Union Pacific Corporation — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014. Financial statements are unaudited; amounts below are in millions of dollars except per-share data. The Railroad is the company’s sole reportable operating segment.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Operating revenue | $6,182 | $5,573 | $17,835 | $16,333 |
| Operating income | $2,330 | $1,962 | $6,380 | $5,473 |
| Net income | $1,370 | $1,151 | $3,749 | $3,214 |
| Diluted EPS | $1.53 | $1.24 | $4.14 | $3.44 |
| Operating ratio | 62.3% | 64.8% | 64.2% | 66.5% |
Q3 revenue grew 11% and net income rose about 19% year over year. Freight revenue increased 11% in Q3 and 9% year to date, reflecting higher volumes and pricing gains. Q3 carloads rose 7% and average revenue per car rose 3%. Agricultural, industrial products and intermodal were the strongest Q3 revenue growth categories; crude oil and coal shipments declined. Management called Q3 the company’s best-ever quarterly financial result. The lower operating ratio indicates improved operating efficiency.
Operating expenses increased 7% in Q3 and 5% year to date, led by compensation, purchased services, and depreciation. Higher volume, slower network operations, weather-related costs, inflation and added equipment costs contributed; lower fuel prices partly offset increases. The effective tax rate was 37.9% in Q3 and 38.0% year to date.
Cash flow, financial position and liquidity
- Nine-month operating cash flow was $5,358, versus $4,881 in 2013. Investing cash use was $3,325, including $3,226 of capital investments; financing cash use was $1,578. Cash increased $455 to $1,887 at September 30.
- Free cash flow, as defined by the company as operating cash flow less investing cash use and dividends paid, was $847, down from $1,317. Higher capital spending and dividends drove the decrease.
- Total debt was $11,505 at September 30, up from $9,577 at December 31, 2013. Debt to capital increased to 34.8% from 31.1%; adjusted debt to capital, including lease and pension obligations, increased to 40.2% from 37.6%.
- The company had $1.7 billion available under its revolving credit facility, no commercial paper outstanding, and was in compliance with its debt covenant. It also had $400 million outstanding under its receivables securitization facility, which has a $650 million limit.
- Capital investments were higher year over year, partly reflecting the $261 million early buyout of the headquarters building lease. The company issued debt during the period and spent $2,312 on share repurchases and $1,186 on dividends.
Operating conditions, outlook and risks
Despite higher volumes, Q3 train speed remained below the prior-year level and terminal dwell was higher. Management cited network congestion, weather and a major Fort Worth infrastructure project. The company added locomotives and train, engine and yard employees, and said it would continue adding resources in Q4 and 2015 to improve service and velocity. The filing provides no specific earnings or revenue guidance.
Key uncertainties include the ability to improve network performance while handling demand growth; volume and pricing trends across commodity groups; fuel prices and the timing of fuel surcharge recovery; and costs for labor, equipment, maintenance and infrastructure. Management said known claims, environmental matters, commitments and guarantees were not expected to have a material adverse effect, but outcomes remain uncertain. Recorded liabilities included $303 million for personal injury claims, $126 million for asbestos claims and $179 million for environmental matters. A favorable pipeline-easement rent judgment remained under appeal; no gain was recognized. IRS examinations for 2009–2010 were at Appeals, and state tax examinations were ongoing. The filing reported no material change in previously disclosed risk factors.
Unusual or notable items included the June 2014 two-for-one stock split, the headquarters lease buyout, and $35 million of first-quarter weather-related costs. The company renewed its receivables facility and replaced its revolving credit facility with a $1.7 billion facility maturing in 2019. A new accounting standard on customer revenue was not expected to have a material impact.
Important facts for investors to verify
- Whether service metrics, including train speed and terminal dwell, improve as the company adds resources and manages volume.
- Whether revenue growth and pricing gains persist, especially given weaker crude oil and coal shipments and commodity-specific demand risks.
- How capital spending, dividends and repurchases affect free cash flow, total debt and leverage.
- Developments in personal injury, asbestos and environmental claims, the pipeline-rent appeal, and tax examinations.
- That reported financial results are for nine months and are not necessarily indicative of full-year results; the filing gives no specific full-year forecast.