EX-99.1 2 unp-20191017xex99_1.htm EX-99.1 Ex 991

 

 

Exhibit 99.1

 





Union Pacific Reports Third Quarter Results

All-Time Best Quarterly Operating Ratio of 59.5%





FOR IMMEDIATE RELEASE





Third Quarter Results

·

Diluted earnings per share of $2.22 increased 3 percent.

·

Operating ratio of 59.5 percent improved 2.2 points.

·

Operating income of $2.2 billion was down 2 percent.



Omaha, Neb., October 17, 2019 – Union Pacific Corporation (NYSE: UNP) today reported 2019 third quarter net income of $1.6 billion, or $2.22 per diluted share. This compares to $1.6 billion, or $2.15 per diluted share, in the third quarter 2018.

“Given the challenging volume environment we delivered solid third quarter financial results, including an all-time best quarterly operating ratio of 59.5 percent,” said Lance Fritz, Union Pacific chairman, president and chief executive officer. “The work our employees are doing as part of Unified Plan 2020 is foundational to the company’s success and I am confident there are additional improvement opportunities going forward for our customers and shareholders.”



Third Quarter Summary

Operating revenue of $5.5 billion was down 7 percent in third quarter 2019, compared to third quarter 2018. Third quarter business volumes, as measured by total revenue carloads, decreased 8 percent compared to 2018. Growth in industrial volumes was more than offset by declines in agricultural products, premium and energy shipments.  In addition:

 

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-2-

 

·

Quarterly freight revenue declined 7 percent, compared to third quarter 2018, as core pricing gains were offset by lower volumes, decreased fuel surcharge revenue and negative mix.

·

Union Pacific’s 59.5 percent operating ratio was an all-time best and improved 2.2 points, compared to third quarter 2018.

·

The $2.09 per gallon average quarterly diesel fuel price in the third quarter 2019 was 12 percent lower than third quarter 2018.

·

Quarterly freight car velocity was 213 daily miles per car, a 10 percent improvement compared to the third quarter 2018.

·

Terminal dwell was 23.4 hours, a 20 percent improvement compared to third quarter 2018.

·

Union Pacific’s reportable personal injury rate was 0.82 per 200,000 employee-hours for the first three quarters 2019, compared to 0.77 for the same period 2018.

·

The Company repurchased 6.4 million shares in the third quarter 2019 at an aggregate cost of $1.1 billion. Union Pacific also received 3.2 million shares to complete a $2.5 billion Accelerated Share Repurchase program initiated in February 2019.



Summary of Third Quarter Freight Revenues

·

Agricultural Products down 1 percent

·

Industrial down 1 percent

·

Premium down 9 percent

·

Energy down 20 percent



2019 Outlook

“We look forward to building on our Unified Plan 2020 successes as we provide a highly consistent and reliable service product for our customers,” Fritz said. “We remain squarely focused on driving long-term shareholder value by appropriately investing in the railroad and returning excess cash to our shareholders.”

 

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Third Quarter 2019 Earnings Conference Call

Union Pacific will webcast its third quarter 2019 earnings release presentation live at www.up.com/investor and via teleconference on Thursday, October 17, 2019 at 8:45 a.m. Eastern Time. Alternatively, the webcast can be accessed directly through the following link. Participants may join the conference call by dialing 877/407-8293 (or for international participants, 201/689-8349).



ABOUT UNION PACIFIC

Union Pacific Railroad is the principal operating company of Union Pacific Corporation (NYSE: UNP). One of America's most recognized companies, Union Pacific Railroad connects 23 states in the western two-thirds of the country by rail, providing a critical link in the global supply chain. The railroad's diversified business mix is classified into its Agricultural Products, Energy, Industrial and Premium business groups. Union Pacific serves many of the fastest-growing U.S. population centers, operates from all major West Coast and Gulf Coast ports to eastern gateways, connects with Canada's rail systems and is the only railroad serving all six major Mexico gateways. Union Pacific provides value to its roughly 10,000 customers by delivering products in a safe, reliable, fuel-efficient and environmentally responsible manner.



Union Pacific Investor contact: Mike Miller at 402-544-4227 or mvmiller@up.com

Union Pacific Media contact: Raquel Espinoza at 402-544-5034 or respinoza@up.com





 

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Supplemental financial information is attached.





****

This presentation and related materials contain statements about the Company’s future that are not statements of historical fact, including specifically the statements regarding the Company’s expectations with respect to economic conditions and demand levels and its ability to improve network performance and customer service.  These statements are, or will be, forward-looking statements as defined by the Securities Act of 1933 and the Securities Exchange Act of 1934.  Forward-looking statements also generally include, without limitation, information or statements regarding:  projections, predictions, expectations, estimates or forecasts as to the Company’s and its subsidiaries’ business, financial, and operational results, and future economic performance;  and management’s beliefs, expectations, goals, and objectives and other similar expressions concerning matters that are not historical facts.



Forward-looking statements should not be read as a guarantee of future performance or results, and will not necessarily be accurate indications of the times that, or by which, such performance or results will be achieved.  Forward-looking information, including expectations regarding operational and financial improvements and the Company’s future performance or results are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in the statement.  Important factors, including risk factors, could affect the Company’s and its subsidiaries’ future results and could cause those results or other outcomes to differ materially from those expressed or implied in the forward-looking statements.  Information regarding risk factors and other cautionary information are available in the Company’s Annual Report on Form 10-K for 2018, which was filed with the SEC on February 8, 2019.  The Company updates information regarding risk factors if circumstances require such updates in its periodic reports on Form 10-Q and its subsequent Annual Reports on Form 10-K (or such other reports that may be filed with the SEC).  



Forward-looking statements speak only as of, and are based only upon information available on, the date the statements were made.  The Company assumes no obligation to update forward-looking information to reflect actual results, changes in assumptions or changes in other factors affecting forward-looking information.  If the Company does update one or more forward-looking statements, no inference should be drawn that the Company will make additional updates with respect thereto or with respect to other forward-looking statements.  References to our website are provided for convenience and, therefore, information on or available through the website is not, and should not be deemed to be, incorporated by reference herein.



###

 

 

 

 



UNION PACIFIC CORPORATION AND SUBSIDIARY COMPANIES

Condensed Consolidated Statements of Income (unaudited) 





 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

Millions, Except Per Share Amounts and Percentages,

3rd Quarter

 

Year-to-Date

For the Periods Ended September 30,

 2019  2018 

%

 

 

 2019  2018 

%

 

Operating Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

     Freight revenues

$

 5,146 

$

 5,558  (7)

%

 

$

 15,392 

$

 15,997  (4)

%

     Other

 

 370 

 

 370 

 -

 

 

 

 1,104 

 

 1,078  2 

 

Total operating revenues

 

 5,516 

 

 5,928  (7)

 

 

 

 16,496 

 

 17,075  (3)

 

Operating Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

     Compensation and benefits

 

 1,134 

 

 1,262  (10)

 

 

 

 3,484 

 

 3,776  (8)

 

     Purchased services and materials

 

 574 

 

 632  (9)

 

 

 

 1,723 

 

 1,861  (7)

 

     Depreciation

 

 557 

 

 547  2 

 

 

 

 1,657 

 

 1,636  1 

 

     Fuel

 

 504 

 

 659  (24)

 

 

 

 1,595 

 

 1,891  (16)

 

     Equipment and other rents

 

 236 

 

 272  (13)

 

 

 

 754 

 

 803  (6)

 

     Other

 

 277 

 

 287  (3)

 

 

 

 829 

 

 801  3 

 

Total operating expenses

 

 3,282 

 

 3,659  (10)

 

 

 

 10,042 

 

 10,768  (7)

 

Operating Income

 

 2,234 

 

 2,269  (2)

 

 

 

 6,454 

 

 6,307  2 

 

     Other income

 

 53 

 

 48  10 

 

 

 

 187 

 

 48 

F

 

     Interest expense

 

 (266)

 

 (241) 10 

 

 

 

 (772)

 

 (630) 23 

 

Income before income taxes

 

 2,021 

 

 2,076  (3)

 

 

 

 5,869 

 

 5,725  3 

 

Income taxes

 

 (466)

 

 (483) (4)

 

 

 

 (1,353)

 

 (1,313) 3 

 

Net Income

$

 1,555 

$

 1,593  (2)

%

 

$

 4,516 

$

 4,412  2 

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Share and Per Share

 

 

 

 

 

 

 

 

 

 

 

 

 

     Earnings per share - basic

$

 2.22 

$

 2.16  3 

%

 

$

 6.39 

$

 5.82  10 

%

     Earnings per share - diluted

$

 2.22 

$

 2.15  3 

 

 

$

 6.36 

$

 5.79  10 

 

     Weighted average number of shares - basic

 

 699.3 

 

 737.4  (5)

 

 

 

 707.2 

 

 758.1  (7)

 

     Weighted average number of shares - diluted

 

 701.9 

 

 740.9  (5)

 

 

 

 709.8 

 

 761.4  (7)

 

     Dividends declared per share

$

 0.97 

$

 0.80  21 

 

 

$

 2.73 

$

 2.26  21 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Ratio

 

 59.5% 

 

 61.7%  (2.2)

pts

 

 

 60.9% 

 

 63.1%  (2.2)

pts

Effective Tax Rate

 

 23.1% 

 

 23.3%  (0.2)

pts

 

 

 23.1% 

 

 22.9%  0.2 

pts



1

 

 



UNION PACIFIC CORPORATION AND SUBSIDIARY COMPANIES

Freight Revenues Statistics (unaudited) 





 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 



3rd Quarter

 

Year-to-Date

For the Periods Ended September 30,

 2019  2018 

%

 

 

 2019  2018 

%

 

Freight Revenues (Millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

Agricultural Products

$

 1,123 

$

 1,133  (1)

%

 

$

 3,345 

$

 3,345 

 -

%

Energy

 

 975 

 

 1,214  (20)

 

 

 

 2,923 

 

 3,498  (16)

 

Industrial

 

 1,485 

 

 1,497  (1)

 

 

 

 4,389 

 

 4,274  3 

 

Premium

 

 1,563 

 

 1,714  (9)

 

 

 

 4,735 

 

 4,880  (3)

 

Total

$

 5,146 

$

 5,558  (7)

%

 

$

 15,392 

$

 15,997  (4)

%

Revenue Carloads (Thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

Agricultural Products

 

 278 

 

 285  (2)

%

 

 

 821 

 

 849  (3)

%

Energy

 

 374 

 

 440  (15)

 

 

 

 1,083 

 

 1,246  (13)

 

Industrial

 

 467 

 

 458  2 

 

 

 

 1,356 

 

 1,321  3 

 

Premium [a]

 

 1,010 

 

 1,133  (11)

 

 

 

 3,093 

 

 3,250  (5)

 

Total

 

 2,129 

 

 2,316  (8)

%

 

 

 6,353 

 

 6,666  (5)

%

Average Revenue per Car

 

 

 

 

 

 

 

 

 

 

 

 

 

Agricultural Products

$

 4,042 

$

 3,973  2 

%

 

$

 4,073 

$

 3,939  3 

%

Energy

 

 2,613 

 

 2,757  (5)

 

 

 

 2,700 

 

 2,807  (4)

 

Industrial

 

 3,178 

 

 3,269  (3)

 

 

 

 3,236 

 

 3,236 

 -

 

Premium

 

 1,546 

 

 1,513  2 

 

 

 

 1,531 

 

 1,501  2 

 

Average 

$

 2,417 

$

 2,399  1 

%

 

$

 2,423 

$

 2,400  1 

%



[a]

For intermodal shipments each container or trailer equals one carload.

2

 

 



UNION PACIFIC CORPORATION AND SUBSIDIARY COMPANIES

Condensed Consolidated Statements of Financial Position (unaudited) 





 

 

 

 

 

 

 

 

 

 

Sep. 30,

Dec. 31,

Millions, Except Percentages

2019  2018 

Assets

 

 

 

 

     Cash and cash equivalents

$

 1,250 

$

 1,273 

     Short-term investments

 

 60 

 

 60 

     Other current assets

 

 2,763 

 

 2,830 

     Investments

 

 2,003 

 

 1,912 

     Net properties

 

 53,488 

 

 52,679 

     Operating lease assets

 

 1,931 

 

 -

     Other assets

 

 483 

 

 393 

Total assets

$

 61,978 

$

 59,147 

 

 

 

 

 

Liabilities and Common Shareholders' Equity

 

 

 

 

     Debt due within one year

$

 1,421 

$

 1,466 

     Other current liabilities

 

 3,166 

 

 3,160 

     Debt due after one year

 

 24,314 

 

 20,925 

     Operating lease liabilities

 

 1,542 

 

 -

     Deferred income taxes

 

 11,744 

 

 11,302 

     Other long-term liabilities

 

 1,775 

 

 1,871 

Total liabilities

 

 43,962 

 

 38,724 

Total common shareholders' equity

 

 18,016 

 

 20,423 

Total liabilities and common shareholders' equity

$

 61,978 

$

 59,147 



3

 

 



UNION PACIFIC CORPORATION AND SUBSIDIARY COMPANIES

Condensed Consolidated Statements of Cash Flows (unaudited)







 

 

 

 

 

 

 

 

 

Millions,

Year-to-Date

For the Periods Ended September 30,

 2019  2018 

Operating Activities

 

 

 

 

     Net income

$

 4,516 

$

 4,412 

     Depreciation

 

 1,657 

 

 1,636 

     Deferred income taxes

 

 297 

 

 312 

     Other - net

 

 (206)

 

 14 

Cash provided by operating activities

 

 6,264 

 

 6,374 

Investing Activities

 

 

 

 

     Capital investments

 

 (2,495)

 

 (2,428)

     Maturities of short-term investments

 

 120 

 

 90 

     Purchases of short-term investments

 

 (110)

 

 (90)

     Other - net

 

 (22)

 

 (6)

Cash used in investing activities

 

 (2,507)

 

 (2,434)

Financing Activities

 

 

 

 

     Common share repurchases

 

 (5,162)

 

 (6,304)

     Debt issued

 

 3,986 

 

 6,992 

     Dividends paid

 

 (1,925)

 

 (1,716)

     Debt repaid

 

 (642)

 

 (1,807)

     Net issuance of commercial paper

 

 (5)

 

 195 

     Accelerated share repurchase programs pending final settlement

 

 -

 

 (720)

     Other - net

 

 (34)

 

 (45)

Cash used in financing activities

 

 (3,782)

 

 (3,405)

Net Change in Cash, Cash Equivalents and Restricted Cash

 

 (25)

 

 535 

Cash, cash equivalents, and restricted cash at beginning of year

 

 1,328 

 

 1,275 

Cash, Cash Equivalents, and Restricted Cash at End of Period

$

 1,303 

$

 1,810 

Free Cash Flow*

 

 

 

 

     Cash provided by operating activities

$

 6,264 

$

 6,374 

     Cash used in investing activities

 

 (2,507)

 

 (2,434)

     Dividends paid

 

 (1,925)

 

 (1,716)

Free cash flow

$

 1,832 

$

 2,224 



*Free cash flow is a non-GAAP measure; however, we believe this measure is important to management and investors in evaluating our financial performance and measures our ability to generate cash without additional external financing.



4

 

 



UNION PACIFIC CORPORATION AND SUBSIDIARY COMPANIES

Operating and Performance Statistics (unaudited) 





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



3rd Quarter

 

Year-to-Date

For the Periods Ended September 30,

 2019 

 

 2018 

%

 

 

 2019 

 

 2018 

%

 

Operating/Performance Statistics 

 

 

 

 

 

 

 

 

 

 

 

     Freight car velocity (daily miles per car)

 213 

 

 193  10 

%

 

 201 

 

 189  6 

%

     Average train speed (miles per hour)*

 23.7 

 

 24.0  (1)

 

 

 23.4 

 

 24.5  (4)

 

     Average terminal dwell time (hours)*

 23.4 

 

 29.3  (20)

 

 

 25.1 

 

 30.6  (18)

 

     Locomotive productivity (GTMs per horsepower day)

 124 

 

 105  18 

 

 

 118 

 

 104  13 

 

     Gross ton-miles (GTMs) (millions)

 215,487 

 

 240,183  (10)

 

 

 645,815 

 

 698,050  (7)

 

     Workforce productivity (car miles per employee)

 883 

 

 852  4 

 

 

 853 

 

 838  2 

 

     Employees (average)

 36,659 

 

 42,323  (13)

 

 

 38,456 

 

 42,057  (9)

 

 

 

 

 

 

 

 

 

 

 

 

 

Locomotive Fuel Statistics

 

 

 

 

 

 

 

 

 

 

 

     Average fuel price per gallon consumed

$       2.09 

 

$       2.38 

 (12)

%

 

$       2.13 

 

$       2.27 

 (6)

%

     Fuel consumed in gallons (millions)

 232 

 

 266  (13)

 

 

 725 

 

 803  (10)

 

     Fuel consumption rate**

 1.075 

 

 1.109  (3)

 

 

 1.122 

 

 1.151  (3)

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue Ton-Miles (Millions)

 

 

 

 

 

 

 

 

 

 

 

     Agricultural Products

 24,001 

 

 25,911  (7)

%

 

 72,805 

 

 76,992  (5)

%

     Energy

 36,053 

 

 45,190  (20)

 

 

 105,268 

 

 129,154  (18)

 

     Industrial

 25,080 

 

 25,899  (3)

 

 

 74,934 

 

 75,939  (1)

 

     Premium

 22,973 

 

 26,313  (13)

 

 

 70,494 

 

 76,264  (8)

 

Total

 108,107 

 

 123,313  (12)

%

 

 323,501 

 

 358,349  (10)

%



*Surface Transportation Board reported performance measures. 



**Fuel consumption is computed as follows: gallons of fuel consumed divided by gross ton-miles in thousands. 



5

 

 



UNION PACIFIC CORPORATION AND SUBSIDIARY COMPANIES

Condensed Consolidated Statements of Income (unaudited) 





 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 



2019

Millions, Except Per Share Amounts and Percentages,

1st Qtr 

2nd Qtr 

3rd Qtr 

Year-to-Date

Operating Revenues

 

 

 

 

 

 

 

 

     Freight revenues

$

 5,010 

$

 5,236 

$

 5,146 

$

 15,392 

     Other revenues

 

 374 

 

 360 

 

 370 

 

 1,104 

Total operating revenues

 

 5,384 

 

 5,596 

 

 5,516 

 

 16,496 

Operating Expenses

 

 

 

 

 

 

 

 

     Compensation and benefits

 

 1,205 

 

 1,145 

 

 1,134 

 

 3,484 

     Purchased services and materials

 

 576 

 

 573 

 

 574 

 

 1,723 

     Depreciation

 

 549 

 

 551 

 

 557 

 

 1,657 

     Fuel

 

 531 

 

 560 

 

 504 

 

 1,595 

     Equipment and other rents

 

 258 

 

 260 

 

 236 

 

 754 

     Other

 

 305 

 

 247 

 

 277 

 

 829 

Total operating expenses

 

 3,424 

 

 3,336 

 

 3,282 

 

 10,042 

Operating Income

 

 1,960 

 

 2,260 

 

 2,234 

 

 6,454 

     Other income

 

 77 

 

 57 

 

 53 

 

 187 

     Interest expense

 

 (247)

 

 (259)

 

 (266)

 

 (772)

Income before income taxes

 

 1,790 

 

 2,058 

 

 2,021 

 

 5,869 

Income taxes

 

 (399)

 

 (488)

 

 (466)

 

 (1,353)

Net Income

$

 1,391 

$

 1,570 

$

 1,555 

$

 4,516 

 

 

 

 

 

 

 

 

 

Share and Per Share

 

 

 

 

 

 

 

 

     Earnings per share - basic

$

 1.94 

$

 2.23 

$

 2.22 

$

 6.39 

     Earnings per share - diluted

$

 1.93 

$

 2.22 

$

 2.22 

$

 6.36 

     Weighted average number of shares - basic

 

 716.8 

 

 705.5 

 

 699.3 

 

 707.2 

     Weighted average number of shares - diluted

 

 719.5 

 

 708.0 

 

 701.9 

 

 709.8 

     Dividends declared per share

$

 0.88 

$

 0.88 

$

 0.97 

$

 2.73 

 

 

 

 

 

 

 

 

 

Operating Ratio

 

 63.6% 

 

 59.6% 

 

 59.5% 

 

 60.9% 

Effective Tax Rate

 

 22.3% 

 

 23.7% 

 

 23.1% 

 

 23.1% 



6

 

 



UNION PACIFIC CORPORATION AND SUBSIDIARY COMPANIES

Freight Revenues Statistics (unaudited) 





 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 



2019



1st Qtr 

2nd Qtr 

3rd Qtr 

Year-to-Date

Freight Revenues (Millions)

 

 

 

 

 

 

 

 

Agricultural Products

$

 1,067 

$

 1,155 

$

 1,123 

$

 3,345 

Energy

 

 982 

 

 966 

 

 975 

 

 2,923 

Industrial

 

 1,410 

 

 1,494 

 

 1,485 

 

 4,389 

Premium

 

 1,551 

 

 1,621 

 

 1,563 

 

 4,735 

Total

$

 5,010 

$

 5,236 

$

 5,146 

$

 15,392 

Revenue Carloads (Thousands)

 

 

 

 

 

 

 

 

Agricultural Products

 

 259 

 

 284 

 

 278 

 

 821 

Energy

 

 358 

 

 351 

 

 374 

 

 1,083 

Industrial

 

 429 

 

 460 

 

 467 

 

 1,356 

Premium [a]

 

 1,041 

 

 1,042 

 

 1,010 

 

 3,093 

Total

 

 2,087 

 

 2,137 

 

 2,129 

 

 6,353 

Average Revenue per Car

 

 

 

 

 

 

 

 

Agricultural Products

$

 4,123 

$

 4,057 

$

 4,042 

$

 4,073 

Energy

 

 2,740 

 

 2,753 

 

 2,613 

 

 2,700 

Industrial

 

 3,292 

 

 3,242 

 

 3,178 

 

 3,236 

Premium

 

 1,489 

 

 1,557 

 

 1,546 

 

 1,531 

Average 

$

 2,401 

$

 2,450 

$

 2,417 

$

 2,423 



[a]

For intermodal shipments each container or trailer equals one carload.



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UNION PACIFIC CORPORATION AND SUBSIDIARY COMPANIES

Non-GAAP Measures Reconciliation to GAAP





Adjusted Debt / Adjusted EBITDA*





 

 

 

 



 

 

 

 

Millions, Except Ratios

Sep. 30,

Dec. 31,

for the Trailing Twelve Months Ended [a]

 2019  2018 

Net income

$

 6,070 

$

 5,966 

Add:

 

 

 

 

Income tax expense

 

 1,815 

 

 1,775 

Depreciation

 

 2,212 

 

 2,191 

Interest expense

 

 1,012 

 

 870 

EBITDA

$

 11,109 

$

 10,802 

Adjustments:

 

 

 

Other income

 

 (233)

 

 (94)

Interest on operating lease liabilities**

 

 71 

 

 84 

Adjusted EBITDA (a)

$

 10,947 

$

 10,792 

Debt

$

 25,735 

$

 22,391 

Operating lease liabilities***

 

 1,919 

 

 2,271 

Unfunded pension and OPEB,  net of taxes of $104 and $135

 

 347 

 

 456 

Adjusted debt (b)

$

 28,001 

$

 25,118 

Adjusted debt / Adjusted EBITDA (b/a)

 

 2.6 

 

 2.3 



[a]

The trailing twelve months income statement information ended September 30, 2019 is recalculated by taking the twelve months ended December 31, 2018, subtracting the nine months ended September 30, 2018, and adding the nine months ended September 30, 2019.







 

 

 

 



 

 

 

 

*Total debt plus operating lease liabilities plus after-tax unfunded pension and OPEB obligation divided by net income plus income tax expense, depreciation, amortization, interest expense and adjustments for other income and interest on operating lease liabilities. Adjusted debt to adjusted EBITDA (earnings before interest, taxes, depreciation, amortization, other income and interest on operating lease liabilities) is considered a non-GAAP financial measure by SEC Regulation G and Item 10 of SEC Regulation S-K and may not be defined and calculated by other companies in the same manner. We believe this measure is important to management and investors in evaluating the Company’s ability to sustain given debt levels (including leases) with the cash generated from operations. In addition, a comparable measure is used by rating agencies when reviewing the Company’s credit rating. Adjusted debt to Adjusted EBITDA should be considered in addition to, rather than as a substitute for, net income. The table above provides reconciliations from net income to adjusted debt to adjusted EBITDA.  At both September 30, 2019 and December 31, 2018, the incremental borrowing rate on operating lease liabilities was 3.7%.



**Represents the hypothetical interest expense we would incur (using the incremental borrowing rate) if the property under our operating leases were owned or accounted for as finance leases.



***Effective January 1, 2019, the Company adopted Accounting Standards Update No. 2016-02 (ASU 2016-02), Leases.  ASU 2016-02 requires companies to recognize lease assets and lease liabilities on the balance sheet.  Prior to adoption, the present value of operating leases was used in this calculation.



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