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 SEPTEMBER 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 September 30, 2013
Common Stock ($1.00 par value per share)		308,910,328 (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 Third Quarters and First Nine Months of 2013 and 2012		3
		Consolidated Statements of Comprehensive Income Third Quarters and First Nine Months of 2013 and 2012		4
		Consolidated Balance Sheets At September 30, 2013 and December 31, 2012		5
		Consolidated Statements of Cash Flows First Nine 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)

 

	Third Quarter						First Nine Months
	2013			2012			2013			2012
	($ in millions, except per share amounts)
Railway operating revenues	$	2,824		$	2,693		$	8,364		$	8,356
Railway operating expenses
Compensation and benefits		735			724			2,241			2,234
Purchased services and rents		420			403			1,223			1,186
Fuel		390			379			1,210			1,182
Depreciation		230			230			683			683
Materials and other		200			226			631			661
Total railway operating expenses		1,975			1,962			5,988			5,946
Income from railway operations		849			731			2,376			2,410
Other income – net		30			33			194			93
Interest expense on debt		131			124			388			366
Income before income taxes		748			640			2,182			2,137
Provision for income taxes		266			238			785			801
Net income	$	482		$	402		$	1,397		$	1,336
Per share amounts
Net income:
Basic	$	1.55		$	1.26		$	4.45		$	4.12
Diluted		1.53			1.24			4.40			4.07
Dividends		0.52			0.50			1.52			1.44

 

 

 

 

 

 

 

See accompanying notes to consolidated financial statements.

Norfolk Southern Corporation and Subsidiaries

Consolidated Statements of Comprehensive Income

(Unaudited)

 

 

 

	Third Quarter						First Nine Months
	2013			2012			2013			2012
	($ in millions)
Net income	$	482		$	402		$	1,397		$	1,336
Other comprehensive income, before tax:
Pension and other postretirement benefits		38			33			110			97
Other comprehensive income (loss) of
equity investees		-			-			2			(4)
Other comprehensive income, before tax		38			33			112			93
Income tax expense related to items of other
comprehensive income		(15)			(13)			(43)			(38)
Other comprehensive income, net of tax		23			20			69			55
Total comprehensive income	$	505		$	422		$	1,466		$	1,391

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to consolidated financial statements.

Norfolk Southern Corporation and Subsidiaries

Consolidated Balance Sheets

(Unaudited)

 

	September 30,				December 31,
	2013				2012
	($ in millions)
Assets
Current assets:
Cash and cash equivalents		$	984			$	653
Short-term investments			20				15
Accounts receivable – net			1,083				1,109
Materials and supplies			224				216
Deferred income taxes			149				167
Other current assets			34				82
Total current assets			2,494				2,242
Investments			2,395				2,300
Properties less accumulated depreciation of $10,271 and
$9,922, respectively			26,413				25,736
Other assets			63				64
Total assets		$	31,365			$	30,342
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable		$	1,267			$	1,362
Short-term debt			-				200
Income and other taxes			241				206
Other current liabilities			377				263
Current maturities of long-term debt			447				50
Total current liabilities			2,332				2,081
Long-term debt			8,499				8,432
Other liabilities			2,166				2,237
Deferred income taxes			8,074				7,832
Total liabilities			21,071				20,582
Stockholders’ equity:
Common stock $1.00 per share par value, 1,350,000,000 shares
authorized; outstanding 308,910,328 and 314,034,174 shares,
respectively, net of treasury shares			310				315
Additional paid-in capital			1,979				1,911
Accumulated other comprehensive loss			(1,040)				(1,109)
Retained income			9,045				8,643
Total stockholders’ equity			10,294				9,760
Total liabilities and stockholders’ equity		$	31,365			$	30,342

 

See accompanying notes to consolidated financial statements.

Norfolk Southern Corporation and Subsidiaries

Consolidated Statements of Cash Flows

(Unaudited)

 

	First Nine Months
	2013			2012
	($ in millions)
Cash flows from operating activities
Net income	$	1,397		$	1,336
Reconciliation of net income to net cash provided by operating activities:
Depreciation		687			688
Deferred income taxes		215			279
Gains and losses on properties and investments		(100)			(4)
Changes in assets and liabilities affecting operations:
Accounts receivable		26			(56)
Materials and supplies		(8)			(27)
Other current assets		48			43
Current liabilities other than debt		121			183
Other – net		18			34
Net cash provided by operating activities		2,404			2,476
Cash flows from investing activities
Property additions		(1,470)			(1,522)
Property sales and other transactions		109			47
Investments, including short-term		(29)			(14)
Investment sales and other transactions		21			37
Net cash used in investing activities		(1,369)			(1,452)
Cash flows from financing activities
Dividends		(476)			(467)
Common stock issued – net		92			77
Purchase and retirement of common stock		(564)			(1,150)
Proceeds from borrowings – net		492			1,291
Debt repayments		(248)			(358)
Net cash used in financing activities		(704)			(607)
Net increase in cash and cash equivalents		331			417
Cash and cash equivalents
At beginning of period		653			276
At end of period	$	984		$	693
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest (net of amounts capitalized)	$	305		$	297
Income taxes (net of refunds)		485			536

 

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 September 30, 2013, and December 31, 2012, our results of operations and comprehensive income for the third quarters and first nine months of 2013 and 2012, and our cash flows for the first nine 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 was an expense of $4 million during the third quarter of 2013 and a benefit of less than $1 million during the third quarter of 2012. For the first nine months of 2013 and 2012, stock-based compensation expense was $47 million and $41 million, respectively. The total tax effects recognized in income in relation to stock-based compensation were a net benefit of $2 million and a net expense of $1 million for the third quarters of 2013 and 2012, respectively, and net benefits of $16 million and $13 million for the first nine months of 2013 and 2012, respectively.

 

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 third quarter of 2013, options relating to 207,233 shares were exercised, yielding $9 million of cash proceeds and $2 million of tax benefit recognized as additional paid-in capital. For the third quarter of 2012, options relating to 703,231 shares were exercised, yielding $19 million of cash proceeds and $12 million of tax benefit recognized as additional paid-in capital.

 

For the first nine months of 2013, options relating to 1,778,733 shares were exercised, yielding $62 million of cash proceeds and $22 million of tax benefit recognized as additional paid-in capital. For the first nine months of 2012, options relating to 1,476,527 shares were exercised, yielding $40 million of cash proceeds and $24 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 third quarters of 2013 or 2012. During the first nine 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 nine 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 $1 million and less than $1 million for the third quarters of 2013 and 2012, respectively, and $3 million for the first nine months of both 2013 and 2012.

 

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 third quarters of 2013 and 2012. During the first nine 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 nine 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 nine 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
	Third Quarter
	2013			2012			2013			2012
	($ in millions except per share amounts,
	shares in millions)
Net income	$	482		$	402		$	482		$	402
Dividend equivalent payments		(2)			(3)			(1)			(1)
Income available to common stockholders		480			399			481			401
Weighted-average shares outstanding		310.4			317.7			310.4			317.7
Dilutive effect of outstanding options
and share-settled awards								3.5			4.1
Adjusted weighted-average shares outstanding								313.9			321.8
Earnings per share	$	1.55		$	1.26		$	1.53		$	1.24

 

 

	Basic						Diluted
	First Nine Months
	2013			2012			2013			2012
	($ in millions except per share amounts,
	shares in millions)
Net income	$	1,397		$	1,336		$	1,397		$	1,336
Dividend equivalent payments		(5)			(7)			(3)			(3)
Income available to common stockholders		1,392			1,329			1,394			1,333
Weighted-average shares outstanding		313.0			322.9			313.0			322.9
Dilutive effect of outstanding options
and share-settled awards								3.6			4.5
Adjusted weighted-average shares outstanding								316.6			327.4
Earnings per share	$	4.45		$	4.12		$	4.40		$	4.07

 

 

During the third quarters and first nine 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 of 0.8 million in both 2013 and 2012.

 

4.  Stockholders’ Equity

 

Common Stock

 

Common Stock is reported net of shares held by our consolidated subsidiaries (Treasury Shares). Treasury Shares at September 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)
Third Quarter
June 30, 2013	$	(955)		$	(108)		$	(1,063)
Other comprehensive income (loss):
Amounts reclassified into net income		38	(1)		-			38
Tax expense		(15)			-			(15)
Other comprehensive income		23			-			23
September 30, 2013	$	(932)		$	(108)		$	(1,040)
First Nine Months
December 31, 2012	$	(999)		$	(110)		$	(1,109)
Other comprehensive income (loss):
Amounts reclassified into net income		110	(1)		-			110
Net gain		-			2			2
Tax expense		(43)			-			(43)
Other comprehensive income		67			2			69
September 30, 2013	$	(932)		$	(108)		$	(1,040)

 

(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 7.5 million and 16.5 million shares of Common Stock in the first nine months of 2013 and 2012, respectively, at a cost of $564 million and $1.2 billion. 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 135.9 million shares at a total cost of $8.1 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 September 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 $42 million and $33 million for the third quarters of 2013 and 2012, respectively, and $115 million and $99 million for the first nine months of 2013 and 2012, respectively. Our equity in the earnings of Conrail, net of amortization, included in “Other income – net” was $9 million and $8 million for the third quarters of 2013 and 2012, respectively, and $27 million and $23 million for the first nine months of 2013 and 2012, respectively.

 

“Accounts payable” includes $188 million at September 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 September 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 September 30, 2013 and December 31, 2012, the amounts outstanding under the facility were $100 million (at an average variable interest rate of 1.22%) and $300 million (at an average variable interest rate of 1.28%), respectively.  In October 2013, we renewed our accounts receivable securitization facility with a 364-day term to run until October 2014.

 

During the third quarter of 2013, we issued $500 million of 4.80% senior notes due 2043.

 

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

 

During the third quarter of 2012, we issued $600 million of senior notes at 2.90% due 2023 and paid $115 million of premium in exchange for $521 million of our previously issued notes ($156 million at 7.25% due 2031, $140 million at 5.64% due 2029, $115 million at 5.59% due 2025, $72 million at 7.80% due 2027, and $38 million at 7.05% due 2037).  The premium is reflected as a reduction of debt in the Consolidated Balance Sheet and within “Debt repayments” in the Statement of Cash Flows and will be amortized as additional interest expense over the term of the new debt.  No gain or loss was recognized as a result of the debt exchange.  Also during the third quarter of 2012, we issued $600 million of 3.95% senior notes due 2042.

 

We have authority from our Board of Directors to issue an additional $1.2 billion 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
	Third Quarter
	2013			2012			2013			2012
	($ in millions)
Service cost	$	11		$	8		$	4		$	3
Interest cost		20			22			12			14
Expected return on plan assets		(35)			(34)			(4)			(4)
Amortization of net losses		22			19			16			14
Net cost	$	18		$	15		$	28		$	27

 

							Other Postretirement
	Pension Benefits						Benefits
	First Nine Months
	2013			2012			2013			2012
	($ in millions)
Service cost	$	31		$	25		$	12		$	11
Interest cost		61			66			37			41
Expected return on plan assets		(106)			(103)			(12)			(11)
Amortization of net losses		66			57			44			40
Net cost	$	52		$	45		$	81		$	81