UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 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, 2013

 

(  )    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 (State or other jurisdiction of incorporation)	52-1188014 (IRS Employer Identification No.)
Three Commercial Place Norfolk, Virginia (Address of principal executive offices)	23510-2191 (Zip Code)
(757) 629-2680 (Registrant’s telephone number, including area code)
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.

Yes [X] No [  ]

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes [X] No [  ]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. 

Large accelerated filer [X] Accelerated filer [  ]  Non-accelerated filer [  ]  Smaller reporting company [   ] 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes [  ] No [X]

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Class		Outstanding at June 30, 2013
Common Stock ($1.00 par value per share)		311,952,780 (excluding 20,320,777 shares held by the registrant’s consolidated subsidiaries)

		TABLE OF CONTENTS
		NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES (NS)
				Page
Part I.	Financial Information:
	Item 1.	Financial Statements:
		Consolidated Statements of Income Second Quarters and First Six Months of 2013 and 2012		3
		Consolidated Statements of Comprehensive Income Second Quarters and First Six Months of 2013 and 2012		4
		Consolidated Balance Sheets At June 30, 2013 and December 31, 2012		5
		Consolidated Statements of Cash Flows First Six Months of 2013 and 2012		6
		Notes to Consolidated Financial Statements		7
		Report of Independent Registered Public Accounting Firm		18
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		19
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk		29
	Item 4.	Controls and Procedures		29
Part II.	Other Information:
	Item 1.	Legal Proceedings		30
	Item 1A.	Risk Factors		30
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		31
	Item 6.	Exhibits		31
Signatures				32
Exhibit Index				33

PART 1. FINANCIAL INFORMATION

 

 

Item 1. Financial Statements

 

Norfolk Southern Corporation and Subsidiaries

Consolidated Statements of Income

(Unaudited)

 

	Second Quarter						First Six Months
	2013			2012			2013			2012
	($ in millions, except per share amounts)
Railway operating revenues	$	2,802		$	2,874		$	5,540		$	5,663
Railway operating expenses
Compensation and benefits		726			724			1,506			1,510
Purchased services and rents		410			392			803			783
Fuel		391			390			820			803
Depreciation		226			229			453			453
Materials and other		213			205			431			435
Total railway operating expenses		1,966			1,940			4,013			3,984
Income from railway operations		836			934			1,527			1,679
Other income – net		29			31			164			60
Interest expense on debt		128			122			257			242
Income before income taxes		737			843			1,434			1,497
Provision for income taxes		272			319			519			563
Net income	$	465		$	524		$	915		$	934
Per share amounts
Net income:
Basic	$	1.47		$	1.62		$	2.90		$	2.86
Diluted		1.46			1.60			2.87			2.82
Dividends		0.50			0.47			1.00			0.94

 

 

 

 

 

 

 

See accompanying notes to consolidated financial statements.

Norfolk Southern Corporation and Subsidiaries

Consolidated Statements of Comprehensive Income

(Unaudited)

 

 

 

	Second Quarter						First Six Months
	2013			2012			2013			2012
	($ in millions)
Net income	$	465		$	524		$	915		$	934
Other comprehensive income, before tax:
Pension and other postretirement benefits		36			32			72			64
Other comprehensive income (loss) of
equity investees		1			-			2			(4)
Other comprehensive income, before tax		37			32			74			60
Income tax expense related to items of other
comprehensive income		(14)			(13)			(28)			(25)
Other comprehensive income, net of tax		23			19			46			35
Total comprehensive income	$	488		$	543		$	961		$	969

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to consolidated financial statements.

Norfolk Southern Corporation and Subsidiaries

Consolidated Balance Sheets

(Unaudited)

 

	June 30,				December 31,
	2013				2012
	($ in millions)
Assets
Current assets:
Cash and cash equivalents		$	587			$	653
Short-term investments			-				15
Accounts receivable – net			1,072				1,109
Materials and supplies			228				216
Deferred income taxes			137				167
Other current assets			54				82
Total current assets			2,078				2,242
Investments			2,366				2,300
Properties less accumulated depreciation of $10,152 and
$9,922, respectively			26,098				25,736
Other assets			63				64
Total assets		$	30,605			$	30,342
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable		$	1,180			$	1,362
Short-term debt			-				200
Income and other taxes			284				206
Other current liabilities			304				263
Current maturities of long-term debt			47				50
Total current liabilities			1,815				2,081
Long-term debt			8,430				8,432
Other liabilities			2,198				2,237
Deferred income taxes			7,974				7,832
Total liabilities			20,417				20,582
Stockholders’ equity:
Common stock $1.00 per share par value, 1,350,000,000 shares
authorized; outstanding 311,952,780 and 314,034,174 shares,
respectively, net of treasury shares			313				315
Additional paid-in capital			1,984				1,911
Accumulated other comprehensive loss			(1,063)				(1,109)
Retained income			8,954				8,643
Total stockholders’ equity			10,188				9,760
Total liabilities and stockholders’ equity		$	30,605			$	30,342

 

See accompanying notes to consolidated financial statements.

Norfolk Southern Corporation and Subsidiaries

Consolidated Statements of Cash Flows

(Unaudited)

 

	First Six Months
	2013			2012
	($ in millions)
Cash flows from operating activities
Net income	$	915		$	934
Reconciliation of net income to net cash provided by operating activities:
Depreciation		456			456
Deferred income taxes		143			138
Gains on properties		(99)			(2)
Changes in assets and liabilities affecting operations:
Accounts receivable		37			(64)
Materials and supplies		(12)			(33)
Other current assets		28			23
Current liabilities other than debt		6			162
Other – net		32			49
Net cash provided by operating activities		1,506			1,663
Cash flows from investing activities
Property additions		(884)			(968)
Property sales and other transactions		68			15
Investments, including short-term		(7)			(12)
Investment sales and other transactions		16			33
Net cash used in investing activities		(807)			(932)
Cash flows from financing activities
Dividends		(315)			(308)
Common stock issued – net		80			47
Purchase and retirement of common stock		(314)			(850)
Proceeds from borrowings – net		-			696
Debt repayments		(216)			(236)
Net cash used in financing activities		(765)			(651)
Net increase (decrease) in cash and cash equivalents		(66)			80
Cash and cash equivalents
At beginning of period		653			276
At end of period	$	587		$	356
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest (net of amounts capitalized)	$	244		$	232
Income taxes (net of refunds)		238			264

 

See accompanying notes to consolidated financial statements.

Norfolk Southern Corporation and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

 

In the opinion of management, the accompanying unaudited interim consolidated financial statements contain all adjustments (consisting of normal recurring accruals) necessary to present fairly Norfolk Southern Corporation (Norfolk Southern) and subsidiaries’ (collectively, NS, we, us, and our) financial condition at June 30, 2013, and December 31, 2012, our results of operations and comprehensive income for the second quarters and first six months of 2013 and 2012, and our cash flows for the first six months of 2013 and 2012 in conformity with U.S. generally accepted accounting principles (GAAP).

 

These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in our latest Annual Report on Form 10-K.

 

1.  Stock-Based Compensation

 

During the first quarter of 2013, a committee of non-employee directors of our Board of Directors granted stock options, restricted stock units (RSUs) and performance share units (PSUs) pursuant to the Long-Term Incentive Plan (LTIP) and granted stock options pursuant to the Thoroughbred Stock Option Plan (TSOP) as discussed below. Stock-based compensation expense was $6 million and $7 million during the second quarters of 2013 and 2012, respectively. For the first six months of 2013 and 2012, stock-based compensation expense was $43 million and $41 million, respectively. The total tax effects recognized in income in relation to stock-based compensation were net benefits of $2 million and $3 million for the second quarters of 2013 and 2012, and net benefits of $14 million for the first six months of both 2013 and 2012.

 

Stock Options

 

In the first quarter of 2013, 748,200 options were granted under LTIP and 268,500 options were granted under TSOP. In each case, the grant price was $69.83, which was the greater of the average fair market value of Norfolk Southern common stock (Common Stock) or the closing price of Common Stock on the effective date of the grant, and the options have a term of ten years. The options granted under LTIP and TSOP in 2013 may not be exercised prior to the fourth and third anniversaries of the date of grant, respectively. Holders of the 2013 options granted under LTIP who remain actively employed receive cash dividend equivalent payments for four years in an amount equal to the regular quarterly dividends paid on Common Stock. Dividend equivalent payments are not made on TSOP options.

 

The fair value of each option award in 2013 was measured on the date of grant using a lattice-based option valuation model. Expected volatilities are based on implied volatilities from traded options on and historical volatility of Common Stock. Historical data is used to estimate option exercises and employee terminations within the valuation model. The average expected option life is derived from the output of the valuation model and represents the period of time that options granted are expected to be outstanding. The average risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant. For options granted that include dividend equivalent payments, a dividend yield of zero was used. A dividend yield of 2.86% was used for LTIP options for periods where no dividend equivalent payments are made as well as for TSOP options, which do not receive dividend equivalents.

 

The assumptions for the 2013 LTIP and TSOP grants are shown in the following table:

 

Expected volatility range	24% - 30%
Average expected volatility	26%
Average risk-free interest rate	1.88%
Average expected option term LTIP	9.0 years
Per-share grant-date fair value LTIP	$20.40
Average expected option term TSOP	8.9 years
Per-share grant-date fair value TSOP	$15.84

 

For the second quarter of 2013, options relating to 546,886 shares were exercised, yielding $18 million of cash proceeds and $7 million of tax benefit recognized as additional paid-in capital. For the second quarter of 2012, options relating to 396,939 shares were exercised, yielding $10 million of cash proceeds and $6 million of tax benefit recognized as additional paid-in capital.

 

For the first six months of 2013, options relating to 1,571,500 shares were exercised, yielding $53 million of cash proceeds and $20 million of tax benefit recognized as additional paid-in capital. For the first six months of 2012, options relating to 773,296 shares were exercised, yielding $21 million of cash proceeds and $12 million of tax benefit recognized as additional paid-in capital.

 

Restricted Stock Units

 

There were 162,000 RSUs granted in 2013, with an average grant-date fair value of $69.83 and a five-year restriction period. The RSUs granted in 2013 will be settled through the issuance of shares of Common Stock.

 

No RSUs were earned or paid out in the second quarter of 2013. In the second quarter of 2012, 30,000 RSUs granted in 2007 vested, with 17,340 shares issued net of withholding taxes. During the first six months of 2013, 298,400 of the RSUs granted in 2008 vested, with 178,250 shares of Common Stock issued net of withholding taxes.  For the first six months of 2012, 311,900 of the RSUs granted in 2007 vested, with 191,875 shares of Common Stock issued net of withholding taxes.  The total related tax benefits recognized as additional paid-in capital were less than $1 million for the second quarters of 2013 and 2012, and $2 million and $3 million for the first six months of 2013 and 2012, respectively.

 

Performance Share Units

 

PSUs provide for awards based on achievement of certain predetermined corporate performance goals (total shareholder return, return on average invested capital, and operating ratio) at the end of a three-year cycle and are paid in the form of shares of Common Stock. During the first quarter of 2013, there were 550,800 PSUs granted with a grant-date fair value of $69.83.

 

No PSUs were earned or paid out in the second quarters of 2013 and 2012. During the first six months of 2013, 577,585 of the PSUs granted in 2010 were earned, with 348,189 shares of Common Stock issued net of withholding taxes.  For the first six months of 2012, 782,889 of the PSUs granted in 2009 were earned, with 488,957 shares of Common Stock issued net of withholding taxes. The total related tax benefits recognized as additional paid-in capital were $5 million and $11 million for the first six months of 2013 and 2012, respectively.

2.  Income Taxes

 

There have been no material changes to the balance of unrecognized tax benefits reported at December 31, 2012.  IRS examinations have been completed for all years prior to 2011.  We expect the IRS could begin auditing our 2011 and 2012 consolidated income tax returns in early 2014.

 

3.  Earnings Per Share

 

	Basic						Diluted
	Second Quarter
	2013			2012			2013			2012
	($ in millions except per share amounts,
	shares in millions)
Net income	$	465		$	524		$	465		$	524
Dividend equivalent payments		(1)			(2)			(1)			-
Income available to common stockholders		464			522			464			524
Weighted-average shares outstanding		314.1			322.7			314.1			322.7
Dilutive effect of outstanding options
and share-settled awards								3.7			4.8
Adjusted weighted-average shares outstanding								317.8			327.5
Earnings per share	$	1.47		$	1.62		$	1.46		$	1.60

 

 

	Basic						Diluted
	First Six Months
	2013			2012			2013			2012
	($ in millions except per share amounts,
	shares in millions)
Net income	$	915		$	934		$	915		$	934
Dividend equivalent payments		(3)			(4)			(2)			(2)
Income available to common stockholders		912			930			913			932
Weighted-average shares outstanding		314.3			325.5			314.3			325.5
Dilutive effect of outstanding options
and share-settled awards								3.6			4.7
Adjusted weighted-average shares outstanding								317.9			330.2
Earnings per share	$	2.90		$	2.86		$	2.87		$	2.82

 

 

During the second quarters and first six months of 2013 and 2012, dividend equivalent payments were made to holders of options and RSUs. For purposes of computing basic earnings per share, dividend equivalent payments made to holders of options and RSUs were deducted from net income to determine income available to common stockholders. For purposes of computing diluted earnings per share, we evaluate on a grant-by-grant basis those options and RSUs receiving dividend equivalent payments under the two-class and treasury stock methods to determine which method is the more dilutive for each grant. For those grants for which the two-class method was more dilutive, net income was reduced by dividend equivalent payments to determine income available to common stockholders. The diluted calculations exclude options having exercise prices exceeding the average market price of Common Stock as follows: zero and 0.8 million in 2013 and 2012, respectively.

 

4.  Stockholders’ Equity

 

Common Stock

 

Common Stock is reported net of shares held by our consolidated subsidiaries (Treasury Shares). Treasury Shares at June 30, 2013 and December 31, 2012, amounted to 20,320,777 shares, with a cost of $19 million at both dates.

 

Accumulated Other Comprehensive Loss

 

“Accumulated other comprehensive loss” reported in the Consolidated Balance Sheets consisted of the following:

 

				Accumulated
	Pensions			Other			Accumulated
	and Other			Comprehensive			Other
	Postretirement			Loss of Equity			Comprehensive
	Benefits			Investees			Loss
	($ in millions)
Second Quarter
March 31, 2013	$	(977)		$	(109)		$	(1,086)
Other comprehensive income (loss):
Amounts reclassified into net income		36	(1)		-			36
Net gain		-			1			1
Tax expense		(14)			-			(14)
Other comprehensive income		22			1			23
June 30, 2013	$	(955)		$	(108)		$	(1,063)
First Six Months
December 31, 2012	$	(999)		$	(110)		$	(1,109)
Other comprehensive income (loss):
Amounts reclassified into net income		72	(1)		-			72
Net gain		-			2			2
Tax expense		(28)			-			(28)
Other comprehensive income		44			2			46
June 30, 2013	$	(955)		$	(108)		$	(1,063)

 

(1)    These items are included in the computation of net periodic pension and postretirement benefit costs. See Note 8, “Pensions and Other Postretirement Benefits” for additional information.

5.  Stock Repurchase Program

 

We repurchased and retired 4.2 million and 12.3 million shares of Common Stock in the first six months of 2013 and 2012, respectively, at a cost of $314 million and $850 million. The timing and volume of purchases is guided by our assessment of market conditions and other pertinent factors. Any near-term share repurchases are expected to be made with internally generated cash, cash on hand, or proceeds from borrowings. Since the beginning of 2006, we have repurchased and retired 132.6 million shares at a total cost of $7.8 billion.

 

6.  Investment in Conrail

 

Through a limited liability company, we and CSX Corporation (CSX) jointly own Conrail Inc. (Conrail), whose primary subsidiary is Consolidated Rail Corporation (CRC). We have a 58% economic and 50% voting interest in the jointly owned entity, and CSX has the remainder of the economic and voting interests. Our investment in Conrail was $1.0 billion at June 30, 2013, and $996 million at December 31, 2012.

 

CRC owns and operates certain properties (the Shared Assets Areas) for the joint and exclusive benefit of Norfolk Southern Railway Company (NSR) and CSX Transportation, Inc. (CSXT). The costs of operating the Shared Assets Areas are borne by NSR and CSXT based on usage. In addition, NSR and CSXT pay CRC a fee for access to the Shared Assets Areas. “Purchased services and rents” and “Fuel” include expenses for the use of the Shared Assets Areas totaling $39 million and $30 million for the second quarters of 2013 and 2012, respectively, and $73 million and $66 million for the first six months of 2013 and 2012, respectively. Our equity in the earnings of Conrail, net of amortization, included in “Other income – net” was $9 million for the second quarters of both 2013 and 2012, and $18 million and $15 million for the first six months of 2013 and 2012, respectively.

 

“Accounts payable” includes $180 million at June 30, 2013, and $178 million at December 31, 2012, due to Conrail for the operation of the Shared Assets Areas. In addition, “Other liabilities” includes $133 million at both June 30, 2013 and December 31, 2012, for long-term advances from Conrail, maturing 2035, that bear interest at an average rate of 4.40%.

 

7.  Debt

 

In the first quarter of 2013, we repaid $200 million under our accounts receivable securitization facility.  At June 30, 2013 and December 31, 2012, the amounts outstanding under the facility were $100 million (at an average variable interest rate of 1.24%) and $300 million (at an average variable interest rate of 1.28%), respectively.  In October 2012, we renewed our accounts receivable securitization facility with a 364-day term to run until October 2013.

 

During the first quarter of 2012, we issued $600 million of 3.00% senior notes due 2022.

 

We have authority from our Board of Directors to issue an additional $600 million of debt or equity securities through public or private sale.

8.  Pensions and Other Postretirement Benefits

 

We have both funded and unfunded defined benefit pension plans covering principally salaried employees. We also provide specified health care and death benefits to eligible retired employees and their dependents; these plans can be amended or terminated at our option.  Under our health care plans, a defined percentage of health care expenses is covered, reduced by any deductibles, co-payments, Medicare payments and, in some cases, coverage provided under other group insurance policies.

 

							Other Postretirement
	Pension Benefits						Benefits
	Second Quarter
	2013			2012			2013			2012
	($ in millions)
Service cost	$	10		$	9		$	4		$	4
Interest cost		21			22			12			13
Expected return on plan assets		(36)			(35)			(4)			(3)
Amortization of net losses		22			19			14			13
Net cost	$	17		$	15		$	26		$	27

 

							Other Postretirement
	Pension Benefits						Benefits
	First Six Months
	2013			2012			2013			2012
	($ in millions)
Service cost	$	20		$	17		$	8		$	8
Interest cost		41			44			25			27
Expected return on plan assets		(71)			(69)			(8)			(7)
Amortization of net losses		44			38			28			26
Net cost	$	34		$	30		$	53		$	54