Union Pacific Corporation — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020; compared with the same 2019 periods. Union Pacific operates one integrated railroad segment. Financial amounts below are in U.S. dollars; “B” means billion and “M” means million.
Financial performance
| Metric | Q3 2020 | Q3 2019 | First 9 months 2020 | First 9 months 2019 |
|---|---|---|---|---|
| Operating revenue | $4.919B | $5.516B | $14.392B | $16.496B |
| Operating income | $2.031B | $2.234B | $5.828B | $6.454B |
| Net income | $1.363B | $1.555B | $3.969B | $4.516B |
| Diluted EPS | $2.01 | $2.22 | $5.83 | $6.36 |
| Operating ratio | 58.7% | 59.5% | 59.5% | 60.9% |
| Cash from operating activities | Quarterly cash generation was $1.6B, as reported by management | $5.993B | $6.264B |
Revenue and costs: Q3 freight revenue fell 11%, reflecting 4% lower volume and 7% lower average revenue per car, including weaker mix and fuel surcharges; core pricing partly offset the decline. Total operating expenses fell 12%, led by lower fuel costs, productivity, and lower volume. Operating income declined 9%. Management reported a record-low operating ratio for the quarter. For the first nine months, revenue fell 13% and expenses fell 15%.
Cash flow and capital allocation: Nine-month cash used in investing was $2.081B, including $2.294B of capital investments. Cash used in financing was $2.150B. Reported free cash flow, a non-GAAP measure, was $1.938B, versus $1.832B in 2019. Dividends paid were $1.974B, and share repurchases were $2.956B, down from $5.162B a year earlier.
Financial position and liquidity
- At September 30, cash and cash equivalents were $2.601B, versus $831M at December 31, 2019. Current assets were $5.130B and current liabilities were $4.841B.
- Debt carrying value was $28.060B, comprising $1.980B due within one year and $26.080B due after one year. Operating lease liabilities were $1.601B. Adjusted debt was $30.010B and adjusted debt/adjusted EBITDA was 2.9x, compared with 2.5x at year-end 2019; both adjusted measures are non-GAAP.
- Available liquidity included $2.0B under the revolving credit facility and up to $400M undrawn under the receivables facility. The company also had $300M outstanding under bilateral credit lines. Management stated it was complying with debt covenants.
- Total shareholders’ equity was $17.199B, down from $18.128B at year-end 2019. The company repurchased 18.4M shares in the first nine months.
Material changes and operating trends
- COVID-19 continued to reduce shipments, though management described sequential volume improvement from Q2. Q3 carloads declined 4%; nine-month carloads declined 10%.
- Performance differed by commodity: Q3 intermodal revenue rose 5%, while coal and renewables fell 31%, metals and minerals fell 30%, and automotive fell 11%. Low oil and gas prices weighed on petroleum, sand, and coal shipments.
- Fuel expense fell 40% in Q3; average locomotive diesel prices were $1.36 per gallon versus $2.09. Lower fuel prices also reduced fuel-surcharge revenue.
- Operating metrics improved year over year, including car velocity, locomotive productivity, and manifest/automotive trip-plan compliance. Intermodal trip-plan compliance declined to 77% from 81% amid a demand surge, though it improved sequentially during the quarter. Average employees fell 18%; approximately 5,100 employees were furloughed at quarter-end.
- Adjusted debt increased from $27.433B at December 31, 2019, while adjusted EBITDA declined, contributing to the higher leverage ratio.
Outlook, management commentary, risks, and unusual items
- Outlook: The company estimated 2020 capital expenditures of approximately $2.9B, reflecting a previously announced $150M–$200M reduction tied to COVID-19 uncertainty. Management planned to maintain the dividend at current levels and resumed share repurchases in Q4 after suspending them in March. No specific full-year earnings or revenue guidance is provided in the filing.
- COVID-19: Management warned that renewed outbreaks, government or consumer responses, and a prolonged or renewed downturn could disrupt customers and supply chains and materially affect 2020 results. It said liquidity analyses indicated capacity to withstand an extended period of lower volumes.
- Debt transactions: In September, the company exchanged $1.047B of notes for notes due 2062 and paid approximately $319M cash consideration, plus accrued interest; no gain or loss was recorded. It gave notice to redeem $500M of 4.0% notes due February 2021. Management also planned to repay $300M of bilateral credit lines and described upcoming debt maturities and possible refinancing.
- Other income: Nine-month other income included a $69M gain on a land and easement sale. Q3 interest expense rose 11% year over year as average debt increased.
- Contingencies: The company recorded $266M for personal injury claims; estimated possible settlement costs ranged from $266M to $290M. Environmental liabilities were $235M across 375 identified sites, including 18 on the Superfund National Priorities List. Management did not expect known claims and contingencies to materially harm results, financial condition, or liquidity, but noted estimation uncertainty.
- Other items: The company increased its bad-debt provision in Q3 for deteriorating customer creditworthiness. It reported no material changes in market-risk disclosures and no material changes to internal control over financial reporting.
Important facts for investors to verify
- Whether freight volumes and revenue per car continue to recover, particularly in automotive, coal, industrial, and intermodal markets.
- Whether productivity and cost reductions can offset persistent volume weakness without impairing service quality or future capacity.
- Debt maturities, the planned note redemption and repayment of bilateral lines, and the effect of higher leverage on liquidity and financing costs.
- Execution of the $2.9B capital plan, dividend policy, and resumed share repurchases amid uncertain operating conditions.
- Developments in COVID-19 impacts, customer credit quality, personal injury claims, and environmental remediation exposures.