Norfolk Southern Corporation — 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012. This is an annual filing; fourth-quarter figures are identified separately below. Unless noted, amounts are in U.S. dollars.
Business context and reporting period
Norfolk Southern is a freight railroad and logistics provider operating approximately 20,000 miles of road across 22 states and the District of Columbia. Its principal markets are coal, general merchandise, and intermodal freight. Coal generated 26% of 2012 railway operating revenue, general merchandise 54%, and intermodal 20%.
Key financial metrics
| Metric | 2012 | 2011 |
|---|---|---|
| Railway operating revenue | $11.040 billion | $11.172 billion |
| Railway operating expenses | $7.916 billion | $7.959 billion |
| Income from railway operations | $3.124 billion | $3.213 billion |
| Operating ratio | 71.7% | 71.2% |
| Net income | $1.749 billion | $1.916 billion |
| Diluted earnings per share | $5.37 | $5.45 |
| Cash from operating activities | $3.065 billion | $3.227 billion |
| Property additions | $2.241 billion | $2.160 billion |
| Total debt at year-end | $8.682 billion | $7.540 billion |
At December 31, 2012, cash, cash equivalents, and short-term investments totaled $668 million, and working capital was $161 million. Total assets were $30.342 billion and stockholders’ equity was $9.760 billion. The debt-to-total-capitalization ratio rose to 47.1% from 43.2%. A $750 million revolving credit facility was undrawn, and the company reported compliance with its covenants. It also had $300 million outstanding under its receivables securitization program.
Fourth quarter: Revenue was $2.684 billion, railway operating income $714 million, net income $413 million, and diluted EPS $1.30. In fourth-quarter 2011, the corresponding figures were $2.797 billion, $800 million, $480 million, and $1.42.
Material changes versus the prior comparable period
- Full-year railway revenue declined 1% and net income declined 9%; the operating ratio worsened by 0.5 percentage point. Management attributed the results to lower coal volumes and lower average revenue per unit, which outweighed growth in merchandise and intermodal.
- Coal revenue fell $579 million, or 17%, as coal carload volume declined 13% and average revenue per unit fell 5%. Utility coal tonnage dropped 17%, amid low natural-gas prices, reduced electricity demand, plant closures, and maintenance.
- General merchandise revenue rose 6% and intermodal revenue rose 5%. Automotive, chemicals, metals and construction, and domestic intermodal contributed to growth.
- Operating expenses decreased 1%. Lower materials and other costs, compensation costs, fuel expense, and equipment rents were partly offset by higher depreciation and purchased services. The 2011 comparison included a $58 million unfavorable arbitration-related charge.
- Operating cash flow fell to $3.065 billion from $3.227 billion, reflecting lower operating results and increased tax payments. Property additions increased to $2.241 billion.
- Total debt rose by $1.142 billion year over year. The company issued $1.8 billion of senior notes in 2012 and exchanged $521 million of older notes for new notes, paying a $115 million premium.
Outlook, management commentary, risks, and contingencies
- Management expected 2013 revenue to increase, reflecting higher volumes, and planned continued focus on safety, cost control, productivity, service, operational efficiency, and market-based pricing.
- Management expected coal revenue, coal carloads, utility coal tonnage, export coal tonnage, and domestic metallurgical coal tonnage to decline in 2013. It anticipated revenue growth in several merchandise categories and intermodal, supported by volume and pricing; employment was expected to be lower, while compensation costs were expected to rise with wage rates.
- The 2013 property-additions budget was $2.0 billion, including planned investment in infrastructure, equipment, terminals, and positive train control. Management expected at least $674 million of additional PTC-related property additions in 2014 and 2015.
- Principal risks include coal-market weakness and customer demand, competition from trucks and other transport modes, fuel-price volatility, labor costs or disruption, severe weather, hazardous-material incidents, cybersecurity or technology failures, economic and regulatory changes, and access to capital markets.
- Environmental liabilities were $42 million at year-end, based on 146 known locations and projects; the company stated that no individual site was considered material and that known matters were not expected to have a material adverse effect. Environmental outcomes remain uncertain.
- Pending matters include fuel-surcharge antitrust class actions and a DuPont rate-reasonableness complaint. The company disputed the allegations and did not expect the proceedings to have a material effect. It also disclosed a Tennessee environmental notice concerning soil runoff at the Memphis intermodal facility, which it planned to contest.
- Other significant exposures include personal-injury and occupational claims, including under FELA, and insurance limits with substantial self-insured layers. The filing cautions that adverse litigation or casualty outcomes could require additional accruals.
Most important facts for investors to verify
- Whether coal demand and pricing, particularly utility and export coal, performed in line with management’s 2013 expectations.
- Whether merchandise and intermodal growth offset continued coal weakness and whether the operating ratio improved.
- Execution and funding of the $2.0 billion 2013 capital program and future positive train control spending.
- Debt growth, refinancing needs, the receivables securitization renewal, and continued access to committed credit facilities.
- Developments in fuel-surcharge litigation, the DuPont rate case, environmental matters, and personal-injury and insurance claims.