Remarks by:
James A. Squires
Executive Vice President Finance and Chief Financial Officer
Norfolk Southern Corporation
Second Quarter Results 2008
Thank you Don. I’ll now provide a review of our overall financial results for the second quarter.
Income From Railway Operations
Second Quarter 2008 vs. 2007
Slide 2 is a snapshot of our operating results.
As Don described, record railway operating revenues were up 16 percent over last year. Operating expenses also rose by 16 percent resulting in record-breaking railway profitability of $799 million for the quarter.
The operating ratio was comparable to last year’s.
Railway Operating Expenses Analysis
Second Quarter 2008 vs. 2007
Slide 3 shows the year-over-year change by major expense category.
As you would expect, the largest increase was in fuel, which rose $212 million, or 76 percent.
Fuel Expense Analysis
Second Quarter 2008 vs. 2007
The next slide illustrates the components of the fuel increase.
Higher prices resulted in an additional $216 million of expenses. Our average price per gallon of diesel fuel was $3.58, an 81 percent increase compared with 2007. The decline in traffic volume resulted in a $4 million reduction in consumption.
Railway Operating Expenses Analysis
Second Quarter 2008 vs. 2007
The next largest expense increase was in compensation and benefits which rose $33 million, or 5 percent.
Compensation and Benefits Analysis
Second Quarter 2008 vs. 2007
Slide 6 lists the reasons for the increase.
Incentive compensation, which covers nonunion employees as well as locomotive engineers and dispatchers, rose by $19 million due to a higher projected payout.
Secondly, stock based compensation added $13 million primarily due to a stock price increase of over $8 during the quarter.
Payroll taxes had a $9 million comparative headwind due to a favorable settlement in the second quarter of 2007.
Other items resulted in a net decrease of $8 million.
Railway Operating Expenses Analysis
Second Quarter 2008 vs. 2007
Continuing on in our expense categories, the next slide highlights the $20 million, or 5 percent, increase in purchased services and rents.
This increase was driven by a variety of small items including rising intermodal terminal costs, higher roadway repair costs and increased professional and legal services. These were somewhat offset by lower equipment rents.
Railway Operating Expenses Analysis
Second Quarter 2008 vs. 2007
Materials and other expenses rose $6 million, or 3 percent, as a result of higher costs associated with derailments and material for locomotive and freight car repairs. These amounts were partially offset by favorable personal injury claims development and lower environmental costs.
Other Income – Net
Second Quarter 2008 vs. 2007
Now let’s turn to our non-operating items.
First, synthetic fuel investments, the tax benefits for which expired at the end of 2007, contributed $26 million to the change.
Second, corporate-owned life insurance decreased $11 million, including higher borrowings and lower returns under the program.
Third, interest on tax deficiencies contributed $9 million to the change.
Fourth, as you’ve seen in recent quarters, our interest income is down $7 million primarily due to lower rates.
And finally, gains on property sales were $5 million higher this quarter.
Turning to the next slide…
Income Before Income Taxes
Second Quarter
The combination of the $109 million increase in income from railway operations and the $25 million increase in other income resulted in a record $733 million of income before income taxes, which is 22 percent above last year.
Income Taxes
Second Quarter
Total income taxes for the quarter were $280 million compared with $206 million last year. The higher effective tax rate of 38.2 percent, compared with a rate of 34.3 percent in 2007, was driven primarily by the absence of the synthetic fuel tax credits.
As shown on Slide 12…
Net Income and Diluted Earnings per Share
Second Quarter
Net income for the quarter was a record $453 million, an increase of $59 million, or 15 percent, compared with the $394 million earned in the second quarter of last year.
Diluted earnings per share for the quarter was a record $1.18, which was 20 cents, or 20 percent, more than last year.
Cumulative Share Repurchases
Slide 13 provides an update on our share repurchase program. In the second quarter of 2008, we bought back 3.4 million shares for $218 million dollars. This brings our total purchases since inception to 54.4 million shares at a cost of $2.7 billion.
Thank you for your attention. And now I’ll turn the program back to Wick.
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