UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
for the quarterly period ended JUNE 30, 2019MARCH 31, 2020
☐ 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 or organization) | | (IRS Employer Identification No.) |
Three Commercial Place | | 23510-2191 |
Norfolk, | Virginia | |
(Address of principal executive offices) | | (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 ☒ 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 ☒ 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 ☒ 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.☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
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 June 30, 2019March 31, 2020 | |
Common Stock ($1.00 par value per share) | | 263,406,773256,179,130 | | (excluding 20,320,777 shares held by the registrant’s | |
| | consolidated subsidiaries) | | |
TABLE OF CONTENTS
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Norfolk Southern Corporation and Subsidiaries
Consolidated Statements of Income
(Unaudited)
| | | Second Quarter | | First Six Months | | First Quarter | |
| 2019 | | 2018 | | 2019 | | 2018 | | 2020 | | 2019 | |
| ($ in millions, except per share amounts) | | ($ in millions, except per share amounts) | |
| | | | | | | | | |
Railway operating revenues | $ | 2,925 |
| | $ | 2,898 |
| | $ | 5,765 |
| | $ | 5,615 |
| Railway operating revenues | $ | 2,625 | | | $ | 2,840 | | |
| | | | | | | | | |
Railway operating expenses: | |
| | |
| | |
| | |
| Railway operating expenses: | | | | |
Compensation and benefits | 712 |
| | 706 |
| | 1,439 |
| | 1,443 |
| Compensation and benefits | 622 | | | 727 | | |
Purchased services and rents | 418 |
| | 430 |
| | 842 |
| | 831 |
| Purchased services and rents | 403 | | | 424 | | |
Fuel | 254 |
| | 272 |
| | 504 |
| | 538 |
| Fuel | 189 | | | 250 | | |
Depreciation | 284 |
| | 273 |
| | 567 |
| | 545 |
| Depreciation | 292 | | | 283 | | |
Materials and other | 192 |
| | 191 |
| | 382 |
| | 397 |
| Materials and other | 166 | | | 190 | | |
Loss on asset disposal | | Loss on asset disposal | 385 | | | — | | |
| | | | | | | | | | | | |
Total railway operating expenses | 1,860 |
| | 1,872 |
| | 3,734 |
| | 3,754 |
| Total railway operating expenses | 2,057 | | | 1,874 | | |
| | | | | | | | | | | | |
Income from railway operations | 1,065 |
| | 1,026 |
| | 2,031 |
| | 1,861 |
| Income from railway operations | 568 | | | 966 | | |
| | | | | | | | | |
Other income – net | 22 |
| | 29 |
| | 66 |
| | 37 |
| Other income – net | 22 | | | 44 | | |
Interest expense on debt | 153 |
| | 131 |
| | 302 |
| | 267 |
| Interest expense on debt | 154 | | | 149 | | |
| | | | | | | | | | | | |
Income before income taxes | 934 |
| | 924 |
| | 1,795 |
| | 1,631 |
| Income before income taxes | 436 | | | 861 | | |
| | | | | | | | | |
Income taxes | 212 |
| | 214 |
| | 396 |
| | 369 |
| Income taxes | 55 | | | 184 | | |
| | | | | | | | | | | | |
Net income | $ | 722 |
| | $ | 710 |
| | $ | 1,399 |
| | $ | 1,262 |
| Net income | $ | 381 | | | $ | 677 | | |
| | | | | | | | | | | | |
Earnings per share: | |
| | |
| | |
| | |
| Earnings per share: | | | | |
Basic | $ | 2.72 |
| | $ | 2.52 |
| | $ | 5.25 |
| | $ | 4.46 |
| Basic | $ | 1.48 | | | $ | 2.53 | | |
Diluted | 2.70 |
| | 2.50 |
| | 5.21 |
| | 4.43 |
| Diluted | 1.47 | | | 2.51 | | |
| | | | | | | | | |
See accompanying notes to consolidated financial statements.
3
Norfolk Southern Corporation and Subsidiaries
Consolidated Statements of Comprehensive Income
(Unaudited)
| | | Second Quarter | | First Six Months | | First Quarter | | | |
| 2019 | | 2018 | | 2019 | | 2018 | | 2020 | | 2019 | | |
| ($ in millions) | | ($ in millions) | |
| | | | | | | | | |
Net income | $ | 722 |
| | $ | 710 |
| | $ | 1,399 |
| | $ | 1,262 |
| Net income | $ | 381 | | | $ | 677 | | | |
Other comprehensive income, before tax: | | | | | | | | Other comprehensive income, before tax: | | |
Pension and other postretirement benefits | 5 |
| | 8 |
| | 10 |
| | 1 |
| Pension and other postretirement benefits | 7 | | | 5 | | | |
Other comprehensive income (loss) of equity investees | — |
| | 1 |
| | (1 | ) | | 2 |
| Other comprehensive income (loss) of equity investees | 5 | | | (1) | | | |
Other comprehensive income, before tax | 5 |
| | 9 |
| | 9 |
| | 3 |
| Other comprehensive income, before tax | 12 | | | 4 | | | |
| | | | | | | | | |
Income tax expense related to items of | | | | | | | | Income tax expense related to items of | | |
other comprehensive income | (2 | ) | | (2 | ) | | (3 | ) | | — |
| other comprehensive income | (2) | | | (1) | | | |
| | | | | | | | | | | | | |
Other comprehensive income, net of tax | 3 |
| | 7 |
| | 6 |
| | 3 |
| Other comprehensive income, net of tax | 10 | | | 3 | | | |
| | | | | | | | | | | | | |
Total comprehensive income | $ | 725 |
| | $ | 717 |
| | $ | 1,405 |
| | $ | 1,265 |
| Total comprehensive income | $ | 391 | | | $ | 680 | | | |
See accompanying notes to consolidated financial statements.
4
Norfolk Southern Corporation and Subsidiaries
Consolidated Balance Sheets
(Unaudited)
| | | June 30, 2019 | | December 31, 2018 | | March 31, 2020 | | December 31, 2019 |
| ($ in millions) | | ($ in millions) | |
| | | | |
Assets | |
| | |
| Assets | | | |
Current assets: | |
| | |
| Current assets: | | | |
Cash and cash equivalents | $ | 274 |
| | $ | 358 |
| Cash and cash equivalents | $ | 608 | | | $ | 580 | |
| Accounts receivable – net | 1,039 |
| | 1,009 |
| Accounts receivable – net | 889 | | | 920 | |
Materials and supplies | 256 |
| | 207 |
| Materials and supplies | 265 | | | 244 | |
Other current assets | 345 |
| | 288 |
| Other current assets | 240 | | | 337 | |
Total current assets | 1,914 |
| | 1,862 |
| Total current assets | 2,002 | | | 2,081 | |
| | | | |
Investments | 3,301 |
| | 3,109 |
| Investments | 3,470 | | | 3,428 | |
Properties less accumulated depreciation of $12,372 | | | |
| |
and $12,374, respectively | 31,201 |
| | 31,091 |
| |
Properties less accumulated depreciation of $11,794 | | Properties less accumulated depreciation of $11,794 | | |
and $11,982, respectively | | and $11,982, respectively | 31,179 | | | 31,614 | |
Other assets | 756 |
| | 177 |
| Other assets | 787 | | | 800 | |
| | | | | | | |
Total assets | $ | 37,172 |
| | $ | 36,239 |
| Total assets | $ | 37,438 | | | $ | 37,923 | |
| | | | | | | |
Liabilities and stockholders’ equity | |
| | |
| Liabilities and stockholders’ equity | | | |
Current liabilities: | |
| | |
| Current liabilities: | | | |
Accounts payable | $ | 1,407 |
| | $ | 1,505 |
| Accounts payable | $ | 1,284 | | | $ | 1,428 | |
| Income and other taxes | 270 |
| | 255 |
| Income and other taxes | 200 | | | 229 | |
Other current liabilities | 373 |
| | 246 |
| Other current liabilities | 352 | | | 327 | |
Current maturities of long-term debt | 401 |
| | 585 |
| Current maturities of long-term debt | 400 | | | 316 | |
Total current liabilities | 2,451 |
| | 2,591 |
| Total current liabilities | 2,236 | | | 2,300 | |
| | | | |
Long-term debt | 11,076 |
| | 10,560 |
| Long-term debt | 11,807 | | | 11,880 | |
Other liabilities | 1,738 |
| | 1,266 |
| Other liabilities | 1,683 | | | 1,744 | |
Deferred income taxes | 6,596 |
| | 6,460 |
| Deferred income taxes | 6,828 | | | 6,815 | |
| | | | | | | |
Total liabilities | 21,861 |
| | 20,877 |
| Total liabilities | 22,554 | | | 22,739 | |
| | | | |
Stockholders’ equity: | |
| | |
| Stockholders’ equity: | | | |
Common stock $1.00 per share par value, 1,350,000,000 shares | |
| | |
| Common stock $1.00 per share par value, 1,350,000,000 shares | | | |
authorized; outstanding 263,406,773 and 268,098,472 shares, | |
| | |
| |
authorized; outstanding 256,179,130 and 257,904,956 shares, | | authorized; outstanding 256,179,130 and 257,904,956 shares, | | | |
respectively, net of treasury shares | 265 |
| | 269 |
| respectively, net of treasury shares | 258 | | | 259 | |
Additional paid-in capital | 2,226 |
| | 2,216 |
| Additional paid-in capital | 2,205 | | | 2,209 | |
Accumulated other comprehensive loss | (557 | ) | | (563 | ) | Accumulated other comprehensive loss | (481) | | | (491) | |
Retained income | 13,377 |
| | 13,440 |
| Retained income | 12,902 | | | 13,207 | |
| | | | | | | |
Total stockholders’ equity | 15,311 |
| | 15,362 |
| Total stockholders’ equity | 14,884 | | | 15,184 | |
| | | | | | | |
Total liabilities and stockholders’ equity | $ | 37,172 |
| | $ | 36,239 |
| Total liabilities and stockholders’ equity | $ | 37,438 | | | $ | 37,923 | |
See accompanying notes to consolidated financial statements.
5
Norfolk Southern Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
| | | | | | | | | | | | | | |
| | First Three Months | | |
| | 2020 | | 2019 |
| | ($ in millions) | | |
| | | | |
Cash flows from operating activities: | | | | |
| Net income | $ | 381 | | | $ | 677 | |
| Reconciliation of net income to net cash provided by operating activities: | | | |
| Depreciation | 292 | | | 283 | |
| Deferred income taxes | 11 | | | 57 | |
| Gains and losses on properties | (8) | | | (18) | |
| Loss on asset disposal | 385 | | | — | |
| Changes in assets and liabilities affecting operations: | | | |
| Accounts receivable | 32 | | | (39) | |
| Materials and supplies | (21) | | | (21) | |
| Other current assets | (33) | | | 12 | |
| Current liabilities other than debt | (40) | | | (27) | |
| Other – net | (44) | | | (43) | |
| | | | |
| Net cash provided by operating activities | 955 | | | 881 | |
| | | | |
Cash flows from investing activities: | | | | |
| Property additions | (366) | | | (467) | |
| Property sales and other transactions | 158 | | | 152 | |
| Investment purchases | — | | | (2) | |
| Investment sales and other transactions | (25) | | | (33) | |
| | | | |
| Net cash used in investing activities | (233) | | | (350) | |
| | | | |
Cash flows from financing activities: | | | | |
| Dividends | (242) | | | (230) | |
| Common stock transactions | 14 | | | 2 | |
| Purchase and retirement of common stock | (466) | | | (500) | |
| Proceeds from borrowings | — | | | 250 | |
| | | | |
| | | | |
| Net cash used in financing activities | (694) | | | (478) | |
| | | | |
| Net increase in cash, cash equivalents, and restricted cash | 28 | | | 53 | |
| | | | |
Cash, cash equivalents, and restricted cash: | | | | | |
| At beginning of year | 580 | | | 446 | |
| | | | |
| At end of period | $ | 608 | | | $ | 499 | |
| | | | |
Supplemental disclosures of cash flow information: | | | | |
| Cash paid during the period for: | | | |
| Interest (net of amounts capitalized) | $ | 121 | | | $ | 112 | |
| Income taxes (net of refunds) | 16 | | | 9 | |
|
| | | | | | | | |
| | First Six Months |
| | 2019 | | 2018 |
| | ($ in millions) |
| | | | |
Cash flows from operating activities: | |
| | |
|
| Net income | $ | 1,399 |
| | $ | 1,262 |
|
| Reconciliation of net income to net cash provided by operating activities: | |
| | |
|
| Depreciation | 567 |
| | 546 |
|
| Deferred income taxes | 133 |
| | 89 |
|
| Gains and losses on properties | (7 | ) | | (14 | ) |
| Changes in assets and liabilities affecting operations: | |
| | |
|
| Accounts receivable | (30 | ) | | (92 | ) |
| Materials and supplies | (49 | ) | | (38 | ) |
| Other current assets | 55 |
| | 19 |
|
| Current liabilities other than debt | (30 | ) | | 134 |
|
| Other – net | (86 | ) | | (80 | ) |
| | | | |
| Net cash provided by operating activities | 1,952 |
| | 1,826 |
|
| | | | |
Cash flows from investing activities: | |
| | |
|
| Property additions | (979 | ) | | (836 | ) |
| Property sales and other transactions | 214 |
| | 48 |
|
| Investment purchases | (12 | ) | | (4 | ) |
| Investment sales and other transactions | (75 | ) | | 6 |
|
| | | | |
| Net cash used in investing activities | (852 | ) | | (786 | ) |
| | | | |
Cash flows from financing activities: | |
| | |
|
| Dividends | (458 | ) | | (408 | ) |
| Common stock transactions | 18 |
| | 15 |
|
| Purchase and retirement of common stock | (1,050 | ) | | (700 | ) |
| Proceeds from borrowings – net of issuance costs | 1,054 |
| | 543 |
|
| Debt repayments | (750 | ) | | (750 | ) |
| | | | |
| Net cash used in financing activities | (1,186 | ) | | (1,300 | ) |
| | | | |
| Net decrease in cash, cash equivalents, | | | |
| and restricted cash | (86 | ) | | (260 | ) |
| | | | |
Cash, cash equivalents, and restricted cash: | |
| | |
|
| At beginning of year | 446 |
| | 690 |
|
| | | | |
| At end of period | $ | 360 |
| | $ | 430 |
|
| | | | |
Supplemental disclosures of cash flow information: | |
| | |
|
| Cash paid during the period for: | |
| | |
|
| Interest (net of amounts capitalized) | $ | 271 |
| | $ | 246 |
|
| Income taxes (net of refunds) | 215 |
| | 126 |
|
See accompanying notes to consolidated financial statements.
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, 2019 | $ | 259 | | | $ | 2,209 | | | $ | (491) | | | $ | 13,207 | | | $ | 15,184 | |
| | | | | | | | | | | | | | |
Comprehensive income: | | | | | | | | | | | | | | |
Net income | | | | | | | 381 | | | 381 | |
Other comprehensive income | | | | | 10 | | | | | 10 | |
Total comprehensive income | | | | | | | | | | | | | 391 | |
Dividends on common stock, | | | | | | | | | | | | | | |
$0.94 per share | | | | | | | (242) | | | (242) | |
Share repurchases | (2) | | | (21) | | | | | (443) | | | (466) | |
Stock-based compensation | 1 | | | 17 | | | | | (1) | | | 17 | |
| | | | | | | | | |
Balance at March 31, 2020 | $ | 258 | | | $ | 2,205 | | | $ | (481) | | | $ | 12,902 | | | $ | 14,884 | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | |
| 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 |
|
|
| |
| |
| |
| |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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 | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
See accompanying notes to consolidated financial statements.
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 June 30, 2019,March 31, 2020, and December 31, 2018,2019, our results of operations, comprehensive income and changes in stockholders’ equity for the secondfirst quarters of 2020 and first six months of 2019, and 2018, and our cash flows for the first sixthree months of 20192020 and 20182019 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 following table disaggregates our revenues by major commodity group:
| | | | Second Quarter | | First Six Months | | First Quarter | | | |
| | 2019 | | 2018 | | 2019 |
| 2018 | | 2020 | | 2019 | | |
Merchandise: | | ($ in millions) | Merchandise: | | ($ in millions) | |
Agriculture, forest and consumer products | | Agriculture, forest and consumer products | | $ | 551 | | | $ | 558 | | | |
Chemicals | | $ | 473 |
| | $ | 465 |
| | $ | 925 |
| | $ | 919 |
| Chemicals | | 520 | | | 507 | | | |
Agriculture products | | 406 |
| | 379 |
| | 791 |
| | 736 |
| |
Metals and construction | | 416 |
| | 413 |
| | 801 |
| | 769 |
| Metals and construction | | 367 | | | 370 | | | |
Automotive | | 251 |
| | 253 |
| | 502 |
| | 496 |
| Automotive | | 234 | | | 251 | | | |
Forest and consumer | | 210 |
| | 208 |
| | 423 |
| | 403 |
| |
Merchandise | | 1,756 |
| | 1,718 |
| | 3,442 |
| | 3,323 |
| Merchandise | | 1,672 | | | 1,686 | | | |
Intermodal | | 701 |
| | 714 |
| | 1,420 |
| | 1,392 |
| Intermodal | | 655 | | | 719 | | | |
Coal | | 468 |
| | 466 |
| | 903 |
| | 900 |
| Coal | | 298 | | | 435 | | | |
| | | | | | | | | | | | | | |
Total | | $ | 2,925 |
| | $ | 2,898 |
| | $ | 5,765 |
| | $ | 5,615 |
| Total | | $ | 2,625 | | | $ | 2,840 | | | |
At the beginning of 2019,2020, we recategorizedcombined the agriculture products and forest and consumer commodity groups. In addition, we also made changes in the categorization of certain other commodity groups within Merchandise. Specifically, certain commodities within Merchandise major commodity groupswere shifted between agriculture, forest, and consumer products; chemicals; and metals and construction. These changes were made as a result of organizational initiatives to better align with how we internally manage these commodities. Prior period amountsrailway operating revenues 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 construction, and Forest and consumer.presentation.
We recognize the amount of revenue we expect to be entitled to for the transfer of promised goods or services to customers. 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 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 June 30, 2019March 31, 2020 or December 31, 2018.2019.
Revenue related to interline transportation services that involve another railroad is reported on a net basis. Therefore, the portion of the amount that relates to another party is not reflected in revenue.
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:
| | | | | | | | | | | | | | |
| | March 31, 2020 | | December 31, 2019 |
| | ($ in millions) | | |
Customer | | $ | 665 | | | $ | 682 | |
Non-customer | | 224 | | | 238 | |
| | | | |
Accounts receivable – net | | $ | 889 | | | $ | 920 | |
|
| | | | | | | | |
| | June 30, 2019 | | December 31, 2018 |
| | ($ in millions) |
Customer | | $ | 767 |
| | $ | 740 |
|
Non-customer | | 272 |
| | 269 |
|
| | | | |
Accounts receivable – net | | $ | 1,039 |
| | $ | 1,009 |
|
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 $55$23 million at both June 30, 2019March 31, 2020 and December 31, 2018.2019. We do not have any material contract assets or liabilities.
liabilities at March 31, 2020 or December 31, 2019.
Certain ancillary services may be provided to customers under their transportation contracts such as switching, demurrage and other incidental service revenues. These are distinct performance obligations that are recognized at a point in time when the services are performed or as contractual obligations are met. This revenue is included within each of the commodity groups and represents approximately 4%5% of total “Railway operating revenues” on the Consolidated Statements of Income for both the first quarter of the second quarters2020 and 2019.
first six months of 2019 and 2018.
2. Stock-Based Compensation
| | | | | | | | | | | | | | | | | | | | |
| | First Quarter | | | | | | |
| | 2020 | | 2019 | | | | |
| | ($ in millions) | | | | | | |
Stock-based compensation expense | | $ | 2 | | | $ | 16 | | | | | |
Total tax benefit | | 26 | | | 23 | | | | | |
|
| | | | | | | | | | | | | | | | |
| | 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 |
|
During 2019,the first quarter of 2020, a committee of nonemployee members of our Board of Directors (and the Chief Executive Officer underwhen 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 |
|
| | | | | | | | | | | | | | | | | | | | |
| | First Quarter | | | | | | |
| | Granted | | Weighted-Average Grant-Date Fair Value | | | | |
| | | | | | | | |
Stock options | | 42,720 | | | $ | 52.37 | | | | | |
RSUs | | 164,160 | | | 210.77 | | | | | |
PSUs | | 76,790 | | | 213.38 | | | | | |
Stock Options
| | | | | | | | | | | | | | | | | | | | |
| | First Quarter | | | | | | |
| | 2020 | | 2019 | | | | |
| | ($ in millions) | | | | | | |
Stock options exercised | | 523,238 | | 406,371 | | | | | |
Cash received upon exercise | | $ | 43 | | | $ | 28 | | | | | |
Related tax benefit realized | | 13 | | | 9 | | | | | |
|
| | | | | | | | | | | | | | | | |
| | 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 |
|
Restricted Stock Units
Beginning in 2018, RSUs granted primarily have a four-yearfour-year ratable restriction period and will be settled through the issuance of shares of Norfolk Southern common stock (Common Stock). RSUs granted in previous years have a five-year restriction period and will also be settled through the issuance of shares of Common Stock. Certain RSU grants include cash dividend equivalent payments during the restriction period in an amount equal to the regular quarterly dividends paid on Common Stock.
| | | | | | | | | | | | | | | | | | | | |
| | First Quarter | | | | | | |
| | 2020 | | 2019 | | | | |
| | ($ in millions) | | | | | | |
RSUs vested | | 202,299 | | | 165,549 | | | | | |
Common Stock issued net of tax withholding | | 143,712 | | | 118,881 | | | | | |
Related tax benefit realized | | $ | 5 | | | $ | 2 | | | | | |
|
| | | | | | | | | | | | | | | | |
| | 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 |
|
Performance Share Units
PSUs provide for awards based on the achievement of certain predetermined corporate performance goals at the end of a three-yearthree-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 quarters of 2019 or 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 Quarter | | |
| | 2020 | | 2019 |
| | ($ in millions) | | |
PSUs earned | | 235,935 | | | 331,099 |
Common Stock issued net of tax withholding | | 156,450 | | | 221,241 |
Related tax benefit realized | | $ | 7 | | | $ | 9 | |
3. Loss on Asset Disposal
In the first quarter of 2020, in connection with our initiatives to increase operational fluidity and asset utilization and improve labor and fuel efficiency, we committed to a plan to dispose of certain locomotives deemed excess and no longer needed for railroad operations. When depreciable operating road and equipment assets are sold or retired in the ordinary course of business, the cost of the assets, net of sale proceeds or salvage, is charged to accumulated depreciation, and no gain or loss is recognized in earnings. A retirement is considered abnormal if it does not occur in the ordinary course of business, if it relates to disposition of a large segment of an asset class and if the retirement varies significantly from the retirement profile identified through our depreciation studies, which inherently consider the impact of normal retirements on expected service lives and depreciation rates. We evaluated the planned locomotive retirements and concluded they were abnormal. Accordingly, a $385 million loss was recorded to adjust their carrying amount to their estimated fair value, which resulted in a $97 million tax benefit. During the first quarter, we sold 297 of 703 locomotives under the plan. The carrying amount of the remaining assets held for sale of $44 million is classified as “Other current assets” in the Consolidated Balance Sheets at March 31, 2020.
3.4. Earnings Per Share
The following table sets forth the calculation of basic and diluted earnings per share:
| | | | | | | | | | | | | | | | | | | | | | | |
| Basic | | | | Diluted | | |
| First Quarter | | | | | | |
| 2020 | | 2019 | | 2020 | | 2019 |
| ($ in millions, except per share amounts, shares in millions) | | | | | | |
| | | | | | | |
Net income | $ | 381 | | | $ | 677 | | | $ | 381 | | | $ | 677 | |
Dividend equivalent payments | (1) | | | (1) | | | (1) | | | — | |
| | | | | | | |
Income available to common stockholders | $ | 380 | | | $ | 676 | | | $ | 380 | | | $ | 677 | |
| | | | | | | |
Weighted-average shares outstanding | 257.3 | | | 267.1 | | | 257.3 | | | 267.1 | |
Dilutive effect of outstanding options | | | | | | | |
and share-settled awards | | | | | 1.4 | | | 2.3 | |
| | | | | | | |
Adjusted weighted-average shares outstanding | | | | | 258.7 | | | 269.4 | |
| | | | | | | |
Earnings per share | $ | 1.48 | | | $ | 2.53 | | | $ | 1.47 | | | $ | 2.51 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
|
| | | | | | | | | | | | | | | |
| Basic | | Diluted |
| Second Quarter |
| 2019 | | 2018 | | 2019 | | 2018 |
| ($ in millions, except per share amounts, shares in millions) |
| | | | | | | |
Net income | $ | 722 |
| | $ | 710 |
| | $ | 722 |
| | $ | 710 |
|
Dividend equivalent payments | (2 | ) | | (1 | ) | | — |
| | — |
|
| | | | | | | |
Income available to common stockholders | $ | 720 |
| | $ | 709 |
| | $ | 722 |
| | $ | 710 |
|
| | | | | | | |
Weighted-average shares outstanding | 264.8 |
| | 281.3 |
| | 264.8 |
| | 281.3 |
|
Dilutive effect of outstanding options | |
| | |
| | |
| | |
|
and share-settled awards | |
| | |
| | 2.3 |
| | 2.4 |
|
| | | | | | | |
Adjusted weighted-average shares outstanding | |
| | |
| | 267.1 |
| | 283.7 |
|
| | | | | | | |
Earnings per share | $ | 2.72 |
| | $ | 2.52 |
| | $ | 2.70 |
| | $ | 2.50 |
|
| | | | | | | |
| Basic | | Diluted |
| First Six Months |
| 2019 | | 2018 | | 2019 | | 2018 |
| ($ in millions, except per share amounts, shares in millions) |
| | | | | | | |
Net income | $ | 1,399 |
| | $ | 1,262 |
| | $ | 1,399 |
| | $ | 1,262 |
|
Dividend equivalent payments | (3 | ) | | (2 | ) | | — |
| | (1 | ) |
| | | | | | | |
Income available to common stockholders | $ | 1,396 |
| | $ | 1,260 |
| | $ | 1,399 |
| | $ | 1,261 |
|
| | | | | | | |
Weighted-average shares outstanding | 265.9 |
| | 282.4 |
| | 265.9 |
| | 282.4 |
|
Dilutive effect of outstanding options | |
| | |
| | |
| | |
|
and share-settled awards | |
| | |
| | 2.4 |
| | 2.4 |
|
| | | | | | | |
Adjusted weighted-average shares outstanding | | | |
| | 268.3 |
| | 284.8 |
|
| | | | | | | |
Earnings per share | $ | 5.25 |
| | $ | 4.46 |
| | $ | 5.21 |
| | $ | 4.43 |
|
During the second quartersfirst quarter of 2020 and first six months of 2019, and 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 zeroThere are 0 awards outstanding that were antidilutive for the first six monthsquarters ended June 30, 2019March 31, 2020 and 2018.2019.
5. 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 Adjustments | | Balance at End of Period |
| ($ in millions) | | | | | | |
Three Months Ended March 31, 2020 | | | | | | | |
Pensions and other | | | | | | | |
postretirement liabilities | $ | (421) | | | $ | — | | | $ | 5 | | | $ | (416) | |
Other comprehensive income (loss) | | | | | | | |
of equity investees | (70) | | | 5 | | | — | | | (65) | |
| | | | | | | |
Accumulated other | | | | | | | |
comprehensive loss | $ | (491) | | | $ | 5 | | | $ | 5 | | | $ | (481) | |
| | | | | | | |
Three Months Ended March 31, 2019 | | | | | | | |
Pensions and other | | | | | | | |
postretirement liabilities | $ | (497) | | | $ | — | | | $ | 4 | | | $ | (493) | |
Other comprehensive loss | | | | | | | |
of equity investees | (66) | | | (1) | | | — | | | (67) | |
| | | | | | | |
Accumulated other | | | | | | | |
comprehensive loss | $ | (563) | | | $ | (1) | | | $ | 4 | | | $ | (560) | |
|
| | | | | | | | | | | | | | | | | | | |
| 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 | ) |
In February 2018, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2018-02, “Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.” We 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.”
5.6. Stock Repurchase Program
We repurchased and retired 5.72.6 million shares and 4.82.9 million shares of Common Stock under our stock repurchase program induring the first sixthree months of 20192020 and 2018,2019, respectively, at a cost of $1.1 billion$466 million and $700$500 million, respectively.
Since the beginning of 2006, we have repurchased and retired 191.3 million shares at a total cost of $15.2 billion.
6.7. 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,both March 31, 2020 and $1.3 billion at December 31, 2018.2019.
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$35 million and $36 million for the second quarters of 2019 and 2018, respectively, and $75 million and $74$37 million for the first six monthsquarters of 20192020 and 2018,2019, respectively. Our equity in the earnings of Conrail, net of amortization, included in “Purchased services and rents”rents,” which offsets the costs of operating the Shared Assets Areas, was $15$9 million and $18 million for the second quarters of 2019 and 2018, respectively, and $23 million and $34$8 million for the first six monthsquarters of 20192020 and 2018,2019, respectively.
“Other liabilities” includes $280 million at both June 30, 2019,March 31, 2020, and December 31, 2018,2019, for long-term advances from Conrail, maturing 2044, that bear interest at an average rate of 2.9%.
Investment in TTX
NS and eight8 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 $60 million and $67$62 million of expense for the secondfirst quarters of 20192020 and 2018, respectively, and $122 million and $133 million for the first six months of 2019, and 2018, respectively. Our equity in the earnings of TTX, which offset the costs and are also included in “Purchased services and rents,” totaled $12$4 million and $17 million for the second quarters of 2019 and 2018, respectively, and $25 million and $33$13 million for the first six monthsquarters of 20192020 and 2018,2019, respectively.
7.8. Debt
During the second quarter of 2019, we issued $200 million of 3.80% senior notes due 2028, $400 million of 4.10% senior notes due 2049, and $200 million of 5.10% senior notes due 2118.
In May 2019, we renewed and amended ourWe have in place an accounts receivable securitization program increasingwith maximum borrowing capacity from $400 million toof $450 million withand a term expiring in May 2020. We had no0 amounts outstanding at June 30, 2019,both March 31, 2020, and December 31, 2018.2019, and our available borrowing capacity was $412 million and $429 million, respectively.
In March 2020, we renewed and amended our five-year credit agreement which expires in May 2025 and provides for borrowings at prevailing rates and includes covenants. We increased the program’s borrowing capacity from $750 million to $800 million. We had 0 amounts outstanding under this facility at both March 31, 2020, and December 31, 2019.
The “Cash, cash equivalents, and restricted cash” line item inon the Consolidated Statements of Cash Flows includes restricted cash of $86 million and $88 million at June 30,in 2019, and December 31, 2018, respectively, reflecting deposits held by a third-party bond agent as collateral for certain debt obligations, maturing in 2019. The restricted cash balance is included as part of “Other current assets”which matured on the Consolidated Balance Sheets in both periods.
8. Leases
In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842),” and subsequent amendments, which replaced existing lease guidance in GAAP and requires lessees to recognize right-of-use (ROU) assets and lease liabilities on the balance sheet for leases greater than twelve months and disclose key information about leasing arrangements. We adopted the standard on January 1, 2019 using the modified retrospective method and used the effective date as our date of initial application. Financial information will not be updated and the disclosures required under the new standard will not be provided for dates and periods before JanuaryOctober 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 |
|
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 ofcertain health care expenses isare 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 secondfirst quarter and first six months arewere as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | |
| | | | | Other Postretirement | | |
| Pension Benefits | | | | Benefits | | |
| First Quarter | | | | | | |
| 2020 | | 2019 | | 2020 | | 2019 |
| ($ in millions) | | | | | | |
| | | | | | | |
Service cost | $ | 10 | | | $ | 9 | | | $ | 1 | | | $ | 2 | |
Interest cost | 19 | | | 23 | | | 3 | | | 4 | |
Expected return on plan assets | (48) | | | (45) | | | (3) | | | (4) | |
Amortization of net losses | 13 | | | 11 | | | — | | | — | |
Amortization of prior service benefit | — | | | — | | | (6) | | | (6) | |
| | | | | | | |
Net benefit | $ | (6) | | | $ | (2) | | | $ | (5) | | | $ | (4) | |
|
| | | | | | | | | | | | | | | |
| | | | | | | |
| | | | | 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 |
| 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 | ) |
The 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.
10. Fair Values of Financial Instruments
The fair values of “Cash and cash equivalents,” “Accounts receivable – net,” and “Accounts payable”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. There are no other assets or liabilities measured at fair value on a recurring basis at June 30, 2019March 31, 2020 or December 31, 2018.2019. The carrying amounts and estimated fair values, 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 | ) |
| | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2020 | | | | December 31, 2019 | | |
| Carrying Amount | | Fair Value | | Carrying Amount | | Fair Value |
| ($ in millions) | | | | | | |
| | | | | | | |
| | | | | | | |
Long-term debt, including current maturities | $ | (12,207) | | | $ | (14,630) | | | $ | (12,196) | | | $ | (14,806) | |
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.
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;certification. The decision was upheld by the findings are subject to appeal.Court of Appeals on August 16, 2019. Since that decision, various individual cases have been filed in multiple jurisdictions. 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.
In 2018, a lawsuit was filed against one of our subsidiaries by the minority owner in a jointly-owned terminal railroad company in which our subsidiary has the majority ownership. The lawsuit alleged violations of various state laws and federal antitrust laws. It is reasonably possible that we could incur a loss in the case; however, we intend to vigorously defend the case and believe that we will prevail. The potential range of loss cannot be estimated at this time.
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 FederalFederal 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 include injuries and illnesses alleged to be caused by exposures which occur over time as opposed to injuries or illnesses caused by a specific accident or event. Types of occupational claims commonly seen allege exposure to asbestos and other claimed toxic substances resulting in respiratory diseases or cancer, exposure to repetitive motion resulting in various musculoskeletal disorders, and exposure to excessive noise resulting in hearing loss.cancer. 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, 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 specialists 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 $63 million and $55$56 million at June 30, 2019both March 31, 2020 and December 31, 2018, respectively,2019 of which $15 million is classified as a current liability at both dates. At June 30, 2019,March 31, 2020, the liability represents our estimates of the probable cleanup, investigation, and remediation costs based on available information at 113109 known locations and projects compared with 114110 locations and projects at December 31, 2018.2019. At June 30, 2019, sixteenMarch 31, 2020, 15 sites accounted for $44$39 million of the liability, and no individual site was considered to be material. We anticipate that much of this liability will be paid out over five years; however, some costs will be paid out over a longer period.
At eleven12 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 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. WeWith limited exceptions, we are currently self-insured up to $50insured above $75 million and abovebelow $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 toabove $25 million and abovebelow $200 million per occurrence and/or policy year for property owned by us or in our care, custody, or control.
12. New Accounting Pronouncements
In June 2016, the FASB issued ASUOn January 1, 2020, we adopted Accounting Standards Update (ASU) 2016-13, “Credit Losses - Measurement of Credit Losses on Financial Instruments,” which replacesreplaced the current incurred loss impairment method with a method that reflects expected credit losses. Historically, losses associated from the inability to collect on accounts receivable have been insignificant, with little divergence in collection trends through varying economic cycles. Short-term and long-term financial assets, as defined by the standard, are impacted by immediate recognition of estimated credit losses in the financial statements, reflecting the net amount expected to be collected. There was no material impact to the financial statements upon adoption.
In December 2019, the Financial Accounting Standards Board (FASB) issued ASU 2019-12, “Simplifying the Accounting for Income Taxes,” which adds new guidance to simplify the accounting for income taxes, changes the accounting for certain income tax transactions, and makes other minor changes. The new standard is effective as of January 1, 2020,2021, and early adoption is permitted as of January 1, 2019. Because credit losses associated from our accounts receivablesfor any interim period for which financial statements have historicallynot been insignificant, weissued. 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 in 22 states and the District of Columbia, serves every major container port in the eastern United States, and provides efficient connections to other rail carriers. Norfolk Southern is a major transporter of industrial products, including chemicals, agriculture, and metals and construction materials. In addition, the railroad operateswe operate the most extensive intermodal network in the East and isare a principal carrier of coal, automobiles, and automotive parts.
Our secondDuring the first quarter 2019of 2020, the execution of our strategic plan, including our new operating plan, continued to deliver financial and operational efficiencies. However, the rapidly developing COVID-19 pandemic has generated significant uncertainty in the economy and our outlook for the remainder of 2020 and could have a material adverse impact on our results reflectof operations, financial condition, and liquidity. While the commitmentmagnitude and duration of the outbreak, including its impact on our customers and general economic conditions, is uncertain, we experienced volume declines that accelerated through the end of the quarter and have continued to accelerate in the weeks subsequent to the implementationquarter-end. As a result, we expect overall revenues for the full year to decline, driven by volume declines in merchandise, intermodal, and coal, with the magnitude of the decline unknown. The pandemic has influenced, and will continue to influence, the demand for our new strategic plan that we unveiledservices and affect our revenues, with year-over-year volume declines in February. We achievedthe first several weeks of April approximating 30%. As a record low second-quarterresult, the impact on the full year 2020 railway operating ratio (a measure of the amount of operating revenues consumed by operating expenses)expense) is uncertain.
Our immediate response to the COVID-19 pandemic included protecting our employees and continuing to provide an excellent transportation service product for our customers. We are continuing to monitor the impact of 63.6%,the pandemic on the availability of our employee base, which was not significantly adversely affected in additionthe first quarter of 2020. We proactively established procedures to second-quarter recordsprotect our employees, including implementing social distancing, transitioning to remote work for income from railway operations, net income,certain office employees, and diluted earnings per share.establishing rigorous cleaning protocols for their work environments.
SUMMARIZED RESULTS OF OPERATIONS
($ in millions, except per share amounts)
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | |
| First Quarter | | | | | | | | | | |
| 2020 | | 2019 | | % change | | | | | | |
Income from railway operations | $ | 568 | | | $ | 966 | | | (41 | %) | | | | | | |
Net income | $ | 381 | | | $ | 677 | | | (44 | %) | | | | | | |
Diluted earnings per share | $ | 1.47 | | | $ | 2.51 | | | (41 | %) | | | | | | |
Railway operating ratio (percent) | 78.4 | | | 66.0 | | | 19 | % | | | | | | |
First quarter 2020 results were adversely impacted by a $385 million loss on asset disposal. During the first quarter of 2020, we recorded a charge related to the loss on sale of approximately 300 locomotives disposed of in the first quarter, and a write-down of approximately 400 additional locomotives that we are actively marketing to sell. For more information on the impact of the charge, see Note 3.
The following table adjusts our 2020 GAAP financial results to exclude the effects of the charge. We use these non-GAAP financial measures internally and believe this information provides useful supplemental information to
|
| | | | | | | | | | | | | | | | | | | |
| Second Quarter | | First Six Months |
| 2019 | | 2018 | | % change | | 2019 | | 2018 | | % change |
Income from railway operations | $ | 1,065 |
| | $ | 1,026 |
| | 4% | | $ | 2,031 |
| | $ | 1,861 |
| | 9% |
Net income | $ | 722 |
| | $ | 710 |
| | 2% | | $ | 1,399 |
| | $ | 1,262 |
| | 11% |
Diluted earnings per share | $ | 2.70 |
| | $ | 2.50 |
| | 8% | | $ | 5.21 |
| | $ | 4.43 |
| | 18% |
Railway operating ratio (percent) | 63.6 |
| | 64.6 |
| | (2%) | | 64.8 |
| | 66.9 |
| | (3%) |
investors to facilitate making period-to-period comparisons by excluding the 2020 charge. While we believe that these non-GAAP financial measures are useful in evaluating our business, this information should be considered as supplemental in nature and is not meant to be considered in isolation, or as a substitute for, the related financial information prepared in accordance with GAAP. In addition, these non-GAAP financial measures may not be the same as similar measures presented by other companies.
Income | | | | | | | | | | | | | | | | | |
| Non-GAAP Reconciliation for First Quarter | | | | |
| Reported 2020 (GAAP) | | 2020 Loss on Asset Disposal | | Adjusted 2020 (non-GAAP) |
| ($ in millions, except per share amounts) | | | | |
| | | | | |
Railway operating expenses | $ | 2,057 | | | $ | (385) | | | $ | 1,672 | |
Income from railway operations | $ | 568 | | | $ | 385 | | | $ | 953 | |
Net income | $ | 381 | | | $ | 288 | | | $ | 669 | |
Diluted earnings per share | $ | 1.47 | | | $ | 1.11 | | | $ | 2.58 | |
Railway operating ratio (percent) | 78.4 | | | (14.7) | | | 63.7 | |
| | | | | |
In the table below and the paragraph below, references to 2020 results and related comparisons use the adjusted, non-GAAP results from the reconciliation in the table above.
| | | | | | | | | | | | | | | | | |
| First Quarter | | | | |
| Adjusted 2020 (non-GAAP) | | 2019 | | Adjusted 2020 (non-GAAP) vs. 2019 |
| ($ in millions, except per share amounts) | | | | % change |
| | | | | |
Railway operating expenses | $ | 1,672 | | | $ | 1,874 | | | (11 | %) |
Income from railway operations | $ | 953 | | | $ | 966 | | | (1 | %) |
Net income | $ | 669 | | | $ | 677 | | | (1 | %) |
Diluted earnings per share | $ | 2.58 | | | $ | 2.51 | | | 3 | % |
Railway operating ratio (percent) | 63.7 | | | 66.0 | | | (3 | %) |
Railway operating revenues decreased 8%, driven by an 11% decline in volumes partially offset by increased revenue per unit. Nearly offsetting the revenue decline was an 11% reduction in adjusted railway operating expenses, and the resulting decline in adjusted income from railway operations increased in both periods, primarily a result of increased railway operating revenues, driven by higher average revenue per unit, reflecting pricing gains. Traffic volumes were down 4% for the second quarter and 2% for the first six months. Railway operating expenses decreased as declines in fuel prices and lower expenses due to increased network velocity were offset by an increase in depreciation. Our share repurchase program resulted inwas $13 million, or 1%. Adjusted diluted earnings per share growth that exceeded that ofwas up 3% as the 1% decline in adjusted net income.income was more than offset by a lower share count due to our share repurchase program. Our adjusted railway operating ratio improved to 63.7 percent.
DETAILED RESULTS OF OPERATIONS
Railway Operating Revenues
The following tables present a comparison of revenues ($ in millions), volumes (units in thousands), and average revenue per unit ($ per unit) by commodity group.
| | | | | | | | | | | | | | | | | | | | | | | |
| First Quarter | | | | | | | | | | |
Revenues | 2020 | | 2019 | | % change | | | | | | |
Merchandise: | | | | | | | | | | | |
Agriculture, forest and consumer products | $ | 551 | | | $ | 558 | | | (1 | %) | | | | | | |
Chemicals | 520 | | | 507 | | | 3 | % | | | | | | |
Metals and construction | 367 | | | 370 | | | (1 | %) | | | | | | |
Automotive | 234 | | | 251 | | | (7 | %) | | | | | | |
Merchandise | 1,672 | | | 1,686 | | | (1 | %) | | | | | | |
Intermodal | 655 | | | 719 | | | (9 | %) | | | | | | |
Coal | 298 | | | 435 | | | (31 | %) | | | | | | |
Total | $ | 2,625 | | | $ | 2,840 | | | (8 | %) | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
Units | | | | | | | | | | | |
Merchandise: | | | | | | | | | | | |
Agriculture, forest and consumer products | 181.5 | | | 190.7 | | | (5 | %) | | | | | | |
Chemicals | 142.3 | | | 145.0 | | | (2 | %) | | | | | | |
Metals and construction | 154.9 | | | 164.4 | | | (6 | %) | | | | | | |
Automotive | 90.4 | | | 98.1 | | | (8 | %) | | | | | | |
Merchandise | 569.1 | | | 598.2 | | | (5 | %) | | | | | | |
Intermodal | 955.1 | | | 1,071.0 | | | (11 | %) | | | | | | |
Coal | 163.5 | | | 236.3 | | | (31 | %) | | | | | | |
Total | 1,687.7 | | | 1,905.5 | | | (11 | %) | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
Revenue per Unit | | | | | | | | | | | |
Merchandise: | | | | | | | | | | | |
Agriculture, forest and consumer products | $ | 3,036 | | | $ | 2,927 | | | 4 | % | | | | | | |
Chemicals | 3,653 | | | 3,495 | | | 5 | % | | | | | | |
Metals and construction | 2,370 | | | 2,255 | | | 5 | % | | | | | | |
Automotive | 2,593 | | | 2,557 | | | 1 | % | | | | | | |
Merchandise | 2,939 | | | 2,819 | | | 4 | % | | | | | | |
Intermodal | 685 | | | 671 | | | 2 | % | | | | | | |
Coal | 1,826 | | | 1,839 | | | (1 | %) | | | | | | |
Total | 1,556 | | | 1,490 | | | 4 | % | | | | | | |
At the beginning of 2019,2020, we combined the agriculture products and forest and consumer commodity groups. In addition, we also made changes in the categorization of certain other commodity groups within Merchandise. Specifically, certain commodities were shifted between agriculture, forest, and consumer products; chemicals; and metals and construction. These changes were made as a result of organizational initiatives to better align with how we manage these commodities. Prior period railway operating revenues, units, and revenue per unit have been reclassified to conform to the current presentation (see Note 1).presentation.
|
| | | | | | | | | | | | | | | | | | | |
| Second Quarter | | First Six Months |
Revenues | 2019 | | 2018 | | % change | | 2019 | | 2018 | | % change |
Merchandise: | | | | | | | | | | | |
Chemicals | $ | 473 |
| | $ | 465 |
| | 2% | | $ | 925 |
| | $ | 919 |
| | 1% |
Agriculture products | 406 |
| | 379 |
| | 7% | | 791 |
| | 736 |
| | 7% |
Metals and construction | 416 |
| | 413 |
| | 1% | | 801 |
| | 769 |
| | 4% |
Automotive | 251 |
| | 253 |
| | (1%) | | 502 |
| | 496 |
| | 1% |
Forest and consumer | 210 |
| | 208 |
| | 1% | | 423 |
| | 403 |
| | 5% |
Merchandise | 1,756 |
| | 1,718 |
| | 2% | | 3,442 |
| | 3,323 |
| | 4% |
Intermodal | 701 |
| | 714 |
| | (2%) | | 1,420 |
| | 1,392 |
| | 2% |
Coal | 468 |
| | 466 |
| | —% | | 903 |
| | 900 |
| | —% |
| | | | | | | | | | | |
Total | $ | 2,925 |
| | $ | 2,898 |
| | 1% | | $ | 5,765 |
| | $ | 5,615 |
| | 3% |
|
| | | | | | | | | | | | | | | |
Units | | | | | | | |
Merchandise: | | | | | | | | | | | |
Chemicals | 129.8 |
| | 133.0 |
| | (2%) | | 255.7 |
| | 259.6 |
| | (2%) |
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 | 101.8 |
| | 104.7 |
| | (3%) | | 199.9 |
| | 207.5 |
| | (4%) |
Forest and consumer | 68.6 |
| | 73.6 |
| | (7%) | | 138.0 |
| | 144.5 |
| | (4%) |
Merchandise | 638.2 |
| | 655.5 |
| | (3%) | | 1,236.4 |
| | 1,261.6 |
| | (2%) |
Intermodal | 1,048.5 |
| | 1,091.8 |
| | (4%) | | 2,119.5 |
| | 2,141.0 |
| | (1%) |
Coal | 258.3 |
| | 273.6 |
| | (6%) | | 494.6 |
| | 522.7 |
| | (5%) |
| | | | | | | | | | | |
Total | 1,945.0 |
| | 2,020.9 |
| | (4%) | | 3,850.5 |
| | 3,925.3 |
| | (2%) |
|
| | | | | | | | | | | | | | | | | | | |
Revenue per Unit | | | | | | | |
Merchandise: | | | | | | | | | | | |
Chemicals | $ | 3,646 |
| | $ | 3,495 |
| | 4% | | $ | 3,617 |
| | $ | 3,539 |
| | 2% |
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 | 2,471 |
| | 2,421 |
| | 2% | | 2,513 |
| | 2,392 |
| | 5% |
Forest and consumer | 3,057 |
| | 2,825 |
| | 8% | | 3,064 |
| | 2,790 |
| | 10% |
Merchandise | 2,751 |
| | 2,621 |
| | 5% | | 2,784 |
| | 2,634 |
| | 6% |
Intermodal | 668 |
| | 654 |
| | 2% | | 670 |
| | 650 |
| | 3% |
Coal | 1,815 |
| | 1,704 |
| | 7% | | 1,826 |
| | 1,723 |
| | 6% |
Total | 1,504 |
| | 1,434 |
| | 5% | | 1,497 |
| | 1,430 |
| | 5% |
Railway operating revenues increased $27decreased $215 million in the secondfirst quarter and $150 million for the first six months compared with the same periodsperiod last year. The table below reflects the components of the revenue change by major commodity group ($ in millions).
| | | | Second Quarter | | First Six Months | | First Quarter | |
| | Increase (Decrease) | | Increase (Decrease) | | Increase (Decrease) | |
| | | | | | | | | | | | | | | |
| | Merchandise | | Intermodal | | Coal | | Merchandise | | Intermodal | | Coal | | Merchandise | | Intermodal | | Coal | |
| | | | | | | | | | | | | | | | | | | |
Volume | | $ | (45 | ) | | $ | (28 | ) | | $ | (26 | ) | | $ | (66 | ) | | $ | (14 | ) | | $ | (48 | ) | Volume | | $ | (82) | | | $ | (78) | | | $ | (134) | | |
Fuel surcharge revenue | | — |
| | (5 | ) | | (8 | ) | | 14 |
| | 4 |
| | (9 | ) | Fuel surcharge revenue | | (6) | | | (10) | | | (6) | | |
Rate, mix and other | | 83 |
| | 20 |
| | 36 |
| | 171 |
| | 38 |
| | 60 |
| Rate, mix and other | | 74 | | | 24 | | | 3 | | |
| | | | | | | | | | | | | | | | | | | |
Total | | $ | 38 |
| | $ | (13 | ) | | $ | 2 |
| | $ | 119 |
| | $ | 28 |
| | $ | 3 |
| Total | | $ | (14) | | | $ | (64) | | | $ | (137) | | |
|
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 thesecontracts that include negotiated fuel surcharges, with over 75% tied to OHD. In the second quarter and first six months of 2019, contracts tied to OHD accounted for about 95% of our fuel surcharge revenue.surcharges. Revenues associated with these surcharges totaled $144$131 million and $157$153 million in the secondfirst quarters of 20192020 and 2018, respectively, and $297 million and $288 million for the first six months of 2019, and 2018, respectively.
Merchandise
Merchandise revenue grew in both periods,decreased for the quarter as lower volumes were partially offset by higher average revenue per unit was driven by pricing gains. The first six months also benefited from increased fuel surcharge revenue. Overall, volumes fell as gains in agricultureall merchandise commodity groups.
Agriculture, forest and consumer products were more than offsetvolume decreased, largely driven by declines in the remaining groups.
shipments of corn, soybeans, wood chips, sweeteners, and feed products, with an increase in wheat shipments. Chemicals volume decreased, in both periods driven by reduced shipments of sand, natural gas liquids and plastics,inorganic chemicals, which were partially offset by gains in municipal wastecrude oil shipments.
Agriculture products volume rose in both periods, with increases in corn and feed 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 volume fell, in both periods, largely the result of decreases in shipments of aggregates, iron and steel, coil, and frac sand.scrap metal. These declines were partially offset by higher aggregates traffic due to improved service and an extended shipping season.
cement shipments. 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 duringunplanned automotive plant shutdowns, including those associated with the first quarter due to disruptions across the U.S. multilevel network.COVID-19 pandemic.
Forest and consumer volume declined in both periods, reflecting decreases in pulpboard, kaolin, lumber, and graphic paper traffic.
Merchandise revenues for the remainder of the year are expected to increase, reflecting higher average revenue per unit, driven by pricing gains, and modest volume growth in the fourth quarter.
Intermodal
Intermodal revenue declined, the result of decreased for the quarter but increased in the first six months. Both periods benefited fromvolumes partially offset by higher average revenue per unit. Revenue per unit increased, a result of pricing gains. Volume declined in both periods.
Intermodal units (in thousands) by market were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| First Quarter | | | | | | | | | | |
| 2020 | | 2019 | | % change | | | | | | |
| | | | | | | | | | | |
Domestic | 598.3 | | | 656.3 | | | (9 | %) | | | | | | |
International | 356.8 | | | 414.7 | | | (14 | %) | | | | | | |
| | | | | | | | | | | |
Total | 955.1 | | | 1,071.0 | | | (11 | %) | | | | | | |
|
| | | | | | | | | | | | | | | |
| Second Quarter | | First Six Months |
| 2019 | | 2018 | | % change | | 2019 | | 2018 | | % change |
| | | | | | | | | | | |
Domestic | 635.8 |
| | 706.5 |
| | (10%) | | 1,292.1 |
| | 1,378.2 |
| | (6%) |
International | 412.7 |
| | 385.3 |
| | 7% | | 827.4 |
| | 762.8 |
| | 8% |
| | | | | | | | | | | |
Total | 1,048.5 |
| | 1,091.8 |
| | (4%) | | 2,119.5 |
| | 2,141.0 |
| | (1%) |
Domestic and international 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 due to increased demandsupply chain disruption resulting from existing and new accounts.COVID-19 related shutdowns.
Intermodal revenues for the remainder of the year are expected to increase, driven by modest volume growth in addition to higher average revenue per unit due to pricing gains.
Coal
Coal revenues were flat in both periods, as higher average revenue per unit, the result of pricing gains, was offsetdecreased, primarily driven by volume decreases.declines.
Coal tonnage (in thousands) by market was as follows:
| | | Second Quarter | | First Six Months | | First Quarter | |
| 2019 | | 2018 | | % change | | 2019 | | 2018 | | % change | | 2020 | | 2019 | | % change | |
| | | | | | | | | | | | | | | |
Utility | 17,129 |
| | 16,695 |
| | 3% | | 32,884 |
| | 32,560 |
| | 1% | Utility | 8,898 | | | 15,755 | | | (44 | %) | |
Export | 6,626 |
| | 7,916 |
| | (16%) | | 13,014 |
| | 15,154 |
| | (14%) | Export | 6,069 | | | 6,388 | | | (5 | %) | |
Domestic metallurgical | 3,851 |
| | 4,251 |
| | (9%) | | 6,782 |
| | 7,398 |
| | (8%) | Domestic metallurgical | 2,276 | | | 2,931 | | | (22 | %) | |
Industrial | 1,181 |
| | 1,457 |
| | (19%) | | 2,403 |
| | 2,717 |
| | (12%) | Industrial | 981 | | | 1,222 | | | (20 | %) | |
| | | | | | | | | | | | | | |
Total | 28,787 |
| | 30,319 |
| | (5%) | | 55,083 |
| | 57,829 |
| | (5%) | Total | 18,224 | | | 26,296 | | | (31 | %) | |
Utility coal tonnage grew in both periodsdeclined due to increased network velocity and customer demand to replenish low stockpiles. Gains in the first six months were partially offset due to plant issues and inclement weather along with declining natural gas prices.prices, additional renewable energy generating capacity, and mild winter weather. Export coal tonnage dropped in both periodsdeclined as a result of coal supply issues and weak thermal seaborne pricing. Domestic metallurgical coal and coke tonnage fell in both periods due to softening domestic steel demand, customer sourcing changes, and plant outages.idled customer facilities. Industrial coal tonnage decreased in both periods as a result of customer sourcing changes and continued pressure from natural gas conversions.
Coal revenues for the remainder of the year are expected to decline. Utility demand continues to be impacted by lower natural gas prices and increased renewable energy generating capacity. Export will be impacted by a lower average revenue per unit, mainly the result of softening seaborne metallurgical prices, and reduced volume due to weak thermal seaborne pricing and 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):
| | | | | | | | | | | | | | | | | | | | | | | |
| First Quarter | | | | | | | | | | |
| 2020 | | 2019 | | % change | | | | | | |
| | | | | | | | | | | |
Compensation and benefits | $ | 622 | | | $ | 727 | | | (14 | %) | | | | | | |
Purchased services and rents | 403 | | | 424 | | | (5 | %) | | | | | | |
Fuel | 189 | | | 250 | | | (24 | %) | | | | | | |
Depreciation | 292 | | | 283 | | | 3% | | | | | | |
Materials and other | 166 | | | 190 | | | (13 | %) | | | | | | |
Loss on asset disposal | 385 | | | — | | | | | | | | | |
| | | | | | | | | | | |
Total | $ | 2,057 | | | $ | 1,874 | | | 10 | % | | | | | | |
|
| | | | | | | | | | | | | | | | | | | |
| Second Quarter | | First Six Months |
| 2019 | | 2018 | | % change | | 2019 | | 2018 | | % change |
| | | | | | | | | | | |
Compensation and benefits | $ | 712 |
| | $ | 706 |
| | 1% | | $ | 1,439 |
| | $ | 1,443 |
| | —% |
Purchased services and rents | 418 |
| | 430 |
| | (3%) | | 842 |
| | 831 |
| | 1% |
Fuel | 254 |
| | 272 |
| | (7%) | | 504 |
| | 538 |
| | (6%) |
Depreciation | 284 |
| | 273 |
| | 4% | | 567 |
| | 545 |
| | 4% |
Materials and other | 192 |
| | 191 |
| | 1% | | 382 |
| | 397 |
| | (4%) |
| | | | | | | | | | | |
Total | $ | 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 refundlevels (down $76 million),
•health and welfare benefits for agreement employees (down $18 million),
•overtime and recrews (down $17 million),
•stock-based and incentive compensation (down $17 million),
•lower capitalized labor ($3110 million unfavorable in both the quarter and first six months)of additional expense),
•increased pay rates (up $22 million for the quarter and $42 million for the first six months),
incentive and stock-based compensation (down $19 million for the quarter and $22 million for the first six months),
employment levels (down $13 million for the quarter and $24 million for the first six months),
overtime and recrews (down $11 million for the quarter and $17 million for the first six months),
higher capitalized labor ($3 million for the quarter and $11 million for the first six months)$16 million), and
•other (down $1 million for the quarter and $3 million for the first six months)million).
Average rail headcount for the quarter was down by about 1,5005,000 compared with the secondfirst quarter 2019.
2018 and down by about 1,200 sequentially. We expect headcount to continue to decline for the remainder of the year.
Purchased services and rents declined in the second quarter, but increased for the first six months as follows ($ in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| First Quarter | | | | | | | | | | |
| 2020 | | 2019 | | % change | | | | | | |
| | | | | | | | | | | |
Purchased services | $ | 321 | | | $ | 346 | | | (7 | %) | | | | | | |
Equipment rents | 82 | | | 78 | | | 5 | % | | | | | | |
| | | | | | | | | | | |
Total | $ | 403 | | | $ | 424 | | | (5 | %) | | | | | | |
|
| | | | | | | | | | | | | | | | | | | |
| Second Quarter | | First Six Months |
| 2019 | | 2018 | | % change | | 2019 | | 2018 | | % change |
| | | | | | | | | | | |
Purchased services | $ | 347 |
| | $ | 342 |
| | 1% | | $ | 693 |
| | $ | 660 |
| | 5% |
Equipment rents | 71 |
| | 88 |
| | (19%) | | 149 |
| | 171 |
| | (13%) |
| | | | | | | | | | | |
Total | $ | 418 |
| | $ | 430 |
| | (3%) | | $ | 842 |
| | $ | 831 |
| | 1% |
The risedecline in purchased services in both periods was largely the result of increased technology-related expenses, and lower earnings in equity affiliates. Additionally, there were higherdecreased intermodal-related costs for the first six months.and decreased transportation expenses. Equipment rents fell in both periods,increased, primarily the result of increased network velocity.lower TTX equity earnings partially offset by decreased intermodal volume-related expenses.
Fuel expense, which includes the cost of locomotive fuel as well as other fuel used in railway operations, decreased in both periods primarily due to decreased consumption (down 15%), as well as lower locomotive fuel prices (down 6% in the second quarter and 5% in the first six months), as well as decreased consumption (down 1% in both the second quarter and the first six months)12%).
Materials and other expenses increased slightly in the second quarter, but decreased for the first six months as follows ($ in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| First Quarter | | | | | | | | | | |
| 2020 | | 2019 | | % change | | | | | | |
| | | | | | | | | | | |
Materials | $ | 72 | | | $ | 87 | | | (17 | %) | | | | | | |
Claims | 42 | | | 49 | | | (14 | %) | | | | | | |
Other | 52 | | | 54 | | | (4 | %) | | | | | | |
| | | | | | | | | | | |
Total | $ | 166 | | | $ | 190 | | | (13 | %) | | | | | | |
|
| | | | | | | | | | | | | | | | | | | |
| Second Quarter | | First Six Months |
| 2019 | | 2018 | | % change | | 2019 | | 2018 | | % change |
| | | | | | | | | | | |
Materials | $ | 82 |
| | $ | 92 |
| | (11%) | | $ | 169 |
| | $ | 182 |
| | (7%) |
Casualties and other claims | 50 |
| | 38 |
| | 32% | | 99 |
| | 85 |
| | 16% |
Other | 60 |
| | 61 |
| | (2%) | | 114 |
| | 130 |
| | (12%) |
| | | | | | | | | | | |
Total | $ | 192 |
| | $ | 191 |
| | 1% | | $ | 382 |
| | $ | 397 |
| | (4%) |
Materials costs decreased, in both periods, due primarily to lower locomotive repair costs as a result of fewer locomotives in service. Casualties and other claimsClaims expenses increased in the second quarterdecreased, driven by higher environmental and derailment costs. For the first six months, the increase is largely a result of higherlower costs related to environmental remediation matters. Other expense decreased for the first six months, reflecting higherslightly, as lower gains from the salesales of operating property.properties were fully offset by lower travel-related expenses. Gains from operating property sales amounted to $11 million and $17 million in 2020 and 2019, respectively.
Other Incomeincome – Net
Other income – net decreased $7$22 million, in the second quarter and increased $29 million for the first six 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 higherprimarily driven by lower investment returns on corporate-owned life insurance, helped partially offsetinsurance. Coal royalties were also lower due to the impairment loss. The increasecompleted sale of the natural resource assets in the first quarter of 2020. In 2019, coal royalties were $24 million for the first six months was driven by higher investment returns on corporate-owned life insurance, which more than offset the impairment loss.full year.
Income Taxestaxes
The second-quarterfirst-quarter effective tax rates were 22.7% and 23.2%rate was 12.6% compared with 21.4% for 2019 and 2018, respectively. The current quarter reflects increasedthe same period last year. Both periods benefited from favorable 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 first six months of 2019 and 2018, respectively.compensation. The current year-to-date effective rateyear reflects increaseda $97 million tax benefitsbenefit associated with the loss on stock-based compensation and higher returns on corporate-owned life insurance, whileasset disposal. The current quarter also benefited by a $19 million reduction of taxes upon the prior year benefited from certain 2017 tax credits that were retroactively enacted and signed into law in early 2018.resolution of our 2012 amended federal return.
FINANCIAL CONDITION AND LIQUIDITY
Cash provided by operating activities, our principal source of liquidity, was $2.0 billion$955 million for the first sixthree months of 2019,2020, compared with $1.8 billion$881 million for the same period of 2018, primarily due to improved operating results.2019. We had negative working capital deficits of $537$234 million at June 30, 2019, compared with $729March 31, 2020 and $219 million at December 31, 2018.2019. Cash and cash equivalents totaled $274$608 million at June 30, 2019. We expect cash on hand combined with cash provided by operating activities will be sufficient to meet our ongoing obligations.March 31, 2020.
In May 2019, we issued $200 million of 3.80% senior notes due 2028, $400 million of 4.10% senior notes due 2049, and $200 million of 5.10% senior notes due 2118. There have been no material changes to the information on future contractual obligations contained in our Form 10-K for the year ended December 31, 2018, with the exception of additional senior notes (see Note 7) and lease obligations (see Note 8).
Cash used in investing activities was $852$233 million for the first sixthree months of 2019,2020, compared with $786$350 million in the same period last year. The decrease was primarily driven by lower property additions in 2020.
Cash used in financing activities was $694 million for the first three months of 2020, compared with $478 million in the same period last year, reflecting higher property additions and increased corporate owned life insurance activity partially offset by higher property sales and other transactions.
Cash used in financing activities was $1.2 billion in the first six months of 2019, compared with $1.3 billion in the same period last year, largely the result of higherlower proceeds from borrowing, partially offset by higherlower repurchases of Common Stock. We repurchased 5.72.6 million shares of Common Stock totaling $1.1 billion,$466 million in the first sixthree months of 2019,2020 compared to 4.82.9 million shares, totaling $700$500 million in the same period last year. The timing and volume of future share repurchases will be guided by our assessment of market conditions, cash flow 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 42.8%45.1% at June 30, 2019,March 31, 2020, and 42.0%44.5% at December 31, 2018.2019.
We have in placeIn March 2020, we renewed and available a $750 millionamended our five-year credit agreement expiringwhich expires in May 2021, which2025 and provides for borrowings at prevailing rates and includes covenants. We increased the program’s borrowing capacity from $750 million to $800 million. We had no amounts outstanding under this facility at both June 30, 2019,March 31, 2020, and December 31, 2018,2019, and we are in compliance with all of its covenants. In May 2019, we renewed and amended ourWe have in place an accounts receivable securitization program increasingwith maximum borrowing capacity from $400 million toof $450 million withand a term expiring in May 2020.2020, which we intend to renew. We had no amounts outstanding under this program at June 30, 2019,both March 31, 2020, and December 31, 2018. 2019, and our available borrowing capacity was $412 million and $429 million, respectively. In addition, we have investments in general purpose corporate-owned life insurance policies and had the ability to borrow up to $652 million against these policies at March 31, 2020.
We expect cash on hand combined with cash provided by operating activities will be sufficient to meet our ongoing obligations. We are monitoring the ongoing impacts of the COVID-19 pandemic, which could lead to a decline of cash inflows from operations. However, we believe our currently-available borrowing capacity, access to additional financing, and ability to reduce expenditures on property additions and shareholder distributions, including share repurchases, will allow us to meet our cash flow needs. There have been no material changes to the information on future contractual obligations contained in our Form 10-K for the year ended December 31, 2019.
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, 2018.2019.
OTHER MATTERS
Labor Agreements
OverApproximately 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 current round of bargaining commenced on November 1, 2019 with both management and the unions serving their formal proposals for changes to the collective bargaining agreements.
New Accounting Pronouncements
For a detailed discussion of new accounting pronouncements, see Note 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. As a capital-intensive company, withwe have 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 the risks and uncertainties related to the COVID-19 pandemic and those discussed under “Risk Factors” in our latest Form 10-K, 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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
The information required by this item is included in Part I, Item 2, “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 June 30, 2019.March 31, 2020. Based on such evaluation, our officers have concluded that, at June 30, 2019,March 31, 2020, 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 secondfirst quarter of 2019,2020, 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;certification. The decision was upheld by the findings are subject to appeal.Court of Appeals on August 16, 2019. Since that decision, various individual cases have been filed in multiple jurisdictions. 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 factorsrisks set forth in “Risk Factors” included in our 20182019 Form 10-K could have a material adverse effect on our financial position, results of operations, or liquidity in a particular year or quarter, and could cause those results to differ materially from those expressed or implied in our forward-looking statements. Those risks remain unchanged and are incorporated herein by reference.reference and are updated to include the following risk.
The COVID-19 pandemic could impact us, our customers, our supply chain and our operations. The pandemic is rapidly developing and generating significant uncertainty in the economy, and it could have a material adverse impact on our financial position, results of operations, or liquidity, dependent on numerous uncertainties. The magnitude and duration of the outbreak, its impact on our customers and general economic conditions, and the extent of social distancing measures and non-essential business shutdowns will influence the demand for our services and affect our revenues. In addition, COVID-19 could affect our operations and business continuity if a significant number of our essential employees, overall or in a key location, are quarantined from contraction of or exposure to the disease or if governmental orders prevent our operating employees or critical suppliers from working. To the extent COVID-19 adversely affects our business and financial results, it may also have the effect of heightening many of the other risks described in the risk factors included in our 2019 Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | (a) Total Number of Shares (or Units) | | (b) Average Price Paid per Share | | (c) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or | | (d) Maximum Number (or Approximate Dollar Value) of Shares (or Units) that may yet be purchased under the Plans or | |
Period | | Purchased (1) | | (or Unit) | | Programs (2) | | Programs (2) | |
| | | | | | | | | |
January 1-31, 2020 | | 864,012 | | | $ | 202.17 | | | 861,977 | | | 27,184,804 | | |
February 1-29, 2020 | | 665,607 | | | 204.15 | | | 664,679 | | | 26,520,125 | | |
March 1-31, 2020 | | 1,067,802 | | | 146.63 | | | 1,067,254 | | | 25,452,871 | | |
| | | | | | | | | |
Total | | 2,597,421 | | | | | 2,593,910 | | | | |
(1)Of this amount, 3,511 represent shares tendered by employees in connection with the exercise of options under the stockholder-approved Long-Term Incentive Plan. |
| | | | | | | | | | | | | |
| | (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 |
| |
| | | | | | | | | |
Total | | 2,784,195 |
| | |
| | 2,773,896 |
| | |
| |
| |
(1)(2)On September 26, 2017, our Board of Directors authorized the repurchase of up to an additional 50 million shares of Common Stock through December 31, 2022. As of March 31, 2020, 25.5 million shares remain authorized for repurchase.
| Of this amount, 10,299 represent shares tendered by employees in connection with the exercise of options under the stockholder-approved Long-Term Incentive Plan. |
| |
(2)
| On September 26, 2017, our Board of Directors authorized the repurchase of up to an additional 50 million shares of Common Stock through December 31, 2022. As of June 30, 2019, 33.7 million shares remain authorized for repurchase. |
Item 6. Exhibits.
|
| | | | |
4.13(ii) | |
| |
10.1 | Amendment No. 14, dated as of May 31, 2019, to Transfer and AdministrationCredit Agreement dated as of November 8, 2007,March 27, 2020, establishing a 5-year, $800 million, unsecured revolving credit facility of the Registrant is incorporated by reference herein tofrom Exhibit 10.1 to Norfolk Southern Corporation’sCorporation's Form 8-K filed on June 3, 2019.March 30, 2020. |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
31-A* | |
| |
31-B* | |
| |
32* | |
| |
101* | The following financial information from Norfolk Southern Corporation’s Quarterly Report on Form 10-Q for the secondfirst quarter of 2019,2020, formatted in Inline Extensible Business Reporting Language (iXBRL) includes (i) the Consolidated Statements of Income for the secondfirst quarter of 2020 and first six months of 2019 and 2018;2019; (ii) the Consolidated Statements of Comprehensive Income for the secondfirst quarter of 2020 and first six months of 2019 and 2018;2019; (iii) the Consolidated Balance Sheets at June 30, 2019March 31, 2020 and December 31, 2018;2019; (iv) the Consolidated Statements of Cash Flows for the first sixthree months of 20192020 and 2018;2019; (v) the Consolidated Statements of Changes in Stockholders’ Equity for the secondfirst quarter of 2020 and first six months of 2019 and 2018;2019; and (vi) the Notes to Consolidated Financial Statements. |
| |
104* | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). |
| |
* 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.
|
| | | | | | | |
| | NORFOLK SOUTHERN CORPORATION Registrant |
| | |
| | |
| | |
Date: | July 24, 2019April 29, 2020 | /s/ Jason A. Zampi |
| | Jason A. Zampi Vice President and Controller
(Principal Accounting Officer) (Signature)
|
| | |
| | |
Date: | July 24, 2019April 29, 2020 | /s/ Denise W. Hutson |
| | Denise W. Hutson Corporate Secretary (Signature)
|