Norfolk Southern Corporation — Q1 2023 Form 10-Q
Reporting period: First quarter ended March 31, 2023; comparisons are with Q1 2022 unless noted. Amounts are in U.S. dollars. Norfolk Southern operates a freight rail network serving 22 states and the District of Columbia.
Key financial results
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Railway operating revenue | $3.132 billion | $2.915 billion | +7% |
| Railway operating expenses | $2.421 billion | $1.830 billion | +32% |
| Income from railway operations | $711 million | $1.085 billion | -34% |
| Net income | $466 million | $703 million | -34% |
| Diluted EPS | $2.04 | $2.93 | -30% |
| Railway operating ratio | 77.3% | 62.8% | Up 14.5 percentage points |
| Operating cash flow | $1.173 billion | $994 million | +$179 million |
The East Palestine incident added $387 million of expense, reducing net income by $293 million and diluted EPS by $1.28. Excluding that expense, the company reported non-GAAP operating income of $1.098 billion, net income of $759 million, diluted EPS of $3.32, and an operating ratio of 64.9%. On this adjusted basis, year-over-year changes were +1%, +8%, +13%, and up 2.1 percentage points, respectively. These company-presented non-GAAP measures are supplemental and are not substitutes for GAAP results.
Revenue per unit rose 8% overall while total shipment units were essentially flat. Merchandise revenue increased 12%, coal 13%, and intermodal declined 5%. Fuel surcharge revenue increased to $375 million from $244 million. Compensation, purchased services and rents, fuel, depreciation, and materials and other expenses all rose year over year; the incident charge was the largest distinct expense item.
Cash, liquidity and debt
- Cash and cash equivalents were $552 million at March 31, 2023, compared with $456 million at year-end 2022. Working capital was negative $702 million.
- Operating cash flow was $1.173 billion; capital additions were $428 million. Cash used in financing was $686 million, including $307 million of dividends, $163 million of share repurchases, and $800 million of debt repayments.
- Total debt, including current maturities, was $14.988 billion carrying value. The debt-to-total-capitalization ratio was 54.1%, versus 54.4% at year-end 2022. The company issued $500 million of 4.45% senior notes due 2033 in February.
- At quarter-end, the company had no borrowings under its $800 million credit facility, available through March 2025, and no balance under its $400 million receivables securitization program, which expires in May 2023. It also reported borrowing capacity against corporate-owned life insurance of up to $620 million.
- Management expects cash on hand and operating cash flow to cover ongoing obligations, with borrowing capacity, access to financing, and the ability to reduce shareholder distributions providing additional flexibility.
Material developments, outlook and risks
- East Palestine derailment: The February 3 derailment involved 38 railcars, including 11 non-company-owned tank cars containing hazardous materials. Following fires and concerns about five vinyl-chloride cars, a controlled vent and burn was conducted on February 6. The company is conducting cleanup and environmental monitoring with government agencies.
- The $387 million incident expense included $317 million for environmental obligations and $12 million for probable losses on incident lawsuits, in addition to amounts paid. Incident-related cash expenditures were $55 million in Q1. The recorded estimates exclude potential insurance recoveries; none had been accrued. Additional costs, penalties, or liabilities may be significant, and the company says the final outcome and reasonably possible loss range cannot be predicted with certainty.
- Government investigations and proceedings remain ongoing, including NTSB and FRA investigations, an FRA safety assessment, federal and state environmental actions, and numerous civil lawsuits. The NTSB preliminary report said a wheel bearing appeared to be in the final stage of overheat failure before the derailment; it also reported that the crew operated within company rules and responded after the wayside detector alert. The investigation remains ongoing.
- Management said revenue growth for the remainder of 2023 would be challenging amid substantial economic uncertainty, with expected headwinds from lower fuel prices, softer coal pricing, and declining storage service charges. Q1 revenue growth reflected higher average revenue per unit and flat overall volumes; expenses also faced inflationary and service-related pressures.
- Approximately 80% of railroad employees are covered by collective bargaining agreements. National bargaining concluded in December 2022; ongoing implementation discussions with several unions were described as carrying no work-stoppage risk. Mandatory bargaining on new proposals cannot be compelled before November 1, 2024.
Most important facts for investors to verify
- How East Palestine cleanup, litigation, investigations, potential fines, and possible insurance recoveries affect future expenses and cash flows; recorded incident costs may change.
- Whether the receivables securitization program expiring in May 2023 is renewed, replaced, or otherwise addressed.
- Whether revenue headwinds and elevated operating costs persist, particularly in intermodal, coal, fuel surcharges, and service-related expenses.
- Progress on rail safety investigations and any resulting regulatory, operational, or legislative changes.