Norfolk Southern Corporation — 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. This is an annual report, not a standalone quarterly filing; fourth-quarter figures are noted separately. Norfolk Southern operates a major freight railroad serving 22 states and the District of Columbia, with about 20,000 route miles. Its principal markets are coal, general merchandise, and intermodal freight.
Financial performance and position
| Metric | 2013 | 2012 |
|---|---|---|
| Railway operating revenues | $11.245 billion | $11.040 billion |
| Income from railway operations | $3.257 billion | $3.124 billion |
| Railway operating ratio | 71.0% | 71.7% |
| Net income | $1.910 billion | $1.749 billion |
| Diluted EPS | $6.04 | $5.37 |
| Cash from operating activities | $3.078 billion | $3.065 billion |
| Property additions | $1.971 billion | $2.241 billion |
| Total debt at year-end | $9.448 billion | $8.682 billion |
| Cash and short-term investments at year-end | $1.561 billion | $668 million |
| Working capital at year-end | $770 million | $161 million |
Operating income margin was approximately 29.0% of railway revenues in 2013; net income margin was approximately 17.0%. The debt-to-total-capitalization ratio was 45.6%, down from 47.1%. Reported interest expense was $525 million. Cash flow from operations broadly funded capital spending, dividends, repurchases, and debt repayments.
Fourth-quarter 2013 revenue was $2.881 billion, railway operating income $881 million, net income $513 million, and diluted EPS $1.64. In fourth-quarter 2012, the corresponding figures were $2.684 billion, $714 million, $413 million, and $1.30.
Changes versus the prior year
- Full-year revenue rose 2%, while operating expenses rose 1%; railway operating income increased 4% and the operating ratio improved by 0.7 percentage point.
- Net income increased 9% and diluted EPS increased 12%. Earnings benefited from better railway operating results, share repurchases, and a $97 million pretax gain on a Michigan property sale, which contributed about $60 million to net income, or $0.19 per diluted share.
- General merchandise revenue increased 7% and intermodal revenue increased 6%. Coal revenue declined 12%, with coal carloads down 5% and average revenue per unit down 7%.
- Coal tonnage fell to 150.1 million tons from 156.1 million. Cash from operations was essentially flat; capital additions declined 12%. Year-end debt rose by $766 million, while cash and short-term investments increased by $893 million.
Outlook, commentary, risks, and contingencies
- Management expected 2014 revenue to increase, reflecting higher volumes. It forecast coal revenue to decline more modestly, citing expected lower carloads and average revenue per unit; utility and export coal volumes were expected to weaken. Chemicals, automotive, and intermodal revenues were anticipated to grow.
- Management budgeted $2.2 billion of 2014 property additions, including $220 million for positive train control (PTC). It expected 2014 depreciation expense to be about $40 million higher than 2013, and pension and other postretirement benefit expense to be about $25 million lower per quarter.
- Coal remains a material exposure: it represented 23% of railway revenue. The filing cites competition from natural gas, weak utility demand, export-market oversupply and competition, customer sourcing shifts, and potential climate-related regulation.
- Other principal risks include rail safety and hazardous-material incidents, environmental liabilities, severe weather, terrorism, economic and customer-demand weakness, fuel and supply constraints, labor disputes, technology disruption, connecting-carrier service, competition, and possible increased economic regulation. PTC implementation may add costs and affect operational efficiency.
- Environmental liabilities were $58 million at year-end, versus $42 million a year earlier, covering estimated remediation at 142 known locations and projects. Management said known matters were not expected to have a material adverse effect, while noting that ultimate exposures are uncertain.
- Pending matters include customer rate-reasonableness complaints by DuPont and Sunbelt, expected by management to be resolved in 2014, and fuel-surcharge antitrust class actions remanded for further consideration. Management did not expect either matter to materially affect financial position, results, or liquidity. A Tennessee environmental notice concerning soil runoff at an intermodal facility was also disclosed; management disputed liability and expected no material effect.
- Funding sources included a $750 million revolving credit facility, unused at year-end, and a $350 million receivables securitization program with $200 million outstanding. Management stated cash on hand and operating cash flow should meet ongoing obligations. A 3.85% $400 million senior-note issue due 2024 was completed in the fourth quarter.
Investor verification priorities
- Assess the sustainability of 2013 earnings growth, including the Michigan property-sale gain, share-count reductions, and operating improvements.
- Track coal trends by utility, export, and metallurgical markets, and test management’s 2014 volume and revenue assumptions against natural-gas prices, export competition, and customer sourcing.
- Review cash conversion, the $2.2 billion 2014 capital budget, PTC spending and remaining commitments, and the resulting debt and liquidity trajectory.
- Monitor environmental and casualty reserves, the DuPont and Sunbelt rate cases, and the fuel-surcharge litigation for changes in estimated exposure.
- Confirm the effects of labor costs, pension assumptions, and the filing’s projected tax-related cash outflow increase of approximately $200 million in 2014.
- The filing reports unqualified audit opinions and effective internal controls; verify subsequent disclosures for any changes or new material events.