☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period endedSEPTEMBER 30, 2021
☐ 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)
Virginia
52-1188014
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
650 West Peachtree Street NW
30308-1925
Atlanta,
Georgia
(Address of principal executive offices)
(Zip Code)
(855)
667-3655
(Registrant’s telephone number, including area code)
Three Commercial Place,
Norfolk,
Virginia
23510-2191
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol
Name of each exchange on which registered
Norfolk Southern Corporation Common Stock (Par Value $1.00)
NSC
New York Stock Exchange
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.
Class
Outstanding at September 30, 2021
Common Stock ($1.00 par value per share)
243,344,509
(excluding 20,320,777 shares held by the registrant’s
See accompanying notes toconsolidatedfinancialstatements.
3
Norfolk Southern Corporation and Subsidiaries
Consolidated Statements of Comprehensive Income
(Unaudited)
Third Quarter
First Nine Months
2021
2020
2021
2020
($ in millions)
Net income
$
753
$
569
$
2,245
$
1,342
Other comprehensive income, before tax:
Pension and other postretirement benefits
10
7
31
20
Other comprehensive income of equity investees
—
—
—
6
Other comprehensive income, before tax
10
7
31
26
Income tax expense related to items of other
comprehensive income
(3)
(3)
(8)
(6)
Other comprehensive income, net of tax
7
4
23
20
Total comprehensive income
$
760
$
573
$
2,268
$
1,362
See accompanying notes toconsolidatedfinancialstatements.
4
Norfolk Southern Corporation and Subsidiaries
Consolidated Balance Sheets
(Unaudited)
September 30, 2021
December 31, 2020
($ in millions)
Assets
Current assets:
Cash and cash equivalents
$
1,465
$
1,115
Accounts receivable – net
945
848
Materials and supplies
235
221
Other current assets
77
134
Total current assets
2,722
2,318
Investments
3,684
3,590
Properties less accumulated depreciation of $11,867
and $11,985, respectively
31,429
31,345
Other assets
769
709
Total assets
$
38,604
$
37,962
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable
$
1,196
$
1,016
Income and other taxes
272
263
Other current liabilities
384
302
Current maturities of long-term debt
558
579
Total current liabilities
2,410
2,160
Long-term debt
13,274
12,102
Other liabilities
1,944
1,987
Deferred income taxes
7,089
6,922
Total liabilities
24,717
23,171
Stockholders’ equity:
Common stock $1.00 per share par value, 1,350,000,000 shares
authorized; outstanding 243,344,509 and 252,095,082 shares,
respectively, net of treasury shares
244
254
Additional paid-in capital
2,224
2,248
Accumulated other comprehensive loss
(571)
(594)
Retained income
11,990
12,883
Total stockholders’ equity
13,887
14,791
Total liabilities and stockholders’ equity
$
38,604
$
37,962
See accompanying notes toconsolidatedfinancialstatements.
5
Norfolk Southern Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
First Nine Months
2021
2020
($ in millions)
Cash flows from operating activities
Net income
$
2,245
$
1,342
Reconciliation of net income to net cash provided by operating activities:
Depreciation
883
867
Deferred income taxes
158
78
Gains and losses on properties
(80)
(14)
Loss on asset disposal
—
385
Impairment of investment
—
99
Changes in assets and liabilities affecting operations:
Accounts receivable
(102)
36
Materials and supplies
(14)
(3)
Other current assets
57
55
Current liabilities other than debt
294
104
Other – net
(128)
(182)
Net cash provided by operating activities
3,313
2,767
Cash flows from investing activities
Property additions
(1,025)
(1,053)
Property sales and other transactions
135
291
Investment purchases
(5)
(6)
Investment sales and other transactions
48
(50)
Net cash used in investing activities
(847)
(818)
Cash flows from financing activities
Dividends
(764)
(722)
Common stock transactions
8
53
Purchase and retirement of common stock
(2,460)
(960)
Proceeds from borrowings
1,676
784
Debt repayments
(576)
(325)
Net cash used in financing activities
(2,116)
(1,170)
Net increase in cash and cash equivalents
350
779
Cash and cash equivalents
At beginning of year
1,115
580
At end of period
$
1,465
$
1,359
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest (net of amounts capitalized)
$
391
$
395
Income taxes (net of refunds)
468
118
See accompanying notes toconsolidatedfinancialstatements.
6
Norfolk Southern Corporation and Subsidiaries
Consolidated Statements of Changes in Stockholders’ Equity
(Unaudited)
Common Stock
Additional Paid-in Capital
Accum. Other Comprehensive Loss
Retained Income
Total
($ in millions, except per share amounts)
Balance at December 31, 2020
$
254
$
2,248
$
(594)
$
12,883
$
14,791
Comprehensive income:
Net income
673
673
Other comprehensive income
8
8
Total comprehensive income
681
Dividends on common stock,
$0.99 per share
(249)
(249)
Share repurchases
(3)
(19)
(569)
(591)
Stock-based compensation
12
(1)
11
Balance at March 31, 2021
251
2,241
(586)
12,737
14,643
Comprehensive income:
Net income
819
819
Other comprehensive income
8
8
Total comprehensive income
827
Dividends on common stock,
$0.99 per share
(247)
(247)
Share repurchases
(3)
(28)
(903)
(934)
Stock-based compensation
27
1
28
Balance at June 30, 2021
248
2,240
(578)
12,407
14,317
Comprehensive income:
Net income
753
753
Other comprehensive income
7
7
Total comprehensive income
760
Dividends on common stock,
$1.09 per share
(268)
(268)
Share repurchases
(4)
(31)
(900)
(935)
Stock-based compensation
15
(2)
13
Balance at September 30, 2021
$
244
$
2,224
$
(571)
$
11,990
$
13,887
See accompanying notes toconsolidatedfinancialstatements.
7
Norfolk Southern Corporation and Subsidiaries
Consolidated Statements of Changes in Stockholders’ Equity
(Unaudited)
Common Stock
Additional Paid-in Capital
Accum. Other Comprehensive Loss
Retained Income
Total
($ in millions, except per share amounts)
Balance at December 31, 2019
$
259
$
2,209
$
(491)
$
13,207
$
15,184
Comprehensive income:
Net income
381
381
Other comprehensive income
10
10
Total comprehensive income
391
Dividends on common stock,
$0.94 per share
(242)
(242)
Share repurchases
(2)
(21)
(443)
(466)
Stock-based compensation
1
17
(1)
17
Balance at March 31, 2020
258
2,205
(481)
12,902
14,884
Comprehensive income:
Net income
392
392
Other comprehensive income
6
6
Total comprehensive income
398
Dividends on common stock,
$0.94 per share
(240)
(240)
Share repurchases
(2)
(10)
(191)
(203)
Stock-based compensation
22
22
Balance at June 30, 2020
256
2,217
(475)
12,863
14,861
Comprehensive income:
Net income
569
569
Other comprehensive income
4
4
Total comprehensive income
573
Dividends on common stock,
$0.94 per share
(240)
(240)
Share repurchases
(1)
(11)
(279)
(291)
Stock-based compensation
40
(2)
38
Balance at September 30, 2020
$
255
$
2,246
$
(471)
$
12,911
$
14,941
See accompanying notes toconsolidatedfinancialstatements.
8
Norfolk Southern Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
In the opinion of management, the accompanying unaudited interim consolidated financial statements contain all adjustments (consisting of normal recurring accruals) necessary to present fairly Norfolk Southern Corporation (Norfolk Southern) and subsidiaries’ (collectively, NS, we, us, and our) financial position at September 30, 2021, and December 31, 2020, our results of operations, comprehensive income and changes in stockholders’ equity for the third quarters and first nine monthsof 2021 and 2020, and our cash flows for the first nine months of 2021 and 2020 in conformity with U.S. generally accepted accounting principles (GAAP).
These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in our latest Annual Report on Form 10-K.
1. Railway Operating Revenues
The following table disaggregates our revenues by major commodity group:
Third Quarter
First Nine Months
2021
2020
2021
2020
($ in millions)
Merchandise:
Agriculture, forest and consumer products
$
564
$
521
$
1,681
$
1,570
Chemicals
504
428
1,457
1,371
Metals and construction
424
337
1,196
997
Automotive
218
270
664
597
Merchandise
1,710
1,556
4,998
4,535
Intermodal
812
700
2,332
1,924
Coal
330
250
960
757
Total
$
2,852
$
2,506
$
8,290
$
7,216
We recognize the amount of revenues to which we expect to be entitled for the transfer of promised goods or services to customers. A performance obligation is created when a customer under a transportation contract or public tariff submits a bill of lading to us for the transport of goods. These performance obligations are satisfied as the shipments move from origin to destination. As such, transportation revenues are recognized proportionally as a shipment moves, and related expenses are recognized as incurred. These performance obligations are generally short-term in nature with transit days averaging approximately one week or less for each commodity group. The customer has an unconditional obligation to pay for the service once the service has been completed. Estimated revenues associated with in-process shipments at period-end are recorded based on the estimated percentage of service completed. We had no material remaining performance obligations at September 30, 2021 and December 31, 2020.
We may provide customers ancillary services, such as switching, demurrage and other incidental activities, under their transportation contracts. These are distinct performance obligations that are recognized at a point in time when the services are performed or as contractual obligations are met. These revenues are included within each of the commodity groups and represent a percentage of total “Railway operating revenues” on the Consolidated Statements of Income as follows: 7% for the third quarter of 2021, 6% for the first nine months of 2021, and 5% for both the third quarter and first nine months of 2020.
Revenues related to interline transportation services that involve another railroad are reported on a net basis. Therefore, the portion of the amount that relates to another party is not reflected in revenues.
9
Under the typical terms of our freight contracts, payment for services is due within fifteen days of billing the customer, thus there are no significant financing components. “Accounts receivable – net” on the Consolidated Balance Sheets includes both customer and non-customer receivables as follows:
September 30, 2021
December 31, 2020
($ in millions)
Customer
$
740
$
629
Non-customer
205
219
Accounts receivable – net
$
945
$
848
Non-customer receivables include non-revenue-related amounts due from other railroads, governmental entities, and others. “Other assets” on the Consolidated Balance Sheets includes non-current customer receivables of $23 million at both September 30, 2021 and December 31, 2020. We do not have any material contract assets or liabilities at September 30, 2021 and December 31, 2020.
2. Stock-Based Compensation
Third Quarter
First Nine Months
2021
2020
2021
2020
($ in millions)
Stock-based compensation expense
$
14
$
13
$
46
$
25
Total tax benefit
3
10
28
39
During 2021, we granted stock options, restricted stock units (RSUs) and performance share units (PSUs) pursuant to the Long-Term Incentive Plan (LTIP), as follows:
Third Quarter
First Nine Months
Granted
Weighted-Average Grant-Date Fair Value
Granted
Weighted-Average Grant-Date Fair Value
Stock options
—
$
—
42,770
$
62.49
RSUs
2,490
258.14
179,345
239.01
PSUs
—
—
50,060
240.69
10
Stock Options
Third Quarter
First Nine Months
2021
2020
2021
2020
($ in millions)
Options exercised
22,502
313,358
363,982
998,996
Cash received upon exercise
$
2
$
27
$
33
$
82
Related tax benefit realized
1
8
13
24
Restricted Stock Units
RSUs granted primarily have a four-year ratable restriction period and will be settled through the issuance of shares of Norfolk Southern common stock (Common Stock). Certain RSU grants include cash dividend equivalent payments during the restriction period in an amount equal to the regular quarterly dividends paid on Common Stock.
Third Quarter
First Nine Months
2021
2020
2021
2020
($ in millions)
RSUs vested
1,100
1,635
260,227
203,934
Common Stock issued net of tax withholding
761
1,630
184,272
145,342
Related tax benefit realized
$
—
$
—
$
7
$
4
Performance Share Units
PSUs provide for awards based on the achievement of certain predetermined corporate performance goals at the end of a three-year cycle and are settled through the issuance of shares of Common Stock. All PSUs will earn out based on the achievement of performance conditions and some will also earn out based on a market condition. The market condition fair value was measured on the date of grant using a Monte Carlo simulation model. No PSUs were earned or paid out during the third quarters of 2021 or 2020.
First Nine Months
2021
2020
($ in millions)
PSUs earned
78,727
235,935
Common Stock issued net of tax withholding
49,967
156,450
Related tax benefit realized
$
1
$
7
3. Loss on Asset Disposal
In 2020, we sold 703 locomotives deemed excess and no longer needed for railroad operations. We evaluated these locomotive retirements and concluded they were abnormal. Accordingly, we recorded a $385 million loss to adjust their carrying amount to their estimated fair value, which resulted in a $97 million tax benefit.
11
4. Earnings Per Share
The following table sets forth the calculation of basic and diluted earnings per share:
Basic
Diluted
Third Quarter
2021
2020
2021
2020
($ in millions, except per share amounts, shares in millions)
Net income
$
753
$
569
$
753
$
569
Dividend equivalent payments
(1)
(2)
—
(1)
Income available to common stockholders
$
752
$
567
$
753
$
568
Weighted-average shares outstanding
245.3
254.6
245.3
254.6
Dilutive effect of outstanding options and share-settled awards
1.1
1.5
Adjusted weighted-average shares outstanding
246.4
256.1
Earnings per share
$
3.07
$
2.23
$
3.06
$
2.22
Basic
Diluted
First Nine Months
2021
2020
2021
2020
($ in millions, except per share amounts, shares in millions)
Net income
$
2,245
$
1,342
$
2,245
$
1,342
Dividend equivalent payments
(2)
(3)
—
(2)
Income available to common stockholders
$
2,243
$
1,339
$
2,245
$
1,340
Weighted-average shares outstanding
248.5
255.7
248.5
255.7
Dilutive effect of outstanding options and share-settled awards
1.2
1.5
Adjusted weighted-average shares outstanding
249.7
257.2
Earnings per share
$
9.03
$
5.24
$
8.99
$
5.21
During the third quarters and first nine months of 2021 and 2020, dividend equivalent payments were made to holders of stock options and RSUs. For purposes of computing basic earnings per share, dividend equivalent payments made to holders of stock options and RSUs were deducted from net income to determine income available to common stockholders. For purposes of computing diluted earnings per share, we evaluate on a grant-by-grant basis those stock options and RSUs receiving dividend equivalent payments under the two-class and treasury stock methods to determine which method is more dilutive for each grant. For those grants for which the two-class method was more dilutive, net income was reduced by dividend equivalent payments to determine income available to common stockholders. There are no options excluded from the dilution calculations due to exercise prices exceeding the average market price of Common Stock for the third quarters and first nine months ended September 30, 2021 and 2020.
12
5. Accumulated Other Comprehensive Loss
The changes in the cumulative balances of “Accumulated other comprehensive loss” reported in the Consolidated Balance Sheets consisted of the following:
Balance at Beginning of Year
Net Income
Reclassification Adjustments
Balance at End of Period
($ in millions)
Nine months ended September 30, 2021
Pensions and other postretirement liabilities
$
(526)
$
—
$
23
$
(503)
Other comprehensive loss of equity investees
(68)
—
—
(68)
Accumulated other comprehensive loss
$
(594)
$
—
$
23
$
(571)
Nine months ended September 30, 2020
Pensions and other postretirement liabilities
$
(421)
$
—
$
14
$
(407)
Other comprehensive income (loss) of equity investees
(70)
6
—
(64)
Accumulated other comprehensive loss
$
(491)
$
6
$
14
$
(471)
6. Stock Repurchase Program
We repurchased and retired 9.4 million and 5.3 million shares of Common Stock under our stock repurchase program during the first nine months of 2021 and 2020, respectively, at a cost of $2.5 billion and $960 million, respectively.
7. Investments
Investment in Conrail
Through a limited liability company, we and CSX Corporation (CSX) jointly own Conrail Inc. (Conrail), whose primary subsidiary is Consolidated Rail Corporation (CRC). We have a 58% economic and 50% voting interest in the jointly-owned entity, and CSX has the remainder of the economic and voting interests. Our investment in Conrail was $1.5 billion and $1.4 billion at September 30, 2021 and December 31, 2020, respectively.
CRC owns and operates certain properties (the Shared Assets Areas) for the joint and exclusive benefit of Norfolk Southern Railway Company (NSR) and CSX Transportation, Inc. (CSXT). The costs of operating the Shared Assets Areas are borne by NSR and CSXT based on usage. In addition, NSR and CSXT pay CRC a fee for access to the Shared Assets Areas. “Purchased services and rents” and “Fuel” include expenses payable to CRC for operation of the Shared Assets Areas totaling $37 million and $32 million for the third quarters of 2021 and 2020, respectively, and $108 million and $97 million for the first nine months of 2021 and 2020, respectively. Our equity in Conrail’s earnings, net of amortization, was $14 million and $17 million for the third quarters of 2021 and 2020, respectively, and $42 million and $39 million for the first nine months of 2021 and 2020, respectively. These amounts offset the costs of operating the Shared Assets Areas and are included in “Purchased services and rents.”
“Other liabilities” includes $534 million at both September 30, 2021, and December 31, 2020 for long-term advances from Conrail, maturing in 2050 that bear interest at an average rate of 1.31%.
13
Investment in TTX
We and eight other North American railroads collectively own TTX Company (TTX), a railcar pooling company that provides its owner-railroads with standardized fleets of intermodal, automotive, and general use railcars at stated rates. We have a 19.65% ownership interest in TTX.
Expenses incurred for use of TTX equipment are included in “Purchased services and rents.” This amounted to $59 million and $67 million for the third quarters of 2021 and 2020, respectively, and $183 million and $185 million for the first nine months of 2021 and 2020, respectively. Our equity in TTX’s earnings offsets these costs and totaled $12 million and $21 million for the third quarters of 2021 and 2020, respectively, and $43 million and $35 million for the first nine months of 2021 and 2020, respectively.
Impairment of Investment
During 2020, we recorded an other-than-temporary impairment of $99 million related to the carrying value of an equity method investment. This non-cash impairment charge is recorded in “Purchased services and rents” on the Consolidated Statements of Income and had a $74 million impact on net income for the third quarter and first nine months of 2020.
8. Debt
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.
In May 2021, we renewed, amended and restated our accounts receivable securitization program with a maximum borrowing capacity of $400 million and a term that expires in May 2022. We had no amounts outstanding under this program and our available borrowing capacity was $400 million at both September 30, 2021 and December 31, 2020.
9. Pensions and Other Postretirement Benefits
We have both funded and unfunded defined benefit pension plans covering eligible employees. We also provide specified health care benefits to eligible retired employees; these plans can be amended or terminated at our option. Under our self-insured retiree health care plan, for those participants who are not Medicare-eligible, certain health care expenses are covered for retired employees and their dependents, reduced by any deductibles, coinsurance, and, in some cases, coverage provided under other group insurance policies. Eligible retired participants and their spouses who are Medicare-eligible are not covered under the self-insured retiree health care plan, but instead are provided with an employer-funded health reimbursement account which can be used for reimbursement of health insurance premiums or eligible out-of-pocket medical expenses.
14
Pension and postretirement benefit cost components for the third quarter and first nine months were as follows:
Other Postretirement
Pension Benefits
Benefits
Third Quarter
2021
2020
2021
2020
($ in millions)
Service cost
$
10
$
10
$
1
$
2
Interest cost
14
19
1
3
Expected return on plan assets
(48)
(48)
(3)
(4)
Amortization of net losses
16
13
—
—
Amortization of prior service benefit
—
—
(6)
(6)
Net benefit
$
(8)
$
(6)
$
(7)
$
(5)
Other Postretirement
Pension Benefits
Benefits
First Nine Months
2021
2020
2021
2020
($ in millions)
Service cost
$
32
$
30
$
4
$
5
Interest cost
41
56
5
9
Expected return on plan assets
(144)
(143)
(9)
(10)
Amortization of net losses
49
39
1
—
Amortization of prior service benefit
—
—
(19)
(19)
Net benefit
$
(22)
$
(18)
$
(18)
$
(15)
The service cost component of defined benefit pension cost and postretirement benefit cost are reported within “Compensation and benefits” and all other components of net benefit cost are presented in “Other income – net” on the Consolidated Statements of Income.
15
10. Fair Values of Financial Instruments
The fair values of “Cash and cash equivalents,” “Accounts receivable – net,” and “Accounts payable,” approximate carrying values because of the short maturity of these financial instruments. The carrying value of corporate-owned life insurance is recorded at cash surrender value and, accordingly, approximates fair value. There are no other assets or liabilities measured at fair value on a recurring basis at September 30, 2021 or December 31, 2020. The carrying amounts and estimated fair values, based on Level 1 inputs, of long-term debt consist of the following:
September 30, 2021
December 31, 2020
Carrying Amount
Fair Value
Carrying Amount
Fair Value
($ in millions)
Long-term debt, including current maturities
$
(13,832)
$
(17,034)
$
(12,681)
$
(16,664)
11. Commitments and Contingencies
Lawsuits
We and/or certain subsidiaries are defendants in numerous lawsuits and other claims relating principally to railroad operations. When we conclude that it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated, it is accrued through a charge to earnings and, if material, disclosed below. While the ultimate amount of liability incurred in any of these lawsuits and claims is dependent on future developments, in our opinion, the recorded liability is adequate to cover the future payment of such liability and claims. However, the final outcome of any of these lawsuits and claims cannot be predicted with certainty, and unfavorable or unexpected outcomes could result in additional accruals that could be significant to results of operations in a particular year or quarter. Any adjustments to the recorded liability will be reflected in earnings in the periods in which such adjustments become known. For lawsuits and other claims where a loss may be reasonably possible, but not probable, or is probable but not reasonably estimable, no accrual is established but the matter, if potentially material, is disclosed below. We routinely review relevant information with respect to our lawsuits and other claims and update our accruals, disclosures and estimates of reasonably possible losses based on such reviews.
In 2007, various antitrust class actions filed against us and other Class I railroads in various Federal district courts regarding fuel surcharges were consolidated in the District of Columbia by the Judicial Panel on Multidistrict Litigation. In 2012, the court certified the case as a class action. The defendant railroads appealed this certification, and the Court of Appeals for the District of Columbia vacated the District Court’s decision and remanded the case for further consideration. On October 10, 2017, the District Court denied class certification. The decision was upheld by the Court of Appeals on August 16, 2019. Since that decision, various individual cases have been filed in multiple jurisdictions and also consolidated in the District of Columbia. We believe the allegations in the complaints are without merit and intend to vigorously defend the cases. We do not believe the outcome of these proceedings will have a material effect on our financial position, results of operations, or liquidity.
In 2018, a lawsuit was filed against one of our subsidiaries by the minority owner in a jointly-owned terminal railroad company in which our subsidiary has the majority ownership. The lawsuit alleged violations of various state laws and federal antitrust laws. It is reasonably possible that we could incur a loss in the case; however, we intend to vigorously defend the case and believe that we will prevail. The potential range of loss cannot be estimated at this time.
Casualty Claims
Casualty claims include employee personal injury and occupational claims as well as third-party claims, all exclusive of legal costs. To aid in valuing our personal injury liability and determining the amount to accrue with respect to such claims during the year, we utilize studies prepared by an independent consulting actuarial firm. Job-
16
related personal injury and occupational claims are subject to the Federal Employer’s Liability Act (FELA), which is applicable only to railroads. FELA’s fault-based tort system produces results that are unpredictable and inconsistent as compared with a no-fault workers’ compensation system. The variability inherent in this system could result in actual costs being different from the liability recorded. While the ultimate amount of claims incurred is dependent on future developments, in our opinion, the recorded liability is adequate to cover the future payments of claims and is supported by the most recent actuarial study. In all cases, we record a liability when the expected loss for the claim is both probable and reasonably estimable.
Employee personal injury claims – The largest component of claims expense is employee personal injury costs. The independent actuarial firm we engage provides quarterly studies to aid in valuing our employee personal injury liability and estimating personal injury expense. The actuarial firm studies our historical patterns of reserving for claims and subsequent settlements, taking into account relevant outside influences. The actuarial firm uses the results of these analyses to estimate the ultimate amount of liability. We adjust the liability quarterly based upon our assessment and the results of the study. The accuracy of our estimate of the liability is subject to inherent limitation given the difficulty of predicting future events such as jury decisions, court interpretations, or legislative changes. As a result, actual claim settlements may vary from the estimated liability recorded.
Occupational claims – Occupational claims include injuries and illnesses alleged to be caused by exposures which occur over time as opposed to injuries or illnesses caused by a specific accident or event. Types of occupational claims commonly seen allege exposure to asbestos and other claimed toxic substances resulting in respiratory diseases or cancer. Many such claims are being asserted by former or retired employees, some of whom have not been employed in the rail industry for decades. The independent actuarial firm provides an estimate of the occupational claims liability based upon our history of claim filings, severity, payments, and other pertinent facts. The liability is dependent upon judgments we make as to the specific case reserves as well as judgments of the actuarial firm in the quarterly studies. The actuarial firm’s estimate of ultimate loss includes a provision for those claims that have been incurred but not reported. This provision is derived by analyzing industry data and projecting our experience. We adjust the liability quarterly based upon our assessment and the results of the study. However, it is possible that the recorded liability may not be adequate to cover the future payment of claims. Adjustments to the recorded liability are reflected in operating expenses in the periods in which such adjustments become known.
Third-party claims – We record a liability for third-party claims including those for highway crossing accidents, trespasser and other injuries, property damage, and lading damage. The actuarial firm assists us with the calculation of potential liability for third-party claims, except lading damage, based upon our experience including the number and timing of incidents, amount of payments, settlement rates, number of open claims, and legal defenses. We adjust the liability quarterly based upon our assessment and the results of the study. Given the inherent uncertainty in regard to the ultimate outcome of third-party claims, it is possible that the actual loss may differ from the estimated liability recorded.
Environmental Matters
We are subject to various jurisdictions’ environmental laws and regulations. We record a liability where such liability or loss is probable and reasonably estimable. Environmental specialists regularly participate in ongoing evaluations of all known sites and in determining any necessary adjustments to liability estimates.
Our Consolidated Balance Sheets include liabilities for environmental exposures of $52 million at September 30, 2021 and $54 million at December 31, 2020, of which $15 million is classified as a current liability at the end of both periods. At September 30, 2021, the liability represents our estimates of the probable cleanup, investigation, and remediation costs based on available information at 97 known locations and projects compared with 100 locations and projects at December 31, 2020. At September 30, 2021, nineteen sites accounted for $40 million of the liability, and no individual site was considered to be material. We anticipate that most of this liability will be paid out over five years; however, some costs will be paid out over a longer period.
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At eight locations, one or more of our subsidiaries in conjunction with a number of other parties have been identified as potentially responsible parties under the Comprehensive Environmental Response, Compensation and Liability Act of 1980 or comparable state statutes that impose joint and several liability for cleanup costs. We calculate our estimated liability for these sites based on facts and legal defenses applicable to each site and not solely on the basis of the potential for joint liability.
With respect to known environmental sites (whether identified by us or by the Environmental Protection Agency or comparable state authorities), estimates of our ultimate potential financial exposure for a given site or in the aggregate for all such sites can change over time because of the widely varying costs of currently available cleanup techniques, unpredictable contaminant recovery and reduction rates associated with available cleanup technologies, the likely development of new cleanup technologies, the difficulty of determining in advance the nature and full extent of contamination and each potential participant’s share of any estimated loss (and that participant’s ability to bear it), and evolving statutory and regulatory standards governing liability.
The risk of incurring environmental liability for acts and omissions, past, present, and future, is inherent in the railroad business. Some of the commodities we transport, particularly those classified as hazardous materials, pose special risks that we work diligently to reduce. In addition, several of our subsidiaries own, or have owned, land used as operating property, or which is leased and operated by others, or held for sale. Because environmental problems that are latent or undisclosed may exist on these properties, there can be no assurance that we will not incur environmental liabilities or costs with respect to one or more of them, the amount and materiality of which cannot be estimated reliably at this time. Moreover, lawsuits and claims involving these and potentially other unidentified environmental sites and matters are likely to arise from time to time. The resulting liabilities could have a significant effect on financial position, results of operations, or liquidity in a particular year or quarter.
Based on our assessment of the facts and circumstances now known, we believe we have recorded the probable and reasonably estimable costs for those environmental matters of which we are aware. Further, we believe that it is unlikely that any known matters, either individually or in the aggregate, will have a material adverse effect on our financial position, results of operations, or liquidity.
Insurance
We purchase insurance covering legal liabilities for bodily injury and property damage to third parties. This insurance provides coverage above $75 million and below $800 million ($1.1 billion for specific perils) per occurrence and/or policy year. In addition, we purchase insurance covering damage to property owned by us or in our care, custody, or control. This insurance covers approximately 87% of potential losses above $75 million and below $275 million per occurrence and/or policy year.
12. New Accounting Pronouncements
On January 1, 2021, we adopted Financial Accounting Standards Board Accounting Standards Update 2019-12, “Simplifying the Accounting for Income Taxes,” which adds new guidance to simplify the accounting for income taxes, changes the accounting for certain income tax transactions, and makes other minor changes. There was no material impact to the financial statements upon adoption.
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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 $385 million loss on asset disposal in 2020 related to locomotives sold or designated as held-for-sale. For more information on the impact of these charges, see Notes 7 and 3, respectively.
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The following tables adjust our 2020 GAAP financial results for the third quarter and first nine months to exclude the effects of these charges. The income tax effects of these non-GAAP adjustments were calculated based on the applicable tax rates to which the non-GAAP adjustment related. We use these non-GAAP financial measures internally and believe this information provides useful supplemental information to investors to facilitate making period-to-period comparisons by excluding the 2020 charges. While we believe that these non-GAAP financial measures are useful in evaluating our business, this information should be considered as supplemental in nature and is not meant to be considered in isolation from, or as a substitute for, the related financial information prepared in accordance with GAAP. In addition, these non-GAAP financial measures may not be the same as similar measures presented by other companies.
Non-GAAP Reconciliation for the Third Quarter of 2020
Reported
Investment Impairment
Adjusted (non-GAAP)
($ 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%)
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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%)
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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%
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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.
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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,
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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 $99 million impairment in the prior year related to an equity method investment. This was partially offset in both periods by higher technology, Conrail-related, and drayage costs. The first nine months also includes higher volume-related intermodal expenses. Equipment rents increased in the third quarter primarily due to greater volume-related general use time and mileage expense. For the first nine months, equipment rents were higher as an increase in volume-related general use time and mileage expense was partially offset by higher equity in TTX earnings and lower intermodal costs.
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Fuel expense, which includes the cost of locomotive fuel as well as other fuel used in railway operations, increased due to higher locomotive fuel prices (up 58% in the third quarter and 35% in the first nine months) and increased consumption (up 5% in the third quarter and 6% in the first nine months).
Materials and other expenses decreased in both periods as follows ($ 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.
26
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
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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
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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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
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.”
Item 4. Controls and Procedures
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 September 30, 2021. Based on such evaluation, our officers have concluded that, at September 30, 2021, 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 third quarter of 2021, 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.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
In 2007, various antitrust class actions filed against us and other Class I railroads in various Federal district courts regarding fuel surcharges were consolidated in the District of Columbia by the Judicial Panel on Multidistrict Litigation. In 2012, the court certified the case as a class action. The defendant railroads appealed this certification, and the Court of Appeals for the District of Columbia vacated the District Court’s decision and remanded the case for further consideration. On October 10, 2017, the District Court denied class certification. The decision was upheld by the Court of Appeals on August 16, 2019. Since that decision, various individual cases have been filed in multiple jurisdictions and also consolidated in the District of Columbia. We believe the allegations in the complaints are without merit and intend to vigorously defend the cases. We do not believe the outcome of these proceedings will have a material effect on our financial position, results of operations, or liquidity.
In 2018, a lawsuit was filed against one of our subsidiaries by the minority owner in a jointly-owned terminal railroad company in which our subsidiary has the majority ownership. The lawsuit alleged violations of various state laws and federal antitrust laws. It is reasonably possible that we could incur a loss in the case; however, we intend to vigorously defend the case and believe that we will prevail. The potential range of loss cannot be estimated at this time.
Item 1A. Risk Factors
The risks set forth in “Risk Factors” included in our 2020 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 remain unchanged and are incorporated herein by reference.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Period
(a) Total Number of Shares (or Units) Purchased(1)
(a) Total Number of Shares (or Units)
(c) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs (2)
(d) Maximum Number (or Approximate Dollar Value) of Shares (or Units) that may yet be purchased under the Plans or Programs (2)
July 1-31, 2021
1,083,372
$
262.34
1,081,820
13,896,044
August 1-31, 2021
1,267,526
260.88
1,267,526
12,628,518
September 1-30, 2021
1,300,073
246.32
1,300,073
11,328,445
Total
3,650,971
3,649,419
(1)Of this amount, 1,552 represent shares tendered by employees in connection with the exercise of options under the stockholder-approved Long-Term Incentive Plan.
(2)On September 26, 2017, our Board of Directors authorized the repurchase of up to an additional 50 million shares of Common Stock through December 31, 2022. As of September 30, 2021, 11.3 million shares remain authorized for repurchase.
The following financial information from Norfolk Southern Corporation’s Quarterly Report on Form 10-Q for the third quarter of 2021, formatted in Inline Extensible Business Reporting Language (iXBRL) includes (i) the Consolidated Statements of Income for the third quarter and first nine months of 2021 and 2020; (ii) the Consolidated Statements of Comprehensive Income for the third quarter and first nine months of 2021 and 2020; (iii) the Consolidated Balance Sheets at September 30, 2021 and December 31, 2020; (iv) the Consolidated Statements of Cash Flows for the first nine months of 2021 and 2020; (v) the Consolidated Statements of Changes in Stockholders’ Equity for the third quarter and first nine months of 2021 and 2020; and (vi) the Notes to Consolidated Financial Statements.
104*
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).
* Filed herewith.
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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.
NORFOLK SOUTHERN CORPORATION
Registrant
Date:
October 27, 2021
/s/ Clyde H. Allison, Jr.
Clyde H. Allison, Jr. Vice President and Controller (Principal Accounting Officer) (Signature)
