Norfolk Southern Corporation — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014. Norfolk Southern operates a rail network of approximately 20,000 miles across 22 states and the District of Columbia. Financial statements are unaudited; the independent accountant performed an interim review.
Financial performance and liquidity
| Metric | Q1 2014 | Q1 2013 / prior date |
|---|---|---|
| Railway operating revenue | $2.689 billion | $2.738 billion |
| Railway operating expenses | $2.022 billion | $2.047 billion |
| Income from railway operations | $667 million | $691 million |
| Operating ratio | 75.2% | 74.8% |
| Net income | $368 million | $450 million |
| Diluted EPS | $1.17 | $1.41 |
| Operating cash flow | $588 million | $723 million |
| Cash and short-term investments | $1.532 billion | $1.561 billion at Dec. 31, 2013 |
| Working capital | $809 million | $770 million at Dec. 31, 2013 |
| Total debt, including current maturities | $9.354 billion | $9.448 billion at Dec. 31, 2013 |
| Debt-to-total capitalization | 44.4% | 45.6% at Dec. 31, 2013 |
Cash from operations funded $381 million of property additions, $167 million of dividends, $100 million of debt repayments, and $50 million of share repurchases. Cash increased $79 million during the quarter. The company reported a $750 million credit facility with no borrowings and stated it was in compliance with its covenants; $100 million was outstanding under its accounts-receivable securitization program.
Changes versus the prior period
- Revenue declined $49 million, or 2%, while railway operating expenses fell $25 million, or 1%. Income from railway operations decreased $24 million, and the operating ratio worsened by 0.4 percentage points.
- Net income fell 18% and diluted EPS fell 17%. Q1 2013 included a $97 million pretax gain on a Michigan asset sale, which benefited net income by $60 million and EPS by $0.19; the gain did not recur.
- Coal revenue decreased $94 million, or 15%, with coal volume down 13%. General merchandise revenue increased 1% and intermodal revenue increased 4%.
- Operating cash flow decreased $135 million, primarily reflecting higher tax payments and lower operating income.
Outlook, commentary, and risks
- Management attributed results to weaker coal markets and severe winter weather, which disrupted network velocity and increased estimated costs by approximately $45 million. Lower pension and postretirement costs partly offset weather-related costs.
- For the remainder of 2014, management expected coal revenue to be lower year over year, while general merchandise and intermodal revenues were expected to increase. The filing provides no consolidated earnings or revenue guidance.
- Following a retiree medical plan amendment effective July 1, 2014, Medicare-eligible participants will receive employer-funded health reimbursement accounts. The amendment produced a $367 million prior-service benefit, partly offset by $80 million of actuarial losses from a discount-rate change; management expected pension and postretirement benefit expenses to be about $40 million lower per quarter for the rest of 2014.
- Management said cash on hand and operating cash flow should meet ongoing obligations. Outstanding purchase commitments totaled approximately $656 million through 2018, including capital projects and long-term service contracts.
- Contingencies include railroad injury and third-party claims, environmental remediation, rate cases, and fuel-surcharge antitrust litigation. Environmental liabilities were $57 million. Management said known environmental matters were unlikely to materially adversely affect the company, but outcomes and estimates remain uncertain.
- The STB ruled in Norfolk Southern’s favor in the DuPont rate case on March 14, 2014; reconsideration or appeal remained possible. The Sunbelt rate case was expected to be resolved in 2014, with no material loss expected. The company also disclosed environmental notices in Tennessee and an investigation concerning possible asbestos-abatement issues in West Virginia; it did not expect either matter to have a material effect.
- Other stated risk factors include severe weather, fuel-price changes, economic and customer-industry conditions, regulation, labor disputes, litigation, hazardous-material transportation, and technology disruptions. The filing reported no material change to previously disclosed risk factors.
Investor verification priorities
- Track coal volumes and the drivers of continued weakness, especially utility sourcing and export-market competition.
- Assess whether service disruptions and weather-related costs normalize, and whether projected benefit-cost savings are realized.
- Verify revenue and margin trends against management’s segment-level outlook; no overall earnings guidance was provided.
- Monitor cash generation, capital spending, dividends, repurchases, debt maturities, and the accounts-receivable securitization balance.
- Follow the Sunbelt and DuPont rate matters, fuel-surcharge litigation, and environmental and casualty claim estimates.