UPS 2005 Annual Report Download - page 41

In December 2003, we redeemed $300 million in cash-settled convertible senior notes at a price of 102.703,
and also terminated 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.
Net Income and Earnings Per Share
2005 compared to 2004
Net income for 2005 was $3.870 billion, a 16.1% increase from the $3.333 billion achieved in 2004,
resulting in an 18.4% increase in diluted earnings per share to $3.47 in 2005 from $2.93 in 2004. The increase in
net income for 2005 was largely due to higher operating profit for both our U.S. Domestic and International
Package segments. Net income was adversely impacted by an increase in our effective tax rate to 36.3% in 2005
from 32.3% in 2004. The lower tax rate in 2004 was 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 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.
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 earnings per share to $2.93 in 2004 from $2.55 in 2003. Net income in 2004 was impacted by
the aircraft impairment, pension charge, and tax items discussed previously.
Net income in 2003 was favorably impacted by the $14 million 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.
Liquidity and Capital Resources
Net Cash From Operating Activities
Net cash provided by operating activities was $5.793, $5.331, and $4.576 billion in 2005, 2004, and 2003,
respectively. The increase in 2005 operating cash flows compared with 2004 was primarily due to higher net
income, but partially offset by higher pension and retirement plan fundings. In 2005, we funded $995 million to
our pension and postretirement benefit plans as compared to $585 million in 2004. As discussed in Note 5 to the
consolidated financial statements, pension and postretirement health contributions to plan trusts in 2006 are
projected to be approximately $828 million. In 2005, we received a $374 million tax refund associated with the
1985-1990 settlement with the Internal Revenue Service (“IRS”) reached previously, primarily on tax matters
related to excess value package insurance. In 2004, we received $610 million from a tax settlement with the IRS
for tax years 1983-84 and 1991-98.
On November 18, 2005, we announced a rate increase and a change in the fuel surcharge that took effect on
January 2, 2006. We increased rates 5.5% on UPS Next Day Air, UPS 2nd Day Air, and UPS 3 Day Select, and
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