Norfolk Southern Corporation — Q1 2021 Form 10-Q
Reporting period: First quarter ended March 31, 2021. Norfolk Southern operates a rail network across 22 states and the District of Columbia. Financial figures below are in millions of dollars except per-share data, percentages, and where otherwise stated.
Financial performance
| Metric | Q1 2021 | Q1 2020 | Change / context |
|---|---|---|---|
| Railway operating revenue | $2,639 | $2,625 | Up 1% |
| Railway operating expenses | $1,624 | $2,057 | Down 21%; Q1 2020 included a $385 asset-disposal loss |
| Income from railway operations | $1,015 | $568 | Up 79% reported; up 7% versus adjusted Q1 2020 |
| Net income | $673 | $381 | Up 77% reported; up 1% versus adjusted Q1 2020 |
| Diluted EPS | $2.66 | $1.47 | Up 81% reported; up 3% versus adjusted Q1 2020 |
| Railway operating ratio | 61.5% | 78.4% | Record quarter; Q1 2020 adjusted for the asset-disposal loss was 63.7% |
Operating expenses declined from lower employment, materials costs, fuel consumption and fuel prices, alongside operational efficiency improvements. Average rail headcount was down approximately 2,500 year over year. Compensation and benefits decreased 2%, purchased services and rents 2%, fuel 6%, and materials and other 9%.
Total shipment units increased 3%, while average revenue per unit declined 2%. Intermodal revenue rose 10%, coal 5%, and merchandise fell 4%. Revenue growth reflected higher volume, partly offset by lower fuel-surcharge revenue and unfavorable mix. Fuel-surcharge revenue was $97, down from $131.
Cash flow, liquidity and debt
- Operating cash flow was $1,015, compared with $955 in Q1 2020. Investing cash outflow was $202 versus $233; financing cash outflow was $930 versus $694.
- Cash and cash equivalents were $998 at March 31, 2021, down from $1,115 at year-end 2020. Working capital was $54, compared with $158 at year-end.
- Property additions were $265. Dividends paid were $249, and the company repurchased $591 of stock, retiring 2.3 million shares. Debt repayments were $84.
- Long-term debt, including current maturities, was $12,617; debt-to-total capitalization was 46.3%, versus 46.2% at December 31, 2020.
- The company had no borrowings under its $800 credit agreement, which expires in March 2025, or its $400 receivables securitization facility, which expires in May 2021. It also reported borrowing capacity against corporate-owned life insurance policies of $720.
- Management said cash on hand and operating cash flow should meet ongoing obligations, with borrowing capacity and the ability to defer capital spending or reduce shareholder distributions providing additional flexibility.
Outlook, commentary and risks
Management expected merchandise revenues to increase over the remainder of 2021, supported by higher volumes and average revenue per unit. Intermodal revenues were expected to rise on volume growth and higher average revenue per unit, including increased fuel surcharges. Coal revenues were expected to decline due to lower average revenue per unit and reduced utility volume. No specific full-year earnings or revenue guidance was provided.
Management cited winter weather disruption and continued uncertainty from COVID-19, including potential effects on employee availability, customer demand and operating cash inflows. It continued to monitor the pace of economic recovery. Collective bargaining negotiations, covering approximately 80% of railroad employees, were ongoing.
Contingencies include railroad-related lawsuits and claims, casualty claims, and environmental obligations. Environmental liabilities were $51, with most expected to be paid over five years; costs and timing remain subject to uncertainty. A terminal railroad dispute could result in a loss, but the potential range could not be estimated. The company said fuel-surcharge antitrust cases were not expected to materially affect its financial position, results or liquidity. Actual outcomes of legal, casualty and environmental matters may differ from estimates.
Q1 2020 included a $385 pretax loss related to the sale or planned sale of 703 excess locomotives, with a $97 tax benefit. Excluding this item, adjusted Q1 2020 diluted EPS was $2.58 and the operating ratio was 63.7%. The Q1 2021 effective tax rate was 22.3%, compared with 12.6%, partly reflecting a prior-year tax benefit from resolution of an amended federal return and higher stock-compensation tax benefits.
Important facts for investors to verify
- Whether volume, pricing and fuel-surcharge trends support management’s segment outlook, particularly the expected coal revenue decline.
- Whether the reported efficiency gains and record operating ratio are sustainable, given winter disruption and ongoing pandemic-related uncertainty.
- Whether cash generation can support capital needs, dividends and repurchases; also monitor the May 2021 expiry of the $400 receivables facility.
- Developments in collective bargaining and the terminal railroad lawsuit, along with changes in casualty and environmental estimates.
- The distinction between reported year-over-year earnings growth and comparisons excluding the $385 Q1 2020 locomotive-related charge.