Union Pacific Corporation — Q2 2014 Form 10-Q
Business context and period: The filing reports unaudited results for the quarter and six months ended June 30, 2014, compared with the corresponding 2013 periods. Union Pacific operates one integrated railroad segment. Unless otherwise noted, financial amounts are in millions. Per-share amounts reflect the June 6, 2014 two-for-one stock split.
Financial performance
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Operating revenue | $6,015 | $5,470 | $11,653 | $10,760 |
| Operating income | $2,196 | $1,878 | $4,050 | $3,511 |
| Net income | $1,291 | $1,106 | $2,379 | $2,063 |
| Diluted EPS | $1.43 | $1.18 | $2.62 | $2.20 |
| Operating ratio | 63.5% | 65.7% | 65.2% | 67.4% |
- Q2 revenue rose 10% and net income rose 17%; first-half revenue rose 8% and net income rose 15%. Freight revenue increased 10% in Q2 and 8% year to date, driven by volume growth and pricing gains.
- Q2 freight carloads increased 8%; average revenue per car increased 1%. Agricultural, industrial products, and intermodal were key growth contributors. Crude-oil shipments declined.
- Q2 operating expenses rose 6%, slower than revenue growth. Higher volume, a slower network, weather-related costs, inflation, and equipment costs contributed to expense increases. The operating ratio improved 2.2 percentage points to a record-low 63.5% for the quarter.
- Interest expense was $138 in Q2 and $271 for the first half, up 4% year over year in both periods, mainly due to higher average debt.
Cash flow, liquidity, and capital
- First-half cash from operations was $3,221, essentially flat with $3,218 in 2013. Investing used $2,178, including $2,068 of capital investments; financing used $938. Cash increased $105 to $1,537.
- First-half free cash flow, as defined by the company, was $267, down from $833, reflecting higher investment spending and dividends. Capital investments were $2,068 versus $1,730 in 2013; the comparison included a $261 headquarters lease buyout.
- Management increased its 2014 capital plan to approximately $4.1 billion, excluding the headquarters building purchase, from $3.9 billion. Planned investment includes locomotives, railcars, and capacity in constrained areas.
- At June 30, total debt was $10,843, up from $9,577 at year-end 2013; debt to capital rose to 33.6% from 31.1%. Adjusted debt to capital, including lease and pension adjustments, was 39.4% versus 37.6%.
- Cash was $1,537; current liabilities were $3,777, including $458 of debt due within one year. The company had $1.7 billion available under a revolving credit facility and reported compliance with its debt-to-net-worth covenant. It had no commercial paper outstanding.
Material developments, outlook, and risks
- Severe winter weather, subsequent Midwest flooding, gateway congestion, and higher volumes strained network performance. Q2 average train speed fell 7% to 23.9 mph and terminal dwell increased 12% to 29.8 hours year over year. The company recalled employees, reactivated locomotives, added more than 500 locomotives to its active fleet, and added more than 1,100 train, engine, and yard employees since year-start.
- The filing describes expectations to improve service and velocity and restore surge capacity, but provides no specific earnings or revenue guidance. Management said the capital plan could change with business conditions or regulatory developments.
- The company issued $1.0 billion of unsecured notes in January and arranged $500 million of equipment-trust financing for locomotive acquisitions. A new $1.7 billion revolving facility runs through May 2019. The $600 million receivables securitization facility had $400 million outstanding and was being renewed on comparable terms.
- The board authorized repurchases of up to 120 million shares through 2017. The company repurchased 15.96 million shares for $1.45 billion during the first half and declared dividends of $0.91 per share, up from $0.69 a year earlier.
- Personal-injury liabilities were $293; management estimated possible settlement costs of approximately $293–$319. Asbestos liabilities were $127 and environmental liabilities were $167. Management did not expect known claims and contingencies to have a material adverse effect, but outcomes and estimates remain uncertain.
- Tax examinations for 2005–2010 were ongoing or in appeals; the company had a $61 net liability for unrecognized tax benefits. Management expected a proposed IRS resolution for 2005–2008 to have no material effect when finalized.
- Management 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 operating, weather, economic, regulatory, litigation, and environmental factors.
Investor verification points
- Verify whether service metrics improved after the quarter and whether the additional staffing, locomotives, and capacity investment restored operating performance.
- Assess whether volume growth and pricing gains continued to outpace expense growth, including fuel, labor, and equipment costs.
- Track execution and funding of the increased $4.1 billion capital plan, alongside free cash flow, dividends, and share repurchases.
- Review debt growth, refinancing plans, facility renewal, and the effect of further borrowing on leverage and covenant headroom.
- Monitor outcomes and estimate changes for personal-injury, asbestos, environmental, and tax matters, as well as the pipeline-easement rent appeal for which no gain was recognized.