Union Pacific Corporation — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015; comparisons are with the corresponding 2014 periods. Union Pacific operates one reportable segment, its integrated railroad network. Financial amounts are in millions unless stated otherwise.
Financial performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Operating revenue | $5,429 | $6,015 | $11,043 | $11,653 |
| Operating income | $1,949 | $2,196 | $3,926 | $4,050 |
| Net income | $1,204 | $1,291 | $2,355 | $2,379 |
| Diluted EPS | $1.38 | $1.43 | $2.68 | $2.62 |
| Operating ratio | 64.1% | 63.5% | 64.4% | 65.2% |
- Q2 revenue fell 10% and net income fell 7%; six-month revenue fell 5% and net income fell 1%. Lower freight volumes, fuel-surcharge revenue and unfavorable traffic mix pressured results. Core pricing gains and lower fuel costs provided offsets.
- Q2 freight revenue declined 10%; carloads fell 6% and average revenue per car fell 5%. Coal revenue dropped 31% in the quarter, while automotive revenue rose 3%. Management cited weak coal demand, lower oil-related shipments, and declines in several industrial and agricultural categories. Automotive and intermodal volumes showed strength.
- Operating expenses declined 9% in Q2 and 6% for the first half, chiefly from lower fuel prices and volume-related savings. Compensation and benefits and depreciation increased. Q2 operating ratio worsened 0.6 percentage points as cost reductions lagged the volume decline; the first-half ratio improved 0.8 points.
- Other income included a $113 million real-estate-sale gain in 2015; total other income was $142 million in Q2 versus $22 million a year earlier. This non-operating gain supported reported earnings.
Cash flow, balance sheet and capital
- First-half cash from operations was $3,773, up from $3,221. Cash used in investing was $2,136; cash used in financing was $1,182. Cash ended June 30 at $2,041, compared with $1,586 at year-end 2014.
- Capital investment was $2,207 in the first half. Management planned approximately $4.2 billion of capital investment for 2015, including Positive Train Control. Reported free cash flow, a non-GAAP measure defined as operating cash flow less investing cash flow and dividends, was $236 versus $267.
- Total debt was $13,339 at June 30, versus $11,480 at December 31, 2014. Debt-to-capital increased to 38.9% from 35.1%; adjusted debt-to-capital was 44.2% versus 41.3%. The company issued $2,243 of debt and repaid $396 in the first half.
- Liquidity included $1.7 billion available under a revolving credit facility, with no draw and no commercial paper outstanding. The company reported compliance with its credit-facility covenant. A $650 million receivables facility had $400 million outstanding.
- Dividends declared were $0.55 per share in Q2 versus $0.455 a year earlier; first-half dividends declared were $1.10 versus $0.91. The company repurchased 14.9 million shares for $1.605 billion in the first half.
Outlook, risks and unusual items
- No specific earnings or revenue guidance was provided in the supplied filing text. Management stated the 2015 capital plan was approximately $4.2 billion and could be revised if business conditions or regulation warranted. It expected employees in training to decline in the second half of 2015.
- Service measures improved year over year in Q2: average train speed rose 3% and terminal dwell time improved 5%. Management attributed improvements partly to lower volumes and resource availability; track maintenance partly offset speed gains. About 1,200 employees were furloughed or in alternate work status, and about 900 locomotives were in storage at quarter-end.
- Risks to demand included low natural-gas and oil prices, weak coal markets, weather impacts, and softer shipments of shale-related products. The company also identified potential uncertainty in environmental remediation, personal-injury and asbestos claims, and other litigation.
- Fuel-surcharge antitrust litigation remained pending, including a proposed class-certification hearing scheduled for November 2015 and Oxbow litigation in discovery. The company denied the allegations and said it believed the cases would not materially affect results, financial condition or liquidity.
- Recorded liabilities included $312 million for personal-injury claims, with reasonably possible settlement costs estimated at $312–$339 million, $123 million for asbestos claims, and $202 million for environmental matters. Management did not expect known claims and contingencies to have a material adverse effect, after recorded liabilities and insurance recoveries.
- A potential recovery in the pipeline-easement rent dispute was treated as a gain contingency; no amount was recognized because the outcome and timing remained uncertain. Management reported no material change in risk factors from the 2014 Form 10-K.
Most important facts for investors to verify
- Whether freight volumes and revenue stabilize, particularly coal, industrial products, agriculture and intermodal, and whether pricing offsets persist.
- Whether lower fuel prices and resource adjustments translate into sustained cost savings and operating-ratio improvement.
- How much of reported earnings reflects recurring railroad operations versus asset-sale gains, and the effect of ongoing buybacks and debt issuance.
- Progress against the $4.2 billion capital plan, cash generation, free cash flow and the rising debt and adjusted leverage measures.
- Developments in fuel-surcharge litigation, environmental and personal-injury liabilities, and the pipeline-easement proceeding.