UPS 2007 Annual Report Download - page 43

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Operating Expenses
2007 compared to 2006
Consolidated operating expenses increased by $8.202 billion, or 20.0%, in 2007 compared with 2006.
Currency fluctuations in our International Package and Supply Chain & Freight segments resulted in
consolidated operating expenses increasing by $471 million for the year.
Compensation and benefits expense increased by $7.324 billion for the year, and was impacted by several
items including the charge for the withdrawal from the Central States Pension Fund, higher wage rates in the
union workforce, increased stock-based compensation, higher expense for union pension and welfare programs,
the SVSO charge, and the restructuring charge in our Supply Chain & Freight business in France. These
increases were slightly offset by lower workers compensation expense.
Our national master agreement with the International Brotherhood of Teamsters (“Teamsters”) allowed us,
upon ratification, to withdraw employees from the Central States Pension Fund and to establish a jointly trusteed
single-employer plan for this group. Upon ratification of the contract in December 2007 and our withdrawal from
the Central States Pension Fund, we recorded a pre-tax $6.100 billion charge to establish our withdrawal liability,
and made a December 2007 payment in the same amount to the Central States Pension Fund to satisfy this
liability.
In December 2006, we offered a special voluntary separation opportunity (“SVSO”) to approximately 640
employees who work in non-operating functions. This program was established to improve the efficiency of
non-operating processes by eliminating duplication and sharing expertise across the company. The SVSO ended
in February 2007, and 195, or 30% of eligible employees, accepted the offer. As a result, we recorded a charge to
expense of approximately $68 million in the first quarter of 2007, to reflect the cash payout and the acceleration
of stock compensation and certain retiree healthcare benefits under the SVSO program.
In the third quarter of 2007, we initiated a restructuring plan for our forwarding and logistics operations in
France. The objective of this restructuring plan was to reduce our forwarding and logistics cost structure and
focus on profitable revenue growth in the Europe region. The restructuring principally consisted of an
employment reduction program, which was ratified by our company’s trade union representatives in France in
July 2007. Employees participating in this program are entitled to severance benefits, including certain bonuses
for employees participating in the voluntary termination phase. These severance benefits are formula-driven and
are in accordance with French statutory laws as well as the applicable collective bargaining agreements. We
recorded a restructuring charge of $46 million ($42 million related to severance costs, and thus recorded in
compensation and benefits expense) in 2007 related to this program.
Stock-based and other management incentive compensation expense increased $113 million, or 17.7%,
during 2007, primarily due to 2007 awards of stock options, restricted performance units, and restricted stock
units. Pension and healthcare expense increased during the year, largely due to higher expense associated with
plans covering union employees, but was somewhat offset by lower expense for the UPS-sponsored pension
benefits (See Note 5 to the consolidated financial statements).
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, with
certain exceptions for first time participants in the program. The restricted stock units granted each year under
this program generally have a five-year graded vesting period, with approximately 20% of the total restricted
stock unit award vesting at each anniversary date of the grant. The other half of the Management Incentive
Award granted each year is in the form of cash and unrestricted shares of Class A common stock and is 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. As discussed in Note 1 to the consolidated financial
statements, we recognize the expense associated with restricted stock unit awards over the appropriate vesting
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