Union Pacific Corporation — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. Comparisons are with the corresponding 2020 periods. Financial statements are unaudited. The Railroad is the company’s sole reportable segment.
Financial performance
| Metric | Q3 2021 | Q3 2020 | First 9 months 2021 | First 9 months 2020 |
|---|---|---|---|---|
| Operating revenue | $5.566B | $4.919B | $16.071B | $14.392B |
| Operating income | $2.432B | $2.031B | $6.898B | $5.828B |
| Net income | $1.673B | $1.363B | $4.812B | $3.969B |
| Diluted EPS | $2.57 | $2.01 | $7.29 | $5.83 |
| Operating ratio | 56.3% | 58.7% | 57.1% | 59.5% |
| Cash from operating activities | Not separately stated | Not separately stated | $6.503B | $5.993B |
Q3 revenue rose 13%, operating income 20%, net income 23%, and diluted EPS 28% year over year. For the first nine months, revenue rose 12%, net income 21%, and diluted EPS 25%. The operating ratio improved 2.4 percentage points in both comparisons.
Q3 freight revenue increased 12% to $5.166B, while carloads were flat; average revenue per car rose 12%, reflecting fuel surcharges, pricing and traffic mix. Nine-month freight revenue increased 11% to $14.947B. Q3 total operating expenses rose 9%, chiefly as fuel expense increased 81%; average locomotive diesel fuel price was $2.37 per gallon, up 74% year over year.
Nine-month cash used in investing was $1.792B, including $1.945B of capital investments. Free cash flow, as defined by the company, was $2.666B, versus $1.938B in 2020. Dividends paid were $2.045B. Financing activities used $5.291B, including $5.846B of cash share repurchases and $2.045B of dividends, partly offset by $3.901B of debt issuance.
Financial position and liquidity
At September 30, 2021, cash and cash equivalents were $1.194B; current assets were $3.810B and current liabilities $5.111B. Debt carrying value totaled $29.395B, comprising $1.835B due within one year and $27.560B due thereafter, compared with $26.729B at December 31, 2020. Total liabilities were $48.443B and shareholders’ equity $13.917B. Fair value of total debt was $32.8B.
The company reported $2.0B available under its revolving credit facility and up to $800M available under its receivables facility, which had no borrowings outstanding at quarter end. Adjusted debt to adjusted EBITDA was 2.8x, versus 2.9x at year-end 2020. Management said it had sufficient capacity to sustain an extended period of lower volumes and was in compliance with debt covenants. It identified $380M of debt maturing before year-end, including $150M in term loans and $200M in commercial paper.
Operating developments, outlook and risks
- California wildfires damaged bridges and closed a key route for more than a month. Rerouting lengthened transit times and required additional crews and locomotives. Q3 freight car velocity fell 13%, train speed 4%, and intermodal and manifest/automotive trip-plan compliance fell 11 and 12 percentage points, respectively.
- Persistent supply-chain disruptions constrained intermodal shipments; semiconductor shortages affected automotive volumes. Q3 premium carloads fell 9%, including an 18% decline in automotive and a 6% decline in intermodal. Industrial and coal strength helped offset these pressures.
- Management attributed expense pressure to fuel prices, inflation, volume-related costs and wildfire impacts, partly offset by productivity initiatives. The filing gives no specific earnings or revenue guidance. It expected 2021 capital expenditures of approximately $2.9B, essentially flat with 2020, subject to business conditions and regulatory factors.
- On October 11, the company announced compliance with a federal-contractor COVID-19 vaccination mandate requiring full vaccination by December 8, subject to lawful accommodations. After three unions objected, the company filed lawsuits on October 15 seeking to prevent disruption; it said workforce availability or disputes could materially affect operations and results.
- Personal-injury liability was $303M, with a reasonably possible settlement-cost range of approximately $303M–$333M. Environmental liability was $248M. The company said known claims and environmental obligations were not expected to materially adversely affect results, financial condition or liquidity, while noting uncertainty in ultimate claim outcomes.
Important facts for investors to verify
- Whether network fluidity and service metrics recover from wildfire damage and supply-chain constraints, and whether this affects volume, costs or customer demand.
- Whether fuel prices and inflation continue to pressure operating expenses and margins, and whether pricing and productivity gains offset those costs.
- Actual 2021 capital expenditures versus the approximately $2.9B outlook, alongside cash generation, debt maturities and liquidity.
- Developments in the union vaccination dispute, workforce availability and related litigation.
- Changes in personal-injury and environmental estimates, and the execution and funding of share repurchases; the company repurchased $5.846B in cash during the first nine months.