Norfolk Southern Corporation — Q1 2017 Form 10-Q
Business context and period. Unaudited results cover the three months ended March 31, 2017, compared with Q1 2016. Norfolk Southern operates a major eastern U.S. freight railroad, with merchandise, intermodal, and coal as its principal markets.
Key financial metrics
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Railway operating revenue | $2,575 million | $2,420 million | +6% |
| Railway operating expenses | $1,802 million | $1,697 million | +6% |
| Income from railway operations | $773 million | $723 million | +7% |
| Operating ratio | 70.0% | 70.1% | Improved 0.1 percentage point |
| Net income | $433 million | $387 million | +12% |
| Diluted EPS | $1.48 | $1.29 | +15% |
| Dividends per share | $0.61 | $0.59 | +3% |
- Cash provided by operating activities was $846 million, versus $879 million. Property additions were $438 million; operating cash flow less property additions was approximately $408 million, versus $481 million.
- Cash and cash equivalents were $955 million at March 31, 2017. Current assets were $2,327 million and current liabilities $2,443 million, a $116 million working capital deficit.
- Total debt, including current maturities, was $10,119 million; the debt-to-total-capitalization ratio was 44.7%, down from 45.1% at year-end 2016.
- Cash used in investing activities was $404 million; cash used in financing activities was $443 million. The company repurchased $200 million of shares and paid $177 million in dividends.
Material changes versus Q1 2016
Revenue growth reflected 5% higher total units and increased average revenue per unit. Coal revenue rose 20% and intermodal 9%; merchandise revenue increased 2%. Coal volumes climbed 21%, intermodal units 4%, and merchandise units 1%. Fuel surcharge revenue increased to $80 million from $49 million.
Operating expenses increased 6%. Fuel expense rose 43%, chiefly because locomotive fuel prices were 46% higher; improved fuel efficiency partly offset the price increase. Compensation and benefits rose 3%, while purchased services and rents declined 1%. The effective tax rate fell to 33.9% from 35.5%, partly due to tax benefits on stock-based compensation.
Outlook, commentary, and risks
- Management reported record first-quarter railway operating income, operating ratio, and diluted EPS, and said it remained focused on improving the full-year operating ratio from the prior year’s record result.
- For the remainder of 2017, management expected merchandise revenue to increase with higher average revenue per unit and broadly flat volumes; intermodal revenue to increase on volume growth and higher average revenue per unit; and coal revenue to be higher, supported by export and utility volumes and pricing gains. No specific numerical full-year forecast was provided.
- Management expected cash on hand and operating cash flow to cover ongoing obligations. The $750 million credit facility, expiring May 2021, was undrawn; the $350 million receivables securitization program had $100 million outstanding. The company reported compliance with credit-facility covenants.
- Environmental liabilities were $67 million, including $15 million current, across 134 known locations and projects. Management considered recorded amounts adequate for known probable exposures, while noting estimates and future costs remain uncertain.
- Other contingencies include personal-injury and other casualty claims, a pending appeal related to the Sunbelt rate case (previously decided in the company’s favor), and fuel-surcharge antitrust class actions. Management did not expect the cited proceedings to have a material effect, but outcomes cannot be predicted with certainty.
- National labor negotiations remained ongoing for many union employees. Management identified forward-looking statements as subject to risks and uncertainties; the filing reported no change to risk factors disclosed in the 2016 Form 10-K.
Most important facts for investors to verify
- Whether strong coal and intermodal volume trends continue, and whether merchandise volumes remain broadly flat as management expected.
- Whether pricing and fuel surcharges can offset fuel, labor, maintenance, and casualty-cost pressures and support further operating-ratio improvement.
- Cash generation relative to capital spending, dividends, share repurchases, and debt obligations, particularly given the working capital deficit.
- Developments in environmental estimates, casualty claims, the Sunbelt appeal, fuel-surcharge litigation, and labor negotiations.
- The effects of upcoming accounting standards, especially lease accounting and the presentation of pension and postretirement benefit costs; management was still evaluating implementation effects.