UPS 2005 Annual Report Download - page 39

During the second quarter of 2003, we sold our Mail Technologies business unit in a transaction that
increased net income by $14 million, or $0.01 per diluted share. The gain consisted of a pre-tax loss of $24
million recorded in other operating expenses within the Supply Chain & Freight segment, and a tax benefit of
$38 million recognized in conjunction with the sale. The tax benefit exceeded the pre-tax loss from this sale
primarily because the goodwill impairment charge we previously recorded for the Mail Technologies business
unit was not deductible for income tax purposes. Consequently, our tax basis was greater than our book basis,
thus producing the tax benefit described above. The operating results of the Mail Technologies unit were
previously included in our Supply Chain & Freight segment, and were not material to our consolidated operating
results in any of the periods presented.
Operating Expenses
2005 compared to 2004
Consolidated operating expenses increased by $4.845 billion, or 15.3%, for the year, and were significantly
impacted by the acquisitions of Menlo Worldwide Forwarding and Overnite. Operating expenses also increased
$56 million for the year due to the impact on revenue and expense of currency fluctuations (net of hedging
activity) in our International Package and Supply Chain & Freight segments, and increased $55 million for the
year due to currency repatriation losses in our International Package segment.
Compensation and benefits increased by $1.694 billion, or 8.1%, for the year, largely due to the acquisitions
of Menlo Worldwide Forwarding and Overnite, as well as increased health and welfare benefit costs and higher
pension expense for our union benefit plans. Stock-based and other management incentive compensation expense
decreased $297 million, or 33.4%, in the year, due to a change in our Management Incentive Awards program
implemented in 2005, described in the next paragraph, which was partially offset by the impact of prospectively
adopting the measurement provisions of FAS 123 beginning with 2003 stock-based compensation awards.
During the first quarter of 2005, we modified our Management Incentive Awards program under our
Incentive Compensation Plan to provide that half of the annual award be made in restricted stock units (“RSUs”).
The RSUs granted in November 2005 under this program have a five-year graded vesting period, with
approximately 20% of the total RSU award vesting at each anniversary date of the grant. The other half of the
award granted in November 2005 was in the form of cash and unrestricted shares of Class A common stock and
was fully vested at the time of grant. Previous awards under the Management Incentive Awards program were
made in common stock that was fully vested in the year of grant. This change had the effect of lowering 2005
expense. As a result, 2005 expense for our Management Incentive Awards program (reported in operating
expenses under “compensation and benefits”), including the RSUs, decreased $334 million ($213 million after-
tax, or $0.19 per diluted share) compared with 2004.
Other operating expenses increased by $3.151 billion, or 29.3%, for the year, largely due to the Menlo
Worldwide Forwarding and Overnite acquisitions, as well as increases in fuel expense and purchased
transportation. The 47.2% increase in fuel expense for the year was impacted by higher prices for jet-A, diesel
and unleaded gasoline, as well as higher fuel usage, but was partially mitigated with hedging gains. The 96.7%
increase in purchased transportation was primarily due to the Menlo Worldwide Forwarding acquisition, but was
also influenced by volume growth in our International Package business and higher fuel prices. The 9.2%
increase in repairs and maintenance was largely due to higher expense on vehicle parts (partially affected by the
Overnite acquisition), airframe and aircraft engine maintenance. The 6.5% increase in depreciation and
amortization for the year was impacted by higher depreciation expense on buildings (largely due to acquisitions),
aircraft, and capitalized software. The 16.0% increase in other occupancy expense was largely due to higher
facilities rent expense in our Supply Chain & Freight segment, which was impacted by the Menlo Worldwide
Forwarding acquisition, and increased utilities expense. The 4.5% increase in other expenses was primarily due
to the Overnite acquisition, but partially offset by the absence in 2005 of the $110 million aircraft impairment
charge that we incurred in 2004.
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