10-QPeriod: Q1 FY2008

NORFOLK SOUTHERN CORP Quarterly Report for Q1 Ended Mar 31, 2008

Filed April 23, 2008For Securities:NSC

Summary

Norfolk Southern Corporation (NSC) reported a modest increase in net income for the first quarter of 2008, reaching $291 million, up 2% from the prior year, driven by higher railway operating revenues and a reduction in interest expense. Despite an 11% rise in revenues to $2.5 billion, largely due to increased average revenue per unit and fuel surcharges, the company's operating expenses also grew by 12%, primarily due to significantly higher fuel costs. This resulted in a slight increase in the railway operating ratio to 76.9%. Cash flow from operations remained strong at $604 million. The company continued its share repurchase program, buying back 5.6 million shares for $276 million. NSC also strengthened its liquidity by securing new borrowings and had $364 million in cash and cash equivalents at the end of the quarter. Investors should note the impact of rising fuel prices on operating expenses and the company's ongoing efforts to offset this through pricing adjustments and efficiency gains. The company's forward-looking statements highlight potential risks related to economic conditions, fuel costs, and labor negotiations.

Key Highlights

  • 1Net income increased by 2% to $291 million for Q1 2008, compared to $285 million in Q1 2007.
  • 2Railway operating revenues grew by 11% to $2.5 billion, driven by higher average revenue per unit and fuel surcharges, despite a 2% decline in traffic volume.
  • 3Railway operating expenses increased by 12% to $1.92 billion, largely attributed to a 63% surge in fuel costs.
  • 4The railway operating ratio slightly worsened to 76.9% from 76.5% year-over-year.
  • 5Cash provided by operating activities was $604 million, up from $586 million in the prior year.
  • 6The company repurchased 5.6 million shares for $276 million during the quarter.
  • 7The effective income tax rate increased to 38.9% from 32.1% due to the expiration of synthetic fuel tax credits.

Frequently Asked Questions

The primary driver was a significant increase in the average revenue per unit, coupled with higher fuel surcharges, which more than offset a slight decrease in overall traffic volume. Specifically, revenue per unit/mix increased by $305 million, while traffic volume decreased by $52 million.

The most significant factor driving the increase in operating expenses was a substantial rise in fuel costs, which were up 63% year-over-year due to higher prices per gallon. Higher compensation and benefits, driven by stock-based compensation and wage rate increases, and higher material costs also contributed.

Norfolk Southern generated strong operating cash flow of $604 million. The company utilized this cash, along with proceeds from new borrowings, to fund capital expenditures, pay dividends, and repurchase approximately $276 million worth of its common stock (5.6 million shares). The company ended the quarter with $364 million in cash and cash equivalents.

The company expects coal revenues to be higher than prior years due to strong export markets and improved pricing. General merchandise revenues are also expected to trend higher, with pricing offsetting modest declines in traffic volume. Intermodal revenues are anticipated to see modest growth, primarily driven by higher per-unit revenue.