10-Q 1 nsc-20210930.htm 10-Q nsc-20210930
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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 SEPTEMBER 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
nsc-20210930_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)
Three Commercial Place,Norfolk,Virginia23510-2191
(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 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 September 30, 2021
Common Stock ($1.00 par value per share)243,344,509(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)
 
 Third QuarterFirst Nine Months
 2021202020212020
 ($ in millions, except per share amounts)
Railway operating revenues$2,852 $2,506 $8,290 $7,216 
Railway operating expenses    
Compensation and benefits609 578 1,844 1,786 
Purchased services and rents432 486 1,254 1,261 
Fuel208 126 573 399 
Depreciation297 293 883 867 
Materials and other170 183 418 500 
Loss on asset disposal   385 
Total railway operating expenses1,716 1,666 4,972 5,198 
Income from railway operations1,136 840 3,318 2,018 
Other income – net14 39 56 110 
Interest expense on debt164 155 481 465 
Income before income taxes986 724 2,893 1,663 
Income taxes233 155 648 321 
Net income$753 $569 $2,245 $1,342 
Earnings per share    
Basic$3.07 $2.23 $9.03 $5.24 
Diluted3.06 2.22 8.99 5.21 
 
 See accompanying notes to consolidated financial statements.
3


Norfolk Southern Corporation and Subsidiaries
Consolidated Statements of Comprehensive Income
(Unaudited)
 
 Third QuarterFirst Nine Months
2021202020212020
 ($ in millions)
Net income$753 $569 $2,245 $1,342 
Other comprehensive income, before tax:  
Pension and other postretirement benefits10 7 31 20 
Other comprehensive income of equity investees   6 
Other comprehensive income, before tax10 7 31 26 
Income tax expense related to items of other
comprehensive income(3)(3)(8)(6)
Other comprehensive income, net of tax7 4 23 20 
Total comprehensive income$760 $573 $2,268 $1,362 
 
 See accompanying notes to consolidated financial statements.
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 – net945 848 
Materials and supplies235 221 
Other current assets77 134 
Total current assets2,722 2,318 
Investments3,684 3,590 
Properties less accumulated depreciation of $11,867
 
and $11,985, respectively
31,429 31,345 
Other assets769 709 
Total assets$38,604 $37,962 
Liabilities and stockholders’ equity  
Current liabilities:  
Accounts payable$1,196 $1,016 
Income and other taxes272 263 
Other current liabilities384 302 
Current maturities of long-term debt558 579 
Total current liabilities2,410 2,160 
Long-term debt13,274 12,102 
Other liabilities1,944 1,987 
Deferred income taxes7,089 6,922 
Total liabilities24,717 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 shares244 254 
Additional paid-in capital2,224 2,248 
Accumulated other comprehensive loss(571)(594)
Retained income11,990 12,883 
Total stockholders’ equity13,887 14,791 
Total liabilities and stockholders’ equity$38,604 $37,962 
 
 See accompanying notes to consolidated financial statements.
5


Norfolk Southern Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
 
 First Nine Months
 20212020
 ($ in millions)
Cash flows from operating activities  
Net income$2,245 $1,342 
Reconciliation of net income to net cash provided by operating activities:  
Depreciation883 867 
Deferred income taxes158 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 assets57 55 
Current liabilities other than debt294 104 
Other – net(128)(182)
Net cash provided by operating activities3,313 2,767 
Cash flows from investing activities  
Property additions(1,025)(1,053)
Property sales and other transactions135 291 
Investment purchases(5)(6)
Investment sales and other transactions48 (50)
Net cash used in investing activities(847)(818)
Cash flows from financing activities  
Dividends(764)(722)
Common stock transactions8 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 equivalents350 779 
Cash and cash equivalents  
At beginning of year1,115 580 
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 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, 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, 2021248 2,240 (578)12,407 14,317 
Comprehensive income:
Net income753 753 
Other comprehensive income7 7 
Total comprehensive income760 
Dividends on common stock,
$1.09 per share
(268)(268)
Share repurchases(4)(31)(900)(935)
Stock-based compensation15 (2)13 
Balance at September 30, 2021$244 $2,224 $(571)$11,990 $13,887 

 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, 2019$259 $2,209 $(491)$13,207 $15,184 
Comprehensive income:
Net income381 381 
Other comprehensive income10 10 
Total comprehensive income391 
Dividends on common stock,
$0.94 per share
(242)(242)
Share repurchases(2)(21)(443)(466)
Stock-based compensation1 17 (1)17 
Balance at March 31, 2020258 2,205 (481)12,902 14,884 
Comprehensive income:
Net income392 392 
Other comprehensive income6 6 
Total comprehensive income398 
Dividends on common stock,
$0.94 per share
(240)(240)
Share repurchases(2)(10)(191)(203)
Stock-based compensation22 22 
Balance at June 30, 2020256 2,217 (475)12,863 14,861 
Comprehensive income:
Net income569 569 
Other comprehensive income4 4 
Total comprehensive income573 
Dividends on common stock,
$0.94 per share
(240)(240)
Share repurchases(1)(11)(279)(291)
Stock-based compensation40 (2)38 
Balance at September 30, 2020$255 $2,246 $(471)$12,911 $14,941 

 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 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 months of 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 QuarterFirst Nine Months
2021202020212020
($ in millions)
Merchandise:
Agriculture, forest and consumer products$564 $521 $1,681 $1,570 
Chemicals504 428 1,457 1,371 
Metals and construction424 337 1,196 997 
Automotive218 270 664 597 
Merchandise1,710 1,556 4,998 4,535 
Intermodal812 700 2,332 1,924 
Coal330 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-customer205 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 QuarterFirst Nine Months
2021202020212020
($ in millions)
Stock-based compensation expense$14 $13 $46 $25 
Total tax benefit3 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 QuarterFirst Nine Months
GrantedWeighted-Average Grant-Date Fair ValueGrantedWeighted-Average Grant-Date Fair Value
Stock options $ 42,770 $62.49 
RSUs2,490 258.14 179,345 239.01 
PSUs  50,060 240.69 


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Stock Options
Third QuarterFirst Nine Months
2021202020212020
($ in millions)
Options exercised22,502313,358 363,982 998,996 
Cash received upon exercise$2 $27 $33 $82 
Related tax benefit realized1 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 QuarterFirst Nine Months
2021202020212020
($ in millions)
RSUs vested1,100 1,635 260,227 203,934 
Common Stock issued net of tax withholding761 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
20212020
($ in millions)
PSUs earned78,727 235,935
Common Stock issued net of tax withholding49,967 156,450
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.


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4.  Earnings Per Share

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

 BasicDiluted
 Third Quarter
 2021202020212020
($ 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 outstanding245.3 254.6 245.3 254.6 
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 $2.22 
 BasicDiluted
 First Nine Months
 2021202020212020
($ 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 outstanding248.5 255.7 248.5 255.7 
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.


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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 IncomeReclassification
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%.


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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.” 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.

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Pension and postretirement benefit cost components for the third quarter and first nine months were as follows:
   Other Postretirement
 Pension BenefitsBenefits
 Third Quarter
 2021202020212020
 ($ in millions)
Service cost$10 $10 $1 $2 
Interest cost14 19 1 3 
Expected return on plan assets(48)(48)(3)(4)
Amortization of net losses16 13   
Amortization of prior service benefit  (6)(6)
Net benefit$(8)$(6)$(7)$(5)

   Other Postretirement
 Pension BenefitsBenefits
 First Nine Months
 2021202020212020
 ($ in millions)
Service cost$32 $30 $4 $5 
Interest cost41 56 5 9 
Expected return on plan assets(144)(143)(9)(10)
Amortization of net losses49 39 1  
Amortization of prior service benefit  (19)(19)
Net benefit$(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.


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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, 2021December 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-

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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 QuarterFirst Nine Months
20212020% change20212020% 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
ReportedInvestment ImpairmentAdjusted
(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
2021Adjusted 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
ReportedLoss on Asset DisposalInvestment ImpairmentAdjusted
(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
2021Adjusted 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 QuarterFirst Nine Months
Revenues 20212020% change20212020% change
Merchandise:
Agriculture, forest and consumer products$564 $521 8%$1,681 $1,570 7%
Chemicals504 428 18%1,457 1,371 6%
Metals and construction424 337 26%1,196 997