Norfolk Southern Corporation — 2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. This is an annual filing, not a standalone fourth-quarter report; unaudited Q4 figures are noted below. Norfolk Southern operates a major freight railroad across approximately 19,300 route miles in 22 states and the District of Columbia.
Financial performance and position
| Metric | 2020 | 2019 |
|---|---|---|
| Railway operating revenues | $9.789 billion | $11.296 billion |
| Income from railway operations | $3.002 billion | $3.989 billion |
| Net income | $2.013 billion | $2.722 billion |
| Diluted EPS | $7.84 | $10.25 |
| Railway operating ratio | 69.3% | 64.7% |
| Operating cash flow | $3.637 billion | $3.892 billion |
| Property additions | $1.494 billion | $2.019 billion |
| Total debt at year-end | $12.681 billion | $12.196 billion |
| Cash and cash equivalents at year-end | $1.115 billion | $580 million |
| Working capital at year-end | $158 million | ($219 million) |
Revenue fell 13% and net income fell 26% year over year. Volume declined 12%, while operating expenses declined 7%. The operating ratio rose 4.6 percentage points, indicating weaker operating efficiency on a reported basis. The effective tax rate was 20.4%, versus 22.0% in 2019.
Management also presented adjusted, non-GAAP 2020 results excluding a $385 million locomotive disposal loss and a $99 million investment impairment: adjusted railway operating income was $3.486 billion, adjusted net income $2.375 billion, diluted EPS $9.25, and operating ratio 64.4%. These adjustments are supplemental and do not replace GAAP results.
Q4 2020, unaudited: Revenue was $2.573 billion, railway operating income $984 million, net income $671 million, and diluted EPS $2.64. Q4 2019 figures were $2.690 billion, $962 million, $666 million, and $2.55, respectively.
Revenue mix and material changes
- 2020 revenue by group: merchandise $6.088 billion, intermodal $2.654 billion, and coal $1.047 billion. Coal revenue fell 37%; merchandise fell 11%; intermodal fell 6%.
- Coal volume fell 37%, including a 46% decline in utility coal tonnage. The filing cites low natural gas prices, high stockpiles, reduced electricity demand, weak export markets, and pandemic-related disruption.
- COVID-19 and softer energy markets weakened demand; automotive plant shutdowns, industrial production declines, and supply-chain disruption also reduced volumes. Pricing gains partly offset lower volume and fuel surcharges.
- Expenses declined mainly from lower headcount, fuel prices and consumption, and productivity initiatives. Average employment fell 18%, from approximately 24,600 to 20,200; locomotive fuel consumption fell 18%.
- Reported expenses included a $385 million loss on disposal of 703 locomotives sold in Q4 and a $99 million non-cash impairment of an equity-method investment.
Liquidity, debt, and capital allocation
Operating cash flow was $3.637 billion. Investing activities used $1.175 billion, including $1.494 billion of property additions; financing activities used $1.927 billion. Dividends totaled $960 million, and share repurchases totaled $1.439 billion, retiring 7.4 million shares. The annual dividend was $3.76 per share, up from $3.60.
Total debt rose to $12.681 billion from $12.196 billion; debt-to-total capitalization was 46.2%, versus 44.5%. The company issued $800 million of 3.05% notes due 2050 and exchanged $554 million of older notes for $800 million of 3.155% notes due 2055. It reported no borrowings under its $800 million revolving credit facility or $400 million receivables program at year-end. Management said cash, operating cash flow, available borrowing capacity, and flexibility to reduce capital spending or shareholder distributions should support ongoing obligations.
Outlook, risks, and contingencies
- Management expected 2021 capital spending of approximately $1.6 billion and an effective tax rate of 23%–24%.
- Management expected 2021 revenue growth in merchandise and intermodal as markets recover, but expected coal revenue to decline overall. Coal outlook included expected export and domestic metallurgical recovery, more than offset by continued utility coal pressure.
- The pace of economic recovery and continuing COVID-19 effects remained uncertain. Other principal risks include additional rail regulation, severe accidents involving hazardous materials, weather and climate-related impacts, cybersecurity or technology disruption, labor negotiations and work stoppages, fuel or supplier constraints, and competition from trucking and other transport modes.
- Approximately 80% of railroad employees were covered by collective bargaining agreements; a new bargaining round had begun in November 2019 and negotiations were ongoing.
- Environmental liabilities were $54 million at year-end, relating to 100 known sites and projects; management considered known matters unlikely to have a material adverse effect, but acknowledged potential exposure from unidentified or changing conditions.
- A terminal railroad minority-owner lawsuit could result in a loss, but the potential range could not be estimated. The company said the ongoing fuel-surcharge antitrust cases were not expected to materially affect its financial position, results, or liquidity.
- Management reported effective internal controls, and the auditor issued unqualified opinions on the financial statements and internal control over financial reporting.
Key facts for investors to verify
- Whether volume recovery and pricing gains offset continued coal weakness and other pandemic-related demand effects.
- Whether operating efficiency improves after the reported operating ratio increase, and how much of the adjusted result reflects recurring performance versus excluded charges.
- Debt maturities, interest costs, liquidity availability, and the effect of ongoing dividends and repurchases on leverage.
- The realization of expected 2021 revenue trends and the approximately $1.6 billion capital-spending outlook.
- Developments in labor negotiations, the terminal railroad lawsuit, environmental exposures, and safety or hazardous-material risks.