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 JUNE 30, 2001
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ---------- to ----------
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 July 31, 2001
- ----- -------------------------------
Common Stock (par value $1.00) 385,325,681 (excluding 21,363,974
shares held by registrant's
consolidated subsidiaries)
2
TABLE OF CONTENTS
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Page
----
Part I. Financial Information:
Item 1. Financial Statements:
Consolidated Statements of Income
Three and Six Months Ended
June 30, 2001 and 2000 3
Consolidated Balance Sheets
June 30, 2001 and Dec. 31, 2000 4
Consolidated Statements of Cash Flows
Six Months Ended June 30, 2001 and 2000 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 13
Item 3. Quantitative and Qualitative Disclosures
About Market Risks 20
Part II. Other Information:
Item 4. Submission of Matters to a Vote of
Security Holders 21
Item 6. Exhibits 21
Signatures 22
Exhibit Index 23
3
PART I. FINANCIAL INFORMATION
- ------------------------------
Item 1. Financial Statements.
- ------ --------------------
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income
($ in millions except per share amounts)
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
------------------ -----------------
2001 2000 2001 2000
---- ---- ---- ----
Railway operating revenues:
Coal $ 395 $ 377 $ 788 $ 724
General merchandise 922 942 1,793 1,857
Intermodal 275 273 551 519
------ ------ ------ ------
TOTAL RAILWAY OPERATING REVENUES 1,592 1,592 3,132 3,100
----- ------ ------ ------
Railway operating expenses:
Compensation and benefits (Note 4) 502 516 1,021 1,171
Materials, services and rents 377 347 749 718
Conrail rents and services (Note 5) 106 124 211 245
Depreciation 128 126 255 251
Diesel fuel 106 106 223 221
Casualties and other claims 40 34 77 66
Other 51 61 109 122
------ ------ ------ ------
TOTAL RAILWAY OPERATING EXPENSES 1,310 1,314 2,645 2,794
------ ------ ------ ------
Income from railway operations 282 278 487 306
Other income - net 24 45 51 73
Interest expense on debt (139) (139) (280) (279)
------ ------ ------ ------
Income from continuing
operations before income taxes 167 184 258 100
Provision for income taxes 60 68 90 32
------ ------ ------ ------
Income from continuing operations 107 116 168 68
Discontinued operations - gain on sale of
motor carrier, net of taxes (Note 3) -- -- 13 --
------ ------ ------ ------
NET INCOME $ 107 $ 116 $ 181 $ 68
====== ====== ====== ======
Per share amounts (Note 9):
Income from continuing
operations, basic and diluted $ 0.28 $ 0.30 $ 0.44 $ 0.18
Net income, basic and diluted $ 0.28 $ 0.30 $ 0.47 $ 0.18
Dividends $ 0.06 $ 0.20 $ 0.12 $ 0.40
See accompanying notes to Consolidated Financial Statements.
4
Item 1. Financial Statements. (continued)
- ------ --------------------
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
($ in millions)
(Unaudited)
June 30, Dec. 31,
2001 2000
---- ----
ASSETS
Current assets:
Cash and cash equivalents $ 47 $ --
Short-term investments -- 2
Accounts receivable, net (Note 7) 430 411
Due from Conrail (Note 5) 8 31
Materials and supplies 96 91
Deferred income taxes 175 182
Other current assets 55 132
-------- --------
Total current assets 811 849
Investment in Conrail (Note 5) 6,180 6,154
Properties less accumulated depreciation 11,249 11,105
Other assets 999 868
-------- --------
TOTAL ASSETS $ 19,239 $ 18,976
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt $ 24 $ --
Accounts payable 861 925
Income and other taxes 265 251
Notes and accounts payable to Conrail (Note 5) 285 155
Other current liabilities 251 259
Current maturities of long-term debt 605 297
-------- --------
Total current liabilities 2,291 1,887
Long-term debt (Note 6) 7,072 7,339
Other liabilities 1,108 1,131
Minority interests 45 50
Deferred income taxes 2,746 2,745
-------- --------
TOTAL LIABILITIES 13,262 13,152
-------- --------
Stockholders' equity:
Common stock $1.00 per share par value,
1,350,000,000 shares authorized;
issued 406,604,756 and 405,421,447 shares,
respectively 407 405
Additional paid-in capital 412 392
Accumulated other comprehensive loss (Note 10) (10) (6)
Retained income 5,188 5,053
Less treasury stock at cost, 21,363,974 shares (20) (20)
-------- --------
TOTAL STOCKHOLDERS' EQUITY 5,977 5,824
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 19,239 $ 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)
Six Months Ended
June 30,
----------------
2001 2000
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 181 $ 68
Reconciliation of net income to net cash
provided by operating activities:
Depreciation 262 258
Deferred income taxes 4 (8)
Equity in earnings of Conrail (26) (10)
Gains and losses on properties and investments (26) (61)
Income from discontinued operations (13) --
Changes in assets and liabilities affecting operations:
Accounts receivable (Note 7) (29) 432
Materials and supplies (5) (36)
Other current assets and due from Conrail 102 111
Current liabilities other than debt (52) 122
Other - net (88) 10
----- -----
Net cash provided by operating activities 310 886
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions (425) (351)
Property sales and other transactions 25 82
Investments, including short-term (59) (43)
Investment sales and other transactions 32 38
----- -----
Net cash used for investing activities (427) (274)
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends (46) (153)
Common stock issued - net 13 1
Proceeds from borrowings 1,606 719
Debt repayments (1,409) (1,171)
----- -----
Net cash provided by (used for)
financing activities 164 (604)
----- -----
Net increase in cash and cash equivalents 47 8
CASH AND CASH EQUIVALENTS:
At beginning of year -- 37
----- -----
At end of period $ 47 $ 45
===== =====
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest (net of amounts capitalized) $ 285 $ 276
Income taxes $ 67 $ 5
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 June 30, 2001, its results of operations
for the three and six months ended June 30, 2001 and 2000, and its
cash flows for the six months ended June 30, 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 in any subsequent Quarterly Reports
on Form 10-Q 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
Results for the six months ended June 30, 2001 include an additional
after-tax gain of $13 million, or 3 cents per share, recorded in the
first quarter, related to the 1998 sale of NS' motor carrier subsidiary,
North American Van Lines, Inc. This noncash gain resulted from the
expiration of certain indemnities contained in the sales agreement.
4. Work-Force Reduction Costs in 2000
"Compensation and benefits" expenses for the six months ended June 30,
2000, include $101 million of costs recorded in the first quarter
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 are being
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
June 30, 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 June 30, 2001 includes $99 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
June 30, 2001, NS has paid $88 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 $194 million at
June 30, 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 4.1 percent at June 30, 2001.
Also included is $91 million at June 30, 2001, and $104 million at
Dec. 31, 2000, due to PRR and CRC related to expenses included in
"Conrail rents and services," as discussed above.
Summary Financial Information - Conrail
---------------------------------------
The following historical cost basis financial information should be
read in conjunction with Conrail's audited financial statements,
included as Exhibit 99 with NS' 2000 Annual Report on Form 10-K.
8
Item 1. Financial Statements. (continued)
- ------ --------------------
Summarized Consolidated Statements of Income - Conrail
- ------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
2001 2000 2001 2000
---- ---- ---- ----
($ in millions)
(Unaudited)
Operating revenues $ 229 $ 246 $ 462 $ 505
Operating expenses 153 194 322 393
----- ----- ----- -----
Operating income 76 52 140 112
Other income (expense) - net (3) (5) (11) 39
----- ----- ----- -----
Income before income taxes 73 47 129 151
Provision for income taxes 26 17 37 55
----- ----- ----- -----
Net income $ 47 $ 30 $ 92 $ 96
===== ===== ===== =====
Note: Conrail's results for the first six months of 2000 included a
gain from the sale in the first quarter 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 $16 million after taxes, was excluded in
determining NS' equity in Conrail's net income.
Summarized Consolidated Balance Sheets - Conrail
- ------------------------------------------------
June 30, Dec. 31,
2001 2000
---- ----
($ in millions)
(Unaudited)
Assets:
Current assets $ 718 $ 520
Noncurrent assets 7,390 7,540
------ ------
Total assets $ 8,108 $ 8,060
====== ======
Liabilities and stockholders' equity:
Current liabilities $ 457 $ 435
Noncurrent liabilities 3,558 3,643
Stockholders' equity 4,093 3,982
------ ------
Total liabilities and
stockholders' equity $ 8,108 $ 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.
In July 2001, NS issued $250 million floating rate, 2-year term Senior
Notes under the $1 billion shelf registration that became effective in
April 2001. NS intends to use the proceeds to retire commercial paper
debt. Accordingly, $250 million of commercial paper outstanding at
June 30, 2001, is included in "Long-term debt" on NS' Consolidated
Balance Sheet. Because the credit facility that supports NS' commercial
paper expires in May 2002, the remaining $24 million of commercial paper
is classified as "Short-term debt."
7. 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 $402 million at June 30, 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."
8. Derivative Financial Instruments
On January 1, 2001, NS adopted Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" (SFAS 133), as amended by Statement of Financial
Accounting Standards No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities" (SFAS 138). 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, the type of hedge transaction
represented and the effectiveness of the hedge. The adoption of
SFAS 133 and SFAS 138 resulted in the recognition of a $5 million
asset and a $5 million increase in long-term debt as of Jan. 1, 2001.
10
Item 1. Financial Statements. (continued)
- ------ --------------------
NS uses derivative financial instruments to reduce the risk of
volatility in its diesel fuel costs and to manage its overall
exposure to fluctuations in interest rates. NS does not engage in
the trading of derivatives. NS' management has determined that its
derivative financial instruments qualify as either fair-value or
cash-flow hedges, having values which highly correlate with the
underlying hedged exposures, and has designated such instruments as
hedging transactions. Credit risk related to the derivative
financial instruments is considered to be minimal and is managed
by requiring high credit standards for counterparties and periodic
settlements.
Diesel Fuel Hedging
-------------------
During April 2001, NS began a program to hedge a portion of its diesel
fuel consumption. Fuel costs in the second quarter represented
approximately 8 percent of NS' operating expenses, and as a result,
fluctuations in the price of diesel fuel can significantly affect its
operating margins and profitability. The intent of the program is to
assist in the management of NS' aggregate risk exposure to fuel price
fluctuations through the use of one or more types of derivative
instruments. The program provides that NS will not enter into any fuel
hedges with a duration of more than thirty-six months, and that no more
than eighty percent of NS' average monthly fuel consumption will be
hedged for each month within any thirty-six month period.
NS entered into two types of diesel fuel derivative transactions during
the second quarter of 2001. NS' management has designated these
derivative instruments as cash-flow hedges of the exposure to
variability in expected future cash flows attributable to fluctuations
in diesel fuel prices. In April, NS purchased eight monthly options at
a strike price of $0.84 per gallon of Nymex No. 2 heating oil. The cost
of the monthly options, which expire serially through Dec. 31, 2001, is
being amortized as a component of diesel fuel expense, and because the
price of diesel fuel did not reach the strike price at any time during
the second quarter, NS has not recorded any benefit related to these
transactions. NS also entered into 78 fuel swaps for approximately
163 million gallons at an average price of approximately $0.74 per
gallon of Nymex No. 2 heating oil. As of June 30, 2001, outstanding
swaps covered approximately 16 percent, 10 percent, and 4 percent of
estimated fuel purchases for the remainder of 2001 and for the years
2002 and 2003, respectively.
NS has not recorded any ineffectiveness related to its use of diesel
fuel hedges through June 30, 2001. NS' fuel hedging activity resulted
in a net increase in diesel fuel expense of $0.6 million for the
second quarter of 2001.
Interest Rate Hedging
---------------------
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. NS had $273 million, or
3.8 percent, and $294 million, or 4.5 percent, of its fixed rate debt
portfolio hedged at June 30, 2001 and June 30, 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 arising from
changes in interest rates, and accordingly, there has been no impact
on earnings resulting from ineffectiveness associated with these
derivative transactions.
11
Item 1. Financial Statements. (continued)
- ------ --------------------
Fair Values
-----------
The fair values of NS' diesel fuel derivative instruments at June 30,
2001, were determined based upon current fair market values as quoted
by third party dealers. Fair values of interest rate swaps were
determined based upon the present value of expected future cash flows
discounted at the appropriate implied spot rate from the spot rate
yield curve. Fair value adjustments are noncash transactions, and
accordingly, are excluded from the Consolidated Statement of Cash
Flows. At June 30, 2001, Accumulated other comprehensive income, a
component of Stockholders' equity, includes $2 million relating to
the decrease in the fair value of the derivative fuel hedging
transactions that will terminate in 2001.
The asset and liability positions of NS' outstanding derivative
financial instruments at June 30, 2001 and Dec. 31, 2000 were
as follows:
June 30, Dec. 31,
2001 2000
---- ----
($ in millions)
Interest rate hedges:
Gross fair market asset position $ 7 $ --
Gross fair market (liability) position -- --
Fuel hedges:
Gross fair market asset position -- --
Gross fair market (liability) position (2) --
---- ----
Total net asset position $ 5 $ --
==== ====
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:
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
2001 2000 2001 2000
---- ---- ---- ----
(In millions)
Weighted-average shares
outstanding 385.0 383.2 384.8 383.1
Dilutive effect of
outstanding options and
performance share units
(as determined by the
application of the
treasury stock method) 1.9 0.4 1.1 0.3
----- ----- ----- -----
Diluted weighted-average
shares outstanding 386.9 383.6 385.9 383.4
===== ===== ===== =====
The calculations exclude options on shares whose exercise price exceeded
the average market price of Common Stock for the period as follows:
in 2001, 19 million in the second quarter and 28 million in the first
quarter;
12
Item 1. Financial Statements. (continued)
- ------ --------------------
and in 2000, 20 million in the second quarter and 28 million in the first
quarter. There are no adjustments to "Net income" for the diluted earnings
per share computations.
10. Comprehensive Income
NS' total comprehensive income was as follows:
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
2001 2000 2001 2000
---- ---- ---- ----
($ in millions)
Net income $ 107 $ 116 $ 181 $ 68
Other comprehensive
income (loss) (3) -- (4) 2
----- ----- ----- -----
Total comprehensive income $ 104 $ 116 $ 177 $ 70
===== ===== ===== =====
For NS, "Other comprehensive income (loss)" reflects the unrealized gains
and losses on certain investments in debt and equity securities and net
fair value adjustments to derivative financial instruments.
13
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
- ----------
Second-quarter net income was $107 million in 2001, down $9 million, or
8 percent, compared with the same period last year, reflecting lower
nonoperating income that was somewhat offset by a 1 percent increase in
income from railway operations. For the first six months of 2001, net
income was $181 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 for the first six
months was $168 million, compared with $68 million for the first half of
2000. Results in 2000 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 $38 million, principally due to higher
income from railway operations, which was somewhat offset by lower
nonoperating income.
Railway Operating Revenues
- --------------------------
Second-quarter railway operating revenues were $1.6 billion in 2001,
unchanged from 2000. For the first six months, railway operating revenues
were $3.1 billion, up $32 million, or 1 percent, compared with last year.
For both periods, the effects of higher revenue per unit were offset,
entirely for the quarter and in part for the first six months,
by lower traffic volume.
Second Quarter First Six Months
2001 vs. 2000 2001 vs. 2000
Increase (Decrease) Increase (Decrease)
------------------- -------------------
($ in millions) ($ in millions)
Traffic volume (carloads) $ (62) $ (83)
Revenue per unit/mix 62 115
------ ------
$ -- $ 32
====== ======
Revenues and carloads for the commodity groups were as follows (prior year
data has been reclassified to conform to the current presentation):
14
Item 2. Management's Discussion and Analysis of Financial Condition
- ------ -----------------------------------------------------------
and Results of Operations. (continued)
-------------------------
Revenues
----------------------------------------------
Second Quarter Six Months
2001 2000 2001 2000
---- ---- ---- ----
($ in millions)
Coal $ 395 $ 377 $ 788 $ 724
General merchandise:
Automotive 244 249 458 490
Chemicals 191 195 379 380
Metals/construction 177 184 342 359
Paper/clay/forest 162 162 316 317
Agr./consumer prod./govt. 148 152 298 311
------ ------ ------ ------
General merchandise 922 942 1,793 1,857
Intermodal 275 273 551 519
------ ------ ------ ------
Total $ 1,592 $ 1,592 $ 3,132 $ 3,100
====== ====== ====== ======
Carloads
----------------------------------------------
Second Quarter Six Months
2001 2000 2001 2000
---- ---- ---- ----
(In thousands)
Coal 437 436 876 858
General merchandise:
Automotive 173 189 325 372
Chemicals 111 116 218 230
Metals/construction 185 206 351 396
Paper/clay/forest 117 126 234 252
Agr./consumer prod./govt. 126 128 256 263
------ ------ ------ ------
General merchandise 712 765 1,384 1,513
Intermodal 538 555 1,081 1,062
------ ------ ------ ------
Total 1,687 1,756 3,341 3,433
====== ====== ====== ======
Coal
- ----
Coal revenues increased $18 million, or 5 percent, in the second quarter
and $64 million, or 9 percent, in the first six months, compared with the
same periods last year. Total tonnage handled increased 1 percent for the
quarter and 4 percent year-to-date, principally due to higher utility coal
volume that was somewhat offset by lower volume for domestic metallurgical
coal, coke and iron ore and export coal. Utility coal volume increased
9 percent in the quarter and 13 percent year-to-date. Growth moderated in
the quarter, reflecting milder weather and production problems at some mines.
Domestic metallurgical coal, coke and iron ore volume declined 21 percent
for the quarter and 25 percent for the first six months, principally due to
continued weakness in the steel-production industry. Export coal volume
decreased 19 percent in the quarter and 17 percent year-to-date, due in
part to high domestic prices, which is diverting coal from the export
market. Coal revenue per unit increased 4 percent in the quarter and
7 percent year-to-date, reflecting utilization of higher capacity cars and
longer hauls. In addition, higher export rates resulting from the annual
contract negotiations began to take effect late in the quarter.
15
Item 2. Management's Discussion and Analysis of Financial Condition
- ------ -----------------------------------------------------------
and Results of Operations. (continued)
-------------------------
For the remainder of the year, coal revenues are expected to continue to
benefit from increased demand for electricity; however, milder weather in
NS' service region has negated this favorable outlook early in the third
quarter.
General Merchandise
- -------------------
General merchandise revenues decreased $20 million, or 2 percent, in the
second quarter and $64 million, or 3 percent, for the first six months,
compared with the same periods last year. Traffic volume (carloads)
declined 7 percent in the quarter and 9 percent year-to-date, as all
commodity groups posted decreases for both periods. Automotive traffic
volume was 9 percent lower in the quarter and 13 percent lower year-to-
date, reflecting continued production cutbacks in the face of the slow
economy. Metals and construction traffic volume declined 10 percent in
the quarter and 11 percent for the first six months, 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 in both the quarter and year-to-date, largely due
to production cutbacks by paper producers, which were mitigated by
increased lumber volume. Chemicals traffic volume declined 4 percent
for the quarter and 5 percent year-to-date, reflecting continued weak
demand. For both periods, higher revenue per unit, largely the result
of higher rates and favorable changes in the mix of traffic, offset much
of the effects of the traffic volume decreases. Revenue per unit for the
automotive group benefited from improved yield associated with the
redesign of the mixing center network and changes in the type of equipment
used on certain movements.
In spite of new business initiatives, general merchandise revenues
are expected to continue to post year-over-year declines in 2001 in view
of the very weak manufacturing and industrial sectors of the economy.
Intermodal
- ----------
Intermodal revenues increased $2 million, or 1 percent, in the second
quarter and $32 million, or 6 percent, for the first six months, compared
with the same periods last year. Growth in traffic volume (units) weakened
in the second quarter, declining 3 percent compared with last year, as a
23 percent decrease in trailer volume more than offset a 3 percent
increase in container shipments. Second-quarter traffic volume was
uncharacteristically lower than that of the first quarter, reflecting the
continuation of weak economic conditions and an abundance of competing
truck capacity. For the year-to-date, shipments remained ahead of last
year, supported by a 10 percent increase in container traffic volume, which
was mitigated by a 20 percent decline in trailer traffic volume. Revenue
per unit increased for both periods, largely due to rate increases.
For the remainder of the year, intermodal revenues are expected to benefit
from new business and facility improvements; however, continued softness
in the economy could temper this positive outlook.
Railway Operating Expenses
- --------------------------
Second-quarter railway operating expenses were $1.3 billion, down slightly
compared with last year. For the first six months, expenses were
$2.6 billion, down $149 million, or 5 percent. Expenses in 2000 included
$101 million of work-force reduction costs in the first quarter (see
Note 4); excluding these costs, year-to-date 2001 expenses were down
$48 million, or 2 percent.
"Compensation and benefits" expenses decreased $14 million, or 3 percent,
in the second quarter and $49 million, or 5 percent, year-to-date,
excluding the first-quarter 2000 work-force reduction costs. 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, a lower pension credit and higher stock-based compensation
costs that resulted from an increase in NS' stock price.
16
Item 2. Management's Discussion and Analysis of Financial Condition
- ------ -----------------------------------------------------------
and Results of Operations. (continued)
-------------------------
"Materials, services and rents" expenses increased $30 million, or
9 percent, in the quarter and $31 million, or 4 percent, year-to-date,
primarily due to higher mechanical and engineering costs and higher
expenses for intermodal-related purchased services. These increases
were partially offset by lower equipment rents and joint facility
expenses.
"Conrail rents and services" expenses decreased $18 million, or
15 percent, in the second quarter and $34 million, or 14 percent,
year-to-date. Both declines reflected higher equity earnings in
Conrail and lower costs in the Shared Assets Areas.
"Diesel fuel" expenses were unchanged in the second quarter, but
increased $2 million, or 1 percent, for the first six months. For
both periods, consumption was lower (5 percent) and price per gallon
was higher (5 percent for the quarter and 7 percent for the
year-to-date).
"Casualties and other claims" expenses increased $6 million, or
18 percent, in the second quarter and $11 million, or 17 percent,
for the first six months. Both comparisons reflected the absence of a
premium refund that benefited last year and adverse claims development.
The year-to-date also reflected higher costs related to derailments.
"Other" expenses decreased $10 million, or 16 percent, in the second
quarter and $13 million, or 11 percent, for the first six months.
Both declines primarily resulted from lower property and sales and use
taxes, together with lower travel and relocation costs.
The second-quarter railway operating ratio was 82.3 percent in 2001,
compared with 82.5 percent in 2000. For the first six months, the ratio
was 84.5 percent in 2001, compared with 86.9 percent in 2000 (excluding
the work-force reduction costs, which added 3.2 percentage points to
the ratio).
Other Income - Net
- ------------------
"Other income - net" decreased $21 million in the second quarter and
$22 million for the first six months, compared with the same periods
last year. The comparisons reflect the $28 million gain in the second
quarter of 2000 from the sale of gas and oil royalty and working
interests.
Provision for Income Taxes
- --------------------------
The second-quarter effective income tax rate was 35.9 percent in 2001,
compared with 37.0 percent last year. For the first six months, the
effective rate was 34.9 percent, compared with 32.0 percent last year.
Excluding NS' equity in Conrail's after-tax income, the second-quarter
rate was 39.2 percent in 2001 and 36.8 percent in 2000, and the year-to-
date rate was 38.8 percent in 2001 and 35.6 percent in 2000. Both
increases resulted from a 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 six months of 2001, compared with the
same period last year. The decline resulted from: (1) the absence of the
large cash infusion received May 1, 2000, upon commencement of the program
to sell accounts receivable; (2) higher tax payments this year, including
the settlement of federal tax years 1995 and 1996; (3) the timing of
payments to Conrail, coupled with the absence of significant one-time
receipts that occurred in 2000; (4) the absence of bonus payments in
2000 and (5) a litigation settlement payment this year. These items
were somewhat offset by higher operating income and the receipt of cash
from a non-recurring settlement. NS' working capital deficit was
$1.5 billion at June 30, 2001, compared with $1.0 billion at Dec. 31, 2000.
17
Item 2. Management's Discussion and Analysis of Financial Condition
- ------ -----------------------------------------------------------
and Results of Operations. (continued)
-------------------------
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
six months of 2001, compared with the same period last year. The
increase resulted from a 21 percent rise in property additions,
reflecting the purchase of locomotives as compared to the absence of such
a purchase in the first half of 2000, somewhat offset by less track
program work and fewer freight car purchases.
Cash provided by financing activities was $164 million for the first six
months of 2001. Sources of cash included $987 million of net proceeds from
the sale of Senior Notes (see Note 6), $174 million of proceeds from the
sale of equipment trust certificates and a net increase of $144 million in
borrowings from PRR. Uses of cash included an $857 million net reduction
to commercial paper and a $200 million repayment of Senior Notes. NS'
debt-to-total capitalization ratio was 56.9 percent at June 30, 2001,
unchanged compared with Dec. 31, 2000. NS currently has in place a
$1 billion credit facility (which expires in May 2002, see Note 6) to
support the $274 million of commercial paper outstanding at June 30, 2001.
In addition, NS has issued (in July 2001, see Note 6) only $250 million
of debt under its $1 billion shelf registration that became effective
in April 2001.
CONRAIL'S RESULTS OF OPERATIONS, FINANCIAL CONDITION AND LIQUIDITY
Conrail's second-quarter net income was $47 million in 2001, compared
with $30 million in the second quarter of last year. The improvement
reflected lower casualties and other claims expenses, largely due to
favorable claims development, and an environmental settlement in favor of
the company. For the first six months, net income was $92 million this
year, compared with $96 million last year. The decline was the result
of the absence of a $37 million after-tax gain from a property sale in the
first quarter of 2000 (see Note 5), largely offset by lower casualties
and other claims expenses, a favorable adjustment to state tax reserves
and the environmental settlement.
Conrail's operating revenues decreased 7 percent in the second quarter
and 9 percent for the first six months, compared with the same periods
of last year. The declines resulted from lower revenues at Conrail's
Indiana Harbor Belt subsidiary, the expiration of some equipment leases
and lower operating fees, largely because of reduced operating costs
in the Shared Assets Areas.
Conrail's operating expenses decreased 21 percent in the second quarter
and 18 percent for the first six months, compared with the same periods
of last year. Both declines principally resulted from lower expenses
for materials, services and rents; casualties and other claims; and
compensation and benefits.
Conrail's working capital was $261 million at June 30, 2001, compared with
$85 million at Dec. 31, 2000. Conrail is expected to have sufficient cash
flow to meet its ongoing obligations.
NS' equity in earnings of Conrail, net of amortization, was $14 million
in the second quarter, compared with a $1 million loss in the second
quarter of last year, and was $26 million for the first six months,
compared with $10 million for the same period last year.
OTHER MATTERS
Telecommunications Subsidiary
- -----------------------------
NS' subsidiary, Thoroughbred Technology and Telecommunications, Inc.
("T-Cubed"), is co-developing fiber optic infrastructure with members of
the telecommunications industry. This industry has recently experienced
a severe downturn. During the second quarter, one of T-Cubed's
co-developers filed for protection under Chapter 11 of the U.S.
Bankruptcy Code and foreign laws. This co-developer owes T-Cubed
18
Item 2. Management's Discussion and Analysis of Financial Condition
- ------ -----------------------------------------------------------
and Results of Operations. (continued)
-------------------------
amounts for work performed on joint projects; however, based on known
facts and circumstances, Management believes that such amounts ultimately
will be realized.
As a result of changes in the values of telecommunications assets,
T-Cubed has reviewed the carrying amount of its telecommunications assets,
including those still under development, as required by SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets
to Be Disposed Of." Management believes that its ultimate investment in
these assets will be recovered, and accordingly, no impairment has been
recognized. Upon completion of the network currently under development,
T-Cubed expects its net investment to be more than $100 million. Should
conditions in the telecommunications industry worsen, T-Cubed's prospects
for recovering its investment in these assets may be reduced.
Labor Arbitration
- -----------------
Several hundred claims have been filed on behalf of NSR employees
furloughed after June 1, 1999, for various periods of time, alleging
that the furloughs were a result of the Conrail transaction and seeking
"New York Dock" income protection benefits. One labor organization has
initiated arbitration on behalf of approximately one hundred of these
claimants. These claims likely will be arbitrated in the fall of 2001.
Management believes, based on known facts and circumstances, including
the availability of legal defenses, that the amount of liability for
claims currently in arbitration should not have a material adverse effect
on NS' financial position, results of operations or liquidity. Depending
on the outcome of the arbitration, other claims may be filed or progressed
to arbitration. Should all such claimants prevail, there could be a
significant effect on results of operations in a particular quarter.
Labor Agreements
- ----------------
Approximately 85 percent of NS' railroad employees are covered by
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. However, an agreement was reached with
the Brotherhood of Locomotive Engineers, which represents about 5,000
NS employees, and a national agreement has been reached with the
Brotherhood of Maintenance of Way Employes, which represents about
4,500 NS employees. In addition, tentative national agreements (subject
to ratification) have been reached with the International Brotherhood of
Electrical Workers, which represents about 1,000 NS employees, and the
United Transportation Union, which represents about 7,500 NS employees.
REQUIRED ACCOUNTING CHANGES
Effective Jan. 1, 2001, NS adopted Statement of Financial Accounting
Standards (SFAS) No. 133, "Accounting for Derivative Instruments and
Hedging Activities" and SFAS No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities" (see Note 8).
Effective April 1, 2001, NS adopted SFAS No. 140, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities," which replaced SFAS No. 125 of the same name.
SFAS No. 140 revises the standards for accounting for securitizations
and other transfers of financial assets and requires certain disclosures,
but carries over most of the provisions of SFAS No. 125. NS adopted the
disclosure requirements with its 2000 Annual Report; the remaining
provisions of SFAS No. 140 did not have a material effect on NS'
financial statements.
19
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 may be
identified by the use of words like "believe," "expect," "anticipate"
and "project." Forward-looking statements reflect Management's good-
faith evaluation of information currently available. However, such
statements are dependent on and, therefore, can be influenced by, a
number of external variables over which Management has little or no
control, including: domestic and international economic conditions;
the business environment in industries that produce and consume rail
freight; competition and consolidation within the transportation
industry; fluctuation in prices of key materials, in particular diesel
fuel; labor difficulties, including strikes and work stoppages;
legislative and regulatory developments; changes in securities and
capital markets; and natural events such as severe weather, floods and
earthquakes. Forward-looking statements are not, and should not be
relied upon as, a guaranty of future performance or results. Nor will
they necessarily prove to be accurate indications of the times at or by
which any such performance or results will be achieved. As a result,
actual outcomes and results may differ materially from those expressed in
forward-looking statements. The Company undertakes no obligation to update
or revise forward-looking statements.
20
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.
21
PART II. OTHER INFORMATION
- ---------------------------
Item 4. Submission of Matters to a Vote of Security Holders
- ------ ---------------------------------------------------
Registrant's Annual Meeting of Stockholders was held on May 10, 2001, at
which meeting three directors were elected to serve for a term of three
years, the appointment of independent public accountants was ratified,
the Long-Term Incentive Plan, as amended, was approved and two
stockholder proposals were defeated.
The three directors were elected by the following vote:
FOR AUTHORITY WITHHELD
--- ------------------
Alston D. Correll 294,963,176 votes 33,832,559 votes
Landon Hilliard 290,688,924 votes 38,106,811 votes
Jane Margaret O'Brien 292,678,662 votes 36,117,073 votes
The appointment of KPMG LLP, independent public accountants, as auditors
of the Corporation's books and records was ratified by the following vote:
FOR: 307,873,292 shares
AGAINST: 18,878,106 shares
ABSTAINED: 2,044,337 shares
The Long-Term Incentive Plan, as amended, was approved by the following
vote:
FOR: 239,645,596 shares
AGAINST: 40,588,852 shares
ABSTAINED: 3,434,201 shares
A stockholder proposal concerning the Board's reporting to the
stockholders on the Corporation's activities and efforts related to
global warming was defeated by the following vote:
FOR: 21,653,627 shares
AGAINST: 251,349,564 shares
ABSTAINED: 10,665,458 shares
A stockholder proposal concerning the elimination of dividend
equivalent payments on stock options for Vice Presidents and above was
defeated by the following vote:
FOR: 31,720,573 shares
AGAINST: 246,744,053 shares
ABSTAINED: 5,204,023 shares
Item 6. Exhibits
- ------ --------
10(v) The Norfolk Southern Corporation Stock Unit Plan,
effective July 24, 2001, is filed herewith.
22
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: August 9, 2001 /s/ Dezora M. Martin
-------------- --------------------------------------
Dezora M. Martin
Corporate Secretary (Signature)
Date: August 9, 2001 /s/ John P. Rathbone
-------------- --------------------------------------
John P. Rathbone
Senior Vice President and Controller
(Principal Accounting Officer) (Signature)
23
EXHIBIT INDEX
-------------
Electronic
Submission
Exhibit
Number Description Page
- ---------- ------------------------------------------------- ----
10(v) Norfolk Southern Corporation Stock Unit 24
Plan, effective July 24, 2001