10-QPeriod: Q3 FY2015

NORFOLK SOUTHERN CORP Quarterly Report for Q3 Ended Sep 30, 2015

Filed October 28, 2015For Securities:NSC

Summary

Norfolk Southern Corporation (NSC) reported a decrease in net income for the third quarter and first nine months of 2015 compared to the same periods in 2014. This decline was primarily driven by lower railway operating revenues, which were impacted by reduced fuel surcharge revenues and significant weakness in the coal markets. While operating expenses also decreased, largely due to lower fuel costs, the drop in revenue outpaced these savings, leading to a higher operating ratio. Despite the revenue challenges, the company continued to invest in its infrastructure, with property additions for the first nine months of 2015 increasing compared to the prior year, including a notable acquisition of the Delaware & Hudson Railway line. NSC also demonstrated a commitment to returning capital to shareholders through substantial share repurchases, totaling $997 million for the first nine months of 2015, and continued dividend payments. The company is also navigating regulatory requirements, including the impending deadline for Positive Train Control (PTC) implementation, which presents both operational and financial considerations.

Financial Highlights

46 data points
Beta

Revenue

$2.71B

Net Income

$452.00M

16.7% Net Margin

EPS (Diluted)

$1.49

Total Assets

$33.53B

Cash & Equivalents

$433.00M

Free Cash Flow

-$184.00M

Financial Statements
Beta
Revenue$2.71B
Operating Expenses$1.89B
Operating Income$822.00M
Interest Expense$137.00M
Net Income$452.00M
EPS (Basic)$1.50
EPS (Diluted)$1.49
Shares Outstanding (Basic)300.10M
Shares Outstanding (Diluted)302.50M

Key Highlights

  • 1Net income for Q3 2015 decreased by 19% to $452 million, or $1.49 per diluted share, compared to $559 million, or $1.79 per diluted share, in Q3 2014.
  • 2Nine-month net income decreased by 20% to $1.2 billion, or $3.90 per diluted share, compared to $1.49 billion, or $4.75 per diluted share, in the same period of 2014.
  • 3Railway operating revenues declined 10% in Q3 2015 and 9% for the first nine months of 2015, primarily due to lower fuel surcharge revenues and a significant drop in coal volumes.
  • 4Operating expenses decreased by 7% in Q3 2015 and 5% for the first nine months, largely driven by a 43% and 40% reduction in fuel costs, respectively.
  • 5The company repurchased $997 million of common stock in the first nine months of 2015, a significant increase from $166 million in the prior year, indicating a strong focus on capital return to shareholders.
  • 6Property additions increased to $1.7 billion in the first nine months of 2015 from $1.3 billion in the prior year, including the acquisition of the Delaware & Hudson Railway line.
  • 7The operating ratio, a key efficiency metric, increased to 69.7% for Q3 2015 from 67.0% in Q3 2014, and rose to 72.0% for the first nine months of 2015 from 69.3% in the prior year.

Frequently Asked Questions

The primary drivers for the decrease in revenue were lower average revenue per unit, largely due to reduced fuel surcharge revenues, and decreased volumes, especially in the coal market, which experienced significant weakness. Lower natural gas prices also led utilities to shift from coal to natural gas generation, further impacting coal volumes.

Operating expenses decreased primarily due to significantly lower fuel costs, a direct result of declining oil prices. The company also saw reductions in incentive compensation expenses. However, these savings were partially offset by costs associated with restructuring its Triple Crown Services (TCS) subsidiary and closing its Roanoke office.

Norfolk Southern demonstrated a strong commitment to returning capital through share repurchases and dividends. In the first nine months of 2015, the company repurchased $997 million of common stock, a substantial increase from the prior year, and continued to pay dividends. The company has board authorization for additional debt or equity issuances and maintains credit facilities.

Key challenges include continued weakness in the coal market, the impact of lower fuel prices on surcharge revenues, and the ongoing implementation of Positive Train Control (PTC) technology, which has a deadline of December 31, 2015, with potential operational and financial implications if not fully met. The company is also subject to extensive environmental and safety regulations.