NSC

Norfolk Southern Corp. 10-Q Summary: Period Ended September 30, 1997

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended September 30, 1997, and the nine-month period ended on that date. Norfolk Southern Corporation (NS) is a major railroad and motor carrier. The reporting period is dominated by the joint acquisition of Conrail Inc. with CSX Corporation, completed in May 1997. NS holds a 58% economic interest in the Conrail entity, which is accounted for using the equity method pending Surface Transportation Board (STB) approval for the final division of assets, expected by mid-1998. Additionally, the company executed a three-for-one common stock split in September 1997.

Key Financial Metrics

Material Changes vs. Prior Period

• Net Income Decline: Net income decreased 11% in Q3 and 13% for the nine months compared to 1996. This decline is primarily attributed to Conrail-related costs, including a $77.2 million charge for credit facility costs in Q1 and increased interest expense on debt issued to finance the acquisition.
• Revenue Growth: Railway operating revenues reached record levels, up 3% for both Q3 and the nine-month period. Intermodal revenues grew 16% in Q3 and 13% year-to-date, while coal revenues remained relatively flat.
• Balance Sheet Shift: Total assets increased significantly from $11.4 billion to $17.5 billion, driven by a $5.8 billion investment in Conrail. Long-term debt surged from $1.8 billion to $7.5 billion to fund the acquisition.
• Liquidity Position: Cash and cash equivalents dropped from $209.2 million to $32.1 million. The company moved from a positive working capital position to a deficit of $36.4 million, largely due to accrued interest on Conrail acquisition debt.

Guidance, Outlook, and Risks

• Conrail Transaction: The final division of Conrail assets is contingent on STB approval, with a decision expected by July 23, 1998. Until then, NS cannot precisely assess its share of Conrail assets and liabilities. Management anticipates the transaction will be consummated after approval.
• Operational Outlook: Management expects fourth-quarter coal revenues to be even with 1996 levels. General merchandise and intermodal revenues are expected to remain ahead of the prior year.
• Legal Contingencies:
  • Jury Verdict: A jury awarded $175 million in punitive damages against a subsidiary (AGS) regarding a 1987 chemical leak. Management believes the verdict is excessive and intends to appeal, estimating no material adverse effect on financial position.
  • Class Action: A pending class action suit regarding employment discrimination is awaiting a briefing schedule; management does not expect a material adverse effect.
• Interest Rate Risk: NS utilizes derivative instruments to manage interest rate exposure. While potential exposure is not determinable, management considers a material adverse effect unlikely.

Investor Verification Checklist

• Verify the status of the Surface Transportation Board (STB) approval for the Conrail division and any potential divestiture requirements.
• Monitor the resolution of the $175 million punitive damages verdict against the Alabama Great Southern Railroad subsidiary and the progress of the appeal.
• Assess the company's ability to refinance commercial paper and manage the increased debt load (58.8% debt-to-capitalization) as interest payments come due.
• Review the impact of the three-for-one stock split on share count and per-share metrics in future filings.
• Track the amortization of the difference between the Conrail purchase price and underlying net assets, which is currently reducing net income.