Norfolk Southern Corporation — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Norfolk Southern operates a freight railroad across 22 states and the District of Columbia. Financial amounts below are in U.S. dollars; income statement and cash flow figures are in millions unless noted.
Key financial results
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Railway operating revenue | $2,971 | $3,343 | $9,083 | $9,508 |
| Income from railway operations | $756 | $1,272 | $2,043 | $3,628 |
| Net income | $478 | $958 | $1,300 | $2,480 |
| Diluted EPS | $2.10 | $4.10 | $5.70 | $10.45 |
| Railway operating ratio | 74.6% | 62.0% | 77.5% | 61.8% |
Revenue declined 11% in Q3 and 4% year to date. Reported operating income fell 41% in Q3 and 44% year to date; net income fell 50% and 48%, respectively. The operating ratio increased, indicating lower operating efficiency. Excluding East Palestine incident expenses, the company reported non-GAAP operating ratios of 69.1% for Q3 and 66.9% year to date, versus 62.0% and 61.8% in 2022. Adjusted diluted EPS was $2.65 for Q3 and $8.92 year to date, still below the comparable 2022 figures of $4.10 and $10.45.
Cash flow and liquidity: First-nine-month operating cash flow was $2,506, down from $3,424 in 2022; investing cash outflow was $1,394 versus $1,060; financing cash outflow was $62 versus $1,989. Cash and equivalents were $1,506 at September 30, 2023, versus $456 at year-end 2022. Working capital was $228, compared with negative $642 at year-end 2022. Management expects cash on hand and operating cash flow, supplemented by available borrowing capacity and financing access, to cover ongoing obligations.
Debt and capital: Long-term debt, including current maturities, totaled $16,584 at September 30, 2023, compared with $15,082 at December 31, 2022. The debt-to-total-capitalization ratio rose to 56.8% from 54.4%. The company issued $1.6 billion of senior notes in 2023: $500 million at 4.45% due 2033, and $600 million at 5.05% due 2030 plus $1.0 billion at 5.35% due 2054. It had no borrowings under its $800 million credit agreement or $400 million receivables facility at quarter-end.
Material changes and operating trends
- East Palestine incident expenses were $163 million in Q3 and $966 million for the first nine months. The company says these costs reduced net income by $123 million and $733 million, respectively.
- Lower fuel surcharge revenue, intermodal storage revenue and volume contributed to revenue declines. Q3 intermodal revenue fell 22%; merchandise fell 7% and coal fell 8%. Total units declined 2% in Q3 and 3% year to date.
- Lower fuel prices reduced fuel expense, while purchased services, depreciation, materials and other costs increased. The company cited inflation, operational-resiliency investment, higher service-related costs and increased headcount among the pressures.
- The Q3 2022 comparison included an unusual $136 million deferred tax benefit from a Pennsylvania tax-rate change; that benefit did not recur in 2023.
- Dividends paid in the first nine months were $920 million. Share repurchases were $503 million, compared with $2.284 billion in the prior-year period.
Outlook, risks and contingencies
- For the remainder of 2023, management expected revenue to decline versus 2022, driven by lower intermodal storage and fuel surcharge revenues. Expected 2023 property additions were approximately $2.2 billion.
- The East Palestine incident remains the principal material uncertainty. At September 30, the company had recognized $966 million of incident expense, net of $25 million in insurance recoveries, and spent $511 million in cash. The filing says the ultimate outcome and reasonably possible loss range cannot be estimated with certainty; cleanup estimates, litigation costs and regulatory outcomes may change, and additional losses could be material.
- Incident-related matters include environmental remediation, federal and state proceedings, putative class actions, shareholder litigation, and ongoing NTSB, FRA and other investigations. The NTSB’s final report was expected in 2024; the FRA investigation remained ongoing. Some potential healthcare-fund costs, penalties and insurance recoveries were not accrued because they were not considered probable or reasonably estimable, or recovery was not yet considered probable.
- The company disclosed possible operational or regulatory changes related to the incident, including changes affecting train operations, that could adversely affect costs, operations or financial results.
- The Cincinnati Southern Railway purchase remained conditional on Cincinnati voter approval and other closing conditions. The STB had authorized the acquisition; the expected purchase price was $1.6–$1.7 billion, with closing expected no earlier than March 15, 2024 under the stated conditions.
- Approximately 80% of railroad employees are represented by unions. National agreements were concluded in December 2022, and neither party could compel mandatory bargaining on new proposals before November 1, 2024.
Most important facts for investors to verify
- Progress and cost estimates for East Palestine cleanup, litigation and investigations, including whether additional accruals or insurance recoveries are recorded.
- Whether operating performance, volumes and revenue recover from the service challenges and weaker demand cited by management, and whether the revenue outlook changes.
- Debt levels, refinancing costs and liquidity after the 2023 note issuances and the planned capital program.
- Outcome and funding requirements for the Cincinnati Southern Railway transaction, including voter approval and final closing terms.
- Reconciliation and assumptions behind management’s non-GAAP incident-adjusted results; these measures are supplemental and do not replace GAAP results.