Union Pacific Corporation — Q2 2012 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2012. Unaudited consolidated results; the railroad is the company’s sole reportable segment. Dollar amounts are in millions unless stated otherwise.
Financial results
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Operating revenue | $5,221 | $4,858 | $10,333 | $9,348 |
| Operating income | $1,724 | $1,392 | $3,234 | $2,529 |
| Net income | $1,002 | $785 | $1,865 | $1,424 |
| Diluted EPS | $2.10 | $1.59 | $3.89 | $2.89 |
| Operating ratio | 67.0% | 71.3% | 68.7% | 72.9% |
- Q2 revenue rose 7%, operating income 24%, and net income 28% year over year. First-half revenue rose 11%, operating income 28%, and net income 31%.
- Operating margin was approximately 33.0% in Q2 versus 28.7% a year earlier, and 31.3% for the first half versus 27.0%. Net margin was approximately 19.2% in Q2 versus 16.2%, and 18.0% for the first half versus 15.2%.
- Q2 freight revenue increased 7%; five of six commodity groups grew. Automotive (+25%), chemicals (+13%), industrial products (+14%) and intermodal (+10%) led, while coal declined 9%. First-half freight revenue rose 10%.
Cash flow, liquidity and capital
- First-half operating cash flow was $2,776, compared with $2,640 in 2011. Investing cash use was $1,882, including $1,816 of capital investments; financing cash use was $910. Cash ended at $1,201, down $16 from year-end 2011.
- Management-defined free cash flow was $319, versus $900 in the prior-year period, reflecting higher investment spending and dividends. The measure is non-GAAP.
- The 2012 capital plan calls for approximately $3.6 billion of new capital investment, plus projected $96 million expenditure for early locomotive lease buyouts.
- Debt totaled $9,416 at June 30, 2012, versus $8,906 at December 31, 2011. Debt-to-capital was 33.0% (32.4% at year-end); adjusted debt-to-capital, including lease and pension adjustments, was 40.6% (40.7%).
- Cash was $1,201; $1.8 billion remained available under the revolving credit facility, which was undrawn. The company reported covenant compliance and no commercial paper outstanding at quarter-end.
- During the quarter, Union Pacific borrowed $100 million under a four-year floating-rate term loan and issued $600 million of unsecured notes: $300 million at 2.95% due 2023 and $300 million at 4.30% due 2042. It redeemed $100 million of bonds, recording a $2 million early-extinguishment charge.
Changes, management commentary and outlook
- Management attributed record Q2 diluted EPS to core pricing gains, higher fuel surcharge recoveries, lower Q2 fuel prices and cost control. Average revenue per car rose 6% in Q2; carloads were roughly flat.
- Shale-related traffic, automotive and intermodal shipments supported growth. Coal carloads fell 17% in Q2 amid high utility stockpiles, low natural-gas prices and lost contracts. Agricultural carloads also declined.
- The operating ratio improved to a record-low 67.0% in Q2. Average train speed increased 2%; terminal dwell time was essentially unchanged, and average rail-car inventory declined 1%.
- Management provided a capital plan but no specific full-year earnings or revenue guidance in the supplied filing text. It cautioned that first-half results are not necessarily indicative of full-year results.
- Dividends declared were $0.60 per share in Q2 versus $0.475 in Q2 2011; first-half dividends were $1.20 versus $0.855. The company repurchased 7.7 million shares in the first half for approximately $848 million and had 20.2 million shares remaining under its authorization at June 30.
Risks, contingencies and unusual items
- Fuel-surcharge antitrust litigation: a court certified a plaintiff class in June 2012; the railroads sought appellate review. Union Pacific denied the allegations and said it would defend the case. The filing did not record a liability for this matter.
- Environmental and personal-injury matters remain subject to estimation. At June 30, recorded liabilities included $180 million for environmental remediation, $340 million for personal injury, and $143 million for asbestos claims. Management said known matters were not expected to have a material adverse effect, while noting uncertainty in ultimate costs.
- UPRR received a judgment for back rent and interest in a pipeline-easement dispute; the counterparty appealed. Any recovery was treated as a gain contingency and not recognized in the financial statements.
- IRS examinations for 1999–2008 and state tax reviews were ongoing. Unrecognized tax benefits were $113 million; a contemplated settlement for 1999–2004 was expected to have an immaterial effect on tax expense.
- Other commitments include $4.2 billion of operating-lease payments, $2.4 billion of capital-lease obligations and $6.6 billion of purchase obligations. The filing also lists $3.7 billion of future minimum lease payments associated with unconsolidated variable-interest entities.
Investor verification points
- Review the drivers and sustainability of pricing and fuel-surcharge gains, particularly as fuel prices and surcharge timing change.
- Monitor coal demand and volume trends, as well as growth in shale-related, automotive and intermodal traffic.
- Compare the $3.6 billion capital plan with cash generation, free cash flow and future debt levels.
- Track developments in the fuel-surcharge class action, pipeline-rent appeal, environmental matters and tax proceedings.
- Check the timing and terms of the receivables-securitization renewal; the facility had $600 million capacity and $100 million utilized, and renewal was in process.