NSC

Norfolk Southern Corp. 10-Q Summary

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended June 30, 2001, and the six months ended on that date. Norfolk Southern Corporation (NS) is a major freight railroad operating in the eastern United States. The company jointly owns Conrail Inc. (58% economic interest) and operates a significant portion of its lines. The filing includes unaudited financial statements and management discussion regarding operations, liquidity, and market risks.

Key Financial Metrics

Note: Working Capital calculated as Current Assets minus Current Liabilities. 6M 2000 Net Income includes $62 million in after-tax workforce reduction costs.

Material Changes vs. Prior Period

• Revenue Stability: Q2 2001 revenues were flat compared to 2000 ($1.592B), driven by higher revenue per unit offsetting lower traffic volume. Six-month revenues increased 1% ($32M).
• Profitability: Net income for Q2 2001 decreased 8% ($9M) due to lower nonoperating income. However, six-month income from continuing operations increased significantly ($100M) compared to 2000, primarily because the prior year included $62 million in one-time workforce reduction costs.
• Operating Expenses: Six-month expenses decreased 5% ($149M). Excluding the 2000 workforce reduction costs, expenses were down 2% year-over-year.
• Cash Flow: Operating cash flow for the first six months dropped significantly to $310 million from $886 million in 2000. This decline is attributed to the absence of a large cash infusion from an accounts receivable sale program in 2000, higher tax payments, and timing of payments to Conrail.
• Commodity Trends: Coal revenues increased 5% in Q2 and 9% year-to-date due to higher utility coal volume. General merchandise revenues declined 2% in Q2 and 3% year-to-date due to weak manufacturing and automotive sectors.

Guidance, Outlook, and Risks

• Outlook: Management expects coal revenues to benefit from electricity demand, though milder weather has tempered early Q3 growth. General merchandise revenues are expected to continue declining year-over-year due to weak economic conditions. Intermodal revenues are expected to benefit from new business but face headwinds from economic softness.
• Liquidity: NS maintains a $1 billion credit facility expiring in May 2002 to support commercial paper. The company issued $987 million in Senior Notes in February 2001 and $250 million in July 2001 to manage debt maturity and retire commercial paper.
• Risks and Contingencies:
  • Telecommunications Subsidiary: A co-developer of NS's fiber optic subsidiary (T-Cubed) filed for Chapter 11 bankruptcy. Management believes amounts owed will be realized and no impairment has been recognized, though industry downturns pose a risk.
  • Labor Arbitration: Arbitration is pending regarding "New York Dock" income protection benefits for furloughed employees. Management does not expect a material adverse effect, but a full loss could significantly impact a specific quarter.
  • Derivatives: NS adopted SFAS 133 in 2001 and uses derivatives to hedge diesel fuel and interest rate risks. Fuel hedging resulted in a negligible net increase in expense ($0.6M) for Q2.

Investor Verification Checklist

• Verify the sustainability of the operating ratio improvement (84.5% vs 86.9% in 2000) once the one-time 2000 workforce reduction costs are fully excluded from comparisons.
• Monitor the decline in operating cash flow ($310M vs $886M) to ensure it is not a structural issue but rather a timing/one-time event as described.
• Assess the impact of the telecommunications subsidiary's co-developer bankruptcy on the recoverability of the >$100 million investment.
• Review the status of labor arbitration claims regarding furloughed employees, as a loss could materially affect future earnings.
• Confirm the trajectory of General Merchandise traffic, which is declining due to the weak automotive and steel industries.