Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Norfolk Southern Corporation and Subsidiaries

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 the U.S. economy. We connect customers to markets and communities to economic opportunity with safe, reliable, and cost-effective shipping solutions. Our Norfolk Southern Railway Company subsidiary operates in 22 states and the District 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.

We continued to produce year-over-year improvement in profitability in the third quarter of 2021. Revenue growth well exceeded increased operating expenses and drove significant improvement in net income and diluted earnings per share. Comparisons to the prior year were aided in part by the absence of last year’s $99 million impairment charge related to an equity method investment.

The COVID-19 pandemic continues to impact the U.S. and global economies and has resulted in ongoing supply chain challenges. We are monitoring and reacting to the evolving nature of the pandemic and its impacts on our business. Our compliance with the federal contractor vaccine mandate, which requires employees to be fully vaccinated against COVID-19 by December 8, 2021, unless legally entitled to an accommodation, could lead to employee absences, resignations, labor disputes or work stoppages. Significant employee availability issues could have a material impact on our operations, resulting in a material adverse impact on our financial results, financial position and liquidity. We remain committed to protecting our employees, operating safely, and providing excellent transportation service products for our customers.

SUMMARIZED RESULTS OF OPERATIONS

			Third Quarter																		First Nine Months
			2021						2020						% change						2021						2020						% change
			($ in millions, except per share amounts)
Income from railway operations			$	1,136					$	840					35%						$	3,318					$	2,018					64%
Net income			$	753					$	569					32%						$	2,245					$	1,342					67%
Diluted earnings per share			$	3.06					$	2.22					38%						$	8.99					$	5.21					73%
Railway operating ratio (percent)			60.2						66.5						(9%)						60.0						72.0						(17%)

Income from railway operations increased in both periods, primarily a result of higher railway operating revenues. Overall volumes remained flat for the third quarter but were up 8% for the first nine months. In both periods, railway operating expenses included increases due to higher fuel and compensation and benefits costs. These increases were partially offset by higher gains on the sale of operating properties.

Our third-quarter 2020 results included a $99 million impairment charge related to an equity method investment. Additionally, the comparison of our current-year results for the first nine months was impacted by a $385 million loss on asset disposal in 2020 related to locomotives sold or designated as held-for-sale. For more information on the impact of these charges, see Notes 7 and 3, respectively.

The following tables adjust our 2020 GAAP financial results for the third quarter and first nine months to exclude the effects of these charges. The income tax effects of these non-GAAP adjustments were calculated based on the applicable tax rates to which the non-GAAP adjustment related. We use these non-GAAP financial measures internally and believe this information provides useful supplemental information to investors to facilitate making period-to-period comparisons by excluding the 2020 charges. While we believe that these non-GAAP financial measures are useful in evaluating our business, this information should be considered as supplemental in nature and is not meant to be considered in isolation from, or as a substitute for, the related financial information prepared in accordance with GAAP. In addition, these non-GAAP financial measures may not be the same as similar measures presented by other companies.

			Non-GAAP Reconciliation for the Third Quarter of 2020
			Reported						Investment Impairment						Adjusted (non-GAAP)
			($ in millions, except per share amounts)
Railway operating expenses			$	1,666					$	(99)					$	1,567
Income from railway operations			$	840					$	99					$	939
Income before income taxes			$	724					$	99					$	823
Income taxes			$	155					$	25					$	180
Net income			$	569					$	74					$	643
Diluted earnings per share			$	2.22					$	0.29					$	2.51
Railway operating ratio (percent)			66.5						(4.0)						62.5

In the table below, references to the third quarter of 2020 results and related comparisons use the adjusted, non-GAAP results from the reconciliation in the table above.

			Third Quarter
			2021						Adjusted 2020 (non-GAAP)						2021 vs. Adjusted 2020 (non-GAAP)
			($ in millions, except per share amounts)												% change
Railway operating expenses			$	1,716					$	1,567					10%
Income from railway operations			$	1,136					$	939					21%
Income before income taxes			$	986					$	823					20%
Income taxes			$	233					$	180					29%
Net income			$	753					$	643					17%
Diluted earnings per share			$	3.06					$	2.51					22%
Railway operating ratio (percent)			60.2						62.5						(4%)

			Non-GAAP Reconciliation for First Nine Months of 2020
			Reported						Loss on Asset Disposal						Investment Impairment						Adjusted (non-GAAP)
			($ in millions, except per share amounts)
Railway operating expenses			$	5,198					$	(385)					$	(99)					$	4,714
Income from railway operations			$	2,018					$	385					$	99					$	2,502
Income before income taxes			$	1,663					$	385					$	99					$	2,147
Income taxes			$	321					$	97					$	25					$	443
Net income			$	1,342					$	288					$	74					$	1,704
Diluted earnings per share			$	5.21					$	1.12					$	0.29					$	6.62
Railway operating ratio (percent)			72.0						(5.3)						(1.4)						65.3

In the table below, references and comparisons to the 2020 results for the first nine months use the adjusted, non-GAAP results from the reconciliation in the table above.

			First Nine Months
			2021						Adjusted 2020 (non-GAAP)						2021 vs. Adjusted 2020 (non-GAAP)
			($ in millions, except per share amounts)												% change
Railway operating expenses			$	4,972					$	4,714					5%
Income from railway operations			$	3,318					$	2,502					33%
Income before income taxes			$	2,893					$	2,147					35%
Income taxes			$	648					$	443					46%
Net income			$	2,245					$	1,704					32%
Diluted earnings per share			$	8.99					$	6.62					36%
Railway operating ratio (percent)			60.0						65.3						(8%)

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.

			Third Quarter																		First Nine Months
Revenues			2021						2020						% change						2021						2020						% change
Merchandise:
Agriculture, forest and consumer products			$	564					$	521					8%						$	1,681					$	1,570					7%
Chemicals			504						428						18%						1,457						1,371						6%
Metals and construction			424						337						26%						1,196						997						20%
Automotive			218						270						(19%)						664						597						11%
Merchandise			1,710						1,556						10%						4,998						4,535						10%
Intermodal			812						700						16%						2,332						1,924						21%
Coal			330						250						32%						960						757						27%
Total			$	2,852					$	2,506					14%						$	8,290					$	7,216					15%

Units
Merchandise:
Agriculture, forest and consumer products			181.3						176.4						3%						547.3						523.7						5%
Chemicals			138.3						111.9						24%						399.0						366.3						9%
Metals and construction			179.2						157.2						14%						510.5						448.2						14%
Automotive			81.5						105.7						(23%)						257.5						233.2						10%
Merchandise			580.3						551.2						5%						1,714.3						1,571.4						9%
Intermodal			1,021.0						1,068.8						(4%)						3,100.0						2,908.3						7%
Coal			160.5						147.7						9%						500.2						422.8						18%
Total			1,761.8						1,767.7						—%						5,314.5						4,902.5						8%

Revenue per Unit
Merchandise:
Agriculture, forest and consumer products			$	3,113					$	2,953					5%						$	3,072					$	2,998					2%
Chemicals			3,647						3,827						(5%)						3,651						3,742						(2%)
Metals and construction			2,360						2,145						10%						2,342						2,226						5%
Automotive			2,679						2,548						5%						2,579						2,558						1%
Merchandise			2,946						2,822						4%						2,915						2,886						1%
Intermodal			796						655						22%						752						662						14%
Coal			2,057						1,698						21%						1,919						1,791						7%
Total			1,619						1,418						14%						1,560						1,472						6%

Railway operating revenues increased $346 million in the third quarter and $1.1 billion for the first nine months compared with the same periods last year. The table below reflects the components of the revenue change by major commodity group ($ in millions).

			Third Quarter																		First Nine Months
			Merchandise						Intermodal						Coal						Merchandise						Intermodal						Coal
			Increase (Decrease)
Volume			$	82					$	(31)					$	22					$	412					$	127					$	139
Fuel surcharge revenue			43						54						2						37						106						1
Rate, mix and other			29						89						56						14						175						63
Total			$	154					$	112					$	80					$	463					$	408					$	203

Approximately 90% of our revenue base is covered by contracts that include negotiated fuel surcharges. Revenues associated with these surcharges totaled $174 million and $75 million in the third quarters of 2021 and 2020, respectively, and $419 million and $275 million for the first nine months of 2021 and 2020, respectively. The increase in fuel surcharge revenues is driven by higher fuel commodity prices and, for the first nine months, increased volumes.

Merchandise

Merchandise revenues increased in the third quarter and first nine months due to increased volume and higher average revenue per unit driven by higher fuel surcharge revenue and increased pricing. With the exception of Automotive in the third quarter, volumes increased in all merchandise commodity groups, reflecting continued economic recovery following the onset of the COVID-19 pandemic.

Agriculture, forest and consumer products volume increased in both periods across almost all markets as the economy has improved since the early months of the pandemic in 2020. The markets with the largest gains in both periods were ethanol, pulpboard, and woodchips, which more than offset declines in soybeans and pulp. The first nine months also included gains in corn, lumber, and food industry products.

Chemicals volume rose in both periods due to economic and production recovery since the beginning of the pandemic, despite ongoing challenges in the energy market. The markets with the largest gains were solid waste, industrial chemicals, and sand. Additionally, crude oil volumes increased in the third quarter.

Metals and construction volume increased in both periods across almost all markets due to economic improvement since the beginning of the pandemic. The markets serving the metal production industry, including coil, iron and steel, and scrap metal, experienced the largest gains.

Automotive volumes declined in the third quarter due to plant shutdowns as a result of the global microchip shortage. Automotive volumes were higher in the first nine months due primarily to prior-year pandemic-induced production shutdowns and increased retail demand.

Merchandise revenues for the remainder of the year are expected to be higher due to increased average revenue per unit, due to higher fuel surcharge revenue and pricing gains, and volume growth.

Intermodal

Intermodal revenues increased in both periods, the result of higher average revenue per unit driven by increased storage service charges, higher fuel surcharge revenue and pricing gains. In addition, for the first nine months, volume growth contributed to the overall increase in revenues.

Intermodal units (in thousands) by market were as follows:

			Third Quarter																		First Nine Months
			2021						2020						% change						2021						2020						% change
Domestic			656.6						699.9						(6%)						1,957.5						1,864.8						5%
International			364.4						368.9						(1%)						1,142.5						1,043.5						9%
Total			1,021.0						1,068.8						(4%)						3,100.0						2,908.3						7%

Domestic volume declined in the third quarter due to limited chassis availability, labor and capacity constraints, and overall supply chain congestion, which more than offset strong consumer demand. Domestic volumes grew in the first nine months due to strong consumer demand which was partially offset by chassis availability issues and overall supply chain congestion. International volume declined in the third quarter as supply chain constraints with warehousing, drayage, terminals, ports, labor, and rail equipment more than offset strong consumer demand. International volume rose in the first nine months, the result of continued strong import demand partially offset by various supply chain constraints.

Intermodal revenues for the remainder of the year are expected to rise, driven by increased average revenue per unit due to higher storage service charges, increased fuel surcharge revenue, and pricing gains that should more than offset volume declines.

Coal

Coal revenues increased in both periods. The increases are due to increased volumes and higher average revenue per unit driven by pricing gains and positive mix.

Coal tonnage (in thousands) by market was as follows:

			Third Quarter																		First Nine Months
			2021						2020						% change						2021						2020						% change
Utility			8,234						9,867						(17%)						25,343						24,465						4%
Export			5,650						3,585						58%						18,923						13,323						42%
Domestic metallurgical			3,074						2,379						29%						8,886						6,993						27%
Industrial			940						864						9%						2,710						2,592						5%
Total			17,898						16,695						7%						55,862						47,373						18%

Coal tonnage rose in both periods driven by increased export and domestic metallurgical volumes. Export volumes increased due to improved global economic conditions, higher seaborne pricing, and strong global demand. Domestic metallurgical volumes were higher resulting from strong recovery in the steel market. Utility tonnage decreased in the third quarter due primarily to coal supply challenges and mine outages. For the first nine months,

utility volumes increased due to higher natural gas prices, reduced stockpiles, and improved industrial electricity demand.

Coal revenues for the remainder of the year are expected to rise, primarily a result of increased demand.

Railway Operating Expenses

Railway operating expenses summarized by major classifications follow ($ in millions):

			Third Quarter																		First Nine Months
			2021						2020						% change						2021						2020						% change
Compensation and benefits			$	609					$	578					5%						$	1,844					$	1,786					3%
Purchased services and rents			432						486						(11%)						1,254						1,261						(1%)
Fuel			208						126						65%						573						399						44%
Depreciation			297						293						1%						883						867						2%
Materials and other			170						183						(7%)						418						500						(16%)
Loss on asset disposal			—						—						—%						—						385						(100%)
Total			$	1,716					$	1,666					3%						$	4,972					$	5,198					(4%)

Compensation and benefits expense increased in both periods as follows:

• incentive and stock-based compensation (up $43 million for the quarter and $104 million for the first nine months),

• overtime and recrews (up $10 million for the quarter and $36 million for the first nine months),

• increased pay rates (up $10 million for the quarter and $31 million for the first nine months),

• health and welfare benefits for craft employees (down $2 million for the quarter and $17 million for the first nine months),

• employee activity levels (down $40 million for the quarter and $121 million for the first nine months), and

• other (up $10 million for the quarter and $25 million for the first nine months).

Average rail headcount for the quarter was down by over 1,400 compared with the third quarter of 2020.

Purchased services and rents decreased in both periods as follows ($ in millions):

			Third Quarter																		First Nine Months
			2021						2020						% change						2021						2020						% change
Purchased services			$	355					$	419					(15%)						$	1,025					$	1,042					(2%)
Equipment rents			77						67						15%						229						219						5%
Total			$	432					$	486					(11%)						$	1,254					$	1,261					(1%)

Purchased services decreased in both periods due to a $99 million impairment in the prior year related to an equity method investment. This was partially offset in both periods by higher technology, Conrail-related, and drayage costs. The first nine months also includes higher volume-related intermodal expenses. Equipment rents increased in the third quarter primarily due to greater volume-related general use time and mileage expense. For the first nine months, equipment rents were higher as an increase in volume-related general use time and mileage expense was partially offset by higher equity in TTX earnings and lower intermodal costs.

Fuel expense, which includes the cost of locomotive fuel as well as other fuel used in railway operations, increased due to higher locomotive fuel prices (up 58% in the third quarter and 35% in the first nine months) and increased consumption (up 5% in the third quarter and 6% in the first nine months).

Materials and other expenses decreased in both periods as follows ($ in millions):

			Third Quarter																		First Nine Months
			2021						2020						% change						2021						2020						% change
Materials			$	71					$	72					(1%)						$	193					$	206					(6%)
Claims			56						59						(5%)						137						141						(3%)
Other			43						52						(17%)						88						153						(42%)
Total			$	170					$	183					(7%)						$	418					$	500					(16%)

Materials expense decreased for the first nine months due to lower maintenance costs as a result of fewer locomotives in service. Claims expense declined in the third quarter as a result of lower costs associated with personal injuries. For the first nine months, lower costs associated with personal injuries were partially offset by increased costs related to derailments. Other expense decreased in both periods due to higher gains from sales of operating property. Gains from operating property sales totaled $5 million and $2 million for the third quarters of 2021 and 2020, respectively, and $76 million and $15 million in the first nine months of 2021 and 2020, respectively. In addition, third-quarter other expense decreased due to lower property taxes.

Other income – net

Other income – net decreased $25 million in the third quarter and $54 million for the first nine months due to lower net returns on corporate-owned life insurance.

Income taxes

The third-quarter effective tax rate was 23.6% compared with 21.4% in the same period last year due to lower tax benefits associated with stock-based compensation and corporate-owned life insurance.

The effective tax rates were 22.4% and 19.3% for the first nine months of 2021 and 2020, respectively. The first nine months of 2020 includes a $19 million reduction of taxes from the resolution of our 2012 amended federal return, while the current year includes a $23 million reduction in deferred taxes associated with a state tax law change. The effective rate for 2021 also reflects lower tax benefits on stock-based compensation and returns on corporate-owned life insurance.

FINANCIAL CONDITION AND LIQUIDITY

Cash provided by operating activities, our principal source of liquidity, was $3.3 billion for the first nine months of 2021, compared with $2.8 billion for the same period of 2020, primarily due to improved operating results. We had working capital of $312 million and $158 million at September 30, 2021 and December 31, 2020, respectively. Cash and cash equivalents totaled $1.5 billion at September 30, 2021.

Cash used in investing activities was $847 million for the first nine months of 2021, compared with $818 million for the same period last year. The increase was primarily driven by lower proceeds from property sales, partially offset by reduced corporate-owned life insurance policy loan repayments and lower property additions.

Cash used in financing activities was $2.1 billion for the first nine months of 2021, compared with $1.2 billion in the same period last year, reflecting higher repurchases of Common Stock and debt repayments, partially offset by increased proceeds from borrowing. We repurchased $2.5 billion of Common Stock in the first nine months of 2021 compared to $960 million in the same period last year. The timing and volume of future share repurchases will be guided by our assessment of market conditions, cash flow and other pertinent factors. 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 49.9% at September 30, 2021, and 46.2% at December 31, 2020.

In August 2021, we issued $600 million of 2.90% senior notes due 2051.

In May 2021, we issued $500 million of 2.30% senior notes due 2031 and $600 million of 4.10% senior notes due 2121. The net proceeds of the 2.30% senior notes due 2031 will be allocated to existing or future investments in projects that provide environmental benefits. The net proceeds of the notes due 2121 will be used for general corporate purposes.

In May 2021, we renewed, amended and restated our accounts receivable securitization program with a maximum borrowing capacity of $400 million. The term expires in May 2022. We had no amounts outstanding under this program and our available borrowing capacity was $400 million at both September 30, 2021, and December 31, 2020.

We also have in place and available an $800 million credit agreement expiring in March 2025, which provides for borrowings at prevailing rates and includes covenants. We had no amounts outstanding under this facility at September 30, 2021 or December 31, 2020. In addition, we have investments in general purpose corporate-owned life insurance policies and had the ability to borrow against these policies up to $720 million and $750 million at September 30, 2021 and December 31, 2020, respectively.

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 contained in our Form 10-K for the year ended December 31, 2020, with the exception of additional senior notes (see Note 8).

APPLICATION OF CRITICAL ACCOUNTING POLICIES

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 application of the critical accounting policies contained in our Form 10-K at December 31, 2020.

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. We largely bargain nationally in concert with other major railroads, represented by the National Carriers’ Conference Committee. Moratorium provisions in the labor agreements govern when the railroads and unions may propose changes to the agreements. The current round of bargaining commenced on November 1, 2019, with both management and the unions serving their formal proposals for changes to the collective bargaining agreements, and negotiations are ongoing.

New Accounting Pronouncements

For a detailed discussion of new accounting pronouncements, see Note 12.

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 the Securities and Exchange Commission, may cause actual results, performance, or achievements to differ materially from those 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 and Sustainability sections of our website (www.norfolksouthern.com/content/nscorp/en/investor-relations.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 in Norfolk 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.