UPS 2004 Annual Report Download

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UPS Annual Report 2004
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Table of contents

  • Page 1
    Every Minute Around the World UPS Annual Report 2004

  • Page 2
    11 10 9 8 7 6 5 4 3 2 1 0 ��00 2�00 3�00 ��00 5�00 ��00 ��00 8�00 ��00 �0�00 ���00 �2� Copyright © 2005 United Parcel Service of America, Inc. All rights reserved.

  • Page 3
    ...11 Introduction Letter to shareowners Financial highlights Small package business Supply chain business How we run our business Worldwide recognition UPS senior leadership Selected financial data Financial table of contents Investor information 1 3 6 8 16 20 21 22 2� 25 72 �2�00 �3�00...

  • Page 4
    ATLANTA, GEORGIA 7:24 A.M. UPS is the world's largest package delivery company and a global leader in supply chain services. At any given moment, anywhere around the globe, UPS people enable the movement of goods, information, and funds through one integrated network that operates in more than 200 ...

  • Page 5
    ...'ve known for quite some time. There's no better time, no better industry, and no better company to capitalize on a world coming closer together through commerce. package business. In fact, small package delivery is perhaps the most integral part of the supply chain. In many cases, it represents the...

  • Page 6
    ... package delivery. Since 1999, we've successfully integrated over 15 acquisitions to develop our global supply chain presence - now in 175 countries - and added to its scope of service with the acquisition of Menlo Worldwide Forwarding late in the fourth quarter of last year. � UPS Annual Report...

  • Page 7
    ... network for all types of shipments: domestic, international, air, ground, commercial, residential. This makes for economies of scope and scale that improve operating efficiency as well as customer service. In addition, the UPS culture is based on the owner/management philosophy through which...

  • Page 8
    ... in the United States to the global market. Net Income �in billions� �1� �2� �3� �4� �5� A significant aspect of UPS's culture that contributes to the strength of the company is the owner/management philosophy, in place since the 1920s. This means UPS is run by investors for...

  • Page 9
    ...charge to pension expense resulting from the consolidation of data collection systems. Also includes credits to income tax expense related to the resolution of various tax matters, the removal of a portion of the valuation allowance on certain deferred tax assets on net operating loss carry forwards...

  • Page 10
    TAIPEI, TAIPEI, TAIWAN TAIWAN 10:2� 10:2� A.M. A.M. Every minute of of every day, UPS Every minute every day, UPS delivers more packages around delivers more packages around the world than any other carrier. the world than any other carrier.

  • Page 11
    UPS has an extensive network across the globe. As a result, the company is the market leader in the United States and has a growing presence in all major international markets. In fact, every minute of every day, UPS delivers 9,800 packages.

  • Page 12
    ... by a number of factors, including excellent operations and network management, improving economies of scale that come with vibrant growth, an enhanced mix of express packages and heavy cargo, higher yields attributable to the value customers derive from our service and technology solutions, and an...

  • Page 13
    International Operating Profit (in billions) �1.0 �.80 �.60 .71 1.12 U.S. Domestic Operating Profit �in billions� �4 �3 �2 �1 �0 02 03 04 00 01 02 03 0� 3.93 3.62 3.58 �.40 �.20 �0 00 .28 .13 01 .32 Export �olume Global Small Package �olume (in billions of ...

  • Page 14
    ...used for large customers; expansion of the product portfolio with the addition of time-definite, guaranteed heavy airfreight service; and doubling the rate of technology integrations through which customers electronically access UPS shipping systems. In early 2005, prudent cost control measures were...

  • Page 15
    ...strong We believe expanding global economies, development of international markets by customers large and small, and direct-to-consumer shipping trends - driven by just-in-time inventory and online purchasing - offer growth opportunities for the small package business. Going forward, look for UPS to...

  • Page 16
    ... technology helps customers solve business process problems, which, in turn, allows them to manage their businesses better. This includes solutions that: n Enable businesses to manage multiple locations through one shipping system, n Provide full visibility of a customer's goods in the supply chain...

  • Page 17
    ... of international shipping for customers by moving multiple packages, going to multiple consignees, as one shipment with one customs clearance. The packages are then fed into the UPS network and shipped directly to the recipients. Whether it's small packages moving between NAFTA markets, air freight...

  • Page 18
    PRAGUE, PRAGUE, CZECH CZECH REPUBLIC REPUBLIC 9:24 9:24 P.M P.M . . When When it comes it comes to to managing managing global global supply supply chains, chains, timing timing is is everything. everything. UPS UPS synchronizes synchronizes the the world world of of commerce. commerce.

  • Page 19
    UPS is one of the world's largest providers of supply chain management services, operating more than 1,200 facilities in 175 countries.

  • Page 20
    ... latest acquisition, Menlo Worldwide Forwarding, was completed at the end of 2004 and added guaranteed, heavy air freight capabilities to the UPS portfolio of solutions. With the addition of Menlo, UPS can now offer expanded time-definite products, such as overnight, two-day, and deferred delivery...

  • Page 21
    ... service and reduce costs involved in the distribution of aftermarket parts. UPS designed a parts distribution system that provided complete visibility throughout the supply chain for dealers ordering parts. The solution reduced the number of shipments, improved on-time delivery and order tracking...

  • Page 22
    ... and practicing philanthropy. n We encourage community involvement and volunteerism by our employees. n We proactively seek solutions that limit the impact of our business on the environment. n Our sustainability report can be found at www.sustainability.ups.com. Employees: We respect and value the...

  • Page 23
    ...Award International Business Award Best Marketing Organization for the "UPS Delivers Synchronized Commerce" campaign National Retail Federation Foundation The UPS Store included in Customer Service Excellence 200�� Exemplary Practices in Retail report Parcel Shipping & Distribution Best Practice...

  • Page 24
    ... and Chief Executive Officer, Mark Controls Corporation Chair, Nominating and Corporate Governance Committee Compensation Committee Director since ���3 Victor A. Pelson Senior Advisor, UBS Securities LLC Chair, Compensation Committee Nominating and Corporate Governance Committee Director since...

  • Page 25
    ... and Chief Executive Officer Allen E. Hill Senior Vice President, General Counsel, and Corporate Secretary Kurt Kuehn Senior Vice President, Worldwide Sales and Marketing John McDevitt Senior Vice President, Global Transportation Services Lea N. Soupata Senior Vice President, Human Resources Robert...

  • Page 26
    ... related notes, Management's Discussion and Analysis of Financial Condition and Results of Operations, and other financial data appearing elsewhere in this report. 2004 2003 Years Ended December 31, 2002 2001 2000 Selected Income Statement Data Revenue: U.S. domestic package International package...

  • Page 27
    ... cashflows Notes to consolidated financial statements Price and dividend information Investor information 26 40 41 42 43 44 45 46 47 71 72 Certifications UPS has included as Exhibit 31 to its Annual Report on Form 10-K filed with the Securities and Exchange Commission certificates of the Chief...

  • Page 28
    ... Ended December 31, Change $ % Revenue (in millions): U.S. domestic package: Next Day Air Deferred Ground Total U.S. domestic package International package: Domestic Export Cargo Total International package Non-package: UPS Supply Chain Solutions Other Total Non-package Consolidated Average Daily...

  • Page 29
    ... Ended December 31, Change $ % Revenue (in millions): U.S. domestic package: Next Day Air Deferred Ground Total U.S. domestic package International package: Domestic Export Cargo Total International package Non-package: UPS Supply Chain Solutions Other Total Non-package Consolidated Average Daily...

  • Page 30
    ... is based on the U.S. Energy Department's Gulf Coast spot price for a gallon of kerosene-type jet fuel. Based on published rates, the average fuel surcharge applied to our air products during 2004 was 7.07%, compared with the average surcharge of 1.47% applied to both air and ground products in 2003...

  • Page 31
    .... Rates for international shipments originating in the United States (Worldwide Express, Worldwide Express Plus, UPS Worldwide Expedited and UPS International Standard service) increased an average of 3.5%. In January 2004, changes were made to the calculation of our fuel surcharge on international...

  • Page 32
    ... largely due to a reduction of flights in our air network in the Americas. Rates for international shipments originating in the United States (UPS Worldwide Express, UPS Worldwide Express Plus, UPS Worldwide Expedited and UPS Standard service) increased an average of 3.9%. Rate changes for shipments...

  • Page 33
    ... in our international package and non-package segments. Compensation and benefits increased by $1.588 billion, or 8.2%, for the year, largely due to increased payroll costs, increased health and welfare expense, and higher pension expense for our union pension plans. Stock-based compensation expense...

  • Page 34
    ... pension contributions to plan trusts in 2005 are approximately $723 million. In 2004, we received $610 million from our previously disclosed settlement with the Internal Revenue Service (IRS) primarily on tax matters related to excess value package insurance Net Income and Earnings Per Share...

  • Page 35
    ...UPS Next Day Air, UPS 2nd Day Air, UPS 3 Day Select, and UPS Ground. We also increased rates 2.9% for international shipments originating in the United States (Worldwide Express, Worldwide Express Plus, UPS Worldwide Expedited and UPS International Standard service). Other pricing changes include an...

  • Page 36
    ...-three now-dismissed lawsuits that sought to hold us liable for the collection of premiums for EV insurance in connection with package shipments since 1984. Based on state and federal tort, contract and statutory claims, these cases generally claimed that we failed to remit collected EV premiums to...

  • Page 37
    ...,000 employees employed under a national master agreement and various supplemental agreements with local unions affiliated with the International Brotherhood of Teamsters ("Teamsters"). These agreements run through July 31, 2008. The majority of our pilots are employed under a collective bargaining...

  • Page 38
    ... as forecasts. We adjust the fixed and floating interest rate mix of our interest rate sensitive assets and liabilities in response to changes in market conditions. Equity Price Risk We hold investments in various common equity securities that are subject to price risk, and for certain of these...

  • Page 39
    Credit Risk The forward contracts, swaps, and options previously discussed contain an element of risk that the counterparties may be unable to meet the terms of the agreements. However, we minimize such risk exposures for these instruments by limiting the counterparties to large banks and financial ...

  • Page 40
    ...Accounting for Pensions" and Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other than Pensions." These assumptions include discount rates, health care cost trend rates, inflation, rate of compensation increases, expected return on plan assets...

  • Page 41
    ... our overall effective income tax rate. We recognize deferred tax assets for items that will generate tax deductions or credits in future years. Realization of deferred tax assets requires sufficient future taxable income (subject to any carry-forward limitations) in the applicable jurisdictions. We...

  • Page 42
    ... of income, shareowners' equity and cashflows for the year ended December 31, 2004, has issued an attestation report on management's assessment of the Company's internal control over financial reporting. United Parcel Service, Inc. March 14, 2005 40 Management's Report on Internal Control...

  • Page 43
    ... Public Accounting Firm on Internal Control Over Financial Reporting Board of Directors and Shareowners United Parcel Service, Inc. Atlanta, Georgia We have audited management's assessment, included in the accompanying Management's Report on Internal Control Over Financial Reporting, that United...

  • Page 44
    ... Public Accounting Firm Board of Directors and Shareowners United Parcel Service, Inc. Atlanta, Georgia We have audited the accompanying consolidated balance sheets of United Parcel Service, Inc. and its subsidiaries as of December 31, 2004 and 2003, and the related consolidated statements of income...

  • Page 45
    ... share amounts) 2004 2003 ASSETS Current Assets: Cash & cash equivalents Marketable securities & short-term investments Accounts receivable, net Finance receivables, net Income tax receivable Deferred income taxes $ Other current assets Total Current Assets Property, Plant & Equipment - at cost...

  • Page 46
    ...Compensation and benefits Other Operating Profit Other Income and (Expense): Investment income Interest expense Gain on redemption of long-term debt Tax assessment reversal Income Before Income Taxes And Cumulative Effect of Change in Accounting Principle Income Taxes Income... UPS Annual Report 2004

  • Page 47
    ...Class B common stock 59 Balance at end of year 614 Additional Paid-In Capital Balance at beginning of year Stock award plans Common stock purchases Common stock issuances Balance at end of year Retained Earnings Balance at beginning of year Net income Dividends ($1.12, $0.92, and $0.76) Common stock...

  • Page 48
    ... benefits Deferred taxes, credits and other Stock award plans Tax assessment reversal Vacation policy change Restructuring charge and related expenses Loss (gain) on impairment or disposal of assets Other (gains) losses Changes in assets and liabilities, net of effect of acquisitions: Accounts...

  • Page 49
    ...in a charge to income when a market decline below cost is other than temporary. Revenue Recognition U.S. Domestic and International Package Operations - Revenue is recognized upon delivery of a letter or package. UPS Supply Chain Solutions - Freight forwarding revenue and the expense related to the...

  • Page 50
    ... market multiples were used to corroborate discounted cash flow results. We recorded a non-cash goodwill impairment charge of $72 million ($0.06 per diluted share) as of January 1, 2002, related to our Mail Technologies business. This charge was reported as Income Taxes Income taxes are accounted...

  • Page 51
    ...Compensation cost is also measured for the fair value of employees' purchase rights under our discounted stock purchase plan using the Black-Scholes option pricing model. The weighted average assumptions used, by year, and the calculated weighted average fair value of options and employees' purchase...

  • Page 52
    ...), "Share-Based Payment" ("FAS 123R"), which replaces FAS 123 and supercedes APB 25. FAS 123R requires all sharebased payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values, beginning with the first interim or annual...

  • Page 53
    ... losses in the preferred equity securities relate to securities issued by the Federal National Mortgage Association (FNMA) and the Federal Home Loan Mortgage Corporation (FHLMC), and are primarily due to changes in market interest rates. Due to the periodic interest rate adjustment features on these...

  • Page 54
    ...): 2004 2003 Customer receivable balances $ Less: Amounts due to client Net funds employed 191 (112) $ 79 $ $ 468 (195) 273 Vehicles Aircraft (including aircraft under capitalized leases) Land Buildings Leasehold improvements Plant equipment Technology equipment Equipment under operating...

  • Page 55
    ... for retirement benefits based on average compensation levels earned by employees prior to retirement. Benefits payable under this Plan are subject to maximum compensation limits and the annual benefit limits for a tax qualified defined benefit plan as prescribed by the Internal Revenue Service. The...

  • Page 56
    ...Assets The following table provides a reconciliation of the changes in the plans' assets as of September 30 (in millions): Pension Benefits 2004 2003 2004 Postretirement Medical Benefits 2003 Fair value of plan assets at October 1, prior year Actual return on plan assets Employer contributions Plan...

  • Page 57
    ...60.2% 28.5% 11.3% 100.0% Equity securities include UPS Class A shares of common stock in the amounts of $466 (4.5% of total plan assets) and $392 million (4.8% of total plan assets), as of September 30, 2004 and 2003, respectively. The UPS benefit plan committees establish investment guidelines and...

  • Page 58
    ... from plan trusts and corporate assets. Net Periodic Benefit Cost Information about net periodic benefit cost for the pension and postretirement benefit plans is as follows (in millions): Pension Benefits 2004 2003 2002 2004 Postretirement Medical Benefits 2003 2002 Net Periodic Cost: Service cost...

  • Page 59
    ... to multi-employer health and welfare plans were $761, $691, and $604 million during 2004, 2003, and 2002, respectively. We also sponsor a defined contribution plan for all employees not covered under collective bargaining agreements. The Company matches, in shares of UPS common stock, a portion of...

  • Page 60
    ... $110 million in par value of debt and capital lease obligations. Menlo Worldwide Forwarding is a global freight forwarder that provides a full suite of heavy air freight forwarding services, ocean services and international trade management, including customs brokerage. 58 UPS Annual Report 2004

  • Page 61
    ... costs related to employee severance, lease terminations, fixed asset impairments, and related items. Depending upon the nature of these costs, some of these items could result in charges to expense, while other items could result in adjustments to the purchase price allocation. We are in process...

  • Page 62
    ...The recorded value of aircraft subject to capital leases, which are included in Property, Plant and Equipment is as follows as of December 31 (in millions): 2004 2003 Aircraft Accumulated amortization $ $ 1,795 (257) 1,538 $ $ 1,474 (198) 1,276 (vii) The UPS Notes program involves the periodic...

  • Page 63
    ... annual principal payments due under our long-term debt, and the aggregate amounts expected to be spent for purchase commitments (in millions). Capitalized Leases Operating Leases Debt Principal Purchase Commitments 2005 2006 2007 2008 2009 After 2009 Total Less: imputed interest Present value...

  • Page 64
    ... of these cases will not have a material adverse effect on our financial condition, results of operations, or liquidity. We participate in a number of trustee-managed multiemployer pension and health and welfare plans for employees covered under collective bargaining agreements. Several factors...

  • Page 65
    ... annually by the Compensation Committee of the UPS Board of Directors. This Committee, in its sole discretion, determines the total award, which consists of The following is an analysis of options to purchase shares of Class A common stock issued and outstanding: 2004 Weighted Average Price Shares...

  • Page 66
    ... costing methods. Unallocated assets are comprised primarily of cash, marketable securities, and shortterm investments. Discounted Employee Stock Purchase Plan We maintain an employee stock purchase plan for all eligible employees. Under the plan, shares of UPS Class A common stock may be purchased...

  • Page 67
    ... UPS Capital and First International Bank. The program was designed to facilitate business growth, streamline management decisionmaking, reduce the cost structure, and provide higher levels of service to our customers. Costs of the program included employee severance costs, asset impairments, costs...

  • Page 68
    ... and generate taxable income before such carryforwards expire. Property, plant and equipment Goodwill and intangible assets Pension plans Other Gross deferred tax liabilities Other postretirement benefits Loss carryforwards (non-U.S. and state) Insurance reserves Vacation pay accrual Other Gross...

  • Page 69
    ...: Net income before the cumulative effect of change in accounting principle Denominator: Weighted average shares Management incentive awards Deferred compensation obligations Denominator for basic earnings per share Effect of dilutive securities: Management incentive awards Stock option plans...

  • Page 70
    ... from rising fuel and energy prices. The net fair value of such contracts subject to price risk, excluding the underlying exposures, as of December 31, 2004 and 2003 was an asset of $101 and $30 million, respectively. We have designated and account for these contracts as cash flow hedges, and...

  • Page 71
    ... related to cash flow hedges that are currently deferred in OCI are expected to be reclassified to income over the 12 month period ending December 31, 2005. The actual amounts that will be reclassified to income over the next 12 months will vary from this amount as a result of changes in market...

  • Page 72
    ... 2003 net income reflects the gain on sale of Aviation Technologies ($15 million after-tax, $0.01 per diluted share) and the credit to tax expense from a favorable ruling on the tax treatment of jet engine maintenance costs ($22 million, $0.02 per diluted share). Fourth quarter 2003 net income was...

  • Page 73
    ...common stock is convertible into one share of our Class B common stock. The following is a summary of our Class B common stock price activity and dividend information for 2004 and 2003. Our Class B common stock is listed on the New York Stock Exchange under the symbol "UPS." High Low Close Dividends...

  • Page 74
    ... a comprehensive Web site at www.shareholder.com/ups and has an active Investor Relations program. You can contact the Investor Relations Department at: UPS 55 Glenlake Parkway, NE Atlanta, GA 30328 800-877-1503 or 404-828-6059 Direct Stock Purchase and Dividend Reinvestment Plan The Mellon...

  • Page 75
    ... Registrar Account information and transactions are managed by Mellon Investor Services LLC. Please direct notices of address changes or questions regarding account status, stock transfers, lost certificates, or dividend payments to the transfer agent at the address below. United Parcel Service, Inc...

  • Page 76
    55 Glenlake Parkway, NE Altanta, GA 30328 www.ups.com