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 MARCH 31, 1997
( ) 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
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 (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, 1997
----- --------------------------------
Common Stock (par value $1.00) 125,454,372 shares (excluding
7,252,634 shares held by
registrant's consolidated
subsidiaries)
<PAGE> PAGE 2
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES (NS)
INDEX
-----
Page
----
Part I. Financial Information:
Item 1. Financial Statements:
Consolidated Statements of Income
Three Months March 31, 1997 and 1996 3
Consolidated Balance Sheets
March 31, 1997, and December 31, 1996 4
Consolidated Statements of Cash Flows
Three Months Ended March 31, 1997 and 1996 5-6
Notes to Consolidated Financial Statements 7-10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11-18
Part II. Other Information:
Item 1. Legal Proceedings 19
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 20
Index to Exhibits 21
<PAGE> PAGE 3
PART I. FINANCIAL INFORMATION
------------------------------
Item 1. Financial Statements.
- ------ --------------------
<TABLE>
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income
(In millions of dollars except per share amounts)
(Unaudited)
<CAPTION>
Three Months Ended
March 31,
1997 1996
-------- --------
<S> <C> <C>
TRANSPORTATION OPERATING REVENUES:
Railway:
Coal $ 326.1 $ 323.8
General merchandise 594.2 574.1
Intermodal 125.7 118.8
-------- --------
Total railway 1,046.0 1,016.7
Motor carrier (Note 6) 203.7 198.3
-------- --------
Total transportation operating revenues 1,249.7 1,215.0
-------- --------
TRANSPORTATION OPERATING EXPENSES:
Railway:
Compensation and benefits 361.9 377.3
Materials, services and rents 169.4 151.9
Depreciation 102.9 100.3
Diesel fuel 62.7 55.4
Casualties and other claims 29.0 34.7
Other 38.6 35.2
-------- --------
Total railway 764.5 754.8
Motor carrier (Note 6) 199.6 199.2
-------- --------
Total transportation operating expenses 964.1 954.0
-------- --------
Income from operations 285.6 261.0
Other income (expense):
Interest income 6.3 5.8
Interest expense on debt (Note 4) (38.4) (27.6)
Charge for credit facility costs (Note 3) (77.2) --
Other - net 22.2 27.6
-------- --------
Total other income (expense) (87.1) 5.8
-------- --------
Income before income taxes 198.5 266.8
Provision for income taxes 70.7 98.7
-------- --------
NET INCOME $ 127.8 $ 168.1
======== ========
Per share amounts (Note 5):
Net income $ 1.02 $ 1.31
Dividends 0.60 0.56
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE> PAGE 4
Item 1. Financial Statements. (continued)
- ------ --------------------
<TABLE>
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
(In millions of dollars)
(Unaudited)
<CAPTION>
March 31, December 31,
1997 1996
----------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 139.5 $ 209.2
Short-term investments 185.7 194.2
Accounts receivable - net 748.7 704.3
Materials and supplies 64.8 63.0
Deferred income taxes 139.5 158.9
Other current assets 108.8 127.2
--------- ---------
Total current assets 1,387.0 1,456.8
Investments (Note 2) 1,266.1 274.7
Properties less accumulated depreciation 9,677.6 9,529.1
Other assets (Note 3) 101.6 155.8
--------- ---------
TOTAL ASSETS $12,432.3 $11,416.4
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt $ 27.2 $ 44.0
Accounts payable 679.0 708.9
Income and other taxes 217.7 178.7
Other current liabilities 161.9 202.7
Current maturities of long-term debt 56.0 56.0
--------- ---------
Total current liabilities 1,141.8 1,190.3
Long-term debt (Note 4) 2,843.6 1,800.3
Other liabilities 959.7 987.1
Minority interests 49.7 49.5
Deferred income taxes 2,392.5 2,411.6
--------- ---------
TOTAL LIABILITIES 7,387.3 6,438.8
--------- ---------
Stockholders' equity:
Common stock $1.00 per share par value 132.7 132.4
Additional paid in capital 488.1 462.1
Retained income 4,444.8 4,403.7
Less treasury stock at cost, 7,252,634 shares (20.6) (20.6)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 5,045.0 4,977.6
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $12,432.3 $11,416.4
========= =========
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE> PAGE 5
Item 1. Financial Statements. (continued)
- ------ --------------------
<TABLE>
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In millions of dollars)
(Unaudited)
<CAPTION>
Three Months Ended
March 31,
1997 1996
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 127.8 $ 168.1
Reconciliation of net income to net cash
provided by operating activities:
Charge for credit facility costs (Note 3) 77.2 --
Depreciation 107.8 105.6
Deferred income taxes 7.5 13.9
Nonoperating gains and losses on properties
and investments (10.4) (15.9)
Changes in assets and liabilities affecting
operations:
Accounts receivable (44.4) (31.1)
Materials and supplies (1.8) (2.3)
Other current assets 7.2 12.1
Current liabilities other than debt 18.7 67.7
Other - net (18.2) 2.4
--------- ---------
Net cash provided by operating activities 271.4 320.5
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions (Note 4) (229.5) (163.0)
Property sales and other transactions 17.5 24.0
Investment in Conrail (959.2) --
Investments, including short-term (119.2) (83.4)
Investment sales and other transactions 102.8 81.5
--------- ---------
Net cash used for investing activities (1,187.6) (140.9)
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends (75.1) (71.9)
Common stock issued - net 9.7 11.2
Purchase and retirement of common stock -- (108.6)
Commercial paper proceeds (Note 4) 993.1 --
Credit facility costs paid (Note 3) (70.9) --
Proceeds from long-term borrowings (Note 4) 1.2 5.6
Debt repayments (11.5) (11.8)
--------- ---------
Net cash provided by (used for)
financing activities 846.5 (175.5)
--------- ---------
Net increase (decrease) in cash
and cash equivalents (69.7) 4.1
CASH AND CASH EQUIVALENTS:*
At beginning of year 209.2 67.7
--------- ---------
At end of period $ 139.5 $ 71.8
========= =========
</TABLE>
<PAGE> PAGE 6
Item 1. Financial Statements. (continued)
- ------ --------------------
<TABLE>
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In millions of dollars)
(Unaudited)
<CAPTION>
Three Months Ended
March 31,
1997 1996
--------- ---------
<S> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest (net of amounts capitalized) $ 52.2 $ 43.1
Income taxes $ 4.3 $ 2.7
* Cash equivalents are highly liquid investments purchased three months or
less from maturity.
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE> PAGE 7
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 financial
position as of March 31, 1997, and the results of operations and cash
flows for the three months ended March 31, 1997, and 1996.
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 Corporation's latest Annual
Report on Form 10-K.
2. Commitments and Contingencies
Except as discussed below, there have been no significant changes
since year-end 1996 in the matters as discussed in NOTE 15,
COMMITMENTS AND CONTINGENCIES, and NOTE 16, EVENTS SUBSEQUENT TO THE
DATE OF THE INDEPENDENT AUDITORS' REPORT-CONRAIL DEVELOPMENTS,
appearing in the NS Annual Report on Form 10-K for 1996, Notes to
Consolidated Financial Statements, beginning on page 76.
JOINT ACQUISITION OF CONRAIL INC. (CONRAIL)
-------------------------------------------
On February 11, 1997, pursuant to its tender offer as then amended,
NS purchased 8.2 million Conrail shares at $115 in cash per share, or
$943 million in the aggregate.
On April 8, 1997, NS and CSX Corporation (CSX) entered into an
agreement ("Agreement") providing for a joint acquisition of Conrail.
The two companies will form a jointly owned entity to acquire all
outstanding shares of Conrail, not currently held by NS or CSX, for
$115 in cash per share, pursuant to a tender offer scheduled to expire
May 23, 1997, followed by a second-step merger. Following the joint
acquisition of the Conrail shares and receipt of all required
regulatory approvals, most of the assets and liabilities of Conrail
are expected to be allocated between NS and CSX pursuant to leasing,
operating, partnership or other arrangements yet to be negotiated by
NS and CSX. NS will contribute $5.9 billion for its 58 percent
share of the purchase price of the Conrail shares, and CSX will
contribute $4.3 billion for its 42 percent share (including amounts
previously paid by NS and CSX to acquire Conrail shares).
Conrail tender offer and merger shares purchased previously by NS
and CSX, and Conrail shares purchased will be placed in a joint voting
trust pending STB approval. NS and CSX intend to file a joint
application with the Surface Transportation Board (STB) in June 1997
seeking approval of the proposed acquisition of Conrail. The
approval of the STB, while expected, cannot be assumed and is not
likely to be effective prior to April 1, 1998.
NS intends to account for its investment in Conrail using the equity
method of accounting following consummation of the joint acquisition
<PAGE> PAGE 8
Item 1. Financial Statements. (continued)
- ------ --------------------
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
2. Commitments and Contingencies (continued)
JOINT ACQUISITION OF CONRAIL INC. (CONRAIL) (continued)
-------------------------------------------
and during the period Conrail shares are held in a voting trust--a
period that will extend at least until the effective date of the STB's
decision approving the transactions contemplated by the Agreement (if
such approval is obtained). The method of accounting for the
investment in Conrail subsequent to the voting trust being dissolved
will depend on the ownership arrangement that is ultimately
negotiated between NS and CSX, and approved by the STB, and the
determination of whether and how controlling financial interests will
be established for selected assets, liabilities and operations of
Conrail. Additionally, the terms of leases, operating, partnership
and other arrangements, yet to be negotiated, will impact the
accounting. It is also expected that some of the assets and
operations of Conrail will remain subject to joint control by NS and
CSX and thus will continue to be accounted for using the equity
method of accounting post STB approval.
The Conrail shares purchased on February 11, 1997, were financed with
commercial paper debt (see Note 4, "Commercial Paper"). During the
second quarter of 1997, NS intends to finance the remaining
approximately $5 billion cost of the Conrail transaction by accessing
both public and private markets by issuing commercial paper and term
debt.
DEBT COMMITMENTS
----------------
Following the April 8, 1997, Agreement with CSX, NS terminated all
but $1.65 billion of the commitments available under a $13.0 billion
credit agreement dated February 10, 1997, as amended. The February
credit agreement provided financing for NS' then-proposed acquisition
of all Conrail shares. NS has begun negotiating a new credit
agreement to provide a bank facility of up to $7.0 billion. During
the second quarter of 1997, NS intends to finance the remaining
approximately $5 billion cost of the Conrail transaction by accessing
both public and private markets by issuing commercial paper and term
debt. NS has entered into certain agreements to hedge its exposure
to changes in interest rates. The total notional amount of such
contracts and agreements is $1.25 billion. As a result, NS is
exposed to the market risk associated with interest rate fluctuations
until the contracts and agreements are terminated. NS expects to
terminate them when the term debt is issued and account for any
gain or loss, which is not expected to be material, as a component
of interest expense over the life of the term debt. Counterparties
to the contracts and agreements are major financial institutions
believed by Management to be creditworthy.
<PAGE> PAGE 9
Item 1. Financial Statements. (continued)
- ------ --------------------
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
3. Charge for Credit Facility Costs
NS recorded a $77.2 million pretax charge in the first quarter of
1997 for the direct costs, principally loan commitment fees, of
having secured and maintained certain now-terminated commitments
under the February credit agreement (see Note 2, "Debt Commitments").
This charge reduced first-quarter net income by $49.7 million, or
$0.40 per share.
4. Long-Term Debt
SHELF REGISTRATIONS
-------------------
On January 22, 1997, and on March 27, 1997, NS filed with the
Securities and Exchange Commission shelf registration statements on
Form S-3 covering the issuance of up to $1.25 billion and
$3.0 billion, respectively, principal amount of any combination of
debt or equity securities.
COMMERCIAL PAPER
----------------
In February 1997, NS issued $1.0 billion of commercial paper debt to
finance its purchase of 8.2 million Conrail shares (see Note 2,
"Joint Acquisition of Conrail Inc."). The debt has been classified
as long-term because NS has the ability, through a revolving back-up
facility, to convert this obligation into longer-term debt. NS
intends to refinance the commercial paper either by issuing
additional commercial paper or by replacing commercial paper notes
with long-term debt.
CAPITAL LEASE OBLIGATIONS
-------------------------
During the first quarters of 1997 and 1996, an NS rail subsidiary
entered into capital leases covering new locomotives. The related
capital lease obligations totaling $44.7 million in 1997 and
$74.4 million in 1996 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 of 6.83 percent for the lease
entered into in 1997, and between 6.20 percent and 6.75 percent for
those entered into in 1996. 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 is exposed to the market risk
associated with fluctuations in interest rates. To date, the effects
of the rate fluctuations have been favorable and not material.
Counterparties to the interest rate swap agreements are major
financial institutions believed by Management to be creditworthy.
<PAGE> PAGE 10
Item 1. Financial Statements. (continued)
- ------ --------------------
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
5. Earnings Per Share
<TABLE>
"Earnings per share" is computed by dividing net income by the
weighted average number of common shares outstanding as follows:
<CAPTION>
Three Months Ended
March 31,
1997 1996
------- -------
(In thousands)
<S> <C> <C>
Average number of shares outstanding 125,255 128,215
</TABLE>
The decrease in the average number of shares outstanding is a result
of the stock purchase program which was suspended on October 23,
1996.
6. Reclassification of Motor Carrier Revenues and Expenses
Motor carrier revenues and expenses have been reclassified to
conform to a change in presentation made in the first quarter of
1997 from a net basis to a gross basis. Certain motor carrier
expenses previously reported net in revenues have been reclassified
to motor carrier expenses to conform with recent industry reporting
practices. Motor carrier operating income is not affected by this
change in presentation, and first-quarter 1996 has been reclassified
to conform to the 1997 presentation.
<PAGE> PAGE 11
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
- ----------
"Net income" for the first quarter of 1997 was $127.8 million, a decrease
of $40.3 million, or 24 percent, compared with first-quarter 1996.
Included in 1997's results was a $77.2 million ($49.7 million after-tax)
charge for costs related to the February credit agreement which had been
established and maintained to purchase all Conrail shares (see Note 3).
Excluding the charge, first-quarter net income was $177.5 million, up
$9.4 million, or 6 percent, compared with the same period last year. A
$24.6 million, or 9 percent, increase in operating income more than
offset a $15.7 million decrease in nonoperating income (excluding the
charge for credit facility costs) that principally resulted from higher
interest expense.
<TABLE>
Railway Operating Revenues
- --------------------------
Railway operating revenues were a record $1.05 billion for the first
quarter, a $29.3 million, or 3 percent, increase, compared with the same
period last year. As shown in the table below, the improvement was the
result of increased traffic volume.
<CAPTION>
First Quarter
1997 vs. 1996
Increase (Decrease)
------------------
(In millions of dollars)
<S> <C>
Traffic volume (carloads) $ 42.3
Revenue per unit (13.0)
------
$ 29.3
======
</TABLE>
<PAGE> PAGE 12
Item 2. Management's Discussion and Analysis of Financial Condition
- ------ -----------------------------------------------------------
and Results of Operations.
-------------------------
<TABLE>
Revenues and carloads for the commodity groups were as follows:
<CAPTION>
Revenues Carloads
1997 1996 1997 1996
-------- -------- ------- -------
($ in millions) (in thousands)
<S> <C> <C> <C> <C>
Coal $ 326.1 $ 323.8 327.7 319.6
Chemicals 147.2 141.1 100.6 96.6
Paper/forest 134.8 129.7 114.7 109.8
Automotive 123.8 118.3 92.1 83.8
Agriculture 99.2 101.6 91.0 93.1
Metals/construction 89.2 83.4 87.2 82.7
-------- -------- ------- -------
General merchandise 594.2 574.1 485.6 466.0
Intermodal 125.7 118.8 342.2 319.2
-------- -------- ------- -------
Total $1,046.0 $1,016.7 1,155.5 1,104.8
======== ======== ======= =======
</TABLE>
Coal
- ----
First-quarter coal revenues of $326.1 million were $2.3 million, or
1 percent, higher than first-quarter 1996. The improvement was due to a
3 percent increase in carloads resulting from increased export, coke and
utility tonnage. Export coal tonnage rose 9 percent, led by increased
shipments to Japan, Brazil and Turkey. Steel coal tonnage also improved,
supported by new coke business that more than offset declines in the
domestic metallurgical coal market resulting from inventory adjustments,
shipment timing and some lost market share. Utility tonnage improved
2 percent despite strong carloadings late in the first quarter of 1996.
Coal revenues for all of 1997 are expected to compare favorably with
those of 1996.
General Merchandise
- -------------------
General merchandise revenues were $594.2 million in the first quarter,
increasing $20.1 million, or 4 percent, compared with the same period last
year. All commodity groups except agriculture posted carload and revenue
gains. Leading the improvement was the chemicals group, up $6.1 million,
or 4 percent, reflecting increased traffic volume, a result of strong
demand for plastics, chloral-alkali and miscellaneous chemicals.
Metals/construction revenues posted a $5.8 million, or 7 percent, increase
on a 5 percent increase in traffic volume. Growth was broad based with
revenue increases reported for most metals and construction commodities.
Automotive revenues increased $5.5 million, or 5 percent, as traffic volume
increased 10 percent. This growth was supported by improved demand for
both parts and finished automobiles despite a mid-March strike at one GM
plant and unscheduled downtime at two Ford plants. Lower average revenues
per car, the result of shorter length of haul and a shift in traffic mix
<PAGE> PAGE 13
Item 2. Management's Discussion and Analysis of Financial Condition
- ------ -----------------------------------------------------------
and Results of Operations. (continued)
-------------------------
among customers, offset some of the volume improvement. Paper/forest
revenues improved $5.1 million, or 4 percent, compared with a weak first
quarter last year. Agriculture revenues declined $2.4 million, or
2 percent, due to softness in the export grain market.
General merchandise revenues are expected to continue to show improvement
for the remainder of the year.
Intermodal
- ----------
Intermodal revenues were $125.7 million in the first quarter, a
$6.9 million, or 6 percent, increase, compared with the same period last
year. Traffic volume increased 7 percent, due to strong unit increases
in international and domestic containers, and double-digit growth in
Triple Crown Services Company volume.
NS' intermodal traffic is expected to continue the first-quarter's
positive growth trend for the remainder of this year.
Railway Operating Expenses
- --------------------------
First-quarter railway operating expenses were $764.5 million, up
$9.7 million, or 1 percent, compared with last year's first quarter,
despite a 5 percent increase in carloadings.
The largest increase was in materials, services and rents expense, up
$17.5 million, or 12 percent. Higher equipment rents resulted from a
change in the mix of received and forwarded traffic, new freight car
leases (mainly covered hoppers and some box cars), and the absence this
year of income from leased locomotives. Purchased services expense was
also higher due to increased automotive and intermodal handling costs
resulting from increased traffic volume.
Diesel fuel expense increased $7.3 million, or 13 percent, due almost
entirely to increased price per gallon--average prices in the first
quarter were 12 percent higher than a year ago. As the quarter
progressed, however, fuel prices did decline.
The largest decrease was in compensation and benefits expense, which was
down $15.4 million, or 4 percent, due to lower accruals for stock-based
compensation and favorable experience in employee benefit costs.
Casualties and other claims expense decreased $5.7 million, or
16 percent. Higher environmental remediation expenses last year and
lower personal injury costs this year resulting from favorable claims
experience were responsible for the improvement.
The 3 percent increase in railway operating revenues, combined with only
a 1 percent increase in railway operating expenses, produced a railway
operating ratio for the first quarter of 73.1 percent, a first-quarter
record, surpassing last year's record of 74.2 percent by more than one
percentage point.
<PAGE> PAGE 14
Item 2. Management's Discussion and Analysis of Financial Condition
- ------ -----------------------------------------------------------
and Results of Operations. (continued)
-------------------------
Motor Carrier Operating Revenues
- --------------------------------
First-quarter motor carrier operating revenues were $203.7 million, a
$5.4 million, or 3 percent, increase, compared with last year's first
quarter. The improvement was principally due to gains in the High Value
Products Division, including increased logistics business.
Effective April 11, 1997, NAVL's largest revenue-producing agent
terminated its relationship with NAVL. Management expects to retain over
half of the revenues produced by this agent in 1997 and beyond. The loss
of this agent is not expected to have a material effect on NS' financial
statements.
Motor Carrier Operating Expenses
- --------------------------------
Motor carrier operating expenses were $199.6 million in the first
quarter, slightly above those of the same period last year, which were
adversely affected by harsh weather. However, this year's expenses were
reduced due to a favorable litigation settlement.
Other Income (Expense)
- ----------------------
Total other income and expense for the first quarter was an expense of
$87.1 million, compared with income of $5.8 million in the first quarter of
last year. Included in this year's expense was a $77.2 million pretax
charge to write off the costs incurred to establish and maintain a
$13.0 billion credit facility in connection with the tender offer for all
Conrail shares (see Note 2, "Joint Acquisition of Conrail Inc.," and
Note 3). Interest expense increased $10.8 million, or 39 percent, in the
first quarter, compared with the same period last year. The increase
reflects the cost of borrowings to acquire the 8.2 million Conrail shares
in mid-February, and the $200 million of medium-term notes issued last
September.
<TABLE>
FINANCIAL CONDITION AND LIQUIDITY
<CAPTION>
March 31, 1997 December 31, 1996
-------------- -----------------
(Dollars in millions)
<S> <C> <C>
Cash and short-term investments $325.2 $403.4
Working capital $245.2 $266.5
Current assets to current liabilities 1.2 1.2
Debt to total capitalization 36.7% 27.6%
</TABLE>
CASH PROVIDED BY OPERATING ACTIVITIES is NS' principal source of liquidity
and was sufficient to cover most of the 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 quarter of last year, was primarily attributable to a decrease in
operating accounts payable, compared with an increase in the same period
last year.
<PAGE> PAGE 15
Item 2. Management's Discussion and Analysis of Financial Condition
- ------ -----------------------------------------------------------
and Results of Operations. (continued)
-------------------------
CASH USED FOR INVESTING ACTIVITIES increased substantially due to the
February purchase of 8.2 million Conrail shares for $115 per share in cash
(see Note 2, "Joint Acquisition of Conrail Inc."). The increase in
property additions in the first quarter of 1997, compared with last year,
is the result of increased roadway additions and the purchase of some
locomotives in 1997 using cash, instead of capital leases.
CASH PROVIDED BY FINANCING ACTIVITIES in the first quarter of 1997
included proceeds from the sale of commercial paper to finance the
purchase of 8.2 million Conrail shares (see Note 2, "Joint Acquisition of
Conrail Inc.," and Note 4, "Commercial Paper"). Included also is
$70.9 million of credit facility costs paid related to certain
now-terminated commitments under credit agreements which were in place to
support the tender offer for all Conrail shares (see Note 3). NS is
negotiating a new credit agreement to provide a bank facility of up to
$7.0 billion. During the second quarter of 1997, NS intends to finance
the remaining approximately $5 billion cost of the Conrail transaction by
accessing both public and private markets by issuing commercial paper
and term debt. NS has entered into certain agreements to hedge its
exposure to changes in interest rates. The total notional amount of
such contracts and agreements is $1.25 billion. As a result, NS is
exposed to the market risk associated with interest rate fluctuations
until the contracts and agreements are terminated. NS expects to
terminate them when the term debt is issued and account for any
gain or loss, which is not expected to be material, as a component
of interest expense over the life of the term debt. Counterparties
to the contracts and agreements are major financial institutions
believed by Management to be creditworthy. In view of the amount
of debt NS will incur to finance its portion of the Conrail
transaction, both major credit rating agencies have downgraded their
ratings on NS debt.
JOINT ACQUISITION OF CONRAIL
On April 8, 1997, NS and CSX announced that they had entered into an
Agreement providing for the joint acquisition of all outstanding Conrail
shares not already owned by them for $115 in cash per share. The Agreement
followed several months of attempts by each of NS and CSX to acquire all of
Conrail. In connection therewith, NS' tender offer to acquire Conrail
shares was terminated and CSX's tender offer to acquire Conrail shares was
amended, among other things, to include NS as co-bidder and to extend its
expiration date to May 23, 1997.
The estimated total cost of the joint acquisition and of the Conrail shares
already acquired by NS and CSX is approximately $10.2 billion, before
transaction expenses. Pursuant to the Agreement, NS will bear 58 percent
of that total cost (or approximately $5.9 billion), and CSX will bear
42 percent of such cost, in each case taking into consideration amounts
previously paid by each of NS and CSX to acquire Conrail shares.
<PAGE> PAGE 16
Item 2. Management's Discussion and Analysis of Financial Condition
- ------ -----------------------------------------------------------
and Results of Operations. (continued)
-------------------------
NS and CSX will have, respectively, a 58 percent and a 42 percent economic
interest in--and each will exercise a 50 percent voting interest in--the
entity formed to acquire Conrail shares. Under the Agreement and subject
to STB approval, NS will operate routes and assets (or rights therein
or thereto) that generated approximately 58 percent of Conrail's 1995
revenues, pursuant to leasing, operating partnerships or other arrangements
to be negotiated and implemented between NS and CSX. Each of NS and
CSX will have the right to appoint 50 percent of that entity's directors
and will be entitled to appoint full-time Co-Chief Executive Officers.
Under the Agreement, it is expected that in some form, yet to be
determined, NS will have primary operating interest in Conrail lines
between Chicago and Cleveland, Ohio, and between Cleveland and northern New
Jersey, via Pittsburgh and Harrisburg, Pennsylvania. In addition, NS will
operate the Conrail line serving the metropolitan New York area between
northern New Jersey and Buffalo through Binghamton, New York, and another
between Buffalo and Harrisburg, Pennsylvania. NS will also operate most
Conrail lines in Michigan, Maryland, Delaware and Pennsylvania, and will
operate the routes between Toledo and Detroit, between Columbus and
Cincinnati and between Columbus and Charleston, West Virginia. NS and CSX
will jointly operate certain Conrail assets in major terminal areas such as
Detroit and northern and southern New Jersey. NS and CSX will also share
access to certain lines in Philadelphia and Indianapolis, and to the rail
lines serving the Monongahela coal fields in southwestern Pennsylvania.
NS and CSX intend to file a joint application with the STB in June of 1997
seeking approval of the Conrail acquisition. NS and CSX have requested a
255-day STB review period. However, other interested parties have
requested either a 365-day review period or the maximum period permitted
under the statute--16 months. Therefore, even under the accelerated
schedule requested by NS and CSX, an STB decision is not likely prior to
March 1, 1998, and could be delayed until as late as October 1998 if the
maximum statutory period is used.
Conrail shares purchased previously by NS and CSX, and Conrail shares
purchased in the joint acquisition will be placed in a joint voting trust
pending STB approval. NS intends to account for its investment in Conrail
using the equity method of accounting following consummation of the joint
acquisition and during the period Conrail shares are held in a voting
trust--a period that will extend at least until the effective date of the
STB's decision approving the transactions contemplated by the Agreement (if
such approval is obtained). The method of accounting for the investment in
Conrail subsequent to the voting trust being dissolved will depend on the
ownership arrangement that is ultimately negotiated between NS and CSX, and
approved by the STB, and the determination of whether and how controlling
financial interests will be established for selected assets, liabilities
and operations of Conrail. Additionally, the terms of leases, operating,
partnership and other arrangements, yet to be negotiated, will impact the
accounting. It is also expected that some of the assets and operations of
Conrail will remain subject to joint control by NS and CSX and thus will
continue to be accounted for using the equity method of accounting post STB
approval.
<PAGE> PAGE 17
Item 2. Management's Discussion and Analysis of Financial Condition
- ------ -----------------------------------------------------------
and Results of Operations. (continued)
-------------------------
NS has identified a number of synergies related to the transaction which
its management believes can be achieved and that are estimated to yield
operating income in nominal dollars of about $71 million in 1998,
$236 million in 1999 and $399 million by the year 2000. For 1996, NS' and
Conrail's most recent full year, combined operating income, reflecting
58 percent of Conrail's operating income adjusted for non-recurring
charges, was $1.6 billion. The synergy estimates reflect anticipated
operating expense savings and revenue enhancements and do not include any
one-time costs to achieve such improvements. Expense savings are expected
to result from, among other things, reduced general and administrative
expenses, improved equipment utilization and maintenance, improved use of
rail yards and routes, more efficient purchasing of material and equipment
coupled with maintenance-of-way efficiencies, and more efficient
transportation operations. Revenue enhancements are expected to result
from net new business (single-line service, new coal traffic and the
diversion of truck traffic to rail). NS anticipates the synergies from
the transaction will result in accretion in NS' earnings per share of
about 6 percent in 1999, 15 percent in 2000 and more than 17 percent
thereafter. NS expects the acquisition to be dilutive to earnings by
approximately 2 percent in 1997 and 3 percent in 1998.
The foregoing estimates of cost savings, synergies, and projected earnings
per share are "forward-looking" and inherently subject to significant
uncertainties and contingencies, many of which are beyond the control of
NS, including: (a) future economic conditions in the markets in which NS
and Conrail operate; (b) financial market conditions; (c) inflation rates;
(d) changing competition and the effects of new and increased competition
in the areas served by NS and Conrail; (e) changes in the economic
regulatory climate in the United States railroad industry; (f) NS' ability
to eliminate or reduce duplicative administrative and other functions and
facilities following the transaction; (g) labor uncertainties and NS'
ability to implement anticipated labor savings; (h) unanticipated
environmental and other situations relating to Conrail assets; (i) NS'
ability to integrate certain Conrail assets, including its information
technology systems, within NS' systems; and (j) adverse changes in
applicable laws, regulations or rules governing environmental, tax or
accounting matters. There can be no assurance that the estimated savings,
revenue increases, synergies or projected earnings per share will be
achieved; actual savings, revenue increases, synergies and earnings per
share may vary materially from those estimated. The inclusion of such
estimates herein should not be regarded as an indication or affirmation
that NS or any other party considers such estimates an accurate prediction
of future events.
CLASS ACTION SUIT
Norfolk Southern Corporation is the defendant in a class action suit
filed in federal district court in Birmingham, Alabama, on behalf of
African-American employees who allege that, since December 16, 1989,
the Corporation has discriminated against them in promotion to
nonagreement positions because of their race. Trial began on May 12.
While the outcome of this matter cannot be predicted, Management's
current assessment, based on all known facts and circumstances and
other available factors, is that the result is unlikely to have a
material adverse effect on NS' financial position, results of
operation or liquidity.
<PAGE> PAGE 18
Item 2. Management's Discussion and Analysis of Financial Condition
- ------ -----------------------------------------------------------
and Results of Operations. (continued)
-------------------------
NEW ACCOUNTING PRONOUNCEMENTS
Effective January 1, 1997, NS adopted AICPA Statement of Position 96-1,
"Environmental Remediation Liabilities." The statement provides guidance
with respect to recognition and measurement of environmental remediation
liabilities and disclosure of such liabilities in financial statements.
The impact to NS of adopting the standards of this statement was not
material to the Corporation's financial position, results of operations or
liquidity.
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 128, "Earnings per Share,"
which establishes standards for computing and presenting earnings per share
and is effective for financial statements issued for periods ending after
December 15, 1997. Implementation of SFAS No. 128 is not expected to have
a material effect on NS' financial statements.
<PAGE> PAGE 19
PART II. OTHER INFORMATION
----------------------------
Item 1. Legal Proceedings.
- ------ -----------------
As was more particularly described most recently in Item 3, Legal
Proceedings, of the Corporation's Annual Report on Form 10-K(405) for the
fiscal year ending December 31, 1996, NS, CSX, Conrail and certain
individuals were parties (both plaintiffs and defendants) to a variety of
actions, suits, counterclaims and other legal proceedings growing out of
NS' and CSX's efforts to acquire all of Conrail.
Pursuant to the Agreement, CSX and NS have entered into a
stipulation (the "Stipulation") providing for the dismissal with prejudice
of NS' claims against CSX and of CSX's counterclaims against NS. As
Conrail is not a party to the Agreement, the Stipulation does not cover
NS' claims against defendants other than CSX or Conrail's counterclaims
against NS. However, in the Agreement, CSX has agreed to request, under
CSX's Merger Agreement with Conrail, the dismissal with prejudice of
all claims and litigation against NS following the merger with Conrail.
Accordingly, NS anticipates that Conrail's counterclaims against NS and
NS' claims against defendants other than CSX will be dismissed with
prejudice upon effectuation of the merger with Conrail. In the interim,
CSX has agreed, in the Agreement, to request that Conrail join in a
stay or similar adjournment of the pending claims.
The ultimate effect of these undertakings is expected to be the
termination with prejudice of all legal proceedings between and among the
parties, including individual defendants, concerning the acquisition of
Conrail.
This matter has been reported previously by NS in Part I, Item 3,
of its Annual Report on Form 10-K(405) for the fiscal year ending
December 31, 1996, and in Part II, Item 1, of its Form 10-Q report for the
quarter ending September 30, 1996.
Item 6. Exhibits and Reports on Form 8-K.
- ------ --------------------------------
(a) Exhibits:
Computation of Per Share Earnings
Financial Data Schedule
(b) Reports on Form 8-K:
A report on Form 8-K dated February 5, 1997 (date of earliest
event reported), was filed on February 14, 1997, reporting
that a wholly owned subsidiary of NS had accepted for payment
8.2 million shares of Conrail tendered pursuant to its tender
offer and that NS had arranged for the issuance and sale,
through private placement, of $1.0 billion of commercial paper.
<PAGE> PAGE 20
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 14, 1997 /s/ Dezora M. Martin
------------------- -----------------------------------------
Dezora M. Martin
Corporate Secretary (Signature)
Date: May 14, 1997 /s/ John P. Rathbone
------------------- -----------------------------------------
John P. Rathbone
Vice President and Controller
(Principal Accounting Officer) (Signature)
<PAGE> PAGE 21
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES
INDEX TO EXHIBITS
-----------------
Electronic
Submission
Exhibit
Number Description Page Number
- ----------- ---------------------------------------------- -----------
11 Statement re Computation of Per Share Earnings 22 - 23
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.) 24
<PAGE> PAGE 22
<TABLE>
EXHIBIT 11, Page 1 of 2
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES
Computation of Per Share Earnings
(In millions except per share amounts)
<CAPTION>
Three Months Ended
March 31,
-------------------
1997 1996
-------- --------
<S> <C> <C>
COMPUTATION FOR STATEMENTS OF INCOME
Net income per statements of income $127.8 $168.1
------ ------
Weighted average number of shares outstanding 125.3 128.2
------ ------
Primary earnings per share $ 1.02 $ 1.31
====== ======
ADDITIONAL PRIMARY COMPUTATION
Net income per statements of income $127.8 $168.1
------ ------
Adjustment to weighted average number
of shares outstanding:
Weighted average number of shares outstanding
per primary computation above 125.3 128.2
Dilutive effect of outstanding options,
stock appreciation rights (SARs) and
performance share units (PSUs) (as
determined by the application of the
treasury stock method) <F1> 1.0 1.4
------ ------
Weighted average number of shares
outstanding, as adjusted 126.3 129.6
====== ======
Primary earnings per share, as adjusted <F2>: $ 1.01 $ 1.30
====== ======
<FN>
<F1> See Note 12 of Notes to Consolidated Financial Statements in Norfolk
Southern's 1996 Annual Report on Form 10-K for a description of the
Long-Term Incentive Plan.
<F2> These calculations are submitted in accordance with Regulation S-K,
item 601(b)(11) although not required by footnote 2 to paragraph 14
of APB Opinion No. 15 because they result in dilution of less than
3 percent.
</FN>
</TABLE>
<PAGE> PAGE 23
<TABLE>
EXHIBIT 11, Page 2 of 2
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES
Computation of Per Share Earnings
(In millions except per share amounts)
<CAPTION>
Three Months Ended
March 31,
-------------------
1997 1996
-------- --------
<S> <C> <C>
FULLY DILUTED COMPUTATION
Net income per statements of income $127.8 $168.1
Adjustment to increase earnings to requisite
level to earn maximum PSUs, net of tax effect 7.7 16.8
------ ------
Net income, as adjusted $135.5 $184.9
====== ======
Adjustment to weighted average number
of shares outstanding, as adjusted for
additional primary calculation:
Weighted average number of shares
outstanding, as adjusted per additional
primary computation on page 1 126.3 129.6
Additional dilutive effect of outstanding
options and SARs (as determined by
the application of the treasury stock
method using period end market price) -- 0.1
Additional shares issuable at maximum
level for PSUs 0.1 0.1
------ ------
Weighted average number of
shares, as adjusted 126.4 129.8
====== ======
Fully diluted earnings per share <F3>: $ 1.07 $ 1.42
====== ======
<FN>
<F3> These calculations are submitted in accordance with Regulation S-K,
item 601(b)(11) although they are contrary to paragraph 40 of
APB Opinion No. 15 because they produce an anti-dilutive result.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> $ 140
<SECURITIES> 186
<RECEIVABLES> 765
<ALLOWANCES> 16
<INVENTORY> 65
<CURRENT-ASSETS> 1,387
<PP&E> 14,095
<DEPRECIATION> 4,417
<TOTAL-ASSETS> 12,432
<CURRENT-LIABILITIES> 1,142
<BONDS> 2,844
<COMMON> 133
0
0
<OTHER-SE> 4,912
<TOTAL-LIABILITY-AND-EQUITY> 12,432
<SALES> 0
<TOTAL-REVENUES> 1,250
<CGS> 0
<TOTAL-COSTS> 964
<OTHER-EXPENSES> 49
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 38
<INCOME-PRETAX> 199
<INCOME-TAX> 71
<INCOME-CONTINUING> 128
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 128
<EPS-PRIMARY> 1.02
<EPS-DILUTED> 0
</TABLE>
