Norfolk Southern Corporation — FY 2016 Form 10-K
Reporting period: Year ended December 31, 2016; this is an annual filing, not a standalone fourth-quarter report. Financial statements are audited and presented under U.S. GAAP. The company operates a freight railroad across 22 states and the District of Columbia, with approximately 19,500 miles of road. Merchandise, intermodal, and coal represented 63%, 22%, and 15% of railway operating revenue, respectively.
Key financial results
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Railway operating revenue | $9.888 billion | $10.511 billion | Down 6% |
| Railway operating expenses | $6.814 billion | $7.627 billion | Down 11% |
| Income from railway operations | $3.074 billion | $2.884 billion | Up 7% |
| Railway operating ratio | 68.9% | 72.6% | Improved 3.7 percentage points |
| Net income | $1.668 billion | $1.556 billion | Up 7% |
| Diluted EPS | $5.62 | $5.10 | Up 10% |
| Cash from operating activities | $3.034 billion | $2.908 billion | Up $126 million |
| Property additions | $1.887 billion | $2.385 billion | Down $498 million |
Railway operating margin was approximately 31.1% of revenue and net margin approximately 16.9%. Operating cash flow less property additions was approximately $1.147 billion. The company paid $695 million in dividends and repurchased $803 million of shares during 2016.
Financial position and liquidity
- Year-end cash and cash equivalents were $956 million, versus $1.101 billion in 2015. Working capital was a $48 million deficit, compared with $281 million of working capital a year earlier.
- Total debt was $10.212 billion, compared with $10.093 billion in 2015; debt-to-total capitalization was 45.1%, versus 45.3%. The company had no borrowings under its $750 million revolving credit facility and reported compliance with its covenants.
- Management said cash on hand and operating cash flow should be sufficient for ongoing obligations. Contractual obligations totaled $26.481 billion, including $13.403 billion of fixed-rate debt interest and $10.598 billion of long-term debt principal.
Material changes and operating trends
- Revenue fell $623 million, as lower revenue per unit ($315 million) and lower volume ($308 million) combined to outweigh pricing gains. Lower fuel surcharge revenue reduced revenue by $241 million; total fuel surcharge revenue was $236 million, versus $477 million in 2015.
- Coal revenue declined 18% to $1.488 billion, with coal tonnage down 17%. Intermodal revenue fell 8%; merchandise revenue decreased 2%. Lower energy-market demand and the restructuring of Triple Crown Services contributed to volume weakness.
- Expense reductions, including lower fuel costs, lower employee levels, cost-control initiatives, and improved service and asset utilization, helped increase railway operating income despite the revenue decline. Fuel expense fell 25% to $698 million.
- Employees averaged 28,044, down from 30,456. Capital spending also declined; the company budgeted $1.9 billion in property additions for 2017.
Outlook, risks, and unusual items
- Management expected 2017 revenue to increase, supported by coal and intermodal volume growth, pricing gains, and higher fuel surcharge revenue. It anticipated higher expenses, including wage and medical inflation and volume-related costs, partly offset by targeted cost reductions. Management expected continued operating-ratio improvement and high service levels; no numerical full-year earnings or operating-ratio guidance was provided.
- Coal outlook depended on expected utility and export volume recovery, including higher natural gas prices, normalized weather, and a tightening international coal supply. Automotive revenue was expected to decline amid lower anticipated U.S. vehicle production and assembly-plant retooling.
- Key disclosed risks include additional rail regulation, positive train control implementation costs and potential service impacts, environmental liabilities, hazardous-material accidents, labor negotiations and disruption, economic and fuel-price volatility, competition, severe weather, cybersecurity and technology disruptions, and access to capital markets.
- Environmental liabilities were $67 million at year-end. The company said its recorded liability covered known probable and estimable matters, while warning that additional or unidentified exposures could arise. It carried insurance but noted coverage limitations, including risks from catastrophic accidents.
- The Sunbelt rate case remained decided in Norfolk Southern’s favor but was subject to appeal. Fuel-surcharge antitrust class actions were ongoing; the company said it intended to defend them and did not expect a material financial effect.
- 2016 included a $37 million gain from sales of operating land and a $17 million income-tax benefit from excess stock-compensation tax benefits. The 2015 comparison included $93 million of Triple Crown and Roanoke office restructuring costs, reducing 2015 net income by $58 million.
Most important facts for investors to verify
- Whether forecast coal and intermodal recovery, pricing, and fuel surcharge gains materialized, and how they affected revenue and operating ratio.
- Whether expense reductions can offset wage, medical, and volume-related cost increases without weakening service or safety.
- Actual 2017 capital spending and the cost, schedule, and operational impact of positive train control implementation.
- Debt maturities, liquidity availability, and the balance between investment, dividends, and share repurchases.
- Developments in environmental, casualty, rate, and fuel-surcharge litigation exposures, including any changes to recorded reserves or insurance availability.