10-QPeriod: Q3 FY2018

NORFOLK SOUTHERN CORP Quarterly Report for Q3 Ended Sep 30, 2018

Filed October 24, 2018For Securities:NSC

Summary

Norfolk Southern Corporation (NSC) reported strong financial results for the third quarter and first nine months of 2018, showcasing a significant increase in net income and diluted earnings per share compared to the prior year. This growth was driven by robust revenue expansion across key segments like Merchandise and Intermodal, supported by higher average revenue per unit due to pricing gains and fuel surcharges. Despite increased operating expenses, particularly in fuel and purchased services, the company achieved a record low operating ratio of 65.4% for the third quarter, demonstrating improved operational efficiency. Financially, NSC's balance sheet shows an increase in total assets and total liabilities, with a notable rise in long-term debt to support business activities and share repurchases. The company actively engaged in share repurchases, demonstrating a commitment to returning capital to shareholders. While facing ongoing challenges such as managing operating costs and navigating regulatory environments, NSC's performance indicates a positive operational and financial trajectory, with management expressing confidence in sufficient liquidity to meet obligations.

Financial Highlights

46 data points
Beta

Revenue

$2.95B

Net Income

$702.00M

23.8% Net Margin

EPS (Diluted)

$2.52

Total Assets

$36.32B

Cash & Equivalents

$729.00M

Free Cash Flow

$568.00M

Financial Statements
Beta
Revenue$2.95B
Operating Expenses$1.93B
Operating Income$1.02B
Interest Expense$142.00M
Net Income$702.00M
EPS (Basic)$2.54
EPS (Diluted)$2.52
Shares Outstanding (Basic)275.50M
Shares Outstanding (Diluted)278.20M

Key Highlights

  • 1Net income increased by 39% to $702 million in Q3 2018 and by 37% to $1,964 million for the first nine months of 2018, compared to the same periods in 2017.
  • 2Diluted earnings per share (EPS) saw substantial growth, rising by 44% to $2.52 in Q3 2018 and by 41% to $6.95 for the first nine months of 2018.
  • 3Railway operating revenues grew by 10% in Q3 and 9% year-to-date, driven by strong performance in Merchandise and Intermodal segments, with total revenues reaching $2,947 million and $8,562 million, respectively.
  • 4The company achieved a record low operating ratio of 65.4% in Q3 2018, a 2% improvement over the prior year's period, indicating enhanced operational efficiency.
  • 5Railway operating expenses increased by 9% in Q3 and 6% year-to-date, primarily due to higher fuel prices and purchased services and rents, though compensation and benefits decreased.
  • 6Total debt increased significantly from $9,136 million at the end of 2017 to $10,635 million by September 30, 2018, with substantial debt issuances during the first nine months of 2018.
  • 7Share repurchases were robust, with $2.1 billion spent in the first nine months of 2018, a significant increase from $712 million in the same period of 2017.

Frequently Asked Questions

The substantial increase in net income and EPS was primarily driven by strong revenue growth across key segments, particularly Merchandise and Intermodal, which benefited from higher average revenue per unit due to pricing gains and fuel surcharges. Additionally, a lower effective income tax rate, resulting from the Tax Cuts and Jobs Act of 2017, also positively impacted net income.

Total railway operating expenses increased in both Q3 and the first nine months of 2018. The main drivers of this increase were higher fuel costs due to rising prices and increased consumption, as well as higher purchased services and rents, largely attributed to increased intermodal volume, additional transportation and engineering activities, and higher technology costs. Conversely, compensation and benefits expenses decreased, influenced by lower incentive and stock-based compensation, reduced employment levels, and lower health and welfare benefit rates.

Norfolk Southern's liquidity appears strong, with cash provided by operating activities increasing to $2.9 billion for the first nine months of 2018, up from $2.5 billion in the prior year. The company anticipates that cash on hand combined with operating cash flow will be sufficient to meet its ongoing obligations. The company also has a $750 million credit agreement and a $400 million accounts receivable securitization program available.

Key risks and regulatory considerations highlighted include potential increases in economic regulation by Congress or the STB, which could negatively impact pricing and operational efficiency. The company is also subject to extensive federal and state environmental laws, with inherent risks of environmental liability. Furthermore, the implementation of Positive Train Control (PTC) systems involves significant capital expenditures and potential operational impacts. Concerns regarding climate change and potential regulations on greenhouse gas emissions could also affect operating costs and markets served.