Norfolk Southern Corporation — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; comparisons are with Q1 2012 unless noted. Norfolk Southern operates a major U.S. freight railroad serving coal, general merchandise and intermodal markets.
Financial performance
- Revenue: $2.738 billion, down 2% from $2.789 billion. Lower revenue per unit reduced revenue by $136 million, partly offset by $85 million from higher traffic volume.
- Operating results: Operating expenses were $2.047 billion, up $3 million; income from railway operations fell 7% to $691 million. The operating ratio worsened to 74.8% from 73.3%.
- Profit and EPS: Net income rose 10% to $450 million; diluted EPS was $1.41 versus $1.23. Results included a $97 million pretax gain on a Michigan land sale, worth $60 million after tax, or $0.19 per share. Excluding this gain, reported earnings growth was materially weaker.
- Margins and taxes: The effective tax rate declined to 35.4% from 37.3%, partly due to $9 million of retroactively reinstated tax credits and higher corporate-owned life insurance returns.
- Cash flow: Operating cash flow was $723 million, down from $1.035 billion, reflecting lower operating results and a smaller contribution from current liabilities. Property additions were $379 million; operating cash flow less property additions was $344 million, compared with $574 million in Q1 2012.
- Liquidity and debt: Cash and short-term investments totaled $687 million at March 31. Working capital was $419 million. Reported long-term debt was $8.438 billion, plus $47 million of current maturities; $100 million was outstanding under the accounts receivable securitization facility. Debt-to-total capitalization was 45.6%, down from 47.1% at year-end. The company had no borrowings under its $750 million revolving credit facility and reported covenant compliance.
- Shareholder returns: Dividends were $0.50 per share, compared with $0.47. The company repurchased approximately 0.5 million shares for $33 million, versus 5.7 million shares for $400 million in Q1 2012.
Material changes and operating trends
- Coal revenue declined 17% to $635 million, with average revenue per unit down 13% and carload volume down 4%. Utility coal tonnage fell 9%, primarily amid natural-gas displacement and high utility stockpiles; export coal tonnage increased 25%.
- General merchandise revenue increased 2% to $1.530 billion. Chemical volumes benefited from higher Bakken and Canadian crude-oil shipments, while several other categories faced weaker or lower volumes.
- Intermodal revenue increased 9% to $573 million, driven by 9% higher volume, including growth in domestic and international traffic.
- Fuel surcharge revenue declined to $274 million from $325 million, while fuel expense rose 4% to $429 million. Total railway operating expenses were nearly flat despite higher fuel and depreciation costs.
- Other income increased to $135 million from $29 million, primarily due to the Michigan land-sale gain. This non-operating item offset the decline in railway operating income.
Outlook, risks and contingencies
- Management expected coal revenue for the remainder of 2013 to be lower year over year, general merchandise revenue to be higher, and intermodal revenue to be higher. These are directional expectations; the filing provides no numerical earnings or revenue guidance.
- Management expected cash on hand and operating cash flow to cover ongoing obligations. Planned private investment in the Crescent Corridor was up to $339 million, with substantial project completion then expected in 2015; approximately $87 million was planned for the remainder of 2013.
- Management warned that oil-price changes can affect fuel costs, fuel surcharges, volumes and results. Other identified risks include economic and customer-industry conditions, competition, labor issues, severe weather, hazardous-material transportation, regulation, litigation and technology disruption.
- Environmental liabilities were $48 million, up from $42 million at December 31, 2012, across 151 known sites and projects. Management considered recorded amounts adequate and did not expect known matters to have a material adverse effect, while noting estimation uncertainty.
- The DuPont rate complaint was expected to be resolved in 2014; the company disputed the claim and did not expect a material effect. Fuel-surcharge antitrust class actions had been certified, with an appeal pending; the company stated it would defend the cases and did not expect a material effect. A Tennessee environmental notice related to construction runoff at the Memphis intermodal facility was also disclosed; the company contested liability and potential penalties.
- More than 80% of railroad employees were covered by collective bargaining agreements extending through December 31, 2014. Separate negotiations and expected mediation concerned Wheelersburg, Ohio terminal workers.
Important facts for investors to verify
- How much of Q1 earnings growth was attributable to the Michigan land-sale gain, and how underlying operating earnings develop.
- Whether coal weakness persists, particularly in utility and domestic metallurgical traffic, and whether export growth continues.
- Whether anticipated general merchandise and intermodal growth offsets lower coal revenue and fuel-surcharge volatility.
- Cash generation, capital spending and share repurchases, including the timing and funding of Crescent Corridor commitments.
- Developments in the DuPont rate case, fuel-surcharge litigation, environmental matters and related potential liabilities.