Union Pacific Corporation — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017; comparisons are with the same 2016 periods. Unaudited consolidated results cover the railroad and subsidiaries, reported as one operating segment.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Operating revenue | $5.408B | $5.174B | $15.790B | $14.773B |
| Operating income | $2.012B | $1.960B | $5.810B | $5.307B |
| Net income | $1.194B | $1.131B | $3.434B | $3.089B |
| Diluted EPS | $1.50 | $1.36 | $4.26 | $3.68 |
| Operating ratio | 62.8% | 62.1% | 63.2% | 64.1% |
| Operating cash flow | Not separately reported in this filing excerpt for Q3 | $5.398B | $5.467B |
Q3 operating revenue increased 5% and diluted EPS increased 10%. For the first nine months, revenue rose 7% and diluted EPS rose 16%. Q3 freight revenue grew 4% as average revenue per car increased 5%, more than offsetting a 1% decline in carloads. Year-to-date freight revenue rose 7%, with carloads up 2%.
Operating expenses rose 6% in Q3 and 5% year to date. Higher fuel prices, compensation costs, purchased services, hurricane-related costs and the workforce-reduction charge were contributors. Q3 operating ratio deteriorated 0.7 percentage points, including a 1.6-point negative impact from the workforce plan; year-to-date operating ratio improved 0.9 points.
Cash flow, debt and liquidity
- Cash from operations was $5.398B for the first nine months, down from $5.467B. Capital investment was $2.379B, versus $2.604B; dividends paid were $1.460B, versus $1.382B.
- Management-reported free cash flow, a non-GAAP measure defined as operating cash flow less investing cash flow and dividends, was $1.678B, compared with $1.266B.
- Cash and cash equivalents were $1.847B at September 30, up from $1.277B at year-end 2016; short-term investments were $90M.
- Total debt was $16.833B, up from $15.007B at year-end. Debt to capital increased to 46.8% from 43.0%; adjusted debt to capital, including lease and pension adjustments, increased to 50.4% from 47.3%.
- The company had $1.7B available under its revolving credit facility and reported compliance with its debt-to-net-worth covenant. It had $200M outstanding under a receivables securitization facility and no commercial paper outstanding.
- Cash used in financing was $2.568B, including $2.882B of share repurchases and $1.460B of dividends, partly offset by $2.285B of debt issued.
Material changes and operating context
- Freight revenue growth varied substantially by commodity in Q3: Industrial Products increased 26%, while Agricultural Products and Coal each declined 2%, and Automotive declined 3%. Industrial Products benefited from shale-related frac sand and other shipments.
- Hurricane Harvey disrupted the Southern network and reduced Q3 earnings by approximately $0.04 per diluted share, through lost revenue and additional operating costs. Average train speed fell 2% to 25.4 mph and terminal dwell time rose 7% to 30.0 hours; the filing also cites Positive Train Control implementation and testing as a drag on speed.
- Management approved a workforce reduction plan affecting approximately 460 management and 150 agreement positions, with another 100 agreement positions identified for elimination during the remainder of 2017. The plan generated an $84M pretax Q3 charge; actions were substantially complete and no further plan charges were expected.
- Q3 other income included a $65M favorable litigation settlement for back rent and a $57M real-estate sale gain. Nine-month other income also benefited from real-estate gains and higher rental income.
- Q3 share repurchases totaled 11.8M shares at an average $106.69 per share. The company had authority to repurchase up to 120M shares through 2020, with 92.9M remaining at September 30.
Outlook, risks and contingencies
- Management expected the 2017 capital plan to be approximately $3.1B, subject to business conditions and regulatory factors. No specific earnings or revenue guidance was provided in the filing text.
- Management said known claims, environmental costs, commitments and guarantees were not expected to have a material adverse effect after recorded liabilities and insurance recoveries. However, outcomes remain uncertain. Recorded environmental liabilities were $201M; asbestos liabilities were $101M. Personal injury liability was $287M, with estimated settlement costs potentially ranging from $287M to $313M.
- Fuel-surcharge antitrust litigation remained ongoing. On October 10, 2017, a court denied class certification; the company continued to deny the allegations and planned to defend the cases. The Oxbow matter was in discovery. A California drayage-reporting matter was settled for a $525,000 fine paid in August 2017.
- Six rail unions reached a tentative national agreement on October 5, 2017, covering January 2015 through December 2019; it represented nearly 60% of U.S. railroad employees in collective bargaining.
- Adoption of the new lease accounting standard was expected to significantly increase reported assets and liabilities. The company expected no material financial-statement impact from the new revenue standard.
- Management reported no material changes to previously disclosed risk factors or market-risk disclosures. Forward-looking statements remain subject to operational, economic, regulatory, labor, litigation and other uncertainties.
Important facts for investors to verify
- Whether revenue-per-car gains and industrial-products strength persist, and how demand trends in coal, agriculture, automotive and chemicals develop.
- Whether the network recovers from hurricane disruption and improves train speed and terminal dwell time, including as Positive Train Control work continues.
- The sustainability of operating-ratio improvement after excluding the workforce charge and other unusual gains or costs.
- Debt growth, leverage, planned repurchases and capital spending relative to operating cash generation and liquidity.
- Developments in labor negotiations, antitrust litigation, personal-injury and environmental exposures, and the future balance-sheet effect of lease-accounting adoption.