Norfolk Southern Corporation — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. Norfolk Southern operates a freight railroad network of approximately 19,500 route miles across 22 states and the District of Columbia. Financial figures below are in millions of dollars unless otherwise noted.
Financial performance
| Metric | Q2 2019 | Q2 2018 | First six months 2019 | First six months 2018 |
|---|---|---|---|---|
| Railway operating revenue | $2,925 | $2,898 | $5,765 | $5,615 |
| Income from railway operations | $1,065 | $1,026 | $2,031 | $1,861 |
| Net income | $722 | $710 | $1,399 | $1,262 |
| Diluted EPS | $2.70 | $2.50 | $5.21 | $4.43 |
| Operating ratio | 63.6% | 64.6% | 64.8% | 66.9% |
| Operating cash flow | Not separately stated for the quarter | $1,952 | $1,826 |
Q2 revenue increased 1%, operating income 4%, net income 2%, and diluted EPS 8% year over year. For the first six months, revenue rose 3%, operating income 9%, net income 11%, and diluted EPS 18%. Management reported a record-low second-quarter operating ratio and records for quarterly railway operating income, net income, and diluted EPS.
Revenue growth reflected higher average revenue per unit, primarily from pricing gains, partly offset by lower traffic. Volumes declined 4% in Q2 and 2% year to date; average revenue per unit increased 5% in both periods. Operating expenses fell 1% in both periods. Lower fuel costs and reduced equipment-rent expense were partly offset by higher depreciation. Share repurchases contributed to EPS growth exceeding net income growth.
Cash, debt, and liquidity
- At June 30, 2019, cash and cash equivalents were $274; total debt, including current maturities, was $11,477. Debt-to-total-capitalization was 42.8%, compared with 42.0% at December 31, 2018.
- First-half operating cash flow was $1,952. Investing activities used $852, including $979 in property additions; financing activities used $1,186.
- First-half dividends were $458 and share repurchases were $1,050, versus $408 and $700, respectively, in the prior-year period. The company repurchased 5.7 million shares.
- Working capital deficit was $537, improved from $729 at year-end 2018. Management expects cash on hand and operating cash flow to cover ongoing obligations.
- Q2 debt issuance included $800 of senior notes due in 2028, 2049, and 2118. The company had no borrowings under its $750 credit facility or $450 receivables securitization program at quarter-end and reported covenant compliance.
Outlook, commentary, and notable items
- Management expected merchandise revenue to increase for the remainder of 2019, supported by pricing and modest volume growth in Q4. Intermodal revenue was also expected to increase, with modest volume growth and pricing gains. Coal revenue was expected to decline, reflecting lower utility demand, weaker export conditions, and softness in domestic metallurgical demand.
- Management expected headcount to continue declining through the rest of the year. It cited its new strategic plan, introduced in February, and improved network velocity as factors supporting operating performance.
- Other income included a $28 impairment loss on natural-resource assets being marketed for sale; gains on non-operating property sales and higher returns on corporate-owned life insurance partly offset it.
- Operating lease adoption in 2019 resulted in $586 of recognized lease assets and liabilities at June 30. A non-cancellable office-building lease is expected to commence in 2021; the filing cites estimated construction cost of $550 and a residual-value guarantee of up to 90% of that cost.
- Environmental liabilities were $63 at June 30, versus $55 at year-end 2018. The company said known matters were not expected to have a material adverse effect, while noting that environmental costs and casualty claims are subject to estimation uncertainty.
- Fuel-surcharge antitrust litigation remained pending; the company said it intended to defend the claims and did not expect a material effect. Other lawsuits and claims could produce additional accruals, potentially significant in a particular period.
Most important facts for investors to verify
- Whether pricing gains and operating-efficiency improvements can offset continued volume weakness, especially in intermodal and coal.
- Whether management’s remaining-year revenue expectations are achieved, given its stated coal-market and demand risks.
- Cash generation and capital allocation, including the pace of buybacks, dividends, property additions, and additional borrowing.
- Changes in debt, leverage, lease commitments, environmental reserves, and casualty claims.
- Developments in the fuel-surcharge litigation and other material legal or environmental contingencies.