10-QPeriod: Q2 FY2010

UNION PACIFIC CORP Quarterly Report for Q2 Ended Jun 30, 2010

Filed July 23, 2010For Securities:UNP

Summary

Union Pacific Corporation (UNP) reported a strong rebound in its second quarter and first half of 2010 results compared to the same periods in 2009, indicating a recovery from the economic downturn. Total operating revenues increased significantly, driven by a substantial rise in freight revenues across most commodity groups, especially automotive, intermodal, and industrial products. This revenue growth was fueled by an 18% increase in carloads during the second quarter and a 15% increase year-to-date, alongside an 8% and 5% increase in average revenue per car (ARC) respectively, due to higher fuel surcharges and core pricing gains. Despite increased operating expenses, primarily driven by higher fuel costs (up 46% in Q2) and compensation, the company managed to improve its operating ratio by 8.0 percentage points in the second quarter and 6.7 percentage points year-to-date. Net income more than doubled year-over-year for both the quarter and the first half of the year. The company also demonstrated robust free cash flow generation and a commitment to returning capital to shareholders through share repurchases, which resumed in May 2010 after a pause in 2009 and early 2010. Overall, UNP appears to be on a solid recovery path, benefiting from increased economic activity and effective cost management.

Financial Highlights

48 data points
Beta

Revenue

$4.18B

Net Income

$711.00M

17.0% Net Margin

EPS (Diluted)

$0.70

Total Assets

$42.53B

Cash & Equivalents

$1.32B

Free Cash Flow

$444.00M

Financial Statements
Beta
Revenue$4.18B
Operating Expenses$2.90B
Operating Income$1.28B
Interest Expense$152.00M
Net Income$711.00M
EPS (Basic)$0.71
EPS (Diluted)$0.70
Shares Outstanding (Basic)1.00B
Shares Outstanding (Diluted)1.01B

Key Highlights

  • 1Total operating revenues surged by 27% in Q2 2010 and 21% year-to-date, reflecting a strong economic recovery and increased demand for rail services.
  • 2Freight revenues saw a significant increase of 27% in Q2 and 21% year-to-date, driven by an 18% (Q2) and 15% (YTD) rise in revenue carloads and an 8% (Q2) and 5% (YTD) increase in average revenue per car.
  • 3Net income dramatically improved, reaching $711 million in Q2 2010 ($1.40/share diluted) compared to $465 million ($0.92/share diluted) in Q2 2009, and $1.2 billion year-to-date compared to $827 million in the prior year.
  • 4Operating expenses increased by 14% in Q2 and 11% year-to-date, largely due to a 46% (Q2) increase in fuel costs; however, efficiency gains and cost savings partially offset these increases.
  • 5The operating ratio improved significantly, down 8.0 points to 69.4% in Q2 2010 and 6.7 points to 72.2% year-to-date, indicating enhanced operational efficiency.
  • 6Union Pacific resumed its share repurchase program in May 2010, buying back 6.5 million shares in the second quarter, demonstrating a commitment to returning capital to shareholders.
  • 7Free cash flow generation was strong, amounting to $755 million for the first six months of 2010, a substantial increase from $281 million in the comparable period of 2009.

Frequently Asked Questions

Revenue growth was primarily driven by a significant increase in freight revenue, which rose 27% year-over-year in Q2 2010. This was fueled by an 18% increase in carloads across most commodity groups, particularly automotive, intermodal, and industrial products, reflecting an improving economic environment. Additionally, average revenue per car (ARC) increased by 8%, due to higher fuel surcharges and core pricing gains.

Operating expenses increased by 14% in the second quarter of 2010 compared to the prior year. The largest contributor to this increase was fuel costs, which were up 46% due to higher prices per gallon. Other contributing factors included higher compensation and benefits, purchased services and materials, and depreciation. However, the company implemented productivity initiatives that led to workforce reductions and improved asset utilization, partially offsetting these increases.

The company reported a strong financial condition with significant improvements in net income and operating ratio. Cash provided by operating activities increased, and free cash flow generation was robust. Union Pacific maintains a revolving credit facility and complies with its debt-to-net-worth covenant. The company expects to continue satisfying its debt-to-net-worth coverage ratio and has access to capital markets. The company also highlighted its ongoing share repurchase program and dividend payments.

Yes, Union Pacific adopted new accounting guidance on January 1, 2010, related to transfers of financial assets, which changed how its receivables securitization facility is accounted for, now reflecting it as debt. Additionally, effective January 1, 2010, the company changed its accounting policy for rail grinding costs from capitalization to expensing as incurred, applying this change retrospectively. A significant one-time event impacting comparative results was a large real estate transaction in June 2009 that generated an $116 million pre-tax gain, making the year-over-year comparison less favorable for 'Other Income' in 2010.