Union Pacific Corporation — Q3 2015 Form 10-Q
Business context and period. Unaudited results cover the three and nine months ended September 30, 2015, compared with the same 2014 periods. The Railroad is the company’s sole reportable operating segment. Results reflected weaker freight demand and lower fuel-surcharge revenue, partly offset by core pricing, lower fuel costs, and productivity improvements.
Key financial metrics
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Operating revenue | $5.562 billion | $6.182 billion | $16.605 billion | $17.835 billion |
| Operating income | $2.208 billion | $2.330 billion | $6.134 billion | $6.380 billion |
| Net income | $1.300 billion | $1.370 billion | $3.655 billion | $3.749 billion |
| Diluted EPS | $1.50 | $1.53 | $4.18 | $4.14 |
| Operating ratio | 60.3% | 62.3% | 63.1% | 64.2% |
| Cash provided by operating activities | — | — | $5.625 billion | $5.358 billion |
| Cash used in investing activities | — | — | $3.250 billion | $3.325 billion |
| Free cash flow | — | — | $498 million | $847 million |
Free cash flow is the company’s non-GAAP measure: operating cash flow less investing cash flow and dividends paid. Figures are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Material changes versus prior period
- Q3 freight revenue fell 10% as carloads declined 6% and average revenue per car declined 4%; nine-month freight revenue fell 7% on a 5% carload decline and 3% lower average revenue per car.
- Q3 fuel expense declined 45%; nine-month fuel expense declined 42%, primarily reflecting lower diesel prices. Total operating expenses fell 13% in Q3 and 9% year to date, improving operating ratios despite weaker revenue.
- Coal, industrial products, and intermodal were the largest weak commodity groups. Q3 freight revenue decreased 18%, 16%, and 11%, respectively. Automotive revenue was flat in Q3 and up 3% year to date.
- Q3 net income declined about 5%, while diluted EPS declined 2%; year-to-date net income declined about 3%, but diluted EPS rose from $4.14 to $4.18 as the weighted-average diluted share count fell. The company repurchased 28.7 million shares during the first nine months.
- Other income included a $113 million gain on a real-estate sale in Q2 2015, contributing to the year-to-date increase in other income. Interest expense rose 10% year to date as average debt increased, partly offset by a lower effective interest rate.
Financial position, liquidity, and capital allocation
- At September 30, 2015, cash was $1.078 billion; total debt was $13.319 billion, compared with $11.480 billion at December 31, 2014. Debt to capital increased to 39.3% from 35.1%; adjusted debt to capital, including operating leases and unfunded pension and OPEB, rose to 44.5% from 41.3%.
- The company had $1.7 billion available under its revolving credit facility, no commercial paper outstanding, and reported compliance with its debt covenant. Its $650 million receivables securitization facility had $400 million outstanding.
- Operating cash flow increased to $5.625 billion. Capital investments were $3.323 billion, and dividends paid were $1.877 billion. Cash declined $508 million over the nine months, compared with a $455 million increase in 2014.
- Dividends declared were $0.55 per share in Q3, versus $0.50 a year earlier; nine-month dividends declared were $1.65 versus $1.41. The company had authority to repurchase 59.3 million additional shares under its current program at quarter-end.
Outlook, commentary, and risks
- Management expected approximately $4.2 billion of 2015 capital investments, including Positive Train Control (PTC) and excluding lease buyouts; the plan could change with business conditions or regulatory requirements.
- Management reported improved Q3 service measures: train speed rose 8% year over year and terminal dwell time improved 3%. Lower volumes and better network fluidity contributed; approximately 2,700 employees were furloughed or in alternate work status and about 950 locomotives were stored at quarter-end.
- PTC implementation by the December 31, 2015 deadline was uncertain. The company stated it might have to embargo toxic-by-inhalation-material and passenger traffic if Congress did not extend the deadline. Potential regulatory fines could be material but could not be estimated. Industry groups had filed actions seeking to prevent railroads from refusing such traffic.
- Other exposures include antitrust litigation relating to fuel surcharges, personal-injury and asbestos claims, and environmental remediation at identified sites. Management did not expect known claims and contingencies, after recorded liabilities and insurance recoveries, to materially adversely affect results, financial condition, or liquidity; outcomes remain uncertain.
- The company reported no material changes to its previously disclosed risk factors or market-risk disclosures. Management stated disclosure controls were effective and there were no material quarterly changes to internal control over financial reporting.
Important facts for investors to verify
- Whether freight volumes, fuel surcharges, and demand in coal, industrial products, and intermodal continued to weaken or stabilized after quarter-end.
- Progress on PTC, any legislative or regulatory deadline extension, and resulting traffic restrictions, legal outcomes, or fines.
- Whether the lower operating ratio and operating cash flow are sustainable as fuel prices, volumes, labor costs, and service conditions change.
- Debt growth, capital spending, dividends, and share repurchases relative to cash generation and the company’s liquidity and leverage targets.
- Developments in fuel-surcharge antitrust litigation and changes in estimates for personal-injury, asbestos, and environmental liabilities.