Union Pacific Corporation — Q2 2021 Form 10-Q
Business context and reporting period. This unaudited quarterly report covers the three and six months ended June 30, 2021. Union Pacific operates an integrated freight railroad network and reports one operating segment. Comparisons with Q2 2020 are against a period of sharply reduced volumes amid pandemic shutdowns.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Operating revenue | $5.504 billion | $4.244 billion | $10.505 billion | $9.473 billion |
| Operating income | $2.473 billion | $1.654 billion | $4.466 billion | $3.797 billion |
| Net income | $1.798 billion | $1.132 billion | $3.139 billion | $2.606 billion |
| Diluted EPS | $2.72 | $1.67 | $4.72 | $3.82 |
| Operating ratio | 55.1% | 61.0% | 57.5% | 59.9% |
Q2 revenue rose 30%, operating income 50%, and net income 59% year over year. Freight revenue increased 29%, reflecting 22% higher carloads and 6% higher average revenue per car, supported by fuel surcharges and core pricing. Premium freight revenue rose 50%; intermodal and automotive shipments benefited from recovery from 2020 shutdowns. For the first half, revenue increased 11% and net income 20%.
Cash flow, debt and liquidity
- First-half cash from operations was $4.219 billion, versus $4.392 billion. Capital investment was $1.190 billion, down from $1.599 billion; dividends paid were $1.350 billion. Reported free cash flow was $1.798 billion, compared with $1.656 billion.
- Cash and cash equivalents were $1.115 billion at June 30, 2021. Total debt carrying value was $28.812 billion, up from $26.729 billion at year-end 2020; adjusted debt was $30.972 billion and adjusted debt/adjusted EBITDA was 2.9x.
- Available liquidity included $2.0 billion under a revolving credit facility and up to $400 million undrawn under the receivables facility. The company reported compliance with debt covenants. Current liabilities of $4.357 billion exceeded current assets of $3.764 billion.
- First-half financing included $2.896 billion of debt issuance, $691 million of debt repayment, $4.085 billion of cash share repurchases and $1.350 billion of dividends paid. The company issued $2.5 billion of long-term notes in May and completed a $1.7 billion debt exchange in April.
Material changes and management commentary
Revenue and earnings rebounded as markets recovered from pandemic-related declines. Productivity initiatives and core pricing helped improve the operating ratio, partly offset by higher fuel prices, inflation and other costs. Q2 fuel expense increased 101%, driven by a 71% increase in locomotive diesel prices and higher traffic volumes. Despite higher volume, network performance weakened: freight car velocity fell 6%, train speed fell 7%, terminal dwell rose 6%, and intermodal trip-plan compliance declined 11 percentage points year over year.
Outlook, risks and unusual items
- Management expected 2021 capital expenditures of approximately $2.9 billion, essentially flat with 2020. The filing provides no specific full-year earnings or revenue guidance.
- Management said ongoing supply-chain disruptions—especially port, equipment, chassis, truck-driver and warehouse constraints—were slowing asset turns and increasing costs. The disruptions were expected to affect Q3 and potentially the remainder of 2021. Semiconductor shortages were also weighing on automotive production.
- Q2 included a $50 million gain on a sale to the Colorado Department of Transportation and a $20 million unrealized investment gain. State tax-rate legislation reduced deferred tax expense by $43 million.
- Recorded personal-injury liabilities were $301 million; the reasonably possible settlement range was approximately $301 million to $330 million. Environmental liabilities were $250 million across 385 identified sites. Management did not expect known claims or environmental matters to have a material adverse effect, while noting estimation uncertainty.
- The company said it had sufficient capacity to withstand an extended period of lower volumes. Forward-looking statements are subject to risks, including pandemic effects, operating disruptions, litigation, environmental obligations and other risks described in its 2020 Form 10-K.
Important facts for investors to verify
- Whether the rebound in volumes, pricing and earnings is sustainable against the Q2 2020 comparison, and how semiconductor and intermodal disruptions affect later periods.
- Whether service performance and network congestion improve, given deteriorating velocity, dwell, speed and trip-plan compliance metrics.
- How continued buybacks, dividends, capital spending and debt issuance affect leverage, liquidity and per-share results.
- Whether personal-injury and environmental claim estimates change; the filing describes uncertainty in ultimate costs and timing.