NSC

Norfolk Southern Corp. 10-Q Summary

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended June 30, 2000, and the six months ended on that date. Norfolk Southern Corporation (NS) is a Class I railroad. A significant operational context is the integration of the "Northern Region" (formerly Conrail assets), which commenced on June 1, 1999, increasing NS's route miles and employees by approximately 50%. The company continues to manage service fluidity issues and traffic diversions resulting from this integration.

Key Financial Metrics

Note: Operating ratio for the six months ended June 30, 2000, would have been 86.8% excluding the $101 million workforce reduction charge.

Material Changes vs. Prior Period

• Revenue Growth: Railway operating revenues increased 32% year-over-year for the quarter and 38% for the six months, driven primarily by the inclusion of Northern Region traffic and higher carload volumes.
• Net Income Volatility: While Q2 2000 net income rose 51% to $116 million, the six-month net income dropped 64% to $68 million. This decline was largely due to a $101 million pretax workforce reduction charge in Q1 2000 (related to a voluntary early retirement program) and higher diesel fuel costs.
• Expense Increases: Diesel fuel expenses surged 121% in Q2 and 160% year-to-date due to an 88% increase in average fuel prices. Compensation and benefits rose 50% year-to-date, including the workforce reduction charge.
• Cash Flow: Operating cash flow for the six months increased significantly to $886 million (from $426 million in 1999), boosted by $700 million in proceeds from the sale of accounts receivable in May 2000.

Guidance, Outlook, and Risks

• Outlook: Management expects income from railway operations to remain adversely affected until service issues (congestion, dwell time) are fully resolved. However, the operating ratio is expected to improve for the remainder of the year compared to the second half of 1999.
• Revenue Expectations: Coal, general merchandise, and intermodal revenues are expected to be slightly or somewhat higher than the comparable 1999 periods for the rest of the year, driven by new business and the return of diverted traffic.
• Liquidity: NS maintains a $2.8 billion credit facility supporting $1.2 billion in commercial paper. The company has a working capital deficit of $654 million but asserts sufficient capability to meet immediate needs.
• Risks: Key risks include the resolution of service issues, the ability to recapture diverted business, and external variables such as fuel prices and economic conditions affecting traffic volume.
• Unusual Items: The $101 million workforce reduction charge and the $28 million gain from the sale of gas and oil royalty interests in Q2 are significant non-recurring items.

Investor Verification Checklist

• Workforce Reduction Impact: Verify the long-term cost savings versus the immediate $101 million charge and the status of pension plan overfunding.
• Service Metrics: Monitor system fluidity, car dwell times, and velocity to assess the timeline for resolving congestion issues in the Northern Region.
• Fuel Price Sensitivity: Evaluate exposure to diesel fuel price volatility, which caused a 160% expense increase year-to-date.
• Accounts Receivable Sale: Review the terms of the $700 million receivable sale and the retained credit risk to understand the sustainability of the cash flow boost.
• Conrail Integration: Assess the ongoing costs of "Conrail rents and services" and the amortization of the investment in Conrail.