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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, 2016



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



As of October 14,  2016, there were 824,112,432 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, 2016 and 2015

3



CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

 



For the Three Months Ended September 30, 2016 and 2015

3



CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

 



For the Nine Months Ended September 30, 2016 and 2015

4



CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

 



For the Nine Months Ended September 30, 2016 and 2015

4



CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (Unaudited)

 



At September 30, 2016 and December 31, 2015

5



CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

 



For the Nine Months Ended September 30, 2016 and 2015

6



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

 



For the Nine Months Ended September 30, 2016 and 2015

7



NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

8

Item 2.

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

23

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

36

Item 4.

Controls and Procedures

36



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,

2016  2015 

Operating revenues:

 

 

 

 

     Freight revenues

$

4,837 

$

5,215 

     Other revenues

 

337 

 

347 

Total operating revenues

 

5,174 

 

5,562 

Operating expenses:

 

 

 

 

     Compensation and benefits

 

1,191 

 

1,267 

     Purchased services and materials

 

566 

 

589 

     Depreciation

 

512 

 

507 

     Fuel

 

392 

 

484 

     Equipment and other rents

 

282 

 

302 

     Other

 

271 

 

205 

Total operating expenses

 

3,214 

 

3,354 

Operating income

 

1,960 

 

2,208 

Other income (Note 6)

 

29 

 

30 

Interest expense

 

(184)

 

(157)

Income before income taxes

 

1,805 

 

2,081 

Income taxes

 

(674)

 

(781)

Net income

$

1,131 

$

1,300 

Share and Per Share (Note 8):

 

 

 

 

     Earnings per share - basic

$

1.36 

$

1.51 

     Earnings per share - diluted

$

1.36 

$

1.50 

     Weighted average number of shares - basic

 

829.0 

 

862.9 

     Weighted average number of shares - diluted

 

832.2 

 

865.8 

Dividends declared per share

$

0.55 

$

0.55 





Condensed Consolidated Statements of Comprehensive Income (Unaudited)

Union Pacific Corporation and Subsidiary Companies







 

 

 

 



 

 

 

 

Millions,

 

 

 

 

for the Three Months Ended September 30,

2016  2015 

Net income

$

1,131 

$

1,300 

Other comprehensive income/(loss):

 

 

 

 

    Defined benefit plans

 

14 

 

17 

    Foreign currency translation

 

(1)

 

(21)

Total other comprehensive income/(loss) [a]

 

13 

 

(4)

Comprehensive income

$

1,144 

$

1,296 



[a]Net of deferred taxes of $(7) million and $3 million during the three months ended September 30, 2016, and 2015, 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,

2016  2015 

Operating revenues:

 

 

 

 

     Freight revenues

$

13,769 

$

15,534 

     Other revenues

 

1,004 

 

1,071 

Total operating revenues

 

14,773 

 

16,605 

Operating expenses:

 

 

 

 

     Compensation and benefits

 

3,564 

 

3,941 

     Purchased services and materials

 

1,705 

 

1,832 

     Depreciation

 

1,518 

 

1,495 

     Fuel

 

1,058 

 

1,589 

     Equipment and other rents

 

857 

 

925 

     Other

 

764 

 

689 

Total operating expenses

 

9,466 

 

10,471 

Operating income

 

5,307 

 

6,134 

Other income (Note 6)

 

152 

 

198 

Interest expense

 

(524)

 

(458)

Income before income taxes

 

4,935 

 

5,874 

Income taxes

 

(1,846)

 

(2,219)

Net income

$

3,089 

$

3,655 

Share and Per Share (Note 8):

 

 

 

 

     Earnings per share - basic

$

3.69 

$

4.19 

     Earnings per share - diluted

$

3.68 

$

4.18 

     Weighted average number of shares - basic

 

836.8 

 

871.5 

     Weighted average number of shares - diluted

 

839.6 

 

874.6 

Dividends declared per share

$

1.65 

$

1.65 





Condensed Consolidated Statements of Comprehensive Income (Unaudited)

Union Pacific Corporation and Subsidiary Companies







 

 

 

 



 

 

 

 

Millions,

 

 

 

 

for the Nine Months Ended September 30,

2016  2015 

Net income

$

3,089 

$

3,655 

Other comprehensive income/(loss):

 

 

 

 

    Defined benefit plans

 

35 

 

45 

    Foreign currency translation

 

(25)

 

(47)

Total other comprehensive income/(loss) [a]

 

10 

 

(2)

Comprehensive income

$

3,099 

$

3,653 



[a]Net of deferred taxes of $(8) million and $(1) million during the nine months ended September 30, 2016, and 2015, 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

2016 

 

2015 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

     Cash and cash equivalents

$

1,909 

 

$

1,391 

     Short-term investments (Note 13)

 

330 

 

 

 -

     Accounts receivable, net (Note 10)

 

1,351 

 

 

1,356 

     Materials and supplies

 

690 

 

 

736 

     Other current assets

 

322 

 

 

647 

Total current assets

 

4,602 

 

 

4,130 

Investments

 

1,446 

 

 

1,410 

Net properties (Note 11)

 

49,939 

 

 

48,866 

Other assets

 

318 

 

 

194 

Total assets

$

56,305 

 

$

54,600 

Liabilities and Common Shareholders' Equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

     Accounts payable and other current liabilities (Note 12)

$

2,850 

 

$

2,612 

     Debt due within one year (Note 14)

 

407 

 

 

594 

Total current liabilities

 

3,257 

 

 

3,206 

Debt due after one year (Note 14)

 

15,205 

 

 

13,607 

Deferred income taxes

 

15,774 

 

 

15,241 

Other long-term liabilities

 

1,785 

 

 

1,844 

Commitments and contingencies (Note 16)

 

 

 

 

 

Total liabilities

 

36,021 

 

 

33,898 

Common shareholders' equity:

 

 

 

 

 

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

 

 

 

 

 

     1,110,997,731 and 1,110,426,354 issued; 825,198,874 and 849,211,436

 

 

 

 

 

     outstanding, respectively

 

2,777 

 

 

2,776 

     Paid-in-surplus

 

4,406 

 

 

4,417 

     Retained earnings

 

31,940 

 

 

30,233 

     Treasury stock

 

(17,654)

 

 

(15,529)

     Accumulated other comprehensive loss (Note 9)

 

(1,185)

 

 

(1,195)

Total common shareholders' equity

 

20,284 

 

 

20,702 

Total liabilities and common shareholders' equity

$

56,305 

 

$

54,600 



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,

2016  2015 

Operating Activities

 

 

 

 

Net income

$

3,089 

$

3,655 

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

 

 

 

 

  Depreciation

 

1,518 

 

1,495 

  Deferred and other income taxes

 

519 

 

355 

  Net gain on non-operating asset dispositions (Note 6)

 

(91)

 

(138)

  Other operating activities, net

 

(177)

 

(33)

  Changes in current assets and liabilities:

 

 

 

 

     Accounts receivable, net

 

 

103 

     Materials and supplies

 

46 

 

(29)

     Other current assets

 

(15)

 

(130)

     Accounts payable and other current liabilities

 

79 

 

(28)

     Income and other taxes

 

494 

 

375 

Cash provided by operating activities

 

5,467 

 

5,625 

Investing Activities

 

 

 

 

Capital investments

 

(2,604)

 

(3,323)

Purchases of short-term investments (Note 13)

 

(580)

 

 -

Maturities of short-term investments (Note 13)

 

250 

 

 -

Proceeds from asset sales

 

116 

 

191 

Other investing activities, net

 

(1)

 

(118)

Cash used in investing activities

 

(2,819)

 

(3,250)

Financing Activities

 

 

 

 

Common share repurchases (Note 17)

 

(2,100)

 

(2,795)

Debt issued (Note 14)

 

1,883 

 

2,243 

Dividends paid

 

(1,382)

 

(1,877)

Debt repaid

 

(481)

 

(436)

Other financing activities, net

 

(50)

 

(18)

Cash used in financing activities

 

(2,130)

 

(2,883)

Net change in cash and cash equivalents

 

518 

 

(508)

Cash and cash equivalents at beginning of year

 

1,391 

 

1,586 

Cash and cash equivalents at end of period

$

1,909 

$

1,078 

Supplemental Cash Flow Information

 

 

 

 

  Non-cash investing and financing activities:

 

 

 

 

     Capital investments accrued but not yet paid

$

106 

$

161 

     Common shares repurchased but not yet paid

 

65 

 

84 

     Capital lease financings

 

 -

 

13 

  Cash paid for:

 

 

 

 

     Income taxes, net of refunds

$

(877)

$

(1,505)

     Interest, net of amounts capitalized

 

(540)

 

(491)



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, 2015

1,110.1  (226.7)

 

 

$   2,775 

 

$   4,321 

 

$   27,367 

 

$   (12,064)

 

$   (1,210)

 

$    21,189 

Net income

 

 

 

 

 -

 

 -

 

3,655 

 

 -

 

 -

 

3,655 

Other comp. loss

 

 

 

 

 -

 

 -

 

 -

 

 -

 

(2)

 

(2)

Conversion, stock option
  exercises, forfeitures, and other

0.3  0.7 

 

 

 

79 

 

 -

 

(5)

 

 -

 

75 

Share repurchases (Note 17)

 -

(28.7)

 

 

 -

 

 -

 

 -

 

(2,879)

 

 -

 

(2,879)

Cash dividends declared
   ($1.65 per share)

 -

 -

 

 

 -

 

 -

 

(1,439)

 

 -

 

 -

 

(1,439)

Balance at September 30, 2015

1,110.4  (254.7)

 

 

$   2,776 

 

$   4,400 

 

$   29,583 

 

$   (14,948)

 

$   (1,212)

 

$    20,599 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 comp. income

 

 

 

 

 -

 

 -

 

 -

 

 -

 

10 

 

10 

Conversion, stock option
  exercises, forfeitures, and other

0.6  0.8 

 

 

 

(11)

 

 -

 

40 

 

 -

 

30 

Share repurchases (Note 17)

 -

(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 



[a]AOCI = Accumulated Other Comprehensive Income/(Loss) (Note 9)

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 2015 Annual Report on Form 10-K. Our Consolidated Statement of Financial Position at December 31, 2015, is derived from audited financial statements. The results of operations for the nine months ended September 30, 2016, are not necessarily indicative of the results for the entire year ending December 31, 2016.  



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 standard is effective for annual reporting periods beginning after December 15, 2017. 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. The Company is currently evaluating the impact of this standard on our consolidated financial position, results of operations, and cash flows.



In March 2016, the FASB issued Accounting Standards Update No. 2016-09 (ASU 2016-09) Compensation - Stock Compensation (Topic 718), which simplifies the accounting for income taxes related to stock-based compensation. We elected to early adopt ASU 2016-09 in the first quarter of 2016 with an effective date of January 1, 2016. As a result of the adoption, we recognized excess tax benefits in the Condensed Consolidated Statements of Income and the Condensed Consolidated Statements of Cash Flows of $5 million and $21 million for the three and nine months ended September 30, 2016, respectively. Prior periods have not been adjusted.

 

8


 

3. 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

2016  2015 

 

2016  2015 

Agricultural Products

$

937 

$

880 

 

$

2,664 

$

2,686 

Automotive

 

485 

 

529 

 

 

1,483 

 

1,605 

Chemicals

 

875 

 

882 

 

 

2,617 

 

2,684 

Coal

 

728 

 

898 

 

 

1,741 

 

2,492 

Industrial Products

 

855 

 

979 

 

 

2,519 

 

2,966 

Intermodal

 

957 

 

1,047 

 

 

2,745 

 

3,101 

Total freight revenues

$

4,837 

$

5,215 

 

$

13,769 

$

15,534 

Other revenues

 

337 

 

347 

 

 

1,004 

 

1,071 

Total operating revenues

$

5,174 

$

5,562 

 

$

14,773 

$

16,605 

 

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 $564 million and $554 million, respectively, for the three months ended September 30, 2016, and September 30, 2015, and $1,649 million and $1,655 million, respectively, for the nine months ended September 30, 2016, and September 30, 2015.

 

4. 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

2016  2015 

 

2016  2015 

Stock-based compensation, before tax:

 

 

 

 

 

 

 

 

 

     Stock options

$

$

 

$

13 

$

14 

     Retention awards

 

15 

 

20 

 

 

48 

 

65 

Total stock-based compensation, before tax

$

20 

$

25 

 

$

61 

$

79 

Excess tax benefits from equity compensation plans

$

$

 

$

21 

$

57 

 

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

2016  2015 

Risk-free interest rate

 

1.3% 

 

1.3% 

Dividend yield

 

2.9% 

 

1.8% 

Expected life (years)

 

5.1 

 

5.1 

Volatility

 

23.2% 

 

23.4% 

Weighted-average grant-date fair value of options granted

$

11.36 

$

22.30 

 

 

9


 

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, 2016, is presented below:



 

 

 

 

 

 

 



 

 

 

 

 

 

 



Options (thous.)

Weighted-Average
Exercise Price

Weighted-Average Remaining Contractual Term

Aggregate Intrinsic Value (millions)

Outstanding at January 1, 2016

5,571 

$

66.69  5.4 

yrs.

$

114 

Granted

1,672 

 

75.52 

 

N/A

 

N/A

Exercised

(620)

 

33.99 

 

N/A

 

N/A

Forfeited or expired

(79)

 

103.93 

 

N/A

 

N/A

Outstanding at September 30, 2016

6,544 

$

71.59  6.0 

yrs.

$

192 

Vested or expected to vest at September 30, 2016

6,467 

$

71.39  6.0 

yrs.

$

191 

Options exercisable at September 30, 2016

3,996 

$

61.26  4.3 

yrs.

$

153 

 

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, 2016, are subject to performance or market-based vesting conditions.



At September 30, 2016, there was $23 million of unrecognized compensation expense related to nonvested stock options, which is expected to be recognized over a weighted-average period of 1.5 years. Additional information regarding stock option exercises appears in the table below:





 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



Three Months Ended

 

Nine Months Ended



September 30,

 

September 30,

Millions

2016  2015 

 

2016  2015 

Intrinsic value of stock options exercised

$

15 

$

 

$

32 

$

42 

Cash received from option exercises

 

11 

 

 

 

24 

 

23 

Treasury shares repurchased for employee payroll taxes

 

(4)

 

(1)

 

 

(9)

 

(10)

Tax benefit realized from option exercises

 

 

 

 

12 

 

16 

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, 2016, were as follows:





 

 

 



 

 

 



Shares
(thous.)

Weighted-Average
Grant-Date Fair Value

Nonvested at January 1, 2016

2,900 

$

80.01 

Granted

835 

 

75.76 

Vested

(792)

 

57.53 

Forfeited

(131)

 

88.88 

Nonvested at September 30, 2016

2,812 

$

84.67 

 

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, 2016, there was $98 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 2016, our Board of Directors approved performance stock unit grants. The basic terms of these performance stock units are identical to those granted in

 

10


 

February 2014 and February 2015, except for different annual return on invested capital (ROIC) performance targets and the addition of 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 plan, 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 plan, 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 2016 grant were as follows:





 

 



 

 



2016 

Dividend per share per quarter

$

0.55 

Risk-free interest rate at date of grant

 

0.9% 

 

Changes in our performance retention awards during the nine months ended September 30, 2016, were as follows:





 

 

 



 

 

 



Shares
(thous.)

Weighted-Average
Grant-Date Fair Value

Nonvested at January 1, 2016

1,255 

$

82.98 

Granted

503 

 

70.09 

Vested

(530)

 

62.57 

Forfeited

(65)

 

91.98 

Nonvested at September 30, 2016

1,163 

$

86.20 

 

At September 30, 2016, there was $17 million of total unrecognized compensation expense related to nonvested performance retention awards, which is expected to be recognized over a weighted-average period of 1.4 years. This expense is subject to achievement of the performance measures established for the performance stock unit grants.

 

5. 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

 

11


 

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





 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



Three Months Ended

 

Nine Months Ended



September 30,

 

September 30,

Millions

2016  2015 

 

2016  2015 

Service cost

$

21 

$

30 

 

$

64 

$

78 

Interest cost

 

36 

 

41 

 

 

107 

 

121 

Expected return on plan assets

 

(67)

 

(63)

 

 

(201)

 

(191)

Amortization of:

 

 

 

 

 

 

 

 

 

      Actuarial loss

 

21 

 

27 

 

 

62 

 

79 

Net periodic pension cost

$

11 

$

35 

 

$

32 

$

87 



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





 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



Three Months Ended

 

Nine Months Ended



September 30,

 

September 30,

Millions

2016  2015 

 

2016  2015 

Service cost

$

 -

$

 

$

$

Interest cost

 

 

 

 

 

10 

Amortization of:

 

 

 

 

 

 

 

 

 

      Prior service credit

 

(2)

 

(3)

 

 

(7)

 

(8)

      Actuarial loss

 

 

 

 

 

10 

Net periodic OPEB cost

$

$

 

$

$

14 



Cash Contributions



For the nine months ended September 30, 2016, we made $100 million of voluntary cash contributions to the qualified pension plan. Any additional contributions made in the fourth quarter of 2016 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, 2016, we do not have minimum cash funding requirements for 2016.

 

6. Other Income



Other income included the following:







 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



Three Months Ended

 

Nine Months Ended



September 30,

 

September 30,

Millions,

2016  2015  2016  2015 

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

$

$

10 

 

$

91 

$

138 

Rental income

 

23 

 

25 

 

 

71 

 

71 

Interest income

 

 

 

 

 

Non-operating environmental costs and other

 

 -

 

(7)

 

 

(18)

 

(15)

Total

$

29 

$

30 

 

$

152 

$

198 



[a]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.

[b]2015 includes $113 million related to a real estate sale in the second quarter.

 

 

12


 

7. Income Taxes



UPC is not currently under examination by the Internal Revenue Service (IRS).  IRS examinations have been completed and settled for all years prior to 2011, and the statute of limitations bars any additional tax assessments for those years.



Several state tax authorities are examining our state tax returns for years 2006 through 2012.

 

At September 30, 2016, we had a net liability for unrecognized tax benefits of $90 million.

 

8. 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

2016  2015 

 

2016  2015 

Net income

$

1,131 

$

1,300 

 

$

3,089 

$

3,655 

Weighted-average number of shares outstanding:    

 

 

 

 

 

 

 

 

 

    Basic

 

829.0 

 

862.9 

 

 

836.8 

 

871.5 

    Dilutive effect of stock options

 

1.6 

 

1.3 

 

 

1.4 

 

1.6 

    Dilutive effect of retention shares and units 

 

1.6 

 

1.6 

 

 

1.4 

 

1.5 

Diluted

 

832.2 

 

865.8 

 

 

839.6 

 

874.6 

Earnings per share – basic

$

1.36 

$

1.51 

 

$

3.69 

$

4.19 

Earnings per share – diluted

$

1.36 

$

1.50 

 

$

3.68 

$

4.18 

Stock options excluded as their inclusion would be anti-dilutive

 

0.9 

 

0.9 

 

 

2.4 

 

0.8 

 

9. Accumulated Other Comprehensive Income/(Loss)



Reclassifications out of accumulated other comprehensive income/(loss) for the three and nine months ended September 30, 2016, and 2015, were as follows (net of tax):





 

 

 

 

 

 



 

 

 

 

 

 

Millions

Defined
benefit
plans

Foreign
currency
translation

Total

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)



 

 

 

 

 

 

Balance at July 1, 2015

$

(1,133)

$

(75)

$

(1,208)

Other comprehensive income/(loss) before reclassifications

 

 -

 

(21)

 

(21)

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

 

17 

 

 -

 

17 

Net quarter-to-date other comprehensive income/(loss),
net of taxes of $3 million

 

17 

 

(21)

 

(4)

Balance at September 30, 2015

$

(1,116)

$

(96)

$

(1,212)



[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 5 Retirement Plans for additional details.



 

13


 



 

 

 

 

 

 



 

 

 

 

 

 

Millions

Defined
benefit
plans

Foreign
currency
translation

Total

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)



 

 

 

 

 

 

Balance at January 1, 2015

$

(1,161)

$

(49)

$

(1,210)

Other comprehensive income/(loss) before reclassifications

 

(5)

 

(47)

 

(52)

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

 

50 

 

 -

 

50 

Net year-to-date other comprehensive income/(loss),
net of taxes of $(1) million

 

45 

 

(47)

 

(2)

Balance at September 30, 2015

$

(1,116)

$

(96)

$

(1,212)



[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 5 Retirement Plans for additional details.

 

10. 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, 2016, and December 31, 2015, our accounts receivable were reduced by $7 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 September 30, 2016, and December 31, 2015, receivables classified as other assets were reduced by allowances of $29 million and $11 million, respectively.



Receivables Securitization Facility –The Railroad maintains a $650 million, 3-year receivables securitization facility (the Receivables Facility), which now matures in July 2019, after we completed a renewal in August 2016 with comparable terms. 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 $400 million at both September 30, 2016, and December 31, 2015. The Receivables Facility was supported by $1.0 billion and $0.9 billion of accounts receivable as collateral at September 30, 2016, and December 31, 2015, 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

 

14


 

fees of participating banks for unused commitment availability. The costs of the Receivables Facility are included in interest expense and were $2 million and $1 million for the three months ended September 30, 2016, and 2015, respectively, and $5 million and $4 million for the nine months ended September 30, 2016, and 2015, respectively.

 

11. 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, 2016

Cost

 Depreciation

Value

Useful Life

Land

$

5,207 

$

N/A

$

5,207 

N/A

Road:

 

 

 

 

 

 

 

  Rail and other track material

 

15,699 

 

5,656 

 

10,043  40 

  Ties

 

9,761 

 

2,712 

 

7,049  33 

  Ballast

 

5,197 

 

1,406 

 

3,791  34 

  Other roadway [a]

 

17,888 

 

3,172 

 

14,716  47 

Total road 

 

48,545 

 

12,946 

 

35,599 

N/A

Equipment:

 

 

 

 

 

 

 

  Locomotives

 

9,433 

 

3,859 

 

5,574  20 

  Freight cars

 

2,241 

 

969 

 

1,272  24 

  Work equipment and other

 

900 

 

226 

 

674  19 

Total equipment 

 

12,574 

 

5,054 

 

7,520 

N/A

Technology and other

 

960 

 

397 

 

563  11 

Construction in progress

 

1,050 

 

 -

 

1,050 

N/A

Total

$

68,336 

$

18,397 

$

49,939 

N/A

 





 

 

 

 

 

 

 



 

 

 

 

 

 

 

Millions, Except Estimated Useful Life

 

 Accumulated

Net Book

Estimated

As of December 31, 2015

Cost

 Depreciation

Value

Useful Life

Land

$

5,195 

$

N/A

$

5,195 

N/A

Road:

 

 

 

 

 

 

 

  Rail and other track material

 

15,236 

 

5,495 

 

9,741  37 

  Ties

 

9,439 

 

2,595 

 

6,844  33 

  Ballast

 

5,024 

 

1,350 

 

3,674  34 

  Other roadway [a]

 

17,374 

 

3,021 

 

14,353  47 

Total road 

 

47,073 

 

12,461 

 

34,612 

N/A

Equipment:

 

 

 

 

 

 

 

  Locomotives

 

9,027 

 

3,726 

 

5,301  19 

  Freight cars

 

2,203 

 

962 

 

1,241  24 

  Work equipment and other

 

897 

 

191 

 

706  19 

Total equipment 

 

12,127 

 

4,879 

 

7,248 

N/A

Technology and other

 

919 

 

358 

 

561  11 

Construction in progress

 

1,250 

 

 -

 

1,250 

N/A

Total

$

66,564 

$

17,698 

$

48,866 

N/A



[a]Other roadway includes grading, bridges and tunnels, signals, buildings, and other road assets.

 

 

15


 

12. Accounts Payable and Other Current Liabilities