Union Pacific Corporation — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. The filing was dated July 21, 2022. Union Pacific reports one integrated railroad operating segment; amounts below are in U.S. dollars.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Operating revenue | $6.269 billion | $5.504 billion | $12.129 billion | $10.505 billion |
| Operating income | $2.495 billion | $2.473 billion | $4.872 billion | $4.466 billion |
| Net income | $1.835 billion | $1.798 billion | $3.465 billion | $3.139 billion |
| Diluted earnings per share | $2.93 | $2.72 | $5.50 | $4.72 |
| Operating ratio | 60.2% | 55.1% | 59.8% | 57.5% |
Quarterly freight revenue rose 14%, primarily from higher fuel surcharges, core pricing and favorable traffic mix; average revenue per car increased 16%, while volume declined 1%. Fuel surcharge revenue was $976 million versus $414 million. Operating expenses increased 25%, led by fuel costs, which rose 89% as average locomotive diesel prices increased 87% year over year. Operating income increased 1%; higher costs largely offset revenue growth.
For the first half, operating cash flow was $4.167 billion, compared with $4.219 billion. Capital investments were $1.645 billion versus $1.190 billion; dividends paid were $1.556 billion. The company reported free cash flow, its non-GAAP measure, of $1.071 billion versus $1.798 billion, and a cash flow conversion rate of 73% versus 96%.
Financial position and liquidity
- At June 30, 2022, cash and cash equivalents were $788 million; total debt on the balance sheet was approximately $32.0 billion, including $2.334 billion due within one year. Adjusted debt to adjusted EBITDA was 2.8x, versus 2.7x at year-end 2021.
- Available liquidity included $2.0 billion under the revolving credit facility and up to $200 million undrawn under the receivables facility. The company reported compliance with debt covenants.
- First-half financing included $4.090 billion of debt issued, $1.664 billion repaid, $3.473 billion spent on share repurchases and $1.556 billion of dividends paid. Shareholders’ equity declined to $12.710 billion from $14.161 billion at December 31, 2021.
Material changes and operating conditions
- Service and network fluidity weakened amid congestion. In Q2, freight car velocity fell 12%, average train speed fell 6%, terminal dwell time rose 7%, and car trip-plan compliance declined 9 percentage points for intermodal and 11 points for manifest/automotive, year over year.
- Management said congestion constrained its ability to meet demand. Actions included hiring and training, relocating employees, adding locomotives in selected locations, and asking customers to reduce excess freight-car inventory; these measures also weighed on volumes.
- Intermodal volumes were affected by supply-chain disruptions and COVID-related shutdowns in China. Automotive shipments and demand for rock partly offset declines. Year-to-date carloads increased 1%, while Q2 carloads decreased 1%.
- Debt increased from $29.729 billion at December 31, 2021, to $32.007 billion at June 30, 2022. The company issued long-dated notes in February and redeemed $750 million of notes in April.
Outlook, risks and unusual items
- Management expected 2022 capital expenditures of approximately $3.3 billion, up 10% from 2021, for infrastructure renewal, capacity, locomotives, freight cars, technology and growth projects. The filing provided no specific earnings or revenue guidance.
- Management said its liquidity analysis indicated sufficient borrowing capacity to sustain an extended period of lower volumes. It also stated that known claims and commitments were not expected to have a material adverse effect, while noting that outcomes remain uncertain.
- Rail labor negotiations were at a critical stage: the National Mediation Board released the parties from mediation in June 2022, beginning a cooling-off period; a Presidential Emergency Board was appointed. If no agreement is reached through the statutory process, strikes or lockouts may become possible, subject to potential congressional action.
- Personal-injury liabilities were $347 million; estimated future settlement costs could range from approximately $347 million to $381 million. Environmental liabilities were $266 million across 359 identified or potentially liable sites. The company said current environmental obligations were not expected to materially harm results, financial condition or liquidity.
- Q2 other income included a $79 million gain on a land sale. Nebraska tax legislation reduced deferred tax expense by $55 million. The filing also cited inflation, elevated fuel prices, the Russia-Ukraine conflict, supply-chain disruption and operational challenges as relevant factors.
Important facts for investors to verify
- Whether service metrics and network congestion improve, and whether recovery actions restore volume without sustained cost pressure.
- Whether pricing and fuel surcharges continue to offset fuel, wage, inflation and other operating-cost increases; monitor operating ratio and margins.
- Progress and potential disruption from labor negotiations, including the Presidential Emergency Board process.
- Debt, interest costs, liquidity and capital returns, including the new authorization to repurchase up to 100 million shares by March 31, 2025.
- Developments in personal-injury and environmental claims and the assumptions underlying recorded liabilities.