10-QPeriod: Q2 FY2017

NORFOLK SOUTHERN CORP Quarterly Report for Q2 Ended Jun 30, 2017

Filed July 26, 2017For Securities:NSC

Summary

Norfolk Southern Corporation (NSC) reported strong financial results for the second quarter and the first six months of 2017. The company demonstrated robust revenue growth driven by increases in traffic volume and average revenue per unit, notably in the intermodal and coal segments. Operating expenses were managed effectively, leading to an all-time record low operating ratio of 66.3% for the second quarter and significant improvements for the first six months. Net income saw a substantial increase of 23% for the quarter and 17% year-to-date, with diluted earnings per share rising by 26% and 20%, respectively. The company's strategic plan execution appears to be paying off, with disciplined cost control measures complementing revenue growth. Key expense areas like fuel saw increases due to higher prices, but efficiencies in locomotive fuel consumption helped mitigate some of the impact. Compensation and benefits expenses rose due to incentive compensation and higher benefit rates, although employment levels decreased. The company maintained a healthy liquidity position, with strong cash flow from operations.

Financial Highlights

47 data points
Beta

Revenue

$2.64B

Net Income

$497.00M

18.8% Net Margin

EPS (Diluted)

$1.71

Total Assets

$34.92B

Cash & Equivalents

$642.00M

Free Cash Flow

$285.00M

Financial Statements
Beta
Revenue$2.64B
Operating Expenses$1.76B
Operating Income$872.00M
Interest Expense$140.00M
Net Income$497.00M
EPS (Basic)$1.72
EPS (Diluted)$1.71
Shares Outstanding (Basic)289.00M
Shares Outstanding (Diluted)291.20M

Key Highlights

  • 1Railway operating revenues increased by 7% to $2.64 billion in Q2 2017 and by 7% to $5.21 billion in the first six months of 2017 compared to the prior year.
  • 2Net income rose by 23% to $497 million in Q2 2017 and by 17% to $930 million in the first six months of 2017.
  • 3Diluted earnings per share (EPS) increased by 26% to $1.71 in Q2 2017 and by 20% to $3.18 in the first six months of 2017.
  • 4The company achieved an all-time record low operating ratio of 66.3% in Q2 2017, a 3% improvement year-over-year.
  • 5Coal revenues saw a significant increase of 32% in Q2 and 26% in the first six months, driven by higher volumes in export and utility markets.
  • 6Intermodal revenues grew by 10% in both Q2 and the first six months, supported by higher volumes and average revenue per unit.
  • 7The company repurchased $402 million of common stock in the first six months of 2017 and anticipates repurchasing $1.0 billion during the full year 2017.

Frequently Asked Questions

Revenue growth was driven by a 6% increase in traffic volume and higher average revenue per unit across most segments. Key contributors included strong performance in the coal sector (especially export and utility markets) and continued growth in intermodal traffic. Merchandise revenue also saw modest growth, primarily due to higher pricing and fuel surcharges, although volumes were largely flat.

Norfolk Southern focused on disciplined cost control. Despite increases in fuel prices and compensation and benefits due to incentive compensation and benefit rates, the company achieved improved locomotive fuel efficiency and managed other expenses effectively. This led to an all-time record low operating ratio of 66.3% in the second quarter of 2017, indicating that operating expenses consumed a lower percentage of revenues.

The company's financial health appears strong, with increased cash provided by operating activities ($1.6 billion in the first six months of 2017). While working capital deficits were noted, cash and cash equivalents remained substantial ($642 million). The company also has a significant credit facility and an accounts receivable securitization program available. The debt-to-total capitalization ratio remained stable, indicating sound leverage management.

The company is involved in several lawsuits, including antitrust class actions related to fuel surcharges and a rate reasonableness complaint by Sunbelt. However, management believes that the outcome of these proceedings will not have a material effect on the company's financial position, results of operations, or liquidity. Environmental liabilities are also recorded, and management believes current accruals are adequate.