Business context and reporting period
Norfolk Southern Corporation operates a freight railroad serving 22 states and the District of Columbia. This unaudited Form 10-Q covers the third quarter and first nine months ended September 30, 2021; comparisons are with the corresponding 2020 periods.
Key financial results
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Railway operating revenue | $2.852 billion | $2.506 billion | $8.290 billion | $7.216 billion |
| Income from railway operations | $1.136 billion | $840 million | $3.318 billion | $2.018 billion |
| Net income | $753 million | $569 million | $2.245 billion | $1.342 billion |
| Diluted EPS | $3.06 | $2.22 | $8.99 | $5.21 |
| Railway operating ratio | 60.2% | 66.5% | 60.0% | 72.0% |
Revenue rose 14% in Q3 and 15% year to date. Operating income increased 35% and 64%, respectively; net income rose 32% and 67%. The lower operating ratio indicates improved operating efficiency.
For a more comparable view excluding unusual 2020 charges, management reported adjusted (non-GAAP) Q3 2020 net income of $643 million and diluted EPS of $2.51; Q3 2021 net income and EPS were up 17% and 22%. Adjusted nine-month 2020 net income was $1.704 billion and diluted EPS was $6.62; 2021 was up 32% and 36%. These adjustments exclude the 2020 $99 million investment impairment and, for the nine-month comparison, the $385 million locomotive disposal loss.
Cash, debt and liquidity
Operating cash flow was $3.313 billion for the first nine months, versus $2.767 billion in 2020. Investing activities used $847 million; financing activities used $2.116 billion. The company ended September with $1.465 billion of cash and $312 million of working capital.
Total debt, including current maturities, was $13.832 billion, compared with $12.681 billion at year-end 2020. Debt-to-total capitalization increased to 49.9% from 46.2%. The company issued $1.7 billion of senior notes during 2021 and repaid $576 million of debt in the first nine months.
Available liquidity included an undrawn $400 million receivables facility and an undrawn $800 million credit agreement, plus borrowing capacity against corporate-owned life insurance. Management said cash on hand and operating cash flow should cover ongoing obligations, with access to financing and flexibility to reduce spending or shareholder distributions as additional support.
Material changes, outlook and risks
- Q3 total volumes were essentially flat year over year; nine-month volumes increased 8%. Q3 revenue growth reflected higher revenue per unit, fuel surcharges and coal and merchandise growth, despite weaker intermodal units and automotive shipments.
- Operating expenses increased 3% in Q3, including fuel expense up 65% and compensation and benefits up 5%. For the first nine months, expenses fell 4%, largely because 2020 included the locomotive disposal loss.
- Management expected remainder-of-year merchandise revenue to increase on pricing, fuel surcharges and volume growth; intermodal revenue to rise on higher revenue per unit despite expected volume declines; and coal revenue to increase, primarily on demand. The filing gives no specific full-year earnings or revenue guidance.
- COVID-19-related supply-chain constraints affected intermodal operations. Management warned that compliance with the federal vaccine mandate could contribute to absences, resignations, labor disputes or work stoppages, potentially materially affecting operations and financial results.
- Collective bargaining negotiations were ongoing; approximately 80% of railroad employees were covered by union agreements. Other exposures include casualty claims, environmental liabilities and litigation. A terminal railroad lawsuit has a reasonably possible loss, but the amount cannot be estimated; management considers the fuel-surcharge antitrust cases non-material.
- The company repurchased $2.5 billion of shares in the first nine months, compared with $960 million in 2020. Repurchases and dividends contributed to cash use and reduced stockholders’ equity.
Important facts for investors to verify
- Whether supply-chain congestion, chassis availability, labor constraints and the vaccine mandate affect service, volumes and costs.
- Whether revenue growth and pricing continue to offset inflation in fuel, compensation and other operating costs.
- Debt levels, refinancing needs and the effect of continued share repurchases on leverage and liquidity.
- Developments in labor negotiations, casualty claims, environmental matters and the terminal railroad litigation.
- The assumptions behind management’s qualitative remainder-of-year expectations, which are subject to the risks described in the filing.