Union Pacific Corporation — Q1 2014 Form 10-Q
Period: Three months ended March 31, 2014; unaudited consolidated results. Union Pacific operates one reportable segment, its integrated railroad network.
Financial and operating performance
| Metric | Q1 2014 | Q1 2013 / comparison |
|---|---|---|
| Operating revenue | $5.638 billion | $5.290 billion; up 7% |
| Freight revenue | $5.286 billion | $4.984 billion; up 6% |
| Operating expenses | $3.784 billion | $3.657 billion; up 3% |
| Operating income | $1.854 billion | $1.633 billion |
| Net income | $1.088 billion | $957 million |
| Diluted EPS | $2.38 | $2.03 |
| Operating ratio | 67.1% | 69.1%; improved 2.0 percentage points |
| Operating cash flow | $1.767 billion | $1.524 billion |
| Capital investments, cash | $893 million | $782 million |
| Free cash flow (company-defined non-GAAP) | $499 million | $401 million |
- Freight revenue growth reflected 5% carload growth and a 1% increase in average revenue per car. Agricultural revenue rose 16%, industrial products 10%, intermodal 4%, coal 3%, and chemicals 2%; automotive was essentially flat.
- Management reported record first-quarter financial results. Pricing gains and productivity more than offset higher volume-related costs, inflation, and approximately $35 million of weather-related costs. Lower fuel prices also helped: average locomotive diesel fuel was $3.12 per gallon versus $3.23.
- Severe winter weather and higher demand reduced average train speed 7% to 24.5 mph and increased terminal dwell time 12% to 30.7 hours. Service fluidity improved late in the quarter as weather moderated and surge resources were deployed.
- Cash and cash equivalents were $1.857 billion at quarter-end, up from $1.432 billion at year-end 2013. Total debt carrying value was $10.176 billion, versus $9.577 billion; debt-to-capital was 32.4%, up from 31.1%. Adjusted debt-to-capital, a company-defined non-GAAP measure, was 38.4%, versus 37.6%.
- The company had $1.8 billion available under its revolving credit facility and no commercial paper outstanding. It reported compliance with the facility’s debt-to-net-worth covenant. Cash used in financing was $437 million, including $644 million of share repurchases and $363 million of dividends paid.
Changes, outlook, risks, and unusual items
- Compared with Q1 2013, revenue increased 7%, net income increased about 14%, and diluted EPS increased about 17%. Weighted-average diluted shares declined to 456.2 million from 470.5 million, partly reflecting repurchases.
- Operating expenses rose $127 million, mainly from volume, depreciation, wages and benefits, materials, and weather. Purchased services and materials increased 9%; depreciation increased 7%.
- The company expects approximately $3.9 billion of capital investments in 2014; it may revise the plan if business conditions or laws and regulations warrant. No full-year revenue or earnings guidance is provided in the supplied filing text.
- In January, Union Pacific issued $1.0 billion of fixed-rate notes due 2019, 2024, and 2044. Proceeds were for general corporate purposes, including share repurchases. A new authorization permits repurchase of up to 60 million shares through December 31, 2017; 3.82 million program shares were repurchased in Q1.
- Other income included a $14 million gain from sale of a permanent easement. Q1 2013 included a $17 million land-lease settlement, which contributed to the year-over-year decline in other income.
- Contingencies include personal-injury liabilities of $294 million, asbestos liabilities of $129 million, and environmental liabilities of $166 million. Management did not expect known claims, environmental matters, commitments, or guarantees to materially adversely affect results, financial condition, or liquidity. A pipeline-easement rent judgment remains under appeal; any recovery is an unrecognized gain contingency.
- The company reported no material changes to previously disclosed risk factors or market-risk disclosures. It cautioned that forward-looking statements are subject to risks and uncertainties, including operational, economic, legal, and environmental factors.
Important facts for investors to verify
- Whether winter-related service constraints and higher demand persist, and their effects on train speed, dwell time, costs, and customer volumes.
- Execution and funding of the approximately $3.9 billion 2014 capital plan, alongside dividends and the authorized share repurchase program.
- Debt growth, interest costs, and continued compliance with credit-facility covenants as financing and capital returns continue.
- Assumptions and potential variability in personal-injury, asbestos, environmental, and tax liabilities, plus the outcome and timing of the pipeline-easement appeal.
- Commodity-level trends, particularly grain, coal, industrial products, intermodal, and crude-oil traffic, which management described as having differing volume drivers.