Union Pacific Corporation — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. Results reflect the substantial disruption to freight demand from COVID-19. Union Pacific operates one integrated railroad segment.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Operating revenue | $4.244 billion | $5.596 billion | $9.473 billion | $10.980 billion |
| Operating income | $1.654 billion | $2.260 billion | $3.797 billion | $4.220 billion |
| Net income | $1.132 billion | $1.570 billion | $2.606 billion | $2.961 billion |
| Diluted EPS | $1.67 | $2.22 | $3.82 | $4.15 |
| Operating ratio | 61.0% | 59.6% | 59.9% | 61.6% |
Q2 revenue fell 24%, freight revenue fell 24%, and carloads declined 20%. Average revenue per car was down 6%, reflecting traffic mix and lower fuel surcharges, partly offset by core pricing. Operating expenses declined 22%, led by lower fuel costs, reduced volume and productivity measures. Operating margin was approximately 39.0% in Q2 versus 40.4% a year earlier; for the first half it was approximately 40.1% versus 38.4%.
Q2 diluted EPS fell about 25% year over year. For the first half, revenue declined 14%, net income declined 12%, and diluted EPS declined about 8%. The first-half operating ratio improved 1.7 percentage points despite the revenue decline.
Cash flow, debt and liquidity
- First-half cash from operations was $4.392 billion, compared with $3.900 billion. Capital investments were $1.599 billion; dividends paid were $1.319 billion. Reported free cash flow was $1.656 billion, a non-GAAP measure.
- Cash and cash equivalents were $2.706 billion at June 30, 2020, up from $831 million at year-end 2019. The six-month increase in cash, cash equivalents and restricted cash was $1.868 billion.
- Total balance-sheet debt was approximately $28.429 billion, compared with $25.200 billion at December 31, 2019. Adjusted debt to adjusted EBITDA was 2.9x, versus 2.5x at year-end, using the company’s non-GAAP calculation.
- Available liquidity included $2.0 billion under the revolving credit facility, up to $400 million undrawn under the receivables facility, and $300 million undrawn on $600 million of short-term bilateral credit lines. The company reported compliance with its debt covenants.
- First-half debt issuance was $4.004 billion and debt repayments were $770 million. The company reported $470 million of debt maturities before year-end and said it expected to fund them even if it did not renew the relevant programs.
Material changes and unusual items
- Freight revenue declined 24% in Q2, with the sharpest weakness in automotive (down 66%), coal and renewables (down 29%), and metals and minerals (down 34%). Automotive production suspensions and pandemic-related supply-chain disruption were significant factors.
- Operating expenses benefited from lower fuel prices and volume, productivity actions, and lower weather-related costs. Q2 locomotive diesel averaged $1.26 per gallon versus $2.21 a year earlier.
- Other income included an $83 million Q2 gain on non-operating asset sales, including a $69 million land and easement sale. This supported earnings but was not recurring operating revenue.
- Debt and interest expense increased: first-half interest expense was $567 million versus $506 million, primarily due to higher average debt outstanding.
- Q2 cash generation benefited from deferred tax payments: a $584 million federal estimated tax payment shifted to Q3 and approximately $150 million of employment tax deposits deferred to future years under the CARES Act.
Outlook, management commentary and risks
The filing provides no specific full-year earnings or revenue guidance. Management estimated 2020 capital expenditures of approximately $2.9 billion, consistent with a previously announced $150–$200 million reduction, and noted further revisions could depend on business conditions and regulation. Management intended to maintain the quarterly dividend at current levels, while suspending share repurchases except for final settlement of the $2 billion accelerated repurchase program initiated in February.
Management said industrial activity was beginning to rebound in Q3 but emphasized uncertainty about renewed COVID-19 effects, customer disruptions and the pace of recovery. The company cited ample operating capacity and improving service measures, while noting that approximately 5,700 employees were furloughed at quarter-end. Bad-debt expense could rise if major customers’ creditworthiness deteriorates.
Reported contingencies included a $259 million personal-injury liability, with estimated settlement costs reasonably possible to range from $259 million to $283 million, and a $228 million environmental liability across 379 identified sites. Management did not expect known claims and contingencies, after recorded liabilities and insurance recoveries, to materially adversely affect results, financial condition or liquidity; ultimate outcomes remain uncertain.
Important facts for investors to verify
- Whether the Q3 industrial and automotive recovery persisted, and how COVID-19 affected volumes, customer credit and freight mix.
- Whether management maintained the $2.9 billion capital expenditure estimate and current dividend, and the timing of any resumed share repurchases.
- How much of reported first-half operating cash flow reflected tax-payment deferrals, and the resulting Q3 tax cash outflow.
- Debt levels, maturities, borrowing availability and adjusted leverage, particularly given the increase in debt and adjusted debt-to-EBITDA.
- Subsequent developments in personal-injury, environmental and other claims, and any changes to estimated liabilities.