PAGE 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 30, 2000
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
---------- ----------
Commission file number 1-8339
NORFOLK SOUTHERN CORPORATION
--------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Virginia 52-1188014
----------------------------------- ---------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
Three Commercial Place
Norfolk, Virginia 23510-2191
----------------------------------- ---------------------------------
(Address of principal executive offices) Zip Code
Registrant's telephone number, including area code (757) 629-2680
--------------------
No Change
--------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90
days. (X) Yes ( ) No
The number of shares outstanding of each of the registrant's classes of
Common Stock, as of the last practicable date:
Class Outstanding as of July 31, 2000
----- --------------------------------
Common Stock (par value $1.00) 383,377,548 (excluding 21,627,902
shares held by registrant's
consolidated subsidiaries)
<PAGE> PAGE 2
TABLE OF CONTENTS
-----------------
Page
----
Part I. Financial Information:
Item 1. Financial Statements:
Consolidated Statements of Income
Three Months and Six Months Ended
June 30, 2000 and 1999 3
Consolidated Balance Sheets
June 30, 2000, and December 31, 1999 4
Consolidated Statements of Cash Flows
Six Months Ended June 30, 2000 and 1999 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12
Part II. Other Information:
Item 3. Quantitative and Qualitative Disclosures
About Market Risks 19
Item 4. Submission of Matters to a Vote of
Security Holders 19
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 21
Exhibit Index 22
<PAGE> PAGE 3
PART I. FINANCIAL INFORMATION
------------------------------
Item 1. Financial Statements.
------ --------------------
<TABLE>
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income
($ in millions except per share amounts)
(Unaudited)
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Railway operating revenues:
Coal $ 377 $ 298 $ 720 $ 580
General merchandise 934 723 1,844 1,346
Intermodal 267 173 509 298
------ ------ ------ ------
TOTAL RAILWAY OPERATING
REVENUES 1,578 1,194 3,073 2,224
------ ------ ------ ------
Railway operating expenses:
Compensation and benefits
(Note 4) 516 413 1,171 781
Materials, services and rents 333 287 691 483
Conrail rents and services
(Note 5) 124 51 245 51
Depreciation 126 117 251 231
Diesel fuel 106 48 221 85
Casualties and other claims 34 29 66 64
Other 61 51 122 94
------ ------ ------ ------
TOTAL RAILWAY OPERATING
EXPENSES 1,300 996 2,767 1,789
------ ------ ------ ------
Income from railway
operations 278 198 306 435
Equity in earnings of Conrail
(Note 5) -- 22 -- 49
Other income - net 45 26 73 48
Interest expense on debt (139) (131) (279) (259)
------ ------ ------ ------
Income before income taxes 184 115 100 273
Provision for income taxes 68 38 32 84
------ ------ ------ ------
NET INCOME $ 116 $ 77 $ 68 $ 189
====== ====== ====== ======
Per share amounts (Note 8):
Net income, basic and diluted $ 0.30 $ 0.20 $ 0.18 $ 0.50
Dividends 0.20 0.20 0.40 0.40
</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>
June 30, Dec. 31,
2000 1999
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 45 $ 37
Short-term investments 5 14
Accounts receivable, net (Note 3) 426 857
Due from Conrail (Note 5) 18 77
Materials and supplies 136 100
Deferred income taxes 160 134
Other current assets 118 152
------- -------
Total current assets 908 1,371
------- -------
Investment in Conrail (Note 5) 6,143 6,132
Properties less accumulated depreciation 11,011 10,956
Other assets 817 791
------- -------
TOTAL ASSETS $18,879 $19,250
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 887 $ 818
Income and other taxes 206 163
Notes and accounts payable to Conrail
(Note 5) 103 184
Other current liabilities 263 256
Current maturities of long-term debt 103 503
------- -------
Total current liabilities 1,562 1,924
------- -------
Long-term debt (Note 6) 7,596 7,556
Other liabilities 1,114 1,101
Minority interests 49 50
Deferred income taxes 2,698 2,687
------- -------
TOTAL LIABILITIES 13,019 13,318
------- -------
Stockholders' equity:
Common stock $1.00 per share par value,
1,350,000,000 shares authorized;
issued 404,943,772 shares and
404,309,672 shares, respectively 405 404
Additional paid-in capital 382 372
Accumulated other comprehensive income
(Note 9) (9) (11)
Retained income 5,102 5,187
Less treasury stock at cost, 21,627,902
shares (20) (20)
------- -------
TOTAL STOCKHOLDERS' EQUITY 5,860 5,932
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $18,879 $19,250
======= =======
</TABLE>
See accompanying notes to Consolidated Financial Statements.
<PAGE> PAGE 5
Item 1. Financial Statements. (continued)
------ --------------------
<TABLE>
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
($ in millions)
(Unaudited)
<CAPTION>
Six Months Ended
June 30,
----------------
2000 1999
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 68 $ 189
Reconciliation of net income to net cash
provided by operating activities:
Depreciation 258 239
Deferred income taxes (8) 22
Equity in earnings of Conrail (Note 5) (10) (41)
Gains and losses on properties and investments (61) (17)
Changes in assets and liabilities affecting
operations:
Accounts receivable (Note 3) 432 (181)
Materials and supplies (36) 7
Other current assets and due from Conrail 111 23
Current liabilities other than debt 122 211
Other - net (Note 4) 10 (26)
------ ------
Net cash provided by operating activities 886 426
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions (351) (536)
Property sales and other transactions 82 40
Investments, including short-term (43) (92)
Investment sales and other transactions 38 172
------ ------
Net cash used for investing activities (274) (416)
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends (153) (152)
Common stock issued - net 1 15
Proceeds from borrowings 719 757
Debt repayments (1,171) (530)
------ ------
Net cash provided by (used for)
financing activities (604) 90
Net increase in cash and cash equivalents 8 100
CASH AND CASH EQUIVALENTS:
At beginning of year 37 5
------ ------
At end of period $ 45 $ 105
====== ======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest (net of amounts capitalized) $ 276 $ 260
Income taxes $ 5 $ 7
</TABLE>
See accompanying notes to Consolidated Financial Statements.
<PAGE> PAGE 6
Item 1. Financial Statements. (continued)
------ --------------------
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
1. In the opinion of Management, the accompanying unaudited interim
financial statements contain all adjustments (consisting of
normal recurring accruals) necessary to present fairly the
Corporation's financial position as of June 30, 2000, and results
of operations and cash flows for the six months ended June 30,
2000 and 1999.
Although Management believes that the disclosures presented are
adequate to make the information not misleading, these
Consolidated Financial Statements should be read in conjunction
with: (a) the financial statements and notes included in the
Corporation's latest Annual Report on Form 10-K and in any
subsequent Quarterly Reports on Form 10-Q, and (b) any Current
Reports on Form 8-K.
2. Commitments and Contingencies
There have been no significant changes since year-end 1999 in the
matters discussed in NOTE 16, COMMITMENTS AND CONTINGENCIES,
appearing in the NS Annual Report on Form 10-K for 1999, Notes to
Consolidated Financial Statements, beginning on page 76.
3. Sale of Accounts Receivable
Effective May 2000, NS sold, through a bankruptcy-remote special
purpose subsidiary, an undivided ownership interest in a pool of
accounts receivable totaling approximately $700 million. New
receivables are added to the pool as collections reduce
previously sold accounts receivable. NS services and collects
the sold receivables on behalf of the purchaser, who has a
priority collection interest in the entire pool of receivables.
NS has retained the credit risk related to collection to the
extent the pool of receivables exceeds the amount sold.
At June 30, 2000, accounts receivable of $450 million had been
sold under this arrangement and accordingly, are not included in
"Accounts receivable, net" on the balance sheet. The fees
associated with the sale are included in "Other income - net."
NS maintains an allowance for doubtful accounts for all
receivables, including receivables sold. The allowance account
totaled $6 million at June 30, 2000, and $5 million at December
31, 1999.
4. Work Force Reduction Charge
"Compensation and benefits" expenses for the first six months of
2000 include a first-quarter $101 million work force reduction
charge, which lowered net income by $62 million, or 16 cents per
diluted share. Most of the charge resulted from a voluntary
early retirement program, which was accepted by 919 of 1,180
eligible employees. The retirements were effective March 1,
2000, and most of the related benefits will be paid from the
Corporation's overfunded pension plan. As a result, there was a
noncash reduction to NS' pension plan asset. Reductions in union
<PAGE> PAGE 7
Item 1. Financial Statements. (continued)
------ --------------------
personnel were achieved primarily through furloughs, and some of
these employees are entitled to postemployment benefits. The
charge includes an accrual for these amounts for the period until
these employees return to work as a result of normal attrition.
5. Investment in Conrail and Operations Over Its Lines
Overview
--------
NS and CSX Corporation (CSX) jointly own Conrail Inc. (Conrail),
whose primary subsidiary is Consolidated Rail Corporation (CRC).
From May 23, 1997, the date NS and CSX completed their
acquisition of Conrail stock, until June 1, 1999 (the "Closing
Date"), Conrail's operations continued substantially unchanged
while NS and CSX awaited regulatory approvals and prepared for
the integration of the respective Conrail routes and assets to be
leased to their railroad subsidiaries, Norfolk Southern Railway
Company (NSR) and CSX Transportation, Inc. (CSXT). From time to
time, NS and CSX, as the indirect owners of Conrail, may need to
make capital contributions, loans or advances to Conrail.
Commencement of Operations
--------------------------
On June 1, 1999 (the "Closing Date"), NSR began operating the
routes and assets of Pennsylvania Lines LLC (PRR), a wholly owned
subsidiary of CRC, under various leasing and operating
arrangements. Costs necessary to operate and maintain the PRR
assets, including leasehold improvements, are borne by NSR. CSXT
operates the routes and assets of another CRC subsidiary under
comparable terms. Certain other Conrail routes and assets (the
"Shared Assets Areas") continue to be operated by CRC for the
joint and exclusive benefit of NSR and CSXT. In addition to a
fee paid for such access, NSR and CSXT pay, based on usage, the
costs incurred by CRC to operate the Shared Assets Areas.
NSR and CSXT now provide substantially all rail freight services
on Conrail's route system, are responsible for performing most
services incident to customer rail transportation contracts, and
employ the majority of Conrail's former work force. As a result,
on the Closing Date, both NS' railroad route miles and its
railroad employees increased by approximately 50 percent.
Investment in Conrail
---------------------
NS applies the equity method of accounting to its investment in
Conrail. NS is amortizing the excess of the purchase price over
Conrail's net equity using the principles of purchase accounting,
based primarily on the estimated remaining useful lives of
Conrail's property and equipment, including the related deferred
tax effect of the differences in tax and accounting bases for
certain assets. At June 30, 2000, the difference between NS'
investment in Conrail and its share of Conrail's underlying net
equity was $3.9 billion.
<PAGE> PAGE 8
Item 1. Financial Statements. (continued)
------ --------------------
NS' investment in Conrail includes $187 million ($115 million
after taxes) of costs that will be paid by NSR. These costs
consist principally of: (1) contractual obligations to Conrail
employees imposed by the Surface Transportation Board when it
approved the transaction and (2) costs to relocate Conrail
employees. Most of these costs are expected to be paid in the
two years following the Closing Date; $48 million is 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 June 30, 2000, NS has paid $51 million of
these costs.
Effective June 1, 1999, NS' consolidated financial statements
include the consolidated financial position and results of Triple
Crown Services Company (TCS), a partnership in which subsidiaries
of NS and PRR are partners.
Related-Party Transactions
--------------------------
NS provides certain general and administrative support functions
to Conrail, the fees for which are billed in accordance with
several service-provider arrangements.
"Conrail rents and services," a line added to the income
statements beginning June 1, 1999, includes: (1) expenses for
amounts due to PRR and CRC for use by NSR of operating properties
and equipment, operation of the Shared Assets Areas and continued
operation of certain facilities during a transition period; and
(2) NS' equity in the earnings (or loss) of Conrail, net of
amortization.
"Notes and accounts payable to Conrail" includes $33 million at
June 30, 2000, and $123 million, at Dec. 31, 1999, of interest-
bearing loans made to NS by a PRR subsidiary, payable on demand.
The interest rate for these loans is variable and was 6.4 percent at
June 30, 2000. Also included is $70 million at June 30, 2000,
and $61 million, at Dec. 31, 1999, due to PRR and CRC related to
expenses included in "Conrail rents and services," as discussed
above.
Summary Financial Information - Conrail
---------------------------------------
The following historical cost basis financial information should
be read in conjunction with Conrail's audited financial
statements, included as Exhibit 99 with NS' 1999 Annual Report on
Form 10-K.
Conrail's results of operations in the first six months of 2000
reflect its new structure and operations. Conrail's current
major sources of operating revenues are operating fees and rents
from NSR and CSXT and, consequently, the composition of its
operating expenses has changed. Results in 1999 reflect freight
line-haul operations prior to the Closing Date.
<PAGE> PAGE 9
Item 1. Financial Statements. (continued)
------ --------------------
<TABLE>
Summarized Consolidated Statements of Income - Conrail
------------------------------------------------------
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
2000 1999 2000 1999
---- ---- ---- ----
($ in millions)
(Unaudited)
<S> <C> <C> <C> <C>
Operating revenues $ 246 $ 737 $ 505 $1,653
Operating expenses 194 798 393 1,568
------ ------ ------ ------
Operating income (loss) 52 (61) 112 85
Other income (expense)
- net (5) (23) 39 (45)
------ ------ ------ ------
Income (loss) before
income taxes 47 (84) 151 40
Provision for income
taxes 17 (21) 55 27
------ ------ ------ ------
Net income (loss) $ 30 $ (63) $ 96 $ 13
====== ====== ====== ======
</TABLE>
Note: Conrail's results for the first six months of 2000
included a gain from the sale of property in the first quarter
that had been written up to fair market value in the allocation
of NS' investment in Conrail. Accordingly, the gain related to
that fair-value write-up, totaling $16 million after taxes, was
excluded in determining NS' equity in Conrail's net income.
Conrail's results for the three months and six months ended
June 30, 1999, include $117 million of after-tax expenses,
principally an increase to certain components of its casualty
reserves based on a then recently completed actuarial valuation.
These items were considered in the fair-value allocation of NS'
investment in Conrail, and, accordingly, were excluded in
determining NS' equity in Conrail's net income.
<PAGE> PAGE 10
Item 1. Financial Statements. (continued)
------ --------------------
<TABLE>
Summarized Consolidated Balance Sheets - Conrail
------------------------------------------------
<CAPTION>
June 30, Dec. 31,
2000 1999
---- ----
($ in millions)
(Unaudited)
<S> <C> <C>
Assets:
Current assets $ 509 $ 669
Noncurrent assets 7,596 7,714
------ ------
Total assets $8,105 $8,383
====== ======
Liabilities and
stockholders' equity:
Current liabilities $ 529 $ 863
Noncurrent liabilities 3,662 3,701
Stockholders' equity 3,914 3,819
------ ------
Total liabilities and
stockholders' equity $8,105 $8,383
====== ======
</TABLE>
6. Long-Term Debt
In May 2000, NS issued $300 million of 8.375 percent, 5-year term
Senior Notes and $300 million of 8.625 percent, 10-year term
Senior Notes and received net proceeds of $594 million. The
notes were issued using the remainder of the capacity under NS'
November 1998 $1 billion shelf registration.
7. Lease Commitment
In March and June 2000, NSR entered into operating leases for a
total of 140 locomotives, which have a maximum term of eight
years and include purchase options. If NSR does not purchase the
locomotives at the end of the lease terms, it is liable for the
difference between the then fair-value of the locomotives and a
specified residual value. NS does not expect that any payments
under this provision would be material to its financial
statements.
<PAGE> PAGE 11
Item 1. Financial Statements. (continued)
------ --------------------
8. Earnings Per Share
<TABLE>
The following table sets forth the reconciliation of the number
of weighted-average shares outstanding used in the calculations
of basic and diluted earnings per share:
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
2000 1999 2000 1999
---- ---- ---- ----
(In millions)
<S> <C> <C> <C> <C>
Weighted-average shares
outstanding 383.2 380.2 383.1 380.0
Dilutive effect of
outstanding options and
performance share units
(as determined by the
application of the
treasury stock method) 0.4 2.5 0.3 2.1
----- ----- ----- -----
Diluted weighted-average
shares outstanding 383.6 382.7 383.4 382.1
===== ===== ===== =====
</TABLE>
The calculations for 2000 exclude 20 million options in the
second quarter and 28 million options in the first quarter
because their exercise price exceeded the average market price of
Common Stock for the period. There are no adjustments to "Net
income" for the diluted earnings per share computations.
9. Comprehensive Income
<TABLE>
NS' total comprehensive income was as follows:
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
2000 1999 2000 1999
---- ---- ---- ----
($ in millions)
<S> <C> <C> <C> <C>
Net income $ 116 $ 77 $ 68 $ 189
Other comprehensive
income (loss) -- (2) 2 (2)
----- ----- ----- -----
Total comprehensive
income $ 116 $ 75 $ 70 $ 187
===== ===== ===== =====
</TABLE>
For NS, "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
OPERATIONS OVER CONRAIL'S LINES
On June 1, 1999 (the "Closing Date"), NS' railroad subsidiary, Norfolk
Southern Railway Company (NSR), began operating a substantial portion
of Conrail's properties (NSR's new "Northern Region") under various
agreements with Pennsylvania Lines LLC (PRR), a wholly owned
subsidiary of Consolidated Rail Corporation (CRC) (see Note 5). As a
result, both the railroad route miles operated by NSR and the number
of its railroad employees increased approximately 50 percent on that
date. Results for the second quarter and first six months of 1999
reflect only one month of operations of the new NS railroad system,
which includes the Northern Region.
Difficulties encountered in the assimilation of the Northern Region
into NSR's existing system during 1999 resulted in system congestion,
an increase in cars on line, increased terminal dwell time and reduced
system velocity. These service issues and actions taken to address
them increased operating expenses. Moreover, revenues were lower than
expected as some customers diverted traffic to other modes of
transportation. Although system fluidity has improved, income from
railway operations is expected to continue to be affected adversely
until these revenue and expense issues have been resolved fully.
RESULTS OF OPERATIONS
Net Income
----------
Net income was $116 million in the second quarter of 2000, up
$39 million, or 51 percent, compared with $77 million in the second
quarter of 1999. The improvement was attributable largely to
increased income from railway operations, as last year's second
quarter was significantly affected by the difficulties encountered in
the commencement of operations in the Northern Region. For the first
six months of 2000, net income was $68 million, compared with
$189 million in the comparable period of 1999. Results in 2000
included a first-quarter pretax charge of $101 million ($62 million
after taxes) for pension expense associated with a voluntary early
retirement program and protective benefits related to other actions
taken to reduce the work force (See Note 4). Excluding the effects of
the work force reduction charge, six-month net income would have been
$130 million, down $59 million, or 31 percent, compared with last
year. The decline was principally due to reduced income from railway
operations that resulted from higher diesel fuel costs, a change in
the mix of traffic (a lower proportion of export coal traffic and a
higher proportion of intermodal traffic), and expenses related to
efforts to improve service (primarily locomotive and freight car costs
earlier in the year).
<PAGE> PAGE 13
Item 2. Management's Discussion and Analysis of Financial Condition
------ -----------------------------------------------------------
and Results of Operations. (continued)
-------------------------
Railway Operating Revenues
--------------------------
<TABLE>
Second-quarter railway operating revenues were $1.6 billion in 2000, and
were $1.2 billion in 1999. For the first six months, railway operating
revenues were $3.1 billion in 2000, and were $2.2 billion in 1999. As
shown in the following table, the increases were attributable to higher
traffic volume, largely the result of the commencement of operations in
the Northern Region. The year-to-date revenue per unit/mix component
includes: (1) a $98 million positive variance for intermodal traffic,
about half of which resulted from the consolidation of Triple Crown
Services Company's (TCS) revenues, beginning June 1, 1999, and (2) a
$57 million negative variance for coal, reflecting an increase in the
proportion of shorter-haul traffic, coupled with a decline in the
proportion of export coal traffic.
<CAPTION>
Second Quarter First Six Months
2000 vs. 1999 2000 vs. 1999
Increase (Decrease) Increase (Decrease)
------------------- -------------------
($ in millions)
<S> <C> <C>
Traffic volume (carloads) $ 337 $ 796
Revenue per unit 47 53
------ ------
$ 384 $ 849
====== ======
</TABLE>
<TABLE>
Revenues and carloads for the commodity groups were as follows (prior
year data has been reclassified to conform to the current
presentation):
<CAPTION>
Revenues
---------------------------------------
Second Quarter Six Months
2000 1999 2000 1999
---- ---- ---- ----
($ in millions)
<S> <C> <C> <C> <C>
Coal $ 377 $ 298 $ 720 $ 580
General merchandise:
Automotive 247 187 487 347
Chemicals 195 147 379 272
Metals/construction 182 126 356 220
Paper/clay/forest 160 139 313 267
Agr./consumer prod./govt. 150 124 309 240
------ ------ ------ ------
General merchandise 934 723 1,844 1,346
Intermodal 267 173 509 298
------ ------ ------ ------
Total $1,578 $1,194 $3,073 $2,224
====== ====== ====== ======
</TABLE>
<PAGE> PAGE 14
Item 2. Management's Discussion and Analysis of Financial Condition
------ -----------------------------------------------------------
and Results of Operations. (continued)
-------------------------
<TABLE>
Carloads
-------------------------------------
<CAPTION>
Second Quarter Six Months
2000 1999 2000 1999
---- ---- ---- ----
(in thousands)
<S> <C> <C> <C> <C>
Coal 436 340 858 640
General merchandise:
Automotive 189 156 372 292
Chemicals 116 92 230 170
Metals/construction 206 126 396 217
Paper/clay/forest 126 113 252 215
Agr./consumer prod./govt. 128 117 263 223
----- ----- ----- -----
General merchandise 765 604 1,513 1,117
Intermodal 555 425 1,062 771
----- ----- ----- -----
Total 1,756 1,369 3,433 2,528
===== ===== ===== =====
</TABLE>
Coal
----
Second-quarter coal revenues were $377 million, compared with
$298 million last year, and were $720 million for the first six
months, compared with $580 million last year. Total tonnage handled
increased 10 million tons in the quarter and 22 million tons for the
first six months, most of which was utility coal traffic. The effects
of Northern Region traffic were somewhat offset by lower export
tonnage out of Norfolk, Va., and reduced utility demand in the
Southeast earlier in the year. Utility volume was affected by plant
repairs and outages in the Spring; however, demand continues to be
driven by increased electricity generation in NS' service region.
Domestic metallurgical coal, coke and iron ore traffic volume also
benefited from increased domestic steel production and new business.
For the remainder of the year, coal revenues are expected to be
slightly higher than the comparable period of 1999.
General Merchandise
-------------------
Second-quarter general merchandise revenues were $934 million,
compared with $723 million last year, and were $1.8 billion for the
first six months, compared with $1.3 billion last year. Both
increases were principally the result of the addition of Northern
Region traffic. Continued strong automotive demand, increased metals
and construction business, and recovery of much of the traffic
diverted last year also contributed to increased revenues.
For the remainder of the year, general merchandise revenues are
expected to be somewhat higher than in the comparable period of 1999,
reflecting the return of diverted traffic, new business and higher
rates.
<PAGE> PAGE 15
Item 2. Management's Discussion and Analysis of Financial Condition
------ -----------------------------------------------------------
and Results of Operations. (continued)
-------------------------
Intermodal
----------
Second-quarter intermodal revenues were $267 million, compared with
$173 million last year, and were $509 million in the first six months,
compared with $298 million last year. Both increases reflected the
addition of Northern Region traffic and the consolidation of TCS'
revenues. Higher traffic volume also resulted from increased demand,
new business and the recovery of diverted traffic.
For the remainder of the year, intermodal revenues are expected to be
somewhat higher than last year, as the effects of the loss of APL
business late in 1999 is expected to be offset by new business.
Railway Operating Expenses
--------------------------
Second-quarter railway operating expenses were $1.3 billion in 2000
and $1.0 billion in 1999. For the first six months, railway operating
expenses were $2.8 billion in 2000 and $1.8 billion in 1999. Both
increases were principally the result of Northern Region operations,
which commenced June 1, 1999, and sharply higher diesel fuel prices.
In addition, year-to-date expenses in 2000 included the $101 million
pretax charge in the first quarter related to the work force reduction
efforts.
"Compensation and benefits" expense increased $103 million, or
25 percent, in the second quarter, and $390 million, or 50 percent,
for the first six months, including the effects of the work force
reduction charge. Excluding the charge, year-to-date compensation and
benefits expense increased $289 million, or 37 percent. Both
increases were primarily the result of the addition of Northern Region
operations, together with higher wage and fringe benefit costs for
union employees. These increases were partially offset by pension
income of $34 million in each of the first and second quarters ($21 million
and $43 million higher than in the second quarter and first six months
of 1999, respectively), lower stock-based compensation costs, and lower
nonunion salary expense following the voluntary early retirement program.
"Materials, services and rents" increased $46 million, or 16 percent,
in the second quarter, and $208 million, or 43 percent, for the first
six months. The increases were principally due to the addition of
Northern Region operations and included higher maintenance expenses,
equipment rents, intermodal handling costs, and the effects of
consolidating TCS. These increases were partially offset by the
absence of certain costs, mostly for alternate transportation, related
to the difficulties encountered last year in the commencement of
Northern Region operations.
"Conrail rents and services" amounted to $124 million in the second
quarter, and $245 million for the first six months, and included
$123 million and $255 million, respectively, of expenses for use of
PRR's assets and for NS' share of CRC's operation of the Shared Assets
Areas. Also included is NS' equity in Conrail's earnings, net of
additional amortization related to the difference between NS'
<PAGE> PAGE 16
Item 2. Management's Discussion and Analysis of Financial Condition
------ -----------------------------------------------------------
and Results of Operations. (continued)
-------------------------
investment in Conrail and its underlying equity. NS' equity in Conrail's
earnings for the first six months included $13 million in the first
quarter related to a gain from the sale of property (see Note 5).
"Diesel fuel" expense increased $58 million, or 121 percent, in the
second quarter, and $136 million, or 160 percent, for the first six
months. Both increases reflected sharply higher average prices per
gallon, up 69 percent for the quarter and 88 percent for the first six
months, and increased consumption related to Northern Region
operations.
"Casualties and other claims" expense increased $5 million, or
17 percent, in the second quarter, and $2 million, or 3 percent, for
the first six months. Both increases reflect the addition of Northern
Region operations. The comparison for the first six months also was
affected by higher environmental expenses last year related to a first-
quarter 1999 settlement associated with a Superfund site.
"Other" expense increased $10 million, or 20 percent, in the second
quarter, and $28 million, or 30 percent, for the first six months,
principally due to higher property and other taxes related to the
Northern Region.
The railway operating ratio was 82.4 percent in the second quarter,
compared with 83.4 percent last year. For the first six months, the
ratio was 90.0 percent; excluding the first-quarter work force
reduction charge, the ratio would have been 86.8 percent, compared
with 80.4 percent last year. For the remainder of the year, the ratio
is expected to improve, compared with 1999's second-half ratio, which
was adversely affected by system congestion and related traffic
diversions after the Closing Date.
Other Income - Net
------------------
"Other income - net" increased $19 million in the second quarter and
$25 million for the first six months, compared with last year. Both
increases reflected a $28 million gain in the second quarter from the
sale of gas and oil royalty and working interests. "Other income -
net" included $8 million of expenses related to the sale of accounts
receivable, which commenced May 1, 2000 (see Note 3).
Provision for Income Taxes
--------------------------
The second-quarter effective income tax rate was 37.0 percent,
compared with 33.0 percent last year. For the first six months, the
effective rate was 32.0 percent, versus 30.8 percent last year.
Excluding NS' equity in Conrail's after-tax income, the second-quarter
rate was 36.8 percent in 2000 and 37.6 percent in 1999, and the year-
to-date rate was 35.6 percent in 2000 and 36.2 percent in 1999.
<PAGE> PAGE 17
Item 2. Management's Discussion and Analysis of Financial Condition
------ -----------------------------------------------------------
and Results of Operations. (continued)
-------------------------
<TABLE>
FINANCIAL CONDITION AND LIQUIDITY
<CAPTION>
June 30, Dec. 31,
2000 1999
---- ----
($ in millions)
<S> <C> <C>
Cash and short-term investments $ 50 $ 51
Working capital deficit $ 654 $ 553
Current assets to current liabilities 0.6 0.7
Debt-to-total capitalization 56.9% 58.0%
</TABLE>
CASH PROVIDED BY OPERATING ACTIVITIES, NS' principal source of
liquidity, increased $460 million, in the first six months of 2000,
compared with last year, reflecting proceeds received May 1 from the
sale of accounts receivable (see Note 3). Absent this infusion of
cash, operating cash flow was even with the prior year, despite the
slight decline in operating income (excluding the noncash work force
reduction charge - see Note 4), primarily due to the lack of bonus
payments and other favorable changes in working capital. NS' working
capital deficit was $654 million at June 30, 2000. NS currently has
in place a $2.8 billion credit facility to support $1.2 billion of
commercial paper outstanding at June 30, 2000. As a result, NS
currently has the capability to issue commercial paper to meet its
more immediate working capital needs.
CASH USED FOR INVESTING ACTIVITIES declined significantly, principally
due to lower property additions -- locomotive fleet additions in 2000
were accomplished by operating lease, whereas locomotives were
purchased in 1999 using proceeds from the sale of equipment trust
certificates.
CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES reflects slightly
lower proceeds from borrowings in 2000, coupled with significantly
higher debt repayments. Proceeds from the sale of accounts receivable
were used to pay notes that matured May 1, 2000. In addition, NS
issued $600 million of debt in May 2000, using the remainder of the
capacity under its November 1998 $1 billion shelf registration (see
Note 6), and used the proceeds to retire commercial paper and pay down
its indebtedness to PRR.
CONRAIL'S RESULTS OF OPERATIONS, FINANCIAL CONDITION AND LIQUIDITY
Conrail's results of operations in 2000 reflect its new structure and
operations that commenced on the Closing Date (see Note 5). Conrail's
current major sources of revenues are operating fees and rents from
NSR and CSXT and, consequently, the composition of its operating
expenses has changed. Results in 1999 reflect freight line-haul
operations prior to the Closing Date.
Conrail's second-quarter net income was $30 million in 2000, compared
with a net loss of $63 million in 1999. For the first six months, net
income was $96 million in 2000, compared with $13 million in 1999.
Results in 1999 included $117 million of after-tax expenses,
principally the result of a then recently completed actuarial
<PAGE> PAGE 18
Item 2. Management's Discussion and Analysis of Financial Condition
------ -----------------------------------------------------------
and Results of Operations. (continued)
-------------------------
valuation of certain components of its casualty reserves. Excluding the
effects of these 1999 expenses, Conrail's net income would have been
down $24 million in the quarter and $34 million for the first six months.
Year-to-date 2000 results included $61 million of gain ($37 million after
taxes) in the first quarter from a large property sale.
Conrail's operating revenues were $246 million in the second quarter
and $505 million for the first six months of 2000, compared with
$737 million and $1.7 billion, respectively, for the same periods last
year. Operating expenses were $194 million for the quarter and
$393 million for the first six months of 2000, compared with
$628 million and $1.4 billion (excluding the expenses discussed
above), respectively, for the same periods last year. The declines in
revenues and expenses for both periods of 2000 were attributable to
the change in its operations.
Conrail's cash provided by operating activities was about breakeven
for the first six months of 2000, and was $267 million for the
comparable period of 1999. The change was principally attributable to
lower operating income, a result of Conrail's new structure and
operations, and substantial payments in the first quarter of 2000 of
one-time items owed to NSR and CSXT.
Conrail's investing activities have been greatly reduced as a result
of NSR's and CSXT's operation of most of its routes and assets.
Conrail's working capital deficit was $20 million at June 30, 2000,
compared with a deficit of $194 million at Dec. 31, 1999. The
reduction was attributable to the repayment of debt that matured in
June 2000. Conrail is expected to have sufficient cash flow to meets
its ongoing obligations.
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 the
resolution of the service issues, the recapture of diverted business,
the addition of new business, and the ability to reduce expenses.
<PAGE> PAGE 19
PART II. OTHER INFORMATION
---------------------------
Item 3. Quantitative and Qualitative Disclosures About Market Risks.
------ -----------------------------------------------------------
There has been no material change to the disclosures made under
the heading "Market Risks and Hedging Activities" on page 43 of the
Corporation's 1999 Annual Report on Form 10-K.
Item 4. Submission of Matters to a Vote of Security Holders.
------ ---------------------------------------------------
Registrant's Annual Meeting of Stockholders was held on May 11,
2000, at which meeting three directors were elected to the class for a
term of three years, the appointment of independent public accountants
was ratified, and a stockholder proposal was defeated.
The three nominees for directors were elected by the following
vote:
THREE-YEAR TERM
------------------------------------------------------------------
FOR AUTHORITY WITHHELD
--- ------------------
Carroll A. Campbell, Jr. 317,982,285 8,395,749 votes
David R. Goode 317,074,380 9,303,654 votes
Harold W. Pote 314,860,806 11,517,228 votes
The appointment of KPMG LLP, independent public accountants, as
auditors of the Corporation's books and records was ratified by the
following vote:
FOR: 322,720,924 shares AGAINST: 2,242,266 shares
ABSTAINED: 1,414,844 shares
A stockholder proposal concerning the Board's reporting to the
stockholders on the Corporation's activities and efforts related to
global warming was defeated by the following vote:
FOR: 18,078,042 shares AGAINST: 249,285,641 shares
ABSTAINED: 13,261,685 shares
<PAGE> PAGE 20
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 April 3, 2000,
advising that NS expected to record a $100 million
charge in the first quarter to reflect the cost of
certain work force reductions.
A report on Form 8-K was filed on May 24, 2000,
advising that on May 23, 2000, NS had closed the sale
of $300 million of its 8-3/8 percent Senior Notes due
in 2005 and $300 million of its 8-5/8 percent Senior
Notes due in 2010, and attaching as an exhibit the
related press release.
A report on Form 8-K was filed on May 25, 2000,
advising that on May 23, 2000, NS had issued and sold
$300 million of its 8-3/8 percent Senior Notes due in
2005 and $300 million of its 8-5/8 percent Senior Notes
due in 2010, and attaching as exhibits certain legal
instruments related thereto.
<PAGE> PAGE 21
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
NORFOLK SOUTHERN CORPORATION
--------------------------------------
(Registrant)
Date: August 9, 2000 /s/ Dezora M. Martin
------------------- --------------------------------------
Dezora M. Martin
Corporate Secretary (Signature)
Date: August 9, 2000 /s/ John P. Rathbone
------------------- --------------------------------------
John P. Rathbone
Senior Vice President and Controller
(Principal Accounting Officer) (Signature)
<PAGE> PAGE 22
EXHIBIT INDEX
-------------
Electronic
Submission
Exhibit
Number Description Page
---------- -----------------------------------------------------
27 Financial Data Schedule 23
(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 23
