10-QPeriod: Q1 FY2002

NORFOLK SOUTHERN CORP Quarterly Report for Q1 Ended Mar 31, 2002

Filed April 24, 2002For Securities:NSC

Summary

Norfolk Southern Corporation (NSC) reported net income of $86 million for the first quarter of 2002, a 16% increase from the prior year's $74 million. Excluding a one-time gain from discontinued operations in the prior year, net income saw a more significant increase of 41%. This improvement was primarily driven by a strong rebound in income from railway operations, largely due to a substantial reduction in operating expenses. While railway operating revenues saw a slight decrease of 3% to $1.5 billion, this was primarily attributed to lower traffic volumes across most commodity groups, particularly coal and general merchandise, influenced by factors like mild weather, high coal prices, and a general economic slowdown. However, the company demonstrated effective cost management, with total railway operating expenses falling by 6%. This was aided by decreased diesel fuel costs, lower materials and services expenses, and favorable settlements, significantly boosting operating margins. Investors should monitor the company's ability to navigate economic headwinds while capitalizing on cost efficiencies.

Key Highlights

  • 1Net income increased by 16% to $86 million in Q1 2002 compared to $74 million in Q1 2001.
  • 2Income from railway operations significantly improved, driven by a 6% reduction in railway operating expenses.
  • 3Railway operating revenues declined by 3% to $1.5 billion, primarily due to a 3% decrease in traffic volume.
  • 4Diesel fuel expenses decreased by 31% due to lower prices and reduced consumption, contributing to lower operating expenses.
  • 5The company's effective income tax rate increased to 37.2% in Q1 2002 from 33.0% in Q1 2001.
  • 6Cash provided by operating activities decreased to $63 million from $118 million, partly due to a reduction in accounts receivable sold.
  • 7The company continues to utilize hedging strategies for diesel fuel and interest rate risks.

Frequently Asked Questions

The primary driver of Norfolk Southern's improved net income was a significant increase in income from railway operations, largely due to a substantial reduction in railway operating expenses. Despite a slight decrease in revenues, the company effectively managed its costs, particularly in areas like diesel fuel, materials, and services.

The decline in railway operating revenues was primarily driven by lower traffic volumes across various commodity groups, including coal and general merchandise. This was influenced by factors such as a mild winter impacting coal demand, high coal prices, weak export demand, and a general economic slowdown affecting industrial output.

Norfolk Southern employs derivative financial instruments, such as fuel swaps, to hedge a portion of its diesel fuel consumption. As of March 31, 2002, approximately 56% of its expected diesel fuel requirements for the remainder of 2002 were hedged, aiming to mitigate the impact of price fluctuations on operating margins.

Norfolk Southern expects the economy to remain flat in the second quarter and resume growth in the latter half of the year. The company anticipates generating sufficient cash flow from operations to meet its obligations. For immediate liquidity needs, especially for debt maturing in May, it plans to use proceeds from new borrowings, sales of accounts receivable, and existing cash. The company also has access to a $1 billion credit facility.