Norfolk Southern Corporation — FY 2009 Form 10-K
Reporting period: Fiscal year ended December 31, 2009. The filing also reports unaudited fourth-quarter results. Norfolk Southern operates a freight railroad serving the eastern United States, with approximately 21,000 route miles; coal, general merchandise and intermodal are its principal traffic groups.
Financial performance and position
| Metric | FY 2009 | FY 2008 |
|---|---|---|
| Railway operating revenue | $7.969 billion | $10.661 billion |
| Railway operating expenses | $6.007 billion | $7.577 billion |
| Income from railway operations | $1.962 billion | $3.084 billion |
| Operating ratio | 75.4% | 71.1% |
| Net income | $1.034 billion | $1.716 billion |
| Diluted earnings per share | $2.76 | $4.52 |
| Cash provided by operating activities | $1.860 billion | $2.715 billion |
| Capital expenditures | $1.299 billion | $1.558 billion |
| Total debt at year-end | $7.153 billion | $6.667 billion |
- Revenue fell 25%, while operating expenses declined 21%; lower volume and fuel surcharge revenue outweighed cost savings. Fuel expense fell $913 million, mainly due to lower fuel prices and reduced consumption.
- Cash and cash equivalents were $996 million, with another $90 million of short-term investments. Working capital improved to $457 million from a $106 million deficit. The company reported $1.1 billion in cash, cash equivalents and short-term investments combined.
- A $1 billion revolving credit facility was undrawn at year-end, and NS reported compliance with its covenants. The receivables securitization program had $200 million outstanding and a reduced $350 million borrowing limit.
- Quarterly 2009 revenue, railway operating income and net income were, respectively: Q1 $1.943 billion, $383 million and $177 million; Q2 $1.857 billion, $468 million and $247 million; Q3 $2.063 billion, $562 million and $303 million; Q4 $2.106 billion, $549 million and $307 million. Q4 2008 comparatives were $2.502 billion, $813 million and $452 million.
- The annual dividend was $1.36 per share, up from $1.22. No shares were repurchased under the public program in 2009.
Material changes versus prior period
- Revenue declined $2.692 billion year over year. Traffic volume accounted for $2.020 billion of the decline and lower revenue per unit/mix for $672 million. Carloadings fell 19%; revenue ton-miles decreased from 195 billion to 159 billion.
- Revenue decreased across the major groups: coal down 27%, general merchandise down 24%, and intermodal down 26%. Coal remained the largest group at 29% of railway revenue.
- Income from railway operations fell 36%, and net income fell 40%. The operating ratio worsened by 4.3 percentage points despite lower operating costs.
- Operating cash flow fell $855 million. Debt increased $486 million, while total assets rose to $27.369 billion and stockholders’ equity to $10.353 billion.
- Employment averaged 28,593, down from 30,709. Capital spending fell to $1.299 billion, though road and other property spending increased.
Outlook, risks and unusual items
- Management expected 2010 revenue to increase with improved average revenue per unit and higher traffic as the economy gradually recovered. It also expected to continue service improvements and market-based pricing; this outlook is not a guarantee of results.
- Management budgeted $1.44 billion of 2010 capital expenditures, expected to be funded from internally generated cash. It anticipated at least $700 million of additional positive train control capital spending during 2011–2015. Positive train control requirements may also raise operating costs or affect efficiency and service.
- Fuel surcharge revenue was $370 million in 2009 versus $1.6 billion in 2008. Management expected higher fuel surcharges if fuel prices remained near year-end levels. Oil-price changes can affect both revenue and expense, with an uncertain net effect.
- Principal risks include economic weakness and customer demand, utility and export coal markets, increased rail regulation, environmental and safety requirements, hazardous-material accidents, litigation, labor negotiations, severe weather, fuel or supplier constraints, technology disruption, competition, connecting-carrier performance, and access to capital markets.
- Environmental liabilities were $32 million at year-end, relating to estimated remediation at 144 known locations. The company cited proceedings involving alleged environmental violations at its Ashtabula coal dock and alleged releases in Pennsylvania; it said it would contest liability and did not expect these matters to materially affect its finances.
- DOJ litigation related to the 2005 Graniteville derailment was stayed while the parties worked toward a consent decree that was expected to include fines exceeding $100,000. NS said it did not expect a material adverse effect. Fuel-surcharge antitrust class actions remained pending; NS said it considered the allegations without merit.
- The 2008 Avondale Mills settlement related to the Graniteville derailment was a notable prior-year expense; NS recorded insurance-recovery receivables, including $143 million subject to arbitration with two insurers. NS considered recovery probable.
- Other notable items include favorable personal-injury claims development, which reduced related annual costs to $51 million from $78 million, and a $21 million favorable adjustment from settlement of a multiyear state tax dispute. Tax benefits from synthetic-fuel investments had expired after 2007.
Important facts for investors to verify
- Whether the expected 2010 recovery in traffic and revenue materialized, particularly for utility coal, export coal, automotive and intermodal.
- How fuel prices, fuel surcharges and their contractual timing affect revenue, costs and operating ratio.
- Cash generation relative to capital spending, dividends, debt maturities and the planned positive train control investment.
- The status and potential financial exposure of environmental, Graniteville, fuel-surcharge and personal-injury claims, including insurer recoveries.
- Whether the reported year-end liquidity and undrawn credit capacity remain available under facility terms and covenant requirements.
Audit and controls: KPMG issued unqualified opinions on the consolidated financial statements and internal control over financial reporting as of December 31, 2009.