Union Pacific Corporation — Q2 2011 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2011. Unaudited results are compared with the corresponding 2010 periods. Union Pacific reports one integrated railroad operating segment. Financial amounts below are in millions of dollars unless noted otherwise.
Financial performance
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Operating revenue | $4,858 | $4,182 | $9,348 | $8,147 |
| Operating income | $1,392 | $1,279 | $2,529 | $2,267 |
| Net income | $785 | $711 | $1,424 | $1,227 |
| Diluted EPS | $1.59 | $1.40 | $2.89 | $2.42 |
| Operating ratio | 71.3% | 69.4% | 72.9% | 72.2% |
- Q2 revenue rose 16%, freight revenue rose 16%, and freight carloads increased 3%. Management attributed revenue growth to higher fuel surcharges, core pricing gains and volume growth. Average revenue per car increased 13%.
- All six commodity groups recorded higher Q2 freight revenue. Agricultural revenue increased 22% and chemicals 19%; intermodal revenue rose 13%, despite a 1% decline in intermodal carloads.
- Operating expenses increased 19% in Q2, faster than revenue. Fuel expense rose 49%, including $263 million from higher fuel prices. Management cited wage and benefit inflation, volume-related costs, depreciation and flooding costs as additional pressures. Productivity and resource utilization savings partly offset them.
- Q2 operating ratio worsened by 1.9 percentage points, reflecting higher fuel prices, inflation and flooding costs, partly offset by pricing and productivity initiatives.
- For the first six months, cash provided by operating activities was $2,640, investing cash outflow was $1,366, and financing cash outflow was $1,305. Capital investments were $1,327 and dividends paid were $374. Company-defined free cash flow, a non-GAAP measure, was $900, compared with $755 in 2010.
Balance sheet, debt and liquidity
- At June 30, 2011, cash and cash equivalents were $1,055; current assets were $3,699 and current liabilities were $3,153.
- Reported debt was $8,938, down from $9,242 at December 31, 2010; shareholders’ equity was $18,306. Debt-to-capital was 32.8%, versus 34.2% at year-end. Adjusted debt-to-capital, including operating leases and unfunded pension and postretirement obligations, was 40.9%, versus 42.5%.
- The company had an undrawn $1.8 billion revolving credit facility expiring in May 2015 and reported compliance with its debt-to-net-worth covenant. No commercial paper was outstanding at quarter-end.
- Six-month capital investments were funded alongside $608 million of share repurchases and $374 million of dividends paid. The board authorized repurchases of up to 40 million shares through March 31, 2014; 36.4 million remained authorized at June 30.
Material changes and management commentary
- Management reported record Q2 diluted EPS. Improved economic activity and higher pricing and fuel recoveries supported growth; fuel price increases and operating disruption constrained operating leverage.
- Historic Midwest flooding led to $14 million of Q2 operating expense and approximately $20 million of missed coal revenue, net of estimated cost savings. Flooding continued into Q3 and could continue into Q4. Average train speed declined 1% and terminal dwell time increased 4% year over year in Q2; customer satisfaction scores improved.
- Six-month operating cash flow rose from $1,695 million in 2010, but the comparison is affected by a 2010 accounting change that moved $400 million related to receivables securitization from operating to financing activities. The company’s adjusted free-cash-flow presentation accounts for this change.
- In June, Union Pacific exchanged $857 million of existing notes due 2013–2019 for $750 million of 4.163% notes due 2022 and approximately $267 million in cash, plus accrued interest. The company said no gain or loss would be recognized; approximately $6 million of transaction costs was expensed in Q2.
- The company replaced its prior revolving facility with the $1.8 billion facility. It was also seeking to renew its receivables securitization facility, which had $600 million of capacity and $100 million utilized at quarter-end.
Outlook, risks and contingencies
- The filing provides no specific quantified earnings, revenue or EPS guidance. Management said current capital plans were expected to remain within the credit covenant, while noting that factors beyond its control could affect future compliance.
- Flooding could continue into Q3 and Q4 and may affect service and coal volumes. Other operating pressures included severe winter weather, track maintenance, higher fuel prices and increased terminal processing needs.
- The IRS issued notices of deficiency for tax years 1999–2008; the company disputes many proposed adjustments and expects a partial settlement for 1999–2004 within 12 months. Uncertain tax benefits were $149 million at June 30, including $78 million classified as current.
- Pending matters include fuel-surcharge antitrust litigation, including a new Oxbow complaint seeking more than $30 million plus unspecified damages, potentially including treble damages. The company denied the allegations and said it would defend the claims. It stated that known claims and contingencies were not expected to materially adversely affect results, financial condition or liquidity.
- The company agreed to pay $25 million to resolve its liability in the Omaha Lead Site matter; the consent decree was lodged with the court and the public-comment period closed July 7, 2011, without adverse comments reported by the EPA.
- Other disclosed exposures include environmental remediation at 294 sites, asbestos and personal-injury claims, $358 million of contingent guarantees, $4.7 billion of operating lease commitments and $4.1 billion of future minimum lease payments for leases involving variable-interest entities. Management said known obligations were not expected to have a material adverse effect.
Key facts for investors to verify
- Whether fuel surcharge and pricing gains can continue to offset fuel inflation and other rising operating costs, and whether the operating ratio improves.
- The duration and financial impact of Midwest flooding, including service performance and missed coal shipments.
- Cash generation relative to planned capital spending, dividends and the 40-million-share repurchase authorization.
- Developments in IRS appeals and settlements, fuel-surcharge litigation, environmental matters and other contingent liabilities.
- Renewal terms for the receivables securitization facility and any future debt issuance or refinancing needs.