Norfolk Southern reports first-quarter 2020 results, non-cash asset rationalization charge related to PSR implementation - Norfolk Southern (NYSE:NSC)

NORFOLK, Va., April 29, 2020 /PRNewswire/ -- Norfolk Southern Corporation NSC today reported first-quarter financial results of net income equal to $381 million, diluted earnings per share of $1.47, and an operating ratio of 78.4%. These results include a $385 million non-cash locomotive rationalization charge related to the ongoing disposition and marketing of excess locomotives not required for future operations due to the successful introduction of Precision Scheduled Railroading. Excluding the effects of the asset rationalization charge, adjusted first-quarter net income was $669 million, adjusted diluted earnings per share were $2.58, and the adjusted operating ratio improved by 230 basis points compared with first-quarter 2019 to 63.7%.

"During the first quarter, Norfolk Southern's determination to transform our operations once again produced all-time best service delivery levels accompanied by productivity improvements, despite volumes being impacted by weak energy prices and the onset of the COVID-19 pandemic," said James A. Squires, Norfolk Southern chairman, president and CEO. "While it is unclear how long economic activity will remain suppressed, we are dedicated to serving our customers and keeping our employees healthy and safe while navigating the downturn so that we can emerge strong and resilient for our shareholders. I am extremely proud of the commitment and strength the Norfolk Southern team has displayed by keeping our nation's freight moving during this challenging start to 2020 while also enhancing our financial position."

First-quarter summary

Railway operating revenues of $2.6 billion decreased 8% compared with first-quarter 2019, driven by an 11% decline in total volume.

Railway operating expenses were $2.1 billion, including a $385 million non-cash locomotive rationalization charge related to locomotives marketed for sale and/or disposed of as a result of productivity gains achieved through the successful introduction of Precision Scheduled Railroading.

Excluding the locomotive rationalization charge, adjusted operating expenses declined $202 million, or 11%, driven by lower compensation and benefits, fuel, purchased services, and materials.

Income from railway operations was $568 million and the operating ratio was 78.4%.

Adjusted income from railway operations of $953 million declined by 1%, while the adjusted operating ratio improved to 63.7% versus the first-quarter record of 66.0% set in 2019.

Guidance update

Second-quarter volumes have continued to decline across all of Norfolk Southern's commodity segments, down 30% quarter-to-date, setting up for a very soft revenue outlook. With uncertainty on both the cadence of reopening the U.S. economy and the slope of recovery, we withdraw the previously-issued outlook for flat full year revenue.

As a result of the current volume environment, we also withdraw core operating ratio guidance for 2020.

"While the COVID-19 pandemic will effect business volumes for the year, the PSR implementation that our team is executing upon will generate significant operating expense savings in 2020," said Chief Financial Officer Mark R. George. "In this challenging environment our team is doubling down on examination of our structural cost opportunities to ensure that we remain positioned to drive enhanced profitability for the long term."

About Norfolk Southern
Norfolk Southern Corporation 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 press release 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 a non-cash charge in the first quarter of 2020 related to the disposal of approximately 300 locomotives and the designation of an additional 400 locomotives as held for sale. The introduction of precision scheduled railroading in 2019 continues to provide significant benefits to the network operations and has resulted in excess capacity resulting in the sidelining of these locomotives.

The Company uses these non-GAAP financial measures internally and believes this information provides useful supplemental information to investors to facilitate making period-to-period comparisons by excluding the locomotive disposal charge. While the Company believes that these non-GAAP financial measures are useful in evaluating the Company's 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.

($ in millions except per share amounts)		First
			Quarter 2020

Railway operating expenses	$	2,057
Effect of locomotive charge		(385)
Adjusted railway operating expenses	$	1,672

Income from railway operations	$	568
Effect of locomotive charge			385
Adjusted income from railway operations	$	953

Operating ratio (%)		78.4
Effect of locomotive charge (%)			(14.7)
Adjusted operating ratio (%)		63.7

Net income	$	381
Effect of locomotive charge			288
Adjusted net income	$	669

Diluted earnings per share	$	1.47
Effect of locomotive charge			1.11
Adjusted diluted earnings per share	$	2.58

Norfolk Southern Corporation and Subsidiaries
Consolidated Statements of Income
(Unaudited)

	First Quarter
	2020		2019
	(in millions, except per share amounts)

Railway operating revenues
Merchandise	$	1,672	$	1,686
Intermodal	655		719
Coal	298		435
Total railway operating revenues	2,625		2,840

Railway operating expenses
Compensation and benefits	622		727
Purchased services and rents	403		424
Fuel	189		250
Depreciation	292		283
Materials and other	166		190
Loss on asset disposal	385		—
Total railway operating expenses	2,057		1,874

Income from railway operations	568		966

Other income – net	22		44
Interest expense on debt	154		149

Income before income taxes	436		861

Income taxes
Current	44		127
Deferred	11		57
Total income taxes	55		184

Net income	$	381	$	677

Earnings per share – diluted	$	1.47	$	2.51

Weighted average shares outstanding – diluted	258.7		269.4

See accompanying notes to consolidated financial statements

Norfolk Southern Corporation and Subsidiaries
Consolidated Balance Sheets
(Unaudited)

	March 31,		December 31,
	2020		2019
	($ in millions)
Assets
Current assets:
Cash and cash equivalents	$	608	$	580
Accounts receivable – net	889		920
Materials and supplies	265		244
Other current assets	240		337
Total current assets	2,002		2,081

Investments	3,470		3,428
Properties less accumulated depreciation of $11,794
and $11,982, respectively	31,179		31,614
Other assets	787		800

Total assets	$	37,438	$	37,923

Liabilities and stockholders' equity
Current liabilities:
Accounts payable	$	1,284	$	1,428
Income and other taxes	200		229
Other current liabilities	352		327
Current maturities of long-term debt	400		316
Total current liabilities	2,236		2,300

Long-term debt	11,807		11,880
Other liabilities	1,683		1,744
Deferred income taxes	6,828		6,815

Total liabilities	22,554		22,739

Stockholders' equity:
Common stock $1.00 per share par value, 1,350,000,000 shares
authorized; outstanding 256,179,130 and 257,904,956 shares,
respectively, net of treasury shares	258		259
Additional paid-in capital	2,205		2,209
Accumulated other comprehensive loss	(481)		(491)
Retained income	12,902		13,207

Total stockholders' equity	14,884		15,184

Total liabilities and stockholders' equity	$	37,438	$	37,923

See accompanying notes to consolidated financial statements

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

See accompanying notes to consolidated financial statements

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS:

1. 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 quarter of 2020, the Company recorded a charge related to the loss on the 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. Accordingly, a $385 million loss was recorded to adjust their carrying amount to their estimated fair value. The loss on asset disposal reduced "Earnings per share – diluted" by $1.11.

2. Stock Repurchase Program
We repurchased and retired 2.6 million and 2.9 million shares of common stock under our stock repurchase program during the first three months of 2020 and 2019, respectively, at a cost of $466 million and $500 million, respectively.

3. Restricted Cash
The "Cash, cash equivalents, and restricted cash" line item on the Consolidated Statement 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.

SOURCE Norfolk Southern Corporation

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