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 ended SEPTEMBERJUNE 30, 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)incorporation or organization) | 52-1188014
(IRS Employer Identification No.) |
Three Commercial Place | 23510-2191 |
Norfolk, | Virginia |
(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) |
Securities registered pursuant to Section 12(b) of the Act:
|
| | |
Title of each class | Trading Symbol | Name of each exchange on which registered |
Norfolk Southern Corporation Common Stock (Par Value $1.00) | NSC | New York Stock Exchange |
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 every Interactive Data File required to be submitted 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 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 Act [ ]Act.☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐No☒
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 SeptemberJune 30, 20182019 |
Common Stock ($1.00 par value per share) | | 272,346,940 (excluding263,406,773 | (excluding 20,320,777 shares held by the registrant’s |
| | consolidated subsidiaries) |
TABLE OF CONTENTS
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Norfolk Southern Corporation and Subsidiaries
Consolidated Statements of Income
(Unaudited)
| | | Third Quarter | | First Nine Months | Second Quarter | | First Six Months |
| 2018 | | 2017 | | 2018 | | 2017 | 2019 | | 2018 | | 2019 | | 2018 |
| ($ in millions, except per share amounts) | ($ in millions, except per share amounts) |
| | | | | | | | | | | | | | |
Railway operating revenues | $ | 2,947 |
| | $ | 2,670 |
| | $ | 8,562 |
| | $ | 7,882 |
| $ | 2,925 |
| | $ | 2,898 |
| | $ | 5,765 |
| | $ | 5,615 |
|
| | | | | | | | | | | | | | |
Railway operating expenses: | |
| | |
| | |
| | |
| |
| | |
| | |
| | |
|
Compensation and benefits | 725 |
| | 771 |
| | 2,168 |
| | 2,249 |
| 712 |
| | 706 |
| | 1,439 |
| | 1,443 |
|
Purchased services and rents | 450 |
| | 377 |
| | 1,281 |
| | 1,146 |
| 418 |
| | 430 |
| | 842 |
| | 831 |
|
Fuel | 274 |
| | 198 |
| | 812 |
| | 601 |
| 254 |
| | 272 |
| | 504 |
| | 538 |
|
Depreciation | 276 |
| | 265 |
| | 821 |
| | 788 |
| 284 |
| | 273 |
| | 567 |
| | 545 |
|
Materials and other | 202 |
| | 164 |
| | 599 |
| | 574 |
| 192 |
| | 191 |
| | 382 |
| | 397 |
|
| | | | | | | | | | | | | | |
Total railway operating expenses | 1,927 |
| | 1,775 |
| | 5,681 |
| | 5,358 |
| 1,860 |
| | 1,872 |
| | 3,734 |
| | 3,754 |
|
| | | | | | | | | | | | | | |
Income from railway operations | 1,020 |
| | 895 |
| | 2,881 |
| | 2,524 |
| 1,065 |
| | 1,026 |
| | 2,031 |
| | 1,861 |
|
| | | | | | | | | | | | | | |
Other income – net | 30 |
| | 39 |
| | 67 |
| | 127 |
| 22 |
| | 29 |
| | 66 |
| | 37 |
|
Interest expense on debt | 142 |
| | 134 |
| | 409 |
| | 416 |
| 153 |
| | 131 |
| | 302 |
| | 267 |
|
| | | | | | | | | | | | | | |
Income before income taxes | 908 |
| | 800 |
| | 2,539 |
| | 2,235 |
| 934 |
| | 924 |
| | 1,795 |
| | 1,631 |
|
| | | | | | | | | | | | | | |
Income taxes | 206 |
| | 294 |
| | 575 |
| | 799 |
| 212 |
| | 214 |
| | 396 |
| | 369 |
|
| | | | | | | | | | | | | | |
Net income | $ | 702 |
| | $ | 506 |
| | $ | 1,964 |
| | $ | 1,436 |
| $ | 722 |
| | $ | 710 |
| | $ | 1,399 |
| | $ | 1,262 |
|
| | | | | | | | | | | | | | |
Per share amounts: | |
| | |
| | |
| | |
| |
Net income | |
| | |
| | |
| | |
| |
Earnings per share: | | |
| | |
| | |
| | |
|
Basic | $ | 2.54 |
| | $ | 1.76 |
| | $ | 7.00 |
| | $ | 4.96 |
| $ | 2.72 |
| | $ | 2.52 |
| | $ | 5.25 |
| | $ | 4.46 |
|
Diluted | 2.52 |
| | 1.75 |
| | 6.95 |
| | 4.93 |
| 2.70 |
| | 2.50 |
| | 5.21 |
| | 4.43 |
|
| | | | | | | | | | | | | | |
Dividends | 0.80 |
| | 0.61 |
| | 2.24 |
| | 1.83 |
| |
See accompanying notes toconsolidatedfinancialstatements.
3
Norfolk Southern Corporation and Subsidiaries
Consolidated Statements of Comprehensive Income
(Unaudited)
| | | Third Quarter | | First Nine Months | Second Quarter | | First Six Months |
| 2018 | | 2017 | | 2018 | | 2017 | 2019 | | 2018 | | 2019 | | 2018 |
| ($ in millions) | ($ in millions) |
| | | | | | | | | | | | | | |
Net income | $ | 702 |
| | $ | 506 |
| | $ | 1,964 |
| | $ | 1,436 |
| $ | 722 |
| | $ | 710 |
| | $ | 1,399 |
| | $ | 1,262 |
|
Other comprehensive income, before tax: | |
| | |
| | |
| | |
| | | | | | | |
Pension and other postretirement benefit | 8 |
| | 7 |
| | 9 |
| | 21 |
| |
Pension and other postretirement benefits | | 5 |
| | 8 |
| | 10 |
| | 1 |
|
Other comprehensive income (loss) of equity investees | — |
| | — |
| | 2 |
| | (1 | ) | — |
| | 1 |
| | (1 | ) | | 2 |
|
Other comprehensive income, before tax | 8 |
| | 7 |
| | 11 |
| | 20 |
| 5 |
| | 9 |
| | 9 |
| | 3 |
|
| | | | | | | | | | | | | | |
Income tax expense related to items of | | | | | | | | | | | | | | |
other comprehensive income | (2 | ) | | (2 | ) | | (2 | ) | | (8 | ) | (2 | ) | | (2 | ) | | (3 | ) | | — |
|
| | | | | | | | | | | | | | |
Other comprehensive income, net of tax | 6 |
| | 5 |
| | 9 |
| | 12 |
| 3 |
| | 7 |
| | 6 |
| | 3 |
|
| | | | | | | | | | | | | | |
Total comprehensive income | $ | 708 |
| | $ | 511 |
| | $ | 1,973 |
| | $ | 1,448 |
| $ | 725 |
| | $ | 717 |
| | $ | 1,405 |
| | $ | 1,265 |
|
See accompanying notes toconsolidatedfinancialstatements.
4
Norfolk Southern Corporation and Subsidiaries
Consolidated Balance Sheets
(Unaudited)
| | | September 30, 2018 | | December 31, 2017 | June 30, 2019 | | December 31, 2018 |
| ($ in millions) | ($ in millions) |
| | | | | | |
Assets | |
| | |
| |
| | |
|
Current assets: | |
| | |
| |
| | |
|
Cash and cash equivalents | $ | 729 |
| | $ | 690 |
| $ | 274 |
| | $ | 358 |
|
Accounts receivable – net | 1,043 |
| | 955 |
| 1,039 |
| | 1,009 |
|
Materials and supplies | 267 |
| | 222 |
| 256 |
| | 207 |
|
Other current assets | 70 |
| | 282 |
| 345 |
| | 288 |
|
Total current assets | 2,109 |
| | 2,149 |
| 1,914 |
| | 1,862 |
|
| | | | | | |
Investments | 3,109 |
| | 2,981 |
| 3,301 |
| | 3,109 |
|
Properties less accumulated depreciation of $12,276 and | | | |
| |
$11,909, respectively | 30,712 |
| | 30,330 |
| |
Properties less accumulated depreciation of $12,372 | | | | |
|
and $12,374, respectively | | 31,201 |
| | 31,091 |
|
Other assets | 392 |
| | 251 |
| 756 |
| | 177 |
|
| | | | | | |
Total assets | $ | 36,322 |
| | $ | 35,711 |
| $ | 37,172 |
| | $ | 36,239 |
|
| | | | | | |
Liabilities and stockholders’ equity | |
| | |
| |
| | |
|
Current liabilities: | |
| | |
| |
| | |
|
Accounts payable | $ | 1,394 |
| | $ | 1,401 |
| $ | 1,407 |
| | $ | 1,505 |
|
Short-term debt | — |
| | 100 |
| |
Income and other taxes | 230 |
| | 211 |
| 270 |
| | 255 |
|
Other current liabilities | 317 |
| | 233 |
| 373 |
| | 246 |
|
Current maturities of long-term debt | 500 |
| | 600 |
| 401 |
| | 585 |
|
Total current liabilities | 2,441 |
| | 2,545 |
| 2,451 |
| | 2,591 |
|
| | | | | | |
Long-term debt | 10,635 |
| | 9,136 |
| 11,076 |
| | 10,560 |
|
Other liabilities | 1,302 |
| | 1,347 |
| 1,738 |
| | 1,266 |
|
Deferred income taxes | 6,464 |
| | 6,324 |
| 6,596 |
| | 6,460 |
|
| | | | |
Total liabilities | 20,842 |
| | 19,352 |
| 21,861 |
| | 20,877 |
|
| | | | | | |
Stockholders’ equity: | |
| | |
| |
| | |
|
Common stock $1.00 per share par value, 1,350,000,000 shares | |
| | |
| |
| | |
|
authorized; outstanding 272,346,940 and 284,157,187 shares, | |
| | |
| |
authorized; outstanding 263,406,773 and 268,098,472 shares, | | |
| | |
|
respectively, net of treasury shares | 274 |
| | 285 |
| 265 |
| | 269 |
|
Additional paid-in capital | 1,996 |
| | 2,254 |
| 2,226 |
| | 2,216 |
|
Accumulated other comprehensive loss | (435 | ) | | (356 | ) | (557 | ) | | (563 | ) |
Retained income | 13,645 |
| | 14,176 |
| 13,377 |
| | 13,440 |
|
| | | | | | |
Total stockholders’ equity | 15,480 |
| | 16,359 |
| 15,311 |
| | 15,362 |
|
| | | | | | |
Total liabilities and stockholders’ equity | $ | 36,322 |
| | $ | 35,711 |
| $ | 37,172 |
| | $ | 36,239 |
|
See accompanying notes toconsolidatedfinancialstatements.
5
Norfolk Southern Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
| | | | First Nine Months | | First Six 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 | $ | 1,964 |
| | $ | 1,436 |
| Net income | $ | 1,399 |
| | $ | 1,262 |
|
| Reconciliation of net income to net cash provided by operating activities: | |
| | |
| Reconciliation of net income to net cash provided by operating activities: | |
| | |
|
| Depreciation | 822 |
| | 791 |
| Depreciation | 567 |
| | 546 |
|
| Deferred income taxes | 138 |
| | 219 |
| Deferred income taxes | 133 |
| | 89 |
|
| Gains and losses on properties | (26 | ) | | (62 | ) | Gains and losses on properties | (7 | ) | | (14 | ) |
| Changes in assets and liabilities affecting operations: | |
| | |
| Changes in assets and liabilities affecting operations: | |
| | |
|
| Accounts receivable | (102 | ) | | (59 | ) | Accounts receivable | (30 | ) | | (92 | ) |
| Materials and supplies | (45 | ) | | 12 |
| Materials and supplies | (49 | ) | | (38 | ) |
| Other current assets | 45 |
| | 68 |
| Other current assets | 55 |
| | 19 |
|
| Current liabilities other than debt | 173 |
| | 165 |
| Current liabilities other than debt | (30 | ) | | 134 |
|
| Other – net | (85 | ) | | (105 | ) | Other – net | (86 | ) | | (80 | ) |
| | | | | | | | |
| Net cash provided by operating activities | 2,884 |
| | 2,465 |
| Net cash provided by operating activities | 1,952 |
| | 1,826 |
|
| | | | | | | | |
Cash flows from investing activities: | Cash flows from investing activities: | |
| | |
| Cash flows from investing activities: | |
| | |
|
| Property additions | (1,326 | ) | | (1,315 | ) | Property additions | (979 | ) | | (836 | ) |
| Property sales and other transactions | 93 |
| | 137 |
| Property sales and other transactions | 214 |
| | 48 |
|
| Investment purchases | (4 | ) | | (4 | ) | Investment purchases | (12 | ) | | (4 | ) |
| Investment sales and other transactions | 96 |
| | 8 |
| Investment sales and other transactions | (75 | ) | | 6 |
|
| | | | | | | | |
| Net cash used in investing activities | (1,141 | ) | | (1,174 | ) | Net cash used in investing activities | (852 | ) | | (786 | ) |
| | | | | | | | |
Cash flows from financing activities: | Cash flows from financing activities: | |
| | |
| Cash flows from financing activities: | |
| | |
|
| Dividends | (627 | ) | | (529 | ) | Dividends | (458 | ) | | (408 | ) |
| Common stock transactions | 38 |
| | 75 |
| Common stock transactions | 18 |
| | 15 |
|
| Purchase and retirement of common stock | (2,300 | ) | | (712 | ) | Purchase and retirement of common stock | (1,050 | ) | | (700 | ) |
| Proceeds from borrowings – net of issuance costs | 2,023 |
| | 293 |
| Proceeds from borrowings – net of issuance costs | 1,054 |
| | 543 |
|
| Debt repayments | (750 | ) | | (650 | ) | Debt repayments | (750 | ) | | (750 | ) |
| | | | | | | | |
| Net cash used in financing activities | (1,616 | ) | | (1,523 | ) | Net cash used in financing activities | (1,186 | ) | | (1,300 | ) |
| | | | | | | | |
| Net increase (decrease) in cash, cash equivalents, | | | | Net decrease in cash, cash equivalents, | | | |
| and restricted cash | 127 |
| | (232 | ) | and restricted cash | (86 | ) | | (260 | ) |
| | | | | | | | |
Cash, cash equivalents, and restricted cash: | 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 | $ | 817 |
| | $ | 724 |
| At end of period | $ | 360 |
| | $ | 430 |
|
| | | | | | | | |
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) | $ | 327 |
| | $ | 345 |
| Interest (net of amounts capitalized) | $ | 271 |
| | $ | 246 |
|
| Income taxes (net of refunds) | 314 |
| | 594 |
| Income taxes (net of refunds) | 215 |
| | 126 |
|
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 |
|
| | | | | | | | | |
Comprehensive income: |
| |
| |
| |
| |
|
Net income | | | | | | | 722 |
| | 722 |
|
Other comprehensive income | | | | | 3 |
| | | | 3 |
|
Total comprehensive income |
| |
| |
| |
| | 725 |
|
Dividends on common stock, |
| |
| |
| |
| |
|
$0.86 per share | | | | | | | (228 | ) | | (228 | ) |
Share repurchases | (2 | ) | | (22 | ) | | | | (526 | ) | | (550 | ) |
Stock-based compensation |
| | 35 |
| | | | (2 | ) | | 33 |
|
| | | | | | | | | |
Balance at June 30, 2019 | $ | 265 |
| | $ | 2,226 |
| | $ | (557 | ) | | $ | 13,377 |
| | $ | 15,311 |
|
|
| |
| |
| |
| |
|
See accompanying notes toconsolidatedfinancialstatements.
7
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, 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 |
|
| | | | | | | | | |
Comprehensive income: | | | | | | | | | |
Net income | | | | | | | 710 |
| | 710 |
|
Other comprehensive income | | | | | 7 |
| | | | 7 |
|
Total comprehensive income | | | | | | | | | 717 |
|
Dividends on common stock, | | | | | | | | | |
$0.72 per share | | | | | | | (203 | ) | | (203 | ) |
Share repurchases | (3 | ) | | (20 | ) | | | | (377 | ) | | (400 | ) |
Stock-based compensation |
| | 28 |
| | | | (1 | ) | | 27 |
|
| | | | | | | | | |
Balance at June 30, 2018 | $ | 281 |
| | $ | 2,263 |
| | $ | (441 | ) | | $ | 14,456 |
| | $ | 16,559 |
|
| | | | | | | | | |
See accompanying notes toconsolidatedfinancialstatements.
8
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 SeptemberJune 30, 2018,2019, and December 31, 2017,2018, our results of operations, and comprehensive income and changes in stockholders’ equity for the thirdsecond quarters and first ninesix months of 20182019 and 2017,2018, and our cash flows for the first ninesix 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: |
| | | | | | | | | | | | | | | | |
| | Second Quarter | | First Six Months |
| | 2019 | | 2018 | | 2019 |
| 2018 |
Merchandise: | | ($ in millions) |
Chemicals | | $ | 473 |
| | $ | 465 |
| | $ | 925 |
| | $ | 919 |
|
Agriculture products | | 406 |
| | 379 |
| | 791 |
| | 736 |
|
Metals and construction | | 416 |
| | 413 |
| | 801 |
| | 769 |
|
Automotive | | 251 |
| | 253 |
| | 502 |
| | 496 |
|
Forest and consumer | | 210 |
| | 208 |
| | 423 |
| | 403 |
|
Merchandise | | 1,756 |
| | 1,718 |
| | 3,442 |
| | 3,323 |
|
Intermodal | | 701 |
| | 714 |
| | 1,420 |
| | 1,392 |
|
Coal | | 468 |
| | 466 |
| | 903 |
| | 900 |
|
| | | | | | | | |
Total | | $ | 2,925 |
| | $ | 2,898 |
| | $ | 5,765 |
| | $ | 5,615 |
|
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. 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 revenue in the third quarter and first nine months of 2018 as compared with the GAAP that was in effect prior to January 1, 2018.
The following table disaggregates our revenues by major commodity group: |
| | | | | | | | |
| | Third Quarter | | First Nine Months |
| | 2018 | | 2018 |
Merchandise: | | ($ in millions) |
Chemicals | | $ | 468 |
| | $ | 1,363 |
|
Agriculture/consumer/government | | 428 |
| | 1,244 |
|
Metals/construction | | 383 |
| | 1,110 |
|
Automotive | | 245 |
| | 741 |
|
Paper/clay/forest | | 213 |
| | 602 |
|
Merchandise | | 1,737 |
| | 5,060 |
|
Intermodal | | 746 |
| | 2,138 |
|
Coal | | 464 |
| | 1,364 |
|
Total | | $ | 2,947 |
| | $ | 8,562 |
|
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 SeptemberJune 30, 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:
|
| | | | | | | | |
| | June 30, 2019 | | December 31, 2018 |
| | ($ in millions) |
Customer | | $ | 767 |
| | $ | 740 |
|
Non-customer | | 272 |
| | 269 |
|
| | | | |
Accounts receivable – net | | $ | 1,039 |
| | $ | 1,009 |
|
|
| | | | | | | | | |
| | September 30, 2018 | | December 31, 2017 | |
| | ($ in millions) | |
Customer | | $ | 781 |
| | $ | 703 |
| |
Non-customer | | 262 |
| | 252 |
| |
Accounts receivable – net | | $ | 1,043 |
| | $ | 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 $53 million and $39$55 million at Septemberboth June 30, 20182019 and December 31, 2017, respectively.2018. We do not have any material contract assets or liabilities.
Certain of our contracts contain refunds (which are primarily volume-based incentives) that are recorded as a reduction to revenue. Refunds are recorded on the basis of management’s best estimate of projected liability, which is based on historical activity, current shipment counts and expectation of future activity.
Certain accessorialancillary services may be provided to customers under their transportation contracts such as switching, demurrage and other incidental service revenues. These are distinct performance obligations that are recognized at a point in time when the services are performed or as contractual obligations are met. This revenue is included within each of the commodity groups and represents approximately 4% of total “Railway operating revenues.”revenues” on the Consolidated Statements of Income for both of the second quarters and first six months of 2019 and 2018.
2. Stock-Based Compensation
|
| | | | | | | | | | | | | | | | |
| | Second Quarter | | First Six Months |
| | 2019 | | 2018 | | 2019 | | 2018 |
| | ($ in millions) |
Stock-based compensation expense | | $ | 20 |
| | $ | 13 |
| | $ | 36 |
| | $ | 29 |
|
Total tax benefit | | 8 |
| | 6 |
| | 31 |
| | 20 |
|
|
| | | | | | | | | | | | | | | | |
| | Third Quarter | | First Nine Months |
| | 2018 | | 2017 | | 2018 | | 2017 |
| | ($ in millions) |
Stock-based compensation expense | | $ | 12 |
| | $ | 7 |
| | $ | 41 |
| | $ | 39 |
|
Total tax benefit | | 9 |
| | 13 |
| | 29 |
| | 47 |
|
During 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:
|
| | | | | | | | | | | | | | |
| | Second Quarter | | First Six Months |
| | Granted | | Weighted-Average Grant-Date Fair Value | | Granted | | Weighted-Average Grant-Date Fair Value |
| | | | | | | | |
Stock options | | 1,540 |
| | $ | 54.83 |
| | 43,920 |
| | $ | 45.93 |
|
RSUs | | 2,870 |
| | 203.25 |
| | 211,190 |
| | 163.87 |
|
PSUs | | 3,060 |
| | 189.57 |
| | 96,770 |
| | 160.24 |
|
|
| | | | | | | | | | | | | | |
| | Third Quarter | | First Nine Months |
| | Granted | | Weighted-Average Grant-Date Fair Value | | Granted | | Weighted-Average Grant-Date Fair Value |
| | | | | | | | |
Stock options | | — |
| | $ | — |
| | 40,960 |
| | $ | 41.70 |
|
RSUs | | 570 |
| | 172.19 |
| | 217,290 |
| | 148.37 |
|
PSUs | | 400 |
| | 103.36 |
| | 92,314 |
| | 91.60 |
|
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
|
| | | | | | | | | | | | | | | | |
| | Second Quarter | | First Six Months |
| | 2019 | | 2018 | | 2019 | | 2018 |
| | ($ in millions) |
Stock options exercised | | 215,546 |
| | 215,132 |
| | 621,917 |
| | 470,114 |
|
Cash received upon exercise | | $ | 16 |
| | $ | 16 |
| | $ | 44 |
| | $ | 33 |
|
Related tax benefit realized | | 6 |
| | 3 |
| | 15 |
| | 7 |
|
|
| | | | | | | | | | | | | | | | |
| | Third Quarter | | First Nine Months |
| | 2018 | | 2017 | | 2018 | | 2017 |
| | ($ in millions) |
Stock options exercised | | 327,275 |
| | 527,543 |
| | 797,389 |
| | 1,538,858 |
|
Cash received upon exercise | | $ | 23 |
| | $ | 33 |
| | $ | 56 |
| | $ | 90 |
|
Related tax benefit realized | | $ | 7 |
| | $ | 10 |
| | $ | 14 |
| | $ | 29 |
|
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. No RSUs vested or were paid out during the second or third quarters of 2018 or 2017.
|
| | | | | | | | | | | | | | | | |
| | Second Quarter | | First Six Months |
| | 2019 | | 2018 | | 2019 | | 2018 |
| | ($ in millions) |
RSUs vested | | 506 |
| | — |
| | 166,055 |
| | 160,200 |
|
Common Stock issued net of tax withholding | | 363 |
| | — |
| | 119,244 |
| | 99,968 |
|
Related tax benefit realized | | $ | — |
| | $ | — |
| | $ | 2 |
| | $ | 3 |
|
|
| | | | | | | | |
| | First Nine Months |
| | 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. No PSUs were earned or paid out during the second or third quarters of 20182019 or 2017.2018.
|
| | | | | | | | |
| | First Six Months |
| | 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 Nine Months |
| | 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 |
| Third Quarter | Second 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 | $ | 702 |
| | $ | 506 |
| | $ | 702 |
| | $ | 506 |
| $ | 722 |
| | $ | 710 |
| | $ | 722 |
| | $ | 710 |
|
Dividend equivalent payments | (2 | ) | | (1 | ) | | — |
| | — |
| (2 | ) | | (1 | ) | | — |
| | — |
|
| | | | | | | | | | | | | | |
Income available to common stockholders | $ | 700 |
| | $ | 505 |
| | $ | 702 |
| | $ | 506 |
| $ | 720 |
| | $ | 709 |
| | $ | 722 |
| | $ | 710 |
|
| | | | | | | | | | | | | | |
Weighted-average shares outstanding | 275.5 |
| | 287.1 |
| | 275.5 |
| | 287.1 |
| 264.8 |
| | 281.3 |
| | 264.8 |
| | 281.3 |
|
Dilutive effect of outstanding options | |
| | |
| | |
| | |
| |
| | |
| | |
| | |
|
and share-settled awards | |
| | |
| | 2.7 |
| | 2.4 |
| |
| | |
| | 2.3 |
| | 2.4 |
|
| | | | | | | | | | | | | | |
Adjusted weighted-average shares outstanding | |
| | |
| | 278.2 |
| | 289.5 |
| |
| | |
| | 267.1 |
| | 283.7 |
|
| | | | | | | | | | | | | | |
Earnings per share | $ | 2.54 |
| | $ | 1.76 |
| | $ | 2.52 |
| | $ | 1.75 |
| $ | 2.72 |
| | $ | 2.52 |
| | $ | 2.70 |
| | $ | 2.50 |
|
| | | | | | | | | | | | | | |
| Basic | | Diluted | Basic | | Diluted |
| First Nine Months | First Six Months |
| 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 | $ | 1,964 |
| | $ | 1,436 |
| | $ | 1,964 |
| | $ | 1,436 |
| $ | 1,399 |
| | $ | 1,262 |
| | $ | 1,399 |
| | $ | 1,262 |
|
Dividend equivalent payments | (4 | ) | | (3 | ) | | (1 | ) | | (1 | ) | (3 | ) | | (2 | ) | | — |
| | (1 | ) |
| | | | | | | | | | | | | | |
Income available to common stockholders | $ | 1,960 |
| | $ | 1,433 |
| | $ | 1,963 |
| | $ | 1,435 |
| $ | 1,396 |
| | $ | 1,260 |
| | $ | 1,399 |
| | $ | 1,261 |
|
| | | | | | | | | | | | | | |
Weighted-average shares outstanding | 280.1 |
| | 288.8 |
| | 280.1 |
| | 288.8 |
| 265.9 |
| | 282.4 |
| | 265.9 |
| | 282.4 |
|
Dilutive effect of outstanding options | | | | | | | | |
| | |
| | |
| | |
|
and share-settled awards | | | | | 2.5 |
| | 2.4 |
| |
| | |
| | 2.4 |
| | 2.4 |
|
| | | | | | | | | | | | | | |
Adjusted weighted-average shares outstanding | | | | | 282.6 |
| | 291.2 |
| | | |
| | 268.3 |
| | 284.8 |
|
| | | | | | | | | | | | | | |
Earnings per share | $ | 7.00 |
| | $ | 4.96 |
| | $ | 6.95 |
| | $ | 4.93 |
| $ | 5.25 |
| | $ | 4.46 |
| | $ | 5.21 |
| | $ | 4.43 |
|
During the thirdsecond quarters and first ninesix months 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 0.3 million for the first ninesix months ended SeptemberJune 30, 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) |
Six Months Ended June 30, 2019 | | | | | | | | | |
Pensions and other | | | | | | | | | |
postretirement liabilities | $ | (497 | ) | | $ | — |
| | $ | — |
| | $ | 7 |
| | $ | (490 | ) |
Other comprehensive loss | |
| | |
| | | | |
| | |
|
of equity investees | (66 | ) | | (1 | ) | | — |
| | — |
| | (67 | ) |
| | | | | | | | | |
Accumulated other | | | | | | | | | |
comprehensive loss | $ | (563 | ) | | $ | (1 | ) | | $ | — |
| | $ | 7 |
| | $ | (557 | ) |
| | | | | | | | | |
Six Months Ended June 30, 2018 | |
| | |
| | | | |
| | |
|
Pensions and other | | | | | | | | | |
postretirement liabilities | $ | (300 | ) | | $ | (11 | ) | | $ | (86 | ) | | $ | 12 |
| | $ | (385 | ) |
Other comprehensive income | | | | | | | | | |
(loss) of equity investees | (56 | ) | | 2 |
| | (2 | ) | | — |
| | (56 | ) |
| | | | | | | | | |
Accumulated other | | | | | | | | | |
comprehensive loss | $ | (356 | ) | | $ | (9 | ) | | $ | (88 | ) | | $ | 12 |
| | $ | (441 | ) |
|
| | | | | | | | | | | | | | | | | | | |
| Balance at Beginning of Year | | Net Income (Loss) | | Reclassification of Stranded Tax Effects | | Reclassification Adjustments | | Balance at End of Period |
| ($ in millions) |
Nine Months Ended September 30, 2018 | | | | | | | | | |
Pensions and other | | | | | | | | | |
postretirement liabilities | $ | (300 | ) | | $ | (11 | ) | | $ | (86 | ) | | $ | 18 |
| | $ | (379 | ) |
Other comprehensive income | |
| | |
| | | | |
| | |
|
(loss) of equity investees | (56 | ) | | 2 |
| | (2 | ) | | — |
| | (56 | ) |
| | | | | | | | | |
Accumulated other | | | | | | | | | |
comprehensive loss | $ | (356 | ) | | $ | (9 | ) | | $ | (88 | ) | | $ | 18 |
| | $ | (435 | ) |
| | | | | | | | | |
Nine Months Ended September 30, 2017 | |
| | |
| | | | |
| | |
|
Pensions and other | | | | | | | | | |
postretirement liabilities | $ | (414 | ) | | $ | — |
| | $ | — |
| | $ | 13 |
| | $ | (401 | ) |
Other comprehensive loss | | | | | | | | | |
of equity investees | (73 | ) | | (1 | ) | | — |
| | — |
| | (74 | ) |
| | | | | | | | | |
Accumulated other | | | | | | | | | |
comprehensive loss | $ | (487 | ) | | $ | (1 | ) | | $ | — |
| | $ | 13 |
| | $ | (475 | ) |
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 ProgramsProgram
We repurchased and retired 12.85.7 million shares (5.7 million shares under an accelerated stock repurchase program (ASR) and 7.1 million shares under our ongoing program) and 6.04.8 million shares of Common Stock under our stock repurchase programsprogram in the first ninesix months of 20182019 and 2017,2018, respectively, at a cost of $2.1$1.1 billion and $712$700 million, respectively. We entered into an ASR on August 2, 2018 with two third-party financial institutions to repurchase Common Stock, at which time we made a payment of $1.2 billion to the financial institutions and received an initial delivery of 5.7 million shares valued at $960 million. The remaining balance of $240 million, included in “Additional paid-in capital” on the Consolidated Balance Sheets, will be settled no later than the end of January 2019, with the final number of shares to be delivered by the financial institutions equal to the volume-weighted average price per share of Common Stock over the ASR term, less a negotiated discount.
Since the beginning of 2006, we have repurchased and retired 181.3191.3 million shares at a total cost of $13.4$15.2 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 $1.4 billion at June 30, 2019, and $1.3 billion at both September 30, 2018, 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 million and $34$36 million for the thirdsecond quarters of 20182019 and 2017,2018, respectively, and $112$75 million and $106$74 million for the first ninesix months of 20182019 and 2017,2018, respectively. Our equity in the earnings of Conrail, net of amortization, included in “Purchased services and rents” was $12$15 million and $10$18 million for the thirdsecond quarters of 20182019 and 2017,2018, respectively, and $46$23 million and $30$34 million for the first ninesix months of 2019 and 2018, and 2017, respectively.
“Other liabilities” includes $280 million at both SeptemberJune 30, 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 paid to TTX for use of equipment are included in “Purchased services and rents” and amounted to $43$60 million and $58$67 million of expense for the thirdsecond quarters of 20182019 and 2017,2018, respectively, and $176$122 million and $173$133 million for the first ninesix months of 20182019 and 2017,2018, respectively. Our equity in the earnings of TTX, also included in “Purchased services and rents,” totaled $16$12 million and $14$17 million for the thirdsecond quarters of 20182019 and 2017,2018, respectively, and $49$25 million and $32$33 million for the first ninesix months of 20182019 and 2017,2018, respectively.
7. Debt
During the thirdsecond quarter of 2018,2019, we issued $300 million of 3.65% senior notes due 2025, $400$200 million of 3.80% senior notes due 2028, $200$400 million of 4.15%4.10% senior notes due 2048,2049, and $600$200 million of 5.10% senior notes due 2118.
In June of 2018,May 2019, we renewed and amended our accounts receivable securitization program, increasing borrowing capacity from $350$400 million to $400$450 million onwith a 364-day term to run throughexpiring in May 2019.2020. We had no amounts outstanding under this program at SeptemberJune 30, 20182019, and $100 million outstanding at December 31, 2017, reflected as “Short-term debt” on the Consolidated Balance Sheets. 2018.
During the first quarter of 2018, we issued $500 million of 4.15% senior notes due 2048.
The “Cash, cash equivalents, and restricted cash” line item in the Consolidated Statements of Cash Flows includes restricted cash of $86 million and $88 million at SeptemberJune 30, 2019 and December 31, 2018, which reflectsrespectively, reflecting deposits held by a third partythird-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.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 land 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:
|
| | | | |
| | June 30, 2019 |
Assets | Classification | ($ in millions) |
ROU assets | Other assets | $ | 586 |
|
| | |
Liabilities | | |
Current lease liabilities | Other current liabilities | $ | 98 |
|
Non-current lease liabilities | Other liabilities | 488 |
|
| | |
Total lease liabilities | | $ | 586 |
|
| | |
The components of total lease expense, primarily included in“Purchased services and rents,” were as follows:
|
| | | | | | | |
| Second Quarter | | First Six Months |
| 2019 | | 2019 |
| ($ in millions) |
Operating lease expense | $ | 29 |
| | $ | 56 |
|
Variable lease expense | 16 |
| | 28 |
|
Short-term lease expense | 1 |
| | 3 |
|
| | | |
Total lease expense | $ | 46 |
| | $ | 87 |
|
At June 30, 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:
|
| | |
| June 30, 2019 |
| |
Weighted-average remaining lease term (years) on operating leases | 8.43 |
|
| |
Weighted-average discount rates on operating leases | 3.51 | % |
As the rates implicit in most of our leases are not readily determinable, we use a collateralized incremental borrowing rate based on the information available at the lease commencement date in determining the present value of future payments. We use the portfolio approach and group leases into short, medium, and long-term categories, applying the corresponding incremental borrowing rates to these categories of leases.
During the first six months of 2019, right-of-use assets obtained in exchange for new operating lease liabilities were $46 million. During the first six months of 2019, cash paid for amounts included in the measurement of lease liabilities was $56 million in operating cash flows from operating leases. During the first quarter, cash proceeds from a sale and leaseback transaction were $82 million and the gain on the transaction was $15 million.
Future minimum lease payments under non-cancellable operating leases were as follows:
|
| | | |
| June 30, 2019 |
| ($ in millions) |
2019 - 6 months | $ | 58 |
|
2020 | 110 |
|
2021 | 104 |
|
2022 | 79 |
|
2023 | 70 |
|
2024 and subsequent years | 266 |
|
Total lease payments | 687 |
|
Less: Interest | 101 |
|
| |
Present value of lease liabilities | $ | 586 |
|
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 |
|
8.9. 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 third quarterssecond quarter and first ninesix months are as follows:
|
| | | | | | | | | | | | | | | |
| | | | | | | |
| | | | | Other Postretirement |
| Pension Benefits | | Benefits |
| Second Quarter |
| 2019 | | 2018 | | 2019 | | 2018 |
| ($ in millions) |
| | | | | | | |
Service cost | $ | 8 |
| | $ | 10 |
| | $ | 1 |
| | $ | 2 |
|
Interest cost | 23 |
| | 22 |
| | 5 |
| | 4 |
|
Expected return on plan assets | (44 | ) | | (45 | ) | | (3 | ) | | (4 | ) |
Amortization of net losses | 11 |
| | 14 |
| | — |
| | — |
|
Amortization of prior service benefit | — |
| | — |
| | (6 | ) | | (6 | ) |
| | | | | | | |
Net expense (benefit) | $ | (2 | ) | | $ | 1 |
| | $ | (3 | ) | | $ | (4 | ) |
|
| | | | | | | | | | | | | | | |
| | | | | Other Postretirement |
| Pension Benefits | | Benefits |
| Third Quarter |
| 2018 | | 2017 | | 2018 | | 2017 |
| ($ in millions) |
| | | | | | | |
Service cost | $ | 9 |
| | $ | 9 |
| | $ | 2 |
| | $ | 2 |
|
Interest cost | 21 |
| | 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 | ) |
|
| | | | | | | | | | | | | | | |
| | | | | | | |
| | | | | Other Postretirement |
| Pension Benefits | | Benefits |
| First Six Months |
| 2019 | | 2018 | | 2019 | | 2018 |
| ($ in millions) |
| | | | | | | |
Service cost | $ | 17 |
| | $ | 20 |
| | $ | 3 |
| | $ | 4 |
|
Interest cost | 46 |
| | 42 |
| | 9 |
| | 8 |
|
Expected return on plan assets | (89 | ) | | (89 | ) | | (7 | ) | | (8 | ) |
Amortization of net losses | 22 |
| | 28 |
| | — |
| | — |
|
Amortization of prior service benefit | — |
| | — |
| | (12 | ) | | (12 | ) |
| | | | | | | |
Net expense (benefit) | $ | (4 | ) | | $ | 1 |
| | $ | (7 | ) | | $ | (8 | ) |
|
| | | | | | | | | | | | | | | |
| | | | | Other Postretirement |
| Pension Benefits | | Benefits |
| First Nine Months |
| 2018 | | 2017 | | 2018 | | 2017 |
| ($ in millions) |
| | | | | | | |
Service cost | $ | 29 |
| | $ | 28 |
| | $ | 6 |
| | $ | 6 |
|
Interest cost | 63 |
| | 60 |
| | 12 |
| | 12 |
|
Expected return on plan assets | (133 | ) | | (129 | ) | | (12 | ) | | (12 | ) |
Amortization of net losses | 42 |
| | 39 |
| | — |
| | — |
|
Amortization of prior service benefit | — |
| | — |
| | (18 | ) | | (18 | ) |
| | | | | | | |
Net expense (benefit) | $ | 1 |
| | $ | (2 | ) | | $ | (12 | ) | | $ | (12 | ) |
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 in “Compensation and benefits” expense and an increase in “Other income – net” on the Consolidated Statements of Income of $16 million and $48 million for the third quarter and first nine months of 2017, respectively, with no impact on “Net income.”
9.10. Fair Values of Financial Instruments
The fair values of “Cash and cash equivalents,” “Accounts receivable” “Accounts payable, – net,” and “Short-term debt”“Accounts payable” approximate carrying values because of the short maturity of these financial instruments. The carrying value of corporate-owned life insurance is recorded at cash surrender value and, accordingly, approximates fair value. Other than these assets and liabilities that approximate fair value, thereThere are no other assets or liabilities measured at fair value on a recurring basis at SeptemberJune 30, 2018,2019 or December 31, 2017.2018. The carrying amounts and estimated fair values, for the remaining financial instruments, excluding investments accounted for under the equity method,based on Level 1 inputs, of long-term debt consisted of the following:
|
| | | | | | | | | | | | | | | |
| June 30, 2019 | | December 31, 2018 |
| Carrying Amount | | Fair Value | | Carrying Amount | | Fair Value |
| ($ in millions) |
| | | | | | | |
Long-term debt, including current maturities | $ | (11,477 | ) | | $ | (13,638 | ) | | $ | (11,145 | ) | | $ | (12,203 | ) |
|
| | | | | | | | | | | | | | | |
| September 30, 2018 | | December 31, 2017 |
| Carrying Amount | | Fair Value | | Carrying Amount | | Fair Value |
| ($ in millions) |
| | | | | | | |
Long-term investments | $ | 21 |
| | $ | 39 |
| | $ | 26 |
| | $ | 43 |
|
Long-term debt, including current maturities | (11,135 | ) | | (12,397 | ) | | (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) |
| | | | | |
September 30, 2018 | | | | | |
Long-term investments | $ | — |
| | $ | 39 |
| | $ | 39 |
|
Long-term debt, including current maturities | (12,304 | ) | | (93 | ) | | (12,397 | ) |
| | | | | |
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 $59$63 million and $58$55 million at SeptemberJune 30, 20182019 and December 31, 2017,2018, respectively, of which $15 million is classified as a current liability at both dates. At SeptemberJune 30, 2018,2019, the liability represents our estimates of the probable cleanup, investigation, and remediation costs based on available information at 120113 known locations and projects compared with 127114 locations and projects at December 31, 2017.2018. At SeptemberJune 30, 2018, 152019, sixteen sites accounted for $38$44 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 twelveeleven 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. In July 2018, the FASB issued ASU 2018-11, “Leases (Topic 842): Targeted Improvements,” which created a new, optional transition method for implementing ASU 2016-02. We expect to use this new transition method, which permits the use of the effective date as the date of initial application. We disclosed $660 million in undiscounted operating lease obligations in our lease commitments footnote in our most recent 10-K, and have evaluated those contracts. We continue to evaluate 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 will not 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.
Our second quarter 2019 results reflect the commitment to the implementation of our new strategic plan that we unveiled in February. We achieved a record low third-quartersecond-quarter operating ratio (a measure of the amount of operating revenues consumed by operating expenses) of 65.4%63.6%, in addition to third-quartersecond-quarter records for income from railway operations, net income, and diluted earnings per share. These record results were driven by strong revenue growth and demonstrate continued progress on our long-range objectives.
SUMMARIZED RESULTS OF OPERATIONS
($ in millions, except per share amounts)
| | | Third Quarter | | First Nine Months | Second Quarter | | First Six Months |
| 2018 | | 2017 | | % change | | 2018 | | 2017 | | % change | 2019 | | 2018 | | % change | | 2019 | | 2018 | | % change |
Income from railway operations | $ | 1,020 |
| | $ | 895 |
| | 14% | | $ | 2,881 |
| | $ | 2,524 |
| | 14% | $ | 1,065 |
| | $ | 1,026 |
| | 4% | | $ | 2,031 |
| | $ | 1,861 |
| | 9% |
Net income | $ | 702 |
| | $ | 506 |
| | 39% | | $ | 1,964 |
| | $ | 1,436 |
| | 37% | $ | 722 |
| | $ | 710 |
| | 2% | | $ | 1,399 |
| | $ | 1,262 |
| | 11% |
Diluted earnings per share | $ | 2.52 |
| | $ | 1.75 |
| | 44% | | $ | 6.95 |
| | $ | 4.93 |
| | 41% | $ | 2.70 |
| | $ | 2.50 |
| | 8% | | $ | 5.21 |
| | $ | 4.43 |
| | 18% |
Railway operating ratio (percent) | 65.4 |
| | 66.5 |
| | (2%) | | 66.4 |
| | 68.0 |
| | (2%) | 63.6 |
| | 64.6 |
| | (2%) | | 64.8 |
| | 66.9 |
| | (3%) |
Income from railway operations roseincreased in both periods, asprimarily a result of increased railway operating revenues, that more than offsetdriven by higher expenses. Averageaverage revenue per unit, grew due to higher fuel surcharge revenues andreflecting pricing gains, partially offset bygains. Traffic volumes were down 4% for the mix-related impacts of increased intermodal volume and decreased coal volume. Volumes rose 5% in both the thirdsecond quarter and 2% for the first ninesix months. Railway operating expense increases included higherexpenses decreased as declines in fuel prices as well as volume-related increases and costs associated with overall lower expenses due to increased network velocity were offset by an increase in both periods. Net income anddepreciation. Our share repurchase program resulted in diluted earnings per share also benefited from a lower effective tax rate, primarily due to the enactmentgrowth that exceeded that of tax reform in late 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 commodity 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).
| | | | Third Quarter | | First Nine Months | Second Quarter | | First Six Months |
Revenues | | 2018 | | 2017 | | % change | | 2018 | | 2017 | | % change | 2019 | | 2018 | | % change | | 2019 | | 2018 | | % change |
Merchandise: | | | | | | | | | | | | | | | | | |
Chemicals | | $ | 468 |
| | $ | 418 |
| | 12% | | $ | 1,363 |
| | $ | 1,251 |
| | 9% | $ | 473 |
| | $ | 465 |
| | 2% | | $ | 925 |
| | $ | 919 |
| | 1% |
Agr./consumer/gov’t | | 428 |
| | 388 |
| | 10% | | 1,244 |
| | 1,156 |
| | 8% | |
Metals/construction | | 383 |
| | 378 |
| | 1% | | 1,110 |
| | 1,089 |
| | 2% | |
Agriculture products | | 406 |
| | 379 |
| | 7% | | 791 |
| | 736 |
| | 7% |
Metals and construction | | 416 |
| | 413 |
| | 1% | | 801 |
| | 769 |
| | 4% |
Automotive | | 245 |
| | 218 |
| | 12% | | 741 |
| | 713 |
| | 4% | 251 |
| | 253 |
| | (1%) | | 502 |
| | 496 |
| | 1% |
Paper/clay/forest | | 213 |
| | 198 |
| | 8% | | 602 |
| | 572 |
| | 5% | |
Forest and consumer | | 210 |
| | 208 |
| | 1% | | 423 |
| | 403 |
| | 5% |
Merchandise | | 1,737 |
| | 1,600 |
| | 9% | | 5,060 |
| | 4,781 |
| | 6% | 1,756 |
| | 1,718 |
| | 2% | | 3,442 |
| | 3,323 |
| | 4% |
Intermodal | | 746 |
| | 621 |
| | 20% | | 2,138 |
| | 1,785 |
| | 20% | 701 |
| | 714 |
| | (2%) | | 1,420 |
| | 1,392 |
| | 2% |
Coal | | 464 |
| | 449 |
| | 3% | | 1,364 |
| | 1,316 |
| | 4% | 468 |
| | 466 |
| | —% | | 903 |
| | 900 |
| | —% |
| | | | | | | | | |
Total | | $ | 2,947 |
| | $ | 2,670 |
| | 10% | | $ | 8,562 |
| | $ | 7,882 |
| | 9% | $ | 2,925 |
| | $ | 2,898 |
| | 1% | | $ | 5,765 |
| | $ | 5,615 |
| | 3% |
| | Units | | | | | | | | | | | | | |
Merchandise: | | | | | | | | | | | | | | | | | |
Chemicals | | 127.9 |
| | 115.2 |
| | 11% | | 375.8 |
| | 348.6 |
| | 8% | 129.8 |
| | 133.0 |
| | (2%) | | 255.7 |
| | 259.6 |
| | (2%) |
Agr./consumer/gov’t | | 155.3 |
| | 147.8 |
| | 5% | | 461.9 |
| | 443.0 |
| | 4% | |
Metals/construction | | 189.7 |
| | 194.2 |
| | (2%) | | 548.0 |
| | 556.0 |
| | (1%) | |
Agriculture products | | 141.3 |
| | 137.4 |
| | 3% | | 272.2 |
| | 267.3 |
| | 2% |
Metals and construction | | 196.7 |
| | 206.8 |
| | (5%) | | 370.6 |
| | 382.7 |
| | (3%) |
Automotive | | 98.4 |
| | 96.6 |
| | 2% | | 305.9 |
| | 318.5 |
| | (4%) | 101.8 |
| | 104.7 |
| | (3%) | | 199.9 |
| | 207.5 |
| | (4%) |
Paper/clay/forest | | 74.5 |
| | 73.4 |
| | 1% | | 215.8 |
| | 214.3 |
| | 1% | |
Forest and consumer | | 68.6 |
| | 73.6 |
| | (7%) | | 138.0 |
| | 144.5 |
| | (4%) |
Merchandise | | 645.8 |
| | 627.2 |
| | 3% | | 1,907.4 |
| | 1,880.4 |
| | 1% | 638.2 |
| | 655.5 |
| | (3%) | | 1,236.4 |
| | 1,261.6 |
| | (2%) |
Intermodal | | 1,116.2 |
| | 1,035.2 |
| | 8% | | 3,257.2 |
| | 3,013.7 |
| | 8% | 1,048.5 |
| | 1,091.8 |
| | (4%) | | 2,119.5 |
| | 2,141.0 |
| | (1%) |
Coal | | 255.8 |
| | 266.6 |
| | (4%) | | 778.5 |
| | 792.3 |
| | (2%) | 258.3 |
| | 273.6 |
| | (6%) | | 494.6 |
| | 522.7 |
| | (5%) |
| | | | | | | | | |
Total | | 2,017.8 |
| | 1,929.0 |
| | 5% | | 5,943.1 |
| | 5,686.4 |
| | 5% | 1,945.0 |
| | 2,020.9 |
| | (4%) | | 3,850.5 |
| | 3,925.3 |
| | (2%) |
| | Revenue per Unit | | | | | | | | | | | | | |
Merchandise: | | | | | | | | | | | | | | | | | |
Chemicals | | $ | 3,661 |
| | $ | 3,624 |
| | 1% | | $ | 3,626 |
| | $ | 3,586 |
| | 1% | $ | 3,646 |
| | $ | 3,495 |
| | 4% | | $ | 3,617 |
| | $ | 3,539 |
| | 2% |
Agr./consumer/gov’t | | 2,756 |
| | 2,626 |
| | 5% | | 2,694 |
| | 2,610 |
| | 3% | |
Metals/construction | | 2,018 |
| | 1,945 |
| | 4% | | 2,025 |
| | 1,959 |
| | 3% | |
Agriculture products | | 2,870 |
| | 2,759 |
| | 4% | | 2,906 |
| | 2,752 |
| | 6% |
Metals and construction | | 2,112 |
| | 1,997 |
| | 6% | | 2,161 |
| | 2,009 |
| | 8% |
Automotive | | 2,486 |
| | 2,256 |
| | 10% | | 2,422 |
| | 2,239 |
| | 8% | 2,471 |
| | 2,421 |
| | 2% | | 2,513 |
| | 2,392 |
| | 5% |
Paper/clay/forest | | 2,867 |
| | 2,699 |
| | 6% | | 2,791 |
| | 2,668 |
| | 5% | |
Forest and consumer | | 3,057 |
| | 2,825 |
| | 8% | | 3,064 |
| | 2,790 |
| | 10% |
Merchandise | | 2,690 |
| | 2,550 |
| | 5% | | 2,653 |
| | 2,542 |
| | 4% | 2,751 |
| | 2,621 |
| | 5% | | 2,784 |
| | 2,634 |
| | 6% |
Intermodal | | 669 |
| | 600 |
| | 12% | | 656 |
| | 592 |
| | 11% | 668 |
| | 654 |
| | 2% | | 670 |
| | 650 |
| | 3% |
Coal | | 1,812 |
| | 1,687 |
| | 7% | | 1,752 |
| | 1,662 |
| | 5% | 1,815 |
| | 1,704 |
| | 7% | | 1,826 |
| | 1,723 |
| | 6% |
Total | | 1,461 |
| | 1,384 |
| | 6% | | 1,441 |
| | 1,386 |
| | 4% | 1,504 |
| | 1,434 |
| | 5% | | 1,497 |
| | 1,430 |
| | 5% |
Railway operating revenues increased $277$27 million in the thirdsecond quarter and $680$150 million for the first ninesix months compared with the same periods last year. The table below reflects the components of the revenue change by major commodity group ($ in millions).
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Third Quarter | | First Nine Months |
| Increase (Decrease) | | Increase (Decrease) |
| | | | | | | | | | | |
| Merchandise | | Intermodal | | Coal | | Merchandise | | Intermodal | | Coal |
| | | | | | | | | | | |
Volume | $ | 47 |
| | $ | 49 |
| | $ | (18 | ) | | $ | 68 |
| | $ | 144 |
| | $ | (23 | ) |
Fuel surcharge | | | | | | | | | | | |
revenue | 41 |
| | 49 |
| | 8 |
| | 84 |
| | 125 |
| | 12 |
|
Rate, mix and | | | | | | | | | | | |
other | 49 |
| | 27 |
| | 25 |
| | 127 |
| | 84 |
| | 59 |
|
| | | | | | | | | | | |
Total | $ | 137 |
| | $ | 125 |
| | $ | 15 |
| | $ | 279 |
| | $ | 353 |
| | $ | 48 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Second Quarter | | First Six Months |
| | Increase (Decrease) | | Increase (Decrease) |
| | | | | | | | | | | | |
| | Merchandise | | Intermodal | | Coal | | Merchandise | | Intermodal | | Coal |
| | | | | | | | | | | | |
Volume | | $ | (45 | ) | | $ | (28 | ) | | $ | (26 | ) | | $ | (66 | ) | | $ | (14 | ) | | $ | (48 | ) |
Fuel surcharge revenue | | — |
| | (5 | ) | | (8 | ) | | 14 |
| | 4 |
| | (9 | ) |
Rate, mix and other | | 83 |
| | 20 |
| | 36 |
| | 171 |
| | 38 |
| | 60 |
|
| | | | | | | | | | | | |
Total | | $ | 38 |
| | $ | (13 | ) | | $ | 2 |
| | $ | 119 |
| | $ | 28 |
| | $ | 3 |
|
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 thirdsecond quarter and first ninesix months of 2018,2019, contracts tied to OHD accounted for about 90%95% of our fuel surcharge revenue. Revenues associated with these surcharges totaled $182$144 million and $84$157 million in the thirdsecond quarters of 20182019 and 2017,2018, respectively, and $470$297 million and $249$288 million for the first ninesix months of 20182019 and 2017,2018, respectively.
Merchandise
Merchandise revenue grew in both periods. Higherperiods, as higher average revenue per unit in both periods was driven by pricing gains andgains. The first six months also benefited from increased fuel surcharge revenue, and volume increasedrevenue. Overall volumes fell, as gains in all commodity groups withagriculture products were more than offset by declines in the exception of metals and construction and, for the year-to-date, automotive.remaining groups.
Chemicals volume grew significantlydecreased in both periods driven by increasedreduced shipments of crude oil, rock salt, liquefied petroleumnatural gas liquids and plastics. Lower shipments of coal ashplastics, which were partially offset by gains in the first half of the year tempered volume growth for the first nine months.municipal waste shipments.
Agriculture consumer products and government volume rose in both periods, aswith increases in ethanol and fertilizer shipments more than offset declines in corn and soybeanfeed shipments. These increases were partially offset by declines in fertilizer traffic during the second quarter. During the first six months, the growth was tempered by decreased ethanol shipments.
Metals and construction traffic was downvolume fell in both periods, largely the result of lower aggregates volume as well as decreases in shipments of iron and steel, scrap metal,coil, and aluminum products traffic. Increased frac sand shipments for use in natural gas drilling in the Marcellus and Utica regions partially offset these decreases in the first nine months.
Automotive volume rose in the third quarter, but declined for the first nine months. The quarter’s growth was the result of increased equipment availability and shifts in shipment timing. The first nine months were negatively impacted by shortages in availability of multilevel equipment, automotive parts supplier production interruptions, and scheduled automotive plant downtime.
Paper, clay, and forest products volume increased slightly in both periods. Gains in pulpboard and municipal waste shipments, a result of tightened truck capacity and growth with existing customers, respectively,sand. These declines were partially offset by higher aggregates traffic due to improved service and an extended shipping season.
Automotive volume declined in the second quarter due to flooding. The first six months were also impacted by decreased U.S. light vehicle production and railcar availability during the first quarter due to disruptions across the U.S. multilevel network.
Forest and consumer volume declined in both periods, reflecting decreases in pulp, woodchippulpboard, kaolin, lumber, and graphic paper traffic.
Merchandise revenues for the fourth quarterremainder of the year are expected to continue to be higher year-over-year,increase, reflecting higher average revenue per unit, driven by pricing gains, and fuel surcharge revenues as well as higher volumes.modest volume growth in the fourth quarter.
Intermodal
Intermodal revenuesrevenue decreased for the quarter but increased 20% in boththe first six months. Both periods driven bybenefited from higher average revenue per unit, a result of increased fuel surcharge revenues and pricing gains, as well as strong volume growth.gains. Volume declined in both periods.
Intermodal units (in thousands) by market were as follows:
| | | Third Quarter | | First Nine Months | Second Quarter | | First Six Months |
| 2018 | | 2017 | | % change | | 2018 | | 2017 | | % change | 2019 | | 2018 | | % change | | 2019 | | 2018 | | % change |
| | | | | | | | | | | | | | | | | |
Domestic | 704.0 |
| | 662.6 |
| | 6% | | 2,082.2 |
| | 1,890.6 |
| | 10% | 635.8 |
| | 706.5 |
| | (10%) | | 1,292.1 |
| | 1,378.2 |
| | (6%) |
International | 412.2 |
| | 372.6 |
| | 11% | | 1,175.0 |
| | 1,123.1 |
| | 5% | 412.7 |
| | 385.3 |
| | 7% | | 827.4 |
| | 762.8 |
| | 8% |
| | | | | | | | | | | | | | | | |
Total | 1,116.2 |
| | 1,035.2 |
| | 8% | | 3,257.2 |
| | 3,013.7 |
| | 8% | 1,048.5 |
| | 1,091.8 |
| | (4%) | | 2,119.5 |
| | 2,141.0 |
| | (1%) |
Domestic volumes fell in both periods, the result of stronger over-the-road competition, weaker customer demand, and severe weather in the Midwest. The first six months were also impacted by trailer lane rationalizations. International volumes rose in both periods as a result of continued highway conversions due to tighter capacity in the truck market, higher truckload pricing, and growth in existing accounts. International volumes rose due to increased demand from existing and new accounts.
Intermodal revenues for the fourth quarterremainder of the year are expected to continue to increase, compared to last year, driven by modest volume growth in addition to higher average revenue per unit due to increased fuel surcharge revenues and pricing gains.
Coal
Coal revenues rosewere flat in both periods, as higher average revenue per unit, primarily the result of pricing gains, was partially offset by volume decreases.
Coal tonnage (in thousands) by market was as follows:
| | | Third Quarter | | First Nine Months | Second Quarter | | First Six Months |
| 2018 | | 2017 | | % change | | 2018 | | 2017 | | % change | 2019 | | 2018 | | % change | | 2019 | | 2018 | | % change |
| | | | | | | | | | | | | | | | |
Utility | 16,213 |
| | 17,410 |
| | (7%) | | 48,773 |
| | 52,599 |
| | (7%) | 17,129 |
| | 16,695 |
| | 3% | | 32,884 |
| | 32,560 |
| | 1% |
Export | 6,621 |
| | 6,280 |
| | 5% | | 21,775 |
| | 19,189 |
| | 13% | 6,626 |
| | 7,916 |
| | (16%) | | 13,014 |
| | 15,154 |
| | (14%) |
Domestic metallurgical | 4,226 |
| | 4,298 |
| | (2%) | | 11,624 |
| | 11,647 |
| | — | 3,851 |
| | 4,251 |
| | (9%) | | 6,782 |
| | 7,398 |
| | (8%) |
Industrial | 1,352 |
| | 1,457 |
| | (7%) | | 4,069 |
| | 4,259 |
| | (4%) | 1,181 |
| | 1,457 |
| | (19%) | | 2,403 |
| | 2,717 |
| | (12%) |
| | | | | | | | | | | | | | | | |
Total | 28,412 |
| | 29,445 |
| | (4%) | | 86,241 |
| | 87,694 |
| | (2%) | 28,787 |
| | 30,319 |
| | (5%) | | 55,083 |
| | 57,829 |
| | (5%) |
Utility coal tonnage declined in both periods, driven by plant outages, decreased coal supply, lower network velocity and, for the first nine months, inclement weather in the first quarter. Export coal tonnage grew in both periods a result of strong seaborne pricing that resulteddue to increased network velocity and customer demand to replenish low stockpiles. Gains in higher demand for U.S. coal. Domestic metallurgicalthe first six months were partially offset due to plant issues and inclement weather along with declining natural gas prices. Export coal tonnage dropped in the third quarterboth periods as a result of coal supply issues and was relatively flat for the first nine monthsweak thermal seaborne pricing. Domestic metallurgical coal and coke tonnage fell in both periods due to softening domestic steel demand, customer sourcing changes. Increased market demand in the first half of the year tempered the decrease.changes, and plant outages. Industrial coal tonnage decreased in both periods reflectingas a result of customer sourcing changes and pressure from natural gas conversions.
Coal revenues for the fourth quarterremainder of the year are expected to continuedecline. Utility demand continues to increase compared to last year,be impacted by lower natural gas prices and increased renewable energy generating capacity. Export will be impacted by a result of increased volumes, primarily in the export and utility markets, and higherlower average revenue per unit, largelymainly the result of softening seaborne metallurgical prices, and reduced volume due to favorable mixweak thermal seaborne pricing and pricing gains.supply issues. Domestic metallurgical coal and coke volumes will continue to be impacted by softening domestic steel demand.
Railway Operating Expenses
Railway operating expenses summarized by major classifications were as follows ($ in millions):
| | | Third Quarter | | First Nine Months | Second Quarter | | First Six Months |
| 2018 | | 2017 | | % change | | 2018 | | 2017 | | % change | 2019 | | 2018 | | % change | | 2019 | | 2018 | | % change |
| | | | | | | | | | | | | | | | |
Compensation and benefits | $ | 725 |
| | $ | 771 |
| | (6%) | | $ | 2,168 |
| | $ | 2,249 |
| | (4%) | $ | 712 |
| | $ | 706 |
| | 1% | | $ | 1,439 |
| | $ | 1,443 |
| | —% |
Purchased services and rents | 450 |
| | 377 |
| | 19% | | 1,281 |
| | 1,146 |
| | 12% | 418 |
| | 430 |
| | (3%) | | 842 |
| | 831 |
| | 1% |
Fuel | 274 |
| | 198 |
| | 38% | | 812 |
| | 601 |
| | 35% | 254 |
| | 272 |
| | (7%) | | 504 |
| | 538 |
| | (6%) |
Depreciation | 276 |
| | 265 |
| | 4% | | 821 |
| | 788 |
| | 4% | 284 |
| | 273 |
| | 4% | | 567 |
| | 545 |
| | 4% |
Materials and other | 202 |
| | 164 |
| | 23% | | 599 |
| | 574 |
| | 4% | 192 |
| | 191 |
| | 1% | | 382 |
| | 397 |
| | (4%) |
| | | | | | | | | | | | | | | | |
Total | $ | 1,927 |
| | $ | 1,775 |
| | 9% | | $ | 5,681 |
| | $ | 5,358 |
| | 6% | $ | 1,860 |
| | $ | 1,872 |
| | (1%) | | $ | 3,734 |
| | $ | 3,754 |
| | (1%) |
Compensation and benefits expense increased in the second quarter, but decreased for the first six months as follows:
2018 employment tax refund ($31 million unfavorable in both periods, as follows:the quarter and first six months),
increased pay rates (up $22 million for the quarter and $42 million for the first six months),
incentive and stock-based compensation (down $45$19 million for the quarter and $19$22 million for the first ninesix months),
employment levels (down $10$13 million for the quarter and $51$24 million for the first ninesix months),
healthovertime and welfare benefit rates for agreement employeesrecrews (down $8$11 million for the quarter and $25$17 million for the first ninesix months),
employment tax refundhigher capitalized labor ($31 million benefit for the first nine months), and
overtime and recrews (up $153 million for the quarter and $47$11 million for the first ninesix months), and
other (down $1 million for the quarter and $3 million for the first six months).
Average rail headcount for the quarter was down by about 3201,500 compared with the thirdsecond quarter 2017,2018 and down almost 100 sequentially, as we have increased our train and engine employee hiring while decreasingby about 1,200 sequentially. We expect headcount in other areas.to continue to decline for the remainder of the year.
Purchased services and rents declined in the second quarter, but increased for the first six months as follows ($ in millions):
| | | Third Quarter | | First Nine Months | Second Quarter | | First Six Months |
| 2018 | | 2017 | | % change | | 2018 | | 2017 | | % change | 2019 | | 2018 | | % change | | 2019 | | 2018 | | % change |
| | | | | | | | | | | | | | | | |
Purchased services | $ | 347 |
| | $ | 309 |
| | 12% | | $ | 1,007 |
| | $ | 931 |
| | 8% | $ | 347 |
| | $ | 342 |
| | 1% | | $ | 693 |
| | $ | 660 |
| | 5% |
Equipment rents | 103 |
| | 68 |
| | 51% | | 274 |
| | 215 |
| | 27% | 71 |
| | 88 |
| | (19%) | | 149 |
| | 171 |
| | (13%) |
| | | | | | | | | | | | | | | | |
Total | $ | 450 |
| | $ | 377 |
| | 19% | | $ | 1,281 |
| | $ | 1,146 |
| | 12% | $ | 418 |
| | $ | 430 |
| | (3%) | | $ | 842 |
| | $ | 831 |
| | 1% |
The increaserise in purchased services in both periods was largely the result of increased technology-related expenses, and lower earnings in equity affiliates. Additionally, there were higher intermodal volume-relatedintermodal-related costs additional transportation and engineering activities as well as higher technology costs.for the first six months. Equipment rents rosefell in both periods, reflecting slowerprimarily the result of increased network velocity, the cost of additional short-term locomotive resources as well as growth in volume. We expect about half of these additional third quarter equipment rent cost increases to not occur in the fourth quarter.velocity.
Fuel expense, which includes the cost of locomotive fuel as well as other fuel used in railway operations, increaseddecreased in both periods primarily due primarily to higherlower locomotive fuel prices (up 33%(down 6% in the thirdsecond quarter and 30%5% in the first ninesix months) which increased expenses $65 million and $179 million, respectively,, as well as decreased consumption (down 1% in both the second quarter and the first six months).
Materials and other expenses increased consumption (up 4%slightly in the thirdsecond quarter, and 3% inbut decreased for the first nine months).
Materials and other expenses increasedsix months as follows ($ in millions):
| | | Third Quarter | | First Nine Months | Second Quarter | | First Six Months |
| 2018 | | 2017 | | % change | | 2018 | | 2017 | | % change | 2019 | | 2018 | | % change | | 2019 | | 2018 | | % change |
| | | | | | | | | | | | | | | | |
Materials | $ | 95 |
| | $ | 85 |
| | 12% | | $ | 277 |
| | $ | 264 |
| | 5% | $ | 82 |
| | $ | 92 |
| | (11%) | | $ | 169 |
| | $ | 182 |
| | (7%) |
Casualties and other claims | 46 |
| | 39 |
| | 18% | | 131 |
| | 114 |
| | 15% | 50 |
| | 38 |
| | 32% | | 99 |
| | 85 |
| | 16% |
Other | 61 |
| | 40 |
| | 53% | | 191 |
| | 196 |
| | (3%) | 60 |
| | 61 |
| | (2%) | | 114 |
| | 130 |
| | (12%) |
| | | | | | | | | | | | | | | | |
Total | $ | 202 |
| | $ | 164 |
| | 23% | | $ | 599 |
| | $ | 574 |
| | 4% | $ | 192 |
| | $ | 191 |
| | 1% | | $ | 382 |
| | $ | 397 |
| | (4%) |
Materials costs increaseddecreased in both periods, due primarily to higherlower locomotive repair costs.costs as a result of fewer locomotives in service. Casualties and other claims expenses increased in both periods,the second quarter driven by higher environmental and derailment costs. For the first six months, the increase is largely a result of higher derailment-related costs.costs related to environmental remediation matters. Other expense increased in the third quarter, but declineddecreased for the first nine months. Both periods reflected the inclusion of net rental income from operating property previously included in “Other income - net” of $20 million and $58 million, respectively. However,six months, reflecting higher gains from salesthe sale of operating property were approximately $36 million higher for both periods of the prior year.property.
Other Income – Net
Other income – net decreased $9$7 million in the thirdsecond quarter and $60increased $29 million for the first ninesix months. We seek to monetize assets that are no longer core to our business in support of our strategic plan. During the second quarter, we recorded a $28 million impairment loss related to our natural resource assets that we are actively marketing to sell. In addition, we recognized gains on the sale of non-operating property and, when coupled with higher investment returns on corporate-owned life insurance, helped partially offset the impairment loss. The decline in both periodsincrease for the first six months was driven by higher investment returns on corporate-owned life insurance, which more than offset the absence of net rental income as discussed above. An increase in non-operating property sales in the third quarter of 2018 mitigated the absence of net rental income.impairment loss.
Income Taxes
The third-quarter and year-to-datesecond-quarter effective income tax rates were 22.7% and 22.6%, respectively, compared with 36.8%23.2% for 2019 and 35.7%2018, respectively. The current quarter reflects increased tax benefits on stock-based compensation and higher returns on corporate-owned life insurance. The year-to-date effective tax rates were 22.1% and 22.6% for the same periods last year,first six months of 2019 and 2018, respectively. The declines resulted from the effects of the enactment of tax reform in late 2017 that lowered the federal corporate income tax rate. The current year-to-date effective rate reflects increased tax rate alsobenefits on stock-based compensation and higher returns on corporate-owned life insurance, while the prior year benefited from certain 2017 tax credits that were retroactively enacted by the Bipartisan Budget Act of 2018, which wasand signed into law in early 2018.
FINANCIAL CONDITION AND LIQUIDITY
Cash provided by operating activities, our principal source of liquidity, was $2.9$2.0 billion for the first ninesix months of 2018,2019, compared with $2.5$1.8 billion for the same period of 2017,2018, primarily a reflection ofdue to improved operating results. We had working capital deficits of $332$537 million at SeptemberJune 30, 2018,2019, compared with $396$729 million at December 31, 2017.2018. Cash and cash equivalents totaled $729$274 million at SeptemberJune 30, 2018.2019. We expect cash on hand combined with cash provided by operating activities will be sufficient to meet our ongoing obligations.
In August of 2018,May 2019, we issued $300 million of 3.65% senior notes due 2025, $400$200 million of 3.80% senior notes due 2028, $200$400 million of 4.15%4.10% senior notes due 2048,2049, and $600$200 million of 5.10% senior notes due 2118. In February of 2018, we issued $500 million of 4.15% senior notes due 2048 (see Note 7). Other than these items, thereThere 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 senior notes (see Note 7) and lease obligations (see Note 8).
Cash used in investing activities was $1.1 billion$852 million for the first ninesix months of 2018,2019, compared with $1.2 billion$786 million in the same period last year, reflecting higher investment sales.property additions and increased corporate owned life insurance activity partially offset by higher property sales and other transactions.
Cash used in financing activities was $1.6$1.2 billion in the first ninesix months of 2018,2019, compared with $1.5$1.3 billion in the same period last year, largely the result of higher proceeds from borrowing, partially offset by higher repurchases of Common Stock, debt repayments, and dividend payments partially offset by increased proceeds from borrowings.Stock. We repurchased 12.85.7 million shares of Common Stock, (including shares retired under the ASR program, see Note 5) totaling $2.1$1.1 billion, in the first ninesix months of 2018,2019, compared to 6.04.8 million shares, totaling $712$700 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-total capitalization ratio was 41.8%42.8% at SeptemberJune 30, 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 SeptemberJune 30, 2018,2019, and December 31, 2017,2018, and are in compliance with all of its covenants. In June of 2018,May 2019, we renewed and amended our accounts receivable securitization program, increasing borrowing capacity from $350$400 million to $400$450 million onwith a 364-day term expiring in May 2019.2020. We had no amounts outstanding under this program at SeptemberJune 30, 2018,2019, and $100 million outstanding at December 31, 2017.2018.
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 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
ApproximatelyOver 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. Moratorium provisions in the labor agreements govern when the railroads and unions may propose changes to the agreements.
The 2015 bargaining round is now complete with finalized agreements in place with all employees. All of the newly negotiated agreements have moratorium provisions that will reopen the agreements for negotiation beginningJanuary 1, 2020.
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 Corporation Investor Relations 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 SeptemberJune 30, 2018.2019. Based on such evaluation, our officers have concluded that, at SeptemberJune 30, 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 thirdsecond quarter of 2018,2019, we have not identified any 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) (3) | | Programs (3) | |
| | | | | | | | | |
July 1-31, 2018 | | 659,655 |
| | 157.04 |
| | 657,377 |
| | 51,004,923 |
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August 1-31, 2018 | | 6,548,145 |
| | 169.93 |
| | 6,544,993 |
| | 44,459,930 |
| |
September 1-30, 2018 | | 802,299 |
| | 180.29 |
| | 801,933 |
| | 43,657,997 |
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| | | | | | | | | |
Total | | 8,010,099 |
| | |
| | 8,004,303 |
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| |
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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) | |
| | | | | | | | | |
April 1-30, 2019 | | 850,568 |
| | 196.64 |
| | 842,318 |
| | 35,621,167 |
| |
May 1-31, 2019 | | 1,003,400 |
| | 200.80 |
| | 1,002,633 |
| | 34,618,534 |
| |
June 1-30, 2019 | | 930,227 |
| | 197.03 |
| | 928,945 |
| | 33,689,589 |
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| | | | | | | | | |
Total | | 2,784,195 |
| | |
| | 2,773,896 |
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(1) | Of this amount, 5,79610,299 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) | Total number of shares purchased as part of publicly announced plans or programs includes 5.7 million shares purchased under the ASR (see Note 5). |
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(3)
| 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 SeptemberJune 30, 2018, 43.72019, 33.7 million shares remain authorized for repurchase. |
Item 6. Exhibits.
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4.1 | |
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10.1 | |
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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 thirdsecond quarter of 2018,2019, formatted in Inline Extensible Business Reporting Language (XBRL)(iXBRL) includes (i) the Consolidated Statements of Income for the thirdsecond quarter and first ninesix months of 20182019 and 2017;2018; (ii) the Consolidated Statements of Comprehensive Income for the thirdsecond quarter and first ninesix months of 20182019 and 2017;2018; (iii) the Consolidated Balance Sheets at SeptemberJune 30, 20182019 and December 31, 2017;2018; (iv) the Consolidated Statements of Cash Flows for the first ninesix months of 20182019 and 2017;2018; (v) the Consolidated Statements of Changes in Stockholders’ Equity for the second quarter and (v)first six months of 2019 and 2018; and (vi) the Notes to Consolidated Financial Statements. |
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* 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: | OctoberJuly 24, 20182019 | /s/ Thomas E. HurlbutJason A. Zampi |
| | Thomas E. HurlbutJason A. Zampi
Vice President and Controller (Principal Accounting Officer) (Signature) |
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Date: | OctoberJuly 24, 20182019 | /s/ Denise W. Hutson |
| | Denise W. Hutson Corporate Secretary (Signature) |