Norfolk Southern Corporation — Q2 2009 Form 10-Q
Business and period: Rail transportation company; unaudited results for the three and six months ended June 30, 2009, compared with the same 2008 periods. Dollar amounts are in millions unless stated otherwise.
Financial results
| Metric | Q2 2009 | Q2 2008 | Six months 2009 | Six months 2008 |
|---|---|---|---|---|
| Railway operating revenue | $1,857 | $2,765 | $3,800 | $5,265 |
| Income from railway operations | $468 | $799 | $851 | $1,377 |
| Net income | $247 | $453 | $424 | $744 |
| Diluted EPS | $0.66 | $1.18 | $1.13 | $1.94 |
| Dividends per share | $0.34 | $0.29 | $0.68 | $0.58 |
- Margins and costs: Q2 railway operating ratio was 74.8%, versus 71.1% a year earlier. Operating expenses fell 29% in Q2 and 24% year to date, but revenue declines were greater.
- Cash flow: First-half operating cash flow was $643, down from $1,058. Investing used $649; financing provided $110. Cash increased to $722 from $618 at year-end.
- Debt and liquidity: Current maturities and long-term debt totaled $7,082 at June 30, versus $6,667 at December 31, 2008. Debt-to-total capitalization was 41.8%, compared with 41.0%. Working capital was $198, versus a $106 deficit at year-end. The company reported an undrawn $1 billion credit facility and compliance with its covenants.
Changes versus prior period
- Q2 revenue declined 33%, with traffic volume down 26%; first-half revenue declined 28%. Lower fuel surcharge revenue and weaker volumes more than offset rate increases.
- Q2 net income fell 45%; first-half net income fell 43%. The downturn reduced freight demand across coal, general merchandise, and intermodal.
- Fuel expense dropped 69% in Q2 and 65% year to date, mainly from lower fuel prices and reduced consumption. Compensation and benefits also declined, including lower volume-related payroll and stock-based and incentive compensation.
- Dividends increased year over year. No shares were repurchased under the repurchase program in the first half of 2009; first-half 2008 repurchases were $494.
Outlook, risks, and unusual items
- Management expected coal, general merchandise, and intermodal revenue for the rest of 2009 to remain below 2008 levels, citing weak volumes and lower fuel surcharge revenue. Budgeted 2009 capital expenditures were approximately $1.3 billion. Management expected cash on hand and operating cash flow to cover ongoing obligations.
- NS formed Pan Am Southern LLC with Pan Am Railways, each holding a 50% equity interest. NS contributed about $60 million and committed a further $80 million over three years, including $75 million represented by notes; planned uses include track improvements and terminals.
- Notable contingencies include environmental proceedings and cleanup exposures, railroad injury and other claims, and fuel-surcharge antitrust litigation. Environmental liabilities were $40 million at June 30. NS also recorded $46 million in receivables tied to a disputed coal transportation contract and considered collection probable; an adverse outcome could affect results in a period.
- NS continued arbitration with insurers over Graniteville derailment reimbursements and had recorded a $100 million recovery from one carrier. Management said resolution of the disclosed environmental and other proceedings was not expected to materially affect financial position, results, or liquidity, while noting outcomes remain uncertain.
- More than 80% of railroad employees were union-covered; labor negotiations, strikes, or work stoppages could disrupt operations or raise costs. Other stated risks include economic conditions, fuel prices, competition, regulation, litigation, technology disruptions, and severe weather.
- KPMG’s interim review stated it was not aware of material modifications needed for GAAP conformity; it was a review, not an audit opinion on the interim statements. Management reported disclosure controls effective and no material second-quarter change in internal control over financial reporting.
Investor verification priorities
- Verify the persistence of demand weakness and the extent to which volume recovery, rates, and fuel surcharges affect revenue and operating ratio.
- Track operating cash flow against the $1.3 billion capital budget, dividends, debt maturities, and additional Pan Am Southern commitments.
- Review debt growth, borrowing costs, facility availability, and refinancing needs.
- Monitor the coal-contract receivable, insurer recoveries, environmental matters, and other litigation for changes in collectability, reserves, or potential exposure.
- Assess labor agreement developments and the potential operational and cost effects of disputes or work stoppages.