(EDGAR Online via COMTEX) -- 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.
Revenue grew 10% in the first quarter as a result of stronger average revenue per unit. Volumes declined compared to the prior year, partly attributable to lower network velocity, and we are progressing with initiatives to improve network fluidity and resiliency for our customers. We experienced an increase in fuel commodity prices, which led to higher fuel surcharge revenues and fuel expense. The overall increase in revenue drove improvements in income from railway operations, net income and diluted earnings per share. However, the net impact of fuel prices on revenues and expenses contributed to the degradation of the operating ratio.
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, 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
First Quarter
2022 2021 % change
($ in millions, except per share amounts)
Income from railway operations $ 1,085 $ 1,015 7%
Net income $ 703 $ 673 4%
Diluted earnings per share $ 2.93 $ 2.66 10%
Railway operating ratio (percent) 62.8 61.5 2%
Income from railway operations increased due to higher railway operating revenues. Revenue growth was driven by higher fuel surcharge revenues and pricing gains, which exceeded the impact of a 5% volume decline. The rise in revenues was offset in part by increased railway operating expenses, driven by higher fuel prices, other inflationary pressures, and service-related costs. Our share repurchase activity resulted in the increase in diluted earnings per share that exceeded the increase in net income.
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.
First Quarter
Revenues 2022 2021 % change
Merchandise:
Agriculture, forest and consumer products $ 573 $ 539 6%
Chemicals 498 459 8%
Metals and construction 375 370 1%
Automotive 226 240 (6%)
Merchandise 1,672 1,608 4%
Intermodal 854 719 19%
Coal 389 312 25%
Total $ 2,915 $ 2,639 10%
Units
Merchandise:
Agriculture, forest and consumer products 177.6 178.3 -%
Chemicals 129.4 127.0 2%
Metals and construction 148.0 155.0 (5%)
Automotive 81.2 93.7 (13%)
Merchandise 536.2 554.0 (3%)
Intermodal 956.5 1,016.4 (6%)
Coal 165.6 166.5 (1%)
Total 1,658.3 1,736.9 (5%)
Revenue per Unit
Merchandise:
Agriculture, forest and consumer products $ 3,228 $ 3,026 7%
Chemicals 3,850 3,615 7%
Metals and construction 2,535 2,386 6%
Automotive 2,776 2,557 9%
Merchandise 3,118 2,903 7%
Intermodal 893 708 26%
Coal 2,347 1,872 25%
Total 1,758 1,519 16%
Railway operating revenues increased $276 million compared with the same period last year. The table below reflects the components of the revenue change by major commodity group ($ in millions).
First Quarter
Merchandise Intermodal Coal
Increase (Decrease)
Volume $ (51) $ (42) $ (2)
Fuel surcharge revenue 67 73 7
Rate, mix and other 48 104 72
Total $ 64 $ 135 $ 77
Approximately 90% of our revenue base is covered by contracts that include negotiated fuel surcharges. Revenues associated with these surcharges totaled $244 million and $97 million in 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 be higher than 2021.
Merchandise
Merchandise revenues increased due to higher average revenue per unit driven by higher fuel surcharge revenue and increased pricing partially offset by decreased volume. Volumes fell as declines in automotive and metals and construction shipments more than offset higher chemical shipments.
Agriculture, forest and consumer products volume decreased, as declines in corn, soybeans, and fertilizers more than offset increases in ethanol and feed. Decreased corn and fertilizer shipments were due to decreased customer demand. Soybean volumes were lower due to slower equipment cycle times. Ethanol and feed shipments were higher due to increased demand in those markets.
Chemicals volume rose as growth in shipments of solid waste and natural gas liquids more than offset declines in petroleum. Volume gains for solid waste and natural gas liquids were driven by increased growth with existing customers. Petroleum volume declined as a result of reduced demand.
Metals and construction volume fell, largely the result of decreased shipments of coil steel, iron and steel driven by commodity pricing and slower equipment cycle times. These declines were partially offset by higher aggregates traffic due to strong demand and rebuilding inventories.
Automotive volume declined due to 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.
Intermodal
Intermodal revenues increased, 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:
First Quarter
2022 2021 % change
Domestic 653.4 639.0 2%
International 303.1 377.4 (20%)
Total 956.5 1,016.4 (6%)
Domestic volume rose due to strong demand, partially offset by labor and capacity constraints, overall supply chain congestion, and limited chassis availability. International volume decreased as supply chain constraints with warehousing, drayage, terminals, ports, labor, and equipment more than offset strong consumer demand.
Intermodal revenues for the remainder of the year are expected to rise, driven by increased fuel surcharge revenue, pricing gains, and volume growth, partially offset by lower storage service revenues.
Coal
Coal revenues increased due to higher average revenue per unit, driven by
pricing gains and higher fuel surcharge revenue.
Coal tonnage (in thousands) by market was as follows:
First Quarter
2022 2021 % change
Utility 8,961 8,546 5%
Export 6,414 6,693 (4%)
Domestic metallurgical 2,430 2,487 (2%)
Industrial 803 899 (11%)
Total 18,608 18,625 -%
Coal tonnage was flat due to increased utility volume, offset by reduced export, domestic metallurgical, and industrial tonnage. Utility tonnage increased due to strengthened market conditions driven by increased natural gas prices and the need to replenish depleted inventories. 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 decreased due to sourcing challenges with coal supply.
Coal revenues for the remainder of the year are expected to rise due to increased revenue per unit, driven by increased fuel surcharge revenue and pricing gains. Volumes are expected to remain flat.
Railway Operating Expenses
Railway operating expenses summarized by major classifications follow ($ in
millions):
First Quarter
2022 2021 % change
Compensation and benefits $ 619 $ 611 1%
Purchased services and rents 437 393 11%
Fuel 301 177 70%
Depreciation 302 292 3%
Materials and other 171 151 13%
Total $ 1,830 $ 1,624 13%
Compensation and benefits expense increased as follows:
increased pay rates (up $10 million),
Average rail headcount for the quarter was down by over 500 compared with the first quarter of 2021, but up over 200 compared to the fourth quarter of 2021.
Purchased services and rents increased as follows ($ in millions):
First Quarter
2022 2021 % change
Purchased services $ 349 $ 318 10%
Equipment rents 88 75 17%
Total $ 437 $ 393 11%
Purchased services increased due to higher intermodal-related expenses, technology costs, as well as, increased operational and transportation expenses. Equipment rents increased due to lower equity in TTX earnings, increased automotive equipment expenses and greater time-and-mileage expense, partially offset by decreased intermodal equipment expenses.
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 77%), partially offset by decreased consumption (down 2%). Should the current fuel price environment persist for the remainder of 2022, we expect higher fuel expenses compared to 2021.
Materials and other expenses increased as follows ($ in millions):
First Quarter
2022 2021 % change
Materials $ 62 $ 61 2%
Claims 49 38 29%
Other 60 52 15%
Total $ 171 $ 151 13%
Materials expense remained relatively flat. Claims expense increased as a result of higher costs associated with personal injuries. Other expense increased due to higher sales and use taxes and travel expenses. Gains from operating property sales, included in Other, totaled $6 million and $4 million in 2022 and 2021, respectively.
Other income (expense) - net
Other income (expense) - net decreased $12 million due to lower net returns on corporate-owned life insurance (COLI) partially offset by a higher net pension benefit.
Income taxes
The first-quarter effective tax rate was 22.9% compared with 22.3% in the same period last year. The effective rate for 2022 reflects lower tax benefits on stock-based compensation and returns on COLI.
FINANCIAL CONDITION AND LIQUIDITY
Cash provided by operating activities, our principal source of liquidity, was $1.0 billion for both the first three months of 2022 and 2021. We had negative working capital of $132 million and $354 million at March 31, 2022 and December 31, 2021, respectively. Cash and cash equivalents totaled $1.6 billion at March 31, 2022.
Cash used in investing activities was $335 million for the first three months of 2022, compared with $202 million for the same period last year. The increase was primarily driven by higher property additions.
Cash provided by financing activities was $73 million for the first three months of 2022, while $930 million was used in financing activities for the same period last year, reflecting increased proceeds from borrowing and lower debt repayments, partially offset by higher dividends. We repurchased $600 million of Common Stock in the first three months of 2022 compared to $591 million in the same period last year. On March 29, 2022, our Board of Directors authorized a new program for the repurchase of up to an additional $10.0 billion of Common Stock beginning April 1, 2022. Our previous share repurchase program terminated on March 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) 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 2022, we issued $600 million of 3.00% senior notes due 2032 and $400 million of 3.70% senior notes due 2053.
Our debt-to-total capitalization ratio was 52.4% at March 31, 2022, and 50.4% at December 31, 2021. 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, 2022 or December 31, 2021. We also have in place an 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 March 31, 2022, and December 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 $675 million and $715 million at March 31, 2022 and December 31, 2021, 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, including those that may have material cash requirements, contained in our Form 10-K for the year ended December 31, 2021, with the exception of additional senior notes (see Note 7) and $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 at December 31, 2021.
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 with the assistance of mediators assigned by the National Mediation Board.
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 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.
Apr 27, 2022
COMTEX_406331955/2041/2022-04-27T11:23:23
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