Acc 411 (Financial Statement Analysis)

University of Bahrain College of Business Administration Department of Accounting

Financial Statements Analysis: Transportation Industry Done by: Ayesha Fazal Amin Khan Fatema Shakil Ahmed Azmi Shameem Ebrahim Meethale Naveed Karim Baksh

20136183 20135089 20126301 20124656

Section 03 Supervised by: Dr. Entessar

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Table of Contents 1. Introduction ........................................................................................................................4 Union Pacific Corporations ..........................................................................................................5 Norfolk Southern Corporation .....................................................................................................6

2. Six Steps in Financial Statement Analysis .......................................................................7 2.1 Identify the Economic Characteristics and Competitive Dynamics in the Transportation Industry.........................................................................................................................................8 2.1.1 Value Chain Analysis .................................................................................................8 2.1.2 Porter’s Five Forces Classification .............................................................................9 2.2 Identify Company Strategies ............................................................................................10 2.3 Cash Flow Analysis ..........................................................................................................12 2.4 Profitability Analysis ........................................................................................................19 2.4.1 Earnings per Share ....................................................................................................19 2.4.2 Common Size Analysis .............................................................................................22 2.4.2.1 Vertical Analysis ........................................................................................22 2.4.2.2 Horizontal Analysis ...................................................................................30 2.4.3 Percentage Change Analysis .....................................................................................38 2.4.4 Rate of Return Ratios ................................................................................................42 2.5 Risk Analysis ....................................................................................................................49 2.6 Other industry related ratios .............................................................................................54

3. Relating the Analysis ......................................................................................................57 4. Railroad Accounting: Strengths and Weaknesses ........................................................59 5. Conclusion and recommendation ...................................................................................60 6. Forecasting........................................................................................................................62 7. Appendix A .......................................................................................................................63 8. Appendix B .......................................................................................................................72 9. References & Work Distribution ...................................................................................78

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Introduction The rail transportation industry in the United States plays a vital role in its economy. They provide rail transportation of passengers and imports and exports in containers, and for the shipment of natural resources like coal and oil. The rail industry has come across a lot of turmoil due to transforming economic demands and due to rise of buses and air transport. However, it still remains the most reliable mode of transport as it is better organized, cheap, and can carry heavy and bulky goods over long distances. The industry consists of many companies that control railroads across the United States. They are classified into large railroads or Class 1 railroads, and regional and local line-haul railroads. For our term project, we will be comparing two Class 1 railroads, Norfolk Southern Railway and Union Pacific Railroad. We will talk about the industry economics and determine the strategies implemented by these companies. Moreover, we will use their financial statements for the years 2010 up to 2014 to conduct various types of analysis (Cash Flow analysis, Common Size analysis, Liquidity and Solvency ratios etc.) With the help of analyzing the statements and relevant information about the industry, the report will communicate the considerable advantages and drawbacks of the two companies and provide explanations wherever needed. Lastly, through the report we will observe the outlook of the companies and henceforth advocate which of the two companies is the best.

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Union Pacific Railroad The Union Pacific Railroad was founded in 1862 by Abraham Lincoln. The company expanded in the following decades and became prominent because of its devotion to safely transporting products across the country and to operate ethically. Union Pacific Corporation is one of America’s major transportation companies. Its main operating company, Union Pacific Railroad is North America’s leading railroad franchise. It is a Class 1 freight railroad that manages around 9,000 locomotives, traversing over 32,000 miles in 23 states across two-thirds of the United States. They ship a wide variety of things ranging from agricultural products, automobiles, food and forest products, coals and chemicals etc. An advantage of this particular railroad is that its shipping facilities are not limited to its large-scale system map. They coordinate shipments beyond their reach with other railroads and provide intact door-to-door services. Union Pacific emphasizes that it provides the most systematic, environmental friendly transportation solutions to its customers today.

Norfolk Southern Railway The Norfolk Southern Railway was established in 1894 and was known as the Southern Railway. It became the fourth oldest Class 1 railroad in North America, after Union Pacific Railroad, Canadian Pacific Railway and Kansas City Southern Railway. The railroad was renamed to Norfolk Southern Railway in 1990 to reflect its parent organization, Norfolk Southern Corporation. Norfolk Southern is a leading transporter of domestic and export coal. Coal transported by Norfolk Southern is thus exported to steel mills and power plants around the globe. The company also transports auto parts and completed vehicles. At the end of 2012, it was found out that transportation of coal and iron ore made up 26% of the total operating revenue of Norfolk Southern while intermodal transportation comprised 20% of the total amount. The company is known for developing new safety initiatives and providing reliable transportation services.

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Six Steps in Financial Statement Analysis We will follow a sequence of six interrelated steps to analyze the financial statements of Norfolk Southern Railway and Union Pacific Railroad. These steps in order are: 1. Identify the economic characteristics and competitive dynamics in the transportation industry. 2. Identify company strategies. 3. Assess the quality of the financial statements. 4. Analyze profitability and risk. 5. Project future financial statements. 6. Value the firm.

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1. Identify the Economic Characteristics and Competitive Dynamics in the Transportation Industry The railroad industry is generally a convenient measure of the underlying North American economy growing at a relatively faster rate over the last few years. In 2014, the main features of interest have been the increasing crude-by-rail trend, rail consolidation, stronger broadbased volume growth and network congestion problems. These key features have been beneficial to the growth of earnings in 2015.

1.1 The Value Chain Analysis: The value chain of an industry is the order or chain of activities involved in the creation, manufacture and distribution of its products and services. Route

Acquisition

Construction

Track

Stock

Planning

Of Land

Work

Installation

Supply

Supply of rail facilities & equipment

Train control

Railroad

Management

Operations

Maintenance

Here, the value chain can be divided into two parts; groundwork and transportation services. Groundwork involves route planning and investment decisions, track installation and maintenance. On the other hand, transportation services include rolling stock supply, train control management and railroad operations.

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1.2 Porter’s Five Forces Classification Framework Applied to the Railway Industry: Supplier Power: High Railway companies depend on only a few domestic and international suppliers of high horsepower locomotives and rail facilities. If one of these suppliers discontinues manufacturing locomotives, the companies could face difficulty.

Threat of New Entrants: Low There are high barriers to entry, including huge amounts of cost required to acquire land and constructing railroad tracks. These factors make it hard for new entrants to enter the industry.

Industry Rivalry: High The industry faces diffused rivalry as there are many railway companies operating across North America. They compete actively to gain market share and to ship commodities at cheaper rates.

Buyer Power: High Customers face many options when it comes to shipping freight through trains as there are many trains that transport similar goods such as agricultural products, coal, industrial products and intermodal. Therefore, they have high buyer power.

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Threat of Substitutes: Low Trains can transfer bulky goods over long distances in a short period of time. Main substitutes involve trucks and air courier services. The threat of substitutes is relatively low.

1.3 Strategies Employed by Union Pacific Railroad and Norfolk Southern Railway: The strategies used by a particular company depend on its economic environment. Companies employ various strategies to distinguish their products or services from other companies in the same industry. Both Union Pacific and Norfolk Southern provide similar services; hence they both seem to be following an undifferentiated low-cost leadership strategy which is why they will have relatively low profit margin (discussed later in profitability analysis). This is because they offer services at low prices and hence achieve higher sales volume. Union Pacific implements the following strategies:  It provides new transportation solutions for agricultural goods, like the coast-to-coast refrigerated produce service that transports produce from production regions to consumption areas.  It transports coal to industrial, utility and export markets. Through their geographic reach and connections, they manage to transport coal to electric plants and facilities across the United States.  They provide logistics solutions for shipping finished vehicles and automotive parts. They distribute imported vehicles from Gulf of Mexico and the West Coast as more manufacturers are locating facilities across the border.  They use multi-modal transportation solutions for domestic and international freight and are committed to offering truckcompetitive rates and services schedules.  They have sales coverage in Mexico and throughout the United States as well as an International Customer Service Center (ICSC) with expertise in border processes, international freight handling and the Mexico rail system. 10

As for Norfolk Southern, it exercises the following strategies to keep its business stable:  Norfolk Southern controls a wide network of intermodal that provides direct accessibility to equipments and containers to ensure goods are shipped reliably and safely.  It operates the largest coal loading pier in Norfolk, Virginia. For customer convenience, Norfolk Southern offers an index that includes all origin stations and is based on the names of coal mines and numbers.  It also provides the government with efficient and reliable shipping solutions by offering lower rail rates as it has numerous Trans load locations.  It serves 79 paper mills and is planning on expanding its business into the Northeast and Midwest.  The “Waste Line Express” which is a private-public partnership between Norfolk Southern and the Roanoke Valley Resource Authority, uses rail transportation to link a solid-waste transfer station and a landfill; emphasizing safety and protection of the environment.  Norfolk Southern uses its Thoroughbred Bulk Transfer facilities that are secure and well-equipped for transferring bulk products from rail to truck.

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3. Cash Flow Analysis Cash flow analysis of a company helps in understanding how and where the company spends money as well as the major sources of cash inflows. This information can be used to evaluate the overall performance of the company, and is a vital aspect of financial statements analysis. Union Pacific Railroad: The following graph presents the relationship between Union Pacific’s cash flows from operating, investing and financing activities, net income, working and non-working capital adjustments for the five years from 2010 to 2014.

UNION PACIFIC CORPORATIONS AND SUBSIDIARIES (in millions) 2010 2011 2012 NET INCOME $ 2,780 $ 3,292 $ 3,943 CASH FLOW FROM OPERATIONG ACTIVITIES $ 4,105 $ 5,873 $ 6,161 CASH FLOW FROM INVESTING ACTIVITIES $ (2,488) $ (3,119) $ (3,633) CASH FLOW FROM FINANCING ACTIVITIES $ (2,381) $ (2,623) $ (2,682) WORKING CAPITAL ADJUSTMENTS $ (351) $ 276 $ (269) NON WORKING CAPITAL ADJUSTMENTS $ 1,676 $ 2,305 $ 2,487

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$ $ $ $ $ $

2013 4,388 6,823 (3,405) (3,049) 161 2,274

2014 $ $ $ $ $ $

5,180 7,385 (4,249) (2,982) (309) 2,514

Cash flows from operating activities were positive and kept increasing throughout the five years. In 2014, the cash generated from operating activities were almost double the amount in 2010. Net income on the other hand, was positive and increasing as well and less than cash flows from operating activities. Cash flows from financing and investing activities were continuously negative. These are signs of a mature and profitable company.

Analysis: In 2010, the company’s net income was higher than that of 2009 which led to an increase in the cash provided by operating activities. In 2011, the relatively higher net income and decreased income tax payments further increased the cash provided by operating activities. The Tax Relief, Unemployment Insurance Reauthorization and Job Creation act of 2010 provided for a 100% bonus depreciation in 2011; as a result of which the company deferred a substantial portion of its income tax expense in 2011. The same applies for 2012, 2013 and 2014; when the Federal Tax law provided for 50% bonus depreciation for qualified investments made during those years. Depreciation increased from 1,487 in 2010 to 1,904 in 2014. The large positive non-working capital adjustments explain the excess of cash flows from operations over net income. On the other hand, working capital adjustments were both positive and negative. This happened mainly due to decreases in accounts receivable as cash was collected and also due to increasing cash outflows for materials and supplies. Net cash used by investing activities kept increasing throughout the five years except for 2013 when it decreased by 228 million. This is because railroad companies are highly capital intensive and they continuously invest in track materials and freight cars. Higher capital investments and lower proceeds from asset sales led to increase in cash used in investing 13

activities. The total capital investments in cash increased from $2.5 million in 2010 to $4.3 million in 2014. The company acquired assets that were financed in 2011 and 2012 but were sold later the same year. Moving on to cash flows from financing activities, they were increasingly negative from 2010 to 2013, but decreased in 2014. Dividend payments increased by $235 million, reflecting Union Pacific’s increased dividend rate. The company continuously repurchased its common stock during the five years as compared to no common share repurchases in 2009. However, the company used less cash to reduce its outstanding debt which partially offset this increase. However, cash used in financing activities decreased in 2014 as increases in repurchase of common shares and higher dividend payments during the year were offset by higher debt issuances. Operating cash flow ratios for Union Pacific:

Union Pacific Corporation

2010

2011

2012

2013

2014

Operating cash flow/Current maturities of long-term debt and notes payable Operating cash flow to total debt Operating cash flow per share

17.2 Times

28.1 times

31.43 times

9.67 times

15.98 times

44%

65%

68%

71%

64%

$5.16

$11.99

$12.92

$14.64

$18.19

Operating cash flow to cash dividends

6.81 Times

7.01 times

5.37 times

5.11 times

4.52 times

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Norfolk Southern Railway:

NORFOLK SOUTHERN CORPORATIONS AND SUBSIDIARIES $4,000 NET INCOME $3,000 $2,000

CASH FLOW FROM OPERATIONG ACTIVITIES

$1,000

CASH FLOW FROM INVESTING ACTIVITIES CASH FLOW FROM FINANCING ACTIVITIES

$2010

2011

2012

2013

WORKING CAPITAL ADJUSTMENTS

2014

$(1,000)

NON WORKING CAPITAL ADJUSTMENTS

$(2,000) $(3,000)

NORFOLK SOUTHERN CORPORATIONS AND SUBSIDIARIES (in millions) 2010 2011 2012 NET INCOME $ 1,496 $ 1,916 $ 1,749 CASH FLOW FROM OPERATIONG ACTIVITIES $ 2,714 $ 3,227 $ 3,065 CASH FLOW FROM INVESTING ACTIVITIES $ (1,456) $ (1,772) $ (1,994) CASH FLOW FROM FINANCING ACTIVITIES $ (1,472) $ (2,006) $ (694) WORKING CAPITAL ADJUSTMENTS $ 122 $ (53) $ 34 NON WORKING CAPITAL ADJUSTMENTS $ 1,096 $ 1,364 $ 1,282

$ $ $ $ $ $

2013 1,910 3,078 (1,894) (394) 88 1,080

2014 $ $ $ $ $ $

2,000 2,852 (2,002) (1,320) (385) 1,237

The above graph links Norfolk Southern’s net income, cash flows from operating, investing and financing activities as well as the working and non-working capital. Cash flows from operating activities were positive but decreasing whereas cash flows from investing and financing activities were always negative. However, cash used by financing activities decreased up to $394 million in 2013 and cash used by investing activities kept increasing. This company seems to be in its maturity stage as well. 15

Analysis: Cash provided by operating activities were $2.7 billion in 2010 and increased to $3.1 in 2011 due to better operating results and lower tax payments. However, it reduced to $3.1 billion in 2012. This happened due to increased tax payments caused by decreased bonus depreciation, in addition to lower operating results. Cash, cash equivalents, and shortterm investment balances totaled $668 million and $301 million on December 31, 2012 and 2011 respectively. In 2013, cash provided from operating activities remained more or less the same ($3.1 billion). However, it decreased to $2.6 billion in 2014 due to the absence of bonus depreciation which led to increase in current income tax expenses and the related cash outflow for the payment of income taxes. The Tax Increase Prevention Act of 2014 provided 50% bonus depreciation and particular business tax credits. The effect of legislation will be seen as a reduction in the 2015 cash outflows for income taxes as the year-end estimated tax payment was due and paid before the 2014 Act was enacted. Hence cash provided by operating activities are expected to grow. Cash used in investing activities increased from $1.5 billion in 2010 to $1.8 billion in 2011. The increase in 2011 was due to higher property additions that were partly offset by a decrease in investment purchases. It increased to $2 billion in 2012 because of a decrease in investment sales, net of purchases, and increased property additions as compared to 2011. Cash used in investing activities decreased in 2013 but increased back to $2 billion in 2014 due to increased use of cash for property additions and COLI (Corporate Owned Life Insurance) investments, which were offset by higher short-term investment maturities.

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Net cash used in financing activities increased in 2011 due to increased share repurchases, offset by higher proceeds from borrowing, net of debt repayments. However, it decreased to $694 in 2012 compared to $2 billion in 2011, because of reduced share repurchases, increased proceeds from borrowings and reduced debt payments and maturities. It decreased even more in 2013. In 2014, the cash used in financing activities increased to $1.3 billion. This increase in 2014 was primarily driven by higher debt repayments and lower debt proceeds. Operating cash flow ratios for Norfolk Southern:

Norfolk Southern Corporation

2010

2011

2012

2013

2014

Operating cash flow/Current maturities of long-term debt and notes payable

7.58 times

64.54 times

61.3 times

6.92 times

1426 times

Operating cash flow to total debt

38%

42%

42%

32%

31%

Operating cash flow per share

$7.40

$9.33

$9.54

$9.86

$0.31

Operating cash flow to cash dividends

5.28 times

5.60 times

4.91 times

4.83 times

4.15 times

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1. Operating cash flow/Current maturities of long-term debt and notes payable: This ratio measures how a company utilizes cash flows from its operations to meet its current maturities of debt. A higher ratio indicates the company can easily pay its current portions of debt with the help of net cash provided by operating activities. Both companies are able to cover their debt payments with the help of operating cash flows but Union Pacific seems to possess better capabilities of paying its debts as it has higher operating cash inflows and greater current maturities of long-term debt as compared to Norfolk Southern. 2. Operating cash flow to total debt: This ratio indicates a company’s ability to cover all of its liabilities with its yearly operating cash flow. It is clear that Union Pacific is better than Norfolk Southern at using its operating cash flows to pay for its debts as it has comparatively high percentages across the five years. 3. Operating cash flow per share: This ratio indicates a firm’s ability to make capital expenditure decisions and pay dividends and is considered better than earnings per share. However, it does not reflect a company’s profitability. Overall, Union Pacific has better operating cash flow per share compared to Norfolk Southern. 4. Operating cash flow to cash dividends: This ratio measures a company’s ability to pay cash dividends with its annual operating cash inflows. Union Pacific has better ability to use its cash generated operations for paying dividends.

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4. Profitability Analysis 4.1 Earnings per Share Analysis:  Basic Earnings per Share Analysis:

2014 $5.77 $6.44

Union Norfolk

2013 $4.74 $6.10

2012 $4.17 $5.42

2011 $3.39 $5.52

2010 $2.79 $4.06

7 6

Dollars

5 4 Union 3

Norfolk

2 1 0 2010

2011

2012

19

2013

2014

 Diluted Earnings per Share Analysis:

2014 $5.75 $6.39

Union Norfolk

2013 $4.71 $6.04

2012 $4.14 $5.37

2011 $3.36 $5.45

2010 $2.77 $4.00

7

6

Dollars

5

4 Union Norfolk

3

2

1

0 2010

2011

2012

20

2013

2014

From the above graphs, it is evident that EPS for Union Pacific kept increasing smoothly. Whereas, EPS for Norfolk Southern experienced a huge increase in 2011 and a minor decrease in 2012, and continued growing in 2013 and 2014. Part of this is because of the net income, which increased and decreased in between the years 2010 and 2012. Union Pacific had growing net income throughout the five years. Increasing net income plays a huge role in the advancement of EPS. Hence both companies had growing EPS in years 2012 to 2014 regardless of the increase in weighted average number of common shares outstanding. The companies also experienced lowest level of EPS in 2010.

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4.2 Common Size Analysis:  Vertical Analysis:

Income Statement for Union Pacific: Union Pacific Corp (in Millions) Sales/ Revenue Agricultural Automotive Chemicals Coal Industrial Products Intermodal Total Freight Revenues Other revenues Total Operating Revenues Operating Expenses Compensation and benefits Fuel Purchased services and materials Depreciation Equipment and other rents Other Total Operating Expenses Operating Income Non-operating Items Other Income Interest Expense Income Taxes Net Income

2014

2013

2012

2011

2010

$ 3,777 $ 2,103 $ 3,664 $ 4,127 $ 4,400 $ 4,489 $ 22,560 $ 1,428 $ 23,988

16% 9% 15% 17% 18% 19% 94% 6% 100%

$ 3,276 $ 2,077 $ 3,501 $ 3,978 $ 3,822 $ 4,030 $ 20,684 $ 1,279 $ 21,963

15% 9% 16% 18% 17% 18% 94% 6% 100%

$ 3,280 $ 1,807 $ 3,238 $ 3,912 $ 3,494 $ 3,955 $ 19,686 $ 1,240 $ 20,926

16% 9% 15% 19% 17% 19% 94% 6% 100%

$ $ $ $ $ $ $ $ $

3,324 1,510 2,815 4,084 3,166 3,609 18,508 1,049 19,557

17% 8% 14% 21% 16% 18% 95% 5% 100%

$ 3,018 $ 1,271 $ 2,425 $ 3,489 $ 2,639 $ 3,227 $ 16,069 $ 896 $ 16,965

18% 7% 14% 21% 16% 19% 95% 5% 100%

$ 5,076 $ 3,539 $ 2,558 $ 1,904 $ 1,234 $ 924 $ 15,235 $ 8,753

21% 15% 11% 8% 5% 4% 64% 36%

$ 4,807 $ 3,534 $ 2,315 $ 1,777 $ 1,235 $ 849 $ 14,517 $ 7,446

22% 16% 11% 8% 6% 4% 66% 34%

$ 4,685 $ 3,608 $ 2,143 $ 1,760 $ 1,197 $ 788 $ 14,181 $ 6,745

22% 17% 10% 8% 6% 4% 68% 32%

$ $ $ $ $ $ $ $

4,681 3,581 2,005 1,617 1,167 782 13,833 5,724

24% 18% 10% 8% 6% 4% 71% 29%

$ 4,314 $ 2,486 $ 1,836 $ 1,487 $ 1,142 $ 719 $ 11,984 $ 4,981

25% 15% 11% 9% 7% 4% 71% 29%

$ 151 $ (561) $ (3,163)

0.62% 2% 13%

$ 128 $ (526) $ (2,660)

0.58% 2% 12%

$ 108 $ (535) $ (2,375)

0.51% 3% 11%

$ 112 $ (572) $ (1,972)

0.57% 3% 10%

$ 54 $ (602) $ (1,653)

0.31% 4% 10%

20%

$ 3,943

19%

$ 3,292

17%

$

5,180

22%

$

4,388

$

2,780

16%

The common size income statements measure all line items as a percentage of the total operating revenues for vertical analysis. According to the above schedule, it is evident that Union Pacific had its operating revenues largely from freight revenues (94% in 2014, 2013, 2012 and 95% in 2011 and 2010). This points out that the company remains successful in freight transportation over the five years. Coal, industrial products and Intermodal transportation constitute the majority of freight revenues. Other revenues include revenues earned by subsidiaries, revenues from Union Pacific’s commuter rail operations and accessorial revenues which are recognized by the company as they perform services or meet contractual obligations. 22

On the other hand, wages and benefits to employees made up most of the operating expenses, followed by fuel. Wages expense decreased from 25% to 21% from 2010 to 2014. Fuel expenses increased by 3% in 2011 due to increase in fuel price per gallon but continued decreasing in the following years. Because of decrease in these two items, total operating expenses decreased from 71% to 64% of the total revenues from 2010 to 2014. As a result of this reduction in expenses; net income increased smoothly from 16% to 22%. Other expenses include personal injury, freight and property damage, insurance, state and local taxes etc. these expenses are relatively insignificant and have minimalistic effect on the net income.

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Balance Sheet for Union Pacific: Union Pacific Corp (in millions) ASSETS Current assets: Cash and cash equivalents Accounts receivable Materials and supplies Current deferred income taxes Other current assets Total current assets Investments Net properties Other assets TOTAL ASSETS Liabilities and Common Shareholders' Equity Current liabilities: Accounts payable and other current liabilities Debt due within one year Total current liabilities Debt due after one year Deferred income taxes Other long-term liabilities Commitments and Contingencies TOTAL LIABILITIES

2014

$

1,586 1,611 712 277 493 4,679 1,390 46,272 375 $ 52,716

3,303 462 3,765 11,018 14,680 2,064 $ 31,527

2013

3% $ 1,432 3% 1,414 1% 653 1% 268 1% 223 9% 3,990 3% 1,321 88% 43,749 1% 671 100% $ 49,731

6% 1% 7% 21% 28% 4%

3,086 705 3,791 8,872 14,163 1,680

2012

3% $ 1,063 3% 1,331 1% 660 1% 263 0.4% 297 8% 3,614 3% 1,259 88% 41,997 1% 283 100% $ 47,153

6% 1% 8% 18% 28% 3%

2,923 196 3,119 8,801 13,108 2,248

2011

2010

2% $ 1,217 3% 1,401 1% 614 1% 306 1% 189 8% 3,727 3% 1,175 89% 39,934 1% 260 100% $ 45,096

3% $ 1,086 3% 1,184 1% 534 1% 261 0.4% 367 8% 3,432 3% 1,137 89% 38,253 1% 266 100% $ 43,088

6% 0.4% 7% 19% 28% 5%

7% 0.5% 7% 19% 27% 5%

3,108 209 3,317 8,697 12,368 2,136

2,713 239 2,952 9,003 11,557 1,813

3% 3% 1% 1% 1% 8% 3% 89% 1% 100%

6% 1% 7% 21% 27% 4%

60% $ 28,506

57% $ 27,276

58% $ 26,518

59% $ 25,325

59%

Common shareholders' equity Common shares, $2.50 par value, 1,400,000,000 authorised; 1,110,100,423 and 1,109,657,652 issued; 883,366,476 and 912,001,996 outstanding respectively (in 2014) 2,775 Paid-in-surplus 4,321 Retained earnings 27,367 Treasury stock -12,064 Accumulated other comprehensive loss -1,210 Total common shareholders' equity $ 21,189

5% 1,387 8% 4,210 52% 25,288 -23% -8,910 -2% -750 40% $ 21,225

3% 1,386 8% 4,113 51% 22,271 -18% -6,707 -2% -1,186 43% $ 19,877

3% 1,386 9% 4,031 47% 19,508 -14% -5,293 -3% -1,054 42% $ 18,578

3% 1,385 9% 3,985 43% 17,154 -12% -4,027 -2% -734 41% $ 17,763

3% 9% 40% -9% -2% 41%

Total liabilities and common shareholders' equity

100% $ 49,731

100% $ 47,153

100% $ 45,096

100% $ 43,088

100%

$ 52,716

Similarly, common size balance sheets express all line items as a percentage of total assets for vertical analysis. Total current assets for Union Pacific grew at a slow pace from 8% in 2010 to 9% in 2014. This indicates that there were no material changes in any of the current assets. Minor increase in cash and cash equivalents contributes to the 1% increase in total current assets. Non-current assets include long-term investments, properties plant and equipment, and other assets. Net properties made up almost 89% of the total assets in 2010, 2011 and 2012 and 88% in 2013 and 2014. It is typical for a railway company to have a greater percentage of assets from properties plant and equipment because they continuously invest in railroad cars and other fixed assets to keep their business going. 24

Investments and other assets play an insignificant role in total assets and they remain the same throughout the five year analysis. Secondly, total current liabilities decreased gradually in 2012 and 2013 but increased by 3% in 2014. This was mainly due to sudden increase in long-term debts in 2014, which changed from 18% in 2013 to 21% in 2014. A 2% reduction in other long-term liabilities occurred in 2013, which caused total liabilities level to drop further more from 58% to 57%. Current liabilities increased by 1% in 2013 but then decreased in 2014. Overall, most liabilities had minimal changes, increases or decreases. Thirdly, the schedule shows that total common shareholder’s equity kept increasing slowly but decreased by 3% in 2014. This decrease occurred as result of increase in treasury stock by 5% from 2013 to 2014. Also, percentage of common shares outstanding increased suddenly to 5% in 2014 compared to 3% in the previous years. This happened as a result of an increase in number of common shares authorized from 800,000,000 in 2010, 2011, 2012 and 2013 to 1,400,000,000 in 2014.

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Income Statement for Norfolk Southern: Norfolk Southern Corp (in millions) Sales/Revenue Coal General Merchandise: Chemicals Metals/Construction Agr./Consumer/gov't Automotive Paper/clay/forest Total General Merchandise Intermodal Total Operating Revenues

2014 $

2,382

$ 1,863 $ 1,521 $ 1,498 $ 1,004 $ 794 $ 6,680 $ 2,562 $ 11,624

2013 21% $ 16% 13% 12% 7% 6% 57% 22% 100%

2,543

$ 1,667 $ 1,405 $ 1,467 $ 984 $ 795 $ 6,318 $ 2,384 $ 11,245

2012 23% $ 15% 12% 13% 9% 7% 56% 21% 100%

2,879

$ 1,467 $ 1,446 $ 1,335 $ 897 $ 775 $ 5,920 $ 2,241 $ 11,040

2011 26% $ 13% 13% 12% 8% 7% 54% 20% 100%

3,458

$ 1,368 $ 1,439 $ 1,241 $ 780 $ 756 $ 5,584 $ 2,130 $ 11,172

2010 31% $

2,719

29%

12% 13% 11% 7% 7% 50% 19% 100%

$ $ $ $ $ $ $ $

1,302 1,326 1,013 648 712 5,001 1,796 9,516

14% 14% 11% 7% 7% 52% 19% 100%

Operating Expenses Compensation and benefits Purchased services and rents Fuel Depreciation Materials and other expenses Total Operating Expenses Income from Railway Operations

$ $ $ $ $ $ $

2,897 1,687 1,574 951 940 8,049 3,575

25% 14% 13% 8% 8% 69% 31%

$ $ $ $ $ $ $

3,002 1,629 1,613 916 828 7,988 3,257

27% 14% 14% 8% 7% 71% 29%

$ $ $ $ $ $ $

2,960 1,604 1,577 916 859 7,916 3,124

27% 14% 14% 8% 8% 72% 28%

$ $ $ $ $ $ $

2,974 1,610 1,589 862 924 7,959 3,213

27% 14% 14% 8% 8% 71% 29%

$ $ $ $ $ $ $

2,708 1,477 1,079 819 757 6,840 2,676

28% 15% 11% 7% 8% 72% 28%

Other income Interest Expense Income before income taxes Provisions for Income taxes Net Income

$ $ $ $ $

104 545 3,134 1,134 2,000

0.9% 5% 27% 10% 17%

$ $ $ $ $

233 525 2,965 1,055 1,910

2% 5% 26% 9% 17%

$ $ $ $ $

129 495 2,758 1,009 1,749

1% 4% 25% 9% 16%

$ $ $ $ $

160 455 2,918 1,002 1,916

1% 4% 26% 9% 15%

$ $ $ $ $

153 462 2,367 871 1,496

2% 5% 25% 9% 16%

Coal and intermodal transportation dominate the operating revenues generated at Norfolk Southern, with percentages of 21% and 22% in 2014, 23% and 21% in 2013, 26% and 20% in 201, 31% and 19% in 2011 and 29% and 19% in 2010 respectively. However, revenues from coal transportation fell by 5% in 2012. This happened because of decrease in carload volumes mainly due to fewer shipments of utility coal. Moreover, it kept decreasing in the following years due to low average revenue per unit driven by continued market-based pricing pressure in the export coal market. On the other hand, general merchandise revenues increased constantly from 50% in 2011 to 57% in 2014. This shows that even though Norfolk Southern had less revenues generating from coal, they had increasing general merchandise revenues. This increase may have resulted due to an increase in chemicals revenues. Revenues from transportation of chemicals went up due to higher shipments of crude oil and increase in 26

carloads of liquefied petroleum gas and higher plastic volumes generated. Another notable aspect of general merchandise is the metal and construction revenues which decreased by 1% in 2013 but increased back to 13% in 2014. The reason for this is the slow but continued growth in the natural gas drilling sector and higher metal-related traffic volumes due to increasing domestic and global steel production. Moving on to operating expenses, compensation and benefits again form a huge percentage of the operating expenses. It represents 28% of the total operating revenues in 2010, and 27% in 2011, 2012 and 2013 and 25% in 2014. The slight decrease can be explained due to reduction in postretirement and pension benefit costs and health and welfare benefit costs in 2014. Fuel expenses also increased from 11% to 14% in 2012, and kept increasing. This was due to increase in locomotive fuel prices, as well as increased fuel consumption. Also, increase in depreciation over the years reflects the company’s larger roadway and equipment capital base as they continue to invest in their infrastructure and rolling stock.

27

Balance Sheet for Norfolk Southern: Norfolk Southern Corp (in millions) ASSETS Current assets: Cash and cash equivalents Short-term investments Accounts receivable Materials and supplies Current deferred income taxes Other current assets Total current assets Investments Net properties Other assets TOTAL ASSETS

2014

$

973

2013

2012

2011

2010

1,055 236 167 347 2,778 2,679 27,694 90 $ 33,241

3% $ 1,443 0% 118 3% 1,024 1% 223 1% 180 1% 87 8% 3,075 8% 2,439 83% 26,645 0.3% 324 100% $ 32,483

4% $ 0.4% 3% 1% 1% 0.3% 8% 8% 82% 1% 100% $

653 15 1,109 216 167 82 2,242 2,300 25,736 64 30,342

2% $ 276 0.05% 25 4% 1,022 1% 209 1% 143 0.3% 76 7% 1,751 8% 2,234 85% 24,469 0.2% 84 100% $ 28,538

1% $ 827 0.1% 283 4% 807 1% 169 1% 145 0.3% 240 6% 2,471 8% 2,193 86% 23,231 0.3% 304 100% $ 28,199

3% 1% 3% 1% 1% 1% 9% 8% 82% 1% 100%

Liabilities and Common Shareholders' Equity Current liabilities: Accounts payable Short-term debt Income and other taxes Other current liabilities Current maturities of long-term debt Total current liabilities Long-term debt Other liabilities Deferred income taxes TOTAL LIABILITIES

1,233 100 217 228 2 1,780 8,924 1,312 8,817 $ 20,833

4% 1,265 0.3% 100 1% 225 1% 270 0.01% 445 5% 2,305 27% 8,903 4% 1,444 27% 8,542 63% $ 21,194

4% 0.3% 1% 1% 1% 7% 27% 4% 26% 65% $

1,362 200 206 263 50 2,081 8,432 2,237 7,832 20,582

4% 1,092 1% 100 1% 207 1% 252 0.2% 50 7% 1,701 28% 7,390 7% 2,050 26% 7,486 68% $ 18,627

4% 1,181 0.4% 100 1% 199 1% 244 0.2% 358 6% 2,082 26% 6,567 7% 1,793 26% 7,088 65% $ 17,530

4% 0.4% 1% 1% 1% 7% 23% 6% 25% 62%

Stockholders' equity Common stock $1 per share par value, 1,350,000,000 shares authorized; outstanding 308,240,130 and 308,878,404 shares, respectively, net of treasury shares (in 2014) Additional paid-in capital Accumulated other comprehensive loss Retained income Total stockholders' equity

310 2,148 -398 10,348 $ 12,408

1% 310 6% 2,021 -1% -381 31% 9,339 37% $ 11,289

1% 6% -1% 29% 35%

315 1,911 -1,109 8,643 $9,760

1% 6% -4% 28% 32%

1% 358 7% 1,892 -4% -805 30% 9,224 35% $ 10,669

1% 7% -3% 33% 38%

Total liabilities and stockholders' equity

$ 33,241

100% $ 32,483

100% $

30,342

332 1,912 -1,026 8,693 $9,911

100% $ 28,538

100% $ 28,199

100%

The first most attractive figure in the assets section is for properties, plant and equipment. As explained for Union Pacific, Norfolk Southern has a greater net properties percentage of total assets because railway companies need to invest in a wide variety of fixed assets and equipments in order to provide freight transportation services which are the main source of revenues. The above schedule shows that net properties increased by 4% in 2012. This explains why cash and cash equivalents decreased by 2% in the same year. As net properties went back to 82% in 2013, cash increased to 4%. This indicates that Norfolk Southern had cash reserves that it used to make significant acquisition.

28

Total current assets also fell by 3% in 2011, mainly due to the reduction in cash and cash equivalents; but continued increasing after that. Investments remained the same in all five years. Total current liabilities decreased from 7% to 6% in 2011 but increased back to 7% in 2012 and 2013. However, they decreased again to 5% in 2014. The decreases in 2011 and 2014 were due to relatively low percentages of current maturities of long-term debt in those years. The schedule also shows that long-term debt and deferred income taxes form the greatest percentages of total liabilities. It is again typical for railway companies to have higher percentages of long-term debt in order to obtain immediate capital. Increase in deferred income taxes reflect the company’s inability to pay off the complete amount of taxes, and will have to pay the unpaid portions in the near future. Total liabilities increased from 62% in 2010 to 68% in 2012 but decreased back to 62% in 2014. This happened as a result of increase in other long-term liabilities in 2011 and 2012 by 1% and due to its decrease in 2013 and 2014 by 3%. Lastly, the amount of common shares remained the same in all years mainly because the number of authorized shares was 1,350,000,000 for all five years, unlike Union Pacific. Accumulated other comprehensive loss indicate total unrealized losses from investments held by the company, which decreased significantly in 2013. The total stockholder’s equity decreased from 38% in 2010 to 35% in 2011, and further decreased to 32% in 2012; because of reduced percentages of retained earnings. As retained earnings increased in 2013 and 2014, total stockholder’s equity rose back to 35% in 2013 and 37% in 2014. Increase in retained earnings can be explained by the increase in net income in 2013 and 2014.

29

 Horizontal Analysis:

Income Statement for Union Pacific: Union Pacific Corp (in Millions) Sales/ Revenue Agricultural Automotive Chemicals Coal Industrial Products Intermodal Total Freight Revenues Other revenues Total Operating Revenues Operating Expenses Compensation and benefits Fuel Purchased services and materials Depreciation Equipment and other rents Other Total Operating Expenses Operating Income Non-operating Items Other Income Interest Expense Income Taxes Net Income

2014

2013

2012

2011

2010

2014

2013

2012

2011

2010

$ $ $ $ $ $ $ $ $

3,777 2,103 3,664 4,127 4,400 4,489 22,560 1,428 23,988

$ $ $ $ $ $ $ $ $

3,276 2,077 3,501 3,978 3,822 4,030 20,684 1,279 21,963

$ $ $ $ $ $ $ $ $

3,280 1,807 3,238 3,912 3,494 3,955 19,686 1,240 20,926

$ 3,324 $ $ 1,510 $ $ 2,815 $ $ 4,084 $ $ 3,166 $ $ 3,609 $ $ 18,508 $ $ 1,049 $ $ 19,557 $

3,018 1,271 2,425 3,489 2,639 3,227 16,069 896 16,965

125% 165% 151% 118% 167% 139% 140.4% 159.4% 141.4%

109% 163% 144% 114% 145% 125% 129% 143% 129%

109% 142% 134% 112% 132% 123% 123% 138% 123%

110% 119% 116% 117% 120% 112% 115% 117% 115%

100% 100% 100% 100% 100% 100% 100% 100% 100%

$ $ $ $ $ $ $ $

5,076 3,539 2,558 1,904 1,234 924 15,235 8,753

$ $ $ $ $ $ $ $

4,807 3,534 2,315 1,777 1,235 849 14,517 7,446

$ $ $ $ $ $ $ $

4,685 3,608 2,143 1,760 1,197 788 14,181 6,745

$ 4,681 $ $ 3,581 $ $ 2,005 $ $ 1,617 $ $ 1,167 $ $ 782 $ $ 13,833 $ $ 5,724 $

4,314 2,486 1,836 1,487 1,142 719 11,984 4,981

117.6% 142.35% 139.3% 128.0% 108% 128.5% 127.1% 176%

111% 142% 126% 120% 108% 118% 121% 149%

109% 145% 117% 118% 105% 110% 118% 135%

109% 144% 109% 109% 102% 109% 115% 115%

100% 100% 100% 100% 100% 100% 100% 100%

$ $ $

151 $ (561) $ (3,163) $

128 $ (526) $ (2,660) $

108 $ (535) $ (2,375) $

112 $ (572) $ (1,972) $

54 (602) (1,653)

279.7% 93.2% 191.3%

237% 87% 160%

200% 89% 144%

207% 95% 119%

100% 100% 100%

$

5,180 $

4,388 $

3,943 $

3,292 $

2,780

186.3%

158%

142%

118%

100%

Common size financial statements measure all elements as a percentage of a base year amount for horizontal analysis. In our report, we will consider 2010 as the base year and use the amounts in that particular year to evaluate any increases or decreases in the following four years. The total operating revenues kept increasing throughout the five years. There was a 41.4% growth from 2010 to 2014. Also, revenues increased the most in 2014, from 129% in 2013 to 141.4% in 2014; which is nearly a 12% increase in one year. This happened as revenues from agricultural products increased by 16% in 2014, and revenues from industrial products increased by 22% in the same year. Increase in these two items led to an increase in total freight revenues by 11.4%. As a result, total operating revenues increased drastically in 2014.

30

Total operating expenses also increased constantly from 2010 to 2014; with the largest increase of 6% in 2014. The increase occurred as a result of a 13% increase of purchased services and material expenses in 2014 and also due to other expenses increasing by 10.5% in the same year. All other expenses increased across the years. However, fuel expenses decreased by 3% in 2013, and then increased slightly by 0.35% in 2014. Lastly, we can see that net income increased significantly up to 86.3% from 2010 to 2014. Other income increased by almost 180%, interest expense remained more or less the same; income taxes also grew by 91.3% from 2010 to 2014.

31

Balance Sheet for Union Pacific: Union Pacific Corp (in millions) ASSETS Current assets: Cash and cash equivalents Accounts receivable Materials and supplies Current deferred income taxes Other current assets Total current assets Investments Net properties Other assets TOTAL ASSETS

2014

2013

2012

2011

2010

$

1,586 $ 1,432 $ 1,063 $ 1,217 $ 1,086 1,611 1,414 1,331 1,401 1,184 712 653 660 614 534 277 268 263 306 261 493 223 297 189 367 4679 3990 3614 3727 3432 1,390 1,321 1,259 1,175 1,137 46,272 43,749 41,997 39,934 38,253 375 671 283 260 266 $ 52,716 $ 49,731 $ 47,153 $ 45,096 $ 43,088

2014

2013

2012

2011

2010

146% 136% 133% 106% 134% 136% 122% 121% 141% 122%

132% 119% 122% 103% 61% 116% 116% 114% 252% 115%

98% 112% 124% 101% 81% 105% 111% 110% 106% 109%

112% 118% 115% 117% 51% 109% 103% 104% 98% 105%

100% 100% 100% 100% 100% 100% 100% 100% 100% 100%

122% 193% 128% 122% 127% 114%

114% 295% 128% 99% 123% 93%

108% 82% 106% 98% 113% 124%

115% 87% 112% 97% 107% 118%

100% 100% 100% 100% 100% 100%

Liabilities and Common Shareholders' Equity Current liabilities: Accounts payable and other current liabilities Debt due within one year Total current liabilities Debt due after one year Deferred income taxes Other long-term liabilities Commitments and Contingencies TOTAL LIABILITIES

$ 31,527 $ 28,506 $ 27,276 $ 26,518 $ 25,325

124%

113%

108%

105%

100%

Common shareholders' equity Common shares, $2.50 par value, 1,400,000,000 authorised; 1,110,100,423 and 1,109,657,652 issued; 883,366,476 and 912,001,996 outstanding respectively (in 2014) Paid-in-surplus Retained earnings Treasury stock Accumulated other comprehensive loss Total common shareholders' equity

2,775 2,774 1,386 1,386 1,385 4,321 4,210 4,113 4,031 3,985 27,367 23,901 22,271 19,508 17,154 -12,064 -8,910 -6,707 -5,293 -4,027 -1,210 -750 -1,186 -1,054 -734 $ 21,189 $ 21,225 $ 19,877 $ 18,578 $ 17,763

200% 108% 160% 300% 165% 119%

200% 106% 139% 221% 102% 119%

100% 103% 130% 167% 162% 112%

100% 101% 114% 131% 144% 105%

100% 100% 100% 100% 100% 100%

Total liabilities and common shareholders' equity

$ 52,716 $ 49,731 $ 47,153 $ 45,096 $ 43,088

122%

115%

109%

105%

100%

3,303 462 3,765 11,018 14,680 2,064

3,086 705 3,791 8,872 14,163 1,680

2,923 196 3,119 8,801 13,108 2,248

3,108 209 3,317 8,697 12,368 2,136

2,713 239 2,952 9,003 11,557 1,813

Again, we consider 2010 to be the base year for the balance sheet, and measure all components accordingly. Total assets increased slowly but consistently by 27% from 2010 to 2014. This happened mainly due to the continuing growth in long-term investments and properties, plant and equipment. However, total current assets decreased by 4% in 2012, but continued growing after that. This reduction in current assets was due to a decrease in the amount of cash and cash equivalents in 2012, which later increased by 34% in 2013. In 2012, accounts receivable also decreased by 6%, but went back to normal with a 7% increase in 2013. Other current assets experienced ups and downs across the five year analysis, with a 49% decrease in 2011, 30% increase in 2012, 20% decrease in 2013 and finally a 73% increase in 2014. 32

Moving on to liabilities, total current liabilities decreased by 6% in 2012. This was due to reduced current maturities of long-term debts as well as a reduction in the amount of accounts payable. Current maturities of long-term debts decreased by 5% and accounts payable decreased by 7% in 2012. Total liabilities increased by 11% in 2014; even though there was no change in total current liabilities (128% for 2013 and 2014). In 2014, long-term debts increased by 23%, deferred income taxes increased by 4% and other long term liabilities also increased by 21%, all of these factors led to the huge increase of total liabilities in 2014. Finally, the company experienced a 7% increase in total common shareholder’s equity in 2013, and remained the same in 2014 (119%). This increase was due to a 100% increase in Union Norfolk’s share capital. Retained earnings also increased by 9% in 2013; and by 21% in 2014. The company’s treasury stocks increased by 31% in 2011, 36% in 2012, 54% in 2013 and 79% in 2014, which meant that the company repurchased more of its stocks throughout the five years.

33

Income Statement for Norfolk Southern: Norfolk Southern Corp (in millions) Sales/Revenue Coal General Merchandise: Chemicals Metals/Construction Agr./Consumer/gov't Automotive Paper/clay/forest Total General Merchandise Intermodal Total Operating Revenues

2014

2012

2011

2010

2,543

$2,879

$3,458

$2,719

88%

94%

106%

127%

100%

$ 1,863 $ 1,521 $ 1,498 $ 1,004 $ 794 $ 6,680 $ 2,562 $ 11,624

$ 1,667 $ 1,405 $ 1,467 $ 984 $ 795 $ 6,318 $ 2,384 $ 11,245

$1,467 $1,446 $1,335 $897 $775 $5,920 $2,241 $11,040

$1,368 $1,439 $1,241 $780 $756 $5,584 $2,130 $11,172

$1,302 $1,326 $1,013 $648 $712 $5,001 $1,796 $9,516

143% 115% 148% 155% 112% 134% 143% 122%

128% 106% 145% 152% 112% 126% 133% 118%

113% 109% 132% 138% 109% 118% 125% 116%

105% 109% 123% 120% 106% 112% 119% 117%

100% 100% 100% 100% 100% 100% 100% 100%

Operating Expenses Compensation and benefits Purchased services and rents Fuel Depreciation Materials and other expenses Total Operating Expenses Income from Railway Operations

$ $ $ $ $ $ $

2,897 1,687 1,574 951 940 8,049 3,575

$ $ $ $ $ $ $

3,002 1,629 1,613 916 828 7,988 3,257

$2,960 $1,604 $1,577 $916 $859 $7,916 $3,124

$2,974 $1,610 $1,589 $862 $924 $7,959 $3,213

$2,708 $1,477 $1,079 $819 $757 $6,840 $2,676

107% 114% 146% 116% 124% 118% 134%

111% 110% 149% 112% 109% 117% 122%

109% 109% 146% 112% 113% 116% 117%

110% 109% 147% 105% 122% 116% 120%

100% 100% 100% 100% 100% 100% 100%

Other income Interest Expense Income before income taxes Provisions for Income taxes Net Income

$ $ $ $ $

104 545 3,134 1,134 2,000

$ $ $ $ $

233 525 2,965 1,055 1,910

$129 $495 $2,758 $1,009 $1,749

$160 $455 $2,918 $1,002 $1,916

$153 $462 $2,367 $871 $1,496

68% 118% 132% 130% 134%

152% 114% 125% 121% 128%

84% 107% 117% 116% 117%

105% 98% 123% 115% 128%

100% 100% 100% 100% 100%

$

2013

2,382 $

2014

2013

2012

2011

2010

According to Norfolk Southern Railway, their main sources of revenues are from coal and intermodal transportation. Revenues generated from coal transportation increased by 27% in 2011 but then decreased by 21% in 2012; and continued to decrease. This decrease in revenues reflected a 13% decrease in carload volume due to fewer shipments of coal. Under general merchandise, revenues from chemicals increased by 15% in 2013, and by an additional 15% in 2014; reflecting a 12% increase in volume growth largely driven by higher shipments of crude oil and also due to growth in shipments of liquefied petroleum gas. Agriculture, consumer product, and government revenues increased by 14% in 2013, reflecting pricing improvements. Another item with significant changes is revenue conceived from intermodal transportation, which increased by 10% in 2014. This

34

happened due to improvement in domestic volume (including truckload and intermodal marketing companies). Moving on to operating expenses; wages expense decreased by 4% in 2014. Purchased services and rents expenses were the highest in 2014, where it increased by 4%. Fuel expenses increased by 47% in 2011 and continued increasing, mainly due to increase in fuel prices. Materials and other expenses increased by 22% in 2011 and by 15% in 2014; reflecting increases in locomotive and equipment maintenance and repair costs. Net income decreased by 11% in 2012 due to increase in interest expense and increase in provisions for income taxes. However, in 2013 net income increased again by 11% and by 6% in 2014. The reason for this was the comparatively higher income amounts in 2013 and 2014.

35

Balance Sheet for Norfolk Southern: Norfolk Southern Corp (in millions) ASSETS Current assets: Cash and cash equivalents Short-term investments Accounts receivable Materials and supplies Current deferred income taxes Other current assets Total current assets Investments Net properties Other assets TOTAL ASSETS

2014

1,055 236 167 347 2,778 2,679 27,694 90 $33,241

$1,443 $653 $276 $827 118 15 25 283 1,024 1,109 1,022 807 223 216 209 169 180 167 143 145 87 82 76 240 3,075 2,242 1,751 2,471 2,439 2,300 2,234 2,193 26,645 25,736 24,469 23,231 324 64 84 304 $32,483 $30,342 $28,538 $28,199

118% 0% 131% 140% 115% 145% 112% 122% 119% 30% 118%

174% 42% 127% 132% 124% 36% 124% 111% 115% 107% 115%

79% 5% 137% 128% 115% 34% 91% 105% 111% 21% 108%

33% 9% 127% 124% 99% 32% 71% 102% 105% 28% 101%

100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%

Liabilities and Common Shareholders' Equity Current liabilities: Accounts payable Short-term debt Income and other taxes Other current liabilities Current maturities of long-term debt Total current liabilities Long-term debt Other liabilities Deferred income taxes TOTAL LIABILITIES

1,233 1,265 1,362 1,092 1,181 100 100 200 100 100 217 225 206 207 199 228 270 263 252 244 2 445 50 50 358 1,780 2,305 2,081 1,701 2,082 8,924 8,903 8,432 7,390 6,567 1,312 1,444 2,237 2,050 1,793 8,817 8,542 7,832 7,486 7,088 $20,833 $21,194 $20,582 $18,627 $17,530

104% 100% 109% 93% 1% 85% 136% 73% 124% 119%

107% 100% 113% 111% 124% 111% 136% 81% 121% 121%

115% 200% 104% 108% 14% 100% 128% 125% 110% 117%

92% 100% 104% 103% 14% 82% 113% 114% 106% 106%

100% 100% 100% 100% 100% 100% 100% 100% 100% 100%

Stockholders' equity Common stock $1 per share par value, 1,350,000,000 shares authorized; outstanding 308,240,130 and 308,878,402 shares, respectively, net of treasury shares (in 2014) Additional paid-in capital Accumulated other comprehensive loss Retained income Total stockholders' equity

310 310 2,148 2,021 -398 -381 10,348 9,339 $12,408 $11,289

87% 114% 49% 112% 116%

87% 107% 47% 101% 106%

88% 101% 138% 94% 91%

93% 101% 127% 94% 93%

100% 100% 100% 100% 100%

Total liabilities and stockholders' equity

$33,241

118%

115%

108%

101%

100%

$973

2013

$32,483

2012

315 1,911 -1,109 8,643 $9,760 $30,342

2011

2010

332 358 1,912 1,892 -1,026 -805 8,693 9,224 $9,911 $10,669 $28,538

$28,199

2014

2013

2012

2011

2010

Under current assets, cash and cash equivalents decreased drastically (by 67%) and the highest increase of 95% were recorded in 2013. Also, short-term investments were highest in 2013 after 2010, accounting for about 42%; and there were no short-term investments in 2014. Materials and supplies increased slowly across the 5 years. Net properties increased by 5% in 2011, by 6% in 2012 and by 4% in 2013 and 2014; which indicates the company continuously invested in equipments and other fixed assets vital to the business. Total assets were highest in 2014 because of increased properties, plant and equipment and also due to an 11% increase long-term investments in 2014. Other current assets were also the highest for 2014. 36

Accounts payable fell by 8% in 2011 but increased to 115% in the following year, probably due to high amount of expenses in 2012 (refer income statement). Short-term debt increased by 100% in 2012. Current maturities of long-term debt decreased to 14% in 2011 and 2012 but increased to 124% in 2013. Total liabilities were highest in 2013 due to this reason. Total stockholders’ equity decreased by 7% in 2011 and further decreased by 2% in 2012. However, as retained earnings and additional paid in surplus increased through the years and other comprehensive loss decreased; net income was highest for 2014.

37

4.3 Percentage change statements:  Income statement for Union Pacific: Union Pacific Corp (in Millions) Sales/ Revenue Agricultural Automotive Chemicals Coal Industrial Products Intermodal Total Freight Revenues Other revenues Total Operating Revenues Operating Expenses Compensation and benefits Fuel Purchased services and materials Depreciation Equipment and other rents Other Total Operating Expenses Operating Income Non-operating Items Other Income Interest Expense Income Taxes Net Income

2014

2013

2012

2011

2010

2011%

2012%

2013%

2014%

$ $ $ $ $ $ $ $ $

3,777 2,103 3,664 4,127 4,400 4,489 22,560 1,428 23,988

$ $ $ $ $ $ $ $ $

3,276 2,077 3,501 3,978 3,822 4,030 20,684 1,279 21,963

$ $ $ $ $ $ $ $ $

3,280 1,807 3,238 3,912 3,494 3,955 19,686 1,240 20,926

$ 3,324 $ $ 1,510 $ $ 2,815 $ $ 4,084 $ $ 3,166 $ $ 3,609 $ $ 18,508 $ $ 1,049 $ $ 19,557 $

3,018 1,271 2,425 3,489 2,639 3,227 16,069 896 16,965

10% 19% 16% 17% 20% 12% 15% 17% 15%

-1% 20% 15% -4% 10% 10% 6% 18% 7%

0% 15% 8% 2% 9% 2% 5% 3% 5%

15% 1% 5% 4% 15% 11% 9% 12% 9%

$ $ $ $ $ $ $ $

5,076 3,539 2,558 1,904 1,234 924 15,235 8,753

$ $ $ $ $ $ $ $

4,807 3,534 2,315 1,777 1,235 849 14,517 7,446

$ $ $ $ $ $ $ $

4,685 3,608 2,143 1,760 1,197 788 14,181 6,745

$ 4,681 $ $ 3,581 $ $ 2,005 $ $ 1,617 $ $ 1,167 $ $ 782 $ $ 13,833 $ $ 5,724 $

4,314 2,486 1,836 1,487 1,142 719 11,984 4,981

9% 44% 9% 9% 2% 9% 15% 15%

0% 1% 7% 9% 3% 1% 3% 18%

3% -2% 8% 1% 3% 8% 2% 10%

6% 0% 10% 7% 0% 9% 5% 18%

$ $ $

151 $ (561) $ (3,163) $

128 $ (526) $ (2,660) $

108 $ (535) $ (2,375) $

112 $ (572) $ (1,972) $

54 (602) (1,653)

107% -5% 19%

-4% -6% 20%

19% -2% 12%

18% 7% 19%

$

5,180 $

4,388 $

3,943 $

3,292 $

2,780

18%

20%

11%

18%

We use the percentage change statements to help provide an understanding of growth and decline in key line items. First and foremost, the total operating revenues kept increasing steadily, and the highest growth was recorded in 2011, due to core pricing gains, higher fuel surcharges and increased volume that led to a growth in energy freight revenue from 2010 levels. Operating expenses also increased the highest in 2011 because of increase in fuel prices as the global economy grew. Net income grew over the five years as revenues increased and interest expense decreased.

38

 Balance sheet for Union Pacific: Union Pacific Corp (in millions) ASSETS Current assets: Cash and cash equivalents Accounts receivable Materials and supplies Current deferred income taxes Other current assets Total current assets Investments Net properties Other assets TOTAL ASSETS Liabilities and Common Shareholders' Equity Current liabilities: Accounts payable and other current liabilities Debt due within one year Total current liabilities Debt due after one year Deferred income taxes Other long-term liabilities Commitments and Contingencies TOTAL LIABILITIES

2014

2013

2012

2011

2010

$

1,586 $ 1,432 $ 1,063 $ 1,217 $ 1,086 1,611 1,414 1,331 1,401 1,184 712 653 660 614 534 277 268 263 306 261 493 223 297 189 367 4679 3990 3614 3727 3432 1,390 1,321 1,259 1,175 1,137 46,272 43,749 41,997 39,934 38,253 375 671 283 260 266 $ 52,716 $ 49,731 $ 47,153 $ 45,096 $ 43,088

3,303 462 3,765 11,018 14,680 2,064

3,086 705 3,791 8,872 14,163 1,680

2,923 196 3,119 8,801 13,108 2,248

3,108 209 3,317 8,697 12,368 2,136

2,713 239 2,952 9,003 11,557 1,813

$ 31,527 $ 28,506 $ 27,276 $ 26,518 $ 25,325

Common shareholders' equity Common shares, $2.50 par value, 1,400,000,000 authorised; 1,110,100,423 and 1,109,657,652 issued; 883,366,476 and 912,001,996 outstanding respectively 2,775 2,774 1,386 1,386 1,385 Paid-in-surplus 4,321 4,210 4,113 4,031 3,985 Retained earnings 27,367 23,901 22,271 19,508 17,154 Treasury stock -12,064 -8,910 -6,707 -5,293 -4,027 Accumulated other comprehensive loss -1,210 -750 -1,186 -1,054 -734 Total common shareholders' equity $ 21,189 $ 21,225 $ 19,877 $ 18,578 $ 17,763 Total liabilities and common shareholders' equity

$ 52,716 $ 49,731 $ 47,153 $ 45,096 $ 43,088

2011%

2012%

2013%

2014%

12% 18% 15% 17% -49% 9% 3% 4% -2% 5%

-13% -5% 7% -14% 57% -3% 7% 5% 9% 5%

35% 6% -1% 2% -25% 10% 5% 4% 137% 5%

11% 14% 9% 3% 121% 17% 5% 6% -44% 6%

15% -13% 12% -3% 7% 18%

-6% -6% -6% 1% 6% 5%

6% 260% 22% 1% 8% -25%

7% -34% -1% 24% 4% 23%

5%

3%

5%

11%

0% 1% 14% 31% 44% 5%

0% 2% 14% 27% 13% 7%

100% 2% 7% 33% -37% 7%

0% 3% 15% 35% 61% 0%

5%

5%

5%

6%

The total assets for Union Pacific grew smoothly throughout the five years, there were no extraordinary changes. However, total liabilities increased by 11% in 2014, as current maturities of long-term debt and other long-term liabilities increased, that include asserted claims and lawsuits. Since there was not much change in the total common shareholders equity in 2014, total liabilities and equity increased at an almost equal pace each year.

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 Income statement for Norfolk Southern; Norfolk Southern Corp (in millions) Sales/Revenue Coal General Merchandise: Chemicals Metals/Construction Agr./Consumer/gov't Automotive Paper/clay/forest Total General Merchandise Intermodal Total Operating Revenues

2014

2012

2011

2010

2,543

$2,879

$3,458

$ 1,863 $ 1,521 $ 1,498 $ 1,004 $ 794 $ 6,680 $ 2,562 $ 11,624

$ 1,667 $ 1,405 $ 1,467 $ 984 $ 795 $ 6,318 $ 2,384 $ 11,245

$1,467 $1,446 $1,335 $897 $775 $5,920 $2,241 $11,040

Operating Expenses Compensation and benefits Purchased services and rents Fuel Depreciation Materials and other expenses Total Operating Expenses Income from Railway Operations

$ $ $ $ $ $ $

2,897 1,687 1,574 951 940 8,049 3,575

$ $ $ $ $ $ $

3,002 1,629 1,613 916 828 7,988 3,257

Other income Interest Expense Income before income taxes Provisions for Income taxes Net Income

$ $ $ $ $

104 545 3,134 1,134 2,000

$ $ $ $ $

233 525 2,965 1,055 1,910

$

2013

2,382 $

2011%

2012%

2013%

2014%

$2,719

27%

-17%

-12%

-6%

$1,368 $1,439 $1,241 $780 $756 $5,584 $2,130 $11,172

$1,302 $1,326 $1,013 $648 $712 $5,001 $1,796 $9,516

5% 9% 23% 20% 6% 12% 19% 17%

7% 0% 8% 15% 3% 6% 5% -1%

14% -3% 10% 10% 3% 7% 6% 2%

12% 8% 2% 2% 0% 6% 7% 3%

$2,960 $1,604 $1,577 $916 $859 $7,916 $3,124

$2,974 $1,610 $1,589 $862 $924 $7,959 $3,213

$2,708 $1,477 $1,079 $819 $757 $6,840 $2,676

10% 9% 47% 5% 22% 16% 20%

0% 0% -1% 6% -7% -1% -3%

1% 2% 2% 0% -4% 1% 4%

-3% 4% -2% 4% 14% 1% 10%

$129 $495 $2,758 $1,009 $1,749

$160 $455 $2,918 $1,002 $1,916

$153 $462 $2,367 $871 $1,496

5% -2% 23% 15% 28%

-19% 9% -5% 1% -9%

81% 6% 8% 5% 9%

-55% 4% 6% 7% 5%

Coal revenues decreased by 17% due to fewer shipments of utility coal and decreased fuel surcharge revenue. Total operating revenues decreased by a small amount in 2012, but continued increasing in 2012 and 2014. On the other hand, operating expenses increased by 16% in 2011 due to increase in fuel prices. Net income decreased by 9% in 2012, mainly due to decrease in other income and increase in interest expenses during that year.

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 Balance sheet for Norfolk Southern: Norfolk Southern Corp (in millions) ASSETS Current assets: Cash and cash equivalents Short-term investments Accounts receivable Materials and supplies Current deferred income taxes Other current assets Total current assets Investments Net properties Other assets TOTAL ASSETS

2014

2011%

2012%

2013%

2014%

$1,443 $653 $276 $827 118 15 25 283 1,024 1,109 1,022 807 223 216 209 169 180 167 143 145 87 82 76 240 3,075 2,242 1,751 2,471 2,439 2,300 2,234 2,193 26,645 25,736 24,469 23,231 324 64 84 304 $32,483 $30,342 $28,538 $28,199

-67% -91% 27% 24% -1% -68% -29% 2% 5% -72% 1%

137% -40% 9% 3% 17% 8% 28% 3% 5% -24% 6%

121% 687% -8% 3% 8% 6% 37% 6% 4% 406% 7%

-33% -100% 3% 6% -7% 299% -10% 10% 4% -72% 2%

1,055 236 167 347 2,778 2,679 27,694 90 $33,241

Liabilities and Common Shareholders' Equity Current liabilities: Accounts payable Short-term debt Income and other taxes Other current liabilities Current maturities of long-term debt Total current liabilities Long-term debt Other liabilities Deferred income taxes TOTAL LIABILITIES

1,233 1,265 1,362 1,092 1,181 100 100 200 100 100 217 225 206 207 199 228 270 263 252 244 2 445 50 50 358 1,780 2,305 2,081 1,701 2,082 8,924 8,903 8,432 7,390 6,567 1,312 1,444 2,237 2,050 1,793 8,817 8,542 7,832 7,486 7,088 $20,833 $21,194 $20,582 $18,627 $17,530

-8% 0% 4% 3% -86% -18% 13% 14% 6% 6%

25% 100% 0% 4% 0% 22% 14% 9% 5% 10%

-7% -50% 9% 3% 790% 11% 6% -35% 9% 3%

-3% 0% -4% -16% -100% -23% 0% -9% 3% -2%

Stockholders' equity Common stock $1 per share par value, 1,350,000,000 shares authorized; outstanding 308,878,402 shares, respectively, net of treasury shares Additional paid-in capital Accumulated other comprehensive loss Retained income Total stockholders' equity

310 310 2,148 2,021 -398 -381 10,348 9,339 $12,408 $11,289

-7% 1% 27% -6% -7%

-5% 0% 8% -1% -2%

-2% 6% -66% 8% 16%

0% 6% 4% 11% 10%

Total liabilities and stockholders' equity

$33,241

1%

6%

7%

2%

$973

2013

$32,483

2012

315 1,911 -1,109 8,643 $9,760 $30,342

2011

2010

332 358 1,912 1,892 -1,026 -805 8,693 9,224 $9,911 $10,669 $28,538

$28,199

Total current assets decreased by 29% in 2011 as cash and cash equivalents decreased as compared to 2010 levels, as the company used more cash for its acquisitions. Total current liabilities decreased by 23% in 2014 as current maturities of long-term debt were very low as compared to that of 2013. As a result, total liabilities decreased by 2%. Total stockholder’s equity increased by 16% in 2013 due to increase in retained earnings and additional paid-in capital.

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4.4 Rate of return ratios:  Return on Total Assets: 2014

2013

2012

2011

2010

Union

10.1%

9.1%

8.5%

7.5%

6.5%

Norfolk

6.1%

6.1%

5.9%

6.8%

5.4%

This ratio measures the extent to which a company utilizes its assets to generate profits and is one of the key elements of profitability analysis. From the above table, we can see that ROA for Union Pacific kept increasing constantly year after year, whereas on the other hand; ROA for Norfolk Southern increased in 2011 but fell back to 5.9% in 2012. This happened because of decrease in net income and relatively higher average total assets. Norfolk’s ROA had a minor increase in 2013 and remained the same in 2014. Overall, Union Pacific had more return on total assets as compared to Norfolk, as it has higher net income and greater amount of average total assets as compared to Norfolk Southern. Disaggregating Return on Total Assets: Return on Total Assets = Net Profit margin * Total Asset Turnover  Net Profit Margin: 2014

2013

2012

2011

2010

Union

21.59%

19.98%

18.84%

16.83%

16.39%

Norfolk

17.21%

16.99%

15.84%

17.15%

15.72%

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This ratio measures the profit generated from sales for a company and is an element of return on assets. Again, profit margin for Union Pacific keeps increasing steadily but net profit margin for Norfolk decreased by almost 2% in 2012 due to decrease in net income, which is why the company has a lower ROA in this year. However, it continued increasing in 2013 and 2014. Union Pacific generated more profit from sales as compared to Norfolk Southern in all five years, as its net income kept increasing throughout the five years.

 Total Asset Turnover:

Union Norfolk

2014

2013

2012

2011

2010

0.47 Times 0.35 Times

0.45 times 0.36 times

0.45 times 0.38 times

0.44 times 0.39 times

0.40 Times 0.34 Times

The asset turnover ratio is the second element of ROA and it measures how well a company uses its assets to generate sales. Union Pacific generated $0.40 for every dollar of its assets in 2010 compared to $0.47 in 2014. On the other hand, Norfolk Southern’s asset turnover was highest in 2011 i.e. 0.39 times. It decreased in the following years and was 0.35 times in 2014, almost the same as that of 2010. Hence, the company didn’t use its assets effectively to generate sales, as compared to Union Pacific, that has relatively high and increasing asset turnover every year.

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 Return on Operating Assets: 2014

2013

2012

2011

2010

Union

17.74%

15.95%

15.11%

13.41%

12.07%

Norfolk

11.88%

11.29%

11.53%

12.38%

10.58%

This ratio measures to what extent a company can use its operating assets to generate profits. Union Pacific has greater returns on operating assets as compared to Norfolk Southern, because it has comparatively higher operating income. Disaggregating Return on Operating Assets: Return on Operating assets = Operating income margin * Operating assets turnover  Operating Income Margin: 2014

2013

2012

2011

2010

Union

36.49%

33.90%

32.23%

29.27%

29.36%

Norfolk

30.76%

28.96%

28.30%

28.76%

28.12%

Operating income margin measures a company’s operating efficiency and is used for calculating the return on operating assets. From the above table, it is clear that the operating margin for Union Pacific is increasing in all years except in 2011, where it fell by 0.09%. Operating margin for Norfolk Southern also increased but the growth was not as much as 44

compared to Union pacific. Also, it experienced a decrease of 0.46% in 2012. Overall, both companies seem to have good operating income margin.  Operating Asset Turnover:

Union Norfolk

2014

2013

2012

2011

2010

0.49 times 0.39 times

0.47 times 0.39 times

0.47 times 0.41 times

0.46 times 0.43 times

0.41 Times 0.38 Times

This ratio measures the ability of a company to use its operating assets to generate sales dollars and is an important aspect of a company’s profitability analysis. Union Pacific has its highest operating asset turnover in 2014, where it generated $0.49 dollar of sales per dollar of operating assets, whereas Norfolk Southern’s highest operating asset turnover was in 2011 (0.43 times). This happened due to a drastic increase in operating revenues due to a growth in Intermodal transportation. However, revenues fell in 2012, resulting in lower operating asset turnover in the following year. Even though operating revenues increased in 2013 and 2013, operating assets turnover was the same due to relatively higher average operating assets.

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 Return on Investment: 2014

2013

2012

2011

2010

Union

18.35%

16.43%

15.54%

13.76%

12.12%

Norfolk

11.32%

11.32%

11.18%

12.14%

10.32%

This ratio measures the efficiency of a company’s investments and the income earned on investment. The highest return on investment for Norfolk Southern was in 2011 (12.14%) and in 2014 for Union Pacific (18.35%). This is because Union Pacific had increasing returns on investment every year as opposed to Norfolk Southern, because the company’s return on investment decreased to 11.18% in 2012. This happened due to decrease in net income in 2011, as well as an increase in average long-term liabilities and equity in the same year. Union Pacific seems to be more profitable as it has comparatively higher returns on investment.  Return on Total Equity: 2014

2013

2012

2011

2010

Union

24.42%

21.35%

20.5%

18.11%

16.08%

Norfolk

16.88%

18.15%

17.8%

18.62%

14.23%

This ratio measures a company’s profitability by the extent to which the company can generate profit with the shareholders equity. The income earned from equity for Union Pacific kept increasing every year. On the other hand, Norfolk Southern had increasing and decreasing returns on equity throughout the five years. This happened as Norfolk’s equity 46

grew largely as compared to its net income, which didn’t increase much. Union Pacific had relatively higher income because of which any decreases in the returns on total equity due to the increasing total shareholders’ equity were offset.  Return on Common Equity: 2014

2013

2012

2011

2010

Union

15.85%

14.96%

14.96%

13.9%

12.95%

Norfolk

16.34%

16.94%

16.05%

17.11%

13.20%

This ratio measures the profit a company generates per dollar of investments that account only for common shareholders. Income earned from common equity for is different from income from total equity, in that the equity includes only common shares outstanding, additional paid-in capital and retained earnings. Both companies seem to have adequate returns on common equity, but Norfolk generates more profits from common equity as compared to Union, as it has very low common equity as compared to Union Pacific.  Sales to Fixed Assets:

Union Norfolk

2014

2013

2012

2011

2010

0.53 Times 0.43 Times

0.51 Times 0.43 times

0.51 times 0.44 times

0.50 times 0.47 times

0.45 Times 0.41 Times

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Also known as the fixed asset turnover ratio, this ratio measures a company’s ability to generate sales dollars from fixed assets. Union Pacific had the highest fixed assets turnover in 2014 (0.53 times), which means it grew over the five years. Norfolk Southern’s sales to fixed asset ratio decreased in 2012, due to increase in property, plant and equipment and other long-term investments and decrease in net income. It continued decreasing in 2013 and remained the same. Hence, Union Pacific has better chances of generating profit by the usage of its fixed assets as compared to Norfolk Southern.

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5. Risk Analysis In this section of the report, we will be analyzing liquidity and solvency for Union Pacific Railroad and Norfolk Southern Railway. Solvency and liquidity help understand a company’s financial state. However, they both differ in definition. Solvency is a company’s ability to meet its long-term financial obligations whereas liquidity refers to the company’s ability to pay off short-term debts as well as its ability to sell assets quickly to increase cash. A good company is both solvent and has appropriate liquidity. We will analyze liquidity and solvency for Union Pacific Railroad and Norfolk Southern Railway using a number of ratios. 5.1 Liquidity Analysis: Current Ratio 2014

2013

2012

2011

2010

Union

1.24

1.05

1.16

1.12

1.16

Norfolk

1.56

1.33

1.08

1.03

1.19

The above ratios indicate that both Union Pacific and Norfolk Southern have enough current assets to pay off their short-term debts. However, Norfolk Southern has better liquidity as its current ratio in 2014 is higher than that of Union Pacific, which means it has a larger fraction of current assets relative to its current liabilities as compared to Union. Higher current ratio means the company has higher capability of settling current obligations.

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Quick Ratio 2014

2013

2012

2011

2010

Union

0.85

0.75

0.77

0.79

0.77

Norfolk

1.14

1.07

0.85

0.76

0.78

The quick ratio determines the company’s ability to pay its short-term debts with its assets that are most liquid. The higher the quick ratio, the more liquid a company is. Both companies seem to have higher quick ratios which mean they can use more of their liquid assets to finance short-term obligations. Accounts Receivable Turnover

Union Norfolk

2014

2013

2012

2011

2010

15.85 times 11.13 Times

16.002 times 10.54 times

15.32 times 10.36 times

14.09 times 12.2 times

18.34 times 12.09 times

Accounts Receivable Turnover in Days 2014

2013

2012

2011

2010

Union

25 days

24 days

23 days

26 days

26 days

Norfolk

33 days

35 days

35 days

30 days

30 days

Accounts receivable turnover indicates the time taken by the firm to collect accounts receivables in cash. It measures the effectiveness of extending credit and collecting cash on that credit. 50

Union Pacific’s turnover ratio has declined from 18.34 in 2010 to 15.85 in 2014. Even though it’s not a significant decline, it shows that union pacific is collecting their receivables slower in 2014 as compared to 2013. Norfolk’s turnover ratio has declined in a similar pattern. Union Pacific collects their receivables in a short time compared to Norfolk. This implies that union pacific has stricter credit policies than Norfolk. This could lead to a loss in revenue. Revenues to Cash ratio 2014

2013

2012

2011

2010

Union

15.9 times

17.6 times

18.3 times

16.9 times

11.6 times

Norfolk

9.6 times

10.7 times

23.8 times

20.3 times

10.4 times

Days Revenues held in Cash 2014

2013

2012

2011

2010

Union

23 days

21 days

20 days

22 days

32 days

Norfolk

38 days

34 days

16 days

18 days

35 days

Revenues to Cash ratio indicate the amount of revenues held as cash in hand. Lenders usually prefer a smaller ratio (more number of days) as compared to company managers who prefer a high ratio so as to avoid idle cash. Union Pacific’s ratio increased from 11.6 in 2010 to 18.3 in 2012. This is due to increase in revenue which was more than increase in average cash. This led to decrease in days revenue held as cash by 12 days and increase in short term liquidity risk. From 2012 to 2014, the ratio 51

decreased slightly due to built-up balances in cash. This is an indication of reduction in short term liquidity risks. On the other hand for Norfolk, the ratio increased by more than 2 times from 2010 to 2012 which was mainly due to the reduction in cash balances. Since 2012, the tremendous increase in cash led to decrease in the ratio, thereby reducing the short term liquidity risk. From the above table, it is clear that Norfolk has a lower ratio (more number of days revenues held as cash) than Union Pacific, i.e. short term liquidity risk for Union Pacific is high.

5.2 Solvency Analysis: Debt-to-equity ratio 2014

2013

2012

2011

2010

Union

148%

134%

137%

143%

143%

Norfolk

168%

188%

211%

188%

164%

Debt to equity ratio measures the financial leverage of a company. It indicates to what extent the company uses debt to finance its assets relative to shareholder’s equity. From 2010 to 2014, Union Pacific has been able to maintain a steady debt to equity ratio. Whereas, for Norfolk in 2012, the increase in “Accumulated other comprehensive loss” led to a decrease in total stockholder’s equity which resulted in an increased debt-to-equity ratio in that year. Norfolk’s ratio is slightly higher than Union Pacific’s. This is an indication that Norfolk faces comparatively higher risk. 52

Debt-to-assets ratio 2014

2013

2012

2011

2010

Union

59%

57%

59%

59%

54%

Norfolk

63%

65%

68%

65%

62%

The debt to asset ratio indicates to what extent assets are financed by liabilities, mainly payables and long term debt. Debt to asset ratios for both the firms has increased slightly over the past 5 years. In 2014, around 59% of the assets of Union Pacific were financed by debt as compared to 62% of Norfolk. Since both the companies have their ratios below 100%, they are in a good position at present, though Norfolk is slightly less solvent than Union Pacific. Interest Coverage Ratio

Union Norfolk

2014

2013

2012

2011

2010

19.3 times 10.2 times

17.8 times 10.0 times

16.1 times 10.1 times

13.0 times 9.3 times

10.8 times 8.5 times

The interest coverage ratio measures the ability of a company to pay interest on its outstanding debts. As shown above, both companies seem to generate more than enough earnings to cover their interest expenses. This means that they face relatively lower risk and can easily get bank financing. When compared, Union Pacific has higher interest coverage capabilities.

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Other ratios related to the industry: Operating Ratio 2014

2013

2012

2011

2010

Union

63.51%

66.10%

67.77%

70.73%

70.64%

Norfolk

69.24%

71.04%

71.70%

71.24%

71.88%

Operating ratios can be defined as company’s operating expenses as a percentage of its operating revenues. An operating ratio of 80% or lower is considered favorable for railroading. Therefore, both, union pacific and Norfolk are said to be in a favorable position. The operating ratio for Union Pacific has decreased from 70.64% in 2010 to 63.51% in 2014. This shows that Union’s management has been more efficient in reducing their operating expenses over the years. The operating ratio for Norfolk hasn’t decreased much from 71% in 2010 to 69% in 2014. Even though it is below favorable 80%, the company has not been successful in managing their expenses efficiently as compared to Union Pacific.

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Long Term debt to Operating Property 2014

2013

2012

2011

2010

Union

23.81%

20.28%

20.96%

21.78%

23.54%

Norfolk

32.22%

33.41%

32.76%

30.20%

28.27%

Long term debt to operating property measures a firm’s operating capacity. Due to heavy investment in operating assets such as roads, land, equipment, etc. this ratio plays an important role as it gives a measure of sources of fund with which it is obtained. Over the years, union’s ratio has changed materially When comparing between the two firms, Norfolk places a heavy reliance on debts to purchase assets as compared to union pacific.

Operating Revenue to Operating Property 2014

2013

2012

2011

2010

Union

51.84%

50.20%

49.83%

48.97%

44.35%

Norfolk

41.97%

42.20%

42.90%

45.66%

40.96%

Operating revenue to operating property indicates the ability to generate dollar revenue per dollar of property. Higher ratio means that firm is able to generate more dollar revenue per dollar of property. The above table shows that there has been a material increase in the ratio of union pacific from 2010 to 2014. Whereas for Norfolk, the ratio increased by 5% in 2011. Since then, the revenue generated hasn’t 55

increased significantly as compared to increase in operating property, due to which there has been a decline in the ratio. When compared between the two firms, Union Pacific has been more successful in generating more dollar revenue than Norfolk.

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Relating the Analysis The primary objective of a company is to reduce risk while they increase their profits. A company will need to have an adequate level of liquidity in order to maintain the day to day cash flow such as wages and salaries, for the business to continue in operation. It is also required to ensure survival of the business in long term. A profitable company can still fail if it doesn’t have enough cash to meet its liabilities. Earlier, we analyzed the cash flows, profitability, liquidity and solvency of Union Pacific Corporation and Norfolk Southern Corporation. Union Pacific Railroad adapted certain strategies to increase its profitability. It had increasing net income and cash inflows from operations, which is a good sign as the company could easily maintain and grow its operations. Its operating cash flow per share increased by $13.03, which is a better indication of Union Pacific’s profitability as compared to its earnings per share ratio as it is believed to be more accurate. However, it had increasing earnings per share as well. The company had almost 95% of its revenues from freight transportation which indicated that the company made the most out of its primary activities. It continued investing in more of its properties, plants and equipments. The company had increasing returns on total assets and operating assets which was another indication of a healthy and profitable company, as it showed that company was effective in using its assets to generate sales. As a result of increasing net income, the company had higher income earned from equity even though total shareholder’s equity increased. The company also maintained good debt-to-assets ratio which saves it from potential risk. Overall, Union Pacific seems to be a growing company, with adequate profitability and is liquid and solvent enough to keep out of any risk for a long period of time. 57

On the other hand, Norfolk Southern which was established in 1894 is one of the main transporters of coal in North America. It uses environment friendly ways to carry out its operating activities. Net income for Norfolk Southern decreased by 9% in 2012 as operating revenues decreased. This happened because revenues from coal transportation fell by 17% in 2012. However, net income continued increasing in the following years. As a result of this decrease in 2012, earnings per share decreased slightly. Coal and Intermodal transportation made up most of Norfolk’s operating revenue and yet again, the company had a high percentage of its assets from properties, plants and equipments which is typical of any railroad company. Its net profit margin decreased in 2012 and the asset turnover decreased over the five years, resulting in slow growth in returns on total assets. It had adequate returns on investment, total equity and common equity. Norfolk had higher returns on common equity as compared to Union as it had relatively lower common equity. It had decreasing fixed asset turnover in 2012, 2012 and 2014 which showed that the company failed to use its fixed assets investments to effectively generate sales dollars. It does seem to be liquid as its current ratio has better chances of settling its current debt. The company has higher debt to equity ratios, which could lead to solvency risk as it indicates that the company is majorly dependent on debt to finance assets relative to stockholder’s equity. It also has slightly higher debt to assets ratios which could cause trouble to the company if it continues to finance more of its assets through debt. The company is profitable and liquid, but may be subject solvency risk.

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Railroad Accounting: Strengths and Weaknesses The operations carried out by railroad companies are subject to various state, federal and local regulations. Although they analyze their revenues by commodities, their net financial results are analyzed as one component due to the coherent nature of railway networks. For both Norfolk and Union, freight revenues play a huge role in maintaining good operations. Of all the operating expenses, fuel expenses are the main. The companies have to deal with any future increases in fuel price per gallon, as was the case in 2011. Railway companies can have higher fuel surcharge if they manage to increase their volumes and improve fuel recovery provisions. Fuel prices are hard to project as they are sensitive to global and U. S. domestic demand, refining capacities and geopolitical events. As Americas economy is expected to continue improving in 2015, the lookout for energy markets is unclear, which could cause both threats and opportunities for the railroad companies. Working capital surplus could improve liquidity for railway companies. They also follow certain accounting policies that involve judgment and estimations. If these estimations differ largely from actual results, the impact on the company’s financial statements could be material.

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Conclusion The purpose of our project was to analyze and compare the financial statements of Union Pacific and Norfolk Southern for five years. We did so by calculating their rates of return, various solvency and liquidity ratios, operating cash flow ratios and by highlighting their major strengths and weaknesses. This analysis is meant to provide for investors an insight into the financial performance of the two companies. The following points where taken into consideration while comparing the analyzed data:  The cash flow analysis for Union Pacific showed that the company is actively maturing and is in a good position as it was able to generate increasing amounts of cash from its operations every year and also managed to pay back a lot of its debts. Norfolk on the other hand, reported lower net income in 2012 which had a major impact on most items, including its cash inflows from operating activities.  When comparing both companies, Union Pacific had higher operating cash flow per share as compared to Norfolk southern. It was also better at using its operating cash inflows to make payments for its total debt as compared to Norfolk. Norfolk had a very high amount of operating cash flow to current maturities of long-term debt as it had very low amount of current maturities, even though cash flows from operating activities decreased in 2014.  Since both companies have complex capital structures, they report both basic and diluted earnings per share. Norfolk had higher earnings per share as compared to Union, which shows it is more profitable. This could lead to potential increases in the stock price of the company. 60

 Both companies managed to effectively use their assets to generate earnings, with Union generating slightly higher returns on total assets as compared to Norfolk. It also had higher profit margin and total asset turnover which showed that it was better at utilizing its assets than Norfolk when it came to maximizing its profits.  Union had higher returns on investment as compared to Norfolk, which is another indication that is more profitable.  Union generates more profit from its shareholder investments as compared to Norfolk that is it generates more profit per dollar of stockholder’s equity. However, Norfolk has comparatively higher returns on common equity, which shows that the company effectively reinvests its investor’s capital.  Union had slightly higher fixed asset turnover which is a good sign as it shows that the company effectively uses its fixed-asset investments to generate sales dollars.  Both companies have more or less the same current ratios. Norfolk has slightly higher current ratio in 2013 and 2014 as it has fewer amounts of current liabilities compared to that of Union and increasing current assets. They also have adequate quick ratios with Norfolk having slightly higher quick ratios.  Union Pacific had higher accounts receivable turnover which means it collects its receivables in a shorter time period than Norfolk, which means it is comparatively more efficient in managing its issued credit and credit collections.  Both Union and Norfolk could easily make interest payments as they had high interest coverage ratios every year. But Union is definitely better than Norfolk as it covered the interest payments 19 times in 2014 as compared to Norfolk, which covered interest payments only 10 times.

61

Forecasting UNION PACIFIC CORPORATIONS Freight revenues are expected to increase for the next two years which will result in increase in operating revenues. Decreasing fuel prices might result in further decrease in fuel expenses while compensation and benefits for employees increase. Following the trend of increasing net income during the 5 year period and the above assumptions, Net Income is expected to be around $6000m for year ending on 31st December 2015 and around $7100m for the year ending on 31st December 2016. NORFOLK SOUTHERN CORPORATIONS The company is expecting coal revenues to decline due to decreased volume. In 2014, coal revenues represented around 21% of the total operating revenues while it was 23% in 2013. Chemical revenues are expected to increase due to increased shipments of coal and petroleum gas. Norfolk is expecting agriculture, consumer products and government revenues to remain steady while they anticipate a decline in metal and constructions. Higher intermodal revenues are expected while revenues from paper, clay and forest products decline. With regards to operating expenses, compensation and benefits are expected to increase significantly while changes in other expenses will not be significant. With these assumptions, the net income is for the year ending on 31st December 2015 and 31st December 2016 is expected to be around $2150m and $23100m respectively.

62

Appendix A - Calculations 1. Cash flow analysis:  Current maturities of long-term debt Operating cash flow/ Current maturities of long term debt and notes payable COMPANY

2010(millions)

2011(millions)

2012(millions)

2013(millions)

2014(millions)

NORFOLK SOUTHERN CO.

2714/358=7.58

3227/50=64.54

3065/50=61.3

3078/445=6.92

2852/2=1426

UNION PACIFIC

4105/239=17.2

5873/209=28.1

6161/196=31.43

6823/705=9.67

7385/462=15.98

 Operating cash flow to total debt Operating cash flow/total debt COMPANY

2010(millions)

2011(millions)

2012(millions)

2013(millions)

2014(millions)

NORFOLK SOUTHERN CO.

2714/7025=0.38

3227/7540=0.42

3065/8682=0.42

3078/9448=0.32

2852/9026=0.31

UNION PACIFIC

4105/9242=0.44

5873/8906=0.65

6161/8997=0.68

6823/9577=0.71

7385/11480=0.64

 Operating cash flow per share Operating cash flow less preferred dividend/diluted weighted average common shares outstanding COMPANY

2010(millions)

2011(millions)

2012(millions)

2013(millions)

2014(millions)

NORFOLK SOUTHERN CO.

2714-1/366.5=7.40

3227-1/345.5=9.33

3065-1/320.9=9.54

3078-1/311.9=9.86

2852-2/9026=0.31

UNION PACIFIC

4105/502.9=5.16

5873/489.8=11.99

6161/476.5=12.92

6823/465.8=14.64

7385/901.1=8.19

 Operating cash flow to cash dividends Operating cash flow/cash dividend COMPANY

2010(millions)

2011(millions)

2012(millions)

2013(millions)

2014(millions)

NORFOLK SOUTHERN CO.

2714/514=5.28

3227/576=5.60

3065/624=4.91

3078/637=4.83

2852/687=4.15

UNION PACIFIC

4105/602=6.81

5873/837=7.01

6161/1146=5.37

6823/1333=5.11

7385/1632=4.52

63

2. Profitability analysis:  Return on assets Net income before non-recurring items/average total assets UNION PACIFIC 2010 2011 2012 net income before nonrecurring items2,780 3,292 3,943 average total assets 42636 44092 46124.5 Return on Assets 6.5% 7.5% 8.5%

NORFOLK SOUTHER SOUTHERN 2010 net income before nonrecurring items1,496 average total assets 27784 Return on Assets 5.4%

2011 1,916 28368.5 6.8%

2012 1,749 29440 5.9%

2013 4,388 48442 9.1%

2014 5,180 51223.5 10.1%

2013 1,910 31412.5 6.1%

2014 2,000 32862 6.1%

 Net profit margin Adjusted net income/sales Union pacific net sales net income before nonrecurring items net profit margin

2010 16,965 2,780 16.39%

2011 19,557 3,292 16.83%

2012 20,926 3,943 18.84%

2013 21,963 4,388 19.98%

2014 23,988 5,180 21.59%

NORFOLK SOUTHER SOUTHERN net sales net income before nonrecurring items net profit margin

2010 9,516 1,496 15.72%

2011 11,172 1,916 17.15%

2012 11,040 1,749 15.84%

2013 11,245 1,910 16.99%

2014 11,624 2,000 17.21%

 Total asset turnover Sales/average total assets UNION PACIFIC net sales average total assets Total Asset Turnover

2010 16,965 42636 0.40

2011 19,557 44092 0.44

2012 20,926 46124.5 0.45

2013 21,963 48442 0.45

2014 23,988 51223.5 0.47

NORFOLK SOUTHER SOUTHERN net sales average total assets Total Asset Turnover

2010 9,516 27784 0.34

2011 11,172 28368.5 0.39

2012 11,040 29440 0.38

2013 11,245 31412.5 0.36

2014 11,624 32862 0.35

64

 Return on investment Net income before non-recurring items and non-controlling interest + [(interest expense)*(1-tax rate)/average (long-term liabilities + equity)

UNION PACIFIC Adjusted Net Income Average Long-Term Liabilities & Equity Return on Investment

2010 4824.3 25848.5 18.66%

2011 5635.8 26477 21.29%

2012 6665.75 27549 24.20%

2013 7389.9 29219.5 25.29%

2014 8707.65 30819.5 28.25%

NORFOLK SOUTHER SOUTHERN Adjusted Net Income Average Long-Term Liabilities & Equity Return on Investment

2010 2667.3 25848.5 10.32%

2011 3213.75 26477 12.14%

2012 3079.75 27549 11.18%

2013 3306.25 29219.5 11.32%

2014 3488.25 30819.5 11.32%

Operating income/average operating assets Union pacific 2010 2011 Operating Income 4,981 5,724 average operating asset 41283.5 42673 Return On Operating Assets 12.07% 13.41%

2012 6,745 44636 15.11%

2013 7,446 46675 15.95%

2014 8,753 49345 17.74%

NORFOLK SOUTHER SOUTHERN Operating Income average operating asset Return On Operating Assets

2011 3,213 25961 12.38%

2012 3,124 27099 11.53%

2013 3,257 28849 11.29%

2014 3,575 30096 11.88%

 Return on operating assets

2010 2,676 25295.5 10.58%

 Operating income margin Union pacific Operating Income net sales OPERATING INCOME MARGIN

2010 4,981 16,965 29.36%

2011 5,724 19,557 29.27%

2012 6,745 20,926 32.23%

2013 7,446 21,963 33.90%

2014 8,753 23,988 36.49%

NORFOLK SOUTHER SOUTHERN Operating Income net sales OPERATING INCOME MARGIN

2010 2,676 9,516 28.12%

2011 3,213 11,172 28.76%

2012 3,124 11,040 28.30%

2013 3,257 11,245 28.96%

2014 3,575 11,624 30.76%

65

 Operating asset turnover Net sales/average operating assets Union pacific 2010 net sales 16,965 average operating asset 41283.5 Operating Asset Turnover 0.41

2011 19,557 42673 0.46

2012 20,926 44636 0.47

2013 21,963 46675 0.47

2014 23,988 49345 0.49

NORFOLK SOUTHER SOUTHERN net sales average operating asset Operating Asset Turnover

2011 11,172 25961 0.43

2012 11,040 27099 0.41

2013 11,245 28849 0.39

2014 11,624 30096 0.39

2010 9,516 25295.5 0.38

 Sales to fixed assets ratio Net sales/average net fixed assets Union pacific 2010 net sales 16,965 AVERAGE NET FIXED ASSETS 37727.5 SALES TO FIXED ASSETS 0.45

NORFOLK SOUTHER SOUTHERN net sales AVERAGE NET FIXED ASSETS SALES TO FIXED ASSETS

2010 9,516 22937 0.41

2011 19,557 39093.5 0.50

2012 20,926 40965.5 0.51

2013 21,963 42873 0.51

2014 23,988 45010.5 0.53

2011 11,172 23850 0.47

2012 11,040 25102.5 0.44

2013 11,245 26190.5 0.43

2014 11,624 27169.5 0.43

 Return on total equity Net income before non-recurring items-dividends on redeemable preferred stock/average total equity Union Pacific 2014 2013 2012 2011 net income before non-recurring items 5180 4388 3943 3292 average total equity 21207 20551 19227.5 18170.5 RETURN ON TOTAL EQUITY 24.43% 21.35% 20.51% 18.12%

2010 2780 17282 16.09%

Norfolk Southern net income before non-recurring items average total equity RETURN ON TOTAL EQUITY

2010 1496 10511 14.23%

2014 2000 11848.5 16.88%

66

2013 1910 10524.5 18.15%

2012 1749 9835.5 17.78%

2011 1916 10290 18.62%

 Return on common equity Net income before non-recurring items-preferred dividends/average common equity Union Pacific net income before non-recurring items average common equity RETURN ON TOTAL EQUITY

2014 5180 32674 15.85%

2013 4388 29327.5 14.96%

2012 3943 26347.5 14.97%

2011 3292 23724.5 13.88%

2010 2780 21451.5 12.96%

Norfolk Southern net income before non-recurring items average common equity RETURN ON TOTAL EQUITY

2014 2000 12238 16.34%

2013 1910 11269.5 16.95%

2012 1749 10893 16.06%

2011 1916 11195.5 17.11%

2010 1496 11340 13.19%

3. Risk analysis:  Current ratio Current assets/current liabilities Union Pacific 2014 current assets 4679 current liabilities 3765 CURRENT RATIO 1.24

2013 3990 3791 1.05

2012 3614 3119 1.16

2011 3727 3317 1.12

2010 3432 2952 1.16

Norfolk Southern current assets current liabilities CURRENT RATIO

2013 3075 2305 1.33

2012 2242 2081 1.08

2011 1751 1701 1.03

2010 2471 2082 1.19

2014 2778 1780 1.56

 Quick ratio Cash equivalents + marketable securities +net receivables/current liabilities Union Pacific 2014 2013 2012 2011 2010 cash and cash equivalents 1586 1432 1063 1217 1086 net receivables 1611 1414 1331 1401 1184 current liabilities 3765 3791 3119 3317 2952 QUICK RATIO 0.85 0.75 0.77 0.79 0.77

Norfolk Southern cash and cash equivalents net receivables current liabilities QUICK RATIO

2014 973 1055 1780 1.14

67

2013 1443 1024 2305 1.07

2012 653 1109 2081 0.85

2011 276 1022 1701 0.76

2010 827 807 2082 0.78

 Accounts receivable turnover Net sales/average gross receivables Union Pacific 2014 net sales 23988 average gross receivables 1616 Accounts receivable turnover 14.84

2013 21963 1415 15.52

2012 20926 1335 15.67

2011 19557 1410 13.87

2010 16965 1189 14.27

Norfolk Southern net sales average gross receivables Accounts receivable turnover

2013 11245 1069.5 10.51

2012 11040 1069 10.33

2011 11172 919 12.16

2010 9516 791.5 12.02

2014 11624 1044 11.13

 Accounts receivable turnover in days 365/accounts receivable turnover Union Pacific net sales average gross receivables Accounts receivable turnover Accounts receivable turnover in days

2014 23988 1616 14.84 25

2013 21963 1415 15.52 24

2012 20926 1335 15.67 23

2011 19557 1410 13.87 26

2010 16965 1189 14.27 26

Norfolk Southern net sales average gross receivables Accounts receivable turnover Accounts receivable turnover in days

2014 11624 1044 11.13 33

2013 11245 1069.5 10.51 35

2012 11040 1069 10.33 35

2011 11172 919 12.16 30

2010 9516 791.5 12.02 30

 Cash turnover ratio Operating revenues/average cash balance UNION PACIFIC 2010 2011 2012 Revenue 16965 19557 20926 Cash 1086 1217 1063 Avg Cash 1468 1151.5 1140 Rev to Cash 11.6 17.0 18.4

2013 21963 1432 1247.5 17.6

2014 23988 1586 1509 15.9

NORFOLK 2011 2012 11172 11040 276 653 551.5 464.5 20.3 23.8

2013 11245 1443 1048 10.7

2014 11624 973 1208 9.6

Revenue Cash Avg Cash Rev to Cash

2010 9516 827 911.5 10.4

68

 Cash turnover in days 365/cash turnover

Revenue Cash Avg Cash Rev to Cash in days

2010 16965 1086 1468 11.6 32

Revenue Cash Avg Cash Rev to Cash in days

2010 9516 827 911.5 10.4 35

UNION PACIFIC 2011 2012 19557 20926 1217 1063 1151.5 1140 17.0 18.4 21 20 NORFOLK 2011 11172 276 551.5 20.3 18

2012 11040 653 464.5 23.8 15

2013 21963 1432 1247.5 17.6 21

2014 23988 1586 1509 15.9 23

2013 11245 1443 1048 10.7 34

2014 11624 973 1208 9.6 38

 Debt-to-equity ratio Total liabilities/total shareholder’s equity Union Pacific total liabilities total shareholders equity DEBT-TO-EQUITY RATIO

2014 31527 21189 1.49

2013 28506 21225 1.34

2012 27276 19877 1.37

2011 26518 18578 1.43

2010 25325 17763 1.43

Norfolk Southern total liabilities total shareholders equity DEBT-TO-EQUITY RATIO

2014 20833 12408 1.68

2013 21194 11289 1.88

2012 20582 9760 2.11

2011 18627 9911 1.88

2010 17350 10669 1.63

Total liabilities/total assets Union Pacific total liabilities total assets DEBT-TO-ASSETS RATIO

2014 31527 52716 0.60

2013 28506 49731 0.57

2012 27276 47133 0.58

2011 26518 45096 0.59

2010 25325 43088 0.59

Norfolk Southern total liabilities total assets DEBT-TO-ASSETS RATIO

2014 20833 33241 0.63

2013 21194 32483 0.65

2012 20582 30342 0.68

2011 18627 28538 0.65

2010 17350 28109 0.62

 Debt-to-assets ratio

69

 Interest coverage ratio (Recurring earnings + noncash expenses) excluding interest expense, tax expense, equity earnings and non-controlling interest/interest expense, including capitalized interest

Net Income interest expense income tax depreciation expense minority interest INTEREST COVERAGE

Net Income interest expense income tax depreciation expense minority interest INTEREST COVERAGE

UNION PACIFIC 2010 2011 2012 2780 3292 3943 602 572 535 1653 1972 2375 1487 1617 1760 10.8

2013 4388 526 2660 1777

2014 5180 561 3163 1904

13.0

16.1

17.8

19.3

NORFOLK 2010 2011 1496 1916 426 455 871 1002 819 862

2012 1749 495 1009 1760

2013 1910 525 1055 1777

2014 2000 545 1134 1904

10.1

10.0

10.2

8.5

9.3

4. Other ratios related to the industry:  Operating ratio Operating expenses/operating revenues Union Pacific 2010 2011 operating revenue 16965 19557 operating expenses 11984 13833 operating ratio 70.64% 70.73%

operating revenue operating expenses operating ratio

2012 20926 14181 67.77%

2013 21963 14517 66.10%

2014 23988 15235 63.51%

Norfolk Southern 2010 2011 2012 9516 11172 11040 6840 7959 7916 71.88% 71.24% 71.70%

2013 11245 7988 71.04%

2014 11624 8049 69.24%

70

 Long-term debt to operating property Long-term debt/operating assets

Union Pacific 2010 2011 Long term debt 9003 8697 operating assets 38253 39934 long term debt to operating property 23.54% 21.78%

2012 8801 41997 20.96%

2013 8872 43749 20.28%

2014 11018 46272 23.81%

Norfolk Southern 2010 2011 Long term debt 6567 7390 operating assets 23231 24469 long term debt to operating property 28.27% 30.20%

2012 8432 25736 32.76%

2013 8903 26645 33.41%

2014 8924 27694 32.22%

Union Pacific 2010 2011 Operating Revenue 16965 19557 Operating Property 38253 39934 operating revenue to operating assets 44.35% 48.97%

2012 20926 41997 49.83%

2013 21963 43749 50.20%

2014 23988 46272 51.84%

Norfolk Southern 2010 2011 Operating Revenue 9516 11172 Operating Property 23231 24469 operating revenue to operating assets 40.96% 45.66%

2012 11040 25736 42.90%

2013 11245 26645 42.20%

2014 11624 27694 41.97%

 Operating revenue to operating property Operating revenue/operating assets

71

Appendix B – Financial Statements Union Pacific Corporation – Consolidated Statements of Income Union Pacific Corp

2014

2013

2012

Sales/ Revenue

2011

2010

($ in millions)

Agricultural

3,777

3,276

3,280

3,324

3,018

Automotive

2,103

2,077

1,807

1,510

1,271

Chemicals

3,664

3,501

3,238

2,815

2,425

Coal

4,127

3,978

3,912

4,084

3,489

Industrial Products

4,400

3,822

3,494

3,166

2,639

Intermodal

4,489

4,030

3,955

3,609

3,227

$22,560

$20,684

$19,686

$18,508

$16,069

1,428

1,279

1,240

1,049

896

$23,988

$21,963

$20,926

$19,557

$16,965

Compensation and benefits

5,076

4,807

4,685

4,681

4,314

Fuel

3,539

3,534

3,608

3,581

2,486

Purchased services and materials

2,558

2,315

2,143

2,005

1,836

Depreciation

1,904

1,777

1,760

1,617

1,487

Equipment and other rents

1,234

1,235

1,197

1,167

1,142

924

849

788

782

719

$15,235

$14,517

$14,181

$13,833

$11,984

151

128

108

112

54

(561)

(526)

(535)

(572)

(602)

(3,163)

(2,660)

(2,375)

(1,972)

(1,653)

$5,180

$4,388

$3,943

$3,292

$2,780

Total Freight Revenues Other revenues Total Operating Revenues Operating Expenses

Other Total Operating Expenses Non-operating Items Other Income Interest Expense Income Taxes Net Income

72

Union Pacific Corporation – Consolidated Balance Sheets Union Pacific Corp ASSETS Current assets: Cash and cash equivalents Accounts receivable Materials and supplies Current deferred income taxes Other current assets

2014

1,586 1,611 712 277 493

1,432 1,414 653 268 223

1,063 1,331 660 263 297

1,217 1,401 614 306 189

1,086 1,184 534 261 367

Total current assets Investments Net properties Other assets TOTAL ASSETS

4,679 1,390 46,272 375 $52,716

3,990 1,321 43,749 671 $49,731

3,614 1,259 41,997 283 $47,153

3,727 1,175 39,934 260 $45,096

3,432 1,137 38,253 266 $43,088

3,303 462 3,765 11,018 14,680 2,064

3,086 705 3,791 8,872 14,163 1,680

2,923 196 3,119 8,801 13,108 2,248

3,108 209 3,317 8,697 12,368 2,136

2,713 239 2,952 9,003 11,557 1,813

$31,527

$28,506

$27,276

$26,518

$25,325

Common shares, $2.50 par value, 1,400,000,000 authorized; 1,110,100,423 and 1,109,657,652 issued; 883,366,476 and 912,001,996 outstanding respectively Paid-in-surplus Retained earnings Treasury stock Accumulated other comprehensive loss Total common shareholders' equity

2,775 4,321 27,367 (12,064) (1,210) $21,189

2,774 4,210 23,901 (8,910) (750) $21,225

1,386 4,113 22,271 (6,707) (1,186) $19,877

1,386 4,031 19,508 (5,293) (1,054) $18,578

1,385 3,985 17,154 (4,027) (734) $17,763

Total liabilities and common shareholders' equity

$52,716

$49,731

$47,153

$45,096

$43,088

Liabilities and Common Shareholders' Equity Current liabilities: Accounts payable and other current liabilities Debt due within one year Total current liabilities Debt due after one year Deferred income taxes Other long-term liabilities Commitments and Contingencies TOTAL LIABILITIES

2013

2012 ($ in million)

2011

2010

Common shareholders' equity

73

Union Pacific Corporation – Consolidated Statements of Cash Flows for the Years ended on December 31

2014

2013

2012

Operating Activities

2011

2010

$ in millions

Net Income

5,180

4,388

3,943

3,292

2,780

1,904

1,777

1,760

1,617

1,487

895

723

887

986

672

(285)

(226)

(160)

(298)

(483)

(197)

(83)

70

(217)

(518)

(59)

7

(46)

(80)

(59)

(270)

74

(108)

178

(17)

217

163

(185)

395

243

7,385

6,823

6,161

5,873

4,105

(4,346)

(3,496)

(3,738)

(3,176)

(2,482)

138

98

80

108

67

(274)

(85)

274

85

Adjustments to reconcile net income to cash provided by operating activities Depreciation Deferred income taxes and unrecognized tax benefits Other operating activities, net Changes in current assets and liabilities Accounts receivable, net Materials and Supplies Other current assets Accounts payable and other current liabilities Cash provided by operating activities Investing Activities Capital Investments Proceeds from asset sales Acquisition of equipment pending finance Proceeds from sale of assets financed Other investing activities, net Cash used in investing activities

(41)

(7)

25

(51)

(73)

(4,249)

(3,405)

(3,633)

(3,119)

(2,488)

(3,225)

(2,218)

(1,474)

(1,418)

(1,249)

2,588

1,443

695

486

894

(1,632)

(1,333)

(1,146)

(837)

(602)

(710)

(640)

(758)

(690)

(1,412)

(272)

(98)

Financing Activities Common shares repurchases Debt issued Dividends paid Debt repaid Debt exchange

(289)

Other financing activities, net

(3)

(12)

1

108

86

(2,982)

(3,049)

(2,682)

(2,623)

(2,381)

154

369

(154)

131

(764)

Cash and cash equivalents at beginning of year

1,432

1,063

1,217

1,086

1,850

Cash and cash equivalents at end of year

1,586

1,432

1,063

1,217

1,086

Cash dividends declared but not yet paid

438

356

318

284

183

Capital investments accrued but not yet paid

174

133

136

147

125

39

290

154

(554)

(528)

(561)

(572)

(614)

(2,492)

(1,656)

(1,552)

(625)

(936)

Cash used in financing activities Net change in cash and cash equivalents

Supplemental Cash Flow Information Non-cash investing and financing activities:

Capital lease financings Cash paid during the year for: Interest, net of amounts capitalized Income taxes, net of refunds

74

Norfolk Southern Corporations – Consolidated Statements of Income Norfolk Southern Corp

2014

2013

2012

Sales/Revenue Coal

2011

2010

($ in million) 2,382

2,543

2,879

3,458

2,719

Chemicals

1,863

1,667

1,467

1,368

1,302

Metals/Construction

1,521

1,405

1,446

1,439

1,326

Agr./Consumer/gov't

1,498

1,467

1,335

1,241

1,013

Automotive

1,004

984

897

780

648

794

795

775

756

712

6,680

6,318

5,920

5,584

5,001

2,562

2,384

2,241

2,130

1,796

11,624

11,245

11,040

11,172

9,516

Compensation and benefits

2,897

3,002

2,960

2,974

2,708

Purchased services and rents

1,687

1,629

1,604

1,610

1,477

Fuel

1,574

1,613

1,577

1,589

1,079

Depreciation

951

916

916

862

819

Materials and other expenses

940

828

859

924

757

Total Operating Expenses

8,049

7,988

7,916

7,959

6,840

Income from Railway Operations

3,575

3,257

3,124

3,213

2,676

104

233

129

160

153

Interest Expense

(545)

(525)

(495)

(455)

(462)

Income before income taxes

3,134

2,965

2,758

2,918

2,367

Provisions for Income taxes

(1,134)

(1,055)

(1,009)

(1,002)

(871)

Net Income

$ 2,000

$ 1,910

$1,749

$1,916

$1,496

General Merchandise:

Paper/clay/forest Total General Merchandise Intermodal Total Operating Revenues Operating Expenses

Other income

75

Norfolk Southern Corporations – Consolidated Statements of Balance Sheets Norfolk Southern Corp ASSETS Current assets: Cash and cash equivalents Short-term investments Accounts receivable Materials and supplies Current deferred income taxes Other current assets Total current assets Investments Net properties Other assets TOTAL ASSETS Liabilities and Common Shareholders' Equity Current liabilities: Accounts payable Short-term debt Income and other taxes Other current liabilities Current maturities of long-term debt Total current liabilities Long-term debt Other liabilities Deferred income taxes TOTAL LIABILITIES

2014

2012 $ in millions

2011

2010

1,055 236 167 347 2,778 2,679 27,694 90 $33,241

1,443 118 1,024 223 180 87 3,075 2,439 26,645 324 $32,483

653 15 1,109 216 167 82 2,242 2,300 25,736 64 $30,342

276 25 1,022 209 143 76 1,751 2,234 24,469 84 $28,538

827 283 807 169 145 240 2,471 2,193 23,231 304 $28,199

1,233 100 217 228 2 1,780 8,924 1,312 8,817 $20,833

1,265 100 225 270 445 2,305 8,903 1,444 8,542 $21,194

1,362 200 206 263 50 2,081 8,432 2,237 7,832 $20,582

1,092 100 207 252 50 1,701 7,390 2,050 7,486 $18,627

1,181 100 199 244 358 2,082 6,567 1,793 7,088 $17,530

Additional paid-in capital Accumulated other comprehensive loss Retained income Total stockholders' equity

310 2,148 (398) 10,348 $12,408

310 2,021 (381) 9,339 $11,289

315 1,911 (1,109) 8,643 $9,760

332 1,912 (1,026) 8,693 $9,911

358 1,892 (805) 9,224 $10,669

Total liabilities and stockholders' equity

$33,241

$32,483

$30,342

$28,538

$28,199

Stockholders' equity Common stock $1 per share par value, 1,350,000,000 shares authorized; outstanding 308,878,402 shares, respectively, net of treasury shares

973

2013

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Norfolk Southern Corporations – Consolidated Statements of Cash Flows for the Years ended on December 31

2014

2013

2012

2011

2010

$ in millions Operating Activities Net Income

2,000

1,910

1,749

1,916

1,496

Depreciation

956

922

922

869

826

Deferred income taxes

294

262

366

527

312

(13)

(104)

(6)

(32)

(42)

Accounts receivable

(31)

85

(64)

(215)

(41)

Materials and Supplies

(13)

(7)

(7)

(40)

(5)

Other current assets

(260)

(5)

(6)

14

(1)

Current liabilities other than debt

53

5

82

68

126

Other - net

(134)

10

29

120

43

Cash provided by operating activities

2,852

3,078

3,065

3,227

2,714

Property additions

(2,118)

(1,971)

(2,241)

(2,160)

(1,470)

Property sale and other transactions

114

144

192

84

97

Investments, including short term

(104)

(130)

(23)

(135)

(504)

Investment sales and other transaction

106

63

78

439

421

Cash used in investing activities

(2,002)

(1,894)

(1,994)

(1,772)

(1,456)

Dividends paid

(687)

(637)

(624)

(576)

(514)

Common stock issued

130

131

89

120

89

Purchase and retirement of Common Stock

(318)

(627)

(1,288)

(2,051)

(863)

Proceeds from borrowing , net

200

989

1,491

1,101

350

Debt repayments

(645)

(250)

(362)

(600)

(489)

Cash used in financing activities

(1,320)

(394)

(694)

(2,006)

(1,427)

Net change in cash and cash equivalents

(470)

790

377

(551)

(169)

Cash and cash equivalents at beginning of year

1,443

653

276

827

996

Cash and cash equivalents at end of year

973

1,443

653

276

827

Interest, net of amounts capitalized

522

492

473

435

453

Income taxes, net of refunds

1,102

735

618

289

602

Reconciliation of net income to net cash provided by operating activities

Gains and losses on properties and investments Changes in current assets and liabilities

Investing Activities

Financing Activities

Supplemental Cash Flow Information Cash paid during the year for:

77

References:     

Union Pacific http://www.up.com/ Norfolk Southern http://www.nscorp.com/ Securities Exchange Commission http://www.sec.gov/ Investopedia http://www.investopedia.com/ Wikipedia www.wikipedia.com

Work Distribution Ayesha Value chain analysis, Porter’s five forces, company strategies Fatema Profitability Analysis Shameem Cash Flow Analysis, Forecasting Naveed Risk Analysis

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