Norfolk Southern Corporation — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. The company operates a freight railroad serving 22 states and the District of Columbia. Financial statements are unaudited and prepared under U.S. GAAP.
Financial performance
| Metric | Q3 2022 | Q3 2021 | First nine months 2022 | First nine months 2021 |
|---|---|---|---|---|
| Railway operating revenue | $3.343 billion | $2.852 billion | $9.508 billion | $8.290 billion |
| Income from railway operations | $1.272 billion | $1.136 billion | $3.628 billion | $3.318 billion |
| Net income | $958 million | $753 million | $2.480 billion | $2.245 billion |
| Diluted EPS | $4.10 | $3.06 | $10.45 | $8.99 |
| Railway operating ratio | 62.0% | 60.2% | 61.8% | 60.0% |
| Operating cash flow | Not separately provided | Not separately provided | $3.424 billion | $3.313 billion |
Q3 revenue rose 17%, operating income 12%, net income 27%, and diluted EPS 34%. For the first nine months, revenue rose 15%, operating income 9%, net income 10%, and diluted EPS 16%. The operating ratio increased, indicating higher operating expenses relative to revenue. Revenue per unit increased 20% in Q3 and 19% year to date, while units declined 2% and 3%, respectively.
Revenue gains reflected fuel surcharges and pricing, which more than offset lower overall volumes. Q3 commodity revenue increased across merchandise (+13%), intermodal (+16%), and coal (+43%). Fuel surcharges totaled $501 million in Q3 versus $174 million a year earlier, and $1.2 billion year to date versus $419 million.
Expense pressures included fuel, labor, inflation, and service-related costs. Q3 operating expenses increased 21%; fuel expense rose 84% and compensation and benefits rose 21%. Year-to-date operating expenses increased 18%; fuel expense rose 91% and compensation and benefits rose 7%. Higher fuel prices were partly offset by lower fuel consumption.
Cash flow, debt and liquidity
- For the first nine months, operating cash flow was $3.424 billion; investing cash outflow was $1.060 billion, including $1.282 billion of property additions; and financing cash outflow was $1.989 billion.
- Cash and cash equivalents were $1.214 billion at September 30, 2022, up from $839 million at December 31, 2021. Working capital was negative $83 million, compared with negative $354 million at year-end 2021.
- Long-term debt, including current maturities, was $15.068 billion, versus $13.840 billion at December 31, 2021. The debt-to-total-capitalization ratio rose to 53.6% from 50.4%.
- During 2022, the company issued $1.75 billion of senior notes: $600 million at 3.00% due 2032, $400 million at 3.70% due 2053, and $750 million at 4.55% due 2053. It had no borrowings under its $400 million receivables facility or $800 million credit agreement; the credit agreement expires in March 2025.
- The company said cash on hand and operating cash flow should cover ongoing obligations, with borrowing capacity and flexibility to reduce capital spending or shareholder distributions as additional liquidity sources.
Material changes, outlook and notable items
- Pennsylvania enacted a phased reduction in its corporate income tax rate. Norfolk Southern recorded a $136 million deferred tax benefit in Q3, increasing diluted EPS by $0.58 in Q3 and $0.57 year to date. The benefit contributed to reported net-income growth; the effective tax rate was 12.4% in Q3 and 19.8% year to date.
- September tentative labor agreements included retroactive pay increases and benefits above prior estimates. Q3 expenses included $85 million in compensation and benefits and $3 million in purchased services for prior periods. The company estimated these prior-period wage adjustments reduced diluted EPS by $0.28 in Q3 and $0.18 year to date.
- At the filing date, some labor agreements remained subject to ratification, and two unions had not initially ratified tentative agreements. The company warned that a service disruption could occur in mid-November or early December if agreements were not ratified and could materially affect results or liquidity. Finalized or ratified agreements were expected to increase labor costs.
- Management expected merchandise and intermodal revenue for the remainder of 2022 to be higher, driven by fuel surcharges and pricing. Coal revenue was expected to rise from higher revenue per unit and volume growth. The company also expected fuel surcharge revenue and fuel expense to remain above 2021 levels if the prevailing fuel-price environment continued. No full-year earnings or EPS guidance is provided in the filing text.
- Service disruptions, terminal congestion, and equipment-cycle issues weighed on several traffic categories, including intermodal, metals and construction, and some merchandise shipments. Management said it continued efforts to improve network fluidity and service.
- Share repurchases totaled $2.284 billion year to date; dividends totaled $881 million. A new $10 billion repurchase authorization began April 1, with $8.3 billion remaining at September 30.
- Environmental liabilities were $57 million, versus $49 million at year-end. A terminal-related lawsuit was considered reasonably possible to result in a loss, but the company could not reasonably estimate a potential loss or range. It stated that the final outcome of lawsuits and claims cannot be predicted with certainty.
Investor verification points
- Assess underlying earnings growth apart from the $136 million tax benefit and retroactive labor-cost adjustments.
- Track labor-agreement ratification, resulting wage costs, and any service interruption; the disruption scenario described was specific to the filing date.
- Monitor operating ratio, network fluidity, service performance, and whether pricing and fuel surcharges continue to offset volume declines and higher expenses.
- Review leverage and cash allocation, including debt maturities, capital investment, dividends, and the remaining share-repurchase authorization.
- Follow the terminal litigation and environmental claims; the filing does not provide a reasonably estimable loss range for the terminal case.