10-QPeriod: Q2 FY2018

UNION PACIFIC CORP Quarterly Report for Q2 Ended Jun 30, 2018

Filed July 19, 2018For Securities:UNP

Summary

Union Pacific Corporation (UNP) reported strong financial performance for the second quarter and first half of 2018, driven by robust freight revenue growth. Total operating revenues increased by 8% in Q2 2018 and 7% year-to-date, primarily fueled by a 4% increase in freight volume and higher Average Revenue Per Car (ARC), attributed to core pricing gains and increased fuel surcharges. This top-line growth, coupled with the benefits of the Tax Cuts and Jobs Act reducing the effective tax rate, led to a significant increase in net income and diluted earnings per share compared to the prior year. Despite facing operational challenges such as higher fuel costs and network congestion, the company demonstrated improved operational productivity and managed expenses effectively. The company's balance sheet remains solid, with growth in cash and cash equivalents. UNP also actively engaged in capital allocation, with substantial share repurchases and dividend payments, indicating a commitment to returning value to shareholders. Management's outlook appears cautiously optimistic, acknowledging operational headwinds but focusing on ongoing productivity initiatives and strategic investments. Investors should monitor fuel price volatility, the impact of ongoing operational improvements, and any changes in freight demand across key commodity sectors.

Financial Highlights

47 data points
Beta

Revenue

$5.67B

Net Income

$1.51B

26.6% Net Margin

EPS (Diluted)

$1.98

Total Assets

$58.69B

Cash & Equivalents

$1.60B

Free Cash Flow

$1.43B

Financial Statements
Beta
Revenue$5.67B
Operating Expenses$3.57B
Operating Income$2.10B
Interest Expense$203.00M
Net Income$1.51B
EPS (Basic)$1.98
EPS (Diluted)$1.98
Shares Outstanding (Basic)760.50M
Shares Outstanding (Diluted)763.70M

Key Highlights

  • 1Total operating revenues increased by 8% to $5.67 billion in Q2 2018 compared to $5.25 billion in Q2 2017, and by 7% to $11.15 billion year-to-date.
  • 2Freight revenues grew 8% in Q2 2018, driven by a 4% increase in volume and a 4% rise in Average Revenue Per Car (ARC), supported by core pricing and fuel surcharges.
  • 3Net income for Q2 2018 was $1.51 billion ($1.98 per diluted share), a significant increase from $1.17 billion ($1.45 per diluted share) in Q2 2017.
  • 4Operating income increased by 5% in Q2 2018, despite a 36% increase in fuel prices.
  • 5The effective tax rate decreased from 37.5% in Q2 2017 to 22.1% in Q2 2018, primarily due to the Tax Cuts and Jobs Act.
  • 6The company repurchased approximately $6.69 billion of its common stock in the six months ended June 30, 2018, including significant Accelerated Share Repurchase (ASR) programs.
  • 7Free cash flow for the first six months of 2018 was $1.28 billion, up from $0.92 billion in the same period of 2017.

Frequently Asked Questions

Revenue growth was primarily driven by an 8% increase in freight revenues. This was a result of a 4% increase in shipment volume and a 4% increase in Average Revenue Per Car (ARC). The rise in ARC was attributable to core pricing gains and higher fuel surcharge revenue, partially offset by a less favorable mix of traffic.

The Tax Cuts and Jobs Act, enacted in late 2017, significantly lowered the federal corporate income tax rate from 35% to 21% effective January 1, 2018. This reduction led to a substantially lower effective tax rate for Union Pacific, decreasing from 37.5% in the second quarter of 2017 to 22.1% in the second quarter of 2018. This lower tax rate was a key contributor to the reported increase in net income.

Union Pacific experienced several operational challenges, including a significant increase in fuel prices (up 36% year-over-year in Q2). The company also faced network congestion on key routes and in terminals, partly due to high freight car inventory levels. A major tunnel outage in late May further exacerbated these issues, leading to train delays, reroutes, and extended transit times. These challenges were partially offset by ongoing productivity initiatives.

Union Pacific is actively returning capital to shareholders. In the first six months of 2018, the company repurchased approximately $6.69 billion of its common stock, including significant Accelerated Share Repurchase (ASR) programs. Additionally, dividends paid increased to $1.125 billion in the first six months of 2018 from $0.980 billion in the same period of 2017. The company also maintained its capital investment plan, focusing on infrastructure replacements and capacity expansion.