Union Pacific Corporation — Q3 2012 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2012; comparisons are with the corresponding 2011 periods. Unaudited consolidated results. The Railroad and affiliates are the company’s sole reportable operating segment.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Operating revenue | $5.343B | $5.101B | $15.676B | $14.449B |
| Operating income | $1.786B | $1.578B | $5.020B | $4.107B |
| Net income | $1.042B | $904M | $2.907B | $2.328B |
| Diluted EPS | $2.19 | $1.85 | $6.08 | $4.74 |
| Operating ratio | 66.6% | 69.1% | 68.0% | 71.6% |
- Q3 revenue rose 5%, operating income 13%, and net income 15%; nine-month revenue rose 8%, operating income 22%, and net income 25%.
- Freight revenue increased 4% in Q3 and 8% year to date. Average revenue per car rose 4% and 7%, respectively, while total carloads were essentially flat in both periods.
- Q3 freight revenue growth included chemicals (+17%), automotive (+15%), and intermodal (+8%); coal declined 5% and agriculture 4%. Year-to-date, all listed commodity groups except coal grew, led by automotive (+22%) and chemicals (+15%).
- Management attributed stronger results to core pricing, efficient operations, cost control, and favorable service conditions. Q3 train speed improved 6%, terminal dwell time improved 1%, and average rail-car inventory declined 2% year over year.
Cash flow, balance sheet, and capital
- Nine-month operating cash flow was $4.366B, versus $4.334B. Investing cash use was $2.866B, versus $2.241B; financing cash use was $1.587B, versus $1.532B. Cash declined $87M to $1.130B.
- Reported free cash flow, defined as operating cash flow less investing cash use and dividends, was $640M, down from $1.486B. The company cited higher capital spending and dividends and lower tax benefits from bonus depreciation.
- At September 30, total debt was $9.486B, compared with $8.906B at year-end 2011; cash was $1.130B. Debt-to-capital was 32.7% (32.4% at year-end); adjusted debt-to-capital, including lease and pension obligations, was 40.2% (40.7%).
- Total assets were $47.070B and shareholders’ equity $19.549B. Current assets were $3.946B and current liabilities $3.874B; debt due within one year was $713M.
- The company had $1.8B available under its revolving credit facility, no commercial paper outstanding, and was in compliance with its debt covenant. The facility’s covenant permitted up to $39.1B of defined debt, versus $10.1B outstanding under that definition.
- Capital investments were $2.876B in the first nine months, versus $2.218B. Management intended approximately $3.6B of 2012 capital investment, plus projected $96M of locomotive lease buyout expenditures. Dividends paid were $860M, and share repurchases were $1.179B in cash; 17.1M shares remained authorized for repurchase under the program.
Outlook, commentary, and risks
- Management reported record Q3 diluted EPS and operating ratio, but noted mixed economic conditions and weaker coal, agricultural, and some industrial shipments. Shale-related, automotive, chemical, and intermodal traffic were growth areas. Management cautioned that nine-month results are not necessarily indicative of full-year results.
- Coal volumes were pressured by high stockpiles, low natural-gas prices, and lost contracts; drought and weak export demand weighed on agricultural shipments. Fuel surcharge revenue was affected by the programs’ roughly two-month lag behind fuel-price movements.
- Significant commitments include $13.163B of debt payments, $4.241B of operating lease payments, $2.479B of capital lease obligations, and $5.425B of purchase obligations. These are contractual totals, not amounts due in the current quarter.
- Contingencies include a $348M recorded personal-injury liability, with reasonably possible future settlement costs estimated at $348M–$377M; a $142M asbestos liability; and a $175M environmental liability. Management did not expect known claims and contingencies, after recorded liabilities and insurance recoveries, to materially adversely affect results, financial condition, or liquidity.
- In fuel-surcharge antitrust litigation, the court certified a class in June 2012; the railroads sought appellate review. Union Pacific denied the allegations and said it would defend the case. A separate pipeline-easement rent judgment favored Union Pacific, but the defendant appealed; no gain was recorded because recovery remained uncertain.
- Tax examinations and disputes remain open for certain years; the recorded liability for unrecognized tax benefits was $115M. Management anticipated a final IRS agreement on 1999–2004 matters within 12 months, with an expected immaterial reduction in tax expense.
- The company reported no material changes to its previously disclosed risk factors or market-risk disclosures. Forward-looking statements remain subject to economic, operating, legal, regulatory, and other uncertainties.
Important facts for investors to verify
- Whether pricing and growth in chemicals, automotive, intermodal, and shale-related traffic can offset persistent coal and agricultural weakness.
- Execution and funding of the approximately $3.6B 2012 capital plan, and the effect of investment and shareholder returns on free cash flow and debt.
- Changes in operating ratio, service metrics, fuel costs, and fuel-surcharge recovery as traffic mix and economic conditions evolve.
- Developments in the fuel-surcharge antitrust appeal, pipeline-rent appeal, tax disputes, and personal-injury, asbestos, and environmental exposures.
- Liquidity and refinancing needs, including current debt maturities, lease commitments, and continued compliance with credit-facility covenants.