Union Pacific Corporation — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. The annual report also presents fourth-quarter results. Union Pacific is a Class I railroad serving 23 states across the western two-thirds of the United States, with connections to Canada, Mexico, and major ports. Its operating results are reported as one integrated railroad segment.
Financial and operating performance
| Metric | 2019 | 2018 |
|---|---|---|
| Operating revenue | $21.708 billion | $22.832 billion |
| Freight revenue | $20.243 billion | $21.384 billion |
| Operating income | $8.554 billion | $8.517 billion |
| Net income | $5.919 billion | $5.966 billion |
| Diluted earnings per share | $8.38 | $7.91 |
| Operating ratio | 60.6% | 62.7% |
| Cash from operating activities | $8.609 billion | $8.686 billion |
| Cash capital investments | $3.453 billion | $3.437 billion |
| Dividends paid | $2.598 billion | $2.299 billion |
- Revenue carloads fell 6%; freight revenue decreased 5%, reflecting lower volumes and unfavorable traffic mix, partly offset by core pricing gains.
- Operating expenses declined 8% to $13.154 billion, led by lower compensation, fuel, and purchased-service costs. Average diesel fuel price fell 7% to $2.13 per gallon.
- Fourth-quarter revenue was $5.212 billion, operating income $2.100 billion, net income $1.403 billion, and diluted EPS $2.02. In fourth-quarter 2018, the respective figures were $5.757 billion, $2.210 billion, $1.554 billion, and $2.12.
- Freight revenue by group: Agricultural Products $4.444 billion (down 1%); Energy $3.761 billion (down 18%); Industrial $5.796 billion (up 2%); Premium $6.242 billion (down 6%).
- Management reported free cash flow of $2.576 billion, a non-GAAP measure defined as operating cash flow less investing cash flow and dividends.
Balance sheet, liquidity, and capital returns
- At year-end, cash and cash equivalents were $831 million; total assets were $61.673 billion and shareholders’ equity was $18.128 billion.
- Total debt was $25.200 billion, including $1.257 billion due within one year; adjusted debt to adjusted EBITDA was 2.5x, versus 2.3x in 2018. Interest expense increased 21% to $1.050 billion.
- The company reported a working-capital deficit, primarily because of upcoming debt maturities, but said it did not indicate a lack of liquidity. It had a $2.0 billion revolving credit facility with no borrowings outstanding and $400 million drawn under its $800 million receivables facility.
- Cash dividends paid were $2.598 billion. The quarterly dividend was increased twice during 2019. The company repurchased about 35 million shares under its repurchase programs; reported cash used for share repurchases was $5.804 billion.
- Cash capital investments were $3.453 billion, including $1.953 billion for road infrastructure replacements and $540 million for capacity and commercial facilities. Management expected 2020 capital spending of approximately $3.1 billion.
Material changes and management commentary
- Unified Plan 2020 drove network and workforce productivity initiatives. Freight-car velocity improved 6%, terminal dwell improved 17%, and locomotive productivity improved 13%; average train speed declined 4%.
- Despite higher diluted EPS, net income was slightly lower year over year. Management attributed EPS growth in part to a 6% reduction in the full-year average share count.
- Safety performance worsened: the reportable personal-injury rate rose to 0.90 from 0.82, and the reportable derailment rate rose to 4.28 from 3.28. Management said results were not acceptable and identified safety improvement as a priority.
- Severe winter weather and widespread flooding disrupted operations in the first half of 2019. Management also cited weak demand in several markets, including intermodal, coal, frac sand, grain, finished vehicles, and lumber.
- In 2020, management expected slightly positive volume growth, continued margin improvement, and at least $500 million in productivity savings. These are forward-looking expectations, not guarantees.
Risks, contingencies, and unusual items
- Principal disclosed risks include economic and freight-demand volatility, competition from trucks and other transport modes, fuel-price changes, severe weather, safety incidents and hazardous-material releases, regulation, cybersecurity, environmental liabilities, labor negotiations, and international trade disruption.
- Approximately 85% of full-time employees were union-represented; negotiations for agreements covering 2020–2024 began January 1, 2020. Management said work stoppages during negotiations are historically rare.
- The company reported $227 million of environmental liabilities across 360 identified sites and $265 million of personal-injury liabilities. Management stated that currently known environmental obligations and claims were not expected to materially affect consolidated results, financial condition, or liquidity.
- Fuel-surcharge antitrust claims continued, including approximately 50 individual lawsuits following denial of class certification; the company said it considered the claims without merit and not expected to have a material adverse effect. A separate disability-related class-certification appeal was pending.
- A Colorado environmental penalty of $140,000 relating to Moffat Tunnel construction was paid January 21, 2020.
- Adoption of the new lease accounting standard on January 1, 2019 increased reported assets and liabilities by approximately $2 billion, with no effect on consolidated results or cash flows. The auditor issued unqualified opinions on the financial statements and internal control; capitalization of property was identified as a critical audit matter.
Important facts for investors to verify
- Whether 2020 volume, margin, and productivity expectations were achieved, particularly the target of at least $500 million in savings.
- Whether operating improvements under Unified Plan 2020 were sustained without compromising safety, given the 2019 increases in injury and derailment rates.
- Debt maturities, refinancing costs, leverage, and continued access to the revolving credit and receivables facilities.
- Developments in the fuel-surcharge litigation, environmental remediation estimates, and other personal-injury or casualty exposures.
- Capital spending and shareholder distributions relative to operating cash generation and freight-market conditions.