UPS 2015 Annual Report Download - page 52

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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
40
2014 compared to 2013
Forwarding and logistics adjusted operating expenses increased $266 million in 2014, largely due to higher purchased
transportation and employee compensation expenses. Purchased transportation expense increased by $229 million for the year,
primarily due to higher volume and tonnage in our international air freight forwarding business and higher rates charged to us
by third-party transportation carriers. Compensation and benefits expense increased $47 million in 2014, due to merit salary and
wage increases for management and hourly employees, along with an increase in the overall size of the workforce.
Freight adjusted operating expenses increased $140 million in 2014, while the total adjusted cost per LTL shipment
increased 2.0%. The increase in adjusted operating expenses was largely due to pick-up and delivery expenses (which increased
$96 million) and the costs associated with operating our linehaul network (which increased $65 million). The increases in pick-
up and delivery and network costs were primarily due to contractual wage increases, higher LTL volume and increased costs
associated with outside contract and rail carriers. Partially offsetting these cost increases were reductions in indirect operating
expenses, including lower auto liability and worker's compensation costs, which were impacted by operational safety and
claims management initiatives, as well as lower pension expense.
Operating expenses for the other businesses within Supply Chain & Freight increased $8 million in 2014 compared with
2013.
Operating Profit and Margin
2015 compared to 2014
Adjusted operating profit for the forwarding and logistics unit increased by $51 million in 2015 compared with 2014,
primarily due to improved results in our international air business, partially offset by the impact of Coyote acquisition costs.
The net impact of fuel costs and revenue management initiatives had a positive impact on operating profit. Operating results for
the international air forwarding business improved, as the rates at which we procure capacity from third party air carriers
decreased faster than the rates we charge our customers. Profitability in our ocean freight unit grew largely as a result of
transportation expense decreasing at a faster rate than the rates we charge our customers. However, operating profit for the
logistics unit declined, as investments in technology and infrastructure continued to pressure distribution margins during 2015.
Adjusted operating profit for our freight unit decreased $16 million in 2015 compared with 2014, as declines in tonnage
and increased pension costs more than offset the increased LTL revenue per hundredweight realized during the year.
The combined operating profit for all of our other businesses in this segment increased $23 million in 2015, primarily due
to higher operating profit at UPS Capital and our service contracts with the U.S. Postal Service.
2014 compared to 2013
Adjusted operating profit for the forwarding and logistics unit remained comparable between 2014 and 2013, and was
impacted by several factors. Operating profit in the international air forwarding business declined in 2014, as continued excess
market capacity in key trade lanes reduced the margin between the rates we charge our customers and the rates at which we
procure capacity from third party air carriers. We increased profitability in our North American air freight, ocean freight,
distribution and mail services units in 2014, as a result of improving market demand and cost controls.
Adjusted operating profit for our freight unit increased $26 million in 2014 compared with 2013, as shipment growth,
increased yields and higher productivity more than offset contractual union wage increases.
The combined operating profit for all of our other businesses in this segment increased $18 million in 2014, primarily due
to higher operating profit at UPS Capital and UPS Customer Solutions.