UNION PACIFIC CORP quarterly report, Q2 FY2009

Union Pacific Corporation — Q2 2009 Form 10-Q

Reporting period: Quarter and six months ended June 30, 2009. The unaudited results cover Union Pacific’s single integrated railroad operating segment and are compared with the corresponding 2008 periods.

Financial results

MetricQ2 2009Q2 2008Six months 2009Six months 2008
Operating revenue$3.303 billion$4.568 billion$6.718 billion$8.838 billion
Operating income$751 million$931 million$1.423 billion$1.719 billion
Net income$468 million$531 million$830 million$974 million
Diluted EPS$0.92$1.02$1.64$1.87
Operating ratio77.3%79.6%78.8%80.5%

Q2 revenue fell 28%, operating income 19%, and net income 12% year over year. For the first half, revenue declined 24%, operating income 17%, and net income 15%. The operating ratio improved 2.3 points in Q2 and 1.7 points year to date; a lower ratio indicates lower operating costs as a share of revenue.

Freight revenue fell 28% in Q2 and 24% year to date. Carloads declined 22% and 21%, respectively, while average revenue per car fell 8% and 4%. All six commodity groups had lower revenue; the sharpest Q2 declines were automotive (54%) and industrial products (39%). Management attributed the broad contraction to recessionary demand and lower fuel surcharges.

Operating cash flow was $1.521 billion for the first half, down from $1.836 billion. Investing used $1.152 billion, including $1.079 billion of capital investment; financing provided $38 million. Free cash flow, as defined by the company as operating cash flow less investing cash flow and dividends paid, was $97 million versus $124 million.

At June 30, cash and equivalents were $1.656 billion, versus $1.249 billion at year-end 2008. Total debt was $9.990 billion, compared with $8.927 billion at year-end; debt to capital rose to 38.4% from 36.6%. Adjusted debt to capital, a non-GAAP measure that includes operating leases, sold receivables, and unfunded pension and OPEB, was 48.1%, versus 47.4%. The company had $1.9 billion available under its revolving facility, no commercial paper outstanding, and reported compliance with its debt covenant.

Drivers, outlook, and notable items

  • Lower fuel prices, cost reduction, productivity initiatives, improved pricing, and reduced casualty expense partly offset severe volume weakness. Diesel averaged $1.57 per gallon in Q2 versus $3.60 a year earlier; fuel expense fell 68% in Q2.
  • Management said it removed about 2,000 road locomotives and 60,000 freight cars from service through June, and workforce levels were down 10% in Q2 year over year. Average train speed improved 20%; customer satisfaction also increased.
  • A June land sale to Colorado’s Regional Transportation District generated $118 million in proceeds and a $116 million pretax gain, materially boosting other income. Q2 other income was $135 million versus $19 million a year earlier.
  • The company planned approximately $2.6 billion in 2009 capital expenditures, down from $2.8 billion, subject to business, regulatory, and other developments. It provided no specific earnings or revenue forecast and cautioned that first-half results are not necessarily indicative of full-year results.
  • In Q2, lease restructurings for 813 locomotives changed operating leases to capital leases, adding approximately $843 million of lease obligations and $742 million of assets; the company received $87 million cash consideration. It also issued $750 million of fixed-rate notes in February.
  • The receivables-sale facility, with $700 million capacity and $400 million utilized at quarter-end, was due to expire in August 2009; management expected renewal on comparable terms. A credit rating below investment grade could reduce or jeopardize access to the facility.
  • Management did not expect known claims, environmental matters, guarantees, or other contingencies to have a material adverse effect, but outcomes are uncertain. Disclosed exposures include $208 million of asbestos liabilities, $199 million of environmental liabilities, $429 million of contingent guarantees, and $36 million of unrecognized tax benefits. IRS examinations and appeals cover multiple tax years.

Most important facts for investors to verify

  • Whether freight volumes and pricing recover, particularly in automotive, industrial products, and intermodal markets, and whether lower fuel surcharges continue to weigh on revenue.
  • How much of reported earnings depended on the $116 million land-sale gain and whether operating performance can sustain margin improvements without that unusual item.
  • Debt growth, capital-lease obligations, adjusted leverage, and refinancing needs, including the renewal of the receivables facility.
  • Delivery of the $2.6 billion capital-spending plan and the sustainability of operating cash flow and free cash flow amid weak demand.
  • Changes in tax disputes, personal injury, asbestos, environmental remediation, and other contingent liabilities.