10-KPeriod: FY2018

NORFOLK SOUTHERN CORP Annual Report, Year Ended Dec 31, 2018

Filed February 8, 2019For Securities:NSC

Summary

Norfolk Southern Corporation (NSC) reported total railway operating revenues of $11.5 billion for the year ended December 31, 2018. The company experienced revenue growth, driven by increased average revenue per unit, primarily due to pricing gains and higher fuel surcharge revenue, across most commodity groups, with notable strength in intermodal and chemicals. However, net income saw a significant decrease of 51% to $2.67 billion in 2018 compared to $5.40 billion in 2017. This decline is largely attributable to a substantial one-time tax benefit recognized in 2017 due to tax reform, which significantly inflated prior-year net income. Excluding this tax adjustment, net income would have shown a 39% increase in 2018. The company's operating ratio improved to 65.4% in 2018 from 66.6% in 2017 (or 68.1% on an adjusted basis), indicating improved operational efficiency. NSC continues to invest heavily in its infrastructure, with property additions totaling $1.95 billion in 2018, aimed at ensuring safe, efficient, and reliable transportation services. The company also actively engaged in share repurchases, demonstrating a commitment to returning value to shareholders. Key risks identified include potential increases in government regulation, environmental liabilities, and competition.

Financial Highlights

47 data points
Beta

Revenue

$11.46B

Net Income

$2.67B

23.3% Net Margin

EPS (Diluted)

$9.51

Total Assets

$36.24B

Cash & Equivalents

$358.00M

Free Cash Flow

$1.77B

Financial Statements
Beta
Revenue$11.46B
Operating Expenses$7.50B
Operating Income$3.96B
Interest Expense$557.00M
Net Income$2.67B
EPS (Basic)$9.58
EPS (Diluted)$9.51
Shares Outstanding (Basic)277.70M
Shares Outstanding (Diluted)280.20M

Key Highlights

  • 1Total railway operating revenues increased by 9% to $11.5 billion in 2018, driven by strong performance in intermodal and chemicals segments, along with overall pricing gains and fuel surcharges.
  • 2Net income significantly decreased by 51% to $2.67 billion in 2018 from $5.40 billion in 2017. This was primarily due to a large tax benefit recorded in 2017 related to tax reform, which inflated the prior year's net income.
  • 3The railway operating ratio improved to 65.4% in 2018 (or 68.1% on an adjusted non-GAAP basis), indicating increased operational efficiency compared to the prior year.
  • 4Capital expenditures for property additions were $1.95 billion in 2018, reflecting ongoing investment in maintaining and improving the railroad infrastructure.
  • 5The company repurchased approximately 17.1 million shares of common stock in 2018 for $2.8 billion, continuing its program to return capital to shareholders.
  • 6Merchandise revenues constituted the largest portion of total revenues at 59% in 2018, followed by Intermodal at 25% and Coal at 16%.
  • 7Significant investments are being made in Positive Train Control (PTC) systems, with full implementation required by December 31, 2020, which will result in additional operating costs and capital expenditures.

Frequently Asked Questions

The primary driver for the substantial decrease in net income from $5.40 billion in 2017 to $2.67 billion in 2018 was a one-time $3.331 billion tax benefit recorded in 2017 due to the enactment of the Tax Cuts and Jobs Act. When this extraordinary item is excluded, net income actually increased by 39% on an adjusted basis in 2018, reflecting improved operating performance.

Norfolk Southern is actively implementing Positive Train Control (PTC) systems as mandated by law. The company met the December 31, 2018 deadline for installing all necessary hardware and implementing PTC on some rail lines. Full implementation across all required lines is scheduled by December 31, 2020. The company acknowledges that full implementation will incur additional operating costs and capital expenditures and may impact operational efficiency.

In 2018, Norfolk Southern's railway operating revenues were primarily generated from three commodity groups: Merchandise, which accounted for 59% of total revenues ($6.74 billion); Intermodal, representing 25% of revenues ($2.89 billion); and Coal, contributing 16% of revenues ($1.82 billion).

For 2019, Norfolk Southern expects capital spending to approximate 16% to 18% of revenues, indicating continued significant investment in its infrastructure and rolling stock to support operations and strategic initiatives.