UPS 2014 Annual Report Download - page 54

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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• Vacation, holiday and excused absence expense increased $41 million in 2014, due to an increase in the overall
number of employees and increased vacation entitlements earned based on employees' years of service.
• Adjusted pension costs declined $23 million in 2014, as a decrease in the expense for company-sponsored pension
plans (largely due to higher discount rates used to determine pension cost for 2014) was largely offset by higher
contributions to multiemployer pension plans (due to both increased contribution rates and higher union labor hours).
• Workers compensation expense decreased $69 million in 2014, impacting all segments. Insurance reserves are
established for estimates of the loss that we will ultimately incur on reported worker's compensation claims, as well as
estimates of claims that have been incurred but not reported, and take into account a number of factors including our
history of claim losses, payroll growth and the impact of safety improvement initiatives. In 2014, we experienced
favorable actuarial expense adjustments as the frequency and severity of claims was less than previously projected,
due to the impact of ongoing operational safety improvement and claim management initiatives.
2013 compared to 2012
Employee payroll costs increased $684 million in 2013 compared with 2012, largely due to contractual union wage rate
increases, a 3.1% increase in average daily union labor hours, and a merit salary increase for management employees; however,
this was partially offset by an overall reduction in the number of management personnel.
Adjusted benefits expense increased $498 million in 2013 compared with 2012, primarily due to higher pension expense,
increased vacation, holiday and excused absence expense, and higher health and welfare costs; however, these items were
partially offset by changes in the expense associated with our self-insurance for worker’s compensation claims. These primary
factors impacting expense are discussed further as follows:
• Pension expense increased $300 million in 2013 compared with 2012, due to higher union contribution rates for
multiemployer pension plans combined with increased service and interest costs for company-sponsored plans. The
increase in service and interest costs for company-sponsored plans was largely due to continued service accruals and
lower discount rates.
• Vacation, holiday and excused absence expense increased $89 million in 2013 compared with 2012, due to increased
vacation entitlements earned based on employees' years of service, higher wage rates and an increase in the overall
number of employees during 2013.
• Health and welfare costs increased $182 million in 2013 compared with 2012, largely due to increased contribution
rates to multiemployer plans, higher medical claims in UPS-sponsored plans, and the impact of several provisions of
the Patient Protection and Affordable Care Act of 2010.
• The expense associated with our self-insurance programs for worker’s compensation claims decreased $131 million in
2013 compared with 2012. In 2013, we experienced favorable actuarial expense adjustments as the frequency and
severity of claims was less than previously projected, due to the impact of ongoing safety improvement and claim
management initiatives.
Repairs and Maintenance
2014 compared to 2013
The increase in repairs and maintenance expense in 2014 was primarily due to a $93 million increase in airframe and
aircraft engine repair and component replacement costs, largely in our Boeing 747 and 767 aircraft fleets. The remaining
increase was largely due to increased vehicle maintenance costs in our global package and freight operations, primarily due to
the growth in the size of our vehicle fleet.
2013 compared to 2012
The increase in repairs and maintenance expense was largely due to increased vehicle maintenance costs in our global
package and freight operations. These higher costs were impacted by the increase in miles driven in 2013 compared with 2012,
as well as the overall increase in the size of our vehicle fleet in our U.S. Domestic Package and UPS Freight operations.