Union Pacific Corporation — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016; filed July 21, 2016. Union Pacific operates one integrated railroad segment.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Operating revenue | $4.770B | $5.429B | $9.599B | $11.043B |
| Operating income | $1.660B | $1.949B | $3.347B | $3.926B |
| Net income | $979M | $1.204B | $1.958B | $2.355B |
| Diluted EPS | $1.17 | $1.38 | $2.32 | $2.68 |
| Operating ratio | 65.2% | 64.1% | 65.1% | 64.4% |
For Q2, revenue fell 12% and operating income fell 15%; freight revenue declined 13%, reflecting an 11% drop in carloads and a 2% decline in average revenue per car. Core pricing gains partly offset lower fuel surcharges and weaker volumes. The six-month revenue decline was 13%.
Operating expenses fell 11% in Q2 and 12% year to date. Lower fuel prices, reduced volume-related costs, and productivity gains were partly offset by inflation, higher depreciation, and increased personal injury and general expenses. Q2 locomotive diesel averaged $1.45 per gallon versus $1.99 a year earlier. Net gains on real estate sales were $50M in Q2 2016, compared with $113M in Q2 2015; 2016 also included a $17M first-quarter gain.
Cash flow, balance sheet, and capital
- Six-month operating cash flow was $3.525B, versus $3.773B. Investing used $1.838B, including $1.590B of capital investments and $330M for short-term investments. Financing used $1.248B. Cash increased $439M to $1.830B.
- Company-defined free cash flow—operating cash flow less investing cash flow and dividends—was $762M, versus $236M.
- At June 30, cash and short-term investments totaled $2.160B. Debt was $15.186B, up from $14.201B at December 31, 2015; debt-to-capital was 42.6%, versus 40.7%. Adjusted debt-to-capital, including lease and unfunded benefit obligations, was 47.1%, versus 45.7%.
- Available revolving credit was $1.7B, with no facility draw or commercial paper outstanding; the company reported covenant compliance. The $650M receivables securitization facility had $400M outstanding and matures in July 2017.
- Cash capital investments were $1.590B in the first half. Management expected full-year 2016 capital spending of approximately $3.675B, including Positive Train Control and excluding lease buyouts.
- The company issued $1.3B of fixed-rate notes in March and $151M of equipment-trust financing for 59 locomotives. It repurchased 16.3M shares in the first half for $1.252B and paid $925M in dividends.
Operating trends, outlook, and risks
- Coal freight revenue fell 27% in Q2; intermodal fell 16%, industrial products 14%, and automotive 13%. Management cited weak coal markets, low energy prices and shale activity, softer trade and domestic demand, and high retail inventories. Agricultural revenue declined 3%; Mexico freight revenue was down 1%, while Mexico volumes rose 5%.
- Management reported improved Q2 train speed (up 8%) and terminal dwell time (down 5%), despite severe Texas flooding. Lower volumes and improved network operations contributed. About 3,900 employees were furloughed or in alternate work status and about 1,700 locomotives were in storage at quarter-end.
- The filing provides a 2016 capital plan but no specific earnings or revenue guidance. Management said it would reassess capital spending if business conditions or regulation warrant.
- Personal injury liability was $289M, with estimated settlement costs reasonably possible to range from $289M to $315M. Asbestos liability was $104M and environmental liability $211M. Management did not expect known claims and contingencies, after recorded liabilities and insurance recoveries, to materially harm results, financial condition, or liquidity.
- Fuel-surcharge antitrust litigation remained pending; a class-certification hearing was scheduled for the week of September 26, 2016. Union Pacific denied the allegations and said it would defend the cases. The company recorded no amount for a separate disputed pipeline-easement rent recovery, treated as a gain contingency.
- No material changes to the 2015 Form 10-K risk factors or market-risk disclosures were reported. Disclosure controls were assessed as effective, with no material quarterly change in internal control over financial reporting.
Most important facts for investors to verify
- Whether freight volumes, fuel surcharges, and commodity demand—especially coal, intermodal, and industrial products—continued to weaken or recover.
- Whether operating costs and service improvements offset lower traffic, and whether the operating ratio trend reversed.
- Actual full-year capital spending versus the approximately $3.675B plan, and the effects of buybacks and additional borrowing on leverage and liquidity.
- Developments in fuel-surcharge litigation, personal injury and environmental estimates, and the unrecognized pipeline-easement recovery.
- That reported earnings include real-estate gains and $16M of first-half excess stock-compensation tax benefits; assess the effect of these items when evaluating underlying performance.