Union Pacific Corporation — 2013 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2013, with comparisons primarily to 2012. Union Pacific’s principal operating business is a Class I railroad serving 23 states across the western two-thirds of the United States, with connections to Canada, Mexico, and major ports. Its six freight groups are Agricultural Products, Automotive, Chemicals, Coal, Industrial Products, and Intermodal. The railroad is reported as one operating segment.
Financial performance and position
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Operating revenue | $21.963 billion | $20.926 billion | Up 5% |
| Freight revenue | $20.684 billion | $19.686 billion | Up 5% |
| Operating income | $7.446 billion | $6.745 billion | Up 10% |
| Net income | $4.388 billion | $3.943 billion | Up 11% |
| Diluted EPS | $9.42 | $8.27 | Up 14% |
| Operating ratio | 66.1% | 67.8% | Improved 1.7 points |
| Operating cash flow | $6.823 billion | $6.161 billion | Up $662 million |
| Free cash flow, non-GAAP | $2.085 billion | $1.382 billion | Up $703 million |
Operating margin was approximately 33.9% (2012: 32.2%); net margin was approximately 20.0% (2012: 18.8%). Free cash flow is defined by the company as operating cash flow less investing cash outflows and dividends paid; it is not a GAAP measure.
- Revenue and volume: Freight revenue rose despite essentially flat carloads (9.022 million versus 9.048 million). Average revenue per car increased 5%, reflecting core pricing, business mix, and an automotive logistics arrangement. Automotive, Chemicals, and Industrial Products were notable growth groups; Agricultural revenue was nearly flat, and Coal volumes weakened substantially.
- Operating costs: Operating expenses increased 2% to $14.517 billion. Higher compensation, purchased services, automotive logistics costs, property taxes, locomotive maintenance, and repairs were partly offset by lower fuel costs. Average diesel fuel cost fell 2% to $3.15 per gallon.
- Cash, liquidity, and capital: Cash and equivalents were $1.432 billion; current assets were $3.990 billion and current liabilities $3.791 billion. The company reported a modest working-capital surplus and said it had adequate liquidity. It had $1.8 billion available on its revolving credit facility, with no borrowings, and its $600 million receivables facility was undrawn at year-end.
- Debt and leverage: Total debt was $9.577 billion, up from $8.997 billion; $705 million was due within one year. Debt-to-capital was 31.1%, versus 31.2%; adjusted debt-to-capital, including operating leases and unfunded pension/OPEB, was 37.6%, versus 39.1%. Total assets were $49.731 billion and shareholders’ equity was $21.225 billion.
- Capital returns: The company invested $3.496 billion in cash capital projects, declared $1.371 billion in dividends, and spent $2.218 billion on share repurchases. Dividends declared per share rose 19% to $2.96. The board authorized repurchases of up to 60 million shares through December 31, 2017, effective January 1, 2014.
Material changes versus 2012
- Higher pricing and growth in automotive, chemicals, industrial products, and shale-related traffic lifted revenue and earnings, while overall carloads remained flat.
- Coal carloads fell 9%, and agricultural carloads fell 3%. Coal revenue still increased 2% as price and mix gains offset lower shipments. Agricultural revenue was approximately unchanged, reflecting drought-related shipment effects.
- Automotive revenue rose 15%, Chemicals 8%, and Industrial Products 9%. Intermodal revenue increased 2%, with domestic growth offset by declining international traffic.
- Operating ratio improved to a record 66.1%; adjusted ROIC increased to 14.7% from 14.0%. Operating cash flow and free cash flow increased.
- Train speed declined 2% to 26.0 mph and terminal dwell rose 3% to 27.1 hours, attributed largely to severe weather, traffic mix, and increased manifest activity.
Outlook, risks, contingencies, and unusual items
- 2014 outlook: Management expected volume to exceed 2013 if industrial production grew approximately 3%. Even with no volume growth, it expected earnings to exceed 2013, supported by pricing, network improvements, and productivity. It expected 2014 free cash flow to be lower because of higher capital spending, dividends, and approximately $400 million of cash taxes on previously deferred income.
- Capital and PTC: Planned 2014 capital investment was approximately $3.9 billion, including about $450 million for Positive Train Control (PTC). The company estimated total PTC cost at approximately $2 billion and acknowledged that the industry likely would not meet the statutory end-of-2015 deadline. PTC spending may constrain other investment.
- Principal business risks: Demand and network-capacity swings; severe weather and service interruptions; competition from other railroads and trucks, barges, and pipelines; coal-market weakness; fuel-price volatility and uncertain surcharge recovery; labor negotiations; reliance on a limited number of locomotive and rail suppliers; cyber or technology disruption; and economic, international-trade, regulatory, environmental, and climate-related risks. Hazardous-material incidents could generate losses exceeding insurance coverage.
- Legal matters: In the fuel-surcharge antitrust litigation, an appellate court vacated class certification and remanded the issue for reconsideration; the remand schedule extended into June 2014. Oxbow filed an amended antitrust complaint claiming more than $50 million in fuel surcharges, among other relief; the company denied the allegations and was defending the case. Union Pacific stated it did not expect these matters to have a material adverse effect. An Illinois environmental penalty suit concerning a former facility remained pending after the company rejected a $240,000 settlement offer.
- Recorded exposures: At year-end, recorded liabilities included $294 million for personal injury (estimated possible settlement range $294–$322 million), $131 million for asbestos claims (range $131–$141 million), and $171 million for environmental remediation. The company identified 268 sites where it may have remediation responsibility. Management said current environmental obligations were not expected to materially adversely affect results, financial condition, or liquidity.
- Tax and other items: Bonus depreciation had deferred significant tax payments; management expected payments to rise as those deferrals reverse. A 2013 debt exchange included approximately $280 million cash consideration plus accrued interest and resulted in no gain or loss; a $1 million early extinguishment charge was recorded on a separate debt redemption. Other income included a $17 million land-lease settlement. A favorable pipeline-easement rent judgment remained under appeal and was not recognized as income.
- Controls and audit: The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded disclosure controls and internal controls were effective.
Important facts for investors to verify
- Whether pricing and productivity can continue to offset inflation and weak or declining coal and agricultural volumes.
- Whether service performance improves after slower train speeds and higher terminal dwell in 2013, especially as traffic grows.
- Actual PTC costs, implementation progress, deadline extensions, and effects on other capital priorities.
- Cash-tax timing as bonus-depreciation deferrals reverse, and the resulting impact on 2014 free cash flow.
- Developments in fuel-surcharge litigation, Oxbow’s amended complaint, environmental proceedings, and the pipeline-easement appeal.
- Execution of the $3.9 billion capital plan and the balance between shareholder distributions, investment, and debt.
- Changes in debt, lease-adjusted leverage, pension funding, and access to capital markets and committed liquidity.