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, 2012MARCH 31, 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 ofof 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.
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Common Stock ($1.00 par value per share) |
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| TABLE OF CONTENTS |
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| NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES (NS) |
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Part I. | Financial Information: | |||
| Item 1. | Financial Statements: |
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| Consolidated Statements of Income
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| Consolidated Statements of Comprehensive Income
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| Consolidated Balance Sheets
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| Consolidated Statements of Cash Flows
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| Notes to Consolidated Financial Statements |
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| Report of Independent Registered Public Accounting Firm |
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| Item 2.
| Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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| Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
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| Item 4. | Controls and Procedures |
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Part II. | Other Information: |
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| Item 1. | Legal Proceedings |
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| Item 1A. | Risk Factors |
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| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
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| Item 6. | Exhibits |
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Signatures |
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Exhibit Index |
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Item 1. Financial Statements
Norfolk Southern Corporation and Subsidiaries
Consolidated Statements of Income
(Unaudited)
See accompanying notes to consolidated financial statements.
Norfolk Southern Corporation and Subsidiaries
Consolidated Statements of Comprehensive Income
(Unaudited)
See accompanying notes to consolidated financial statements.
Norfolk Southern Corporation and Subsidiaries
Consolidated Balance Sheets
(Unaudited)
See accompanying notes to consolidated financial statements.
Norfolk Southern Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
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)NS, we, us, and our) financial condition as of September 30, 2012,at March 31, 2013, and December 31, 2011,2012, and itsour results of operations, and comprehensive income, for the three and nine months ended September 30, 2012 and 2011, and its cash flows for the nine months ended September 30,first quarters of 2013 and 2012 and 2011, in conformity with U.S. generally accepted accounting principles.principles (GAAP).
These Consolidated Financial Statementsconsolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in NS’our latest Annual Report on Form 10-K.
During the first quarter of 2012,2013, a committee of non-employee directors of Norfolk Southern’sour 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 a benefit of less than $1$37 million and $34 million during the third quarterfirst quarters of 2012, compared with an expense of $3 million during the same period of 2011. For the first nine months of 20122013 and 2011, stock-based compensation expense was $41 million and $52 million,2012, respectively. The total tax effects recognized in income in relation to stock-based compensation were a net expense of $1 million and a net benefit of $1 million for the quarters ended September 30, 2012 and 2011, respectively, and net benefits of $13$12 million and $17$11 million for the first nine monthsquarters of 20122013 and 2011,2012, respectively.
In the first quarter of 2012, 567,3002013, 748,200 options were granted under the LTIP and 210,300268,500 options were granted under the TSOP. In each case, the grant price was $75.14,$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 the LTIP and TSOP in 20122013 may not be exercised prior to the fourth and third anniversaries of the date of grant, respectively. Holders of the 20122013 options granted under the 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 20122013 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 Common Stock and historical volatility of Common Stock. NS uses historicalHistorical 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 2.3%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 20122013 LTIP and TSOP grants are shown in the following table:
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Average expected volatility |
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Average risk-free interest rate |
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Average expected option term LTIP | 9.0 years |
Per-share grant-date fair value LTIP | $ |
Average expected option term TSOP | 8.9 years |
Per-share grant-date fair value TSOP | $ |
DuringFor the thirdfirst quarter of 2012,2013, options relating to 703,2311,024,614 shares were exercised, yielding $19$35 million of cash proceeds and $12 million of tax benefit recognized as additional paid-in capital. During the third quarter of 2011, options relating to 555,659 shares were exercised, yielding $15 million of cash proceeds and $11 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$13 million of tax benefit recognized as additional paid-in capital. For the first nine monthsquarter of 2011,2012, options relating to 2,204,705376,357 shares were exercised, yielding $60$11 million of cash proceeds and $33$6 million of tax benefit recognized as additional paid-in capital.
There were 140,000162,000 RSUs granted in 2012,2013, with an average grant-date fair value of $75.14$69.83 and a five-year restriction period. The RSUs granted in 20122013 will be settled through the issuance of shares of Common Stock.
During the third quartersfirst quarter 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 quarter of 2012, and 2011, no281,900 of the RSUs were earned or paid out. There were 311,900 RSU’s earned and paid out during the first nine monthsgranted in 2007 vested, with 174,535 shares of 2012. There were no RSUs earned or paid out during the first nine monthsCommon Stock issued net of 2011.withholding taxes. The total related tax benefitbenefits recognized as additional paid-in capital was less than $1were $2 million for the third quarter of 2012 and $3 million for the first nine monthsquarters of 2012. The total related tax benefit recognized as additional paid-in capital was less than $1 million for both the third quarter of 20112013 and the first nine months of 2011.2012, respectively.
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 2012,2013, there were 468,850550,800 PSUs granted with a grant-date fair value of $75.14.$69.83.
During the first nine monthsquarter of 2012, 782,8892013, 577,585 of the PSUs granted in 2010 were earned, and paid out inwith 348,189 shares of Common Stock.Stock issued net of withholding taxes. For the first quarter 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 benefitbenefits recognized as additional paid-in capital waswere $5 million and $11 million for the first nine monthsquarters of 2012.2013 and 2012, respectively.
During the first nine months of 2011, 850,595 PSUs were earned and paid out, one-half in shares of Common Stock and one-half in cash. These PSUs had a grant-date fair value of $50.47 per unit and a fair value at payout of $62.75 per unit. The total related tax benefit recognized as additional paid-in capital was $2 million for the first nine months of 2011.
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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. NS anticipates thatWe expect the Internal Revenue Service (IRS) will complete its examination of NS’ 2009IRS to begin auditing our 2011 and 2010 federal2012 consolidated income tax returns by the end of 2012. NS does not expect that the resolution of the examination will have a material effect on its financial position, results of operations, or liquidity.in late 2013.
During the thirdfirst quarters of 2013 and first nine months of 2012, and 2011, dividend equivalent payments were made to holders of stock options and RSUs. For purposes of computing basic earnings per share, the total amount of 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, NS evaluateswe 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 the amount of dividend equivalent payments on these grants 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: 0.8 million in 2012both 2013 and zero in 2011. 2012.
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Common stockStock
Common Stock is reported net of shares held by our consolidated subsidiaries (Treasury Shares) of Norfolk Southern.. Treasury Shares at September 30, 2012March 31, 2013 and December 31, 2011,2012, amounted to 20,320,777 shares, respectively, with a cost of $19 million as ofat both dates.
Accumulated Other Comprehensive Loss
“Accumulated other comprehensive loss” reported in the Consolidated Balance Sheets consisted of the following:
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| Postretirement |
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December 31, 2012 | $ |
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Other comprehensive income (loss): |
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Amounts reclassified into net income |
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Net gain |
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Tax expense |
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Other comprehensive income |
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March 31, 2013 | $ |
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(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
NSWe repurchased and retired 16.50.5 million and 5.7 million shares of Common Stock in the first nine monthsquarters of 2013 and 2012, respectively, at a cost of $1.2 billion. NS repurchased$33 million and retired 23.8 million shares at a cost of $1.6 billion for the same period of 2011. On August 1, 2012, NS’ Board of Directors authorized the repurchase of up to an additional 50 million shares of Common Stock through December 31, 2017.$400 million. The timing and volume of purchases is guided by management’sour 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, NS haswe have repurchased and retired 126.1128.9 million shares at a total cost of $7.4$7.5 billion.
Through a limited liability company, Norfolk Southernwe and CSX Corporation (CSX) jointly own Conrail Inc. (Conrail), whose primary subsidiary is Consolidated Rail Corporation (CRC). NS hasWe have a 58% economic and 50% voting interest in the jointly owned entity, and CSX has the remainder of the economic and voting interests. NS’Our investment in Conrail was $991 million$1.0 billion at September 30, 2012,March 31, 2013, and $969$996 million at December 31, 2011.2012.
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 $33$34 million and $32 million for the third quarters of 2012 and 2011, respectively, and
$99 million and $97$36 million for the first nine monthsquarters of 2013 and 2012, and 2011, respectively. NS’Our equity in the earnings of Conrail, net of amortization, included in “Other income – net” was $8 million for both the third quarters of 2012 and 2011, and $23$9 million and $21$6 million for the first nine monthsquarters of 20122013 and 2011,2012, respectively.
“Accounts payable” includes $161$174 million at September 30, 2012,March 31, 2013, and $160$178 million at December 31, 2011,2012, due to Conrail for the operation of the Shared Assets Areas. In addition, “Other liabilities” includes $133 million at both September 30, 2012March 31, 2013 and December 31, 2011,2012, for long-term advances from Conrail, maturing 2035, that bear interest at an average rate of 4.4%4.40%.
In the first quarter of 2012, NS borrowed $100 million and2013, we repaid $200 million under itsour accounts receivable securitization facility. At September 30, 2012March 31, 2013 and December 31, 2011,2012, the amounts outstanding under the facility were $100 million (at an average variable interest rate of 1.29%1.25%) and $200$300 million (at an average variable interest rate of 1.35%1.28%), respectively. In October 2012, NSwe renewed itsour accounts receivable securitization facility with a 364-day term to run until October 2013. Also during
During the first quarter of 2012, NSwe issued $600 million of 3.00% senior notes due 2022.
During the third quarter of 2012, NS issued $600 million of senior notes at 2.90% due 2023 and paid $115 million of premium in exchange for $521 million of its 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, NS issued $600 million of 3.95% senior notes due 2042.
NS hasWe have authority from itsour Board of Directors to issue an additional $600 million of debt or equity securities through public or private sale.
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8. Pensions and Other Postretirement Benefits
Norfolk Southern and certain subsidiariesWe have both funded and unfunded defined benefit pension plans covering principally salaried employees. Norfolk Southern and certain subsidiariesWe also provide specified health care and death benefits to eligible retired employees and their dependents. Under the presentdependents; these plans which maycan be amended or terminated at NS’ option,our option. Under our health care plans, a defined percentage of health care expenses areis covered, reduced by any deductibles, co-payments, Medicare payments and, in some cases, coverage provided under other group insurance policies.
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Fair Value Measurements
The Financial Accounting Standards Board (FASB) Accounting Standards Codifications (ASC) 820-10, “Fair Value Measurements,” established a framework for measuring fair value and a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels, as follows:
Level 1 | Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets that |
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Level 2 | Inputs to the valuation methodology include: |
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market data by correlation or other means. |
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| If the asset or liability has a specified (contractual) term, the Level 2 input must be observable for substantially the full term of the asset or liability. |
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Level 3 | Inputs to the valuation methodology are unobservable and significant to the fair value measurement. |
The asset’s or liability’s fair value measurement level within the hierarchy is based on the lowest level of any input that is significant to the fair value measurement. ThereOther than those assets and liabilities described below that approximate fair value, there were no assets or liabilities measured at fair value on a recurring basis as of September 30, 2012 andat March 31, 2013 or December 31, 2011. 2012.
Fair Values of Financial Instruments
NS hasWe have evaluated the fair values of financial instruments and methods used to determine those fair values. The fair values of “Cash and cash equivalents,” “Short-term investments,” “Accounts receivable,” “Accounts payable,” and “Short-term debt” approximate carrying values because of the short maturity of these financial instruments. The carrying value of corporate-owned life insurance is recorded at cash surrender value and, accordingly, approximates fair value. The carrying amounts and estimated fair values for the remaining financial instruments, excluding investments accounted for under the equity method, consisted of the following:
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Underlying net assets were used to estimate the fair value of investments with the exception of notes receivable, which are based on future discounted cash flows. The fair values of long-term debt were estimated based on quoted market prices or discounted cash flows using current interest rates for debt with similar terms, company rating, and remaining maturity.
The following table sets forth the fair value of long-term investment and long-term debt balances disclosed above by valuation technique level, within the fair value hierarchy (there were no level 3 valued assets or liabilities).
Sales of available-for-sale securities were zero and $173 million (which included current maturities) for the nine months ended September 30, 2012 and 2011, respectively.
10. Commitments and Contingencies
Lawsuits
Norfolk SouthernWe and/or certain subsidiaries are defendants in numerous lawsuits and other claims relating principally to railroad operations. When management concludeswe conclude that it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated, it is accrued through a charge to earnings. While the ultimate amount of liability incurred in any of these lawsuits and claims is dependent on future developments, in management’sour opinion, the recorded liability is adequate to cover the future payment of such liability and claims. However, the final outcome of any of these lawsuits and claims cannot be predicted with certainty, and unfavorable or unexpected outcomes could result in additional accruals that could be significant to results of operations in a particular year or quarter. Any adjustments to the recorded liability will be reflected in earnings in the periods in which such adjustments are known.
One of NS’our customers, DuPont, has a rate reasonableness complaint pending before the Surface Transportation Board (STB)STB alleging that the NSour tariff rates for transportation of regulated movements are unreasonable. NS disputes these allegations.We dispute this allegation. Since June 1, 2009, NS haswe have been billing and collecting from DuPont amounts based on the challenged tariff rates. ManagementWe presently expectsexpect resolution of the DuPont case to occur in 20132014 and believesbelieve the estimate of reasonably possible loss will not have a material effect on NS’our financial position, results of operations, or liquidity. With regard to rate cases, management recordswe record adjustments to revenues in the periods, if and when, such adjustments are probable and estimable.
On November 6, 2007, various antitrust class actions filed against NSus and other Class 1I railroads in various Federalfederal district courts regarding fuel surcharges were consolidated in the District of Columbia by the Judicial Panel on Multidistrict Litigation. On June 21, 2012, the court certified the case as a class action. The defendant railroads have appealed such certification, and a decision by the court to either reject the appeal outright or proceed with ruling on its merits is pending. NS believesWe believe the allegations in the complaints are without merit and intendsintend to vigorously defend the cases. NS doesWe do not believe that the outcome of these proceedings will have a material effect on itsour financial position, results of operations, or liquidity. A lawsuit containing similar allegations against NS and four other major railroads that was filed on March 25, 2008, in the U.S. District Court for the District of Minnesota containing similar allegations against us and four other major railroads was voluntarily dismissed by the plaintiff subject to a tolling agreement entered into in August 2008.
Casualty claims include employee personal injury and occupational claims as well as third-party claims, all exclusive of legal costs. To aid in valuing itsour personal injury liability and determining the amount to accrue with respect to such claims during the year, NS’ management utilizeswe utilize studies prepared by an independent consulting actuarial firm. Job-related accidental injury and occupational claims are subject to the Federal Employers’ Liability Act (FELA), which is applicable only to railroads. FELA’s fault-based system produces results that are unpredictable and inconsistent as compared with a no-fault workers’ compensation system. The variability inherent in this system could result in actual costs being different from the liability recorded. While the ultimate amount of claims incurred is dependent on future developments, in management’sour opinion, the recorded liability is adequate to cover the future payments of claims and is supported by the most recent actuarial study. In all cases, NS recordswe record a liability when the expected loss for the claim is both probable and estimable.
The Consolidated Balance Sheets reflect long-term receivables for estimated recoveries from NS’ insurance carriers for claims associated with the January 6, 2005, derailment in Graniteville, S.C. In the first quarter of 2011, NS received an unfavorable ruling for an arbitration claim with an insurance carrier, and was denied recovery of the contested portion ($43 million) of the claim. As a result, NS recorded a $43 million charge during the first quarter of 2011 for the receivables associated with the contested portion of the claim and a $15 million charge for other receivables affected by the ruling for which recovery was no longer probable.
Employee personal injury claims – The largest component of casualties and other claims expense is employee personal injury costs. The independent actuarial firm engaged by NSus provides quarterly studies to aid in valuing itsour employee personal injury liability and estimating its employee personal injury expense. The actuarial firm studies NS’our historical patterns of reserving for claims and subsequent settlements, taking into account relevant outside influences. The actuaryactuarial firm uses the results of these analyses to estimate the ultimate amount of liability, which includes amounts for incurred but unasserted claims. NS adjusts itsWe adjust the liability quarterly based upon management’sour assessment and the results of the study. TheOur estimate of loss liabilities is subject to inherent limitation given the difficulty of predicting future events such as jury decisions, court interpretations, or legislative changes and as such the actual loss may vary from the estimated liability recorded.
Occupational claims – Occupational claims (including asbestosis and other respiratory diseases, as well as conditions allegedly related to repetitive motion) are often not caused by a specific accident or event but rather allegedly result from a claimed exposure over time. Many such claims are being asserted by former or retired employees, some of whom have not been employed in the rail industry for decades. The independent actuarial firm provides an estimate of the occupational claims liability based upon NS’our history of claim filings, severity, payments, and other pertinent facts. The liability is dependent upon management’s judgments madewe make as to the specific case reserves as well as judgments of the consulting independent actuarial firm in the periodicquarterly studies. The actuarial firm’s estimate of ultimate loss includes a provision for those claims that have been incurred but not reported. This provision is derived by analyzing industry data and projecting NS’our experience into the future as far as can be reasonably determined. NS adjusts itsWe adjust the liability quarterly based upon management’sour assessment and the results of the study. However, it is possible that the recorded liability may not be adequate to cover the future payment of claims. Adjustments to the recorded liability are reflected in operating expenses in the periods in which such adjustments become known.
Third-party claims – NS records We record a liability for third-party claims including those for highway crossing accidents, trespasser and other injuries, automobile liability, property damage, and lading damage. The independent actuarial firm assists us with the calculation of potential liability for third-party claims, except lading damage, based upon NS’our experience including the number and timing of incidents, amount of payments, settlement rates, number of open claims, and legal defenses. The actuarial estimate includes a provision for claims that have been incurred but have not yet been reported. Each quarter, NS adjusts itsWe adjust the liability quarterly based upon management’sour assessment and the results of the study. Given the inherent uncertainty in regard to the ultimate outcome of third-party claims, it is possible that the actual loss may differ from the estimated liability recorded.
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We are subject to various jurisdictions’ environmental laws and regulations. It is NS’ policy toWe record a liability where such liability or loss is probable and its amount can be estimated reasonably. Claims, if any, against third parties, for recovery of cleanup costs we have incurred by NS are reflected as receivables (when collection is probable) in the Consolidated Balance Sheets and are not netted against the associated NS liability. Environmental engineers regularly participate in ongoing evaluations of all known sites and in determining any necessary adjustments to liability estimates. NS also hasWe have an Environmental Policy Council, composed of senior managers, to oversee and interpret itsour environmental policy.
NS’Our Consolidated Balance Sheets include liabilities for environmental exposures of $34$48 million at September 30, 2012,March 31, 2013, and $35$42 million at December 31, 20112012 (of which $12 million is classified as a current liability at the end of each period). At September 30, 2012,March 31, 2013, the liability represents NS’our estimate of the probable cleanup, investigation, and remediation costs based on available information at 142151 known locations and projects. As of that date, sevenprojects compared with 146 locations and projects at December 31, 2012. At March 31, 2013, ten sites accounted for $17$28 million of the liability, and no individual site was considered to be material. NS anticipatesWe anticipate that much of this liability will be paid out over five years; however, some costs will be paid out over a longer period.
At 2221 locations, one or more Norfolk Southernof our subsidiaries in conjunction with a number of other parties have been identified as potentially responsible parties under the Comprehensive Environmental Response, Compensation and Liability Act of 1980 or comparable state statutes that impose joint and several liability for cleanup costs. NS calculates itsWe calculate our estimated liability for these sites based on facts and legal defenses applicable to each site and not solely on the basesbasis of the potential for joint liability.
With respect to known environmental sites (whether identified by NSus or by the EPA,Environmental Protection Agency (EPA) or comparable state authorities), estimates of NS’our ultimate potential financial exposure for a given site or in the aggregate for all such sites are necessarily imprecise because of the widely varying costs of currently available cleanup techniques, the likely development of new cleanup technologies, unpredictable contaminant recovery and reduction rates associated with available clean-upcleanup technologies, the likely development of new cleanup technologies, the difficulty of determining in advance the nature and full extent of contamination and each potential participant’s share of any estimated loss (and that participant’s ability to bear it), and evolving statutory and regulatory standards governing liability.
The risk of incurring environmental liability – for acts and omissions, past, present, and future – is inherent in the railroad business. Some of the commodities in NS’our traffic mix, particularly those classified as hazardous materials, pose special risks that NS workswe work diligently to minimize. In addition, several Norfolk Southernof our subsidiaries own, or have owned, land used as operating property, or which is leased and operated by others, or held for sale. Because environmental problems that are latent or undisclosed may exist on these properties, that are latent or undisclosed, there can be no assurance that NSwe will not incur environmental liabilities or costs with respect to one or more of them, the amount and materiality of which cannot be estimated reliably at this time. Moreover, lawsuits and claims involving these and potentially other unidentified environmental sites and matters are likely to arise from time to time. The resulting liabilities could have a significant effect on NS’ financial position, results of operations, or liquidity in a particular year or quarter.
Based on itsour assessment of the facts and circumstances now known, management believes that it haswe believe we have recorded the probable and reasonably estimable costs for dealing with those environmental matters of which NS iswe are aware. Further, management believeswe believe that it is unlikely that any known matters, either individually or in the aggregate, will have a material adverse effect on NS’our financial position, results of operations, or liquidity.
Norfolk Southern obtainsWe obtain on behalf of itselfourself and itsour subsidiaries insurance for potential losses for third-party liability and first-party property damages. NS isWe are currently self-insured up to $50 million and above $1$1.1 billion per occurrence for bodily injury and property damage to third parties and up to $25 million and above $175 million per occurrence for property owned by NSus or in NS’in our care, custody, or control.
At September 30, 2012, NSMarch 31, 2013, we had outstanding purchase commitments totaling approximately $515 million for long-term service contracts through 2019, as well as locomotives, track and yard expansion projects, track material, freight cars, and track materialvehicle fleet additions, in connection with itsour capital programs through 2014.2016.
11. New Accounting PronouncementsPronouncement
In the first quarter of 2012, NS2013, we prospectively adopted Accounting Standards Update (ASU) No. 2011-05, 2013-02, “Comprehensive Income (Topic 220): PresentationReporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income.” This update requires the disclosure of the effects of reclassifications out of Accumulated Other Comprehensive Loss on the respective line items in our Consolidated Statements of Income if the amount being reclassified is required under GAAP to be reclassified in its entirety to net income. For other amounts that are not required to be reclassified in their entirety to net income in the totalsame reporting period, we are required to cross-reference other required GAAP disclosures to provide additional detail about those amounts. These disclosures can be made on the face of comprehensivethe financial statement that reports net income or in the notes, provided all the information is disclosed in a single location. However, an entity is prohibited from providing this information on the face of the statement that reports net income if it has items that are not reclassified in their entirety into net income. This update does not change the requirement to present the components of net income and the components of other comprehensive income be presented in either a single continuous statement of comprehensive income or in two separate but consecutive statements. This updatestatements, nor does notit change whatthe items arecurrently reported in other comprehensive income or the requirement to report reclassification of items from other comprehensive income to net income.
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Norfolk Southern Corporation:
We have reviewed the accompanying consolidated balance sheet of Norfolk Southern Corporation and subsidiaries as of September 30, 2012,March 31, 2013, and the related consolidated statements of income, and comprehensive income for the three-month and nine-month periods ended September 30, 2012 and 2011 and the related consolidated statements of cash flows for the nine-monththree-month periods ended September 30, 2012March 31, 2013 and 2011.2012. These consolidated financial statements are the responsibility of the Company’s management.
We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should be made to the consolidated financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles.
We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Norfolk Southern Corporation and subsidiaries as of December 31, 2011,2012, and the related consolidated statements of income, comprehensive income, changes in stockholders’ equity and cash flows for the year then ended (not presented herein); and in our report dated February 15, 2012,2013, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 2011,2012, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
/s/KPMG LLP
KPMG LLP
Norfolk, Virginia
October 25, 2012April 24, 2013
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Norfolk Southern Corporation and Subsidiaries
The following discussion and analysis should be read in conjunction with the Consolidated Financial Statements and Notes.
OVERVIEW
NS’We are one of the nation’s premier transportation companies. Our Norfolk Southern Railway Company subsidiary operates approximately 20,000 miles of road in 22 states and the District of Columbia, serves every major container port in the eastern United States, and provides efficient connections to other rail carriers. We operate the most extensive intermodal network in the East and are a major transporter of coal, automotive, and industrial products. During the first quarter of 2013, we opened the Franklin County Regional Intermodal Facility in Greencastle, Pennsylvania. This is the third Crescent Corridor-related facility we have opened since mid-2012, in order to position ourselves to handle increased intermodal volumes faster and more reliably.
Our first quarter net income was $402improved to $450 million in 2013 from $410 million in 2012 a decline from $554 million in 2011, primarily a reflection of depressed coal volumes and lower fuel surcharge revenue. Earningsearnings per share declinedgrew to $1.24$1.41 from $1.59$1.23 in the prior year, despite feweryear. Net income and earnings per share were favorably impacted by the recognition of the gain from the sale of certain assets to the Michigan Department of Transportation, resulting in an after-tax benefit of $60 million, or $0.19 per share.
Cash provided by operating activities for the first quarter of 2013 was $723 million, which along with cash on hand allowed for property additions, debt repayments, dividends, and share repurchases. In the first quarter of 2013, we repurchased approximately 0.5 million shares outstandingof Norfolk Southern common stock (Common Stock) at a total cost of $33 million. Since inception of our stock repurchase program in 2006, we have repurchased and retired 128.9 million shares of Common Stock at a total cost of $7.5 billion. At March 31, 2013, cash, cash equivalents, and short-term investments totaled $687 million.
SUMMARIZED RESULTS OF OPERATIONS
First quarter 2013 net income was $450 million, up $40 million, or 10%, compared with the same period last year. The increase resulted from higher non-operating income, primarily the gain on sale of land in Michigan as discussed above, which was partially offset by a result of share repurchases (see below).$54 million decline in income from railway operations. The decrease in income from railway operations reflected a $51 million, or 2%, decline in railway operating revenues as the softness in our coal business overshadowed intermodal and general merchandise revenue growth. The railway operating ratio (a measure of the amount of operating revenues consumed by operating expenses) rose to 72.9%, compared with 67.5% for the third quarter of 2011.
Cash provided by operating activities74.8% for the first nine monthsquarter of 2012 was $2.5 billion, which along2013, compared with proceeds from borrowings and cash on hand allowed73.3% for property additions, share repurchases, dividends, and debt repayments. In the first nine monthsquarter of 2012, 16.5 million shares of Norfolk Southern Corporation common stock (Common Stock) were repurchased at a total cost of $1.2 billion. Since the beginning of 2006, NS has repurchased and retired 126.1 million shares of Common Stock at a total cost of $7.4 billion. At September 30, 2012, cash, cash equivalents, and short-term investments totaled $708 million.
SUMMARIZED RESULTS OF OPERATIONS2012.
Third quarter 2012 net income was $402 million, down $152 million, or 27%, compared with the same period last year. The decrease resulted from a $207 million decline in income from railway operations and reduced nonoperating income items, which were partially offset by a $92 million decrease in income taxes. The decrease in income from railway operations reflected a $196 million, or 7%, decline in railway operating revenues and an $11 million, or 1%, increase in railway operating expenses.
For the first nine months of 2012, net income was $1.3 billion, down $100 million, or 7%, compared with the same period last year, driven by lower nonoperating income items and increased income tax expense. Income from railway operations was relatively flat, reflecting slightly lower railway operating revenues partially offset by slightly lower operating expenses (which reflects the absence of the prior year’s $58 million unfavorable insurance arbitration ruling).
Oil prices affect NS’our results of operations in a variety of ways and can have an overall favorable or unfavorable impact in any particular period. In addition to the impact of oil prices on general economic conditions, traffic volume, and supplier costs, oil prices directly affect NS’our revenues through market-based fuel surcharges and contract escalators (see “Railway Operating Revenues”) and also affect fuel costs (see “Railway Operating Expenses”). For the thirdfirst quarter of 2012,2013, excluding the impact of decreasedincreased consumption, fuel surcharge revenue decreased while fuel expense increased. For the first nine months of 2012, the increase in fuel surcharge revenue was less than the increase in fuel expense. Future changes in oil prices may cause volatility in operating results that could be material to a particular year or quarter.
DETAILED RESULTS OF OPERATIONS
Railway Operating Revenues
ThirdFirst quarter railway operating revenues were $2.7$2.7 billion in 20122013, down $51 million or 2%, down $196 million or 7%,compared with the third quarter of 2011. For the first nine months of 2012, railway operating revenues were $8.4 billion, down
$19 million compared with the same period last year.first quarter of 2012. As shown in the following table, the decreasedecrease for the quarter waswas the result of lower average revenue per unit (which includesincludes the effects of fuel surcharges) and lower traffic volume. For the first nine months, lower average revenue per unit was, partially offset by higher traffic volume. Fuel surcharges amounted to $286 million in the third quarter (down $72million) and $976surcharge revenue totaled $274 million for the first nine months (up $8 million).quarter of 2013 and $325 million for the first quarter of 2012.
| Third Quarter |
| First Nine Months | ||||||
| 2012 vs. 2011 |
| 2012 vs. 2011 | ||||||
|
| Increase (Decrease) |
| ||||||
| ($ in millions) | ||||||||
|
|
|
|
|
|
|
|
|
|
Revenue per unit |
| $ | (156) |
|
|
| $ | (30) |
|
Traffic volume (units) |
|
| (40) |
|
|
|
| 11 |
|
|
|
|
|
|
|
|
|
|
|
Total |
| $ | (196) |
|
|
| $ | (19) |
|
First Quarter | ||||
2013 vs. 2012 | ||||
Increase (Decrease) | ||||
($ in millions) | ||||
Revenue per unit | $ | |||
Traffic volume (units) | ||||
Total | $ | |||
Many of NS’our negotiated fuel surcharges for coal and general merchandise trafficshipments are based on the monthly average price of West Texas Intermediate Crude Oil (WTI Average Price). These surcharges are reset the first day of each calendar month based on the WTI Average Price for the second preceding calendar month. This two-month lag in applying WTI Average Price coupled with the change in fuel prices decreased fuel surcharge revenue by approximately $21 million for the third quarter, but increased fuel surcharge revenue by approximately $14$23 million for the first nine months. In 2011, this two-month lag increased fuel surcharge revenue byquarter of 2013 and approximately $52$26 million for the thirdfirst quarter and had an insignificant impact for the first nine months.of 2012.
One of NS’our customers, DuPont, has a rate reasonableness complaint pending before the Surface Transportation Board (STB) alleging that the NSour tariff rates for transportation of regulated movements are unreasonable. NS disputes these allegations.We dispute this allegation. Since June 1, 2009, NS haswe have been billing and collecting from DuPont amounts based on the challenged tariff rates. ManagementWe presently expectsexpect resolution of the DuPont case to occur in 20132014 and believesbelieve the estimate of reasonably possible loss will not have a material effect on NS’our financial position, results of operations, or liquidity. With regard to rate cases, managementwe records adjustments to revenues in the periods, if and when, such adjustments are probable and estimable.estimable.
20
Revenues, units, and average revenue per unit for NS’our market groups were as follows:
Coal revenues decreased $198$131 million, or 22%17%, in the thirdfirst quarter, and $386 million, or 15%, for the first nine months, compared with the same periodsperiod last year. Both decreases were the result of declinesyear, reflecting a 13% decline in traffic volume (down 14% in the third quarter and 13% for the first nine months) and average revenue per unit (down 9%and a 4% decrease in the third quarter and 3% for the first nine months). carload volume. Coal tonnage by market was as follows:
Utility The decline in coal tonnage decreased 14% infor the thirdfirst quarter and 17% forof 2013 as compared to the first nine months, reflecting competition from lowsame period of 2012 was driven primarily by the effects of natural gas prices, reduced electrical demanddisplacement, resulting in NS-served regions, andhigher than normal utility coal plant closures due to Environmental Protection Agency (EPA) regulations. Exportstockpiles that drove a 9% decrease in utility coal tonnage, which declined substantially in September, decreased 5% in the third quarter and 2%for the first ninemonths. Both periods were negatively impacted by the return of Australian supply and weaker global demand for metallurgical coal used in steel production, offset in part by increased thermal coal shipments.tonnage. Domestic metallurgical coal tonnage was down 17%12% in the thirdfirst quarter as due to the closure of a steel plant in the second half of 2012 and the continued decline in domestic steel production decelerated, but was relatively flat forproduction. These declines were offset in part by a 25% increase in export coal tonnage in the first ninemonths. Industrialquarter, as an increase in Asian steel production resulted in a greater demand for metallurgical coal. Export coal tonnage decreased 13% in the third quarter and 3% for the first nine months, as weak industrial demand was partially offset by new business. also reflected higher thermal coal shipments.
Coal revenues for the remainder of the year are expected to decreasebe lower compared to last year due to lower traffic volume and lower average revenue per unit, primarily due to declines with the utility and export coal market segments.unit.
General merchandise revenues decreased $14increased $34 million, or 1%2%, in the thirdfirst quarter, compared with the same period last year, driven by a marginal decrease in traffic volume, partially offset by a slight rise in average revenue per unit. For the first nine months, general merchandise revenues increased $286 million, or 7%, reflecting a 4% improvement3% increase in average revenue per unit, partially offset by a marginal decrease in volumes.
Chemicals volume increased 10% in the first quarter, a result of higher shipments of crude oil originated from the Bakken and a 2% increase in traffic volume.Canadian oil fields.
Agriculture, consumer products, and government volume was flat during the third quarter, but decreased 1% for3% in the first nine months. The first nine months contained fewer carloads of fertilizer led by certain network classification changes and the negative impact of the drought in the Midwest. Volume declines for the first nine months were also driven byquarter, reflecting reduced corn shipments (due to plant closures) and reduced carloads of wheat to the eastern U.S. (duedue to customer sourcing changes). These volume declines were offset in part by more revenue movementschanges and an ethanol plant closure during the fourth quarter of empty equipment, as well as more shipments of corn-based feed to Texas. 2012.
Chemicals volume increased 4% in the third quarter and 2% for the first nine months, reflecting more shipments of crude oil, as well as additional carloads of liquefied petroleum gas. The first nine months also contained higher shipments of plastics driven by increased demand for plastic bottles. Volume increases for both periods were offset in part by fewer shipments of rock salt as a mild winter resulted in higher inventory levels.
22
Metals and construction volume decreased 7%6% in the thirdfirst quarter, but increased 2% for the first nine months. Both periods includedreflecting fewer iron and steel carloads (due to a steel plant closure), reduced scrap metal shipments (led by weakening demand), and fewer shipments of aggregates carloads, primarily driven by(due to weak market conditions in road/highway construction andas well as fewer movements of scrubber stone as a result of lower utility coal burn. The third quarter also included fewer iron and steel carloads driven by a plant closure, in addition to fewer shipments of fractionating sand due to reduced natural gas drilling in NS-served regions. Conversely, the first nine months contained higher shipments of fractionating sand for natural gas drilling, as well as more carloads of coil and scrap metal driven by increased domestic steel and automotive production. The first nine months also included more iron and steel shipments.burn).
Automotive volume grew 7%2% in the thirdfirst quarter, and 15% for the first nine months, primarily a result of increased North American light vehicle production at NS-served plants. new business from existing customers (including both finished vehicles and auto parts).
Paper, clay, and forest products volume was down 5% in the third quarter and 4% forrelatively flat during the first nine months, driven by fewer shipments of pulp as a result of declining export market demand. Both periods also contained reduced carloads of miscellaneous wood driven by the loss of business. quarter.
General merchandise revenues for the remainder of the year are expected to increasebe higher compared to last year due to higherimproved average revenue per unit offset by slightly lower traffic volume.and higher volumes.
Intermodal revenues increased $16$46 million, or 3%9%, in the thirdfirst quarter, compared with the same period last year, reflecting a 5%9% increase in traffic volumes partially offset by a 2% decline in average revenue per unit. For the first nine months, intermodal revenues increased $81 million, or 5%, reflecting a 5%volumes. The increase in traffic volume.
Domesticintermodal volumes was primarily due to a 10% improvement in domestic volume (which includes truckload and intermodal marketing companies) volume increased 11% in both the third quarter and the first nine months, reflecting continued highway conversions.
Premium business, which includes parcel and less-than-truckload (LTL) carriers, increased 3% for the third quarter and 2% for the first nine months, as a result of stronger market demand and new business.
Triple Crown Services (Triple Crown), a service with rail-to-highway trailers,continued highway conversions. We also experienced a 13% growth in international volume declinedue to an improving economy and additional business associated with the opening of 3% in the third quarter and was relatively flat for the first nine months, as Triple Crown eliminated some of its lower margin volume.
International traffic volume declined 1% for both the third quarter and the first nine months, as the loss of business from a shipping line was partially offset by growth across remaining international customers. new intermodal terminals.
Intermodal revenues for the remainder of the year are expected to increase,be higher compared to last year due to higher traffic volumes partially offset by lowerand improved average revenue per unit.
ThirdFirst quarter railway operating expenses were $2.0 billion in 2012,2013, up $11$3 million or 1%, compared to the same period last year. For
Fuel expense, which includes the cost of locomotive fuel as well as other fuel used in railway operations, increased $16 million, or 4%. The increase was principally the result of higher fuel consumption (locomotive fuel consumption was up 2%), which had an impact of $9 million, as well as increased fuel prices (locomotive fuel prices rose 1%), which had an impact of $7 million.
Depreciation expense increased $3 million, or 1%, reflecting the effects of a larger capital base that more than offset the results of a recently completed equipment depreciation study. The impact of the study was a decrease to depreciation expense in the first nine months, expenses were $5.9 billion, down $16quarter of $8 million, comparedprimarily due to lower depreciation rates. This impact is expected to continue for the same period last year, reflecting the absenceremainder of the prior year’s first quarter $58 million unfavorable arbitration ruling. Both periods included higher depreciation expense as a resultyear, but to be more than offset by the effects of an increased capital base.
23
Compensation and benefits expenses decreased $12 million, or 2%, in the third quarter and $6 million for the first nine months. Both periods include changes in:
· incentive and stock-based compensation (down $19 million for the quarter and $24 million
for the first nine months),
· employee activity levels (down $13 million for the quarter and $25 million for the first nine
months),
· pay rates (up $13 million for the quarter and $29 million for the first nine months), and
· pension and post-retirement medical costs (up $6 million for the quarter and $13 million for the
first nine months).
Purchased services and rents includes the costs of services provided by outside contractors, the net costs of operating joint (or leased) facilities with other railroads and the net cost of equipment rentals. This category of expenses was flat for the third quarter and down $5rose $2 million, for the first nine months,or 1%, driven by lower equipment rentshigher professional fees and haulage expenses, which were offset entirely for the quarterautomotive and in part for the first nine months by increasedjoint facilities costs, associated with professional and consulting fees, freight car repair, intermodal operations, and advertising expenses.
Fuel expense, which includes the cost of locomotive fuel as well as other fuel used in railway operations, decreased $6 million, or 2%, for the third quarter and $4 million for the first nine months. The decreases were principally the result of decreased fuel consumption (locomotive fuel consumption declined 3% and 2%, respectively), which had an impact of $10 million in the third quarter and $31 million for the first nine months, offset in part by increased fuel prices (locomotive fuel prices increased 1%lower engineering and 2%, respectively), which had an impact of $4 million and $27 million, respectively.haulage costs.
The following table shows the components of purchased services and rents expenses:
First Quarter | |||||
| 2013 |
| 2012 | ||
| ($ in millions) | ||||
|
|
|
| ||
Purchased services | $ |
| $ | ||
Equipment rents |
|
|
| ||
|
|
|
|
|
|
Total | $ |
| $ | ||
|
|
|
| ||
Materials and other expenses (including the estimates of costs related to personal injury, property damage, and environmental matters) increased $16million, or 8%, in the third quarter, but decreased $43decreased $12 million, or 6%5%, for the first nine months. Both periods were impacted by higher costsreflecting lower materials usage associated with materials used for equipment and roadway repairs and property taxes. The quarter also includes higher derailment costs. For both periods, these increases were partially offset by more repairs.
The following table shows the components of materials and other expenses:
The Consolidated Balance Sheets reflect long-term receivables for estimated recoveries from NS’ insurance carriers for claims associated with the January 6, 2005, derailment in Graniteville, S.C. In the first quarter of 2011, NS received an unfavorable ruling for an arbitration claim with an insurance carrier,Compensation and was denied recovery of the contested portion($43 million) of the claim. As a result, NS recorded a $43benefits expense decreased $6 million, charge during the first quarter of 2011 for the receivables associateor 1%, reflecting changes in:
• d with the contested portion of the claimemployee activity levels (down $14 million),
• payroll taxes (down $7 million), and a
• pay rates (up $15 million charge for other receivables affected by the ruling for which recovery was no longer probable.million).
24
Other income – net decreased $27increased $106 million in the thirdfirst quarter, and $28reflecting a $97 million for the first nine months, primarily driven by fewer net gains on theland sale of property (down $28 million for the quartergain in Michigan and $27 million for the first nine months), decreased coal royalties (down $5 million for the quarter and $7 million for the first nine months), and higher interest expense on uncertain tax positions (up $3 million for the quarter and $11 million for the first nine months) offset in part by higher net returns from corporate-owned life insurance (up $10 million$7 million).
Provision for the quarter and $9 millionIncome Taxes
The effective income tax rate for the first nine months). Other miscellaneous income items were down $1 million for the quarter but up $8 million for the first nine months.
The third quarter and year-to-date effective income tax rates were 37.2% and 37.5% in 2012, respectively,of 2013 was 35.4%, compared with 37.3% and 34.6%, respectively, for the same periodsperiod last year. The decrease was primarily due to $9 million in income tax benefits we recognized in the first quarter of 2013 for certain tax credits retroactively reinstated by the American Taxpayer Relief Act of 2012, which was signed into law on January 2, 2013, and higher effective rate year-to-date primarily reflects the absence of the prior year’s favorable resolution of IRS examination of NS’ 2008 return and review of certain claims for refund ($40 million) and the absence of a favorable reduction in deferred tax expense for state law changes ($19 million).net returns from corporate-owned life insurance.
In December 2010, the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act increasedFifty-percent bonus depreciation to 100 percentwas allowed for the period September 2010 through the endfederal income taxes in 2012. The American Taxpayer Relief Act of 2011 and allows 50 percent2012 extended fifty-percent bonus depreciation in 2012.for 2013. While bonus depreciation does not affect NS’our total provision for income taxes or effective tax rate, we expect the absence of bonus depreciation is expected to increase current income tax expense and the related cash outflows for the payment of income taxes beginning in 2013.2014.
NS’IRS examinations have been completed for all years prior to 2011. We expect the IRS will begin auditing our 2011 and 2012 consolidated income tax returns for 2009 and 2010 are being audited by the IRS and NS expects the examinations to be completed by the end of 2012. NS does not expect that the results of the examinations will have a material effect on income tax expense.in late 2013.
FINANCIAL CONDITION AND LIQUIDITY
Cash provided by operating activities, NS’our principal source of liquidity, was $2.5 billion$723 million for the first nine monthsquarter of 20122013 compared with $2.8$1.0 billion for the same period of 2011. NS2012, primarily reflecting the reduction of accounts payable and lower operating results. We had working capital of $375$419 million at September 30, 2012,March 31, 2013, compared with $50$161 million at December 31, 2011,2012, primarily reflecting a higher cash balance as a result of new debt issued and lower share repurchase activity during the first nine months of 2012.short-term debt. Cash, cash equivalents, and short-term investment balances totaled $708$687 million at September 30, 2012,March 31, 2013, and were invested in accordance with NS’our corporate investment policy as approved by theour Board of Directors. The portfolio contains securities that are subject to market risk. There are no limits or restrictions on NS’our access to the assets. NS expects thatWe expect cash on hand combined with cash flows from operationsprovided by operating activities will be sufficient to meet itsour ongoing obligations. During the first nine months of 2012, NS issued $600 million of 3.00% senior notes due 2022, $600 million of 3.95% senior notes due 2042, and as part of a debt exchange, issued $600 million of 2.90% senior notes due 2023 for $521 million of previously issued notes (see below). Other than these items, thereThere have been no material changes to the information on NS’our future obligations contained in NS’our Form 10-K for the year ended December 31, 2011.2012.
Cash used in investing activities was $1.5 billion$366 million for the first nine monthsquarter of 2012,2013, compared with $1.2 billion$436 million in the same period last year, primarily reflecting a decrease in investment sales, net of purchases and an increase in property additions.
25
The Crescent Corridor consists of a program of projects for infrastructure and other facility improvements geared towardtoward creating a seamless, high-capacity intermodal route spanning 11 states from New Jersey to Louisiana and offering truck-competitive service along several major interstate highway corridors, including I-81, I-85, I-20, I-40, I-59, I-78, and I-75. Based on the public benefits that stand to be derived in the form of highway congestion relief, NS planswe will continue to implement certain elements of the Crescent Corridor throughthrough a series of public-private partnerships.public-private partnerships. Currently, the Crescent Corridor has receivedreceived or expects to receive a total of $295 $305 million in public capital funding commitments from the Commonwealths of Pennsylvania and Virginia, the State of Tennessee, the federal TIGER Stimulus Program and other federal funding sources related to projects in Alabama, Pennsylvania, Tennessee, and North Carolina. With respect to the private funding component, NSwe currently anticipatesanticipate spending up to $363 $339 million for the substantial completion of work on these projects, which is now expected in 2014, including planned2015 based on business considerations. This includes planned investments of approximately $87 million for the remainder of 2012 of2013 and approximately$85 million. $57 million thereafter through 2015. If and when capacity warrants, additional improvements and expansions beyond these amounts may be made to the Crescent Corridor.
Cash used in financing activities was $607$338 million in the first nine monthsquarter of 20122013 compared with $2.1 billion$46 million in the same period last year. The change includes increasedthe absence of proceeds from borrowings, decreased share repurchases, and lower debt repayments and maturities, offset in part by increased dividends. Share repurchases were 16.5lower share repurchases. We repurchased approximately 0.5 million shares, totaling $1.2 billion$33 million, in the first nine monthsquarter of 2012,2013, compared to 23.85.7 million shares, totaling $1.6 billion$400 million, in the same period last year. On August 1, 2012, NS’ Board of Directors authorized the repurchase of up to an additional 50 million shares of Common Stock through December 31, 2017. The timing and volume of future share repurchases will be guided by management’sour assessment of market conditions and other pertinent factors, however, share repurchases for the remainder of the year are expected to be lower than the $300 million purchased in third quarter 2012.factors. Any near-term purchases under the program are expected to be made with internally generated cash, cash on hand, or proceeds from borrowings.
During the first nine months of 2012, NS issued:
· $600 million of 3.00% senior notes due 2022,
· $600 million of 3.95% senior notes due 2042, and
· $600 million of 2.90% senior notes due 2023 and paid $115 million of premium in cash in
exchange for $521 million of its 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 exchange premium, reflected as a reduction of debt in the Consolidated Balance Sheet and within “Debt repayments” in the Statement of Cash Flows, will be amortized as additional interest expense over the term of the new debt. NS’Our total debt-to-total capitalization ratio was 46.5%45.6% at September 30, 2012March 31, 2013 and 43.2%47.1% at December 31, 2011.2012.
As of September 30, 2012, NS hasWe have authority from itsour Board of Directors to issue an additional $600 million of debt or equity securities through public or private sale. NS hasWe have on file with the Securities and Exchange Commission a Form S-3 automatic shelf registration statement for well-known seasoned issuers under which securities may be issued pursuant to this authority.
NSWe also hashave in place and available a $750 million, five-year credit agreement expiring in 2016, which provides for borrowings at prevailing rates and includes covenants. NSWe had no amounts outstanding under this facility at September 30, 2012,March 31, 2013, and NS isare in compliance with all of itsour covenants. In October 2012, NSwe renewed itsour $350 million accounts receivable securitization program with a 364-day term to run until October 2013. There was $100 million and $200$300 million outstanding under this program at September 30, 2012March 31, 2013 and December 31, 2011,2012, respectively.
APPLICATION OF CRITICAL ACCOUNTING ESTIMATES
The preparation of financial statements in accordance with U.S. generally accepted accounting principlesGenerally Accepted Accounting Principles (GAAP) requires managementus to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. These estimates and assumptions may require significant judgment about matters that are inherently uncertain, and future events are likely to occur that may require managementus to make changes to these estimates and assumptions. Accordingly, managementwe regularly reviewsreview these estimates and assumptions based on historical experience, changes in the business environment, and other factors that management believeswe believe to be reasonable under the circumstances. ManagementWe regularly discussesdiscuss the development, selection, and disclosures concerning critical accounting estimates with the Audit Committee of itsour Board of Directors. There have been no significant changes to the Applicationapplication of Critical Accounting Estimatescritical accounting estimates disclosure contained in NS’our Form 10-K as ofat December 31, 2011.2012.
Labor Agreements
More than 80% of NS’our railroad employees are covered by collective bargaining agreements with various labor unions. These agreements remain in effect until changed pursuant to the Railway Labor Act. NSWe largely bargainsbargain nationally in concert with other major railroads, represented by the National Carriers Conference Committee (NCCC). Moratorium provisions in the labor agreements govern when the railroads and the unions may propose changes.
TheWe and the NCCC hashave concluded the round of bargaining that began in November 2009 and reached national agreements with all applicable labor unions. Although NS previously concluded separate agreements with each of the Brotherhood of Locomotive Engineers and Trainmen (BLET) and the American Train Dispatchers Association (ATDA) that extend through December 31, 2014 the health and welfare provisions from the national agreements applywith all applicable labor unions. With regard to the BLET and ATDA. NS bargains separately with its AshtabulaWheelersburg (Ohio) Docks longshoremen,Terminal workers who are represented by the International Longshoremen’s Association (ILA) and do not participate in national bargaining. The present agreement remains in effect, and noBrotherhood of Maintenance of Way Employes Division (BMWED), negotiations are underway and mediation under the auspices of the National Mediation Board is expected to begin in progress with ILA.
Market Risksmid-2013.
NS manages itsMarket Risks
We manage overall exposure to fluctuations in interest rates by issuing both fixed- and floating-rate debt instruments. At September 30, 2012, NS’March 31, 2013, debt subject to interest rate fluctuations totaled $100 million. A 1%one-percentage point increase in interest rates would increase NS’ total annual interest expense related to all its variable debt by $1 million. Management considersWe consider it unlikely that interest rate fluctuations applicable to these instruments will have a material adverse effect on NS’our financial position, results of operations, or liquidity.
Environmental Matters
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NS isWe are subject to various jurisdictions’ environmental laws and regulations. It is NS’ policy toWe record a liability where such liability or loss is probable and its amount can be estimated reasonably. Claims, if any, against third parties for recovery of cleanup costs we have incurred, by NS are reflected as receivables (when collection is probable) in the Consolidated Balance Sheets and are not netted against the associated NS liability. Environmental engineers regularly participate in ongoing evaluations of all known sites and in determining any necessary adjustments to liability estimates. NS also hasWe have an Environmental Policy Council, composed of senior managers, to oversee and interpret itsour environmental policy.
NS’Our Consolidated Balance Sheets include liabilities for environmental exposures of $34$48 million at
September 30, 2012,March 31, 2013, and $35$42 million at December 31, 20112012 (of which $12 million is classified as a current liability at the end of each period). At September 30, 2012,March 31, 2013, the liability represents NS’our estimate of the probable cleanup,
investigation, and remediation costs based on available information at 142151 known locations and projects. As ofAt that date, seventen sites accounted for $17$28 million of the liability, and no individual site was considered to be material. NS anticipatesWe anticipate that much of this liability will be paid out over five years; however, some costs will be paid out over a longer period.
At 2221 locations, one or more Norfolk Southernof our subsidiaries in conjunction with a number of other parties, have been identified as potentially responsible parties under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, or comparable state statutes that impose joint and several liability for cleanup costs. NS calculates itsWe calculate our estimated liability for these sites based on facts and legal defenses applicable to each site and not solely on the basis of the potential joint liability.
With respect to known environmental sites (whether identified by NSus or by the EPA, or comparable state authorities), estimates of NS’our ultimate potential financial exposure for a given site or in the aggregate for all such sites are necessarily imprecise because of the widely varying costs of currently available cleanup techniques, the likely development of new cleanup technologies, unpredictable contaminant recovery and reduction rates associated with available clean-up technologies, the likely development of new cleanup technologies, the difficulty of determining in advance the nature and full extent of contamination and each potential participant’s share of any estimated loss (and that participant’s ability to bear it), and evolving statutory and regulatory standards governing liability. NS estimates itsWe estimate our environmental remediation liability on a site-by-site basis, using assumptions and judgments that management deemswe deem appropriate for each site. As a result, it is not practical to quantitatively describe the effects of changes in these many assumptions and judgments. NS hasWe have consistently applied itsour methodology of estimating itsour environmental liabilities.
Based on itsthe assessment of the facts and circumstances now known, management believes that it haswe believe we have recorded the probable and reasonably estimable costs for dealing with those environmental matters of which NS iswe are aware. Further, management believeswe believe that it is unlikely that any known matters, either individually or in the aggregate, will have a material adverse effect on NS’our financial position, results of operations, or liquidity.
Inflation
In preparing financial statements, U.S. generally accepted accounting principles requireGAAP requires the use of historical cost that disregards the effects of inflation on the replacement cost of property. NS,As a capital-intensive company, has most of itsour capital is invested in such property.long-lived assets. The replacement cost of these assets, as well as the related depreciation expense, would be substantially greater than the amounts reported on the basis of historical cost.
This Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that may be identified by the use of words like “believe,” “expect,” “anticipate,” “estimate,” “unlikely,“plan,” “consider,” “project,” and “project.”similar references to the future. Forward-looking statements reflect management’sour good-faith evaluation of information currently available.
However, such statements are dependent on and, therefore, can be influenced by, a number of external variables over which management haswe have little or no control, including: transportation of hazardous materials as a common carrier by rail; acts of terrorism or war; general economic conditions;conditions including, but not limited to, fluctuation and competition within the industries of our customers; competition and consolidation within the transportation industry; the operations of carriers with which NS interchanges;we interchange; disruptions to NS’our technology infrastructure, including computer systems; labor difficulties, including strikes and work stoppages; commercial, operating, environmental, and climate change legislative and regulatory developments; results of litigation; natural events such as severe weather, hurricanes, and floods; unavailability of qualified personnel due to unpredictability ofunpredictable demand for rail services; fluctuation in supplies and prices of key materials, in particular diesel fuel; and changes in securities and capital markets. For a discussion of significant risk factors applicable to NS,our business, see Part II, Item 1A “Risk Factors.” Forward-looking statements are not, and should not be relied upon as, a guarantee of future performance or results, nor will they necessarily prove to be accurate indications of the times at or by which any such performance or results will be achieved. As a result, actual outcomes and results may differ materially from those expressed in forward-looking statements. NS undertakesWe undertake no obligation to update or revise forward-looking statements.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The information required by this item is included in Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under the heading “Market Risks.”
Item 4. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
Norfolk Southern’sOur Chief Executive Officer and Chief Financial Officer, havewith the assistance of management, evaluated the effectiveness of NS’our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)(Exchange Act)) as of September 30, 2012.at March 31, 2013. Based on such evaluation, suchour officers have concluded that, as of September 30, 2012, NS’at March 31, 2013, our disclosure controls and procedures are effective in alerting them on a timely basis to material information relating to NS required to be included in NS’our periodic filings under the Exchange Act.
(b) Changes in Internal Control Over Financial Reporting
During the thirdfirst quarter of 2012, management did2013, we have not identifyidentified any changes in NS’ internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, NS’our internal control over financial reporting.
Item 1. Legal Proceedings
On November 6, 2007, various antitrust class actions filed against NSus and other Class 1I railroads in various Federal district courts regarding fuel surcharges were consolidated in the District of Columbia by the Judicial Panel on Multidistrict Litigation. On June 21, 2012, the court certified the case as a class action. NS believes the allegations in the complaints are without merit and intends to vigorously defend the cases. The defendant railroads have appealed such certification, and a decision by the court to either reject the appeal outright or proceed with ruling on its merits is pending. NS believesWe believe the allegations in the complaints are without merit and intendsintend to vigorously defend the cases. NS doesWe do not believe the outcome of these proceedings will have a material effect on itsour financial position, results of operations, or liquidity. A lawsuit containing similar allegations against NSus and four other major railroads that was filed on March 25, 2008, in the U.S. District Court for the District of Minnesota was voluntarily dismissed by the plaintiff subject to a tolling agreement entered into in August 2008.
NSWe received a Notice of Violation (NOV) issued by the Tennessee Department of Environmental Conservation concerning soil runoff in connection with construction of an intermodal facility nearthe Memphis TN.Regional Intermodal Facility in Rossville, Tennessee. Although NSwe will contest liability and the imposition of any penalties, this matter is described here consistent with SEC rules and requirements concerning governmental proceedings with respect to environmental laws and regulations. NS doesWe do not believe that the outcome of this proceeding will have a material effect on itsour financial position, results of operations, or liquidity.
Item 1A. Risk Factors
The risk factors included in NS’ 2011our 2012 Form 10-K remain unchanged and are incorporated herein by reference.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
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January 1-31, 2013 |
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Item 6. Exhibits
See Exhibit Index beginning on page 3330 for a description of the exhibits filed as part of this report.
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.
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| NORFOLK SOUTHERN CORPORATION Registrant |
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(Principal Accounting Officer) (Signature) |
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15* |
| Letter regarding unaudited interim financial information. |
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| Rule 13a-14(a)/15d-014(a) CEO Certifications. |
31-B* | Rule 13a-14(a)/15d-014(a) CFO Certifications. | |
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32* |
| Section 1350 Certifications. |
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101* |
| The following financial information from Norfolk Southern Corporation’s Quarterly Report on Form 10-Q for the first quarter |
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* Filed herewith. | ||