Norfolk Southern Corporation — FY2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. The filing also presents unaudited fourth-quarter results. Norfolk Southern operates a freight railroad serving 22 states and the District of Columbia, with approximately 20,000 miles of road.
Financial performance
- Revenue: Railway operating revenue was $10.511 billion, down 9.6% from $11.624 billion in 2014. Lower average revenue per unit reduced revenue by $816 million, and lower traffic volume reduced it by $297 million.
- Profit: Railway operating income was $2.884 billion, down 19%; net income was $1.556 billion, down 22% from $2.000 billion. Diluted EPS was $5.10 versus $6.39.
- Margins and costs: The railway operating ratio rose to 72.6% from 69.2% (higher is worse); operating margin was approximately 27.4% versus 30.8%. Operating expenses declined 5% to $7.627 billion, principally because fuel expense fell $640 million, partly offset by restructuring costs, higher wages, and depreciation.
- Fourth quarter: Revenue was $2.518 billion versus $2.870 billion in Q4 2014; railway operating income was $642 million versus $891 million; net income was $361 million versus $511 million. Diluted EPS was $1.20 versus $1.64.
- Cash flow and investment: Operating cash flow was $2.877 billion, compared with $2.852 billion in 2014. Capital additions were $2.385 billion, up from $2.118 billion. Cash used in investing activities was $2.087 billion; cash used in financing was $662 million. Year-end cash was $1.101 billion.
- Debt and liquidity: Total debt was $10.093 billion, up from $8.985 billion; debt-to-total capitalization increased to 45.3% from 42.0%. Working capital was $402 million versus $998 million, mainly reflecting higher current debt maturities. The company reported a $750 million credit facility with no borrowings outstanding and stated cash plus operating cash flow should meet ongoing obligations.
- Shareholder returns: Dividends were $2.36 per share for 2015. The company spent $1.075 billion repurchasing and retiring 11.3 million shares; 23.9 million shares remained authorized for repurchase at year-end.
Changes versus 2014
- Coal revenue fell 23%, with coal tonnage down 15%; general merchandise revenue fell 6%, and intermodal revenue fell 6%. These declines reflected weak coal demand, energy-price effects on fuel surcharges, and lower revenue per unit.
- Fuel surcharge revenue declined 64% to $477 million. The $852 million year-over-year reduction was a major contributor to lower revenue.
- Fuel expense declined 41% to $934 million as locomotive fuel prices fell 40%. Lower fuel costs and incentive compensation partly offset the revenue decline.
- Management reported improved network performance during the year: terminal dwell declined 21% and train speed improved 17% from the beginning of 2015.
Outlook, risks, and unusual items
- 2016 outlook: Management expected $130 million in expense savings, modest growth in intermodal and automotive, pricing gains, and continued improvement in service. It expected coal revenue and volumes to decline, fuel surcharge revenue to be lower if fuel prices remained at then-current levels, and commodity weakness to remain a risk. The 2016 property-additions budget was $2.1 billion, including $250 million for positive train control (PTC).
- Restructuring: The Triple Crown Services subsidiary restructuring and Roanoke office closure generated $93 million of costs in 2015, reducing net income by $58 million, or $0.19 per diluted share. TCS restructuring also resulted in $63 million of accelerated depreciation.
- Acquisition: Norfolk Southern acquired 282 miles of Delaware & Hudson line for approximately $215 million in September 2015.
- Key risks: Continued coal-market weakness, economic and energy-price changes, competition from trucks and other carriers, possible increased rail regulation, labor negotiations, severe weather, hazardous-material accidents, environmental liabilities, and PTC implementation costs and operational effects.
- Contingencies: Environmental liabilities were $69 million at year-end. Fuel-surcharge antitrust litigation remained pending; the company said it did not expect a material effect. DuPont and Sunbelt rate cases remained potentially appealable, with the company likewise not expecting a material loss. The filing describes other operational, injury, and environmental claims whose final outcomes cannot be predicted.
- Controls and audit: Management and KPMG reported effective internal control over financial reporting; KPMG issued an unqualified opinion on the financial statements.
Investor verification priorities
- Check whether coal volumes and fuel-surcharge revenue continued to weaken, and whether forecast 2016 pricing and intermodal/automotive growth offset that decline.
- Track delivery of the $130 million cost-savings plan and whether operating ratio and service improvements persisted.
- Review debt maturities, leverage, the receivables facility renewal, and liquidity after capital spending, dividends, and repurchases.
- Monitor PTC spending and deadlines, environmental and casualty reserves, and developments in fuel-surcharge litigation and customer rate cases.
- Assess the continuing effects of the TCS restructuring and the strategic and financial contribution of the D&H acquisition.