10-QPeriod: Q2 FY2018

NORFOLK SOUTHERN CORP Quarterly Report for Q2 Ended Jun 30, 2018

Filed July 25, 2018For Securities:NSC

Summary

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% 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.

Financial Highlights

46 data points
Beta

Revenue

$2.90B

Net Income

$710.00M

24.5% Net Margin

EPS (Diluted)

$2.50

Total Assets

$35.79B

Cash & Equivalents

$430.00M

Free Cash Flow

$557.00M

Financial Statements
Beta
Revenue$2.90B
Operating Expenses$1.87B
Operating Income$1.03B
Interest Expense$131.00M
Net Income$710.00M
EPS (Basic)$2.52
EPS (Diluted)$2.50
Shares Outstanding (Basic)281.30M
Shares Outstanding (Diluted)283.70M

Key Highlights

  • 1Railway 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.
  • 2Net 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.
  • 3Diluted 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.
  • 4The railway operating ratio improved to a record-low 64.6% in Q2 2018, indicating enhanced operational efficiency.
  • 5Key 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).
  • 6Operating 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.
  • 7The 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.

Frequently Asked Questions

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.

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.

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.

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.