Union Pacific Corporation — Q1 2020 Form 10-Q
Business context and period: Unaudited results for the three months ended March 31, 2020, compared with Q1 2019. Union Pacific operates one integrated railroad segment. The quarter began to reflect COVID-19 disruptions, including supply-chain impacts from China and North American automotive plant closures late in March.
Financial performance
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Operating revenue | $5.229 billion | $5.384 billion | (3%) |
| Operating income | $2.143 billion | $1.960 billion | +9% |
| Net income | $1.474 billion | $1.391 billion | +6% |
| Diluted EPS | $2.15 | $1.93 | +11% |
| Operating ratio | 59.0% | 63.6% | Improved 4.6 points |
| Operating cash flow | $2.155 billion | $1.959 billion | +10% |
| Capital investments | $807 million | $752 million | +7% |
| Free cash flow | $688 million | $549 million | +25% |
Freight revenue fell 3% as carloads declined 7%; average revenue per car rose 5%, supported by traffic mix and pricing, partly offset by lower fuel surcharges. Freight fuel-surcharge revenue was $351 million versus $398 million. Bulk revenue decreased 5%, industrial increased 3%, and premium declined 6%. Operating expenses fell 10%, driven by productivity initiatives, lower volumes and fuel prices, and fewer weather-related costs than in 2019. Compensation expense declined 12%, and fuel expense declined 18%.
Cash and cash equivalents were $1.130 billion at March 31, 2020, versus $831 million at year-end 2019; total cash, cash equivalents and restricted cash were $1.207 billion. Debt was $27.876 billion, comprising $1.511 billion due within one year and $26.365 billion due after one year. Adjusted debt/adjusted EBITDA was 2.7x, up from 2.5x at year-end. Total liabilities were $46.225 billion, and shareholders’ equity was $15.991 billion, down from $18.128 billion.
Material changes, outlook and risks
- COVID-19: Management reported material volume declines beginning in March in autos, intermodal, chemicals, petroleum, coal and metals, partly offset by increases in grain, construction, and pulp and paper. The pandemic’s duration and financial effects were uncertain; management warned that 2020 operating and financial results could be materially affected. Additional safety-related costs were expected, but management did not then expect them to materially harm overall Q2 results.
- Capital and liquidity: The 2020 capital-spending estimate was reduced by $150–$200 million to approximately $2.9 billion, with further changes possible. At quarter-end, the company had $2 billion available under its revolving facility and up to $400 million undrawn under its receivables facility. It issued $750 million of long-term debt on April 7, 2020, and said it did not expect difficulty funding 2020 maturities. Management said it expected to remain in compliance with debt covenants.
- Shareholder returns: Management planned to maintain the dividend but suspended share repurchases, except final settlement of the $2 billion accelerated repurchase program initiated in February. Q1 dividends paid were $660 million; share-repurchase cash outflows were $2.556 billion, with a further $400 million pending final settlement.
- Operating execution: The operating ratio reached an all-time record 59.0%. Network measures improved, including freight-car velocity (+8%), locomotive productivity (+18%), and intermodal trip-plan compliance (85%, up 19 points). Average employees declined 15% year over year.
- Contingencies: Personal-injury liabilities were $270 million; management estimated reasonably possible settlement costs of approximately $270–$295 million. Environmental liabilities were $226 million across 359 identified sites. Management stated known claims and environmental matters were not expected to have a material adverse effect, while acknowledging estimation uncertainty. An ADA class action was decertified by the Eighth Circuit in March; plaintiffs indicated they would pursue individual claims.
- Other notable comparison: Q1 2019 included $27 million of interest income related to an employment-tax refund, contributing to lower other income in 2020. The company also cited lower weather-related costs compared with Q1 2019.
No specific full-year earnings or revenue guidance was provided in the filing. Management’s outlook emphasized the uncertainty of COVID-19 impacts and the possibility of materially adverse results.
Key facts for investors to verify
- How subsequent carload, revenue, and customer-credit trends developed as COVID-19 effects continued.
- Whether the approximately $2.9 billion capital plan, dividend, and suspended repurchase policy changed.
- Debt maturities and financing capacity, including the April 2020 debt issuance and covenant compliance.
- Whether productivity gains and the record operating ratio were sustained as volumes changed.
- Developments in personal-injury, environmental, and individual ADA claims and related estimates.