Union Pacific 2010 Annual Report Download - page 23

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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
2010 Results
• Safety – During 2010, we continued our positive, multi-year trend in safety performance by setting
records in many of our safety metrics. The employee injury incident rate per 200,000 man-hours
declined 4% from 2009 to its lowest level ever. Our continued focus on derailment prevention resulted
in another strong performance as our incident rate finished at 10.54 per million train miles, slightly
behind 2009 record results. However, the severity of those incidents was lower, resulting in a 12%
reduction in associated costs. With respect to public safety, we closed 286 grade crossings to reduce
our exposure to incidents. We also continued installing video cameras on our locomotives, which
assist us in reviewing grade crossing incidents, and we now have camera-equipped locomotives in
the lead position of over 97% of our through-freight trains. During 2010, the rate of grade crossing
incidents per million train miles increased 10% from record low levels of 2009, as both highway and
rail traffic increased in conjunction with economic improvement. Overall, our 2010 safety results
reflect our continued focus on the safety of our employees and the public.
• Financial Performance – In 2010, we generated record operating income of $5.0 billion, a 47%
increase over 2009, reflecting a 13% increase in volume, core pricing gains, and improved
productivity. Improved economic conditions increased demand for our services across almost all
market sectors compared to 2009, a year in which economic conditions substantially reduced
demand for rail service. We leveraged additional traffic volumes during 2010 by effectively utilizing
our assets and minimizing operational cost increases compared to 2009. These achievements
translated into an all-time record operating ratio of 70.6% for 2010, outpacing our previous record of
76.1% set in 2009. Net income of $2.8 billion also surpassed our previous milestone set in 2008,
translating into earnings of $5.53 per diluted share for 2010.
• Freight Revenues – Our freight revenues grew 20% year-over-year to $16.1 billion. Freight revenues
and volumes for all six commodity groups increased. Overall, volume increased 13% in 2010, with
particularly strong growth in automotive, intermodal, and industrial products shipments. Core pricing
gains and higher fuel surcharges (due to higher fuel prices, volume growth, and new fuel surcharge
provisions in contracts renegotiated in 2010) also drove the growth in freight revenue in 2010
compared to 2009. We continued to focus on improving the reinvestibility of our business, and we
have repriced approximately 88% of our business since 2004.
• Network Operations – In 2010, we continued operating an efficient and fluid network, effectively
handling the 13% increase in carloads compared to 2009. As reported to the Association of
American Railroads (AAR), average train speed decreased 4% in 2010 compared to a record-setting
2009. Maintenance activities and weather disruptions, combined with higher volume levels,
negatively impacted our average train speed. Average terminal dwell time increased 2% while
average rail car inventory decreased 3% in 2010 compared to 2009. We maintained more freight
cars off-line and retired a number of old freight cars, which drove a decrease in average rail car
inventory during the year. In 2010, customer satisfaction improved, surpassing a record established
in 2009, an indication that our ongoing efforts to improve operations again translated into better
customer service.
• Asset Utilization – In response to economic conditions and lower revenue in 2009, we implemented
productivity initiatives to improve efficiency and reduce costs, in addition to adjusting our resources to
reflect lower demand. By the end of 2009, we had removed from service approximately 26% of our
multiple purpose locomotives and 18% of our freight car inventory. As volume increased 13% from