Norfolk Southern Corporation — FY2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017; comparisons are primarily with FY2016. Norfolk Southern operates a freight railroad across 22 states and the District of Columbia, with major markets in merchandise, intermodal, and coal.
Financial performance
| Metric | FY2017 | FY2016 | Change / context |
|---|---|---|---|
| Railway operating revenue | $10.551 billion | $9.888 billion | Up 7% |
| Railway operating expenses | $6.965 billion | $6.814 billion | Up 2% |
| Income from railway operations | $3.586 billion reported; $3.435 billion excluding tax-reform effects | $3.074 billion | Adjusted operating income up 12% |
| Operating ratio | 66.0% reported; 67.4% excluding tax-reform effects | 68.9% | Lower is better; adjusted ratio improved 1.5 percentage points |
| Net income | $5.404 billion reported; $1.922 billion excluding tax-reform effects | $1.668 billion | Adjusted net income up 15% |
| Diluted EPS | $18.61 reported; $6.61 excluding tax-reform effects | $5.62 | Adjusted EPS up 18% |
| Operating cash flow | $3.253 billion | $3.034 billion | Up from improved operating results |
| Property additions | $1.723 billion | $1.887 billion | 2018 budget: $1.8 billion |
| Total debt | $9.836 billion | $10.212 billion | Debt-to-total capitalization was 37.5%, versus 45.1% |
Cash and cash equivalents were $690 million at year-end, down from $956 million. Working capital was negative $396 million, versus negative $48 million. Management said cash on hand and operating cash flows should cover ongoing obligations. A $750 million revolving credit facility was undrawn at year-end; $100 million was outstanding under a receivables securitization facility due to expire in June 2018.
Changes and business drivers
- Revenue rose $663 million: higher volume contributed $479 million and higher revenue per unit contributed $184 million. Total traffic volume increased 5%.
- Intermodal revenue rose 11% and coal revenue rose 17%; coal tonnage increased 16%, led by export shipments. Merchandise revenue increased 3%, with metals and construction strength offset by softer automotive and other traffic.
- Expenses increased 2%, including higher fuel costs (up 20%) and compensation and benefits (up 6%); purchased services and rents declined 9%. Management cited productivity improvements and approximately $150 million in productivity savings.
- Share repurchases were $1.012 billion in 2017, retiring 8.2 million shares. The quarterly dividend was $0.61 per share throughout 2017, or $2.44 for the year.
Outlook, commentary, and risks
- Management expected 2018 revenue growth in merchandise and intermodal, but anticipated coal revenue to decline, reflecting lower export and utility volumes and weaker export pricing. It planned to continue its strategy of growth, efficiency, service, and returns on capital.
- Management expected a go-forward effective tax rate of approximately 24%; cash income taxes were expected to be about 25% lower than 2017 levels. The 2017 tax benefit is not representative of recurring earnings: tax reform added $3.482 billion to net income and $12.00 to diluted EPS, including a $3.331 billion income-tax benefit and $151 million benefit recorded in operating expenses. Provisional tax-reform estimates could be adjusted during 2018.
- Principal risks include additional rail regulation, implementation costs and operating effects of positive train control, environmental and climate-related liabilities or regulation, hazardous-material accidents, economic and commodity-market shifts, fuel-price volatility, competition, labor negotiations, severe weather, cybersecurity and technology disruption, and access to capital markets.
- About 80% of railroad employees were covered by collective bargaining agreements. Negotiations with one union coalition remained ongoing; agreements had been reached with other coalitions, with some ratifications pending.
- Environmental liabilities were $58 million at year-end. The filing says known matters were not expected to have a material adverse effect, but notes that undisclosed conditions and future claims could create costs that cannot be reliably estimated. Fuel-surcharge antitrust litigation remained subject to appeal after class certification was denied; the company did not expect a material effect.
- Long-term debt principal was $10.584 billion in the contractual-obligations schedule, including current maturities; scheduled 2018 principal was $600 million. Total contractual obligations, including interest, leases, purchases, and other items, were $22.977 billion.
Important facts for investors to verify
- Assess recurring earnings using the company’s tax-reform-adjusted measures, and confirm the final tax accounting and subsequent adjustments.
- Track 2018 coal volumes and pricing, alongside intermodal and merchandise demand, to test management’s outlook.
- Monitor whether productivity gains offset compensation, fuel, and other cost inflation while preserving service levels.
- Review capital spending, cash generation, debt maturities, the receivables-facility renewal or repayment, and planned share repurchases.
- Follow PTC implementation deadlines and spending, labor negotiations, environmental and casualty claims, and the status of appealed litigation.