James A. Squires
Executive Vice President Finance
Norfolk Southern Corporation
Thank you Don. I’ll now provide a review of our overall financial results for the first quarter.
Net Income and Diluted Earnings per Share
Net income for the quarter was $285 million, a decrease of $20 million, or 7 percent, compared with the $305 million earned in the first quarter last year.
Diluted earnings per share for the first quarter were 71 cents, which was one cent per share, or 1 percent, less than last year. The more modest decrease in earnings per share reflects the impact of our share repurchase program, on which Wick will provide an update in a moment.
Income from Railway Operations
This is a snapshot of our operating results. As Don described, railway operating revenues declined 2 percent from last year. Operating expenses also declined 2 percent resulting in a $23 million, or 4 percent, reduction in operating income.
The railway operating ratio for the quarter was 76.5 compared with 76.1 last year, an increase of 0.4 percentage points. We estimate that the more severe winter weather this year added about $10 million to our operating expenses and 0.4 percentage points to our operating ratio.
Now, let’s take a look at our operating expenses in detail.
Railway Operating Expense Analysis
The largest decrease was in compensation and benefits, which declined $40 million, or 6 percent.
Compensation and Benefits Analysis
This decrease was driven by a number of items as shown on this slide: First, you’ll recall that last year’s quarter included the effect of grants and retirement agreements with our former CEO and CMO. Second, performance based compensation decreased $17 million, as the bar has been set higher for our bonus calculation this year. Third, a modest increase in our stock price during the first quarter of this year compared with the $9.24 increase last year resulted in $14 million less in expenses. You will recall that each dollar increase in our share price adds about $1.5 million to our stock-based compensation expenses. These decreases were partially offset by a $10 million increase for health and welfare benefits and an increase of $4 million in wage rates.
Railway Operating Expense Analysis - First Quarter 2007 vs. 2006
The next largest expense decrease was for diesel fuel, which declined $12 million, or 5 percent.
Diesel Fuel Cost Analysis
The absence of any hedge benefits, which reduced last year’s first quarter expenses by $15million, was almost entirely offset by a 5percent drop in the average price per gallon, which reduced diesel fuel costs by $14 million. Also, lower consumption in the first quarter of 2007 resulted in an additional $13 million reduction.
Railway Operating Expense Analysis
Materials, services and rents decreased $6 million, or 1 percent, in the first quarter compared with last year, as lower equipment rents and the absence of purchased services associated with hurricane recovery traffic more than offset higher maintenance costs.
Depreciation expense increased $9 million, or 5 percent, over last year, reflecting continuing investment in our network and equipment.
Other expenses increased by $17million, or 28 percent, primarily due to higher franchise, sales and use, and property taxes.
Now let’s turn to our non-operating items.
Other income - net for the quarter was $7 million compared with $35 million last year, a decline of $28 million.
Most of this decrease resulted from lower gains on sales of property and investments that were $17 million below 2006. We do experience some variability in gains on property sales from quarter to quarter and you’ll recall that last year we had a sale of a large parcel of land in Georgia.
Expenses related to our synthetic fuel investments increased $6 million over last year reflecting a lower expected phase-out in 2007 compared with 2006.
All other was a decrease of $5 million.
Interest expense on debt was $5 million lower than last year, largely due to less outstanding debt.
Synthetic Fuel Investments
As you know, NS has invested in companies that own and operate facilities that produce synthetic fuel from coal and thereby generate tax credits. This slide shows amounts recognized during the first quarter related to these investments. As you can see, the net benefit from these investments was slightly above the amount recognized in the first quarter of last year.
You will also remember that these credits are subject to reduction as oil prices rise. As of the end of the first quarter, based on oil prices to date and expected future prices indicated by the forward curve, we estimated a full-year phase-out of 15 percent. Of course, this estimate may change as the year progresses; but if it holds true, we would expect to be recognizing comparable amounts in the remaining quarters.
Income Before Taxes
Turning back to our results, the combination of the $23 million decline in income from railway operations and the $23 million decrease in nonoperating items resulted in first quarter income before income taxes of $420 million, which was $46 million, or 10 percent, below last year.
Provision for Income Taxes
The provision for income taxes for the first quarter was $135 million compared with $161 million last year. The effective tax rate was 32.1 percent, compared with 34.5 percent in 2006. We still expect our full year effective tax rate to be around 34 percent.
Thank you for your attention and I will now turn the program back to Wick.
Remarks by Wick Moorman >>