Union Pacific Corporation — FY 2017 Form 10-K
Reporting period: Year ended December 31, 2017; filed February 9, 2018. The filing covers Union Pacific’s integrated railroad business across 23 western U.S. states, with routes connecting major ports, domestic markets, Canada, and Mexico.
Financial and operating results
| Metric | 2017 | 2016 | Change / context |
|---|---|---|---|
| Operating revenue | $21.240 billion | $19.941 billion | Up 7% |
| Freight revenue | $19.837 billion | $18.601 billion | Up 7%; volume, pricing, and fuel surcharges contributed |
| Operating income | $8.061 billion | $7.272 billion | Up 11% reported; 2017 included a $212 million non-cash tax-related reduction to operating expenses |
| Operating ratio | 62.0% | 63.5% | Improved 1.5 points reported; adjusted ratio was 63.0% versus 63.5% |
| Net income | $10.712 billion | $4.233 billion | 2017 included a $5.9 billion non-cash tax benefit from U.S. tax reform |
| Diluted EPS | $13.36 reported; $5.79 adjusted | $5.07 reported | Adjusted EPS rose 14%; adjusted results exclude specified tax-reform effects |
| Cash from operations | $7.230 billion | $7.525 billion | Down; management cited timing of tax payments, partly offset by higher income |
| Cash capital investments | $3.238 billion | $3.505 billion | Lower year over year |
| Free cash flow | $2.162 billion | $2.253 billion | Company-defined non-GAAP measure, after investing cash flows and dividends |
| Total debt | $16.944 billion | $15.007 billion | Up; debt-to-capital fell to 40.5% from 43.0%, largely reflecting higher equity after tax remeasurement |
- Revenue carloads increased 2% to 8.588 million, following a 7% decline in 2016. Industrial Products carloads rose 12% and Coal rose 6%; Automotive fell 3%, Agricultural Products and Chemicals each fell 2%, and Intermodal volume was approximately flat.
- Freight revenue by group: Industrial Products $4.078 billion, Intermodal $3.835 billion, Agricultural Products $3.685 billion, Chemicals $3.596 billion, Coal $2.645 billion, and Automotive $1.998 billion.
- Higher fuel prices increased fuel expense by $334 million; average diesel price rose 22% to $1.81 per gallon. Fuel efficiency improved 2%.
- Network service weakened: average train speed fell 5% to 25.4 mph and terminal dwell time increased 8% to 30.3 hours. Flooding, Hurricane Harvey, operational challenges, and PTC testing affected fluidity.
- Cash and cash equivalents were $1.275 billion. The company reported a working-capital surplus at year-end but did not state its amount in the supplied text. It had $1.7 billion available under its revolving credit facility, with no borrowings, and $500 million outstanding under a $650 million receivables facility.
- Shareholder distributions included $1.982 billion of dividends and $4.013 billion of cash share repurchases. The company reported returning approximately $6 billion through dividends and repurchases. It repurchased 36.4 million shares during 2017.
Material changes and unusual items
- The Tax Cuts and Jobs Act reduced the federal corporate rate from 35% to 21%, effective January 1, 2018. Remeasurement of deferred taxes produced a $5.9 billion non-cash income-tax benefit and sharply increased reported 2017 net income and EPS. Some tax accounting remained provisional and subject to refinement during 2018.
- Adjusted net income was $4.638 billion and adjusted diluted EPS was $5.79, excluding the specified tax-reform effects; these are non-GAAP measures and are not directly interchangeable with reported results.
- A workforce reduction plan eliminated approximately 460 management and 250 union positions and generated an $86 million pretax charge. Management said actions were substantially complete and no further plan charges were expected.
- Other income included a $65 million litigation settlement for back rent and $57 million from a real estate sale in the third quarter.
- 2017 capital investment was approximately $3.1 billion in management’s overview; the cash capital-investments schedule reports $3.238 billion. PTC investment through year-end was approximately $2.6 billion cumulatively, including $336 million of 2017 cash capital investment.
Outlook, risks, and contingencies
- For 2018, management expected low-single-digit volume growth, continued margin improvement from pricing and productivity, and approximately $3.3 billion of capital investment. It expected around 60 new locomotives and initial construction on a new Southern Region classification yard.
- Management estimated tax reform could generate approximately $1 billion of additional 2018 operating cash, assuming normal business conditions, with potential uses including returns-focused capital projects, dividends, and repurchases.
- The quarterly dividend was increased to $0.73 per share in February 2018. The company said it expected to continue paying dividends.
- Key risks include economic and commodity-demand swings; network congestion and severe weather; competition from other railroads and trucking, waterways, and pipelines; fuel-price volatility and the lag in surcharge recovery; labor negotiations and possible work stoppages; hazardous-material incidents; regulation and environmental liabilities; cybersecurity and technology risks; and dependence on key locomotive and rail suppliers.
- PTC implementation was subject to a December 31, 2018 deadline, potentially extendable to 2020 if specified criteria were met; integration with other railroads remained a challenge.
- Approximately 85% of employees were union-represented. Most tentative agreements had been ratified, but negotiations or mediation remained unresolved for some unions; two unions had rejected tentative agreements in early February 2018.
- Environmental remediation liabilities were $196 million across 315 identified sites. The filing describes personal-injury liabilities of $285 million and asbestos liabilities of $99 million; estimated settlement ranges were $285–$310 million and $99–$105 million, respectively.
- In antitrust fuel-surcharge litigation, the court denied class certification in October 2017; plaintiffs obtained permission to pursue an interlocutory appeal. A separate Oxbow matter was in discovery. The company denied the allegations and said it did not expect these matters to have a material adverse effect.
- The filing also describes a $125,000 state civil-penalty demand related to a 2015 diesel-fuel release in Illinois; the company was evaluating the demand. Management said recorded environmental obligations were not expected to materially affect consolidated results, financial condition, or liquidity.
Investor verification priorities
- Reconcile reported 2017 earnings with adjusted earnings and verify the final accounting for the Tax Act’s provisional effects.
- Track whether expected 2018 volume growth, margin improvement, and the $3.3 billion capital plan are achieved, especially as service metrics recover.
- Review debt maturities, lease obligations, and liquidity availability; total debt rose while buybacks and dividends remained substantial.
- Monitor labor negotiations, PTC completion and related costs, and the status and financial exposure of antitrust, environmental, and personal-injury matters.
- Compare commodity trends and fuel-surcharge recovery with management’s outlook, particularly for energy-related shipments and fuel-price changes.
Audit and controls: Deloitte & Touche issued an unqualified opinion on the financial statements and on internal control over financial reporting.