Norfolk Southern Corporation — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022; unaudited. Comparisons are with the corresponding 2021 periods. Amounts are in U.S. dollars.
Financial performance
| Metric | Q2 2022 | Q2 2021 | First six months 2022 | First six months 2021 |
|---|---|---|---|---|
| Railway operating revenue | $3.250 billion | $2.799 billion | $6.165 billion | $5.438 billion |
| Income from railway operations | $1.271 billion | $1.167 billion | $2.356 billion | $2.182 billion |
| Net income | $819 million | $819 million | $1.522 billion | $1.492 billion |
| Diluted earnings per share | $3.45 | $3.28 | $6.37 | $5.94 |
| Railway operating ratio | 60.9% | 58.3% | 61.8% | 59.9% |
Q2 revenue rose 16%, while operating income increased 9% and net income was unchanged. For the first six months, revenue rose 13%, operating income 8%, and net income 2%. Lower share count from repurchases helped diluted EPS growth exceed net income growth. The operating ratio increased, indicating that a larger share of revenue was consumed by operating expenses.
Revenue growth reflected higher fuel surcharge revenue and pricing, more than offsetting lower volumes. Total units declined 3% in Q2 and 4% for the first six months. Q2 revenue increased across merchandise, intermodal, and coal; coal revenue rose 34%, with higher pricing and fuel surcharges offsetting lower volume.
Operating expenses increased 21% in Q2 and 17% for the first six months. Fuel expense rose 117% and 94%, respectively, principally due to higher locomotive fuel prices; purchased services and rents and materials and other costs also increased. Lower property-sale gains and higher claims-related costs contributed to expense growth. The filing reports no separate gross margin; the railway operating ratio is the company’s principal operating-cost measure.
Cash flow, balance sheet, and capital allocation
- First-half operating cash flow was $2.011 billion, versus $2.097 billion in 2021. Property additions were $837 million, versus $627 million; investing cash use totaled $714 million.
- Financing cash use was $877 million. The company repurchased $1.454 billion of stock and paid $591 million in dividends during the first six months.
- Cash and cash equivalents were $1.259 billion at June 30, 2022, versus $839 million at year-end 2021. Working capital was $248 million, compared with negative $354 million at year-end.
- Total debt, including current maturities, was $15.054 billion, versus $13.840 billion at December 31, 2021. The debt-to-total-capitalization ratio increased to 53.4% from 50.4%.
- Debt issuance included $600 million of 3.00% notes due 2032, $400 million of 3.70% notes due 2053, and $750 million of 4.55% notes due 2053. The company had no borrowings under its $800 million credit agreement or $400 million receivables securitization program at quarter-end.
- The board authorized up to $10 billion of repurchases beginning April 1, 2022; $9.1 billion remained authorized at June 30. Management said future repurchases depend on market conditions and other factors.
Outlook, commentary, and material risks
- Management cited challenged network fluidity and service disruptions, and said it was recruiting, training, and retaining transportation crews and adapting its operating plan to restore service.
- For the remainder of 2022, management expected higher merchandise revenue, supported by pricing, fuel surcharges, and volume growth; higher intermodal revenue, with growth partly offset by lower storage-service revenue; and higher coal revenue from increased volumes. If fuel prices remained at then-current levels, management expected fuel surcharge revenue and fuel expense to remain higher than in 2021.
- Labor negotiations remained unresolved. About 80% of railroad employees were covered by collective bargaining agreements. The filing warned that a service disruption could materially affect results or liquidity, and that new agreements could significantly increase wages, healthcare, and benefit costs.
- Inflation, supply-chain constraints, COVID-19 effects, and lower network fluidity were identified as operating pressures. Environmental and casualty claims, and litigation, could produce additional costs. The company recorded $56 million of environmental liabilities; the ultimate outcome of a terminal-railroad lawsuit was not estimable, and an adverse result could be material.
- A Pennsylvania tax-law change enacted July 8, 2022 was expected to reduce deferred taxes and income tax expense by approximately $135 million in Q3 2022.
- Management expected cash on hand and operating cash flow to meet ongoing obligations, with borrowing capacity, financing access, and flexibility to reduce capital spending or shareholder distributions as additional liquidity sources.
Most important facts for investors to verify
- Whether service fluidity and shipment volumes improved, particularly in intermodal and other disrupted markets.
- Whether fuel prices, fuel surcharges, and inflation continued to affect revenue, expenses, and the operating ratio as management anticipated.
- The outcome and cost effects of labor negotiations, including any risk of service interruption.
- Progress on repurchases and debt levels, and the extent to which capital returns are funded by operating cash flow versus borrowing.
- The realized Q3 tax benefit relative to the estimated $135 million and developments in disclosed litigation, casualty, and environmental exposures.