| Document Information | |
| 3 Months Ended
Mar. 31, 2010 | |
| Document Type | 10-Q |
| Amendment Flag | false |
| Document Period End Date | 2010-03-31 |
| Document Fiscal Year Focus | 2,010 |
| Document Fiscal Period Focus | Q1 |
| Entity Information | |
| 3 Months Ended
Mar. 31, 2010 | |
| Entity Registrant Name | Norfolk Southern Corporation |
| Entity Central Index Key | 0000702165 |
| Current Fiscal Year End Date | --12-31 |
| Entity Filer Category | Large Accelerated Filer |
| Entity Common Stock, Shares Outstanding | 370,055,972 |
| Consolidated Statements of Income (Unaudited) (USD $) | ||
| In Millions, except Per Share data | 3 Months Ended
Mar. 31, 2010 | 3 Months Ended
Mar. 31, 2009 |
| Railway operating revenues | $2,238 | $1,943 |
| Railway operating expenses: | ||
| Compensation and benefits | 699 | 639 |
| Purchased services and rents | 335 | 355 |
| Fuel | 254 | 159 |
| Depreciation | 204 | 207 |
| Materials and other | 191 | 200 |
| Total railway operating expenses | 1,683 | 1,560 |
| Income from railway operations | 555 | 383 |
| Other income, net | 20 | 17 |
| Interest expense on debt | 119 | 117 |
| Income before income taxes | 456 | 283 |
| Provision for income taxes | 199 | 106 |
| Net income | $257 | $177 |
| Per share amounts | ||
| Basic | 0.69 | 0.48 |
| Diluted | 0.68 | 0.47 |
| Dividends | 0.34 | 0.34 |
| Consolidated Balance Sheets (Unaudited) (USD $) | ||
| In Millions | Mar. 31, 2010
| Dec. 31, 2009
|
| Assets | ||
| Cash and cash equivalents | $1,161 | $996 |
| Short-term investments | 225 | 90 |
| Accounts receivable, net | 867 | 766 |
| Materials and supplies | 180 | 164 |
| Deferred income taxes | 145 | 142 |
| Other current assets | 68 | 88 |
| Total current assets | 2,646 | 2,246 |
| Investments | 2,166 | 2,164 |
| Properties less accumulated depreciation | 22,697 | 22,643 |
| Other assets | 221 | 316 |
| Total assets | 27,730 | 27,369 |
| Liabilities and stockholders' equity | ||
| Accounts payable | 987 | 974 |
| Short-term debt | 0 | 100 |
| Income and other taxes | 252 | 109 |
| Other current liabilities | 306 | 232 |
| Current maturities of long-term debt | 648 | 374 |
| Total current liabilities | 2,193 | 1,789 |
| Long-term debt | 6,379 | 6,679 |
| Other liabilities | 1,794 | 1,801 |
| Deferred income taxes | 6,800 | 6,747 |
| Total liabilities | 17,166 | 17,016 |
| Stockholders' equity: | ||
| Common stock $1.00 per share par value, 1,350,000,000 shares authorized; outstanding 370,055,972 and 369,019,990 shares, respectively, net of treasury shares | 371 | 370 |
| Additional paid-in capital | 1,871 | 1,809 |
| Accumulated other comprehensive loss | (834) | (853) |
| Retained income | 9,156 | 9,027 |
| Total stockholders' equity | 10,564 | 10,353 |
| Total liabilities and stockholders' equity | $27,730 | $27,369 |
| Consolidated Balance Sheets (Parenthetical) (Unaudited) (USD $) | ||
| Mar. 31, 2010
| Dec. 31, 2009
| |
| Common Stock, Par or Stated Value Per Share | $1 | $1 |
| Common Stock, Shares Authorized | 1,350,000,000 | 1,350,000,000 |
| Common Stock, Shares, Outstanding, net of treasury shares | 370,055,972 | 369,019,990 |
| Cosolidated Statements of Cash Flows (Unaudited) (USD $) | ||
| In Millions | 3 Months Ended
Mar. 31, 2010 | 3 Months Ended
Mar. 31, 2009 |
| Cash flows from operating activities | ||
| Net income | $257 | $177 |
| Reconciliation of net income to net cash provided by operating activities: | ||
| Depreciation | 206 | 209 |
| Deferred income taxes | 40 | 16 |
| Gains and losses on properties | (1) | (2) |
| Changes in assets and liabilities affecting operations: | ||
| Accounts receivable | (101) | 39 |
| Materials and supplies | (16) | 3 |
| Other current assets | 17 | 35 |
| Current liabilities other than debt | 209 | (107) |
| Other, net | 147 | (16) |
| Net cash provided by operating activities | 758 | 354 |
| Cash flows from investing activities | ||
| Property additions | (256) | (243) |
| Property sales and other transactions | 0 | 1 |
| Investments, including short-term | (155) | 0 |
| Investment sales and other transactions | 51 | (2) |
| Net cash used in investing activities | (360) | (244) |
| Cash flows from financing activities | ||
| Dividends | (126) | (125) |
| Common stock issued, net | 21 | 6 |
| Proceeds from borrowings | 0 | 500 |
| Debt repayments | (128) | (225) |
| Net cash provided by (used in) financing activities | (233) | 156 |
| Net increase in cash and cash equivalents | 165 | 266 |
| Cash and cash equivalents | ||
| At beginning of year | 996 | 618 |
| At end of period | 1,161 | 884 |
| Supplemental disclosure of cash flow information | ||
| Interest (net of amounts capitalized) | 50 | 49 |
| Income taxes (net of refunds) | $0 | $23 |
| Stock-Based Compensation (Unaudited) | |
| 3 Months Ended
Mar. 31, 2010 | |
| Stock-Based Compensation | 1. Stock-Based Compensation In the first quarter of 2010, a committee of non-employee directors of Norfolk Southerns Board of Directors granted stock options, restricted stock units and performance share units (PSUs) pursuant to the Long-Term Incentive Plan (LTIP) and granted stock options pursuant to the Thoroughbred Stock Option Plan (TSOP) as discussed below. Stock-based compensation expense was $40 million during the first quarter of 2010 and $15 million during the same period of 2009. The total tax effects recognized in income in relation to stock-based compensation were net benefits of $13 million and $3 million for the quarters ended March 31, 2010 and 2009, respectively. Stock Options In the first quarter of 2010, 824,900 options were granted under the LTIP and 259,800 options were granted under the TSOP. In each case, the grant price was $47.76, which was the greater of the average fair market value of Norfolk Southern common stock (Common Stock) or the closing price of the Common Stock on the effective date of the grant, and the options have a term of ten years. The options granted under the LTIP and TSOP in 2010 may not be exercised prior to the fourth and third anniversaries of the date of grant, respectively. Holders of the options granted under the LTIP who remain actively employed receive cash dividend equivalent payments for four years in an amount equal to the regular quarterly dividends paid on Common Stock. Dividend equivalent payments are not made on TSOP options. The fair value of each option award in 2010 was measured on the date of grant using a lattice-based option valuation model. Expected volatilities are based on implied volatilities from traded options on Common Stock and historical volatility of Common Stock. NS uses historical data to estimate option exercises and employee terminations within the valuation model. The average expected option life is derived from the output of the valuation model and represents the period of time that options granted are expected to be outstanding. The average risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant. A dividend yield of zero was used for LTIP options during the four-year period in which dividend equivalent payments are made. A dividend yield of 2.89% was used for LTIP options for periods where no dividend equivalent payments are made as well as for TSOP options which do not receive dividend equivalents. The assumptions for the 2010 LTIP and TSOP grants are shown in the following table: 2010 Expected volatility range 29% - 32% Average expected volatility 32% Average expected option life 8.3 years Average risk-free interest rate 3.63% LTIP per-share grant-date fair value $18.54 TSOP per-share grant-date fair value $14.91 For the first three months of 2010, options relating to 592,110 shares were exercised, yielding $12 million of cash proceeds and $7 million of tax benefit recognized as additional paid-in capital. For the first three months of 2009, options relating to 283,961 shares were exercised, yielding $ |
| Income Taxes (Unaudited) | |
| 3 Months Ended
Mar. 31, 2010 | |
| Income Taxes | 2. Income Taxes During the first quarter of 2010, the Patient Protection and Affordable Care Act, and the Health Care and Education Reconciliation Act of 2010 were signed into law. Provisions of the Acts eliminate, after 2012, the tax deduction available for reimbursed prescription drug expenses under the Medicare Part D retiree drug subsidy program. As required by ASC 740, Income Taxes, NS recorded a $27 million charge to deferred tax expense. There have been no material changes to the balance of unrecognized tax benefits reported at December 31, 2009. |
| Earnings Per Share (Unaudited) | |
| 3 Months Ended
Mar. 31, 2010 | |
| Earnings Per Share | 3. Earnings Per Share The following tables set forth the calculations of basic and diluted earnings per share: Three Months Ended March 31, 2010 2009 ($ in millions except per share, shares in millions) Basic earnings per share: Income available to common stockholders $ 255 $ 175 Weighted-average shares outstanding 369.5 366.2 Basic earnings per share $ 0.69 $ 0.48 As required under the provisions of ASC 260-10, Earnings Per Share, income available to common stockholders for the three months ended March 31, 2010 and 2009 reflects a $2 million reduction from net income for the effect of dividend equivalent payments made to holders of stock options. Three Months Ended March 31, 2010 2009 ($ in millions except per share, shares in millions) Diluted earnings per share: Income available to common stockholders $ 255 $ 175 Weighted-average shares outstanding per above 369.5 366.2 Dilutive effect of outstanding options and share-settled awards (as determined by the application of the two-class or treasury stock method, as appropriate) 5.4 4.9 Adjusted weighted-average shares outstanding 374.9 371.1 Diluted earnings per share $ 0.68 $ 0.47 As required under the provisions of ASC 260-10, diluted earnings per share for the three months ended March 31, 2010 and 2009, was calculated under the more dilutive two-class method (as compared to the treasury stock method) and accordingly, income available to common stockholders for both periods reflects a $2 million reduction from net income for dividend equivalent payments. The diluted calculations exclude options having exercise prices exceeding the average market price of Common Stock as follows: zero in 2010 and 5.6 million in 2009. |
| Stockholders' Equity (Unaudited) | |
| 3 Months Ended
Mar. 31, 2010 | |
| Stockholders' Equity | 4. Stockholders Equity Common stock is reported net of shares held by consolidated subsidiaries of Norfolk Southern, which at March 31, 2010, and December 31, 2009, amounted to 20,414,388 and 20,443,337 shares, respectively, with a cost of $19 million for both periods. |
| Stock Repurchase Program (Unaudited) | |
| 3 Months Ended
Mar. 31, 2010 | |
| Stock Repurchase Program | 5 . Stock Repurchase Program In March 2007, NS Board of Directors amended NS share repurchase program, increasing the authorized amount of share repurchases from 50 million to 75 million shares and shortening the term of the program from 2015 to 2010. The timing and volume of purchases is guided by managements assessment of market conditions and other pertinent facts. Any near-term purchases under the program are expected to be made with internally generated cash or proceeds from borrowings. There were no shares repurchased under this program in the first quarter of 2010 and 2009. Since inception of this program in 2006, NS has repurchased and retired 64.7 million shares of Common Stock at a total cost of $3.3 billion. |
| Investments (Unaudited) | |
| 3 Months Ended
Mar. 31, 2010 | |
| Investments | 6. Investments Short-Term Investments As of March 31, 2010 and December 31, 2009, with average maturities is presented below: March 31, December 31, 2010 2009 ($ in millions) Short-term investments with average maturities: Federal government notes, 7 months $ 110 $ 60 Corporate notes, 11 months 25 20 Other short-term investments, 6 months 90 10 Total short-term investments $ 225 $ 90 Investment in Conrail, Inc. Through a limited liability company, Norfolk Southern and CSX Corporation (CSX) jointly own Conrail Inc. (Conrail), whose primary subsidiary is Consolidated Rail Corporation (CRC). NS has a 58% economic and 50% voting interest in the jointly owned entity, and CSX has the remainder of the economic and voting interests. NS investment in Conrail was $930 million at March 31, 2010, and $924 million at December 31, 2009. CRC owns and operates certain properties (the Shared Assets Areas) for the joint and exclusive benefit of Norfolk Southern Railway Company (NSR) and CSX Transportation, Inc. (CSXT). The costs of operating the Shared Assets Areas are borne by NSR and CSXT based on usage. In addition, NSR and CSXT pay CRC a fee for access to the Shared Assets Areas. Purchased services and rents and Fuel include expenses for the use of the Shared Assets Areas totaling $29 million in the first quarter of 2010 and $31 million in the first quarter of 2009. NS equity in the earnings of Conrail, net of amortization, included in Other income net was $6 million and $9 million in the first quarters of 2010 and 2009, respectively. Accounts payable includes $124 million at March 31, 2010, and $104 million at December 31, 2009, due to Conrail for the operation of the Shared Assets Areas. In addition, Other liabilities includes $133 million at both March 31, 2010, and December 31, 2009, for long-term advances from Conrail, maturing 2035, that bear interest at an average rate of 4.4%. Investment in Pan Am Southern During the second quarter of 2009, NS and Pan Am Railways, Inc. (Pan Am) formed a joint venture, Pan Am Southern LLC (PAS), a railroad company in which each has a 50% equity interest. As of March 31, 2010, NS had contributed cash and other property with a combined value of approximately $85 million and committed to contribute an additional $55 million in cash over the next two years. A significant portion of NS contributions has and will continue to be used for capital improvements to the PAS Lines and the related construction of new intermodal and automotive terminals. |
| Debt (Unaudited) | |
| 3 Months Ended
Mar. 31, 2010 | |
| Debt | 7. Debt In the first quarter of 2010, NS repaid $100 million under its accounts receivable securitization facility. At March 31, 2010, and December 31, 2009, the amounts outstanding under the facility were $100 million (at an average variable interest rate of 1.89%) and $200 million (at an average variable interest rate of 2.22%), respectively. NS has authority from its Board of Directors to issue an additional $500 million of debt or equity securities through public or private sale. |
| Pensions and Other Postretirement Benefits (Unaudited) | |
| 3 Months Ended
Mar. 31, 2010 | |
| Pensions and Other Postretirement Benefits | 8. Pensions and Other Postretirement Benefits Norfolk Southern and certain subsidiaries have both funded and unfunded defined benefit pension plans covering principally salaried employees. Norfolk Southern and certain subsidiaries also provide specified health care and death benefits to eligible retired employees and their dependents. Under the present plans, which may be amended or terminated at NS option, a defined percentage of health care expenses is covered, reduced by any deductibles, co-payments, Medicare payments and, in some cases, coverage provided under other group insurance policies. Pension and Other Postretirement Benefit Cost Components Three months ended March 31, 2010 2009 2010 2009 Pension Benefits Other Benefits ($ in millions) Service cost $ 7 $ 7 $ 4 $ 5 Interest cost 24 25 15 14 Expected return on plan assets (36) (39) (4) (4) Amortization of prior service cost 1 1 -- -- Amortization of net losses 12 6 12 8 Net cost $ 8 $ -- $ 27 $ 23 |
| Comprehensive Income (Unaudited) | |
| 3 Months Ended
Mar. 31, 2010 | |
| Comprehensive Income | 9. Comprehensive Income NS total comprehensive income was as follows: Three Months Ended March 31, 2010 2009 ($ in millions) Net income $ 257 $ 177 Other comprehensive income 19 9 Total comprehensive income $ 276 $ 186 Other comprehensive income" in 2010 and 2009 reflects primarily, net of tax, the amortization of the actuarial net losses and prior service costs for the pension and other postretirement benefit plans. |
| Fair Value (Unaudited) | |
| 3 Months Ended
Mar. 31, 2010 | |
| Fair Value | 10. Fair Value Fair Value Measurements ASC 820-10, Fair Value Measurements, established a framework for measuring fair value and a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels, as follows: Level 1 Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets that NS has the ability to access. Level 2 Inputs to the valuation methodology include: Quoted prices for similar assets or liabilities in active markets; Quoted prices for identical or similar assets or liabilities in inactive markets; Inputs other than quoted prices that are observable for the asset or liability; and Inputs that are derived principally from or corroborated by observable market data by correlation or other means. If the asset or liability has a specified (contractual) term, the Level 2 input must be observable for substantially the full term of the asset or liability. Level 3 Inputs to the valuation methodology are unobservable and significant to the fair value measurement. The assets or liabilitys fair value measurement level within the hierarchy is based on the lowest level of any input that is significant to the fair value measurement. At March 31, 2010, and December 31, 2009 for assets measured at fair value on a recurring basis, there were $225 million and $90 million of available-for-sale securities as valued under level 2 of the fair value hierarchy, respectively. There were no such assets valued under level 1 or level 3 valuation techniques. Fair Values of Financial Instruments In accordance with ASC 825, Financial Instruments, NS has evaluated the fair values of financial instruments and methods used to determine those fair values. The fair values of Cash and cash equivalents, Short-term investments, Accounts receivable, Accounts payable, and Short-term debt approximate carrying values because of the short maturity of these financial instruments. The carrying value of corporate-owned life insurance is recorded at cash surrender value and, accordingly, approximates fair value. The carrying amounts and estimated fair values for the remaining financial instruments, excluding derivatives and investments accounted for under the equity method, consisted of the following at March 31, 2010, and December 31, 2009: March 31, 2010 December 31, 2009 Carrying Fair Carrying Fair Amount Value Amount Value ($ in millions) Investments $ 207 $ 229 $ 237 $ 260 Long-term debt $ (7,027) $ (7,968) $ (7,053) $ (8,048) Underlying net assets were used to estimate the fair value of investments with the exception of notes receivable, which are based on future discounted cash flows. The fair values of debt were estimated based on quoted market prices or discounted cash flows using current interest rates for debt with similar terms, company rating, |
| Commitments and Contingencies (Unaudited) | |
| 3 Months Ended
Mar. 31, 2010 | |
| Commitments and Contingencies | 11. Commitments and Contingencies Lawsuits Norfolk Southern and/or certain subsidiaries are defendants in numerous lawsuits and other claims relating principally to railroad operations. When management concludes that it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated, it is accrued through a charge to earnings. While the ultimate amount of liability incurred in any of these lawsuits and claims is dependent on future developments, in managements opinion, the recorded liability is adequate to cover the future payment of such liability and claims. However, the final outcome of any of these lawsuits and claims cannot be predicted with certainty, and unfavorable or unexpected outcomes could result in additional accruals that could be significant to results of operations in a particular year or quarter. Any adjustments to the recorded liability will be reflected in earnings in the periods in which such adjustments are known. Casualty Claims Casualty claims include employee personal injury and occupational claims as well as third-party claims, all exclusive of legal costs. To aid in valuing its personal injury liability and determining the amount to accrue with respect to such claims during the year, NS management utilizes studies prepared by an independent consulting actuarial firm. Job-related accidental injury and occupational claims are subject to the Federal Employers Liability Act (FELA), which is applicable only to railroads. FELAs fault-based system produces results that are unpredictable and inconsistent as compared with a no-fault workers compensation system. The variability inherent in this system could result in actual costs being different from the liability recorded. While the ultimate amount of claims incurred is dependent on future developments, in managements opinion, the recorded liability is adequate to cover the future payments of claims and is supported by the most recent actuarial study. In all cases, NS records a liability when the expected loss for the claim is both probable and estimable. The Consolidated Balance Sheets reflect long-term receivables for estimated recoveries from NS insurance carriers for claims associated with the January 6, 2005, derailment in Graniteville, SC. NS is currently engaged in arbitration with one of its insurance carriers that failed to respond to an insurance claim submitted by NS. NS believes these expenses are covered by the insurance policy and that recovery of the contested portion ($43 million) of the recorded recoveries is probable. During the first quarter, NS settled an arbitration claim with another insurance carrier with no adverse effect on NS financial position, results of operations, or liquidity. Employee personal injury claims The largest component of casualties and other claims expense is employee personal injury costs. The independent actuarial firm engaged by NS provides quarterly studies to aid in valuing its employee personal injury liability and estimating its employee personal injury expense. The actuarial firm studies NS historical patterns of reserving for claims and subsequent |
