Union Pacific Corporation — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. Financial statements are unaudited. Union Pacific reports one integrated railroad operating segment.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Operating revenue | $5.963B | $6.269B | $12.019B | $12.129B |
| Operating income | $2.204B | $2.495B | $4.498B | $4.872B |
| Net income | $1.569B | $1.835B | $3.199B | $3.465B |
| Diluted EPS | $2.57 | $2.93 | $5.24 | $5.50 |
| Operating ratio | 63.0% | 60.2% | 62.6% | 59.8% |
| Cash from operations | Not separately stated for quarter | Not separately stated for quarter | $3.858B | $4.167B |
| Free cash flow | Not separately stated for quarter | Not separately stated for quarter | $596M | $1.071B |
Q2 revenue fell 5%, operating income 12%, net income 14%, and diluted EPS 12% year over year. First-half revenue declined 1%, net income 8%, and diluted EPS 5%. The operating ratio worsened 2.8 percentage points in both comparisons; the corresponding operating margins were 37.0% in Q2 and 37.4% for the first half, versus 39.8% and 40.2% in 2022.
- Q2 freight revenue decreased 5%, reflecting a 3% decline in average revenue per car and 2% lower volume. Lower fuel surcharges and weaker intermodal and forest-products traffic weighed on results; automotive and rock shipments provided offsets.
- Q2 operating expenses were nearly flat: lower fuel and volume-related costs were largely offset by inflation, higher staffing, and a one-time $67M crew-staffing agreement ratification charge. First-half expenses rose 4%.
- Q2 fuel expense fell 29%; average locomotive diesel price was $2.86 per gallon versus $4.03 a year earlier. Compensation and benefits rose 16% in Q2.
- First-half free cash flow, as defined by the company, was $596M, down from $1.071B. Operating cash flow declined partly because of $445M in labor-agreement settlement payments.
Balance sheet, liquidity and capital allocation
- At June 30, 2023, cash and cash equivalents were $830M; total debt was $33.302B, comprising $1.745B due within one year and $31.557B due thereafter. Total debt was broadly unchanged from December 31, 2022.
- Available liquidity included $2.0B under the revolving credit facility and $400M undrawn under the receivables facility. The company reported compliance with debt covenants; adjusted debt to adjusted EBITDA was 2.9x.
- First-half capital investments were $1.607B. Management expects a 2023 capital plan of approximately $3.6B, up 6% from 2022, for infrastructure renewal, safety and resiliency, growth projects, and operational efficiency.
- First-half dividends paid were $1.588B and share repurchases were $705M. The company repurchased 3.5M shares in the first half; $121M of repurchases occurred in Q2.
Management commentary, outlook and risks
- Management said network fluidity improved year over year, with better freight-car velocity, train speed, terminal dwell, and trip-plan compliance. Staffing and training continued: 2,263 employees graduated between May 2022 and July 7, 2023, with 769 in the training pipeline as of July 7.
- Q2 other income was lower year over year, partly because Q2 2022 included a $79M land-sale gain. First-half other income included a one-time $107M real-estate transaction. Nebraska tax legislation reduced deferred tax expense by $73M in Q2 2023; the comparable 2022 benefit was $55M.
- The filing provides a capital-investment plan but no specific earnings or revenue guidance. Management stated it believes borrowing capacity is sufficient to withstand an extended period of lower volumes.
- Risks include economic and volume uncertainty, fuel and interest-rate volatility, labor and hiring needs, service and weather disruptions, environmental remediation, personal-injury claims, and litigation. The company identified 347 sites where it may have environmental remediation responsibility; the recorded environmental liability was $265M. Personal-injury liability was $367M, with possible future settlement costs estimated at $367M–$473M.
- A pending Illinois biometric-privacy class action remains in discovery; the company said it cannot reasonably estimate a possible loss. Management does not expect known claims and contingencies, after recorded liabilities and insurance recoveries, to materially adversely affect results, financial condition, or liquidity.
Most important facts for investors to verify
- Whether revenue and volume trends—particularly intermodal and forest products—stabilize, and whether core pricing offsets weaker mix and lower fuel surcharges.
- Whether service improvements persist and support productivity gains as staffing and training levels remain elevated.
- Whether operating-ratio deterioration and cost pressures ease, including wage inflation, maintenance, environmental costs, and the ratification charge.
- Whether cash generation supports the capital plan, dividends, and repurchases without increasing leverage materially.
- Developments in environmental and personal-injury estimates, the biometric-privacy litigation, and other contingencies.