Norfolk Southern Corporation — Q2 2013 Form 10-Q
Reporting period: Three and six months ended June 30, 2013; comparisons are with the corresponding 2012 periods. Norfolk Southern operates a rail network of approximately 20,000 miles across 22 states and the District of Columbia. Interim financial statements are unaudited; the independent accountant performed a review, not an audit.
Financial performance
| Metric | Q2 2013 | Q2 2012 | First half 2013 | First half 2012 |
|---|---|---|---|---|
| Railway operating revenue | $2.802bn | $2.874bn | $5.540bn | $5.663bn |
| Income from railway operations | $836m | $934m | $1.527bn | $1.679bn |
| Net income | $465m | $524m | $915m | $934m |
| Diluted EPS | $1.46 | $1.60 | $2.87 | $2.82 |
| Operating ratio | 70.2% | 67.5% | 72.4% | 70.3% |
| Cash from operating activities | Not separately stated by quarter | $1.506bn | $1.663bn |
Q2 operating expenses increased 1% to $1.966bn while revenue declined 3%; the resulting operating income fell $98m. Q2 net income was down 11%, although lower income taxes partly offset the operating decline. First-half net income declined 2%, while diluted EPS rose 2% as weighted-average shares declined. First-half reported results included a $97m gain on a Michigan land sale, which management said benefited net income by $60m and EPS by $0.19.
Revenue mix and material changes
- Coal: Revenue fell 17% in both Q2 ($129m) and the first half ($260m). Lower average revenue per unit and lower carload volumes contributed. Management expected coal revenue for the rest of 2013 to be below the prior year on lower rates and volumes.
- General merchandise: Revenue rose 2% in Q2 and the first half, with growth in chemicals and automotive partly offset by weakness in metals/construction and other categories. Chemicals volumes benefited from crude oil shipments from the Bakken and Canadian fields.
- Intermodal: Revenue increased 4% in Q2 and 7% in the first half, driven by higher volumes. Management expected higher full-year revenue, supported by volumes and improved average revenue per unit.
- Overall revenue fell as lower average revenue per unit—partly reflecting reduced fuel surcharges—more than offset higher volume. Fuel surcharge revenue was $306m in Q2 versus $365m, and $580m for the first half versus $690m.
Operating expense trends were mixed: purchased services and rents rose 5% in Q2 and 3% in the first half; first-half fuel expense increased 2%; compensation and benefits were nearly flat in Q2 and down slightly year to date. Lower personal-injury claims expense partly offset increases elsewhere.
Cash, debt and liquidity
- At June 30, cash and cash equivalents were $587m, down from $653m at year-end 2012. Current assets were $2.078bn and current liabilities $1.815bn; reported working capital was $263m.
- First-half operating cash flow was $1.506bn, versus $1.663bn, primarily reflecting the reduction in accounts payable. Investing cash outflow was $807m, including $884m in property additions. Financing cash outflow was $765m, including $315m in dividends, $314m in share repurchases and $216m in debt repayments.
- Long-term debt was $8.430bn, with $47m of current maturities and no short-term debt reported on the balance sheet. The accounts-receivable securitization facility had $100m outstanding at June 30, down from $300m at year-end. Management reported a 45.4% debt-to-total-capitalization ratio, versus 47.1% at year-end.
- The company had no borrowings under its $750m credit facility, which expires in 2016, and said it was in compliance with covenants. Management expected cash on hand and operating cash flows to cover ongoing obligations.
Outlook, risks and other matters
- Management forecast lower coal revenue, but higher general merchandise and intermodal revenue, for the remainder of 2013. It gave no consolidated earnings or revenue guidance.
- Oil-price changes can affect fuel costs, fuel surcharges, demand and results; management said the 2013 decline in surcharge revenue exceeded the fuel-cost benefit, excluding consumption changes.
- Environmental liabilities were $53m at June 30, compared with $42m at year-end, across 149 known locations. Management considered recorded amounts adequate and known matters unlikely to have a material adverse effect, while noting uncertainty in cleanup costs and potential future liabilities.
- Contingencies include railroad injury and third-party claims, environmental matters, a DuPont rate-reasonableness complaint expected to be resolved in 2014, and fuel-surcharge antitrust litigation. The company disputed the allegations and did not expect the cited cases to materially affect its financial position, results or liquidity. It also disclosed a Tennessee environmental Notice of Violation relating to construction runoff and said it would contest liability and penalties.
- Outstanding purchase commitments were approximately $487m for capital-program items through 2016. Crescent Corridor projects were expected to require up to $332m of company funding, including about $61m for the remainder of 2013; substantial completion was expected in 2015.
- More than 80% of railroad employees were covered by collective bargaining agreements. Agreements with applicable unions extend through December 31, 2014; negotiations and expected mediation continued for Wheelersburg terminal workers.
Key facts for investors to verify
- Whether coal-market weakness, lower revenue per unit and fuel-surcharge dynamics persist, and how they affect operating ratio and margins.
- The durability of general merchandise and intermodal growth and management’s stated expectations for the rest of 2013.
- Cash generation relative to capital spending, dividends, repurchases and debt repayments, including the October 2013 renewal or replacement of the securitization facility.
- The effects of the Michigan land-sale gain on comparisons, and the extent to which earnings excluding that unusual item differ from reported results.
- Developments in the DuPont rate case, fuel-surcharge litigation, environmental exposures and other claims; the filing notes that outcomes and liabilities can be uncertain.