UPS 2008 Annual Report Download - page 41

July 2007. Employees participating in this program were entitled to severance benefits, including certain bonuses
for employees participating in the voluntary termination phase. These severance benefits were formula-driven
and were 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 a $59 million decrease in expense for the
UPS-sponsored pension plans in the U.S.
The expense associated with our self-insurance accruals for workers’ compensation claims, automotive
liability and general business liabilities was $46 million lower in 2007 compared with 2006. Insurance reserves
are established for estimates of the loss that we will ultimately incur on reported claims, as well as estimates of
claims that have been incurred but not yet reported. Recorded balances are based on reserve levels, which
incorporate historical loss experience and judgments about the present and expected levels of cost per claim. The
lower expense reflects favorable claims experience resulting from several company initiatives put into place over
the last several years and other factors, including initiatives to decrease accident frequencies, improved oversight
and management of claims, improved trends in health care costs, and favorable state legislative reforms.
The 0.2% increase in repairs and maintenance reflects higher maintenance expense on aircraft, largely offset
by lower maintenance expense on vehicles and buildings. The 0.2% decrease in depreciation and amortization
was influenced by several factors, including lower depreciation expense on aircraft and amortization expense on
capitalized software, partially offset by increased depreciation expense on vehicles. The 7.4% increase in
purchased transportation was impacted by volume growth in our International Package business and currency
fluctuations, as well as growth in our international forwarding business. The 12.0% increase in fuel expense for
the year was primarily due to higher prices for jet and diesel fuel, as well as higher usage, but was partially
mitigated by hedging gains. Other occupancy expense increased 2.1% for the year, and was affected by increased
rent expense and property taxes, but partially offset by lower utilities expense. The 3.0% increase in other
expenses for the year was affected by a $221 million aircraft impairment charge, discussed further below, but
partially offset with cost controls in several areas. The comparison in other expenses was also affected by an $87
million charge to settle class action litigation in 2006.
As a result of business changes that occurred in the first quarter of 2007, including capacity-optimization
programs in our domestic and international air freight forwarding business as well as changes to our aircraft
orders and planned delivery dates, we began a review process of our aircraft fleet types to ensure that we
maintain the optimum mix of aircraft types to service our international and domestic package businesses. The
review was completed in March 2007, and based on the results of our evaluation we accelerated the planned
retirement of certain Boeing 727 and 747 aircraft, and recognized an impairment and obsolescence charge of
$221 million for the aircraft and related engines and parts in 2007. This charge is included in the caption “Other
expenses” in the Statement of Consolidated Income, of which $159 million impacted our U.S. Domestic Package
segment and $62 million impacted our International Package segment.
Investment Income and Interest Expense
2008 compared to 2007
The decrease in investment income of $24 million was primarily due to a lower average balance of interest-
earning investments, investment impairment charges, and a lower yield earned on our investments. During 2008,
we recorded impairment losses on two auction rate securities that were collateralized by preferred stock issued by
the Federal National Mortgage Association (“FNMA”) and the Federal Home Loan Mortgage Corporation
(“FHLMC”). The impairment followed actions by the U.S. Treasury Department and the Federal Housing
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