01—Abstract
Summary
Summary of the 10-Q filed July 23, 2010. Cited figures are marked; the original filing is the authoritative source.
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%a 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.
02—Key points
Key Highlights
- Total operating revenues surged by 27% in Q2 2010 and 21% year-to-date, reflecting a strong economic recovery and increased demand for rail services.
- Freight 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.
- Net 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.
- Operating 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.
- The 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.
- Union 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.
- Free 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.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-QQ2 FY2010filed July 23, 2010Financial Statements
Q2 FY2010 against Q2 FY2009
| Line item | Q2 FY2010Q2 FY2009 | Change |
|---|---|---|
| Revenue | $4.18B$3.30B | +26.6% |
| Operating Expenses | $2.90B$2.56B | +13.6% |
| Operating Income | $1.28B$748.00M | +71.0% |
| Interest Expense | $152.00M$150.00M | +1.3% |
| Net Income | $711.00M$465.00M | +52.9% |
| EPS (Basic) | $0.71$0.46 | +54.3% |
| EPS (Diluted) | $0.70$0.46 | +52.2% |
| Shares Outstanding (Basic) | 1.00B1.01B | −0.2% |
| Shares Outstanding (Diluted) | 1.01B1.01B | +0.2% |
05—Questions
Frequently Asked Questions
What were the primary drivers of Union Pacific's revenue growth in the second quarter of 2010?
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.
How did operating expenses change, and what factors influenced them?
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.
What is the company's outlook on financial condition and liquidity?
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.
Were there any significant accounting changes or one-time events impacting the results?
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.
06—Continue