(Dow Jones Newswires circulated the following story by Tom Locke on July 24.)
DENVER — Citing the negative effects and uncertainty surrounding high fuel prices, Union Pacific Corp. (NYSE:UNP – News) Chief Executive Dick Davidson said Thursday he expects third-quarter earnings per share to be a $1.10, plus or minus five cents.
That’s lower than what analysts were expecting.
The $1.10 view includes an anticipated charge of three cents a share for redemption of securities, by the Omaha, Neb., transportation company and parent of the Union Pacific Railroad.
On an operating basis, the company’s view is for earnings per share of $1.13 in the third quarter. That compares with the current analyst estimate compiled by Thomson First Call (News – Websites) of $1.28, said Mr. Davidson during a conference call discussing second-quarter results.
Mr. Davidson also said that the third-quarter view assumes revenue growth of 3% from a year ago, and it assumes fuel costs of 85 cents to 90 cents a gallon. The main reason for the lower-than-expected third-quarter earnings view is persistently high fuel costs, executives said.
The high fuel costs not only raise Union Pacific’s expenses but hurt the businesses of some of its customers such as those in the chemicals segment, executives said, as well as the economic recovery as a whole.
Each penny per gallon increase in fuel prices means about $3 million in higher costs per quarter for Union Pacific, executives said.
The company has a small amount hedged at 73 cents for 2003. It is unhedged for 2004, but it is looking at both 2004 and 2005 for hedging.
Union Pacific posted second quarter net income of $288 million, or $1.10 a diluted share, down 5.3% from $304 million, or $1.15 a diluted share, a year ago. The latest quarter included a one-time expense of 3 cents a diluted share for costs tied to redemption of convertible preferred securities.
Union Pacific noted that fuel surcharges in the quarter didn’t make up for the added $54 million in railroad fuel expense tied to the increase of 16 cents per gallon in diesel fuel prices.
The company beat the Thomson First Call average estimate from analysts of $ 1.02 a share. In April, Chief Executive Davidson had said that he expected second-quarter earnings per share to be below the $1.15 of the second quarter of 2002, but above $1 a share.
The company had second-quarter operating revenue of $3.27 billion, a 3.5% increase from $3.16 billion a year ago. It posted its best quarter ever in revenue, and beat the First Call average estimate from analysts of $3.13 billion.
Operating income rose 0.5%, to $605 million, compared with $602 million a year ago.
Executives stressed the resurgence of coal volumes, continued strength in industrial products, strength in agriculture and energy, and a falloff in automotive and chemicals due partly to the weak economy. They also stressed income gains in the company’s Overnite Corp. trucking operations.
Looking at commodity revenue for the quarter versus a year ago, agriculture revenue was up 6%; energy up 6%; industrial products up 5%; intermodal flat; automotive down 2%; and chemicals down 2%.
Executives in the conference call said they still expect free cash flow, after payment of dividends, to be $400 million to $600 million for 2003. “Free cash flow” is after the payment of capital expenditures, which Davidson estimated at $1.9 billion for 2003.
Free cash flow for the first six months was $31 million, but Mr. Davidson noted that typically free cash flow ramps up in the last half of the year. In the first six months, Union Pacific had cash from operations of $1.09 billion, minus capital and other spending of $939 million, and dividends paid of $117 million.
The company called $500 million in convertible preferred securities with a May 16 redemption date to reduce diluted shares by 7.3 million annually, or 3%, and provide annual interest savings of $31 million. That redemption caused the 3- cents-a-share charge in the third quarter.
It called an additional $500 million in convertible preferred securities with a July 7 redemption date to reduced diluted shares by another 7.3 million and generate annual interest savings of $9 million, net of refinancings. That redemption will generate a 3-cents-a-share charge in the third quarter.
The 2004 positive impact from those redemptions will be $40 million in interest savings and a reduced share count of 14.6 million that will add 19 cents a diluted share to earnings.
Whether the company uses its cash to implement another redemption is still not decided, but it is one of the options Union Pacific is considering, said Mr. Davidson.
Other options would include buybacks of common shares, dividends, and investments, he said.
Union Pacific shares were up $2.41, or 4.1%, at $61.30 in late-morning trading on the New York Stock Exchange.