Union Pacific Corporation — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; comparisons are with Q1 2022 unless stated otherwise. Union Pacific operates one integrated railroad segment. Amounts below are in U.S. dollars; financial statement figures are in millions except per-share data.
Financial and operating performance
| Metric | Q1 2023 | Q1 2022 | Change / context |
|---|---|---|---|
| Operating revenues | $6.056 billion | $5.860 billion | Up 3% |
| Freight revenues | $5.656 billion | $5.440 billion | Up 4%; average revenue per car rose 6%, while carloads fell 1% |
| Operating expenses | $3.762 billion | $3.483 billion | Up 8%, reflecting weather, inflation, higher fuel costs and increased staffing |
| Operating income | $2.294 billion | $2.377 billion | Down 3% |
| Operating ratio | 62.1% | 59.4% | Deteriorated 2.7 percentage points |
| Net income | $1.630 billion | $1.630 billion | Flat |
| Diluted EPS | $2.67 | $2.57 | Up; weighted-average diluted shares fell to 611.5 million from 633.6 million |
| Cash from operations | $1.840 billion | $2.236 billion | Down; included $383 million of labor-agreement settlement payments |
| Capital investments | $772 million | $848 million | Cash capital spending |
| Free cash flow | $240 million | $657 million | Company-defined non-GAAP measure: operating cash flow less investing cash flow and dividends |
| Debt | $33.784 billion | $33.326 billion at Dec. 31, 2022 | Adjusted debt / adjusted EBITDA remained 2.9x |
Revenue gains reflected fuel surcharges and core pricing, partly offset by lower volume and unfavorable traffic mix. Fuel surcharge revenue rose to $883 million from $635 million. Operating income was pressured by higher costs and operational challenges. Other income was $184 million versus $47 million, including a one-time $107 million real-estate transaction; this helped keep pretax income and net income above what operating performance alone would suggest.
Liquidity, debt and capital allocation
At March 31, 2023, cash and cash equivalents were $1.079 billion; the company also reported $2.0 billion available under its revolving credit facility and $800 million undrawn under its receivables facility. Current liabilities were $6.209 billion, including $2.592 billion of debt due within one year. Long-term debt was $31.192 billion. The company reported compliance with debt covenants.
Q1 financing included $1.0 billion of fixed-rate notes: $500 million at 4.750% due 2026 and $500 million at 4.950% due 2053. The company paid $795 million in dividends and repurchased $591 million of shares. The Board’s authorization permits repurchases of up to 100 million shares through March 31, 2025; 19.0 million had been repurchased under that authorization by quarter-end.
Management commentary, outlook and risks
Management attributed service and volume challenges to weather interruptions across the network, including snow and flooding, as well as weaker domestic intermodal and forest-products markets. Weather-related impacts to operating income, including lost revenue and additional expense, were estimated at approximately $50 million. Train, engine and yard staffing was up 5% year over year as the company continued hiring and training. Some operating measures improved sequentially, but most service metrics were flat or weaker year over year.
The company expects its 2023 capital plan to be approximately $3.6 billion, up 6% from 2022, focused on infrastructure renewal, safety and resilience, growth projects, locomotive modernization and operational efficiency. The filing provides no specific full-year earnings or revenue guidance and says the capital plan may change with business conditions or regulatory developments. Management stated it had sufficient borrowing capacity to sustain an extended period of lower volumes.
Risks include demand and volume weakness, weather and service disruptions, inflation and fuel costs, hiring and operating challenges, environmental remediation and personal-injury claims, and litigation. The company reported 347 sites where it may have environmental remediation responsibility and an environmental liability of $271 million. Recorded personal-injury liability was $379 million; management estimated reasonably possible future settlement costs of approximately $379 million to $488 million and accrued at the low end. A putative Illinois biometric-privacy class action remains in discovery; the company cannot reasonably estimate a loss range. Management did not expect known claims or environmental matters, after recorded liabilities and insurance recoveries, to materially adversely affect results, financial condition or liquidity.
Most important facts for investors to verify
- Whether service performance and weather-related disruption improve, and whether staffing additions translate into better productivity and customer service.
- Whether revenue and pricing gains can offset volume softness, unfavorable mix, fuel and inflation costs, and the higher expense base.
- How much reported earnings benefited from the one-time $107 million real-estate transaction and from reduced share count due to repurchases.
- Whether operating cash flow and free cash flow recover after labor-settlement payments, while the company funds dividends, buybacks and its approximately $3.6 billion capital plan.
- Debt maturities, borrowing costs and covenant headroom, together with changes in environmental, personal-injury and biometric-privacy exposures.