Union Pacific Corporation — Q2 2018 Form 10-Q
Business context and reporting period. Unaudited results cover the three and six months ended June 30, 2018, compared with the same 2017 periods. The railroad and its affiliates are the company’s single reportable segment.
Key financial results
| Metric | Q2 2018 | Q2 2017 | First half 2018 | First half 2017 |
|---|---|---|---|---|
| Operating revenue | $5.672B (+8%) | $5.250B | $11.147B (+7%) | $10.382B |
| Operating income | $2.099B (+5%) | $1.998B | $4.038B (+7%) | $3.786B |
| Net income | $1.509B (+29%) | $1.168B | $2.819B (+26%) | $2.240B |
| Diluted EPS | $1.98 | $1.45 | $3.65 | $2.76 |
| Operating ratio | 63.0% (up 1.1 points) | 61.9% | 63.8% (up 0.3 points) | 63.5% |
| Cash from operations | Not separately stated | Not separately stated | $4.033B | $3.459B |
Revenue and profitability. Q2 freight revenue rose 8% on 4% volume growth and a 4% increase in average revenue per car, reflecting fuel surcharges and core pricing, partly offset by unfavorable traffic mix. First-half freight revenue also increased 8%. Q2 operating expenses rose 10%, led by fuel costs, contributing to the higher operating ratio despite revenue growth. Net income benefited from the lower federal tax rate: the Q2 effective tax rate was 22.1%, versus 37.5% a year earlier.
Cash flow and investment. First-half investing cash use was $1.625B, including $1.614B of capital investments; financing cash use was $2.079B. Free cash flow, as defined by the company, was $1.283B, up from $915M. Cash and cash equivalents were $1.604B at June 30, versus $1.275B at year-end. The 2018 capital plan was expected to be approximately $3.3B.
Debt, liquidity, and shareholder returns. Total debt was $22.813B at June 30, 2018, compared with $16.944B at December 31, 2017; adjusted debt to adjusted EBITDA increased to 2.4x from 1.9x. The company issued $6.892B of debt and repurchased $6.693B of shares in the first half. A $2.0B revolving credit facility, expiring in June 2023, was undrawn; $200M of commercial paper was outstanding. The company declared $1.46 per share in dividends in the first half, compared with $1.21 in 2017.
Material changes and management commentary
- Freight volume increased 4% in Q2, but service remained constrained: average train speed fell 3% to 24.7 mph and terminal dwell rose 4% to 29.5 hours year over year. Management cited congestion, high freight-car inventories, a late-May tunnel outage, and Positive Train Control implementation and testing.
- Fuel expense increased 48% in Q2; the average locomotive diesel price rose to $2.30 per gallon from $1.69, and fuel consumption per gross ton-mile also increased. About $65M of additional operational-challenge costs offset productivity savings in Q2.
- Q2 share repurchases totaled approximately 33.2M shares, including 19.9M shares initially delivered under accelerated repurchase agreements for $3.6B. Final ASR settlement was expected before year-end 2018.
- In June, the company issued $6.0B of fixed-rate notes with maturities from 2021 to 2058; proceeds were for general corporate purposes, including share repurchases. A first-quarter early debt redemption generated an $85M charge.
Outlook, risks, and contingencies
- No specific full-year revenue or earnings guidance is provided in the supplied filing text. Management said the capital plan could change with business conditions or regulation and stated expectations to comply with its debt-to-EBITDA covenant under current financial plans.
- The company identified 324 sites where it may have environmental remediation liability; recorded environmental liabilities were $206M. Personal-injury liabilities were $269M, with reasonably possible settlement costs estimated at $269M–$294M.
- Pending matters include environmental proceedings related to a 2014 Oregon fuel spill and antitrust litigation over fuel surcharge programs. Management said it did not expect known claims and contingencies to materially adversely affect results, financial condition, or liquidity; outcomes remain uncertain.
- One union, representing about 5% of the agreement workforce, had an arbitration scheduled for August 2018. Most other unions had concluded agreements or resolved specified terms through arbitration.
- Adoption of the new lease accounting standard was expected to increase reported assets and liabilities by more than $2B. Management reported no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether service performance and network fluidity improved after the tunnel outage and amid ongoing Positive Train Control work.
- Whether fuel consumption, fuel prices, and surcharge recovery continue to pressure margins and the operating ratio.
- How debt-funded repurchases affect leverage, interest expense, liquidity, and final ASR share settlement.
- Whether the expected $3.3B capital plan, cash generation, and debt-covenant headroom remain on track.
- Developments in environmental and antitrust proceedings, labor arbitration, and the expected balance-sheet effect of lease-standard adoption.