<PAGE> COVER
FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549-1004
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
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.)
Martin Tower, Eighth and Eaton Avenues, Bethlehem, Pennsylvania
(Address of principal executive offices)
18018
(Zip Code)
(610) 861-3200
(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 X NO
-------- --------
As of April 30, 1997, there were 246,903,137 shares of the Registrant's
Common Stock outstanding.
<PAGE> INDEX
UNION PACIFIC CORPORATION
INDEX
PART I. FINANCIAL INFORMATION
------------------------------ Page Number
Item 1: Condensed Consolidated Financial Statements:
CONDENSED STATEMENT OF CONSOLIDATED INCOME - For the
Three Months Ended March 31, 1997 and 1996............ 1
CONDENSED STATEMENT OF CONSOLIDATED FINANCIAL POSITION -
At March 31, 1997 and December 31, 1996............... 2
CONDENSED STATEMENT OF CONSOLIDATED CASH FLOWS - For
the Three Months Ended March 31, 1997 and 1996........ 4
CONDENSED STATEMENT OF CONSOLIDATED RETAINED EARNINGS -
For the Three Months Ended March 31, 1997 and 1996.... 4
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.... 5
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations..................... 10
PART II. OTHER INFORMATION
---------------------------
Item 4: Submission of Matters to a Vote of Security
Holders................................................. 17
Item 6: Exhibits and Reports on Form 8-K........................ 17
Signature........................................................ 18
<PAGE> 1
PART I. FINANCIAL INFORMATION
- ------------------------------
Item 1. Condensed Consolidated Financial Statements
<TABLE>
<CAPTION>
UNION PACIFIC CORPORATION AND SUBSIDIARY COMPANIES
CONDENSED STATEMENT OF CONSOLIDATED INCOME
For the Three Months Ended March 31, 1997 and 1996
--------------------------------------------------
(Amounts in Millions, Except Ratio and Per Share Amounts)
(Unaudited)
1997 1996
-------- --------
<S> <C> <C>
Operating Revenues (Note 2)................. $ 2,810 $ 1,968
-------- --------
Operating Expenses (Note 2):
Salaries, wages and employee benefits..... 1,026 773
Equipment and other rents................. 322 202
Fuel and utilities (Note 4)............... 296 164
Depreciation and amortization ............ 258 172
Purchased services........................ 200 125
Materials and supplies.................... 157 117
Other costs............................... 206 150
-------- --------
Total.................................. 2,465 1,703
-------- --------
Operating Income............................ 345 265
Other Income................................ 38 18
Interest Expense (Notes 2, 3 and 4)......... (150) (117)
Corporate Expenses.......................... (28) (28)
-------- --------
Income before Income Taxes.................. 205 138
Income Taxes................................ (77) (31)
-------- --------
Income from Continuing Operations........... 128 107
Income from Discontinued Operations
(Note 3).................................. -- 49
-------- --------
Net Income.................................. $ 128 $ 156
======== ========
Earnings Per Share (Note 7):
Income from Continuing Operations......... $ 0.52 $ 0.52
Income from Discontinued Operations....... -- 0.24
-------- --------
Net Income................................ $ 0.52 $ 0.76
======== ========
Weighted Average Number of Shares........... 247.8 206.3
Cash Dividends Per Share.................... $ 0.43 $ 0.43
Ratio of Earnings to Fixed Charges (Note 5). 2.0 1.9
</TABLE>
<PAGE> 2
<TABLE>
<CAPTION>
UNION PACIFIC CORPORATION AND SUBSIDIARY COMPANIES
CONDENSED STATEMENT OF CONSOLIDATED FINANCIAL POSITION
(Millions of Dollars)
(Unaudited)
March 31, December 31,
ASSETS 1997 1996
- ------ --------- ------------
<S> <C> <C>
Current Assets:
Cash and temporary investments............... $ 94 $ 191
Accounts receivable ......................... 699 494
Inventories.................................. 275 304
Other current assets......................... 386 345
--------- ---------
Total Current Assets.................... 1,454 1,334
--------- ---------
Investments:
Investments in and advances to affiliated
companies................................. 377 387
Other investments............................ 237 226
--------- ---------
Total Investments....................... 614 613
--------- ---------
Properties:
Railroad:
Road and other............................. 22,908 22,665
Equipment.................................. 6,711 6,573
--------- ---------
Total Railroad.......................... 29,619 29,238
Trucking..................................... 729 736
Other........................................ 128 123
--------- ---------
Total Properties........................ 30,476 30,097
Accumulated depreciation..................... (5,230) (5,053)
--------- ---------
Properties - Net ........................ 25,246 25,044
--------- ---------
Excess Acquisition Costs - Net.................. 695 700
Other Assets.................................... 177 223
--------- ---------
Total Assets............................. $ 28,186 $ 27,914
========= =========
</TABLE>
<PAGE> 3
<TABLE>
<CAPTION>
UNION PACIFIC CORPORATION AND SUBSIDIARY COMPANIES
CONDENSED STATEMENT OF CONSOLIDATED FINANCIAL POSITION
------------------------------------------------------
(Amounts in Millions, Except Share and Per Share Amounts)
(Unaudited)
March 31, December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1997 1996
--------- ------------
<S> <C> <C>
Current Liabilities:
Accounts payable................................ $ 736 $ 705
Accrued wages and vacation...................... 413 427
Accrued casualty costs.......................... 315 332
Dividends and interest.......................... 278 293
Income and other taxes.......................... 243 250
Debt due within one year........................ 164 127
Other current liabilities (Note 2).............. 960 922
--------- --------
Total Current Liabilities.................... 3,109 3,056
--------- --------
Debt Due After One Year........................... 8,075 7,900
Deferred Income Taxes............................. 5,995 5,939
Accrued Casualty Costs............................ 794 730
Retiree Benefits Obligation....................... 732 720
Other Long-Term Liabilities (Notes 2 and 6)....... 1,242 1,344
Stockholders' Equity:
Common stock, $2.50 par value, authorized
500,000,000 shares, 275,060,633 shares issued
in 1997, 274,595,151 shares issued in 1996.... 688 686
Paid-in surplus................................. 4,017 4,009
Retained earnings............................... 5,283 5,262
Treasury stock, at cost, 28,216,972 shares in
1997, 27,935,628 shares in 1996............... (1,749) (1,732)
--------- --------
Total Stockholders' Equity.................... 8,239 8,225
v --------- --------
Total Liabilities and Stockholders' Equity.... $ 28,186 $ 27,914
========= =========
</TABLE>
<PAGE> 4
<TABLE>
<CAPTION>
UNION PACIFIC CORPORATION AND SUBSIDIARY COMPANIES
CONDENSED STATEMENT OF CONSOLIDATED CASH FLOWS
----------------------------------------------
For the Three Months Ended March 31, 1997 and 1996
(Millions of Dollars)
(Unaudited)
1997 1996
------- -------
<S> <C> <C>
Cash from continuing operations:
Net income......................................... $ 128 $ 156
Non-cash charges to income:
Depreciation and amortization.................. 258 172
Deferred income taxes.......................... 35 (54)
Other - net.................................... (6) 79
Income from discontinued operations (Note 3)....... -- (49)
Changes in current assets and liabilities.......... (164) (43)
------ ------
Cash continuing from operations................ 251 261
------ ------
Cash flows from investing activities:
Capital investments................................ (407) (259)
Other - net........................................ (27) 13
------ ------
Cash used in investing activities.............. (434) (246)
------ ------
Cash flows from equity and financing activities:
Dividends paid..................................... (105) (89)
Debt repaid........................................ (348) (678)
Financings......................................... 560 668
Other - net........................................ (21) (67)
------ ------
Cash provided by (used in) equity and
financing activities......................... 86 (166)
------ ------
Net decrease in cash and temporary investments.. $ (97) $ (151)
======= =======
</TABLE>
<TABLE>
<CAPTION>
CONDENSED STATEMENT OF CONSOLIDATED RETAINED EARNINGS
For the Three Months Ended March 31, 1997 and 1996
--------------------------------------------------
(Amounts in Millions, Except Per Share Amounts)
(Unaudited)
1997 1996
------- -------
<S> <C> <C>
Balance at Beginning of Year......................... $ 5,262 $ 5,327
Net Income........................................... 128 156
------- -------
Total......................................... 5,390 5,483
Dividends Declared ($0.43 per share in
both 1997 and 1996)............................. (107) (89)
------- -------
Balance at End of Period........................ $ 5,283 $ 5,394
======= =======
</TABLE>
<PAGE> 5
UNION PACIFIC CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Responsibilities for Financial Statements - The condensed consolidated
financial statements are unaudited and reflect all adjustments (consisting
only of normal and recurring adjustments) that are, in the opinion of
management, necessary for a fair presentation of the financial position
and operating results for the interim periods. The Condensed Statement of
Consolidated Financial Position at December 31, 1996 is derived from
audited financial statements. The condensed consolidated financial
statements should be read in conjunction with the consolidated financial
statements and notes thereto contained in the Union Pacific Corporation
(the Corporation or UPC) Annual Report to Shareholders incorporated by
reference in the Corporation's Annual Report on Form 10-K for the year
ended December 31, 1996. The results of operations for the three months
ended March 31, 1997 are not necessarily indicative of the results for the
entire year ending December 31, 1997. Certain 1996 amounts have been
reclassified to conform to the 1997 financial statement presentation.
2. Acquisition of Southern Pacific Rail Corporation (Southern Pacific or SP)-
UPC consummated the acquisition of Southern Pacific in September 1996 by
acquiring the remaining 75% of Southern Pacific common shares not
previously owned by the Corporation for $25 per SP share in cash, 0.4065
shares of the Corporation's common stock per SP share or a combination
thereof, at the holder's election and subject to proration. As a result of
the initial cash tender offer in 1995 for 25% of Southern Pacific's
outstanding shares and the acquisition of the remaining 75% of Southern
Pacific shares, 60% of the outstanding Southern Pacific shares were
converted into 38.1 million shares of UPC common stock, and the remaining
40% of the outstanding shares were acquired for $1,562 million in cash.
UPC initially funded the cash portion of the acquisition with credit
facility borrowings, a portion of which was subsequently refinanced with
long-term borrowings.
The acquisition of Southern Pacific has been accounted for using the
purchase method. Results for the first quarter of 1996 include equity
income equal to 25% of Southern Pacific's net income during that period,
reflecting UPC's ownership of SP. SP's results were fully consolidated
with the Corporation effective October 1, 1996. The purchase price was
determined as follows and was based on a market value of the Corporation's
common stock of $65.00 per share, the value at the time of the
announcement of the merger agreement between the Corporation and Southern
Pacific:
(in millions)
Initial 25% investment in SP on September 15, 1995,
including equity income $ 990
Second step cash purchase (23.4 million shares at $25.00
per SP share) on September 11, 1996 586
Merger exchange of SP shares (93.7 million SP shares converted
into 38.1 million shares of UPC common stock at
$65.00 per UP share) on September 11, 1996 2,476
Transaction costs 45
------
Purchase Price $4,097
------
<PAGE> 6
The Southern Pacific purchase price has been allocated as follows:
(in millions)
Purchase price to be allocated $ 4,097
Pre-tax merger costs:
Current 317
Long-term 746
Equity acquired (1,083)
-------
Unallocated purchase price $ 4,077
-------
Purchase price allocation:
Property and equipment $ 6,160
Debt and preference share revaluation (220)
Deferred income taxes (including the effect
of merger costs) (1,863)
-------
Total $ 4,077
-------
In connection with the acquisition and subsequent consolidation of Union
Pacific Railroad Company's (UPRR) and Southern Pacific's rail operations
(collectively, the Railroad), the Railroad plans to eliminate duplicate
positions, relocate certain functions, merge or dispose of redundant
facilities and dispose of certain rail lines. The Railroad is also
canceling uneconomical and duplicative SP contracts and has repaid certain
of Southern Pacific's debt obligations. The Railroad has recognized an
estimated $1,063 million liability in the Southern Pacific purchase price
allocation for costs associated with these activities.
Through March 31, 1997, the Railroad charged $85 million to these
reserves, principally comprising costs to reduce Southern Pacific's
workforce. The Railroad expects the remaining acquisition-related
payments to be made in 1997 through 1999, as the Southern Pacific rail
system is integrated with UPRR and labor negotiations are completed.
In addition, the Railroad expects to incur approximately $250 million in
acquisition-related costs for severing or relocating UPRR employees and
disposing of certain UPRR facilities. Results for the quarter ended March
31, 1997 include $6 million in acquisition-related severance and
relocation costs. The Railroad anticipates charging the remaining
acquisition-related payments for UPRR employees and facilities to
operating expense in 1997 through 1999, as definitive plans are refined
and communicated, relocation and other costs are incurred, and labor
negotiations are completed.
The amounts recorded for Southern Pacific-related costs and estimated
costs for UPRR severance, relocation and facility closings are subject to
refinement as more information becomes available and the Railroad's
management finalizes merger implementation plans. The status of union
negotiations, the actual portion of terminated or relocated UPRR and SP
employees, and the resolution of certain litigation and other claims will
be determined by September 1997. As a result, the amounts included in
purchase accounting reserves--and to be expensed by the Railroad in the
future--could change. Any revision required is not expected to be
material to the Corporation's financial position or ongoing results of
operations.
<PAGE> 7
The pro forma results presented below have been prepared to reflect the
consummation of the Southern Pacific acquisition and the subsequent pro-
rata distribution of the shares of Union Pacific Resource Group Inc.
(Resources) owned by the Corporation to UPC's stockholders (see Note 3 to
the Condensed Consolidated Financial Statements), as if such events
occurred on January 1, 1996. The pro forma results presented below do not
reflect synergies expected to result from the integration of UPRR's and
Southern Pacific's rail operations, and, accordingly, do not account for
any potential increase in revenue or operating income, estimated cost
savings, or one-time costs associated with the elimination of UPRR's
duplicate facilities and relocation or severance payments to UPRR's
employees. The effects of the foregoing could be substantial. This
unaudited pro forma information is not necessarily indicative of the
results of operations that might have occurred had the Southern Pacific
acquisition and the distribution of the shares of Resources owned by the
Corporation actually occurred on the date indicated, or of future results
of operations of the resulting entity.
--------------------------------------------------------
Millions of Dollars Three-Months Ended
Except Per Share Amount March 31, 1996
--------------------------------------------------------
Operating Revenues $ 2,748
Operating Income 286
Net Income 78
Net Income per Share 0.32
3. Resources - In July 1995, the Corporation's Board of Directors approved a
formal plan to divest UPC's natural resources business through an initial
public offering (IPO) by Resources, followed by a pro-rata distribution of
the Resources shares owned by the Corporation to its stockholders (the
Spin-Off).
The IPO of 42.5 million Resources shares at $21 per share was completed in
October 1995 and generated net proceeds of $844 million. At that time,
Resources distributed to UPC a dividend of $1,621 million ($912 million in
cash, $650 million in 8.5% notes, which were repaid on the Spin-Off date,
and a $59 million intercompany balance owed by the Corporation). UPC used
the cash proceeds from the IPO dividend (including the notes receivable
repayment) to reduce outstanding commercial paper.
In September 1996, the Corporation's Board of Directors declared a special
dividend consisting of the shares of Resources common stock owned by UPC.
As a result of the Spin-Off, each of the Corporation's stockholders
received 0.846946 of a share of Resources common stock for each UPC share
of common stock held by such stockholder at the September 26, 1996 record
date for the distribution.
Resources' results prior to the Spin-Off were reported as a discontinued
operation in the Corporation's consolidated financial statements. UPC's
results for the first quarter of 1996 include income from discontinued
operations of $49 million (approximately 83% of Resources' net income for
the quarter), net of income taxes of $27 million.
<PAGE> 8
4. Financial Instruments - The Corporation uses derivative financial
instruments in limited instances for other than trading purposes to manage
risk as it relates to fuel prices and interest rates. Where the
Corporation has fixed interest rates or fuel prices through the use of
swaps, futures or forward contracts, the Corporation has mitigated the
downside risk of adverse price and rate movements; however, it has also
limited future gains from favorable movements.
The Corporation addresses market risk related to these instruments by
selecting instruments whose value fluctuations correlate highly with the
underlying item being hedged. Credit risk related to derivative financial
instruments, which is minimal, is managed by requiring minimum credit
standards for counterparties and periodic settlements. The total credit
risk associated with the Corporation's counterparties was $32 million at
March 31, 1997. The Corporation has not been required to provide, nor has
it received, any significant amount of collateral relating to its hedging
activity.
The fair market value of the Corporation's derivative financial instrument
positions at March 31, 1997 was determined based upon current fair market
values as quoted by recognized dealers or developed based upon the present
value of future cash flows discounted at the applicable zero coupon U.S.
treasury rate and swap spread.
Interest Rates - The Corporation controls its overall risk to fluctuations
in interest rates by managing the proportion of fixed and floating rate
debt instruments within its debt portfolio over a given period.
Derivatives are used in limited circumstances as one of the tools to
obtain the targeted mix. The mix of fixed and floating rate debt is
largely managed through the issuance of targeted amounts of such debt as
debt maturities occur or as incremental borrowings are required. The
Corporation also obtains additional flexibility in managing interest cost
and the interest rate mix within its debt portfolio by issuing callable
fixed rate debt securities.
At March 31, 1997, the Corporation had outstanding interest rate swaps on
$263 million of notional principal amount of debt (3% of the total debt
portfolio) with a gross fair market value asset position of $32 million
and a gross fair market value liability position of $16 million. These
contracts mature over the next one to eight years. Interest rate hedging
activity increased interest expense by $3 million in the first quarter of
1997 and by $2 million in the first quarter of 1996.
Fuel - Over the past three years, fuel costs approximated 10% of the
Corporation's total operating expenses. As a result of the significance
of the fuel costs and the historical volatility of fuel prices, the
Corporation's transportation subsidiaries periodically use swaps, futures
and forward contracts to mitigate the impact of fuel price volatility. The
intent of this program is to protect the Corporation's operating margins
and overall profitability from adverse fuel price changes.
At March 31, 1997, the Railroad had hedged 12% of its estimated remaining
1997 diesel fuel consumption at $0.53 per gallon on a Gulf Coast basis,
while Overnite Transportation Company had not hedged any of its 1997 fuel
requirements. At March 31, 1997, the Railroad had outstanding swap
agreements covering its fuel purchases of $73 million, with gross and net
asset positions of $1 million. Fuel hedging had no impact on first quarter
<PAGE> 9
1997 fuel expense and lowered first quarter 1996 fuel costs by $4
million.
5. Ratio of Earnings to Fixed Charges - The ratio of earnings to fixed
charges has been computed on a total enterprise basis. Earnings represent
income from continuing operations less equity in undistributed earnings of
unconsolidated affiliates, plus income taxes and fixed charges. Fixed
charges represent interest, amortization of debt discount and expense, and
the estimated interest portion of rental charges.
6. Commitments and Contingencies - There are various lawsuits pending against
the Corporation and certain of its subsidiaries. The Corporation is also
subject to Federal, state and local environmental laws and regulations,
and is currently participating in the investigation and remediation of
numerous sites. The Corporation and its subsidiaries also periodically
enter into financial and other commitments in connection with their
businesses, and have retained certain contingent liabilities upon the
disposition of formerly-owned operations.
The Corporation does not anticipate that the ultimate resolution of the
matters described in Part I, Item 3. Legal Proceedings of the
Corporation's 1996 Annual Report on Form 10-K will have a material adverse
effect on the Corporation's consolidated financial condition or operating
results.
7. Accounting Pronouncements - The Financial Accounting Standards Board
(FASB) issued Statement No. 125, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities," which provides
consistent standards for determining if transfers of financial assets are
sales or secured borrowings, and which revises the accounting rules for
liabilities extinguished by an in-substance defeasance. UPC adopted
Statement No. 125 on January 1, 1997 with no impact on the Corporation's
operating results or financial condition.
The American Institute of Certified Public Accountants issued Statement
of Position 96-1, "Environmental Remediation Liabilities," effective for
1997, which clarifies the accounting for environmental remediation
liabilities. Adoption had no significant impact on UPC's operating results
or financial condition.
In February 1997, the FASB issued Statement No. 128, "Earnings per Share,"
which simplifies the standards for computing earnings per share (EPS) and
makes them comparable to international EPS standards. Statement No. 128
replaces the standards for computing and presenting EPS found in
Accounting Principles Board Opinion No. 15, "Earnings per Share."
Statement No. 128 requires dual presentation of Basic and Diluted EPS on
the face of the income statement for all entities with complex capital
structures. Statement No. 128 will be effective for UPC's 1997 Annual
Report, including interim periods to be presented therein; however,
earlier application is not permitted. Had Statement No. 128 been
effective for the first quarter of 1997, UPC's Basic and Diluted EPS
(based on income from continuing operations and net income) would both
have been $0.52 per share.
<PAGE> 10
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
UNION PACIFIC CORPORATION AND SUBSIDIARY COMPANIES
RESULTS OF OPERATIONS
Quarter Ended March 31, 1997 Compared to March 31, 1996
CORPORATE REOGRANIZATION
During 1996, Union Pacific Corporation (UPC or the Corporation) completed
several strategic transactions that refocused the Corporation's business
objectives on its core transportation operations.
Natural Resources Divestiture - In July 1995, UPC's Board of Directors
approved a formal plan to dispose of its natural resources business by an
initial public offering (IPO) by Union Pacific Resources Group Inc.
(Resources) of 17% of its common stock, followed by a distribution of UPC's
interest in Resources to the Corporation's stockholders on a tax-free, pro-
rata basis (the Spin-Off)(see Note 3 to the Condensed Consolidated Financial
Statements). In October 1995, Resources completed the IPO, and, after UPC's
receipt of a favorable Internal Revenue Service ruling as to the tax-free
nature of the Spin-Off in September 1996, UPC completed its divestiture of
Resources. The Corporation's share of Resources' first quarter 1996 financial
results are presented in discontinued operations for that period.
Southern Pacific Rail Corporation (Southern Pacific or SP) Acquisition - In
September 1995, UPC acquired 25% of Southern Pacific, and, in September 1996,
it acquired the remaining 75%. The aggregate Southern Pacific purchase price
was $4.1 billion ($2.5 billion in UPC common stock and $1.6 billion in cash).
The acquisition of Southern Pacific was accounted for as a purchase. The
statement of consolidated income for the first quarter of 1996 includes equity
income equal to 25% of Southern Pacific's net income, reflecting UPC's
ownership of Southern Pacific during such period. For the first quarter of
1997, Southern Pacific's results were fully consolidated with the
Corporation's results (see Note 2 to the Condensed Consolidated Financial
Statements).
As a result of the SP acquisition, UPC now operates the largest rail system in
the United States, with 36,000 route miles linking Pacific Coast and Gulf
Coast ports to the Midwest and eastern U.S. gateways. The Corporation also
owns Overnite Transportation Company (Overnite), a major interstate trucking
company specializing in less-than-truckload (LTL) shipments.
CONSOLIDATED - The Corporation reported net income of $128 million or $0.52
per share for the first quarter of 1997, compared to 1996 net income of $156
million or $0.76 per share. Results for 1997 included the effects of the
completion of the Southern Pacific acquisition. Net income for 1996 included
83% of Resources' net income in discontinued operations.
RESULTS OF CONTINUING OPERATIONS
Consolidated - In the first quarter of 1997, the Corporation reported income
from continuing operations of $128 million ($0.52 per share), compared to
results for the first quarter of 1996 of $107 million ($0.52 per share). This
earnings increase resulted primarily from continued strong financial
performance at Union Pacific Railroad Company (UPRR), additional operating
income from Southern Pacific (UPRR and SP are collectively referred to as the
Railroad), and improved operating results at Overnite.
<PAGE> 11
Operating revenues increased $842 million (43%) to $2.81 billion in 1997,
reflecting increased volumes at the Railroad (largely from the addition of
Southern Pacific volumes), slightly offset by lower volumes at Overnite.
Operating expenses increased $762 million (45%) to $2.47 billion in 1997. The
addition of Southern Pacific operations slightly offset by merger-related
workforce reductions and base business productivity improvements caused
salaries, wages and employee benefits to increase $253 million. The addition
of Southern Pacific operations and inflation were primary factors causing
increases in equipment and other rents ($120 million); purchased services ($75
million); materials and supplies ($40 million); casualty accruals ($39
million); and other taxes ($11 million). Fuel and utility costs rose $132
million (80%), principally the result of increased volumes at the Railroad and
a 21% increase in fuel prices. Depreciation charges rose $86 million,
primarily due to the addition of Southern Pacific properties and UPC's
continued reinvestment in its equipment and rail infrastructure.
Consolidated operating income advanced $80 million (30%) to $345 million in
1997, principally because of improved results at the Railroad and Overnite
($61 million and $20 million, respectively). Other income rose $20 million,
primarily reflecting the Railroad's sale of its Escanaba line. Interest
expense increased $33 million, the result of higher debt levels associated
with the Southern Pacific acquisition, partially offset by the favorable
impact of applying to debt reduction the proceeds of Resources notes payable
repayment (see Note 3 to the Condensed Consolidated Financial Statements).
Income taxes increased $46 million to $77 million, primarily reflecting higher
income before income taxes and the absence of a first quarter 1996 one-time
favorable tax settlement at the Railroad ($20 million).
Railroad - The Railroad earned $170 million in the first quarter of 1997,
compared to $166 million a year ago. Earnings improvements reflected base
business growth and the addition of Southern Pacific volumes, offset by
incremental interest costs incurred in 1997 ($25 million reduction in net
income) associated with the completion of the SP acquisition and the
consolidation of SP's debt, the impact of a 21% increase in fuel prices ($27
million reduction in net income), and one-time SP merger-related costs ($9
million reduction in net income). Both periods included the impact of severe
weather ($11 million reduction in net income in 1997 and $34 million reduction
in net income in 1996), while the first quarter of 1996 included the effects
of a 17-day General Motors brake plant strike (the GM Strike)($7 million
reduction in net income).
Operating revenues grew $885 million (53%) to $2.56 billion in 1997. This
increase primarily relates to an $866 million (54%) increase in commodity
revenue, reflecting the addition of Southern Pacific volumes, base business
growth and a 1% increase in average commodity revenue per car to $1,151 per
car, resulting from a longer average length of haul and a shift in commodity
mix. Total carloadings grew 52% (approximately 728,000 cars).
On a pro forma basis, assuming the Southern Pacific acquisition had been
completed at the beginning of 1996, operating revenues for 1997 would have
grown $105 million (4%), primarily reflecting a $97 million (4%) increase in
commodity revenue. Compared to pro forma first quarter 1996 carloadings, first
quarter 1997 carloadings would have advanced nearly 27,000 cars (1%) and
average commodity revenue per car would have grown 3% to $1,165 per car,
detailed as follows:
<PAGE> 12
Agricultural Products: Compared to pro forma 1996 amounts, agricultural
products commodity revenue was essentially unchanged at $395 million.
Carloadings declined 2% to 240,000 cars, primarily the result of a 20%
decrease in wheat volumes--reflecting strong worldwide export competition.
Wheat declines were offset by improvements in shipments of sweeteners (18%),
meals and oils (8%) and rice products (12%). Average commodity revenue per
car increased 3%, the result of price increases and a shift to longer-haul
traffic.
Automotive: Compared to pro forma 1996 amounts, automotive commodity revenue
rose 5% to $237 million, as carloadings increased 6% on continued auto
industry sales growth and the absence of the first quarter 1996 GM Strike.
Finished autos and auto parts carloadings rose 4% and 9%, respectively.
Average commodity revenue per car declined 1%, as auto parts volumes outpaced
the growth in finished vehicle shipments.
Chemicals: Compared to pro forma 1996 amounts, chemicals carloadings advanced
3% to 237,000 cars and commodity revenue increased $10 million (2%) to $438
million. The growth in chemicals volume resulted principally from strong
plastics and soda ash demand. Average commodity revenue per car was unchanged
from 1996.
Energy (Primarily Coal): Compared to pro forma 1996 amounts, energy commodity
revenue rose 15% to $512 million in 1997, driven by a 9% increase in
carloadings and a 5% increase in average commodity revenue per car. Volume
increases reflected continued growth in demand from both domestic and foreign
utilities for low-sulfur, Powder River Basin (PRB) coal, improved train cycle
times and train capacity, and the absence of severe winter weather in 1996 in
the PRB region. The Railroad averaged 25.1 trains per day in 1997 out of the
PRB, up from 23.5 trains per day in 1996. The Railroad's use of distributed
power and its continued investment in aluminum coal cars further enhanced PRB
coal volumes. Average commodity revenue per car improvements resulted from a
longer average length of haul related to the SP integration.
Industrial Products: Compared to pro forma 1996 amounts, industrial products
carloadings decreased 12% and commodity revenue remained unchanged at $481
million. Volume declines resulted primarily from the Railroad's sale of its
Escanaba line. Average commodity revenue per car improved 14%, the result of
shedding the Railroad's metallic ore business in connection with this line
sale.
Intermodal: Compared to pro forma 1996 amounts, intermodal commodity revenue
rose 3% to $414 million as a 5% increase in carloadings--the result of new
business and strong economic conditions--was offset by a 2% customer-mix-
related decrease in average commodity revenue per car.
Operating expenses rose $824 million (59%) to $2.21 billion in 1997. The
addition of Southern Pacific's operations, base rail volume growth and
inflation were the primary factors causing increases in equipment and other
rents ($118 million); purchased services ($88 million); materials and supplies
($45 million); casualty accruals ($38 million); and other taxes ($13 million).
Salaries, wages and employee benefits rose $284 million, as the effect of the
SP acquisition was partially countered by merger-related workforce reductions
and base business productivity improvements (largely increased train weight
and improved crew management). Fuel and utility costs rose $135 million, the
result of increased volumes and a 21% increase in fuel prices, slightly offset
by an improved fuel consumption rate. Depreciation charges rose $87 million,
primarily due to the addition of Southern Pacific properties and the
Railroad's continued reinvestment
<PAGE> 13
in its equipment and rail infrastructure.
Operating income improved $61 million (21%) to $353 million in 1997, while the
operating ratio increased to 86.2 in 1997 from 82.6 last year, reflecting the
addition of SP's operations. On a pro forma basis, assuming the Southern
Pacific acquisition had been completed at the beginning of 1996, the
Railroad's operating ratio for the first quarter of 1996 would have been 87.3.
Interest expense increased $40 million to $138 million, principally from
higher debt levels associated with the completion of the Southern Pacific
acquisition, while other income increased $19 million, the result of the
Escanaba line sale. Income taxes increased $37 million to $98 million,
primarily reflecting higher income before income taxes and the absence of a
one-time favorable tax settlement in the first quarter of 1996 ($20 million).
Trucking - During 1996, Overnite implemented several strategic initiatives
aimed at better matching its operations to the current trucking industry
business environment. Actions taken included workforce reductions, service
center consolidations, centralization of the linehaul management process and
pricing initiatives targeting Overnite's lowest margin customers. Primarily
as a result of these initiatives, Overnite reduced its net loss from $17
million in the first quarter of 1996 to $4 million in the first quarter of
1997. Results for both periods included goodwill amortization of $5 million.
Overnite's operating revenues decreased $41 million (16%) to $214 million, as
a 28% decrease in volumes more than offset a 15% increase in average prices--
resulting from Overnite's pricing initiatives. Lower volumes reflected a 24%
decrease in LTL tonnage and a 54% decrease in truckload volumes.
Operating expenses decreased $61 million (22%) to $219 million. Salaries,
wages and employee benefit costs decreased $33 million (20%) to $136 million,
reflecting workforce reductions and lower volumes, partially offset by wage
and benefit inflation. A reduced use of intermodal rail service and contract
linehaul carriers caused a $13 million (53%) decrease in purchased services.
Fuel costs declined $3 million, as a 13% increase in fuel prices was more than
offset by a 26% volume-related reduction in fuel consumption. Lower volumes
and spending controls caused decreases in materials and supplies ($4 million),
operating taxes and licenses ($3 million) and administrative expenses ($5
million). Overnite's operating loss declined $20 million to $5 million in the
first quarter of 1997, while Overnite's operating ratio (including goodwill
amortization) improved to 102.2 in 1997 from 109.7 in 1996.
Corporate Services and Other Operations - Expenses related to Corporate
Services and Other Operations (consisting of corporate expenses, third-party
interest charges, intercompany interest allocations, other income and income
taxes related to the Corporation's holding company operations, and the results
of other operating units) decreased $4 million to $38 million in 1997. This
decrease largely reflects lower Corporate interest costs, the result of
applying to debt reduction the proceeds of Resources notes payable repayment.
Other operating units generated an operating loss of $3 million in the first
quarter of 1997, compared to an operating loss of $2 million in 1996.
RESULTS OF DISCONTINUED OPERATIONS
Resources reported net income of $59 million in the first quarter of 1996.
UPC recognized its share of Resources' net income (approximately 83%) in
discontinued operations in 1996.
<PAGE> 14
CHANGES IN FINANCIAL CONDITION AND OTHER DEVELOPMENTS
FINANCIAL CONDITION - During the first three months of 1997, cash from
continuing operations was $251 million, compared to $261 million in 1996.
This $10 million decrease primarily reflects higher cash payments for income
taxes and merger costs offset by increased income from continuing operations
and a higher proportion of non-cash charges included in income.
Cash used in investing activities was $434 million in the first quarter of
1997 compared to $246 million in 1996. This increase primarily reflects higher
Southern Pacific-related capital spending and the absence of dividends to UPC
on the Resources stock held by the Corporation ($10 million).
Cash provided by equity and financing activities was $86 million in the first
quarter of 1997 compared to cash used in equity and financing activities of
$166 million in 1996. This change in cash principally reflects higher net
borrowings ($222 million) and higher dividends to UPC shareholders ($16
million)--resulting from the 38.1 million shares issued in the Southern
Pacific acquisition. The ratio of debt to debt plus equity increased to 50.0%
at March 31, 1997, compared to 49.4% at December 31, 1996. This change
resulted from the increase in debt levels from year-end 1996.
OTHER MATTERS
Southern Pacific Integration
Labor: Under the conditions imposed by the Surface Transportation Board of the
U.S. Department of Transportation in connection with the Southern Pacific
acquisition, labor agreements between the Railroad and the unions must be
negotiated before the UPRR and Southern Pacific rail systems can be fully
integrated. The Railroad has begun negotiations with the union leadership
representing Southern Pacific's workforce and expects union agreements to be
ratified in 1997 and 1998. To date, the leadership of certain regional
operating, shopcraft, carmen and clerical unions (collectively representing
approximately 45% of Southern Pacific's unionized workforce) have negotiated
agreements relating to the consolidation and coordination of UPRR's and
Southern Pacific's operations. The terms of ratified and pending labor
agreements are not expected to have a material adverse effect on the
Corporation's results of operations.
Benefits: The Railroad has begun to realize benefits from the SP acquisition.
Examples of these benefits include the following: (a) a five mile per hour
increase in the average speed of SP trains; (b) a dramatic decrease in transit
times for lumber shipments from the Pacific Northwest to the Midwest; (c) the
introduction of a new premium intermodal service linking Oakland to Chicago,
with plans to institute other customer-responsive services in the near future;
(d) a marked improvement in on-time train departures and arrivals; and (e) a
50% reduction in train hours held for power. As the process of integrating
SP's and UPRR's rail operations continues, the Corporation expects to realize
further acquisition benefits.
Computer Systems: The Railroad's plan for integrating the Southern Pacific
rail system with UPRR has been divided into four implementation regions.
Integration of these regions will include a complete conversion of SP's
operations to UPRR's computer operating systems. The first region (SP's
central corridor) was implemented on May 1, 1997, with the remaining three
regions to be completely integrated in phases by May 1998.
<PAGE> 15
Accounting Pronouncements - The Financial Accounting Standards Board (FASB)
issued Statement No. 125, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities," which provides consistent
standards for determining if transfers of financial assets are sales or
secured borrowings and which revises the accounting rules for liabilities
extinguished by an in-substance defeasance. UPC adopted Statement No. 125 on
January 1, 1997 with no impact on the Corporation's operating results or
financial condition.
The American Institute of Certified Public Accountants issued Statement of
Position 96-1, "Environmental Remediation Liabilities," effective for 1997,
which clarifies the accounting for environmental remediation liabilities.
Adoption had no significant impact on UPC's operating results or financial
condition.
In February 1997, the FASB issued Statement No. 128, "Earnings per Share,"
which simplifies the standards for computing earnings per share (EPS) and
makes them comparable to international EPS standards. Statement No. 128
replaces the standards for computing and presenting EPS found in Accounting
Principles Board Opinion No. 15, "Earnings per Share." Statement No. 128
requires dual presentation of Basic and Diluted EPS on the face of the income
statement for all entities with complex capital structures. Statement No. 128
will be effective for UPC's 1997 Annual Report, including interim periods to
be presented therein; however, earlier application is not permitted. Had
Statement No. 128 been effective for the first quarter of 1997, UPC's Basic
and Diluted EPS (based on income from continuing operations and net income)
would both have been $0.52 per share.
Commitments and Contingencies - There are various lawsuits pending against the
Corporation and certain of its subsidiaries. The Corporation is also subject
to Federal, state and local environmental laws and regulations, and is
currently participating in the investigation and remediation of numerous
sites. Where the remediation costs can be reasonably determined, and where
such remediation is probable, the Corporation has recorded a liability. In
addition, the Corporation and its subsidiaries also periodically enter into
financial and other commitments in connection with their businesses, and have
retained certain contingent liabilities upon the disposition of formerly-owned
operations. The Corporation does not expect that the lawsuits, environmental
costs, commitments or guarantees will have a material adverse effect on its
consolidated financial condition, results of operations or liquidity.
CAUTIONARY INFORMATION
Certain information included in this report contains, and other materials
filed or to be filed by the Corporation with the Securities and Exchange
Commission (as well as information included in oral statements or other
written statements made or to be made by the Corporation) contain or will
contain, forward-looking statements within the meaning of the Securities Act
of 1933, as amended, and the Securities Exchange Act of 1934, as amended.
Such forward-looking information may include, without limitation, statements
that the Corporation does not expect that lawsuits, environmental costs,
commitments, contingent liabilities, labor negotiations or other matters will
have a material adverse effect on its consolidated financial condition,
results of operations or liquidity and other similar expressions concerning
matters that are not historical facts, and projections as to the Corporation's
financial results. Such forward-looking information is or will be based on
information available at that time, and is or will be subject to risks and
uncertainties that could cause actual results to
<PAGE> 16
differ materially from those expressed in the statements. Important factors
that could cause such differences include, but are not limited to industry
competition and regulatory developments, natural events such as floods and
earthquakes, the effects of adverse general economic conditions, changes in
fuel prices and the ultimate outcome of environmental investigations or
proceedings and other types of claims and litigation.
<PAGE> 17
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.
(a) The annual meeting of stockholders of the Corporation was held on
April 18, 1997.
(c) At the Annual Meeting, the Corporation's stockholders voted for the
election of Philip F. Anschutz (209,162,565 shares in favor; 989,347
shares withheld), Spencer F. Eccles (209,397,644 shares in favor;
754,268 shares withheld), William H. Gray, III (209,334,242 shares in
favor; 817,670 shares withheld), Judith Richards Hope (209,399,203
shares in favor; 752,709 shares withheld), John R. Meyer (209,398,490
shares in favor; 753,422 shares withheld), and Richard D. Simmons,
Jr.(209,423,038 shares in favor; 728,874 shares withheld) as
directors of the Corporation. In addition, the Corporation's
stockholders voted to ratify the appointment of Deloitte & Touche LLP
as independent auditors of the Corporation (209,182,465 shares in
favor, 415,881 shares against and 553,564 shares abstained).
Furthermore, a stockholder proposal presented at the Annual Meeting
to create an Employee Stock Ownership Plan in which the Corporation's
employees would own 51% of the stock of the Corporation was defeated
(82,276 shares in favor, 210,107,648 shares against and 1,000 shares
abstained).
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10 - Amendments to the 1982 Stock Option and Retention Stock Plan,
the 1988 Stock Option and Retention Stock Plan and the 1993
Stock Option and Retention Stock Plan of the Corporation,
adopted April 24, 1997.
11 - Computation of earnings per share.
12 - Computation of ratio of earnings to fixed charges.
27 - Financial data schedule.
(b) Reports on Form 8-K
On February 26, 1997, the Corporation filed a Current Report on Form
8-K, which included a press release dated January 23, 1997 containing
earnings information for the Corporation for the fourth quarter of
1996 and the year ended December 31, 1996.
<PAGE> 18
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: May 13, 1997
UNION PACIFIC CORPORATION
(Registrant)
/s/ Joseph E. O'Connor, Jr.
-----------------------------
Joseph E. O'Connor, Jr.
Vice President and Controller
(chief accounting officer and
duly authorized officer)
<PAGE>
UNION PACIFIC CORPORATION
EXHIBIT INDEX
Exhibit No. Description
10 Amendments to the 1982 Stock Option and Retention
Stock Plan, the 1988 Stock Option and Retention Stock
Plan and the 1993 Stock Option and Retention Stock
Plan of the Corporation, adopted April 24, 1997.
11 Computation of Earnings Per Share
12 Computation of Ratio of Earnings to
Fixed Charges
27 Financial Data Schedule
Exhibit 10
Amendments to the 1982 Stock Option and Restricted Stock Plan (the "1982
Plan"), the 1988 Stock Option and Restricted Stock Plan (the "1988 Plan") and
the 1993 Stock Option and Retention Stock Plan (the "1993 Plan") of Union
Pacific Corporation, Adopted Effective as of April 24, 1997.
1. Paragraphs 5(c) and 6(b) of the 1982 Plan, Paragraphs 5(c) and 6(b) of the
1988 Plan and Paragraphs 6(c) and 7(b) of the 1993 Plan are amended to remove
the requirement that written notices be submitted to exercise stock options or
stock appreciation rights if such rights are in existence at time of exercise.
2. Paragraph 5(h) (iv) of the 1982 Plan, Paragraph 5(h) (iv) of the 1988 Plan
and Paragraph 6(h) (iv) of the 1993 Plan are amended to add the following to
the end of each Paragraph:
"; provided, the Committee may provide for a longer exercise period, not to
exceed three (3) years from the date of such termination or, if later, three
years from the date the option becomes exercisable but not more than five
years after the date of such termination."
3. Paragraph 8(c) of the 1993 Plan is amended to add the following to the end
of such Paragraph:
"In the case of incentive stock options granted after April 24, 1997, the
Committee may extend the period during which an incentive stock option may be
exercised as a non-qualified stock option to up to three (3) years from the
date of a termination not due to retirement, disability or gross misconduct
or, if later, three (3) years from the date the option becomes exercisable but
not more than five years after the date of such a termination."
4. The second sentence of Paragraph 9(a) of the 1993 Plan is amended to add
the words "or in the next sentence" immediately following the words "as
provided in Section 9(c)."
5. Paragraph 9(a) of the 1993 Plan is amended to add the following sentence
between the second and third sentences of such Paragraph:
"The Committee may determine in its sole discretion to waive any or all of
such restrictions prior to the end of the Restriction Period or the
satisfaction of any Vesting Condition."
Exhibit 11
<TABLE>
<CAPTION>
UNION PACIFIC CORPORATION AND SUBSIDIARY COMPANIES
COMPUTATION OF EARNINGS PER SHARE
(In Thousands, Except Share and Per Share Amounts)
(Unaudited)
Three Months
Ended March 31,
--------------------
1997 1996
---------------------
<S> <C> <C>
Average number of shares outstanding (a)....... 245,489 205,177
Average shares issuable on exercise of stock
options less shares repurchasable from
proceeds..................................... 2,322 1,163
------- -------
Total average number of common and common
equivalent shares............................ 247,811 206,340
======== ========
Income from continuing operations.............. $127,811 $107,061
Income from discontinued operations (Note 3)... -- 48,964
------- -------
Net Income..................................... $127,811 $156,025
======== ========
Earnings per share:
Income from continuing operations............ $ 0.52 $ 0.52
Income from discontinued operations.......... -- 0.24
-------- --------
Net Income................................... $ 0.52 $ 0.76
======== ========
(a) The increase in the average number of shares outstanding resulted from the
Corporation's issuance of approximately 38.1 million shares of UPC common
stock in connection with the Southern Pacific acquisition. See Note 2 to the
Condensed Consolidated Financial Statements.
</TABLE>
Exhibit 12
<TABLE>
<CAPTION>
UNION PACIFIC CORPORATION AND SUBSIDIARY COMPANIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
-------------------------------------------------
(In Thousands, Except Ratios)
(Unaudited)
Three Months
Ended March 31,
-------------------------
1997 1996
-------------------------
<S> <C> <C>
Earnings:
Income from continuing operations.............. $127,811 $107,061
Undistributed equity earnings.................. (7,854) (11,894)
-------- --------
Total................................ 119,957 95,167
-------- --------
Income Taxes..................................... 76,856 31,269
-------- --------
Fixed Charges:
Interest expense including amortization of
debt discount.............................. 149,862 116,862
Portion of rentals representing an interest
factor..................................... 49,297 28,130
-------- --------
Total................................ 199,159 144,992
-------- --------
Earnings available for fixed charges............. $395,972 $271,428
======== ========
Fixed Charges -- as above........................ $199,159 $144,992
Interest capitalized............................. -- --
-------- --------
Total fixed charges.................. $199,159 $144,992
======== ========
Ratio of earnings to fixed charges (Note 5)...... 2.0 1.9
======== ========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
Schedule contains summary financial information extracted from the condensed
consolidated financial statements and is qualified in its entirety by reference
to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 94
<SECURITIES> 0
<RECEIVABLES> 699
<ALLOWANCES> 0
<INVENTORY> 275
<CURRENT-ASSETS> 1,454
<PP&E> 30,476
<DEPRECIATION> 5,230
<TOTAL-ASSETS> 28,186
<CURRENT-LIABILITIES> 3,109
<BONDS> 8,075
0
0
<COMMON> 688
<OTHER-SE> 7,551
<TOTAL-LIABILITY-AND-EQUITY> 28,186
<SALES> 0
<TOTAL-REVENUES> 2,810
<CGS> 0
<TOTAL-COSTS> 2,465
<OTHER-EXPENSES> 28
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 150
<INCOME-PRETAX> 205
<INCOME-TAX> 77
<INCOME-CONTINUING> 128
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 128
<EPS-PRIMARY> 0.52
<EPS-DILUTED> 0
</TABLE>
