Remarks by:
James A. Squires
Executive Vice President Finance and Chief Financial Officer
Norfolk Southern Corporation
Thank you Don. I’ll now provide a review of our overall financial results for the first quarter.
Income From Railway Operations First Quarter 2008 vs. 2007
Slide 2 is a snapshot of our operating results.
As Don described, record railway operating revenues were up 11 percent from last year. Operating expenses rose 12 percent resulting in a $50 million, or 9 percent, improvement in operating income.
The railway operating ratio for the quarter was 76.9 compared with 76.5 last year, an increase of .4 percentage points.
Income From Railway Operations 2004 -2008
The next slide depicts first quarter operating results for the past five years. As you can see, 2008 was a record first quarter, with a 9 percent increase in operating income, despite the effects of a legal settlement reached earlier this month.
Turning to our operating expense detail…
Railway Operating Expenses Analysis First Quarter 2008 vs. 2007
Slide 4 shows the year-over-year change by major expense category.
As you would expect, the largest increase was in fuel, which rose $156 million, or 63 percent.
Fuel Expense Analysis First Quarter 2008 vs. 2007
The next slide illustrates the components of the fuel increase.
Higher prices resulted in an additional $155 million of costs. Our average price per gallon of diesel fuel was $2.79, a 65 percent increase compared with 2007. There was a slight increase in consumption related to the mix of traffic.
Railway Operating Expenses Analysis First Quarter 2008 vs. 2007
Turning back to our expense categories, materials and other rose $26 million, or 12 percent.
The two primary components are listed on the next slide.
Materials and Other Expense Analysis First Quarter 2008 vs. 2007
As described in our April 7 press release, we reached a legal settlement related to the January 2005 Graniteville accident. This settlement, and offsetting favorable personal injury and environmental claims development, combined to result in a $13 million year-over-year expense increase, which reduced diluted earnings per share by 2 cents.
The other component of the increase was in materials costs which rose $12 million related to locomotive and car repair materials. Nearly half of this increase was a direct result of higher prices for raw materials such as steel. Additionally, while our internal usage of car repair materials is up, you will see in a couple of slides that we had fewer third party car repairs.
Railway Operating Expenses Analysis First Quarter 2008 vs. 2007
The next largest expense increase was in compensation and benefits which rose $24 million, or 4 percent.
Compensation and Benefits Analysis First Quarter 2008 vs. 2007
Slide 9 lists the two main reasons for the increase. First, stock-based compensation rose $14 million due to this year’s stock price increase and the combination of a higher earnout in ‘08 and a lower earnout in ‘07.
Second, higher wage rates added $10 million to compensation costs.
Railway Operating Expenses Analysis First Quarter 2008 vs. 2007
Continuing on in our expense categories, the next slide shows the $9 million, or 2 percent, decrease in purchased services and rents. This was due to lower equipment rents related to the decline in traffic volume and also to fewer third party freight car repairs.
Other Income – Net First Quarter 2008 vs. 2007
Now let’s turn to our non-operating items.
As you will recall, the synthetic fuel tax credits expired at the end of 2007. Therefore, we no longer have this expense as a component of non-operating items AND we no longer have the tax benefit associated with these credits.
The second non-operating item with a significant variance is corporate-owned life insurance, which decreased $21 million. As you are aware, the underlying investment returns can be volatile in this area. The $18 million net expense from corporate-owned life insurance this quarter resulted in a 4 cent reduction to diluted earnings per share.
And finally, interest income declined $10 million as a result of lower cash balances.
Turning to the next slide…
Income Before Income Taxes First Quarter
The combination of the $50 million increase in income from railway operations and a $6 million decrease in interest expense resulted in first quarter income before taxes of $476 million, which was $56 million, or 13 percent, above last year.
Income Taxes First Quarter
Total income taxes for the quarter were $185 million compared with $135 million last year. The higher effective tax rate of nearly 39percent, compared with a rate of 32 percent in 2007, was driven primarily by the absence of the synthetic fuel tax credits.
As shown on Slide 14…
Net Income and Diluted Earnings per Share First Quarter
Net income for the quarter was $291 million, an increase of $6 million, or 2 percent, compared with the $285 million earned in the first quarter of last year.
Diluted earnings per share for the quarter were 76 cents, which was 5 cents, or 7 percent, more than last year.
Cash Provided by Operations 2004 -2008
Turning to the next slide, you can see that these earnings resulted in strong cashflows for the quarter. Operating cashflows exceeded $600 million and set a first quarter record.
Cumulative Share Repurchases
As depicted on slide 16, a portion of these strong cashflows was used to repurchase stock. In the first quarter of 2008, we bought back 5.6 million shares for $276 million dollars. This brings our total purchases since inception to 51 million shares at a cost of $2.4 billion.
Thank you for your attention. And now I’ll turn the program back to Wick.
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