10-QPeriod: Q1 FY2003

NORFOLK SOUTHERN CORP Quarterly Report for Q1 Ended Mar 31, 2003

Filed April 30, 2003For Securities:NSC

Summary

Norfolk Southern Corporation (NSC) reported its first-quarter 2003 financial results, showing a net income of $209 million, or $0.54 per share, a significant increase from $86 million, or $0.22 per share, in the prior year. This substantial year-over-year growth was largely driven by a $114 million cumulative effect of accounting changes related to the adoption of new accounting standards (SFAS No. 143 and FIN No. 46) and a $10 million gain from discontinued operations. Excluding these items, income from continuing operations before accounting changes was $85 million, a slight decrease from $86 million in the prior year, indicating that core operational performance was relatively stable. Despite a modest 4% increase in railway operating revenues to $1.56 billion, driven by higher traffic volume and increased average revenues across general merchandise and intermodal segments, operating expenses also rose by 5% to $1.33 billion. Key drivers of the expense increase included higher diesel fuel costs, increased casualty and other claims, and changes in accounting for asset retirement obligations. The company's liquidity remains a focus, with a working capital deficit of $840 million, though management expects sufficient cash flow from operations, receivables sales, and existing credit facilities to meet upcoming debt obligations.

Key Highlights

  • 1Net income surged to $209 million ($0.54/share) in Q1 2003 from $86 million ($0.22/share) in Q1 2002, heavily influenced by accounting changes and a gain from discontinued operations.
  • 2Railway operating revenues increased by 4% to $1.56 billion, primarily due to growth in general merchandise and intermodal segments, driven by higher traffic volume and average revenues.
  • 3Railway operating expenses increased by 5% to $1.33 billion, with notable rises in diesel fuel costs, casualty claims, and effects from new accounting standards for asset retirement obligations.
  • 4The company adopted new accounting standards (SFAS No. 143 and FIN No. 46), resulting in a significant $114 million cumulative effect adjustment in Q1 2003.
  • 5NS reported a working capital deficit of $840 million at the end of Q1 2003, but management expressed confidence in meeting upcoming debt obligations through operational cash flow, receivables sales, and borrowings.
  • 6Diesel fuel costs rose significantly, up 28% year-over-year, though hedging activities provided a $26 million benefit in Q1 2003.
  • 7The company's effective income tax rate decreased to 32.0% from 37.2% in the prior year, partly due to favorable resolutions of prior tax audits.

Frequently Asked Questions

The substantial increase in net income from $86 million in Q1 2002 to $209 million in Q1 2003 was primarily due to non-operational factors. This included a $114 million cumulative effect of changes in accounting principles (adoption of SFAS No. 143 and FIN No. 46) and a $10 million gain from discontinued operations. Core operating income from continuing operations before accounting changes saw a slight decrease.

Norfolk Southern reported a working capital deficit of $840 million. However, management is confident in its ability to meet upcoming debt obligations, including significant maturities in July 2003 and February 2004. They plan to utilize cash generated from operations, cash on hand, proceeds from the sale of accounts receivable, and potential borrowings from a subsidiary of PRR to meet these obligations. The company also has a $1 billion credit facility available.

Key risks include potential fluctuations in diesel fuel prices, which significantly impacted operating expenses in Q1 2003 despite hedging benefits. The company is also involved in various lawsuits and claims, including a significant dispute with Williams Communications related to telecommunications infrastructure, and potential labor arbitration claims. Environmental liabilities and evolving regulations also pose ongoing risks, though management currently believes they will not materially impact the company's financial position.

The adoption of SFAS No. 143 (Accounting for Asset Retirement Obligations) and FIN No. 46 (Consolidation of Variable Interest Entities) effective January 1, 2003, resulted in a cumulative effect of $114 million recorded in net income for prior years. SFAS No. 143 changed the accounting for crosstie removal, lowering depreciation and increasing operating expenses. FIN No. 46 led to the consolidation of a special-purpose entity leasing locomotives, increasing depreciation and interest expense.