Norfolk Southern Corporation — Q1 2010 Form 10-Q
Business context and period: This unaudited quarterly report covers the three months ended March 31, 2010, compared with the same quarter of 2009. Norfolk Southern operates a freight railroad. Management attributed improved results to an improving economic landscape and stronger traffic in most non-coal markets. The interim financial statements received an independent accountant’s review, not an audit.
Financial results and liquidity
| Metric | Q1 2010 | Q1 2009 / prior balance date |
|---|---|---|
| Railway operating revenue | $2,238 million | $1,943 million |
| Railway operating expenses | $1,683 million | $1,560 million |
| Income from railway operations | $555 million | $383 million |
| Railway operating ratio | 75.2% | 80.3% |
| Net income | $257 million | $177 million |
| Basic / diluted EPS | $0.69 / $0.68 | $0.48 / $0.47 |
| Dividends per share | $0.34 | $0.34 |
| Operating cash flow | $758 million | $354 million |
Revenue increased 15%; operating expenses rose 8%; income from railway operations and net income each increased 45%. The operating margin, calculated as income from railway operations divided by revenue, was approximately 24.8%, versus 19.7% a year earlier.
Cash and cash equivalents were $1.161 billion at March 31, 2010, with short-term investments of $225 million; together these totaled about $1.4 billion. Working capital was $453 million, compared with $457 million at December 31, 2009. Investing activities used $360 million, including $256 million of property additions; financing activities used $233 million. Total debt carrying value was $7.027 billion, including $648 million of current maturities. The debt-to-total-capitalization ratio was 39.9%, down from 40.9% at year-end 2009.
Material changes and notable items
- Revenue growth reflected $170 million from higher traffic volume and $125 million from revenue per unit and mix. Fuel surcharge revenue increased $65 million to $159 million.
- General merchandise revenue rose 23% and intermodal revenue rose 12%. Coal revenue increased 4%, although coal tonnage declined 5%, mainly because utility coal shipments fell 16%; export and domestic metallurgical coal volumes grew.
- Fuel expense increased $95 million, or 60%, chiefly because of a 54% increase in average locomotive fuel price. Compensation and benefits rose $60 million, including higher stock-based and incentive compensation.
- A $27 million deferred tax charge related to 2010 health-care legislation contributed to an effective tax rate of 43.6%, compared with 37.5% in Q1 2009. Stock-based compensation expense was $40 million, up from $15 million.
- Operating cash flow benefited from stronger operating results, no income-tax payments in the quarter, working-capital effects, and a favorable settlement of a Graniteville-related insurance claim. A favorable freight-car supplier settlement also reduced purchased services and rents.
- Environmental liabilities were $37 million at March 31, versus $32 million at year-end. The company reported $229 million of outstanding purchase commitments, primarily for services and capital-program items.
Outlook, risks and contingencies
Management expected 2010 capital expenditures of approximately $1.44 billion and stated that cash on hand and operating cash flows should meet ongoing obligations. It expected revenue for the remainder of 2010 to be higher than 2009 in coal, general merchandise and intermodal, based on projected traffic and revenue-per-unit trends.
Positive train control was expected to require at least $700 million of additional capital expenditures during 2011–2015, with another $400 million of systems and track upgrades accelerated from later years to meet the 2015 deadline. The company also described planned spending on the CREATE and Crescent Corridor projects and an additional $55 million contribution to Pan Am Southern over two years.
Management cited uncertainty from economic conditions, fuel prices, traffic demand, competition, labor negotiations, regulation, litigation, technology disruptions and severe weather. Fuel prices may affect both operating costs and surcharge revenue. The company reported ongoing fuel-surcharge antitrust litigation and a shareholder demand relating to those allegations; it disputed the claims. The Graniteville environmental matter had reached a proposed consent decree subject to public comment. Management did not expect known environmental matters or the described proceedings to materially affect financial position, results or liquidity, but noted that litigation and environmental outcomes are uncertain.
Important facts for investors to verify
- Whether the stronger traffic and operating results persisted beyond Q1, particularly in utility coal and other cyclical markets.
- How fuel prices, surcharges and their timing affect margins, and whether the fuel-cost increase continues.
- Execution and funding of the $1.44 billion 2010 capital plan, positive train control requirements and corridor projects.
- Resolution and potential financial impact of fuel-surcharge litigation, environmental proceedings, casualty claims and the disputed $43 million Graniteville insurance recovery.
- Whether cash generation, debt maturities and liquidity facilities remain sufficient as investment and operating needs evolve.