Norfolk Southern Corporation — FY 2010 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2010; it is not a standalone fourth-quarter filing. Norfolk Southern operates a major freight railroad across approximately 20,000 route miles in 22 states and the District of Columbia, with principal markets in coal, general merchandise, and intermodal freight. The filing also reports quarterly results, including fourth-quarter 2010.
Financial performance
| Metric | FY 2010 | FY 2009 |
|---|---|---|
| Railway operating revenue | $9.516 billion | $7.969 billion |
| Railway operating expenses | $6.840 billion | $6.007 billion |
| Income from railway operations | $2.676 billion | $1.962 billion |
| Operating ratio | 71.9% | 75.4% |
| Net income | $1.496 billion | $1.034 billion |
| Diluted earnings per share | $4.00 | $2.76 |
| Cash provided by operating activities | $2.714 billion | $1.860 billion |
| Capital expenditures | $1.470 billion | $1.299 billion |
| Total debt | $7.025 billion | $7.153 billion |
| Cash, cash equivalents, and short-term investments | $1.110 billion | $1.086 billion |
| Working capital | $389 million | $457 million |
Fourth-quarter results: 2010 revenue was $2.392 billion, railway operating income $642 million, net income $402 million, and diluted EPS $1.09. In fourth-quarter 2009, the respective figures were $2.106 billion, $549 million, $307 million, and $0.82.
Revenue grew 19% for the year as traffic volumes rose 14% and average revenue per unit increased. Income from railway operations rose 36%; net income increased 45%. Expenses increased 14%, principally from higher traffic-related costs and fuel prices. Fuel expense rose $354 million (49%), while fuel surcharge revenue increased to $724 million from $370 million. Coal supplied 28% of railway revenue, general merchandise 53%, and intermodal 19%.
Liquidity included an undrawn $1 billion revolving credit facility expiring in 2012; $200 million was outstanding under the receivables securitization program. Management said cash on hand and operating cash flow should cover ongoing obligations. Total contractual obligations were reported as $9.171 billion, including debt, leases, purchase obligations, and other items.
Material changes versus prior period
- Results rebounded from the 2009 downturn: revenue was up $1.547 billion in 2010, following a $2.692 billion decline in 2009 versus 2008.
- All commodity groups reported higher volumes in 2010. General merchandise revenue increased 20%, coal 20%, and intermodal 17% year over year.
- The operating ratio improved 3.5 percentage points to 71.9%, despite higher fuel and volume-related expenses.
- Operating cash flow increased to $2.714 billion. The company resumed significant buybacks, repurchasing 14.7 million shares for $863 million; no shares were repurchased in 2009.
- Dividends were $1.40 per share for 2010, compared with $1.36 in 2009.
Outlook, commentary, risks, and unusual items
- Management expected 2011 revenue to increase, with traffic and average revenue per unit higher but growth more moderate than in 2010. It planned continued emphasis on safety, service, and market-based pricing.
- Management budgeted $2.2 billion in 2011 capital expenditures, including $146 million for positive train control (PTC); it anticipated at least $1 billion of additional PTC-related capital spending during 2012–2015 to meet the 2015 deadline.
- 2011 expectations included higher coal revenue, supported by volumes, pricing, fuel surcharges, and contract escalators; management also generally anticipated revenue growth across merchandise and intermodal markets.
- Key risks include additional rail regulation, PTC implementation costs, fuel-price and fuel-supply volatility, competition, economic weakness, labor negotiations and work stoppages, severe weather, hazardous-material accidents, environmental exposure, technology disruption, and capital-market access. Coal is a significant concentration, and management noted competition from low natural-gas prices.
- DuPont and South Mississippi Electric Power Association challenged rail rates before the STB. Management expected decisions in late 2012 or 2013; an unfavorable outcome could materially affect results or liquidity, though the cases had not progressed enough to assess their likelihood.
- Other disclosed matters included fuel-surcharge antitrust and derivative litigation, environmental proceedings in Ohio and Pennsylvania, and PHMSA pipeline matters. Management did not expect these proceedings to have a material effect. Environmental liabilities were $33 million at year-end, based on 143 known sites.
- Unusual items included a $100 million insurance-arbitration settlement received in 2010 related to the 2005 Graniteville derailment; a further $43 million contested insurance recovery was recorded as probable but remained awaiting arbitration ruling. Other income also included gains on property sales, including $35 million from land sold to Virginia Beach, and a $13 million coal royalty settlement.
- The effective tax rate was 37%, including a $27 million deferred-tax charge related to Medicare Part D and a $34 million benefit from revised deferred-tax estimates. The company’s 2008 federal tax return was under IRS audit.
Important facts for investors to verify
- Whether 2011 volume and pricing expectations were achieved, particularly for coal, intermodal, and automotive freight.
- Fuel-price, fuel-surcharge, and consumption trends, including the effect of surcharge timing lags on margins.
- Actual capital spending and PTC costs against the $2.2 billion 2011 budget and the statutory implementation schedule.
- Developments and potential financial exposure in the STB rate cases, fuel-surcharge litigation, environmental matters, and the outstanding $43 million insurance arbitration.
- Debt maturities, continued access to credit and receivables financing, and the balance between capital investment, dividends, and share repurchases.
- Quarterly data are unaudited; the full-year financial statements received an unqualified independent audit opinion, and management and the auditor reported effective internal control over financial reporting.