Remarks by:
James A. Squires
Executive Vice President Finance and Chief Financial Officer
Norfolk Southern Corporation
Thank you Mark. I’ll now provide a review of our overall financial results for the first quarter.
Operating Results
First Quarter 2009 vs. 2008
Let’s start with our operating results.
As Don described, railway operating revenues for the quarter were $1.9 billion, down $557 million, or 22 percent compared to last year.
Operating Results
First Quarter 2009 vs. 2008
Slide 3 displays our corresponding operating expenses, which decreased by $362 million, or 19%, for the quarter. The resulting income from railway operations was $383 million, down 34%. The substantial decrease in revenues, due primarily to lower volumes this quarter, resulted in an increased operating ratio of 80.3.
Railway Operating Expense Analysis
First Quarter 2009 vs. 2008
Turning to our expense detail, this slide presents the major components driving the $362 million decrease.
As you can see, all of our expense categories are down this quarter with the exception of depreciation, which reflects our ongoing investment in infrastructure. The largest reason for our overall expense decline was sharply lower fuel costs, which decreased by $245 million, or 61 percent.
Fuel Expense Analysis
First Quarter 2009 vs. 2008
This reduction was a combination of lower usage and lower prices. Our consumption for the quarter declined commensurate with the 20% traffic volume decline Don discussed. This consumption improvement accounted for approximately $70 million of the fuel expense decrease.
In addition, lower fuel prices, as illustrated on our next slide, provided a $175 million benefit.
Locomotive Diesel Fuel Average Prices
2007-2009
This graph shows our average price per gallon for each of the last 9 quarters. The $1.39 average price in the first quarter of 2009 was a 50% decline compared with the $2.79 price per gallon in the first quarter of 2008.
Railway Operating Expense Analysis
First Quarter 2009 vs. 2008
The next largest expense decline was compensation and benefits, which decreased by $66 million, or 9%.
Compensation and Benefits Analysis First Quarter 2009 vs. 2008
Slide 8 presents the major components driving this change.
First, stock-based and other incentive compensation fell $56 million, due largely to a $13 per share decrease in our stock price during the quarter, coupled with a $4 per share increase during the first quarter of 2008, as well as reduced performance relative to financial measures.
Second, volume-related labor was reduced by $47 million in the quarter. The reductions primarily reflect reduced train and engine crew hours and other labor in response to the lower volumes, as well as a significant reduction in overtime.
Somewhat offsetting these reductions were higher wage rates, up by $13 million, reflective of the agreement pay increase that went into effect last July. Pension benefits increased by $10 million, primarily due to reduced asset values. Also, medical benefits for active and retired employees were up $10 million.
Railway Operating Expense Analysis
First Quarter 2009 vs. 2008
Materials and other expenses decreased $40 million, or 17%.
Materials and Other Expense Analysis
First Quarter 2009 vs. 2008
Slide 10 provides additional details to define this decrease.
As you will recall, last year we reached a legal settlement related to the January 2005 Graniteville accident. The absence of expenses related to this settlement and favorable personal injury and other loss and damage claims development, combined to result in a $29 million year-over-year expense reduction.
The other large component of the decrease was a $12 million reduction related primarily to materials used in operations, as we have aligned engineering and freight-car material use to conform with lower traffic volumes. Other expenses include a mix of relatively small items.
Railway Operating Expense Analysis
First Quarter 2009 vs. 2008
Purchased services and rents decreased $20 million, or 5%, reflecting decreased volumes. Intermodal operating costs declined $14 million; transportation services, comprised primarily of automotive-related costs, fell $7 million; and, equipment rents decreased $6 million. Partially offsetting these declines, we incurred additional costs during the quarter preparing for positive train control requirements.
Railway Operating Expense Analysis
First Quarter 2009 vs. 2008
And finally, as reflected on slide 12, depreciation expense increased by $9 million, or 5 percent, reflecting both continuing investment in our network and equipment and the impact of higher replacement costs.
Other Income – Net
First Quarter 2009 vs. 2008
Now let’s turn to our non-operating items on slide 13. Corporate-owned life insurance contributed a net $8 million. In addition, coal royalties were up $6 million. All other non-operating items were a net unfavorable of $4 million.
Income Before Income Taxes
First Quarter
As illustrated on slide 14, income before income taxes decreased $193 million, or 41%, largely related to lower operating income.
Income Taxes
First Quarter
Income taxes for the first quarter were $106 million, for an effective tax rate of 37.5%, which compares with $185 million, or an effective rate of 38.9%, last year.
Net Income and Diluted Earnings per Share
First Quarter
Slide 16 depicts our bottom line results. First quarter net income was $177 million, a decrease of $114 million, or 39 percent.
Diluted earnings per share were $0.47, which was 29 cents per share, or 38 percent, below last year.
Cash Flows
First Quarter 2009 vs. 2008
Now turning to cash flows, cash provided by operating activities was down; however, free cash flow generated for the period was a positive $111 million. While we did not acquire shares this quarter, dividends were up reflecting the $0.02 per share increase approved this year in January, as well as the $0.03 per share increase approved in July last year. As you will recall, cash and cash equivalents at the end of 2008 were at $618 million. This balance at the end of March was $884 million, and reflects, in part, the cash provided from our $500 million debt offering in January; some of this cash was used to repay $200 million of Accounts Receivable borrowings in January.
Subsequent to the quarter end, we repaid $400 million in term debt and we have no significant remaining maturities for the balance of the year.
Thank you for your attention and now I will turn the program over to our President and CEO, Wick Moorman. |
