The following discussion and analysis should be read in conjunction with the Consolidated Financial Statements and Notes.
OVERVIEW
We are one of the nation's premier transportation companies, moving goods and materials that help drive theU.S. economy. We connect customers to markets and communities to economic opportunity with safe, reliable, and cost-effective shipping solutions. OurNorfolk Southern Railway Company subsidiary operates in 22 states and theDistrict of Columbia . We are a major transporter of industrial products, including agriculture, forest and consumer products, chemicals, and metals and construction materials. In addition, in the East we serve every major container port and operate the most extensive intermodal network. We are also a principal carrier of coal, automobiles, and automotive parts. Strong revenue growth drove operating income improvement in the second quarter. Although lower network velocity contributed to volume declines compared to prior year, higher fuel surcharge revenues and pricing gains led to revenue per unit growth that more than offset the impact of lower volume. The increase in fuel commodity prices also led to higher fuel expense. The net impact of fuel prices on revenues and expenses, coupled with lower current-year gains on operating property sales, contributed to the degradation of the railway operating ratio (a measure of the amount of operating revenues consumed by operating expenses). While network fluidity remained challenged, we are taking the steps necessary for service restoration. These efforts include recruiting, training, and retaining our transportation crews as well as evolving our operating plan, with the goal of improving service for our customers. The COVID-19 pandemic continues to impact theU.S. and global economies and has resulted in ongoing supply chain challenges. We are monitoring and reacting to the evolving nature of the pandemic, governmental responses, and their impacts on our business, including employee availability. We remain committed to protecting our employees, operating safely, and providing excellent transportation service products for our customers.
SUMMARIZED RESULTS OF OPERATIONS
Second Quarter First Six Months 2022 2021 % change 2022 2021 % change ($ in
millions, except per share amounts)
Income from railway operations$ 1,271 $ 1,167 9%$ 2,356 $ 2,182 8% Net income$ 819 $ 819 -%$ 1,522 $ 1,492 2% Diluted earnings per share$ 3.45 $ 3.28 5%$ 6.37 $ 5.94 7% Railway operating ratio (percent) 60.9 58.3 4% 61.8 59.9 3% Income from railway operations increased in both periods due to higher railway operating revenues. Revenue growth was driven by higher fuel surcharge revenues and pricing gains, which exceeded the impact of a 3% and 4% volume decline in the second quarter and first six months, respectively. The rise in revenues was offset in part by increased railway operating expenses, driven by higher fuel prices, other inflationary pressures, service-related costs, lower gains on the sale of operating properties, and higher claims-related expenses. Offsetting the growth in income from railway operations were lower net returns on corporate-owned life insurance (COLI) and higher income taxes. Our share repurchase activity resulted in the percentage increase in diluted earnings per share that exceeded that of net income. 19
--------------------------------------------------------------------------------
DETAILED RESULTS OF OPERATIONS
Railway Operating Revenues
The following tables present a comparison of revenues ($ in millions), units (in thousands), and average revenue per unit ($ per unit) by commodity group.
Second Quarter First Six Months Revenues 2022 2021 % change 2022 2021 % change Merchandise: Agriculture, forest and consumer products$ 624 $ 578 8%$ 1,197 $ 1,117 7% Chemicals 552 494 12% 1,050 953 10% Metals and construction 420 402 4% 795 772 3% Automotive 257 206 25% 483 446 8% Merchandise 1,853 1,680 10% 3,525 3,288 7% Intermodal 972 801 21% 1,826 1,520 20% Coal 425 318 34% 814 630 29% Total$ 3,250 $ 2,799 16%$ 6,165 $ 5,438 13% Units Merchandise: Agriculture, forest and consumer products 183.6 187.7 (2%) 361.2 366.0 (1%) Chemicals 140.0 133.7 5% 269.4 260.7 3% Metals and construction 163.9 176.3 (7%) 311.9 331.3 (6%) Automotive 85.7 82.3 4% 166.9 176.0 (5%) Merchandise 573.2 580.0 (1%) 1,109.4 1,134.0 (2%) Intermodal 1,016.5 1,062.6 (4%) 1,973.0 2,079.0 (5%) Coal 166.1 173.2 (4%) 331.7 339.7 (2%) Total 1,755.8 1,815.8 (3%) 3,414.1 3,552.7 (4%)
Revenue per Unit
Merchandise:
Agriculture, forest and consumer products$ 3,398 $ 3,076 10%$ 3,314 $ 3,051 9% Chemicals 3,941 3,691 7% 3,897 3,654 7% Metals and construction 2,560 2,285 12% 2,548 2,332 9% Automotive 3,007 2,507 20% 2,894 2,534 14% Merchandise 3,233 2,896 12% 3,177 2,899 10% Intermodal 955 754 27% 925 731 27% Coal 2,562 1,837 39% 2,455 1,854 32% Total 1,851 1,542 20% 1,806 1,531 18% 20
--------------------------------------------------------------------------------
Railway operating revenues increased$451 million in the second quarter and$727 million for the first six months compared with the same periods last year. The table below reflects the components of the revenue change by major commodity group ($ in millions). Second Quarter First Six Months Merchandise Intermodal Coal Merchandise Intermodal Coal Increase (Decrease) Volume$ (20) $ (35) $ (13) $ (71) $ (77) $ (15) Fuel surcharge revenue 121 136 16 188 209 23 Rate, mix and other 72 70 104 120 174 176 Total$ 173 $ 171 $ 107 $ 237 $ 306 $ 184 Approximately 95% of our revenue base is covered by contracts that include negotiated fuel surcharges. Revenues associated with these surcharges totaled$421 million and$148 million in the second quarters of 2022 and 2021, respectively, and$665 million and$245 million for the first six months of 2022 and 2021, respectively. The increase in fuel surcharge revenues is driven by higher fuel commodity prices. Should the current fuel price environment persist for the remainder of 2022, we expect fuel surcharge revenue to continue to be higher than 2021. Merchandise Merchandise revenues increased in both periods due to higher average revenue per unit, driven by higher fuel surcharge revenue and increased pricing, partially offset by decreased volume. Volumes fell in both periods as declines in metals and construction and agriculture, forest, and consumer products shipments more than offset higher chemical shipments. Agriculture, forest and consumer products volume decreased in both periods, as declines in corn, fertilizers, and pulp more than offset increases in soybeans and feed. Decreased corn and pulp shipments were due to service disruptions. Lower fertilizer shipments were due to high fertilizer prices causing customers to draw down on existing inventories or delay purchases. Soybean volumes were higher due to increased opportunity for exports and feed shipments were up because of increased customer demand.
Chemicals volume rose in both periods due to growth in shipments of sand and solid waste, driven by growth with existing customers.
Metals and construction volume fell in both periods, largely the result of decreased shipments of coil steel, iron and steel, aggregates, scrap metal, and cement driven by commodity pricing, service disruptions and slower equipment cycle times. Automotive volume increased in the second quarter but decreased for the first six months. Higher shipments in the second quarter were primarily due to production shutdowns in the prior year caused by parts supply issues. Volumes for the first six months were impacted by plant shutdowns, as a result of the global microchip shortage, and slower equipment cycle times. Merchandise revenues for the remainder of the year are expected to be higher due to increased average revenue per unit, driven by higher fuel surcharge revenue and pricing gains, and volume growth. 21
--------------------------------------------------------------------------------
Intermodal
Intermodal revenues increased in both periods, driven by higher average revenue per unit, a result of higher fuel surcharge revenues, pricing gains and storage service charges, partially offset by lower volume.
Intermodal units (in thousands) by market were as follows:
Second Quarter First Six Months 2022 2021 % change 2022 2021 % change Domestic 670.4 661.9 1% 1,323.8 1,300.9 2% International 346.1 400.7 (14%) 649.2 778.1 (17%) Total 1,016.5 1,062.6 (4%) 1,973.0 2,079.0 (5%) Domestic volume rose slightly due to strong demand, partially offset by service disruptions and limited chassis availability. International volume decreased as supply chain constraints with terminals, ports, labor, and chassis availability, as well as excess inventory in the warehousing retail sector more than offset strong consumer demand. Intermodal revenues for the remainder of the year are expected to rise, driven by increased fuel surcharge revenue, volume growth, and pricing gains, partially offset by lower storage service revenues.
Coal
Coal revenues increased in both periods due to higher average revenue per unit, driven by pricing gains and higher fuel surcharge revenue, partially offset by lower volume.
Coal tonnage (in thousands) by market was as follows:
Second Quarter First Six Months 2022 2021 % change 2022 2021 % change Utility 8,267 8,563 (3%) 17,228 17,109 1% Export 6,514 6,580 (1%) 12,928 13,273 (3%) Domestic metallurgical 2,782 3,325 (16%) 5,212 5,812 (10%) Industrial 1,083 871 24% 1,886 1,770 7% Total 18,646 19,339 (4%) 37,254 37,964 (2%) Coal tonnage declined in both periods primarily due to decreased domestic metallurgical tonnage. While utility tonnage increased slightly for the first six months, it experienced a decrease in the second quarter due to service disruptions and tight coal supply. Export tonnage decreased due to service disruptions and tight coal supply. Domestic metallurgical coal tonnage fell due to reduced coke shipments related to customer sourcing changes. Industrial coal tonnage increased in both periods due to increased demand.
Coal revenues for the remainder of the year are expected to rise due to increased volumes.
22
--------------------------------------------------------------------------------
Railway Operating Expenses
Railway operating expenses summarized by major classifications follow ($ in millions): Second Quarter First Six Months 2022 2021 % change 2022 2021 % change
Compensation and benefits
1,233
Purchased services and rents 481 429 12%
918 822 12% Fuel 408 188 117% 709 365 94% Depreciation 304 294 3% 606 586 3% Materials and other 172 97 77% 343 248 38% Total$ 1,979 $ 1,632 21%$ 3,809 $ 3,256 17%
Compensation and benefits expense decreased in both periods as follows:
•incentive and stock-based compensation (down$32 million for the quarter and$24 million for the first six months), •employee activity levels (up$2 million for the quarter but down$15 million for the first six months), •overtime (up$4 million for the quarter and$13 million for the first six months), •increased pay rates (up$11 million for the quarter and$21 million for the first six months), and •other (up$5 million for the quarter and$3 million for the first six months).
Average rail headcount for the quarter was up by over 100 compared with the second quarter of 2021, and up over 600 compared with the fourth quarter of 2021.
Purchased services and rents increased in both periods as follows ($ in millions): Second Quarter First Six Months 2022 2021 % change 2022 2021 % change Purchased services$ 387 $ 352 10%$ 736 $ 670 10% Equipment rents 94 77 22% 182 152 20% Total$ 481 $ 429 12%$ 918 $ 822 12% Purchased services increased in both periods due to inflationary pressures which resulted in higher intermodal-related expenses, increased operational and transportation expenses, as well as, higher technology-related costs. Equipment rents increased in both periods as lower network fluidity led to greater time-and-mileage expenses and increased automotive equipment expenses. Additionally, both periods had lower equity in TTX earnings. Fuel expense, which includes the cost of locomotive fuel as well as other fuel used in railway operations, increased in both periods due to higher locomotive fuel prices (up 124% in the second quarter and 102% in the first six months), partially offset by decreased consumption (down 3% in both the second quarter and first six months). Should the current fuel price environment persist for the remainder of 2022, we expect fuel expenses to continue to be higher compared to 2021. 23
--------------------------------------------------------------------------------
Materials and other expenses increased in both periods as follows ($ in millions): Second Quarter First Six Months 2022 2021 % change 2022 2021 % change Materials$ 70 $ 61 15%$ 132 $ 122 8% Claims 64 43 49% 113 81 40% Other 38 (7) 643% 98 45 118% Total$ 172 $ 97 77%$ 343 $ 248 38% Materials expense increased in both periods due to increased track and freight car materials costs. Locomotive maintenance costs were also higher in the second quarter. Claims expense increased in both periods as a result of higher costs associated with personal injuries, environmental remediation matters, and derailments. Other expense increased in both periods due to lower gains from operating property sales and litigation-related expenses. Gains from operating property sales totaled$28 million and$67 million for the second quarters of 2022 and 2021, respectively, and$34 million and$71 million in the first six months of 2022 and 2021, respectively.
Other income (expense) - net
Other income (expense) - net decreased$49 million in the second quarter and$61 million for the first six months. Both periods experienced lower net returns on COLI partially offset by a higher net pension benefit.
Income taxes
The second-quarter and six month effective tax rates for 2022 were 24.7% and 23.9%, compared with 21.3% and 21.8%, respectively, for the same periods last year. The increases in the effective rates for 2022 reflect lower returns on COLI and lower tax benefits on stock-based compensation. Additionally, in 2021, we recognized a$23 million reduction in deferred taxes associated with a state tax law change. OnJuly 8, 2022 , House Bill 1342 was signed into law in theCommonwealth of Pennsylvania , making significant changes to its corporate income tax rate. The bill reduces its corporate income tax rate from 9.99% to 4.99%, with reductions occurring in phases beginning each tax year fromJanuary 1, 2023 throughJanuary 1, 2031 . GAAP requires companies to recognize the effect of tax law changes in the period of enactment. As a result, it is expected that there will be a decrease in "Deferred income taxes" on the Consolidated Balance Sheet and a corresponding decrease in "Income taxes" on the Income Statement in the third quarter of 2022. We currently estimate that the impact will be approximately$135 million .
FINANCIAL CONDITION AND LIQUIDITY
Cash provided by operating activities, our principal source of liquidity, was$2.0 billion for the first six months of 2022, compared with$2.1 billion for the same period of 2021. We had working capital of$248 million and negative working capital of$354 million atJune 30, 2022 andDecember 31, 2021 , respectively. Cash and cash equivalents totaled$1.3 billion atJune 30, 2022 . Cash used in investing activities was$714 million for the first six months of 2022, compared with$529 million for the same period last year. The increase was primarily driven by higher property additions. Cash used in financing activities was$877 million for the first six months of 2022, while$1.0 billion was used in financing activities for the same period last year, reflecting increased proceeds from borrowing partially offset by higher debt repayments and dividends. We repurchased$1.5 billion of Common Stock in the first six months of both 2022 and 2021. OnMarch 29, 2022 , our Board of Directors authorized a new program for the repurchase of 24
--------------------------------------------------------------------------------
up to an additional$10.0 billion of Common Stock beginningApril 1, 2022 . Our previous share repurchase program terminated onMarch 31, 2022 . The timing and volume of future share repurchases will be guided by our assessment of market conditions and other pertinent factors. Repurchases may be executed in the open market, through derivatives, accelerated repurchase and other negotiated transactions and through plans designed to comply with Rule 10b5-1(c) and Rule 10b-18 under the Securities and Exchange Act of 1934. Any near-term purchases under the program are expected to be made with internally-generated cash, cash on hand, or proceeds from borrowings.
Our debt-to-total capitalization ratio was 53.4% at
In
InMay 2022 , we renewed our accounts receivable securitization program with a maximum borrowing capacity of$400 million . The term expires inMay 2023 . We had no amounts outstanding under this program and our available borrowing capacity was$400 million at bothJune 30, 2022 , andDecember 31, 2021 .
In
We also have in place and available an$800 million credit agreement expiring inMarch 2025 , which provides for borrowings at prevailing rates and includes covenants. We had no amounts outstanding under this facility atJune 30, 2022 orDecember 31, 2021 .
In addition, we have investments in general purpose corporate-owned life
insurance policies and had the ability to borrow against these policies up to
We expect cash on hand combined with cash provided by operating activities will be sufficient to meet our ongoing obligations. In addition, we believe our currently-available borrowing capacity, access to additional financing, and ability to reduce or defer expenditures on property additions and decrease shareholder distributions, including share repurchases, provide additional flexibility to meet our ongoing obligations. Nonetheless, we are monitoring the ongoing impacts of the COVID-19 pandemic, which could lead to a decline of cash inflows from operations. There have been no material changes to the information on future contractual obligations, including those that may have material cash requirements, contained in our Form 10-K for the year endedDecember 31, 2021 , with the exception of additional senior notes (see Note 7) and approximately$1.0 billion of additional unconditional purchase obligations, which extend through 2025.
CRITICAL ACCOUNTING ESTIMATES
The preparation of financial statements in accordance with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. These estimates and assumptions may require judgment about matters that are inherently uncertain, and future events are likely to occur that may require us to make changes to these estimates and assumptions. Accordingly, we regularly review these estimates and assumptions based on historical experience, changes in the business environment, and other factors we believe to be reasonable under the circumstances. There have been no significant changes to the critical accounting estimates contained in our Form 10-K atDecember 31, 2021 . 25
--------------------------------------------------------------------------------
OTHER MATTERS
Labor Agreements
Approximately 80% of our railroad employees are covered by collective bargaining agreements with various labor unions. Pursuant to the Railway Labor Act, these agreements remain in effect until new agreements are reached, or until the bargaining procedures mandated by the Railway Labor Act are completed. Moratorium provisions in the labor agreements govern when the railroads and unions may propose changes to the agreements. We largely bargain nationally in concert with other major railroads, represented by the National Carriers' Conference Committee. After management and the unions served their formal proposals inNovember 2019 for changes to the collective bargaining agreements, negotiations began in 2020 following the expiration of the last moratorium. OnJune 17, 2022 , theNational Mediation Board notified the parties that all practical methods of ending the dispute had been exhausted without effecting a settlement and that its mediation services had been terminated. Although negotiations between the parties continue, this release allowed either party to engage in self-help (strike or lockout) after a 30-day cooling off period. However, because the dispute threatens to interrupt commerce and deprive certain segments of the domestic economy of essential transportation service,President Biden created Presidential Emergency Board (PEB) No. 250, effectiveJuly 18, 2022 , to investigate the facts of the dispute and make recommendations. The creation of the PEB delays any potential self-help for 60 days while the PEB makes recommendations (expected 30 days from the date the PEB was created) and the parties engage in further negotiations (for a period of 30 days). The outcome of the negotiations cannot be determined at this time; however, if the dispute is not resolved during this final period of negotiations and either party rejects the recommendations of the PEB, self-help could occur in mid-September. As has occurred during prior labor agreement negotiations, the parties could potentially reach an agreement during post-PEB negotiations, orCongress could take legislative action to preempt self-help and avert a service disruption. A service disruption, depending on the duration, could have a material adverse effect on our financial position, results of operations, or liquidity. In addition, changes in our labor agreements could significantly increase our costs for health care, wages, and other benefits.
New Accounting Pronouncements
For a detailed discussion of new accounting pronouncements, see Note 11.
Inflation
In preparing financial statements, GAAP requires the use of historical cost that disregards the effects of inflation on the replacement cost of property. As a capital-intensive company, we have most of our capital invested in long-lived assets. The replacement cost of these assets, as well as the related depreciation expense, would be substantially greater than the amounts reported on the basis of historical cost.
FORWARD-LOOKING STATEMENTS
Certain statements in Management's Discussion and Analysis of Financial Condition and Results of Operations are "forward-looking statements" within the meaning of the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, as amended. These statements relate to future events or our future financial performance and involve known and unknown risks, uncertainties, and other factors that may cause our actual results, levels of activity, performance, or our achievements or those of our industry to be materially different from those expressed or implied by any forward-looking statements. In some cases, forward-looking statements can be identified by terminology such as "may," "will," "could," "would," "should," "expect," "plan," "anticipate," "intend," "believe," "estimate," "project," "consider," "predict," "potential," "feel," or other comparable terminology. We have based these forward-looking statements on our current expectations, assumptions, estimates, beliefs, and projections. While we believe these expectations, assumptions, estimates, beliefs, and projections are reasonable, such forward-looking statements are only predictions and involve known and unknown risks and uncertainties, many of which involve factors or circumstances that are beyond our control. These and other important factors, including those discussed under "Risk Factors" in our latest Form 10-K, as well as our subsequent filings with theSecurities and Exchange Commission , may cause actual results, performance, or achievements to differ materially from those 26
--------------------------------------------------------------------------------
expressed or implied by these forward-looking statements. The forward-looking statements herein are made only as of the date they were first issued, and unless otherwise required by applicable securities laws, we disclaim any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.
Additional Information
Investors and others should note that we routinely use the Investor Relations, Performance Metrics, and Sustainability sections of our website (www.norfolksouthern.com/content/nscorp/en/investor-relations.html, http://www.nscorp.com/content/nscorp/en/investor-relations/performance-metrics.html & www.nscorp.com/content/nscorp/en/about-ns/sustainability.html) to post presentations to investors and other important information, including information that may be deemed material to investors. Information about us, including information that may be deemed material, may also be announced by posts on our social media channels, including Twitter (www.twitter.com/nscorp) and LinkedIn (www.linkedin.com/company/norfolk-southern). We may also use our website and social media channels for the purpose of complying with our disclosure obligations under Regulation FD. As a result, we encourage investors, the media, and others interested inNorfolk Southern to review the information posted on our website and social media channels. The information posted on our website and social media channels is not incorporated by reference in this Quarterly Report on Form 10-Q.
© Edgar Online, source