Norfolk Southern Corporation — 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014. The filing also reports fourth-quarter results. Norfolk Southern primarily operates a freight railroad across 22 states and the District of Columbia.
Financial performance and position
| Metric | 2014 | 2013 |
|---|---|---|
| Railway operating revenue | $11.624 billion | $11.245 billion |
| Railway operating expenses | $8.049 billion | $7.988 billion |
| Income from railway operations | $3.575 billion | $3.257 billion |
| Operating ratio | 69.2% | 71.0% |
| Net income | $2.000 billion | $1.910 billion |
| Diluted EPS | $6.39 | $6.04 |
| Cash from operating activities | $2.852 billion | $3.078 billion |
| Property additions | $2.118 billion | $1.971 billion |
| Total debt at year-end | $9.026 billion | $9.448 billion |
Revenue increased 3%, while expenses rose 1%; operating income increased 10%. The operating ratio reached a company record low. Net margin was approximately 17.2% in 2014. Operating cash flow declined, primarily because of higher tax payments, partly offset by improved operating results.
At year-end, cash and cash equivalents were $973 million, working capital was $998 million, total assets were $33.241 billion, and stockholders’ equity was $12.408 billion. Debt-to-total capitalization was 42.1%, down from 45.6%. The company reported an unused $750 million credit agreement and stated that cash on hand and operating cash flow were expected to cover ongoing obligations.
Fourth quarter: Revenue was $2.870 billion, operating income $891 million, net income $511 million, and diluted EPS $1.64. In fourth-quarter 2013, these were $2.881 billion, $881 million, $513 million, and $1.64, respectively.
Business mix and changes versus prior year
- General merchandise revenue increased 6% to $6.680 billion, led by chemicals, metals and construction, and automotive.
- Intermodal revenue increased 7% to $2.562 billion, with volume up 8%.
- Coal revenue declined 6% to $2.382 billion; coal tonnage fell 5%, including a 19% decline in export coal tonnage. Coal represented 21% of railway revenue.
- Total railway volume grew; the filing attributes the $379 million revenue increase to a $512 million volume benefit partly offset by a $133 million decline from revenue per unit.
- The $97 million Michigan land-sale gain benefited 2013 other income and net income; it did not recur in 2014.
- Severe winter weather and unexpected volume growth caused resource shortages and network delays. Management reported service metrics improved later in the year after adding resources.
Outlook, risks, and unusual items
- For 2015, management expected lower oil prices to reduce fuel-surcharge revenue, with increased volumes and higher rates expected to offset the effect overall. At then-current oil prices, fuel surcharges could be less than half the 2014 amount.
- Management expected coal revenue and tonnage to decline, while intermodal revenue was expected to increase. Chemicals revenue was anticipated to rise, though prolonged low oil prices could weaken crude-by-rail demand. Outlook for other merchandise categories was mixed.
- 2015 property additions were budgeted at $2.4 billion, including $220 million for positive train control (PTC). The filing also anticipated more than $450 million in post-2015 PTC-related property additions.
- A proposed $217 million acquisition of 282 miles of Delaware & Hudson rail line was subject to Surface Transportation Board approval, with completion expected in 2015.
- Key risks include additional railroad regulation, PTC implementation costs and effects on service, hazardous-material accidents, environmental liabilities, coal-market weakness, fuel and economic volatility, severe weather, labor negotiations, technology disruption, and access to capital markets.
- Environmental liabilities were $66 million at year-end, compared with $58 million in 2013. Management considered known matters adequately accrued but noted uncertainty around latent or unidentified contamination. Fuel-surcharge antitrust litigation remained pending; management did not expect a material effect from the disclosed legal proceedings.
- Other notable items: the retiree medical plan was amended in 2014, reducing the reported postretirement obligation; a new mortality assumption contributed to pension actuarial losses. The company reported effective internal controls and received unqualified audit opinions.
Important facts for investors to verify
- Whether coal weakness, particularly in export markets, continues to offset growth in intermodal and merchandise traffic.
- How actual 2015 fuel-surcharge revenue and fuel-cost savings compare with management’s expectations.
- Whether service reliability and capacity improve after the reported winter-related network delays and resource additions.
- Actual capital spending, PTC costs and deployment progress, and approval and completion of the proposed D&H acquisition.
- Changes in debt, liquidity, pension and postretirement obligations, environmental reserves, and outcomes of material litigation or regulatory proceedings.