Norfolk Southern Corporation — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. Norfolk Southern operates a freight railroad across 22 states and the District of Columbia, transporting merchandise, intermodal, and coal. Management attributed improved results to stronger demand and continued focus on margins, while noting ongoing COVID-19-related supply-chain challenges.
Financial performance
| Metric | Q2 2021 | Q2 2020 | First six months 2021 | First six months 2020 |
|---|---|---|---|---|
| Railway operating revenue | $2.799 billion | $2.085 billion | $5.438 billion | $4.710 billion |
| Income from railway operations | $1.167 billion | $610 million | $2.182 billion | $1.178 billion |
| Net income | $819 million | $392 million | $1.492 billion | $773 million |
| Diluted EPS | $3.28 | $1.53 | $5.94 | $3.00 |
| Operating ratio | 58.3% | 70.7% | 59.9% | 75.0% |
Q2 revenue rose 34%, income from railway operations 91%, net income 109%, and diluted EPS 114% year over year. Total volume increased 25% in Q2 and 13% in the first half; first-half revenue rose 15%. Growth spanned major commodity groups, led in Q2 by intermodal revenue (+41%), coal (+52%), and automotive (+122%).
Operating cash flow was $2.097 billion for the first six months, versus $1.758 billion a year earlier. Investing activities used $529 million and financing activities used $1.013 billion. Capital additions were $627 million; dividends were $496 million and share repurchases were $1.525 billion.
At June 30, cash was $1.670 billion; working capital was $216 million. Current assets were $3.012 billion and current liabilities $2.796 billion. Total debt, including current maturities, was $13.717 billion, compared with $12.681 billion at year-end 2020; debt-to-total capitalization was 48.9%, up from 46.2%. The company reported $400 million available under its receivables program and an undrawn $800 million credit facility.
Material changes and notable items
- First-half 2020 included a $385 million loss on disposal of excess locomotives. On management’s adjusted, non-GAAP comparison excluding that loss, first-half 2021 operating income increased 40%, net income 41%, diluted EPS 45%, and operating ratio improved to 59.9% from 66.8%.
- Operating expenses increased 11% in Q2, including higher fuel, purchased services, and compensation costs. First-half expenses decreased 8% on a reported basis, principally because the prior-year period included the locomotive disposal loss; excluding it, expenses increased 3%.
- Q2 fuel expense rose 124%, reflecting higher fuel prices and consumption. Gains on operating-property sales were $67 million in Q2, versus $2 million in Q2 2020.
- In May, the company issued $500 million of 2.30% senior notes due 2031 and $600 million of 4.10% notes due 2121. The 2031-note proceeds are designated for environmental-benefit projects; the 2121-note proceeds are for general corporate purposes.
- The company repurchased 5.7 million shares for $1.5 billion in the first half, versus 3.9 million shares for $669 million in the prior-year period.
Outlook, risks, and contingencies
Management expected merchandise, intermodal, and coal revenue to increase over the remainder of 2021, citing volume growth, pricing gains, and fuel surcharges; coal expectations reflected increased demand. The filing gives no specific full-year earnings or revenue guidance. Management said cash on hand and operating cash flow should meet ongoing obligations, with borrowing capacity and flexibility to adjust capital spending and shareholder distributions as additional liquidity sources.
Key uncertainties include the pandemic’s effects on demand, cash inflows, and supply chains; higher fuel and operating costs; and labor negotiations, which began in November 2019 and remained ongoing. The filing also discusses railroad casualty and environmental exposures. Recorded environmental liabilities were $50 million at June 30, 2021. A terminal-railroad minority-owner lawsuit could result in a loss, but the potential range was not estimable. Fuel-surcharge antitrust litigation remained active; the company said it did not expect a material effect. Management cautioned that unfavorable litigation, claims, or environmental developments could require additional accruals.
Important facts for investors to verify
- Whether volume, pricing, and the stated commodity-level revenue outlook persisted as pandemic comparisons normalized.
- How fuel prices, labor and service costs, and supply-chain constraints affected margins and operating performance after Q2.
- Whether share repurchases and new borrowing changed leverage, liquidity, or the company’s stated capacity to meet obligations.
- Developments in labor bargaining, the terminal-railroad lawsuit, casualty claims, and environmental exposures.
- The non-GAAP first-half comparison: 2020 adjusted results exclude the $385 million locomotive disposal loss and should be considered alongside GAAP results.