10-QPeriod: Q1 FY2004

UNION PACIFIC CORP Quarterly Report for Q1 Ended Mar 31, 2004

Filed May 7, 2004For Securities:UNP

Summary

Union Pacific Corporation (UNP) reported its first-quarter 2004 financial results, showing a mixed performance. While operating revenues saw a healthy increase of 6% year-over-year, driven by growth across several commodity groups including Industrial Products, Agricultural, and Intermodal, operating income declined by 15%. This decline was attributed to increased operating expenses, including higher salaries, wages, employee benefits, equipment rents, and casualty costs, partly influenced by operational challenges such as severe winter weather, derailments, and a significant jury verdict. The company is actively addressing network performance issues by accelerating hiring and training of train crews and acquiring new locomotives to improve efficiency. Despite these operational headwinds, UNP maintained strong liquidity with $332 million in cash provided by operating activities. The company also refinanced its credit facilities and issued new long-term debt, indicating proactive financial management.

Key Highlights

  • 1Operating revenues increased by 6% to $2.9 billion, driven by strong performance in Agricultural, Industrial Products, and Intermodal segments.
  • 2Operating income decreased by 15% to $314 million due to a 9% increase in operating expenses.
  • 3Salaries, wages, and employee benefits rose 5%, while casualty costs saw a significant 47% increase, notably impacted by a $30 million jury verdict.
  • 4The company is investing in network improvements, including accelerating hiring of train crews and acquiring new locomotives to address operational challenges.
  • 5Cash provided by operating activities was $332 million, demonstrating solid operational cash generation.
  • 6The company refinanced its credit facilities, securing $2.0 billion in revolving credit, and issued new long-term debt totaling $500 million in early May 2004.
  • 7Effective tax rate decreased significantly from 36% in Q1 2003 to 20% in Q1 2004 due to a one-time reduction in deferred state income tax liability and tax credits.

Frequently Asked Questions

The primary drivers of the 6% increase in operating revenues were growth in key commodity groups, including Industrial Products (10% increase), Agricultural (10% increase), and Intermodal (9% increase). This growth was supported by a 4% increase in revenue carloads and a 2% rise in average revenue per car, which benefited from pricing gains, fuel surcharges, and contract escalators.

Operating income decreased by 15% due to a 9% increase in operating expenses. Significant cost pressures included higher salaries, wages, and employee benefits (up 5%), increased equipment rents (up 5%), and a substantial rise in casualty costs (up 47%). The latter was heavily influenced by a $30 million jury verdict related to a 1998 accident, as well as increased costs from derailments and severe winter weather conditions that hampered network performance.

Union Pacific is implementing several initiatives to address network performance issues. This includes accelerating the hiring and training of nearly 1,000 trainmen in the first quarter of 2004 and expecting to add another 1,400 in the second quarter. The company is also accelerating locomotive acquisitions, planning to acquire 270 new locomotives and lease an additional 350. These efforts aim to improve train velocity and overall network fluidity.

The company's liquidity remains strong, with $332 million in cash provided by operating activities in the first quarter of 2004. Union Pacific also secured $2.0 billion in revolving credit facilities in March 2004 and subsequently issued $500 million in new long-term debt in early May 2004. The debt-to-capital ratio slightly improved to 38.9% as of March 31, 2004.