Union Pacific Corporation — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. Unaudited consolidated results; Union Pacific reports as one operating segment.
Financial results
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Operating revenue | $5.516B | $5.928B | $16.496B | $17.075B |
| Operating income | $2.234B | $2.269B | $6.454B | $6.307B |
| Net income | $1.555B | $1.593B | $4.516B | $4.412B |
| Diluted EPS | $2.22 | $2.15 | $6.36 | $5.79 |
| Operating ratio | 59.5% | 61.7% | 60.9% | 63.1% |
| Operating cash flow | Not separately stated for the quarter | $6.264B | $6.374B |
Q3 freight revenue fell 7%, principally due to an 8% carload decline; average revenue per car rose 1%. Operating expenses fell 10%, reflecting lower volumes, productivity gains and lower fuel prices. Year-to-date revenue declined 3%, while operating income rose about 2% and net income about 2%. Reduced weighted-average shares from repurchases contributed to EPS growth.
For the first nine months, cash used in investing was $2.507B, including $2.495B of capital investments; cash used in financing was $3.782B. Free cash flow, as defined by the company (operating cash flow less investing cash flow and dividends), was $1.832B versus $2.224B. Cash and cash equivalents were $1.250B at September 30, 2019.
Debt due within and after one year totaled $25.735B at September 30, 2019. The company reported adjusted debt of $28.001B and adjusted debt/adjusted EBITDA of 2.6x, compared with 2.3x at December 31, 2018. It had $2.0B available under its revolving credit facility and $200M of commercial paper outstanding. Current assets were $4.073B and current liabilities $4.587B.
Material changes and drivers
- Q3 freight revenue weakness reflected declines in intermodal, coal and frac sand. Energy revenue decreased 20% and premium revenue decreased 9%; industrial revenue was nearly flat. Construction, petroleum products and plastics provided partial offsets.
- Year-to-date operating results benefited from productivity measures and a $74M employer employment-tax refund recorded as reductions to compensation expense, plus associated interest income. Other income also included a $85M prior-year debt-extinguishment charge in 2018, affecting the comparison.
- Interest expense increased to $266M in Q3 from $241M and to $772M year to date from $630M, mainly due to higher average debt levels.
- Operating ratio improved 2.2 percentage points in both reported comparison periods. Management cited Unified Plan 2020: Q3 locomotive productivity improved 18%, freight car velocity 10%, and workforce productivity 4% year over year.
- At September 30, the company had repurchased 31.4M shares year to date for $5.162B in cash. It authorized repurchases of up to 150M shares through March 31, 2022; 136.7M remained authorized.
Outlook, risks and unusual items
Management estimated 2019 capital expenditures of approximately $3.1B, about $100M below its prior estimate, while noting that further revisions could follow from business or regulatory conditions. The filing gives no numerical revenue or earnings guidance.
Risks and uncertainties include weak demand and traffic mix, truck competition, trade uncertainty and tariffs, lower coal and frac-sand shipments, fuel-price changes, weather-related operating challenges, derailment and equipment-damage costs, and execution of operating and capital plans. The company stated that it did not expect known claims, environmental matters, commitments or guarantees to materially adversely affect results, financial condition or liquidity.
Recorded environmental liabilities were $226M; the company identified 364 sites where it may have remediation liability, including 20 sites on the Superfund National Priorities List. Personal-injury liabilities were $272M, with a reasonably possible settlement-cost range of $272M–$297M. A Colorado environmental matter had a preliminary $140,000 penalty agreement, with settlement and payment expected in Q1 2020. Antitrust litigation remained pending; the court of appeals affirmed denial of class certification, and additional individual lawsuits had been filed. Union Pacific said it considered the claims without merit.
Adoption of the new lease accounting standard on January 1, 2019 increased reported assets and liabilities by approximately $2B without affecting results or cash flows; comparative periods were not recast. A subsequent event: on October 15, the company redeemed $163M of notes due in 2020, expecting a $2M early-extinguishment charge in Q4.
Key facts for investors to verify
- Whether traffic volumes and freight revenue stabilize, especially in intermodal, coal and frac sand, and how pricing offsets mix and fuel-surcharge changes.
- Whether Unified Plan 2020 productivity gains persist and translate into lower costs without compromising service or safety.
- Debt growth, the increase in adjusted leverage to 2.6x, and the funding of capital spending, dividends and share repurchases.
- The duration and financial effect of environmental, personal-injury and antitrust matters, including the estimated ranges and potential changes in claims.
- Whether the $3.1B capital expenditure estimate and share-repurchase authorization change with business or regulatory conditions.