10-Q 1 unp20220930_10q.htm FORM 10-Q unp20220930_10q.htm
0000100885 UNION PACIFIC CORP false --12-31 Q3 2022 2.50 2.50 1,400,000,000 1,400,000,000 1,112,618,814 1,112,440,400 615,789,169 638,841,656 203 125 1.07 1.30 3.11 3.78 0 1.7 3 629 212 841 0 6 6 15 0 15 6 6 614 218 832 1,332 219 1,551 1 6 7 0 8 24 6 18 1,308 225 1,533 17 26 51 3 July 31, 2025 200 1 1.25 2.800 February 14, 2032 0.50 3.375 February 14, 2042 1.25 3.500 February 14, 2053 0.5 3.85 February 14, 2072 0.90 4.500 January 20, 2033 0.60 4.950 September 9, 2052 0.40 5.150 January 20, 2063 1.3 260 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 completed 2022 and 2021 accelerated share repurchase programs was $248.32 and $217.56, respectively. The three months ended September 30, 2022, includes a $35 million gain from a sale to the Colorado Department of Transportation. The nine months ended September 30, 2022, also includes a $79 million gain from a land sale to the Illinois State Toll Highway Authority. The nine months ended September 30, 2021, includes a $50 million gain from a sale to the Colorado Department of Transportation. Prior periods have been reclassified to conform to the current period financial statement presentation. The accrued compensation includes a $114 million one-time accrual for tentative agreements reached with our labor unions (see Labor Agreements in Other Matters). Net of deferred taxes of ($6) million and ($8) million during the three months ended September 30, 2022 and 2021, respectively. Other roadway includes grading, bridges and tunnels, signals, buildings, and other road assets. AOCI = Accumulated Other Comprehensive Income/Loss (Note 9) 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 benefit/cost. See Note 5 Retirement Plans for additional details. Prior periods have been reclassified to conform to the current period financial statement presentation. Includes 7,012,232 shares repurchased in 2022 under accelerated share repurchase programs. Net of deferred taxes of ($17) million and ($26) million during the nine months ended September 30, 2022 and 2021, respectively. Includes an incremental 1,983,859 shares received upon final settlement in 2021 under accelerated share repurchase programs. 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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 September 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 incorporation or organization)

(I.R.S. Employer Identification No.)

 

1400 Douglas Street, Omaha, Nebraska68179
(Address of principal executive offices)(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 Exchange Act).

☐ Yes     ☒ No

As of October 14, 2022, there were 614,800,800 shares of the Registrant's Common Stock outstanding.

 
Table of Contents
 

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 September 30, 2022 and 2021

 3
     
 

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

  
 

For the Three Months Ended September 30, 2022 and 2021

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

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (Unaudited)

  
 

At September 30, 2022, and December 31, 2021

 5
     
 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

  
 

For the Nine Months Ended September 30, 2022 and 2021

 6
     
 

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

  
 

For the Three and Nine Months Ended September 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

 31
     

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
 

 

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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 September 30,

  

2022

    

2021

  

Operating revenues:

                

Freight revenues

   $ 6,109     $ 5,166  

Other revenues

     457       400  

Total operating revenues

     6,566       5,566  

Operating expenses:

                

Compensation and benefits

     1,278       1,040  

Fuel

     932       544  

Purchased services and materials

     626       510  

Depreciation

     563       553  

Equipment and other rents

     215       217  

Other

     319       270  

Total operating expenses

     3,933       3,134  

Operating income

     2,633       2,432  

Other income, net (Note 6)

     124       38  

Interest expense

     (315 )     (290 )

Income before income taxes

     2,442       2,180  

Income taxes (Note 7)

     (547 )     (507 )

Net income

   $ 1,895     $ 1,673  

Share and Per Share (Note 8):

                

Earnings per share - basic

   $ 3.05     $ 2.58  

Earnings per share - diluted

   $ 3.05     $ 2.57  

Weighted average number of shares - basic

     620.4       648.7  

Weighted average number of shares - diluted

     621.5       650.3  
 

Condensed Consolidated Statements of Comprehensive Income (Unaudited)

Union Pacific Corporation and Subsidiary Companies

 

Millions, for the Three Months Ended September 30,

 

2022

  

2021

 

Net income

 $1,895  $1,673 

Other comprehensive income/(loss):

        

Defined benefit plans

  15   24 

Foreign currency translation

  (6)  (6)

Total other comprehensive income/(loss) [a]

  9   18 

Comprehensive income

 $1,904  $1,691 

 

[a]

Net of deferred taxes of ($6) million and ($8) million during the three months ended September 30, 2022 and 2021, respectively.

 

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

 

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Condensed Consolidated Statements of Income (Unaudited)

Union Pacific Corporation and Subsidiary Companies
 

Millions, Except Per Share Amounts, for the Nine Months Ended September 30,

  

2022

    

2021

  

Operating revenues:

                

Freight revenues

   $ 17,391     $ 14,947  

Other revenues

     1,304       1,124  

Total operating revenues

     18,695       16,071  

Operating expenses:

                

Compensation and benefits

     3,471       3,088  

Fuel

     2,586       1,452  

Purchased services and materials

     1,809       1,478  

Depreciation

     1,677       1,652  

Equipment and other rents

     660       629  

Other

     987       874  

Total operating expenses

     11,190       9,173  

Operating income

     7,505       6,898  

Other income, net (Note 6)

     334       214  

Interest expense

     (938 )     (862 )

Income before income taxes

     6,901       6,250  

Income taxes (Note 7)

     (1,541 )     (1,438 )

Net income

   $ 5,360     $ 4,812  

Share and Per Share (Note 8):

                

Earnings per share - basic

   $ 8.56     $ 7.31  

Earnings per share - diluted

   $ 8.54     $ 7.29  

Weighted average number of shares - basic

     626.1       658.3  

Weighted average number of shares - diluted

     627.4       659.9  
 

Condensed Consolidated Statements of Comprehensive Income (Unaudited)

Union Pacific Corporation and Subsidiary Companies

 

Millions, for the Nine Months Ended September 30,

  

2022

    

2021

  

Net income

   $ 5,360     $ 4,812  

Other comprehensive income/(loss):

                

Defined benefit plans

     44       73  

Foreign currency translation

     38       (13 )

Total other comprehensive income/(loss) [a]

     82       60  

Comprehensive income

   $ 5,442     $ 4,872  

 

[a]
Net of deferred taxes of ($17) million and ($26) million during the nine months ended September 30, 2022 and 2021, respectively.

 

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

 

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Condensed Consolidated Statements of Financial Position (Unaudited)

Union Pacific Corporation and Subsidiary Companies

 

  

Sep. 30,

  

Dec. 31,

 

Millions, Except Share and Per Share Amounts

 

2022

  

2021

 

Assets

        

Current assets:

        

Cash and cash equivalents

 $1,267  $960 

Short-term investments (Note 13)

  46   46 

Accounts receivable, net (Note 10)

  2,052   1,722 

Materials and supplies

  794   621 

Other current assets

  246   202 

Total current assets

  4,405   3,551 

Investments

  2,314   2,241 

Properties, net (Note 11)

  55,689   54,871 

Operating lease assets

  1,703   1,787 

Other assets

  1,232   1,075 

Total assets

 $65,343  $63,525 

Liabilities and Common Shareholders' Equity

        

Current liabilities:

        

Accounts payable and other current liabilities (Note 12)

 $4,034  $3,578 

Debt due within one year (Note 14)

  1,678   2,166 

Total current liabilities

  5,712   5,744 

Debt due after one year (Note 14)

  31,744   27,563 

Operating lease liabilities

  1,303   1,429 

Deferred income taxes

  12,868   12,675 

Other long-term liabilities

  1,973   1,953 

Commitments and contingencies (Note 15)

        

Total liabilities

  53,600   49,364 

Common shareholders' equity:

        

Common shares, $2.50 par value, 1,400,000,000 authorized; 1,112,618,814 and

        

1,112,440,400 issued; 615,789,169 and 638,841,656 outstanding, respectively

  2,782   2,781 

Paid-in-surplus

  5,055   4,979 

Retained earnings

  58,047   55,049 

Treasury stock

  (53,309)  (47,734)

Accumulated other comprehensive loss (Note 9)

  (832)  (914)

Total common shareholders' equity

  11,743   14,161 

Total liabilities and common shareholders' equity

 $65,343  $63,525 

 

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

 

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Condensed Consolidated Statements of Cash Flows (Unaudited)

Union Pacific Corporation and Subsidiary Companies

 

Millions, for the Nine Months Ended September 30,

  

2022

    

2021

  

Operating Activities

                

Net income

   $ 5,360     $ 4,812  

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

                

Depreciation

     1,677       1,652  

Deferred and other income taxes

     180       189  

Other operating activities, net

     (93 )     (67 )

Changes in current assets and liabilities:

                

Accounts receivable, net

     (330 )     (174 )

Materials and supplies

     (173 )     (26 )

Other current assets

     (9 )     19  

Accounts payable and other current liabilities

     433       (4 )

Income and other taxes

     25       102  

Cash provided by operating activities

     7,070       6,503  

Investing Activities

                

Capital investments

     (2,690 )     (1,945 )

Proceeds from asset sales

     172       120  

Maturities of short-term investments (Note 13)

     46       64  

Purchases of short-term investments (Note 13)

     (46 )     (40 )

Other investing activities, net

     (41 )     9  

Cash used in investing activities

     (2,559 )     (1,792 )

Financing Activities

                

Debt issued (Note 14)

     6,080       3,901  

Share repurchase programs (Note 16)

     (5,497 )     (5,846 )

Dividends paid

     (2,362 )     (2,045 )

Debt repaid

     (2,185 )     (1,120 )

Net issued/(paid) commercial paper (Note 14)

    

(203)

      

125

  

Debt exchange

     -       (270 )

Other financing activities, net

     (43 )     (36 )

Cash used in financing activities

     (4,210 )     (5,291 )

Net Change in Cash, Cash Equivalents, and Restricted Cash

     301       (580 )

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

     983       1,818  

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

   $ 1,284     $ 1,238  

Supplemental Cash Flow Information

                

Non-cash investing and financing activities:

                

Capital investments accrued but not yet paid

   $ 172     $ 151  

Common shares repurchased but not yet paid

     80       80  

Cash (paid for)/received from:

                

Income taxes, net of refunds

   $ (1,473 )   $ (1,241 )

Interest, net of amounts capitalized

     (980 )     (904 )

Reconciliation of cash, cash equivalents, and restricted cash

to the Condensed Consolidated Statement of Financial Position:

Cash and cash equivalents

   $ 1,267     $ 1,194  

Restricted cash equivalents in other current assets

     13       32  

Restricted cash equivalents in other assets

     4       12  

Total cash, cash equivalents and restricted cash equivalents per above

   $ 1,284     $ 1,238  

 

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

 

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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 July 1, 2021

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

Net income

          -   -   1,673   -   -   1,673 

Other comprehensive income/(loss)

          -   -   -   -   18   18 

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

  (0.1)  0.1   -   22   -   5   -   27 

Share repurchase programs

  (Note 16)

  -   (8.6)  -   426   -   (1,835)  -   (1,409)

Dividends declared ($1.07 per share)

  -   -   -   -   (695)  -   -   (695)

Balance at September 30, 2021

  1,112.4   (468.0) $2,781  $4,947  $54,094  $(46,372) $(1,533) $13,917 
                                 

Balance at July 1, 2022

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

Net income

          -   -   1,895   -   -   1,895 

Other comprehensive income/(loss)

          -   -   -   -   9   9 

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

  -   0.2   1   25   -   11   -   37 

Share repurchase programs

  (Note 16)

  -   (9.5)  -   -   -   (2,102)  -   (2,102)

Dividends declared ($1.30 per share)

  -   -   -   -   (806)  -   -   (806)

Balance at September 30, 2022

  1,112.6   (496.8) $2,782  $5,055  $58,047  $(53,309) $(832) $11,743 

 

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

          -   -   4,812   -   -   4,812 

Other comprehensive income/(loss)

          -   -   -   -   60   60 

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

  0.2   0.4   -   57   -   -   -   57 

Share repurchase programs

  (Note 16)

  -   (27.5)  -   26   -   (5,952)  -   (5,926)

Dividends declared ($3.11 per share)

  -   -   -   -   (2,044)  -   -   (2,044)

Balance at September 30, 2021

  1,112.4   (468.0) $2,781  $4,947  $54,094  $(46,372) $(1,533) $13,917 
                                 

Balance at January 1, 2022

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

Net income

          -   -   5,360   -   -   5,360 

Other comprehensive income/(loss)

          -   -   -   -   82   82 

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

  0.2   0.4   1   88   -   (10)  -   79 

Share repurchase programs

  (Note 16)

  -   (23.6)  -   (12)  -   (5,565)  -   (5,577)

Dividends declared ($3.78 per share)

  -   -   -   -   (2,362)  -   -   (2,362)

Balance at September 30, 2022

  1,112.6   (496.8) $2,782  $5,055  $58,047  $(53,309) $(832) $11,743 

 

[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.

 

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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 nine months ended September 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 adopted the ASU, and it did not have an impact on our consolidated financial statements.
 

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.

 

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

 

  

Three Months Ended

  

Nine Months Ended

 
  

September 30,

  

September 30,

 

Millions

 

2022

  

2021

  

2022

  

2021

 

Bulk

 $1,959  $1,687  $5,604  $4,847 

Industrial

  2,194   1,911   6,206   5,426 

Premium

  1,956   1,568   5,581   4,674 

Total freight revenues

 $6,109  $5,166  $17,391  $14,947 

Other subsidiary revenues

  231   182   669   539 

Accessorial revenues

  212   198   596   535 

Other

  14   20   39   50 

Total operating revenues

 $6,566  $5,566  $18,695  $16,071 

 

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 $708 million and $592 million, respectively, for the three months ended September 30, 2022 and 2021, and $2.0 billion and $1.8 billion, respectively, for the nine months ended September 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

  

Nine Months Ended

 
  

September 30,

  

September 30,

 

Millions

 

2022

  

2021

  

2022

  

2021

 

Stock-based compensation, before tax:

                

Stock options

 $4  $4  $11  $12 

Retention awards

  13   16   54   50 

ESPP

  4   4   12   4 

Total stock-based compensation, before tax

 $21  $24  $77  $66 

Excess tax benefits from equity compensation plans

 $2  $1  $20  $18 

 

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 September 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.

 

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A summary of stock option activity during the nine months ended September 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

  (397)  125.28   N/A   N/A 

Forfeited or expired

  (29)  213.28   N/A   N/A 

Outstanding at September 30, 2022

  2,008  $169.22   6.3  $71 

Vested or expected to vest at September 30, 2022

  1,987  $168.69   6.2  $70 

Options exercisable at September 30, 2022

  1,331  $143.54   5.1  $69 

 

At September 30, 2022, there was $19 million of unrecognized compensation expense related to nonvested stock options, which is expected to be recognized over a weighted-average period of 1.2 years. Additional information regarding stock option exercises appears in the following table:

 

  

Three Months Ended

  

Nine Months Ended

 
  

September 30,

  

September 30,

 

Millions

 

2022

  

2021

  

2022

  

2021

 

Intrinsic value of stock options exercised

 $7  $1  $51  $33 

Cash received from option exercises

  7   1   24   35 

Treasury shares repurchased for employee payroll taxes

  (2)  -   (7)  (7)

Tax benefit realized from option exercises

  1   -   7   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 nine months ended September 30, 2022, were as follows:

 

 

Shares (thous.)

Weighted-Average Grant-Date Fair Value 

Nonvested at January 1, 2022

  1,287  $165.10 

Granted

  238   243.92 

Vested

  (408)  126.06 

Forfeited

  (50)  191.59 

Nonvested at September 30, 2022

  1,067  $196.37 

 

At September 30, 2022, there was $99 million of total unrecognized compensation expense related to nonvested retention awards, which is expected to be recognized over a weighted-average period of 1 .7  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 nine months ended September 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

  (26)  211.28 

Nonvested at September 30, 2022

  605  $200.07 

 

At September 30, 2022, there was $28 million of total unrecognized compensation expense related to nonvested performance retention awards, which is expected to be recognized over a weighted-average period of 1.4 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 benefit/cost were as follows:

 

  

Three Months Ended

  

Nine Months Ended

 
  

September 30,

  

September 30,

 

Millions

 

2022

  

2021

  

2022

  

2021

 

Service cost

 $21  $25  $73  $85 

Interest cost

  31   25   93   78 

Expected return on plan assets

  (74)  (67)  (220)  (202)

Amortization of actuarial loss

  21   35   64   106 

Net periodic pension (benefit)/cost

 $(1) $18  $10  $67 

 

Cash Contributions

 

For the nine months ended September 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 September 30, 2022, we do not have minimum cash funding requirements for 2022.

 

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6. Other Income

 

Other income included the following:

 

  

Three Months Ended

  

Nine Months Ended

 
  

September 30,

  

September 30,

 

Millions

 

2022

  

2021

  

2022

  

2021

 

Real estate income [a] [b]

 $103  $53  $309  $209 

Net periodic pension benefit/(cost)

  22   7   63   18 

Environmental remediation and restoration

  (4)  (4)  (35)  (13)

Other [a]

  3   (18)  (3)  - 

Total

 $124  $38  $334  $214 

 

[a]Prior periods have been reclassified to conform to the current period financial statement presentation.
[b]
The three months ended September 30, 2022, includes a $35 million gain from a sale to the Colorado Department of Transportation. The nine months ended September 30, 2022, also includes a $79 million gain from a land sale to the Illinois State Toll Highway Authority. The nine months ended September 30, 2021, includes a $50 million gain from a sale to the Colorado Department of Transportation.
 

7. Income Taxes

 

In the third quarter of 2022, the states of Iowa, Arkansas, and Idaho enacted legislation to reduce their corporate income tax rates for future years resulting in a $40 million reduction of our deferred tax expense.

 

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

  

Nine Months Ended

 
  

September 30,

  

September 30,

 

Millions, Except Per Share Amounts

 

2022

  

2021

  

2022

  

2021

 

Net income

 $1,895  $1,673  $5,360  $4,812 

Weighted-average number of shares outstanding:

                

Basic

  620.4   648.7   626.1   658.3 

Dilutive effect of stock options

  0.5   0.8   0.7   0.8 

Dilutive effect of retention shares and units

  0.6   0.8   0.6   0.8 

Diluted

  621.5   650.3   627.4   659.9 

Earnings per share – basic

 $3.05  $2.58  $8.56  $7.31 

Earnings per share – diluted

 $3.05  $2.57  $8.54  $7.29 

Stock options excluded as their inclusion would be anti-dilutive

  0.3   0.4   0.3   0.3 

 

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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 July 1, 2022

 

$

(629)

  

$

(212)

  

$

(841)

 

Other comprehensive income/(loss) before reclassifications

  

-

   

(6)

   

(6)

 

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

  

15

   

-

   

15

 

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

  

15

   

(6)

   

9

 

Balance at September 30, 2022

 

$

(614)

  

$

(218)

  

$

(832)

 
             

Balance at July 1, 2021

 

$

(1,332)

  

$

(219)

  

$

(1,551)

 

Other comprehensive income/(loss) before reclassifications

  

(1)

   

(6)

   

(7)

 

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

  

25

   

-

   

25

 

Net quarter-to-date other comprehensive income/(loss), net of taxes of ($8) million

  

24

   

(6)

   

18

 

Balance at September 30, 2021

 

$

(1,308)

  

$

(225)

  

$

(1,533)

 

 

Millions

Defined benefit plansForeign currency translation

Total

 

Balance at January 1, 2022

 $(658) $(256) $(914)

Other comprehensive income/(loss) before reclassifications

  -   38   38 

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

  44   -   44 

Net year-to-date other comprehensive income/(loss), net of taxes of ($17) million

  44   38   82 

Balance at September 30, 2022

 $(614) $(218) $(832)
             

Balance at January 1, 2021

 $(1,381) $(212) $(1,593)

Other comprehensive income/(loss) before reclassifications

  (3)  (13)  (16)

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

  76   -   76 

Net year-to-date other comprehensive income/(loss), net of taxes of ($26) million

  73   (13)  60 

Balance at September 30, 2021

 $(1,308) $(225) $(1,533)

 

[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 benefit/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 September 30, 2022, and December 31, 2021, our accounts receivable were reduced by $11 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 both  September 30, 2022, and December 31, 2021, receivables classified as other assets were reduced by an allowance of $51 million.

 

Receivables Securitization Facility – On July 29, 2022, the Railroad completed the renewal of the receivables securitization facility (the Receivables Facility). The new $800 million, 3-year facility replaces the prior $800 million facility and will mature in July 2025. 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 $200 million and $300 million at September 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 September 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.

 

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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 $4 million and $1 million for the three months ended  September 30, 2022 and 2021 , respectively, and $8  mi llion and $3 million for the nine months ended September 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 September 30, 2022

 

Cost

 

Depreciation

 

Value

 

Useful Life

 

Land

 $5,334  $N/A  $5,334   N/A 

Road:

                

Rail and other track material

  18,329   7,024   11,305   43 

Ties

  11,610   3,648   7,962   34 

Ballast

  6,182   1,925