Norfolk Southern 10-Q 2023-03-31

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2023

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ___________ to___________

Commission File Number: 1-8339

NORFOLK SOUTHERN CORPORATION

(Exact name of registrant as specified in its charter)

Securities registered pursuant to Section 12(b) of the Act:

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☒ Accelerated filer ☐ Non-accelerated filer ☐ Smaller reporting company ☐ Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

TABLE OF CONTENTS

NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES

PART I. FINANCIAL INFORMATION

Norfolk Southern Corporation and Subsidiaries

Consolidated Statements of Income

(Unaudited)

See accompanying notes to consolidated financial statements.

Norfolk Southern Corporation and Subsidiaries

Consolidated Statements of Comprehensive Income

(Unaudited)

See accompanying notes to consolidated financial statements.

Norfolk Southern Corporation and Subsidiaries

Consolidated Balance Sheets

(Unaudited)

Showing the first 8K of 73K characters. Open the full section

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.

Our first quarter results were impacted by a February 2023 derailment in Eastern Ohio. The derailment consisted of 38 railcars and resulted in the release of certain chemicals that were being transported for our customers. Following the Incident (as defined and as further described in Note 10 in the Notes to Consolidated Financial Statements), we have worked to clean the derailment site safely and thoroughly and to monitor for any impact on public health and the environment. Expenses recognized in the first quarter amounted to $387 million and relate to our initial response costs, ongoing cleanup efforts and estimates associated with environmental remediation and legal proceedings. Our current estimates of future environmental cleanup and remediation liabilities related to the Incident may change over time due to various factors, and the final outcome of any legal proceedings cannot be predicted with certainty. Thus, unfavorable or unexpected developments or outcomes could result in additional accruals that could be significant to results of operations in a particular year or quarter. This amount does not include any estimate of loss for specific items for which we believe a loss is either not probable or not reasonably estimable for the reasons noted. In addition, this amount does not include any amounts that may be recoverable from third parties, including expenses or liabilities that may be recovered under our insurance policies and for which such amounts will be reflected in future periods when reimbursement is considered probable. Please see Note 10 in the Notes to Consolidated Financial Statements for a detailed discussion of these estimates and exclusions. We continue to work with federal, state, and local officials to mitigate impacts from the Incident and to provide support to affected members of the community.

Revenue growth over the prior year was driven by higher average revenue per unit, as our volumes for the quarter were flat. In addition to the costs recognized from the Incident, our operating expenses were higher, driven by inflationary pressures and service-related costs. As we continue to make progress in response to the derailment and support the impacted community, we are committed to our strategy — a balanced approach of delivering safe, reliable and resilient service, smart and sustainable growth, and continuous productivity improvement.

SUMMARIZED RESULTS OF OPERATIONS

First-quarter 2023 income from railway operations included $387 million of expenses arising from the Incident, which reduced net income by $293 million and diluted earnings per share by $1.28. For more information see Note 10 in the Notes to Consolidated Financial Statements. First quarter income from railway operations, net income, and diluted earnings per share were further impacted by the factors set forth further below.

The following table adjusts our 2023 GAAP financial results to exclude the effects of the Incident. The income tax effect of this non-GAAP adjustment was 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 2023 costs arising from the Incident. 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, 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.

In the table below, references to 2023 results and related comparisons use the adjusted, non-GAAP results from the reconciliation in the table above.

On a non-GAAP basis excluding the impact of the Incident, income from railway operations increased due to higher railway operating revenues. Revenue growth was driven by higher fuel surcharge revenues and pricing gains, as volumes remained flat compared to the same period last year. The rise in revenues was partially offset by increased railway operating expenses, primarily driven by inflationary pressures and service-related costs.

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.

Railway operating revenues increased $217 million compared with the same period last year. The table below reflects the components of the revenue change by major commodity group ($ in millions).

Approximately 95% of our revenue base is covered by contracts that include negotiated fuel surcharges. Revenues associated with these surcharges totaled $375 million and $244 million in the first quarters of 2023 and 2022, respectively. The increase in fuel surcharge revenues is driven by higher fuel commodity prices.

For the remainder of 2023, we expect that revenue growth will be a challenge, as there is substantial economic uncertainty. We expect revenue headwinds resulting from lower fuel prices, softening coal pricing, and declining storage service charges.

Merchandise

Merchandise revenues increased due to higher average revenue per unit, driven by higher fuel surcharge revenue and increased pricing, as well as higher volumes in all commodity groups.

Agriculture, forest and consumer products volume increased as the shipment demand for corn, soybeans, ethanol, feed, and lumber, more than offset the declines in pulpboard. Volume gains in corn, ethanol, feed and lumber were driven by increased market demand. Higher soybean volume was due to an extended export season. The decline in pulpboard was due to higher inventories slowing down the demand for shipments.

Chemicals volume rose as growth in shipments of sand, petroleum products, and solid waste more than the offset declines in plastics, organic chemicals and natural gas liquids. Volume gains for sand were driven by current market demand, while the volume increases for petroleum and solid waste were both driven by growth with existing customers. Plastics volumes declined due to lower demand as a result of decreased activity in the housing market, while organic chemicals volumes declined as a result of production delays due to weather events. Natural gas liquid volumes were down due to decreased demand.

Metals and construction volume increased, largely driven by higher demand for aggregates and scrap metal.

Automotive volume was higher due to an increase in production of vehicles partially offset by elongated cycle times.

Intermodal

Intermodal revenues decreased, driven by lower volumes, and lower average revenue per unit, a result of decreased storage service charges partially offset by higher fuel surcharge revenue.

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

Domestic volume declined due to high inventories and increased truck availability resulting in strong over-the-road competition. International volume increased driven by ocean carriers favoring inland point intermodal traffic.

Coal

Coal revenues increased due to higher average revenue per unit, driven by traffic mix and higher fuel surcharge revenue, and increased export coal volumes.

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

Coal tonnage increased due to increased export volume, partially offset by decreased volumes in all other market groups. Export tonnage was higher due to increased demand, coal supply, and metal production. Utility tonnage decreased as a result of low natural gas prices and mild winter weather. Domestic metallurgical and industrial coal tonnage decreased due to reduced coal shipments related to idled customer facilities.

Railway Operating Expenses

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

Compensation and benefits expense increased as follows:

• increased pay rates (up $49 million),

• employee activity levels (up $36 million),

• stock-based compensation (down $12 million), and

• other (down $2 million).

Average rail headcount for the quarter was up by over 1,400 compared with the first quarter of 2022 primarily due to the hiring of additional train and engine craft employees.

Purchased services and rents increased as follows ($ in millions):

Purchased services primarily increased 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 as lower network fluidity led to increased intermodal equipment expenses and greater time-and-mileage expenses. We also incurred higher freight car lease 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 (5%). Locomotive fuel consumption was flat compared to the same period last year.

Depreciation expense increased due to our higher asset base and the impact of the results of our periodic roadway study.

Materials and other expenses increased as follows ($ in millions):

Materials expense increased due to increased locomotive and freight car materials costs. Claims expense increased as a result of higher costs associated with derailments not related to the Incident. Other expense increased due to higher travel-related expenses. Gains from operating property sales, included in Other, totaled $3 million and $6 million in 2023 and 2022, respectively.

Eastern Ohio incident

During the first quarter, we recorded $387 million for costs primarily associated with environmental matters and legal proceedings. The expense recorded in the first quarter does not include any estimates for amounts that may be recovered under our insurance policies. For further details regarding the Incident, see Note 10 in the Notes to Consolidated Financial Statements.

Other income (expense) – net

Other income increased $61 million due to higher returns on corporate-owned life insurance (COLI) and increased interest income.

Income taxes

The first-quarter effective tax rate was 21.3% compared with 22.9% for the same period last year. The effective rate for 2023 includes the recognition of certain business tax credits and tax benefits on stock-based compensation.

FINANCIAL CONDITION AND LIQUIDITY

Cash provided by operating activities, our principal source of liquidity, was $1.2 billion for the first three months of 2023, compared with $1.0 billion for the same period of 2022. The increase reflected changes in working capital, offset in part by lower operating results. We had negative working capital of $702 million and $642 million at March 31, 2023 and December 31, 2022, respectively. Cash and cash equivalents totaled $552 million at March 31, 2023.

Cash used in investing activities was $391 million for the first three months of 2023, compared with $335 million for the same period last year. The increase was primarily driven by higher property additions.

Cash used in financing activities was $686 million for the first three months of 2023, while cash provided by financing activities was $73 million for the same period last year, reflecting higher debt repayments and decreased proceeds from borrowing. Partially offsetting this activity was lower repurchases of Common Stock. We repurchased $163 million of Common Stock in the first three months of 2023 compared to $600 million in the same period last year. 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.

In February 2023, we issued $500 million of 4.45% senior notes due 2033.

Our debt-to-total capitalization ratio was 54.1% at March 31, 2023 and 54.4% at December 31, 2022. We 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 March 31, 2023 or December 31, 2022. We also have in place an accounts receivable securitization program with a maximum borrowing capacity of $400 million. The term expires in May 2023. We had no amounts outstanding under this program at March 31, 2023 and $100 million outstanding at December 31, 2022. Our available borrowing capacity was $400 million and $300 million at March 31, 2023 and December 31, 2022, respectively.

In addition, we have investments in general purpose COLI policies and had the ability to borrow against these policies up to $620 million and $610 million at March 31, 2023 and December 31, 2022, 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 decrease shareholder distributions, including share repurchases, provide additional flexibility to meet our ongoing obligations. 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 ended December 31, 2022, with the exception of additional senior notes (see Note 7).

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. In addition to the critical accounting estimates below, the remainder of our critical accounting estimates are contained in our December 31, 2022 Form 10-K.

Contingencies

We are currently involved in certain environmental response and remediation activities and subject to numerous legal proceedings and regulatory inquiries and investigations resulting from the Incident. As required, we have accrued estimates of the probable and reasonably estimable costs for the resolution of these matters. Our environmental estimates are based upon types of remediation efforts currently anticipated, the volume of contaminants in the impacted areas, and governmental oversight and other costs, amongst other factors. Estimates associated with the legal proceedings to which we are subject are based on information that is currently available, including but not limited to an assessment of the proceedings and the potential and likely results of such proceedings.

Our current estimates of future environmental cleanup and remediation liabilities related to the Incident may change over time due to various factors, including but not limited to, the success of current cleanup techniques, the nature and extent of required future cleanup activities, and the extent of governmental oversight, amongst other factors. Additionally, the final outcome of any of the legal proceedings and regulatory inquiries and investigations cannot be predicted with certainty, and unfavorable or unexpected developments or outcomes could result in new or additional accruals that could be material. Furthermore, certain of these costs may be recoverable under our insurance policies in effect at the date of the Incident. Any amounts that are recoverable under our insurance policies will be reflected in periods in which we determine that such amounts are probable of recovery.

See Note 10 in the Notes to Consolidated Financial Statements for more detailed information as it pertains to these contingencies.

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.

The latest round of national bargaining concluded in December 2022, when agreements were either ratified or enacted through legislative action for all twelve of our unions. We are currently participating in additional discussions (none of which carry the risk of a work stoppage) with several of our unions to conclude the implementation of these national agreements. With the conclusion of national bargaining, neither party can compel mandatory bargaining around any new proposals until November 1, 2024.

In addition, we understand the imperative to continue improving quality of life for our craft employees and are actively engaged in voluntary local discussions with our unions on this important issue.

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 supplemented in Part II, Item 1 A of this Form 10-Q, 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, 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 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.

The information required by this item is included in Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under the heading “Financial Condition and Liquidity.”

Evaluation of Disclosure Controls and Procedures

Our Chief Executive Officer and Chief Financial Officer, with the assistance of management, evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (Exchange Act)) at March 31, 2023. Based on such evaluation, our officers have concluded that, at March 31, 2023, our disclosure controls and procedures were effective in alerting them on a timely basis to material information required to be included in our periodic filings under the Exchange Act.

Changes in Internal Control Over Financial Reporting

During the first quarter of 2023, we have not identified any changes in internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

For information on our legal proceedings, see Note 10 “Commitments and Contingencies” in the Notes to Consolidated Financial Statements.

The risks set forth in “Risk Factors” included in our 2022 Form 10-K could have a material adverse effect on our financial position, results of operations, or liquidity in a particular year or quarter, and could cause those results to differ materially from those expressed or implied in our forward-looking statements. Those risks are incorporated herein by reference and are updated to include the following risks.

INCIDENT RISKS

As defined and as further described in Note 10 in the Notes to Consolidated Financial Statements, there was an Incident that occurred in the first quarter that consisted of a February 3, 2023 train derailment in East Palestine, Ohio that included 11 non-Company-owned tank cars containing hazardous materials, fires associated with the derailment that threatened certain of the tank cars, and a controlled vent and burn procedure conducted on February 6, 2023 on five of the derailed tank cars, all of which contained vinyl chloride. As a result of the Incident, we have become subject to numerous legal, regulatory, legislative and other proceedings related thereto, including but not limited to, the NTSB Investigation, the FRA Incident Investigation, the FRA Safety Assessment, the DOJ Complaint, the Ohio Complaint, the Incident Lawsuits, the Shareholder Lawsuits, and the Incident Inquiries and Investigations, in addition to other proceedings, actions, or potential changes in response to the Incident, including but not limited to those related to, among other items, train size, train length, train composition, or crew size (collectively, the “Incident Proceedings”). Set forth below are additional risks pertaining to an investment in the Company that are related to the Incident and the Incident Proceedings.

New or additional governmental regulation and/or operational changes resulting from or related to the Incident or the Incident Proceedings may negatively impact us, our customers, the rail industry, or the markets we serve. The legislative, regulatory, operational or other actions taken, protocols adopted (including by us), or changes resulting from the Incident or any of the Incident Proceedings may, either individually or in the aggregate, negatively impact us, our customers, the rail industry, or the markets we serve. Our inability to comply with the requirements of any new or additional laws, regulations or operating protocols resulting from or related to the Incident or the Incident Proceedings may have a material adverse effect on our financial position, results of operations, liquidity, or operations.

The costs, liabilities, fines, penalties, and/or financial impact resulting from or related to the Incident or the Incident Proceedings may be significant, exceed expected or accrued amounts, or negatively affect our financial results. We have incurred and will continue to remain subject to incurring significant costs, liabilities, fines, and penalties related to the Incident and the Incident Proceedings, including amounts that may have a material adverse effect on our financial position, results of operations, or liquidity.

In addition, while we have provided estimates of probable and reasonably estimable liabilities with respect to the Incident and the Incident Proceedings, we cannot predict the final outcome or estimate the reasonably possible range of loss with certainty and such estimates may change over time due to a variety of factors, including unfavorable or unexpected developments or outcomes which could result in our current estimates being insufficient. These estimated amounts also do not include any estimate of loss for specific items for which we believe a loss is either not probable or not reasonably estimable for the reasons set forth in Note 10 hereto. As a result, our currently accrued amounts of estimated liabilities may be insufficient, and any additional, new or updated accruals may potentially have a material adverse effect on our results of operations or financial condition.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

(1)Of this amount, 606 represent shares were tendered by employees in connection with the exercise of options under the stockholder-approved LTIP.

(2)On March 29, 2022, our Board of Directors authorized a new program for the repurchase of up to $10.0 billion of Common Stock beginning April 1, 2022. As of March 31, 2023, $7.3 billion remains authorized for repurchase.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

None.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.