Union Pacific Corporation — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; comparisons are with Q1 2017 unless stated otherwise. The company operates one integrated railroad segment. Amounts are in millions of dollars except per-share data and where noted.
Financial results and position
- Revenue: Operating revenue was $5,475, up 7%; freight revenue was $5,122, up 7%. Freight carloads grew 2% and average revenue per car rose 5%.
- Profit and margins: Operating income was $1,939, up 8%; net income was $1,310, up 22%. Diluted EPS was $1.68 versus $1.32. Operating ratio improved 0.6 percentage points to 64.6%.
- Expenses and taxes: Operating expenses increased 6% to $3,536, including fuel expense up 28%. The effective tax rate fell to 23.4% from 36.5%, reflecting the federal tax-rate reduction effective January 1, 2018.
- Cash flow: Operating cash flow was $1,901, versus $1,883. Investing cash use was $919, including $910 of capital investments. Free cash flow, as defined by the company, was $414 versus $548. Cash ended the quarter at $1,048.
- Debt and liquidity: Debt was $17,588, up from $16,944 at year-end; debt to capital was 41.9%, versus 40.5%. The company had $1.7 billion available under its revolving credit facility and had not drawn on it. Its $650 million receivables securitization facility was fully utilized.
- Shareholder returns: The company repurchased 9.26 million shares for approximately $1.23 billion in Q1 and paid $568 million in dividends. The declared dividend was $0.73 per share, compared with $0.605 a year earlier.
Material changes and operating performance
- Revenue growth reflected higher fuel surcharges, core pricing gains, and 2% volume growth. Fuel surcharge revenue rose to $353 from $212.
- Energy freight revenue increased 15%, industrial 6%, and premium 7%; agricultural revenue was flat. Growth in frac sand, intermodal, petroleum products, and automotive parts offset declines in grain, coal, and rock.
- Operating costs rose with higher fuel prices, volume-related expenses, and network operating challenges. Diesel averaged $2.13 per gallon versus $1.75; fuel consumption per gross ton-mile also increased 2%.
- Operating performance weakened: average train speed declined 4% to 24.8 mph and terminal dwell increased 8% to 33.0 hours. Management cited congestion, high freight-car inventories, execution challenges, and Positive Train Control implementation.
- Productivity initiatives generated approximately $35 million net of added costs from operational challenges. Average employment declined 1% despite volume growth of 2%.
- Other income/expense was a $42 expense versus $72 of income, including an $85 early debt-extinguishment charge. Interest expense increased 8% to $186.
Outlook, risks, and unusual items
- The company expects its 2018 capital plan to be approximately $3.3 billion, subject to revision if business or regulatory conditions affect expected returns. No earnings or revenue guidance is stated in the provided filing text.
- Management said it expects to continue meeting the revolving-credit debt-to-net-worth covenant; compliance could be affected by factors beyond its control. The company reported $17.6 billion of covenant-defined debt against a stated permitted level of up to $48.8 billion.
- Collective bargaining remained unresolved with some unions. Nine unions, representing nearly 70% of the agreement workforce, had ratified tentative agreements; health-plan arbitration for a two-union coalition was scheduled for early May 2018. Other union ratification or mediation processes continued.
- Environmental liabilities were $198 million. The company identified 310 potentially liable remediation sites, including 21 on the Superfund National Priorities List. Personal-injury liabilities were $272 million; estimated future settlement costs were described as potentially ranging from $272 million to $296 million.
- The company reported ongoing antitrust litigation and California environmental settlement negotiations, but said it did not expect known claims and contingencies to have a material adverse effect. It reported no material change to previously disclosed risk factors.
- Adoption of the new revenue standard had no material financial-statement impact. The company early-adopted a standard allowing $300 million to be reclassified from accumulated other comprehensive loss to retained earnings. It expects lease accounting adoption to increase assets and liabilities by more than $2 billion.
Important facts for investors to verify
- Whether freight growth, pricing, and fuel-surcharge recovery can offset higher fuel and operating costs.
- Whether congestion improves, including train speed and terminal dwell, and whether service challenges continue to affect costs and volumes.
- How the $3.3 billion capital plan, substantial repurchases, dividends, and debt levels affect liquidity and leverage over the remainder of 2018.
- Progress and potential outcomes of labor negotiations, environmental matters, and antitrust litigation, including any changes to recorded contingencies.
- The continuing tax effects of the Tax Act and the expected balance-sheet impact of lease-standard adoption.