Norfolk Southern Corporation — Q3 2012 Form 10-Q
Business context and period: Railroad operator; unaudited results for the three and nine months ended September 30, 2012, compared with the corresponding 2011 periods. The interim financial statements received an independent accountant’s review, not an audit.
Financial results
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Railway operating revenue | $2.693 billion | $2.889 billion | $8.356 billion | $8.375 billion |
| Income from railway operations | $731 million | $938 million | $2.410 billion | $2.413 billion |
| Net income | $402 million | $554 million | $1.336 billion | $1.436 billion |
| Diluted EPS | $1.24 | $1.59 | $4.07 | $4.03 |
| Operating ratio | 72.9% | 67.5% | Not stated | Not stated |
- Q3 operating expenses were $1.962 billion, up $11 million year over year; the operating ratio worsened 5.4 percentage points.
- Nine-month operating expenses were $5.946 billion, down $16 million. The filing attributes much of the comparison to the absence of a $58 million unfavorable insurance-arbitration charge recorded in 2011.
- Operating cash flow was $2.476 billion for the first nine months, down from $2.764 billion. Property additions were $1.522 billion; operating cash flow less property additions was approximately $954 million.
- At September 30, cash and short-term investments totaled $708 million; working capital was $375 million. Total debt, including current maturities, was approximately $8.480 billion. Debt-to-total capitalization was 46.5%, versus 43.2% at year-end 2011.
- Dividends paid in the first nine months were $467 million. The quarterly dividend per share was $0.50, compared with $0.43 in 2011.
Material changes and operating drivers
- Q3 revenue fell 7%, mainly from lower coal traffic and reduced average revenue per unit, including lower fuel surcharge revenue. Coal revenue declined 22% for the quarter and 15% year to date.
- For the first nine months, general merchandise revenue grew 7% and intermodal revenue grew 5%, substantially offsetting coal weakness; total revenue was down $19 million.
- Management cited low natural-gas prices, reduced electricity demand and coal-plant closures as factors in utility coal declines; weaker global metallurgical-coal demand also affected export traffic.
- Q3 net income declined 27%, reflecting the $207 million decrease in railway operating income and lower nonoperating income, partly offset by a $92 million decrease in income taxes. Nine-month net income fell 7%, partly due to lower nonoperating income and higher taxes.
- Despite lower nine-month net income, diluted EPS rose to $4.07 from $4.03, with fewer weighted-average shares following repurchases.
Outlook, liquidity, and notable items
- Management expected coal revenue for the remainder of 2012 to decline year over year, citing lower volume and average revenue per unit. It expected general merchandise revenue to increase, with higher average revenue per unit offset by slightly lower traffic, and intermodal revenue to increase on higher volume, partly offset by lower average revenue per unit.
- Management said cash on hand and operating cash flows should be sufficient for ongoing obligations. The company had no borrowings under its $750 million revolving credit facility at quarter-end and reported compliance with its covenants.
- During 2012, NS issued $600 million of 3.00% notes due 2022 and $600 million of 3.95% notes due 2042. It also issued $600 million of 2.90% notes due 2023 in a debt exchange for $521 million of older notes, paying a $115 million premium. The premium will be amortized as additional interest expense.
- NS repurchased 16.5 million shares for $1.2 billion in the first nine months and authorized repurchases of up to a further 50 million shares through December 31, 2017. Management expected remaining-2012 repurchases to be below the $300 million purchased in Q3.
- The filing identifies fuel-price volatility, economic and traffic conditions, labor issues, regulation, severe weather, hazardous-material transportation and litigation as risks. Environmental liabilities were $34 million for 142 known sites; management said known matters were not expected to have a material adverse effect, while noting estimates and ultimate exposure are uncertain.
- Fuel-surcharge antitrust litigation had been certified as a class action; the railroads appealed, and a decision was pending. NS disputed the claims and did not expect a material effect. A DuPont rate complaint was expected to be resolved in 2013; management did not expect a material loss. NS also disclosed a Tennessee environmental notice concerning soil runoff at an intermodal construction site and did not expect a material effect.
Important facts for investors to verify
- Whether coal weakness—especially utility and export traffic—continued, and how segment volumes and fuel surcharges developed after quarter-end.
- The sustainability of general merchandise and intermodal growth, and whether operating costs and the operating ratio improved.
- Debt and interest-cost trends following new issuance and the debt exchange; the filing reports interest expense of $366 million for nine months, versus $339 million in 2011.
- Actual cash generation after capital spending, share repurchases and dividends, and the pace of authorized buybacks.
- Developments in the fuel-surcharge class action, DuPont rate case, environmental matters, and other contingencies.