Union Pacific Corporation — Q2 2009 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2009. The unaudited results cover Union Pacific’s single integrated railroad operating segment and are compared with the corresponding 2008 periods.
Financial results
| Metric | Q2 2009 | Q2 2008 | Six months 2009 | Six months 2008 |
|---|---|---|---|---|
| Operating revenue | $3.303 billion | $4.568 billion | $6.718 billion | $8.838 billion |
| Operating income | $751 million | $931 million | $1.423 billion | $1.719 billion |
| Net income | $468 million | $531 million | $830 million | $974 million |
| Diluted EPS | $0.92 | $1.02 | $1.64 | $1.87 |
| Operating ratio | 77.3% | 79.6% | 78.8% | 80.5% |
Q2 revenue fell 28%, operating income 19%, and net income 12% year over year. For the first half, revenue declined 24%, operating income 17%, and net income 15%. The operating ratio improved 2.3 points in Q2 and 1.7 points year to date; a lower ratio indicates lower operating costs as a share of revenue.
Freight revenue fell 28% in Q2 and 24% year to date. Carloads declined 22% and 21%, respectively, while average revenue per car fell 8% and 4%. All six commodity groups had lower revenue; the sharpest Q2 declines were automotive (54%) and industrial products (39%). Management attributed the broad contraction to recessionary demand and lower fuel surcharges.
Operating cash flow was $1.521 billion for the first half, down from $1.836 billion. Investing used $1.152 billion, including $1.079 billion of capital investment; financing provided $38 million. Free cash flow, as defined by the company as operating cash flow less investing cash flow and dividends paid, was $97 million versus $124 million.
At June 30, cash and equivalents were $1.656 billion, versus $1.249 billion at year-end 2008. Total debt was $9.990 billion, compared with $8.927 billion at year-end; debt to capital rose to 38.4% from 36.6%. Adjusted debt to capital, a non-GAAP measure that includes operating leases, sold receivables, and unfunded pension and OPEB, was 48.1%, versus 47.4%. The company had $1.9 billion available under its revolving facility, no commercial paper outstanding, and reported compliance with its debt covenant.
Drivers, outlook, and notable items
- Lower fuel prices, cost reduction, productivity initiatives, improved pricing, and reduced casualty expense partly offset severe volume weakness. Diesel averaged $1.57 per gallon in Q2 versus $3.60 a year earlier; fuel expense fell 68% in Q2.
- Management said it removed about 2,000 road locomotives and 60,000 freight cars from service through June, and workforce levels were down 10% in Q2 year over year. Average train speed improved 20%; customer satisfaction also increased.
- A June land sale to Colorado’s Regional Transportation District generated $118 million in proceeds and a $116 million pretax gain, materially boosting other income. Q2 other income was $135 million versus $19 million a year earlier.
- The company planned approximately $2.6 billion in 2009 capital expenditures, down from $2.8 billion, subject to business, regulatory, and other developments. It provided no specific earnings or revenue forecast and cautioned that first-half results are not necessarily indicative of full-year results.
- In Q2, lease restructurings for 813 locomotives changed operating leases to capital leases, adding approximately $843 million of lease obligations and $742 million of assets; the company received $87 million cash consideration. It also issued $750 million of fixed-rate notes in February.
- The receivables-sale facility, with $700 million capacity and $400 million utilized at quarter-end, was due to expire in August 2009; management expected renewal on comparable terms. A credit rating below investment grade could reduce or jeopardize access to the facility.
- Management did not expect known claims, environmental matters, guarantees, or other contingencies to have a material adverse effect, but outcomes are uncertain. Disclosed exposures include $208 million of asbestos liabilities, $199 million of environmental liabilities, $429 million of contingent guarantees, and $36 million of unrecognized tax benefits. IRS examinations and appeals cover multiple tax years.
Most important facts for investors to verify
- Whether freight volumes and pricing recover, particularly in automotive, industrial products, and intermodal markets, and whether lower fuel surcharges continue to weigh on revenue.
- How much of reported earnings depended on the $116 million land-sale gain and whether operating performance can sustain margin improvements without that unusual item.
- Debt growth, capital-lease obligations, adjusted leverage, and refinancing needs, including the renewal of the receivables facility.
- Delivery of the $2.6 billion capital-spending plan and the sustainability of operating cash flow and free cash flow amid weak demand.
- Changes in tax disputes, personal injury, asbestos, environmental remediation, and other contingent liabilities.