01—Abstract
Summary
Summary of the 10-Q filed July 25, 2018. Cited figures are marked; the original filing is the authoritative source.
Norfolk Southern Corporation (NSC) reported strong financial performance for the second quarter and the first six months of 2018, driven by significant increases in railway operating revenues.
This growth was primarily fueled by higher traffic volumes across most commodity groups, particularly intermodal and merchandise segments, and favorable pricing gains, including robust fuel surcharge revenues. The company achieved a record-low operating ratio of 64.6%a for the second quarter, reflecting improved operational efficiency.
Net income saw a substantial increase year-over-year, benefiting not only from revenue growth but also from a lower effective income tax rate due to the Tax Cuts and Jobs Act of 2017. Despite an increase in certain operating expenses, such as fuel and purchased services, the company's focus on its strategic plan has translated into improved profitability and shareholder returns, evidenced by increased diluted earnings per share and continued share repurchases.
02—Key points
Key Highlights
- Railway operating revenues increased by 10% to $2,898 million in Q2 2018 and by 8% to $5,615 million for the first six months of 2018 compared to the prior year.
- Net income rose significantly by 43% to $710 million in Q2 2018 and by 36% to $1,262 million for the first six months of 2018.
- Diluted earnings per share (EPS) increased by 46% to $2.50 in Q2 2018 and by 39% to $4.43 for the first six months of 2018, demonstrating improved profitability on a per-share basis.
- The railway operating ratio improved to a record-low 64.6% in Q2 2018, indicating enhanced operational efficiency.
- Key revenue drivers included strong performance in the Intermodal segment (up 20% in both periods) and Merchandise segment (up 8% in Q2 and 4% in H1).
- Operating expenses increased, notably fuel costs (up 43% in Q2 and 33% in H1) due to higher prices and consumption, and purchased services and rents (up 10% in Q2 and 8% in H1) driven by higher volumes and repairs.
- The company repurchased $700 million of common stock in the first six months of 2018, an increase from $402 million in the same period of 2017, signaling a commitment to returning capital to shareholders.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-QQ2 FY2018filed July 25, 2018Financial Statements
Q2 FY2018 against Q2 FY2017
| Line item | Q2 FY2018Q2 FY2017 | Change |
|---|---|---|
| Revenue | $2.90B$2.64B | +9.9% |
| Operating Expenses | $1.87B$1.76B | +6.1% |
| Operating Income | $1.03B$872.00M | +17.7% |
| Interest Expense | $131.00M$140.00M | −6.4% |
| Net Income | $710.00M$497.00M | +42.9% |
| EPS (Basic) | $2.52$1.72 | +46.5% |
| EPS (Diluted) | $2.50$1.71 | +46.2% |
| Shares Outstanding (Basic) | 281.30M289.00M | −2.7% |
| Shares Outstanding (Diluted) | 283.70M291.20M | −2.6% |
05—Questions
Frequently Asked Questions
What were the main drivers of Norfolk Southern's revenue growth in the second quarter and first six months of 2018?
Revenue growth was primarily driven by a 6% increase in traffic volume in Q2 and 4% in the first six months, alongside average revenue per unit growth. This was supported by pricing gains, higher fuel surcharge revenues, and strong performance in key segments like Intermodal and Merchandise. Specific drivers included increased shipments of chemicals, agricultural products, and export coal, as well as continued conversion from trucking to rail for domestic intermodal traffic.
How did the company's profitability change, and what factors contributed to this change?
Profitability significantly improved, with net income increasing by 43% in Q2 and 36% in the first six months. This was due to strong top-line revenue growth, a record-low operating ratio of 64.6% in Q2 reflecting improved efficiency, and a lower effective income tax rate (23.2% in Q2, 22.6% year-to-date) resulting from the Tax Cuts and Jobs Act of 2017. While operating expenses increased, particularly fuel and purchased services, the revenue growth outpaced these increases.
What is the company's outlook for the remainder of the year, particularly regarding key commodity groups?
Norfolk Southern expects continued year-over-year revenue increases for the remainder of the year. Merchandise revenues are projected to grow due to higher average revenue per unit and volumes. Intermodal revenues are also expected to rise, driven by volume growth and higher average revenue per unit. Coal revenues are anticipated to increase, primarily from export market volumes and favorable pricing, despite ongoing shifts in utility coal demand.
What is the company doing with its cash flow, and what are its liquidity and leverage positions?
The company generated $1.8 billion in cash from operating activities in the first six months of 2018. A significant portion of this was used for investing activities ($786 million) and financing activities ($1.3 billion), which included $700 million for share repurchases and $408 million for dividends. The company maintained a strong liquidity position with $430 million in cash and cash equivalents at June 30, 2018, and its total debt-to-total capitalization ratio remained stable at 36.8%, indicating a healthy leverage profile.
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