UNION PACIFIC CORP quarterly report, Q1 FY2021

Business context and reporting period

Union Pacific Corporation’s unaudited Form 10-Q covers the three months ended March 31, 2021, compared with the first quarter of 2020. Its railroad and related operations are reported as one operating segment. Unless otherwise stated, financial figures below are in millions of dollars.

Financial and operating highlights

• Freight revenue fell 5% to $4,649, with carloads down 1% and average revenue per car down 4%. Other revenue rose to $352.
• Operating expenses declined 3% to $3,008, but the revenue decrease contributed to a 7% decline in operating income. The operating ratio worsened by 1.1 percentage points.
• Free cash flow, as defined by the company (operating cash flow less investing cash outflows and dividends), was $803, versus $688. Cash flow conversion was 106%, versus 91%.
• At March 31, cash and cash equivalents were $1,183; total debt was $26,682, comprising $1,565 due within one year and $25,117 due thereafter. Adjusted debt/adjusted EBITDA was 2.9x, unchanged from December 31, 2020.
• Quarter-end shareholders’ equity was $16,254, compared with $16,958 at year-end. The company paid $650 in dividends and repurchased $1,347 of shares during the quarter.

Material changes and drivers

• Revenue pressure reflected weaker traffic mix, lower fuel-surcharge revenue and a 1% decline in volume; core pricing gains partially offset these factors. Fuel-surcharge revenue was $260, down from $351.
• Commodity results were mixed: grain and intermodal freight revenue each increased 11%, while industrial revenue declined 13%, automotive declined 15%, and coal and renewables declined 19%.
• Management cited February winter weather across several regions as disrupting railroad operations and customers. Productivity initiatives and lower volumes reduced expenses, partly offset by inflation, weather-related and casualty costs.
• Share repurchases were lower than in Q1 2020 ($1,347 versus $2,556); the prior-year quarter also included $2,996 of debt issued, compared with none in Q1 2021.

Outlook, risks and contingencies

• Management expected 2021 capital expenditures of approximately $2.9 billion, essentially flat with 2020, for infrastructure, safety, growth and productivity investments. The filing gives no specific earnings or revenue guidance.
• Management said pandemic effects could materially affect 2021 results. A semiconductor shortage had reduced automotive shipments 13% in Q1; customer plant shutdowns were expected to affect Q2 and potentially the rest of the year, depending on chip availability. The pace of economic recovery remained uncertain.
• Management identified continued focus on customer service, new business, productivity and employee, customer and community safety. Weather, fuel prices, traffic mix, customer demand and supply-chain disruptions remain relevant operating risks.
• At March 31, the company had $2.0 billion available under its revolving credit facility and up to $800 million undrawn on its receivables facility; it reported $1.0 billion of debt maturing before year-end. It was in compliance with its debt covenant.
• Subsequent events: in April, the company exchanged approximately $1.7 billion of existing notes for new 2036 and 2071 notes plus about $257 million cash consideration, and drew $400 million on its receivables facility for general corporate purposes, including share repurchases.
• Recorded personal-injury liability was $293; management described a reasonably possible settlement-cost range of approximately $293–$320. Environmental liability was $234 across 368 identified sites. Management did not expect known claims or environmental matters, after recorded liabilities and insurance recoveries, to materially adversely affect results, financial condition or liquidity.

Important facts for investors to verify

• Whether automotive production and semiconductor availability recover as expected, and the resulting effects on shipment volumes and revenue.
• Whether weather-related service disruptions and weaker intermodal trip-plan compliance improve, while productivity initiatives sustain cost control.
• Execution and funding of the approximately $2.9 billion 2021 capital plan, alongside dividends, repurchases and upcoming debt maturities.
• Changes in personal-injury and environmental estimates, and the status and financial effects of the April debt exchange and receivables-facility draw.