Norfolk Southern Corp. Q1 2009 Filing Summary
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended March 31, 2009. Norfolk Southern Corporation (NS) operates as a Class I railroad. The reporting period reflects the impact of a substantially weaker economy, resulting in significant declines in traffic volumes and fuel surcharge revenues.
Key Financial Metrics
| Metric | Q1 2009 | Q1 2008 |
|---|---|---|
| Railway Operating Revenues | $1,943 million | $2,500 million |
| Net Income | $177 million | $291 million |
| Earnings Per Share (Diluted) | $0.47 | $0.76 |
| Operating Cash Flow | $354 million | $604 million |
| Operating Ratio | 80.3% | 76.9% |
| Cash and Equivalents | $884 million | $364 million |
| Total Debt (Current + Long-term) | $6,935 million | $6,667 million |
Material Changes vs. Prior Period
- Revenue Decline: Railway operating revenues decreased 22% ($557 million) due to a 20% drop in traffic volumes and lower fuel surcharges.
- Coal: Revenues down 9% (11% volume decline) driven by lower utility, export, and domestic metallurgical demand.
- General Merchandise: Revenues down 28% (29% volume decline), heavily impacted by a 48% drop in automotive volumes and 35% decline in metals/construction.
- Intermodal: Revenues down 25% (18% volume decline), with international traffic falling 32%.
- Expense Reduction: Total railway operating expenses fell 19% ($362 million).
- Fuel: Expenses dropped 61% ($245 million) due to a 50% decrease in fuel prices and 19% lower consumption.
- Compensation: Decreased 9% ($66 million) primarily due to lower stock-based and incentive compensation.
- Casualties: "Materials and other" expenses declined 17%, partly due to the absence of the 2008 Avondale Mills settlement costs.
- Profitability: Net income fell 39% ($114 million). The operating ratio worsened to 80.3% from 76.9% as revenue declines outpaced expense reductions.
Guidance, Outlook, and Risks
- Outlook: Management expects coal, general merchandise, and intermodal revenues for the remainder of 2009 to be lower than 2008 levels due to continued weak volumes and reduced fuel surcharge revenue.
- Liquidity: Cash provided by operations ($354 million) combined with cash on hand ($884 million) is expected to meet ongoing obligations. NS issued $500 million in unsecured notes in January 2009 and maintains a $1 billion credit facility.
- Share Repurchases: No shares were repurchased in Q1 2009. Future repurchases are uncertain and dependent on market conditions.
- Legal and Environmental:
- NS is involved in litigation regarding the 2005 Graniteville derailment; management believes insurance will cover most costs, though arbitration with carriers is ongoing.
- Environmental liabilities are recorded at $40 million for 147 known locations. Management does not expect a material adverse effect from known matters.
- Antitrust class actions regarding fuel surcharges are being defended; management believes allegations are without merit.
- Joint Venture: On April 9, 2009, NS completed the creation of Pan Am Southern LLC (PAS), a 50/50 joint venture with Pan Am Railways, contributing approximately $60 million in cash and property.
Investor Verification Checklist
- Volume Sensitivity: Verify the correlation between macroeconomic indicators (steel production, automotive sales, housing starts) and NS's traffic volumes.
- Fuel Price Lag: Monitor the two-month lag in fuel surcharge calculations and its impact on future revenue recognition versus current fuel costs.
- Insurance Recoveries: Track the status of arbitration with insurance carriers regarding the Graniteville derailment settlement to confirm the $100 million receivable.
- Automotive Sector: Assess the impact of General Motors' announced plant idling plans on Q2 and Q3 automotive volumes.
- Debt Maturities: Review the $468 million in current maturities of long-term debt and the company's ability to refinance or repay using operating cash flows.