PAGE 1
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, 1996
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
---------- ----------
Commission file numbers 1-743; 1-3744; 1-4793; 1,546-2
NORFOLK SOUTHERN RAILWAY COMPANY
- -------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Virginia 53-6002016
- ---------------------------------------- -------------------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
Three Commercial Place
Norfolk, Virginia 23510-2191
- ---------------------------------------- -------------------------------
(Address of principal executive offices) Zip Code
Registrant's telephone number, including area code (804) 629-2682
----------------------
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, 1996
----- -------------------------------
Common Stock (par value $1.00) 16,668,997
PAGE 2
NORFOLK SOUTHERN RAILWAY COMPANY AND SUBSIDIARIES (NS RAIL)
INDEX
Page
----
Part I. Financial Information:
Item 1. Consolidated Statements of Income
Three Months and Six Months Ended
June 30, 1996 and 1995 3
Consolidated Balance Sheets
June 30, 1996, and December 31, 1995 4
Consolidated Statements of Cash Flows
Six Months Ended June 30, 1996 and 1995 5
Notes to Consolidated Financial Statements 6-9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10-16
Part II. Other Information:
Item 4. Submission of Matters to a Vote of
Security Holders 17
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 19
Index to Exhibits 20
PAGE 3
PART I. FINANCIAL INFORMATION
------------------------------
Item 1. Financial Statements.
- ------ --------------------
NORFOLK SOUTHERN RAILWAY COMPANY AND SUBSIDIARIES
(A Majority-Owned Subsidiary of Norfolk Southern Corporation)
Consolidated Statements of Income
(In millions of dollars)
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
1996 1995 1996 1995
-------- -------- -------- --------
RAILWAY OPERATING REVENUES (Note 5):
Coal $ 328.5 $ 318.0 $ 652.3 $ 624.9
Merchandise 593.1 578.7 1,167.2 1,156.3
Intermodal 116.4 119.7 235.2 234.4
-------- -------- -------- --------
Railway operating revenues 1,038.0 1,016.4 2,054.7 2,015.6
-------- -------- -------- --------
RAILWAY OPERATING EXPENSES:
Compensation and benefits 351.3 356.6 728.6 731.9
Materials, services and rents 159.6 163.7 312.8 327.9
Depreciation 100.4 95.1 199.5 188.0
Diesel fuel 56.7 47.0 112.1 95.7
Casualties and other claims 30.9 28.8 65.6 61.0
Other 39.1 40.9 74.3 76.4
-------- -------- -------- --------
Railway operating expenses 738.0 732.1 1,492.9 1,480.9
-------- -------- -------- --------
Income from railway operations 300.0 284.3 561.8 534.7
Other income (expense):
Interest income 8.3 9.5 16.2 15.9
Interest expense on debt (8.8) (8.4) (17.0) (16.2)
Other - net (4.2) 3.0 (4.6) 1.4
-------- -------- -------- --------
Other income (expense) (4.7) 4.1 (5.4) 1.1
-------- -------- -------- --------
Income before income taxes 295.3 288.4 556.4 535.8
Provision for income taxes 104.7 108.1 202.7 202.2
-------- -------- -------- --------
NET INCOME $ 190.6 $ 180.3 $ 353.7 $ 333.6
======== ======== ======== ========
See accompanying notes to consolidated financial statements.
PAGE 4
Item 1. Financial Statements. (continued)
- ------ --------------------
NORFOLK SOUTHERN RAILWAY COMPANY AND SUBSIDIARIES
(A Majority-Owned Subsidiary of Norfolk Southern Corporation)
Consolidated Balance Sheets
(In millions of dollars)
(Unaudited)
June 30, December 31,
1996 1995
-------------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 22.2 $ 49.3
Short-term investments 135.8 180.7
Accounts receivable - net 569.8 542.1
Materials and supplies 60.3 59.8
Deferred income taxes 105.8 98.8
Other current assets 88.2 92.1
--------- ---------
Total current assets 982.1 1,022.8
Due from NS - net (Note 3) 387.0 186.8
Investments 837.7 771.0
Properties less accumulated depreciation 8,918.9 8,750.4
Other assets 21.8 21.3
--------- ---------
TOTAL ASSETS $11,147.5 $10,752.3
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt $ 27.2 $ 27.2
Accounts payable 577.8 567.2
Income and other taxes 203.3 179.4
Other current liabilities 121.8 124.3
Current maturities of long-term debt (Note 4) 80.5 79.7
--------- ---------
Total current liabilities 1,010.6 977.8
Long-term debt (Note 4) 579.1 494.7
Other liabilities 890.5 870.8
Minority interests 1.9 2.3
Deferred income taxes (Note 3) 2,793.4 2,761.3
--------- ---------
TOTAL LIABILITIES 5,275.5 5,106.9
--------- ---------
Stockholders' equity:
Serial preferred stock $50 stated value 54.8 54.8
Common stock $10 stated value 166.7 166.7
Other capital 525.5 525.5
Unrealized gain on marketable securities 359.8 337.3
Retained income 4,765.2 4,561.1
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 5,872.0 5,645.4
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $11,147.5 $10,752.3
========= =========
See accompanying notes to consolidated financial statements.
PAGE 5
Item 1. Financial Statements. (continued)
- ------ --------------------
NORFOLK SOUTHERN RAILWAY COMPANY AND SUBSIDIARIES
(A Majority-Owned Subsidiary of Norfolk Southern Corporation)
Consolidated Statements of Cash Flows
(In millions of dollars)
(Unaudited)
Six Months Ended
June 30,
---------------------
1996 1995
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 353.7 $ 333.6
Reconciliation of net income to net cash
provided by operating activities:
Special charge payments (9.0) (7.0)
Depreciation 200.0 188.5
Deferred income taxes 10.5 32.8
Nonoperating gains on property sales (2.7) (2.6)
Changes in assets and liabilities
affecting operations:
Accounts receivable (27.7) 3.4
Materials and supplies (0.5) (8.4)
Other current assets 21.8 20.9
Current liabilities other than debt 42.0 52.9
Other - net 9.2 26.4
-------- --------
Net cash provided by operating activities 597.3 640.5
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions (Note 4) (309.5) (325.4)
Property sales and other transactions 33.0 35.5
Investment purchases (40.1) (38.6)
Investment sales and other transactions 12.2 18.3
Advances due from NS (200.2) (132.2)
Short-term investments - net 43.0 21.9
-------- --------
Net cash used for investing activities (461.6) (420.5)
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends (149.6) (146.8)
Proceeds from long-term borrowings 9.6 7.6
Debt repayments (22.8) (30.8)
-------- --------
Net cash used for financing activities (162.8) (170.0)
-------- --------
Net increase (decrease) in cash
and cash equivalents (27.1) 50.0
CASH AND CASH EQUIVALENTS:*
At beginning of year 49.3 33.8
-------- --------
At end of period $ 22.2 $ 83.8
======== ========
- --------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest (net of amounts capitalized) $ 36.9 $ 23.8
Income taxes $ 155.2 $ 115.4
* Cash equivalents are highly liquid investments purchased three months
or less from maturity.
See accompanying notes to consolidated financial statements.
PAGE 6
Item 1. Financial Statements. (continued)
- ------ --------------------
NORFOLK SOUTHERN RAILWAY COMPANY AND SUBSIDIARIES
(A Majority-Owned Subsidiary of Norfolk Southern Corporation)
Notes to Consolidated Financial Statements
(All Tables in millions of dollars)
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 financial
position as of June 30, 1996, and the results of operations and cash
flows for the three months ended June 30, 1996 and 1995.
While Management believes that the disclosures presented are
adequate to make the information not misleading, these consolidated
financial statements should be read in conjunction with the
financial statements and notes included in the Company's latest
Annual Report on Form 10-K.
2. Contingencies
There have been no significant changes since year-end 1995 in the
matters as discussed in Note 17, CONTINGENCIES, appearing in the
NS Rail Annual Report on Form 10-K for 1995, Notes to Consolidated
Financial Statements, beginning on page 61.
3. Related Parties
GENERAL
-------
Norfolk Southern Corporation (NS) is the parent holding company of
NS Rail. The costs of functions performed by NS are allocated to
NS Rail. Rail operations are coordinated at the holding company
level by the NS Executive Vice President-Operations.
INTERCOMPANY ACCOUNTS
---------------------
June 30, 1996 December 31, 1995
------------------ -------------------
Average Average
Interest Interest
Balance Rate Balance Rate
------- -------- ------- --------
Due from NS:
Advances $ 613.2 4.4% $ 407.1 3.4%
Due to NS:
Notes and advances 226.2 5.9% 220.3 6.6%
------- -------
Due from NS - net $ 387.0 $ 186.8
======= =======
Interest is applied to certain advances at the average NS yield on
short-term investments and to the notes at specified rates.
PAGE 7
Item 1. Financial Statements. (continued)
- ------ --------------------
NORFOLK SOUTHERN RAILWAY COMPANY AND SUBSIDIARIES
(A Majority-Owned Subsidiary of Norfolk Southern Corporation)
Notes to Consolidated Financial Statements
(All Tables in millions of dollars)
3. Related Parties (continued)
INTERCOMPANY FEDERAL INCOME TAX ACCOUNTS
----------------------------------------
In accordance with the NS Tax Allocation Agreement, intercompany
federal income tax accounts are recorded between companies in the NS
consolidated group. At March 31, 1996, and December 31, 1995,
NS Rail had intercompany federal income tax payables (which are
included in "Deferred income taxes" in the Consolidated Balance
Sheets) of $254.7 million.
CASH REQUIRED FOR NS STOCK PURCHASE PROGRAM AND NS DEBT
-------------------------------------------------------
In January 1996, the NS Board of Directors authorized the purchase
and retirement of up to 30 million shares of NS Common Stock. NS
completed its purchases (65 million shares) under the 1987 and 1989
authorizations on March 8, 1996. The new share program is expected
to be completed by the end of the year 2000. Purchases under the
programs have been made with internally generated cash and through
issuances of debt by NS. Since the first purchases in December 1987
through June 30, 1996, NS has purchased and retired 66,921,200
shares of its common stock at a cost of $3.1 billion. Future
purchases are dependent on market conditions, the economy, cash
needs and alternative investment opportunities.
Consistent with earlier purchases, a significant portion of the
funding for future NS stock purchases, either in the form of direct
cash or cash used for debt service, will come from NS Rail through
intercompany advances or dividends to NS. Cash required to service
NS debt, which may be issued as well for general corporate purposes,
will come principally from NS Rail.
4. Capital Lease Obligations
During the first half of 1996 and 1995, NS Rail entered into capital
leases covering new locomotives. The related capital lease
obligations totaling $107.8 million in 1996 and $104.5 million in
1995 were reflected in the Consolidated Balance Sheets as debt and,
because they were non-cash transactions, were excluded from the
Consolidated Statements of Cash Flows. The lease obligations carry
stated interest rates between 6.20 percent and 6.75 percent for
those entered into in 1996, and between 8.23 percent and
8.60 percent for those entered into in 1995. All were converted to
variable rate obligations using interest rate swap agreements. The
interest rates on these obligations are based on the six-month
London Interbank Offered Rate and are reset every six months with
realized gains or losses accounted for as an adjustment of interest
expense over the terms of the leases. As a result, NS Rail is
exposed to the market risk associated with fluctuations in interest
PAGE 8
Item 1. Financial Statements. (continued)
- ------ --------------------
NORFOLK SOUTHERN RAILWAY COMPANY AND SUBSIDIARIES
(A Majority-Owned Subsidiary of Norfolk Southern Corporation)
Notes to Consolidated Financial Statements
(All Tables in millions of dollars)
4. Capital Lease Obligations (continued)
rates. To date, the effects of the rate fluctuations have been
favorable. Counterparties to the interest rate swap agreements
are major financial institutions believed by Management to be
credit-worthy. NS Rail's use of interest rate swaps has been
limited to those discussed above.
5. Reclassification of Railway Revenues
Beginning in 1996, revenues previously reported as "Other railway
revenues" (principally switching and demurrage) are included in each
of the respective commodity groups. 1995 revenues have been
reclassified to conform with the current presentation.
6. Norfolk and Western Railway Company and Subsidiaries (NW)--
Summarized Consolidated Financial Information
SUMMARIZED CONSOLIDATED STATEMENTS OF INCOME
--------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------
1996 1995 1996 1995
-------- -------- -------- --------
(In millions of dollars)
(Unaudited)
Railway operating revenues $ 500.8 $ 490.9 $ 984.0 $ 965.4
Railway operating expenses 342.7 360.5 707.3 725.5
------- ------- ------- -------
Income from operations 158.1 130.4 276.7 239.9
Other - net 11.7 11.0 22.9 17.0
------- ------- ------- -------
Income before
income taxes 169.8 141.4 299.6 256.9
Provision for income taxes 60.6 53.0 108.8 96.4
------- ------- ------- -------
Net income $ 109.2 $ 88.4 $ 190.8 $ 160.5
======= ======= ======= =======
PAGE 9
Item 1. Financial Statements. (continued)
- ------ --------------------
NORFOLK SOUTHERN RAILWAY COMPANY AND SUBSIDIARIES
(A Majority-Owned Subsidiary of Norfolk Southern Corporation)
Notes to Consolidated Financial Statements
(All Tables in millions of dollars)
6. Norfolk and Western Railway Company and Subsidiaries (NW)--
Summarized Consolidated Financial Information (continued)
SUMMARIZED CONSOLIDATED BALANCE SHEETS
--------------------------------------
June 30, December 31,
1996 1995
------------ ------------
(Unaudited)
Assets
Current assets $ 337.4 $ 298.3
Noncurrent assets 4,965.6 4,778.2
-------- --------
Total assets $5,303.0 $5,076.5
======== ========
Liabilities and stockholder's equity
Current liabilities $ 260.6 $ 246.2
Noncurrent liabilities 1,623.0 1,603.9
Stockholder's equity 3,419.4 3,226.4
-------- --------
Total liabilities and
stockholder's equity $5,303.0 $5,076.5
======== ========
7. Lease Commitments
On July 29, 1996, implementation of the Lease Extension Agreement
between NS Rail and North Carolina Railroad Company (NCRR) was
enjoined by a federal court, which ruled that a quorum of private
stockholders was not present at the NCRR stockholders' meeting at
which the Agreement was approved. While the parties seek to resolve
this matter, NS Rail continues to discharge its common carrier
obligations by operating over the lines of NCRR. As reported in the
past, final resolution is not expected to have a material effect on
NS Rail's consolidated financial position.
PAGE 10
Item 2. Management's Discussion and Analysis of Financial Condition
- ------ -----------------------------------------------------------
and Results of Operations.
-------------------------
NORFOLK SOUTHERN RAILWAY COMPANY AND SUBSIDIARIES
(A Majority-Owned Subsidiary of Norfolk Southern Corporation)
Management's Discussion and Analysis of Financial Condition
and Results of Operations
RESULTS OF OPERATIONS
Net Income
- ----------
"Net income" for the second quarter of 1996 was a record $190.6 million,
$10.3 million, or 6 percent, above 1995's second-quarter earnings of
$180.3 million. "Net income" for the six months ended June 30, 1996,
was also a record $353.7 million, a $20.1 million, or 6 percent,
increase over the first half of 1995. Increased "Income from railway
operations," up 6 percent for the second quarter and 5 percent for the
first six months, and a lower effective income tax rate (see "Income
Taxes") were responsible for the improvements.
Railway Operating Revenues
- --------------------------
Second-quarter "Railway operating revenues" were a record $1.04 billion, a
$21.6 million, or 2 percent, increase over the same period last year.
"Railway operating revenues" for the first six months were $2.05 billion,
up $39.1 million, or 2 percent, compared with the same period last year.
The increases in operating revenues were due to:
Second Quarter First Six Months
1996 vs. 1995 1996 vs. 1995
Increase (Decrease) Increase (Decrease)
------------------ ------------------
(In millions of dollars)
Traffic volume (carloads) $ 16.6 $ --
Revenue per unit 5.0 39.1
------- -------
$ 21.6 $ 39.1
======= =======
PAGE 11
Item 2. Management's Discussion and Analysis of Financial Condition
- ------ -----------------------------------------------------------
and Results of Operations. (continued)
-------------------------
The principal revenue commodity groups were as follows (see Note 5 on
page 8 for a discussion of revenue reclassifications):
Revenues
-------------------------------------------
Second Quarter Six Months
1996 1995 1996 1995
-------- -------- -------- --------
($ in millions)
Coal $ 328.5 $ 318.0 $ 652.3 $ 624.9
Paper/forest 128.7 138.3 258.4 271.8
Chemicals 138.9 134.0 279.3 274.6
Automotive 133.7 118.8 252.0 238.5
Agriculture 97.1 97.5 198.7 194.7
Metals/construction 94.7 90.1 178.8 176.7
-------- -------- -------- --------
General merchandise 593.1 578.7 1,167.2 1,156.3
Intermodal 116.4 119.7 235.2 234.4
-------- -------- -------- --------
Total $1,038.0 $1,016.4 $2,054.7 $2,015.6
======== ======== ======== ========
The principal revenue commodity carloads were as follows:
Carloads
-------------------------------------------
Second Quarter Six Months
1996 1995 1996 1995
-------- -------- -------- --------
(in thousands)
Coal 334.5 313.6 654.1 632.0
Paper/forest 108.4 117.9 218.2 233.9
Chemicals 91.4 92.0 186.9 187.3
Automotive 95.8 87.7 179.6 174.4
Agriculture 90.8 96.6 183.9 195.1
Metals/construction 97.7 97.7 181.5 187.7
-------- -------- -------- --------
General merchandise 484.1 491.9 950.1 978.4
Intermodal 323.2 317.3 642.4 624.2
-------- -------- -------- --------
Total 1,141.8 1,122.8 2,246.6 2,234.6
======== ======== ======== ========
PAGE 12
Item 2. Management's Discussion and Analysis of Financial Condition
- ------ -----------------------------------------------------------
and Results of Operations. (continued)
-------------------------
Coal
- ----
Second-quarter coal revenues were $10.5 million, or 3 percent, above
second quarter 1995, and were $27.4 million, or 4 percent, higher for
the first six months. Increased traffic volume was principally
responsible for the improvements, as carloads were 7 percent and
3 percent ahead of last year's second quarter and first six months,
respectively. Lower average revenue per car, largely the result of an
increased proportion of utility traffic, offset some of the revenue
increase generated by improved second-quarter traffic volume. Domestic
utility coal led the volume gains, as customers rebuilt depleted
stockpiles. Second-quarter export and industrial coal traffic volumes
were also strong, continuing the first quarter's favorable trend.
Additional gains in domestic utility coal traffic are expected in the
second half of 1996, as customers continue to rebuild stockpiles and
demand increases during the customary peak electricity-generating months
of July and August. NS Rail's export coal volume is projected to
fluctuate in the coming months, but is expected to trend upward overall
for the remainder of the year.
General Merchandise
- -------------------
Second-quarter general merchandise revenues increased $14.4 million, or
2 percent, over last year and were $10.9 million, or 1 percent, above
the first six months of 1995. Higher revenue yields in all five major
merchandise commodity groups produced the improvements.
Automotive, which was the only commodity group also to report increased
traffic volume, led the growth, climbing $14.9 million, or 13 percent,
for the quarter and $13.5 million, or 6 percent, for the first six
months. NS Rail's automotive revenues benefited from a combination of
increased production at selected plants that produce popular cars and
trucks, production at the GM assembly plant in Wentzville, Mo., which
was down two years for retooling, and new BMW production at Greer, S.C.
Automotive revenues for 1996 are expected to surpass 1995's levels,
barring disruptions which could result from the expiration in September
of the current labor contract between the Big Three automakers and the
United Auto Workers' Union.
Revenues in the chemicals group were up $4.9 million, or 4 percent, for
the quarter and $4.7 million, or 2 percent, for the first six months.
Higher average revenues more than offset small declines in traffic
volume for both the second quarter and first six months. Chemical
revenues are expected to remain ahead of last year, benefiting from
increasing demand. Revenues from metals/construction traffic were up
$4.6 million, or 5 percent, for the quarter and $2.1 million, or
1 percent, for the first six months. Traffic volume, which was down
7 percent in the first quarter, began improving in the second quarter
and is expected to continue to pick up in the third quarter as a result
of higher overall construction activity and increased metals production,
PAGE 13
Item 2. Management's Discussion and Analysis of Financial Condition
- ------ -----------------------------------------------------------
and Results of Operations. (continued)
-------------------------
including the new SDI steel mini-mill located on NS Rail's line in
Butler, Ind. Revenues in the agriculture group were flat in the second
quarter and were $4.0 million, or 2 percent, higher for the first six
months. Higher average revenues due to longer hauls and a profitability
improvement program more than offset volume declines in grain, soybeans
and feed traffic for the first six months. Paper/forest revenues
decreased $9.6 million, or 7 percent, for the quarter and were
$13.4 million, or 5 percent, lower for the first six months. Declines
in NS Rail's paper/forest traffic reflected the overall softness in
the U.S. paper industry during the first half of the year. Some
recovery in this market is projected for the second half of 1996,
although revenues in this group are expected to continue to lag last
year's performance.
Intermodal
- ----------
Second-quarter intermodal revenues declined $3.3 million, or 3 percent,
compared with last year, but were $0.8 million higher for the first six
months. Traffic volume was up 2 percent and 3 percent for the quarter
and six months, respectively; however, these volume gains were more than
offset by lower average revenue per unit. The decline in average
revenues was largely due to a change in traffic mix from trailers to
containers which have lower average revenues but generally produce
higher margins. NS Rail's intermodal traffic is expected to continue
the first half's positive growth trend into the third quarter.
Railway Operating Expenses
- --------------------------
"Railway operating expenses" increased $5.9 million, or 1 percent, in the
second quarter of 1996, and $12.0 million, or 1 percent, for the first
six months, compared with the same periods last year.
The largest increase was in "Diesel fuel," which was up $9.7 million, or
21 percent, for the quarter and $16.4 million, or 17 percent, for the
first six months. The increases were primarily due to higher price per
gallon, up 16 percent and 14 percent for the quarter and six months,
respectively. The price of diesel fuel, which peaked in April of this
year at the highest level since the Persian Gulf crisis in 1991, began to
decline during the second quarter.
"Depreciation" increased $5.3 million, or 6 percent, for the quarter and
$11.5 million, or 6 percent, for the first six months due to a
combination of investment in additional depreciable assets and higher
overall depreciation rates.
PAGE 14
Item 2. Management's Discussion and Analysis of Financial Condition
- ------ -----------------------------------------------------------
and Results of Operations. (continued)
-------------------------
"Casualties and other claims" were up $2.1 million, or 7 percent, in the
second quarter and $4.6 million, or 8 percent, for the first six months.
These increases were largely due to the effect of a $3.0 million
favorable adjustment made to the personal injury reserve in June of 1995.
Absent this adjustment, 1996's casualties and other claims expenses were
comparable with last year, as increases in environmental-related accruals
offset reductions in personal injury costs.
The largest decrease was in expenses for "Materials, services and rents"
which were $4.1 million, or 3 percent, and $15.1 million, or 5 percent,
below last year's second quarter and first six months, respectively. The
reductions were primarily attributable to: (1) lower locomotive
maintenance costs, largely resulting from the replacement of older
locomotives with new units and (2) lower freight car maintenance costs,
reflecting favorable results from ongoing programs both to reduce the
number of cars in the fleet and to reengineer freight car maintenance
practices. "Other" expense declined $1.8 million, or 4 percent, for the
quarter and $2.1 million, or 3 percent, for the first six months. The
favorable comparisons were due to relocation costs related to last year's
shop closings which are reflected in 1995's expenses.
Other Income (Expense)
- ----------------------
"Interest income" was $1.2 million, or 13 percent, lower for the quarter
but was $0.3 million higher for the six months. The second-quarter
decline resulted from last year's $1.7 million of interest related to a
settlement in June 1995 between the major railroads and the Internal
Revenue Service regarding a Supplemental Annuity Tax (man-hour) issue.
"Other-net" was $7.2 million unfavorable for the quarter and $6.0 million
unfavorable for the first six months. The unfavorable second-quarter
comparison was primarily due to a combination of lower income from
corporate-owned life insurance and the effect of favorable adjustments
last year to interest expense on possible income tax deficiencies. These
prior year adjustments were also principally responsible for the
unfavorable year-to-date comparison.
Income Taxes
- ------------
The effective income tax rate for the second quarter was 35.5 percent,
compared with second-quarter 1995's effective rate of 37.5 percent. For
the first six months, the effective rate was 36.4 percent versus
37.7 percent for the first six months of 1995. The lower effective rate
in 1996 results from favorable adjustments for settlement of federal
income tax years 1990 through 1992 and reductions in state income tax
accruals.
PAGE 15
Item 2. Management's Discussion and Analysis of Financial Condition
- ------ -----------------------------------------------------------
and Results of Operations. (continued)
-------------------------
FINANCIAL CONDITION AND LIQUIDITY
June 30, 1996 December 31, 1995
-------------- -----------------
(Dollars in millions)
Cash and short-term investments $158.0 $230.0
Debt to total capitalization 10.5% 9.6%
CASH PROVIDED BY OPERATING ACTIVITIES is NS Rail's principal source of
liquidity and was sufficient to cover cash outflows for dividends, debt
repayments and capital spending (see Consolidated Statements of Cash
Flows on page 5). The decline in cash provided by operations, compared
with the first six months of 1995, was primarily attributable to tax and
interest payments made as a result of the federal income tax settlement
in 1996 (see "Income Taxes"). The use of cash in accounts receivable
was primarily attributable to higher freight receivables, commensurate
with increased operating revenues.
CASH USED FOR INVESTING ACTIVITIES was affected principally by capital
spending for property additions, which included $33 million and
$30 million in 1996 and 1995, respectively, related to locomotives under
capital leases (see Note 4). The increase in cash used for "Advances
due from NS," in part, reflects higher amounts related to NS' stock
purchase program compared with the first six months of 1995 (see
Note 3). "Investment purchases" consists primarily of premium payments
related to corporate-owned life insurance (COLI), while "Investment
sales and other transactions" principally reflects borrowing on COLI.
The increase in "Investments" in the Consolidated Balance Sheet at
June 30, 1996, was principally due to higher unrealized holding gains
on NS Rail's investments as a result of an increase in the price of
NS stock. Carrying value adjustments are non-cash transactions and
are not included in the Consolidated Statements of Cash Flows.
CASH USED FOR FINANCING ACTIVITIES includes "Proceeds from long-term
borrowings" which represents amounts received in connection with
capital lease transactions (see Note 4).
As discussed in Note 3, NS has issued a significant amount of long-term
debt in recent years. Funds to service this debt are expected to come
primarily from NS Rail, NS' principal subsidiary.
NEW ACCOUNTING PRONOUNCEMENT
Effective January 1, 1996, NS Rail adopted Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to be Disposed Of" (SFAS 121).
This standard establishes the accounting and reporting requirements for
recognizing and measuring impairment of long-lived assets to be either
held and used or held for disposal. SFAS 121 did not have a material
effect on NS Rail's financial statements.
PAGE 16
Item 2. Management's Discussion and Analysis of Financial Condition
- ------ -----------------------------------------------------------
and Results of Operations. (continued)
-------------------------
ENVIRONMENTAL MATTERS
During 1995, the EPA alleged that The Alabama Great Southern Railroad
Company ("AGS"), a subsidiary of NS Rail, was responsible, along with
several other entities believed to be financially solvent, for past and
future clean-up and monitoring costs at the Bayou Bonfouca NPL Superfund
site located in Slidell, Louisiana. The site was owned by the parent of
an AGS predecessor from 1882 until 1902. Some of the bridge timbers used
in the 1882 construction of the predecessor's bridge across Lake
Pontchartrain were treated at the site. The United States and the State
of Louisiana filed suit to recover all costs incurred (estimated in the
complaint at around $100 million) and unspecified amounts to be incurred.
Defendants in that suit include AGS and all other entities the EPA
earlier identified as potentially responsible parties. AGS believes it
never owned, operated or had any other culpable connection to the site
and denies responsibility; however, because the amount of liability, if
any, that ultimately may be assessed against NS Rail or AGS cannot be
estimated reliably at this time, the materiality of such amount to
NS Rail's financial position, results of operation or liquidity in a
particular quarter or year cannot be evaluated.
PAGE 17
PART II - OTHER INFORMATION
---------------------------
NORFOLK SOUTHERN RAILWAY COMPANY AND SUBSIDIARIES
Item 4. Submission of Matters to a Vote of Security Holders
- ------ ---------------------------------------------------
Registrant's annual meeting of stockholders was held on May 28,
1996, at which meeting two directors were elected to the class whose term
will expire in 1999, and two directors were elected to the class whose
term will expire in 1997.
The four nominees for directors, who were uncontested, were
elected by the following vote:
THREE-YEAR TERM
--------------------------------------------------------------------
FOR AUTHORITY WITHHELD
--- ------------------
D. Henry Watts 17,609,021 votes 8,902 votes
Henry C. Wolf 17,609,421 votes 8,502 votes
ONE-YEAR TERM
--------------------------------------------------------------------
FOR AUTHORITY WITHHELD
--- ------------------
James C. Bishop, Jr. 17,609,361 votes 8,562 votes
L. I. Prillaman 17,609,481 votes 8,442 votes
Item 6. Exhibits and Reports on Form 8-K
- ------ --------------------------------
(a) Exhibits
Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed for the three months
ended June 30, 1996.
PAGE 18
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 RAILWAY COMPANY
------------------------------------------
(Registrant)
Date: August 9, 1996 /s/ Dezora M. Martin
------------------- ------------------------------------------
Dezora M. Martin
Assistant Corporate Secretary (Signature)
Date: August 9, 1996 /s/ John P. Rathbone
------------------- ------------------------------------------
John P. Rathbone
Vice President and Controller
(Principal Accounting Officer) (Signature)
PAGE 19
NORFOLK SOUTHERN RAILWAY COMPANY AND SUBSIDIARIES
INDEX TO EXHIBITS
-----------------
Electronic
Submission
Exhibit
Number Description Page Number
- ----------- ----------------------------------------- -----------
27 Financial Data Schedule (This exhibit is
required to be submitted electronically
pursuant to the rules and regulations of
the Securities and Exchange Commission
and shall not be deemed filed for purposes
of Section 11 of the Securities Act of 1933
or Section 18 of the Securities Exchange Act
of 1934). 20