 206 |
| | 210 |
| | 190 |
| | 206 |
|
| | | | | | | |
Total railway operating expenses | 1,882 |
| | 1,818 |
| | 1,874 |
| | 1,882 |
|
| | | | | | | |
Income from railway operations | 835 |
| | 757 |
| | 966 |
| | 835 |
|
| | | | | | | |
Other income – net | 8 |
| | 40 |
| | 44 |
| | 8 |
|
Interest expense on debt | 136 |
| | 142 |
| | 149 |
| | 136 |
|
| | | | | | | |
Income before income taxes | 707 |
| | 655 |
| | 861 |
| | 707 |
|
| | | | | | | |
Income taxes | 155 |
| | 222 |
| | 184 |
| | 155 |
|
| | | | | | | |
Net income | $ | 552 |
| | $ | 433 |
| | $ | 677 |
| | $ | 552 |
|
| | | | | | | |
Per share amounts: | |
| | |
| | |
Net income | |
| | |
| | |
Earnings per share: | | |
| | |
|
Basic | $ | 1.94 |
| | $ | 1.49 |
| | $ | 2.53 |
| | $ | 1.94 |
|
Diluted | 1.93 |
| | 1.48 |
| | 2.51 |
| | 1.93 |
|
| | | | | | | |
Dividends | 0.72 |
| | 0.61 |
| | |
See accompanying notes toconsolidatedfinancialstatements.
3
Norfolk Southern Corporation and Subsidiaries
Consolidated Statements of Comprehensive Income
(Unaudited)
| | | First Quarter | First Quarter |
| 2018 | | 2017 | 2019 | | 2018 |
| ($ in millions) | ($ in millions) |
| | | | | | |
Net income | $ | 552 |
| | $ | 433 |
| $ | 677 |
| | $ | 552 |
|
Other comprehensive income (loss), before tax: | |
| | |
| | | |
Pension and other postretirement benefit (expense) | (7 | ) | | 7 |
| |
Pension and other postretirement benefits (expense) | | 5 |
| | (7 | ) |
Other comprehensive income (loss) of equity investees | 1 |
| | (2 | ) | (1 | ) | | 1 |
|
Other comprehensive income (loss), before tax | (6 | ) | | 5 |
| 4 |
| | (6 | ) |
| | | | | | |
Income tax benefit (expense) related to items of | | | | | | |
other comprehensive income (loss) | 2 |
| | (3 | ) | (1 | ) | | 2 |
|
| | | | | | |
Other comprehensive income (loss), net of tax | (4 | ) | | 2 |
| 3 |
| | (4 | ) |
| | | | | | |
Total comprehensive income | $ | 548 |
| | $ | 435 |
| $ | 680 |
| | $ | 548 |
|
See accompanying notes toconsolidatedfinancialstatements.
4
Norfolk Southern Corporation and Subsidiaries
Consolidated Balance Sheets
(Unaudited)
| | | March 31, 2018 | | December 31, 2017 | March 31, 2019 | | December 31, 2018 |
| ($ in millions) | ($ in millions) |
| | | | | | |
Assets | |
| | |
| |
| | |
|
Current assets: | |
| | |
| |
| | |
|
Cash and cash equivalents | $ | 1,072 |
| | $ | 690 |
| $ | 411 |
| | $ | 358 |
|
Accounts receivable – net | 973 |
| | 955 |
| 1,048 |
| | 1,009 |
|
Materials and supplies | 245 |
| | 222 |
| 228 |
| | 207 |
|
Other current assets | 189 |
| | 282 |
| 235 |
| | 288 |
|
Total current assets | 2,479 |
| | 2,149 |
| 1,922 |
| | 1,862 |
|
| | | | | | |
Investments | 3,020 |
| | 2,981 |
| 3,198 |
| | 3,109 |
|
Properties less accumulated depreciation of $12,076 and | | | |
| |
$11,909, respectively | 30,396 |
| | 30,330 |
| |
Properties less accumulated depreciation of $12,374 | | | | |
|
at both periods | | 31,158 |
| | 31,091 |
|
Other assets | 267 |
| | 251 |
| 784 |
| | 177 |
|
| | | | | | |
Total assets | $ | 36,162 |
| | $ | 35,711 |
| $ | 37,062 |
| | $ | 36,239 |
|
| | | | | | |
Liabilities and stockholders’ equity | |
| | |
| |
| | |
|
Current liabilities: | |
| | |
| |
| | |
|
Accounts payable | $ | 1,217 |
| | $ | 1,401 |
| $ | 1,334 |
| | $ | 1,505 |
|
Short-term debt | 50 |
| | 100 |
| 250 |
| | — |
|
Income and other taxes | 217 |
| | 211 |
| 338 |
| | 255 |
|
Other current liabilities | 304 |
| | 233 |
| 378 |
| | 246 |
|
Current maturities of long-term debt | 600 |
| | 600 |
| 585 |
| | 585 |
|
Total current liabilities | 2,388 |
| | 2,545 |
| 2,885 |
| | 2,591 |
|
| | | | | | |
Long-term debt | 9,637 |
| | 9,136 |
| 10,569 |
| | 10,560 |
|
Other liabilities | 1,352 |
| | 1,347 |
| 1,759 |
| | 1,266 |
|
Deferred income taxes | 6,367 |
| | 6,324 |
| 6,518 |
| | 6,460 |
|
| | | | |
Total liabilities | 19,744 |
| | 19,352 |
| 21,731 |
| | 20,877 |
|
| | | | | | |
Stockholders’ equity: | |
| | |
| |
| | |
|
Common stock $1.00 per share par value, 1,350,000,000 shares | |
| | |
| |
| | |
|
authorized; outstanding 282,541,886 and 284,157,187 shares, | |
| | |
| |
authorized; outstanding 265,967,039 and 268,098,472 shares, | | |
| | |
|
respectively, net of treasury shares | 284 |
| | 285 |
| 267 |
| | 269 |
|
Additional paid-in capital | 2,255 |
| | 2,254 |
| 2,213 |
| | 2,216 |
|
Accumulated other comprehensive loss | (448 | ) | | (356 | ) | (560 | ) | | (563 | ) |
Retained income | 14,327 |
| | 14,176 |
| 13,411 |
| | 13,440 |
|
| | | | | | |
Total stockholders’ equity | 16,418 |
| | 16,359 |
| 15,331 |
| | 15,362 |
|
| | | | | | |
Total liabilities and stockholders’ equity | $ | 36,162 |
| | $ | 35,711 |
| $ | 37,062 |
| | $ | 36,239 |
|
See accompanying notes toconsolidatedfinancialstatements.
5
Norfolk Southern Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
| | | | First Three Months | | First Three Months |
| | 2018 | | 2017 | | 2019 | | 2018 |
| | ($ in millions) | | ($ in millions) |
| | | | | | | | |
Cash flows from operating activities: | Cash flows from operating activities: | |
| | |
| Cash flows from operating activities: | |
| | |
|
| Net income | $ | 552 |
| | $ | 433 |
| Net income | $ | 677 |
| | $ | 552 |
|
| Reconciliation of net income to net cash provided by operating activities: | |
| | |
| Reconciliation of net income to net cash provided by operating activities: | |
| | |
|
| Depreciation | 272 |
| | 260 |
| Depreciation | 283 |
| | 272 |
|
| Deferred income taxes | 45 |
| | 56 |
| Deferred income taxes | 57 |
| | 45 |
|
| Gains and losses on properties | (8 | ) | | (9 | ) | Gains and losses on properties | (18 | ) | | (8 | ) |
| Changes in assets and liabilities affecting operations: | |
| | |
| Changes in assets and liabilities affecting operations: | |
| | |
|
| Accounts receivable | (26 | ) | | (53 | ) | Accounts receivable | (39 | ) | | (26 | ) |
| Materials and supplies | (23 | ) | | (24 | ) | Materials and supplies | (21 | ) | | (23 | ) |
| Other current assets | 13 |
| | 31 |
| Other current assets | 12 |
| | 13 |
|
| Current liabilities other than debt | 12 |
| | 188 |
| Current liabilities other than debt | (27 | ) | | 12 |
|
| Other – net | (21 | ) | | (36 | ) | Other – net | (43 | ) | | (21 | ) |
| | | | | | | | |
| Net cash provided by operating activities | 816 |
| | 846 |
| Net cash provided by operating activities | 881 |
| | 816 |
|
| | | | | | | | |
Cash flows from investing activities: | Cash flows from investing activities: | |
| | |
| Cash flows from investing activities: | |
| | |
|
| Property additions | (383 | ) | | (438 | ) | Property additions | (467 | ) | | (383 | ) |
| Property sales and other transactions | 13 |
| | 35 |
| Property sales and other transactions | 152 |
| | 13 |
|
| Investment purchases | (2 | ) | | (2 | ) | Investment purchases | (2 | ) | | (2 | ) |
| Investment sales and other transactions | 1 |
| | 1 |
| Investment sales and other transactions | (33 | ) | | 1 |
|
| | | | | | | | |
| Net cash used in investing activities | (371 | ) | | (404 | ) | Net cash used in investing activities | (350 | ) | | (371 | ) |
| | | | | | | | |
Cash flows from financing activities: | Cash flows from financing activities: | |
| | |
| Cash flows from financing activities: | |
| | |
|
| Dividends | (205 | ) | | (177 | ) | Dividends | (230 | ) | | (205 | ) |
| Common stock transactions | (1 | ) | | 34 |
| Common stock transactions | 2 |
| | (1 | ) |
| Purchase and retirement of common stock | (300 | ) | | (200 | ) | Purchase and retirement of common stock | (500 | ) | | (300 | ) |
| Proceeds from borrowings – net of issuance costs | 543 |
| | — |
| Proceeds from borrowings – net of issuance costs | 250 |
| | 543 |
|
| Debt repayments | (100 | ) | | (100 | ) | Debt repayments | — |
| | (100 | ) |
| | | | | | | | |
| Net cash used in financing activities | (63 | ) | | (443 | ) | Net cash used in financing activities | (478 | ) | | (63 | ) |
| | | | | | | | |
| Net increase (decrease) in cash and cash equivalents | 382 |
| | (1 | ) | Net increase in cash, cash equivalents, | | | |
| | | | | and restricted cash | 53 |
| | 382 |
|
Cash and cash equivalents: | |
| | |
| |
| | | | | |
Cash, cash equivalents, and restricted cash: | | Cash, cash equivalents, and restricted cash: | |
| | |
|
| At beginning of year | 690 |
| | 956 |
| At beginning of year | 446 |
| | 690 |
|
| | | | | | | | |
| At end of period | $ | 1,072 |
| | $ | 955 |
| At end of period | $ | 499 |
| | $ | 1,072 |
|
| | | | | | | | |
Supplemental disclosures of cash flow information: | Supplemental disclosures of cash flow information: | |
| | |
| Supplemental disclosures of cash flow information: | |
| | |
|
| Cash paid during the period for: | |
| | |
| Cash paid during the period for: | |
| | |
|
| Interest (net of amounts capitalized) | $ | 69 |
| | $ | 70 |
| Interest (net of amounts capitalized) | $ | 112 |
| | $ | 69 |
|
| Income taxes (net of refunds) | 7 |
| | 12 |
| Income taxes (net of refunds) | 9 |
| | 7 |
|
See accompanying notes toconsolidatedfinancialstatements.
6
Norfolk Southern Corporation and Subsidiaries
Consolidated Statements of Changes in Stockholders’ Equity
(Unaudited)
|
| | | | | | | | | | | | | | | | | | | |
| Common Stock | | Additional Paid-in Capital | | Accum. Other Comprehensive Loss | | Retained Income | | Total |
| ($ in millions, except per share amounts) |
| | | | | | | | | |
Balance at December 31, 2018 | $ | 269 |
| | $ | 2,216 |
| | $ | (563 | ) | | $ | 13,440 |
| | $ | 15,362 |
|
|
| |
| |
| |
| |
|
Comprehensive income: |
| |
| |
| |
| |
|
Net income |
| |
| |
| | 677 |
| | 677 |
|
Other comprehensive income |
| |
| | 3 |
| |
| | 3 |
|
Total comprehensive income |
| |
| |
| |
| | 680 |
|
Dividends on common stock, |
| |
| |
| |
| |
|
$0.86 per share |
| |
| |
| | (230 | ) | | (230 | ) |
Share repurchases | (3 | ) | | (22 | ) | |
| | (475 | ) | | (500 | ) |
Stock-based compensation | 1 |
| | 19 |
| |
| | (1 | ) | | 19 |
|
|
| |
| |
| |
| |
|
Balance at March 31, 2019 | $ | 267 |
| | $ | 2,213 |
| | $ | (560 | ) | | $ | 13,411 |
| | $ | 15,331 |
|
|
| | | | | | | | | | | | | | | | | | | |
| Common Stock | | Additional Paid-in Capital | | Accum. Other Comprehensive Loss | | Retained Income | | Total |
| ($ in millions, except per share amounts) |
| | | | | | | | | |
Balance at December 31, 2017 | $ | 285 |
| | $ | 2,254 |
| | $ | (356 | ) | | $ | 14,176 |
| | $ | 16,359 |
|
| | | | | | | | | |
Comprehensive income: | | | | | | | | | |
Net income |
| |
| |
| | 552 |
| | 552 |
|
Other comprehensive loss |
| |
| | (4 | ) | |
| | (4 | ) |
Total comprehensive income |
| |
| |
| |
| | 548 |
|
Dividends on common stock, |
| |
| |
| |
| |
|
$0.72 per share |
| |
| |
| | (205 | ) | | (205 | ) |
Share repurchases | (2 | ) | | (16 | ) | |
| | (282 | ) | | (300 | ) |
Stock-based compensation | 1 |
| | 17 |
| |
| | (2 | ) | | 16 |
|
Reclassification of stranded | | | | | | | | | |
tax effects | | | | | (88 | ) | | 88 |
| | — |
|
| | | | | | | | | |
Balance at March 31, 2018 | $ | 284 |
| | $ | 2,255 |
| | $ | (448 | ) | | $ | 14,327 |
| | $ | 16,418 |
|
See accompanying notes toconsolidatedfinancialstatements.
7
Norfolk Southern Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
In the opinion of management, the accompanying unaudited interim consolidated financial statements contain all adjustments (consisting of normal recurring accruals) necessary to present fairly Norfolk Southern Corporation (Norfolk Southern) and subsidiaries’ (collectively, NS, we, us, and our) financial position at March 31, 2018,2019, and December 31, 2017,2018, our results of operations, and comprehensive income and changes in stockholders’ equity for the first quarters of 20182019 and 2017,2018, and our cash flows for the first three months of 20182019 and 20172018 in conformity with U.S. generally accepted accounting principles (GAAP).
These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in our latest Annual Report on Form 10-K.
1. Railway Operating Revenues
The Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, “Revenue from Contractsfollowing table disaggregates our revenues by major commodity group: |
| | | | | | | | |
| | First Quarter |
| | 2019 | | 2018 |
Merchandise: | | ($ in millions) |
Chemicals | | $ | 452 |
| | $ | 454 |
|
Agriculture products | | 385 |
| | 357 |
|
Metals and construction | | 385 |
| | 356 |
|
Automotive | | 251 |
| | 243 |
|
Forest and consumer | | 213 |
| | 195 |
|
Merchandise | | 1,686 |
| | 1,605 |
|
Intermodal | | 719 |
| | 678 |
|
Coal | | 435 |
| | 434 |
|
| | | | |
Total | | $ | 2,840 |
| | $ | 2,717 |
|
At the beginning of 2019, we recategorized certain commodities within Merchandise major commodity groups to better align with Customers,”how we internally manage these commodities. Prior period amounts have been reclassified to conform to the current presentation with no net impact to overall Merchandise revenue or total railway operating revenues. Specifically, certain commodities were shifted between Chemicals, Agriculture products, Metals and related amendments which are jointly referred to as Accounting Standards Codification (ASC) Topic 606. This update replaced most existing revenue recognition guidance in GAAPconstruction, and requires entities toForest and consumer.
We recognize the amount of revenue to which it expectswe expect to be entitled to for the transfer of promised goods or services to customers. FASB ASC Topic 606 defines a performance obligation as a promise in a contract to transfer a distinct good or service to the customer. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. We adopted the provisions of this standard on January 1, 2018, using the modified retrospective method. There was no cumulative effect of initially applying ASC Topic 606, nor is there any material difference in first quarter 2018 revenue as compared with the GAAP that was in effect prior to January 1, 2018.
The following table disaggregates our revenues by major commodity group (in millions): |
| | | | | | | | | |
| | | | | | First Quarter | |
| | | | 2018 | |
Merchandise: | | | | | |
Chemicals | | | | | | $ | 443 |
| |
Agr./consumer/gov’t | | | | | | | 393 |
| |
Metals/construction | | | | | | | 338 |
| |
Automotive | | | | | | | 243 |
| |
Paper/clay/forest | | | | | | | 188 |
| |
Merchandise | | | | | | | 1,605 |
| |
Intermodal | | | | | | | 678 |
| |
Coal | | | | | | | 434 |
| |
Total | | | | | | $ | 2,717 |
| |
A performance obligation is created when a customer under a transportation contract or public tariff submits a bill of lading to NS for the transport of goods. These performance obligations are satisfied as the shipments move from origin to destination. As such, transportation revenue is recognized proportionally as a shipment moves, and related expenses are recognized as incurred. These performance obligations are generally short-term in nature with transit days averaging approximately one week or less for each major commodity group. The customer has an unconditional obligation to pay for the service once the service has been completed. Estimated revenue associated with in-process shipments at period-end is recorded based on the estimated percentage of service completed to total transit days. We had no material remaining performance obligations as of March 31, 2019 or December 31, 2018.
Under the typical payment terms of our freight contracts, payment for services is due within fifteen days of billing the customer, thus there are no significant financing components. “Accounts receivable – net” on the Consolidated Balance Sheets includes both customer and non-customer receivables as follows ($ millions):follows:
|
| | | | | | | | |
| | March 31, 2019 | | December 31, 2018 |
| | ($ in millions) |
Customer | | $ | 793 |
| | $ | 740 |
|
Non-customer | | 255 |
| | 269 |
|
| | | | |
Accounts receivable – net | | $ | 1,048 |
| | $ | 1,009 |
|
|
| | | | | | | | | |
| | March 31, 2018 | | December 31, 2017 | |
| | ($ in millions) | |
Customer | | $ | 751 |
| | $ | 703 |
| |
Non-customer | | 222 |
| | 252 |
| |
Accounts receivable - net | | $ | 973 |
| | $ | 955 |
| |
Non-customer receivables include non-revenue-related amounts due from other railroads, governmental entities, and others. “Other assets” on the Consolidated Balance Sheets includes non-current customer receivables of $47 million and $39$55 million at both March 31, 20182019 and December 31, 2017, respectively.2018. We do not have any material contract assets or liabilities.
Certain of our contracts contain refunds (which are primarily volume-based incentives) that are recorded as a reduction to revenue. Refunds are recorded on the basis of management’s best estimate of projected liability, which is based on historical activity, current shipment counts and expectation of future activity.
Certain accessorialancillary services may be provided to customers under their transportation contracts such as switching, demurrage and other incidental service revenues. These are distinct performance obligations that are recognized at a point in time when the services are performed or as contractual obligations are met. This revenue is included within each of the commodity groups and represents approximately 5% and 4% of total “Railway operating revenues.”revenues” on the Consolidated Statements of Income for the quarters ended March 31, 2019 and 2018, respectively.
2. Stock-Based Compensation
|
| | | | | | | | |
| | First Quarter |
| | 2019 | | 2018 |
| | ($ in millions) |
Stock-based compensation expense | | $ | 16 |
| | $ | 16 |
|
Total tax benefit | | 23 |
| | 14 |
|
|
| | | | | | | | | |
| | First Quarter | |
| | 2018 | | 2017 | |
| | ($ in millions) |
Stock-based compensation expense | | $ | 16 |
| | $ | 27 |
| |
Total tax benefit | | 14 |
| | 30 |
| |
During thethe first quarter of 2018, 2019, a committee of nonemployee members of our Board of Directors (and the Chief Executive Officer under delegated authority by such committee) granted stock options, restricted stock units (RSUs) and performance share units (PSUs) pursuant to the Long-Term Incentive Plan (LTIP), as follows:
|
| | | | | | | |
| | First Quarter |
| | Granted | | Weighted-Average Grant-Date Fair Value |
| | | | |
Stock options | | 42,380 |
| | $ | 45.61 |
|
RSUs | | 208,320 |
| | 163.33 |
|
PSUs | | 93,710 |
| | 97.75 |
|
|
| | | | | | | | | |
| | | | Granted | | Weighted-Average Grant-Date Fair Value |
| | | | |
Stock options | | 40,960 |
| | $ | 41.70 |
|
Restricted stock units | | 215,880 |
| | 148.32 |
|
Performance share units | | 91,914 |
| | 91.55 |
|
Beginning in 2018, recipients of certain RSUs and PSUs pursuant to the LTIP who retire prior to October 1st will forfeit awards received in the current year.
Stock Options
|
| | | | | | | | |
| | First Quarter |
| | 2019 | | 2018 |
| | ($ in millions) |
Stock options exercised | | 406,371 |
| | 254,982 |
|
Cash received upon exercise | | $ | 28 |
| | $ | 17 |
|
Related tax benefit realized | | 9 |
| | 4 |
|
|
| | | | | | | | | |
| | First Quarter | |
| | 2018 | | 2017 | |
| | ($ in millions) |
Stock options exercised | | 254,982 |
| | 885,722 |
| |
Cash received upon exercise | | $ | 17 |
| | $ | 49 |
| |
Related tax benefit realized | | $ | 4 |
| | $ | 16 |
| |
Restricted Stock Units
Beginning in 2018, RSUs granted primarily have a four-year ratable restriction period and will be settled through the issuance of shares of Norfolk Southern common stock (Common Stock). Compensation cost forRSUs granted in previous years have a five-year restriction period and will also be settled through the award is recognized on a straight-line basis over the requisite service period for the entire award.issuance of shares of Common Stock. Certain RSU grants include cash dividend equivalent payments during the restriction period in an amount equal to the regular quarterly dividends paid on Common Stock.
|
| | | | | | | | |
| | First Quarter |
| | 2019 | | 2018 |
| | ($ in millions) |
RSUs vested | | 165,549 |
| | 160,200 |
Common Stock issued net of tax withholding | | 118,881 |
| | 99,968 |
Related tax benefit realized | | $ | 2 |
| | $ | 3 |
|
|
| | | | | | | | |
| | First Quarter |
| | 2018 | | 2017 |
| | ($ in millions) |
RSUs vested | | 160,200 |
| | 137,200 |
Common Stock issued net of tax withholding | | 99,968 |
| | 81,318 |
Related tax benefit realized | | $ | 3 |
| | $ | 3 |
|
Performance Share Units
PSUs provide for awards based on the achievement of certain predetermined corporate performance goals at the end of a three-year cycle and are settled through the issuance of shares of Common Stock. All PSUs will earn out based on the achievement of performance conditions and some will also earn out based on a market condition. The market condition fair value was measured on the date of grant using a Monte Carlo simulation model.
|
| | | | | | | | |
| | First Quarter |
| | 2019 | | 2018 |
| | ($ in millions) |
PSUs earned | | 331,099 |
| | 154,189 |
Common Stock issued net of tax withholding | | 221,241 |
| | 94,399 |
Related tax benefit realized | | $ | 9 |
| | $ | 3 |
|
|
| | | | | | | | |
| | First Quarter |
| | 2018 | | 2017 |
| | ($ in millions) |
PSUs earned | | 154,189 |
| | 171,080 |
Common Stock issued net of tax withholding | | 94,399 |
| | 99,805 |
Related tax benefit realized | | $ | 3 |
| | $ | 1 |
|
3. Earnings Per Share
The following table sets forth the calculation of basic and diluted earnings per share:
| | | Basic | | Diluted | Basic | | Diluted |
| First Quarter | First Quarter |
| 2018 | | 2017 | | 2018 | | 2017 | 2019 | | 2018 | | 2019 | | 2018 |
| ($ in millions, except per share amounts, shares in millions) | ($ in millions, except per share amounts, shares in millions) |
| | | | | | | | | | | | | | |
Net income | $ | 552 |
| | $ | 433 |
| | $ | 552 |
| | $ | 433 |
| $ | 677 |
| | $ | 552 |
| | $ | 677 |
| | $ | 552 |
|
Dividend equivalent payments | (1 | ) | | (1 | ) | | (1 | ) | | (1 | ) | (1 | ) | | (1 | ) | | — |
| | (1 | ) |
| | | | | | | | | | | | | | |
Income available to common stockholders | $ | 551 |
| | $ | 432 |
| | $ | 551 |
| | $ | 432 |
| $ | 676 |
| | $ | 551 |
| | $ | 677 |
| | $ | 551 |
|
| | | | | | | | | | | | | | |
Weighted-average shares outstanding | 283.5 |
| | 290.3 |
| | 283.5 |
| | 290.3 |
| 267.1 |
| | 283.5 |
| | 267.1 |
| | 283.5 |
|
Dilutive effect of outstanding options | |
| | |
| | |
| | |
| |
| | |
| | |
| | |
|
and share-settled awards | |
| | |
| | 2.4 |
| | 2.5 |
| |
| | |
| | 2.3 |
| | 2.4 |
|
| | | | | | | | | | | | | | |
Adjusted weighted-average shares outstanding | |
| | |
| | 285.9 |
| | 292.8 |
| |
| | |
| | 269.4 |
| | 285.9 |
|
| | | | | | | | | | | | | | |
Earnings per share | $ | 1.94 |
| | $ | 1.49 |
| | $ | 1.93 |
| | $ | 1.48 |
| $ | 2.53 |
| | $ | 1.94 |
| | $ | 2.51 |
| | $ | 1.93 |
|
During the first quartersquarter of 20182019 and 2017,2018, dividend equivalent payments were made to certain holders of stock options and RSUs. For purposes of computing basic earnings per share, dividend equivalent payments made to holders of stock options and RSUs were deducted from net income to determine income available to common stockholders. For purposes of computing diluted earnings per share, we evaluate on a grant-by-grant basis those stock options and RSUs receiving dividend equivalent payments under the two-class and treasury stock methods to determine which method is more dilutive for each grant. For those grants for which the two-class method was more dilutive, net income was reduced by dividend equivalent payments to determine income available to common stockholders. The dilution calculations exclude options having exercise prices exceeding the average market price of Common Stock of zero and 0.5 million for the quarters ended March 31, 20182019 and 2017, respectively.2018.
4. Accumulated Other Comprehensive Loss
The changes in the cumulative balances of “Accumulated other comprehensive loss” reported in the Consolidated Balance Sheets consisted of the following:
|
| | | | | | | | | | | | | | | | | | | |
| Balance at Beginning of Year | | Net Income (Loss) | | Reclassification of Stranded Tax Effects | | Reclassification Adjustments | | Balance at End of Period |
| ($ in millions) |
Three Months Ended March 31, 2019 | | | | | | | | | |
Pensions and other | | | | | | | | | |
postretirement liabilities | $ | (497 | ) | | $ | — |
| | $ | — |
| | $ | 4 |
| | $ | (493 | ) |
Other comprehensive loss | |
| | |
| | | | |
| | |
|
of equity investees | (66 | ) | | (1 | ) | | — |
| | — |
| | (67 | ) |
| | | | | | | | | |
Accumulated other | | | | | | | | | |
comprehensive loss | $ | (563 | ) | | $ | (1 | ) | | $ | — |
| | $ | 4 |
| | $ | (560 | ) |
| | | | | | | | | |
Three Months Ended March 31, 2018 | |
| | |
| | | | |
| | |
|
Pensions and other | | | | | | | | | |
postretirement liabilities | $ | (300 | ) | | $ | (11 | ) | | $ | (86 | ) | | $ | 6 |
| | $ | (391 | ) |
Other comprehensive income | | | | | | | | | |
(loss) of equity investees | (56 | ) | | 1 |
| | (2 | ) | | — |
| | (57 | ) |
| | | | | | | | | |
Accumulated other | | | | | | | | | |
comprehensive loss | $ | (356 | ) | | $ | (10 | ) | | $ | (88 | ) | | $ | 6 |
| | $ | (448 | ) |
|
| | | | | | | | | | | | | | | | | | | |
| Balance at Beginning of Year | | Net Income (Loss) | | Reclassification of Stranded Tax Effects | | Reclassification Adjustments | | Balance at End of Period |
| ($ in millions) |
Three Months Ended March 31, 2018 | | | | | | | | | |
Pensions and other | | | | | | | | | |
postretirement liabilities | $ | (300 | ) | | $ | (11 | ) | | $ | (86 | ) | | $ | 6 |
| | $ | (391 | ) |
Other comprehensive income | |
| | |
| | | | |
| | |
|
(loss) of equity investees | (56 | ) | | 1 |
| | (2 | ) | | — |
| | (57 | ) |
| | | | | | | | | |
Accumulated other comprehensive loss | $ | (356 | ) | | $ | (10 | ) | | $ | (88 | ) | | $ | 6 |
| | $ | (448 | ) |
| | | | | | | | | |
Three Months Ended March 31, 2017 | |
| | |
| | | | |
| | |
|
Pensions and other | | | | | | | | | |
postretirement liabilities | $ | (414 | ) | | $ | — |
| | $ | — |
| | $ | 4 |
| | $ | (410 | ) |
Other comprehensive loss | | | | | | | | | |
of equity investees | (73 | ) | | (2 | ) | | — |
| | — |
| | (75 | ) |
| | | | | | | | | |
Accumulated other comprehensive loss | $ | (487 | ) | | $ | (2 | ) | | $ | — |
| | $ | 4 |
| | $ | (485 | ) |
In February 2018, the FASBFinancial Accounting Standards Board (FASB) issued ASUAccounting Standards Update (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 (“tax reform”) that was enacted on December 22, 2017 from accumulated other comprehensive income (AOCI) to retained earnings. The amount of the reclassification is the difference between the amount initially charged or credited directly to other comprehensive income at the previously enacted U.S. federal corporate income tax rate that remains in AOCI and the amount that would have been charged or credited directly to other comprehensive income using the newly enacted U.S. federal corporate income tax rate. In the first quarter of 2018, weWe adopted the provisions of ASU 2018-02 in the first quarter of 2018 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.”
5. Stock Repurchase Program
We repurchased and retired 2.12.9 million shares and 1.72.1 million shares of Common Stock under our stock repurchase program in the first quartersthree months of 20182019 and 2017,2018, respectively, at a cost of $500 million and $300 million, and $200 million, respectively.
Since the beginning of 2006, we have repurchased and retired 170.6188.5 million shares at a total cost of $11.6$14.6 billion.
6. Investments
Investment in Conrail
Through a limited liability company, we and CSX Corporation (CSX) jointly own Conrail Inc. (Conrail), whose primary subsidiary is Consolidated Rail Corporation (CRC). We have a 58% economic and 50% voting interest in the jointly owned entity, and CSX has the remainder of the economic and voting interests. Our investment in Conrail was $1.3 billion at both March 31, 2018,2019, and December 31, 2017.2018.
CRC owns and operates certain properties (the Shared Assets Areas) for the joint and exclusive benefit of Norfolk Southern Railway Company (NSR) and CSX Transportation, Inc. (CSXT). The costs of operating the Shared Assets Areas are borne by NSR and CSXT based on usage. In addition, NSR and CSXT pay CRC a fee for access to the Shared Assets Areas. “Purchased services and rents” and “Fuel” include amounts payable to CRC for the operation of the Shared Assets Areas totaling $38$37 million and $35$38 million for the first quarters of 20182019 and 2017,2018, respectively. Our equity in the earnings of Conrail, net of amortization, included in “Purchased services and rents” was $16$8 million and $10$16 million for the first quarters of 20182019 and 2017,2018, respectively.
“Other liabilities” includes $280 million at both March 31, 2018, 2019, and December 31, 2017,2018, for long-term advances from Conrail, maturing 2044, that bear interest at an average rate of 2.9%.
Investment in TTX
NS and eight other North American railroads jointly own TTX Company (TTX). NS has a 19.65% ownership interest in TTX, a railcar pooling company that provides its owner-railroads with standardized fleets of intermodal, automotive, and general use railcars at stated rates.
Amounts payablepaid to TTX for use of equipment are included in “Purchased services and rents” and amounted to $66$62 million and $57$66 million of expense for the first quarters of 20182019 and 2017,2018, respectively. Our equity in the earnings of TTX, also included in “Purchased services and rents,” totaled $16$13 million and $8$16 million for the first quarters of 20182019 and 2017,2018, respectively.
7. Debt
During the first quarter of 2018, we issued $500 million of 4.15% senior notes due 2048.
We have a $350$400 million accounts receivable securitization program expiring in June 2018. There was $50 million and $100May 2019. We had $250 million outstanding under this program at March 31, 2018, and December 31, 2017, respectively,2019, reflected as “Short-term debt” on the Consolidated Balance Sheets. Sheets, and no amounts outstanding at December 31, 2018.
The “Cash, cash equivalents, and restricted cash” line item in the Consolidated Statements of Cash Flows includes restricted cash of $88 million at March 31, 2019 and December 31, 2018 reflecting 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 in both periods.
8. Leases
In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842),” and subsequent amendments, which replaced existing lease guidance in GAAP and requires lessees to recognize right-of-use (ROU) assets and lease liabilities on the balance sheet for leases greater than twelve months and disclose key information about leasing arrangements. We adopted the standard on January 1, 2019 using the modified retrospective method and used the effective date as our date of initial application. Financial information will not be updated and the disclosures required under the new standard will not be provided for dates and periods before January 1, 2019. There were no adjustments to “Retained income” on adoption.
The new standard provides a number of optional practical expedients for transition. We elected the package of practical expedients under the transition guidance which permitted us not to reassess under the new standard our prior conclusions for lease identification and lease classification on expired or existing contracts and whether initial direct costs previously capitalized would qualify for capitalization under FASB Accounting Standards Codification (ASC) 842. We also elected the practical expedient related to land easements, which allowed us to not reassess our current accounting treatment for existing agreements on land easements, which are not accounted for as leases. We did not elect the hindsight practical expedient to determine the reasonably certain lease term for existing leases.
The new standard also provides practical expedients and recognition exemptions for an entity’s ongoing accounting policy elections. We elected the short-term lease recognition exemption for all leases that qualify. This means, for those leases that qualify, we do not recognize ROU assets or lease liabilities.
We are committed under long-term lease agreements for equipment, lines of road, and other property. Some of these agreements contain variable payment provisions that depend on an index or rate, initially measured using the index or rate at the lease commencement date, and are therefore not included in our future minimum lease payments. These variable lease agreements include usage-based payments for equipment under service contracts, lines of road, and other property. Our long-term lease agreements do not contain any material restrictive covenants.
Our equipment leases have remaining terms of less than 1 year to 9 years and our lines of road and property leases have remaining terms of less than 1 year to 138 years. Some of these leases may include options to extend the leases for up to 99 years, and some may include options to terminate the leases within 30 days. Because we are not reasonably certain to exercise these renewal options, the options are not considered in determining the lease term, and associated payments are excluded from future minimum lease payments.
Leases with an initial term of twelve months or less are not recorded on the balance sheet. We recognize lease expense for these leases on a straight-line basis over the lease term. We do not separate lease and non-lease components.
Operating lease amounts included in the Consolidated Balance Sheet are as follows:
|
| | | | |
| | March 31, 2019 |
Assets | Classification | ($ in millions) |
ROU assets | Other assets | $ | 593 |
|
| | |
Liabilities | | |
Current lease liabilities | Other current liabilities | $ | 93 |
|
Non-current lease liabilities | Other liabilities | 500 |
|
| | |
Total lease liabilities | | $ | 593 |
|
| | |
The components of operating lease expense, primarily included in“Purchased services and rents,” were as follows:
|
| | | |
| First Quarter |
| 2019 |
| ($ in millions) |
Operating lease expense | $ | 27 |
|
Variable lease expense | 12 |
|
Short-term lease expense | 2 |
|
| |
Total lease expense | $ | 41 |
|
At March 31, 2019, we do not have any material finance lease assets or liabilities, nor do we have any material subleases.
During March 2019, we entered into a non-cancellable lease for an office building with an estimated construction cost of $550 million. The lease will commence upon completion of the construction (for which we are a construction agent) of the office building which is expected to be in 2021. The initial term of the lease is five years, with options to renew, purchase, or sell the office building at the end of the lease term. Upon lease commencement, the ROU asset and lease liability will be determined and recorded. The lease also contains a residual value guarantee of up to ninety percent of the total construction cost.
Other information related to operating leases was as follows:
|
| | | |
| First Quarter |
| 2019 |
| ($ in millions) |
Cash paid for amounts included in the measurement of lease liabilities: | |
Operating cash flows from operating leases | $ | 27 |
|
| |
Right-of-use assets obtained in exchange for new operating lease liabilities | 29 |
|
| |
Weighted-average remaining lease term (years) on operating leases | 8.68 |
|
| |
Weighted-average discount rates on operating leases | 3.52 | % |
During the first quarter, cash proceeds from a sale and leaseback transaction were $82 million and the gain on the transaction was $15 million.
Future minimum lease payments under non-cancellable operating leases were as follows:
|
| | | |
| March 31, 2019 |
| ($ in millions) |
2019 - 9 months | $ | 84 |
|
2020 | 105 |
|
2021 | 99 |
|
2022 | 76 |
|
2023 | 68 |
|
2024 and subsequent years | 266 |
|
Total lease payments | $ | 698 |
|
Less: Interest | 105 |
|
| |
Present value of lease liabilities | $ | 593 |
|
Undiscounted future minimum lease payments under non-cancellable operating leases accounted for under ASC 840 “Leases” were as follows:
|
| | | |
| December 31, 2018 |
| ($ in millions) |
2019 | $ | 101 |
|
2020 | 95 |
|
2021 | 88 |
|
2022 | 75 |
|
2023 | 69 |
|
2024 and subsequent years | 267 |
|
| |
Total | $ | 695 |
|
9. Pensions and Other Postretirement Benefits
We have both funded and unfunded defined benefit pension plans covering principally salaried employees. We also provide specified health care and life insurance benefits to eligible retired employees; these plans can be amended or terminated at our option. Under our self-insured retiree health care plan, for those participants who are not Medicare-eligible, a defined percentage of health care expenses is covered for retired employees and their dependents, reduced by any deductibles, coinsurance, and, in some cases, coverage provided under other group insurance policies. Those participants who are Medicare-eligible are not covered under the self-insured retiree
health care plan, but instead are provided with an employer-funded health reimbursement account which can be used for reimbursement of health insurance premiums or eligible out-of-pocket medical expenses.
Pension and postretirement benefit cost components for the first quartersquarter are as follows:
|
| | | | | | | | | | | | | | | |
| | | | | | | |
| | | | | Other Postretirement |
| Pension Benefits | | Benefits |
| First Quarter |
| 2019 | | 2018 | | 2019 | | 2018 |
| ($ in millions) |
| | | | | | | |
Service cost | $ | 9 |
| | $ | 10 |
| | $ | 2 |
| | $ | 2 |
|
Interest cost | 23 |
| | 20 |
| | 4 |
| | 4 |
|
Expected return on plan assets | (45 | ) | | (44 | ) | | (4 | ) | | (4 | ) |
Amortization of net losses | 11 |
| | 14 |
| | — |
| | — |
|
Amortization of prior service benefit | — |
| | — |
| | (6 | ) | | (6 | ) |
| | | | | | | |
Net benefit | $ | (2 | ) | | $ | — |
| | $ | (4 | ) | | $ | (4 | ) |
|
| | | | | | | | | | | | | | | |
| | | | | Other Postretirement |
| Pension Benefits | | Benefits |
| First Quarter |
| 2018 | | 2017 | | 2018 | | 2017 |
| ($ in millions) |
| | | | | | | |
Service cost | $ | 10 |
| | $ | 9 |
| | $ | 2 |
| | $ | 2 |
|
Interest cost | 20 |
| | 20 |
| | 4 |
| | 4 |
|
Expected return on plan assets | (44 | ) | | (43 | ) | | (4 | ) | | (4 | ) |
Amortization of net losses | 14 |
| | 13 |
| | — |
| | — |
|
Amortization of prior service benefit | — |
| | — |
| | (6 | ) | | (6 | ) |
| | | | | | | |
Net benefit | $ | — |
| | $ | (1 | ) | | $ | (4 | ) | | $ | (4 | ) |
In March 2017, the FASB issued ASU 2017-07, “Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.” This update requires segregation of net benefit costs between operating and non-operating expenses and also requires retrospective application. We adopted the standard on January 1, 2018. Under the new standard, only theThe service cost component of defined benefit pension cost and postretirement benefit cost are reported within “Compensation and benefits” and all other components of net benefit cost are presented in “Other income – net” on the Consolidated Statements of Income, whereas under the previous standard all components were included in “Compensation and benefits.”Income.
The retrospective application resulted in an offsetting increase of $16 million in “Compensation and benefits” expense and an increase in “Other income – net” on the Consolidated Statements of Income for the first quarter of 2017, with no impact on “Net income.”
9.10. Fair Values of Financial Instruments
The fair values of “Cash and cash equivalents,” “Accounts receivable – net,” “Accounts payable,” and “Short-term debt” approximate carrying values because of the short maturity of these financial instruments. The carrying value of corporate-owned life insurance is recorded at cash surrender value and, accordingly, approximates fair value. Other than these assets and liabilities that approximate fair value, thereThere are no other assets or liabilities measured at fair value on a recurring basis at March 31, 2018,2019 or December 31, 2017.2018. The carrying amounts and estimated fair values, for the remaining financial instruments, excluding investments accounted for under the equity method,based on Level 1 inputs, of long-term debt consisted of the following:
|
| | | | | | | | | | | | | | | |
| March 31, 2019 | | December 31, 2018 |
| Carrying Amount | | Fair Value | | Carrying Amount | | Fair Value |
| ($ in millions) |
| | | | | | | |
Long-term debt, including current maturities | $ | (11,154 | ) | | $ | (12,698 | ) | | $ | (11,145 | ) | | $ | (12,203 | ) |
|
| | | | | | | | | | | | | | | |
| March 31, 2018 | | December 31, 2017 |
| Carrying Amount | | Fair Value | | Carrying Amount | | Fair Value |
| ($ in millions) |
| | | | | | | |
Long-term investments | $ | 26 |
| | $ | 43 |
| | $ | 26 |
| | $ | 43 |
|
Long-term debt, including current maturities | (10,237 | ) | | (11,780 | ) | | (9,736 | ) | | (11,771 | ) |
Underlying net assets and future discounted cash flows were used to estimate the fair value of investments. The fair values of long-term debt were estimated based on quoted market prices or discounted cash flows using current interest rates for debt with similar terms, credit rating, and remaining maturity.
The following table sets forth the fair value of long-term investment and long-term debt balances disclosed above by valuation technique level, within the fair value hierarchy (there were no level 3 valued assets or liabilities).
|
| | | | | | | | | | | |
| Level 1 | | Level 2 | | Total |
| ($ in millions) |
| | | | | |
March 31, 2018 | | | | | |
Long-term investments | $ | 4 |
| | $ | 39 |
| | $ | 43 |
|
Long-term debt, including current maturities | (11,685 | ) | | (95 | ) | | (11,780 | ) |
| | | | | |
December 31, 2017 | |
| | |
| | |
|
Long-term investments | $ | 4 |
| | $ | 39 |
| | $ | 43 |
|
Long-term debt, including current maturities | (11,676 | ) | | (95 | ) | | (11,771 | ) |
10.11. Commitments and Contingencies
Lawsuits
We and/or certain subsidiaries are defendants in numerous lawsuits and other claims relating principally to railroad operations. When we conclude that it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated, it is accrued through a charge to earnings. While the ultimate amount of liability incurred in any of these lawsuits and claims is dependent on future developments, in our opinion, the recorded liability is adequate to cover the future payment of such liability and claims. However, the final outcome of any of these lawsuits and claims cannot be predicted with certainty, and unfavorable or unexpected outcomes could result in additional accruals that could be significant to results of operations in a particular year or quarter. Any adjustments to the recorded liability will be reflected in earnings in the periods in which such adjustments become known.
One of our chemical customers, Sunbelt Chlor Alkali Partnerships (Sunbelt), filed in 2011 a rate reasonableness complaint before the Surface Transportation Board (STB) alleging that our tariff rates for transportation of regulated movements are unreasonable. Since April 1, 2011, we have been billing and collecting amounts based on the challenged tariff rates. In 2014, the STB resolved this rate reasonableness complaint in our favor and, in June 2016, the STB resolved petitions for reconsideration. Sunbelt’s appeal of the STB’s decision to the United States Court of Appeal for the 11th Circuit was denied on January 26, 2018. This matter did not have a material effect on our financial position, results of operations, or liquidity.
In 2007, various antitrust class actions filed against us and other Class I railroads in various Federal district courts regarding fuel surcharges were consolidated in the District of Columbia by the Judicial Panel on Multidistrict Litigation. In 2012, the court certified the case as a class action. The defendant railroads appealed this certification, and the Court of Appeals for the District of Columbia vacated the District Court’s decision and remanded the case for further consideration. On October 10, 2017, the District Court denied class certification; the findings are subject to appeal. We believe the allegations in the complaints are without merit and intend to vigorously defend the cases. We do not believe the outcome of these proceedings will have a material effect on our financial position, results of operations, or liquidity.
Casualty Claims
Casualty claims include employee personal injury and occupational claims as well as third-party claims, all exclusive of legal costs. To aid in valuing our personal injury liability and determining the amount to accrue with respect to such claims during the year, we utilize studies prepared by an independent consulting actuarial firm. Job-related personal injury and occupational claims are subject to the Federal Employer’s Liability Act (FELA), which is applicable only to railroads. FELA’s fault-based tort system produces results that are unpredictable and inconsistent as compared with a no-fault workers’ compensation system. The variability inherent in this system could result in actual costs being different from the liability recorded. While the ultimate amount of claims incurred is dependent on future developments, in our opinion, the recorded liability is adequate to cover the future payments of claims and is supported by the most recent actuarial study. In all cases, we record a liability when the expected loss for the claim is both probable and reasonably estimable.
Employee personal injury claims – The largest component of casualties and other claims expense is employee personal injury costs. The independent actuarial firm engaged by us provides quarterly studies to aid in valuing our employee personal injury liability and estimating personal injury expense. The actuarial firm studies our historical patterns of reserving for claims and subsequent settlements, taking into account relevant outside influences. The actuarial firm uses the results of these analyses to estimate the ultimate amount of liability. We adjust the liability quarterly based upon our assessment and the results of the study. Our estimate of the liability is subject to inherent limitation given the difficulty of predicting future events such as jury decisions, court interpretations, or legislative changes. As a result, actual claim settlements may vary from the estimated liability recorded.
Occupational claims – Occupational claims (including asbestosisinclude injuries and other respiratory diseases,illnesses alleged to be caused by exposures which occur over time as well as conditions allegedly relatedopposed to repetitive motion) are often notinjuries or illnesses caused by a specific accident or event but rather allegedly result from aevent. Types of occupational claims commonly seen allege exposure to asbestos and other claimed toxic substances resulting in respiratory diseases or cancer, exposure over time.to repetitive motion resulting in various musculoskeletal disorders, and exposure to excessive noise resulting in hearing loss. Many such claims are being asserted by former or retired employees, some of whom have not been employed in the rail industry for decades. The independent actuarial firm provides an estimate of the occupational claims liability based upon our history of claim filings, severity, payments, and other pertinent facts. The liability is dependent upon judgments we make as to the specific case reserves as well as judgments of the actuarial firm in the quarterly studies. The actuarial firm’s estimate of ultimate loss includes a provision for those claims that have been incurred but not reported. This provision is derived by analyzing industry data and projecting our experience. We adjust the liability quarterly based upon our assessment and the results of the study. However, it is possible that the recorded liability may not be adequate to cover the future payment of claims. Adjustments to the recorded liability are reflected in operating expenses in the periods in which such adjustments become known.
Third-party claims – We record a liability for third-party claims including those for highway crossing accidents, trespasser and other injuries, automobile liability, property damage, and lading damage. The actuarial firm assists us with the calculation of potential liability for third-party claims, except lading damage, based upon our experience including the number and timing of incidents, amount of payments, settlement rates, number of open claims, and legal defenses. We adjust the liability quarterly based upon our assessment and the results of the study. Given the inherent uncertainty in regard to the ultimate outcome of third-party claims, it is possible that the actual loss may differ from the estimated liability recorded.
Environmental Matters
We are subject to various jurisdictions’ environmental laws and regulations. We record a liability where such liability or loss is probable and reasonably estimable. Environmental engineersspecialists regularly participate in ongoing evaluations of all known sites and in determining any necessary adjustments to liability estimates.
Our Consolidated Balance Sheets include liabilities for environmental exposures of $56$58 million and $58$55 million at March 31, 2018,2019 and December 31, 2017,2018, respectively, (ofof which $15 million is classified as a current liability at both dates).dates. At March 31, 2018,2019, the liability represents our estimates of the probable cleanup, investigation, and remediation costs based on available information at 128112 known locations and projects compared with 127114 locations and projects at December 31, 2017.2018. At March 31, 2018, 152019, fifteen sites accounted for $35$39 million of the liability, and no individual site was considered to be material. We anticipate that much of this liability will be paid out over five years; however, some costs will be paid out over a longer period.
At thirteeneleven locations, one or more of our subsidiaries in conjunction with a number of other parties have been identified as potentially responsible parties under the Comprehensive Environmental Response, Compensation and Liability Act of 1980 or comparable state statutes that impose joint and several liability for cleanup costs. We calculate our estimated liability for these sites based on facts and legal defenses applicable to each site and not solely on the basis of the potential for joint liability.
With respect to known environmental sites (whether identified by us or by the Environmental Protection Agency or comparable state authorities), estimates of our ultimate potential financial exposure for a given site or in the aggregate for all such sites can change over time because of the widely varying costs of currently available cleanup techniques, unpredictable contaminant recovery and reduction rates associated with available cleanup technologies, the likely development of new cleanup technologies, the difficulty of determining in advance the nature and full extent of contamination and each potential participant’s share of any estimated loss (and that participant’s ability to bear it), and evolving statutory and regulatory standards governing liability.
The risk of incurring environmental liability for acts and omissions, past, present, and future, is inherent in the railroad business. Some of the commodities we transport, particularly those classified as hazardous materials, pose special risks that we work diligently to reduce. In addition, several of our subsidiaries own, or have owned, land used as operating property, or which is leased and operated by others, or held for sale. Because environmental problems that are latent or undisclosed may exist on these properties, there can be no assurance that we will not incur environmental liabilities or costs with respect to one or more of them, the amount and materiality of which cannot be estimated reliably at this time. Moreover, lawsuits and claims involving these and potentially other unidentified environmental sites and matters are likely to arise from time to time. The resulting liabilities could have a significant effect on our financial position, results of operations, or liquidity in a particular year or quarter.
Based on our assessment of the facts and circumstances now known, we believe we have recorded the probable and reasonably estimable costs for dealing with those environmental matters of which we are aware. Further, we believe that it is unlikely that any known matters, either individually or in the aggregate, will have a material adverse effect on our financial position, results of operations, or liquidity.
Insurance
We obtain on behalf of ourself and our subsidiaries insurance for potential losses for third-party liability and first-party property damages. We are currently self-insured up to $50 million and above $1.1 billion ($1.5 billion for specific perils) per occurrence and/or policy year for bodily injury and property damage to third parties and up to $25 million and above $200 million per occurrence and/or policy year for property owned by us or in our care, custody, or control.
11.12. New Accounting Pronouncements
In February 2016, the FASB issued ASU 2016-02, “Leases.” This update, effective for our annual and interim reporting periods beginning January 1, 2019, will replace existing lease guidance in GAAP and will require lessees to recognize lease assets and lease liabilities on the balance sheet for leases greater than twelve months and disclose key information about leasing arrangements. When implemented, lessees will be required to measure and record leases at the present value of the remaining lease payments. The FASB approved amendments that permit the use of the effective date as the date of initial application or a modified retrospective transition approach, with application in all comparative periods presented. We are evaluating which transition approach to adopt. We are currently evaluating the effects ASU 2016-02 will have on our consolidated financial statements and related disclosures. We disclosed $660 million in undiscounted operating lease obligations in our lease commitments footnote in our most recent 10-K and we will evaluate those contracts as well as other existing arrangements to determine if they qualify for lease accounting under the new standard. We are in the process of implementing a lease management system to support the new reporting requirements. We do not anticipate a material impact on our results of operations and we do not plan to adopt the standard early.
In June 2016, the FASB issued ASU 2016-13, “Credit Losses - Measurement of Credit Losses on Financial Instruments,” which replaces the current incurred loss impairment method with a method that reflects expected credit losses. The new standard is effective as of January 1, 2020, and early adoption is permitted as of January 1, 2019. Because credit losses associated from our tradeaccounts receivables have historically been insignificant, we do not expect this standard to have a material effect on our financial statements. We will not adopt the standard early.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Norfolk Southern Corporation and Subsidiaries
The following discussion and analysis should be read in conjunction with the Consolidated Financial Statements and Notes.
OVERVIEW
We are one of the nation’s premier transportation companies. Our Norfolk Southern Railway Company subsidiary operates approximately 19,500 route miles of road in 22 states and the District of Columbia, with service toserves every major container port in the eastern United States, and provides efficient connections to other rail carriers. We operateNorfolk 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 areis a major transporterprincipal carrier of coal, automobiles, and automotive and industrial products. parts.
We continued to make progress towardsOur first quarter 2019 results reflect the goalsinitial steps in the implementation of our new strategic plan postingthat we unveiled in February. We achieved a record results in the first quarter. Thelow first-quarter operating ratio (a measure of the amount of operating revenues consumed by operating expenses) of 69.3% was a66.0%, in addition to first-quarter record, as wasrecords for railway operating revenues, income from railway operations, net income, and diluted earnings per share. We are progressinghave started the year with initiatives to improve the fluiditypositive momentum as we build a stronger company for our shareholders, customers, and resilience of our network while simultaneously positioning it for additional growth and efficiency.employees.
SUMMARIZED RESULTS OF OPERATIONS
($ in millions, except per share amounts)
| | | First Quarter | | First Quarter | |
| 2018 | | 2017 | | % change | | 2019 | | 2018 | | % change | |
Income from railway operations | $ | 835 |
| | $ | 757 |
| | 10% | | $ | 966 |
| | $ | 835 |
| | 16% | |
Net income | $ | 552 |
| | $ | 433 |
| | 27% | | $ | 677 |
| | $ | 552 |
| | 23% | |
Diluted earnings per share | $ | 1.93 |
| | $ | 1.48 |
| | 30% | | $ | 2.51 |
| | $ | 1.93 |
| | 30% | |
Railway operating ratio (percent) | 69.3 |
| | 70.6 |
| | (2%) | | 66.0 |
| | 69.3 |
| | (5%) | |
The increase in incomeIncome from railway operations wasrose as a result of increased railway operating revenues. Traffic volume was up 3% andrevenues, driven by higher average revenue per unit, growth was driven byreflecting pricing gains, and higher fuel surcharge revenues, partially offsetrevenue, and increased accessorial charges. Overall volumes were flat, as gains in intermodal were tempered by mix related impactsdeclines in coal and merchandise. Railway operating expenses were relatively flat as fuel price declines, decreased compensation expense, and lower expenses due to increased intermodal volume. The risenetwork velocity were offset by increases in revenues was offsetpurchased services. Our share repurchase program resulted in part by increased railway operating expenses, driven by higher fuel expense and costs associated with overall lower network velocity. Net income and diluted earnings per share also benefited from a lower effective tax rate, primarily due to the enactmentgrowth that exceeded that of tax reform in 2017.net income.
DETAILED RESULTS OF OPERATIONS
Railway Operating Revenues
The following tables present a comparison of revenues ($ in millions), volumes (units in thousands), and average revenue per unit ($ per unit) by marketcommodity group. At the beginning of 2019, we made changes in the categorization of certain commodity groups within Merchandise. Prior period railway operating revenues, units, and revenue per unit have been reclassified to conform to the current presentation (see Note 1).
| | | First Quarter | | First Quarter | |
Revenues | 2018 | | 2017 | | % change | | 2019 | | 2018 | | % change | |
Merchandise: | | | | | | | | |
Chemicals | $ | 443 |
| | $ | 427 |
| | 4% | | $ | 452 |
| | $ | 454 |
| | — |
Agr./consumer/gov’t | 393 |
| | 384 |
| | 2% | | |
Metals/construction | 338 |
| | 340 |
| | (1%) | | |
Agriculture products | | 385 |
| | 357 |
| | 8% | |
Metals and construction | | 385 |
| | 356 |
| | 8% | |
Automotive | 243 |
| | 246 |
| | (1%) | | 251 |
| | 243 |
| | 3% | |
Paper/clay/forest | 188 |
| | 187 |
| | 1% | | |
Forest and consumer | | 213 |
| | 195 |
| | 9% | |
Merchandise | 1,605 |
| | 1,584 |
| | 1% | | 1,686 |
| | 1,605 |
| | 5% | |
Intermodal | 678 |
| | 571 |
| | 19% | | 719 |
| | 678 |
| | 6% | |
Coal | 434 |
| | 420 |
| | 3% | | 435 |
| | 434 |
| | — |
| | | | | |
Total | $ | 2,717 |
| | $ | 2,575 |
| | 6% | | $ | 2,840 |
| | $ | 2,717 |
| | 5% | |
| | Units | | | | |
Merchandise: | | | | | | | | |
Chemicals | 120.8 |
| | 118.6 |
| | 2% | | 125.9 |
| | 126.6 |
| | (1%) | |
Agr./consumer/gov’t | 148.3 |
| | 149.5 |
| | (1%) | | |
Metals/construction | 164.6 |
| | 168.4 |
| | (2%) | | |
Agriculture products | | 130.9 |
| | 129.9 |
| | 1% | |
Metals and construction | | 173.9 |
| | 175.9 |
| | (1%) | |
Automotive | 102.8 |
| | 110.5 |
| | (7%) | | 98.1 |
| | 102.8 |
| | (5%) | |
Paper/clay/forest | 69.6 |
| | 70.6 |
| | (1%) | | |
Forest and consumer | | 69.4 |
| | 70.9 |
| | (2%) | |
Merchandise | 606.1 |
| | 617.6 |
| | (2%) | | 598.2 |
| | 606.1 |
| | (1%) | |
Intermodal | 1,049.2 |
| | 969.4 |
| | 8% | | 1,071.0 |
| | 1,049.2 |
| | 2% | |
Coal | 249.1 |
| | 259.6 |
| | (4%) | | 236.3 |
| | 249.1 |
| | (5%) | |
| | | | | |
Total | 1,904.4 |
| | 1,846.6 |
| | 3% | | 1,905.5 |
| | 1,904.4 |
| | — |
| | Revenue per Unit | | | | |
Merchandise: | | | | | | | | |
Chemicals | $ | 3,663 |
| | $ | 3,599 |
| | 2% | | $ | 3,587 |
| | $ | 3,585 |
| | — |
Agr./consumer/gov’t | 2,650 |
| | 2,568 |
| | 3% | | |
Metals/construction | 2,053 |
| | 2,020 |
| | 2% | | |
Agriculture products | | 2,945 |
| | 2,744 |
| | 7% | |
Metals and construction | | 2,217 |
| | 2,023 |
| | 10% | |
Automotive | 2,362 |
| | 2,221 |
| | 6% | | 2,557 |
| | 2,362 |
| | 8% | |
Paper/clay/forest | 2,704 |
| | 2,651 |
| | 2% | | |
Forest and consumer | | 3,070 |
| | 2,755 |
| | 11% | |
Merchandise | 2,647 |
| | 2,564 |
| | 3% | | 2,819 |
| | 2,647 |
| | 6% | |
Intermodal | 647 |
| | 589 |
| | 10% | | 671 |
| | 647 |
| | 4% | |
Coal | 1,743 |
| | 1,617 |
| | 8% | | 1,839 |
| | 1,743 |
| | 6% | |
Total | 1,427 |
| | 1,394 |
| | 2% | | 1,490 |
| | 1,427 |
| | 4% | |
First-quarter railwayRailway operating revenues increased $142$123 million in the first quarter over the same period last year. The table below reflects the components of the revenue change by major marketcommodity group ($ in millions).
| | | | First Quarter | | First Quarter |
| | Increase (Decrease) | | Increase (Decrease) |
| | | | | | | | | | | | |
| | Merchandise | | Intermodal | | Coal | | Merchandise | | Intermodal | | Coal |
| | | | | | | | | | | | |
Volume | | $ | (30 | ) | | $ | 47 |
| | $ | (17 | ) | | $ | (21 | ) | | $ | 14 |
| | $ | (22 | ) |
Fuel surcharge revenue | | 18 |
| | 31 |
| | 2 |
| | 14 |
| | 9 |
| | (1 | ) |
Rate, mix and other | | 33 |
| | 29 |
| | 29 |
| | 88 |
| | 18 |
| | 24 |
|
| | | | | | | | | | | | |
Total | | $ | 21 |
| | $ | 107 |
| | $ | 14 |
| | $ | 81 |
| | $ | 41 |
| | $ | 1 |
|
Most of our contracts include negotiated fuel surcharges, typically tied to either On-Highway Diesel (OHD) or West Texas Intermediate Crude Oil (WTI). Approximately 90% of our revenue base is covered by these negotiated fuel surcharges, with almostover 75% tied to OHD. In the first quarter of 2018,2019, contracts tied to OHD accounted for about 95% of our fuel surcharge revenue, as price levels were below most of our surcharge trigger points in contracts tied to WTI.revenue. Revenues associated with these surcharges totaled $131$153 million and $80$131 million in the first quarters of 20182019 and 2017,2018, respectively.
Merchandise
Merchandise revenues increasedrevenue grew in the first quarter, as a result of higher average revenue per unit was driven by pricing gains and higherincreased fuel surcharge revenues, offset by volume declines,revenue. Overall volumes fell, as gains in chemicals shipmentsagriculture products were more than offset by declines in the remaining groups.
Chemicals volume rose,decreased driven by higherreduced shipments of liquefied petroleum gas, due to colder winter weathercrude oil, and increased shipments of plastics partially offset by lower shipments of coal ash.gains in municipal waste and petroleum shipments.
Agriculture consumer products volume rose, as increases in corn and government volume was down slightlyfeed shipments more than offset declines in ethanol, primarily due to reduced network velocity as well as lower soybean shipments due to export market contractionsevere flooding in the Midwest, and decreased corn shipments, partially offset by increased ethanol shipments.wheat traffic.
Metals and construction volume declined, afell, largely the result of lower aggregates, coildecreases in iron and steel and aluminum products traffic, related to reduced network velocity. These decreases were partially offset by increased frac sandhigher aggregate shipments for use in natural gas drilling in the Marcellus and Utica regions.due to an extended shipping season.
Automotive volume declined driven by shortages in availabilityas a result of multilevel equipment, reduced network velocity and decreases in U.S. light vehicle production.
Paper, clay,production and forest products volume decreased in the first quarter. Woodchip volumes fellrailcar availability, due to customer sourcing changes,disruptions across the U.S. multilevel network.
Forest and consumer volume declined, reflecting decreases in addition to a drop inkaolin, lumber, and graphic paper traffic. These declines were partially offset by increases in pulpboard and municipal waste shipments, a result of tightened truck capacity and growth with existing customers, respectively.
Merchandise revenues for the remainder of the year are expected to increase comparedcontinue to last year,be higher year-over-year, reflecting higher average revenue per unit, driven by pricing gains and higher fuel surcharge revenues, and higher volumes.gains.
Intermodal
Intermodal revenuesrevenue increased, driven by higher average revenue per unit, a result of pricing gains and increased fuel surcharge revenues, and pricing gains, andas well as volume growth.
Intermodal units (in thousands) by market were as follows:
| | | First Quarter | First Quarter |
| 2018 | | 2017 | | % change | 2019 | | 2018 | | % change |
| | | | | | | | |
Domestic | 671.7 |
| | 600.9 |
| | 12% | 656.3 |
| | 671.7 |
| | (2%) |
International | 377.5 |
| | 368.5 |
| | 2% | 414.7 |
| | 377.5 |
| | 10% |
| | | | | | | | |
Total | 1,049.2 |
| | 969.4 |
| | 8% | 1,071.0 |
| | 1,049.2 |
| | 2% |
Domestic volume increases were thevolumes fell as a result of continued highway conversions due to tighter capacityinclement winter weather in the truck market, higher truckload pricing,Midwest and growth in existing accounts.trailer lane rationalizations. International volumevolumes rose due to increased demand from existing accounts.
Intermodal revenues for the remainder of the year are expected to increase comparedcontinue to last year,increase, driven by greater volume growth in addition to higher average revenue per unit due to increased fuel surcharge revenues and pricing gains.
Coal
Coal revenues increased,were relatively flat, as higher average revenue per unit, the result of pricing gains, and positive mix due to increased export traffic, was partially offsettempered by volume decreases in the other markets.decreases.
Coal tonnage (in thousands) by market was as follows:
| | | First Quarter | First Quarter |
| 2018 | | 2017 | | % change | 2019 | | 2018 | | % change |
| | | | | | | | |
Utility | 15,865 |
| | 17,602 |
| | (10%) | 15,755 |
| | 15,865 |
| | (1%) |
Export | 7,238 |
| | 6,343 |
| | 14% | 6,388 |
| | 7,238 |
| | (12%) |
Domestic metallurgical | 3,147 |
| | 3,367 |
| | (7%) | 2,931 |
| | 3,147 |
| | (7%) |
Industrial | 1,260 |
| | 1,471 |
| | (14%) | 1,222 |
| | 1,260 |
| | (3%) |
| | | | | | | | |
Total | 27,510 |
| | 28,783 |
| | (4%) | 26,296 |
| | 27,510 |
| | (4%) |
The decline in utilityUtility coal tonnage was driven primarilyrelatively flat as volume declines due to plant outages and inclement weather were offset by higher volumes from increased network velocity issues and inclement weather.demand to replenish low stockpiles. Export coal tonnage growth wasdropped as a result of higher demand for U.S. coal.a decline in coal availability and weak thermal seaborne pricing. Domestic metallurgical coal tonnage decreased, driven byfell due to customer sourcing changes.changes and plant outages. Industrial coal tonnage fell, reflecting continueddecreased as a result of customer sourcing changes and pressure from natural gas conversions and customer sourcing changes.conversions.
Coal revenues for the remainder of the year are expected to decline. Utility demand continues to be flat asimpacted by lower natural gas prices. Export will be impacted by a lower average revenue per unit, will be lowermainly the result of softening seaborne metallurgical prices, and reduced volume due to market conditions that will influenceweak thermal seaborne pricing and changes in the mix of traffic.supply issues.
Railway Operating Expenses
Railway operating expenses summarized by major classifications were as follows ($ in millions):
| | | First Quarter | First Quarter |
| 2018 | | 2017 | | % change | 2019 | | 2018 | | % change |
| | | | | | | | |
Compensation and benefits | $ | 737 |
| | $ | 759 |
| | (3%) | $ | 727 |
| | $ | 737 |
| | (1%) |
Purchased services and rents | 401 |
| | 377 |
| | 6% | 424 |
| | 401 |
| | 6% |
Fuel | 266 |
| | 213 |
| | 25% | 250 |
| | 266 |
| | (6)% |
Depreciation | 272 |
| | 259 |
| | 5% | 283 |
| | 272 |
| | 4% |
Materials and other | 206 |
| | 210 |
| | (2%) | 190 |
| | 206 |
| | (8%) |
| | | | | | | | |
Total | $ | 1,882 |
| | $ | 1,818 |
| | 4% | $ | 1,874 |
| | $ | 1,882 |
| | — |
Compensation and benefits expense decreased reflecting changes in:as follows:
employment levels (down $24$11 million),
health and welfare benefit rates for agreement employees (down $8higher capitalized labor ($8 million),
incentive and stock-based compensation (down $8 million), and
overtime and recrews (down $6 million),
payroll taxes on stock-based compensation (down $4 million),
other (down $1 million), and
increased pay rates (up $19$20 million).
Average rail headcount for the quarter was down by about 1,000175 compared with the first-quarter 2017. Going forward,first quarter 2018 and down by about 375 sequentially. We expect that headcount is expected to remain relatively flat for the fullremainder of the year as trainwill continue to decline and engine employee hiringthat our year-end headcount will be largely offset by headcount reductions in other areas.down at least 500 as compared to prior year.
Purchased services and rents increased as follows ($ in millions):
| | | First Quarter | First Quarter |
| 2018 | | 2017 | | % change | 2019 | | 2018 | | % change |
| | | | | | | | |
Purchased services | $ | 318 |
| | $ | 304 |
| | 5% | $ | 346 |
| | $ | 318 |
| | 9% |
Equipment rents | 83 |
| | 73 |
| | 14% | 78 |
| | 83 |
| | (6%) |
| | | | | | | | |
Total | $ | 401 |
| | $ | 377 |
| | 6% | $ | 424 |
| | $ | 401 |
| | 6% |
The increaserise in purchased services was primarily due tolargely the result of higher intermodal volume-relatedintermodal-related costs, increased technology-related expenses, and decreasedlower earnings in equity affiliates. Equipment rents fell, the result of increased network velocity.
Fuel expense, which includes the cost of locomotive fuel as well as other fuel used in railway operations, increaseddecreased primarily due primarily to higherlower locomotive fuel prices (up 21%(down 4%), as well as increaseddecreased consumption (up 2%(down 1%).
Materials and other expenses declineddecreased as follows ($ in millions):
| | | First Quarter | First Quarter |
| 2018 | | 2017 | | % change | 2019 | | 2018 | | % change |
| | | | | | | | |
Materials | $ | 90 |
| | $ | 92 |
| | (2%) | $ | 87 |
| | $ | 90 |
| | (3%) |
Casualties and other claims | 47 |
| | 40 |
| | 18% | 49 |
| | 47 |
| | 4% |
Other | 69 |
| | 78 |
| | (12%) | 54 |
| | 69 |
| | (22%) |
| | | | | | | | |
Total | $ | 206 |
| | $ | 210 |
| | (2%) | $ | 190 |
| | $ | 206 |
| | (8%) |
Materials costs decreased modestly, asdue primarily to lower roadway repairs were tempered by increased freight car and locomotive repairs.repair costs. Casualties and other claims expenses include the estimates of costs related to personal injury, property damage, and environmental remediation matters. The increase wasincreased, largely a result of higher damagescosts related to derailments during the quarter.environmental remediation matters, partially offset by lower derailment-related costs. Other expense decreased, reflecting higher gains from the inclusionsale of $18 million of net rental income from operating property within railway operating expenses previously included in “Other income – net.”property.
Other Income – Net
Other income – net declined $32increased $36 million in the first quarter primarily driven primarily by lowerhigher investment returns on corporate-owned life insurance and the absence of net rental income as discussed above.insurance.
Income Taxes
The first-quarter effective tax rate was 21.9%21.4% compared with 33.9%21.9% for the same period last year. The decline is a result of the effects of the enactment of tax reform in 2017 that lowered the federal corporate income tax rate, as well as incomeBoth periods reflect favorable tax benefits foron stock-based compensation. The current year also benefited from higher returns on corporate-owned life insurance, while the prior year included benefits of certain 2017 tax credits enacted retroactively by the Bipartisan Budget Act of 2018, which was signed into law on February 9, 2018. We expect our full year effective rate to be around 24%.
FINANCIAL CONDITION AND LIQUIDITY
Cash provided by operating activities, our principal source of liquidity, was $816$881 million for the first three months of 2018,2019, compared with $846$816 million for the same period of 2017,2018, primarily the result of increased incentive compensation paymentsimproved operating results partially offset by improved operating results.increased interest payments. We had working capital deficits of $91$963 million at March 31, 2018,2019, compared with a working capital deficit of $396$729 million at December 31, 2017.2018. Cash, and cash equivalents, and restricted cash totaled $1.1 billion$499 million at March 31, 2018.2019. We expect cash on hand combined with cash provided by operating activities will be sufficient to meet our ongoing obligations.
During the first quarter of 2018, we issued $500 million of 4.15% senior notes due 2048. Other than this item, there There have been no material changes to the information on future contractual obligations contained in our Form 10-K for the year ended December 31, 2017.2018 with the exception of additional lease obligations (see Note 8).
Cash used in investing activities was $371$350 million for the first three months of 2018,2019, compared with $404$371 million in the same period last year, the decrease driven primarilyreflecting increased property sale proceeds partially offset by lowerhigher property additions.
Cash used in financing activities was $63$478 million in the first three months of 2018,2019, compared with $443$63 million in the same period last year, primarilylargely the result of increasedlower proceeds from borrowing partially offset byand higher repurchases of common stock.Common Stock. We repurchased 2.12.9 million shares of Common Stock, totaling $300$500 million, in the first three months of 2018,2019, compared to 1.72.1 million shares, totaling $200$300 million, in the same period last year. The timing and volume of future share repurchases will be guided by our assessment of market conditions and other pertinent factors. Any near-term purchases under the program are expected to be made with internally-generated cash, cash on hand, or proceeds from borrowings.
Our total debt-to-totaltotal-debt-to-total capitalization ratio was 38.5%42.7% at March 31, 2018,2019, and 37.5%42.0% at December 31, 2017.2018.
We have in place and available a $750 million credit agreement expiring in May 2021, which provides for borrowings at prevailing rates and includes covenants. We had no amounts outstanding under this facility at both March 31, 2018,2019, and December 31, 2017,2018, and are in compliance with all of its covenants. We have a $350$400 million accounts
account receivable securitization program expiring in June 2018. There was $50 million and $100May 2019. We had $250 million outstanding under this program at March 31, 2018,2019, and no amounts outstanding at December 31, 2017, respectively.2018.
APPLICATION OF CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in accordance with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. These estimates and assumptions may require significant judgment about matters that are inherently uncertain, and future events are likely to occur that may require us to make changes to these estimates and assumptions. Accordingly, we regularly review these estimates and assumptions based on historical experience, changes in the business environment, and other factors we believe to be reasonable under the circumstances. There have been no significant changes to the application of the critical accounting policies disclosure contained in our Form 10-K at December 31, 2017.2018.
OTHER MATTERS
Labor Agreements
Approximately 80% of our railroad employees are covered by collective bargaining agreements with various labor unions. Pursuant to the Railway Labor Act, these agreements remain in effect until new agreements are reached, or until the bargaining procedures mandated by the Railway Labor Act are completed. We largely bargain nationally in concert with other major railroads, represented by the National Carriers Conference Committee (NCCC).Committee. Moratorium provisions in the labor agreements govern when the railroads and unions may propose changes to the agreements.
Beginning in late 2014, the NCCC and the various unions exchanged new proposals to begin the current round of national negotiations. The unions formed three separate bargaining coalitions and the NCCC has reached agreements with 2 of these coalitions representing 10 separate unions and approximately 80% of the unionized workforce. Two of these agreements (applicable to approximately 10% of the unionized workforce) are still pending ratification by the union membership while the remainder are already final. The NCCC and the third coalition have agreed to resolve their contract dispute through binding arbitration. That arbitration decision is expected in late May and the contract will be final at that time. In accordance with the Railway Labor Act, current agreements will remain in effect during the statutory bargaining process. Separately, NS has reached agreement covering wages and work rules through 2019 with the Brotherhood of Locomotive Engineers and Trainmen (BLET), which represents approximately 4,600 NS engineers.
New Accounting Pronouncements
For a detailed discussion of new accounting pronouncements, see Note 11.12.
Inflation
In preparing financial statements, GAAP requires the use of historical cost that disregards the effects of inflation on the replacement cost of property. We areAs a capital-intensive company with most of our capital invested in long-lived assets. The replacement cost of these assets, as well as the related depreciation expense, would be substantially greater than the amounts reported on the basis of historical cost.
FORWARD-LOOKING STATEMENTS
Certain statements in Management’s Discussion and Analysis of Financial Condition and Results of Operations are “forward-looking statements” within the meaning of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, as amended. These statements relate to future events or our future financial performance and involve known and unknown risks, uncertainties, and other factors that may cause our actual results, levels of activity, performance, or our achievements or those of our industry to be materially different from those expressed or implied by any forward-looking statements. In some cases, forward-looking statements can be identified by
terminology such as “may,” “will,” “could,” “would,” “should,” “expect,” “plan,” “anticipate,” “intend,” “believe,” “estimate,” “project,” “consider,” “predict,” “potential,” “feel,” or other comparable terminology. We have based these forward-looking statements on our current expectations, assumptions, estimates, beliefs, and projections. While we believe these expectations, assumptions, estimates, beliefs, and projections are reasonable, such forward-looking statements are only predictions and involve known and unknown risks and uncertainties, many of which involve factors or circumstances that are beyond our control. These and other important factors, including those discussed under “Risk Factors” in our latest Form 10-K, and herein, as well as our subsequent filings with the Securities and Exchange Commission, may cause actual results, performance, or achievements to differ materially from those expressed or implied by these forward-looking statements. The forward-looking statements herein are made only as of the date they were first issued, and unless otherwise required by applicable securities laws, we disclaim any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. Copies of our press releases and additional information about us is available at www.norfolksouthern.com, or you can contact Norfolk Southern Corporationour Investor Relations department by calling 757-629-2861.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
The information required by this item is included in Part I, Item 2,“Management’s “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under the heading “Financial Condition and Liquidity.”
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Our Chief Executive Officer and Chief Financial Officer, with the assistance of management, evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (Exchange Act)) at March 31, 2018.2019. Based on such evaluation, our officers have concluded that, at March 31, 2018,2019, our disclosure controls and procedures were effective in alerting them on a timely basis to material information required to be included in our periodic filings under the Exchange Act.
Changes in Internal Control Over Financial Reporting
During the first quarter of 2018,2019, we implemented controls to support the adoption of the new lease accounting standard ASU No. 2016-02, “Leases (Topic 842).” We have not identified any other changes in internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
In 2007, various antitrust class actions filed against us and other Class I railroads in various Federal district courts regarding fuel surcharges were consolidated in the District of Columbia by the Judicial Panel on Multidistrict Litigation. In 2012, the court certified the case as a class action. The defendant railroads appealed this certification, and the Court of Appeals for the District of Columbia vacated the District Court’s decision and remanded the case for further consideration. On October 10, 2017, the District Court denied class certification; the findings are subject to appeal. We believe the allegations in the complaints are without merit and intend to vigorously defend the cases. We do not believe the outcome of these proceedings will have a material effect on our financial position, results of operations, or liquidity.
Item 1A. Risk Factors.
The risk factors included in our 20172018 Form 10-K remain unchanged and are incorporated herein by reference with the exception of the following:reference.
Significant governmental legislation and regulation over commercial, operating and environmental matters could affect us, our customers, and the markets we serve. Congress can enact laws that could increase economic regulation of the industry. Railroads presently are subject to commercial regulation by the STB, which has jurisdiction to varying extents over rates, routes, customer access provisions, fuel surcharges, conditions of service, and the extension or abandonment of rail lines. The STB also has jurisdiction over the consolidation, merger, or acquisition of control of and by rail common carriers. Additional economic regulation of the rail industry by Congress or the STB, whether under new or existing laws, could have a significant negative impact on our ability to determine prices for rail services and on the efficiency of our operations. This potential material adverse effect could also result in reduced capital spending on our rail network or abandonment of lines.
Railroads are also subject to the enactment of laws by Congress and regulation by the Department of Transportation and the Department of Homeland Security (which regulate most aspects of our operations) related to safety and security. The Rail Safety Improvement Act of 2008 (RSIA), the Surface Transportation Extension Act of 2015, and the implementing regulations promulgated by the Federal Railroad Association (collectively “the PTC laws and regulations”) require us (and each other Class I railroad) to implement, on certain mainline track where intercity and commuter passenger railroads operate and where toxic inhalation hazardous materials are transported, an interoperable positive train control system (PTC). PTC is a set of highly advanced technologies designed to prevent train-to-train collisions, speed-related derailments, and certain other accidents caused by human error, but PTC will not prevent all types of train accidents or incidents. The PTC laws and regulations require us to install all hardware and to implement the PTC system on some of those rail lines by December 31, 2018, and to implement such system on the remainder of those rail lines by December 31, 2020. In addition, other railroads’ implementation schedules could impose additional interoperability requirements and accelerated timelines on us, which could impact our operations over other railroads if not met.
Full implementation of PTC will result in additional operating costs and capital expenditures, and PTC implementation may result in reduced operational efficiency and service levels, as well as increased compensation and benefits expenses, and increased claims and litigation costs.
Our operations are subject to extensive federal and state environmental laws and regulations concerning, among other things, emissions to the air; discharges to waterways or groundwater supplies; handling, storage, transportation, and disposal of waste and other materials; and the cleanup of hazardous material or petroleum releases. The risk of incurring environmental liability, for acts and omissions, past, present, and future, is inherent in the railroad business. This risk includes property owned by us, whether currently or in the past, that is or has been subject to a variety of uses, including our railroad operations and other industrial activity by past owners or our past and present tenants.
Environmental problems that are latent or undisclosed may exist on these properties, and we could incur environmental liabilities or costs, the amount and materiality of which cannot be estimated reliably at this time, with respect to one or more of these properties. Moreover, lawsuits and claims involving other unidentified environmental sites and matters are likely to arise from time to time.
Concern over climate change has led to significant federal, state, and international legislative and regulatory efforts to limit greenhouse gas (GHG) emissions. Restrictions, caps, taxes, or other controls on GHG emissions, including diesel exhaust, could significantly increase our operating costs, decrease the amount of traffic handled, and decrease the value of coal reserves we own.
In addition, legislation and regulation related to GHGs could negatively affect the markets we serve and our customers. Even without legislation or regulation, government incentives and adverse publicity relating to GHGs could negatively affect the markets for certain of the commodities we carry and our customers that (1) use commodities that we carry to produce energy, including coal, (2) use significant amounts of energy in producing or delivering the commodities we carry, or (3) manufacture or produce goods that consume significant amounts of energy.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
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| | (a) Total Number of Shares (or Units) | | (b) Average Price Paid per Share | | (c) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or | | (d) Maximum Number (or Approximate Dollar Value) of Shares (or Units) that may yet be purchased under the Plans or | |
Period | | Purchased (1) | | (or Unit) | | Programs (2) | | Programs (2) | |
| | | | | | | | | |
January 1-31, 2018 | | 661,196 |
| | 151.24 |
| | 661,196 |
| | 55,809,039 |
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February 1-28, 2018 | | 670,296 |
| | 142.08 |
| | 668,527 |
| | 55,140,512 |
| |
March 1-31, 2018 | | 757,034 |
| | 138.77 |
| | 756,616 |
| | 54,383,896 |
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| | | | | | | | | |
Total | | 2,088,526 |
| | |
| | 2,086,339 |
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| | | | | | | | | | | | | |
| | (a) Total Number of Shares (or Units) | | (b) Average Price Paid per Share | | (c) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or | | (d) Maximum Number (or Approximate Dollar Value) of Shares (or Units) that may yet be purchased under the Plans or | |
Period | | Purchased (1) | | (or Unit) | | Programs (2) | | Programs (2) | |
| | | | | | | | | |
January 1-31, 2019 | | 1,089,814 |
| | 160.66 |
| | 1,089,201 |
| | 38,278,718 |
| |
February 1-28, 2019 | | 928,331 |
| | 177.68 |
| | 921,840 |
| | 37,356,878 |
| |
March 1-31, 2019 | | 894,511 |
| | 180.45 |
| | 893,393 |
| | 36,463,485 |
| |
| | | | | | | | | |
Total | | 2,912,656 |
| | |
| | 2,904,434 |
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(1) | Of this amount, 2,1878,222 represent shares tendered by employees in connection with the exercise of options under the stockholder-approved Long-Term Incentive Plan. |
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(2) | On September 26, 2017, our Board of Directors authorized the repurchase of up to an additional 50 million shares of Common Stock through December 31, 2022. As of March 31, 2018, 54.42019, 36.5 million shares remain authorized for repurchase. |
Item 6. Exhibits.
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3(ii) | |
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4.110.1 | |
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4.210.2 | |
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10.1*10.3 | |
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10.4 | |
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10.5*,** | |
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10.6*,** | |
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10.7*,** | |
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10.8* | |
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31-A** | |
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31-B** | |
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32** | |
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101** | The following financial information from Norfolk Southern Corporation’s Quarterly Report on Form 10-Q for the first quarter of 2018,2019, formatted in Inline Extensible Business Reporting Language (XBRL)(iXBRL) includes (i) the Consolidated Statements of Income for the first quarter of 20182019 and 2017;2018; (ii) the Consolidated Statements of Comprehensive Income for the first quarter of 20182019 and 2017;2018; (iii) the Consolidated Balance Sheets at March 31, 20182019 and December 31, 2017;2018; (iv) the Consolidated Statements of Cash Flows for the first three months of 20182019 and 2017;2018; (v) the Consolidated Statements of Changes in Stockholders’ Equity for the first quarter of 2019 and (v)2018; and (vi) the Notes to Consolidated Financial Statements. |
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* Management contract or compensatory arrangement. |
** Filed herewith. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| | NORFOLK SOUTHERN CORPORATION Registrant |
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Date: | April 25, 201824, 2019 | /s/ Thomas E. HurlbutJason A. Zampi |
| | Thomas E. HurlbutJason A. Zampi
Vice President and Controller (Principal Accounting Officer) (Signature) |
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Date: | April 25, 201824, 2019 | /s/ John M. ScheibDenise W. Hutson |
| | John M. ScheibDenise W. Hutson
Executive Vice President Law and Administration and Chief Legal OfficerCorporate Secretary (Signature)
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