Norfolk Southern Corporation — Q1 2020 Form 10-Q
Business context and period: The filing covers the three months ended March 31, 2020. Norfolk Southern operates a freight railroad across 22 states and the District of Columbia. Results reflect continued operating-efficiency initiatives, alongside the early effects of COVID-19 and a significant locomotive-disposal charge.
Key financial results
| Metric | Q1 2020 | Q1 2019 | Change / context |
|---|---|---|---|
| Railway operating revenue | $2.625 billion | $2.840 billion | Down 8%; volumes declined 11%, partly offset by 4% higher revenue per unit |
| Operating expenses | $2.057 billion | $1.874 billion | Up 10%, including a $385 million locomotive-disposal loss |
| Income from railway operations | $568 million | $966 million | Down 41% reported |
| Net income | $381 million | $677 million | Down 44% reported |
| Diluted EPS | $1.47 | $2.51 | Down 41% reported |
| Railway operating ratio | 78.4% | 66.0% | Higher reported ratio indicates weaker reported operating margin |
| Operating cash flow | $955 million | $881 million | Up from prior-year quarter |
Excluding the $385 million disposal loss (company-presented non-GAAP measures): Q1 2020 operating income was $953 million, net income $669 million, diluted EPS $2.58, and operating ratio 63.7%. Against Q1 2019, adjusted operating income and net income were each down 1%, adjusted diluted EPS was up 3%, and the adjusted operating ratio improved from 66.0%.
Revenue, cash flow, debt, and liquidity
- Coal revenue fell 31%, intermodal 9%, and merchandise 1%. Total volume declined 11%; coal volume was down 31% and intermodal volume 11%.
- Operating cash flow was $955 million. Investing cash outflow was $233 million, including $366 million of property additions; financing cash outflow was $694 million.
- Cash and cash equivalents were $608 million at March 31, 2020. Working capital was negative $234 million.
- Total debt, including current maturities, was $12.207 billion; the debt-to-total-capitalization ratio was 45.1%, versus 44.5% at year-end 2019.
- The company had no borrowings under its renewed $800 million revolving credit facility, which expires in May 2025. It reported $412 million available under a receivables securitization program expiring in May 2020, which it intended to renew, and borrowing capacity of up to $652 million against corporate-owned life insurance policies.
- Dividends paid were $242 million, and the company repurchased $466 million of stock. The quarterly dividend was $0.94 per share.
Material changes and unusual items
- The $385 million charge followed a plan to dispose of 703 excess locomotives; 297 had been sold by quarter-end. The charge included a $97 million tax benefit. The remaining assets held for sale had a $44 million carrying amount.
- Reported operating expenses rose despite lower compensation, purchased services, fuel, and materials costs. Excluding the disposal charge, expenses were down 11% year over year.
- The effective tax rate was 12.6%, compared with 21.4% in Q1 2019. Besides the disposal-related benefit, the quarter included a $19 million tax reduction following resolution of the company’s 2012 amended federal return.
- The company repurchased 2.6 million shares, compared with 2.9 million in Q1 2019; the lower share count supported adjusted EPS.
Outlook, management commentary, and risks
- Management expected full-year 2020 revenue to decline, with the magnitude unknown, due to COVID-19-related volume declines across merchandise, intermodal, and coal. Year-over-year volume declines in the first weeks of April were approximately 30%; the full-year operating ratio outlook was uncertain.
- Management said cash on hand and operating cash flow were expected to meet ongoing obligations. It cited available borrowing capacity, access to additional financing, and the ability to reduce capital spending and shareholder distributions as liquidity measures if needed.
- COVID-19 could affect demand, customers, supply chains, operations, and employee availability. Management reported no significant adverse effect on its employee base during Q1, while noting risks from illness, quarantine, or government restrictions.
- Environmental liabilities were $56 million. The company stated that known matters were not expected to have a material adverse effect, but noted estimates and ultimate costs remain uncertain.
- Fuel-surcharge antitrust claims had led to individual cases after class certification was denied; the company intended to defend them and did not expect a material effect. A separate terminal-company lawsuit had a reasonably possible loss, but the potential range could not be estimated.
Important facts for investors to verify
- How quickly COVID-19-related volume and revenue declines progressed after the quarter, and whether the approximately 30% early-April volume decline persisted.
- Whether the company renewed the receivables securitization program that was due to expire in May 2020, and any subsequent changes in borrowing capacity or liquidity.
- Whether locomotive sales and proceeds matched the company’s estimates, and whether further disposal charges or operating impacts arose.
- Whether the adjusted results are comparable with other periods and issuers; these non-GAAP figures exclude the $385 million charge and are not a substitute for GAAP results.
- Developments in the terminal lawsuit, environmental exposures, and other claims that could affect future expenses or cash requirements.