UPS 2004 Annual Report Download - page 34

32 UPS Annual Report 2004
Management’s discussion and analysis of financial condition and results of operations
Investment Income/Interest Expense
2004 compared to 2003
Investment income increased by $64 million during the year,
primarily due to a $58 million impairment charge recognized
during 2003. We periodically review our investments for indica-
tions of other than temporary impairment considering many
factors, including the extent and duration to which a security’s
fair value has been less than its cost, overall economic and mar-
ket conditions, and the financial condition and specific prospects
for the issuer. During the first quarter of 2003, after considering
the continued decline in the U.S. equity markets, we recognized
an impairment charge of $58 million, primarily related to our
investment in S&P 500 equity portfolios. Investment income
also increased in 2004 due to higher interest rates earned on
cash balances, but was somewhat offset by increased equity-
method losses on certain investment partnerships.
The $28 million increase in interest expense during 2004 was
primarily due to the impact of higher interest rates on variable
rate debt and certain interest rate swaps, as well as the impact of
currency exchange rates and imputed interest expense associated
with certain investment partnerships. The impact of higher inter-
est rates was somewhat offset by lower average debt balances
outstanding in 2004 compared to 2003.
In December 2003, we redeemed $300 million in cash-settled
convertible senior notes at a price of 102.703, and also termi-
nated the swap transaction associated with the notes. The
redemption amount paid was lower than the amount recorded
for the fair value of the notes at the time of redemption, which,
along with the cash settlement received on the swap, resulted in
a $28 million non-operating gain recorded in 2003 results.
2003 compared to 2002
The decrease in investment income of $45 million in 2003 is
primarily due to the $58 million impairment charge recognized
during the first quarter of 2003. The $52 million decline in inter-
est expense in 2003 was primarily the result of lower commercial
paper balances outstanding, lower interest rates on variable rate
debt, and lower floating rates on interest rate swaps.
Net Income and Earnings Per Share
2004 compared to 2003
2004 net income was $3.333 billion, a 15.0% increase from the
$2.898 billion in 2003, resulting in an increase in diluted earn-
ings per share to $2.93 in 2004 from $2.55 in 2003. Net income
in 2004 was adversely impacted by a $70 million after-tax
impairment charge ($0.06 per diluted share) on Boeing 727,
747, and McDonnell Douglas DC-8 aircraft, engines, and parts,
as well as a $40 million after-tax charge ($0.04 per diluted
share) to pension expense resulting from the consolidation of
data systems used to collect and accumulate plan participant
data. Net income was positively impacted by credits to income
tax expense totaling $142 million ($0.13 per diluted share)
related to various items, including the resolution of certain tax
matters, the removal of a portion of the valuation allowance on
certain deferred tax assets on net operating loss carryforwards,
and an adjustment for identified tax contingency items.
Net income in 2003 was favorably impacted by the $14 mil-
lion after-tax gain ($0.01 per diluted share) on the sale of Mail
Technologies, the $15 million after-tax gain ($0.01 per diluted
share) on the sale of Aviation Technologies, and the $18 million
after-tax gain ($0.02 per diluted share) recognized upon
redemption of our $300 million cash-settled senior convertible
notes. Net income in 2003 was adversely impacted by the $37
million after-tax investment impairment charge ($0.03 per
diluted share) described previously. Net income in 2003 was
also favorably impacted by reductions in income tax expense of
$116 million ($0.10 per diluted share) due to the resolution of
various tax issues with the IRS, a favorable court ruling on the
tax treatment of jet engine maintenance costs, and a lower
effective state tax rate.
2003 compared to 2002
Net income for 2003 was $2.898 billion, a decrease of $284 mil-
lion from the $3.182 billion achieved in 2002, resulting in a
decrease in diluted earnings per share to $2.55 in 2003 from
$2.81 in 2002. Net income in 2003 was affected by the items
noted above. Net income in 2002 was favorably impacted by a
$776 million after-tax ($0.68 per diluted share) benefit resulting
from the reversal of a portion of the previously established tax
assessment liability, and by $121 million after-tax ($0.11 per
diluted share) from the credit to expense as a result of the
change in our vacation policy for non-union employees. Net
income in 2002 was adversely impacted by $65 million after-tax
($0.06 per diluted share) due to the restructuring charge and
related expenses and by $72 million after-tax ($0.06 per diluted
share) due to the FAS 142 cumulative expense adjustment.
Liquidity and Capital Resources
Net Cash From Operating Activities
Net cash provided by operating activities was $5.331, $4.576,
and $5.688 billion in 2004, 2003 and 2002, respectively. The
increase in 2004 operating cash flows compared with 2003 was
primarily due to higher net income, decreased pension and retire-
ment plan fundings, and cash received upon the resolution of
various tax matters. In 2004, we funded $450 million to our pen-
sion plans as compared to $1.136 billion in 2003. As discussed in
Note 5 to the consolidated financial statements, projected pen-
sion 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) pri-
marily on tax matters related to excess value package insurance