UPS 2008 Annual Report Download - page 39

Fund. Partially offsetting this was a $216 million increase in expense for UPS-sponsored pension plans in the
U.S., which was impacted by expense recognition now being required for the new UPS IBT Pension Plan.
Non-pension benefits expense increased largely due to higher employee health and welfare program costs, which
is impacted by medical cost inflation. Employee payroll costs increased due to contractual wage increases for our
union employees and normal merit increases for our non-union employees. Compensation and benefits expense
also declined due to the absence in 2008 of the SVSO and France restructuring charges, which had increased
compensation and benefits expense by $68 and $42 million in 2007, respectively.
The 3.2% increase in repairs and maintenance was largely due to increased aircraft maintenance, somewhat
offset by reduced vehicle maintenance expense. The 4.0% increase in depreciation and amortization was
influenced by several factors, including higher depreciation expense on aircraft and vehicles resulting from new
deliveries, but partially offset by reduced amortization expense on capitalized software resulting from a decrease
in software development projects. The 11.0% increase in purchased transportation was driven by a combination
of higher volume in our international package and forwarding businesses, the impact of currency exchange rates,
and increased fuel surcharge rates charged to us by third-party carriers. The 39.0% increase in fuel expense was
impacted by higher prices for jet-A fuel, diesel, and unleaded gasoline as well as lower hedging gains. The 7.2%
increase in other occupancy expense was influenced by higher electricity and natural gas costs, as well as higher
rent and property tax expense. During the fourth quarter of 2008, declining energy prices impacted costs such as
purchased transportation, which decreased $132 million, or 7.6%, and fuel, which decreased $118 million, or
12.7%, compared with the fourth quarter of 2007.
Other expenses increased 14.9% for the year primarily due to goodwill and intangible asset impairment
charges. In addition, we also experienced increased expenses for leased transportation equipment, data
processing, advertising, professional services, and bad debts. These factors were partially offset by the absence in
2008 of a $221 million aircraft impairment charge recorded in 2007.
We test our goodwill for impairment annually, as of October 1st, on a reporting unit basis in accordance with
FASB Statement No. 142 “Goodwill and Other Intangible Assets” (“FAS 142”). Our reporting units are
comprised of the Europe, Asia, and Americas reporting units in the International Package reporting segment, and
the Forwarding & Logistics, UPS Freight, MBE / UPS Store, and UPS Capital reporting units in the Supply
Chain & Freight reporting segment. The impairment test involves a two-step process. First, a comparison of the
fair value of the applicable reporting unit with the aggregate carrying values, including goodwill, is performed.
We primarily determine the fair value of our reporting units using a discounted cash flow model, and supplement
this with observable valuation multiples for comparable companies, as applicable. If the carrying amount of a
reporting unit exceeds the reporting unit’s fair value, we perform the second step of the goodwill impairment test
to determine the amount of impairment loss. The second step includes comparing the implied fair value of the
affected reporting unit’s goodwill with the carrying value of that goodwill.
In the fourth quarter of 2008, we completed our annual goodwill impairment testing and determined that our
UPS Freight reporting unit, which was formed through the acquisition of Overnite Corporation in 2005, had a
goodwill impairment of $548 million. This impairment charge resulted from several factors, including a lower
cash flow forecast due to a longer estimated economic recovery time for the LTL sector, and significant
deterioration in equity valuations for other similar LTL industry participants. At the time of acquisition of
Overnite Corporation, LTL equity valuations were higher and the economy was significantly stronger. We
invested in operational improvements and technology upgrades to enhance service and performance, as well as
expand service offerings. However, this process took longer than initially anticipated, and thus financial results
have been below our expectations. Additionally, the LTL sector in 2008 has been adversely impacted by the
economic recession in the U.S., lower industrial production and retail sales, volatile fuel prices, and significant
levels of price-based competition. By the fourth quarter of 2008, the combination of these internal and external
factors reduced our near term expectations for this unit, leading to the goodwill impairment charge. None of the
other reporting units incurred an impairment of goodwill in 2008, nor did we have any goodwill impairment
charges in 2007 or 2006.
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