UPS 2013 Annual Report Download - page 50

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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2012 compared to 2011
Forwarding and logistics adjusted operating expenses decreased $97 million in 2012 compared with 2011, due to several
factors. Purchased transportation expense fell by $65 million in 2012, primarily due to lower rates charged to us by third-party
transportation carriers (though this briefly reversed in the fourth quarter). Compensation and benefits expense declined by $28
million in 2012, largely due to reduced payroll and lower management incentive compensation costs. These factors were
partially offset by a $10 million increase in depreciation and amortization, due to the amortization of intangible assets
associated with our acquisition of Pieffe Group and the continued investment in technology and facilities in our health care
logistics business.
Freight adjusted operating expenses increased $57 million in 2012, while the total cost per LTL shipment increased 3.8%
for the year. The largest component of this increase related to the cost of operating our linehaul network, which grew by $40
million for the year, primarily as a result of an increase in tonnage, coupled with wage and purchased transportation increases.
Pick-up and delivery costs increased $12 million for the year, largely due to the increase in tonnage as well as contractual driver
wage increases of 3.5%. Rising diesel fuel prices increased the fuel expense for our fleet, as well as increased the fuel
surcharge rates passed to us from third-party transportation carriers. These factors were, however, partially offset by
productivity improvements.
Adjusted operating expenses for the other businesses within Supply Chain & Freight increased $56 million in 2012
compared with 2011.
Operating Profit and Margin
2013 compared to 2012
Adjusted operating profit for the forwarding and logistics unit decreased by $97 million in 2013 compared with 2012.
This decrease was primarily due to reduced profitability in our international air forwarding business, which resulted from
competitive pressures combined with weak overall air freight market demand due to continued economic weakness in Europe,
slowing growth in China and a sluggish U.S. economy. Additionally, our customer concentration among the technology and
military sectors negatively impacted our results, as demand in these sectors was relatively weaker than the remainder of the air
freight market. This lower demand pressured the rates we charge to our customers, which more than offset the reduced rates we
incur from third-party transportation carriers, and thereby led to a compression in our operating margin.
Adjusted operating profit for our freight unit increased $8 million in 2013 compared with 2012, as improvements in
average daily LTL volume, yields and productivity measures (including gains in pick-up and delivery stops per hour, dock bills
per hour and linehaul network utilization) more than offset an increase in wage and benefit expenses.
The combined adjusted operating profit for all of our other businesses in this segment increased $35 million in 2013
compared with 2012, primarily due to higher operating profit at UPS Capital and The UPS Store.
2012 compared to 2011
Adjusted operating profit for the forwarding and logistics unit decreased by $29 million in 2012 compared with 2011.
This decrease was primarily due to reduced profitability in our international air forwarding business, as European economic
uncertainty, slower growth in China and a sluggish U.S. economy all contributed to a reduction in overall air freight market
demand. This lower demand pressured the rates we charge to our customers, which more than offset the reduced rates we incur
from third-party transportation carriers, and thereby led to a decline in our operating margin. Operating profit for our logistics
business declined in 2012 compared with 2011, largely due to increased depreciation expense resulting from the continued
investment in technology and facilities for our global health care business.
Adjusted operating profit for our freight unit increased $20 million in 2012 compared with 2011, as gains in productivity
(including pick-up and delivery stops per hour, dock bills per hour and linehaul network utilization) as well as improved yields,
more than offset the overall decline in volume.
The combined adjusted operating profit for all of our other businesses in this segment increased $1 million in 2012
compared with 2011, largely due to growth from our contract to provide domestic air transportation services for the U.S. Postal
Service.