Union Pacific Corporation — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; comparisons are with Q1 2018 unless stated otherwise. Union Pacific’s railroad and affiliates constitute one reportable segment. Financial amounts are in millions of dollars except per-share data and operating statistics.
Financial results and key metrics
- Revenue: Total operating revenue was $5.384 billion, down 2%; freight revenue was $5.010 billion, down 2%. Freight carloads fell 2%, while average revenue per car was essentially flat.
- Profit: Operating income was $1.960 billion, up 1%; net income was $1.391 billion, up 6%. Diluted EPS increased to $1.93 from $1.68, supported in part by a lower weighted-average diluted share count (719.5 million versus 779.6 million).
- Margins: The operating ratio improved 1.0 percentage point to 63.6%, implying an operating margin of approximately 36.4%. Management cited productivity, pricing, lower fuel prices, and a $42 million employment-tax refund as offsets to weather-related costs.
- Cash flow: Operating cash flow was $1.959 billion, versus $1.901 billion. Cash used in investing was $784 million, including $752 million of capital investments. Dividends paid were $626 million. Company-defined free cash flow was $549 million, versus $414 million. Cash, cash equivalents, and restricted cash ended the quarter at $1.098 billion.
- Debt and liquidity: Balance-sheet debt was $25.112 billion, up from $22.391 billion at December 31, 2018; cash was $1.059 billion. Adjusted debt to adjusted EBITDA was 2.6x, versus 2.3x at year-end. The company had $2.0 billion available under its revolving credit facility and $500 million of commercial paper outstanding. It remained in compliance with its credit-facility debt covenant.
- Balance sheet: Total assets were $61.319 billion and shareholders’ equity was $17.742 billion at March 31, 2019. Current assets were $3.953 billion and current liabilities were $5.262 billion.
Material changes and operating performance
- Freight revenue declines were concentrated in Energy (down 16%) and Agricultural Products (down 3%); Industrial revenue rose 5% and Premium rose 3%. Energy volumes fell 15%, including a 45% decline in frac sand shipments and a 14% decline in coal and coke shipments.
- Severe winter weather and widespread flooding disrupted operations, reduced volumes, and increased labor, equipment-rental, maintenance, and fuel-consumption costs. Management estimated an adverse earnings effect of approximately $0.15 per diluted share.
- Operating expenses fell 3% to $3.424 billion. Compensation and benefits declined 5% and fuel expense declined 10%; “Other” expense rose 15%, principally due to destroyed equipment and freight loss and damage costs.
- Freight car velocity improved 7% and locomotive productivity improved 6% year over year, while average train speed declined 6% amid weather disruptions. Management said network operations improved through implementation of Unified Plan 2020.
- Cash capital investments declined to $752 million from $910 million. Share repurchases totaled $2.987 billion in cash during the quarter; the company issued $2.95 billion of fixed-rate notes and reported $2.992 billion of total debt issuance in financing cash flows.
Outlook, commentary, and notable items
- Management expected 2019 capital expenditures of approximately $3.2 billion, subject to review based on Unified Plan 2020, business conditions, and the regulatory environment. The filing gives no specific earnings or revenue guidance.
- The company adopted lease accounting standard Topic 842 on January 1, 2019 without recasting prior periods. Adoption added approximately $2 billion to reported assets and liabilities and did not affect results of operations or cash flows. Lease liabilities totaled $2.739 billion at quarter-end.
- Q1 results included a $42 million reduction in compensation expense and approximately $27 million of interest income from an employment-tax refund. Refund claims for 2008–2017 remained pending with the IRS; no gain was recognized for those claims as of March 31. The company expected IRS approval in 2019.
- A new authorization effective April 1 permits repurchases of up to 150 million shares through March 31, 2022. Final settlement of the Q1 accelerated repurchase programs was expected before the end of Q3 2019.
- Recorded personal-injury liabilities were $266 million; estimated future settlement costs could range from $266 million to $292 million. Environmental liabilities were $216 million across 337 identified sites. Management did not expect known claims and contingencies to have a material adverse effect, but outcomes remain uncertain.
- The company agreed to pay $47,500 each to the United States and Oregon in a settled environmental matter. Material pending matters also included antitrust litigation and an ADA class-action certification decision under appeal. Management said it believed these matters would not materially affect results, financial condition, or liquidity.
- No material changes to the risk factors in the 2018 Form 10-K or to market-risk disclosures were reported. Disclosure controls were assessed as effective.
Most important facts for investors to verify
- Whether operating improvements under Unified Plan 2020 persist after weather disruptions and support further productivity gains.
- Whether freight volumes recover, particularly in coal, frac sand, grain, domestic intermodal, and Mexico-related shipments, and how pricing and traffic mix affect revenue per car.
- How much of Q1 earnings growth depended on the $42 million employment-tax refund, associated interest income, lower fuel prices, and share-count reductions; also verify the outcome and timing of pending IRS refund claims.
- How increased debt, lease obligations, and buybacks affect leverage, liquidity, and the company’s ability to fund its approximately $3.2 billion capital plan and dividends.
- Developments in personal-injury, environmental, antitrust, and ADA litigation, along with the July 2019 maturity of the receivables securitization facility.