10-Q 1 nsc-20220630.htm 10-Q nsc-20220630
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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 JUNE 30, 2022

    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

nsc-20220630_g1.jpg
 
NORFOLK SOUTHERN CORPORATION
(Exact name of registrant as specified in its charter) 
Virginia52-1188014
(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.)
650 West Peachtree Street NW30308-1925
Atlanta,Georgia
(Address of principal executive offices)(Zip Code)
(855)667-3655
(Registrant’s telephone number, including area code)
No change
(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 classTrading SymbolName of each exchange on which registered
Norfolk Southern Corporation Common Stock (Par Value $1.00)NSCNew 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 June 30, 2022
Common Stock ($1.00 par value per share)234,873,651 (excluding 20,320,777 shares held by the registrant’s
consolidated subsidiaries)




TABLE OF CONTENTS

NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES
  Page
  
  
  
  
  
  
 
 
 
 
 
 
 
 


2


PART I. FINANCIAL INFORMATION
  
Item 1. Financial Statements
 
Norfolk Southern Corporation and Subsidiaries
Consolidated Statements of Income
(Unaudited)
 
 Second QuarterFirst Six Months
 2022202120222021
 ($ in millions, except per share amounts)
Railway operating revenues$3,250 $2,799 $6,165 $5,438 
Railway operating expenses    
Compensation and benefits614 624 1,233 1,235 
Purchased services and rents481 429 918 822 
Fuel408 188 709 365 
Depreciation304 294 606 586 
Materials and other172 97 343 248 
Total railway operating expenses1,979 1,632 3,809 3,256 
Income from railway operations1,271 1,167 2,356 2,182 
Other income (expense) – net(14)35 (19)42 
Interest expense on debt170 161 338 317 
Income before income taxes1,087 1,041 1,999 1,907 
Income taxes268 222 477 415 
Net income$819 $819 $1,522 $1,492 
Earnings per share    
Basic$3.46 $3.29 $6.39 $5.96 
Diluted3.45 3.28 6.37 5.94 
 
 See accompanying notes to consolidated financial statements.
3


Norfolk Southern Corporation and Subsidiaries
Consolidated Statements of Comprehensive Income
(Unaudited)
 
 Second QuarterFirst Six Months
2022202120222021
 ($ in millions)
Net income$819 $819 $1,522 $1,492 
Other comprehensive income, before tax:  
Pension and other postretirement benefits5 10 11 21 
Other comprehensive income of equity investees2  8  
Other comprehensive income, before tax7 10 19 21 
Income tax expense related to items of other
comprehensive income(1)(2)(5)(5)
Other comprehensive income, net of tax6 8 14 16 
Total comprehensive income$825 $827 $1,536 $1,508 
 
 See accompanying notes to consolidated financial statements.
4


Norfolk Southern Corporation and Subsidiaries
Consolidated Balance Sheets
(Unaudited)
June 30,
2022
December 31,
2021
($ in millions)
Assets  
Current assets:  
Cash and cash equivalents$1,259 $839 
Accounts receivable – net1,208 976 
Materials and supplies289 218 
Other current assets101 134 
Total current assets2,857 2,167 
Investments3,671 3,707 
Properties less accumulated depreciation of $12,267
 
and $12,031, respectively
31,787 31,653 
Other assets1,021 966 
Total assets$39,336 $38,493 
Liabilities and stockholders’ equity  
Current liabilities:  
Accounts payable$1,308 $1,351 
Income and other taxes333 305 
Other current liabilities363 312 
Current maturities of long-term debt605 553 
Total current liabilities2,609 2,521 
Long-term debt14,449 13,287 
Other liabilities1,843 1,879 
Deferred income taxes7,281 7,165 
Total liabilities26,182 24,852 
Stockholders’ equity:  
Common stock $1.00 per share par value, 1,350,000,000 shares
  
  authorized; outstanding 234,873,651 and 240,162,790 shares,
  
  respectively, net of treasury shares236 242 
Additional paid-in capital2,190 2,215 
Accumulated other comprehensive loss(388)(402)
Retained income11,116 11,586 
Total stockholders’ equity13,154 13,641 
Total liabilities and stockholders’ equity$39,336 $38,493 
 
 See accompanying notes to consolidated financial statements.
5


Norfolk Southern Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
 
 First Six Months
 20222021
 ($ in millions)
Cash flows from operating activities  
Net income$1,522 $1,492 
Reconciliation of net income to net cash provided by operating activities:  
Depreciation606 586 
Deferred income taxes111 107 
Gains and losses on properties(37)(75)
Changes in assets and liabilities affecting operations:  
Accounts receivable(230)(96)
Materials and supplies(71)(25)
Other current assets30 30 
Current liabilities other than debt75 170 
Other – net5 (92)
Net cash provided by operating activities2,011 2,097 
Cash flows from investing activities  
Property additions(837)(627)
Property sales and other transactions100 66 
Investment purchases(7)(5)
Investment sales and other transactions30 37 
Net cash used in investing activities(714)(529)
Cash flows from financing activities  
Dividends(591)(496)
Common stock transactions(14)6 
Purchase and retirement of common stock(1,454)(1,525)
Proceeds from borrowings1,732 1,087 
Debt repayments(550)(85)
Net cash used in financing activities(877)(1,013)
Net increase in cash and cash equivalents420 555 
Cash and cash equivalents  
At beginning of year839 1,115 
At end of period$1,259 $1,670 
Supplemental disclosures of cash flow information  
Cash paid during the period for:  
Interest (net of amounts capitalized)$294 $281 
Income taxes (net of refunds)321 249 

 See accompanying notes to consolidated financial statements.
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, 2021$242 $2,215 $(402)$11,586 $13,641 
Comprehensive income:
Net income703 703 
Other comprehensive income8 8 
Total comprehensive income711 
Dividends on common stock,
$1.24 per share
(297)(297)
Share repurchases(2)(19)(579)(600)
Stock-based compensation7 (1)6 
Balance at March 31, 2022240 2,203 (394)11,412 13,461 
Comprehensive income:
Net income819 819 
Other comprehensive income6 6 
Total comprehensive income825 
Dividends on common stock,
$1.24 per share
(294)(294)
Share repurchases(4)(29)(821)(854)
Stock-based compensation16 16 
Balance at June 30, 2022$236 $2,190 $(388)$11,116 $13,154 


 See accompanying notes to consolidated financial statements.
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, 2020$254 $2,248 $(594)$12,883 $14,791 
Comprehensive income:
Net income673 673 
Other comprehensive income8 8 
Total comprehensive income681 
Dividends on common stock,
$0.99 per share
(249)(249)
Share repurchases(3)(19)(569)(591)
Stock-based compensation12 (1)11 
Balance at March 31, 2021251 2,241 (586)12,737 14,643 
Comprehensive income:
Net income819 819 
Other comprehensive income8 8 
Total comprehensive income827 
Dividends on common stock,
$0.99 per share
(247)(247)
Share repurchases(3)(28)(903)(934)
Stock-based compensation27 1 28 
Balance at June 30, 2021$248 $2,240 $(578)$12,407 $14,317 

 See accompanying notes to consolidated financial statements.
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 June 30, 2022 and December 31, 2021, our results of operations, comprehensive income and changes in stockholders’ equity for the second quarters and first six months of 2022 and 2021, and our cash flows for the first six months of 2022 and 2021 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:
Second QuarterFirst Six Months
2022202120222021
($ in millions)
Merchandise:
Agriculture, forest and consumer products$624 $578 $1,197 $1,117 
Chemicals552 494 1,050 953 
Metals and construction420 402 795 772 
Automotive257 206 483 446 
Merchandise1,853 1,680 3,525 3,288 
Intermodal972 801 1,826 1,520 
Coal425 318 814 630 
Total$3,250 $2,799 $6,165 $5,438 

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 June 30, 2022 and December 31, 2021.

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 approximately 6% of total “Railway operating revenues” on the Consolidated Statements of Income for the second quarters of 2022 and 2021 and first six months of 2021 and 7% for the first six months of 2022.


9


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.

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:

June 30,
2022
December 31, 2021
($ in millions)
Customer$924 $741 
Non-customer284 235 
  Accounts receivable – net$1,208 $976 

Non-customer receivables include non-revenue related amounts due from other railroads, governmental entities, and others. There were no non-current customer receivables at June 30, 2022, while “Other assets” on the Consolidated Balance Sheets included $23 million at December 31, 2021. We do not have any material contract assets or liabilities at June 30, 2022 and December 31, 2021.

2.  Stock-Based Compensation

Second QuarterFirst Six Months
2022202120222021
($ in millions)
Stock-based compensation expense$13 $16 $36 $32 
Total tax benefit4 8 17 25 

During 2022, we granted stock options, restricted stock units (RSUs) and performance share units (PSUs) pursuant to the Long-Term Incentive Plan (LTIP), as follows:

Second QuarterFirst Six Months
GrantedWeighted-Average Grant-Date Fair ValueGrantedWeighted-Average Grant-Date Fair Value
Stock options1,640 $84.01 133,810 $60.69 
RSUs9,090 265.31 163,991 268.31 
PSUs2,430 271.83 51,455 274.70 


10


Stock Options
Second QuarterFirst Six Months
2022202120222021
($ in millions)
Options exercised39,546128,934 158,889 341,480 
Cash received upon exercise$4 $12 $14 $31 
Related tax benefits realized1 5 6 12 

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. 
Second QuarterFirst Six Months
2022202120222021
($ in millions)
RSUs vested3,652 1,730 246,953 259,127 
Common Stock issued net of tax withholding2,612 1,222 174,976 183,511 
Related tax benefits realized$ $ $5 $7 

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 second quarters of 2022 or 2021.

First Six Months
20222021
($ in millions)
PSUs earned86,420 78,727 
Common Stock issued net of tax withholding54,651 49,967 
Related tax benefits realized$1 $1 


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3.  Earnings Per Share

The following table sets forth the calculation of basic and diluted earnings per share:

 BasicDiluted
 Second Quarter
 2022202120222021
($ in millions, except per share amounts,
shares in millions)
Net income$819 $819 $819 $819 
Dividend equivalent payments(1) (1) 
Income available to common stockholders$818 $819 $818 $819 
Weighted-average shares outstanding236.7 248.9 236.7 248.9 
Dilutive effect of outstanding options and share-settled awards  0.8 1.1 
Adjusted weighted-average shares outstanding  237.5 250.0 
Earnings per share$3.46 $3.29 $3.45 $3.28 
 BasicDiluted
 First Six Months
 2022202120222021
($ in millions, except per share amounts,
shares in millions)
Net income$1,522 $1,492 $1,522 $1,492 
Dividend equivalent payments(1)(1)(1) 
Income available to common stockholders$1,521 $1,491 $1,521 $1,492 
Weighted-average shares outstanding238.0 250.1 238.0 250.1 
Dilutive effect of outstanding options and share-settled awards  0.9 1.2 
Adjusted weighted-average shares outstanding 238.9 251.3 
Earnings per share$6.39 $5.96 $6.37 $5.94 

During the second quarters and first six months of 2022 and 2021, dividend equivalent payments were made to certain 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. The dilution calculations exclude options having exercise prices exceeding the average market price of Common Stock as follows: 0.1 million in the second quarter and first six months ended June 30, 2022 and none in the second quarter and first six months ended June 30, 2021.


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4. 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 IncomeReclassification
Adjustments
Balance at
End of Period
 ($ in millions)   
Six months ended June 30, 2022     
Pensions and other postretirement liabilities$(356)$ $8 $(348)
Other comprehensive income (loss) of equity investees(46)6   (40)
Accumulated other comprehensive loss$(402)$6 $8  $(388)
Six months ended June 30, 2021     
Pensions and other postretirement liabilities$(526)$ $16 $(510)
Other comprehensive loss of equity investees(68)   (68)
Accumulated other comprehensive loss$(594)$ $16  $(578)

5.  Stock Repurchase Program
 
We repurchased and retired 5.7 million shares of Common Stock under our stock repurchase program at a cost of $1.5 billion during the first six months of both 2022 and 2021. 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. Our previous share repurchase program terminated on March 31, 2022.

6.  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 $1.6 billion and $1.5 billion at June 30, 2022 and December 31, 2021, respectfully.

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 $36 million and $37 million for the second quarters of 2022 and 2021, respectively, and $74 million and $71 million for the first six months of 2022 and 2021, respectively. Our equity in Conrail’s earnings, net of amortization, was $11 million and $14 million for the second quarters of 2022 and 2021, respectively, and $25 million and $28 million for the first six months of 2022 and 2021, respectively. These amounts partially offset the costs of operating the Shared Assets Areas and are included in “Purchased services and rents.”

“Other liabilities” includes $534 million at both June 30, 2022 and December 31, 2021 for long-term advances from Conrail, maturing in 2050 that bear interest at an average rate of 1.31%.


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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.” These expenses amounted to $66 million and $61 million for the second quarters of 2022 and 2021, respectively, and $130 million and $124 million for the first six months of 2022 and 2021, respectively. Our equity in TTX’s earnings partially offsets these costs and totaled $11 million and $14 million for the second quarters of 2022 and 2021, respectively, and $21 million and $31 million for the first six months of 2022 and 2021, respectively.

7.  Debt

In June 2022, we issued $750 million of 4.55% senior notes due 2053.

In May 2022, we renewed our 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 and our available borrowing capacity was $400 million at both June 30, 2022, and December 31, 2021.

In February 2022, we issued $600 million of 3.00% senior notes due 2032 and $400 million of 3.70% senior notes due 2053.

8.  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.

Pension and postretirement benefit cost components for the second quarter and first six months were as follows:

 Pension BenefitsOther Postretirement Benefits
 Second Quarter
 2022202120222021
 ($ in millions)
Service cost$10 $11 $2 $1 
Interest cost17 14 2 2 
Expected return on plan assets(54)(48)(3)(3)
Amortization of net losses12 16  1 
Amortization of prior service benefit  (7)(7)
Net benefit$(15)$(7)$(6)$(6)

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 Pension BenefitsOther Postretirement Benefits
 First Six Months
 2022202120222021
 ($ in millions)
Service cost$20 $22 $3 $3 
Interest cost34 27 4 4 
Expected return on plan assets(107)(96)(6)(6)
Amortization of net losses24 33  1 
Amortization of prior service benefit  (13)(13)
Net benefit$(29)$(14)$(12)$(11)

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 (expense) – net” on the Consolidated Statements of Income.

9.  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 June 30, 2022 or December 31, 2021. The carrying amounts and estimated fair values, based on Level 1 inputs, of long-term debt consist of the following:

 June 30, 2022December 31, 2021
Carrying
Amount
Fair
Value
Carrying
Amount
Fair
Value
 ($ in millions)
Long-term debt, including current maturities$(15,054)$(14,571)$(13,840)$(17,033)

10.  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 loss based on such reviews.


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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. Summary judgment has been briefed but not decided, and trial is likely to occur in the first quarter of 2023. We continue to vigorously defend the lawsuit and, although it is reasonably possible we could incur a loss in the case, we believe that we will prevail. However, given that litigation is inherently unpredictable and subject to uncertainties, there can be no assurances that the final outcome of the litigation or a litigation settlement will not be material. We cannot reasonably estimate the potential loss or range of loss associated with the litigation 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 actuarial consulting firm.  Job-related personal injury and occupational claims are subject to the Federal Employer’s Liability Act (FELA), which is applicable only to railroads. The variability inherent in FELA’s fault-based tort 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.  Our 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.


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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 $56 million at June 30, 2022 and $49 million at December 31, 2021, of which $15 million is classified as a current liability at the end of both periods. At June 30, 2022, the liability represents our estimates of the probable cleanup, investigation, and remediation costs based on available information at 91 known locations and projects compared with 88 locations and projects at December 31, 2021. At June 30, 2022, nineteen sites accounted for $45 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.

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 dealing with 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.
 

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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. Bargaining procedures, which began in November 2019, are ongoing, with the ultimate outcome unknown. The ultimate changes in our labor agreements resulting from this process could significantly increase our costs for health care, wages, and other benefits.

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 82% of potential losses above $75 million and below $275 million per occurrence and/or policy year.

11. New Accounting Pronouncements

In November 2021, the Financial Accounting Standards Board issued Accounting Standards Update 2021-10, “Government Assistance (Topic 832): Disclosures by Business Entities about Government Assistance,” which requires annual disclosures when an entity has received government assistance. Entities are required to disclose the types of government assistance received, the accounting treatment for that government assistance, and the effect of the government assistance on the financial statements. The new standard is effective for annual periods beginning after December 15, 2021, and early adoption is permitted. We do not expect this standard to have a material effect on our disclosures. We did not adopt the standard early.

12. Subsequent Events

On July 8, 2022, House Bill 1342 was signed into law in the Commonwealth of Pennsylvania, making significant changes to its corporate income tax rate. The bill reduces its corporate income tax rate from 9.99% to 4.99%, with reductions occurring in phases beginning each tax year from January 1, 2023 through January 1, 2031. GAAP requires companies to recognize the effect of tax law changes in the period of enactment. As a result, it is expected that there will be a decrease in “Deferred income taxes” on the Consolidated Balance Sheet and a corresponding decrease in “Income taxes” on the Income Statement in the third quarter of 2022. We currently estimate that the impact will be approximately $135 million.


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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.

Strong revenue growth drove operating income improvement in the second quarter. Although lower network velocity contributed to volume declines compared to prior year, higher fuel surcharge revenues and pricing gains led to revenue per unit growth that more than offset the impact of lower volume. The increase in fuel commodity prices also led to higher fuel expense. The net impact of fuel prices on revenues and expenses, coupled with lower current-year gains on operating property sales, contributed to the degradation of the railway operating ratio (a measure of the amount of operating revenues consumed by operating expenses). While network fluidity remained challenged, we are taking the steps necessary for service restoration. These efforts include recruiting, training, and retaining our transportation crews as well as evolving our operating plan, with the goal of improving service for our customers.

The COVID-19 pandemic continues to impact 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

Second QuarterFirst Six Months
20222021% change20222021% change
($ in millions, except per share amounts)
Income from railway operations$1,271 $1,167 9%$2,356 $2,182 8%
Net income$819 $819 —%$1,522 $1,492 2%
Diluted earnings per share$3.45 $3.28 5%$6.37 $5.94 7%
Railway operating ratio (percent)60.9 58.3 4%61.8 59.9 3%

Income from railway operations increased in both periods due to higher railway operating revenues. Revenue growth was driven by higher fuel surcharge revenues and pricing gains, which exceeded the impact of a 3% and 4% volume decline in the second quarter and first six months, respectively. The rise in revenues was offset in part by increased railway operating expenses, driven by higher fuel prices, other inflationary pressures, service-related costs, lower gains on the sale of operating properties, and higher claims-related expenses. Offsetting the growth in income from railway operations were lower net returns on corporate-owned life insurance (COLI) and higher income taxes. Our share repurchase activity resulted in the percentage increase in diluted earnings per share that exceeded that of net income.



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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.
Second QuarterFirst Six Months
Revenues 20222021% change20222021% change
Merchandise:
Agriculture, forest and consumer products$624 $578 8%$1,197 $1,117 7%
Chemicals552 494 12%1,050 953 10%
Metals and construction420 402 4%795 772 3%
Automotive257 206 25%483 446 8%
Merchandise1,853 1,680 10%3,525 3,288 7%
Intermodal972 801 21%1,826 1,520 20%
Coal425 318 34%814 630 29%
Total$3,250 $2,799 16%$6,165 $5,438 13%
Units
Merchandise:
Agriculture, forest and consumer products183.6 187.7 (2%)361.2 366.0 (1%)
Chemicals140.0 133.7 5%269.4 260.7 3%
Metals and construction163.9 176.3 (7%)311.9 331.3 (6%)
Automotive85.7 82.3 4%166.9 176.0 (5%)
Merchandise573.2 580.0 (1%)1,109.4 1,134.0 (2%)
Intermodal1,016.5 1,062.6 (4%)1,973.0 2,079.0 (5%)
Coal166.1 173.2 (4%)331.7 339.7 (2%)
Total1,755.8 1,815.8 (3%)3,414.1 3,552.7 (4%)
Revenue per Unit
Merchandise:
Agriculture, forest and consumer products$3,398 $3,076 10%$3,314 $3,051 9%
Chemicals3,941 3,691 7%3,897 3,654 7%
Metals and construction2,560 2,285 12%2,548 2,332 9%
Automotive3,007 2,507 20%2,894 2,534 14%
Merchandise3,233 2,896 12%3,177 2,899 10%
Intermodal955 754 27%925 731 27%
Coal2,562 1,837 39%2,455 1,854 32%
Total1,851 1,542 20%1,806 1,531 18%


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Railway operating revenues increased $451 million in the second quarter and $727 million for the first six months compared with the same periods last year. The table below reflects the components of the revenue change by major commodity group ($ in millions).

Second QuarterFirst Six Months
MerchandiseIntermodalCoalMerchandiseIntermodalCoal
Increase (Decrease)
Volume$(20)$(35)$(13)$(71)$(77)$(15)
Fuel surcharge revenue121 136 16 188 209 23 
Rate, mix and other72 70 104 120 174 176 
Total$173 $171 $107 $237 $306 $184 
 
Approximately 95% of our revenue base is covered by contracts that include negotiated fuel surcharges. Revenues associated with these surcharges totaled $421 million and $148 million in the second quarters of 2022 and 2021, respectively, and $665 million and $245 million for the first six months of 2022 and 2021, respectively. The increase in fuel surcharge revenues is driven by higher fuel commodity prices. Should the current fuel price environment persist for the remainder of 2022, we expect fuel surcharge revenue to continue to be higher than 2021.

Merchandise

Merchandise revenues increased in both periods due to higher average revenue per unit, driven by higher fuel surcharge revenue and increased pricing, partially offset by decreased volume. Volumes fell in both periods as declines in metals and construction and agriculture, forest, and consumer products shipments more than offset higher chemical shipments.

Agriculture, forest and consumer products volume decreased in both periods, as declines in corn, fertilizers, and pulp more than offset increases in soybeans and feed. Decreased corn and pulp shipments were due to service disruptions. Lower fertilizer shipments were due to high fertilizer prices causing customers to draw down on existing inventories or delay purchases. Soybean volumes were higher due to increased opportunity for exports and feed shipments were up because of increased customer demand. 

Chemicals volume rose in both periods due to growth in shipments of sand and solid waste, driven by growth with existing customers.

Metals and construction volume fell in both periods, largely the result of decreased shipments of coil steel, iron and steel, aggregates, scrap metal, and cement driven by commodity pricing, service disruptions and slower equipment cycle times.

Automotive volume increased in the second quarter but decreased for the first six months. Higher shipments in the second quarter were primarily due to production shutdowns in the prior year caused by parts supply issues. Volumes for the first six months were impacted by plant shutdowns, as a result of the global microchip shortage, and slower equipment cycle times.

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


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Intermodal
 
Intermodal revenues increased in both periods, driven by higher average revenue per unit, a result of higher fuel surcharge revenues, pricing gains and storage service charges, partially offset by lower volume.

Intermodal units (in thousands) by market were as follows:
Second QuarterFirst Six Months
20222021% change20222021% change
Domestic670.4 661.9 1%1,323.8 1,300.9 2%
International346.1 400.7 (14%)649.2 778.1 (17%)
Total1,016.5 1,062.6 (4%)1,973.0 2,079.0 (5%)

Domestic volume rose slightly due to strong demand, partially offset by service disruptions and limited chassis availability. International volume decreased as supply chain constraints with terminals, ports, labor, and chassis availability, as well as excess inventory in the warehousing retail sector more than offset strong consumer demand.

Intermodal revenues for the remainder of the year are expected to rise, driven by increased fuel surcharge revenue, volume growth, and pricing gains, partially offset by lower storage service revenues.

Coal

Coal revenues increased in both periods due to higher average revenue per unit, driven by pricing gains and higher fuel surcharge revenue, partially offset by lower volume.

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

 Second QuarterFirst Six Months
 20222021% change20222021% change
Utility8,267 8,563 (3%)17,228 17,109 1%
Export6,514 6,580 (1%)12,928 13,273 (3%)
Domestic metallurgical2,782 3,325 (16%)5,212 5,812 (10%)
Industrial1,083 871 24%1,886 1,770 7%
Total18,646 19,339 (4%)37,254 37,964 (2%)
 
Coal tonnage declined in both periods primarily due to decreased domestic metallurgical tonnage. While utility tonnage increased slightly for the first six months, it experienced a decrease in the second quarter due to service disruptions and tight coal supply. Export tonnage decreased due to service disruptions and tight coal supply. Domestic metallurgical coal tonnage fell due to reduced coke shipments related to customer sourcing changes. Industrial coal tonnage increased in both periods due to increased demand.

Coal revenues for the remainder of the year are expected to rise due to increased volumes.


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Railway Operating Expenses

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

Second QuarterFirst Six Months
20222021% change20222021% change
Compensation and benefits$614 $624 (2%)$1,233 $1,235 —%
Purchased services and rents481 429 12%