Jennifer Hamann
Executive Vice President and Chief Financial Officer at Union Pacific
Thanks, Eric, and good morning. Starting off with the income statement on Slide 15, whereas Lance mentioned earlier, we've adjusted 2020 results to exclude the Brazos impairment charge. Throughout my remarks today, I will be comparing 2021 to 2020 adjusted results. Operating revenue in the quarter totaled $5.7 billion, up 12% versus 2020 despite a 4% year-over-year volume decline. Operating expense increased 15% to $3.3 billion. I'll provide more detail in a moment, but excluding the impact of higher fuel prices, expenses were up 7% in the quarter.
Together, we are reporting record fourth quarter operating income of $2.4 billion, a 7% increase versus 2020. Other income of $83 million is up 26%, driven by a $36 million gain on the sale of the technology investment. Interest expense was up 6%, as increased average debt levels were partially offset by a lower effective interest rate. Net income of $1.7 billion increased 8%, which when combined with our strong share repurchase program led to a 13% increase in earnings per share to $2.66. Our 57.4% fourth quarter operating ratio increased 180 basis points, reflecting 100 basis point negative impact of higher fuel prices, as well as reduced operational efficiency. As we did throughout 2021, we're also comparing our results to 2019. Against that fourth quarter comparison, we generated 16% higher operating income on 1% less volume, clearly demonstrating the ongoing price discipline and operational efficiency we've achieved over the past two years.
Looking more closely at fourth quarter revenue, Slide 16 provides a breakdown of our freight revenue, which totaled $5.3 billion in the fourth quarter, up 10% compared to 2020. Volume was down 400 basis points driven by the factors Kenny described earlier. Positive business mix coupled with the strong pricing actions that yielded dollars exceeding our inflation drove 725 basis points in total improvement. Lower intermodal volume combined with higher industrial shipments drove the positive mix. Fuel surcharge revenue of $522 million increased freight revenue, 700 basis points, as our fuel surcharge programs continue to chase rising fuel prices.
Now let's move on to Slide 17, which provides a summary of our fourth quarter operating expenses. As I just mentioned, the primary driver of the increase was fuel expense, up 80% as a result of a 74% increase in fuel prices. Our fuel consumption rate was flat compared to 2020, as the favorable business mix was offset by negative productivity. Looking further at the expense lines, compensation and benefits expense was up 5% versus 2020. Fourth quarter workforce levels increased 1%, as flat management, engineering, and mechanical workforces were offset by 3% growth in our train and engine crews. This increase reflects our actions to recall furloughed employees, as well as bring on new hires to manage utilization challenges and importantly in preparation for growth.
Cost per employee increased 4% as a result of wage inflation, as well as higher recrew, over-time and borrow-out costs, partially offset by last year's $37 million employee COVID bonus. Purchased services and materials expense was up 9%, in part due to the comparison to favorable interline settlements in 2020, as well as increased locomotive maintenance, crew van usage, and purchase transportation. Equipment and other rents was up 5%, driven by lower TTX equity income. Other expense increased 29% in the quarter, driven by higher personal injury expense associated primarily with two adverse outcomes, as well as increased freight loss and damage, and state and local taxes. As we look to 2022, overall workforce levels are expected to increase with volume, although not one for one as we continue to drive productivity. Cost per employee in 2022 should increase in the low single-digits as productivity partially offsets inflation.
Depreciation expense will be up around 2% versus 2021, while we expect the other expense line to be relatively flat year-over-year. Purchased services and materials expense is a bit more of a wildcard, but will and be impacted by inflationary pressure, as well as the expected recovery in autos volumes. Finally, we expect our annual effective tax rate to be around 24%.
Looking now at our efficiency results on Slide 18. We took a step back in the quarter and did not meet our original or revised productivity targets, finishing the year with $195 million of net productivity. Higher casualty expenses, increased costs associated with network operations, and reduced volume leverage cumulatively drove the productivity loss. For the full-year, we achieved improvements in all areas led by locomotive and workforce productivity initiatives. These gains were partially offset by roughly $55 million of weather and incident related headwinds in 2021. While these results are clearly not what we expect of ourselves, we view the productivity as deferred, not lost. Similarly, fourth quarter incremental margins were muted at 27%. For the full-year, our 77% incremental margins are more indicative of our capabilities, particularly given the positive business mix in 2021. The ability to efficiently add volume to our network is the foundation for delivering strong shareholder value going forward.
Moving to Slide 19, we will review full quarter -- excuse me, full-year 2021 with earnings per share of $9.95, a 21% increase versus adjusted 2020 results. Revenue was up 12% on 4% volume growth, increased fuel surcharges, strong pricing gains, and a positive business mix. Record operating income increased 15% to $9.3 billion. Even with a 140 basis point headwind from rising fuel prices, our full-year operating ratio of 57.2% improved 130 basis points versus adjusted 2020. Our improvement in 2021 marks the fifth consecutive year of operating ratio gains for Union Pacific, demonstrating our ability to drive efficiency even during a difficult year. And a further comparison of our results to 2019 shows that the hurdles of the past two years has not slowed our momentum.
Turning now to cash and returns on Slide 20. Full-year cash from operations increased approximately $500 million to $9 billion, a 6% increase from 2020. The first priority for our cash is our capital investment, which finished 2021 just over $3 billion or roughly 14% of revenue. Our cash flow conversion rate was a strong 93% and free cash flow after dividends increased $285 million or 9% compared to 2020. Our dividend payout ratio for 2021 was 43% in line with our 45% target as we rewarded shareholders with two 10% dividend increases during the year, distributing a total of $2.8 billion to shareholders. We also returned cash to our owners through strong share repurchases, buying back a total of 33 million common shares or 3% at an all-in cost of $7.3 billion, which includes $1.4 billion in the fourth quarter. In total between dividends and share repurchases, we returned $10.1 billion to our owners in 2021, demonstrating our ongoing commitment to deliver significant shareholder value.
Now looking at the strength of our balance sheet on Slide 21. We finished the year at an adjusted debt-to-EBITDA ratio of 2.7 times, consistent with our results to maintain strong investment grade credit ratings. At year-end, our Moody's rating was Baa1 and A minus from both S&P and Fitch. Our all-in adjusted debt balance on December 31st of $31 billion increased over $2 billion from year-end 2020, as we continue to utilize our strong balance sheet and earnings growth to reward shareholders.
Finally, our return on invested capital came in at a record 16.4%, bouncing back more than 2 points from a challenging 2020 and increased 1.4 points from 2019. The reduced capital intensity associated with running a PSR operation is seen clearly in this performance and positions us for growth in the years ahead.
So wrapping up with a look to 2022 on Slide 22, let me start by pointing you back to our May Investor Day and the three-year targets we laid out. Those targets remain intact and are the building blocks of our view to 2022. With volumes we state that we would outpace industrial production through our business development -- business development efforts which are going strong. As Kenny mentioned, the current forecast for 2022 industrial production is 4.8%. To outperform that forecast, we have new business wins like Knight-Swift, as well as the anticipated recovery of autos and international intermodal. We also expect to have the added benefit of coal volume growth.
As you'll recall, we originally anticipated coal to be a half-point headwind over the next three years, but with current natural gas prices and recent business wins, that business should actually provide a tailwind in 2022. Looking at the cadence of volumes through the year, the first half should be led by Bulk and Industrial. In the second half, we'd look for stronger year-over-year gains, and for it to be more premium-driven as supply chains and chip shortages improve.
For first quarter volumes specifically, we're anticipating carloads will track below full-year 2022 growth expectations as we experience a muted post holiday rebound likely impacted by rising COVID infection rates plus continued soft international intermodal volumes. With a strong overall demand environment and our disciplined pricing approach, we expect to yield pricing dollars in excess of inflation dollars. Embedded in that guidance is our expectation that all-in inflation for the year will be elevated a little north of 3%.
At our Investor Day, we targeted incremental margins in the mid to upper 60% range. For 2022, we would expect to be at the low end of that range, given the significant mix shift to intermodal growth. The combination of growing volumes, pricing above inflation, and strong incremental margins should lead to the achievement of our long-term goal of a 55% operating ratio. Putting a little finer point to it, we would expect to achieve around a 55.5% operating ratio for full-year 2022.
Turning to cash and capital, you heard our plan to invest around $3.3 billion of capital for the year well within our long-term guidance of less than 15% of revenue. Strong top-line growth, increasing profitability, and ongoing capital discipline should result in a cash conversion rate near 100%. This strong cash generation allows us to continue rewarding our owners with an industry leading dividend payout and strong share repurchases, which we expect will be in line with 2021 levels. Before I turn it back to Lance to wrap up, I'd like to express my appreciation to the Union Pacific team. What they achieved over the past year is truly remarkable. Union Pacific success begins and ends with our people.
So with that, I'll turn it back to Lance.
