Union Pacific Corporation — FY 2010 Form 10-K
Reporting period: Year ended December 31, 2010; filed February 4, 2011. This is an annual filing, not a standalone fourth-quarter report. Union Pacific is a Class I railroad operating 31,953 route miles across 23 western U.S. states, with six principal freight businesses.
Financial and operating performance
| Metric | 2010 | 2009 | Change |
|---|---|---|---|
| Operating revenue | $16.965 billion | $14.143 billion | +20% |
| Freight revenue | $16.069 billion | $13.373 billion | +20% |
| Operating income | $4.981 billion | $3.379 billion | +47% |
| Net income | $2.780 billion | $1.890 billion | +47% |
| Diluted EPS | $5.53 | $3.74 | +48% |
| Operating ratio | 70.6% | 76.1% | Improved 5.5 points |
| Operating margin | 29.4% | 23.9% | Improved 5.5 points |
| Operating cash flow | $4.105 billion | $3.204 billion | +$901 million |
| Capital investments | $2.482 billion | $2.354 billion | +$128 million |
| Debt at year-end | $9.242 billion | $9.848 billion | -$606 million |
Quarterly results also strengthened year over year: fourth-quarter revenue was $4.410 billion versus $3.754 billion, operating income $1.313 billion versus $999 million, net income $775 million versus $549 million, and diluted EPS $1.56 versus $1.08.
Revenue and carloads rose across all six commodity groups. Freight carloads increased 13%; average revenue per car rose 6%, reflecting core pricing, traffic mix and higher fuel surcharges. Automotive revenue rose 49%, intermodal 30%, and industrial products 23%. Management attributed the recovery to stronger demand, pricing and productivity, while higher fuel prices increased expense by $566 million year over year. Fuel expense rose 41% overall; fuel efficiency improved 3%.
Cash provided by investing activities was $2.488 billion, primarily reflecting capital investment. Financing activities used $2.381 billion, including $1.249 billion of share repurchases and $602 million of dividends paid. The company reported non-GAAP free cash flow of $1.415 billion, defined as operating cash flow adjusted for receivables securitization, less investing cash flow and dividends. Cash and cash equivalents were $1.086 billion at year-end, down from $1.850 billion. Current assets exceeded current liabilities by approximately $480 million. The company had $1.9 billion available under its revolving credit facility, with no borrowings outstanding.
Shareholders’ equity was $17.763 billion; reported debt-to-capital was 34.2%, down from 37.0%. Adjusted debt-to-capital, which includes lease and other obligations, was 42.5%, versus 46.1%. The filing reports $22.373 billion of long-term obligations, a broader measure than debt. The quarterly dividend was increased twice during 2010; declared dividends totaled $1.31 per share for the year.
Changes versus prior periods and management outlook
- 2010’s results rebounded from recession-affected 2009, when revenue fell 21% and net income was $1.890 billion. The 2010 performance set company records for operating income, operating ratio and net income.
- Productivity gains helped absorb increased volume with average employee levels down 1%. Customer satisfaction reached a new high, while average train speed fell 4% and terminal dwell time increased 2% from 2009.
- For 2011, management expected volume to increase from 2010 and anticipated operating-ratio improvement, with volume, price and productivity gains expected to offset higher fuel, labor, depreciation, casualty and property-tax costs. These are expectations, not guarantees.
- Planned 2011 capital investment was approximately $3.2 billion, including about $250 million for Positive Train Control (PTC). The company estimated total PTC implementation costs of approximately $1.4 billion by the end of 2015. The plan could change with business or regulatory conditions.
Risks, contingencies and unusual items
- Key risks include economic and freight-demand volatility; network congestion or weather disruptions; competition from trucks, barges and other railroads; fuel-price volatility and uncertainty over surcharge recovery; labor negotiations; and dependence on a limited number of locomotive and rail suppliers.
- Regulatory requirements include PTC implementation by 2015 and potentially expanded Surface Transportation Board authority. The filing warns that PTC spending could constrain other capital investments.
- Environmental, safety and litigation exposures include 294 sites where the company may have remediation responsibility, with a recorded environmental liability of $213 million. Personal-injury and asbestos liabilities were $426 million and $162 million, respectively; management notes that estimates may vary.
- Customs and Border Protection penalties related to drug discoveries in railcars totaled approximately $376 million at year-end. Union Pacific disputes the agency’s authority and said it did not expect the matter to materially affect results, financial condition or liquidity.
- The company reported a tentative, confidential settlement under negotiation concerning the Omaha Lead Site. It also disclosed environmental proceedings and fuel-surcharge antitrust litigation; management disputed the claims and did not expect a material adverse effect from the matters described.
- Unusual 2010 items included a $45 million one-time payment related to a CSXI transaction and $21 million of early debt-extinguishment charges. Other income fell to $54 million from $195 million, partly because 2009 included a $116 million pretax land-sale gain.
- Adoption of a new accounting standard changed receivables securitization from sale treatment to secured-borrowing treatment. The filing states this reduced reported operating cash flow by $400 million in 2010; management’s adjusted free-cash-flow calculation includes an adjustment for comparability.
The independent auditor issued an unqualified opinion on the financial statements and internal control over financial reporting.
Most important facts for investors to verify
- Whether 2011 volume and operating-ratio improvement materialized, and how fuel, labor and other cost inflation affected margins.
- Actual capital spending and PTC costs, and the effect of those investments on cash generation and returns.
- Cash flow and leverage on a comparable basis, including the receivables-securitization accounting change and lease-adjusted obligations.
- Developments in the $376 million CBP penalty dispute, Omaha Lead Site negotiations, environmental liabilities and antitrust litigation.
- Whether the reported volume recovery, pricing gains and service levels were sustained across commodity groups.