UPS 2005 Annual Report Download - page 40

2004 compared to 2003
Consolidated operating expenses increased by $2.553 billion, or 8.8%, for the year, $311 million of which
was due to currency fluctuations in our International Package and Supply Chain & Freight segments.
Compensation and benefits increased by $1.572 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 increased $167 million, or 23.2%, during the year, primarily as a result of increased
Management Incentive Awards expense and adopting the measurement provisions of FAS 123 prospectively
beginning with 2003 stock-based compensation awards.
Other operating expenses increased by $981 million, or 10.0%, for the year, largely due to a 34.9% increase
in fuel expense and a 12.6% increase in purchased transportation, but were somewhat offset by a decline in
depreciation and amortization expense. The increase in fuel expense was primarily due to higher prices for Jet-A,
diesel, and unleaded gasoline, in addition to somewhat higher fuel usage and lower hedging gains. The increase
in purchased transportation expense was influenced by the impact of currency, higher fuel prices, and volume
growth in our international package business. The decline in depreciation and amortization for the year was
impacted by lower depreciation expense on aircraft engines, largely due to the retirement of some older aircraft.
The increase in repairs and maintenance expense was affected by increased expense on vehicle parts and airframe
and engine maintenance. The increase in other occupancy expense was largely related to higher rent expense, but
somewhat offset by lower real estate taxes. The increase in other expenses was affected by the $110 million
impairment of aircraft, engines, and parts, as well as the $63 million pension charge discussed previously, in
addition to higher advertising costs.
Investment Income and Interest Expense
2005 compared to 2004
The increase in investment income of $22 million during the year was primarily due to higher average
yields earned caused by the increasing short-term interest rates in the United States, but partially offset by a
lower average balance of interest-earning investments, increased equity-method losses on certain investment
partnerships, and an investment impairment charge on certain available-for-sale securities. We periodically
review our investments for indications 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 market
conditions, and the financial condition and specific prospects for the issuer. After considering these factors, we
recorded an impairment charge of $16 million in the fourth quarter of 2005 related to several variable rate
preferred securities issued by the Federal National Mortgage Association (FNMA) and the Federal Home Loan
Mortgage Corporation (FHLMC).
The $23 million increase in interest expense for the year was primarily due to higher floating interest rates
on variable rate debt and interest rate swaps, as well as higher imputed interest expense associated with certain
investment partnerships.
2004 compared to 2003
Investment income increased by $64 million during the year, primarily due to a $58 million impairment
charge recognized during 2003. 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 interest rates was
somewhat offset by lower average debt balances outstanding in 2004 compared to 2003.
25