Norfolk Southern Corporation — FY2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. The filing also presents unaudited fourth-quarter results. Norfolk Southern operates a major freight railroad across approximately 19,500 route miles in 22 states and the District of Columbia.
Financial and operating results
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Railway operating revenues | $11.296 billion | $11.458 billion | -1% |
| Railway operating expenses | $7.307 billion | $7.499 billion | -3% |
| Income from railway operations | $3.989 billion | $3.959 billion | +1% |
| Railway operating ratio | 64.7% | 65.4% | Improved 0.7 percentage points |
| Net income | $2.722 billion | $2.666 billion | +2% |
| Diluted earnings per share | $10.25 | $9.51 | +8% |
| Operating cash flow | $3.892 billion | $3.726 billion | +4% |
Management said productivity initiatives lowered expenses enough to offset a 1% revenue decline, producing record income from railway operations and a record-low operating ratio. The 2019 effective tax rate was 22.0%, versus 23.1% in 2018; lower taxes and share repurchases also supported earnings-per-share growth. The 2017 net income comparison is distorted by a $3.331 billion tax-reform benefit.
Traffic volume fell 5% overall, while revenue per unit rose 3%. Merchandise revenue increased 1%; intermodal revenue declined 2%; and coal revenue declined 8%. Coal tons fell 11%, including a 17% decline in export tonnage. Operating expenses benefited from lower compensation, rents, fuel prices and fuel consumption, partly offset by higher depreciation, casualty and other costs.
Fourth quarter: Revenue was $2.690 billion, versus $2.896 billion in Q4 2018; railway operating income was $962 million, versus $1.078 billion; net income was $666 million, versus $702 million; diluted EPS was $2.55, versus $2.57.
Cash, debt and liquidity
- Cash and cash equivalents were $580 million at year-end, compared with $358 million in 2018; cash, cash equivalents and restricted cash totaled $580 million.
- Cash used in investing activities was $1.764 billion, including $2.019 billion of property additions. Cash used in financing was $1.994 billion, including $2.099 billion of share repurchases and $949 million of dividends.
- Total debt was $12.196 billion, up from $11.145 billion; debt-to-total capitalization rose to 44.5% from 42.0%. Interest expense was $604 million, versus $557 million.
- Working capital was negative $219 million, an improvement from a $729 million deficit in 2018. Management expects cash on hand and operating cash flow to cover ongoing obligations.
- The company had no borrowings outstanding under its $750 million revolving credit facility or its receivables securitization program at year-end. The latter had $429 million of available capacity.
Outlook, risks and notable items
- For 2020, management expected merchandise and intermodal revenue to increase, coal revenue to decline, and total revenue to be approximately flat. Expected capital spending was 16%–18% of revenue; the expected effective tax rate was 23%–24%.
- Management cited productivity, asset utilization and service improvements as priorities. National labor bargaining began in November 2019; approximately 80% of railroad employees are covered by collective bargaining agreements.
- Key risks include additional economic regulation, competition from trucks and other transport modes, weaker economic or commodity demand, coal-market contraction, fuel-price or supply volatility, labor disruption, severe weather, cybersecurity and technology failures, and accidents involving hazardous materials. The company said full positive train control implementation on remaining required lines was due by December 31, 2020.
- Environmental liabilities were $56 million at year-end. The company cautioned that undiscovered contamination or changes in cleanup estimates could create additional costs. It said the fuel-surcharge antitrust cases were not expected to have a material effect, while individual cases continue after class certification was denied.
- Unusual items included a $49 million impairment related to natural-resource assets held for sale and a $32 million customer-receivable write-off tied to a legal dispute. Adoption of lease accounting resulted in $539 million of lease right-of-use assets and $538 million of lease liabilities at year-end. A separate office-building lease, with estimated construction cost of $550 million and a residual-value guarantee of up to 90%, is expected to commence in 2021.
- The independent auditor issued an unqualified opinion on the financial statements and internal controls. The auditor identified capitalization of property expenditures as a critical audit matter, focusing on classification of project costs versus repair and maintenance expense.
Important facts for investors to verify
- Whether 2020 revenue expectations are borne out, particularly the balance between merchandise/intermodal growth and continued coal declines.
- Whether expense reductions and operating-ratio improvement remain sustainable as volumes, service requirements and labor costs change.
- Debt maturities, leverage, interest costs and liquidity capacity, alongside continued dividends and share repurchases.
- Progress on positive train control implementation, labor negotiations, environmental remediation and the office-building lease commitment.
- How the $49 million asset impairment, $32 million receivable write-off and ongoing legal and casualty exposures affect subsequent periods.