UPS 2008 Annual Report Download - page 42

Finance Agency with respect to FNMA and FHLMC. Additionally, we recorded impairment losses on a
municipal auction rate security and on holdings of several medium term notes issued by Lehman Brothers Inc.,
which declared bankruptcy during 2008. We do not hold any other securities in any of these entities. The total of
these credit-related impairment losses during 2008 was $23 million, which was recorded in investment income
on the income statement.
Interest expense increased $196 million in 2008, primarily due to a higher average balance of outstanding
debt. In early 2008, we completed the issuance of $4.0 billion in long-term debt, the proceeds of which were used
to reduce our commercial paper balance. Our commercial paper balances had previously increased to fund the
$6.100 billion Central States Pension Fund withdrawal payment in December 2007. The impact of increased debt
balances was partially mitigated, however, by lower average rates incurred on our variable rate debt and interest
rate swap agreements as a result of declines in short-term interest rates in the United States throughout 2008.
2007 compared to 2006
The increase in investment income of $13 million was primarily due to higher realized gains on sales of
investments, but partially offset by a lower average balance of interest-earning investments and increased equity-
method losses on investment partnerships.
Interest expense increased $35 million in 2007, primarily due to higher average debt balances outstanding,
largely related to commercial paper. Our commercial paper balances increased in the fourth quarter of 2007,
causing a corresponding increase in interest expense, as a result of the payment made to withdraw from the
Central States Pension Fund. Increased interest charges were somewhat offset, however, by higher capitalized
interest related to various construction projects, including aircraft purchases and our Worldport expansion.
Income Tax Expense
2008 compared to 2007
Income tax expense increased by $1.963 billion in 2008 compared with 2007, primarily due to higher
pre-tax income. Pre-tax income in 2007 was adversely impacted by the Central States withdrawal charge, as
noted previously. The effective tax rate was 40.1% in 2008, compared with 11.4% in 2007. The increase in the
effective tax rate was primarily due to several factors resulting from the Central States withdrawal charge in
2007. These factors included having proportionally lower tax credits in 2008, and the effect of having a much
higher proportion of our taxable income in 2008 being subject to tax in the United States, whereas a relatively
greater proportion of taxable income in 2007 was subject to tax outside the United States, where effective tax
rates are generally lower. The effective tax rate in 2008 was also 4.1 percentage points higher due to the lack of
tax deductibility of the $548 million goodwill and $27 million intangible impairment charges discussed
previously.
2007 compared to 2006
Income tax expense declined by $2.259 billion in 2007 compared with 2006, due to lower pre-tax income
primarily resulting from the Central States Pension Fund withdrawal charge. The effective tax rate was 11.4% in
2007 and 35.5% in 2006. During 2007, our effective tax rate was reduced primarily due to proportionally higher
tax credits and the effect of having a relatively larger proportion of our taxable income being earned in
international jurisdictions with lower tax rates.
Net Income and Earnings Per Share
2008 compared to 2007
Net income for 2008 was $3.003 billion, compared with the $382 million achieved in 2007, resulting in an
increase in diluted earnings per share to $2.94 in 2008 from $0.36 in 2007. The increase in net income was
largely due to the absence in 2008 of some of the previously discussed charges to expense in 2007. In 2007, net
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