Norfolk Southern Corporation — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013. The filing covers Norfolk Southern’s rail operations across 22 states and the District of Columbia. Financial statements are unaudited interim statements; the independent accountant performed a review, not an audit.
Financial performance
| Metric | Q3 2013 | Q3 2012 | First nine months 2013 | First nine months 2012 |
|---|---|---|---|---|
| Railway operating revenue | $2.824 billion | $2.693 billion | $8.364 billion | $8.356 billion |
| Income from railway operations | $849 million | $731 million | $2.376 billion | $2.410 billion |
| Net income | $482 million | $402 million | $1.397 billion | $1.336 billion |
| Diluted EPS | $1.53 | $1.24 | $4.40 | $4.07 |
| Railway operating ratio | 69.9% | 72.9% | Not stated | Not stated |
- Q3 revenue grew 5%, while net income rose 20%; operating income increased $118 million. The operating ratio improved 3 percentage points.
- For the first nine months, revenue was essentially flat and income from railway operations declined about 1%; net income increased 5%. The year-to-date net income comparison benefited from a $97 million Michigan land-sale gain, which added $60 million to net income, or $0.19 per share.
- Q3 revenue growth reflected higher volume and average revenue per unit. General merchandise and intermodal gains more than offset weaker coal results. Coal revenue declined 9% for the quarter and 14% year to date; general merchandise and intermodal revenue each rose 7% year to date.
- Operating expenses rose 1% in both comparison periods. Favorable personal-injury claims development reduced materials and other expense by $18 million in Q3 and $47 million year to date.
- Operating cash flow was $2.404 billion for the first nine months, versus $2.476 billion in 2012. Capital expenditures/property additions were $1.470 billion; dividends were $476 million; share repurchases were $564 million, compared with $1.150 billion in the prior-year period.
Liquidity, debt and capital
- Cash and cash equivalents were $984 million at September 30, 2013, up from $653 million at year-end 2012; short-term investments were $20 million. Management reported working capital of $162 million and stated cash on hand plus operating cash flow should cover ongoing obligations.
- Total debt, including current maturities, was $8.946 billion on a carrying-value basis, compared with $8.482 billion at December 31, 2012. The debt-to-total-capitalization ratio was 46.5%, down from 47.1%.
- During Q3 the company issued $500 million of 4.80% senior notes due 2043. It had no borrowings outstanding under its $750 million credit facility at quarter-end and was in compliance with covenants. The $350 million receivables securitization facility had $100 million outstanding and was renewed in October 2013 through October 2014.
- Cash, cash equivalents and short-term investments totaled approximately $1.0 billion. The company repurchased 7.5 million shares in the first nine months, down from 16.5 million a year earlier.
Outlook, risks and contingencies
- Management expected coal revenues for the remainder of 2013 to be lower than the prior year because of lower volumes and average revenue per unit. It expected general merchandise revenue to increase on improved pricing and volume, and intermodal revenue to increase on volume and pricing gains.
- Management noted oil-price changes can affect volumes, supplier costs, fuel surcharges and fuel expense, potentially causing material quarterly or annual volatility. Fuel-surcharge revenue was $321 million in Q3 and $901 million year to date, versus $286 million and $976 million, respectively, in 2012.
- Environmental liabilities were $59 million, up from $42 million at year-end 2012, based on 146 known sites and projects. Management said known matters were not expected to have a material adverse effect, while acknowledging estimation uncertainty and possible future exposure.
- Pending matters include a DuPont rate-reasonableness complaint, fuel-surcharge antitrust litigation, and a Tennessee environmental notice concerning soil runoff at an intermodal facility. Management disputed the allegations and did not expect material effects from these proceedings.
- More than 80% of railroad employees were covered by collective bargaining agreements. National bargaining agreements extend through December 31, 2014; negotiations and expected mediation were underway for workers at the Wheelersburg terminal.
- Management identified regulatory and environmental requirements, hazardous-material transportation, litigation, labor issues, severe weather, economic and customer-industry conditions, competition, technology disruption, fuel prices and unpredictable demand among the risks that could cause actual results to differ from forward-looking statements.
Important facts for investors to verify
- Whether coal-market weakness and lower coal pricing persist, and whether growth in general merchandise and intermodal continues.
- How much of year-to-date earnings growth reflects recurring operations versus the Michigan land-sale gain and favorable claims development.
- Whether operating cash flow continues to cover capital needs, dividends, repurchases and debt service as debt and current maturities change.
- Developments in the DuPont rate case, fuel-surcharge litigation, environmental matters and casualty-claim estimates.
- The impact of changing fuel prices, fuel-surcharge timing and the expected increase in cash taxes as bonus depreciation effects change beginning in 2014.