Union Pacific Corporation — Q1 2010 Form 10-Q
Reporting period: Three months ended March 31, 2010; comparison is with Q1 2009 unless otherwise stated. Amounts are in millions of dollars except per-share figures and operating statistics. Union Pacific Railroad and affiliates comprised the company’s sole reportable operating segment. Financial statements are unaudited.
Financial results
| Metric | Q1 2010 | Q1 2009 | Change |
|---|---|---|---|
| Operating revenue | $3,965 | $3,415 | +16% |
| Freight revenue | $3,755 | $3,240 | +16% |
| Operating expenses | $2,977 | $2,744 | +8% |
| Operating income | $988 | $671 | +47% |
| Net income | $516 | $362 | +43% |
| Diluted EPS | $1.01 | $0.72 | +40% |
| Operating ratio | 75.1% | 80.4% | Improved 5.3 points |
| Operating cash flow | $656 | $718 | -$62 |
| Cash and equivalents, period-end | $1,753 | $1,466 | Compared with March 31, 2009 |
Operating margin, calculated as operating income divided by revenue, was approximately 24.9%, compared with 19.6% a year earlier. The company reported a 38.1% effective tax rate versus 34.5%; the prior-year rate benefited from a California tax-law change. Dividends declared were $0.27 per share in both periods.
Revenue, operations and period-over-period drivers
- Freight carloads increased 13%, and average revenue per car rose 3%, reflecting core pricing gains and higher fuel recoveries. Revenue increased across all six commodity groups; automotive revenue rose 88% and intermodal 25%. Energy carloads declined 1%.
- Management attributed improved earnings to traffic recovery from the recession-affected prior-year quarter, pricing, fuel surcharges, cost control and productivity. Mexico business revenue increased 33% to $364 million.
- Fuel expense rose 51% to $583 million, including a $171 million impact from higher fuel prices; diesel averaged $2.16 per gallon versus $1.51. Compensation and benefits declined 1%, helped by a 6% workforce reduction and $83 million of productivity savings, partly offset by inflation and volume costs.
- Other operating costs included a one-time $45 million payment related to a CSX Intermodal transaction. Operating expenses also reflected higher depreciation and volume-related costs; lease savings and productivity gains partly offset increases.
- Severe winter weather and track work contributed to average train speed falling 4% to 26.2 mph and terminal dwell increasing 7% to 26.1 hours. The company reported gross ton-miles up 9% and customer satisfaction unchanged at 87.
Cash flow, debt and liquidity
- Operating cash flow was $656 million; investing cash outflow was $495 million, including $461 million of capital investments; financing cash outflow was $258 million. Cash declined $97 million during the quarter to $1.753 billion.
- Management’s non-GAAP free cash flow measure was $426 million, versus $38 million in Q1 2009. It adjusts operating cash flow for receivables securitization activity to make the periods comparable, then deducts investing outflows and dividends. This differs from simply subtracting those amounts from reported operating cash flow.
- Balance-sheet debt was approximately $9.719 billion, including $239 million due within one year; debt-to-capital was 36.1%, down from 37.0% at year-end. Adjusted debt-to-capital, which includes operating leases and unfunded pension and OPEB obligations, was 44.3%, versus 46.1% at year-end.
- Available revolving credit was $1.9 billion; the facility was undrawn and there was no commercial paper outstanding. The company reported compliance with its debt-to-net-worth covenant. Current assets were $4.112 billion and current liabilities $2.909 billion.
- Capital investments were below the prior-year quarter’s $521 million. The company redeemed $175 million of 6.5% notes and recorded a $16 million early-extinguishment charge. It had authorization to issue up to $3 billion under a new shelf registration.
Accounting changes, outlook and risks
- Effective January 1, 2010, the company changed rail-grinding accounting from capitalization and depreciation to expense as incurred, applied retrospectively. The change reduced Q1 2010 net income by $2 million and diluted EPS by $0.01; the filing also restated prior-period amounts.
- Adoption of new receivables-transfer guidance changed securitization accounting from sale treatment to secured borrowing. Investor-held receivables interests were $100 million at quarter-end versus $400 million at year-end, and the filing classified related cash flows as financing activities. This accounting change affects comparisons of reported cash flow.
- No quantified full-year earnings or revenue guidance was provided in the supplied filing text. Management described improving demand and continued productivity efforts, but cautioned that Q1 results are not necessarily indicative of full-year results.
- Contingencies include personal-injury, asbestos and environmental matters. Recorded environmental liabilities were $222 million; the company identified 301 potentially responsible sites, including 17 on the Superfund National Priorities List. Management did not expect known claims and contingencies to materially adversely affect results, financial condition or liquidity, but estimates are subject to uncertainty.
- DOJ and EPA proceedings concerning alleged environmental violations and derailment-related spills remained under investigation or negotiation; proposed penalties could exceed $100,000. Fuel-surcharge antitrust litigation continued; the company denied the allegations and said it would defend itself. The appeals court affirmed dismissal of indirect purchasers’ state-law claims in April 2010.
- The company cited operating risks including weather, track maintenance, fuel-price changes, economic conditions, litigation and environmental remediation. It reported no material change in previously disclosed risk factors or market-risk disclosures.
Key facts for investors to verify
- Whether traffic growth, pricing and productivity gains persisted beyond the recession-affected comparison quarter, particularly in automotive, intermodal and energy.
- How fuel prices and fuel-surcharge program changes affected revenue recovery and operating costs in subsequent periods.
- Cash generation and capital spending, taking account of the securitization accounting change and management’s adjusted free-cash-flow presentation.
- Debt maturities, refinancing plans, credit-facility covenant compliance and the company’s adjusted leverage measure.
- Potential costs and outcomes of environmental and fuel-surcharge litigation, and changes in recorded casualty, asbestos and environmental liabilities.