NORFOLK SOUTHERN CORP annual report, FY2013

Norfolk Southern Corporation — 2013 Form 10-K

Reporting period: Fiscal year ended December 31, 2013. This is an annual report, not a standalone quarterly filing; fourth-quarter figures are noted separately. Norfolk Southern operates a major freight railroad serving 22 states and the District of Columbia, with about 20,000 route miles. Its principal markets are coal, general merchandise, and intermodal freight.

Financial performance and position

Metric20132012
Railway operating revenues$11.245 billion$11.040 billion
Income from railway operations$3.257 billion$3.124 billion
Railway operating ratio71.0%71.7%
Net income$1.910 billion$1.749 billion
Diluted EPS$6.04$5.37
Cash from operating activities$3.078 billion$3.065 billion
Property additions$1.971 billion$2.241 billion
Total debt at year-end$9.448 billion$8.682 billion
Cash and short-term investments at year-end$1.561 billion$668 million
Working capital at year-end$770 million$161 million

Operating income margin was approximately 29.0% of railway revenues in 2013; net income margin was approximately 17.0%. The debt-to-total-capitalization ratio was 45.6%, down from 47.1%. Reported interest expense was $525 million. Cash flow from operations broadly funded capital spending, dividends, repurchases, and debt repayments.

Fourth-quarter 2013 revenue was $2.881 billion, railway operating income $881 million, net income $513 million, and diluted EPS $1.64. In fourth-quarter 2012, the corresponding figures were $2.684 billion, $714 million, $413 million, and $1.30.

Changes versus the prior year

  • Full-year revenue rose 2%, while operating expenses rose 1%; railway operating income increased 4% and the operating ratio improved by 0.7 percentage point.
  • Net income increased 9% and diluted EPS increased 12%. Earnings benefited from better railway operating results, share repurchases, and a $97 million pretax gain on a Michigan property sale, which contributed about $60 million to net income, or $0.19 per diluted share.
  • General merchandise revenue increased 7% and intermodal revenue increased 6%. Coal revenue declined 12%, with coal carloads down 5% and average revenue per unit down 7%.
  • Coal tonnage fell to 150.1 million tons from 156.1 million. Cash from operations was essentially flat; capital additions declined 12%. Year-end debt rose by $766 million, while cash and short-term investments increased by $893 million.

Outlook, commentary, risks, and contingencies

  • Management expected 2014 revenue to increase, reflecting higher volumes. It forecast coal revenue to decline more modestly, citing expected lower carloads and average revenue per unit; utility and export coal volumes were expected to weaken. Chemicals, automotive, and intermodal revenues were anticipated to grow.
  • Management budgeted $2.2 billion of 2014 property additions, including $220 million for positive train control (PTC). It expected 2014 depreciation expense to be about $40 million higher than 2013, and pension and other postretirement benefit expense to be about $25 million lower per quarter.
  • Coal remains a material exposure: it represented 23% of railway revenue. The filing cites competition from natural gas, weak utility demand, export-market oversupply and competition, customer sourcing shifts, and potential climate-related regulation.
  • Other principal risks include rail safety and hazardous-material incidents, environmental liabilities, severe weather, terrorism, economic and customer-demand weakness, fuel and supply constraints, labor disputes, technology disruption, connecting-carrier service, competition, and possible increased economic regulation. PTC implementation may add costs and affect operational efficiency.
  • Environmental liabilities were $58 million at year-end, versus $42 million a year earlier, covering estimated remediation at 142 known locations and projects. Management said known matters were not expected to have a material adverse effect, while noting that ultimate exposures are uncertain.
  • Pending matters include customer rate-reasonableness complaints by DuPont and Sunbelt, expected by management to be resolved in 2014, and fuel-surcharge antitrust class actions remanded for further consideration. Management did not expect either matter to materially affect financial position, results, or liquidity. A Tennessee environmental notice concerning soil runoff at an intermodal facility was also disclosed; management disputed liability and expected no material effect.
  • Funding sources included a $750 million revolving credit facility, unused at year-end, and a $350 million receivables securitization program with $200 million outstanding. Management stated cash on hand and operating cash flow should meet ongoing obligations. A 3.85% $400 million senior-note issue due 2024 was completed in the fourth quarter.

Investor verification priorities

  • Assess the sustainability of 2013 earnings growth, including the Michigan property-sale gain, share-count reductions, and operating improvements.
  • Track coal trends by utility, export, and metallurgical markets, and test management’s 2014 volume and revenue assumptions against natural-gas prices, export competition, and customer sourcing.
  • Review cash conversion, the $2.2 billion 2014 capital budget, PTC spending and remaining commitments, and the resulting debt and liquidity trajectory.
  • Monitor environmental and casualty reserves, the DuPont and Sunbelt rate cases, and the fuel-surcharge litigation for changes in estimated exposure.
  • Confirm the effects of labor costs, pension assumptions, and the filing’s projected tax-related cash outflow increase of approximately $200 million in 2014.
  • The filing reports unqualified audit opinions and effective internal controls; verify subsequent disclosures for any changes or new material events.