Union Pacific Corporation — Q3 2022 Form 10-Q
Business context and reporting period. This unaudited filing covers the quarter and nine months ended September 30, 2022, compared with the corresponding 2021 periods. Union Pacific operates one integrated railroad segment, transporting freight across bulk, industrial, and premium commodity groups.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Change |
|---|---|---|---|
| Operating revenue | $6.566 billion | $5.566 billion | +18% |
| Operating income | $2.633 billion | $2.432 billion | +8% |
| Net income | $1.895 billion | $1.673 billion | +13% |
| Diluted EPS | $3.05 | $2.57 | +19% |
| Operating ratio | 59.9% | 56.3% | Worsened 3.6 points |
For the first nine months, revenue was $18.695 billion (+16%), operating income $7.505 billion (+9%), net income $5.360 billion (+11%), and diluted EPS $8.54 (+17%). The year-to-date operating ratio was 59.9%, 2.8 points worse than in 2021.
- Revenue and volume: Q3 freight revenue rose 18%, with average revenue per car up 15% and carloads up 3%. Higher fuel surcharges and core pricing contributed; traffic mix partially offset the increase. Fuel-surcharge revenue was $1.2 billion versus $464 million.
- Costs and margins: Q3 operating expenses increased 25% to $3.933 billion. Fuel expense rose 71%, including a 67% increase in average locomotive diesel prices; compensation and benefits rose 23%. Management also cited inflation, network recovery costs, volume-related costs, and casualty expenses.
- Cash flow: Nine-month operating cash flow was $7.070 billion versus $6.503 billion. Capital investment was $2.690 billion versus $1.945 billion. Free cash flow, as defined by the company, declined to $2.149 billion from $2.666 billion; cash-flow conversion was 82% versus 95%.
- Debt and liquidity: September 30 debt totaled $33.422 billion, compared with $29.729 billion at December 31, 2021. Adjusted debt/adjusted EBITDA was 2.9x versus 2.7x. Cash and cash equivalents were $1.267 billion; the company reported $2.0 billion available under its revolving credit facility and up to $600 million undrawn under its receivables facility. Current assets were $4.405 billion and current liabilities $5.712 billion.
- Shareholder returns: Nine-month share repurchases were $5.497 billion and dividends paid were $2.362 billion. Shares outstanding declined year over year.
Material changes and management commentary
- Revenue growth was supported by pricing, fuel surcharges, and stronger automotive, coal, and industrial shipments. Q3 carloads rose 3%; year-to-date carloads rose 2%.
- Service improved sequentially from Q2, but remained weaker than the prior-year period. Q3 freight car velocity fell 2%, average train speed fell 2%, and car trip-plan compliance declined for both intermodal and manifest/automotive traffic. Management attributed ongoing service challenges to congestion and crew availability, and described hiring, employee redeployment, additional locomotives, and reduced freight-car inventory as mitigation steps.
- Operating income grew more slowly than revenue as expense increases outpaced revenue growth. The operating ratio included a $114 million one-time accrual related to tentative or ratified labor agreements.
- Other income included a $35 million Q3 land-sale gain. Nine-month 2022 other income also included a $79 million land-sale gain. State tax-rate changes reduced deferred tax expense by $40 million in Q3 and $55 million in Q2.
Outlook, risks, and contingencies
- The company expected 2022 capital expenditures of approximately $3.4 billion, 13% above 2021, for infrastructure renewal, capacity, equipment, technology, and growth projects. The filing does not provide a specific earnings or revenue forecast.
- Management said liquidity analyses indicated borrowing capacity to sustain an extended period of lower volumes and expected continued compliance with debt covenants. The revolving facility had a 2027 maturity; the company reported covenant compliance at quarter-end.
- Labor negotiations remained a risk: as of October 20, 2022, six unions had ratified agreements, one had not, and other ratifications were pending. A potential work stoppage could arise if negotiations failed after applicable status-quo periods.
- Risks include persistent network congestion and service deterioration, fuel-price volatility, inflation, casualty costs, demand and supply-chain changes, and environmental remediation obligations. The company identified 357 sites where it may bear remediation responsibility and recorded a $263 million environmental liability.
- Personal-injury claims were accrued at $347 million; estimated future settlement costs could range from approximately $347 million to $381 million. Management stated that known claims and environmental obligations were not expected to have a material adverse effect, while noting uncertainty in ultimate costs.
- The filing reported no material changes to previously disclosed market-risk information and no material changes to internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether service metrics and network fluidity improved after quarter-end, and whether operational recovery required further staffing or spending.
- Final labor-agreement ratification status and any related costs beyond the $114 million accrual.
- Whether elevated fuel, labor, inflation, and casualty costs can be offset by pricing and revenue growth.
- Execution and funding of the approximately $3.4 billion 2022 capital plan alongside debt, dividends, and share repurchases.
- Developments in environmental and personal-injury claims, including whether estimated liabilities change materially.