Norfolk Southern Corp. Q1 2008 Filing Summary
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended March 31, 2008. Norfolk Southern Corporation (NS) is a large accelerated filer operating as a Class I railroad. The company reported a net income of $291 million, a 2% increase from the prior year, driven by improved railway operating income despite a 2% reduction in traffic volume.
Key Financial Metrics
| Metric | Q1 2008 | Q1 2007 |
|---|---|---|
| Total Railway Operating Revenues | $2,500 million | $2,247 million |
| Net Income | $291 million | $285 million |
| Diluted Earnings Per Share | $0.76 | $0.71 |
| Operating Ratio | 76.9% | 76.5% |
| Cash from Operating Activities | $604 million | $586 million |
| Total Debt (Current + Long-term) | $6,493 million | $6,368 million |
| Cash and Cash Equivalents | $364 million | $470 million |
| Debt-to-Total Capitalization | 40.0% | 39.6% |
Material Changes vs. Prior Period
- Revenue Growth: Revenues increased 11% ($253 million) due to a 17% increase in average revenue per unit and higher fuel surcharges, which offset a 2% decline in traffic volume.
- Expense Increases: Total operating expenses rose 12% ($203 million). The primary driver was a 63% increase in fuel expenses ($156 million) due to a 65% rise in fuel prices. Compensation and benefits also increased 4% due to higher stock-based compensation and wage rates.
- Tax Rate: The effective income tax rate increased to 38.9% from 32.1% in the prior year, largely due to the expiration of synthetic fuel tax credits at the end of 2007.
- Coal Segment: Coal revenues rose 19% ($105 million) driven by a 64% surge in export tonnage, partially offset by a 2% decline in utility coal tonnage.
- Share Repurchases: The company repurchased and retired 5.6 million shares at a cost of $276 million, consistent with the prior year's activity.
Outlook, Risks, and Unusual Items
- Guidance: Management expects coal revenues to remain up for the remainder of the year due to export strength. General merchandise and intermodal revenues are expected to trend modestly higher, driven by pricing that offsets lower traffic volumes.
- Unusual Items: In April 2008, NS settled a lawsuit with Avondale Mills regarding the January 2005 Graniteville, SC derailment. A portion of the settlement not reimbursed by insurance was expensed in Q1. NS recorded a receivable for estimated insurance recoveries, though one carrier may contest up to $100 million of this amount.
- Legal Proceedings: NS is facing antitrust class actions regarding fuel surcharge programs and a potential DOJ action regarding environmental violations from the Graniteville derailment. Management does not believe these will have a material adverse effect.
- Labor Risks: Approximately 85% of employees are covered by collective bargaining agreements. While agreements with most unions are in place through 2009, negotiations with the United Transportation Union (UTU) and International Association of Machinists (IAM) remain in mediation.
- Capital Expenditures: The Board approved an additional $64 million in 2008 capital expenditures to accelerate the purchase of approximately 750 new coal cars.
Investor Verification Checklist
- Verify the status of the insurance carrier contesting the $100 million recovery related to the Graniteville derailment settlement.
- Monitor the outcome of ongoing labor negotiations with the UTU and IAM unions.
- Track the impact of rising fuel prices on the operating ratio and the effectiveness of fuel surcharge pass-throughs.
- Review the resolution of the antitrust class actions regarding fuel surcharges filed in April 2008.
- Confirm the timeline for the completion of the IRS audit of 2004 and 2005 federal income tax returns.