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Union Pacific 10-Q 2015
20150930 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, 2015

 

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 16,  2015, there were 854,120,634 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, 2015 and 2014

3

 

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

 

 

For the Three Months Ended September 30, 2015 and 2014

3

 

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

 

 

For the Nine Months Ended September 30, 2015 and 2014

4

 

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

 

 

For the Nine Months Ended September 30, 2015 and 2014

4

 

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (Unaudited)

 

 

At September 30, 2015 and December 31, 2014

5

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

 

 

For the Nine Months Ended September 30, 2015 and 2014

6

 

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

 

 

For the Nine Months Ended September 30, 2015 and 2014

7

 

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

8

Item 2. 

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

22

Item 3. 

Quantitative and Qualitative Disclosures About Market Risk

35

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,

2015 
2014 

Operating revenues:

 

 

 

 

     Freight revenues

$

5,215 

$

5,819 

     Other revenues

 

347 

 

363 

Total operating revenues

 

5,562 

 

6,182 

Operating expenses:

 

 

 

 

     Compensation and benefits

 

1,267 

 

1,287 

     Purchased services and materials

 

589 

 

650 

     Fuel

 

484 

 

882 

     Depreciation

 

507 

 

481 

     Equipment and other rents

 

302 

 

310 

     Other

 

205 

 

242 

Total operating expenses

 

3,354 

 

3,852 

Operating income

 

2,208 

 

2,330 

Other income (Note 6)

 

30 

 

20 

Interest expense

 

(157)

 

(144)

Income before income taxes

 

2,081 

 

2,206 

Income taxes

 

(781)

 

(836)

Net income

$

1,300 

$

1,370 

Share and Per Share (Note 8):

 

 

 

 

     Earnings per share - basic

$

1.51 

$

1.53 

     Earnings per share - diluted

$

1.50 

$

1.53 

     Weighted average number of shares - basic

 

862.9 

 

893.2 

     Weighted average number of shares - diluted

 

865.8 

 

896.9 

Dividends declared per share

$

0.55 

$

0.50 

 

 

Condensed Consolidated Statements of Comprehensive Income (Unaudited)

Union Pacific Corporation and Subsidiary Companies

 

 

 

 

 

 

 

 

 

 

 

 

Millions,

 

 

 

 

for the Three Months Ended September 30,

2015 
2014 

Net income

$

1,300 

$

1,370 

Other comprehensive income/(loss):

 

 

 

 

    Defined benefit plans

 

17 

 

11 

    Foreign currency translation

 

(21)

 

(5)

Total other comprehensive income/(loss) [a]

 

(4)

 

Comprehensive income

$

1,296 

$

1,376 

 

[a] Net of deferred taxes of $(3) million and $3 million during the three months ended September 30, 2015, and 2014, 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,

2015 
2014 

Operating revenues:

 

 

 

 

     Freight revenues

$

15,534 

$

16,766 

     Other revenues

 

1,071 

 

1,069 

Total operating revenues

 

16,605 

 

17,835 

Operating expenses:

 

 

 

 

     Compensation and benefits

 

3,941 

 

3,787 

     Purchased services and materials

 

1,832 

 

1,893 

     Fuel

 

1,589 

 

2,726 

     Depreciation

 

1,495 

 

1,415 

     Equipment and other rents

 

925 

 

938 

     Other

 

689 

 

696 

Total operating expenses

 

10,471 

 

11,455 

Operating income

 

6,134 

 

6,380 

Other income (Note 6)

 

198 

 

80 

Interest expense

 

(458)

 

(415)

Income before income taxes

 

5,874 

 

6,045 

Income taxes

 

(2,219)

 

(2,296)

Net income

$

3,655 

$

3,749 

Share and Per Share (Note 8):

 

 

 

 

     Earnings per share - basic

$

4.19 

$

4.16 

     Earnings per share - diluted

$

4.18 

$

4.14 

     Weighted average number of shares - basic

 

871.5 

 

900.9 

     Weighted average number of shares - diluted

 

874.6 

 

904.8 

Dividends declared per share

$

1.65 

$

1.41 

 

 

Condensed Consolidated Statements of Comprehensive Income (Unaudited)

Union Pacific Corporation and Subsidiary Companies

 

 

 

 

 

 

 

 

 

 

 

 

Millions,

 

 

 

 

for the Nine Months Ended September 30,

2015 
2014 

Net income

$

3,655 

$

3,749 

Other comprehensive income/(loss):

 

 

 

 

    Defined benefit plans

 

45 

 

42 

    Foreign currency translation

 

(47)

 

 -

Total other comprehensive income/(loss) [a]

 

(2)

 

42 

Comprehensive income

$

3,653 

$

3,791 

 

[a] Net of deferred taxes of $1 million and $20 million during the nine months ended September 30, 2015, and 2014, 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

2015 

 

2014 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

     Cash and cash equivalents

$

1,078 

 

$

1,586 

     Accounts receivable, net (Note 10)

 

1,508 

 

 

1,611 

     Materials and supplies

 

741 

 

 

712 

     Current deferred income taxes

 

218 

 

 

277 

     Other current assets

 

397 

 

 

493 

Total current assets

 

3,942 

 

 

4,679 

Investments

 

1,373 

 

 

1,390 

Net properties (Note 11)

 

48,149 

 

 

46,272 

Other assets

 

299 

 

 

375 

Total assets

$

53,763 

 

$

52,716 

Liabilities and Common Shareholders' Equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

     Accounts payable and other current liabilities (Note 12)

$

2,987 

 

$

3,303 

     Debt due within one year (Note 14)

 

521 

 

 

462 

Total current liabilities

 

3,508 

 

 

3,765 

Debt due after one year (Note 14)

 

12,798 

 

 

11,018 

Deferred income taxes

 

15,062 

 

 

14,680 

Other long-term liabilities

 

1,796 

 

 

2,064 

Commitments and contingencies (Note 16)

 

 

 

 

 

Total liabilities

 

33,164 

 

 

31,527 

Common shareholders' equity:

 

 

 

 

 

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

 

 

 

 

 

     1,110,430,736 and 1,110,100,423 issued; 855,717,446 and 883,366,476

 

 

 

 

 

     outstanding, respectively

 

2,776 

 

 

2,775 

     Paid-in-surplus

 

4,400 

 

 

4,321 

     Retained earnings

 

29,583 

 

 

27,367 

     Treasury stock

 

(14,948)

 

 

(12,064)

     Accumulated other comprehensive loss (Note 9)

 

(1,212)

 

 

(1,210)

Total common shareholders' equity

 

20,599 

 

 

21,189 

Total liabilities and common shareholders' equity

$

53,763 

 

$

52,716 

 

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,

2015 
2014 

Operating Activities

 

 

 

 

Net income

$

3,655 

$

3,749 

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

 

 

 

 

  Depreciation

 

1,495 

 

1,415 

  Deferred income taxes and unrecognized tax benefits

 

355 

 

289 

  Net gain on non-operating asset dispositions

 

(138)

 

(15)

  Other operating activities, net

 

(33)

 

18 

  Changes in current assets and liabilities:

 

 

 

 

     Accounts receivable, net

 

103 

 

(221)

     Materials and supplies

 

(29)

 

(83)

     Other current assets

 

(130)

 

(81)

     Accounts payable and other current liabilities

 

(28)

 

216 

     Income and other taxes

 

375 

 

71 

Cash provided by operating activities

 

5,625 

 

5,358 

Investing Activities

 

 

 

 

Capital investments

 

(3,323)

 

(3,226)

Proceeds from asset sales

 

191 

 

59 

Other investing activities, net

 

(118)

 

(158)

Cash used in investing activities

 

(3,250)

 

(3,325)

Financing Activities

 

 

 

 

Debt issued (Note 14)

 

2,243 

 

2,588 

Common share repurchases (Note 17)

 

(2,795)

 

(2,312)

Dividends paid (Note 12)

 

(1,877)

 

(1,186)

Debt repaid

 

(436)

 

(678)

Other financing activities, net

 

(18)

 

10 

Cash used in financing activities

 

(2,883)

 

(1,578)

Net change in cash and cash equivalents

 

(508)

 

455 

Cash and cash equivalents at beginning of year

 

1,586 

 

1,432 

Cash and cash equivalents at end of period

$

1,078 

$

1,887 

Supplemental Cash Flow Information

 

 

 

 

  Non-cash investing and financing activities:

 

 

 

 

     Capital investments accrued but not yet paid

$

161 

$

92 

     Common shares repurchased but not yet paid

 

84 

 

33 

     Capital lease financings

 

13 

 

 -

     Cash dividends declared but not yet paid (Note 12)

 

 -

 

440 

  Cash paid for:

 

 

 

 

     Income taxes, net of refunds

$

(1,505)

$

(1,907)

     Interest, net of amounts capitalized

 

(491)

 

(460)

 

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, 2014

1,109.7 
(197.7)

 

 

$   2,774 

 

$   4,210 

 

$   23,901 

 

$    (8,910)

 

$     (750)

 

$   21,225 

Net income

 

 

 

 

 -

 

 -

 

3,749 

 

 -

 

 -

 

3,749 

Other comp. income

 

 

 

 

 -

 

 -

 

 -

 

 -

 

42 

 

42 

Conversion, stock option
 exercises, forfeitures, and other

0.4 
2.8 

 

 

 

89 

 

 -

 

62 

 

 -

 

152 

Share repurchases (Note 17)

 -

(24.3)

 

 

 -

 

 -

 

 -

 

(2,345)

 

 -

 

(2,345)

Cash dividends declared
   ($1.41 per share)

 -

 -

 

 

 -

 

 -

 

(1,270)

 

 -

 

 -

 

(1,270)

Balance at September 30, 2014

1,110.1 
(219.2)

 

 

$   2,775 

 

$   4,299 

 

$   26,380 

 

$  (11,193)

 

$     (708)

 

$   21,553 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 

 

[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 2014 Annual Report on Form 10-K. Our Consolidated Statement of Financial Position at December 31, 2014, is derived from audited financial statements. The results of operations for the nine months ended September 30, 2015, are not necessarily indicative of the results for the entire year ending December 31, 2015.

 

The Condensed Consolidated Financial Statements are presented in accordance with GAAP as codified in the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC). Certain prior period amounts have been disaggregated to provide more detail and conform to the current period financial statement presentation.  

 

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 April 2015, the FASB issued Accounting Standards Update No. 2015-03 (ASU 2015-03), Interest - Imputation of Interest (Subtopic 835-30). ASU 2015-03 changes the presentation of debt issuance costs in the financial statements to present such costs as a direct deduction from the related debt liability rather than as an asset. Amortization of debt issuance costs will be reported as interest expense. This standard is effective for annual reporting periods beginning after December 15, 2015. ASU 2015-03 will not have a material impact on our consolidated financial position, results of operations, or cash flows.

 

 

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

2015 
2014 

 

2015 
2014 

Agricultural Products

$

880 

$

915 

 

$

2,686 

$

2,759 

Automotive

 

529 

 

527 

 

 

1,605 

 

1,560 

Chemicals

 

882 

 

936 

 

 

2,684 

 

2,742 

Coal

 

898 

 

1,099 

 

 

2,492 

 

3,049 

Industrial Products

 

979 

 

1,161 

 

 

2,966 

 

3,302 

Intermodal

 

1,047 

 

1,181 

 

 

3,101 

 

3,354 

Total freight revenues

$

5,215 

$

5,819 

 

$

15,534 

$

16,766 

Other revenues

 

347 

 

363 

 

 

1,071 

 

1,069 

Total operating revenues

$

5,562 

$

6,182 

 

$

16,605 

$

17,835 

 

Although our revenues are principally derived from customers domiciled in the U.S., the ultimate points of origination or destination for some products transported by us are outside the U.S. Each of our commodity groups includes revenue from shipments to and from Mexico. Included in the above table are revenues from our Mexico business which amounted to $554 million and $579 million, respectively, for the three months ended September 30, 2015, and September 30, 2014 and $1.7 billion for both the nine months ended September 30, 2015, and September 30, 2014.

 

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

2015 
2014 

 

2015 
2014 

Stock-based compensation, before tax:

 

 

 

 

 

 

 

 

 

     Stock options

$

$

 

$

14 

$

17 

     Retention awards

 

20 

 

23 

 

 

65 

 

74 

Total stock-based compensation, before tax

$

25 

$

28 

 

$

79 

$

91 

Excess tax benefits from equity compensation plans

$

$

 

$

57 

$

110 

 

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

2015 
2014 

Risk-free interest rate

 

1.3% 

 

1.6% 

Dividend yield

 

1.8% 

 

2.1% 

Expected life (years)

 

5.1 

 

5.2 

Volatility

 

23.4% 

 

30.0% 

Weighted-average grant-date fair value of options granted

$

22.30 

$

20.18 

 

The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant; the dividend yield is calculated as the ratio of dividends paid per share of common stock to the stock price on the date

 

9


 

of grant; the expected life is based on historical and expected exercise behavior; and 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, 2015, is presented below:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Options (thous.)

Weighted-Average
Exercise Price

Weighted-Average Remaining Contractual Term

Aggregate Intrinsic Value (millions)

Outstanding at January 1, 2015

5,387 

$

53.56 
5.8 

yrs.

$

353 

Granted

934 

 

122.85 

 

N/A

 

N/A

Exercised

(569)

 

42.25 

 

N/A

 

N/A

Forfeited or expired

(30)

 

90.66 

 

N/A

 

N/A

Outstanding at September 30, 2015

5,722 

$

65.80 
6.1 

yrs.

$

161 

Vested or expected to vest at September 30, 2015

5,665 

$

65.43 
5.8 

yrs.

$

161 

Options exercisable at September 30, 2015

3,819 

$

48.34 
4.5 

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, 2015, are subject to performance or market-based vesting conditions.

 

At September 30, 2015, there was $21 million of unrecognized compensation expense related to nonvested stock options, which is expected to be recognized over a weighted-average period of 1.3 years. Additional information regarding stock option exercises appears in the table below:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

September 30,

 

September 30,

Millions

2015 
2014 

 

2015 
2014 

Intrinsic value of stock options exercised

$

$

16 

 

$

42 

$

174 

Cash received from option exercises

 

 

12 

 

 

23 

 

43 

Treasury shares repurchased for employee payroll taxes

 

(1)

 

(5)

 

 

(10)

 

(18)

Tax benefit realized from option exercises

 

 

 

 

16 

 

66 

Aggregate grant-date fair value of stock options vested

 

 -

 

 -

 

 

19 

 

17 

 

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, 2015, were as follows:

 

 

 

 

 

 

 

 

 

 

Shares
(thous.)

Weighted-Average
Grant-Date Fair Value

Nonvested at January 1, 2015

3,403 

$

64.39 

Granted

521 

 

122.79 

Vested

(913)

 

47.11 

Forfeited

(85)

 

72.34 

Nonvested at September 30, 2015

2,926 

$

79.95 

 

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, 2015, there was $101 million of total unrecognized compensation expense related to nonvested retention awards, which is expected to be recognized over a weighted-average period of 1.7 years.

 

Performance Retention Awards – In February 2015, our Board of Directors approved performance stock unit grants. Other than different performance targets, the basic terms of these performance stock units are identical to those granted in February 2013, and February 2014, including using annual return on invested capital (ROIC) as the performance measure. 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.

 

10


 

 

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. 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. 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 2015 grant were as follows:

 

 

 

 

 

 

 

 

2015 

Dividend per share per quarter

$

0.55 

Risk-free interest rate at date of grant

 

0.8% 

 

Changes in our performance retention awards during the nine months ended September 30, 2015, were as follows:

 

 

 

 

 

 

 

 

 

 

Shares
(thous.)

Weighted-Average
Grant-Date Fair Value

Nonvested at January 1, 2015

1,583 

$

65.33 

Granted

339 

 

117.42 

Vested

(580)

 

54.38 

Forfeited

(30)

 

76.26 

Nonvested at September 30, 2015

1,312 

$

83.38 

 

At September 30, 2015, there was $25 million of total unrecognized compensation expense related to nonvested performance retention awards, which is expected to be recognized over a weighted-average period of 0.9 years. This expense is subject to achievement of the ROIC levels 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 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.

 

 

11


 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

September 30,

 

September 30,

Millions

2015 
2014 

 

2015 
2014 

Service cost

$

30 

$

17 

 

$

78 

$

52 

Interest cost

 

41 

 

41 

 

 

121 

 

118 

Expected return on plan assets

 

(63)

 

(57)

 

 

(191)

 

(172)

Amortization of:

 

 

 

 

 

 

 

 

 

      Actuarial loss

 

27 

 

18 

 

 

79 

 

53 

Net periodic pension cost

$

35 

$

19 

 

$

87 

$

51 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

September 30,

 

September 30,

Millions

2015 
2014 

 

2015 
2014 

Service cost

$

$

 -

 

$

$

Interest cost

 

 

 

 

10 

 

10 

Amortization of:

 

 

 

 

 

 

 

 

 

      Prior service credit

 

(3)

 

(3)

 

 

(8)

 

(9)

      Actuarial loss

 

 

 

 

10 

 

Net periodic OPEB cost

$

$

 

$

14 

$

11 

 

Cash Contributions

 

For the nine months ended September 30, 2015, we made $100 million of cash contributions to the qualified pension plan. Any additional contributions made in the fourth quarter of 2015 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, 2015, we do not have minimum cash funding requirements for 2015.

 

6. Other Income

 

Other income included the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

September 30,

 

September 30,

Millions,

2015 
2014 
2015 
2014 

Net gain on non-operating asset dispositions [a]

$

10 

$

 

$

138 

$

16 

Rental income

 

25 

 

25 

 

 

71 

 

72 

Interest income

 

 

 

 

 

Non-operating environmental costs and other [b]

 

(7)

 

(11)

 

 

(15)