UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended MARCH 31, 2001
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-8339
NORFOLK SOUTHERN CORPORATION
- -------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Virginia 52-1188014
- ----------------------------------- ---------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
Three Commercial Place
Norfolk, Virginia 23510-2191
- ----------------------------------- ---------------------------------
(Address of principal executive offices) Zip Code
Registrant's telephone number, including area code (757) 629-2680
----------------------
No Change
- -------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90
days. (X) Yes ( ) No
The number of shares outstanding of each of the registrant's classes of
Common Stock, as of the last practicable date:
Class Outstanding as of April 30, 2001
----- --------------------------------
Common Stock (par value $1.00) 384,676,029 (excluding 21,363,974
shares held by registrant's
consolidated subsidiaries)
2
TABLE OF CONTENTS
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Page
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Part I. Financial Information:
Item 1. Financial Statements:
Consolidated Statements of Income
Three Months Ended March 31, 2001 and 2000 3
Consolidated Balance Sheets
March 31, 2001 and Dec. 31, 2000 4
Consolidated Statements of Cash Flows
Three Months Ended March 31, 2001 and 2000 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures
About Market Risks 17
Part II. Other Information:
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 19
3
PART I. FINANCIAL INFORMATION
------------------------------
Item 1. Financial Statements.
- ------ --------------------
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income
($ in millions except per share amounts)
(Unaudited)
Three Months Ended
March 31,
-------------------
2001 2000
---- ----
Railway operating revenues:
Coal $ 393 $ 347
General merchandise 871 915
Intermodal 276 246
------ ------
TOTAL RAILWAY OPERATING REVENUES 1,540 1,508
------ ------
Railway operating expenses:
Compensation and benefits (Note 4) 519 655
Materials, services and rents 372 371
Conrail rents and services (Note 5) 105 121
Depreciation 127 125
Diesel fuel 117 115
Casualties and other claims 37 32
Other 58 61
------ ------
TOTAL RAILWAY OPERATING EXPENSES 1,335 1,480
------ ------
Income from railway operations 205 28
Other income - net 27 28
Interest expense on debt (141) (140)
------ ------
Income (loss) from continuing operations
before income taxes 91 (84)
Provision (benefit) for income taxes 30 (36)
------ ------
Income (loss) from continuing operations 61 (48)
Discontinued operations - gain on sale of
motor carrier, net of taxes (Note 3) 13 --
------ ------
NET INCOME (LOSS) $ 74 $ (48)
====== ======
Per share amounts (Note 9):
Income (loss) from continuing operations,
basic and diluted $ 0.16 $(0.12)
Net income (loss), basic and diluted $ 0.19 $(0.12)
Dividends $ 0.06 $ 0.20
See accompanying notes to Consolidated Financial Statements.
4
Item 1. Financial Statements. (continued)
- ------ --------------------
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
($ in millions)
(Unaudited)
March 31, Dec. 31,
2001 2000
---- ----
ASSETS
Current assets:
Cash and cash equivalents $ 54 $ --
Short-term investments 1 2
Accounts receivable, net (Note 7) 440 411
Due from Conrail (Note 5) 20 31
Materials and supplies 93 91
Deferred income taxes 171 182
Other current assets 75 132
-------- --------
Total current assets 854 849
Investment in Conrail (Note 5) 6,166 6,154
Properties less accumulated depreciation 11,268 11,105
Other assets 952 868
-------- --------
TOTAL ASSETS $19,240 $18,976
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 866 $ 925
Income and other taxes 246 251
Notes and accounts payable
to Conrail (Note 5) 219 155
Other current liabilities 329 259
Current maturities of long-term debt 306 297
-------- --------
Total current liabilities 1,966 1,887
Long-term debt (Note 6) 7,535 7,339
Other liabilities 1,108 1,131
Minority interests 46 50
Deferred income taxes 2,703 2,745
-------- --------
TOTAL LIABILITIES 13,358 13,152
-------- --------
Stockholders' equity:
Common stock $1.00 per share par value,
1,350,000,000 shares authorized; issued
405,913,657 and 405,421,447 shares,
respectively 406 405
Additional paid-in capital 399 392
Accumulated other comprehensive loss
(Note 10) (7) (6)
Retained income 5,104 5,053
Less treasury stock at cost,
21,363,974 shares (20) (20)
-------- --------
TOTAL STOCKHOLDERS' EQUITY 5,882 5,824
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $19,240 $18,976
======== ========
See accompanying notes to Consolidated Financial Statements.
5
Item 1. Financial Statements. (continued)
- ------ --------------------
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
($ in millions)
(Unaudited)
Three Months Ended
March 31,
------------------
2001 2000
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 74 $(48)
Reconciliation of net income (loss) to net cash
provided by operating activities:
Depreciation 130 129
Deferred income taxes (36) (34)
Equity in earnings of Conrail (12) (11)
Gains and losses on properties and investments (9) (20)
Income from discontinued operations (13) --
Changes in assets and liabilities affecting operations:
Accounts receivable (28) 3
Materials and supplies (2) (20)
Other current assets and due from Conrail 68 89
Current liabilities other than debt -- 165
Other - net (54) 39
----- -----
Net cash provided by operating activities 118 292
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions (294) (170)
Property sales and other transactions 10 30
Investments, including short-term (35) (21)
Investment sales and other transactions 2 35
----- -----
Net cash used for investing activities (317) (126)
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends (23) (77)
Common stock issued - net 4 --
Proceeds from borrowings 1,275 68
Debt repayments (1,003) (134)
----- -----
Net cash provided by (used for) financing activities 253 (143)
----- -----
Net increase in cash and cash equivalents 54 23
CASH AND CASH EQUIVALENTS:
At beginning of year -- 37
----- -----
At end of period $ 54 $ 60
===== =====
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest (net of amounts capitalized) $ 82 $ 74
Income taxes $ 62 $ (2)
See accompanying notes to Consolidated Financial Statements.
6
Item 1. Financial Statements. (continued)
- ------ --------------------
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
1. In the opinion of Management, the accompanying unaudited
interim financial statements contain all adjustments
(consisting of normal recurring accruals) necessary to present
fairly the Corporation's financial position as of March 31,
2001, and its results of operations and cash flows for the
three months ended March 31, 2001 and 2000.
Although Management believes that the disclosures presented
are adequate to make the information not misleading, these
Consolidated Financial Statements should be read in
conjunction with: (a) the financial statements and notes
included in the Corporation's latest Annual Report on
Form 10-K and (b) any Current Reports on Form 8-K.
2. Commitments and Contingencies
There have been no significant changes since year-end 2000 in
the matters discussed in NOTE 17, COMMITMENTS AND
CONTINGENCIES, appearing in the NS Annual Report on Form 10-K
for 2000, Notes to Consolidated Financial Statements,
beginning on page 78.
3. Discontinued Operations
First-quarter 2001 results include an additional after-tax
gain of $13 million, or 3 cents per share, related to the 1998
sale of NS' motor carrier subsidiary, North American Van
Lines, Inc. This noncash gain resulted from the reversal of
reserves established at the time of the sale for indemnities
provided as a part of the transaction.
4. Work-Force Reduction Costs in 2000
First-quarter 2000 "Compensation and benefits" expenses
include $101 million of costs related to actions taken to
reduce the size of the work force, which reduced net income by
$62 million, or 16 cents per share. These costs resulted
principally from a voluntary early retirement program accepted
by 919 of 1,180 eligible employees. The retirements were
effective March 1, 2000, and most of the related benefits will
be paid from the Corporation's overfunded pension plan. The
resulting noncash reduction to NS' pension plan asset is
included in "Other - net" in the Consolidated Statement of
Cash Flows. In addition, an accrual was made for certain
postemployment benefits due to some union employees who were
furloughed.
5. Investment in Conrail and Operations Over Its Lines
Overview
--------
NS and CSX Corporation (CSX) jointly own Conrail Inc.
(Conrail), whose primary subsidiary is Consolidated Rail
Corporation (CRC), the major freight railroad in the
Northeast. NS has a 58 percent economic and 50 percent voting
interest in the jointly owned entity, and CSX has the
remainder of the economic and voting interests. From time to
time, NS and CSX, as the indirect owners of Conrail, may need
to make capital contributions, loans or advances to Conrail.
7
Item 1. Financial Statements. (continued)
- ------ --------------------
Operations of Conrail's Lines
-----------------------------
NS' railroad subsidiary, Norfolk Southern Railway Company
(NSR) operates as a part of its rail system the routes and
assets of Pennsylvania Lines LLC (PRR), a wholly owned
subsidiary of CRC, pursuant to operating and lease agreements.
Costs necessary to operate and maintain the PRR assets,
including leasehold improvements, are borne by NSR. CSX
Transportation, Inc. (CSXT) operates the routes and assets of
another CRC subsidiary under comparable terms. Certain other
Conrail routes and assets (the "Shared Assets Areas") continue
to be operated by CRC for the joint and exclusive benefit of
NSR and CSXT. In addition to a fee paid for access, NSR and
CSXT pay, based on usage, the costs incurred by CRC to operate
the Shared Assets Areas.
Investment in Conrail
---------------------
NS is applying the equity method of accounting to its
investment in Conrail. NS is amortizing the excess of the
purchase price over Conrail's net equity using the principles
of purchase accounting, based primarily on the estimated
remaining useful lives of Conrail's property and equipment,
including the related deferred tax effect of the differences
in tax and accounting bases for certain assets. At March 31,
2001, the difference between NS' investment in Conrail and its
share of Conrail's underlying net equity was $3.8 billion.
NS' Consolidated Balance Sheet at March 31, 2001 includes
$108 million of liabilities related to the Conrail
transaction, principally for contractual obligations to
Conrail employees imposed by the Surface Transportation Board
when it approved the transaction. Through March 31, 2001, NS
has paid $79 million of these costs.
Related-Party Transactions
--------------------------
NS provides certain general and administrative support
functions to Conrail, the fees for which are billed in
accordance with several service-provider arrangements. Any
unpaid balance is included in "Due from Conrail."
"Conrail rents and services" includes: (1) expenses for
amounts due to PRR and CRC for use by NSR of operating
properties and equipment and operation of the Shared Assets
Areas and (2) NS' equity in the earnings of Conrail, net of
amortization.
"Notes and accounts payable to Conrail" includes $130 million
at March 31, 2001, and $51 million at Dec. 31, 2000, of
interest-bearing loans made to NS by a PRR subsidiary, payable
on demand. The interest rate for these loans is variable and
was 4.8 percent at March 31, 2001. Also included is
$89 million at March 31, 2001, and $104 million at Dec. 31,
2000, due to PRR and CRC related to expenses included in
"Conrail rents and services," as discussed above.
Summary Financial Information - Conrail
---------------------------------------
The following historical cost basis financial information
should be read in conjunction with Conrail's audited financial
statements, included as Exhibit 99 with NS' 2000 Annual Report
on Form 10-K.
8
Item 1. Financial Statements. (continued)
- ------ --------------------
Summarized Consolidated Statements of Income - Conrail
------------------------------------------------------
Three Months Ended
March 31,
------------------
2001 2000
---- ----
($ in millions)
(Unaudited)
Operating revenues $ 233 $ 259
Operating expenses 169 199
------ ------
Operating income 64 60
Other income (expense) - net (8) 44
------ ------
Income before income taxes 56 104
Provision for income taxes 11 39
------ ------
Net income $ 45 $ 65
====== ======
Note: Conrail's results for the first three months of 2000
included a gain from the sale of property that had been
written up to fair market value in the allocation of NS'
investment in Conrail. Accordingly, the gain related to that
fair-value write-up, totaling $16 million after taxes, was
excluded in determining NS' equity in Conrail's net income.
Summarized Consolidated Balance Sheets - Conrail
------------------------------------------------
March 31, Dec. 31,
2001 2000
---- ----
($ in millions)
(Unaudited)
Assets:
Current assets $ 608 $ 520
Noncurrent assets 7,463 7,540
------ ------
Total assets $8,071 $8,060
====== ======
Liabilities and
stockholders' equity:
Current liabilities $ 476 $ 435
Noncurrent liabilities 3,549 3,643
Stockholders' equity 4,046 3,982
------ ------
Total liabilities and
stockholders' equity $8,071 $8,060
====== ======
9
Item 1. Financial Statements. (continued)
- ------ --------------------
6. Long-Term Debt
In February 2001, NS received net proceeds of $987 million
from issuing $300 million of 6.75 percent, 10-year term Senior
Notes and $700 million of 7.25 percent, 30-year term Senior
Notes. The notes were issued under NS' October 2000
$1 billion shelf registration.
NS has not issued any securities under the $1 billion shelf
registration that became effective in April 2001.
7. Sale of Accounts Receivable
Beginning in May 2000, a bankruptcy-remote special purpose
subsidiary of NS sold without recourse undivided ownership
interests in a pool of accounts receivable totaling
approximately $700 million. The buyers have a priority
collection interest in the entire pool of receivables, and as
a result, NS has retained credit risk to the extent the pool
of receivables exceeds the amount sold. NS services and
collects the receivables on behalf of the buyers; however, no
servicing asset or liability has been recognized because the
benefits of servicing are estimated to be just adequate to
compensate NS for its responsibilities. Payments collected
from sold receivables are reinvested in new accounts
receivable on behalf of the buyers.
Accounts receivable sold under this arrangement, and therefore
not included in "Accounts receivable, net" on the Consolidated
Balance Sheets, were $382 million at March 31, 2001, and $388
million at Dec. 31, 2000. The fees associated with the sale,
which are based on the buyers' financing costs, are included
in "Other income - net." NS' retained interest, which is
included in "Accounts receivable, net" is recorded at fair
value using estimates of dilution based on NS' historical
experience. These estimates are adjusted regularly based on
NS' actual experience with the pool, including defaults and
credit deterioration. NS has experienced very low levels of
default, and as a result, little dilution. If historical
dilution percentages were to increase one percentage point,
the value of NS' retained interest would be reduced by
approximately $7 million.
NS' allowance for doubtful accounts was $7 million at March
31, 2001 and Dec. 31, 2000.
8. Derivative Financial Instruments
Required Accounting Change
--------------------------
On Jan. 1, 2001, NS adopted Statement of Financial Accounting
Standards (SFAS) No. 133, "Accounting for Derivative Instruments
and Hedging Activities", as amended by SFAS No. 138, "Accounting
for Certain Derivative Instruments and Certain Hedging
Activities." The Statements establish accounting and reporting
standards for derivative instruments and hedging activities,
requiring that all derivatives be recognized in the financial
statements as either assets or liabilities and that they be
measured at fair value.
Changes in fair value are recorded as adjustments to the assets or
liabilities being hedged, in "Other comprehensive income," or in
current earnings, depending on whether the derivative is designated
and qualifies for hedge accounting and the type of hedge transaction
represented. For qualifying fair-value hedge transactions (those in
which the particular risk being hedged is the exposure to changes
10
Item 1. Financial Statements. (continued)
- ------ --------------------
changes in the fair value of an asset or a liability, or an
identified portion thereof), changes in the fair values of
derivative instruments are reflected as adjustments to the carrying
amounts of the hedged assets or liabilities. Changes in fair values
of the derivative instruments that do not offset changes in the fair
values of the hedged assets or liabilities are reflected in current
earnings. For qualifying cash-flow hedge transactions (those in
which the particular risk being hedged is the exposure to the
variability of cash flows related to variable rate assets,
liabilities, or forecasted transactions), changes in the fair values
of derivative instruments are reported in "Other comprehensive
income" to the extent they offset changes in the cash flows related
to the variable asset, liability, or forecasted transaction. Any
difference is reported in current period earnings. Gains and losses
on derivative instruments that are reported in "Other comprehensive
income" are reclassified in earnings in the periods in which
earnings are impacted by the hedged item. Since the existing swaps
have been designated as fair-value hedges, NS recognized a $5 million
asset related to interest rate swaps and recorded a $5 million
increase in long-term debt as of Jan. 1, 2001, as a result of
adopting provisions of SFAS 133 and 138.
Market Risks and Hedging Activities
-----------------------------------
NS manages its overall exposure to fluctuations in interest rates by
issuing both fixed and floating-rate debt instruments, and by
entering into interest rate hedging transactions on a limited basis.
NS had $273 million, or 3.6 percent, and $301 million, or 4.7 percent,
of its fixed-rate debt portfolio hedged at March 31, 2001 and
March 31, 2000, respectively, using interest rate swaps that qualify
for and are designated as fair-value hedge transactions. These swaps
have been effective in hedging the changes in fair value of the related
debt, and accordingly, there has been no impact on earnings resulting
from these derivative transactions.
At March 31, 2001, "Other assets" on NS' Consolidated Balance Sheet
included a $10 million asset related to interest-rate swaps and
"Long-term debt" included a corresponding $10 million increase.
Fair values were determined based upon the present value of expected
future cash flows discounted at the appropriate implied spot rate
from the swap rate yield curve. Fair value adjustments are noncash
transactions, and accordingly, were excluded from the Consolidated
Statement of Cash Flows.
During April 2001, NS began a program, as approved by the Board of
Directors, to hedge a portion of its diesel fuel consumption.
The program is designed to assist in the management of aggregate
risk exposure to fuel price fluctuations through the use of one or
more types of derivative instruments. During April 2001, NS began
to implement the program by entering into swap and call option
transactions. NS' management has identified these transactions as
cash-flow hedges and expects them to qualify for hedge accounting
treatment.
9. Earnings Per Share
The following table sets forth the reconciliation of the
number of weighted-average shares outstanding used in the
calculations of basic and diluted earnings per share:
11
Item 1. Financial Statements. (continued)
- ------ --------------------
Three Months Ended
March 31,
------------------
2001 2000
---- ----
(In millions)
Weighted-average shares
outstanding 384.5 382.9
Dilutive effect of
outstanding options and
performance share units
(as determined by the
application of the
treasury stock method) 0.3 --
----- -----
Diluted weighted-average
shares outstanding 384.8 382.9
===== =====
The calculation for 2001 excludes options on 28 million shares
because their exercise price exceeded the average market price
of Common Stock for the period. The calculation for 2000
excludes 0.2 million dilutive shares due to their anti-
dilutive effect as a result of the first-quarter 2000 net
loss. There are no adjustments to "Net income" for the
diluted earnings per share computations.
10. Comprehensive Income (Loss)
NS' total comprehensive income (loss) was as follows:
Three Months Ended
March 31,
------------------
2001 2000
---- ----
($ in millions)
Net income (loss) $ 74 $ (48)
Other comprehensive
income (loss) (1) 2
----- -----
Total comprehensive
income (loss) $ 73 $ (46)
===== =====
For NS, "Other comprehensive income (loss)" reflects the
unrealized gains and losses on certain investments in debt and
equity securities.
12
Item 2. Management's Discussion and Analysis of Financial Condition
- ------ -----------------------------------------------------------
and Results of Operations.
-------------------------
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition
and Results of Operations
RESULTS OF OPERATIONS
Net Income
- ----------
First-quarter 2001 net income was $74 million, and included $13 million
of additional after-tax gain related to the 1998 sale of NS' motor
carrier subsidiary, which is reported as "Discontinued operations" on the
Consolidated Statement of Income (see Note 3). Income from continuing
operations was $61 million, compared with a net loss of $48 million in
the first quarter of 2000, which included $62 million of after-tax costs
related to actions taken to reduce the size of the work force (see Note
4). Excluding the effects of last year's work-force reduction costs,
income from continuing operations increased $47 million, principally due
to higher income from railway operations.
Railway Operating Revenues
- --------------------------
First-quarter railway operating revenues were $1.54 billion in 2001, up
$32 million, or 2 percent, compared with last year. As shown in the
following table, the increase was attributable to a favorable revenue
per unit/mix variance.
First Quarter
2001 vs. 2000
Increase (Decrease)
-------------------
($ in millions)
Traffic volume (carloads) $ (21)
Revenue per unit/mix 53
------
$ 32
======
Revenues and carloads for the commodity groups were as follows
(prior year data has been reclassified to conform to the current
presentation):
Revenues Carloads
2001 2000 2001 2000
---- ---- ---- ----
($ in millions) (In thousands)
Coal $ 393 $ 347 439 422
General merchandise:
Automotive 214 241 152 183
Chemicals 188 185 107 114
Metals/construction 165 175 166 191
Paper/clay/forest 154 155 117 126
Agr./consumer prod./govt. 150 159 130 134
------ ------ ------ ------
General merchandise 871 915 672 748
Intermodal 276 246 543 508
------ ------ ------ ------
Total $1,540 $1,508 1,654 1,678
====== ====== ====== ======
13
Item 2. Management's Discussion and Analysis of Financial Condition
- ------ -----------------------------------------------------------
and Results of Operations. (continued)
-------------------------
Coal
- ----
Coal revenues increased $46 million, or 13 percent, in the first quarter,
compared with the first quarter of last year. Total tonnage handled
increased 6 percent, due to higher utility coal volume that was somewhat
offset by lower volume for export coal and domestic metallurgical coal,
coke and iron ore. Utility coal volume benefited from increased demand
for electricity and diminished utility stockpiles, coupled with high
natural gas prices and a lack of excess nuclear generation capacity. The
decline in export tonnage resulted, in part, from the strong domestic
utility demand, which drew tonnage that would otherwise be bound for
export. Coal revenue per unit increased 9 percent, reflecting higher
rates, longer length-of-haul and improved loading efficiency that
resulted in more tons per car.
In the near term, coal revenues are expected to continue to benefit from
increased demand for electricity and depleted utility stockpiles.
General Merchandise
- -------------------
General merchandise revenues decreased $44 million, or 5 percent, in the
first quarter, compared with the same period last year. Traffic volume
(carloads) declined 10 percent, as all commodity groups posted decreases.
Automotive traffic volume was 17 percent lower, reflecting reduced
production in the face of a slowing economy. Metals and construction
traffic volume declined 13 percent, principally due to the effects of the
automotive slowdown and continued weakness in the steel industry. Paper,
clay and forest products traffic volume decreased 7 percent, largely due
to production cutbacks. Chemicals traffic volume was 6 percent lower,
reflecting reduced demand. General merchandise revenue per unit
increased, a result of improvements for all commodity groups except the
agriculture, consumer products and government group. The improvements
reflected higher rates and favorable changes in the mix of traffic within
some of the groups.
General merchandise revenues are expected to continue to post year-over-
year declines, absent a turnaround in the economic climate.
Intermodal
- ----------
First-quarter intermodal revenues increased $30 million, or 12 percent,
compared with the first quarter of last year, due to higher traffic
volume and increased revenue per unit. Traffic volume benefited from new
domestic container business and strong international shipments early in
the quarter. However, the effects of a slowing economy tempered these
gains. Premium business and Triple Crown Services volumes were flat,
reflecting weak economic conditions.
Intermodal revenues are expected to continue to show growth, supported by
new business and facility improvements; however, continued softness in
the economy could temper this positive outlook.
Railway Operating Expenses
- --------------------------
Railway operating expenses were $1.34 billion in the first quarter of
2001, down $145 million, or 10 percent, compared with the same period of
last year. Expenses in 2000 included $101 million of work-force
reduction costs (see Note 4); excluding these costs, 2001 expenses were
down $44 million, or 3 percent. The decline was largely due to lower
compensation and benefit expenses, a result of the reduced size of the
work force.
14
Item 2. Management's Discussion and Analysis of Financial Condition
- ------ -----------------------------------------------------------
and Results of Operations. (continued)
-------------------------
"Compensation and benefits" expenses decreased $35 million, or 6 percent,
excluding the effects of the work-force reduction costs in the first
quarter of 2000. Lower salaries and wages, a result of last year's work
force reductions, were somewhat offset by higher wage rates and benefit
costs for union employees and a lower pension credit.
"Materials, services and rents" expenses increased slightly, as higher
intermodal volume-related purchased services and higher materials
expenses were largely offset by lower equipment rents.
"Conrail rents and services" expenses decreased $16 million, or 13
percent, reflecting lower costs in the Shared Assets Areas and a
favorable adjustment to Conrail's state tax reserves.
"Diesel fuel" expenses increased $2 million, or 2 percent, due to a 7
percent rise in the average price per gallon that was partially offset by
a 5 percent decline in consumption.
"Casualties and other claims" expenses increased $5 million, or 16
percent, principally due to adverse claims development.
The railway operating ratio was 86.7 percent in the first quarter of
2001, compared with 91.4 percent in the same period of 2000 (excluding
the work-force reduction costs, which added 6.7 percentage points to the
ratio). The improvement reflected the difference in the mix of traffic
(a higher proportion of coal traffic), coupled with expense reductions.
Other Income - Net
- ------------------
"Other income - net" decreased slightly in the first quarter of 2001, but
included $13 million for a non-recurring settlement.
Provision for Income Taxes
- --------------------------
The effective income tax rate was 33.0 percent in the first quarter of
2001. Excluding NS' equity in Conrail's after-tax earnings, it was 38.0
percent. The effective rate was higher than in 2000, principally due to
a substantial reduction in the level of benefits from investments in coal-
seam gas properties.
FINANCIAL CONDITION AND LIQUIDITY
Cash provided by operating activities, NS' principal source of liquidity,
decreased significantly in the first quarter of 2001, compared with the
same period last year, despite an increase in operating income. The
decline resulted from: (1) higher tax payments, including the settlement
of federal tax years 1995 and 1996; (2) the timing of payments to Conrail,
coupled with the absence of significant one-time receipts that occurred
in 2000; (3) the timing of payroll payments and (4) a litigation
settlement payment. In addition, last year reflected the absence of
bonus payments. NS' working capital deficit was $1.1 billion at March
31, 2001, compared with $1.0 billion at Dec. 31, 2000. NS currently has
the capability to issue commercial paper to meet its more immediate
working capital needs (see the discussion of financing activities,
below).
Cash used for investing activities increased significantly in the first
quarter of 2001, compared with last year. The increase resulted from a
73 percent rise in property additions, a result of the purchase of
locomotives versus no such purchase in the first quarter of 2000.
15
Item 2. Management's Discussion and Analysis of Financial Condition
- ------ -----------------------------------------------------------
and Results of Operations. (continued)
-------------------------
Cash provided by financing activities was $253 million in the first
quarter of 2001, and included $987 million of net proceeds from the sale
of Senior Notes (see Note 6) and $174 million of proceeds from the sale
of equipment trust certificates. "Debt repayments" included a
$981 million reduction to outstanding commercial paper. NS' debt-to-
total capitalization ratio was 57.5 percent at March 31, 2001, compared
with 56.9 percent at Dec. 31, 2000. NS currently has in place a
$1 billion credit facility to support the $180 million of commercial
paper outstanding at March 31, 2001. In addition, NS has not yet issued
any securities under the $1 billion shelf registration that became
effective in April 2001.
CONRAIL'S RESULTS OF OPERATIONS, FINANCIAL CONDITION AND LIQUIDITY
Conrail's first-quarter net income was $45 million in 2001, down
$20 million, or 31 percent, compared with the same period last year,
which included a $61 million gain ($37 million after taxes) from a
property sale (see Note 5). Results in 2001 reflected a favorable
adjustment to state tax reserves.
Conrail's first-quarter operating revenues were $233 million, down
$26 million, or 10 percent, compared with the same period last year. The
decline reflected lower revenues at Conrail's Indiana Harbor Belt
subsidiary, the expiration of some equipment leases and lower operating
fees, largely a result of reduced operating costs in the Shared Assets
Areas.
Conrail's first-quarter operating expenses were $169 million, down
$30 million, or 15 percent, compared with the same period last year,
reflecting lower expenses for compensation and benefits; materials,
services and rents; and casualties and other claims.
Conrail's working capital was $132 million at March 31, 2001, compared
with $85 million at Dec. 31, 2000. Conrail is expected to have
sufficient cash flow to meet its ongoing obligations.
NS' first-quarter equity in earnings of Conrail, net of amortization,
was $12 million in 2001 and $11 million in 2000.
LABOR AGREEMENTS
Approximately 85 percent of NS' railroad employees are represented by
labor unions under collective bargaining agreements with 15 different labor
unions. These agreements remain in effect until changed pursuant to the
Railway Labor Act. Moratorium provisions in these agreements permitted
NS and the unions to propose such changes in late 1999; negotiations at
the national level commenced shortly thereafter. The outcome of these
negotiations is uncertain at this time. However, an agreement was
reached with the Brotherhood of Locomotive Engineers, which represents
about 5,000 locomotive engineers on NS. In addition, tentative national
agreements (subject to ratification) have been reached with the United
Transportation Union, which represents about 7,500 train service
employees on NS, and with the Brotherhood of Maintenance of Way
Employees, which represents about 4,500 employees on NS.
REQUIRED ACCOUNTING CHANGE
Effective Jan. 1, 2001, NS adopted Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities (SFAS 133) and Statement of Financial Accounting Standards No.
138, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities" (SFAS 138). SFAS 133 and SFAS 138 did not have a significant
impact on NS for the first quarter of 2001 (see Note 8).
16
Item 2. Management's Discussion and Analysis of Financial Condition
- ------ -----------------------------------------------------------
and Results of Operations. (continued)
-------------------------
FORWARD-LOOKING STATEMENTS
This Management's Discussion and Analysis of Financial Condition and
Results of Operations contains forward-looking statements that are
based on current expectations, estimates and projections. Such
forward-looking statements reflect Management's good-faith evaluation
of information currently available. However, because such statements
are based upon and, therefore, can be influenced by, a number of
external variables over which Management has no, or incomplete, control,
they are not, and should not be read as being, guarantees of future
performance or of actual future results; nor will they necessarily prove
to be accurate indications of the times at or by which any such
performance or result will be achieved. Accordingly, actual outcomes
and results may differ materially from those expressed in such
forward-looking statements. This caveat has particular importance in the
context of all such statements that relate to the addition of new business
and the ability to reduce expenses.
17
Item 3. Quantitative and Qualitative Disclosures About Market Risks.
- ------ -----------------------------------------------------------
There has been no material change to the disclosures
made under the heading "Market Risks and Hedging
Activities" on page 46 of the Corporation's 2000 Annual
Report on Form 10-K. Additional information required by
this item is included in Part I, Item I, "Financial
Statements" in Note 8 on page 9.
18
PART II. OTHER INFORMATION
---------------------------
Item 6. Exhibits and Reports on Form 8-K.
- ------ --------------------------------
(b) Reports on Form 8-K:
A report on Form 8-K was filed Jan. 23, 2001, advising of
the declaration of a quarterly dividend and outlining
certain restructuring initiatives, and attaching as an
exhibit the related press release.
A report on Form 8-K was filed Jan. 26, 2001, attaching as
an exhibit Registrant's unaudited Consolidated Statements
of Income, Consolidated Balance Sheets, and Consolidated
Statements of Cash Flows for the years ended Dec. 31, 1999
and 2000, excluding footnotes.
A report on Form 8-K was filed Feb. 6, 2001, advising that
the Registrant had closed the sale of Senior Notes, and
attaching as an exhibit the related press release.
A report on Form 8-K was filed Feb. 7, 2001, advising of
certain details of the issuance and sale of the
Registrant's Senior Notes, and attaching as exhibits the
related agreements, indenture and opinions.
19
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
NORFOLK SOUTHERN CORPORATION
--------------------------------------
(Registrant)
Date: May 9, 2001 /s/ Dezora M. Martin
----------- --------------------------------------
Dezora M. Martin
Corporate Secretary (Signature)
Date: May 9, 2001 /s/ John P. Rathbone
----------- --------------------------------------
John P. Rathbone
Senior Vice President and Controller
(Principal Accounting Officer) (Signature)