In his 2007 year-end letter to shareholders, Warren Buffett showed an ownership of 60,828,818 shares of Burlington Northern Santa Fe (BNSF) for a cost basis of $4.73 billion. This represented a 17.5 percent stake in the company at an average price of $77.76 per share. This marked Buffett’s initial investment in BNSF, which was and remains one of the two largest railroad companies, along with Union Pacific, in North America. In late 2009, Buffett and Berkshire Hathaway purchased all the remaining shares outstanding in BNSF in a deal that gave the company a total market capitalization of $34 billion, or roughly $100 per share for its 341.2 million outstanding shares at the time. The remainder purchased at this time represented a 77.4 percent stake in the company. Berkshire Hathaway had grown its shares from a 17.5 percent stake to a 22.6 percent stake between 2007 and 2010. This chapter looks at the BNSF investment from both the perspective of the initial investment in 2007 as well as the buy-out in 2010. Operating a railroad network is often associated with high capital requirements. BNSF generates the vast majority of its revenue from transporting freight between major North American economic centers, and thus incurs the costs of maintaining a fleet of locomotives and freight cars, an infrastructure of tracks, and a whole network of support facilities including yards, terminals, dispatching centers, and specialized service and maintenance shops. According to BNSF’s 2008 annual report, the railroad had approximately 40,000 employees, 6,510 locomotives, and 82,555 freight cars. Matthew Rose, the CEO and chairman of the company, stated that between 1997 and 2008, BNSF spent $30 billion on improving its rail infrastructure and rolling stock. By any metric, this is a huge amount of money invested. Besides dealing with the day-to-day operations, running a profitable railroad also involves allocating capital wisely on expansion, navigating the competitive landscape, and successfully managing regulatory issues such as trackage rights.
Figure 19.1.
According to the BNSK 2008 annual report the business is segmented into four core divisions and an “other” category. The split by revenue is as follows:
Table 19.1.
Overview of business segments
| Segment |
Revenue |
% of total |
| Consumer products |
$6,064m |
34% |
| Industrial products |
$4,028m |
22% |
| Coal |
$3,970m |
22% |
| Agricultural products |
$3,441m |
19% |
| Other |
$515m |
3% |
| Total |
$18,018m |
100% |
Excluding the Other category, the four core freight businesses generated revenue of $17.5 billion in 2008. As table 19.1 shows, although Consumer Products was the largest segment, Industrial Products, Coal, and Agricultural Products were also significant.
Researching further into the details of each freight category, Consumer Products refers to approximately 90 percent containers (both international shipping containers as well as domestic goods) and 10 percent automotive products. Industrial Products refers to construction products, building products, petroleum products, chemicals/plastics, and food and beverage products. Coal is coal, but refers specifically to BNSF’s transportation of U.S. low-sulfur coal originating from the Powder River Basin in Wyoming and Montana. Agricultural Products is the transportation of corn, wheat, soybeans, and other bulk foods, as well as ethanol, fertilizers, and related products. Overall, whichever the product category, BNSF’s main business activity is the transportation of bulk products. As seen in figure 19.2, which is taken from its 10-K statement of that year, BNSF does this mostly across the heartland of the central and western United States.
Figure 19.2.
Map of BNSF footprint. (Source: Union Pacific Corporation, 2007 Annual Report.)
As is also noted in the 10K statement, the customer interface of BNSF is such that approximately two-thirds of the revenues of BNSF are covered by individual customer contracts of various durations, while one-third of revenues come from customers who pay the common carrier published prices.
Table 19.2.
Operational metrics BNSF
| Year ended Dec. 31 |
2008 |
2007 |
2006 |
| Revenue ton-miles (millions) |
664,384 |
657,572 |
647,857 |
| Freight revenue per tsd revenue ton-miles |
$26.34 |
$23.34 |
$22.45 |
| Average length of haul (miles) |
1,090 |
1,079 |
1,071 |
Source: Based on Burlington Northern Santa Fe, 2008 10K Report, 10.
As one can see, while average length of hauls have remained roughly in line, the total amount of ton-miles (volume) has increased between one percent and two percent in each of the last two years. The real difference, however, comes from the average revenue per ton-miles—in other words, the price—which increased significantly between four percent and 13 percent in the last two years. Some of this was due to higher fuel prices; but according to BNSF’s detailed financials, fuel costs increased by only $1.7 billion while freight revenues increased by $3 billion. This information indicates that BNSF has pricing power.
Another key aspect in understanding BNSF is recognizing its competitive position. First, BNSF competes with other railroads. Union Pacific, with its 48,000 employees and approximately 8,700 locomotives in 2008, was the largest competing railroad. To understand to what degree BNSF competes with Union Pacific, see the map of operations for Union Pacific in figure 19.3.
Figure 19.3.
Operational Metrics, BNSF. (Source: Burlington Northern Santa Fe Corporation, 2008 Annual Report.)
As you can see, Union Pacific and BNSF competed on a significant number of routes between the Central Plains and the West Coast.1 Given this fact, price, timeliness, and quality of service must also be operational aspects on which the two railroads compete. Table 19.3 contains the operational metrics from Union Pacific’s 2008 annual report.
Table 19.3.
Operational metrics Union Pacific
| Year ended Dec. 31 |
2008 |
2007 |
2006 |
| Revenue ton-miles (millions) |
562,600 |
561,800 |
565,200 |
| Freight revenue per tsd revenue ton-miles |
$30.43 |
$27.56 |
$26.17 |
| Operating ratio |
77.3% |
79.3% |
81.5% |
| Customer satisfaction index |
83 |
79 |
72 |
Source: Based on Union Pacific, “Operating/Performance Statistics,” 2008 Annual Report, 35.
By comparing these metrics with those of BNSF, one can draw two conclusions. First, it seemed that BNSF had added trackage or managed volumes slightly better than Union Pacific. Unlike Union Pacific, which saw a very slight decrease in revenue ton-miles during the period from 2006 to 2008, BNSF saw an increase of three percent. Second, like BNSF, Union Pacific was increasing prices. The fact that both railroads were able to increase prices indicates a favorable pricing environment within the industry and an absence of cutthroat price competition between the railroads.
As far as direct competition, Union Pacific was a real competitor to BNSF, but based on the previous analysis, this was likely a respected duopoly with pricing discipline. BNSF seemed to be the better operator of these two players because it had been able to grow revenue ton-miles profitably between 2006 and 2008, although Union Pacific also performed reasonably well.
In addition to the direct competition of alternative railroads, one must also consider the competition from the substitutes available for long distance freight transport, the most obvious of which are transport via truck, water, and aircraft. Given that water transport is limited to areas near waterways, and given the very high price point of aircraft transportation, the most relevant substitute for cargo rail is clearly truck transport.
BNSF Chairman Matthew Rose goes to great lengths in his annual report to detail the advantages of cargo rail over truck transport, noting that “trains transport on average a ton of freight nearly three times as far as a truck on the same amount of fuel.” And so while train transport accounts for a bit more than 40 percent of the nation’s freight, it only accounts for 2.6 percent of the nation’s greenhouse gas emissions.2 Overall, rail is probably the most efficient, cheap, and environmentally friendly option for regular transport. In fact, Rose states that BNSF’s focus should not be on direct competitors like Union Pacific as much as on the opportunity the whole rail industry has in capturing a larger slice of the overall freight transportation pie.
As to the financials of Burlington Northern Santa Fe, from 2000 to 2007, BNSF’s revenues increased from $9.2 billion in 2000 to $15.8 billion in 2007. Similarly, EBIT increased from $2.2 billion in 2000 to $3.5 billion in 2007. Net earnings increased from $980 million in 2000 to $1.8 billion in 2007. As a CAGR for the period, the annual growth rates for revenue, EBIT, and net earnings were approximately eight percent, seven percent, and nine percent, respectively. According to the balance sheet of the BNSF business at year-end 2007, its capital requirements and return economics were as described in table 19.4.
Table 19.4.
| Category |
Amount in $ |
As a % of revenues |
| PPE |
$33,583m |
213% |
| Inventories |
$579m |
4% |
| Accounts receivable |
$790m |
5% |
| Accounts payable |
−$2824m |
−18% |
| Total capital employed (TCE) |
$32,128m |
203% |
As table 19.4 shows, the primary capital employed in the railroad business is tied to PPE: property, plant, and equipment. This category includes the tracks, the maintenance facilities, and the rolling stock, including locomotives and rail cars. Besides the PPE, the business requires very little capital. Based on the $15.8 billion revenues and $3.5 billion EBIT, one can calculate a before-tax return of 10.9 percent. Assuming a tax rate of 30 percent leading to a NOPAT of $2.4 billion, the theoretical after-tax ROTCE would be 7.6 percent.
Although this in itself is not very impressive (a good ROTCE is usually considered to be something above 15 percent), BNSF seemed to have a significantly better marginal return on tangible capital than on its entire capital base. This case is not obvious, but it is fairly straightforward. Out of its approximately $40 billion in gross net PPE, approximately 80 percent was tied to track structure and other roadway.3 All the locomotives, freight cars, and other equipment together only accounted for approximately $6 billion in gross PPE. Here, while locomotives and freight cars may need replacement every several years, or more may need to be purchased, the core railroad tracks and roadways are mostly costs that have to be incurred once and do not require significant additional capital. Of course, there are some new tracks laid with regional expansion, but the scope of this “marginal capital” is much less than the cost of laying the core tracks. To be specific, BNSF reported its new and maintenance track miles laid in 2006, 2007, and 2008 as 854 miles, 994 miles, and 972 miles, respectively. Out of the approximately 60,000 total operated miles of track for the company, this represents an annual figure of a bit over one percent. New expansion tracks are a fraction of this amount. This is a very small investment in relation to the freight revenue growth, which increased five percent and 14 percent in 2007 and 2008, respectively. Hence, the marginal ROTCE is likely at least two times as high as what is suggested by the 7.6 percent ROTCE, which is based on the total capital of the business.
In total, with a long-term growth rate of about six to eight percent per annum based on railroads being more efficient than other modes of transport, and a high marginal ROTCE of 15 percent or greater, BNSF would have looked attractive to a prospective investor who understood the business economics—a good-quality business with some structural advantages. The major arguments one could make against BNSF are regarding qualitative issues, such as that it is a business with competition and one where good operational execution is critical to success.
This leads naturally to an analysis of the BNSF management team, who are responsible for good execution. At the end of 2007, the team in charge of BNSF included CEO and President Matthew Rose and CFO Thomas Hund. Matthew Rose had been the chairman and CEO of BNSF since 2000. He had joined the company in 1993 and moved up the ranks on the operations side, having held the position of COO before becoming CEO. Before he joined BNSF, he worked in the rail industry as vice president of transportation at a subsidiary of Norfolk Southern Railroad. Rose was clearly a manager with significant experience in operating railroads, and, as discussed previously, as CEO he had a track record of great financial performance, helping his company generate consistent revenue and profit growth. Under Rose’s leadership BNSF often outperformed Union Pacific.4 Thomas Hund was also an executive with extensive background in railroads. He had been the CFO of BNSF since 1999 and had previously held multiple financial positions with BNSF and Santa Fe Railway. Between December 31, 1999 and December 31, 2007, BNSF’s shares outstanding (diluted) were reduced by about 23 percent, from approximately 467 million to 359 million, a reduction of about 23 percent, and dividends increased from $0.48 to $1.14. This indicates good capital management on Hund’s part. While the BNSF management team members did not seem to own many shares themselves, they seemed to be very experienced and had a very respectable history.
Finally, valuation. Buffett made his purchase of Burlington Northern Santa Fe in several tranches. For his initial purchase of a 17.5 percent stake in the company in 2007, Buffett paid $4.7 billion, valuing the total company at $27.0 billion. On a per share basis, this reflects an average price of $77.78 per share. The conventional valuation multiples for this purchase would have been as follows:5
Table 19.5.
Valuation multiples
| |
2007 expected |
2006 actual |
| EPS (diluted) |
$5.10 |
$5.11 |
| PER |
15.3× |
15.2× |
| EBIT |
$3.49 billion |
$3.52 billion |
| EV/EBIT |
10.1× |
10.0× |
| P/B |
2.43× |
2.42× |
This is not incredibly cheap, but for a well-managed and inherently good-quality business with an understandable reason for having seven percent annual increases in profits and revenues at a high marginal ROTCE, this is a more than fair price for an investor who believes in the value of growth. The key then becomes the certainty of that growth. Given that BNSF had the structural advantage of being a more fuel-efficient form of cargo transport, had a long history of growth, and had a competent management team, as a potential investor, I would have been fairly comfortable with its growth prospects.
When purchasing the remainder of the company in 2010, Berkshire’s cost was roughly $100 per share for the 341.2 million shares outstanding that it did not already own. This was roughly 20 percent higher than the cost basis of his initial share purchases in 2007. Looking at year-end 2009 earnings (of which fourth quarter results were likely still not available at the time the purchase was made), the new valuation would have looked as follows:6
Table 19.6.
Valuation multiples II
| |
2009 expected |
2008 actual |
| EPS (diluted) |
$5.01 |
$6.06 |
| PER |
19.9× |
16.5× |
| EBIT |
$3.26 billion |
$3.91 billion |
| EV/EBIT |
13.2× |
11.0× |
| P/B |
2.66× |
3.06× |
Even more than his 2007 purchase, it is clear that the valuation that Buffett pays is not cheap. Even accounting for the premium he would have had to pay to take 100 percent ownership of the company, an investor at the time could have easily thought that the multiple of 11.0× EV/EBIT based on 2008 was based on peak-year earnings in the industry, and that the 13.2× 2009 multiple was a more accurate reflection of the price paid on sustainable earnings. It seems that Buffett either thought he knew better or was confident enough in the growth prospects of BNSF to pay a 13.2× EV/EBIT price.
Most impressive to me was the economic context in which this investment was made. When Buffett made this purchase in late 2009, the United States had just gone through one of the deepest economic recessions of recent times. On November 3, 2009, when the Burlington Northern deal was announced, the Dow was hovering just around 10,000, when in March of that year it had fallen to below 7,000. Looking specifically at Burlington Northern Santa Fe, the year-end operating performance (which would not have been available at the time Buffett purchased his shares) was roughly in line with the performance BNSF achieved in 2006, a full three years prior. But despite the fear abounding in the market and the short-term poor performance of BNSF, Buffett had the fortitude to invest the largest stake in his career at a time of relative uncertainty. He saw an opportunity to purchase a high-quality business with decent growth and high marginal ROTCE and was confident enough to pay a price others would have considered expensive—especially in 2009. Here I can only guess that Buffett chose to stick to a good investment that he had come to known well, over other surely interesting investment candidates in late 2009.
To sum up, it seems that Buffett first invested in BNSF as a good business with good management at a fair price. In 2009, he then took an opportunity to pay “only” an approximate 25 percent premium to his initial purchase price to take private a business he knew well but at a time where both the market uncertainty and the company specific momentum were still uncertain. For any seasoned investor, doing this takes a lot of courage regardless if one has to answer to shorter-term investors in one’s fund or not.
INTERVIEW WITH MATT ROSE
On December 21, 2009, Burlington Northern Santa Fe Corporation (BNSF) posted on its intranet a video of CEO Matt Rose interviewing Warren Buffett, CEO of Berkshire Hathaway Inc. (Berkshire Hathaway), on matters related to Berkshire Hathaway’s acquisition of BNSF. A transcription of the interview follows:
BNSF Video News
Interview with Warren Buffett
Interviewer: Matt Rose
December 3, 2009
MKR: Hi, I’m Matt Rose. Welcome to this special edition of BNSF Video News. As you all know, we’ve been in the news a lot with the major announcement that we have the future ownership position of BNSF being acquired by Berkshire Hathaway. So I’ve been asked a lot of questions around, what does this mean for BNSF, what does it mean for the individuals that work for BNSF, what does it mean for customers, and what does it mean for the communities in which we operate? And so I thought, who better to ask these questions to than Warren Buffett, chairman, chief executive officer of Berkshire Hathaway. We have a great treat. We’ve got Warren with us today at this taping, so we’re going to get right into it. I’ve asked about 20 people to send in a number of questions, of “ask-Warren” questions, and they did. They sent in about 150 questions. We’re only going to ask about 15 to 20. We’ll see how we do on time. So let’s get right into it. Again, Warren, welcome, thank you for joining us. The first one is, why BNSF, and why now?
WB: Well, uh, you know, I love railroads. I mean, you go back 70 years when I used to be going down to Union Station every Sunday, and so I’ve watched it for years. And, and we couldn’t have done this 20 years ago, in terms of the size of Berkshire. But Berkshire piles up. We don’t pay out any dividends, so we pile up 8 or 9 or 10 billion dollars a year, and you know, this is a dream for me, you know, getting a chance to buy a wonderful railroad like this, and uh, I couldn’t be happier about it.
MKR: So, the next one. In announcing the acquisition, you said it’s an all-in wager on the economic future of the United States. Buffett, who has been building up his rail holdings for several years, said in the statement, I love these events. So would you please just share your perspective and thoughts on the future of the rail industry?
WB: Well, it has to do well if the country does well, and the country is going to do well. So, you know, I don’t know about next week or next month or even next year, but if you look at the next 50 years, this country is going to grow, it’s going to have more people, it’s going to have more goods moving, and rail is the logical way for many of those goods to travel, and probably a greater percentage all the time, just in terms of, of cost efficiency, in terms of fuel efficiency, in terms of environmentally-friendly. So there’s no way rail is going to lose share, and I think the pie is going to grow, and I think the rail share of the pie is going to grow.
MKR: So the next question. You said in the past, you’d rather buy a great business at a fair price than a fair business at a great price. What does BNSF meet the definition of a great business?
WB: Well, it’s a great business in that you know it’s going to be here forever, to start with. I mean, the hula-hoop business came and, you know, went, and then, you know, the pet rocks and all that kind of thing. And even television set manufacturers have, you know, moved over to Japan. All of that sort of thing. The rail business is not going to go anyplace. It’s going to be right here in the United States. There’s going to be four big railroads that are moving more and more goods. So it’s, it’s, it’s a good business. It, it can’t be, it can’t be something like Coca-Cola or Google, because it’s, you know, it’s a public service type business, too, and it has, it has a fair amount of regulation that is part of the picture. But it’ll be a good business over time. It will make sense for this country to want railroads to continue to invest more and more money, in terms of expanding and becoming more efficient. So you’re on the side of society, and society will largely be on your side. Not every day, but most of the time.
MKR: Well, I think our 40,000 employees definitely agree with that. Alright, so the next one. Historically, are companies more profitable after joining Berkshire Hathaway, and if so, why?
WB: Well, you can run the business exactly as you see fit. You don’t have to please banks. You don’t have to please Wall Street. You don’t have to, you know, you don’t have to please media or anybody else. Basically, it frees up the managers of our businesses to do exactly what they love to do, which is to run their businesses. And, and, and there’s no home really like Berkshire that can offer that.
MKR: Alright. The next question is, and I didn’t ask this, will Berkshire directly be involved in the management of BNSF, and will the management structure change?
WB: No, it won’t. It’s very simple. We’ve got 20 people in Omaha, and there isn’t one of them that knows how to run a railroad.
MKR: Alright, next question. Will this transaction impact employment levels positively or negatively?
WB: Well, I don’t think it changes anything, really, in that respect. I mean, you’ll be running the railroad, and you’ll run it in an efficient way, and when times are good, you’re going to have more people employed than when times are bad. But nothing in our ownership really has any effect on employment.
MKR: Okay. So, this came from one of our locomotive engineers. He said, will rail labor have access to you regarding issues? How do you balance negotiating fair wages, health care, and a good work environment with Berkshire Hathaway earnings?
WB: Well, you’ll do it just like you’ve managed it in terms of BNSF earnings. And there will be no involvement by me or anybody else in Omaha in terms of labor or in terms of purchasing or in terms of what locomotives you buy, anything of the sort. It’s—we bought it because it was well-managed. If, if, if we had to bring management to BNSF, both of us would have been in trouble.
MKR: Okay. The next question came from our finance group. Will there be a significant, will there be significant BNSF asset sales to pay down the eight-billion-dollar acquisition debt?
WB: Not a dime. Not a dime.
MKR: Next question. Will Berkshire continue to invest the capital needed to maintain the BNSF infrastructure?
WB: Well, it’d be crazy if we didn’t. You know, we’re not going to, we’re not going to buy a business and starve it. You got where you are because you were willing to make the investments ahead of time to pay it off 3, 5, 10 years down the road, and that’s, that’s part of the railroad business, and it’ll stay part of the railroad business.
MKR: You’ve heard me talk about regulatory risk. We’ve been talking to our employees about that for a number of years. And the question is, uh, what’s your perspective on the regulatory risk in our industry, from what you know about it?
WB: Well, Matt, it’ll never go away, in the sense that, people, you know, you will always have people that are bothered by what you’re charging, and you know, whether it’s in some farmer in a pasture or wherever. And the very fact that it has a utility aspect to it. Now it has an entrepreneurial aspect to it, too, but it has a utility aspect to it. So it’s always going to be regulated. There always will be some tension between shippers and railroads, and they will all, there will always be some people who will try and use political influence to affect rates. But in the end, the country needs railroads to spend lots and lots and lots of money merely to stay in the same place, but then beyond that, to grow, and, and it would be crazy of society to deny you a reasonable rate of return.
MKR: Another question from the finance group. Will BNSF capital requests now have to compete internally with other Berkshire interests?
WB: Not in the least. No.
MKR: I thought it was a good question. Okay, next question. In 10 years, how will you evaluate the acquisition of BNSF, whether or not it’s been successful?
WB: Well, I—I’ll measure it against my own standard, which is that I have made a bet on the country doing well. And if I’m wrong on that, that’s my fault and not anybody at BNSF’s fault. But I will look at it how it does compared to other railroads. I’ll look at how railroads are doing versus trucking and all of that. But in the end, I don’t really worry about that very much. I, I’ve seen what’s been done here. I think I know how the country is going to develop. I think the West is going to do well. I’d rather be in the West than the East. So I really don’t have much of a worry about that.
MKR: The next question is, how should be BNSF support the long-term goals of Berkshire Hathaway, and what expectations have you established for the BNSF management team?
WB: You should, you should really be doing it as if you had the same 250,000 owners you have now. I mean, their interests are the same, you know, as Berkshire’s will be, and, and I don’t really see any difference. We want this railroad run as well as it can be. We’d love it every, every, every car you can steal away from the Union Pacific [unintelligible], but we want Union Pacific to do well, too. I mean, we’re both going to do well, too. I mean, we’re both going to do well, you know, in the years ahead. And, and, you know, if we thought it needed changing, we wouldn’t be here.
MKR: Okay, this was a question from one of the employees. I heard Berkshire’s eliminated company-sponsored pension plans at some companies. What are the plans for the BNSF pension plans, and what factors do you take into consideration when evaluating whether to maintain a pension plan at a company you acquire?
WB: Yeah. That will be up to the management. I mean, there may be changes in benefits that the government legislates. I mean, who would have guessed 401Ks would have come along 40 years ago or something of the sort. But you’ll make those determinations just like you make all other determinations.
MKR: BNSF has developed a pay structure that encourages employees to take ownership of the company by basing a portion of the compensation on corporate performance. How will this change after the merger?
WB: Well, the people who have been involved in any kind of a pay-for-performance-type arrangement, whether it’s stock or anything else, will undoubtedly have a pay-for-performance type of compensation, which, you know, you’ll work out, basically.
MKR: Okay, so there were just a lot of questions on your view of the national economy and philosophy around this. A couple of questions. One, it’s been said recently that the rising national debt may be the next economic crisis. Do you agree, and what should be done about it?
WB: Well, I actually wrote an article about that a few months ago. I mean, it is a problem, but if, if you sat down at the start of every year going back to 1776, you could have written down a bunch of problems in the United States. We aren’t perfect at avoiding them, but we’re pretty darn good at solving them. I mean, you know, we’ve even had a civil war in this country, you know, let alone a Great Depression, world wars, and flu epidemics and all that sort of thing. So the country always has problems. The country always solves them. And I don’t know whether business comes back in 3 months or 6 months, but I know this: in the next 100 years, we’re probably going to have 50 bad years, I mean 15 bad years in the United States, and we’re probably going to have, you know, another 15 so-so, and we’ll probably have 70 good ones, something like that. I don’t know the order in which they’re going to come, but overall, this country works. We started out with 4 million people in 1790, and look at what we’ve got now. And it’s because of the system.
MKR: Next question. Do you promote management collaboration among the subsidiary companies?
WB: Yeah, we, we tell them if they can find ways to do things among themselves that benefit both parties, go to it. But we don’t, we don’t force anything through Omaha. We’ve got, for example, a carpet company that worked out something with our insulation company, Johns Manville, in terms of back hauls, for example. And we’ve got other companies cooperated on getting special discounts by buying computers cause of mass purchasing power. But we’ve never ordered anything from Omaha. We don’t convene people to do that or anything. The managers do get to know each other, and sometimes they figure out things to their mutual advantage.
MKR: Okay, the next question is, it’s thought that Berkshire Hathaway has not previously invested in heavily unionized companies. Given that, what are Mr. Buffett’s views of the role of unions in private-sector businesses generally, and at BNSF in particular?
WB: Yeah, we probably have, I’m sure we have more than a dozen businesses that are, are anywhere from moderately unionized to very heavily unionized. The Buffalo News we’ve probably got, I don’t know, 12 or 13 unions. In See’s Candies, we’ve got unions. We’ve got, we’ve got unions at CTB, our farm equipment company. We’ve got lots and lots of unions. And there, you know, we—it’s a question of the industry, to a great extent, and, and uh, and what the management has done in the past, and so on.
MKR: You’ve acquired some terrific private and family-run companies where the owners have great passion for their business. What traits have made those companies so successful, and how can the BNSF family of 40,000 employees apply those principles in our work and lives?
WB: Yeah, well, we, we do—we look for companies where the managers are passionate about the business. It makes a real difference. I mean, anybody that’s enthused about something just brings something extra to the decision-making and the work every day. So I wouldn’t, I really wouldn’t be here today unless I thought you were passionate about the business. I mean, it’s crazy to have some bureaucratic type going through the motions every day running a business. It won’t work in America. And, and it’s, it’s an important ingredient. You do find quite often in family businesses, and you probably find it a little less often in, in, in the professionally managed operation, but I’m sure it exists at BNSF.
MKR: Closing comments?
WB: Closing comments is, I’m happy to be here. This—I had to wait until I was 79, but it’s still a boyhood dream come true.
MKR: Well, Warren, I get the question a lot, of how life will change. It’s been a little frustrating, I think, for some of our employees, because at the end of the day, truly, this is mainly about corporate structure. Instead of shareholders, we now have Berkshire Hathaway and yourself. What our employees continue to be focused on, of course, every day, is improving safety, getting more freight to the railroad, taking cost out, and, and going deeper into our customer supply chain. And we look forward to a great relationship with Berkshire Hathaway, and we’re delighted that you took this time to come and spend it on our video news, and I’m sure it means a lot to all of our employees. Thanks very much.
WB: Thanks for inviting me.
Table 19.7.
Income statement (2006–2008)
Year ended Dec. 31
($ in millions except per share data)
| |
2008 |
2007 |
2006 |
| Revenues |
18,018 |
15,902 |
14,985 |
| Operating expenses |
| Fuel |
4,640 |
3,327 |
2,856 |
| Compensation and benefits |
3,884 |
3,773 |
3,816 |
| Purchased services |
2,136 |
2,023 |
1,906 |
| Depreciation and amortization |
1,397 |
1,293 |
1,176 |
| Equipment rents |
901 |
942 |
930 |
| Materials and other |
1,148 |
959 |
780 |
| Total operating expenses |
14,106 |
12,316 |
11,464 |
| Operating income |
3,912 |
3,486 |
3,521 |
| Interest expense |
533 |
511 |
485 |
| Other expense, net |
11 |
18 |
40 |
| Income before income taxes |
3,368 |
2,957 |
2,996 |
| Income tax expense |
1,253 |
1,128 |
1,107 |
| NET INCOME |
2,115 |
1,829 |
1,889 |
| Earnings per share: |
| Basic earnings per share |
6.15 |
5.19 |
5.23 |
| Diluted earnings per share |
6.08 |
5.10 |
5.11 |
| Average shares: |
| Basic |
343.8 |
352.5 |
361.0 |
| Dilutive effect of stock awards |
4.0 |
6.4 |
8.8 |
| Diluted |
347.8 |
358.9 |
369.8 |
Source: Burlington Northern Santa Fe Corporation, 2008 10K Report, 39.
Table 19.8.
Balance sheet (2007–2008)
Year ended Dec. 31
($ in millions)
| Assets |
2008 |
2007 |
| Current assets |
| Cash and cash equivalents |
633 |
330 |
| Accounts receivable, net |
847 |
790 |
| Materials and supplies |
525 |
579 |
| Current portion of deferred income taxes |
442 |
290 |
| Other current assets |
218 |
192 |
| Total current assets |
2.665 |
2.181 |
| Property, plant, and equipment, net |
30.847 |
29.567 |
| Other assets |
2.891 |
1.836 |
| TOTAL ASSETS |
36.403 |
33.583 |
| Liabilities and stockholders’ equity |
| Current liabilities |
| Accounts payable and other current liabilities |
3.190 |
2.824 |
| Long-term debt due within one year |
456 |
411 |
| Total current liabilities |
3.646 |
3.235 |
| Long-term debt and commercial paper |
9.099 |
7.735 |
| Deferred income taxes |
8.590 |
8.484 |
| Pension and retiree health and welfare liability |
1.047 |
444 |
| Casualty and environmental liabilities |
959 |
843 |
| Employee separation costs |
57 |
77 |
| Other liabilities |
1.874 |
1.621 |
| Total liabilities |
25.272 |
22.439 |
| Stockholders’ equity |
| Common stock, $0.01 par value, 600,000 shares authorized; 541,346 and 537,330 shares issued, respectively |
5 |
5 |
| Additional paid-in capital |
7.631 |
7.348 |
| Retained earnings |
12.764 |
11.152 |
| Treasury stock, at cost, 202,165 shares and 189,626 shares, respectively |
−8.395 |
−7.222 |
| Accumulated other comprehensive loss |
−874 |
−139 |
| Total stockholders’ equity |
11.131 |
11.144 |
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY |
36.403 |
33.583 |
Source: Burlington Northern Santa Fe Corporation, 2008 10K Report, 40.
Table 19.9.
Cash-flow statement (2006–2008)
Year ended Dec. 31
($ in millions)
| |
2008 |
2007 |
2006 |
| Operating activities |
| Net income |
2.115 |
1.829 |
1.889 |
| Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
| Depreciation and amortization |
1.397 |
1.293 |
1.176 |
| Deferred income taxes |
417 |
280 |
316 |
| Employee separation costs paid |
−15 |
−21 |
−27 |
| Long-term casualty and environmental liabilities, net |
150 |
26 |
−55 |
| Other, net |
81 |
183 |
−43 |
| Changes in current assets and liabilities: |
| Accounts receivable, net |
191 |
20 |
−127 |
| Change in accounts receivable sales program |
−250 |
— |
— |
| Material and supplies |
54 |
−91 |
−92 |
| Other current assets |
−31 |
12 |
99 |
| Accounts payable and other current liabilities |
−132 |
−39 |
53 |
| Net cash provided by operating activities |
3.977 |
3.492 |
3.189 |
| Investing activities |
| Capital expenditures |
−2.175 |
−2.248 |
−2.014 |
| Construction costs for facility financing obligation |
−64 |
−37 |
−14 |
| Acquisition of equipment pending financing |
−941 |
−745 |
−1.223 |
| Proceeds from sale of assets financed |
348 |
778 |
1.244 |
| Other, net |
−241 |
−163 |
−160 |
| Net cash used for investing activities |
−3.073 |
−2.415 |
−2.167 |
| Financing activities |
| Net increase/decrease in commercial paper and bank borrowings |
−161 |
−584 |
283 |
| Proceeds from issuance of long-term debt |
1.150 |
1.300 |
300 |
| Payments on long-term debt |
−217 |
−482 |
−467 |
| Dividends paid |
−471 |
−380 |
−310 |
| Proceeds from stock options exercised |
91 |
142 |
116 |
| Purchase of BNSF common stock |
−1.147 |
−1.265 |
−730 |
| Excess tax benefits from equality compensation plans |
96 |
121 |
95 |
| Proceeds from facility financing obligation |
68 |
41 |
— |
| Other, net |
−10 |
−15 |
−9 |
| Net cash used for financing activities |
−601 |
−1.122 |
−722 |
| Increase/decrease in cash and cash equivalents |
303 |
−45 |
300 |
| Cash and cash equivalents: |
| Beginning of year |
330 |
375 |
75 |
| End of year |
633 |
330 |
375 |
| Supplemental cash-flow information |
| Interest paid, net of amounts capitalized |
538 |
494 |
462 |
| Income taxes paid, net of refunds |
820 |
680 |
779 |
| Noncash asset financing |
258 |
461 |
109 |
Source: Burlington Northern Santa Fe Corporation, 2008 10K Report, 41.
