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, 1998
( ) 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, 1998
----- --------------------------------
Common Stock (par value $1.00) 378,741,105
(excluding 21,757,902 shares
held by registrant's
consolidated subsidiaries)
<PAGE> PAGE 2
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES (NS)
INDEX
-----
Page
----
Part I. Financial Information:
Item 1. Financial Statements:
Consolidated Statements of Income
Three Months Ended March 31, 1998 and 1997 3
Consolidated Balance Sheets
March 31, 1998, and December 31, 1997 4
Consolidated Statements of Cash Flows
Three Months Ended March 31, 1998 and 1997 5-6
Notes to Consolidated Financial Statements 7-11
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12-16
Part II. Other Information:
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
Index to Exhibits 19
<PAGE> PAGE 3
PART I. FINANCIAL INFORMATION
------------------------------
Item 1. Financial Statements.
- ------ --------------------
<TABLE>
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income
($ in millions except per share amounts)
(Unaudited)
<CAPTION>
Three Months Ended
March 31,
1998 1997
------- -------
<S> <C> <C>
Railway operating revenues:
Coal $ 323 $ 326
General merchandise 605 594
Intermodal 138 126
------- -------
Total railway operating revenues 1,066 1,046
Railway operating expenses:
Compensation and benefits 396 362
Materials, services and rents 190 169
Depreciation 107 103
Diesel fuel 48 63
Casualties and other claims 30 29
Other 44 39
------- -------
Total railway operating expenses 815 765
------- -------
Income from railway operations 251 281
Equity in earnings of Conrail (Note 3) 32 --
Charge for credit facility costs (Note 3) -- (77)
Other income - net 33 29
Interest expense on debt (Note 3) (128) (38)
------- -------
Income from continuing operations
before income taxes 188 195
Provision for income taxes 56 70
------- -------
Income from continuing operations 132 125
------- -------
Discontinued operations:
Income (loss) from motor carrier operations,
net of taxes (1) 3
Gain on sale of motor carrier,
net of taxes (Note 4) 98 --
------- -------
Income from discontinued operations 97 3
------- -------
Net income $ 229 $ 128
======= =======
Per share amounts (Note 6):
Income from continuing operations,
basic and diluted $ 0.35 $ 0.33
Net income, basic and diluted 0.61 0.34
Dividends 0.20 0.20
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)
(Unaudited)
<CAPTION>
March 31, December 31,
1998 1997
-------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 176 $ 34
Short-term investments 110 125
Accounts receivable - net 558 552
Materials and supplies 64 58
Deferred income taxes 115 114
Other current assets 117 119
Net assets of discontinued operations (Note 4) -- 101
------- -------
Total current assets 1,140 1,103
Investment in Conrail (Note 3) 5,929 5,888
Other investments 360 333
Properties less accumulated depreciation 10,075 9,904
Other assets 143 122
------- -------
TOTAL ASSETS $17,647 $17,350
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt $ 27 $ 27
Accounts payable 624 624
Income and other taxes 181 169
Other current liabilities 263 212
Current maturities of long-term debt 64 61
------- -------
Total current liabilities 1,159 1,093
Long-term debt (Note 5) 7,426 7,398
Other liabilities 893 885
Minority interests 49 49
Deferred income taxes 2,487 2,480
------- -------
TOTAL LIABILITIES 12,014 11,905
------- -------
Stockholders' equity:
Common stock $1.00 per share par value,
1,350,000,000 shares authorized;
issued 400,153,690 shares and
398,912,698 shares, respectively 400 399
Additional paid-in capital 274 241
Retained income 4,980 4,826
Less treasury stock at cost, 21,757,902 shares (21) (21)
------- -------
TOTAL STOCKHOLDERS' EQUITY 5,633 5,445
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $17,647 $17,350
======= =======
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE> PAGE 5
Item 1. Financial Statements. (continued)
- ------ --------------------
<TABLE>
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
($ in millions)
(Unaudited)
<CAPTION>
Three Months Ended
March 31,
1998 1997
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 229 $ 128
Reconciliation of net income to net cash
provided by operating activities:
Depreciation 110 106
Deferred income taxes 9 7
Equity in earnings of Conrail (Note 3) (32) --
Charge for credit facility costs (Note 3) -- 77
Nonoperating gains and losses on properties
and investments (20) (10)
Income from discontinued operations (97) (3)
Changes in assets and liabilities affecting
operations:
Accounts receivable (16) (46)
Materials and supplies (6) (2)
Other current assets 5 11
Current liabilities other than debt 85 10
Other - net 5 (15)
------- -------
Net cash provided by continuing operations 272 263
Net cash provided by (used for)
discontinued operations (2) 4
------- -------
Net cash provided by operating activities 270 267
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions (Note 5) (227) (228)
Property sales and other transactions 22 17
Investment in Conrail (17) (959)
Other investments, including short-term (37) (119)
Investment sales and other transactions 27 103
Proceeds from sale of motor carrier (Note 4) 200 --
------- -------
Net cash used for investing activities (32) (1,186)
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends (76) (75)
Common stock issued - net 20 10
Commercial paper proceeds -- 993
Credit facility costs paid (Note 3) -- (71)
Proceeds from long-term borrowings (Note 5) 2 1
Debt repayments (42) (10)
------- -------
Net cash provided by (used for)
financing activities (96) 848
------- -------
Net increase (decrease) in cash
and cash equivalents 142 (71)
CASH AND CASH EQUIVALENTS:*
At beginning of year 34 207
------- -------
At end of period $ 176 $ 136
======= =======
</TABLE>
<PAGE> PAGE 6
Item 1. Financial Statements. (continued)
- ------ --------------------
<TABLE>
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows (continued)
($ in millions)
(Unaudited)
<CAPTION>
Three Months Ended
March 31,
1998 1997
-------- --------
<S> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest (net of amounts capitalized) $ 68 $ 53
Income taxes $ 1 $ 4
* 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 Corporation's
financial position as of March 31, 1998, and results of operations
and cash flows for the three months ended March 31, 1998, and 1997.
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 the financial
statements and notes included in the Corporation's latest Annual
Report on Form 10-K.
2. Commitments and Contingencies
There have been no significant changes since year-end 1997 in the
matters discussed in NOTE 17, COMMITMENTS AND CONTINGENCIES,
appearing in the NS Annual Report on Form 10-K for 1997, Notes to
Consolidated Financial Statements, beginning on page 78.
3. Joint Acquisition of Conrail
On February 11, 1997, NS purchased 8.2 million Conrail, Inc.
(Conrail) shares acquired pursuant to NS' prior tender offer. On
May 23, 1997, NS and CSX Corporation (CSX), through a jointly owned
entity, completed the acquisition of Conrail stock tendered pursuant
to their joint tender offer. Conrail stock owned by NS and CSX has
been placed in a voting trust pending approval of the control
transaction by the Surface Transportation Board (STB). The approval
of the STB, while anticipated, cannot be assumed, and a final decision
is not expected to be effective prior to August 1998. Should the STB
not approve the transaction, NS could incur a significant loss on the
disposition of its investment in Conrail. If approved, the
transaction will be consummated as soon as practicable after STB
approval and is contingent upon, among other things, attainment of
necessary labor implementing agreements.
The equity method of accounting is being applied to NS' investment in
Conrail. The equity in earnings of Conrail represents NS' portion of
Conrail's net income, including items considered in purchase
accounting and amortization of the difference between NS' investment
in Conrail and the underlying equity in net assets, net of tax.
First-quarter 1998 results included other Conrail-related items,
primarily interest expense on debt issued to finance NS' share of the
NS/CSX joint acquisition of Conrail stock as well as integration costs
which are included in railway operating expenses.
First-quarter 1997 results included a $77 million pretax charge for
credit facility costs incurred in conjunction with certain now-terminated
commitments to provide financing for NS' then-proposed acquisition of
all Conrail stock and interest expense on commercial paper issued to
finance NS' acquisition of the 8.2 million Conrail shares.
<PAGE> PAGE 8
Item 1. Financial Statements. (continued)
- ------ --------------------
3. Joint Acquisition of Conrail (continued)
The following summary financial information for Conrail for its
fiscal periods ended March 31, 1998 and 1997, and at December 31,
1997, as provided by Conrail's management, should be read in
conjunction with Conrail's audited financial statements included as
an exhibit to NS' Annual Report on Form 10-K for 1997 filed with the
Securities and Exchange Commission (SEC) and Consolidated Rail
Corporation's latest Annual Report on Form 10-K and subsequent
Quarterly Report on Form 10-Q filed with the SEC.
<TABLE>
Summarized Consolidated Statements of Income - Conrail
------------------------------------------------------
<CAPTION>
Three Months Ended
March 31,
1998 1997
------ ------
($ in millions)
(Unaudited)
<S> <C> <C>
Operating revenues $ 927 $ 906
Operating expenses 767 790
------- -------
Operating income 160 116
Other - net (23) (18)
------- -------
Income before income taxes 137 98
Provision for income taxes 52 37
------- -------
Net income $ 85 $ 61
======= =======
</TABLE>
<TABLE>
Summarized Consolidated Balance Sheets - Conrail
------------------------------------------------
<CAPTION>
March 31, December 31,
1998 1997
---------- ------------
($ in millions)
(Unaudited)
<S> <C> <C>
Assets
Current assets $ 961 $ 954
Noncurrent assets 7,574 7,530
------- -------
Total assets $ 8,535 $ 8,484
======= =======
Liabilities and stockholders' equity
Current liabilities $ 1,188 $ 1,208
Noncurrent liabilities 4,016 4,111
Stockholders' equity 3,331 3,165
------- -------
Total liabilities and stockholders'
equity $ 8,535 $ 8,484
======= =======
</TABLE>
<PAGE> PAGE 9
Item 1. Financial Statements. (continued)
- ------ --------------------
4. Discontinued Operations - Motor Carrier
On January 12, 1998, NS announced an agreement to sell all the common
stock of its motor carrier subsidiary, North American Van Lines, Inc.
(NAVL). Accordingly, NAVL's results of operation, financial position
and cash flows are presented as "discontinued operations" in the
accompanying financial statements.
On March 28, 1998, NS closed the sale of NAVL for $200 million in
cash and recorded an $83 million pretax ($98 million, or $0.26 per
share, after-tax) gain. The higher after-tax gain was the result of
differences between book and tax bases and the realization of
deferred tax benefits. The purchase price is subject to adjustment
based on NAVL's net working capital at the time of closing.
Management expects that any such adjustment will be immaterial.
NAVL's revenues for the first quarters of 1998 and 1997 were
$207 million and $204 million, respectively. These amounts are not
included in revenue in the accompanying income statements. Income
(loss) from motor carrier operations was $(1) million in the first
quarter of 1998, and $3 million, or $0.01 per share, in the first
quarter of 1997.
5. Capital Lease Obligations
During the first quarters of 1998 and 1997, a rail subsidiary of NS
entered into capital leases covering new locomotives. The related
capital lease obligations, totaling $73 million in 1998 and
$45 million in 1997, 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 between 6.36% and 6.45%
for the leases entered into in 1998, and 6.83% for the lease entered
into in 1997. 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)
- ------ --------------------
6. Earnings Per Share
<TABLE>
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:
<CAPTION>
Three Months Ended
March 31,
1998 1997
-------- --------
(In millions)
<S> <C> <C>
Weighted-average shares outstanding 378 376
Dilutive effect of outstanding options and
performance share units (as determined
by the application of the treasury stock
method) 3 3
--- ---
Diluted weighted-average shares outstanding 381 379
=== ===
</TABLE>
There are no adjustments to "Net income" or "Income from continuing
operations" for the diluted earnings per share computations.
7. Tax Benefit Leases
In January 1995, the United States Tax Court issued a preliminary
decision that would disallow some of the tax benefits a subsidiary of
NS purchased from a third party in 1981 pursuant to a safe harbor
lease agreement. The Tax Court finalized this decision in February
1997, and the Fourth Circuit Court of Appeals affirmed it. A
petition for rehearing and request that the case be heard by the full
court has been filed, but there is no assurance that the petition
will be granted. Management continues to believe that NS ultimately
should incur no loss from this decision because the lease agreement
provides for full indemnification if any such disallowance is
sustained.
8. Comprehensive Income
Effective January 1, 1998, NS adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income." This
Statement requires that all items that are recognized under
accounting standards as components of comprehensive income be
reported in an annual financial statement displayed with the same
<PAGE> PAGE 11
Item 1. Financial Statements. (continued)
- ------ --------------------
8. Comprehensive Income (continued)
prominence as other annual financial statements. Condensed financial
statements of interim periods are to include a total for
comprehensive income. NS' total comprehensive income was as follows:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1998 1997
-------- --------
($ in millions)
<S> <C> <C>
Net income $ 229 $ 128
Other comprehensive income 1 12
----- -----
Total comprehensive income $ 230 $ 140
===== =====
</TABLE>
For NS, "Other comprehensive income" is the unrealized gains and
losses on certain investments in debt and equity securities.
Accumulated other comprehensive income included in retained
earnings was $6 million as of March 31, 1998, and $5 million
as of December 31, 1997.
<PAGE> PAGE 12
Item 2. Management's Discussion and Analysis of Financial Condition
- ------ -----------------------------------------------------------
and Results of Operations.
-------------------------
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition
and Results of Operations
RESULTS OF OPERATIONS
Net Income
- ----------
Net income for the first quarter of 1998 was $229 million, an increase of
$101 million, compared with the first quarter of 1997. The improvement
was attributable primarily to a $98 million after-tax gain from the sale
of NS' motor carrier subsidiary, North American Van Lines, Inc. (NAVL),
which is included in "Income from discontinued operations" (see Note 4).
"Income from continuing operations" was $132 million, up $7 million, or
6 percent. Included in 1998's results were NS' equity in the earnings of
Conrail for the quarter and several Conrail-related expenses (primarily
interest expense on the $5.8 billion of debt incurred to finance the
acquisition and integration costs), which together reduced NS' net income
by $50 million. First-quarter 1997 also included Conrail-related items,
principally the $77 million pretax charge for credit facility costs,
which reduced net income by $52 million. Absent the effects of Conrail-
related items, 1998 first-quarter income from continuing operations was
$182 million, up $5 million, or 3 percent. The increase was the result
of higher nonoperating income that more than offset lower income from
railway operations.
<TABLE>
Railway Operating Revenues
- --------------------------
First-quarter railway operating revenues were $1,066 million, up
$20 million, or 2 percent, compared with last year. As shown in the table
below, the improvement was due entirely to increased traffic volume.
<CAPTION>
First Quarter
1998 vs. 1997
Increase (Decrease)
------------------
($ in millions)
<S> <C>
Traffic volume (carloads) $ 47
Revenue per unit (27)
-----
$ 20
=====
</TABLE>
<PAGE> PAGE 13
Item 2. Management's Discussion and Analysis of Financial Condition
- ------ -----------------------------------------------------------
and Results of Operations. (continued)
-------------------------
<TABLE>
Revenues and carloads for the commodity groups were as follows:
<CAPTION>
Revenues Carloads
1998 1997 1998 1997
---- ---- ---- ----
($ in millions) (in thousands)
<S> <C> <C> <C> <C>
Coal $ 323 $ 326 331 328
Chemicals 146 147 102 101
Automotive 138 124 116 92
Paper/clay/forest 137 135 116 115
Agri./govt./consumer 93 99 89 91
Metals/construction 91 89 88 87
------ ------ ----- -----
General merchandise 605 594 511 486
Intermodal 138 126 367 342
------ ------ ----- -----
Total $1,066 $1,046 1,209 1,156
====== ====== ===== =====
</TABLE>
Coal
- ----
First-quarter coal revenues of $323 million were $3 million, or
1 percent, below last year. Total tonnage handled increased 3 percent,
as gains in utility and coke traffic more than offset declines in export
volume and domestic metallurgical traffic. Most of the utility growth
was in shorter-haul (lower average revenue) traffic. Export tonnage was
down 3 percent, compared with a strong first quarter last year.
Coal revenues for all of 1998 are expected to continue to be about even
with those of 1997.
General Merchandise
- -------------------
First-quarter general merchandise revenues were $605 million, $11 million,
or 2 percent, higher than last year. Automotive revenues increased
$14 million, or 11 percent, due primarily to the ramp-up of the Ford mixing
centers. Most of the mixing center traffic is shorter-haul and, therefore,
lower revenue per car, which contributed to the overall decline in revenue
per unit. Automotive revenues were less than expected due to slower than
anticipated ramp-up of the mixing centers, industrywide bilevel equipment
shortages, and some softening in automotive production. By the end of the
quarter, mixing center vehicle flow had improved, and operations were
continuing to add volume. Agriculture revenues declined $6 million, or
6 percent, mostly due to decreased grain traffic resulting from excess
supplies of export grain, the strong U.S. dollar, and reduced Asian demand.
General merchandise revenues are expected to post moderate gains for the
remainder of the year, supported by mixing center traffic and progress in
overcoming Western rail service problems.
<PAGE> PAGE 14
Item 2. Management's Discussion and Analysis of Financial Condition
- ------ -----------------------------------------------------------
and Results of Operations. (continued)
-------------------------
Intermodal
- ----------
First-quarter intermodal revenues were $138 million, up $12 million, or
10 percent, compared with last year. The improvement was primarily the
result of a 7 percent increase in traffic volume. Container and
RoadRailer(RT) volume posted double-digit increases, while trailer volume
declined 5 percent. International container volume was strong due to
increased imports and extremely bad weather in Canada that forced
business to Norfolk. Domestic container volumes were less than expected
due, at least in part, to service problems in the West.
Intermodal revenues are expected to continue to post increases in 1998,
although not the double-digit growth of the first quarter.
Railway Operating Expenses
- --------------------------
First-quarter railway operating expenses were $815 million, up
$50 million, or 7 percent, compared with last year. The increase resulted
principally from higher carloadings, up 5 percent compared with last year,
higher stock-based compensation expenses and Conrail integration costs.
The largest increase was in "Compensation and benefits" expense, up
$34 million, or 9 percent, due to higher wage rates, Conrail integration
costs, and increased stock-based compensation expenses, a result of the
23 percent increase in the NS stock price during the quarter.
"Materials, service and rents" expense increased $21 million, or
12 percent, due to increased traffic levels that have affected locomotive
and car repair costs and equipment rents, Conrail integration expenses, and
start-up costs related to the automotive mixing centers.
"Other expenses" increased $5 million, or 13 percent, largely a result of
the effect of a favorable adjustment for property taxes made last year.
"Diesel fuel" expense decreased $15 million, or 24 percent, primarily due
to a 25 percent decline in the average price per gallon. The benefit of
the lower price was partially offset by higher consumption related to the
increase in traffic.
The 2 percent increase in railway operating revenues, coupled with the
7 percent increase in railway operating expenses, produced a railway
operating ratio of 76.5 percent, compared with last year's first-quarter
record of 73.1 percent. The increase was principally a result of the
Conrail integration costs and the higher stock-based compensation
expenses. Excluding the effect of these items, the first-quarter railway
operating ratio would have been 73.3 percent, slightly higher than last
year, mostly because of the automotive mixing center start-up costs.
Integration expenses associated with Conrail properties that NS expects
to operate may accelerate as the year progresses.
<PAGE> PAGE 15
Item 2. Management's Discussion and Analysis of Financial Condition
- ------ -----------------------------------------------------------
and Results of Operations. (continued)
-------------------------
Equity in Earnings of Conrail
- -----------------------------
Conrail's first-quarter 1998 net income was $85 million. NS' portion,
or 58 percent, of Conrail's net income, net of $17 million of amortization
of the difference between NS' investment in Conrail and the underlying
equity in net assets, was $32 million. The first quarter of 1997
included no equity in Conrail's earnings, since NS then owned
approximately 9.9 percent of Conrail's outstanding shares and therefore
accounted for its investment in Conrail under the cost method.
Interest Expense on Debt
- ------------------------
"Interest expense on debt" increased significantly in the first quarter
of 1998, compared with the first quarter of 1997, a result of interest
on the $5.8 billion of debt issued to finance NS' portion of the cost
of the Conrail acquisition.
Income Taxes
- ------------
The effective income tax rate for the first quarter was 29.8 percent,
compared with 35.9 percent for the first quarter of 1997. 1998's rate was
affected by NS' equity in the after-tax earnings of Conrail. Excluding
equity in earnings of Conrail from pretax income, the effective rate was
35.9 percent.
Discontinued Operations
- -----------------------
First-quarter income from discontinued operations included a $98 million
after-tax gain from the sale of NAVL that was consummated on March 28 (see
Note 4). Motor carrier operations produced a loss of $1 million for the
period, compared with net income of $3 million last year.
<TABLE>
FINANCIAL CONDITION AND LIQUIDITY
<CAPTION>
March 31, 1998 December 31, 1997
-------------- -----------------
($ in millions)
<S> <C> <C>
Cash and short-term investments $ 286 $ 159
Working capital $ (19) $ 10
Current assets to current liabilities 1.0 1.0
Debt-to-total capitalization 57.2% 57.9%
</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 Statement of Cash Flows
on page 5). The increase in the cash source "Current liabilities other
than debt" this year is principally due to interest accruals for debt
issued to finance the Conrail acquisition. The small working capital
deficit at March 31, 1998, is also attributable to that accrued interest,
which is due in the second quarter. NS expects to issue additional
commercial paper to fund some of the interest payments.
<PAGE> PAGE 16
Item 2. Management's Discussion and Analysis of Financial Condition
- ------ -----------------------------------------------------------
and Results of Operations. (continued)
-------------------------
CASH USED FOR INVESTING ACTIVITIES in the first quarter of 1998 reflects
the $200 million of proceeds from the sale of NAVL (see Note 4). The
investment in Conrail expenditures in the first quarter of 1998 reflects
payments for previously untendered Conrail shares. The first quarter of
1997 included the purchase of 8.2 million shares of Conrail stock (see
Note 3).
NS' commitment in prior years to an aggressive capital spending program
should position it well to integrate Conrail operations into its system.
Additional capital spending in the early years following closing of the
transaction will be necessary to achieve a safe and efficient integration.
New connections are required to integrate NS and Conrail routes. New
terminals, improvements to existing terminals, new sidings and improvements
to existing Conrail routes are required to handle anticipated increases in
traffic. NS expects to make whatever investments in plant, equipment and
facilities prove necessary. Following STB approval of the transaction,
NS' ability to assess system needs will be enhanced, with the result that
the timing and amount of expenditures may differ from earlier estimates.
CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES in the first quarter of
1997 included proceeds from the sale of commercial paper to finance the
acquisition of 8.2 million shares of Conrail stock. First-quarter 1998
debt repayments included a $28 million reduction in outstanding commercial
paper.
NEW ACCOUNTING PRONOUNCEMENTS
Effective January 1, 1998, NS adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" (see Note 8).
During the first quarter of 1998, Statement of Financial Accounting
Standards No. 132 (SFAS 132), "Employers' Disclosures about Pension and
Other Postretirement Benefits -- an amendment of FASB Statements No. 87,
88 and 106," was issued. SFAS 132, which NS will adopt in its 1998
annual report, revises disclosures about pension and other postretirement
benefit plans, but does not change the measurement or recognition of
liabilities associated with such plans. Adoption of SFAS 132 is not
expected to have a material effect on NS' financial statements.
<PAGE> PAGE 17
PART II. OTHER INFORMATION
----------------------------
Item 6. Exhibits and Reports on Form 8-K.
- ------ --------------------------------
(a) Exhibits:
Financial Data Schedule
(b) Reports on Form 8-K:
A report on Form 8-K was filed on January 13, 1998,
reporting that NS had reached agreement with the
investment firm of Clayton, Dubilier and Rice, Inc. on
the sale of all of the common stock of NS' subsidiary,
North American Van Lines, Inc. (NAVL).
A report of Form 8-K was filed on March 30, 1998,
reporting that NS had closed, effective March 28, 1998,
the sale of NAVL.
<PAGE> 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 CORPORATION
-----------------------------------------
(Registrant)
Date: May 12, 1998 /s/ Dezora M. Martin
------------------- -----------------------------------------
Dezora M. Martin
Corporate Secretary (Signature)
Date: May 12, 1998 /s/ John P. Rathbone
------------------- -----------------------------------------
John P. Rathbone
Vice President and Controller
(Principal Accounting Officer) (Signature)
<PAGE> PAGE 19
NORFOLK SOUTHERN CORPORATION 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
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> $ 176
<SECURITIES> 110
<RECEIVABLES> 562
<ALLOWANCES> 4
<INVENTORY> 64
<CURRENT-ASSETS> 1,140
<PP&E> 14,549
<DEPRECIATION> 4,474
<TOTAL-ASSETS> 17,647
<CURRENT-LIABILITIES> 1,159
<BONDS> 7,426
0
0
<COMMON> 400
<OTHER-SE> 5,233
<TOTAL-LIABILITY-AND-EQUITY> 17,647
<SALES> 0
<TOTAL-REVENUES> 1,066
<CGS> 0
<TOTAL-COSTS> 815
<OTHER-EXPENSES> (65)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 128
<INCOME-PRETAX> 188
<INCOME-TAX> 56
<INCOME-CONTINUING> 132
<DISCONTINUED> 97
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 229
<EPS-PRIMARY> 0.61
<EPS-DILUTED> 0.61
</TABLE>
