Norfolk Southern Corporation — Q1 2012 Form 10-Q
Business context and reporting period. Norfolk Southern operates a railroad. This unaudited filing covers the three months ended March 31, 2012, compared with Q1 2011; balance-sheet figures are compared with December 31, 2011. Amounts are in millions of dollars unless stated otherwise.
Financial and operating performance
| Metric | Q1 2012 | Q1 2011 / prior balance | Change |
|---|---|---|---|
| Railway operating revenues | $2,789 | $2,620 | Up $169, or 6% |
| Railway operating expenses | $2,044 | $2,020 | Up $24, or 1% |
| Income from railway operations | $745 | $600 | Up $145, or 24% |
| Operating ratio | 73.3% | 77.1% | Improved 3.8 percentage points |
| Net income | $410 | $325 | Up $85, or 26% |
| Diluted earnings per share | $1.23 | $0.90 | Up $0.33 |
| Dividends per share | $0.47 | $0.40 | Up $0.07 |
| Operating cash flow | $1,035 | $652 | Up $383 |
| Property additions | $461 | $423 | Cash outflow |
| Cash and cash equivalents | $829 | $276 at Dec. 31, 2011 | |
| Cash, equivalents and short-term investments | $831 | — | At March 31, 2012 |
| Total debt, including current maturities | $8,017 | $7,440 at Dec. 31, 2011 | Fair value was $9,960 |
| Debt-to-total-capitalization ratio | 45.0% | 43.2% at Dec. 31, 2011 | Increased 1.8 percentage points |
Revenue growth reflected higher revenue per unit and increased traffic. General merchandise revenue rose 13%, intermodal rose 9%, and coal fell 6%. General merchandise and intermodal benefited from stronger volumes and pricing; coal was pressured by lower utility and export shipments. The operating margin, calculated as railway operating income divided by railway operating revenue, was approximately 26.7%, versus 22.9% in Q1 2011.
Operating cash flow increased partly because of improved results and a $316 million cash contribution from changes in current liabilities other than debt. Financing cash flow included $600 million of 3.0% senior notes due 2022, $400 million of share repurchases, $155 million of dividends, and net debt proceeds of $478 million. NS repurchased 5.7 million shares during the quarter.
Material changes and unusual items
- Operating expenses included no repeat of the prior-year $58 million unfavorable insurance-arbitration charge related to the Graniteville derailment ($43 million for a disputed insurance recovery and $15 million for other affected receivables). This comparison materially benefited Q1 2012 operating income.
- Coal revenue declined $50 million: traffic volume fell 12%, partly offset by a 6% increase in revenue per unit. Utility coal tonnage fell 17%, reflecting mild winter weather, lower electricity demand, and competition from low natural-gas prices; export tonnage fell 10% amid weaker steel demand and increased Australian supply.
- General merchandise revenue increased $177 million, supported by 5% higher volume and 8% higher revenue per unit. Intermodal revenue rose $42 million, with volume up 5%.
- Fuel expense rose $24 million, primarily because locomotive fuel prices increased 10%; lower locomotive fuel consumption partly offset the price effect. Compensation and benefits increased $21 million, while materials and other expenses fell $42 million, largely due to the prior-year arbitration charge not recurring.
- Share repurchases reduced outstanding shares; weighted-average basic shares fell to 328.3 million from 355.2 million in Q1 2011.
Outlook, liquidity, risks and contingencies
- Management expected coal revenues for the rest of 2012 to decrease year over year because of lower average revenue per unit and traffic volumes. It expected general merchandise and intermodal revenues to increase, based on improved pricing and higher traffic volumes.
- Management said cash on hand and operating cash flows should be sufficient for ongoing obligations. NS had a $750 million revolving credit facility available through 2016, with no borrowings outstanding and covenants in compliance. Its $350 million receivables securitization facility ran to October 2012; $100 million was outstanding at quarter-end.
- NS expected to spend up to $351 million of private funding on Crescent Corridor work, with substantial completion expected in 2014; approximately $127 million of that spending was planned for the remainder of 2012. Public funding commitments or expected funding totaled $267 million.
- Environmental liabilities were $38 million at March 31, 2012, including $12 million current, covering 143 known locations and projects. Management considered known matters unlikely to have a material adverse effect, but noted that actual costs may vary and future environmental liabilities could be significant in a particular period.
- NS faced numerous railroad-related claims and lawsuits. The DuPont rate case was expected to be resolved in 2013; management did not expect a material effect. NS disputed fuel-surcharge antitrust allegations and a Tennessee environmental notice concerning soil runoff near a Memphis-area intermodal facility; management did not expect either matter to have a material effect.
- Key risks cited include economic conditions, competition, fuel prices, labor disruptions, severe weather, hazardous-material transportation, litigation and regulatory developments. Management noted that oil-price changes can affect revenue, fuel costs and results in either direction.
- The effective tax rate was 37.3%, versus 36.9%. NS expected IRS examinations of its 2009 and 2010 federal returns to conclude by year-end 2012 and did not expect a material impact.
Important facts for investors to verify
- Whether coal-market weakness and management’s expected full-year segment trends developed as anticipated.
- How much of the 26% net-income growth reflects the nonrecurrence of the $58 million prior-year insurance-arbitration charge versus ongoing operating improvement.
- Whether operating cash flow remains strong after considering working-capital movements, capital spending, dividends and repurchases.
- Debt growth, the higher debt-to-capitalization ratio, and refinancing or renewal of the receivables facility due to expire in October 2012.
- Developments in the DuPont rate case, fuel-surcharge litigation, environmental matters and casualty claims, including any changes to recorded liabilities.
- The financial statements received an independent accountant’s interim review, not an audit opinion; the auditor reported no material modifications that should be made for GAAP conformity.