UPS 2006 Annual Report Download - page 45

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due to favorable developments with certain U.S. Federal tax contingency matters involving non-U.S. operations.
Diluted earnings per share has increased at a faster rate than the growth in net income due to the reduction in
shares outstanding as a result of our ongoing share repurchase program. The increase in net income for 2006 was
largely due to higher operating profits for both our U.S. Domestic and International Package segments.
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.
Liquidity and Capital Resources
Net Cash From Operating Activities
Net cash provided by operating activities was $5.589, $5.793, and $5.331 billion in 2006, 2005, and 2004,
respectively. The decrease in 2006 operating cash flows compared with 2005 was primarily due to higher pension
and retirement plan fundings, but partially offset by increased net income. In 2006, we funded $1.625 billion to
our pension and postretirement benefit plans as compared to $995 million in 2005. As discussed in Note 5 to the
consolidated financial statements, pension and postretirement health contributions to plan trusts in 2007 are
projected to be approximately $581 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. Additionally, we expect to pay a total of $69 million between 2007 and 2008
related to employees who accepted a recently-announced special voluntary separation opportunity, which is
discussed further in Note 16 to the consolidated financial statements.
On November 17, 2006, we announced a rate increase and a change in the fuel surcharge that took effect on
January 1, 2007. We increased the base rates 6.9% on UPS Next Day Air, UPS 2nd Day Air, and UPS 3 Day
Select, and 4.9% on UPS Ground. We also increased the base rates 6.9% for international shipments originating
in the United States (Worldwide Express, Worldwide Express Plus, UPS Worldwide Expedited and UPS
International Standard service). We increased our Ground Hundredweight rates by an average of 5.9%. Other
pricing changes included a $0.10 increase in the residential surcharge, and a $0.75 increase in the charge for
undeliverable packages after three delivery attempts. These rate changes are customary, and are consistent with
previous years’ rate increases. Additionally, in January 2007 we will modify the fuel surcharge on domestic and
U.S.-origin international air services by reducing by 2% the index used to determine the fuel surcharge. The UPS
Ground fuel surcharge continues to fluctuate based on the U.S. Energy Department’s On-Highway Diesel Fuel
Price. Rate changes for shipments originating outside the U.S. are made throughout the year and vary by
geographic market.
Net Cash Used In Investing Activities
Net cash used in investing activities was $2.340 billion, $975 million, and $3.638 billion in 2006, 2005, and
2004, respectively. The increased cash used in 2006 compared with 2005 was primarily due to increased capital
expenditures and fewer net sales of marketable securities and short-term investments. During 2006, we
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