Norfolk Southern Corporation — Q1 2022 Form 10-Q
Business context and period: The filing covers the quarter ended March 31, 2022. Norfolk Southern operates a freight rail network across 22 states and the District of Columbia, serving merchandise, intermodal, coal, and other markets. Financial statements are unaudited and prepared under U.S. GAAP.
Key financial results
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Railway operating revenue | $2.915 billion | $2.639 billion | +10% |
| Railway operating expenses | $1.830 billion | $1.624 billion | +13% |
| Income from railway operations | $1.085 billion | $1.015 billion | +7% |
| Net income | $703 million | $673 million | +4% |
| Diluted EPS | $2.93 | $2.66 | +10% |
| Operating ratio | 62.8% | 61.5% | 1.3 percentage points higher |
| Operating cash flow | $994 million | $1.015 billion | Down $21 million |
Revenue growth reflected stronger average revenue per unit, pricing, and fuel surcharges, partly offset by a 5% decline in units. The operating ratio worsened as expense growth, especially fuel, exceeded revenue growth. Fuel expense rose 70% to $301 million, mainly due to a 77% increase in locomotive fuel prices; fuel consumption declined 2%. Interest expense was $168 million versus $156 million.
Revenue mix and operating trends
- Merchandise revenue rose 4%; units fell 3%. Automotive units declined 13%, while chemicals units increased 2%.
- Intermodal revenue rose 19%, while units declined 6%; international units fell 20%, partly offset by 2% domestic growth.
- Coal revenue rose 25% on higher revenue per unit; coal tonnage was flat.
- Fuel surcharge revenue was $244 million versus $97 million. About 90% of revenue is covered by contracts with negotiated fuel surcharges.
- Compensation and benefits increased 1%; purchased services and rents increased 11%; materials and other increased 13%.
Cash, liquidity, and capital
- Cash and cash equivalents were $1.571 billion at March 31, 2022, up from $839 million at year-end. Net cash increased $732 million during the quarter.
- Operating cash flow was $994 million; property additions were $389 million, compared with $265 million a year earlier. Net cash used in investing was $335 million.
- Dividends were $297 million, or $1.24 per share. The company repurchased $600 million of stock, approximately 2.2 million shares.
- Total debt, including current maturities, was $14.844 billion, compared with $13.840 billion at December 31, 2021. Debt-to-total capitalization rose to 52.4% from 50.4%.
- In February, the company issued $600 million of 3.00% senior notes due 2032 and $400 million of 3.70% notes due 2053. It had no borrowings on its $800 million credit facility or $400 million receivables securitization facility; the latter expires in May 2022.
- Management reported negative working capital of $132 million, improved from negative $354 million at year-end, and expects cash on hand and operating cash flow to cover ongoing obligations.
Outlook, risks, and notable items
- Management expected merchandise revenue to increase for the rest of 2022, supported by pricing, fuel surcharges, and volume growth; intermodal revenue was expected to rise on similar drivers, with lower storage-service revenue a partial offset. Coal revenue per unit was expected to increase, with volumes expected to remain flat.
- If fuel prices remained at then-current levels, management expected higher fuel surcharge revenue and higher fuel expense than in 2021. The filing provides no specific full-year earnings or revenue guidance.
- Management cited lower network velocity, labor and capacity constraints, supply-chain congestion, limited chassis availability, and COVID-related challenges. It described initiatives to improve network fluidity and resiliency.
- Approximately 80% of railroad employees are covered by collective bargaining agreements; national bargaining that began in November 2019 remained ongoing with mediation assistance.
- The board authorized a new stock-repurchase program of up to $10 billion beginning April 1, 2022. Timing and volume depend on market conditions and other factors; management said purchases could use cash or borrowings.
- Environmental liabilities were $49 million. The company also disclosed litigation and casualty-claim estimation uncertainties; it said a potential loss in a terminal railroad ownership lawsuit was reasonably possible, but the range could not be estimated. Management did not expect known environmental matters or the cited fuel-surcharge litigation to materially affect the company, while noting outcomes remain uncertain.
Important facts for investors to verify
- Whether service velocity, network fluidity, and volumes recover, especially in intermodal and automotive traffic.
- How fuel prices and surcharge timing affect the spread between revenue growth and expense growth, and whether the operating ratio improves.
- Cash generation and capital allocation after the new $10 billion repurchase authorization, including the effect on leverage and liquidity.
- Progress and potential cost effects of labor negotiations, supply-chain constraints, and inflation.
- Expiration or renewal of the $400 million receivables securitization program and developments in litigation, casualty claims, and environmental exposures.