NORFOLK SOUTHERN CORP Annual Report: Key Insights for Investors

1. Business Overview

Norfolk Southern (NS) stands as a leading Class I freight railroad, managing an extensive network across the eastern United States. The company moves a diverse array of goods, serving key industrial sectors such as chemicals, metals, construction materials, agricultural products, automotive, and intermodal freight. Its operations are vital to the supply chain throughout its service territory, linking ports, production facilities, and distribution centers.

In fiscal year 2025, Norfolk Southern generated total railway operating revenue of $12.10 billion. This represents a 2.1% increase from $11.85 billion in fiscal year 2024, signaling a positive recovery from a slight dip observed between 2023 ($12.01 billion) and 2024, and indicating positive momentum in its core business.

2. Financial Performance

Here's a breakdown of Norfolk Southern's revenue by segment for fiscal years 2025 and 2024:

• Merchandise Revenue: As the largest segment, encompassing chemicals, metals, construction materials, and agricultural products, merchandise revenue reached $7.30 billion in 2025, a slight increase from $7.25 billion in 2024.
  • Chemicals and Metals & Construction segments grew.
  • Agricultural, Forest & Consumer products revenue declined slightly from $1.75 billion in 2024 to $1.70 billion in 2025.
  • Automotive shipments held steady at $1.60 billion in both years.
• Intermodal Revenue: This segment, which involves transporting shipping containers often combined with truck services, grew strongly, increasing 3.6% to $2.90 billion in 2025 from $2.80 billion in 2024. This growth underscores NS's strength in integrated logistics.
• Coal Revenue: Despite broader energy transitions, coal remains a significant contributor, growing 6.25% to $1.70 billion in 2025 from $1.60 billion in 2024.
• Ancillary Services: These smaller, supporting services held steady at $200 million in both 2024 and 2025.

Overall, the company achieved modest revenue growth, primarily driven by strong performance in its Intermodal and Coal segments.

3. Management Discussion and Analysis (MD&A) Highlights

Fiscal year 2025 saw several significant developments and strategic initiatives:

• Potential Union Pacific Merger: A significant strategic event involves the potential merger or transaction with Union Pacific, anticipated around July 31, 2025. This potential transaction will likely be a key focus, addressing its strategic rationale, anticipated benefits, and potential challenges.
• Network Expansion and Infrastructure Investment: NS strategically invested in its railway network. Investments included a railway purchase in March 2024 to enhance capacity or reach. Additionally, NS secured significant long-term agreements:
  • A partnership with the Virginia Passenger Rail Authority (VPRA) in September 2024, a project expected to continue until at least December 2027, aims to improve passenger and freight rail capacity.
  • An agreement with the City of Charlotte in September 2024 to expand or upgrade local railway infrastructure, likely supporting urban development and freight flow. These initiatives underscore a commitment to long-term infrastructure development and public-private partnerships, aiming to enhance operational efficiency and market reach.
• Restructuring Costs: NS incurred $100 million in restructuring costs in both fiscal years 2024 and 2025. These costs are often related to operational efficiency improvements, workforce adjustments, asset rationalization, or strategic shifts.
• Strategic Focus: Management would highlight its focus on network optimization, operational efficiency, and customer service. Recurring restructuring costs suggest an ongoing drive to streamline operations, reduce costs, and modernize the business, critical for maintaining competitiveness and improving the operating ratio.

4. Financial Health and Liquidity

• Debt Levels: Total long-term debt, including various notes and debentures maturing between 2030 and 2121, remained consistent at $14.00 billion in both 2024 and 2025.
• Other Borrowings: NS also maintained $500 million in securitization borrowings and $1.00 billion in commercial paper (short-term debt) in both fiscal years.
• Credit Facilities: A robust $800 million credit agreement, expiring in January 2029, provides a significant liquidity buffer, enhancing the company's ability to manage short-term funding needs and capital expenditures.

5. Risk Factors

Investing in Norfolk Southern involves various risks that could materially affect its business, financial condition, and operating results. Key risks include:

• Merger Integration Risks: The potential Union Pacific merger carries substantial risks, including regulatory hurdles, integration challenges (systems, operations, culture), unexpected costs, and potential loss of customers or market share during the transition. Failure to realize anticipated synergies or incurring significant integration costs could negatively impact financial performance.
• Economic Downturns: As a freight railroad, NS's performance is highly sensitive to the overall health of the economy. A significant economic slowdown, recession, or disruptions to global supply chains could reduce freight volumes across all segments, impacting revenue and profitability.
• Regulatory and Political Environment: Changes in regulations from the Surface Transportation Board (STB), environmental agencies, or labor laws could impact operations and costs. Increased scrutiny on rail safety, competition, and potential anti-competitive practices also poses a persistent risk.
• Operational and Safety Risks: The nature of rail operations inherently involves risks such as derailments, accidents, and severe weather disruptions, potentially leading to significant costs, service interruptions, environmental liabilities, and reputational damage. Compliance with safety regulations and effective risk management are critical.
• Labor Relations: A significant portion of NS's workforce is unionized. Negotiations for new collective bargaining agreements and potential labor disputes, including strikes or work stoppages, could disrupt operations, increase costs, and negatively impact service.
• Competition: NS faces intense competition from other Class I railroads, regional railroads, and the trucking industry. This competition requires continuous investment in service quality, efficiency, and pricing strategies to maintain market share.
• Climate Change Impacts: Extreme weather events, such as floods, droughts, and severe storms, can disrupt service, damage infrastructure, and increase operating costs. Evolving environmental policies and societal pressures for decarbonization may also impact demand for certain commodities like coal and necessitate significant investments in greener technologies.
• Cybersecurity Risks: The company relies heavily on information technology systems. Cyberattacks, data breaches, or system failures could disrupt operations, compromise sensitive data, and result in significant financial losses and reputational harm.

6. Competitive Position

Norfolk Southern maintains its competitive position through its extensive network, diversified freight mix, and strategic alliances within the broader rail industry:

• Network Advantage: NS operates a critical rail network across the eastern U.S., providing access to major industrial centers, ports, and intermodal facilities. This network acts as a significant barrier to entry for competitors.
• Investments in Conrail Inc.: NS maintains significant economic and voting interests in Conrail Inc., valued at $1.20 billion and $1.00 billion respectively in 2025 (unchanged from 2024). Conrail provides terminal and switching services in key Northeast markets, offering NS critical access and operational flexibility in highly congested areas, thereby enhancing its competitive reach.
• Investment in TTX Company: NS's $1.10 billion investment in TTX Company provides access to a shared fleet of railcars, crucial for intermodal and automotive transport. This arrangement enhances equipment availability, reduces capital expenditure on rolling stock, and offers flexibility to meet fluctuating customer demand, strengthening its intermodal and automotive service offerings.
• Strategic Partnerships: Agreements like those with the Virginia Passenger Rail Authority (VPRA) and the City of Charlotte demonstrate NS's ability to engage in public-private partnerships. These partnerships enhance infrastructure and potentially expand service capabilities, further solidifying its market presence.

These investments and partnerships highlight NS's strategic approach to leveraging shared assets and collaborative efforts to strengthen its network and operational capabilities within the competitive rail landscape.

7. Future Outlook

Norfolk Southern's outlook for the near to medium term is shaped by continued, albeit modest, revenue growth and significant strategic initiatives.

• Continued Revenue Growth: The projected $12.10 billion in revenue for 2025 suggests sustained growth, driven by key segments like intermodal and coal, and a general recovery in freight volumes.
• Long-term Infrastructure Benefits: Projects like the VPRA agreement, extending to at least 2027, and other network investments should yield long-term benefits, including increased capacity, improved efficiency, and potential new revenue streams, supporting sustainable growth.
• Transformative Merger Impact: The potential Union Pacific transaction stands as the most significant factor for the future. Its successful execution and integration may unlock substantial synergies, expand market reach, and redefine NS's scale and long-term competitive strategy. Conversely, challenges in regulatory approval or integration may pose significant risks. Investors should look for further details on this event and its implications for NS's financial and operational future.
• Capital Allocation: Future capital allocation decisions, including capital expenditures for network improvements, technology upgrades, and potential shareholder returns (dividends, share repurchases), will indicate management's confidence and strategic priorities. NS's ability to generate sufficient cash flow to fund these initiatives is critical.
• Market Trends and Regulatory Landscape: NS anticipates navigating dynamic market trends such as evolving supply chain dynamics, increasing demand for sustainable transportation solutions, and technological advancements. The regulatory environment, particularly concerning safety, competition, and environmental compliance, will influence operational flexibility and strategic decisions.