Norfolk Southern reports third-quarter 2020 results

Rhea-AI Summary

Norfolk Southern Corporation (NYSE: NSC) reported Q3 2020 results with a net income of $569 million and diluted EPS of $2.22. Excluding a $99 million impairment charge, adjusted net income was $643 million, and diluted EPS was $2.51. The operating ratio improved to 62.5%, a 240 basis point increase from Q3 2019. Total railway operating revenues reached $2.5 billion, a decrease of 12% year-over-year, attributed to a 7% decline in volume. Management remains optimistic about achieving a 60% operating ratio with continued productivity enhancements.

Positive

• Q3 net income increased to $569 million.
• Adjusted diluted EPS rose to $2.51, a significant improvement.
• Operating ratio improved to 62.5%, reflecting operational efficiency.
• Reduced operating expenses by $278 million, or 15%, year-over-year.
• Successful execution of Precision Scheduled Railroading strategy.

Negative

• Total railway operating revenues decreased by 12% compared to Q3 2019.
• 7% decline in total volume impacted revenue.
• 5% decline in revenue per unit.

NORFOLK, Va., Oct. 28, 2020 /PRNewswire/ -- Norfolk Southern Corporation (NYSE: NSC) today reported financial results for the quarter ended September 30, 2020. During the quarter, the company achieved net income of $569 million, diluted earnings per share of $2.22, and an operating ratio of 66.5%. These results include a previously announced $99 million non-cash impairment charge. Excluding the effects of the impairment charge, adjusted third-quarter net income was $643 million, adjusted diluted earnings per share were $2.51, and the adjusted operating ratio was 62.5%, which reflects a 240 basis point improvement compared with third-quarter 2019.

"Since launching our Precision Scheduled Railroading strategy, we have significantly enhanced Norfolk Southern's operational and financial performance and delivered superior returns for shareholders," said James A. Squires, Norfolk Southern chairman, president and CEO. "Given the impact of the COVID-19 pandemic on our industry and the broader economy, we quickly executed a plan to align our assets and resources with demand and generate sustainable margin improvement. In addition to maintaining outstanding service levels with fewer resources and reduced headcount, we successfully idled our fifth hump in the last five quarters, helping Norfolk Southern achieve record productivity. With the resilience of our railroad, strong customer relationships and the hard work of our team, including new Chief Operating Officer and PSR veteran Cindy Sanborn, we are confident in our ability to achieve our goal of a 60% operating ratio with more to come, while delivering enhanced free cash flow and further value creation for Norfolk Southern shareholders."

Third-quarter summary

• Railway operating revenues of $2.5 billion decreased 12% compared with third-quarter 2019, driven by a 7% decline in total volume and 5% decline in revenue per unit.
• Railway operating expenses were $1.7 billion, including a $99 million non-cash impairment charge related to an equity-method investment.
• Excluding the impairment charge, adjusted operating expenses declined $278 million, or 15%, compared with third-quarter 2019, driven by lower compensation and benefits, fuel, purchased services, materials, and the absence of last year's $32 million receivable write-off.
• Income from railway operations was $840 million and the operating ratio was 66.5%.
• Excluding the impairment charge, adjusted income from railway operations was $939 million, while the adjusted operating ratio improved to 62.5% versus the third-quarter record of 64.9% set in 2019.

About Norfolk Southern

Norfolk Southern Corporation (NYSE: NSC) is one of the nation's premier transportation companies. Its Norfolk Southern Railway Company subsidiary operates approximately 19,500 route miles in 22 states and the District of Columbia, serves every major container port in the eastern United States, and provides efficient connections to other rail carriers. Norfolk Southern is a major transporter of industrial products, including chemicals, agriculture, and metals and construction materials. In addition, the railroad operates the most extensive intermodal network in the East and is a principal carrier of coal, automobiles, and automotive parts.

Non-GAAP Financial Measures

This news release includes certain non-GAAP financial measures. Reconciliation of these non-GAAP financial measures is provided in the table below, entitled "Reconciliation of Non-GAAP Financial Measures."

Forward-looking statements

This news release contains forward-looking statements that may be identified by the use of words like "believe," "expect," "anticipate," "estimate," "plan," "consider," "project," and similar references to the future. Forward-looking statements reflect our good-faith evaluation of information currently available. These forward-looking statements are subject to a number of risks and uncertainties, and our actual results may differ materially from those projected. Please refer to our annual and quarterly reports filed with the SEC for a full discussion of those risks and uncertainties we view as most important. Additional risks include the impact of the COVID-19 pandemic on us, our customers, our supply chain and our operations. Forward-looking statements are not, and should not be relied upon as, a guarantee of future performance or results, nor will they necessarily prove to be accurate indications of the times at or by which any such performance or results will be achieved. As a result, actual outcomes and results may differ materially from those expressed in forward-looking statements. We undertake no obligation to update or revise forward-looking statements.

Reconciliation of Non-GAAP Financial Measures

Information included within this filing includes non-GAAP financial measures, as defined by SEC Regulation G. Non-GAAP financial measures should be considered in addition to, not as a substitute for, the financial measures reported in accordance with U.S. generally accepted accounting principles (GAAP).

GAAP financial results are adjusted to exclude the effects of an impairment charge in the third quarter of 2020 related to an equity method investment. 

Norfolk Southern believes that these non-GAAP financial measures provide valuable information regarding its earnings and business trends by excluding specific items that it believes are not indicative of the ongoing operating results of its business, providing a useful way for investors to make a comparison of our performance over time and against other companies in our industry by excluding the effects of the impairment charge. These non-GAAP financial measures are being provided as supplemental information to Norfolk Southern's GAAP financial measures, and Norfolk Southern believes these measures provide investors with additional meaningful financial information regarding our operational performance. Norfolk Southern also uses these non-GAAP measures as supplemental measures to evaluate its business and performance. 

($ in millions except per share amounts)	Third
	Quarter 2020
Railway operating expenses	$	1,666
Effect of impairment charge		(99)
Adjusted railway operating expenses	$	1,567
Income from railway operations	$	840
Effect of impairment charge		99
Adjusted income from railway operations	$	939
Operating ratio (%)		66.5
Effect of impairment charge (%)		(4.0)
Adjusted operating ratio (%)		62.5
Net income	$	569
Effect of impairment charge		74
Adjusted net income	$	643
Diluted earnings per share	$	2.22
Effect of impairment charge		0.29
Adjusted diluted earnings per share	$	2.51

Norfolk Southern Corporation and Subsidiaries
Consolidated Statements of Income
(Unaudited)
	Third Quarter								First Nine Months
	2020				2019				2020				2019
	(in millions, except per share amounts)
Railway operating revenues
Merchandise	$	1,556			$	1,731			$	4,535			$	5,173
Intermodal	700				707				1,924				2,127
Coal	250				403				757				1,306
Total railway operating revenues	2,506				2,841				7,216				8,606
Railway operating expenses
Compensation and benefits	578				682				1,786				2,121
Purchased services and rents	486				423				1,261				1,265
Fuel	126				226				399				730
Depreciation	293				286				867				853
Materials and other	183				228				500				610
Loss on asset disposal	—				—				385				—
Total railway operating expenses	1,666				1,845				5,198				5,579
Income from railway operations	840				996				2,018				3,027
Other income – net	39				22				110				88
Interest expense on debt	155				150				465				452
Income before income taxes	724				868				1,663				2,663
Income taxes
Current	133				119				243				382
Deferred	22				92				78				225
Total income taxes	155				211				321				607
Net income	$	569			$	657			$	1,342			$	2,056
Earnings per share – diluted	$	2.22			$	2.49			$	5.21			$	7.70
Weighted average shares outstanding – diluted	256.1				264.3				257.2				266.9
See accompanying notes to consolidated financial statements

Norfolk Southern Corporation and Subsidiaries
Consolidated Balance Sheets
(Unaudited)
	September 30,				December 31,
	2020				2019
	($ in millions)
Assets
Current assets:
Cash and cash equivalents	$	1,359			$	580
Accounts receivable – net	883				920
Materials and supplies	247				244
Other current assets	90				337
Total current assets	2,579				2,081
Investments	3,566				3,428
Properties less accumulated depreciation of $11,873
and $11,982, respectively	31,239				31,614
Other assets	795				800
Total assets	$	38,179			$	37,923
Liabilities and stockholders' equity
Current liabilities:
Accounts payable	$	1,273			$	1,428
Income and other taxes	257				229
Other current liabilities	386				327
Current maturities of long-term debt	89				316
Total current liabilities	2,005				2,300
Long-term debt	12,634				11,880
Other liabilities	1,701				1,744
Deferred income taxes	6,898				6,815
Total liabilities	23,238				22,739
Stockholders' equity:
Common stock $1.00 per share par value, 1,350,000,000 shares  authorized; outstanding 253,985,338 and 257,904,956 shares, respectively, net of treasury shares	255				259
Additional paid-in capital	2,246				2,209
Accumulated other comprehensive loss	(471)				(491)
Retained income	12,911				13,207
Total stockholders' equity	14,941				15,184
Total liabilities and stockholders' equity	$	38,179			$	37,923
See accompanying notes to consolidated financial statements

Norfolk Southern Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
	First Nine Months
	2020				2019
	($ in millions)
Cash flows from operating activities
Net income	$	1,342			$	2,056
Reconciliation of net income to net cash provided by operating activities:
Depreciation	867				854
Deferred income taxes	78				225
Gains and losses on properties	(14)				(4)
Loss on asset disposal	385				—
Impairment of investment	99				—
Changes in assets and liabilities affecting operations:
Accounts receivable	36				34
Materials and supplies	(3)				(59)
Other current assets	55				40
Current liabilities other than debt	104				(72)
Other – net	(182)				(77)
Net cash provided by operating activities	2,767				2,997
Cash flows from investing activities
Property additions	(1,053)				(1,494)
Property sales and other transactions	291				282
Investment purchases	(6)				(12)
Investment sales and other transactions	(50)				(99)
Net cash used in investing activities	(818)				(1,323)
Cash flows from financing activities
Dividends	(722)				(705)
Common stock transactions	53				21
Purchase and retirement of common stock	(960)				(1,550)
Proceeds from borrowings – net of issuance costs	784				1,404
Debt repayments	(325)				(750)
Net cash used in financing activities	(1,170)				(1,580)
Net increase in cash, cash equivalents, and restricted cash	779				94
Cash, cash equivalents, and restricted cash
At beginning of year	580				446
At end of period	$	1,359			$	540
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest (net of amounts capitalized)	$	395			$	392
Income taxes (net of refunds)	118				404
See accompanying notes to consolidated financial statements

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS:

1.  Impairment of Investment

During the third quarter of 2020, we recorded an other-than-temporary impairment of $99 million related to the carrying value of an equity method investment.  This non-cash impairment charge is recorded in "Purchased services and rents" on the Consolidated Statements of Income and had a $74 million impact on net income for the third quarter and the first nine months of 2020. 

2.  Loss on Asset Disposal

In the first quarter of 2020, we committed to a plan to dispose of certain locomotives deemed excess and no longer needed for railroad operations.  Specifically, during the first nine months of 2020, the Company recorded a charge related to the loss on the sale of 574 locomotives disposed of in the first nine months, and a write-down of  129 additional locomotives that we are actively marketing to sell.   Accordingly, a $385 million loss was recorded to adjust their carrying amount to their estimated fair value.

3.  Stock Repurchase Program

We repurchased and retired 5.3 million and 8.4 million shares of common stock under our stock repurchase program during the first nine months of 2020 and 2019, respectively, at a cost of $960 million and $1.6 billion, respectively. 

4.  Restricted Cash

The "Cash, cash equivalents, and restricted cash" line item on the Consolidated Statements of Cash Flows  includes restricted cash of $88 million in 2019, reflecting deposits held by a third-party bond agent as collateral for certain debt obligations which matured on October 1, 2019.

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SOURCE Norfolk Southern Corporation