UPS 2006 Annual Report Download - page 42

In an effort to rationalize our cost structure and focus on profitable revenue growth, we initiated a
restructuring plan for our forwarding and logistics operations in the fourth quarter of 2006. This restructuring
plan is expected to generate efficiencies resulting in improved operating profits by further integrating all of our
transportation services to better serve our customers. This restructuring involves plans to reduce non-operating
expenses by approximately 20%, including a reduction in non-operating staff of approximately 1,400 people. As
of December 31, 2006, $12 million in costs have been accrued related to employee severance.
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 $2.383 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 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 0.3% 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”).
Operating Expenses
2006 compared to 2005
Consolidated operating expenses increased by $4.474 billion, or 12.3%, for the year, and were significantly
impacted by the acquisitions of Overnite, Stolica, and Lynx. Currency fluctuations in our International Package
and Supply Chain & Freight segments resulted in operating expenses increasing by $84 million for the year.
Compensation and benefits increased by $1.904 billion, or 8.5%, for the year, largely due to the acquisitions
mentioned above, as well as increased health and welfare benefit costs and higher pension expense. These
increases were partially offset by the decline in workers compensation expense, as previously discussed.
Excluding the effect of acquisitions, compensation and benefits expense increased 5.1% for the year. Stock-based
and other management incentive compensation expense increased $49 million, or 8.0% in 2006, due to the
expensing of restricted stock units granted in the fourth quarter of 2005, the impact of a new grant of stock
options and restricted performance units in the second quarter of 2006, and the impact of adopting the non-
substantive vesting period approach of FAS 123R (discussed further in Note 1 to the consolidated financial
statements). These grants were partially offset by lower accruals for our Management Incentive Awards program
in 2006.
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