Norfolk Southern Corporation — Q3 2010 Form 10-Q
Business context and reporting period. Norfolk Southern operates a railroad business. This unaudited quarterly filing covers the three and nine months ended September 30, 2010, compared with the corresponding 2009 periods; balance-sheet comparisons are with December 31, 2009. Amounts are in millions of dollars except per-share data.
Key financial results
| Metric | Q3 2010 | Q3 2009 | 9M 2010 | 9M 2009 |
|---|---|---|---|---|
| Railway operating revenue | $2,456 | $2,063 | $7,124 | $5,863 |
| Operating expenses | $1,710 | $1,501 | $5,090 | $4,450 |
| Income from railway operations | $746 | $562 | $2,034 | $1,413 |
| Net income | $445 | $303 | $1,094 | $727 |
| Diluted EPS | $1.19 | $0.81 | $2.91 | $1.94 |
- Q3 revenue rose 19% and net income rose 47%; nine-month revenue increased 22% and net income increased 50%.
- The operating ratio improved to 69.6% from 72.8% in Q3. The filing reports railway operating income, but does not provide a separately labeled operating-margin percentage.
- Q3 operating expenses rose 14%, led by higher compensation, fuel, and materials costs. Nine-month fuel expense rose 53%, reflecting higher prices and consumption.
- Interest expense was $113 in Q3 versus $118 a year earlier, and $347 for nine months versus $348.
- Cash from operations was $2,128 for nine months, up from $1,375. Investing activities used $1,006 and financing activities used $989; cash increased $133 to $1,129.
Financial position and material changes
- At September 30, cash and cash equivalents were $1,129 and short-term investments were $229, totaling $1.4 billion. Working capital was $678, versus $457 at year-end 2009.
- Total debt, including current maturities, was approximately $6,935, compared with $7,153 at December 31, 2009. The debt-to-total-capitalization ratio declined to 39.1% from 40.9%.
- NS had no borrowings under its $1 billion, five-year credit facility and reported compliance with its covenants. The accounts-receivable securitization facility had $100 outstanding at quarter-end and was renewed in October 2010 through October 2011.
- Property additions were $907 for the first nine months. The company repurchased and retired 7.8 million shares for $437, including 5.8 million shares for $323 in Q3; the board authorized repurchases of up to an additional 50 million shares through 2014.
- Revenue growth reflected higher volume and revenue per unit, including fuel surcharges and rate increases. Total units increased 15% in Q3. Coal, general merchandise, and intermodal revenues all increased.
Outlook, commentary, risks, and unusual items
- Management expected coal, general merchandise, and intermodal revenues for the remainder of 2010 to exceed 2009, citing expected higher traffic volumes and average revenue per unit, including fuel surcharges. The filing does not provide formal full-year earnings guidance.
- Management expected 2010 capital expenditures of approximately $1.5 billion. Positive train control was expected to require at least $700 of additional capital spending during 2011–2015, plus $400 of systems and track upgrades accelerated to meet the 2015 deadline.
- Management said cash on hand and operating cash flows were expected to be sufficient for ongoing obligations. Oil-price changes may materially affect results through fuel costs, surcharges, traffic, and supplier costs.
- Other income benefited from a $35 gain on a land sale and a $13 favorable coal royalty settlement. A $27 deferred-tax charge arose from 2010 health-care legislation. Favorable personal-injury claims development reduced the liability by $19 in the first nine months; operating cash flow also benefited from an insurance settlement related to the 2005 Graniteville derailment.
- NS was seeking $43 in disputed insurance recoveries related to Graniteville and stated recovery was probable. Environmental liabilities were $34 at September 30. The filing describes environmental proceedings in Ohio and Pennsylvania, fuel-surcharge antitrust litigation, and a shareholder derivative lawsuit; management did not expect these matters to materially affect financial position, results, or liquidity.
- More than 80% of railroad employees were covered by collective bargaining agreements; national negotiations were ongoing and outcomes were uncertain. Other disclosed risks include litigation, environmental regulation, hazardous-material transportation, severe weather, labor disruption, competition, and fuel-price volatility.
- The independent accountant performed an interim review, not an audit, and reported no material modifications needed for GAAP conformity. Management concluded disclosure controls were effective and reported no material change in internal control during the quarter.
Important facts for investors to verify
- Whether volume, pricing, and fuel-surcharge growth can continue, and how changes in fuel prices affect net operating economics.
- The sustainability of operating-ratio improvement as labor, fuel, and other costs rise.
- Cash generation relative to planned capital investment, positive train control spending, dividends, debt maturities, and share repurchases.
- Actual outcomes and potential costs of labor negotiations, the Graniteville insurance recovery, environmental proceedings, and fuel-surcharge litigation.
- Whether management’s remainder-of-year revenue expectations and capital-spending plans are achieved.