<PAGE> 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, 1999
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
---------- ----------
Commission file number 1-8339
NORFOLK SOUTHERN CORPORATION
- --------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Virginia 52-1188014
- ----------------------------------- ---------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
Three Commercial Place
Norfolk, Virginia 23510-2191
- ----------------------------------- ---------------------------------
(Address of principal executive offices) Zip Code
Registrant's telephone number, including area code (757) 629-2680
----------------------
No Change
- --------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. (X) Yes ( ) No
The number of shares outstanding of each of the registrant's classes of
Common Stock, as of the last practicable date:
Class Outstanding as of April 30, 1999
----- --------------------------------
Common Stock (par value $1.00) 379,947,642 (excluding 21,627,902
shares held by registrant's
consolidated subsidiaries)
<PAGE> PAGE 2
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES (NS)
INDEX
-----
Page
----
Part I. Financial Information:
Item 1. Financial Statements:
Consolidated Statements of Income
Three Months Ended March 31, 1999 and 1998 3
Consolidated Balance Sheets
March 31, 1999, and December 31, 1998 4
Consolidated Statements of Cash Flows
Three Months Ended March 31, 1999 and 1998 5-6
Notes to Consolidated Financial Statements 7-11
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12-20
Part II. Other Information:
Item 6. Exhibits and Reports on Form 8-K 21
Signatures 22
Index to Exhibits 23
<PAGE> PAGE 3
PART I. FINANCIAL INFORMATION
------------------------------
Item 1. Financial Statements.
- ------ --------------------
<TABLE>
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income
($ in millions except per share amounts)
(Unaudited)
<CAPTION>
Three Months Ended
March 31,
------------------
1999 1998
---- ----
<S> <C> <C>
Railway operating revenues:
Coal $ 282 $ 323
General merchandise 623 605
Intermodal 125 138
------ ------
TOTAL RAILWAY OPERATING REVENUES 1,030 1,066
Railway operating expenses:
Compensation and benefits 368 396
Materials, services, and rents 196 190
Depreciation 114 107
Diesel fuel 37 48
Casualties and other claims 35 30
Other 43 44
------ ------
TOTAL RAILWAY OPERATING EXPENSES 793 815
------ ------
Income from railway operations 237 251
Equity in earnings of Conrail (Note 3) 27 32
Other income - net 22 33
Interest expense on debt (128) (128)
------ ------
Income from continuing operations before
income taxes 158 188
Provision for income taxes 46 56
------ ------
Income from continuing operations 112 132
------ ------
Discontinued operations (Note 4):
Loss from motor carrier operations, net of taxes -- (1)
Gain on sale of motor carrier, net of taxes -- 98
------ ------
Income from discontinued operations -- 97
------ ------
NET INCOME $ 112 $ 229
====== ======
Per share amounts (Note 6):
Income from continuing operations, basic and
diluted $0.30 $0.35
Net income, basic and diluted 0.30 0.61
Dividends 0.20 0.20
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> PAGE 4
Item 1. Financial Statements. (continued)
- ------ --------------------
<TABLE>
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
($ in millions)
(Unaudited)
<CAPTION>
March 31, December 31,
1999 1998
--------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 86 $ 5
Short-term investments 17 58
Accounts receivable, net of allowance for
doubtful accounts of $5 million and
$4 million, respectively 569 519
Materials and supplies 55 59
Deferred income taxes 140 141
Other current assets 132 131
-------- --------
Total current assets 999 913
Investment in Conrail (Note 3) 6,237 6,210
Properties less accumulated depreciation 10,618 10,477
Other assets 626 580
-------- --------
TOTAL ASSETS $ 18,480 $ 18,180
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 577 $ 600
Income and other taxes 177 151
Other current liabilities 291 225
Current maturities of long-term debt 147 141
-------- --------
Total current liabilities 1,192 1,117
Long-term debt 7,660 7,483
Other liabilities 1,058 1,065
Minority interests 49 49
Deferred income taxes 2,554 2,545
-------- --------
TOTAL LIABILITIES 12,513 12,259
-------- --------
Stockholders' equity:
Common stock $1.00 per share par value,
1,350,000,000 shares authorized;
issued 401,483,592 shares and
401,031,994 shares, respectively 401 401
Additional paid-in capital 307 296
Accumulated other comprehensive income
(Note 7) (9) (8)
Retained income 5,288 5,252
Less treasury stock at cost, 21,627,902
shares (20) (20)
-------- --------
TOTAL STOCKHOLDERS' EQUITY 5,967 5,921
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 18,480 $ 18,180
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
<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,
------------------
1999 1998
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 112 $ 229
Reconciliation of net income to net cash
provided by continuing operations:
Depreciation 118 110
Deferred income taxes 11 9
Equity in earnings of Conrail (Note 3) (27) (32)
Nonoperating gains and losses on properties
and investments (5) (20)
Income from discontinued operations -- (97)
Changes in assets and liabilities affecting
operations:
Accounts receivable (50) (16)
Materials and supplies 4 (6)
Other current assets (1) 5
Current liabilities other than debt 64 85
Other - net 2 5
------- -------
Net cash provided by continuing
operations 228 272
Net cash used for discontinued
operations -- (2)
------- -------
Net cash provided by operating
activities 228 270
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions (Note 5) (266) (227)
Property sales and other transactions 13 22
Investment in Conrail (1) (17)
Investments, including short-term (47) (37)
Investment sales and other transactions 45 27
Proceeds from sale of motor carrier (Note 4) -- 200
------- -------
Net cash used for investing activities (256) (32)
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends (76) (76)
Common stock issued - net 4 20
Commercial paper proceeds 99 --
Proceeds from long-term borrowings (Note 5) 94 2
Debt repayments (12) (42)
------- -------
Net cash provided by (used for)
financing activities 109 (96)
------- -------
Net increase in cash and cash
equivalents 81 142
CASH AND CASH EQUIVALENTS:*
At beginning of year 5 34
------- -------
At end of period $ 86 $ 176
======= =======
<PAGE> PAGE 6
Item 1. Financial Statements. (continued)
- ------ --------------------
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows (continued)
($ in millions)
(Unaudited)
Three Months Ended
March 31,
------------------
1999 1998
---- ----
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest (net of amounts capitalized) $ 68 $ 68
Income taxes $ -- $ 1
* Cash equivalents represent all highly liquid
investments purchased three months or less
from maturity.
</TABLE>
See accompanying notes to consolidated financial statements.
<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, 1999, and
results of operations and cash flows for the three months ended
March 31, 1999 and 1998.
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 1998 in the
matters discussed in NOTE 16, COMMITMENTS AND CONTINGENCIES,
appearing in the NS Annual Report on Form 10-K for 1998, Notes to
Consolidated Financial Statements, beginning on page 80.
3. Investment in Conrail
Background
----------
NS and CSX Corporation (CSX) jointly own Conrail Inc. (Conrail),
whose primary subsidiary is Consolidated Rail Corporation, the
major freight railroad in the Northeast.
It is expected that Conrail's operations will continue
substantially unchanged until the railroad subsidiaries of NS and
CSX (Norfolk Southern Railway Company [NSR] and
CSX Transportation [CSXT]) commence operating the respective
Conrail properties that will be leased to them pursuant to
operating and lease agreements, an event that NS and CSX have
agreed will occur on June 1, 1999 (the "Closing Date"). A
failure by NSR or CSXT to integrate successfully the respective
portion of Conrail that each will lease, including information
technology systems, could have a substantial adverse impact on
NS' financial position, results of operations, and liquidity.
After the Closing Date, NSR and CSXT will provide substantially
all rail freight services on Conrail's former route system,
perform or be responsible for performance of most services
incident to customer freight contracts, and employ the majority
of Conrail's work force. From time to time, NS and CSX, as the
indirect owners of Conrail, may need to fund Conrail's cash
requirements through capital contributions, loans, or advances.
Until the Closing Date, NS' railroad subsidiaries will continue
to have transactions in the normal course of business with
Conrail's railroad subsidiary.
<PAGE> PAGE 8
Item 1. Financial Statements. (continued)
- ------ --------------------
Accounting Treatment
--------------------
NS is applying the equity method of accounting to its investment
in Conrail in accordance with APB No. 18, "The Equity Method of
Accounting for Investments in Common Stock." NS is amortizing
the excess of the purchase price over Conrail's net equity based
principally on the estimated remaining useful lives of Conrail's
property and equipment, net of the related deferred tax effect of
the differences in tax and accounting bases for certain assets.
At March 31, 1999, the difference between NS' investment in
Conrail and its share of Conrail's underlying net equity was
$4.0 billion, and the related amortization amounted to
$72 million annually.
NS' investment in Conrail includes $165 million ($101 million
after taxes) of costs that will be paid by NS. These costs
consist principally of: (1) contractual obligations to Conrail
employees imposed by the STB when it approved the transaction,
and (2) costs to relocate Conrail employees. Most of NS' costs
are expected to be paid in the two years following the Closing
Date, and $60 million of such are classified on NS' balance sheet
as "Current liabilities." However, certain contractual
obligations by their terms will be paid out over a longer period
and are classified as "Other liabilities" on NS' balance sheet.
Through March 31, 1999, NS has paid $6 million of these costs.
Conrail's underlying net equity reflects liabilities recognized
by Conrail primarily for separations of nonunion employees and
for change-in-control obligations.
The liabilities recorded by NS and Conrail are based on
preliminary estimates of separation, relocation, and other labor-
related contractual obligations to Conrail employees. These
liability estimates, along with the fair value allocation, may be
modified as more information becomes available. Severance and
relocation plans are expected to be finalized shortly after the
Closing Date. As a consequence, amounts ultimately included in
the allocation could differ from the original estimates; however,
any such differences are not now expected to be material to NS'
financial position, results of operations, or liquidity. As
definitive plans are determined and communicated, costs, if any,
for severing or relocating NS employees and for disposing of NS
facilities will be charged to operating expense.
Summary Financial Information - Conrail
---------------------------------------
The following summary financial information for Conrail was
provided by Conrail's management and should be read in
conjunction with Conrail's audited financial statements included
as an exhibit to NS' Annual Report on Form 10-K for 1998 filed
with the Securities and Exchange Commission.
<PAGE> PAGE 9
Item 1. Financial Statements. (continued)
- ------ --------------------
<TABLE>
Summarized Consolidated Statements of Income - Conrail
------------------------------------------------------
<CAPTION>
Three Months Ended
March 31,
------------------
1999 1998
---- ----
($ in millions)
(Unaudited)
<S> <C> <C>
Operating revenues $ 916 $ 927
Operating expenses 770 767
------ ------
Operating income 146 160
Other - net (22) (23)
------ ------
Income before income taxes 124 137
Provision for income taxes 48 52
------ ------
Net income $ 76 $ 85
====== ======
</TABLE>
<TABLE>
Summarized Consolidated Balance Sheets - Conrail
------------------------------------------------
<CAPTION>
March 31, December 31,
1999 1998
-------- -----------
($ in millions)
(Unaudited)
<S> <C> <C>
Assets:
Current assets $1,126 $1,005
Noncurrent assets 7,987 8,039
------ ------
Total assets $9,113 $9,044
====== ======
Liabilities and stockholders'
equity:
Current liabilities $1,210 $1,207
Noncurrent liabilities 4,026 4,037
Stockholders' equity 3,877 3,800
------ ------
Total liabilities and
stockholders' equity $9,113 $9,044
====== ======
</TABLE>
<PAGE> PAGE 10
Item 1. Financial Statements. (continued)
- ------ --------------------
4. Discontinued Operations - Motor Carrier
During the first quarter of 1998, NS sold all the common stock of
North American Van Lines, Inc. (NAVL), its motor carrier
subsidiary. Proceeds from the sale in that quarter were
$200 million, resulting in an $83 million pretax gain
($98 million, or $0.26 per share, after taxes). The higher
after-tax gain was the result of differences between book and tax
bases and the realization of deferred tax benefits. In the third
quarter of 1998, as a result of a purchase price adjustment, NS
recorded an additional $7 million ($0.02 per share) after-tax
gain.
NAVL's results of operation and cash flows are presented as
"discontinued operations" in the accompanying 1998 financial
statements. NAVL's operations in the first quarter of 1998
generated revenues of $207 million and a loss of $1 million.
5. Long-Term Debt
Equipment Trust Certificates
----------------------------
NS issued equipment trust certificates in the first quarter of
1999 and received $94 million of net proceeds. The certificates
mature serially April 1, 2000 through 2014, inclusive, and carry a
weighted-average interest rate of 6.0 percent. Proceeds were used
to acquire locomotives and freight cars, and at March 31, 1999,
$27 million of the proceeds had not been spent and were included
in "Other assets."
Capital Lease Obligations
-------------------------
During the first quarter of 1998, a rail subsidiary of NS entered
into capital leases covering new locomotives. The related
capital lease obligations, totaling $73 million, were reflected
in the Consolidated Balance Sheet as debt and, because they were
noncash transactions, were excluded from the Consolidated
Statement of Cash Flows.
Shelf Registration
------------------
In April 1999, NS issued $400 million of 6.2 percent, 10-year term
notes under its November 1998 shelf registration.
6. Earnings Per Share
The following table sets forth the reconciliation of the number
of weighted-average shares outstanding used in the calculations
of basic and diluted earnings per share:
<PAGE> PAGE 11
Item 1. Financial Statements. (continued)
- ------ --------------------
<TABLE>
6. Earnings Per Share (continued)
<CAPTION>
Three Months Ended
March 31,
------------------
1999 1998
---- ----
(In millions)
<S> <C> <C>
Weighted-average shares outstanding 380 378
Dilutive effect of outstanding options
and performance share units (as
determined by the application of
the treasury stock method) 2 3
---- ----
Diluted weighted-average shares
outstanding 382 381
==== ====
</TABLE>
There are no adjustments to "Net income" or "Income from
continuing operations" for the diluted earnings per share
computations.
7. Comprehensive Income
<TABLE>
NS' total comprehensive income was as follows:
<CAPTION>
Three Months Ended
March 31,
------------------
1999 1998
---- ----
($ in millions)
<S> <C> <C>
Net income $ 112 $ 229
Other comprehensive income (loss) (1) 1
----- -----
Total comprehensive income $ 111 $ 230
===== =====
</TABLE>
"Other comprehensive income" reflects the unrealized gains and
losses on certain investments in debt and equity securities.
<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 1999 was $112 million, compared
with the $229 million in the first quarter of 1998 that included a
$98 million after-tax gain included in "Discontinued operations" from
the sale of NS' motor carrier subsidiary (see Note 4). "Income from
continuing operations" was $112 million, down $20 million, or
15 percent, due to declines in both income from railway operations and
nonoperating income.
<TABLE>
Railway Operating Revenues
- --------------------------
First-quarter railway operating revenues were $1,030 million, down
$36 million, or 3 percent, compared with last year. As shown in the
table below, the decrease was due to lower traffic volume.
<CAPTION>
First Quarter
1999 vs. 1998
Increase (Decrease)
------------------
($ in millions)
<S> <C>
Traffic volume (carloads) $ (37)
Revenue per unit 1
------
$ (36)
======
</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
1999 1998 1999 1998
---- ---- ---- ----
($ in millions) (in thousands)
<S> <C> <C> <C> <C>
Coal $ 282 $ 323 301 331
General merchandise:
Automotive 160 138 136 116
Chemicals 148 146 99 102
Paper/clay/forest 128 137 103 116
Metals/construction 94 91 90 88
Agri./consumer prod./
govt. 93 93 84 89
------ ------ ----- -----
General merchandise 623 605 512 511
Intermodal 125 138 346 367
------ ------ ----- -----
Total $1,030 $1,066 1,159 1,209
====== ====== ===== =====
</TABLE>
Coal
- ----
Coal revenues decreased $41 million, or 13 percent. Total tonnage
handled decreased 8 percent, reflecting declines of 34 percent in
export coal and 18 percent in domestic steel coal that were partially
offset by a 3 percent increase in utility tonnage. Export coal
traffic volume continues to be adversely affected by world economic
conditions and the strength of the U.S. dollar compared with the
currencies of countries that provide the primary competition for U.S.
export coal. Domestic steel coal traffic volume reflected the effects
of increased imports of lower-priced steel and plant closures in the
second quarter of 1998.
Coal revenues for the remainder of the year are expected to continue
to be adversely affected by weak demand for export coal. In the first
full month of operations after the Closing Date of the Conrail
transaction (see "Joint Acquisition of Conrail," below), coal revenues
are expected to increase by about one-third. As a result of these two
factors, total coal revenues, compared with last year, are expected to
be comparable in the second quarter and up about one-fourth in the
last half of 1999.
General Merchandise
- -------------------
General merchandise revenues increased $18 million, or 3 percent,
driven by a $22 million, or 16 percent, increase in automotive
revenues, reflecting continued growth in traffic handled through the
mixing center network. Metals/construction revenues increased
$3 million, or 3 percent, due to increased shipments of iron, steel, and
aggregates. Metals traffic increased despite a soft market resulting
from the availability of lower-priced, imported steel, reflecting new
business obtained from industrial development along NS' lines.
Paper/clay/forest revenues declined $9 million, or 7 percent, due to
continued weakness in export markets and plant closures.
<PAGE> PAGE 14
Item 2. Management's Discussion and Analysis of Financial Condition
- ------ -----------------------------------------------------------
and Results of Operations. (continued)
-------------------------
General merchandise revenues are expected to continue to benefit from
new and increased business resulting from industrial development along
NS' lines, which should offset the adverse effects of weaknesses in
other traffic segments. Immediately following the Closing Date of the
Conrail transaction, general merchandise revenues are expected to
increase by almost one-half, and, as a result, to increase by about
one-fifth in the second quarter, compared with 1998.
Intermodal
- ----------
Intermodal revenues decreased $13 million, or 9 percent, compared with
a strong first quarter last year. Trailer and container traffic
volume decreased, reflecting the effects of the service network
redesign that was implemented in August 1998 and extreme winter
weather conditions early in the quarter. Lower average revenues also
contributed to the decline.
Immediately following the Closing Date of the Conrail transaction,
intermodal revenues are expected to about double, and, as a result, to
increase by almost one-third in the second quarter, compared with last
year.
Railway Operating Expenses
- --------------------------
Railway operating expenses were $793 million in the first quarter,
down $22 million, or 3 percent, compared with last year. The decline
was due to lower "Compensation and benefits" and "Diesel fuel"
expenses, somewhat offset by higher "Materials, services, and rents"
and "Casualties and other claims" expenses.
"Compensation and benefits" expense decreased $28 million, or
7 percent. The decline was the result of: (1) lower stock-based
compensation expense that resulted from a decrease in the price of NS
stock, compared with an increase last year, and (2) premium refunds
attributable to a surplus in the national union welfare benefit plan.
"Diesel fuel" expense declined $11 million, or 23 percent, due to a
lower average price per gallon.
"Materials, services, and rents" increased $6 million, or 3 percent,
due to costs associated with the increase in automotive traffic and
Conrail integration expenses, mitigated by reduced repair and
maintenance costs.
"Casualties and other claims" increased $5 million, or 17 percent, due
to the settlement of contested liability associated with the Bayou
Bonfouca NPL Superfund site located in Slidell, La., and increased
loss and damage expense, principally resulting from a derailment in
Holliday, Mo., involving automobiles. Lower environmental expense
(excluding the effect of the settlement) and reduced personal injury
costs resulting from favorable claims experience somewhat offset these
increases.
<PAGE> PAGE 15
Item 2. Management's Discussion and Analysis of Financial Condition
- ------ -----------------------------------------------------------
and Results of Operations. (continued)
-------------------------
The railway operating ratio was 77.0 percent, compared with
76.5 percent in the first quarter of 1998. Excluding the effects of
the higher stock-based compensation last year and the union welfare
benefit plan premium refund, the difference in railway operating
ratios would have been about three percentage points, reflecting the
change in traffic mix related to the increase in automotive traffic
and the decrease in coal traffic.
Immediately following the Closing Date of the Conrail transaction, NS'
railway operating expenses will increase, reflecting expenses incurred
to lease and operate its portion of Conrail's routes and assets (see
"Joint Acquisition of Conrail," below).
Equity in Earnings of Conrail
- -----------------------------
"Equity in earnings of Conrail" decreased $5 million, or 16 percent,
in the first quarter (see "Joint Acquisition of Conrail" and
"Conrail's Results of Operations, Financial Condition, and Liquidity,"
below). Once NS begins to operate its portion of Conrail's routes and
assets, its equity in Conrail's earnings, net of amortization, will be
included in railway operating expenses.
Other Income - Net
- ------------------
"Other income - net" was $11 million lower in the first quarter,
principally due to lower gains from property sales.
Provision for Income Taxes
- --------------------------
The first-quarter effective income tax rate was 29.1 percent, compared
with 29.8 percent last year. Excluding NS' equity in Conrail's
after-tax earnings, the effective rate was 35.1 percent, compared with
35.9 percent. The improvement was due to favorable adjustments to
state tax accruals.
Discontinued Operations
- -----------------------
"Income from discontinued operations" for the first quarter of 1998
included a $98 million gain from the sale of NS' motor carrier
subsidiary (see Note 4).
<TABLE>
FINANCIAL CONDITION AND LIQUIDITY
<CAPTION>
March 31, December 31,
1999 1998
-------- -----------
($ in millions)
<S> <C> <C>
Cash and short-term investments $ 103 $ 63
Working capital $(193) $(204)
Current assets to current liabilities 0.8 0.8
Debt-to-total capitalization 56.7% 56.3%
</TABLE>
<PAGE> PAGE 16
Item 2. Management's Discussion and Analysis of Financial Condition
- ------ -----------------------------------------------------------
and Results of Operations. (continued)
-------------------------
CASH PROVIDED BY OPERATING ACTIVITIES is NS' principal source of
liquidity (see Consolidated Statements of Cash Flows on page 5). The
decline in "Net cash provided by operating activities" in the first
quarter of 1999, compared with first-quarter 1998, was principally due
to a larger increase in outstanding accounts receivable and a decrease
in operating income. The working capital deficit at March 31, 1999,
included $124 million of accrued interest to be paid in May. NS has
the capability to issue commercial paper to meet its working capital
needs (see the discussion of financing activities, below).
CASH USED FOR INVESTING ACTIVITIES increased substantially in the
first quarter of 1999, compared with the first quarter of 1998 that
included $200 million of proceeds from the sale of NAVL (see Note 4).
The higher property additions in 1999 reflected a change in financing
methods: in 1998, locomotives were acquired under capital leases,
which were excluded from the Consolidated Statements of Cash Flows
because they were noncash transactions (see Note 5); in 1999,
locomotives and freight cars were financed through the sale of
equipment trust certificates.
CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES in the first quarter
of 1999 included proceeds from the sale of commercial paper to meet
short-term working capital needs and proceeds from the sale of
equipment trust certificates. NS expects to issue commercial paper as
working capital needs arise and repay such commercial paper as
resources become available or by issuing additional commercial paper.
In April 1999, NS issued $400 million of 6.2 percent, 10-year term
notes, and expects to use substantially all the net proceeds to reduce
its outstanding commercial paper.
JOINT ACQUISITION OF CONRAIL
NS and CSX Corporation (CSX), through a jointly owned entity, control
Conrail Inc. (Conrail), the owner of Consolidated Rail Corporation,
the major freight railroad in the Northeast (see Note 3).
NS will begin providing rail freight services on portions of Conrail's
route system after the Closing Date, which NS and CSX have agreed will
be June 1, 1999. As a result, beginning in June, NS' railway
operating revenues will include revenues earned through operation of
its portion of Conrail's routes and assets and its access to the
Shared Assets Areas, which will be operated on behalf of NS and CSX.
NS' railway operating expenses will include the costs of such
operation and access, including compensation and benefits for the
approximately 11,500 Conrail employees who will become NS employees on
the Closing Date. Furthermore, NS will begin recording expenses
related to amounts paid to Pennsylvania Lines LLC, a Conrail
subsidiary, pursuant to the operating and lease agreements. Such
amounts include the fair value rental payments, which are expected to
be between $325 million and $350 million annually, for the portion of
Conrail's routes and assets that NS will lease. In addition, NS will
begin recording expenses for amounts paid to Conrail related to NS'
access to the Shared Assets Areas, which will be based on fair value
and percentage usage. Moreover, NS will begin to include in railway
operating expenses its equity in earnings of Conrail, net of
amortization.
<PAGE> PAGE 17
Item 2. Management's Discussion and Analysis of Financial Condition
- ------ -----------------------------------------------------------
and Results of Operations. (continued)
-------------------------
NS has obtained, through negotiation or arbitration, all labor
implementing agreements necessary for closing.
NS plans to implement its own information technology systems on the
portion of Conrail's routes it will operate. While some systems will
be operational on the Closing Date, others -- particularly the
transportation systems -- will be integrated geographically over a
period of several months after the Closing Date. Accordingly, some of
Conrail's systems are being modified to be compatible with NS' systems
during the interim period. Moreover, in the Shared Assets Areas, some
of Conrail's existing systems will continue to be used and, therefore,
must be able to work with both NS' and CSX's systems. Programming
identified as being necessary for closing has been substantially
completed, and testing and refining of detailed implementation plans
will continue through the Closing Date. Contingency plans involving
labor-intensive, manual processes are being developed where warranted
to ensure continued operations in the event of isolated or systemwide
information technology systems problems.
In anticipation of the Closing Date, NS has accumulated resources to
enable it to operate the portion of Conrail's routes and assets that
it will lease. This has included maintaining or increasing its work
force (particularly hiring and training additional train crews and
management employees), acquiring or leasing equipment based on
projected requirements, and beginning expansions to facilities on its
lines and on the portion of Conrail's property that it will operate.
These actions have resulted in increased operating expenses, and
expenses of this type are anticipated to continue after the Closing
Date.
The Closing Date marks the point at which Norfolk Southern Railway
Company (NSR) actually can begin to operate certain of the assets and
routes of Conrail, thereby permitting NS to begin to realize many of
the anticipated transaction benefits. Realization of these benefits
is dependent upon, among other things: (1) successful integration of
NS' portion of Conrail's system into its railroad system;
(2) successful operations within the Shared Assets Areas; and
(3) successful coordination of NSR's (and CSXT's) operations with the
Shared Assets Areas' operations. In addition, increased rail
competition in the Northeast could affect the extent of benefits
realized. A failure by NS or CSX to integrate successfully their
respective portions of Conrail, including information technology
systems, could have a substantial impact on NS' financial position,
results of operations, or liquidity.
CONRAIL'S RESULTS OF OPERATIONS, FINANCIAL CONDITION, AND LIQUIDITY
Conrail's first-quarter net income was $76 million in 1999, compared
with $85 million in 1998. The decline was principally the result of
adverse weather conditions early in the quarter that hampered rail
operations and affected railway operating revenues and two derailments
that necessitated accruals for personal injuries and equipment and
lading damage.
Operating revenues decreased $11 million, or 1 percent, reflecting
lower coal and other unit train revenue that was somewhat offset by
higher automotive and intermodal revenue. Operating expenses were
<PAGE> PAGE 18
Item 2. Management's Discussion and Analysis of Financial Condition
- ------ -----------------------------------------------------------
and Results of Operations. (continued)
-------------------------
$3 million higher as the adverse weather conditions, the two derailments,
and continued costs related to the integration of rail operations with NSR
and CSXT resulted in higher expenses that more than offset lower
diesel fuel expense.
Conrail's working capital deficit was $84 million at March 31, 1999,
compared with a deficit of $202 million at Dec. 31, 1998. The
improvement was principally the result of cash provided by operations,
which was $170 million for the first quarter of 1999. The working
capital deficit at March 31, 1999, included $188 million of employee-
related liabilities, principally severance accruals, which are
expected to be funded using assets from an employee benefits trust and
Conrail's over-funded pension plan. Conrail should continue to have
sufficient cash flow to meet its ongoing obligations both before and
after NSR and CSXT integrate their respective portions of its rail
operations.
YEAR-2000 COMPLIANCE
General
- -------
In October 1995, NS initiated a project to review and modify, as
necessary, its computer applications, hardware, and other equipment to
make them Year-2000 compliant. NS has engaged outside consultants and
independent contractors to assist with its Year-2000 project. The
progress of the project is reviewed regularly by NS' senior management
and by the Board's Audit Committee. The project is organized into
three principal areas: mainframe systems, nonmainframe systems, and
enterprise systems (operations and embedded processors), and for each
such system involves: inventory, assessment, remediation, testing,
and implementation. NS expects to have all business-critical systems
remediated, tested, and implemented in the third quarter of 1999.
State of Readiness
- ------------------
For mainframe systems (data center infrastructure, purchased or leased
software, and mainframe applications), remediation and unit testing
for business-critical systems are in the final stages. Systems
testing and implementation began in February 1999, and both are
expected to be completed in the third quarter of 1999 but require use
of the same resources needed for testing related to the Conrail
transaction (see "Joint Acquisition of Conrail," above).
For most business-critical nonmainframe and enterprise systems,
remediation has been completed. Testing and implementation is
expected to be completed by the third quarter of 1999.
NS also has initiated formal communications with third parties having
a substantial relationship to its business (including other railroads,
significant suppliers, larger customers, and financial institutions)
to determine the extent to which NS may be vulnerable to any such
third party's failure to achieve Year-2000 compliance. Thus far, NS
has no information that indicates that a significant third party may
be unable to provide goods or services or to request NS' services
because of Year-2000 issues.
<PAGE> PAGE 19
Item 2. Management's Discussion and Analysis of Financial Condition
- ------ -----------------------------------------------------------
and Results of Operations. (continued)
-------------------------
Cost
- ----
NS has allocated existing information technology resources and has
incurred incremental costs, mostly for contract programmers and
consultants, in connection with its Year-2000 compliance project.
Since the project began, Management estimates that up to 10 percent of
NS' in-house programming resources have been used for Year-2000
compliance efforts. The effects of deferring other information
technology projects to accommodate the Year-2000 effort have been
minor. Incremental costs incurred through March 31, 1999, which were
expensed, are immaterial to NS' results of operations. Total
incremental costs are expected to be approximately $25 million.
Contingency Plans
- -----------------
In all areas, the project includes extensive testing to ensure that
remediation successfully addresses Year-2000 compliance. NS has
established a series of initiatives to focus on business-critical
systems to ensure continued operations in the event of a Year-2000
problem. In addition, contingency plans are being developed where
warranted.
Conrail
- -------
As a part of its preparations to integrate its railroad system with a
portion of Conrail's system, NS is working with Conrail and CSX to
ensure that certain Conrail computer applications, hardware, and other
equipment are Year-2000 compliant. Conrail's core transportation
system is being made Year-2000 compliant, with a projected completion
date for all programming and testing of September 1999. Conrail's
other information technology systems are expected to be replaced by NS
and CSX systems within six months after the Closing Date, or by
Dec. 1, 1999. A delay in replacing these systems, which are not
Year-2000 compliant, could result in their failure. Conrail also has
under way a project to inventory, assess, and remediate all of its
business-critical enterprise systems that will continue to operate
after the Closing Date. This Conrail project is scheduled for
completion in the third quarter of 1999.
Risks
- -----
Failure to achieve Year-2000 compliance -- by NS, other railroads, its
principal suppliers and customers, and certain financial institutions
with which it has relationships -- could negatively affect NS' ability
to conduct business for an extended period. Unanticipated delays in
either the Conrail systems integration effort or the Year-2000 project
could adversely affect NS' ability to complete the other. Management
believes that NS will be successful in its Year-2000 compliance
effort; however, there can be no assurance that all NS information
technology systems and components will be fully Year-2000 compliant.
In addition, other companies on which NS systems and operations rely
may or may not be fully compliant on a timely basis, and any such
failure could have a material adverse effect on NS' financial
position, results of operations, or liquidity.
<PAGE> PAGE 20
Item 2. Management's Discussion and Analysis of Financial Condition
- ------ -----------------------------------------------------------
and Results of Operations. (continued)
-------------------------
NEW ACCOUNTING PRONOUNCEMENT
Effective Jan. 1, 1999, NS adopted AICPA Statement of Position 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained
for Internal Use." Adoption of this pronouncement had no material
effect on NS' consolidated financial statements.
FORWARD-LOOKING STATEMENTS
This Management's Discussion and Analysis of Financial Condition and
Results of Operations contains forward-looking statements that are
based on current expectations, estimates, and projections. Such
forward-looking statements reflect Management's good-faith evaluation
of information currently available. However, because such statements
are based upon, and therefore can be influenced by, a number of
external variables over which Management has no, or incomplete,
control, they are not, and should not be read as being, guarantees of
future performance or of actual future results; nor will they
necessarily prove to be accurate indications of the times at or by
which any such performance or result will be achieved. Accordingly,
actual outcomes and results may differ materially from those expressed
in such forward-looking statements. This caveat has particular
importance in the context of all such statements that relate to
Year-2000 compliance and to the Conrail transaction, including the
realization and the timing of benefits expected to result from its
consummation.
<PAGE> PAGE 21
PART II. OTHER INFORMATION
---------------------------
Item 6. Exhibits and Reports on Form 8-K.
- ------ --------------------------------
(a) Exhibits:
Financial Data Schedule
(b) Reports on Form 8-K:
During the three-month period covered by this report,
one current report on Form 8-K was filed: January 20,
1999, reporting that NS and CSX had agreed on June 1,
1999, as the Closing Date for the Conrail transaction.
<PAGE> PAGE 22
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
NORFOLK SOUTHERN CORPORATION
--------------------------------------
(Registrant)
Date: May 12, 1999 /s/ Dezora M. Martin
------------------- --------------------------------------
Dezora M. Martin
Corporate Secretary (Signature)
Date: May 12, 1999 /s/ John P. Rathbone
------------------- --------------------------------------
John P. Rathbone
Vice President and Controller
(Principal Accounting Officer) (Signature)
<PAGE> PAGE 23
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES
INDEX TO EXHIBITS
-----------------
Electronic
Submission
Exhibit
Number Description Page
- ---------- --------------------------------------------- ----
27 Financial Data Schedule 24
(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.)
<PAGE> PAGE 24
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> $ 86
<SECURITIES> 17
<RECEIVABLES> 574
<ALLOWANCES> 5
<INVENTORY> 55
<CURRENT-ASSETS> 999
<PP&E> 15,257
<DEPRECIATION> 4,639
<TOTAL-ASSETS> 18,480
<CURRENT-LIABILITIES> 1,192
<BONDS> 7,660
0
0
<COMMON> 401
<OTHER-SE> 5,566
<TOTAL-LIABILITY-AND-EQUITY> 18,480
<SALES> 0
<TOTAL-REVENUES> 1,030
<CGS> 0
<TOTAL-COSTS> 793
<OTHER-EXPENSES> (49)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 128
<INCOME-PRETAX> 158
<INCOME-TAX> 46
<INCOME-CONTINUING> 112
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 112
<EPS-PRIMARY> 0.30
<EPS-DILUTED> 0.30
</TABLE>
