10-Q 1 unp-20170930x10q.htm 10-Q 09302017 Q3



 





UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)



 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934



For the quarterly period ended September 30, 2017

OR



 



 

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 1-6075



UNION PACIFIC CORPORATION

(Exact name of registrant as specified in its charter)





 

 

UTAH

 

13-2626465

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)



1400 DOUGLAS STREET, OMAHA, NEBRASKA

(Address of principal executive offices)

68179

(Zip Code)

(402) 544-5000

(Registrant’s telephone number, including area code)



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      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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

 Yes      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 

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 Act).



 Yes      No



Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).

Emerging growth company     



If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

As of October 20,  2017, there were 787,168,815 shares of the Registrant's Common Stock outstanding.







 

 


 



TABLE OF CONTENTS

UNION PACIFIC CORPORATION

AND SUBSIDIARY COMPANIES



PART I. FINANCIAL INFORMATION





 

 

Item 1.

Condensed Consolidated Financial Statements:

 



CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

 



For the Three Months Ended September 30, 2017 and 2016

3



CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

 



For the Three Months Ended September 30, 2017 and 2016

3



CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

 



For the Nine Months Ended September 30, 2017 and 2016

4



CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

 



For the Nine Months Ended September 30, 2017 and 2016

4



CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (Unaudited)

 



At September 30, 2017 and December 31, 2016

5



CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

 



For the Nine Months Ended September 30, 2017 and 2016

6



CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN COMMON SHAREHOLDERS’ EQUITY (Unaudited)

 



For the Nine Months Ended September 30, 2017 and 2016

7



NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

8

Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations

24

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

34

Item 4.

Controls and Procedures

35



PART II. OTHER INFORMATION

 

 

2


 

PART I. FINANCIAL INFORMATION



Item 1. Condensed Consolidated Financial Statements



Condensed Consolidated Statements of Income (Unaudited)

Union Pacific Corporation and Subsidiary Companies







 

 

 

 



 

 

 

 

Millions, Except Per Share Amounts,

 

 

 

 

for the Three Months Ended September 30,

2017  2016 

Operating revenues:

 

 

 

 

     Freight revenues

$

5,050 

$

4,837 

     Other revenues

 

358 

 

337 

Total operating revenues

 

5,408 

 

5,174 

Operating expenses:

 

 

 

 

     Compensation and benefits

 

1,298 

 

1,191 

     Purchased services and materials

 

615 

 

566 

     Depreciation

 

528 

 

512 

     Fuel

 

450 

 

392 

     Equipment and other rents

 

275 

 

282 

     Other

 

230 

 

271 

Total operating expenses

 

3,396 

 

3,214 

Operating income

 

2,012 

 

1,960 

Other income (Note 7)

 

151 

 

29 

Interest expense

 

(180)

 

(184)

Income before income taxes

 

1,983 

 

1,805 

Income taxes

 

(789)

 

(674)

Net income

$

1,194 

$

1,131 

Share and Per Share (Note 9):

 

 

 

 

     Earnings per share - basic

$

1.50 

$

1.36 

     Earnings per share - diluted

$

1.50 

$

1.36 

     Weighted average number of shares - basic

 

794.5 

 

829.0 

     Weighted average number of shares - diluted

 

797.6 

 

832.2 

Dividends declared per share

$

0.605 

$

0.55 





Condensed Consolidated Statements of Comprehensive Income (Unaudited)

Union Pacific Corporation and Subsidiary Companies







 

 

 

 



 

 

 

 

Millions,

 

 

 

 

for the Three Months Ended September 30,

2017  2016 

Net income

$

1,194 

$

1,131 

Other comprehensive income/(loss):

 

 

 

 

    Defined benefit plans

 

40 

 

14 

    Foreign currency translation

 

 

(1)

Total other comprehensive income/(loss) [a]

 

49 

 

13 

Comprehensive income

$

1,243 

$

1,144 



[a]Net of deferred taxes of $(27) million and $(7) million during the three months ended September 30, 2017, and 2016, respectively.

The accompanying notes are an integral part of these unaudited Condensed Consolidated Financial Statements.

 

 

3


 

Condensed Consolidated Statements of Income (Unaudited)

Union Pacific Corporation and Subsidiary Companies







 

 

 

 



 

 

 

 

Millions, Except Per Share Amounts,

 

 

 

 

for the Nine Months Ended September 30,

2017  2016 

Operating revenues:

 

 

 

 

     Freight revenues

$

14,750 

$

13,769 

     Other revenues

 

1,040 

 

1,004 

Total operating revenues

 

15,790 

 

14,773 

Operating expenses:

 

 

 

 

     Compensation and benefits

 

3,752 

 

3,564 

     Purchased services and materials

 

1,778 

 

1,705 

     Depreciation

 

1,573 

 

1,518 

     Fuel

 

1,344 

 

1,058 

     Equipment and other rents

 

824 

 

857 

     Other

 

709 

 

764 

Total operating expenses

 

9,980 

 

9,466 

Operating income

 

5,810 

 

5,307 

Other income (Note 7)

 

261 

 

152 

Interest expense

 

(531)

 

(524)

Income before income taxes

 

5,540 

 

4,935 

Income taxes

 

(2,106)

 

(1,846)

Net income

$

3,434 

$

3,089 

Share and Per Share (Note 9):

 

 

 

 

     Earnings per share - basic

$

4.27 

$

3.69 

     Earnings per share - diluted

$

4.26 

$

3.68 

     Weighted average number of shares - basic

 

803.4 

 

836.8 

     Weighted average number of shares - diluted

 

806.5 

 

839.6 

Dividends declared per share

$

1.815 

$

1.65 





Condensed Consolidated Statements of Comprehensive Income (Unaudited)

Union Pacific Corporation and Subsidiary Companies







 

 

 

 



 

 

 

 

Millions,

 

 

 

 

for the Nine Months Ended September 30,

2017  2016 

Net income

$

3,434 

$

3,089 

Other comprehensive income/(loss):

 

 

 

 

    Defined benefit plans

 

66 

 

35 

    Foreign currency translation

 

34 

 

(25)

Total other comprehensive income/(loss) [a]

 

100 

 

10 

Comprehensive income

$

3,534 

$

3,099 



[a]Net of deferred taxes of $(59) million and $(8) million during the nine months ended September 30, 2017, and 2016, respectively.

The accompanying notes are an integral part of these unaudited Condensed Consolidated Financial Statements.

 

 

4


 

Condensed Consolidated Statements of Financial Position (Unaudited)

Union Pacific Corporation and Subsidiary Companies







 

 

 

 

 



 

 

 

 

 



September 30,

 

December 31,

Millions, Except Share and Per Share Amounts

2017 

 

2016 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

     Cash and cash equivalents

$

1,847 

 

$

1,277 

     Short-term investments (Note 14)

 

90 

 

 

60 

     Accounts receivable, net (Note 11)

 

1,428 

 

 

1,258 

     Materials and supplies

 

742 

 

 

717 

     Other current assets

 

342 

 

 

284 

Total current assets

 

4,449 

 

 

3,596 

Investments

 

1,566 

 

 

1,457 

Net properties (Note 12)

 

51,036 

 

 

50,389 

Other assets

 

346 

 

 

276 

Total assets

$

57,397 

 

$

55,718 

Liabilities and Common Shareholders' Equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

     Accounts payable and other current liabilities (Note 13)

$

2,928 

 

$

2,882 

     Debt due within one year (Note 15)

 

903 

 

 

758 

Total current liabilities

 

3,831 

 

 

3,640 

Debt due after one year (Note 15)

 

15,930 

 

 

14,249 

Deferred income taxes

 

16,524 

 

 

15,996 

Other long-term liabilities

 

1,961 

 

 

1,901 

Commitments and contingencies (Note 17)

 

 

 

 

 

Total liabilities

 

38,246 

 

 

35,786 

Common shareholders' equity:

 

 

 

 

 

     Common shares, $2.50 par value, 1,400,000,000 authorized;   

 

 

 

 

 

     1,111,418,228 and 1,110,986,415 issued; 789,834,578 and 815,824,413

 

 

 

 

 

     outstanding, respectively

 

2,778 

 

 

2,777 

     Paid-in-surplus

 

4,454 

 

 

4,421 

     Retained earnings

 

34,561 

 

 

32,587 

     Treasury stock

 

(21,470)

 

 

(18,581)

     Accumulated other comprehensive loss (Note 10)

 

(1,172)

 

 

(1,272)

Total common shareholders' equity

 

19,151 

 

 

19,932 

Total liabilities and common shareholders' equity

$

57,397 

 

$

55,718 



The accompanying notes are an integral part of these unaudited Condensed Consolidated Financial Statements.

 

 

5


 

Condensed Consolidated Statements of Cash Flows (Unaudited)

Union Pacific Corporation and Subsidiary Companies







 

 

 

 



 

 

 

 

Millions,

 

 

for the Nine Months Ended September 30,

2017  2016 

Operating Activities

 

 

 

 

Net income

$

3,434 

$

3,089 

Adjustments to reconcile net income to cash provided by operating activities:

 

 

 

 

  Depreciation

 

1,573 

 

1,518 

  Deferred and other income taxes

 

514 

 

519 

  Other operating activities, net

 

85 

 

(268)

  Changes in current assets and liabilities:

 

 

 

 

     Accounts receivable, net

 

(170)

 

     Materials and supplies

 

(25)

 

46 

     Other current assets

 

(58)

 

(15)

     Accounts payable and other current liabilities

 

(43)

 

79 

     Income and other taxes

 

88 

 

494 

Cash provided by operating activities

 

5,398 

 

5,467 

Investing Activities

 

 

 

 

Capital investments

 

(2,379)

 

(2,604)

Proceeds from asset sales

 

152 

 

116 

Purchases of short-term investments (Note 14)

 

(90)

 

(580)

Maturities of short-term investments (Note 14)

 

60 

 

250 

Other investing activities, net

 

(3)

 

(1)

Cash used in investing activities

 

(2,260)

 

(2,819)

Financing Activities

 

 

 

 

Common share repurchases (Note 18)

 

(2,882)

 

(2,100)

Debt issued (Note 15)

 

2,285 

 

1,883 

Dividends paid

 

(1,460)

 

(1,382)

Debt repaid

 

(471)

 

(481)

Other financing activities, net

 

(40)

 

(50)

Cash used in financing activities

 

(2,568)

 

(2,130)

Net change in cash and cash equivalents

 

570 

 

518 

Cash and cash equivalents at beginning of year

 

1,277 

 

1,391 

Cash and cash equivalents at end of period

$

1,847 

$

1,909 

Supplemental Cash Flow Information

 

 

 

 

  Non-cash investing and financing activities:

 

 

 

 

     Capital investments accrued but not yet paid

$

120 

$

106 

     Common shares repurchased but not yet paid

 

29 

 

65 

  Cash (paid for)/received from:

 

 

 

 

     Income taxes, net of refunds

$

(1,557)

$

(877)

     Interest, net of amounts capitalized

 

(532)

 

(540)



The accompanying notes are an integral part of these unaudited Condensed Consolidated Financial Statements.

 

 

6


 

Condensed Consolidated Statements of Changes in Common Shareholders’ Equity (Unaudited)

Union Pacific Corporation and Subsidiary Companies







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


Millions

Common
Shares

Treasury
Shares

 

Common Shares

Paid-in-Surplus

Retained Earnings

Treasury Stock

AOCI
[a]

Total 

Balance at January 1, 2016

1,110.4  (261.2)

 

 

$   2,776 

 

$   4,417 

 

$   30,233 

 

$   (15,529)

 

$   (1,195)

 

$    20,702 

Net income

 

 

 

 

 -

 

 -

 

3,089 

 

 -

 

 -

 

3,089 

Other comprehensive income

 

 

 

 

 -

 

 -

 

 -

 

 -

 

10 

 

10 

Conversion, stock option
  exercises, forfeitures, and other

0.6  0.8 

 

 

 

(11)

 

 -

 

40 

 

 -

 

30 

Share repurchases (Note 18)

 -

(25.4)

 

 

 -

 

 -

 

 -

 

(2,165)

 

 -

 

(2,165)

Cash dividends declared
   ($1.65 per share)

 -

 -

 

 

 -

 

 -

 

(1,382)

 

 -

 

 -

 

(1,382)

Balance at September 30, 2016

1,111.0  (285.8)

 

 

$   2,777 

 

$   4,406 

 

$   31,940 

 

$   (17,654)

 

$   (1,185)

 

$    20,284 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at January 1, 2017

1,111.0  (295.2)

 

 

$   2,777 

 

$   4,421 

 

$   32,587 

 

$   (18,581)

 

$   (1,272)

 

$    19,932 

Net income

 

 

 

 

 -

 

 -

 

3,434 

 

 -

 

 -

 

3,434 

Other comprehensive income

 

 

 

 

 -

 

 -

 

 -

 

 -

 

100 

 

100 

Conversion, stock option
  exercises, forfeitures, and other

0.4  0.7 

 

 

 

33 

 

 -

 

22 

 

 -

 

56 

Share repurchases (Note 18)

 -

(27.1)

 

 

 -

 

 -

 

 -

 

(2,911)

 

 -

 

(2,911)

Cash dividends declared
   ($1.815 per share)

 -

 -

 

 

 -

 

 -

 

(1,460)

 

 -

 

 -

 

(1,460)

Balance at September 30, 2017

1,111.4  (321.6)

 

 

$   2,778 

 

$   4,454 

 

$   34,561 

 

$   (21,470)

 

$   (1,172)

 

$    19,151 



[a]AOCI = Accumulated Other Comprehensive Income/(Loss) (Note 10)

The accompanying notes are an integral part of these unaudited Condensed Consolidated Financial Statements.

 

 

7


 

UNION PACIFIC CORPORATION AND SUBSIDIARY COMPANIES



NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS



(Unaudited)



For purposes of this report, unless the context otherwise requires, all references herein to the “Corporation”, “Company”, “UPC”, “we”, “us”, and “our” mean Union Pacific Corporation and its subsidiaries, including Union Pacific Railroad Company, which will be separately referred to herein as “UPRR” or the “Railroad”.

 

1. Basis of Presentation



Our Condensed Consolidated Financial Statements are unaudited and reflect all adjustments (consisting of normal and recurring adjustments) that are, in the opinion of management, necessary for their fair presentation in conformity with accounting principles generally accepted in the United States of America (GAAP). Pursuant to the rules and regulations of the Securities and Exchange Commission (SEC), certain information and note disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted. Accordingly, this Quarterly Report on Form 10-Q should be read in conjunction with our Consolidated Financial Statements and notes thereto contained in our 2016 Annual Report on Form 10-K. Our Consolidated Statement of Financial Position at December 31, 2016, is derived from audited financial statements. The results of operations for the nine months ended September 30, 2017, are not necessarily indicative of the results for the entire year ending December 31, 2017.  



The Condensed Consolidated Financial Statements are presented in accordance with GAAP as codified in the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC).  



2. Accounting Pronouncements



In May 2014, the FASB issued Accounting Standards Update No. 2014-09 (ASU 2014-09), Revenue from Contracts with Customers (Topic 606).  ASU 2014-09 supersedes the revenue recognition guidance in Topic 605, Revenue Recognition. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods and services to customers in an amount that reflects the consideration to which the entity expects to be entitled in the exchange for those goods or services. This may require the use of more judgment and estimates in order to correctly recognize the revenue expected as an outcome of each specific performance obligation. Additionally, this guidance will require the disclosure of the nature, amount, and timing of revenue arising from contracts so as to aid in the understanding of the users of financial statements.



This standard is effective for annual reporting periods beginning after December 15, 2017, and we intend to adopt the standard beginning in 2018 using the modified retrospective transition method. The Company has analyzed a significant proportion of our freight and other revenues and we expect to continue to recognize freight revenues as freight moves from origin to destination and to recognize other revenues as identified performance obligations are satisfied.  We are currently analyzing freight and other revenues in the context of the new guidance on principal versus agent considerations and evaluating the required new disclosures. At this time, ASU 2014-09 is not expected to have a material impact on our consolidated financial position, results of operations, or cash flows.



In January 2016, the FASB issued Accounting Standards Update No. 2016-01 (ASU 2016-01), Recognition and Measurement of Financial Assets and Financial Liabilities (Subtopic 825-10). ASU 2016-01 provides guidance for the recognition, measurement, presentation, and disclosure of financial instruments. This guidance is effective for annual and interim periods beginning after December 15, 2017, and early adoption is not permitted. ASU 2016-01 is not expected to have a material impact on our consolidated financial position, results of operations, or cash flows.



In February 2016, the FASB issued Accounting Standards Update No. 2016-02 (ASU 2016-02), Leases (Subtopic 842). ASU 2016-02 will require companies to recognize lease assets and lease liabilities on the balance sheet and disclose key information about leasing arrangements. For public companies, this standard is effective for annual reporting periods beginning after December 15, 2018, and early adoption is permitted. Management is currently evaluating the impact of this standard on our consolidated financial

 

8


 

position, results of operations, and cash flows, but expects that the adoption will result in a significant increase in the Company’s assets and liabilities.



In March 2017, the FASB issued Accounting Standards Update No. 2017-07 (ASU 2017-07), Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost (Topic 715). ASU 2017-07 requires the service cost component be reported separately from the other components of net benefit costs in the income statement, provides explicit guidance on the presentation of the service cost component and the other components of net benefit cost in the income statement, and allows only the service cost component of net benefit cost to be eligible for capitalization. This standard is effective for annual and interim reporting periods beginning after December 15, 2017, and requires retrospective adoption.  Early adoption is permitted.  ASU 2017-07 is not expected to have an  impact on our consolidated financial position, results of operations, cash flows, net income or earnings per share as a result of adopting this new standard.  The Company currently records service costs and net benefit costs within compensation and benefits expense. Upon adoption, only the service cost will be recorded within compensation and benefits expense, and the other components of net benefit costs, including $67 million related to the 2017 workforce reduction plan as described in Note 6, will be recorded in other income. The retrospective impact of future adoption is shown in the table below:



 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 



 

Three Months Ended

 

Nine Months Ended



 

September 30,

 

September 30,

Millions

 

2017  2016 

 

2017  2016 

Increase/(decrease) in operating income

$

 

61 

$

(8)

 

$

49 

$

(24)

Increase/(decrease) in other income

 

 

(61)

 

 

 

(49)

 

24 

 

 

3. Workforce Reduction Plan



On August 16, 2017, the Company approved and commenced a management and administrative personnel reorganization plan (the “Plan”) furthering its on-going efforts to increase efficiency and more effectively align Company resources. The Plan implemented productivity initiatives identified during a recently completed Company-wide organizational review that included the reduction of approximately 460 management positions and 150 agreement positions. An additional 100 agreement positions have been identified and will be eliminated throughout the remainder of 2017.  The Plan resulted in a pretax charge recognized in the third quarter of 2017 within compensation and benefits expense in our Condensed Consolidated Statements of Income.  This charge consisted of management employee termination benefits, including pension expenses, severance costs, and acceleration of equity compensation expense as shown in the table below.  The actions associated with the Plan are substantially complete, and we do not expect to incur additional charges for the Plan in subsequent years.



 

 

 

 



 

 

 

 

Millions

 

Compensation and

 

 

As of September 30, 2017

 

Benefits Expense

 

Liability

Pension

$

67 

$

67 

Severance

 

12 

 

12 

Equity Compensation

 

 

Total

$

84 

$

84 



 



 

9


 

4. Operations and Segmentation



The Railroad, along with its subsidiaries and rail affiliates, is our one reportable operating segment. Although we provide and analyze revenue by commodity group, we treat the financial results of the Railroad as one segment due to the integrated nature of our rail network. The following table provides freight revenue by commodity group:





 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



Three Months Ended

 

Nine Months Ended



September 30,

 

September 30,

Millions

2017  2016 

 

2017  2016 

Agricultural Products

$

914 

$

937 

 

$

2,763 

$

2,664 

Automotive

 

469 

 

485 

 

 

1,486 

 

1,483 

Chemicals

 

896 

 

875 

 

 

2,679 

 

2,617 

Coal

 

711 

 

728 

 

 

1,978 

 

1,741 

Industrial Products

 

1,079 

 

855 

 

 

3,016 

 

2,519 

Intermodal

 

981 

 

957 

 

 

2,828 

 

2,745 

Total freight revenues

$

5,050 

$

4,837 

 

$

14,750 

$

13,769 

Other revenues

 

358 

 

337 

 

 

1,040 

 

1,004 

Total operating revenues

$

5,408 

$

5,174 

 

$

15,790 

$

14,773 

 

Although our revenues are principally derived from customers domiciled in the U.S., the ultimate points of origination or destination for some products we transport are outside the U.S. Each of our commodity groups includes revenue from shipments to and from Mexico. Included in the above table are freight revenues from our Mexico business which amounted to $555 million and $564 million, respectively, for the three months ended September 30, 2017, and September 30, 2016, and $1,697 million and $1,649 million, respectively, for the nine months ended September 30, 2017, and September 30, 2016.

 

5. Stock-Based Compensation



We have several stock-based compensation plans under which employees and non-employee directors receive stock options, nonvested retention shares, and nonvested stock units. We refer to the nonvested shares and stock units collectively as “retention awards”. We have elected to issue treasury shares to cover option exercises and stock unit vestings, while new shares are issued when retention shares are granted. Information regarding stock-based compensation appears in the table below:





 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



Three Months Ended

 

Nine Months Ended



September 30,

 

September 30,

Millions

2017  2016 

 

2017  2016 

Stock-based compensation, before tax:

 

 

 

 

 

 

 

 

 

     Stock options

$

$

 

$

15 

$

13 

     Retention awards

 

24 

 

15 

 

 

68 

 

48 

Total stock-based compensation, before tax

$

30 

$

20 

 

$

83 

$

61 

Excess tax benefits from equity compensation plans

$

$

 

$

29 

$

21 



Stock Options – We estimate the fair value of our stock option awards using the Black-Scholes option pricing model. The table below shows the annual weighted-average assumptions used for valuation purposes:





 

 

 

 



 

 

 

 

Weighted-Average Assumptions

2017  2016 

Risk-free interest rate

 

2.0% 

 

1.3% 

Dividend yield

 

2.3% 

 

2.9% 

Expected life (years)

 

5.3 

 

5.1 

Volatility

 

21.7% 

 

23.2% 

Weighted-average grant-date fair value of options granted

$

18.19 

$

11.36 

 

 

10


 

The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant; the expected dividend yield is calculated as the ratio of dividends paid per share of common stock to the stock price on the date of grant; the expected life is based on historical and expected exercise behavior; and expected volatility is based on the historical volatility of our stock price over the expected life of the option.



A summary of stock option activity during the nine months ended September 30, 2017, is presented below:



 

 

 

 

 

 

 



 

 

 

 

 

 

 



Options (thous.)

Weighted-Average
Exercise Price

Weighted-Average Remaining Contractual Term

Aggregate Intrinsic Value (millions)

Outstanding at January 1, 2017

6,162 

$

73.13  5.9 

yrs.

$

205 

Granted

1,086 

 

107.30 

 

N/A

 

N/A

Exercised

(648)

 

47.64 

 

N/A

 

N/A

Forfeited or expired

(90)

 

91.17 

 

N/A

 

N/A

Outstanding at September 30, 2017

6,510 

$

81.12  6.0 

yrs.

$

233 

Vested or expected to vest at September 30, 2017

6,477 

$

80.98  6.0 

yrs.

$

233 

Options exercisable at September 30, 2017

4,118 

$

72.95  4.5 

yrs.

$

181 

 

Stock options are granted at the closing price on the date of grant, have ten-year contractual terms, and vest no later than three years from the date of grant.  None of the stock options outstanding at September 30, 2017, are subject to performance or market-based vesting conditions.



At September 30, 2017, there was $22 million of unrecognized compensation expense related to nonvested stock options, which is expected to be recognized over a weighted-average period of 1.4 years. Additional information regarding stock option exercises appears in the table below:





 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



Three Months Ended

 

Nine Months Ended



September 30,

 

September 30,

Millions

2017  2016 

 

2017  2016 

Intrinsic value of stock options exercised

$

10 

$

15 

 

$

40 

$

32 

Cash received from option exercises

 

11 

 

11 

 

 

39 

 

24 

Treasury shares repurchased for employee payroll taxes

 

(3)

 

(4)

 

 

(12)

 

(9)

Tax benefit realized from option exercises

 

 

 

 

15 

 

12 

Aggregate grant-date fair value of stock options vested

 

 -

 

 -

 

 

19 

 

19 

 

Retention Awards – The fair value of retention awards is based on the closing price of the stock on the grant date. Dividends and dividend equivalents are paid to participants during the vesting periods.



Changes in our retention awards during the nine months ended September 30, 2017, were as follows:





 

 

 



 

 

 



Shares
(thous.)

Weighted-Average
Grant-Date Fair Value

Nonvested at January 1, 2017

2,789 

$

84.68 

Granted

562 

 

107.30 

Vested

(801)

 

68.10 

Forfeited

(79)

 

92.82 

Nonvested at September 30, 2017

2,471 

$

94.94 

 

Retention awards are granted at no cost to the employee or non-employee director and vest over periods lasting up to four years. At September 30, 2017, there was $99 million of total unrecognized compensation expense related to nonvested retention awards, which is expected to be recognized over a weighted-average period of 1.8 years.



Performance Retention Awards – In February 2017, our Board of Directors approved performance stock unit grants. The basic terms of these performance stock units are identical to those granted in February 2016, except for different annual return on invested capital (ROIC) performance targets. The 2016 and

 

11


 

2017 plans also include relative operating income growth (OIG) as a modifier compared to the companies included in the S&P 500 Industrials Index. We define ROIC as net operating profit adjusted for interest expense (including interest on the present value of operating leases) and taxes on interest divided by average invested capital adjusted for the present value of operating leases. The modifier can be up to +/- 25% of the award earned based on the ROIC achieved.



Stock units awarded to selected employees under these grants are subject to continued employment for 37 months and the attainment of certain levels of ROIC, and for the 2016 and 2017 plans, modified for the relative OIG. We expense the fair value of the units that are probable of being earned based on our forecasted ROIC over the 3-year performance period, and with respect to the third year of the 2016 and 2017 plans, the relative OIG modifier. We measure the fair value of these performance stock units based upon the closing price of the underlying common stock as of the date of grant, reduced by the present value of estimated future dividends. Dividend equivalents are paid to participants only after the units are earned.



The assumptions used to calculate the present value of estimated future dividends related to the February 2017 grant were as follows:





 

 



 

 



2017 

Dividend per share per quarter

$

0.605 

Risk-free interest rate at date of grant

 

1.5% 

 

Changes in our performance retention awards during the nine months ended September 30, 2017, were as follows:





 

 

 



 

 

 



Shares
(thous.)

Weighted-Average
Grant-Date Fair Value

Nonvested at January 1, 2017

1,145 

$

86.23 

Granted

461 

 

101.38 

Vested

(255)

 

83.06 

Unearned

(110)

 

83.06 

Forfeited

(52)

 

92.20 

Nonvested at September 30, 2017

1,189 

$

92.82 

 

At September 30, 2017, there was $47 million of total unrecognized compensation expense related to nonvested performance retention awards, which is expected to be recognized over a weighted-average period of 1.8 years. This expense is subject to achievement of the performance measures established for the performance stock unit grants.

 

6. Retirement Plans



Pension and Other Postretirement Benefits



Pension Plans – We provide defined benefit retirement income to eligible non-union employees through qualified and non-qualified (supplemental) pension plans. Qualified and non-qualified pension benefits are based on years of service and the highest compensation during the latest years of employment, with specific reductions made for early retirements.



Other Postretirement Benefits (OPEB) – We provide medical and life insurance benefits for eligible retirees. These benefits are funded as medical claims and life insurance premiums are paid.



Expense



Both pension and OPEB expense are determined based upon the annual service cost of benefits (the actuarial cost of benefits earned during a period) and the interest cost on those liabilities, less the expected return on plan assets. The expected long-term rate of return on plan assets is applied to a calculated value of plan assets that recognizes changes in fair value over a five-year period. This practice is intended to reduce year-to-year volatility in pension expense, but it can have the effect of delaying the recognition of differences between actual returns on assets and expected returns based on long-term rate of return

 

12


 

assumptions. Differences in actual experience in relation to assumptions are not recognized in net income immediately, but are deferred in accumulated other comprehensive income and, if necessary, amortized as pension or OPEB expense.



The workforce reduction plan initiated in the third quarter of 2017 included a curtailment loss of $20 million and a special termination benefit of $47 million as a result of a remeasurement as of September 30, 2017, due to the eliminated future service for approximately 460 management employees.  These amounts were recognized in the third quarter of 2017 within compensation and benefits expense in our Condensed Consolidated Statements of IncomeIn connection with this remeasurement, the Company also updated the pension effective discount rate assumption from 4.20% to 3.81%.



The components of our net periodic pension cost were as follows:





 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



Three Months Ended

 

Nine Months Ended



September 30,

 

September 30,

Millions

2017  2016 

 

2017  2016 

Service cost

$

21 

$

21 

 

$

66 

$

64 

Interest cost

 

35 

 

36 

 

 

106 

 

107 

Expected return on plan assets

 

(66)

 

(67)

 

 

(198)

 

(201)

Curtailment cost

 

20 

 

 -

 

 

20 

 

 -

Special termination cost

 

47 

 

 -

 

 

47 

 

 -

Amortization of actuarial loss

 

20 

 

21 

 

 

59 

 

62 

 Net periodic pension cost

$

77 

$

11 

 

$

100 

$

32 



The components of our net periodic OPEB cost were as follows:





 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



Three Months Ended

 

Nine Months Ended



September 30,

 

September 30,

Millions

2017  2016 

 

2017  2016 

Service cost

$

 -

$

 -

 

$

$

Interest cost

 

 

 

 

 

Amortization of:

 

 

 

 

 

 

 

 

 

      Prior service credit

 

 -

 

(2)

 

 

 -

 

(7)

      Actuarial loss

 

 

 

 

 

Net periodic OPEB cost

$

$

 

$

16 

$

 

Cash Contributions



For the nine months ended September 30, 2017, we did not make any cash contributions to the qualified pension plan. Any contributions made during 2017 will be based on cash generated from operations and financial market considerations. Our policy with respect to funding the qualified plans is to fund at least the minimum required by law and not more than the maximum amount deductible for tax purposes. At September 30, 2017, we do not have minimum cash funding requirements for 2017.

 

 

13


 

7. Other Income



Other income included the following:





 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



Three Months Ended

 

Nine Months Ended



September 30,

 

September 30,

Millions

2017  2016  2017  2016 

Rental income [a]

$

89 

$

23 

 

$

152 

$

71 

Net gain on non-operating asset dispositions [b] [c]

 

63 

 

 

 

108 

 

91 

Interest income

 

 

 

 

10 

 

Non-operating environmental costs and other

 

(5)

 

 -

 

 

(9)

 

(18)

Total

$

151 

$

29 

 

$

261 

$

152 



[a]2017 includes $65 million related to a favorable litigation settlement in the third quarter.

[b]2017 includes $26 million related to a real estate sale in the first quarter and $57 million related to a real estate sale in the third quarter.

[c]2016 includes $17 million related to a real estate sale in the first quarter and $50 million related to a real estate sale in the second quarter.



8. Income Taxes



The statute of limitations has run for all years prior to 2013 and UPC is not currently under examination by the Internal Revenue Service (IRS) for any of its open years.  In 2017, UPC amended its 2013 income tax returns, primarily to claim deductions resulting from the resolution of prior year IRS examinations.



In 2016, UPC amended its 2011 and 2012 income tax returns to claim deductions resulting from the resolution of IRS examinations for years prior to 2011. The IRS and Joint Committee on Taxation have completed their review of these amended returns, and in the third quarter of 2017, we received a refund of $62 million, consisting of $60 million of tax and $2 million of interest.



Several state tax authorities are examining our state tax returns for years 2006 through 2014.

 

At September 30, 2017, we had a net liability for unrecognized tax benefits of $170 million.



On July 6, 2017, the State of Illinois increased its corporate income tax rate effective July 1, 2017.  In the third quarter of 2017, we increased our deferred tax expense by $33 million to reflect the increased tax rate.

 

9. Earnings Per Share



The following table provides a reconciliation between basic and diluted earnings per share:





 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



Three Months Ended

 

Nine Months Ended



September 30,

 

September 30,

Millions, Except Per Share Amounts

2017  2016 

 

2017  2016 

Net income

$

1,194 

$

1,131 

 

$

3,434 

$

3,089 

Weighted-average number of shares outstanding:    

 

 

 

 

 

 

 

 

 

    Basic

 

794.5 

 

829.0 

 

 

803.4 

 

836.8 

    Dilutive effect of stock options

 

1.7 

 

1.6 

 

 

1.7 

 

1.4 

    Dilutive effect of retention shares and units 

 

1.4 

 

1.6 

 

 

1.4 

 

1.4 

Diluted

 

797.6 

 

832.2 

 

 

806.5 

 

839.6 

Earnings per share – basic

$

1.50 

$

1.36 

 

$

4.27 

$

3.69 

Earnings per share – diluted

$

1.50 

$

1.36 

 

$

4.26 

$

3.68 

Stock options excluded as their inclusion would be anti-dilutive

 

1.9 

 

0.9 

 

 

1.8 

 

2.4 

 

 

14


 

10. Accumulated Other Comprehensive Income/(Loss)



Reclassifications out of accumulated other comprehensive income/(loss) for the three and nine months ended September 30, 2017, and 2016, were as follows (net of tax):





 

 

 

 

 

 



 

 

 

 

 

 

Millions

Defined
benefit
plans

Foreign
currency
translation

Total

Balance at July 1, 2017

$

(1,106)

$

(115)

$

(1,221)

Other comprehensive income/(loss) before reclassifications

 

 

 

12 

Amounts reclassified from accumulated other comprehensive income/(loss) [a]

 

37 

 

 -

 

37 

Net quarter-to-date other comprehensive income/(loss),
net of taxes of $(27) million

 

40 

 

 

49 

Balance at September 30, 2017

$

(1,066)

$

(106)

$

(1,172)



 

 

 

 

 

 

Balance at July 1, 2016

$

(1,082)

$

(116)

$

(1,198)

Other comprehensive income/(loss) before reclassifications

 

 

(1)

 

 -

Amounts reclassified from accumulated other comprehensive income/(loss) [a]

 

13 

 

 -

 

13 

Net quarter-to-date other comprehensive income/(loss),
net of taxes of $(7) million

 

14 

 

(1)

 

13 

Balance at September 30, 2016

$

(1,068)

$

(117)

$

(1,185)









 

 

 

 

 

 



 

 

 

 

 

 

Millions

Defined
benefit
plans

Foreign
currency
translation

Total

Balance at January 1, 2017

$

(1,132)

$

(140)

$

(1,272)

Other comprehensive income/(loss) before reclassifications

 

 

34 

 

35 

Amounts reclassified from accumulated other comprehensive income/(loss) [a]

 

65 

 

 -

 

65 

Net year-to-date other comprehensive income/(loss),
net of taxes of $(59) million

 

66 

 

34 

 

100 

Balance at September 30, 2017

$

(1,066)

$

(106)

$

(1,172)



 

 

 

 

 

 

Balance at January 1, 2016

$

(1,103)

$

(92)

$

(1,195)

Other comprehensive income/(loss) before reclassifications

 

(4)

 

(25)

 

(29)

Amounts reclassified from accumulated other comprehensive income/(loss) [a]

 

39 

 

 -

 

39 

Net year-to-date other comprehensive income/(loss),
net of taxes of $(8) million

 

35 

 

(25)

 

10 

Balance at September 30, 2016

$

(1,068)

$

(117)

$

(1,185)



[a]The accumulated other comprehensive income/(loss) reclassification components are 1) prior service cost/(credit) and 2) net actuarial loss which are both included in the computation of net periodic pension cost. See Note 6 Retirement Plans for additional details.

 

15


 



 

 

 

 

 

 



11. Accounts Receivable



Accounts receivable includes freight and other receivables reduced by an allowance for doubtful accounts. The allowance is based upon historical losses, credit worthiness of customers, and current economic conditions. At September 30, 2017, and December 31, 2016, our accounts receivable were reduced by $2 million and $5 million, respectively. Receivables not expected to be collected in one year and the associated allowances are classified as other assets in our Condensed Consolidated Statements of Financial Position. At both September 30, 2017, and December 31, 2016, receivables classified as other assets were reduced by allowances of $17 million.  



Receivables Securitization Facility  The Railroad maintains a $650 million, 3-year receivables securitization facility (the Receivables Facility) maturing in July 2019. Under the Receivables Facility, the Railroad sells most of its eligible third-party receivables to Union Pacific Receivables, Inc. (UPRI), a consolidated, wholly-owned, bankruptcy-remote subsidiary that may subsequently transfer, without recourse, an undivided interest in accounts receivable to investors. The investors have no recourse to the Railroad’s other assets except for customary warranty and indemnity claims. Creditors of the Railroad do not have recourse to the assets of UPRI. 



The amount outstanding under the Receivables Facility was $200 million and $0 at September 30, 2017, and December 31, 2016, respectively. The Receivables Facility was supported by $1.1 billion and $1.0 billion of accounts receivable as collateral at September 30, 2017, and December 31, 2016, respectively, which, as a retained interest, is included in accounts receivable, net in our Condensed Consolidated Statements of Financial Position.



The outstanding amount the Railroad is allowed to maintain under the Receivables Facility, with a maximum of $650 million, may fluctuate based on the availability of eligible receivables and is directly affected by business volumes and credit risks, including receivables payment quality measures such as default and dilution ratios. If default or dilution ratios increase one percent, the allowable outstanding amount under the Receivables Facility would not materially change.



The costs of the Receivables Facility include interest, which will vary based on prevailing benchmark and commercial paper rates, program fees paid to participating banks, commercial paper issuance costs, and fees of participating banks for unused commitment availability. The costs of the Receivables Facility are included in interest expense and were $1 million and $2 million for the three months ended September 30, 2017, and 2016, respectively, and $4 million and $5 million for the nine months ended September 30, 2017, and 2016, respectively.

 

 

16


 

12. Properties



The following tables list the major categories of property and equipment, as well as the weighted-average estimated useful life for each category (in years):





 

 

 

 

 

 

 



 

 

 

 

 

 

 

Millions, Except Estimated Useful Life

 

 Accumulated

Net Book

Estimated

As of September 30, 2017

Cost

 Depreciation

Value

Useful Life

Land

$

5,228 

$

N/A

$

5,228 

N/A

Road:

 

 

 

 

 

 

 

  Rail and other track material

 

16,226 

 

5,869 

 

10,357  43 

  Ties

 

10,084 

 

2,863 

 

7,221  33 

  Ballast

 

5,376 

 

1,493 

 

3,883  34 

  Other roadway [a]

 

18,732 

 

3,420 

 

15,312  47 

Total road 

 

50,418 

 

13,645 

 

36,773 

N/A

Equipment:

 

 

 

 

 

 

 

  Locomotives

 

9,309 

 

3,606 

 

5,703  20 

  Freight cars

 

2,254 

 

980 

 

1,274  24 

  Work equipment and other

 

939 

 

263 

 

676  19 

Total equipment 

 

12,502 

 

4,849 

 

7,653 

N/A

Technology and other

 

1,028 

 

441 

 

587  11 

Construction in progress

 

795 

 

 -

 

795 

N/A

Total

$

69,971 

$

18,935 

$

51,036 

N/A

 





 

 

 

 

 

 

 



 

 

 

 

 

 

 

Millions, Except Estimated Useful Life

 

 Accumulated

Net Book

Estimated

As of December 31, 2016

Cost

 Depreciation

Value

Useful Life

Land

$

5,220 

$

      N/A

$

5,220 

N/A

Road:

 

 

 

 

 

 

 

  Rail and other track material

 

15,845 

 

5,722 

 

10,123  40 

  Ties

 

9,812 

 

2,736 

 

7,076  33 

  Ballast

 

5,242 

 

1,430 

 

3,812  34 

  Other roadway [a]

 

18,138 

 

3,226 

 

14,912  47 

Total road 

 

49,037 

 

13,114 

 

35,923 

N/A

Equipment: