F I N A N C I A L R E V I E W
|2000 Compared to 1999
Results of Operations
Net Income The Corporation reported net income of $842 million ($3.42 per basic share and $3.34 per diluted share) in 2000, including a $115 million pre-tax ($72 million after-tax) charge related to a work force reduction plan at the Railroad (see note 15 to the consolidated financial statements). Excluding the effect of the charge, net income grew to $914 million ($3.71 per basic share and $3.61 per diluted share) compared to $810 million ($3.28 per basic share and $3.22 per diluted share) in 1999. The increase in net income was due primarily to revenue growth, improved service levels and productivity improvements at the Railroad, partially offset by significantly higher fuel prices. Net income for 1999 included a one-time after-tax gain of $27 million ($0.11 per basic share and $0.10 per diluted share) from the adjustment of a liability established in connection with the discontinued operations of a former subsidiary (see note 3 to the consolidated financial statements).
Operating Revenues Operating revenues increased $641 million (6%) to $11.9 billion in 2000, reflecting higher volumes in five of the six commodity groups at the Railroad, higher other revenue at the Railroad and a 5% increase in revenue at Overnite.
Operating Expenses Operating expenses increased to $10.0 billion in 2000 from $9.4 billion in 1999, reflecting the work force reduction charge, higher fuel prices, inflation, volume-related costs from a 4% increase in carloads at the Railroad and increased depreciation expense. The increase in fuel prices added $464 million to operating expenses in 2000 compared to 1999. Productivity improvements and other cost control measures partially offset the increase in operating expenses. Excluding the $115 million pre-tax work force reduction charge, operating expenses increased $427 million (5%) to $9.9 billion.
Salaries, wages and employee benefits increased $26 million compared to 1999, including the work force reduction charge. Salaries, wages and employee benefits declined $89 million (2%), excluding the work force reduction charge, as lower employment levels and improved productivity at the Railroad more than offset higher rail volume and inflation. Equipment and other rents expense decreased $16 million (1%) as improved car cycle times and lower rental rates more than offset increased Railroad volume and higher contract transportation costs at Overnite. Depreciation expense increased $57 million (5%) as a result of the Railroad's capital spending in recent years. Fuel and utilities costs were $518 million (62%) higher than 1999 resulting from significantly higher fuel prices and increased carloads, partially offset by favorable fuel hedging (see note 4 to the consolidated financial statements). Materials and supplies expense increased $3 million (1%) primarily due to volume-related increases in car and locomotive repairs, partially offset by productivity and cost control actions. Casualty costs decreased $18 million (5%) over 1999 as a result of lower settlement costs at the Railroad. Other costs decreased $28 million (3%) as productivity and cost control efforts more than offset volume-related costs and higher state and local taxes.
Operating Income Operating income increased to $1.9 billion in 2000 from $1.8 billion in 1999, as revenue growth and productivity gains at the Railroad more than offset higher fuel prices, rail volume costs and increased depreciation expense. Excluding the $115 million pre-tax work force reduction charge, operating income increased $214 million (12%) to $2.0 billion.
Non-Operating Items Interest expense decreased $10 million (1%) compared to 1999 primarily due to lower average debt levels in 2000. Excluding the income tax expense associated with the work force reduction charge, income taxes for 2000 increased $92 million (22%) over 1999 as a result of higher income levels in 2000 and settlements in 1999 related to prior tax years.
Key Measures Net income as a percentage of operating revenues declined to 7.1% in 2000 from 7.2% in 1999, including the work force reduction charge. Net income as a percentage of operating revenues excluding the work force reduction charge improved to 7.7% in 2000. Return on average common shareholders' equity was 10.1% (including the work force reduction charge) and 10.9% (excluding the work force reduction charge) in 2000, up from 10.5% in 1999, reflecting strong revenue growth and improved operations at the Railroad and Overnite. The Corporation's operating ratio was 84.0% (including the work force reduction charge) and 83.0% (excluding the work force reduction charge) in 2000 compared to 83.9% in 1999.
Net Income Rail operations reported record net income of $926 million (including the $72 million after-tax work force reduction charge) in 2000 compared to net income of $854 million in 1999. The increase in income resulted primarily from higher commodity and other revenue, improved operations, productivity gains and lower interest expense, partially offset by significantly higher fuel prices and volume-related costs. Excluding the work force reduction charge, net income was $998 million in 2000.
Operating Revenues Rail operating revenues increased $591 million (6%) over 1999 to a record $10.7 billion. Revenue carloads increased 4% over 1999 with gains in five of the six commodity groups. Other revenue gains were the result of higher subsidiary revenues and increased accessorial services.
The following tables summarize the year-over-year changes in rail commodity revenue, revenue carloads and average revenue per car by commodity type:
Agricultural Revenue declined 1%, as a 4% decrease in carloads more than offset a 3% increase in average revenue per car. Carloads decreased primarily due to reduced export demand for wheat and corn and a lack of producer selling in anticipation of higher prices. Revenue increased for fresh fruits and vegetables primarily as a result of new express train service from the Pacific Northwest and northern California to eastern markets. Beverage revenue increased due to new wine shipments out of California and higher domestic beer carloads. Average revenue per car increased primarily due to an increase in longer haul traffic, particularly domestic corn shuttle shipments to California.
Automotive Revenue increased 13% as a result of a 15% increase in carloads. Both revenue and carload totals were all-time records, resulting from strong demand for finished vehicles and parts, market share gains and improved rail service. Business volume with Mexico was particularly strong due to increased vehicle production levels and more reliable and expanded rail service. New service offerings facilitated the conversion of automotive parts shipments from truck to the Railroad. Increased container shipments of automotive parts, rather than boxcar shipments, caused average revenue per car to decrease slightly.
Chemicals A 1% increase in carloads combined with a 2% increase in average revenue per car led to a 3% increase in revenue. Revenue growth was driven primarily by an increase in average revenue per car for soda ash, fertilizer, and liquid and dry commodities due to selected price increases. Year-over-year carload improvements came mainly in the first half of the year, as a strong economy and customer plant expansions led to increased market demand for plastics, liquid and dry chemicals, and domestic soda ash. However, a softening economy late in the year resulted in a 2% decline in fourth-quarter revenue compared to 1999, with weakness in most areas of the chemical market.
Energy Energy revenue was down 1% compared to 1999, despite a 3% increase in carloads for the year. Average revenue per car dropped 4% as a result of contract pricing provisions with certain major customers. In the first six months of 2000, carloads declined compared to 1999 due to lower coal demand at utilities resulting from high inventories caused by mild winter weather and Year 2000 (Y2K) stockpiles. In the second half of 2000, carloads increased over 1999 levels due to hot summer weather and the combination of cold winter weather late in the year and a significant increase in the price of alternative fuels. Delays due to severe winter weather partially offset volume gains in the second half of the year.
Industrial Products Revenue increased 5% on a 2% increase in carloads and a 2% increase in average revenue per car. A strong economy in the first half of 2000 led to a general increase in demand for most business lines. The largest revenue gains were in steel, lumber, cement and other building materials due to an expanding construction market, especially in the south and southwest. New rail services and generally improved service performance also contributed to the increase in carloads. Starting in the third quarter, a softening in the economy began to adversely affect business demand. Fourth-quarter revenue and carloads decreased in nearly all business lines but especially minerals, steel, and hazardous waste. The increase in average revenue per car was due to gains in higher average revenue per car, steel and lumber carloads and selected price increases during the year.
Intermodal Revenue increased 11% due to a 7% increase in carloads and a 4% increase in average revenue per car. Carload growth resulted from a strong U.S. economy in the first half of 2000 and increased demand for imports from Asia. Improved service performance led to an increase in carloads and revenue for expedited premium service. New and expanded rail service offerings also contributed to the gains. The increase in average revenue per car was primarily the result of price increases and a longer average length of haul in some markets.
Operating Expenses Operating expense increased $510 million (6%) to $8.8 billion in 2000 including the work force reduction charge. The higher expenses are primarily the result of significantly higher fuel prices, inflation, volume costs associated with a 4% increase in carloads and higher depreciation expense, partially offset by productivity gains and other cost control measures. Operating expenses increased $395 million (5%) to $8.7 billion in 2000, excluding the $115 million pre-tax charge for the work force reduction plan.
Salaries, Wages and Employee Benefits Including the work force reduction charge, salaries, wages and employee benefits increased $19 million (1%) to $3.6 billion. Costs decreased $96 million (3%), excluding the $115 million pre-tax work force reduction charge. The primary driver was productivity improvements that resulted in lower train crew expenses despite a 4% increase in carload volume. In addition, the average employee count decreased 4% from 1999 to 2000. Partially offsetting these gains were volume-related costs and wage and employee benefit inflation.
Equipment and Other Rents Expenses decreased $20 million (2%) compared to 1999. The improvement was attributable to lower prices for equipment and improvements in car cycle times, partially offset by higher volume-related costs.
Depreciation Depreciation expense increased $55 million (5%) over 1999, resulting from capital spending in recent years. Capital spending totaled $1.7 billion in 2000 compared to $1.8 billion in 1999 and $2.0 billion in 1998.
Fuel and Utilities Expenses increased $496 million (63%). The increase was driven by significantly higher fuel prices (which added $444 million of additional costs) and higher volume. Fuel prices were 90 cents per gallon in 2000 compared to 56 cents per gallon in 1999, including taxes, transportation costs, and regional pricing spreads. The Railroad hedged approximately 10% of its fuel consumption for the year, which decreased fuel costs by $52 million. As of December 31, 2000, expected fuel consumption for 2001 is 8% hedged at 68 cents per gallon excluding taxes, transportation costs, and regional pricing spreads (see note 4 to the consolidated financial statements).
Materials and Supplies Expenses increased $6 million (1%), reflecting volume-related increases in car and locomotive repairs, partially offset by productivity improvements and cost control measures.
Casualty Costs Costs decreased $15 million (4%) compared to 1999, primarily as a result of lower settlement costs.
Other Costs Expenses decreased $31 million (4%) compared to 1999. Cost control, productivity gains, and lower contract services expenses more than offset volume-related cost increases and higher state and local taxes.
Operating Income Operating income increased $81 million (4%) to $1.9 billion including the work force reduction charge. Operating income increased $196 million (11%) to a record $2.0 billion excluding the work force reduction charge. The operating ratio for 2000 was 81.2%, excluding the work force reduction charge, 0.8 percentage points better than 1999's 82.0% operating ratio.
Non-Operating Items Other income increased $11 million (10%), primarily the result of higher real estate sales. Interest expense decreased $26 million (4%) primarily as a result of lower average debt levels compared to 1999. Excluding the effect of the work force reduction charge, income taxes increased $89 million (19%) for the year, reflecting higher income levels and 1999 settlements related to prior tax years.
Trucking Product Line
Net Income Trucking net income increased $14 million (51%) to $43 million in 2000. The increase was primarily the result of revenue growth and decreased expenses related to responses to activity by the International Brotherhood of Teamsters (Teamsters). See "Other Matters Labor Matters Trucking".
Operating Revenues In 2000, trucking revenues rose $51 million (5%) to over $1.1 billion. The growth resulted primarily from yield initiatives, new services and the impact of a fuel surcharge assessed due to higher fuel prices. Partially offsetting this growth was a 4% decline in tonnage compared to 1999.
Operating Expenses Trucking operating expenses rose $18 million (2%) to $1.1 billion in 2000. Salaries, wages and employee benefits decreased $1 million as lower volume, lower employment levels and productivity gains offset wage and benefit inflation. Fuel and utilities costs increased $23 million (47%), primarily as a result of significantly higher fuel prices (90 cents per gallon in 2000 compared to 54 cents per gallon in 1999, including taxes, transportation costs, and regional pricing spreads). Overnite hedged 9% of 2000 fuel consumption at an average price of 39 cents per gallon excluding taxes, transportation costs, and regional pricing spreads, which decreased costs by $2 million. As of December 31, 2000, Overnite has not hedged any of its expected 2001 fuel consumption. Equipment and other rents increased $2 million (2%) primarily due to an increase in purchased transportation costs in response to the ongoing Teamster activity. Casualty costs and other costs decreased $7 million (5%), primarily due to lower expenses related to the Teamsters' activity and also lower cargo loss and damage expenses.
Operating Income Trucking operations generated operating income of $53 million in 2000, compared to $20 million for 1999. The operating ratio decreased to 95.2%, compared to 98.1% in 1999.
Other Product Lines
The other product lines include the corporate holding company (which largely supports the Railroad), Fenix, self-insurance activities, and all appropriate consolidating entries (see note 1 to the consolidated financial statements). Operating losses increased by $15 million in 2000 compared to 1999. Operating revenue declined $1 million year over year. Operating expenses increased $14 million, primarily due to increased spending at Fenix as part of its overall strategy of developing new products and services.
|Corporate Structure | 1999 Compared to 1998|