Locomotive costs dent Norfolk Southern’s first-quarter profits

A photograph of a train on the dock of a port. The train is next to the water.

The costs associated with Norfolk Southern’s (NYSE: NSC) actions to divest a portion of its locomotive fleet resulted in lower net profits for the company in the first quarter.

First-quarter net income was $381 million, or $1.47/diluted share, compared with $677 million, or $2.51/diluted share, in the first quarter of 2019. The 2020 first-quarter results take into account a $385 million non-cash locomotive rationalization charge related to the ongoing disposition and marketing of excess locomotives, Norfolk Southern (NS) said. NS attributed its decision to divest a portion of its locomotive fleet to its deployment of precision scheduled railroading (PSR), an operating model that seeks to streamline operations. 

Without the $385 million charge, NS’ first-quarter net income on a non-GAAP (generally accepted accounting principles) basis was $669 million, or $2.58/diluted share.

In the first quarter, operating revenues fell on lower carload volumes. NS’ operating revenues dropped 8% to $2.6 billion on an 11% dip in rail volumes. Operating expenses also rose in part because of the $385 million non-cash charge related to the locomotives. Operating expenses were $2.1 billion, compared with $1.9 billion in the first quarter of 2019. On a non-GAAP basis, operating expenses were $1.7 billion. 

Source: NS

The operating ratio (OR) for the first quarter was 78.4%, compared with 66% a year ago. On a non-GAAP basis, OR was 63.7%. A lower OR can imply a company’s improved financial performance.

Meanwhile, service metrics improved in the first quarter, with terminal dwell, or the amount of time a train spends at a terminal, down 16% to 18.6 hours, and train speed up 10% to 23.8 miles per hour. 

Source: NS

“During the first quarter, Norfolk Southern’s determination to transform our operations once again produced all-time best service delivery levels accompanied by productivity improvements, despite volumes being impacted by weak energy prices and the onset of the COVID-19 pandemic,” said Jim Squires, Norfolk Southern chairman, president and CEO. “While it is unclear how long economic activity will remain suppressed, we are dedicated to serving our customers and keeping our employees healthy and safe while navigating the downturn so that we can emerge strong and resilient for our shareholders. I am extremely proud of the commitment and strength the Norfolk Southern team has displayed by keeping our nation’s freight moving during this challenging start to 2020 while also enhancing our financial position.”

Second-quarter volumes have fallen 30% quarter-to-date across all commodity segments, which sets up “a very soft revenue outlook” for the quarter. As a result of this and the continued economic uncertainty related to the COVID-19 pandemic, NS is withdrawing its financial guidance for the year.

“While the COVID-19 pandemic will affect business volumes for the year, the PSR implementation that our team is executing upon will generate significant operating expense savings in 2020,” said NS Chief Financial Officer Mark R. George. “In this challenging environment our team is doubling down on examination of our structural cost opportunities to ensure that we remain positioned to drive enhanced profitability for the long term.”