Union Pacific Corporation — Q1 2012 Form 10-Q
Business context and reporting period. The filing covers the three months ended March 31, 2012, and compares results with Q1 2011. Union Pacific’s integrated railroad business is its sole reportable operating segment. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
Financial performance
- Revenue: Operating revenue rose 14% to $5.112 billion. Freight revenue increased 14% to $4.823 billion; other revenue increased 19% to $289 million. Freight revenue growth reflected core pricing, higher fuel surcharges and volume growth.
- Profit and margins: Operating income increased to $1.510 billion from $1.137 billion. Net income rose 35% to $863 million from $639 million; diluted EPS increased to $1.79 from $1.29. The reported operating ratio improved to 70.5% from 74.7%. The effective tax rate was 38.0%, versus 36.8%.
- Expenses: Operating expenses rose 7% to $3.602 billion. Fuel expense increased 12% to $926 million, principally reflecting a 12% rise in fuel price per gallon. Management also cited wage and benefit inflation, depreciation and higher purchased services; locomotive and container lease costs partly offset increases.
- Cash flow and investment: Operating cash flow was $1.404 billion, up from $1.294 billion. Capital investment was $804 million versus $602 million. Free cash flow, a company-defined non-GAAP measure, was $285 million versus $451 million, after investing cash flows and dividends paid.
- Debt and liquidity: Balance-sheet debt totaled $8.835 billion at March 31, compared with $8.906 billion at year-end; cash was $995 million, down from $1.217 billion. Current assets were $3.565 billion and current liabilities $3.902 billion. The company had $1.8 billion available on its revolving credit facility, no commercial paper outstanding, and was in compliance with its debt covenant. Adjusted debt-to-capital, including specified lease and pension obligations, was 40.1%, versus 40.7% at year-end.
- Capital returns: The company repurchased 3.9 million shares under its program for approximately $433 million and paid $289 million in dividends. Declared dividends were $0.60 per share, up from $0.38.
Material changes and operating trends
- Carloads increased 1% overall, while average revenue per car rose 12%. Revenue increased across all six commodity groups; automotive and industrial products revenue grew 26% and 25%, respectively.
- Automotive, crude oil and frac sand shipments helped offset lower energy, agricultural and international intermodal volumes. Coal shipments declined amid warm weather, higher coal stockpiles and low natural-gas prices.
- Management reported improved train speed, up 1% to 26.3 mph, and unchanged terminal dwell time at 26.4 hours. Average rail-car inventory increased 3% to 275,400.
- Operating cash flow increased, but higher capital spending, repurchases and dividends contributed to a $222 million net decrease in cash; cash had increased $162 million in Q1 2011.
Outlook, risks and unusual items
- Outlook: No specific earnings or revenue guidance is provided in the supplied filing text. The company expected approximately $3.6 billion of new capital investment in 2012, subject to business conditions and regulatory changes, plus $96 million for early buyouts of long-term locomotive leases.
- Management commentary: Management attributed record quarterly earnings to volume growth, pricing gains and continued cost controls. It also said mild winter conditions supported better operating velocity, while reducing coal demand.
- Risks and contingencies: The filing discusses personal injury, asbestos and environmental claims, tax examinations, guarantees, leases and other commitments. Management did not expect known claims and commitments to have a material adverse effect, but noted uncertainty in estimating some outcomes. Personal injury liability was $372 million, with a stated reasonably possible range of approximately $372 million to $408 million; environmental liability was $178 million.
- The company had $109 million of unrecognized tax benefits. It was pursuing resolution of IRS matters for tax years 1999–2008; a proposed agreement for 1999–2004 was expected to result in an immaterial tax-expense reduction when finalized.
- A court proceeding concerning pipeline easement rent could result in a recovery for the railroad, but no gain was recorded because the amount, timing and appeal outcome were uncertain. Separately, the railroad agreed to a $1.5 million civil penalty under a consent decree resolving alleged environmental violations.
- Operating expenses included a one-time adjustment to record personal injury liabilities on an undiscounted basis. The filing also cautions that forward-looking statements are subject to risks and uncertainties; it reported no material change to the risk factors in the 2011 Form 10-K.
Important facts for investors to verify
- Whether pricing, fuel surcharges and growth in automotive, chemicals and industrial products can continue to offset coal weakness and other volume variability.
- How fuel prices, labor and benefit costs, and the planned $3.6 billion capital program affect margins and free cash flow.
- Debt maturities, refinancing plans and available liquidity, including the renewal status of the receivables securitization facility, which matured in August 2012.
- Developments in tax examinations, injury and environmental claims, and the pipeline easement rent litigation; actual liability or recovery amounts may differ from estimates.
- Capital allocation, including the pace of share repurchases and dividend growth relative to cash generation and investment needs.