Union Pacific Corporation — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; unaudited consolidated results, compared with Q1 2016. Union Pacific’s railroad and affiliates constitute one reportable operating segment.
Financial performance
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Operating revenue | $5.132 billion | $4.829 billion | +6% |
| Freight revenue | $4.794 billion | $4.502 billion | +6% |
| Operating income | $1.793 billion | $1.687 billion | +6% |
| Net income | $1.072 billion | $979 million | +10% |
| Diluted EPS | $1.32 | $1.16 | +14% |
| Operating ratio | 65.1% | 65.1% | Unchanged |
| Cash from operations | $1.883 billion | $2.173 billion | Lower |
| Free cash flow | $548 million | $1.036 billion | Lower |
Freight revenue growth reflected 2% higher carloads and a 4% increase in average revenue per car, supported by pricing, fuel surcharges and traffic mix. Coal revenue rose 25%, agricultural products 7%, industrial products 9%, intermodal 3%, and chemicals 1%; automotive declined 1%. Fuel-surcharge revenue was $212 million, versus $113 million.
Operating expenses increased 6% to $3.339 billion. Fuel expense rose 44% to $460 million, principally reflecting higher fuel prices and increased gross ton-miles; fuel efficiency improved 4%. Compensation, depreciation and other expenses also increased, partly offset by productivity gains and lower purchased services and rents. The effective tax rate declined to 36.5% from 37.5%.
Cash, debt and capital
At March 31, cash and cash equivalents were $1.049 billion, short-term investments $90 million, and total debt $15.033 billion. Debt to capital was 43.3%; adjusted debt to capital, including operating leases and unfunded pension and OPEB obligations, was 47.4%. The company had $1.7 billion available under its revolving credit facility, no commercial paper outstanding, and $200 million drawn under its receivables securitization facility.
Cash used in investing was $843 million, including $811 million of capital investments. The company’s 2017 capital plan was approximately $3.1 billion, subject to revision based on business conditions and expected returns. Cash used in financing was $1.268 billion, including $759 million of share repurchases and $492 million of dividends. The board authorized repurchases of up to 120 million shares through December 31, 2020; 7.53 million were repurchased under the program in Q1 at an average $106.55 per share.
On April 5, 2017, the company issued $500 million of 3.000% notes due 2027 and $500 million of 4.000% notes due 2047. Proceeds were for general corporate purposes, including potential share repurchases.
Material changes, outlook and risks
- Western snow, rain and flooding disrupted operations and reduced train speed 6% to 25.7 mph; terminal dwell time increased 7% to 30.6 hours. Management estimated an approximately $0.03-per-share adverse impact from deferred or lost revenue and added costs.
- Despite 2% volume growth, average employee levels fell 4%; approximately 2,300 employees were furloughed or in alternate work status and approximately 1,400 locomotives were stored at quarter-end.
- Management cited improving coal demand and shale-drilling-related frac sand shipments, alongside declines in crude oil, rock, finished vehicles and domestic intermodal. No specific earnings guidance was provided in the filing.
- Cash from operations fell year over year primarily because of the timing of tax payments; the prior-year period benefited from tax-payment timing related to bonus depreciation. The company attributed lower free cash flow to lower operating cash generation and increased investment.
- Personal-injury liability was $291 million, with a reasonably possible settlement-cost range of $291 million to $318 million. Environmental liability was $203 million. The filing describes asbestos, environmental, antitrust and other litigation; management did not expect known matters to materially adversely affect results, financial condition or liquidity.
- The company identified 300 potentially liable environmental sites, including 20 on the Superfund National Priorities List. It was evaluating an Illinois demand for $125,000 in civil penalties related to a 2015 diesel-fuel release. A pipeline-easement rent case remained a gain contingency, with no recovery recognized.
- Management expected adoption of the new lease accounting standard to significantly increase reported assets and liabilities. Revenue-recognition adoption was planned for 2018 and was not expected to have a material financial impact.
Investor verification points
- Whether weather-related service disruption, train speed and terminal dwell improve, and whether the estimated earnings impact proves temporary.
- Durability of coal, grain and frac sand demand, fuel-surcharge recovery timing, and continuing declines in crude oil and selected traffic categories.
- Progress toward the $3.1 billion capital plan and the balance between investment, dividends, share repurchases and debt issuance.
- Cash-flow comparability, including tax-payment timing, and the effect of higher fuel and labor costs on margins and the operating ratio.
- Developments in personal-injury, asbestos, environmental and antitrust matters, and the unresolved pipeline-easement rent proceeding.