Union Pacific Corporation — Q1 2011 Form 10-Q
Reporting period: Three months ended March 31, 2011; comparative period is Q1 2010. Unaudited consolidated results; railroad operations are the company’s single reportable segment. Unless otherwise stated, amounts are in millions of dollars.
Financial performance
| Metric | Q1 2011 | Q1 2010 | Change |
|---|---|---|---|
| Operating revenue | $4,490 | $3,965 | +13% |
| Operating income | $1,137 | $988 | +15% |
| Net income | $639 | $516 | +24% |
| Diluted EPS | $1.29 | $1.01 | +28% |
| Operating ratio | 74.7% | 75.1% | Improved 0.4 points |
| Operating cash flow | $1,294 | $656 | +97% |
| Capital investments | $602 | $461 | +31% |
- Freight revenue rose 13% to $4,248, with carloads up 5% and average revenue per car up 8%. Revenue increased across all six commodity groups; industrial products and chemicals had the strongest volume growth. Other revenue rose 15% to $242.
- Operating expenses increased 13% to $3,353. Fuel expense rose 42% to $826; diesel averaged $2.88 per gallon versus $2.16 a year earlier. Higher wages, benefits, volume-related costs and depreciation also contributed. Productivity and resource utilization gains partly offset cost inflation.
- Operating margin, calculated as operating income divided by revenue, was approximately 25.3%, versus 24.9% in Q1 2010. Net margin on the same basis was approximately 14.2%, versus 13.0%.
- Cash provided by operating activities was $1,294; investing activities used $657 and financing activities used $475. Cash increased $162 during the quarter to $1,248. Reported Q1 2010 operating cash flow was affected by a $400 accounting-related classification difference for receivables securitization; management’s adjusted free cash flow was $451 in 2011 versus $426 in 2010.
- At March 31, cash was $1,248 and current assets were $3,677, compared with current liabilities of $2,947. Total debt was $9,196, down from $9,242 at year-end; debt-to-capital was 33.8%, and adjusted debt-to-capital was 41.7%. Total liabilities were $25,541 and shareholders’ equity was $18,046.
- Declared dividends were $0.38 per share, versus $0.27 a year earlier. The company repurchased approximately 2.6 million shares for $248 during the quarter.
Material changes and operating conditions
- Management attributed revenue and earnings growth to recovering demand, 5% volume growth, core pricing gains, higher fuel surcharges and effective use of assets. Every commodity group recorded higher freight revenue.
- Fuel-price increases were only partly recovered during the quarter because many surcharge mechanisms use prior-month fuel prices. Fuel surcharge programs generated $412 of revenue.
- Severe February winter weather disrupted Southwest and Midwest operations, particularly around Chicago. Average train speed was essentially flat at 26.1 mph; terminal dwell increased 1% to 26.4 hours. Average rail-car inventory declined 3%, and customer satisfaction improved to 91 from 87.
- Q1 2010 included a $45 one-time CSX Intermodal transaction payment in operating expenses and a $16 early-debt-extinguishment charge in other income. These items make year-over-year comparisons more favorable in 2011. Arizona tax legislation reduced Q1 2011 deferred tax expense by $14; the effective tax rate was 36.8%, versus 38.1%.
Liquidity, outlook and risks
- The company had $1.9 billion available under its revolving credit facility and no commercial paper outstanding; it did not draw on the facility in Q1. It reported compliance with its debt-to-net-worth covenant and expects to remain compliant under current capital plans. The facility expires in April 2012, and management intends to replace it with a substantially similar agreement.
- No numerical earnings or revenue guidance is provided in the filing. Management’s commentary describes continued demand growth and operational improvements, while noting exposure to fuel prices, weather, inflation and service disruption.
- The board authorized a new repurchase program effective April 1, 2011, allowing repurchases of up to 40 million shares by March 31, 2014. Timing and volume are at management’s discretion; funding may include operating cash, property sales or leases, debt issuance and cash on hand.
- Commitments include $4.7 billion of future operating lease payments and $2.6 billion of capital lease obligations. The company also reported $4.0 billion of future minimum lease payments associated with unconsolidated variable-interest-entity leases.
- Recorded liabilities include $429 for personal injury claims, $160 for asbestos-related claims and $212 for environmental matters. The company identified 289 potentially liable remediation sites, including 17 on the Superfund National Priorities List. Management does not expect known claims and contingencies to have a material adverse effect, but actual costs and recoveries may differ from estimates.
- The IRS had issued notices of deficiency for tax years 1999–2006; the company disputed many proposed adjustments and anticipated a partial settlement for 1999–2004 during 2011. Unrecognized tax benefits totaled $76, of which $65 was classified as current.
- Management reported no material changes to previously disclosed risk factors or market-risk disclosures, no new material legal proceedings, and effective disclosure controls.
Important facts for investors to verify
- Whether pricing and fuel surcharges keep pace with diesel costs, given surcharge timing lags and fuel’s sharp year-over-year increase.
- Whether volume growth, service performance and operating-ratio improvement persist, especially after winter disruption and higher terminal dwell.
- Capital-spending needs and funding for the new 40-million-share repurchase authorization, while maintaining liquidity and leverage targets.
- Progress and cash impact of the anticipated IRS settlement, and developments in personal-injury, asbestos and environmental claims.
- Renewal of the revolving credit facility before its April 2012 expiration and renewal of the receivables securitization program, which was scheduled to mature in August 2011.