Union Pacific Corporation — Q2 2019 Form 10-Q
Business context and reporting period. This unaudited quarterly report covers the three and six months ended June 30, 2019. Union Pacific operates an integrated railroad network and reports one operating segment. Unless otherwise stated, financial figures below are in millions of dollars.
Financial results and key metrics
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Operating revenue | $5,596 | $5,672 | $10,980 | $11,147 |
| Operating income | $2,260 | $2,099 | $4,220 | $4,038 |
| Net income | $1,570 | $1,509 | $2,961 | $2,819 |
| Diluted EPS | $2.22 | $1.98 | $4.15 | $3.65 |
| Operating ratio | 59.6% | 63.0% | 61.6% | 63.8% |
| Cash provided by operations | — | — | $3,900 | $4,033 |
| Capital investments | — | — | $1,560 | $1,614 |
| Free cash flow | — | — | $1,042 | $1,283 |
Q2 revenue fell 1%, while operating expenses declined 7%; operating income rose 8% and diluted EPS rose about 12%. For the first half, revenue declined 2% and net income increased about 5%. The filing defines free cash flow as operating cash flow less investing cash flow and dividends; it is a non-GAAP measure.
Freight revenue declined 2% in both periods. Q2 freight carloads fell 4%, partly offset by a 3% increase in average revenue per car. For the first half, carloads fell 3% and average revenue per car rose 1%. In Q2, agricultural and industrial freight revenue increased 4% each; energy declined 13%, and premium declined 2%. Energy was down 15% for the first half, primarily reflecting lower coal and frac sand shipments.
At June 30, cash and cash equivalents were $1,049; total current assets were $4,086 and current liabilities $5,665. Debt was $25,252, comprising $2,297 due within one year and $22,955 due after one year. The company had $675 of commercial paper outstanding and $2.0 billion available under its revolving credit facility; it reported compliance with the facility’s debt-to-EBITDA covenant. Trailing-twelve-month adjusted debt to adjusted EBITDA was 2.5x, versus 2.3x at year-end 2018.
Material changes and management commentary
- Management said Unified Plan 2020 continued to improve efficiency despite widespread flooding. Q2 year-over-year locomotive productivity improved 19%, freight car velocity 4%, and workforce productivity 4%; the operating ratio reached a record 59.6%.
- Flooding disrupted operations and volumes, increased costs, and reduced Q2 earnings by approximately $0.07 per diluted share. Management attributed expense reductions to productivity initiatives, lower volumes, lower fuel prices, and employment tax refunds, partly offset by inflation, weather impacts, and equipment damage.
- Q2 compensation expense included a $32 employment-tax refund; first-half compensation expense included $74 in refunds, with $33 of associated interest income reported in other income for Q2 and the first half. The refunds followed resolution of claims for railroad retirement taxes on certain stock awards and bonus payments.
- Interest expense increased to $259 in Q2 from $203, reflecting higher average debt, partly offset by a lower effective rate. First-half interest expense was $506 versus $389.
- The company adopted lease accounting effective January 1, 2019, recognizing approximately $2 billion of additional assets and liabilities; management said adoption did not affect earnings or cash flows. Reported operating lease liabilities were $2,054 at quarter-end.
Outlook, risks, and contingencies
Management expected 2019 capital expenditures of approximately $3.2 billion, subject to reassessment based on Unified Plan 2020, business conditions, and the regulatory environment. The filing gives no specific revenue or earnings guidance. The board authorized repurchases of up to 150 million shares through March 31, 2022; 146.3 million shares remained available under that authorization at June 30. First-half cash dividends paid were $1,248.
Key operating exposures include weather-related disruption, lower freight volumes and competition, commodity-specific weakness, fuel-price movements, and execution of operating improvements. The company reported no material changes to previously disclosed risk factors or market-risk disclosures. It stated that known claims and contingencies were not expected to materially adversely affect results, financial condition, or liquidity, while noting outcomes remain uncertain.
Recorded personal-injury liabilities were $265, with reasonably possible settlement costs estimated at $265–$290; the company accrues the low end of the range. Environmental liabilities were $220 across 345 identified sites. A long-running rail-shippers antitrust class-certification matter remained pending; a related Oxbow market-allocation claim was dismissed, while its fuel-surcharge claim remained stayed. The company denied the allegations and said it would defend the claims. The receivables securitization facility, with $400 outstanding, matured in July 2019; the company intended to renew it on comparable terms.
Important facts for investors to verify
- Whether volume trends, especially in energy and domestic intermodal, recover and whether pricing continues to offset declines.
- Whether Unified Plan 2020 productivity gains persist and offset weather, inflation, and other operating costs.
- Progress on the stated $3.2 billion capital plan, liquidity, debt levels, and the 2.5x adjusted leverage measure.
- Final settlement of the 2019 accelerated share repurchase program and the pace and funding of future repurchases and dividends.
- Developments in personal-injury, environmental, and antitrust matters, and renewal terms for the receivables facility.