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 financial results for the third quarter.
Operating Results - Third Quarter 2008 vs. 2007
Let’s start with our operating results on slide 2.
As Don described, railway operating revenues were $2.9 billion, up $541 million, or 23 percent. Also as Don mentioned, the quarter’s revenue includes $22 million for one-time adjustments related to our coal business. With respect to the timing-effect of our fuel surcharges, as you know many of our contracts have a 60-day lag. Therefore the quarter includes a $55 million favorable timing-effect. However, for the nine months this lag effect is unfavorable.
Operating Results - Third Quarter 2008 vs. 2007
Slide 3 shows you the corresponding operating expenses which rose by 20 percent. The resulting railway profitability of $894 million is another record-breaking quarter, and the 69.1 operating ratio is two points better than last year.
Railway Operating Expense Analysis - Third Quarter 2008 vs. 2007
Slide 4 exhibits the year-over-year change by major expense category.
The largest increase was once again in fuel, which rose $185 million, or 64 percent, and has been a consistent theme in 2008.
Fuel Expense Analysis - Third Quarter 2008 vs. 2007
Slide 5 breaks down the fuel expense components. Consumption decreased slightly. As you would expect, it was higher prices that drove the increase.
Diesel Fuel Price Analysis - Third Quarter 2008 vs. 2007
Delving deeper into the price analysis, slide 6 shows the components of diesel fuel price comprised of crude oil (in green) and other costs (in gold). These other costs include crack spread, transportation costs and availability premium. What we see here is that while crude oil prices rose 57% compared to 2007, our other costs per gallon increased by 103%. The result is that the average price per gallon rose 65%. Some of this inflated spread in diesel fuel prices versus crude reflects supply constraints in the Gulf Coast region due to hurricane activity. NS sources about 50% of its diesel fuel from the Gulf Coast market.
Railway Operating Expense Analysis - Third Quarter 2008 vs. 2007
The next largest expense increase was in compensation and benefits which rose $89 million, or 14 percent.
Compensation and Benefits Analysis - Third Quarter 2008 vs. 2007
Slide 8 presents the major components driving this increase. First, $28 million relates to the two lump-sum payments that are in our new labor contract with our Locomotive Engineers. This amount includes related payroll taxes. The new agreement covers approximately 5,000 employees and provides each engineer the opportunity for an annual bonus payment based on company financial and service performance metrics and, for the first time, his or her work availability.
Second, the accrual for incentive compensation increased commensurate with the strong performance reflected this quarter.
Third, increased wage rates of $18 million reflect higher contract labor rates.
Next, stock-based compensation rose $9 million in the quarter due primarily to an uptick in price as of September 30th.
Finally, payroll taxes increased $6 million.
Railway Operating Expense Analysis - Third Quarter 2008 vs. 2007
Slide 9 depicts the $28 million, or 7%, rise in purchased services and rents. This increase includes a mix of relatively small items, including increased intermodal terminal and transportation operating costs, as well as increased professional and legal services. These were partly offset by lower equipment rents. A continued strong focus on asset utilization enabled a 10% decline in equipment rents.
Railway Operating Expense Analysis - Third Quarter 2008 vs. 2007
The next largest expense increase was in materials and other, which rose $19 million, or 11 percent. The primary components are higher maintenance-related material costs, including higher prices for materials, and the absence of a favorable 2007 adjustment.
Railway Operating Expense Analysis - Third Quarter 2008 vs. 2007
And finally, depreciation expense increased by $7 million, or 4 percent, reflecting continuing investment in our network and equipment.
Other Income - Net - Third Quarter 2008 vs. 2007
Now let’s turn to our non-operating items.
First, gains on property sales and investments were $20 million lower this quarter.
Second, synthetic fuel investments, the tax benefits for which expired at the end of 2007, contributed $18 million to the change.
Third, interest on tax deficiencies added $11 million to the change as the IRS concluded its review of our 2004 and 2005 tax returns.
A note on interest expense on debt, since 98% of our debt is under fixed rates, we don’t anticipate interest rate volatility to impact us.
Income Before Income Taxes - Third Quarter
Slide 13 depicts our pre-tax results. Income before income taxes increased 36 percent.
Income Taxes - Third Quarter
Income taxes for the third quarter, as shown on slide 14, were $302 million, which compares with $219 million last year. The effective tax rate of 36.7 percent compares with a rate of 36.2 percent in 2007. The effective tax rate increase was largely due to the absence of synthetic fuel-related credits, offset by both an Illinois tax law change that increased deferred taxes by $19 million in the third quarter of 2007, and the tax benefit from the donation of a conservation easement for 12,000 acres in South Carolina.
The slightly lower effective tax rate this quarter compared to the second quarter relates largely to the conservation easement donation.
Net Income and Diluted Earnings per Share - Third Quarter
Slide 15 depicts our bottom line results. Net income for the quarter was a record-breaking $520 million, an increase of $134 million, or 35 percent.
Diluted earnings per share for the quarter was $1.37, which was 40 cents per share, or 41 percent, more than last year. The greater percentage increase in EPS is reflective of our share repurchase program, which is updated for you on our next slide.
Cumulative Share Repurchases
Third quarter share repurchases totaled 6.2 million shares and $405 million. Over the past 3 years we have repurchased 60.5 million shares for $3.1 billion.
Dividends
As shown on slide 17, we will pay dividends approximating $1.1 billion to our owners for this three-year period. When added to our share repurchase program, by the end of this year we will have returned over $4 billion to our shareholders.
Thank you for your attention and I will now turn the program back to Wick.
Back to main page >> |
Version 1.2.7