UPS 2007 Annual Report Download - page 46

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Net Income and Earnings Per Share
2007 compared to 2006
Net income for 2007 was $382 million, an 90.9% decrease from the $4.202 billion achieved in 2006,
resulting in an 90.7% decrease in diluted earnings per share to $0.36 in 2007 from $3.86 in 2006. This decrease
in net income was largely due to the after-tax $3.772 billion charge recorded to reflect our withdrawal from the
Central States Pension Fund. Additionally, 2007 net income was adversely impacted by $31 million as a result of
the restructuring charge in our France Supply Chain & Freight business, $141 million as a result of the aircraft
impairment charge, and $43 million as a result of the SVSO charge. These items were partially offset by the
improved results in our International Package and Supply Chain & Freight segments.
The reduction in basic and diluted earnings per share were largely due to the pension withdrawal, aircraft
impairment, France restructuring, and SVSO charges noted above. These items reduced basic and diluted
earnings per share by $3.77 and $3.75 in 2007. Basic and diluted earnings per share benefited from a reduction in
outstanding shares in 2007 compared with 2006, due to our ongoing share repurchase program.
2006 compared to 2005
Net income for 2006 was $4.202 billion, an 8.6% increase from the $3.870 billion achieved in 2005,
resulting in a 11.2% increase in diluted earnings per share to $3.86 in 2006 from $3.47 in 2005. Net income in
2006 benefited from a $52 million reduction in income tax expense ($0.05 impact to diluted earnings per share)
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.
Liquidity and Capital Resources
Operating Activities
Net cash provided by operating activities was $1.123, $5.589, and $5.793 billion in 2007, 2006, and 2005,
respectively. The decrease in 2007 operating cash flows compared with 2006 and 2005 was primarily due to the
$6.100 billion payment made to withdraw from the Central States Pension Fund in 2007. This was partially offset
by reduced 2007 fundings to our management pension and postretirement benefit plans. In 2007, we funded $687
million to our pension and postretirement benefit plans as compared to $1.625 billion in 2006 and $995 million
in 2005. As discussed in Note 5 to the consolidated financial statements, pension and postretirement health
contributions to plan trusts in 2008 are projected to be approximately $133 million.
The amount of U.S. federal estimated income tax payments was lower in 2007 compared with 2006 and
2005, due to the deductibility of the pension withdrawal payment for income tax purposes. Additionally, in the
first quarter of 2008, we received an $850 million U.S. federal tax refund due to 2007 overpayments of our
estimated tax liability. 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.
Additionally, we paid approximately $35 million in 2007 to employees who accepted the SVSO offer, and
we expect to pay approximately $28 million in the first quarter of 2008 related to this program.
On November 9, 2007, we announced a rate increase and a change in the fuel surcharge that took effect on
December 31, 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). Other pricing changes included a $0.10 increase in the residential surcharge, and
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