NSC

Norfolk Southern Corp. 10-Q Summary

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended September 30, 2001, for Norfolk Southern Corporation, a major freight railroad operator. The filing includes unaudited consolidated financial statements for the three and nine months ended September 30, 2001, compared to the same periods in 2000. The company operates a significant portion of the Northeastern U.S. rail network through its joint ownership of Conrail Inc.

Key Financial Metrics

Note: Debt figures exclude notes payable to Conrail. Operating ratios exclude 2000 workforce reduction costs for year-to-date comparison.

Material Changes vs. Prior Period

• Revenue Decline: Q3 2001 revenues fell 2% ($27 million) year-over-year due to a 6% decline in traffic volume, partially offset by higher revenue per unit. Year-to-date revenues were flat ($5 million increase) despite a 4% volume decline.
• Profitability: Q3 Net Income decreased 20% to $79 million, driven by a $65 million drop in "Other income - net" (absence of 2000 asset sale gains). However, Income from Railway Operations increased 16% in Q3 and 42% year-to-date (excluding 2000 workforce reduction costs).
• Expense Management: Railway operating expenses decreased 5% in Q3 and 5% year-to-date. Excluding 2000 workforce reduction costs, year-to-date expenses were down 3%. Diesel fuel expenses dropped 21% in Q3 due to lower consumption and prices.
• Cash Flow: Operating cash flow for the first nine months dropped significantly to $577 million from $1.223 billion in 2000. This was primarily due to the absence of a large cash infusion from an accounts receivable sale program in 2000 and higher tax payments.
• Commodity Trends: Coal revenues rose 6% year-to-date despite volume declines in export and metallurgical coal, driven by higher rates and utility coal demand. General merchandise revenues fell 3% year-to-date due to an 8% volume decline across all groups.

Guidance, Outlook, and Risks

• Outlook: Management expects fourth-quarter coal revenues to compare favorably year-over-year. General merchandise revenues are expected to be comparable to last year, while intermodal revenues may benefit from new business but face headwinds from economic softness.
• Liquidity: The company reported a working capital deficit of $1.5 billion at September 30, 2001. It maintains a $1 billion credit facility and the ability to issue commercial paper or borrow from Conrail to meet immediate needs.
• Telecommunications Risk: The subsidiary T-Cubed is co-developing fiber optic infrastructure. A co-developer filed for Chapter 11 bankruptcy. While management believes the $140 million investment will be recovered, a detailed market evaluation is pending in Q4.
• Labor Risks: Arbitration is ongoing regarding "New York Dock" income protection benefits for furloughed employees. Management believes the liability will not be material, though a significant effect is possible if all claimants prevail.
• Derivatives: The company adopted SFAS 133 in 2001 and uses derivatives to hedge diesel fuel and interest rate risks. Fuel hedging resulted in a net increase in diesel fuel expense of $2.1 million for the first nine months.

Investor Verification Checklist

• Verify the sustainability of the 16% increase in railway operating income given the 6% decline in traffic volume.
• Monitor the outcome of the T-Cubed telecommunications asset evaluation in Q4 2001 regarding potential impairment.
• Review the status of labor arbitration claims regarding furloughed employees and potential liability exposure.
• Assess the impact of the $1.5 billion working capital deficit on short-term liquidity and borrowing costs.
• Confirm the effectiveness of the diesel fuel hedging program as fuel prices fluctuate.