Union Pacific Corporation — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013; amounts are unaudited. Unless noted, financial amounts are in U.S. dollars. The Railroad is the company’s sole reportable operating segment.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Operating revenue | $5.573B | $5.343B | $16.333B | $15.676B |
| Operating income | $1.962B | $1.786B | $5.473B | $5.020B |
| Net income | $1.151B | $1.042B | $3.214B | $2.907B |
| Diluted EPS | $2.48 | $2.19 | $6.88 | $6.08 |
| Operating ratio | 64.8% | 66.6% | 66.5% | 68.0% |
- Q3 revenue rose 4%, freight revenue 5%, and net income 10% year over year. Nine-month revenue rose 4% and net income 11%.
- Q3 diluted EPS increased 13%; nine-month diluted EPS increased 13%. Average diluted shares fell to 464.2 million for the quarter from 475.2 million, reflecting fewer shares outstanding.
- Q3 operating expenses increased 2% to $3.611B, below revenue growth. Higher purchased services, wages and benefits, rents, and other expenses were partly offset by lower fuel costs. Nine-month operating expenses also rose 2%.
- Freight revenue growth reflected pricing and mix, including the automotive logistics arrangement. Q3 carloads were essentially flat; automotive, industrial products, and chemicals grew, while coal, agricultural products, and international intermodal volumes declined. Agricultural freight revenue fell 2% in Q3 and 6% year to date; automotive revenue rose 17% and 14%, respectively.
- Cash from operations was $4.881B for the first nine months, versus $4.366B. Investing cash outflow was $2.596B versus $2.866B; cash capital investment was $2.635B versus $2.876B. Free cash flow, as defined by the company, was $1.317B versus $640M.
- Cash and cash equivalents were $1.366B at September 30, 2013, compared with $1.063B at year-end 2012. Current assets were $4.064B and current liabilities $3.655B. The company had $1.8B available under its revolving facility and no commercial paper outstanding.
- Balance-sheet debt was $9.455B, compared with $8.997B at year-end 2012. Debt-to-capital was 31.3% versus 31.2%; adjusted debt-to-capital was 38.5% versus 39.1%. Shareholders’ equity was $20.774B.
- Dividends declared per share were $0.79 for Q3 and $2.17 for the first nine months, versus $0.60 and $1.80 in 2012. The company repurchased 9.61 million shares for $1.432B during the first nine months; 5.43 million shares remained authorized for repurchase.
Management commentary, outlook, and unusual items
- Management attributed record Q3 financial results to core pricing, safety, service and network efficiency, and productivity initiatives. It stated that the nine-month results are not necessarily indicative of full-year results; the filing provides no specific earnings or revenue guidance.
- Network measures were mixed year over year: Q3 train speed improved 1%, terminal dwell worsened 1%, and average rail-car inventory fell 4%. Management said all three operating metrics improved sequentially from Q2. Manifest traffic growth in the Southern Region contributed to longer terminal dwell.
- The August debt exchange replaced $1.170B of notes with $1.139B of new notes plus approximately $280M cash consideration and accrued interest; no gain or loss was recognized. Related third-party costs of about $9M were included in Q3 interest expense. The company also issued $650M of long-term notes in March.
- The company reported a $17M land-lease settlement in year-to-date other income. It redeemed $40M of bonds, recording a $1M early-extinguishment charge.
- Contingencies include personal-injury liabilities of $317M, asbestos liabilities of $132M, and environmental liabilities of $179M. The company said it did not expect known claims and contingencies to have a material adverse effect, while noting uncertainty in ultimate claim and remediation costs. Environmental remediation had been identified at 278 sites.
- Fuel-surcharge antitrust litigation remained pending. The appeals court vacated class certification in the broader rail-shipping case and remanded it for reconsideration. Oxbow’s amended complaint sought damages, including treble damages; the company denied the allegations and said it would defend them. A separate Illinois environmental matter involved a proposed penalty exceeding $100,000; settlement discussions continued.
- IRS examinations for 2005–2010 had resulted in notices of deficiency; disputes were in appeals or pending appeal. Net unrecognized tax-benefit liability was $115M. Management reported no material changes to previously disclosed risk factors or market-risk disclosures.
Key facts for investors to verify
- Whether pricing and favorable business mix can continue to offset flat or declining volumes in coal, agriculture, and international intermodal.
- Whether operating-ratio improvement and service performance are sustainable given higher purchased-service, labor, and network-capacity costs.
- Debt maturities, refinancing plans, the debt-exchange economics, and continued compliance with the revolving-credit covenant.
- Cash deployment among capital investment, dividends, and share repurchases, including the remaining repurchase authorization.
- Developments in fuel-surcharge litigation, tax appeals, personal-injury and asbestos claims, and environmental remediation obligations.