Item 7. 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, we operate the most extensive intermodal network in the East and are a principal carrier of coal, automobiles, and automotive parts.
The execution of the initiatives in our strategic plan allowed us to achieve records for income from railway operations and railway operating ratio (a measure of the amount of operating revenues consumed by operating expenses) for the year. We continued our focus on improving the efficiency of our operations and utilization of our assets, allowing us to reduce our operating expenses by 3% in the face of a 1% revenue decline.
SUMMARIZED RESULTS OF OPERATIONS
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2019
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2018
|
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2019
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2018
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2017
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|
vs. 2018
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vs. 2017
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|
($ in millions, except per share amounts)
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(% change)
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Income from railway operations
|
$
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3,989
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$
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3,959
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|
|
$
|
3,522
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|
|
1
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%
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|
12
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%
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Net income
|
$
|
2,722
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|
|
$
|
2,666
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$
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5,404
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2
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%
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(51
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%)
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Diluted earnings per share
|
$
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10.25
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$
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9.51
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$
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18.61
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8
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%
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(49
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%)
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Railway operating ratio (percent)
|
64.7
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65.4
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|
66.6
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(1
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%)
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(2
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%)
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Income from railway operations rose in 2019 as a 3% reduction in railway operating expenses more than offset the impact of a 1% decline in railway operating revenues. In addition to higher income from railway operations, net income and diluted earnings per share growth in 2019 also benefited from a lower effective tax rate. Our continuing share repurchase program contributed to diluted earnings per share growth that exceeded that of net income.
On December 22, 2017, the Tax Cuts and Jobs Act (“tax reform”) was signed into law. The following table adjusts our 2017 U.S. Generally Accepted Accounting Principles (GAAP) financial results to exclude the effects of tax reform, specifically, the effects of remeasurement of net deferred tax liabilities related to the reduction of the federal tax rate from 35% to 21% (the “2017 tax adjustments”). We use these non-GAAP financial measures internally and believe this information provides useful supplemental information to investors to facilitate making period-to-period comparisons by excluding the 2017 tax adjustments. 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.
Reconciliation of Non-GAAP Financial Measures
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Reported 2017 (GAAP)
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2017
tax adjustments
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Adjusted 2017
(non-GAAP)
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($ in millions, except per share amounts)
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Income from railway operations
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$
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3,522
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|
$
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(151)
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|
$
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3,371
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Net income
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$
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5,404
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|
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$
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(3,482)
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$
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1,922
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Diluted earnings per share
|
$
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18.61
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|
$
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(12.00)
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$
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6.61
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Railway operating ratio (percent)
|
66.6
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|
1.5
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|
68.1
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|
In the table below and the paragraph following, references to 2017 results and related comparisons use the adjusted, non-GAAP results from the reconciliation in the table above.
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2018 vs.
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|
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Adjusted
|
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Adjusted
|
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2017
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|
2019
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|
2017
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|
|
2019
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|
2018
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|
(non-GAAP)
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|
vs. 2018
|
|
(non-GAAP)
|
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|
($ in millions, except per share amounts)
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|
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(% change)
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|
Income from railway operations
|
$
|
3,989
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|
|
$
|
3,959
|
|
|
$
|
3,371
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|
|
1
|
%
|
|
17
|
%
|
|
Net income
|
$
|
2,722
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|
|
$
|
2,666
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|
|
$
|
1,922
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|
|
2
|
%
|
|
39
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%
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|
Diluted earnings per share
|
$
|
10.25
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|
|
$
|
9.51
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|
|
$
|
6.61
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|
|
8
|
%
|
|
44
|
%
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|
Railway operating ratio (percent)
|
64.7
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|
|
65.4
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|
|
68.1
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|
|
(1
|
%)
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|
(4
|
%)
|
|
Income from railway operations increased in 2018 as compared to 2017, as a 9% increase in railway operating revenues more than offset a 4% increase in adjusted operating expenses. In addition to higher income from railway operations, net income and diluted earnings per share growth in 2018 also benefited from a lower effective tax rate, primarily due to the enactment of tax reform. Finally, our share repurchase program resulted in diluted earnings per share growth that exceeded that of net income.
DETAILED RESULTS OF OPERATIONS
Railway Operating Revenues
The following tables present a three-year comparison of revenues, volumes (units), and average revenue per unit by major commodity group. At the beginning of 2019, we made changes in the categorization of certain commodity groups within Merchandise. Prior period railway operating revenues, units, and revenue per unit have been reclassified to conform to the current presentation (see Note 2).
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Revenues
|
|
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|
2019
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|
2018
|
|
|
2019
|
|
2018
|
|
2017
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|
vs. 2018
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|
vs. 2017
|
|
|
($ in millions)
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|
|
|
|
|
(% change)
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|
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Merchandise:
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Chemicals
|
$
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1,874
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|
|
$
|
1,858
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|
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$
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1,710
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|
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1
|
%
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|
9
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%
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Agriculture products
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1,567
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|
|
1,514
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|
|
1,416
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4
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%
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|
7
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%
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Metals and construction
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1,522
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|
|
1,539
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|
1,481
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(1
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%)
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4
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%
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Automotive
|
994
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|
|
991
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|
|
955
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|
|
—
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%
|
|
4
|
%
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Forest and consumer
|
846
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|
|
842
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|
|
795
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|
|
—
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%
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|
6
|
%
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|
Merchandise
|
6,803
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|
|
6,744
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|
|
6,357
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|
|
1
|
%
|
|
6
|
%
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|
Intermodal
|
2,824
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|
|
2,893
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|
|
2,452
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|
|
(2
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%)
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|
18
|
%
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|
Coal
|
1,669
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|
|
1,821
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|
|
1,742
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|
(8
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%)
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|
5
|
%
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|
Total
|
$
|
11,296
|
|
|
$
|
11,458
|
|
|
$
|
10,551
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|
|
(1
|
%)
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|
9
|
%
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|
|
|
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|
|
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|
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|
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|
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|
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|
|
|
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|
|
Units
|
|
|
|
|
|
2019
|
|
2018
|
|
|
2019
|
|
2018
|
|
2017
|
|
vs. 2018
|
|
vs. 2017
|
|
|
(in thousands)
|
|
|
|
|
|
(% change)
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|
|
|
Merchandise:
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|
|
|
|
|
|
|
|
|
|
Chemicals
|
514.9
|
|
|
523.3
|
|
|
488.6
|
|
|
(2
|
%)
|
|
7
|
%
|
|
Agriculture products
|
528.5
|
|
|
538.9
|
|
|
524.8
|
|
|
(2
|
%)
|
|
3
|
%
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|
Metals and construction
|
721.3
|
|
|
759.7
|
|
|
761.2
|
|
|
(5
|
%)
|
|
—
|
%
|
|
Automotive
|
394.7
|
|
|
403.9
|
|
|
423.1
|
|
|
(2
|
%)
|
|
(5
|
%)
|
|
Forest and consumer
|
273.0
|
|
|
293.3
|
|
|
293.7
|
|
|
(7
|
%)
|
|
—
|
%
|
|
Merchandise
|
2,432.4
|
|
|
2,519.1
|
|
|
2,491.4
|
|
|
(3
|
%)
|
|
1
|
%
|
|
Intermodal
|
4,207.2
|
|
|
4,375.7
|
|
|
4,074.1
|
|
|
(4
|
%)
|
|
7
|
%
|
|
Coal
|
914.0
|
|
|
1,033.5
|
|
|
1,046.0
|
|
|
(12
|
%)
|
|
(1
|
%)
|
|
Total
|
7,553.6
|
|
|
7,928.3
|
|
|
7,611.5
|
|
|
(5
|
%)
|
|
4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
Revenue per Unit
|
|
|
|
|
|
2019
|
|
2018
|
|
|
2019
|
|
2018
|
|
2017
|
|
vs. 2018
|
|
vs. 2017
|
|
|
($ per unit)
|
|
|
|
|
|
(% change)
|
|
|
|
Merchandise:
|
|
|
|
|
|
|
|
|
|
|
Chemicals
|
$
|
3,640
|
|
|
$
|
3,551
|
|
|
$
|
3,501
|
|
|
3
|
%
|
|
1
|
%
|
|
Agriculture products
|
2,964
|
|
|
2,809
|
|
|
2,697
|
|
|
6
|
%
|
|
4
|
%
|
|
Metals and construction
|
2,110
|
|
|
2,026
|
|
|
1,946
|
|
|
4
|
%
|
|
4
|
%
|
|
Automotive
|
2,517
|
|
|
2,453
|
|
|
2,257
|
|
|
3
|
%
|
|
9
|
%
|
|
Forest and consumer
|
3,101
|
|
|
2,870
|
|
|
2,706
|
|
|
8
|
%
|
|
6
|
%
|
|
Merchandise
|
2,797
|
|
|
2,677
|
|
|
2,552
|
|
|
4
|
%
|
|
5
|
%
|
|
Intermodal
|
671
|
|
|
661
|
|
|
602
|
|
|
2
|
%
|
|
10
|
%
|
|
Coal
|
1,826
|
|
|
1,762
|
|
|
1,665
|
|
|
4
|
%
|
|
6
|
%
|
|
Total
|
1,495
|
|
|
1,445
|
|
|
1,386
|
|
|
3
|
%
|
|
4
|
%
|
|
Revenues decreased $162 million in 2019 but increased $907 million in 2018 compared to the prior years. As reflected in the table below, lower 2019 revenues were the result of decreased volumes, partially offset by higher average revenue per unit, driven by pricing gains. The rise in 2018 revenues was the result of higher average revenue per unit, driven by pricing gains and higher fuel surcharge revenue, partially offset by the mix-related impacts of increased intermodal volume and decreased coal volume. In addition, overall volume also increased.
The table below reflects the components of the revenue change by major commodity group.
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|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019 vs. 2018
|
|
|
|
|
|
2018 vs. 2017
|
|
|
|
|
|
Increase (Decrease)
|
|
|
|
|
|
Increase (Decrease)
|
|
|
|
|
|
($ in millions)
|
|
|
|
|
|
|
|
|
|
|
|
Merchandise
|
|
Intermodal
|
|
Coal
|
|
Merchandise
|
|
Intermodal
|
|
Coal
|
|
|
|
|
|
|
|
|
|
|
|
|
Volume
|
$
|
(232)
|
|
|
$
|
(111)
|
|
|
$
|
(210)
|
|
|
$
|
71
|
|
|
$
|
182
|
|
|
$
|
(21)
|
|
Fuel surcharge
|
|
|
|
|
|
|
|
|
|
|
|
revenue
|
(14)
|
|
|
(30)
|
|
|
(35)
|
|
|
119
|
|
|
159
|
|
|
20
|
|
Rate, mix and
|
|
|
|
|
|
|
|
|
|
|
|
other
|
305
|
|
|
72
|
|
|
93
|
|
|
197
|
|
|
100
|
|
|
80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
$
|
59
|
|
|
$
|
(69)
|
|
|
$
|
(152)
|
|
|
$
|
387
|
|
|
$
|
441
|
|
|
$
|
79
|
|
Approximately 90% of our revenue base is covered by contracts that include negotiated fuel surcharges. These revenues totaled $578 million, $657 million, and $359 million in 2019, 2018, and 2017, respectively.
For 2020, merchandise and intermodal revenues are expected to increase, while coal revenues are anticipated to decline, resulting in overall revenues that are expected to be flat.
MERCHANDISE revenues increased in both 2019 and 2018 compared with the prior years. In 2019, revenues grew due to higher average revenue per unit, driven by pricing gains, which were partially offset by volume declines in all commodity groups. In 2018, revenues grew due to higher average revenue per unit, driven by pricing gains and higher fuel surcharge revenue, as well as higher volumes. Volume gains in chemicals and agriculture products were partially offset by declines in automotive traffic.
Chemicals revenues rose in both 2019 and 2018 compared with the prior years. In 2019, the rise was the result of higher average revenue per unit, due to pricing gains, which were partially offset by volume declines. Volume declines in natural gas, petroleum products, organic and inorganic chemicals, and plastics were partially offset by gains in crude oil and municipal waste. In 2018, the rise was the result of higher volume and higher average revenue per unit, due to pricing gains and higher fuel surcharge revenue. Volumes grew due to increased shipments of crude oil, liquefied petroleum gas, plastics, and municipal waste shipments, partially offset by a decrease in coal ash shipments.
Agriculture products revenues rose in both 2019 and 2018 compared to the prior years. Growth in 2019 was due to higher average revenue per unit, a result of pricing gains, which more than offset volume declines. Volumes were down due to decreased shipments of ethanol, soybeans, and fertilizer, partially offset by increases in corn shipments. Growth in 2018 was due to higher average revenue per unit, a result of pricing gains and higher fuel surcharge revenues, and higher volume. Higher ethanol and fertilizer shipments more than offset declines in soybean and corn shipments.
Metals and construction revenues declined in 2019 but increased in 2018 compared to the prior years. In 2019, volume declines were largely offset by higher average revenue per unit, the result of pricing gains. Volume declines in iron and steel, coil, sand, and scrap metal were partially offset by increases in aggregates shipments due to improved service and market strength. In 2018, higher average revenue per unit, the result of pricing gains and
higher fuel surcharge revenue, drove the increase while volumes remained flat. Volume increases in frac sand shipments for use in natural gas drilling in the Marcellus and Utica regions were offset by declines in aggregates, cement, aluminum, and iron and steel.
Automotive revenues were flat in 2019 and increased in 2018 compared to the prior years. In 2019, higher average revenue per unit, driven by price increases, offset volume declines that were primarily the result of decreases in U.S. light vehicle production and the United Automobile Workers strike in the fourth quarter. In 2018, higher average revenue per unit, driven by price increases and higher fuel surcharge revenues, more than offset volume declines. Traffic declines were the result of shortages of availability of multilevel equipment and scheduled automotive plant downtime.
Forest and consumer revenues were flat in 2019 and increased in 2018 compared to the prior years. In 2019, higher average revenue per unit, the result of pricing gains, offset volume declines. Volume declines were primarily driven by reduced shipments of pulpboard, lumber and wood, and kaolin. In 2018, higher average revenue per unit, the result of pricing gains and higher fuel surcharge revenue drove the increase while volumes remained flat. Gains in pulpboard, a result of tightened truck capacity, were offset by decreases in pulp, woodchip, and graphic paper.
INTERMODAL revenues decreased in 2019, but increased considerably in 2018 compared to the prior years. The decline in 2019 was driven by lower volumes, which were partially offset by higher average revenue per unit, a result of pricing gains. The rise in 2018 was driven by higher average revenue per unit, a result of increased fuel surcharge revenue and pricing gains, and higher volume.
Intermodal units by market were as follows:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
|
2019
|
|
2018
|
|
2017
|
|
vs. 2018
|
|
vs. 2017
|
|
|
(units in thousands)
|
|
|
|
|
|
(% change)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
2,593.5
|
|
|
2,801.1
|
|
|
2,585.0
|
|
|
(7
|
%)
|
|
8
|
%
|
|
International
|
1,613.7
|
|
|
1,574.6
|
|
|
1,489.1
|
|
|
2
|
%
|
|
6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
4,207.2
|
|
|
4,375.7
|
|
|
4,074.1
|
|
|
(4
|
%)
|
|
7
|
%
|
|
Domestic volume fell in 2019 but increased in 2018. Volume was challenged in 2019 by stronger over-the-road competition. The rise in 2018 benefited from continued highway conversions due to tighter capacity in the truck market, higher truckload pricing, and growth from existing accounts.
International volume increased in both periods reflecting increased demand from new and existing customers, despite 2019 volume being somewhat tempered by tariff concerns.
COAL revenues decreased in 2019, but increased in 2018 compared with the prior years. The decrease in 2019 was a result of lower volume, which was partially offset by higher average revenue per unit, driven by pricing gains. Revenue growth in 2018 was the result of higher average revenue per unit, largely the result of pricing gains, which more than offset volume declines.
As shown in the following table, total tonnage decreased in both periods.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
|
2019
|
|
2018
|
|
2017
|
|
vs. 2018
|
|
vs. 2017
|
|
|
(tons in thousands)
|
|
|
|
|
|
(% change)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Utility
|
60,278
|
|
|
65,688
|
|
|
67,899
|
|
|
(8
|
%)
|
|
(3
|
%)
|
|
Export
|
23,324
|
|
|
28,046
|
|
|
26,460
|
|
|
(17
|
%)
|
|
6
|
%
|
|
Domestic metallurgical
|
13,562
|
|
|
15,500
|
|
|
15,675
|
|
|
(13
|
%)
|
|
(1
|
%)
|
|
Industrial
|
4,655
|
|
|
5,410
|
|
|
5,545
|
|
|
(14
|
%)
|
|
(2
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
101,819
|
|
|
114,644
|
|
|
115,579
|
|
|
(11
|
%)
|
|
(1
|
%)
|
|
Utility coal tonnage declined in both periods from continued headwinds from low natural gas prices as well as additional natural gas and renewable energy generating capacity, that were slightly offset by our service improvements and customer inventory rebuilding.
Export coal tonnage decreased in 2019 but increased in 2018. The decline in 2019 was a result of weak thermal seaborne pricing and coal supply disruptions at certain mines. The increase in 2018 was due to strong seaborne pricing that resulted in higher demand for U.S. coal.
Domestic metallurgical coal tonnage was down in both years. The decline in 2019 was a reflection of challenging overall market conditions including softening domestic steel demand, customer sourcing changes, and plant outages. The decline in 2018 was a reflection of customer sourcing changes.
Industrial coal tonnage decreased in both years driven by customer sourcing changes and pressure from natural gas conversions.
Railway Operating Expenses
Railway operating expenses summarized by major classifications were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
|
2019
|
|
2018
|
|
2017
|
|
vs. 2018
|
|
vs. 2017
|
|
|
($ in millions)
|
|
|
|
|
|
(% change)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
$
|
2,751
|
|
|
$
|
2,925
|
|
|
$
|
2,979
|
|
|
(6
|
%)
|
|
(2
|
%)
|
|
Purchased services and rents
|
1,725
|
|
|
1,730
|
|
|
1,414
|
|
|
—
|
%
|
|
22
|
%
|
|
Fuel
|
953
|
|
|
1,087
|
|
|
840
|
|
|
(12
|
%)
|
|
29
|
%
|
|
Depreciation
|
1,138
|
|
|
1,102
|
|
|
1,055
|
|
|
3
|
%
|
|
4
|
%
|
|
Materials and other
|
740
|
|
|
655
|
|
|
741
|
|
|
13
|
%
|
|
(12
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
$
|
7,307
|
|
|
$
|
7,499
|
|
|
$
|
7,029
|
|
|
(3
|
%)
|
|
7
|
%
|
|
In 2019, expenses fell as our strategic initiatives to improve productivity resulted in lower compensation, equipment rents, and materials expense. These decreases along with lower fuel prices and consumption were partially offset by lower gains on property sales, increased depreciation, and a write-off of a $32 million receivable as a result of a legal dispute. In 2018, expenses rose due to higher fuel prices as well as volume-related increases and costs associated with overall lower network velocity, partially offset by higher gains on property sales.
Compensation and benefits decreased in 2019, reflecting changes in:
•employment levels (down $117 million),
•incentive and stock-based compensation (down $83 million),
•overtime and recrews (down $45 million),
•higher capitalized labor ($9 million),
•2018 employment tax refund ($31 million unfavorable in 2019),
•pay rates (up $76 million), and
•other (down $27 million).
In 2018, compensation and benefits decreased, a result of changes in:
•employment levels (down $61 million),
•health and welfare benefit rates for agreement employees (down $34 million),
•employment tax refund ($31 million benefit),
•incentive and stock-based compensation (down $7 million),
•pay rates (up $34 million),
•overtime and recrews (up $58 million), and
•other (down $13 million).
Our employment averaged 24,587 in 2019, compared with 26,662 in 2018, and 27,110 in 2017.
Purchased services and rents includes the costs of services purchased from outside contractors, including the net costs of operating joint (or leased) facilities with other railroads and the net cost of equipment rentals. In 2017, this line item includes a $151 million benefit from the 2017 tax adjustments ($36 million in purchased services and $115 million in equipment rents) in the form of higher income of certain equity investees.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
|
2019
|
|
2018
|
|
2017
|
|
vs. 2018
|
|
vs. 2017
|
|
|
($ in millions)
|
|
|
|
|
|
(% change)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchased services
|
$
|
1,434
|
|
|
$
|
1,367
|
|
|
$
|
1,233
|
|
|
5
|
%
|
|
11
|
%
|
|
Equipment rents
|
291
|
|
|
363
|
|
|
181
|
|
|
(20
|
%)
|
|
101
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
$
|
1,725
|
|
|
$
|
1,730
|
|
|
$
|
1,414
|
|
|
—
|
%
|
|
22
|
%
|
|
The increase in purchased services in 2019 was the result of increased technology-related expenses, expenses associated with our headquarters relocation, and increased intermodal-related costs partially offset by decreased transportation activities. The increase in purchased services in 2018 was largely the result of the absence of the benefit from the 2017 tax adjustments, higher intermodal volume-related costs, additional transportation and engineering activities as well as higher technology costs.
Equipment rents, which includes our cost of using equipment (mostly freight cars) owned by other railroads or private owners less the rent paid to us for the use of our equipment, decreased in 2019, but increased in 2018. In 2019, the decrease was largely due to improved network velocity and the absence of short-term locomotive resource costs incurred in the prior year. In 2018, the rise was due to the absence of the benefits from the 2017 tax adjustments, the impact of slower network velocity, the cost of additional short-term locomotive resources as well as growth in volume.
Fuel expense, which includes the cost of locomotive fuel as well as other fuel used in railway operations, decreased in 2019, but increased in 2018. The change in both years was principally due to locomotive fuel prices (down 8% in 2019 and up 25% in 2018) which decreased expenses $82 million in 2019 but increased expenses $208 million in 2018. Locomotive fuel consumption decreased 4% in 2019, but increased 3% in 2018. We consumed
approximately 451 million gallons of diesel fuel in 2019, compared with 472 million gallons in 2018 and 458 million gallons in 2017.
Depreciation expense increased in both periods, a reflection of growth in our roadway and equipment capital base as we continue to invest in our infrastructure and rolling stock, and technology.
Materials and other expenses increased in 2019 but decreased in 2018 as shown in the following table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
|
2019
|
|
2018
|
|
2017
|
|
vs. 2018
|
|
vs. 2017
|
|
|
($ in millions)
|
|
|
|
|
|
(% change)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Materials
|
$
|
327
|
|
|
$
|
362
|
|
|
$
|
348
|
|
|
(10
|
%)
|
|
4
|
%
|
|
Casualties and other claims
|
193
|
|
|
176
|
|
|
145
|
|
|
10
|
%
|
|
21
|
%
|
|
Other
|
220
|
|
|
117
|
|
|
248
|
|
|
88
|
%
|
|
(53
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
$
|
740
|
|
|
$
|
655
|
|
|
$
|
741
|
|
|
13
|
%
|
|
(12
|
%)
|
|
Materials expense decreased in 2019, due primarily to lower locomotive repair costs as a result of fewer locomotives in service. In 2018, the increase was primarily a result of higher locomotive repair costs.
Casualties and other claims expenses include the estimates of costs related to personal injury, property damage, and environmental matters. The 2019 expense increased, primarily the result of higher costs related to environmental remediation matters and higher personal injury costs. The 2018 expense increased, primarily the result of higher derailment-related costs.
Other expense increased in 2019 but decreased in 2018, largely a result of gains from sales of operating properties. Gains from operating property sales amounted to $64 million, $158 million, and $79 million in 2019, 2018, and 2017, respectively. In 2019, the increase was additionally impacted by the write-off of a $32 million receivable as a result of a legal dispute. In 2018, the decline was also impacted by the inclusion of net rental income from operating property previously included in “Other income – net” of $78 million, partially offset by increased costs as a result of the relocation of our train dispatchers to Atlanta, Georgia.
Other income – net
Other income – net increased in 2019 but decreased in 2018. The increase in 2019 was driven by higher returns on corporate-owned life insurance (COLI) investments and increased gains on sales of non-operating property, which more than offset a $49 million impairment loss related to our natural resource assets that we are actively marketing to sell. The decline in 2018 was driven by the absence of net rental income as discussed above and unfavorable returns from COLI investments.
Income Taxes
The effective income tax rate was 22.0% in 2019, compared with 23.1% in 2018 and negative 72.8% in 2017. Both 2019 and 2018 benefited from favorable reductions in deferred taxes for state tax law changes and certain business tax credits, while 2019 and 2017 benefited from higher returns from COLI. Income taxes in 2018 benefited from the effects of the enactment of tax reform in late 2017 that lowered the federal corporate income tax rate. Income taxes in 2017 included a benefit of $3,331 million related to the effects of the enactment of tax reform from the reduction in our net deferred tax liabilities driven by the change in the federal rate. All three years benefited from favorable tax benefits associated with stock-based compensation.
For 2020, we expect the effective income tax rate to range from 23% to 24%.
FINANCIAL CONDITION, LIQUIDITY, AND CAPITAL RESOURCES
Cash provided by operating activities, our principal source of liquidity, was $3.9 billion in 2019, $3.7 billion in 2018, and $3.3 billion in 2017. The increases in both 2019 and 2018 were primarily the result of improved operating results. We had working capital deficits of $219 million and $729 million at December 31, 2019, and 2018, respectively. Cash, cash equivalents, and restricted cash totaled $580 million and $446 million at December 31, 2019, and 2018, respectively. We expect cash on hand combined with cash provided by operating activities will be sufficient to meet our ongoing obligations.
Contractual obligations at December 31, 2019, include interest on fixed-rate long-term debt, long-term debt (Note 9), unconditional purchase obligations (Note 17), operating leases (Note 10), long-term advances from Conrail and agreements with Consolidated Rail Corporation (CRC) (Note 6), and unrecognized tax benefits (Note 4):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
2020
|
|
2021 -
2022
|
|
2023 -
2024
|
|
2025 and
Subsequent
|
|
Other
|
|
($ in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest on fixed-rate long-term debt
|
$
|
15,285
|
|
|
$
|
568
|
|
|
$
|
1,070
|
|
|
$
|
988
|
|
|
$
|
12,659
|
|
|
$
|
—
|
|
Long-term debt principal
|
13,005
|
|
|
316
|
|
|
1,189
|
|
|
1,000
|
|
|
10,500
|
|
|
—
|
|
Unconditional purchase obligations
|
1,225
|
|
|
499
|
|
|
521
|
|
|
82
|
|
|
123
|
|
|
—
|
|
Operating leases
|
630
|
|
|
110
|
|
|
183
|
|
|
131
|
|
|
206
|
|
|
—
|
|
Long-term advances from Conrail
|
280
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
280
|
|
|
—
|
|
Agreements with CRC
|
176
|
|
|
40
|
|
|
80
|
|
|
56
|
|
|
—
|
|
|
—
|
|
Unrecognized tax benefits*
|
24
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
$
|
30,625
|
|
|
$
|
1,533
|
|
|
$
|
3,043
|
|
|
$
|
2,257
|
|
|
$
|
23,768
|
|
|
$
|
24
|
|
* This amount is shown in the Other column because the year of settlement cannot be reasonably estimated.
Off balance sheet arrangements consist primarily of unrecognized obligations, including unconditional purchase obligations and future interest payments on fixed-rate long-term debt, which are included in the table above. In addition, we entered into a synthetic lease during 2019 which is discussed further in Note 10.
Cash used in investing activities was $1.8 billion in 2019, compared with $1.7 billion in 2018, and $1.5 billion in 2017. In 2019, increased corporate owned life insurance activity and higher property additions were partially offset by increased proceeds from property sales. In 2018, higher property additions drove the increase.
Capital spending and track and equipment statistics can be found within the “Railway Property” section of Part I of this report on Form 10-K. For 2020, we expect capital spending to approximate 16% to 18% of revenues.
Cash used in financing activities was $2.0 billion in 2019, compared with $2.3 billion in 2018, and $2.0 billion in 2017. Both year-over-year comparisons reflect higher debt repayments and increased dividends. In 2019, the decrease was also impacted by fewer repurchases of common stock. In 2018, the increase was also impacted by increased repurchases of common stock, but tempered by increased proceeds from borrowings.
Share repurchases totaled $2.1 billion in 2019, $2.8 billion in 2018, and $1.0 billion in 2017 for the purchase and retirement of 11.3 million, 17.1 million (including 7.0 million shares repurchased for $1.2 billion under the Accelerated Share Repurchase (ASR) program), and 8.2 million shares, respectively. As of December 31, 2019, 28.0 million shares remain authorized by our Board of Directors for repurchase. The timing and volume of future
share repurchases will be guided by our assessment of market conditions 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.
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. In November 2019, we issued $400 million of 2.55% senior notes due 2029, and $400 million of 3.40% senior notes due 2049.
In May 2019, we also renewed and amended our accounts receivable securitization program, increasing our maximum borrowing capacity from $400 million to $450 million with a term expiring in May 2020. We had no amounts outstanding at both December 31, 2019 and 2018.
We discuss our credit agreement and our accounts receivable securitization program in Note 9, and we have authority from our Board of Directors to issue an additional $1.6 billion of debt or equity securities through public or private sale, all of which provide for access to additional liquidity should the need arise. Our debt-to-total capitalization ratio was 44.5% at December 31, 2019, compared with 42.0% at December 31, 2018.
Upcoming annual debt maturities are disclosed in Note 9. Overall, our goal is to maintain a capital structure with appropriate leverage to support our business strategy and provide flexibility through business cycles.
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. The following critical accounting policies are a subset of our significant accounting policies described in Note 1.
Pensions and Other Postretirement Benefits
Accounting for pensions and other postretirement benefit plans requires us to make several estimates and assumptions (Note 12). These include the expected rate of return from investment of the plans’ assets and the expected retirement age of employees as well as their projected earnings and mortality. In addition, the amounts recorded are affected by changes in the interest rate environment because the associated liabilities are discounted to their present value. We make these estimates based on our historical experience and other information that we deem pertinent under the circumstances (for example, expectations of future stock market performance). We utilize an independent actuarial consulting firm’s studies to assist us in selecting appropriate actuarial assumptions and valuing related liabilities.
In recording our net pension benefit, we assumed a long-term investment rate of return of 8.25%, which was supported by the long-term total rate of return on plan assets since inception, as well as our expectation of future returns. A one-percentage point change to this rate of return assumption would result in a $23 million change in pension expense. We review assumptions related to our defined benefit plans annually, and while changes are likely to occur in assumptions concerning retirement age, projected earnings, and mortality, they are not expected to have a material effect on our net pension expense or net pension liability in the future. The net pension liability is recorded at net present value using discount rates that are based on the current interest rate environment in light of the timing of expected benefit payments. We utilize analyses in which the projected annual cash flows from the pension and postretirement benefit plans are matched with yield curves based on an appropriate universe of high-quality corporate bonds. We use the results of the yield curve analyses to select the discount rates that match the payment streams of the benefits in these plans. A one-percentage point change to this discount rate assumption would result in about an $18 million change in pension expense.
Properties and Depreciation
Most of our assets are long-lived railway properties (Note 7). “Properties” are stated principally at cost and are depreciated using the group method whereby assets with similar characteristics, use, and expected lives are grouped together in asset classes and depreciated using a composite depreciation rate. See Note 1 for a more detailed discussion of the assumptions and estimates in this area.
Expenditures, including those on leased assets, that extend an asset’s useful life or increase its utility are capitalized. Expenditures capitalized include those that are directly related to a capital project and may include materials, labor, and other direct costs, in addition to an allocable portion of indirect costs that relate to a capital project. A significant portion of our annual capital spending relates to the replacement of self-contructed assets. Costs related to repairs and maintenance activities that, in our judgment, do not extend an asset’s useful life or increase its utility are expensed when such repairs are performed.
Depreciation expense for 2019 totaled $1.1 billion. Our composite depreciation rates for 2019 are disclosed in
Note 7; a one year increase (or decrease) in the estimated average useful lives of depreciable assets would have resulted in an approximate $40 million decrease (or increase) to depreciation expense.
Personal Injury
Casualties and other claims expense, included in “Materials and other” in the Consolidated Statements of Income, includes our accrual for personal injury liabilities.
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. The actuarial firm studies our historical patterns of reserving for claims and subsequent settlements, taking into account relevant outside influences. We adjust the liability quarterly based upon our assessment and the results of the study. Our estimate is subject to inherent limitation given the difficulty of predicting future events and as such the ultimate loss sustained may vary from the estimated liability recorded.
For a more detailed discussion of the assumptions and estimates in accounting for personal injury see Note 17.
Income Taxes
Our net deferred tax liability totaled $6.8 billion at December 31, 2019 (Note 4). This liability is estimated based on the expected future tax consequences of items recognized in the financial statements. After application of the federal statutory tax rate to book income, judgment is required with respect to the timing and deductibility of expenses in our income tax returns. For state income and other taxes, judgment is also required with respect to the apportionment among the various jurisdictions. A valuation allowance is recorded if we expect that it is more likely than not that deferred tax assets will not be realized. We have a $54 million valuation allowance on $513 million of deferred tax assets as of December 31, 2019, reflecting the expectation that almost all of these assets will be realized.
OTHER MATTERS
Labor Agreements
Approximately 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 next 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.
Market Risks
At December 31, 2019, we had no outstanding debt subject to interest rate fluctuations. Market risk for fixed-rate debt is estimated as the potential increase in fair value resulting from a one percentage point decrease in interest rates as of December 31, 2019, and amounts to an increase of approximately $2.1 billion to the fair value of our debt at December 31, 2019. We consider it unlikely that interest rate fluctuations applicable to these instruments will result in a material adverse effect on our financial position, results of operations, or liquidity.
New Accounting Pronouncements
For a detailed discussion of new accounting pronouncements, see Note 1.
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, we 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 those discussed in Item 1A “Risk Factors,” 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 7A. Quantitative and Qualitative Disclosures About Market Risk
The information required by this item is included in Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under the heading “Market Risks.”
Properties
“Properties” are stated principally at cost and are depreciated using the group method whereby assets with similar characteristics, use, and expected lives are grouped together in asset classes and depreciated using a composite depreciation rate. This methodology treats each asset class as a pool of resources, not as singular items. We use approximately 75 depreciable asset classes. “Depreciation” in the Consolidated Statements of Cash Flows includes both depreciation and depletion on operating and nonoperating properties.
Depreciation expense is based on our assumptions concerning expected service lives of our properties as well as the expected net salvage that will be received upon their retirement. In developing these assumptions, we utilize periodic depreciation studies that are performed by an independent outside firm of consulting engineers and approved by the STB. Our depreciation studies are conducted about every three years for equipment and every six years for track assets and other roadway property. The frequency of these studies is consistent with guidelines established by the STB. We adjust our rates based on the results of these studies and implement the changes prospectively. The studies may also indicate that the recorded amount of accumulated depreciation is deficient (or in excess) of the amount indicated by the study. Any such deficiency (or excess) is amortized as a component of depreciation expense over the remaining service lives of the affected class of property, as determined by the study.
Key factors that are considered in developing average service life and salvage estimates include:
•statistical analysis of historical retirement data and surviving asset records;
•review of historical salvage received and current market rates;
•review of our operations including expected changes in technology, customer demand, maintenance practices and asset management strategies;
•review of accounting policies and assumptions; and
•industry review and analysis.
The composite depreciation rate for rail in high density corridors is derived based on consideration of annual gross tons as compared to the total or ultimate capacity of rail in these corridors. Our experience has shown that traffic density is a leading factor in the determination of the expected service life of rail in high density corridors. In developing the respective depreciation rate, consideration is also given to several rail characteristics including age, weight, condition (new or second-hand) and type (curved or straight).
We capitalize interest on major projects during the period of their construction. Expenditures, including those on leased assets, that extend an asset’s useful life or increase its utility are capitalized. Expenditures capitalized include those that are directly related to a capital project and may include materials, labor, and other direct costs, in addition to an allocable portion of indirect costs that relate to a capital project. A significant portion of our annual capital spending relates to the replacement of self-constructed assets. Removal activities occur in conjunction with replacement and are estimated based on the average percentage of time employees replacing assets spend on removal functions. Costs related to repairs and maintenance activities that, in our judgment, do not extend an asset’s useful life or increase its utility are expensed when such repairs are performed.
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. Actual historical cost values are retired when available, such as with most equipment assets. The use of estimates in recording the retirement of certain roadway assets is necessary based on the impracticality of tracking individual asset costs. When retiring rail, ties and ballast, we use statistical curves that indicate the relative distribution of the age of the assets retired. The historical cost of other roadway assets is estimated using a combination of inflation indices specific to the rail industry and those published by the U.S. Bureau of Labor Statistics. The indices are applied to the replacement value based on the age of the retired assets. These indices are used because they closely correlate with the costs of roadway assets. Gains and losses on disposal of operating land are included in “Materials and other” expenses. Gains and losses on disposal of nonoperating land and nonrail assets are included in “Other income – net” since such income is not a product of our railroad operations.
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. Gains or losses from abnormal retirements would be recognized in income from railway operations.
We review the carrying amount of properties whenever events or changes in circumstances indicate that such carrying amount may not be recoverable based on future undiscounted cash flows. Assets that are deemed impaired as a result of such review are recorded at the lower of carrying amount or fair value.
New Accounting Pronouncements
The FASB issued ASU 2014-09, “Revenue from Contracts with Customers,” and related amendments, which are jointly referred to as Accounting Standards Codification (ASC) Topic 606. This standard replaced most existing revenue recognition guidance in GAAP and requires entities to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. A performance obligation is defined as a promise in a contract to transfer a distinct good or service to the customer. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. We adopted the provisions of this standard on January 1, 2018, using the modified retrospective method. There was no cumulative effect of initially applying the standard, nor was there any material difference in revenue for the year ended December 31, 2018, as compared with GAAP that was in effect prior to January 1, 2018. See Note 2 for additional information.
In March 2017, the FASB issued ASU 2017-07, “Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.” This update requires segregation of net benefit costs between operating and nonoperating expenses and requires retrospective application. We adopted the standard on January 1, 2018. Under the new standard, only 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, whereas under the previous standard all components were included in “Compensation and benefits.” The retrospective application resulted in an increase to “Compensation and benefits” expense and an offsetting increase to “Other income – net” on the Consolidated Statements of Income of $64 million for the year ended December 31, 2017, with no impact on “Net income.”
In February 2018, the FASB issued ASU 2018-02, “Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.” This update is intended to reclassify the stranded tax effects resulting from tax reform from accumulated other comprehensive income (AOCI) to retained earnings. The amount of the reclassification is the difference between the amount initially charged or credited directly to other comprehensive income at the previously enacted U.S. federal corporate income tax rate that remains in AOCI and the amount that would have been charged or credited directly to other comprehensive income using the newly enacted U.S. federal corporate income tax rate. In the first quarter of 2018, we adopted the provisions of ASU 2018-02 resulting in an increase to
“Accumulated other comprehensive loss” of $88 million and a corresponding increase to “Retained income,” with no impact on “Total stockholders’ equity.”
In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842),” and subsequent amendments, which replaced existing lease guidance in GAAP. We adopted the standard on January 1, 2019 using the modified retrospective method and used the effective date as our date of initial application. See Note 10 for additional information.
In June 2016, the FASB issued ASU 2016-13, “Credit Losses - Measurement of Credit Losses on Financial Instruments,” which replaces the current incurred loss impairment method with a method that reflects expected credit losses. We adopted the standard on January 1, 2020. Because credit losses associated from our trade receivables have historically been insignificant, we do not expect this standard to have a material effect on our financial statements.
In December 2019, the FASB issued ASU 2019-12, “Simplifying the Accounting for Income Taxes,” which adds new guidance to simplify the accounting for income taxes, changes the accounting for certain income tax transactions, and makes other minor changes. The new standard is effective as of January 1, 2021, and early adoption is permitted for any interim period for which financial statements have not been issued. We do not expect this standard to have a material effect on our financial statements. We will not adopt the standard early.
2. Railway Operating Revenues
The following table disaggregates our revenues by major commodity group:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
|
($ in millions)
|
|
|
Merchandise:
|
|
|
|
|
Chemicals
|
|
$
|
1,874
|
|
|
$
|
1,858
|
|
Agriculture products
|
|
1,567
|
|
|
1,514
|
|
Metals and construction
|
|
1,522
|
|
|
1,539
|
|
Automotive
|
|
994
|
|
|
991
|
|
Forest and consumer
|
|
846
|
|
|
842
|
|
Merchandise
|
|
6,803
|
|
|
6,744
|
|
Intermodal
|
|
2,824
|
|
|
2,893
|
|
Coal
|
|
1,669
|
|
|
1,821
|
|
|
|
|
|
|
Total
|
|
$
|
11,296
|
|
|
$
|
11,458
|
|
At the beginning of 2019, we recategorized certain commodities within Merchandise major commodity groups to
better align with how we internally manage these commodities. Prior period amounts 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.
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 at December 31, 2019 and 2018.
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
2019
|
|
2018
|
|
|
($ in millions)
|
|
|
|
|
|
|
|
Customer
|
|
$
|
682
|
|
|
$
|
740
|
|
Non-customer
|
|
238
|
|
|
269
|
|
|
|
|
|
|
Accounts receivable – net
|
|
$
|
920
|
|
|
$
|
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 $23 million and $55 million at December 31, 2019 and 2018, respectively. In 2019, we wrote off a $32 million non-current customer receivable resulting from a legal dispute and this expense is included in “Materials and other” on the Consolidated Statements of Income. We do not have any material contract assets or liabilities at December 31, 2019 and 2018.
Certain accessorial services may be provided to customers under their transportation contracts such as switching, demurrage and other incidental service revenues. These are distinct performance obligations that are recognized at a point in time when the services are performed or as contractual obligations are met. This revenue is included within each of the commodity groups and represents approximately 5% and 4% of total “Railway operating revenues” on the Consolidated Statements of Income for the years ended December 31, 2019 and 2018, respectively.
3. Other Income – Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
($ in millions)
|
|
|
|
|
|
|
|
|
|
|
Corporate-owned life insurance – net
|
$
|
69
|
|
|
$
|
(10)
|
|
|
|
$
|
33
|
|
Net pension and other postretirement benefit cost (Note 12)
|
63
|
|
|
61
|
|
|
64
|
|
Rental income
|
4
|
|
|
5
|
|
|
87
|
|
Other
|
(30)
|
|
|
11
|
|
|
(28)
|
|
|
|
|
|
|
|
Total
|
$
|
106
|
|
|
$
|
67
|
|
|
$
|
156
|
|
4. Income Taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
($ in millions)
|
|
|
|
|
Current:
|
|
|
|
|
|
Federal
|
$
|
356
|
|
|
$
|
499
|
|
|
$
|
500
|
|
State
|
83
|
|
|
131
|
|
|
83
|
|
Total current taxes
|
439
|
|
|
630
|
|
|
583
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
Federal
|
280
|
|
|
156
|
|
|
(2,924)
|
|
State
|
50
|
|
|
17
|
|
|
65
|
|
Total deferred taxes
|
330
|
|
|
173
|
|
|
(2,859)
|
|
|
|
|
|
|
|
Income taxes
|
$
|
769
|
|
|
$
|
803
|
|
|
$
|
(2,276)
|
|
Reconciliation of Statutory Rate to Effective Rate
“Income taxes” on the Consolidated Statements of Income differs from the amounts computed by applying the statutory federal corporate tax rate as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
|
|
2018
|
|
|
|
2017
|
|
|
|
Amount
|
|
%
|
|
Amount
|
|
%
|
|
Amount
|
|
%
|
|
($ in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal income tax at statutory rate
|
$
|
733
|
|
|
21.0
|
|
|
$
|
728
|
|
|
21.0
|
|
|
$
|
1,095
|
|
|
35.0
|
|
State income taxes, net of federal tax effect
|
110
|
|
|
3.1
|
|
|
120
|
|
|
3.5
|
|
|
88
|
|
|
2.8
|
|
Equity in earnings related to tax reform
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(38)
|
|
|
(1.2)
|
|
Tax reform
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(3,331)
|
|
|
(106.5)
|
|
Excess tax benefits on stock-based compensation
|
(29)
|
|
|
(0.8)
|
|
|
(22)
|
|
|
(0.7)
|
|
|
(39)
|
|
|
(1.2)
|
|
Other, net
|
(45)
|
|
|
(1.3)
|
|
|
(23)
|
|
|
(0.7)
|
|
|
(51)
|
|
|
(1.7)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Taxes
|
$
|
769
|
|
|
22.0
|
|
|
$
|
803
|
|
|
23.1
|
|
|
$
|
(2,276)
|
|
|
(72.8)
|
|
Tax reform, enacted in 2017, lowered the Federal corporate tax rate from 35% to 21% and made numerous other tax law changes. GAAP requires companies to recognize the effect of tax law changes in the period of enactment. As a result, in 2017, “Purchased services and rents” included a $151 million benefit for earnings generated from reductions to net deferred tax liabilities at certain equity investees and “Income taxes” included a $3,331 million benefit primarily due to the remeasurement of our net deferred tax liabilities to reflect the lower rate.
Deferred Tax Assets and Liabilities
Certain items are reported in different periods for financial reporting and income tax purposes. Deferred tax assets and liabilities are recorded in recognition of these differences. The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2019
|
|
2018
|
|
($ in millions)
|
|
|
Deferred tax assets:
|
|
|
|
Compensation and benefits, including postretirement benefits
|
$
|
222
|
|
|
$
|
284
|
|
Accruals, including casualty and other claims
|
89
|
|
|
69
|
|
Other
|
202
|
|
|
72
|
|
Total gross deferred tax assets
|
513
|
|
|
425
|
|
Less valuation allowance
|
(54)
|
|
|
(50)
|
|
Net deferred tax assets
|
459
|
|
|
375
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
Property
|
(6,714)
|
|
|
(6,422)
|
|
Other
|
(560)
|
|
|
(413)
|
|
Total deferred tax liabilities
|
(7,274)
|
|
|
(6,835)
|
|
|
|
|
|
Deferred income taxes
|
$
|
(6,815)
|
|
|
$
|
(6,460)
|
|
Except for amounts for which a valuation allowance has been provided, we believe that it is more likely than not that the results of future operations will generate sufficient taxable income to realize the deferred tax assets. The valuation allowance at the end of each year primarily relates to subsidiary state income tax net operating losses and state investment tax credits that may not be utilized prior to their expiration. The total valuation allowance increased by $4 million in 2019, $6 million in 2018, and $5 million in 2017.
Uncertain Tax Positions
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2019
|
|
2018
|
|
($ in millions)
|
|
|
|
|
|
|
Balance at beginning of year
|
$
|
21
|
|
|
$
|
17
|
|
|
|
|
|
Additions based on tax positions related to the current year
|
4
|
|
|
5
|
|
Lapse of statutes of limitations
|
(1)
|
|
|
(1)
|
|
|
|
|
|
Balance at end of year
|
$
|
24
|
|
|
$
|
21
|
|
Included in the balance of unrecognized tax benefits at December 31, 2019 are potential benefits of $19 million that would affect the effective tax rate if recognized. Unrecognized tax benefits are adjusted in the period in which new information about a tax position becomes available or the final outcome differs from the amount recorded.
The statute of limitations on Internal Revenue Service examinations has expired for all years prior to 2015. We have amended our 2012 income tax return to request a refund of $46 million, which is not included in the above balance of unrecognized tax benefits. We would recognize a tax benefit of around $18 million if the refund is allowed. State income tax returns generally are subject to examination for a period of three to four years after filing of the return. In addition, we are generally obligated to report changes in taxable income arising from federal income tax examinations to the states within a period of up to two years from the date the federal examination is final. We have various state income tax returns either under examination, administrative appeal, or litigation.
5. Fair Value Measurements
FASB ASC 820-10, “Fair Value Measurements,” established a framework for measuring fair value and a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels, as follows:
|
|
|
|
|
|
Level 1
|
Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets that we have the ability to access.
|
|
|
Level 2
|
Inputs to the valuation methodology include:
|
|
• quoted prices for similar assets or liabilities in active markets;
• quoted prices for identical or similar assets or liabilities in inactive markets;
• inputs other than quoted prices that are observable for the asset or liability;
• inputs that are derived principally from or corroborated by observable market data by correlation or other means.
|
|
|
|
If the asset or liability has a specified (contractual) term, the Level 2 input must be observable for substantially the full term of the asset or liability.
|
|
|
Level 3
|
Inputs to the valuation methodology are unobservable and significant to the fair value measurement.
|
The asset or liability’s fair value measurement level within the hierarchy is based on the lowest level of any input that is significant to the fair value measurement.
Fair Values of Financial Instruments
The fair values of “Cash and cash equivalents,” “Accounts receivable – net,” and “Accounts payable,” approximate carrying values because of the short maturity of these financial instruments. The carrying value of COLI 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 December 31, 2019 or 2018. The carrying amounts and estimated fair values, based on Level 1 inputs, of long-term debt consisted of the following at December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
|
|
2018
|
|
|
|
Carrying
Amount
|
|
Fair
Value
|
|
Carrying
Amount
|
|
Fair
Value
|
|
($ in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt, including current maturities
|
$
|
(12,196)
|
|
|
$
|
(14,806)
|
|
|
$
|
(11,145)
|
|
|
$
|
(12,203)
|
|
6. Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2019
|
|
2018
|
|
($ in millions)
|
|
|
Long-term investments:
|
|
|
|
Equity method investments:
|
|
|
|
Conrail Inc.
|
$
|
1,387
|
|
|
$
|
1,337
|
|
TTX Company
|
749
|
|
|
692
|
|
Meridian Speedway LLC
|
271
|
|
|
271
|
|
Pan Am Southern LLC
|
154
|
|
|
155
|
|
Other
|
85
|
|
|
77
|
|
Total equity method investments
|
2,646
|
|
|
2,532
|
|
|
|
|
|
Corporate-owned life insurance at net cash surrender value
|
767
|
|
|
556
|
|
Other investments
|
15
|
|
|
21
|
|
|
|
|
|
Total long-term investments
|
$
|
3,428
|
|
|
$
|
3,109
|
|
Investment in Conrail
Through a limited liability company, we and CSX jointly own Conrail, whose primary subsidiary is 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. We are amortizing the excess of the purchase price over Conrail’s net equity using the principles of purchase accounting, based primarily on the estimated useful lives of Conrail’s depreciable property and equipment, including the related deferred tax effect of the differences in book and tax accounting bases for such assets, as all of the purchase price at acquisition was allocable to Conrail’s tangible assets and liabilities.
At December 31, 2019, based on the funded status of Conrail’s pension plans, we decreased our proportional investment in Conrail by $3 million. This resulted in a loss of $3 million recorded to “Other comprehensive loss”.
At December 31, 2018, based on the funded status of Conrail’s pension plans, we decreased our proportional investment in Conrail by $11 million. This resulted in a loss of $10 million recorded to “Other comprehensive loss” and a combined federal and state deferred tax liability of $1 million.
At December 31, 2019, the difference between our investment in Conrail and our share of Conrail’s underlying net equity was $497 million. Our equity in the earnings of Conrail, net of amortization, included in “Purchased services and rents,” which offsets the costs of operating the Shared Assets Areas, was $53 million for 2019, $55 million for 2018, and $75 million for 2017 (including $33 million related to the enactment of tax reform – see Note 4). Equity in earnings are included in the “Other – net” line item within operating activities in the Consolidated Statements of Cash Flows.
CRC owns and operates certain properties (the Shared Assets Areas) for the joint and exclusive benefit of 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 expenses payable to CRC for operation of the Shared Assets Areas totaling $149 million in 2019, $150 million in 2018, and $141 million in 2017. Future payments for access fees due to CRC under the Shared Assets Areas agreements are as follows: $40 million in each of 2020 through 2023 and $16 million thereafter. We provide certain general and administrative support functions to Conrail, the fees for which are billed in accordance with several service-provider arrangements and approximate $6 million annually.
“Accounts payable” includes $264 million at December 31, 2019, and $202 million at December 31, 2018, due to Conrail for the operation of the Shared Assets Areas. “Other liabilities” includes $280 million at both December 31, 2019 and 2018 for long-term advances from Conrail, maturing in 2044, that bear interest at an average rate of 2.9%.
Investment in TTX
NS and eight 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.” This amounted to $244 million, $262 million, and $237 million of expense, respectively, for the years ended December 31, 2019, 2018 and 2017. Our equity in the earnings of TTX, which offset the costs and are also included in “Purchased services and rents,” totaled $58 million for 2019, $61 million for 2018, and $158 million for 2017 (including $115 million related to the enactment of tax reform – see Note 4).
7. Properties
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
Net Book
|
|
Depreciation
|
December 31, 2019
|
Cost
|
|
Depreciation
|
|
Value
|
|
Rate (1)
|
|
($ in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land
|
$
|
2,385
|
|
|
$
|
—
|
|
|
$
|
2,385
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Roadway:
|
|
|
|
|
|
|
|
|
Rail and other track material
|
7,024
|
|
|
(1,905)
|
|
|
5,119
|
|
|
2.30
|
%
|
Ties
|
5,536
|
|
|
(1,496)
|
|
|
4,040
|
|
|
3.37
|
%
|
Ballast
|
2,868
|
|
|
(723)
|
|
|
2,145
|
|
|
2.72
|
%
|
Construction in process
|
360
|
|
|
—
|
|
|
360
|
|
|
—
|
|
Other roadway
|
14,261
|
|
|
(3,786)
|
|
|
10,475
|
|
|
2.71
|
%
|
Total roadway
|
30,049
|
|
|
(7,910)
|
|
|
22,139
|
|
|
|
|
|
|
|
|
|
|
|
|
Equipment:
|
|
|
|
|
|
|
|
|
Locomotives
|
5,973
|
|
|
(2,112)
|
|
|
3,861
|
|
|
3.66
|
%
|
Freight cars
|
2,988
|
|
|
(1,148)
|
|
|
1,840
|
|
|
2.45
|
%
|
Computers and software
|
732
|
|
|
(355)
|
|
|
377
|
|
|
9.68
|
%
|
Construction in process
|
291
|
|
|
—
|
|
|
291
|
|
|
—
|
|
Other equipment
|
1,082
|
|
|
(388)
|
|
|
694
|
|
|
4.89
|
%
|
Total equipment
|
11,066
|
|
|
(4,003)
|
|
|
7,063
|
|
|
|
|
|
|
|
|
|
|
|
|
Other property
|
96
|
|
|
(69)
|
|
|
27
|
|
|
1.05
|
%
|
|
|
|
|
|
|
|
|
Total properties
|
$
|
43,596
|
|
|
$
|
(11,982)
|
|
|
$
|
31,614
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
Net Book
|
|
Depreciation
|
December 31, 2018
|
Cost
|
|
Depreciation
|
|
Value
|
|
Rate (1)
|
|
($ in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land
|
$
|
2,337
|
|
|
$
|
—
|
|
|
$
|
2,337
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Roadway:
|
|
|
|
|
|
|
|
Rail and other track material
|
6,888
|
|
|
(1,951)
|
|
|
4,937
|
|
|
2.29
|
%
|
Ties
|
5,346
|
|
|
(1,448)
|
|
|
3,898
|
|
|
3.36
|
%
|
Ballast
|
2,759
|
|
|
(676)
|
|
|
2,083
|
|
|
2.70
|
%
|
Construction in process
|
442
|
|
|
—
|
|
|
442
|
|
|
—
|
|
Other roadway
|
14,072
|
|
|
(3,737)
|
|
|
10,335
|
|
|
2.64
|
%
|
Total roadway
|
29,507
|
|
|
(7,812)
|
|
|
21,695
|
|
|
|
|
|
|
|
|
|
|
|
Equipment:
|
|
|
|
|
|
|
|
Locomotives
|
5,870
|
|
|
(2,262)
|
|
|
3,608
|
|
|
3.77
|
%
|
Freight cars
|
3,183
|
|
|
(1,288)
|
|
|
1,895
|
|
|
2.47
|
%
|
Computers and software
|
623
|
|
|
(365)
|
|
|
258
|
|
|
10.65
|
%
|
Construction in process
|
437
|
|
|
—
|
|
|
437
|
|
|
—
|
|
Other equipment
|
1,071
|
|
|
(380)
|
|
|
691
|
|
|
4.94
|
%
|
Total equipment
|
11,184
|
|
|
(4,295)
|
|
|
6,889
|
|
|
|
|
|
|
|
|
|
|
|
Other property
|
437
|
|
|
(267)
|
|
|
170
|
|
|
0.78
|
%
|
|
|
|
|
|
|
|
|
Total properties
|
$
|
43,465
|
|
|
$
|
(12,374)
|
|
|
$
|
31,091
|
|
|
|
(1)Composite annual depreciation rate for the underlying assets, excluding the effects of the amortization of any deficiency (or excess) that resulted from our depreciation studies.
“Other current assets” on the Consolidated Balance Sheets at December 31, 2019 includes natural resource assets of $88 million, reflecting their status as held for sale. In 2019, we recorded a $49 million impairment loss related to our natural resource assets that we are actively marketing to sell. The impairment loss is reflected in “Gains and losses on properties” in the Consolidated Statements of Cash Flows for the year ended December 31, 2019. At December 31, 2018, these assets were reflected in other property within “Properties” on the Consolidated Balance Sheets, reflecting costs of obtaining rights to natural resources of $336 million, with associated accumulated depletion of $200 million.
Capitalized Interest
Total interest cost incurred on debt was $620 million, $574 million, and $570 million during 2019, 2018 and 2017, respectively, of which $16 million, $17 million, and $20 million were capitalized during 2019, 2018, and 2017, respectively.
8. Current Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2019
|
|
2018
|
|
($ in millions)
|
|
|
Accounts payable:
|
|
|
|
Accounts and wages payable
|
$
|
710
|
|
|
$
|
828
|
|
Due to Conrail (Note 6)
|
264
|
|
|
202
|
|
Casualty and other claims (Note 17)
|
212
|
|
|
213
|
|
Vacation liability
|
136
|
|
|
140
|
|
Other
|
106
|
|
|
122
|
|
|
|
|
|
Total
|
$
|
1,428
|
|
|
$
|
1,505
|
|
|
|
|
|
Other current liabilities:
|
|
|
|
Interest payable
|
$
|
149
|
|
|
$
|
139
|
|
Current operating lease liability (Note 10)
|
97
|
|
|
—
|
|
Pension benefit obligations (Note 12)
|
18
|
|
|
18
|
|
Other
|
63
|
|
|
89
|
|
|
|
|
|
Total
|
$
|
327
|
|
|
$
|
246
|
|
9. Debt
Debt with weighted average interest rates and maturities is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2019
|
|
2018
|
|
($ in millions)
|
|
|
Notes and debentures:
|
|
|
|
4.22% maturing to 2024
|
$
|
2,497
|
|
|
$
|
3,082
|
|
4.35% maturing 2025 to 2031
|
3,265
|
|
|
2,665
|
|
4.38% maturing 2037 to 2052
|
5,904
|
|
|
5,104
|
|
5.79% maturing 2097 to 2118
|
1,331
|
|
|
1,131
|
|
Financing leases
|
8
|
|
|
2
|
|
Discounts, premiums, and debt issuance costs
|
(809)
|
|
|
(839)
|
|
Total debt
|
12,196
|
|
|
11,145
|
|
|
|
|
|
Less current maturities
|
(316)
|
|
|
(585)
|
|
|
|
|
|
Long-term debt excluding current maturities
|
$
|
11,880
|
|
|
$
|
10,560
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt maturities subsequent to 2020 are as follows:
|
|
|
|
2021
|
|
|
$
|
586
|
|
2022
|
|
|
603
|
|
2023
|
|
|
600
|
|
2024
|
|
|
400
|
|
2025 and subsequent years
|
|
|
9,691
|
|
|
|
|
|
Total
|
|
|
$
|
11,880
|
|
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. In November 2019, we issued $400 million of 2.55% senior notes due 2029 and $400 million of 3.40% senior notes due 2049.
In May 2019, we also renewed and amended our accounts receivable securitization program, increasing the program’s maximum borrowing capacity from $400 million to $450 million with a term expiring in May 2020. Under this facility, NSR sells substantially all of its eligible third-party receivables to a subsidiary, which in turn may transfer beneficial interests in the receivables to various commercial paper vehicles. Under this facility, we received $600 million in 2019 and $50 million in 2018, and paid $600 million and $150 million during 2019 and 2018, respectively. We had no amounts outstanding at both December 31, 2019 and 2018, and our available borrowing capacity was $429 million and $400 million, respectively.
The January 1, 2019 and December 31, 2018 “Cash, cash equivalents, and restricted cash” line item in the Consolidated Statements of Cash Flows includes restricted cash of $88 million which reflects deposits held by a third-party bond agent as collateral for certain debt obligations, which matured on October 1, 2019. The restricted cash balance is included as part of “Other current assets” on the Consolidated Balance Sheets at December 31, 2018.
Credit Agreement and Debt Covenants
We have in place and available a $750 million, five-year credit agreement which expires in May 2021 and provides for borrowings at prevailing rates and includes covenants. We had no amounts outstanding under this facility at both December 31, 2019 and 2018, and we are in compliance with all of its covenants.
10. 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 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 January 1, 2019. Upon adoption of the standard, we recognized ROU assets and corresponding lease liabilities of $586 million on the Consolidated Balance Sheets as of January 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 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 also elected the practical expedient not to separate lease and non-lease components for all of our leases.
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 include options to extend the leases for up to 99 years and some 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.
Operating lease amounts included on the Consolidated Balance Sheet were as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
($ in millions)
|
Assets
|
Classification
|
|
ROU assets
|
Other assets
|
$
|
539
|
|
|
|
|
Liabilities
|
|
|
Current lease liabilities
|
Other current liabilities
|
$
|
97
|
|
Non-current lease liabilities
|
Other liabilities
|
441
|
|
|
|
|
Total lease liabilities
|
|
$
|
538
|
|
The components of total lease expense, primarily included in “Purchased services and rents,” were as follows:
|
|
|
|
|
|
|
December 31, 2019
|
|
($ in millions)
|
|
|
Operating lease expense
|
$
|
114
|
|
Variable lease expense
|
57
|
|
Short-term lease expense
|
5
|
|
|
|
Total lease expense
|
$
|
176
|
|
At December 31, 2019, we do not have any material finance lease assets or liabilities, nor do we have any material subleases.
In 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:
|
|
|
|
|
|
|
December 31, 2019
|
|
|
Weighted-average remaining lease term (years) on operating leases
|
8.25
|
|
|
Weighted-average discount rates on operating leases
|
3.52
|
%
|
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 2019, ROU assets obtained in exchange for new operating lease liabilities were $49 million. During 2019, cash paid for amounts included in the measurement of lease liabilities was $114 million and is included in operating cash flows. During 2019, cash proceeds from a sale and leaseback transaction were $82 million and the gain on the transaction was $15 million.
Future minimum lease payments under non-cancellable operating leases were as follows:
|
|
|
|
|
|
|
December 31, 2019
|
|
($ in millions)
|
|
|
2020
|
$
|
110
|
|
2021
|
104
|
|
2022
|
79
|
|
2023
|
70
|
|
2024
|
61
|
|
2025 and subsequent years
|
206
|
|
Total lease payments
|
630
|
|
Less: Interest
|
92
|
|
|
|
Present value of lease liabilities
|
$
|
538
|
|
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
|
|
Operating lease expense accounted for under ASC 840 “Leases” was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
($ in millions)
|
|
|
|
|
|
|
Minimum rents
|
$
|
102
|
|
|
$
|
96
|
|
Contingent rents
|
102
|
|
|
54
|
|
|
|
|
|
Total
|
$
|
204
|
|
|
$
|
150
|
|
Contingent rents are primarily comprised of usage-based payments for equipment under service contracts.
11. Other Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2019
|
|
2018
|
|
($ in millions)
|
|
|
|
|
|
|
Non-current operating lease liability (Note 10)
|
$
|
441
|
|
|
|
$
|
—
|
|
Net pension benefit obligations (Note 12)
|
302
|
|
|
278
|
|
Net other postretirement benefit obligations (Note 12)
|
287
|
|
|
308
|
|
Long-term advances from Conrail (Note 6)
|
280
|
|
|
280
|
|
Casualty and other claims (Note 17)
|
171
|
|
|
158
|
|
Deferred compensation
|
104
|
|
|
106
|
|
Other
|
159
|
|
|
136
|
|
|
|
|
|
Total
|
$
|
1,744
|
|
|
$
|
1,266
|
|
|
|
|
|
12. 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, certain health care expenses are 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 Other Postretirement Benefit Obligations and Plan Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
|
|
Other Postretirement
Benefits
|
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
($ in millions)
|
|
|
|
|
|
|
Change in benefit obligations:
|
|
|
|
|
|
|
|
Benefit obligation at beginning of year
|
$
|
2,371
|
|
|
$
|
2,541
|
|
|
$
|
466
|
|
|
$
|
510
|
|
Service cost
|
35
|
|
|
39
|
|
|
6
|
|
|
7
|
|
Interest cost
|
93
|
|
|
83
|
|
|
17
|
|
|
15
|
|
Actuarial losses (gains)
|
235
|
|
|
(149)
|
|
|
28
|
|
|
(24)
|
|
Plan amendment
|
—
|
|
|
—
|
|
|
(18)
|
|
|
—
|
|
Benefits paid
|
(146)
|
|
|
(143)
|
|
|
(42)
|
|
|
(42)
|
|
Benefit obligation at end of year
|
2,588
|
|
|
2,371
|
|
|
457
|
|
|
466
|
|
|
|
|
|
|
|
|
|
Change in plan assets:
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year
|
2,105
|
|
|
2,373
|
|
|
158
|
|
|
201
|
|
Actual return on plan assets
|
485
|
|
|
(143)
|
|
|
34
|
|
|
(19)
|
|
Employer contribution
|
18
|
|
|
18
|
|
|
20
|
|
|
18
|
|
Benefits paid
|
(146)
|
|
|
(143)
|
|
|
(42)
|
|
|
(42)
|
|
Fair value of plan assets at end of year
|
2,462
|
|
|
2,105
|
|
|
170
|
|
|
158
|
|
|
|
|
|
|
|
|
|
Funded status at end of year
|
$
|
(126)
|
|
|
$
|
(266)
|
|
|
$
|
(287)
|
|
|
$
|
(308)
|
|
|
|
|
|
|
|
|
|
Amounts recognized in the Consolidated
|
|
|
|
|
|
|
|
Balance Sheets:
|
|
|
|
|
|
|
|
Other assets
|
$
|
194
|
|
|
$
|
30
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Other current liabilities
|
(18)
|
|
|
(18)
|
|
|
—
|
|
|
—
|
|
Other liabilities
|
(302)
|
|
|
(278)
|
|
|
(287)
|
|
|
(308)
|
|
|
|
|
|
|
|
|
|
Net amount recognized
|
$
|
(126)
|
|
|
$
|
(266)
|
|
|
$
|
(287)
|
|
|
$
|
(308)
|
|
|
|
|
|
|
|
|
|
Amounts included in accumulated other comprehensive
|
|
|
|
|
|
|
|
loss (before tax):
|
|
|
|
|
|
|
|
Net loss
|
$
|
781
|
|
|
$
|
895
|
|
|
$
|
29
|
|
|
$
|
21
|
|
Prior service cost (benefit)
|
1
|
|
|
2
|
|
|
(253)
|
|
|
(259)
|
|
Our accumulated benefit obligation for our defined benefit pension plans is $2.3 billion and $2.2 billion at December 31, 2019 and 2018, respectively. Our unfunded pension plans, included above, which in all cases have no assets, had projected benefit obligations of $320 million and $296 million at December 31, 2019 and 2018, respectively, and had accumulated benefit obligations of $292 million and $263 million at December 31, 2019 and 2018, respectively.
Pension and Other Postretirement Benefit Cost Components
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
($ in millions)
|
|
|
|
|
|
|
|
|
|
|
Pension benefits:
|
|
|
|
|
|
Service cost
|
$
|
35
|
|
|
$
|
39
|
|
|
$
|
38
|
|
Interest cost
|
93
|
|
|
83
|
|
|
80
|
|
Expected return on plan assets
|
(179)
|
|
|
(177)
|
|
|
(172)
|
|
Amortization of net losses
|
43
|
|
|
57
|
|
|
51
|
|
Amortization of prior service cost
|
1
|
|
|
—
|
|
|
1
|
|
|
|
|
|
|
|
Net cost (benefit)
|
$
|
(7)
|
|
|
$
|
2
|
|
|
$
|
(2)
|
|
|
|
|
|
|
|
Other postretirement benefits:
|
|
|
|
|
|
Service cost
|
$
|
6
|
|
|
$
|
7
|
|
|
$
|
7
|
|
Interest cost
|
17
|
|
|
15
|
|
|
15
|
|
Expected return on plan assets
|
(14)
|
|
|
(15)
|
|
|
(15)
|
|
|
|
|
|
|
|
Amortization of prior service benefit
|
(24)
|
|
|
(24)
|
|
|
(24)
|
|
|
|
|
|
|
|
Net benefit
|
$
|
(15)
|
|
|
$
|
(17)
|
|
|
$
|
(17)
|
|
Other Changes in Plan Assets and Benefit Obligations Recognized in Other Comprehensive Income
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
|
|
Pension
Benefits
|
|
Other
Postretirement
Benefits
|
|
($ in millions)
|
|
|
|
|
|
|
Net loss (gain) arising during the year
|
$
|
(71)
|
|
|
$
|
8
|
|
Prior service effect of plan amendment
|
—
|
|
|
(18)
|
|
Amortization of net losses
|
(43)
|
|
|
—
|
|
Amortization of prior service (cost) benefit
|
(1)
|
|
|
24
|
|
|
|
|
|
Total recognized in other comprehensive income
|
$
|
(115)
|
|
|
$
|
14
|
|
Total recognized in net periodic cost
|
|
|
|
and other comprehensive income
|
$
|
(122)
|
|
|
$
|
(1)
|
|
Net gains arising during the year for pension benefits were due primarily to higher actual returns on plan assets, partially offset by a decrease in discount rates. Net losses arising during the year for other postretirement benefits were due primarily to a decrease in discount rates, partially offset by higher actual returns on plan assets.
The estimated net losses for the pension plans that will be amortized from accumulated other comprehensive loss into net periodic cost over the next year are $52 million. The estimated prior service benefit for the other postretirement benefit plans that will be amortized from accumulated other comprehensive loss into net periodic benefit over the next year is $25 million.
Pension and Other Postretirement Benefits Assumptions
Costs for pension and other postretirement benefits are determined based on actuarial valuations that reflect appropriate assumptions as of the measurement date, ordinarily the beginning of each year. The funded status of the plans is determined using appropriate assumptions as of each year end. A summary of the major assumptions follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Pension funded status:
|
|
|
|
|
|
Discount rate
|
3.38
|
%
|
|
4.33
|
%
|
|
3.74
|
%
|
Future salary increases
|
4.21
|
%
|
|
4.21
|
%
|
|
4.21
|
%
|
Other postretirement benefits funded status:
|
|
|
|
|
|
|
|
|
Discount rate
|
3.13
|
%
|
|
4.18
|
%
|
|
3.57
|
%
|
Pension cost:
|
|
|
|
|
|
|
|
|
Discount rate - service cost
|
4.55
|
%
|
|
4.01
|
%
|
|
4.31
|
%
|
Discount rate - interest cost
|
3.99
|
%
|
|
3.33
|
%
|
|
3.43
|
%
|
Return on assets in plans
|
8.25
|
%
|
|
8.25
|
%
|
|
8.25
|
%
|
Future salary increases
|
4.21
|
%
|
|
4.21
|
%
|
|
4.21
|
%
|
Other postretirement benefits cost:
|
|
|
|
|
|
|
|
|
Discount rate - service cost
|
4.39
|
%
|
|
3.83
|
%
|
|
4.17
|
%
|
Discount rate - interest cost
|
3.83
|
%
|
|
3.13
|
%
|
|
3.14
|
%
|
Return on assets in plans
|
8.00
|
%
|
|
8.00
|
%
|
|
8.00
|
%
|
Health care trend rate
|
6.50
|
%
|
|
6.30
|
%
|
|
6.56
|
%
|
To determine the discount rates used to measure our benefit obligations, we utilize analyses in which the projected annual cash flows from the pension and other postretirement benefit plans were matched with yield curves based on an appropriate universe of high-quality corporate bonds. We use the results of the yield curve analyses to select the discount rates that match the payment streams of the benefits in these plans.
We use a spot rate approach to estimate the service cost and interest cost components of net periodic benefit cost for our pension and other postretirement benefit plans.
Health Care Cost Trend Assumptions
For measurement purposes at December 31, 2019, increases in the per capita cost of pre-Medicare covered health care benefits were assumed to be 6.25% for 2020. It is assumed the rate will decrease gradually to an ultimate rate of 5.0% for 2025 and remain at that level thereafter.
Assumed health care cost trend rates affect the amounts reported in the consolidated financial statements. To illustrate, a one-percentage point change in the assumed health care cost trend would have the following effects:
|
|
|
|
|
|
|
|
|
|
|
|
|
One-percentage point
|
|
|
|
Increase
|
|
Decrease
|
|
($ in millions)
|
|
|
Increase (decrease) in:
|
|
|
|
Total service and interest cost components
|
$
|
1
|
|
|
$
|
(1)
|
|
Postretirement benefit obligation
|
8
|
|
|
(7)
|
|
Asset Management
Eleven investment firms manage our defined benefit pension plans’ assets under investment guidelines approved by our Benefits Investment Committee that is composed of members of our management. Investments are restricted to domestic and international equity securities, domestic and international fixed income securities, and unleveraged exchange-traded options and financial futures. Limitations restrict investment concentration and use of certain derivative investments. The target asset allocation for equity is 75% of the pension plans’ assets. Fixed income investments must consist predominantly of securities rated investment grade or higher. Equity investments must be in liquid securities listed on national exchanges. No investment is permitted in our securities (except through commingled pension trust funds).
Our pension plans’ weighted average asset allocations, by asset category, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of plan
assets at December 31,
|
|
|
|
2019
|
|
2018
|
|
|
|
|
Domestic equity securities
|
50
|
%
|
|
49
|
%
|
International equity securities
|
24
|
%
|
|
23
|
%
|
Debt securities
|
24
|
%
|
|
25
|
%
|
Cash and cash equivalents
|
2
|
%
|
|
3
|
%
|
|
|
|
|
Total
|
100
|
%
|
|
100
|
%
|
The other postretirement benefit plan assets consist primarily of trust-owned variable life insurance policies with an asset allocation at December 31, 2019 of 67% in equity securities and 33% in debt securities compared with 64% in equity securities and 36% in debt securities at December 31, 2018. The target asset allocation for equity is between 50% and 75% of the plan’s assets.
The plans’ assumed future returns are based principally on the asset allocations and historical returns for the plans’ asset classes determined from both actual plan returns and, over longer time periods, expected market returns for those asset classes. For 2020, we assume an 8.25% return on pension plan assets.
Fair Value of Plan Assets
The following is a description of the valuation methodologies used for pension plan assets measured at fair value.
Common stock: Shares held by the plan at year end are valued at the official closing price as defined by the exchange or at the most recent trade price of the security at the close of the active market.
Common collective trusts: The readily determinable fair value is based on the published fair value per unit of the trusts. The common collective trusts hold equity securities, fixed income securities and cash and cash equivalents.
Fixed income securities: Valued based on quotes received from independent pricing services or at an estimated price at which a dealer would pay for the security at year end using observable market-based inputs.
Commingled funds: The readily determinable fair value is based on the published fair value per unit of the funds. The commingled funds hold equity securities.
Cash and cash equivalents: Short-term Treasury bills or notes are valued at an estimated price at which a dealer would pay for the security at year end using observable market-based inputs; money market funds are valued at the closing price reported on the active market on which the funds are traded.
The following table sets forth the pension plans’ assets by valuation technique level, within the fair value hierarchy. There were no level 3 valued assets at December 31, 2019 or 2018.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Total
|
|
($ in millions)
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
$
|
1,329
|
|
|
$
|
—
|
|
|
$
|
1,329
|
|
Common collective trusts:
|
|
|
|
|
|
International equity securities
|
—
|
|
|
377
|
|
|
377
|
|
Debt securities
|
—
|
|
|
303
|
|
|
303
|
|
Fixed income securities:
|
|
|
|
|
|
Government and agencies securities
|
—
|
|
|
172
|
|
|
172
|
|
Corporate bonds
|
—
|
|
|
84
|
|
|
84
|
|
Mortgage and other asset-backed securities
|
—
|
|
|
26
|
|
|
26
|
|
Commingled funds
|
—
|
|
|
121
|
|
|
121
|
|
Cash and cash equivalents
|
50
|
|
|
—
|
|
|
50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
$
|
1,379
|
|
|
$
|
1,083
|
|
|
$
|
2,462
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Total
|
|
($ in millions)
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
$
|
1,106
|
|
|
$
|
—
|
|
|
$
|
1,106
|
|
Common collective trusts:
|
|
|
|
|
|
International equity securities
|
—
|
|
|
314
|
|
|
314
|
|
Debt securities
|
—
|
|
|
287
|
|
|
287
|
|
Fixed income securities:
|
|
|
|
|
|
Government and agencies securities
|
—
|
|
|
89
|
|
|
89
|
|
Corporate bonds
|
—
|
|
|
83
|
|
|
83
|
|
Mortgage and other asset-backed securities
|
—
|
|
|
62
|
|
|
62
|
|
|
|
|
|
|
|
Commingled funds
|
—
|
|
|
92
|
|
|
92
|
|
Cash and cash equivalents
|
72
|
|
|
—
|
|
|
72
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
$
|
1,178
|
|
|
$
|
927
|
|
|
$
|
2,105
|
|
The following is a description of the valuation methodologies used for other postretirement benefit plan assets measured at fair value.
Trust-owned life insurance: Valued at our share of the net assets of trust-owned life insurance issued by a major insurance company. The underlying investments of that trust consist of a U.S. stock account and a U.S. bond account but may retain cash at times as well. The U.S. stock account and U.S. bond account are valued based on readily determinable fair values.
The other postretirement benefit plan assets consisted of trust-owned life insurance with fair values of $170 million and $158 million at December 31, 2019 and 2018, respectively, and are valued under level 2 of the fair value hierarchy. There were no level 1 or level 3 valued assets.
Contributions and Estimated Future Benefit Payments
In 2020, we expect to contribute approximately $18 million to our unfunded pension plans for payments to pensioners and approximately $37 million to our other postretirement benefit plans for retiree health and death benefits. We do not expect to contribute to our funded pension plan in 2020.
Benefit payments, which reflect expected future service, as appropriate, are expected to be paid as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
Benefits
|
|
Other
Postretirement
Benefits
|
|
($ in millions)
|
|
|
|
|
|
|
2020
|
$
|
144
|
|
|
$
|
37
|
|
2021
|
144
|
|
|
36
|
|
2022
|
144
|
|
|
34
|
|
2023
|
144
|
|
|
33
|
|
2024
|
144
|
|
|
32
|
|
Years 2025 – 2029
|
719
|
|
|
148
|
|
Other Postretirement Coverage
Under collective bargaining agreements, Norfolk Southern and certain subsidiaries participate in a multi-employer benefit plan, which provides certain postretirement health care and life insurance benefits to eligible union employees. Premiums under this plan are expensed as incurred and totaled $31 million in 2019, $35 million in 2018, and $44 million in 2017.
Section 401(k) Plans
Norfolk Southern and certain subsidiaries provide Section 401(k) savings plans for employees. Under the plans, we match a portion of employee contributions, subject to applicable limitations. Our matching contributions, recorded as an expense, under these plans were $22 million in 2019 and $23 million in both 2018 and 2017.
13. Stock-Based Compensation
Under the stockholder-approved Long-Term Incentive Plan (LTIP), the Compensation Committee (Committee), which is made up of nonemployee members of the Board of Directors, or the Chief Executive Officer (when delegated authority by such Committee), may grant stock options, stock appreciation rights (SARs), restricted stock units (RSUs), restricted shares, performance share units (PSUs), and performance shares, up to a maximum of 104,125,000 shares of our Common Stock, of which 9,294,726 remain available for future grants as of December 31, 2019.
The number of shares remaining for issuance under the LTIP is reduced (i) by 1 for each award granted as a stock option or stock-settled SAR, or (ii) by 1.61 for an award made in the form other than a stock option or stock-settled SAR. Under the Board-approved Thoroughbred Stock Option Plan (TSOP), the Committee may grant stock options up to a maximum of 6,000,000 shares of Common Stock. We use newly issued shares to satisfy any exercises and awards under the LTIP and the TSOP.
The LTIP also permits the payment, on a current or a deferred basis and in cash or in stock, of dividend equivalents on shares of Common Stock covered by stock options, RSUs, or PSUs in an amount commensurate with regular quarterly dividends paid on Common Stock. With respect to stock options, if employment of the participant is terminated for any reason, including retirement, disability, or death, we have no further obligation to make any dividend equivalent payments. Regarding RSUs, we have no further obligation to make any dividend equivalent payments unless employment of the participant is terminated as a result of qualifying retirement or disability. Should an employee terminate employment, they are not required to forfeit dividend equivalent payments already received. Outstanding PSUs do not receive dividend equivalent payments.
The Committee granted stock options, RSUs and PSUs pursuant to the LTIP and granted stock options pursuant to the TSOP for the last three years as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
|
|
2018
|
|
|
|
2017
|
|
|
|
Granted
|
|
Weighted Average Grant-Date Fair Value
|
|
Granted
|
|
Weighted Average Grant-Date Fair Value
|
|
Granted
|
|
Weighted Average Grant-Date Fair Value
|
Stock options:
|
|
|
|
|
|
|
|
|
|
|
|
LTIP
|
47,360
|
|
$
|
45.74
|
|
|
40,960
|
|
$
|
41.70
|
|
|
341,120
|
|
$
|
37.73
|
|
TSOP
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
144,440
|
|
31.33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
47,360
|
|
|
|
40,960
|
|
|
|
485,560
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RSUs
|
219,710
|
|
164.47
|
|
|
217,290
|
|
148.37
|
|
|
83,330
|
|
120.16
|
|
PSUs
|
102,250
|
|
160.97
|
|
|
92,314
|
|
147.47
|
|
|
300,334
|
|
88.56
|
|
Beginning in 2018, recipients of certain RSUs and PSUs pursuant to the LTIP who retire prior to October 1st will forfeit awards received in the current year. Receipt of certain LTIP awards is contingent on the recipient having executed a non-compete agreement with the company.
We account for our grants of stock options, RSUs, PSUs, and dividend equivalent payments in accordance with FASB ASC 718, “Compensation - Stock Compensation.” Accordingly, all awards result in charges to net income while dividend equivalent payments, which are all related to equity classified awards, are charged to retained income. Compensation cost for the awards is recognized on a straight-line basis over the requisite service period for the entire award. Related compensation costs and tax benefits during the year were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
($ in millions)
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense
|
$
|
53
|
|
|
$
|
47
|
|
|
$
|
45
|
|
Total tax benefit
|
37
|
|
|
33
|
|
|
54
|
|
Stock Options
Option exercise prices will be at least the higher of (i) the average of the high and low prices at which Common Stock is traded on the grant date, or (ii) the closing price of Common Stock on the grant date. All options are subject to a vesting period of at least one year, and the term of the option will not exceed ten years. Holders of the options granted under the LTIP who remain actively employed receive cash dividend equivalent payments for four years in an amount equal to the regular quarterly dividends paid on Common Stock. Dividend equivalent payments are not made on the TSOP options.
For all years, options granted under the LTIP and the TSOP may not be exercised prior to the fourth and third anniversaries of the date of grant, respectively, or if the optionee retires or dies before that anniversary date, may not be exercised before the later of one year after the grant date or the date of the optionee’s retirement or death.
The fair value of each option awarded in 2019 and 2018 was measured on the date of grant using the Black-Scholes valuation model. The fair value of each option awarded in 2017 was measured on the date of grant using a binomial lattice-based option valuation model. Expected volatility is based on implied volatility from traded options on, and historical volatility of, Common Stock. Historical data is used to estimate option exercises and employee terminations within the valuation model. For the 2019 and 2018 grant years, historical exercise data is used to estimate the average expected option term. For the 2017 grant year, the average expected option term is derived from the output of the valuation model and represents the period of time that all options granted are expected to be outstanding, including the branches of the model that result in options expiring unexercised. The average risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant. A dividend yield of zero was used for the LTIP options during the vesting period. For 2019, 2018, and 2017, a dividend yield of 2.06%, 1.94%, and 2.04%, respectively, was used for all vested LTIP options and all TSOP options.
The assumptions for the LTIP and TSOP grants for the last three years are shown in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
Average expected volatility
|
23
|
%
|
|
24
|
%
|
|
26
|
%
|
Average risk-free interest rate
|
2.56
|
%
|
|
2.55
|
%
|
|
2.51
|
%
|
Average expected option term LTIP
|
7.2 years
|
|
7.2 years
|
|
8.6 years
|
Average expected option term TSOP
|
—
|
|
|
—
|
|
|
8.3 years
|
A summary of changes in stock options is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
Options
|
|
Weighted Avg.
Exercise Price
|
|
|
|
|
Outstanding at December 31, 2018
|
3,419,644
|
|
|
$
|
86.66
|
|
Granted
|
47,360
|
|
|
168.36
|
|
Exercised
|
(770,597)
|
|
|
74.39
|
|
Forfeited
|
(18,958)
|
|
|
105.28
|
|
|
|
|
|
Outstanding at December 31, 2019
|
2,677,449
|
|
|
91.51
|
|
The aggregate intrinsic value of options outstanding at December 31, 2019 was $275 million with a weighted average remaining contractual term of 5 years. Of these options outstanding, 1,856,019 were exercisable and had an aggregate intrinsic value of $196 million with a weighted average exercise price of $88.48 and a weighted average remaining contractual term of 2.9 years.
The following table provides information related to options exercised for the last three years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
($ in millions)
|
|
|
|
|
|
|
|
|
|
|
Options exercised
|
770,597
|
|
|
840,175
|
|
|
1,789,939
|
|
Total intrinsic value
|
$
|
86
|
|
|
$
|
72
|
|
|
$
|
114
|
|
Cash received upon exercise
|
53
|
|
|
58
|
|
|
104
|
|
Related tax benefits realized
|
18
|
|
|
16
|
|
|
35
|
|
At December 31, 2019, total unrecognized compensation related to options granted under the LTIP and the TSOP was $2 million, and is expected to be recognized over a weighted-average period of approximately 1.6 years.
Restricted Stock Units
Beginning in 2018, RSUs granted primarily have a four-year ratable restriction period and will be settled through the issuance of shares of Common Stock. RSUs granted prior to 2018 have a five-year restriction period and will also be settled through the issuance of shares of Common Stock. Certain RSU grants include cash dividend equivalent payments during the restriction period in an amount equal to regular quarterly dividends paid on Common Stock.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
($ in millions)
|
|
|
|
|
|
|
|
|
|
|
RSUs vested
|
166,197
|
|
|
160,200
|
|
|
137,200
|
|
Common Stock issued net of tax withholding
|
119,346
|
|
|
99,968
|
|
|
81,318
|
|
Related tax benefit realized
|
$
|
2
|
|
|
$
|
3
|
|
|
$
|
3
|
|
A summary of changes in RSUs is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
RSUs
|
|
Weighted-
Average
Grant-Date
Fair Value
|
|
|
|
|
Nonvested at December 31, 2018
|
637,035
|
|
|
$
|
111.87
|
|
Granted
|
219,710
|
|
|
164.47
|
|
Vested
|
(166,197)
|
|
|
111.79
|
|
Forfeited
|
(24,376)
|
|
|
152.17
|
|
|
|
|
|
Nonvested at December 31, 2019
|
666,172
|
|
|
127.77
|
|
At December 31, 2019, total unrecognized compensation related to RSUs was $25 million, and is expected to be recognized over a weighted-average period of approximately 2.6 years.
Performance Share Units
PSUs provide for awards based on the achievement of certain predetermined corporate performance goals at the end of a three-year cycle and are settled through the issuance of shares of Common Stock. All PSUs will earn out based on the achievement of performance conditions and some will also earn out based on a market condition. The market condition fair value was measured on the date of grant using a Monte Carlo simulation model.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
($ in millions)
|
|
|
|
|
|
|
|
|
|
|
PSUs earned
|
331,099
|
|
|
154,189
|
|
|
171,080
|
|
Common Stock issued net of tax withholding
|
221,241
|
|
|
94,399
|
|
|
99,805
|
|
Related tax benefit realized
|
$
|
9
|
|
|
$
|
3
|
|
|
$
|
1
|
|
A summary of changes in PSUs is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
PSUs
|
|
Weighted-
Average
Grant-Date
Fair Value
|
|
|
|
|
Balance at December 31, 2018
|
1,426,826
|
|
|
$
|
66.35
|
|
Granted
|
102,250
|
|
|
160.97
|
|
Earned
|
(331,099)
|
|
|
42.70
|
|
Unearned
|
(735,048)
|
|
|
60.02
|
|
Forfeited
|
(6,419)
|
|
|
126.92
|
|
|
|
|
|
Balance at December 31, 2019
|
456,510
|
|
|
114.04
|
|
At December 31, 2019, total unrecognized compensation related to PSUs granted under the LTIP was $6 million, and is expected to be recognized over a weighted-average period of approximately 1.7 years.
Shares Available and Issued
Shares of Common Stock available for future grants and issued in connection with all features of the LTIP and the TSOP at December 31, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Available for future grants:
|
|
|
|
|
|
LTIP
|
9,294,726
|
|
|
8,644,108
|
|
|
8,774,768
|
|
TSOP
|
434,401
|
|
|
422,973
|
|
|
410,895
|
|
Issued:
|
|
|
|
|
|
LTIP
|
852,869
|
|
|
820,746
|
|
|
1,679,547
|
|
TSOP
|
258,315
|
|
|
213,796
|
|
|
291,515
|
|
14. Stockholders’ Equity
Common Stock
Common Stock is reported net of shares held by our consolidated subsidiaries (Treasury Shares). Treasury Shares at December 31, 2019 and 2018 amounted to 20,320,777, with a cost of $19 million at both dates.
Accumulated Other Comprehensive Loss
The components of “Other comprehensive income (loss)” reported in the Consolidated Statements of Comprehensive Income and changes in the cumulative balances of “Accumulated other comprehensive loss” reported in the Consolidated Balance Sheets consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at Beginning
of Year
|
|
Net Income
(Loss)
|
|
Reclassification
of Stranded Tax Effects
|
|
Reclassification
Adjustments
|
|
Balance
at End
of Year
|
|
($ in millions)
|
|
|
|
|
|
|
|
|
Year ended December 31, 2019
|
|
|
|
|
|
|
|
|
|
Pensions and other postretirement
|
|
|
|
|
|
|
|
|
|
liabilities
|
$
|
(497)
|
|
|
$
|
61
|
|
|
$
|
—
|
|
|
$
|
15
|
|
|
$
|
(421)
|
|
Other comprehensive loss
|
|
|
|
|
|
|
|
|
|
of equity investees
|
(66)
|
|
|
(4)
|
|
|
—
|
|
|
—
|
|
|
(70)
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive
|
|
|
|
|
|
|
|
|
|
loss
|
$
|
(563)
|
|
|
$
|
57
|
|
|
$
|
—
|
|
|
$
|
15
|
|
|
$
|
(491)
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2018
|
|
|
|
|
|
|
|
|
|
Pensions and other postretirement
|
|
|
|
|
|
|
|
|
|
liabilities
|
$
|
(300)
|
|
|
$
|
(136)
|
|
|
$
|
(86)
|
|
|
$
|
25
|
|
|
$
|
(497)
|
|
Other comprehensive loss
|
|
|
|
|
|
|
|
|
|
of equity investees
|
(56)
|
|
|
(8)
|
|
|
(2)
|
|
|
—
|
|
|
(66)
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive
|
|
|
|
|
|
|
|
|
|
loss
|
$
|
(356)
|
|
|
$
|
(144)
|
|
|
$
|
(88)
|
|
|
$
|
25
|
|
|
$
|
(563)
|
|
The adoption of FASB ASU 2018-02 (see Note 1) resulted in an increase to “Accumulated other comprehensive loss” of $88 million and a corresponding increase to “Retained income,” with no impact on “Total stockholders’ equity.”
Other Comprehensive Income (Loss)
“Other comprehensive income (loss)” reported in the Consolidated Statements of Comprehensive Income consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pretax
Amount
|
|
Tax
(Expense)
Benefit
|
|
Net-of-Tax
Amount
|
|
($ in millions)
|
|
|
|
|
Year ended December 31, 2019
|
|
|
|
|
|
Net gain arising during the year:
|
|
|
|
|
|
Pensions and other postretirement benefits
|
$
|
81
|
|
|
$
|
(20)
|
|
|
$
|
61
|
|
Reclassification adjustments for costs
|
|
|
|
|
|
included in net income
|
20
|
|
|
(5)
|
|
|
15
|
|
|
|
|
|
|
|
Subtotal
|
101
|
|
|
(25)
|
|
|
76
|
|
|
|
|
|
|
|
Other comprehensive loss of equity investees
|
(4)
|
|
|
—
|
|
|
(4)
|
|
|
|
|
|
|
|
Other comprehensive income
|
$
|
97
|
|
|
$
|
(25)
|
|
|
$
|
72
|
|
|
|
|
|
|
|
Year ended December 31, 2018
|
|
|
|
|
|
Net gain (loss) arising during the year:
|
|
|
|
|
|
Pensions and other postretirement benefits
|
$
|
(181)
|
|
|
$
|
45
|
|
|
$
|
(136)
|
|
Reclassification adjustments for costs
|
|
|
|
|
|
included in net income
|
33
|
|
|
(8)
|
|
|
25
|
|
|
|
|
|
|
|
Subtotal
|
(148)
|
|
|
37
|
|
|
(111)
|
|
|
|
|
|
|
|
Other comprehensive loss of equity investees
|
(9)
|
|
|
1
|
|
|
(8)
|
|
|
|
|
|
|
|
Other comprehensive loss
|
$
|
(157)
|
|
|
$
|
38
|
|
|
$
|
(119)
|
|
|
|
|
|
|
|
Year ended December 31, 2017
|
|
|
|
|
|
Net gain arising during the year:
|
|
|
|
|
|
Pensions and other postretirement benefits
|
$
|
127
|
|
|
$
|
(32)
|
|
|
$
|
95
|
|
Reclassification adjustments for costs
|
|
|
|
|
|
included in net income
|
28
|
|
|
(9)
|
|
|
19
|
|
|
|
|
|
|
|
Subtotal
|
155
|
|
|
(41)
|
|
|
114
|
|
|
|
|
|
|
|
Other comprehensive income of equity investees
|
19
|
|
|
(2)
|
|
|
17
|
|
|
|
|
|
|
|
Other comprehensive income
|
$
|
174
|
|
|
$
|
(43)
|
|
|
$
|
131
|
|
15. Stock Repurchase Programs
We repurchased and retired 11.3 million, 17.1 million (7.0 million shares under the ASR and 10.1 million shares under our ongoing open-market program), and 8.2 million shares of Common Stock under our stock repurchase programs in 2019, 2018, and 2017, respectively, at a cost of $2.1 billion, $2.8 billion, and $1.0 billion, respectively.
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 December 31, 2019, 28.0 million shares remain authorized for repurchase. Since the beginning of 2006, we have repurchased and retired 196.9 million shares at a total cost of $16.2 billion.
16. Earnings Per Share
The following table sets forth the calculation of basic and diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
2019
|
|
2018
|
|
2017
|
|
($ in millions except per share amounts, shares in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
$
|
2,722
|
|
|
$
|
2,666
|
|
|
$
|
5,404
|
|
|
$
|
2,722
|
|
|
$
|
2,666
|
|
|
$
|
5,404
|
|
Dividend equivalent payments
|
(5)
|
|
|
(6)
|
|
|
(4)
|
|
|
—
|
|
|
(1)
|
|
|
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income available to common stockholders
|
$
|
2,717
|
|
|
$
|
2,660
|
|
|
$
|
5,400
|
|
|
$
|
2,722
|
|
|
$
|
2,665
|
|
|
$
|
5,402
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding
|
263.3
|
|
|
277.7
|
|
|
287.9
|
|
|
263.3
|
|
|
277.7
|
|
|
287.9
|
|
Dilutive effect of outstanding options
|
|
|
|
|
|
|
|
|
|
|
|
and share-settled awards
|
|
|
|
|
|
|
2.3
|
|
|
2.5
|
|
|
2.4
|
|
Adjusted weighted-average shares outstanding
|
|
|
|
|
|
|
265.6
|
|
|
280.2
|
|
|
290.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share
|
$
|
10.32
|
|
|
$
|
9.58
|
|
|
$
|
18.76
|
|
|
$
|
10.25
|
|
|
$
|
9.51
|
|
|
$
|
18.61
|
|
In each year, dividend equivalent payments were made to 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 zero for the years ended December 31, 2019 and 2018, and 0.2 million for the year ended December 31, 2017.
17. 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. The decision was upheld by the 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.
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 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. 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 $56 million at December 31, 2019, and $55 million at December 31, 2018, of which $15 million is classified as a current liability at the end of both 2019 and 2018. At December 31, 2019, the liability represents our estimates of the probable cleanup, investigation, and remediation costs based on available information at 110 known locations and projects compared with 114 locations and projects at December 31, 2018. At December 31, 2019, sixteen sites accounted for $40 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 eleven 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. With limited exceptions, we are currently insured above $75 million and below $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 above $25 million and below $200 million per occurrence and/or policy year for property owned by us or in our care, custody, or control.
Purchase Commitments
At December 31, 2019, we had outstanding purchase commitments totaling approximately $1.2 billion for locomotives, track material, long-term service contracts, track and yard expansion projects in connection with our capital programs as well as freight cars and containers through 2024.
Change-In-Control Arrangements
We have compensation agreements with certain officers and key employees that become operative only upon a change in control of Norfolk Southern, as defined in those agreements. The agreements provide generally for payments based on compensation at the time of a covered individual’s involuntary or other specified termination and for certain other benefits.
Indemnifications
In a number of instances, we have agreed to indemnify lenders for additional costs they may bear as a result of certain changes in laws or regulations applicable to their loans. Such changes may include impositions or modifications with respect to taxes, duties, reserves, liquidity, capital adequacy, special deposits, and similar requirements relating to extensions of credit by, deposits with, or the assets or liabilities of such lenders. The nature and timing of changes in laws or regulations applicable to our financings are inherently unpredictable, and therefore our exposure in connection with the foregoing indemnifications cannot be quantified. No liability has been recorded related to these indemnifications.
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES
QUARTERLY FINANCIAL DATA
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
March 31
|
|
June 30
|
|
September 30
|
|
December 31
|
|
($ in millions, except per share amounts)
|
|
|
|
|
|
|
2019
|
|
|
|
|
|
|
|
Railway operating revenues
|
$
|
2,840
|
|
|
$
|
2,925
|
|
|
$
|
2,841
|
|
|
$
|
2,690
|
|
Income from railway operations
|
966
|
|
|
1,065
|
|
|
996
|
|
|
962
|
|
Net income
|
677
|
|
|
722
|
|
|
657
|
|
|
666
|
|
Earnings per share:
|
|
|
|
|
|
|
|
Basic
|
2.53
|
|
|
2.72
|
|
|
2.50
|
|
|
2.56
|
|
Diluted
|
2.51
|
|
|
2.70
|
|
|
2.49
|
|
|
2.55
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
|
|
|
|
|
Railway operating revenues
|
$
|
2,717
|
|
|
$
|
2,898
|
|
|
$
|
2,947
|
|
|
$
|
2,896
|
|
Income from railway operations
|
835
|
|
|
1,026
|
|
|
1,020
|
|
|
1,078
|
|
Net income
|
552
|
|
|
710
|
|
|
702
|
|
|
702
|
|
Earnings per share:
|
|
|
|
|
|
|
|
Basic
|
1.94
|
|
|
2.52
|
|
|
2.54
|
|
|
2.59
|
|
Diluted
|
1.93
|
|
|
2.50
|
|
|
2.52
|
|
|
2.57
|
|