Union Pacific Corporation — Q1 2013 Form 10-Q
Business context and reporting period
Unaudited results for the three months ended March 31, 2013, compared with Q1 2012. Union Pacific operates one integrated railroad segment and reports freight revenue across six commodity groups.
Financial results and liquidity
| Metric | Q1 2013 | Q1 2012 / comparison |
|---|---|---|
| Operating revenue | $5.290 billion | $5.112 billion; up 3% |
| Operating income | $1.633 billion | $1.510 billion |
| Operating ratio | 69.1% | 70.5%; improved 1.4 points |
| Net income | $957 million | $863 million |
| Diluted EPS | $2.03 | $1.79 |
| Cash from operations | $1.524 billion | $1.404 billion |
| Capital investments | $782 million | $804 million |
| Free cash flow | $401 million | $285 million |
| Cash and cash equivalents | $1.917 billion at March 31 | $1.063 billion at December 31, 2012 |
| Debt | $9.861 billion at March 31 | $8.997 billion at December 31, 2012 |
| Debt to capital | 32.9% | 31.2% at December 31, 2012 |
Freight revenue increased 3% to $4.984 billion, while carloads declined 2%. Average revenue per car rose 6%, reflecting core pricing, fuel surcharges, and traffic mix. Chemicals (+14%), automotive (+13%), intermodal (+9%), and industrial products (+6%) grew; agricultural (-9%) and coal (-6%) declined. Coal carloads fell 19%, and agricultural carloads fell 9%.
Operating expenses rose 2% to $3.657 billion. Lower fuel expense and volume-related costs partly offset higher purchased services, rents, depreciation, and other costs. Basic and diluted weighted-average shares fell year over year, while declared dividends per share rose to $0.69 from $0.60.
Material changes, outlook and management commentary
Management attributed record first-quarter financial results to core pricing, safety and service efforts, network efficiency, and cost control. Operating income and earnings grew despite lower overall volumes. Train speed was slightly higher at 26.4 mph; terminal dwell increased 4% to 27.4 hours, primarily as manifest traffic grew in the Southern Region. Average rail-car inventory fell 4%.
The company planned approximately $3.6 billion of capital investments for 2013, subject to revision if business conditions or laws and regulations warrant. No specific full-year revenue or earnings guidance is provided in the supplied filing text. Management said it expected to remain compliant with the revolving-credit covenant under current capital plans.
Cash increased partly alongside $944 million of debt issuance. In March, the company issued $325 million of 2.75% notes due 2023 and $325 million of 4.25% notes due 2043. It repurchased 2.88 million shares under its program during the quarter and had 12.15 million shares of authorization remaining. The $1.8 billion revolving facility was undrawn; $400 million was outstanding under the receivables securitization facility.
Risks, contingencies and unusual items
- Q1 other income was $40 million versus $16 million, including $17 million of rental income from a land-lease contract settlement.
- Fuel-surcharge antitrust litigation included a certified shipper class; an appeal of class certification was pending, with oral argument scheduled for May 3, 2013. The company denied the allegations and said it would defend the cases. Oxbow’s complaint was dismissed without prejudice, with an opportunity to refile.
- Recorded personal-injury liability was $335 million; estimated future settlement costs could range from approximately $335 million to $369 million. Asbestos and environmental liabilities were $136 million and $166 million, respectively. The filing describes uncertainty in estimating these exposures.
- The IRS had issued notices of deficiency for tax years 2005–2008, which the company disputed; examinations of 2009–2010 were ongoing. Unrecognized tax benefits were $119 million.
- Future minimum operating-lease payments were approximately $4.1 billion. Total contractual obligations were reported at $26.4 billion; guarantees were $307 million, with a $2 million recorded liability.
- A favorable pipeline-easement rent judgment could result in a material recovery, but was under appeal and recognized as a gain contingency, not recorded in the financial statements.
Important facts for investors to verify
- Whether pricing gains can continue to offset volume weakness, particularly in coal and agriculture.
- Whether manifest growth and higher terminal dwell affect service, costs, and network capacity.
- Actual 2013 capital spending versus the approximately $3.6 billion plan and its effect on cash generation.
- Debt growth, share repurchases, and dividend commitments relative to operating cash flow and leverage.
- Developments in fuel-surcharge litigation, tax disputes, personal-injury claims, environmental remediation, and the pipeline-rent appeal.
The filing states that the quarter’s results are not necessarily indicative of full-year 2013 results. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.