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, 2014

 

(  )    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 the 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, 2014
Common Stock ($1.00 par value per share)		309,515,208 (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 2014 and 2013		3
		Consolidated Statements of Comprehensive Income Second Quarters and First Six Months of 2014 and 2013		4
		Consolidated Balance Sheets At June 30, 2014 and December 31, 2013		5
		Consolidated Statements of Cash Flows First Six Months of 2014 and 2013		6
		Notes to Consolidated Financial Statements		7
		Report of Independent Registered Public Accounting Firm		19
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		20
	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 I. FINANCIAL INFORMATION

 

 

Item 1. Financial Statements.

 

Norfolk Southern Corporation and Subsidiaries

Consolidated Statements of Income

(Unaudited)

 

	Second Quarter						First Six Months
	2014			2013			2014			2013
	($ in millions, except per share amounts)
Railway operating revenues	$	3,042		$	2,802		$	5,731		$	5,540
Railway operating expenses
Compensation and benefits		715			726			1,455			1,506
Purchased services and rents		414			410			806			803
Fuel		408			391			840			820
Depreciation		238			226			475			453
Materials and other		248			213			469			431
Total railway operating expenses		2,023			1,966			4,045			4,013
Income from railway operations		1,019			836			1,686			1,527
Other income – net		18			29			44			164
Interest expense on debt		139			128			278			257
Income before income taxes		898			737			1,452			1,434
Provision for income taxes		336			272			522			519
Net income	$	562		$	465		$	930		$	915
Per share amounts
Net income:
Basic	$	1.81		$	1.47		$	2.99		$	2.90
Diluted		1.79			1.46			2.97			2.87
Dividends		0.54			0.50			1.08			1.00

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to consolidated financial statements.

Norfolk Southern Corporation and Subsidiaries

Consolidated Statements of Comprehensive Income

(Unaudited)

 

	Second Quarter						First Six Months
	2014			2013			2014			2013
	($ in millions)
Net income	$	562		$	465		$	930		$	915
Other comprehensive income, before tax:
Pension and other postretirement benefits		7			36			306			72
Other comprehensive income of equity investees		7			1			10			2
Other comprehensive income, before tax		14			37			316			74
Income tax expense related to items of other
comprehensive income		(4)			(14)			(118)			(28)
Other comprehensive income, net of tax		10			23			198			46
Total comprehensive income	$	572		$	488		$	1,128		$	961

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to consolidated financial statements.

Norfolk Southern Corporation and Subsidiaries

Consolidated Balance Sheets

(Unaudited)

 

	June 30,			December 31,
	2014			2013
	($ in millions)
Assets
Current assets:
Cash and cash equivalents	$	1,667		$	1,443
Short-term investments		-			118
Accounts receivable – net		1,122			1,024
Materials and supplies		251			223
Deferred income taxes		161			180
Other current assets		65			87
Total current assets		3,266			3,075
Investments		2,505			2,439
Properties less accumulated depreciation of $10,634 and
$10,387, respectively		26,927			26,645
Other assets		342			324
Total assets	$	33,040		$	32,483
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	1,245		$	1,265
Short-term debt		-			100
Income and other taxes		359			225
Other current liabilities		331			270
Current maturities of long-term debt		433			445
Total current liabilities		2,368			2,305
Long-term debt		8,814			8,903
Other liabilities		1,122			1,444
Deferred income taxes		8,659			8,542
Total liabilities		20,963			21,194
Stockholders’ equity:
Common stock $1.00 per share par value, 1,350,000,000 shares
authorized; outstanding 309,515,208 and 308,878,402 shares,
respectively, net of treasury shares		311			310
Additional paid-in capital		2,113			2,021
Accumulated other comprehensive loss		(183)			(381)
Retained income		9,836			9,339
Total stockholders’ equity		12,077			11,289
Total liabilities and stockholders’ equity	$	33,040		$	32,483

 

 

See accompanying notes to consolidated financial statements.

Norfolk Southern Corporation and Subsidiaries

Consolidated Statements of Cash Flows

(Unaudited)

 

	First Six Months
	2014			2013
	($ in millions)
Cash flows from operating activities
Net income	$	930		$	915
Reconciliation of net income to net cash provided by operating activities:
Depreciation		478			456
Deferred income taxes		17			143
Gains and losses on properties and investments		(3)			(99)
Changes in assets and liabilities affecting operations:
Accounts receivable		(98)			37
Materials and supplies		(28)			(12)
Other current assets		30			28
Current liabilities other than debt		144			6
Other – net		(33)			32
Net cash provided by operating activities		1,437			1,506
Cash flows from investing activities
Property additions		(809)			(884)
Property sales and other transactions		44			68
Investments, including short-term		(3)			(7)
Investment sales and other transactions		121			16
Net cash used in investing activities		(647)			(807)
Cash flows from financing activities
Dividends		(335)			(315)
Common stock issued – net		82			80
Purchase and retirement of common stock		(100)			(314)
Debt repayments		(213)			(216)
Net cash used in financing activities		(566)			(765)
Net increase (decrease) in cash and cash equivalents		224			(66)
Cash and cash equivalents
At beginning of period		1,443			653
At end of period	$	1,667		$	587
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest (net of amounts capitalized)	$	255		$	244
Income taxes (net of refunds)		313			238

 

 

 

 

 

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, 2014, and December 31, 2013, our results of operations and comprehensive income for the second quarters and first six months of 2014 and 2013, and our cash flows for the first six months of 2014 and 2013 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 2014, 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 $10 million and $6 million during the second quarters of 2014 and 2013, respectively.  For the first six months of 2014 and 2013, stock-based compensation was $42 million and $43 million, respectively. The total tax effects recognized in income in relation to stock-based compensation were net benefits of $4 million and $2 million for the second quarters of 2014 and 2013, and net benefits of $14 million for the first six months of both 2014 and 2013.

 

Stock Options

 

In the first quarter of 2014, 515,240 options were granted under LTIP and 181,070 options were granted under TSOP. In each case, the grant price was $94.17, 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 2014 may not be exercised prior to the fourth and third anniversaries of the date of grant, respectively. Holders of the 2014 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 2014 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 all options granted are expected to be outstanding, including the branches of the model that result in options expiring unexercised. 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 2.29% 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 2014 LTIP and TSOP grants are shown in the following table:

 

Expected volatility range	23% - 27%
Average expected volatility	25%
Average risk-free interest rate	2.79%
Average expected option term LTIP	8.9 years
Per-share grant-date fair value LTIP	$29.87
Average expected option term TSOP	8.8 years
Per-share grant-date fair value TSOP	$24.38

 

For the second quarter of 2014, options relating to 353,327 shares were exercised, yielding $16 million of cash proceeds and $4 million of tax benefit recognized as additional paid-in capital. 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 first six months of 2014, options relating to 1,234,071 shares were exercised, yielding $56 million of cash proceeds and $15 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.

 

Restricted Stock Units

 

During the first quarter of 2014, there were 113,505 RSUs granted with a grant-date fair value of $94.17 and a five-year restriction period that will be settled through the issuance of shares of Common Stock.  The RSU grants include cash dividend equivalent payments during the restriction period commensurate with regular quarterly dividends paid on Common Stock.

 

No RSUs were earned or paid out in the second quarters of 2014 and 2013.  During the first six months of 2014, 318,150 of the RSUs granted in 2009 vested, with 187,449 shares of Common Stock issued net of withholding taxes.  For 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.  The total related tax benefits recognized as additional paid-in capital were less than $1 million for the second quarters of both 2014 and 2013 and $6 million and $2 million for the first six months of 2014 and 2013, respectively.

 

Performance Share Units

 

PSUs provide for awards based on achievement of certain predetermined corporate performance goals at the end of a three-year cycle and are paid in the form of shares of Common Stock. During the first quarter of 2014, there were 399,530 PSUs granted.  PSUs will earn out based on the achievement of a return on average invested capital target (a performance condition) and a total shareholder return target (a market condition).  The grant-date fair values of the PSUs associated with the performance and market conditions were $94.17 and $50.31, respectively, with the market condition fair value measured on the date of grant using a Monte Carlo simulation model.

 

No PSUs were earned or paid out in the second quarters of 2014 and 2013.  During the first six months of 2014, 374,099 of the PSUs granted in 2011 were earned, with 223,253 shares of Common Stock issued net of withholding taxes.  For 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. The total related tax benefits recognized as additional paid-in capital were $5 million for the first six months of both 2014 and 2013.

2.  Income Taxes

 

There have been no material changes to the balance of unrecognized tax benefits reported at December 31, 2013.  IRS examinations have been completed for all years prior to 2011.  Our consolidated federal income tax returns for 2011 and 2012 are currently being audited by the IRS.

 

3.  Earnings Per Share

 

	Basic						Diluted
	Second Quarter
	2014			2013			2014			2013
	($ in millions, except per share amounts,
	shares in millions)
Net income	$	562		$	465		$	562		$	465
Dividend equivalent payments		(2)			(1)			(1)			(1)
Income available to common stockholders	$	560		$	464		$	561		$	464
Weighted-average shares outstanding		309.5			314.1			309.5			314.1
Dilutive effect of outstanding options
and share-settled awards								3.3			3.7
Adjusted weighted-average shares outstanding								312.8			317.8
Earnings per share	$	1.81		$	1.47		$	1.79		$	1.46

 

	Basic						Diluted
	First Six Months
	2014			2013			2014			2013
	($ in millions, except per share amounts,
	shares in millions)
Net income	$	930		$	915		$	930		$	915
Dividend equivalent payments		(4)			(3)			(2)			(2)
Income available to common stockholders	$	926		$	912		$	928		$	913
Weighted-average shares outstanding		309.5			314.3			309.5			314.3
Dilutive effect of outstanding options
and share-settled awards								3.2			3.6
Adjusted weighted-average shares outstanding								312.7			317.9
Earnings per share	$	2.99		$	2.90		$	2.97		$	2.87

 

 

During the second quarters and first six months of 2014 and 2013, dividend equivalent payments were made to holders of stock options and RSUs. For purposes of computing basic earnings per share, dividend equivalent payments made to holders of stock 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 stock 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 dilution calculations exclude options having exercise prices

exceeding the average market price of Common Stock as follows: 0.7 million and 0.8 million in the first quarters of 2014 and 2013, respectively, and zero for the second quarters of both 2014 and 2013.

 

4.  Stockholders’ Equity

 

Common Stock

 

Common Stock is reported net of shares held by our consolidated subsidiaries (Treasury Shares). Treasury Shares at June 30, 2014, and December 31, 2013, 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, 2014	$	(125)		$	(68)		$	(193)
Other comprehensive income:
Amounts reclassified into net income		7	(1)		-			7
Net gain		-			7			7
Tax expense		(3)			(1)			(4)
Other comprehensive income		4			6			10
June 30, 2014	$	(121)		$	(62)		$	(183)

 

	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:
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)

 

				Accumulated
	Pensions			Other			Accumulated
	and Other			Comprehensive			Other
	Postretirement			Loss of Equity			Comprehensive
	Benefits			Investees			Loss
	($ in millions)
First Six Months
December 31, 2013	$	(310)		$	(71)		$	(381)
Other comprehensive income:
Prior service benefit		367			-			367
Amounts reclassified into net income		19	(1)		-			19
Net gain (loss)		(80)			10			(70)
Tax expense		(117)			(1)			(118)
Other comprehensive income		189			9			198
June 30, 2014	$	(121)		$	(62)		$	(183)

 

				Accumulated
	Pensions			Other			Accumulated
	and Other			Comprehensive			Other
	Postretirement			Loss of Equity			Comprehensive
	Benefits			Investees			Loss
	($ in millions)
First Six Months
December 31, 2012	$	(999)		$	(110)		$	(1,109)
Other comprehensive income:
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 7, “Pensions and Other Postretirement Benefits” for additional information.

 

5.  Stock Repurchase Program

 

We repurchased and retired 1.0 million and 4.2 million shares of Common Stock in each of the first six months of 2014 and 2013, respectively, at a cost of $100 million and $314 million, respectively. 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 137.8 million shares at a total cost of $8.2 billion.