UPS 2005 Annual Report Download - page 38

The improvement in operating profit for our International Package operations was $417 million, or 57.0%,
for the year, $54 million of which was due to favorable currency fluctuations. The remaining increase in
operating profit was primarily due to the solid export volume growth and revenue per piece increases described
previously, and a strong 380 basis point increase in operating margin primarily due to better network utilization.
International operating profit was adversely affected by aircraft impairment charges of $19 million in 2004,
compared to a $6 million charge in 2003.
Supply Chain & Freight Operations
2005 compared to 2004
Supply Chain & Freight revenue increased $3.181 billion, or 113.1%, for the year. Forwarding services and
logistics revenue increased by $2.358 billion during the year, largely due to the acquisition of Menlo Worldwide
Forwarding in December 2004. The growth in our existing forwarding services and logistics businesses
(excluding Menlo Worldwide Forwarding) was driven by solid growth in our ocean and ground forwarding
operations. Revenue increased by $17 million during the year due to favorable currency fluctuations. Overall
growth continues to benefit from the expansion of our freight forwarding network throughout the world, as well
as the increase in global trade and the increased outsourcing of manufacturing and distribution.
During the third quarter of 2005, we completed our acquisition of Overnite Corp., now known as UPS
Freight, which offers a variety of less-than-truckload (LTL) and truckload services to customers in North
America. Overnite’s results have been included in the Supply Chain & Freight reporting segment since the
August 5, 2005 acquisition date. Overnite generally reported improvements in its operating performance
measures in the post-acquisition period versus the same period a year ago when it was not a part of UPS,
including improvements in average daily LTL shipments and average LTL revenue per LTL hundredweight.
The other businesses within Supply Chain & Freight, which include our retail franchising business, our mail
and consulting services, and our financial business, increased revenue by 6.0% during the year. This revenue
growth was primarily due to increased revenue at our mail and financial services units.
Operating profit for the Supply Chain & Freight segment increased by $18 million, or 13.0%, for the year,
largely due to the operating profits generated by Overnite. Operating profit and margin were negatively affected
by operating losses incurred in the acquired Menlo Worldwide Forwarding operations, as well as costs incurred
in integrating this business into our existing forwarding services business. Currency fluctuations positively
affected operating profit by $4 million during the year. Operating profit also was favorably impacted by $15
million due to a change in our Management Incentive Awards program (discussed below in “Operating
Expenses”).
2004 compared to 2003
Supply Chain & Freight revenue increased $299 million, or 11.9%, for the year. Freight services and
logistics revenue increased by 11.9% during the year, with strong growth in our air and ground freight
forwarding businesses, as well as our logistics business. The acquisition of Menlo Worldwide Forwarding, which
was completed in December 2004, increased freight services and logistics revenue by $33 million. Favorable
currency fluctuations provided $73 million of the increase in revenue for the year. The other businesses within
Supply Chain & Freight, which includes our retail franchising business, our mail and consulting services, and our
financial business, increased revenue by 11.9% for the year, largely due to strong double-digit franchise and
royalty revenue growth at our retail franchising business resulting from an expanding store base.
Supply Chain & Freight operating profit increased $82 million, or 146.4%, and operating margin increased
by 270 basis points for the year, primarily due to improved results from our financial business (largely due to a
lower loan loss provision), and our mail services business, which was affected in 2003 by the sale of our Mail
Technologies business unit as described in the next paragraph. Our retail franchising business also experienced
profit growth, due to the increased franchise and royalty revenue noted previously. These increases were partially
offset by somewhat lower profits at our freight services and logistics operations.
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