Union Pacific Corporation — Q2 2013 Form 10-Q
Business context and reporting period. This unaudited filing covers the quarter and six months ended June 30, 2013, compared with the same periods in 2012. Union Pacific operates one integrated railroad segment. Unless otherwise stated, amounts are in millions of dollars.
Financial results and key metrics
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Operating revenue | $5,470 | $5,221 | $10,760 | $10,333 |
| Operating income | $1,878 | $1,724 | $3,511 | $3,234 |
| Net income | $1,106 | $1,002 | $2,063 | $1,865 |
| Diluted EPS | $2.37 | $2.10 | $4.40 | $3.89 |
| Operating ratio | 65.7% | 67.0% | 67.4% | 68.7% |
- Q2 revenue rose 5% and net income rose about 10%; first-half revenue rose 4% and net income rose about 11%. The operating ratio improved 1.3 percentage points in each comparison.
- Freight revenue grew 5% in Q2 and 4% year to date, while carloads declined 1% in both periods. Average revenue per car increased 5% in Q2 and 6% year to date, reflecting core pricing and a richer mix.
- Q2 freight revenue gains were strongest in automotive, chemicals, coal and industrial products; agricultural revenue fell 8% and intermodal fell 1%. First-half agricultural revenue fell 8%; automotive and chemical revenue increased 13% each.
- Operating expenses increased 3% in Q2 and 2% year to date. Higher wages and benefits, purchased services, rents and other costs were partly offset by lower fuel expense.
- Six-month operating cash flow was $3,218, versus $2,776; investing cash use was $1,739, versus $1,882; and financing cash use was $697, versus $910. Reported free cash flow, defined by the company as operating cash flow less investing cash use and dividends paid, was $833, versus $319.
- Cash and equivalents were $1,845 at June 30, up from $1,063 at year-end 2012. Total debt on the balance sheet was $9,809, including $733 due within one year and $9,076 due after one year; debt-to-capital was 32.3%, versus 31.2% at year-end. Adjusted debt-to-capital, including lease and pension obligations, was 39.6%, versus 39.1%.
- The company had $1.8 billion available on its revolving credit facility and no commercial paper outstanding. It reported compliance with the facility covenant. Six-month capital investments were $1,730; dividends paid were $646 and share repurchases were $833.
Changes, management commentary and outlook
- Management attributed earnings and margin improvement primarily to core pricing, shipment mix, safety, service and network efficiency, alongside ongoing cost control. A $17 million land-lease settlement contributed to year-to-date other income.
- Operating conditions showed some strain: Q2 average train speed declined 3% and terminal dwell time increased 4%, attributed to weather, incidents, capital work and growth in manifest traffic. Average rail-car inventory declined 3%. Management said it continued to manage the network effectively.
- There is no specific earnings or revenue guidance in the provided filing text. Management expected to remain within its debt covenant under current capital plans, while noting that factors beyond its control could affect future compliance. The company was seeking renewal of its $600 million receivables securitization facility on comparable terms.
- Risks and contingencies include pending fuel-surcharge antitrust litigation, tax examinations and appeals, personal-injury claims, asbestos claims and environmental remediation. The company said known claims were not expected to have a material adverse effect, but outcomes and costs remain uncertain. A favorable pipeline-easement rent judgment was under appeal and was not recognized as income.
- Other notable items: the company issued $650 million of long-term notes in March and redeemed $40 million of bonds, recording a $1 million early-extinguishment charge. The filing reported no material change in risk factors or market-risk disclosures and no material weakness in disclosure controls.
Most important facts for investors to verify
- Whether pricing and higher-revenue shipment mix can continue to offset weak or declining volumes, particularly in agriculture, coal and intermodal.
- Whether service metrics recover, given slower train speeds and longer terminal dwell, and whether network investment supports further volume growth.
- Capital allocation and leverage: debt growth, planned refinancing, share repurchases, dividends and the company’s adjusted-debt measure.
- Renewal terms and continued availability of the receivables securitization facility, and the company’s ability to comply with credit-facility covenants.
- Developments in antitrust appeals, IRS and state tax proceedings, environmental obligations, and personal-injury and asbestos claims.
- Whether the one-time land-lease settlement and other unusual items affect comparability of reported earnings.