Business Context and Reporting Period
Union Pacific Corporation’s Form 10-K covers the fiscal year ended December 31, 2011. The company operates one reportable segment, Union Pacific Railroad, a Class I freight railroad with 31,898 route miles serving 23 states across the western two-thirds of the United States and connecting with Canada and Mexico. Figures below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Financial and Operating Performance
| Metric | FY 2011 | FY 2010 | Change |
|---|---|---|---|
| Operating revenue | $19.557 billion | $16.965 billion | +15% |
| Freight revenue | $18.508 billion | $16.069 billion | +15% |
| Operating income | $5.724 billion | $4.981 billion | +15% |
| Net income | $3.292 billion | $2.780 billion | +18% |
| Diluted EPS | $6.72 | $5.53 | +22% |
| Operating ratio | 70.7% | 70.6% | Up 0.1 percentage point |
| Cash from operations | $5.873 billion | $4.105 billion | +$1.768 billion |
| Cash capital investments | $3.176 billion | $2.482 billion | +$694 million |
| Cash dividends paid | $837 million | $602 million | +$235 million |
| Debt at year-end | $8.906 billion | $9.242 billion | Down $336 million |
Management reported record free cash flow of $1.917 billion, a non-GAAP measure defined as operating cash flow adjusted for the receivables facility, less investing cash flow and dividends. Return on invested capital, as adjusted, was 12.4%, versus 10.8%; return on average common equity was 18.1%, versus 16.1%. The reported operating margin was 29.3%, compared with 29.4%.
For the fourth quarter, revenue was $5.108 billion, operating income $1.617 billion, net income $964 million, and diluted EPS $1.99. In fourth-quarter 2010, those figures were $4.410 billion, $1.313 billion, $775 million, and $1.56, respectively.
Freight revenue increased in all six commodity groups. Revenue carloads rose 3% overall; volume declined 2% in intermodal but increased in the other groups. Average revenue per car rose 12%, reflecting fuel recovery and core pricing. Energy was the largest freight group at $4.084 billion, followed by intermodal at $3.609 billion and agricultural products at $3.324 billion.
Material Changes Versus Prior Year
- Operating expenses rose 15% to $13.833 billion. Fuel expense increased 44% to $3.581 billion; higher fuel prices added $922 million, excluding volume effects. Wage and benefit inflation, higher volumes, depreciation and weather-related costs also contributed.
- Fuel surcharges generated $2.243 billion, versus $1.237 billion in 2010. The company cautioned that program changes limit year-to-year comparability.
- Weather disruptions included Midwest flooding, Southwest and Midwest blizzards, and Southern heat and drought. Average train speed declined 2% to 25.6 mph; terminal dwell time increased 3% to 26.2 hours.
- Operating cash flow increased, partly because lower cash income-tax payments reflected 100% bonus depreciation for qualifying 2011 investments. The company stated that deferred taxes will require cash payments in future years.
- The quarterly dividend rose during 2011, reaching $0.60 per share in the fourth quarter. Cash share repurchases totaled $1.418 billion; the company repurchased 14.780 million shares under its program during 2011.
Liquidity, Debt and Capital
Year-end cash and cash equivalents were $1.217 billion. Current assets of $3.727 billion exceeded current liabilities of $3.317 billion. The company reported $1.8 billion available under its revolving credit facility, with no borrowings outstanding, and no commercial paper outstanding. The facility matures in May 2015. Debt to capital was 32.4%, down from 34.2%; adjusted debt to capital, including leases and unfunded pension and other postretirement obligations, was 40.7%, down from 42.5%.
2011 capital investments were a record $3.176 billion, with more than half directed to infrastructure replacement and improvement. Management expected approximately $3.6 billion of capital investment in 2012, including about $335 million for Positive Train Control (PTC). The company estimated total PTC costs of approximately $2 billion by the end of 2015.
Outlook, Risks and Unusual Items
Management was cautious about economic conditions but expected slow, steady volume growth exceeding 2011 levels and earnings above 2011, supported by pricing, network improvements and productivity. It also highlighted possible growth in Mexico trade, crude oil and natural gas shipments, and existing customer demand. These are forward-looking expectations, not guarantees.
- Key risks include economic weakness and fluctuating demand, network capacity and service disruption, volatile fuel prices and uncertainty over surcharge recovery, severe weather, labor disputes, competition, and reliance on a small number of locomotive and rail suppliers.
- Regulatory risks include potential expansion of Surface Transportation Board oversight and mandated PTC implementation. Management noted PTC costs could constrain other capital investment.
- Environmental exposure included 285 sites where the company may face remediation costs; the recorded environmental liability was $172 million. The company also reported asbestos and personal-injury liabilities of $147 million and $368 million, respectively, with estimates subject to uncertainty.
- Pending matters included fuel-surcharge antitrust litigation and an Oxbow lawsuit seeking more than $30 million plus other damages; the company denied the allegations and said it would defend itself. A separate EPA/DOJ matter concerning alleged Clean Water Act and oil-spill-prevention violations remained under investigation and negotiation.
- CBP had previously asserted more than $500 million in drug-seizure fines. Under a 2011 agreement, the company committed $50 million to border and supply-chain security, and CBP agreed to reduce covered prior fines to zero as the expenditures are made. A court separately ruled against CBP regarding approximately $38 million in fines.
- Other notable items: the company exchanged $857 million of existing notes for $750 million of new notes plus cash consideration, and redeemed $475 million of notes in December, recording a $5 million early-extinguishment charge. A favorable potential pipeline-easement rent judgment was treated as a gain contingency; no recovery was recorded.
Most Important Facts for Investors to Verify
- Whether revenue growth, pricing and fuel-surcharge recovery can continue to outpace fuel, labor and other operating-cost inflation.
- Whether management’s 2012 earnings outlook and approximately $3.6 billion capital plan were achieved, particularly the PTC schedule and cost estimate.
- How cash taxes evolve as bonus-depreciation deferrals reverse, and whether operating cash flow continues to cover capital spending, dividends and repurchases.
- Whether service performance recovers from slower train speeds and longer terminal dwell times, and whether weather or capacity constraints affect customer service.
- Developments in antitrust, environmental, personal-injury and asbestos matters, and the timing or amount of any pipeline-easement recovery.