10-QPeriod: Q2 FY2015

NORFOLK SOUTHERN CORP Quarterly Report for Q2 Ended Jun 30, 2015

Filed July 27, 2015For Securities:NSC

Summary

Norfolk Southern Corporation (NSC) reported a decrease in net income for the second quarter and the first six months of 2015 compared to the prior year. This decline was primarily driven by lower railway operating revenues, which fell due to reduced fuel surcharge revenues stemming from lower oil prices and weaker coal volumes. While operating expenses also decreased, largely due to lower fuel costs, this reduction did not fully offset the revenue decline, leading to a higher operating ratio. Despite the revenue challenges, the company maintained positive cash flow from operations, which, along with existing cash reserves, supported significant investments in property additions, substantial share repurchases, and dividend payments. Management highlighted improvements in network fluidity and indicated that cash on hand and operating cash flow are expected to be sufficient for ongoing obligations. Key financial metrics reflect a challenging revenue environment, but the company's operational adjustments and financial management appear to be mitigating some of the negative impacts.

Financial Highlights

47 data points
Beta

Revenue

$2.71B

Net Income

$433.00M

16.0% Net Margin

EPS (Diluted)

$1.41

Total Assets

$33.31B

Cash & Equivalents

$889.00M

Free Cash Flow

$376.00M

Financial Statements
Beta
Revenue$2.71B
Operating Expenses$1.90B
Operating Income$814.00M
Interest Expense$134.00M
Net Income$433.00M
EPS (Basic)$1.43
EPS (Diluted)$1.41
Shares Outstanding (Basic)302.90M
Shares Outstanding (Diluted)305.50M

Key Highlights

  • 1Net income decreased by 23% in Q2 2015 and 20% for the first six months of 2015 compared to the prior year, primarily due to lower railway operating revenues.
  • 2Railway operating revenues declined 11% in Q2 and 8% for the first six months, driven by reduced fuel surcharge revenues and weaker coal volumes.
  • 3Operating expenses decreased by 6% in Q2 and 5% for the first six months, largely due to a 38% drop in fuel costs.
  • 4The operating ratio increased by 3.5 percentage points to 70.0% in Q2 2015, indicating higher operating expenses relative to revenues.
  • 5Cash provided by operating activities remained strong at $1.5 billion for the first six months of 2015.
  • 6The company repurchased 7.4 million shares of common stock for $765 million in the first six months of 2015, a significant increase from the prior year's $100 million.
  • 7Long-term debt remained stable, with a new issuance of $500 million in senior notes in Q2 2015.

Frequently Asked Questions

The primary drivers for the decrease in net income were lower railway operating revenues, significantly impacted by reduced fuel surcharge revenues (due to lower oil prices) and a decline in coal volumes. While operating expenses also decreased, the revenue shortfall was not fully offset.

Norfolk Southern managed its expenses by reducing fuel costs, which decreased by 38% due to lower locomotive fuel prices. Other operating expenses were also managed, though purchased services and rents, and compensation and benefits saw increases.

The company maintained a strong liquidity position with $889 million in cash and cash equivalents at the end of Q2 2015. Cash generated from operations was used for property additions, significant share repurchases ($765 million in H1 2015), dividend payments, and debt repayments. Management expects sufficient liquidity for ongoing obligations.

The company is involved in several legal proceedings, including antitrust class actions related to fuel surcharges and rate reasonableness complaints. Environmental liabilities are recorded where probable and estimable, with the company believing current accruals are adequate, although uncertainties exist. None of these are currently expected to have a material adverse effect on financial position, results of operations, or liquidity.