10-QPeriod: Q1 FY2016

NORFOLK SOUTHERN CORP Quarterly Report for Q1 Ended Mar 31, 2016

Filed April 22, 2016For Securities:NSC

Summary

Norfolk Southern Corporation (NSC) reported a solid first quarter for 2016, with net income increasing by 25% year-over-year to $387 million, or $1.29 per diluted share. This performance was driven by a significant reduction in railway operating expenses, down 13% to $1.7 billion, largely due to lower fuel costs and successful cost control initiatives. Despite a 6% decrease in railway operating revenues to $2.4 billion, primarily impacted by declining coal volumes and reduced fuel surcharge revenues, the company achieved a record-low railway operating ratio of 70.1%. The company remains focused on operational efficiency, targeting $200 million in productivity savings and an operating ratio below 70% for the full year. Key financial developments include strong operating cash flow generation of $879 million. The company also continued its commitment to returning capital to shareholders through dividends and share repurchases, though repurchase activity was lower compared to the prior year. NSC's balance sheet remains robust, with a debt-to-total capitalization ratio of 43.7% at quarter-end. Management expressed confidence in the company's ability to meet ongoing obligations and achieve its strategic goals.

Financial Highlights

46 data points
Beta

Revenue

$2.42B

Net Income

$387.00M

16.0% Net Margin

EPS (Diluted)

$1.29

Total Assets

$33.78B

Cash & Equivalents

$589.00M

Free Cash Flow

$481.00M

Financial Statements
Beta
Revenue$2.42B
Operating Expenses$1.70B
Operating Income$723.00M
Interest Expense$139.00M
Net Income$387.00M
EPS (Basic)$1.30
EPS (Diluted)$1.29
Shares Outstanding (Basic)297.20M
Shares Outstanding (Diluted)298.90M

Key Highlights

  • 1Net income increased 25% to $387 million ($1.29 diluted EPS) in Q1 2016 compared to Q1 2015.
  • 2Railway operating expenses decreased 13% to $1.7 billion, mainly due to a 44% drop in fuel costs.
  • 3Record-low railway operating ratio of 70.1% achieved in Q1 2016, an improvement from 76.4% in Q1 2015.
  • 4Railway operating revenues declined 6% to $2.4 billion, impacted by lower coal volumes and reduced fuel surcharges.
  • 5Operating cash flow strengthened significantly, rising to $879 million in Q1 2016 from $631 million in Q1 2015.
  • 6Share repurchases totaled $200 million in Q1 2016, a decrease from $415 million in Q1 2015.
  • 7Total debt-to-total capitalization ratio improved to 43.7% at March 31, 2016, from 45.3% at December 31, 2015.

Frequently Asked Questions

The increase in net income was primarily driven by a substantial reduction in railway operating expenses, which fell by 13%. This was largely attributable to a 44% decrease in fuel costs due to lower prices and reduced consumption, coupled with effective cost control initiatives, lower employee levels, and reduced material usage. These factors more than offset a 6% decline in operating revenues.

Management expects continued focus on operational efficiency, targeting $200 million in productivity savings and an operating ratio below 70% for the full year. While coal volumes are expected to remain lower, merchandise revenues are projected to increase due to higher average revenue per unit, despite lower volumes. Intermodal revenues are expected to be lower year-over-year due to reduced fuel surcharges and restructuring, partially offset by higher volumes. Coal revenues are anticipated to be lower due to decreased volumes.

Norfolk Southern generated strong operating cash flow of $879 million in the first quarter of 2016. The company used cash for investing activities, primarily property additions, and for financing activities, including debt repayments and dividends. Share repurchase activity was reduced compared to the prior year. The company's debt-to-total capitalization ratio improved to 43.7%, indicating a healthy financial position. Management believes that cash on hand combined with operating cash flow will be sufficient to meet ongoing obligations.

Railway operating revenues decreased by 6% to $2.4 billion. This was mainly due to lower average revenue per unit and volume declines. The decline in average revenue per unit was significantly influenced by reduced fuel surcharge revenues, which were down $114 million year-over-year. Coal volumes were particularly weak, seeing a 23% decrease. Intermodal revenues also declined, partly due to restructuring of the Triple Crown Services subsidiary.