10-QPeriod: Q2 FY2006

NORFOLK SOUTHERN CORP Quarterly Report for Q2 Ended Jun 30, 2006

Filed July 28, 2006For Securities:NSC

Summary

Norfolk Southern Corporation (NSC) reported solid financial results for the second quarter and the first six months of 2006, demonstrating revenue growth driven by a combination of increased pricing, including fuel surcharges, and higher traffic volumes across key segments. Despite a notable increase in operating expenses, primarily due to rising diesel fuel costs, the company managed to improve its operating ratio and increase income from railway operations. The company's financial position remains strong, with substantial cash flows and a healthy liquidity position, supporting ongoing capital expenditures, share repurchases, and dividend payments. Key financial metrics show year-over-year improvements in revenue and operating income, although net income saw a slight decrease in the second quarter compared to the prior year, largely due to the absence of one-time benefits recognized in Q2 2005 related to tax law changes and rate case settlements. The company continues to navigate economic uncertainties, such as fluctuating energy prices and interest rates, with a strategic focus on service levels and pricing. Investments in capital improvements, including a new joint venture for rail line enhancements, signal a commitment to future growth and efficiency. Shareholder returns are being augmented through dividends and an active share repurchase program.

Key Highlights

  • 1Railway operating revenues increased by 11% to $2.4 billion in Q2 2006 and by 14% to $4.7 billion in the first six months of 2006, driven by higher rates (including fuel surcharges) and increased traffic volumes.
  • 2Operating expenses rose by 10% in Q2 2006 and 11% in the first six months of 2006, primarily due to significant increases in diesel fuel costs and higher compensation and benefits.
  • 3Net income for Q2 2006 was $375 million, a decrease from $424 million in Q2 2005, largely due to the absence of prior-year benefits from tax law changes and rate case settlements.
  • 4First six months net income increased to $680 million in 2006 from $618 million in 2005, reflecting growth in operating income partially offset by the absence of prior-year one-time benefits.
  • 5The company repurchased 2.3 million shares of common stock in Q2 2006 for $186 million as part of its ongoing share repurchase program.
  • 6Capital expenditures for the full year 2006 are expected to be approximately $1.2 billion, with all expenditures planned to be funded through internally generated funds.
  • 7Norfolk Southern formed a joint venture (MSLLC) with Kansas City Southern, contributing $100 million for a 30% interest to enhance a rail line, expected to improve capacity and service.

Frequently Asked Questions

Revenue growth was primarily driven by a combination of higher pricing, including increased fuel surcharges, and a rise in traffic volumes across key commodity groups like intermodal, metals/construction, and coal.

Operating expenses saw a significant increase due to higher diesel fuel prices, which nearly doubled compared to the prior year, and also due to increased compensation and benefits costs, as well as volume-related expenses.

The decrease in net income was primarily due to the absence of significant one-time benefits recorded in the second quarter of 2005. These included a $96 million benefit from state tax law changes and a $24 million benefit from the settlement of two coal rate cases, which together boosted the prior year's net income.

Norfolk Southern previously had a diesel fuel hedging program, but the last remaining contracts were settled in the second quarter of 2006, ending the program's benefits. The company now relies on fuel surcharges, which cover approximately 90% of total revenues, to mitigate some of the impact of fuel price fluctuations. They also revised their fuel surcharge mechanics for certain traffic, increasing the trigger price for West Texas Intermediate Crude Oil.