UNION PACIFIC CORP quarterly report, Q3 FY2023

Union Pacific Corporation — Q3 2023 Form 10-Q

Reporting period: Three and nine months ended September 30, 2023; unaudited. Union Pacific operates as one integrated railroad segment.

Metric	Q3 2023	Q3 2022	9M 2023	9M 2022
Operating revenue	$5.941B	$6.566B	$17.960B	$18.695B
Operating income	$2.177B	$2.633B	$6.675B	$7.505B
Net income	$1.528B	$1.895B	$4.727B	$5.360B
Diluted EPS	$2.51	$3.05	$7.75	$8.54
Operating ratio	63.4%	59.9%	62.8%	59.9%

Q3 freight revenue fell 9%: average revenue per car declined 7% and carloads fell 3%. Lower fuel-surcharge revenue and weaker traffic mix contributed to the yield decline.
Q3 operating expenses declined 4%, principally from lower fuel costs, lower volume-related costs, and a prior-year labor-agreement charge. The benefit was partly offset by inflation, higher workforce levels, casualty costs, and one-time write-offs.
For the first nine months, operating expenses rose 1%, while operating income fell 11%. Core pricing gains and lower fuel costs were not enough to offset lower revenue and higher costs.
Fuel-surcharge revenue was $637 million in Q3 versus $1.2 billion a year earlier. Locomotive diesel averaged $3.12 per gallon versus $3.96.

Nine-month operating cash flow was $5.984B, down from $7.070B. Capital investments were $2.582B; dividends paid were $2.380B; reported free cash flow, as defined by the company, was $954M versus $2.149B.
Cash and cash equivalents were $750M at September 30, 2023, down from $973M at year-end 2022. Current assets were $3.813B and current liabilities $5.304B.
Debt was $32.877B, including $1.724B due within one year. Debt to net income was 5.2x; adjusted debt to adjusted EBITDA was 3.0x, compared with 2.9x at year-end 2022.
Available liquidity included $2.0B under the revolving credit facility and $800M undrawn under the receivables facility. The company reported compliance with debt covenants and stated it had capacity to withstand an extended period of lower volumes.
Dividends declared were $3.90 per share for the first nine months. The company repurchased 3.5 million shares under its current authorization during that period.

Q3 carloads declined 3%; intermodal, coal, and export grain were among the weaker demand areas. Automotive volumes improved, supported by production increases and dealer inventory replenishment. Mexico business volume increased 5% in Q3, though its revenue declined 5% on lower fuel surcharges.
Network fluidity improved year over year: Q3 freight-car velocity rose 5%, terminal dwell improved 4%, and intermodal and manifest/automotive trip-plan compliance improved 13 and 6 percentage points, respectively. Workforce productivity fell 6% as employee levels increased 3%.
Interest expense rose 6% in Q3, reflecting higher average debt and a higher effective interest rate. The nine-month effective tax rate was 21.9%, versus 22.3%.

No specific revenue or earnings guidance is provided in the supplied filing text. Management expects 2023 capital spending of approximately $3.7B, up 9% from 2022, for infrastructure, safety, growth, and operational-efficiency projects; the plan may change with business conditions or regulation.
Management cited macroeconomic and geopolitical uncertainty, volume and customer-demand variability, fuel and interest-rate volatility, hiring and service execution, labor matters, and weather as risks to results. Forward-looking statements are not guarantees.
Q3 income tax expense included a $41M deferred-tax benefit from enacted state tax-rate reductions. Nine-month other income included a one-time $107M real-estate transaction.
Recorded personal-injury liability was $393M; the reasonably possible settlement-cost range was approximately $393M to $503M. Environmental liabilities were $263M across 338 identified sites. Management did not expect known claims or environmental matters to materially adversely affect results, financial condition, or liquidity, but outcomes remain uncertain.
A putative Illinois biometric-privacy class action remains in discovery; the company said it cannot reasonably estimate a possible loss. The filing also notes other claims and contingencies.

Whether freight volumes, revenue per car, fuel-surcharge collections, and demand in intermodal, coal, and grain stabilize or recover.
Whether improved network fluidity can be sustained while workforce productivity and costs improve.
Progress against the approximately $3.7B 2023 capital plan and the impact on cash generation, dividends, and debt metrics.
Developments in personal-injury, environmental, and biometric-privacy matters, including any changes to recorded liabilities or potential loss estimates.