Norfolk Southern Corporation (NSC) — 2011 Form 10-K
Business context and reporting period
Annual report for the fiscal year ended December 31, 2011; the filing also provides fourth-quarter results. Norfolk Southern operates a freight railroad across approximately 20,000 route miles in 22 states and the District of Columbia, with coal, general merchandise, and intermodal as its principal traffic groups.
Financial performance and position
| Metric | 2011 | 2010 |
|---|---|---|
| Railway operating revenues | $11.172 billion | $9.516 billion |
| Railway operating expenses | $7.959 billion | $6.840 billion |
| Income from railway operations | $3.213 billion | $2.676 billion |
| Railway operating ratio | 71.2% | 71.9% |
| Net income | $1.916 billion | $1.496 billion |
| Diluted earnings per share | $5.45 | $4.00 |
| Cash from operating activities | $3.227 billion | $2.714 billion |
| Property additions | $2.160 billion | $1.470 billion |
| Total debt at year-end | $7.540 billion | $7.025 billion |
| Cash and short-term investments at year-end | $301 million | $1.110 billion |
| Working capital at year-end | $50 million | $389 million |
Fourth-quarter 2011 revenue was $2.797 billion, operating income was $800 million, and net income was $480 million; diluted EPS was $1.42. Corresponding fourth-quarter 2010 amounts were $2.392 billion, $642 million, $402 million, and $1.09.
Changes versus the prior comparable period
- Full-year revenue increased 17%, while operating expenses increased 16%; net income rose 28%. Management attributed growth to higher revenue per unit—including rate increases and fuel surcharges—and higher traffic volumes. Lower effective taxes also contributed to earnings growth.
- The operating ratio improved 0.7 percentage points to 71.2%. Fuel expense rose $510 million, primarily from higher fuel prices; fuel surcharges increased to $1.3 billion from $724 million.
- Coal revenue rose 27%, led by pricing and export demand; intermodal revenue rose 19%. General merchandise revenue increased 12%, while its traffic volume was relatively flat.
- Operating cash flow increased, but year-end cash and short-term investments declined by $809 million. Share repurchases reached $2.051 billion, versus $863 million in 2010; property additions increased $690 million.
- Debt-to-total capitalization increased to 43.2% from 39.7%. Stockholders’ equity declined to $9.911 billion from $10.669 billion, reflecting, among other items, repurchases, dividends, and other comprehensive loss.
Outlook, commentary, risks, and unusual items
- For 2012, NS expected revenue growth from higher traffic volumes, but at a more moderate pace than 2011, and average revenue per unit growth at or slightly above rail inflation. Management planned to emphasize safety, service, operating efficiency, and market-based pricing.
- Management expected coal revenue to increase, particularly from export volumes and pricing, but forecast lower utility and domestic metallurgical coal tonnage. It anticipated revenue growth in intermodal and several general merchandise groups, subject to market and volume conditions.
- NS budgeted $2.4 billion for 2012 property additions, including $247 million for positive train control (PTC); it expected at least $800 million in additional PTC-related additions during 2013–2015. Crescent Corridor spending was planned at approximately $128 million in 2012.
- Liquidity resources included a renewed $750 million revolving credit facility, with no borrowings outstanding at year-end, and a $350 million receivables securitization program, of which $200 million was outstanding. Management said cash on hand and operating cash flow should meet ongoing obligations. Debt-to-total capitalization was 43.2%; the filing reports compliance with debt covenants.
- Unusual expense: an unfavorable insurance arbitration ruling led to $58 million of charges in 2011, comprising $43 million of contested Graniteville-derailment insurance receivables and $15 million of other receivables no longer considered recoverable.
- Key risks include fuel-price and economic volatility, coal-market and natural-gas competition, additional rail regulation, PTC costs, labor negotiations, severe weather, hazardous-material incidents, environmental liabilities, litigation, and interruptions to technology or connecting-carrier service.
- Environmental liabilities were $35 million at year-end, covering 149 known locations and projects; management considered known matters unlikely to have a material adverse effect. The DuPont rate case remained pending, with resolution expected in 2013; management did not expect a material loss. Fuel-surcharge antitrust litigation also remained pending, and NS said it did not expect a material effect.
Important facts for investors to verify
- Whether 2012 traffic, pricing, fuel surcharges, and coal-export demand supported management’s more moderate revenue-growth outlook.
- Whether rising fuel, labor, pension, claims, and PTC costs affected operating ratio and free cash generation.
- How capital spending, share repurchases, dividends, and new borrowing affected leverage and liquidity; confirm debt maturities and the status of the receivables facility.
- Developments in the DuPont rate case, fuel-surcharge litigation, environmental matters, and personal-injury claims.
- For full-year context, note that the filing’s audited financial statements received an unqualified opinion and the auditor reported effective internal control over financial reporting as of December 31, 2011.