Financial overview
1998 was a watershed year for NS. In March, NS completed the sale of its motor carrier subsidiary, North American Van Lines Inc. (NAVL), which resulted in an after-tax gain of $105 million, or 28 cents per diluted share.
In August, NS and CSX were allowed jointly to exercise control over Conrail and proceed with the transactions contemplated in their joint application filed in 1997 with the Surface Transportation Board.
NS' planning for the operation of certain Conrail routes and assets intensified with the approach of Day One - the June 1, 1999, Closing Date.
1998 results
Net income for 1998 was $734 million, or $1.93 per diluted share, up 2% from 1997. Income from continuing operations, which excludes NAVL's operating results and the gain on its sale, was $630 million, or $1.65 per diluted share, down 10% from 1997.
Included in both years' results were Conrail-related items that reduced 1998 net income by $156 million, or 41 cents per diluted share, and 1997 net income by $107 million, or 29 cents per diluted share.
Conrail-related items principally consist of interest expense on debt, estimated integration expenses, and credit facility costs, which reduce net income, and NS' equity in Conrail earnings, which increases net income.
"Our 1998 financial results were burdened by substantial costs as we prepare for the integration of Conrail," says Hank Wolf, NS Vice Chairman and Chief Financial Officer.
"This has been a tremendous challenge, but we view these costs as a long-term investment in our future that will position us to secure significant benefits from the transaction."
Excluding Conrail-related items, income from continuing operations in 1998 would have been $786 million, down 2%, and diluted earnings per share would have been $2.06, down 3%, due to reduced income from railway operations.
Railway operating revenues were $4.22 billion, nearly even with 1997. General merchandise revenues increased $55 million, or 2%. However, coal revenues decreased $49 million, or 4%, because of declines in export and domestic metallurgical coal traffic. Intermodal revenues declined $8 million, or 1%.
The increase in general merchandise revenues was driven by a $74 million, or 15%, increase in automotive revenues. Metals and construction revenues increased $5 million, or 1%. Chemicals revenues decreased $11 million, or 2%; agriculture, consumer products, and government revenues decreased $8 million, or 2%; and paper, clay, and forest products revenues decreased $5 million, or 1%.
Railway operating expenses were $3.17 billion, up 5% compared with 1997. The railway operating ratio was 75.1%, compared with a record-low 71.3% in 1997. Both increases were mostly due to Conrail-related integration expenses.
Return on equity was 12.9%; excluding Conrail-related items, 1998 return on equity would have been 15.2%, compared with the 15.7% in 1997 that matched the all-time NS high.
Total dividends paid in 1998 were $303 million, and dividends per share were 80 cents. Based on year-end prices, stockholders received a dividend yield of 2.5% in 1998, compared with an average of 1.2% for all S&P 500 stocks.
Since 1983, NS' first full year after consolidation, the annual dividend rate has grown at a compound annual rate of 6.5%, well above the average inflation rate of 3.6%.
1998's net income and diluted earnings per share, excluding Conrail-related items, were up 7% over 1997, reflecting a $105 million, or 28 cents per share, gain from the sale of NS' motor carrier subsidiary.
*1993 excludes the effect of accounting changes that increased net income by $223 million and diluted EPS by 53 cents, and the prior years' effect of a federal tax rate increase that reduced net income by $46 million and diluted EPS by 11 cents. 1995 excludes an early retirement charge that reduced net income by $20 million and diluted EPS by six cents. 1997 and 1998 exclude Conrail-related items.
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A Conrail train travels Horseshoe Curve, a well-known landmark on Conrail's Pittsburgh line in Pennsylvania. |