10-Q 1 unp20220525_10q.htm FORM 10-Q unp20220525_10q.htm
0000100885 UNION PACIFIC CORP false --12-31 Q2 2022 2.50 2.50 1,400,000,000 1,400,000,000 1,112,629,114 1,112,440,400 625,168,003 638,841,656 1.07 1.3 2.48 1 3 0 3 6 10 11 18 3 1 1.25 2.800 February 14, 2032 0.50 3.375 1.25 3.500 0.5 3.85 February 14, 2072 1.6 Other roadway includes grading, bridges and tunnels, signals, buildings, and other road assets. Net of deferred taxes of ($11) million and ($18) million during the six months ended June 30, 2022 and 2021, respectively. AOCI = Accumulated Other Comprehensive Income/Loss (Note 9) In the period of the final settlement, the average price paid under the accelerated share repurchase programs is calculated based on the total program value less the value assigned to the initial delivery of shares. The average price of the initial settlement of the 2022 accelerated share repurchase programs was $250.99. Includes 1,847,185 and 7,209,156 shares repurchased in 2022 and 2021, respectively, under accelerated share repurchase programs. Includes 7,012,232 shares repurchased in 2022 under accelerated share repurchase programs. Net of deferred taxes of ($6) million and ($10) million during the three months ended June 30, 2022 and 2021, respectively. ESPP = employee stock purchase plan (Note 4) 2022 includes a $79 million gain from a land sale to the Illinois State Toll Highway Authority. 2021 includes a $50 million gain from a sale to the Colorado Department of Transportation. The accumulated other comprehensive income/loss reclassification components are 1) prior service cost/(credit) and 2) net actuarial loss which are both included in the computation of net periodic pension cost. 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Table of Contents



UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2022

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from __________ to ____________

 

Commission File Number 1-6075

 

UNION PACIFIC CORPORATION

(Exact name of registrant as specified in its charter)

Utah

13-2626465

(State or other jurisdiction of

(I.R.S. Employer

incorporation or organization)

Identification No.)

 

1400 Douglas Street, Omaha, Nebraska

(Address of principal executive offices)

 

68179

(Zip Code)

 

(402) 544-5000

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

Title of each Class

Trading Symbol

Name of each exchange on which registered

Common Stock (Par Value $2.50 per share)

UNP

New York Stock Exchange

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes     ☐ No

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes     ☐ No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large Accelerated Filer 

 

Accelerated Filer 

Non-Accelerated Filer

 

Smaller Reporting Company 

 

Emerging Growth Company

  

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

 ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).

Yes     ☒ No

As of July 15, 2022, there were 624,478,594 shares of the Registrant's Common Stock outstanding.



 

TABLE OF CONTENTS

UNION PACIFIC CORPORATION

AND SUBSIDIARY COMPANIES

 

PART I. FINANCIAL INFORMATION
     

Item 1.

Condensed Consolidated Financial Statements:

 
 

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

 
 

For the Three Months Ended June 30, 2022 and 2021

3
     
 

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

 
 

For the Three Months Ended June 30, 2022 and 2021

3
     
  CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)  
  For the Six Months Ended June 30, 2022 and 2021 4
     
  CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)  
  For the Six Months Ended June 30, 2022 and 2021 4
     
 

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (Unaudited)

 
 

At June 30, 2022, and December 31, 2021

5
     
 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

 
 

For the Six Months Ended June 30, 2022 and 2021

6
     
 

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN COMMON SHAREHOLDERS’ EQUITY (Unaudited)

 
 

For the Three and Six Months Ended June 30, 2022 and 2021

7
     
 

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

8
     

Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations

19
     

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

29
     

Item 4.

Controls and Procedures

30
     
PART II. OTHER INFORMATION
     

Item 1.

Legal Proceedings

30
     

Item 1A.

Risk Factors

30
     

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

31
     

Item 3.

Defaults Upon Senior Securities

31
     

Item 4.

Mine Safety Disclosures

31
     

Item 5.

Other Information

31

     

Item 6.

Exhibits

32

   

Signatures

33

   

Certifications

34

 

 

 

PART I. FINANCIAL INFORMATION

 

Item 1. Condensed Consolidated Financial Statements

 

Condensed Consolidated Statements of Income (Unaudited)

Union Pacific Corporation and Subsidiary Companies

 

Millions, Except Per Share Amounts, for the Three Months Ended June 30,

 

2022

  

2021

 

Operating revenues:

        

Freight revenues

 $5,842  $5,132 

Other revenues

  427   372 

Total operating revenues

  6,269   5,504 

Operating expenses:

        

Compensation and benefits

  1,092   1,022 

Fuel

  940   497 

Purchased services and materials

  622   478 

Depreciation

  559   550 

Equipment and other rents

  230   200 

Other

  331   284 

Total operating expenses

  3,774   3,031 

Operating income

  2,495   2,473 

Other income, net (Note 6)

  163   125 

Interest expense

  (316)  (282)

Income before income taxes

  2,342   2,316 

Income taxes (Note 7)

  (507)  (518)

Net income

 $1,835  $1,798 

Share and Per Share (Note 8):

        

Earnings per share - basic

 $2.93  $2.73 

Earnings per share - diluted

 $2.93  $2.72 

Weighted average number of shares - basic

  625.6   658.5 

Weighted average number of shares - diluted

  626.8   660.1 

 

Condensed Consolidated Statements of Comprehensive Income (Unaudited)

Union Pacific Corporation and Subsidiary Companies

 

Millions, for the Three Months Ended June 30,

 

2022

  

2021

 

Net income

 $1,835  $1,798 

Other comprehensive income/(loss):

        

Defined benefit plans

  14   24 

Foreign currency translation

  23   19 

Total other comprehensive income/(loss) [a]

  37   43 

Comprehensive income

 $1,872  $1,841 

 

[a]

Net of deferred taxes of ($6) million and ($10) million during the three months ended June 30, 2022 and 2021, respectively.

 

The accompanying notes are an integral part of these unaudited Condensed Consolidated Financial Statements.

 

 

Condensed Consolidated Statements of Income (Unaudited)

Union Pacific Corporation and Subsidiary Companies
 

Millions, Except Per Share Amounts, for the Six Months Ended June 30,

 

2022

  

2021

 

Operating revenues:

        

Freight revenues

 $11,282  $9,781 

Other revenues

  847   724 

Total operating revenues

  12,129   10,505 

Operating expenses:

        

Compensation and benefits

  2,193   2,048 

Fuel

  1,654   908 

Purchased services and materials

  1,183   968 

Depreciation

  1,114   1,099 

Equipment and other rents

  445   412 

Other

  668   604 

Total operating expenses

  7,257   6,039 

Operating income

  4,872   4,466 

Other income, net (Note 6)

  210   176 

Interest expense

  (623)  (572)

Income before income taxes

  4,459   4,070 

Income taxes (Note 7)

  (994)  (931)

Net income

 $3,465  $3,139 

Share and Per Share (Note 8):

        

Earnings per share - basic

 $5.51  $4.73 

Earnings per share - diluted

 $5.50  $4.72 

Weighted average number of shares - basic

  628.9   663.1 

Weighted average number of shares - diluted

  630.2   664.7 
 
Condensed Consolidated Statements of Comprehensive Income (Unaudited)
Union Pacific Corporation and Subsidiary Companies

 

Millions, for the Six Months Ended June 30,

 

2022

  

2021

 

Net income

 $3,465  $3,139 

Other comprehensive income/(loss):

        

Defined benefit plans

  29   49 

Foreign currency translation

  44   (7)

Total other comprehensive income/(loss) [a]

  73   42 

Comprehensive income

 $3,538  $3,181 

 

[a]
Net of deferred taxes of ($11) million and ($18) million during the six months ended June 30, 2022 and 2021, respectively.

 

The accompanying notes are an integral part of these unaudited Condensed Consolidated Financial Statements.
 

 

 

Condensed Consolidated Statements of Financial Position (Unaudited)

Union Pacific Corporation and Subsidiary Companies

 

  

Jun. 30,

  

Dec. 31,

 

Millions, Except Share and Per Share Amounts

 

2022

  

2021

 

Assets

        

Current assets:

        

Cash and cash equivalents

 $788  $960 

Short-term investments (Note 13)

  46   46 

Accounts receivable, net (Note 10)

  2,052   1,722 

Materials and supplies

  790   621 

Other current assets

  300   202 

Total current assets

  3,976   3,551 

Investments

  2,287   2,241 

Properties, net (Note 11)

  55,315   54,871 

Operating lease assets

  1,706   1,787 

Other assets

  1,156   1,075 

Total assets

 $64,440  $63,525 

Liabilities and Common Shareholders' Equity

        

Current liabilities:

        

Accounts payable and other current liabilities (Note 12)

 $3,668  $3,578 

Debt due within one year (Note 14)

  2,334   2,166 

Total current liabilities

  6,002   5,744 

Debt due after one year (Note 14)

  29,673   27,563 

Operating lease liabilities

  1,295   1,429 

Deferred income taxes

  12,777   12,675 

Other long-term liabilities

  1,983   1,953 

Commitments and contingencies (Note 15)

          

Total liabilities

  51,730   49,364 

Common shareholders' equity:

        

Common shares, $2.50 par value, 1,400,000,000 authorized; 1,112,629,114 and

        

1,112,440,400 issued; 625,168,003 and 638,841,656 outstanding, respectively

  2,781   2,781 

Paid-in-surplus

  5,030   4,979 

Retained earnings

  56,958   55,049 

Treasury stock

  (51,218)  (47,734)

Accumulated other comprehensive loss (Note 9)

  (841)  (914)

Total common shareholders' equity

  12,710   14,161 

Total liabilities and common shareholders' equity

 $64,440  $63,525 

 

The accompanying notes are an integral part of these unaudited Condensed Consolidated Financial Statements.

 

 

Condensed Consolidated Statements of Cash Flows (Unaudited)

Union Pacific Corporation and Subsidiary Companies

 

Millions, for the Six Months Ended June 30,

 

2022

   

2021

 

Operating Activities

               

Net income

  $ 3,465     $ 3,139  

Adjustments to reconcile net income to cash provided by operating activities:

               

Depreciation

    1,114       1,099  

Deferred and other income taxes

    93       128  

Other operating activities, net

    (52 )     (128 )

Changes in current assets and liabilities:

               

Accounts receivable, net

    (330 )     (161 )

Materials and supplies

    (169 )     (50 )

Other current assets

    (39 )     (3 )

Accounts payable and other current liabilities

    203       73  

Income and other taxes

    (118 )     122  

Cash provided by operating activities

    4,167       4,219  

Investing Activities

               

Capital investments

    (1,645 )     (1,190 )

Proceeds from asset sales

    120       101  

Maturities of short-term investments (Note 13)

    -       48  

Purchases of short-term investments (Note 13)

    -       (24 )

Other investing activities, net

    (15 )     (6 )

Cash used in investing activities

    (1,540 )     (1,071 )

Financing Activities

               

Debt issued (Note 14)

    4,090       2,896  

Share repurchase programs (Note 16)

    (3,473 )     (4,085 )

Debt repaid

    (1,664 )     (691 )

Dividends paid

    (1,556 )     (1,350 )
Net issued/(paid) commercial paper (Note 14)     (151 )     125  

Accelerated share repurchase programs pending final settlement (Note 16)

    -       (400 )

Debt exchange

    -       (268 )

Other financing activities, net

    (42 )     (34 )

Cash used in financing activities

    (2,796 )     (3,807 )

Net Change in Cash, Cash Equivalents, and Restricted Cash

    (169 )     (659 )

Cash, cash equivalents, and restricted cash at beginning of year

    983       1,818  

Cash, cash equivalents, and restricted cash at end of period

  $ 814     $ 1,159  

Supplemental Cash Flow Information

               

Non-cash investing and financing activities:

               

Capital investments accrued but not yet paid

  $ 241     $ 104  

Common shares repurchased but not yet paid

    2       32  

Cash (paid for)/received from:

               

Income taxes, net of refunds

  $ (1,033 )   $ (712 )

Interest, net of amounts capitalized

    (565 )     (535 )

Reconciliation of cash, cash equivalents, and restricted cash

to the Condensed Consolidated Statement of Financial Position:

Cash and cash equivalents

  $ 788     $ 1,115  

Restricted cash equivalents in other current assets

    22       32  

Restricted cash equivalents in other assets

    4       12  

Total cash, cash equivalents and restricted cash equivalents per above

  $ 814     $ 1,159  

 

The accompanying notes are an integral part of these unaudited Condensed Consolidated Financial Statements.

 

 

Condensed Consolidated Statements of Changes in Common Shareholders Equity (Unaudited)

Union Pacific Corporation and Subsidiary Companies

 

Millions

Common SharesTreasury Shares Common SharesPaid-in-SurplusRetained EarningsTreasury StockAOCI [a]

Total

 

Balance at April 1, 2021

  1,112.5   (447.4) $2,781  $4,874  $52,019  $(41,826) $(1,594) $16,254 

Net income

          -   -   1,798   -   -   1,798 

Other comprehensive income/(loss)

          -   -   -   -   43   43 

Conversion, stock option exercises, forfeitures, ESPP, and other [b]

  -   0.1   -   25   -   (1)  -   24 

Share repurchase programs

(Note 16)

  -   (12.2)  -   (400)  -   (2,715)  -   (3,115)

Dividends declared

($1.07 per share)

  -   -   -   -   (701)  -   -   (701)

Balance at June 30, 2021

  1,112.5   (459.5) $2,781  $4,499  $53,116  $(44,542) $(1,551) $14,303 
                                 

Balance at April 1, 2022

  1,112.6   (484.4) $2,782  $4,571  $55,937  $(50,515) $(878) $11,897 

Net income

          -   -   1,835   -   -   1,835 

Other comprehensive income/(loss)

          -   -   -   -   37   37 

Conversion, stock option exercises, forfeitures, ESPP, and other [b]

  -   -   (1)  31   -   7   -   37 

Share repurchase programs

(Note 16)

  -   (3.1)  -   428   -   (710)  -   (282)

Dividends declared

($1.30 per share)

  -   -   -   -   (814)  -   -   (814)

Balance at June 30, 2022

  1,112.6   (487.5) $2,781  $5,030  $56,958  $(51,218) $(841) $12,710 

 

Millions

Common Shares

Treasury Shares

 

Common Shares

Paid-in-Surplus

Retained Earnings

Treasury Stock

AOCI [a]

Total

 

Balance at January 1, 2021

  1,112.2   (440.9) $2,781  $4,864  $51,326  $(40,420) $(1,593) $16,958 

Net income

          -   -   3,139   -   -   3,139 

Other comprehensive income/(loss)

          -   -   -   -   42   42 

Conversion, stock option exercises, forfeitures, ESPP, and other [b]

  0.3   0.3   -   35   -   (5)  -   30 

Share repurchase programs

(Note 16)

  -   (18.9)  -   (400)  -   (4,117)  -   (4,517)

Dividends declared

($2.04 per share)

  -   -   -   -   (1,349)  -   -   (1,349)

Balance at June 30, 2021

  1,112.5   (459.5) $2,781  $4,499  $53,116  $(44,542) $(1,551) $14,303 
                                 

Balance at January 1, 2022

  1,112.4   (473.6) $2,781  $4,979  $55,049  $(47,734) $(914) $14,161 

Net income

          -   -   3,465   -   -   3,465 

Other comprehensive income/(loss)

          -   -   -   -   73   73 

Conversion, stock option exercises, forfeitures, ESPP, and other [b]

  0.2   0.2   -   63   -   (21)  -   42 

Share repurchase programs

(Note 16)

  -   (14.1)  -   (12)  -   (3,463)  -   (3,475)

Dividends declared

($2.48 per share)

  -   -   -   -   (1,556)  -   -   (1,556)

Balance at June 30, 2022

  1,112.6   (487.5) $2,781  $5,030  $56,958  $(51,218) $(841) $12,710 

 

[a]

AOCI = Accumulated Other Comprehensive Income/Loss (Note 9)

[b] ESPP = employee stock purchase plan (Note 4)

 

The accompanying notes are an integral part of these unaudited Condensed Consolidated Financial Statements.

 

 

UNION PACIFIC CORPORATION AND SUBSIDIARY COMPANIES

 

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

(Unaudited)

 

For purposes of this report, unless the context otherwise requires, all references herein to the “Corporation”, “Company”, “UPC”, “we”, “us”, and “our” mean Union Pacific Corporation and its subsidiaries, including Union Pacific Railroad Company, which will be separately referred to herein as “UPRR” or the “Railroad”.

 

1. Basis of Presentation

 

Our Condensed Consolidated Financial Statements are unaudited and reflect all adjustments (consisting of normal and recurring adjustments) that are, in the opinion of management, necessary for their fair presentation in conformity with accounting principles generally accepted in the United States of America (GAAP). Pursuant to the rules and regulations of the Securities and Exchange Commission (SEC), certain information and note disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted. Accordingly, this Quarterly Report on Form 10-Q should be read in conjunction with our Consolidated Financial Statements and notes thereto contained in our 2021 Annual Report on Form 10-K. Our Consolidated Statement of Financial Position at December 31, 2021, is derived from audited financial statements. The results of operations for the six months ended June 30, 2022, are not necessarily indicative of the results for the entire year ending December 31, 2022.

 

The Condensed Consolidated Financial Statements are presented in accordance with GAAP as codified in the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC).

 

2. Accounting Pronouncements

 

In November 2021, the FASB issued Accounting Standards Update No. (ASU) 2021-10, Government Assistance (Topic 832): Disclosures by Business Entities about Government Assistance, which requires business entities to provide certain disclosures when they have received government assistance and use a grant or contribution accounting model by analogy to other accounting guidance. The ASU was effective January 1, 2022, and had no material impact on our consolidated financial statements and related disclosures.

 

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides optional expedients and exceptions for applying GAAP principles to contracts, hedging relationships, and other transactions that reference London Interbank Offered Rate (LIBOR) or another reference rate expected to be discontinued due to reference rate reform. This guidance was effective beginning on March 12, 2020, and can be adopted on a prospective basis no later than December 31, 2022, with early adoption permitted. The Company is currently evaluating the effect that the new guidance will have on our consolidated financial statements and related disclosures.

 

3. Operations and Segmentation

 

The Railroad, along with its subsidiaries and rail affiliates, is our one reportable operating segment. Although we provide and analyze revenues by commodity group, we treat the financial results of the Railroad as one segment due to the integrated nature of our rail network. Our operating revenues are primarily derived from contracts with customers for the transportation of freight from origin to destination.

 

8

 

The following table represents a disaggregation of our freight and other revenues:

 

  

Three Months Ended

  

Six Months Ended

 
  

June 30,

  

June 30,

 

Millions

 

2022

  

2021

  

2022

  

2021

 

Bulk

 $1,813  $1,648  $3,645  $3,160 

Industrial

  2,091   1,859   4,012   3,515 

Premium

  1,938   1,625   3,625   3,106 

Total freight revenues

 $5,842  $5,132  $11,282  $9,781 

Other subsidiary revenues

  233   180   438   357 

Accessorial revenues

  183   176   384   337 

Other

  11   16   25   30 

Total operating revenues

 $6,269  $5,504  $12,129  $10,505 

 

Although our revenues are principally derived from customers domiciled in the U.S., the ultimate points of origin or destination for some products we transport are outside the U.S. Each of our commodity groups includes revenues from shipments to and from Mexico. Included in the above table are revenues from our Mexico business, which amounted to $681 million and $618 million, respectively, for the three months ended June 30, 2022 and 2021, and $1.3 billion and $1.2 billion, respectively, for the six months ended June 30, 2022 and 2021.

 

4. Stock-Based Compensation

 

We have several stock-based compensation plans where employees receive nonvested stock options, nonvested retention shares, and nonvested stock units. We refer to the nonvested shares and stock units collectively as “retention awards”. Starting in July 2021, employees are also able to participate in our employee stock purchase plan (ESPP). 

 

Information regarding stock-based compensation appears in the table below:

 

  

Three Months Ended

  

Six Months Ended

 
  

June 30,

  

June 30,

 

Millions

 

2022

  

2021

  

2022

  

2021

 

Stock-based compensation, before tax:

                

Stock options

 $3  $4  $7  $8 

Retention awards

  19   18   41   34 

ESPP

  4   -   8   - 

Total stock-based compensation, before tax

 $26  $22  $56  $42 

Excess tax benefits from equity compensation plans

 $1  $2  $18  $17 

 

Stock Options – Stock options are granted at the closing price on the date of grant, have 10-year contractual terms, and vest no later than 3 years from the date of grant. None of the stock options outstanding at June 30, 2022, are subject to performance or market-based vesting conditions.

 

The table below shows the annual weighted-average assumptions used for Black-Scholes valuation purposes:

 

Weighted-Average Assumptions

 

2022

  

2021

 

Risk-free interest rate

  1.6%  0.4%

Dividend yield

  1.9%  1.9%

Expected life (years)

  4.4   4.6 

Volatility

  28.7%  28.3%

Weighted-average grant-date fair value of options granted

 $51.92  $39.97 

 

The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant; the expected dividend yield is calculated as the ratio of dividends paid per share of common stock to the stock price on the date of grant; the expected life is based on historical and expected exercise behavior; and expected volatility is based on the historical volatility of our stock price over the expected life of the stock option.

 

9

 

A summary of stock option activity during the six months ended June 30, 2022, is presented below:

 

 

Options (thous.)

Weighted-Average Exercise PriceWeighted-Average Remaining Contractual Term (in years)Aggregate Intrinsic Value (millions) 

Outstanding at January 1, 2022

  2,106  $149.84   6.3  $215 

Granted

  328   244.35   N/A   N/A 

Exercised

  (339)  127.62   N/A   N/A 

Forfeited or expired

  (25)  211.39   N/A   N/A 

Outstanding at June 30, 2022

  2,070  $167.71   6.5  $104 

Vested or expected to vest at June 30, 2022

  2,049  $167.17   6.4  $104 

Options exercisable at June 30, 2022

  1,390  $142.20   5.3  $99 

 

At June 30, 2022, there was $23 million of unrecognized compensation expense related to nonvested stock options, which is expected to be recognized over a weighted-average period of 1.5 years. Additional information regarding stock option exercises appears in the following table:

 

  

Three Months Ended

  

Six Months Ended

 
  

June 30,

  

June 30,

 

Millions

 

2022

  

2021

  

2022

  

2021

 

Intrinsic value of stock options exercised

 $2  $9  $44  $32 

Cash received from option exercises

  2   4   17   34 

Treasury shares repurchased for employee payroll taxes

  -   (1)  (5)  (7)

Tax benefit realized from option exercises

  1   2   6   6 

Aggregate grant-date fair value of stock options vested

  -   -   13   14 

 

Retention Awards – Retention awards are granted at no cost to the employee, vest over periods lasting up to 4 years, and dividends and dividend equivalents are paid to participants during the vesting periods.

 

Changes in our retention awards during the six months ended June 30, 2022, were as follows:

 

 

Shares (thous.)

Weighted-Average Grant-Date Fair Value 

Nonvested at January 1, 2022

  1,287  $165.10 

Granted

  234   244.27 

Vested

  (408)  125.98 

Forfeited

  (36)  190.72 

Nonvested at June 30, 2022

  1,077  $196.26 

 

At June 30, 2022, there was $113 million of total unrecognized compensation expense related to nonvested retention awards, which is expected to be recognized over a weighted-average period of 2.0 years.

 

Performance Retention Awards – In February 2022, our Board of Directors approved performance stock unit grants. This plan is based on performance targets for annual return on invested capital (ROIC) and operating income growth (OIG) compared to companies in the S&P 100 Industrials Index plus the Class I railroads. We define ROIC as net operating profit adjusted for interest expense (including interest on average operating lease liabilities) and taxes on interest divided by average invested capital adjusted for average operating lease liabilities.

 

The February 2022 stock units awarded to selected employees are subject to continued employment for 37 months, the attainment of certain levels of ROIC, and the relative three-year OIG. We expense two-thirds of the fair value of the units that are probable of being earned based on our forecasted ROIC over the 3-year performance period, and with respect to the third year of the plan, the remaining one-third of the fair value is subject to the relative three-year OIG. We measure the fair value of performance stock units based upon the closing price of the underlying common stock as of the date of grant. Dividend equivalents are accumulated during the service period and paid to participants only after the units are earned.
 

Changes in our performance retention awards during the six months ended June 30, 2022, were as follows:

 

 

Shares (thous.)

Weighted-Average Grant-Date Fair Value

 

Nonvested at January 1, 2022

  641  $173.03 

Granted

  209   244.35 

Vested

  (56)  162.64 

Unearned

  (163)  161.57 

Forfeited

  (21)  207.64 

Nonvested at June 30, 2022

  610  $200.29 

 

At June 30, 2022, there was $37 million of total unrecognized compensation expense related to nonvested performance retention awards, which is expected to be recognized over a weighted-average period of 1.7 years. This expense is subject to achievement of the performance measures established for the performance stock unit grants.

 

5. Retirement Plans

 

We provide defined benefit retirement income to eligible non-union employees through qualified and non-qualified (supplemental) pension plans. Qualified and non-qualified pension benefits are based on years of service and the highest compensation during the latest years of employment, with specific reductions made for early retirements. Non-union employees hired on or after January 1, 2018, are no longer eligible for pension benefits, but are eligible for an enhanced 401(k) plan.

 

Expense

 

Pension expense is determined based upon the annual service cost of benefits (the actuarial cost of benefits earned during a period) and the interest cost on those liabilities, less the expected return on plan assets. The expected long-term rate of return on plan assets is applied to a calculated value of plan assets that recognizes changes in fair value over a 5-year period. This practice is intended to reduce year-to-year volatility in pension expense, but it can have the effect of delaying the recognition of differences between actual returns on assets and expected returns based on long-term rate of return assumptions. Differences in actual experience in relation to assumptions are not recognized in net income immediately, but are deferred in accumulated other comprehensive income/loss and, if necessary, amortized as pension expense.

 

The components of our net periodic pension cost were as follows:

 

  

Three Months Ended

  

Six Months Ended

 
  

June 30,

  

June 30,

 

Millions

 

2022

  

2021

  

2022

  

2021

 

Service cost

 $26  $30  $52  $60 

Interest cost

  31   27   62   53 

Expected return on plan assets

  (73)  (68)  (146)  (135)

Amortization of actuarial loss

  21   35   43   71 

Net periodic pension cost

 $5  $24  $11  $49 

 

Cash Contributions

 

For the six months ended June 30, 2022, cash contributions totaled $0 to the qualified pension plans. Any contributions made during 2022 will be based on cash generated from operations and financial market considerations. Our policy with respect to funding the qualified pension plans is to fund at least the minimum required by law and not more than the maximum amount deductible for tax purposes. At June 30, 2022, we do not have minimum cash funding requirements for 2022.

 

 

11

 

6. Other Income

 

Other income included the following:

 

  

Three Months Ended

  

Six Months Ended

 
  

June 30,

  

June 30,

 

Millions

 

2022

  

2021

  

2022

  

2021

 

Gain on non-operating asset dispositions [a]

 $98  $63  $114  $72 

Rental income

  39   34   75   67 

Net periodic pension costs

  21   6   41   11 

Environmental remediation and restoration

  (5)  (5)  (31)  (9)

Other

  10   27   11   35 

Total

 $163  $125  $210  $176 

 

[a]2022 includes a $79 million gain from a land sale to the Illinois State Toll Highway Authority. 2021 includes a $50 million gain from a sale to the Colorado Department of Transportation.
 

7. Income Taxes

 

In the second quarter of 2022, the state of Nebraska enacted legislation to reduce its corporate income tax rate for future years resulting in a $55 million reduction of our deferred tax expense.

 

In the second quarter of 2021, the states of Nebraska, Oklahoma, and Idaho enacted legislation to reduce their corporate income tax rates for future years resulting in a $43 million reduction of our deferred tax expense.

 

8. Earnings Per Share

 

The following table provides a reconciliation between basic and diluted earnings per share:

 

  

Three Months Ended

  

Six Months Ended

 
  

June 30,

  

June 30,

 

Millions

 

2022

  

2021

  

2022

  

2021

 

Net income

 $1,835  $1,798  $3,465  $3,139 

Weighted-average number of shares outstanding:

                

Basic

  625.6   658.5   628.9   663.1 

Dilutive effect of stock options

  0.6   0.8   0.7   0.8 

Dilutive effect of retention shares and units

  0.6   0.8   0.6   0.8 

Diluted

  626.8   660.1   630.2   664.7 

Earnings per share – basic

 $2.93  $2.73  $5.51  $4.73 

Earnings per share – diluted

 $2.93  $2.72  $5.50  $4.72 

Stock options excluded as their inclusion would be anti-dilutive

  0.3   0.4   0.3   0.3 
 

 

12

 

9. Accumulated Other Comprehensive Income/Loss

 

Reclassifications out of accumulated other comprehensive income/loss were as follows (net of tax):

 

Millions

Defined benefit plans

Foreign currency translation

Total

 

Balance at April 1, 2022

 

$

(643

) 

$

(235

) 

$

(878

)

Other comprehensive income/(loss) before reclassifications

  

-

   

23

   

23

 

Amounts reclassified from accumulated other comprehensive income/(loss) [a]

  

14

   

-

   

14

 

Net quarter-to-date other comprehensive income/(loss), net of taxes of ($6) million

  

14

   

23

   

37

 

Balance at June 30, 2022

 

$

(629

) 

$

(212

) 

$

(841

)
             

Balance at April 1, 2021

 

$

(1,356

) 

$

(238

) 

$

(1,594

)

Other comprehensive income/(loss) before reclassifications

  

(1

)  

19

   

18

 

Amounts reclassified from accumulated other comprehensive income/(loss) [a]

  

25

   

-

   

25

 

Net quarter-to-date other comprehensive income/(loss), net of taxes of ($10) million

  

24

   

19

   

43

 

Balance at June 30, 2021

 

$

(1,332

) 

$

(219

) 

$

(1,551

)

 

Millions

Defined benefit plansForeign currency translation

Total

 

Balance at January 1, 2022

 $(658) $(256) $(914)

Other comprehensive income/(loss) before reclassifications

  -   44   44 

Amounts reclassified from accumulated other comprehensive income/(loss) [a]

  29   -   29 

Net year-to-date other comprehensive income/(loss), net of taxes of ($11) million

  29   44   73 

Balance at June 30, 2022

 $(629) $(212) $(841)
             

Balance at January 1, 2021

 $(1,381) $(212) $(1,593)

Other comprehensive income/(loss) before reclassifications

  (2)  (7)  (9)

Amounts reclassified from accumulated other comprehensive income/(loss) [a]

  51   -   51 

Net year-to-date other comprehensive income/(loss), net of taxes of ($18) million

  49   (7)  42 

Balance at June 30, 2021

 $(1,332) $(219) $(1,551)

 

[a]

The accumulated other comprehensive income/loss reclassification components are 1) prior service cost/credit and 2) net actuarial loss, which are both included in the computation of net periodic pension cost. See Note 5 Retirement Plans for additional details.

 

10. Accounts Receivable

 

Accounts receivable includes freight and other receivables reduced by an allowance for doubtful accounts. At June 30, 2022, and December 31, 2021, our accounts receivable were reduced by $9 million and $10 million, respectively. Receivables not expected to be collected in one year and the associated allowances are classified as other assets in our Condensed Consolidated Statements of Financial Position. At June 30, 2022, and December 31, 2021, receivables classified as other assets were reduced by allowances of $47 million and $51 million, respectively.

 

Receivables Securitization Facility – The Railroad maintains an $800 million, 3-year receivables securitization facility (the Receivables Facility) maturing in July 2022, with the intent to renew under comparable terms and conditions. Under the Receivables Facility, the Railroad sells most of its eligible third-party receivables to Union Pacific Receivables, Inc. (UPRI), a consolidated, wholly-owned, bankruptcy-remote subsidiary that may subsequently transfer, without recourse, an undivided interest in accounts receivable to investors. The investors have no recourse to the Railroad’s other assets except for customary warranty and indemnity claims. Creditors of the Railroad do not have recourse to the assets of UPRI.

 

The amount recorded under the Receivables Facility was $600 million and $300 million at June 30, 2022, and December 31, 2021, respectively. The Receivables Facility was supported by $1.7 billion and $1.3 billion of accounts receivable as collateral at June 30, 2022, and December 31, 2021, respectively, which, as a retained interest, is included in accounts receivable, net in our Condensed Consolidated Statements of Financial Position.

 

13

 

The outstanding amount the Railroad maintains under the Receivables Facility may fluctuate based on current cash needs. The maximum allowed under the Receivables Facility is $800 million with availability directly impacted by eligible receivables, business volumes, and credit risks, including receivables payment quality measures such as default and dilution ratios. If default or dilution ratios increase one percent, the allowable outstanding amount under the Receivables Facility would not materially change.

 

The costs of the Receivables Facility include interest, which will vary based on prevailing benchmark and commercial paper rates, program fees paid to participating banks, commercial paper issuance costs, and fees of participating banks for unused commitment availability. The costs of the Receivables Facility are included in interest expense and were $3 million and $1 million for the three months ended  June 30, 2022 and 2021 , respectively, and $ 4 mi llion and $2 million for the six months ended June 30, 2022 and 2021 , respectively.
 

11. Properties

 

The following tables list the major categories of property and equipment, as well as the weighted-average estimated useful life for each category (in years):

 

Millions, Except Estimated Useful Life

    Accumulated

Net Book

Estimated

 

As of June 30, 2022

Cost

Depreciation

Value

Useful Life

 

Land

 $5,333  $N/A  $5,333   N/A 

Road:

                

Rail and other track material

  18,217   6,977   11,240   43 

Ties

  11,538   3,605   7,933   34 

Ballast

  6,140   1,903   4,237   34 

Other roadway [a]

  21,945   4,811   17,134   47 

Total road

  57,840   17,296   40,544   N/A 

Equipment:

                

Locomotives

  9,158   3,617   5,541   18 

Freight cars

  2,407