Norfolk Southern Corporation — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. Norfolk Southern operates a freight railroad across approximately 19,500 route miles in 22 states and the District of Columbia.
Financial performance
| Metric | Q2 2020 | Q2 2019 | First six months 2020 | First six months 2019 |
|---|---|---|---|---|
| Railway operating revenue | $2.085B | $2.925B | $4.710B | $5.765B |
| Income from railway operations | $610M | $1.065B | $1.178B | $2.031B |
| Net income | $392M | $722M | $773M | $1.399B |
| Diluted EPS | $1.53 | $2.70 | $3.00 | $5.21 |
| Railway operating ratio | 70.7% | 63.6% | 75.0% reported; 66.8% adjusted | 64.8% |
| Cash provided by operating activities | Not separately reported | Not separately reported | $1.758B | $1.952B |
Q2 operating expenses were $1.475B, down 21%. Lower compensation, fuel, purchased services, and materials costs partly offset the revenue decline. For the first half, reported expenses included a $385M locomotive-disposal loss; excluding that charge, operating income was $1.563B, net income $1.061B, diluted EPS $4.11, and the operating ratio 66.8%. Adjusted first-half net income and diluted EPS declined 24% and 21%, respectively, versus 2019.
For the first half, property additions were $735M, cash used in investing activities was $540M, and cash used in financing activities was $655M. Cash and cash equivalents were $1.143B at June 30, versus $580M at year-end 2019. Working capital was $415M, compared with negative $219M at year-end.
Changes and drivers
- Q2 revenue fell 29% and first-half revenue fell 18%, principally from lower shipment volumes during the COVID-19 downturn. Q2 volumes declined 26% overall; coal revenue fell 55%, automotive 63%, merchandise 26%, and intermodal 19%.
- Q2 railway operating income declined 43%, net income 46%, and diluted EPS 43%. The operating ratio worsened by 7.1 percentage points.
- Lower fuel prices and consumption, reduced staffing, lower volumes, and operational efficiencies reduced expenses. Average rail headcount in Q2 was down by more than 4,900 year over year.
- Pricing and mix partly offset volume pressure: first-half merchandise revenue per unit increased 5%, while total revenue per unit was approximately flat.
Debt, liquidity, outlook, and risks
Long-term debt, including current maturities, was $12.697B at June 30, 2020, versus $12.196B at December 31, 2019. The total-debt-to-total-capitalization ratio increased to 46.1% from 44.5%. In May, the company issued $800M of 3.05% notes due 2050 for $790M net proceeds and exchanged $554M of older notes for $800M of 3.155% notes due 2055, recording a $4M extinguishment loss.
The company reported no borrowings under its $800M credit facility, which expires in March 2025, and $308M of available capacity under its receivables securitization program, which expires in May 2021. It also said it could borrow up to $725M against corporate-owned life insurance policies. Management expected cash on hand and operating cash flow to meet ongoing obligations, with borrowing capacity and the ability to reduce capital spending or shareholder distributions providing additional flexibility.
Management provided no specific financial guidance. It emphasized that the pandemic’s duration and economic effects remained uncertain, and that continued weakness could further reduce operating cash inflows. COVID-19 could also affect employee availability, operations, suppliers, and business continuity. The company said employee availability had not been significantly impaired through the filing period.
Unusual item: the $385M first-quarter loss reflected a write-down of excess locomotives to estimated fair value; 446 of 703 locomotives in the disposal plan had been sold by June 30. The remaining $29M carrying value was classified in other current assets. Contingencies include railroad injury, environmental, and legal claims. Environmental liabilities totaled $54M. A terminal-company minority-owner lawsuit was described as reasonably possible, but the potential loss range could not be estimated. The company said fuel-surcharge antitrust proceedings were not expected to have a material effect.
Important facts for investors to verify
- Whether freight volumes and revenues recover as pandemic-related restrictions and customer shutdowns ease, particularly in coal, automotive, and merchandise.
- How the reported first-half results compare with the adjusted figures, and whether locomotive-disposal activity creates further charges or proceeds.
- Cash-flow resilience, debt levels and refinancing needs, and actual availability of the stated credit and insurance-backed borrowing capacity.
- Progress on cost reductions and their effects on service, network fluidity, and operating ratio as volumes change.
- Developments in COVID-19 exposure, labor negotiations, environmental obligations, and the terminal-owner litigation whose potential loss range was not estimable.