Union Pacific 2007 Annual Report Download - page 24

20
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with the Consolidated Financial Statements and
applicable notes to the Financial Statements and Supplementary Data, Item 8, and other information in this
report, including Risk Factors set forth in Item 1A and Critical Accounting Policies and Cautionary
Information at the end of this Item 7.
The Railroad, along with its subsidiaries and rail affiliates, is our one reportable operating segment. Although
we analyze revenue by commodity group, we analyze the net financial results of the Railroad as one segment
due to the integrated nature of our rail network.
EXECUTIVE SUMMARY
2007 Results
• Safety – We operated a safer railroad in 2007, improving safety for our employees, customers, and the
public. The employee injury incident rate per 200,000 man-hours declined to its lowest level. A continued
focus on derailment prevention in 2007 resulted in a 14% reduction in incidents, with associated costs
declining 13%. In the area of public safety, we closed 482 grade crossings to reduce our exposure
incidents, and we installed additional video cameras in our road locomotives. As a result of this
installation work, we now have camera-equipped locomotives in the lead position of over 85% of our road
trains. These video cameras allow us to better analyze grade crossing incidents, thereby increasing safety
for our employees and the public. The number of grade crossing incidents decreased 9% during the year,
despite the combination of increasing highway traffic and urban expansion. Also, through extensive
trespass reduction programs, we were able to reduce trespasser incidents by 21%. All of these
improvements are the result of comprehensive efforts to enhance employee training, increase public
education, make capital investments, and take proactive steps to reduce safety risks.
• Financial Performance – In 2007, we generated record operating income of $3.4 billion despite lower
volume. Yield increases, network management initiatives, and improved productivity drove the 17%
increase in operating income. Our operating ratio was 79.3% for the year, a 2.2 point improvement
compared to 2006. Net income of $1.86 billion also exceeded our previous milestone, translating into
earnings of $6.91 per diluted share.
• Commodity Revenue – Our commodity revenue grew 4% year-over-year to $15.5 billion, the highest level
in our history. We achieved record revenue levels in five of our six commodity groups, driven primarily by
better pricing and fuel surcharges. Since 2004, we have repriced approximately 75% of our business.
Volume decreased 1% in 2007 due to softening markets for some of our commodities and adverse weather
conditions.
• Network Operations – In 2007, we significantly improved the fluidity and efficiency of our transportation
network. Continued focus on increasing velocity, eliminating work events, improving asset utilization,
and expanding capacity were key drivers of our operational improvement. We reduced average terminal
dwell time by 8%, improved car utilization by 7%, and increased average train speed by 2% with ongoing
enhancements to our Unified Plan (an ongoing program that streamlines segments of our transportation
plan) and implementation of initiatives to make train processing at our terminals more efficient. We
completed implementation of Customer Inventory Management System, an operational productivity
initiative that complements the Unified Plan by reducing the number of rail cars in our terminals without
adding capacity. We also expanded capacity and continued to use industrial engineering techniques to
further improve network fluidity, ease capacity constraints, and improve asset utilization. Our customer
satisfaction improved during 2007, an indication that efforts to improve network operations translated
into better customer service.