Norfolk Southern Corporation — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. Amounts are in U.S. dollars; financial figures are in millions except per-share data. Norfolk Southern operates a freight railroad across approximately 19,500 route miles in 22 states and the District of Columbia.
Financial performance
| Metric | Q3 2019 | Q3 2018 | First nine months 2019 | First nine months 2018 |
|---|---|---|---|---|
| Railway operating revenue | $2,841 | $2,947 | $8,606 | $8,562 |
| Income from railway operations | $996 | $1,020 | $3,027 | $2,881 |
| Net income | $657 | $702 | $2,056 | $1,964 |
| Diluted EPS | $2.49 | $2.52 | $7.70 | $6.95 |
| Operating ratio | 64.9% | 65.4% | 64.8% | 66.4% |
Q3 operating margin, calculated as railway operating income divided by railway revenue, was approximately 35.1%, versus 34.6% a year earlier. The company reported a record-low third-quarter operating ratio. For the nine-month period, the corresponding operating margin was approximately 35.2%, versus 33.6%.
Cash from operations was $2,997 for the first nine months, compared with $2,884 in 2018. Investing activities used $1,323, including $1,494 of property additions; financing activities used $1,580. Dividends were $705 and share repurchases were $1,550. Cash and cash equivalents were $452 at September 30; cash, cash equivalents, and restricted cash totaled $540.
Total debt, including short-term debt and current maturities, was $11,836 at September 30, compared with $11,145 at year-end 2018. The debt-to-total-capitalization ratio rose to 43.7% from 42.0%. Current assets of $2,016 were below current liabilities of $2,761; management reported a $745 working-capital deficit and said cash on hand and operating cash flow should cover ongoing obligations. The company had no borrowings under its $750 credit facility and $350 outstanding under its $450 receivables securitization program.
Changes versus the prior comparable period
- Q3 revenue fell 4%, railway operating income fell 2%, and net income fell 6%; diluted EPS declined 1%, partly cushioned by a lower share count from repurchases.
- For the first nine months, revenue increased 1%, railway operating income and net income each rose 5%, and diluted EPS increased 11%.
- Volumes declined 6% in Q3 and 3% year to date. Pricing and higher average revenue per unit partly offset weaker traffic. Q3 coal revenue fell 13%, intermodal fell 5%, and merchandise was approximately flat.
- Operating expenses declined 4% in Q3 and 2% year to date. Lower fuel costs, compensation, and equipment rents helped; depreciation and materials and other expenses increased.
Outlook, commentary, risks and unusual items
- Management attributed improved operating efficiency to its new strategic plan and operating model, which it said improved network velocity and fluidity. Average rail headcount was down about 2,400 year over year; year-end headcount was expected to be approximately 23,300.
- For the remainder of 2019, management expected merchandise and intermodal revenues to decline, with pricing gains partly offsetting lower volumes; coal revenues were also expected to decline. No overall quantified financial guidance was provided.
- Q3 materials and other expense included a $32 write-off of a non-current customer receivable arising from a legal dispute. Other income for the first nine months included a $28 impairment loss on natural-resource assets recognized in Q2.
- Environmental liabilities were $60 at September 30, versus $55 at year-end 2018. The filing notes uncertainty in environmental, casualty, occupational-injury, and other claims estimates; unexpected outcomes could require additional accruals.
- Fuel-surcharge antitrust class-action certification was denied and that decision was upheld in August 2019; individual cases have since been filed. The company said it intended to defend them and did not expect a material effect.
- Collective bargaining covers more than 80% of railroad employees; the next bargaining round was to commence November 1, 2019. The company also disclosed a planned office-building lease tied to construction expected to finish in 2021, with estimated construction cost of $550 and a residual-value guarantee of up to 90% of that cost.
- In May 2019, the company issued $800 of senior notes with maturities in 2028, 2049, and 2118. Operating lease liabilities were $561 at September 30 following adoption of the new lease standard.
Important facts for investors to verify
- Whether continued volume weakness, particularly in coal and domestic intermodal, is offset by pricing and cost reductions.
- Progress and sustainability of operating-ratio and network-efficiency gains, including the effects of lower staffing and service performance.
- Debt growth, share repurchases, dividends, capital spending, and liquidity needs relative to operating cash generation.
- Developments in customer-receivable litigation, fuel-surcharge individual cases, environmental exposures, and casualty reserves.
- Labor negotiations beginning November 1, 2019, and the timing and financial commitments associated with the office-building lease.