10-QPeriod: Q1 FY2007

NORFOLK SOUTHERN CORP Quarterly Report for Q1 Ended Mar 31, 2007

Filed April 27, 2007For Securities:NSC

Summary

Norfolk Southern Corporation (NSC) reported its first quarter 2007 financial results, showing a slight decrease in net income to $285 million from $305 million in the prior year's quarter. This was driven by a 2% decline in railway operating revenues, largely due to a 4% decrease in traffic volume, partially offset by higher average revenue per unit. While income from railway operations decreased, operating expenses were also reduced, resulting in an operating ratio of 76.5%, a marginal increase from 76.1% in Q1 2006. The company's liquidity remained strong, with cash provided by operating activities increasing year-over-year, supporting significant share repurchases, capital expenditures, and dividend payments. A key strategic initiative highlighted is the expansion of the share repurchase program, authorizing up to 75 million shares through 2010. In the first quarter, NSC repurchased 5.6 million shares for $276 million. The company also provided updates on its investment in Conrail and its ongoing efforts to manage market risks, particularly concerning diesel fuel and interest rates. While no new fuel hedging contracts have been entered into since 2004, interest rate hedging continues. The company also addressed ongoing legal proceedings and environmental matters, expressing confidence that these issues would not materially impact its financial position.

Key Highlights

  • 1Net income for Q1 2007 was $285 million, a decrease from $305 million in Q1 2006, primarily due to lower revenues driven by a 4% decline in traffic volume.
  • 2Railway operating revenues decreased by 2% to $2.25 billion, as lower traffic volumes outpaced a 2% increase in average revenue per unit.
  • 3Operating expenses decreased by 2% to $1.72 billion, mainly due to lower compensation and benefits costs.
  • 4The company significantly increased its share repurchase activity, buying back 5.6 million shares for $276 million in Q1 2007, under an expanded program authorizing up to 75 million shares through 2010.
  • 5Cash provided by operating activities increased to $586 million in Q1 2007, up from $510 million in Q1 2006, strengthening liquidity.
  • 6The effective income tax rate decreased to 32.1% in Q1 2007 from 34.5% in Q1 2006, largely due to increased tax credits from synthetic fuel investments.
  • 7The company reported $52 million in liabilities for environmental exposures, with a management assessment that known matters are unlikely to have a material adverse effect.

Frequently Asked Questions

In the first quarter of 2007, Norfolk Southern reported a net income of $285 million, a slight decrease from $305 million in the same period of 2006. This was primarily driven by a 2% decline in railway operating revenues, which fell to $2.25 billion due to a 4% decrease in traffic volume, partially offset by higher average revenue per unit.

Norfolk Southern significantly expanded its share repurchase program. In March 2007, the Board authorized the repurchase of up to 75 million shares of common stock through the end of 2010. During the first quarter of 2007, the company purchased and retired 5.6 million shares for $276 million.

Diesel fuel expenses decreased by 5% due to lower consumption and a 5% decrease in average price per gallon. While the company's diesel fuel hedging program concluded in the second quarter of 2006, there were no fuel hedging activities in the first quarter of 2007. The company continues to manage interest rate risk through hedging transactions.

Norfolk Southern is involved in several legal proceedings, including environmental penalty assessments in Pennsylvania related to past derailments. The company also has liabilities for environmental exposures totaling $52 million. Management believes that while the outcomes of these matters are uncertain, they are unlikely to have a material adverse effect on the company's financial position, results of operations, or liquidity.