Union Pacific Corporation — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; comparisons are with Q1 2015 unless noted. The Railroad and its affiliates constitute the company’s sole reportable operating segment. Financial amounts are in millions except per-share data and where otherwise stated.
Financial results and key metrics
| Metric | Q1 2016 | Q1 2015 / comparison |
|---|---|---|
| Operating revenue | $4,829 | $5,614; down 14% |
| Freight revenue | $4,502 | $5,251; down 14% |
| Operating expenses | $3,142 | $3,637; down 14% |
| Operating income | $1,687 | $1,977; down 15% |
| Operating ratio | 65.1% | 64.8%; worsened 0.3 percentage points |
| Net income | $979 | $1,151; down 15% |
| Diluted EPS | $1.16 | $1.30; down 11% |
| Cash from operating activities | $2,173 | $2,064 |
| Cash used in investing activities | $672 | $1,142 |
| Cash used in financing activities | $219 | $921 |
| Cash and cash equivalents | $2,673 at March 31 | $1,391 at December 31, 2015 |
| Total debt | $15,193 at March 31 | $14,201 at December 31, 2015 |
| Debt to capital | 42.6% | 40.7% at December 31, 2015 |
| Dividend declared per share | $0.55 | $0.55 |
Management-defined free cash flow was $1,036, calculated as operating cash flow less investing cash flow and dividends paid; Q1 2015 was reported as zero, in part because two quarterly dividend payments fell in that quarter after a change in payment timing. Cash from operations benefited from the timing of tax payments and working-capital changes. The filing reports no separate gross-margin measure.
Material changes and operating drivers
- Freight revenue fell 14% amid an 8% decline in carloads and a 6% decline in average revenue per car. Lower fuel surcharge revenue and unfavorable traffic mix contributed; core pricing gains partly offset the declines.
- Fuel surcharge revenue was $113 versus $447. Coal revenue declined 43%, industrial products 18%, and intermodal 9%; automotive revenue was down 1%. Coal carloads fell 34%, reflecting weak markets, low natural gas prices, mild winter weather, and high inventories.
- Operating expenses declined 14%, principally from lower fuel prices, volume-related savings, and productivity. Fuel expense fell 43%; locomotive diesel averaged $1.25 per gallon versus $1.95. Depreciation increased 2%.
- Despite lower expenses, the operating ratio worsened slightly because lower volumes, inflation, and comparison with a larger prior-year fuel surcharge lag benefit more than offset pricing and productivity gains.
- Average train speed improved 11% to 27.3 mph and terminal dwell improved 7% to 28.6 hours, with management attributing improvements partly to lower volumes and better network fluidity.
Liquidity, capital, outlook, and risks
- Cash increased by $1,282 during the quarter. Capital investments were $687 versus $1,101 a year earlier. The company reduced its 2016 capital plan by $75 to approximately $3,675, including positive train control but excluding lease buyouts.
- Q1 debt issuance totaled $1,300: $500 of 2.750% notes due 2026, $600 of 4.050% notes due 2046, and $200 of reopened 4.375% notes due 2065. Proceeds were for general corporate purposes, including share repurchases. The company had $1,700 of available revolving credit, no commercial paper outstanding, and reported covenant compliance.
- The company repurchased 9.3 million shares under its program for $706 of cash outflow; 43.3 million shares remained authorized for repurchase. Management said timing and volume depend on market conditions and other factors.
- Management reported approximately 4,400 employees furloughed or in alternate work status and approximately 1,400 locomotives in storage at quarter-end as it aligned resources with demand. The filing provides no earnings or revenue guidance.
- Reported unusual items included a $17 real-estate-sale gain within other income and $10 of excess tax benefits from early adoption of stock-compensation accounting guidance. The filing says the adoption’s prior periods were not adjusted.
- Key exposures include antitrust fuel-surcharge litigation, personal-injury and asbestos claims, and environmental remediation. Management stated that known matters were not expected to materially adversely affect results, financial condition, or liquidity. A potential recovery in a pipeline-easement rent dispute remains an unrecognized gain contingency.
- Future minimum operating lease payments were approximately $3,282; future minimum lease payments associated with variable-interest-entity leases totaled $2,400. The company identified 303 sites where it may have remediation liability. Management reported no material changes to previously disclosed risk factors or market-risk disclosures.
Important facts for investors to verify
- Whether freight volumes, coal demand, fuel surcharges, and revenue per car stabilize or continue to pressure revenue and operating ratio.
- Whether cost savings and service improvements can be sustained without further resource reductions as volumes change.
- How the higher debt balance, share repurchases, and planned capital spending affect leverage, liquidity, and cash generation.
- Developments and potential financial exposure in the antitrust, personal-injury, asbestos, environmental, and pipeline-easement matters.
- The timing and cash-flow effects of tax payments, dividends, and capital investment; Q1 comparisons are affected by the prior-year dividend-payment timing.