We see…
55 Glenlake Parkway, NE
Atlanta, GA 30328
www.ups.com
UPS Annual Report 2003
…a world of opportunity.
We see a company with a strong vision and the agility to
execute that vision — synchronizing global commerce.
Letter to shareowners
We see growth
We see a world of opportunity
UPS senior leadership
Financial highlights
Selected financial data
Financial table of contents
Investor information
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66
Copyright © 2004 United Parcel Service of America, Inc. All rights reserved.
Vision. Execution. Growth. At UPS, we know success begins by seeing
opportunities to grow the business. With a powerful brand, rapidly expanding
capabilities, and a fi nely tuned network, we see a world of opportunity.
Dear fellow shareowners,
At UPS, we see a world poised for
strong and sustainable growth. And,
we see a company positioned to
capitalize on that growth.
Mike Eskew
Chairman and
Chief Executive Officer
The global economic sluggishness of the past three years
is giving way to growing consumer optimism, greater
business investment, decreasing inventory-to-sales
ratios, and a renewed commitment to innovation,
execution, and growth.
Over the past year, I’ve had the opportunity to meet
with scores of customers and hear their stories about
the need to rethink their business models and the way
in which they interact with their customers, suppliers,
partners, and employees. They talk about new tech-
nologies, emerging global markets, and supply chain
strategies to reach those markets. I walk away from
these meetings energized because I sense that this world
in transition bodes extremely well for UPS. Our people,
customers, and shareowners sense it too.
U.S. Package Business Remains Strong
Five years ago, we extended our mission beyond
package delivery to enabling global commerce by
creating new services that bring buyers and sellers
closer together. At the same time, we said that our U.S.
package delivery business would remain important to
our future growth. It still is. In 2003, we began to
reengineer our U.S. operations on a scale unmatched
in the history of our industry.
We initiated a $600 million investment in new
package flow technologies that will help us simplify the
loading and delivery process, improve customer service,
reduce vehicle mileage by more than 100 million miles
each year, and save 14 million gallons of fuel annu-
ally. When fully implemented in 2007, we expect a
$600 million savings in annual operating costs and the
opportunity to create new services and solutions for
our customers.
Our U.S. operations gained significant momentum
over the course of 2003. U.S. domestic volume in-
creased 4.9 percent for the fourth quarter in contrast
to a 1.2 percent decline in the first quarter. In 2004, we
anticipate volume growth will be about 4 percent,
with margins continuing to improve.
Part of that momentum was driven by the
opportunity we gave to Mail Boxes Etc. franchisees
in the United States to convert to The UPS Store.TM
More than 3,000, or almost 90 percent, did so. The
UPS Store is an important channel in our growing
number of customer access points, which now include
more than 125,000 points of entry through our drivers,
customer centers, and drop boxes.
The stores give us a platform to launch new services
in the coming years. They are a central part of our
retail strategy that is guided by the forces of e-commerce
and consumer pull, the expanding ranks of entrepre-
neurs, and the growing numbers of home office and
mobile corporate workers.
International Growth Drives Industry-Leading Profits
Five years ago, we told the world that our international
business showed great promise as advances in tech-
nology, consumer empowerment, and deregulation
were making it easier — and indeed imperative —
for businesses and societies to trade more freely with
one another.
Today, our international business has arrived.
In fact, our international operating margin is higher
than it’s ever been. This is due to well-established
customer relationships that have been enhanced through
technology and an expansive product portfolio that
addresses local, regional, and global distribution and
supply chain needs.
In 2003, our international segment had a record year
with operating profit of $709 million, a 128 percent
increase over adjusted 2002 results. In fact, over the
past five years, international operating profits have
grown more than 200 percent — driven by a favorable
combination of good operations management, cost
control, economies of scale, excellent yield manage-
ment, a strong product mix, and favorable currency
exchange rates.
Letter to shareowners 3
Mike Eskew
Chairman and
Chief Executive Officer
Financial highlights
IN MILLIONS
Revenue
Operating Expenses
Net Income (Adjusted)
Diluted Earnings Per Share (Adjusted)
Assets
Capital Expenditures
Long-Term Debt
Shareowners’ Equity
2003
33,485
29,040
2,772(1)
2.44(1)
28,909
1,947
3,149
14,852
$
$
$
$
$
$
$
$
2002
% CHANGE
$
$
$
$
$
$
$
$
31,272
27,176
2,422(2)
2.14(2)
26,357
1,658
3,495
12,455
7.1%
6.9%
14.5%
14.0%
9.7%
17.4%
(9.9%)
19.2%
(1) 2003 excludes after-tax gain from sale of Mail Technologies ($14 million, $0.01 per share) and Aviation Technologies ($15 million, $0.01 per share), gain on redemption of long-term
debt ($18 million, $0.02 per share), impairment of investments ($37 million, $0.03 per share) and credits to income tax expense for a lower effective state tax rate in the fourth quarter
($39 million, $0.03 per share), the resolution of various tax contingencies ($55 million, $0.05 per share), and a favorable ruling on the tax treatment of jet engine maintenance costs
($22 million, $0.02 per share).
(2) 2002 excludes after-tax impact of tax assessment reversal ($776 million, $0.68 per share), credit from vacation policy change ($121 million, $0.11 per share), restructuring charge
and related expenses ($65 million, $0.06 per share), and charge upon adoption of FAS 142 ($72 million, $0.06 per share).
Our international network gained expanded reach
in 2003 with the award of 12 frequencies to fl y beyond
Hong Kong and connect to Cologne, Germany, and to
our intra-Asia hub in the Philippines.
Asia, in particular, remains an important link in our
international strategy. Export volume from China alone
has doubled since the launch of air services to Beijing
and Shanghai in 2001.
In Europe, we continue to see solid export volume
growth, and we continue to expand our network to
handle even more. We recently began construction on a
$135 million, 30,000-square-meter facility at Cologne/
Bonn Airport in Germany, which will be the largest
UPS facility outside the United States. And, we’re
expanding our operations in the 10 countries slated to
join the European Union.
For our customers and shareowners, partnering
with UPS has proven to be a powerful and profitable
way to participate in the growth of global commerce.
Synchronizing Commerce For Our Customers
Five years ago, we talked about supply chain manage-
ment mostly in conceptual terms. We talked about
coordinating business processes to help companies
operate more efficiently and serve their customers
better.
Today, UPS Supply Chain Solutions is a $2 billion-
plus business that is helping companies like IBM,
National Semiconductor, Nikon, and others streamline
their distribution systems, reach markets faster, serve
customers better, and achieve their business plan goals.
4 UPS Annual Report 2003
In 2003, UPS Supply Chain Solutions successfully
integrated more than 20 acquisitions made over the
preceding four years. This integration, coupled with
concentrated cross-enterprise sales efforts, has resulted
in growth and steadily improving profit margins that
we believe will continue to expand in 2004.
We’re encouraged by customer interest in UPS’s
comprehensive supply chain management services,
which include handling our customers’ air and ocean
freight, configuring and managing their warehouses and
distribution systems, helping them manage returns and
service-parts replacement, and financing their inventory,
among other services.
Ensuring Future Stakeholder Value
Globalization and technology advancements continue
to fuel greater worldwide economic opportunity,
mobility, spending power, entrepreneurial activity, and
multinational business expansion. This means a bright
future for our business segments. In fact, by 2007, we
anticipate operating margins of more than 15 percent in
each of our business segments.
We’re also excited by the momentum that is build-
ing through the launch of the new UPS brandmark
— only the fourth change to our corporate identity
since our founding in 1907. The rebranding effort is
the largest in corporate history and has already made
tremendous inroads in enhancing awareness of UPS’s
expanding capabilities.
But, the success of UPS extends beyond our brand
awareness and financial performance to our social and
environmental responsibilities. In the fall, we unveiled
our first Corporate Sustainability Report that analyzes
the progress we’ve made — and the challenges that lie
ahead — in areas of economic, social, and environ-
mental performance. Running a sustainable company
is good for business and for the world we live in and
has been ingrained in UPS culture since our founding in
1907. This report shows how that philosophy is mani-
fested in our operations around the globe.
We see every aspect of our business working cohe-
sively to synchronize commerce — helping companies
simultaneously manage goods, information, and funds
with speed, precision, security, and efficiency.
Customers tell us they need the strategic advantages
gained by synchronizing every aspect of their business
operations, from order-entry through delivery and
returns. For UPS, this means offering new services made
possible by our integrated global network, powerful
technologies, intellectual capital, and the service ethic
of some 355,000 UPS people around the globe who
have made our company one of the world’s most
admired businesses.
We believe the world of synchronized commerce —
and its promise of bringing businesses, economies,
cultures, and people closer together — will continue
to create significant benefits for our customers,
shareowners, and employees around the world.
As we enter 2004, we see a company with a strong
vision and the agility to execute that vision.
At UPS, we see a world of opportunity.
Michael L. Eskew
Chairman and Chief Executive Officer
Letter to shareowners 5
We see growth in all segments of our business.
2003 Highlights
International Package
Air and ground shipment of packages that cross
countries’ borders, including packages shipped
into and out of the United States, referred to as
“international export.” This segment also includes
packages shipped within the borders of a non-U.S.
country, referred to as “international domestic.”
2003 Highlights
• Operating margin of 12.7% was the highest
ever for this business
• Adjusted operating profi t was up 128%
• Export volume up 8.6%; Asia, Canada, and
the Americas all up over 10%
• Awarded 12 air rights that connect Hong Kong
to our international hub in Cologne, Germany,
and to our intra-Asia hub in the Philippines
• Began expansion of our international air hub in
Cologne, Germany, to double sorting capacity
2004 Outlook*
• Export volume expected to increase 8% or more
• Operating margin expected to continue expanding
• Operating profi t should increase about 20%
• Air and ground network expanding in the 10
countries slated to join the European Union in 2004
* The statements made under “2004 Outlook” are forward-looking statements that involve
certain risks and uncertainties. Many factors may cause actual results to differ materially
from those contained in the forward-looking statements, including the factors set forth in
this annual report under the heading “Risk Factors.”
International Package Revenue
(in billions)
International Package Adjusted Operating Profit(1)
(in millions)
• Adjusted earnings per share increased 14%
• Quarterly dividend increased 32%
• Return on equity over 20%
• Introduced new corporate brand for the fi rst
time in over 40 years to symbolize the broad
scope of UPS services and capabilities, in
addition to package delivery
• Published fi rst Corporate Sustainability Report
2003 Revenue by Segment
(in billions)
$2.9
$5.6
$25.0
2003 Operating Profit by Segment
(in millions)
$464
$709
$3,272
6 UPS Annual Report 2003
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Non-Package
U.S. Domestic Package
Operations outside of the traditional delivery of
packages. Includes UPS Capital, Mail Innovations,
retail operations (The UPS Store and Mail Boxes Etc.
franchises), consulting, insurance, and UPS Supply
Chain Solutions. UPS Supply Chain Solutions is the
largest component of the non-package segment and
provides international management of customer
supply chains, consisting of transportation manage-
ment, freight forwarding services, international
customs brokerage, international trade management,
service parts logistics, inventory fulfillment, and
distribution services.
2003 Highlights
• Successfully completed integration of more than
20 UPS Supply Chain Solutions acquisitions made
over the preceding four years
• Completed restructuring of UPS Supply Chain
Solutions operations, resulting in more than $100
million profit improvement in the segment
2004 Outlook*
• Operating profit expected to increase
$50 million or more
• Supply chain revenues expected to improve
by more than 10%
• Supply chain operating margin expected to increase
100 to 200 basis points
Air and ground shipment of packages within the 50
states. Includes next-day delivery, deferred delivery,
which is air with a two- to three-day delivery
commitment, and ground delivery, which has a
one- to five-day delivery commitment.
2003 Highlights
• Began implementation of new package flow
technologies, based on data- and technology-driven
platforms, to simplify and optimize package sorting
and delivery; $600 million investment in 1,000
facilities expected to result in $600 million annual
savings fully realized in 2007
• Provided opportunity for more than 3,000 Mail
Boxes Etc. franchisees to rebrand to The UPS Store
• Implemented largest time-in-transit improvements in
seven years, slashing a day off many previous delivery
times without changing rates or pickup/delivery hours
2004 Outlook*
• Domestic volume expected to increase about 4%
• Domestic operating margin expected to increase
100 basis points
Non-Package Revenue
(in billions)
Non-Package Adjusted Operating Profit(1)
(in millions)
U.S. Domestic Package Revenue
(in billions)
U.S. Domestic Package Adjusted Operating(1)
Profit (in billions)
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(1) 2000 Non-package operating profit excludes $49 million gain on sale of UPS Truck Leasing; 2000 U.S. Domestic package operating profit excludes $59 million charge related to arbitration ruling on
Teamsters contract; 2002 excludes credit to operating profit from change in vacation policy for non-union employees ($175 million - U.S. Domestic, $11 million - International, $11 million - Non-package);
2002 Non-package excludes $106 million restructuring charge and related expenses.
We see growth 7
We see $600 million in operational effi ciencies.
By investing hundreds of millions in leading-edge package fl ow
technologies, we are improving upon what was already a highly
effi cient U.S. package network.
8 UPS Annual Report 2003
We see $600 million in operational effi ciencies.
For nearly a century we’ve innovated, perfected,
and invested in our network to create a system that
runs like clockwork. Our uniquely integrated
business model, which fl ows packages of all kinds
through one system, and our use of technology
differentiate UPS, allowing for optimum performance
and the broadest capabilities.
Most recently, we’ve begun implementing new
operational technologies that allow us to use precise
package information to streamline our operations.
In addition, new routing and dispatch technologies
are expected to reduce miles driven by more than
100 million per year and save 14 million gallons
of fuel annually. They are expected to save more than
$600 million annually once fully operational in 2007.
These industry-leading technologies will allow
UPS to be even more nimble in our responsiveness to
individual customer needs and ultimately create the
potential for proactive services.
Facts:
• UPS WorldportSM processes in excess of 304,000 packages
per hour.
• Our mobile radio network transmits more than 3 million
packets of tracking data each day.
• Our mainframe capacity allows the transmission of more
than 22 million instructions per second.
• UPS shipping tools are embedded in more than
65,000 customer Web sites.
• Using Global Positioning Satellite technology, we will
have the capability to pinpoint a package within 30 feet
of its location.
We see… 9
We see great opportunity in a $3 trillion industry.
Our rapidly expanding capabilities help customers manage the
complexity of global commerce and establish us as a leader in
a vast supply chain and logistics marketplace.
10 UPS Annual Report 2003
We see great opportunity in a $3 trillion industry.
At UPS, we’re operating as an increasingly globalized
and synchronized business that is in step with a
changing world marketplace. UPS Supply Chain
Solutions provides customized solutions, taking
advantage of the full strength of our small package
network and creating deeper relationships with
our customers.
With more than 750 worldwide distribution centers,
we’re simplifying complex supply chains for businesses
through multimodal freight shipments, customs
clearance, order and inventory management, returns,
parts distribution, international trade support, and
fi nancial services.
By doing so, we allow customers to focus on what
they do best while we help increase their cash fl ow,
improve service to their customers, differentiate their
products from competitors, and fi nd new ways to
reach their customers around the world with effi ciency
and ease.
Facts:
• UPS Supply Chain Solutions has operations in more
than 120 countries around the world.
• UPS Supply Chain Solutions fi les more than
4 million customs entries in the United States,
making it the nation’s largest broker.
• UPS Supply Chain Solutions has hundreds of engineers
to help remap supply chains for greater effi ciency and
market responsiveness.
• UPS Supply Chain Solutions was rated as the No. 1
logistics provider in Inbound Logistics’ annual “Top 10
3PL Excellence Award” survey.
• UPS is ranked as the largest third-party logistics provider
in North America by Traffi c World magazine.
We see… 11
We see more than 125,000 ways to connect.
Through drop boxes, retail outlets, and customer centers — even
through our more than 70,000 drivers — we offer customers a
broad range of access points.
12 UPS Annual Report 2003
We see more than 125,000 ways to connect.
By expanding and diversifying our customer access
points, we not only offer customers convenience and
accessibility, we’re also invigorating our U.S. ground
business and increasing our brand presence.
Facts:
• We have 4,500 retail locations worldwide — more than
all other franchised shipping chains put together.
The UPS Store locations offer a full range of shipping
• In the United States and Canada, we have more
and business services and represent a considerable
package volume opportunity. Store locations have seen
signifi cant increases in UPS volume from both small
businesses and retail customers. In fact, since the
more than 3,000 Mail Boxes Etc. centers in the United
States opted to convert to The UPS Store in March
2003, their UPS volume has more than doubled.
UPS also has thousands of drop boxes strategically
located near businesses and retail areas for air express
and expedited shipments, as well as in-store shipping
and third-party retail pack-and-ship locations. What’s
more, customers can give their packages to any of
our drivers who deliver more than 13 million packages
and documents to customer loading docks, offi ces, and
homes every day around the world.
than 41,000 drop boxes.
• There are 7,500 third-party retail pack-and-ship locations.
• We operate 1,400 customer centers within our operating
facilities worldwide.
• We have more than 12,900 in-store shipping locations
and commercial counters.
We see… 13
We see 4 billion addresses.
Spanning the globe, we deliver more than 13.6 million packages
and documents to customers in more than 200 countries and
territories every day.
14 UPS Annual Report 2003
We see 4 billion addresses.
As the only company in the industry with an integrated
global network and a substantial presence in every
major market around the world, we saw international
operating profi t more than double in 2003. Our
international export volume has grown at an annual
compound rate of more than 13 percent in the last fi ve
years, generating the best margins in the industry.
Globalization has helped spur such growth, and
our unparalleled product portfolio offers solutions
addressing customers’ local, regional, and global
needs. Those solutions are possible through our use of
sophisticated technologies, allowing us to consolidate
shipments, speed packages through customs, and
improve transit times.
We continue to expand our presence throughout the
world via additional air rights and routes in Asia, and
we’re building upon our already extensive network
with new facilities in Vancouver, Canada and Cologne,
Germany. We’re also set to expand our pan-European
air and ground network in the 10 countries that are
joining the European Union.
Facts:
• We serve more than 850 airports around the world,
fl ying more than 1,800 fl ight segments each day.
• We operate the 11th largest airline in the world.
• Local country management people average 14 years
of UPS experience.
• With expanded air rights to Hong Kong, we now offer
direct service to our two largest hubs in Europe and Asia
and enhanced service to China’s fastest growing express
and cargo region.
• We have begun construction on a $135 million,
30,000-square-meter facility at Cologne/Bonn Airport in
Germany, which will be the largest UPS facility outside
the United States.
We see… 15
We see margins over 15 percent.
Our integrated network, operational effi ciencies, dedicated people,
brand equity, and broad service portfolio create the best returns
in the industry. By 2007, we expect even more — with operating
profi t margins expected to be above 15 percent in each of our
business segments.
16 UPS Annual Report 2003
We see margins over 15 percent.
With a committment to employee stock ownership,
UPS is a company run by investors for investors. UPS
operates with the innovative qualities of a start-up
company and the vision, discipline, and execution of
a well-established industry leader. In fact, UPS strives
to be the most effi cient, cost effective, environmentally
responsible, and profi table company in the industry.
And, we see a continued, positive outlook for
growth in our industry. As trade barriers fall, free trade
agreements are signed, and the movement towards
globalization redefi nes the marketplace, companies
increasingly are outsourcing services and moving
goods around the world.
UPS is embracing these globalization trends. The
strength of our brand has allowed us to expand beyond
borders and cultures and given us the opportunity to
offer innovative solutions to our customers. We are
becoming synonymous with world commerce, and it’s
translating to the bottom line.
Facts:
• We have a 96-year history of revenue growth.
• We are one of seven companies in the United States that
has a Triple-A credit rating from both Standard & Poor’s
and Moody’s.
• Our quarterly dividend increased 32 percent in 2003.
• We delivered 3.44 billion packages in 2003,
an average of 13.6 million per day.
• Active and former employees and their families own
more than 50 percent of UPS stock.
• For the sixth straight year, FORTUNE magazine named
UPS a “World’s Most Admired Company,” and for the 21st
consecutive year, FORTUNE named UPS “America’s Most
Admired” company in its industry.
We see… 17
UPS 2003 Board of Directors
(left to right) John W. Thompson, James P. Kelly, Lea N. Soupata, Carol B. Tomé, Gary E. MacDougal, Victor A. Pelson, Joseph R. Moderow, Michael L. Eskew,
Calvin Darden, Thomas H. Weidemeyer, Robert M. Teeter, Ann M. Livermore
Calvin Darden
Senior Vice President, UPS
Michael L. Eskew
Chairman and
Chief Executive Officer, UPS
James P. Kelly
Former Chairman and
Chief Executive Officer, UPS
Ann M. Livermore
Executive Vice President,
Hewlett-Packard Company
Victor A. Pelson
Senior Advisor,
UBS Securities LLC
Gary E. MacDougal
Former Chairman and
Chief Executive Officer,
Mark Controls Corporation
Joseph R. Moderow*
Senior Vice President, UPS
Lea N. Soupata
Senior Vice President, UPS
Robert M. Teeter
President,
Coldwater Corporation
John W. Thompson
Chairman and Chief
Executive Officer,
Symantec Corporation
Carol B. Tomé
Chief Financial Officer,
The Home Depot
Thomas H. Weidemeyer*
Senior Vice President, UPS
*After many years of distinguished
service and leadership, Joe Moderow
and Tom Weidemeyer retired
effective January 1, 2004.
18 UPS Annual Report 2003
Management
Committee
This committee is
responsible for the
overall day-to-day
management of
our business.
David Abney
Senior Vice President and
President, UPS International
Michael L. Eskew
Chairman and
Chief Executive Officer
Christopher D. Mahoney
Senior Vice President,
Global Transportation Services
John J. Beystehner
Senior Vice President,
Chief Operating Officer, and
President, UPS Airlines
Calvin Darden
Senior Vice President,
U.S. Operations
D. Scott Davis
Senior Vice President,
Chief Financial Officer,
and Treasurer
Allen E. Hill
Senior Vice President,
General Counsel, and
Corporate Secretary
Kurt Kuehn
Senior Vice President,
Worldwide Sales and
Marketing
Kenneth W. Lacy
Senior Vice President and
Chief Information Officer
John McDevitt
Senior Vice President,
Strategic Integration
Joseph M. Pyne
Senior Vice President,
UPS Supply Chain Solutions
Lea N. Soupata
Senior Vice President,
Human Resources
Senior
Operations
Management
Jovita Carranza
Air Operations
Myron A. Gray
Southwest Region
Christine M. Owens
Southeast Region
Scott. E. Corrigan
Pacific Region
Wayne C. Herring
East Central Region
Robert E. Stoffel
UPS Supply Chain Solutions
Northeast Region Manager
Joe Farinacci, Europe Region
Manager John Warrick, and East
Central Region Manager Joe Zito
recently retired after many years
of dedicated service.
Wolfgang Flick
Europe Region
Michael J. Kamienski
West Region
Kenneth A. Torok
Asia Pacific Region
Stephen D. Flowers
Americas Region
Robert L. Lekites
UPS Airlines
James F. Winestock
North Central Region
Alan Gershenhorn
Canada Region
Stephen R. Miele
Northeast Region
UPS senior leadership 19
Financial highlights
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(1) 1999 excludes after-tax impact of tax assessment charge ($1.442 billion, $1.27 per share).
(2) 2000 excludes after-tax impact of charge from Teamsters contract arbitration ruling ($35 million, $0.03 per share), gain on sale of UPS Truck Leasing ($29 million, $0.03 per share), and investment gains ($145 million, $0.12 per share).
(3) 2001 excludes after-tax charge from adoption of FAS 133 ($26 million, $0.02 per share).
(4) 2002 excludes after-tax impact of tax assessment reversal ($776 million, $0.68 per share), credit from vacation policy change ($121 million, $0.11 per share), restructuring charge and related expenses ($65 million, $0.06 per share),
and charge upon adoption of FAS 142 ($72 million, $0.06 per share).
(5) 2003 excludes after-tax gain from sale of Mail Technologies ($14 million, $0.01 per share) and Aviation Technologies ($15 million, $0.01 per share), gain on redemption of long-term debt ($18 million, $0.02 per share), impairment
of investments ($37 million, $0.03 per share) and credits to income tax expense for a lower effective tax rate in the fourth quarter ($39 million, $0.03 per share), the resolution of various tax contingencies ($55 million, $0.05 per share),
and a favorable ruling on the tax treatment of jet engine maintenance costs ($22 million, $0.02 per share).
(6) Excludes $5.266 billion net IPO proceeds in 1999 and 2000.
(7) EBITDA defined as earnings before interest, taxes, depreciation, and amortization.
20 UPS Annual Report 2003
Selected financial data
The following table sets forth selected financial data for each of the five years in the period ended December 31, 2003 (amounts
in millions, except per share amounts). This financial data should be read together with our consolidated financial statements and
the related notes, Management’s Discussion and Analysis of Financial Condition and Results of Operations, and other financial
data appearing elsewhere in this report.
Selected Income Statement Data Years Ended December 31,
2003 2002 2001 2000 1999
Revenue:
U.S. domestic package $ 25,022 $ 23,924 $ 23,997 $ 24,002 $ 22,313
International package 5,561 4,680 4,245 4,078 3,718
Non-package 2,902 2,668 2,079 1,418 841
Total revenue 33,485 31,272 30,321 29,498 26,872
Operating expenses:
Compensation and benefits 19,328 17,940 17,397 16,546 15,285
Other 9,712 9,236 8,962 8,440 7,682
Total operating expenses 29,040 27,176 26,359 24,986 22,967
Operating profit:
U.S. domestic package 3,272 3,576 3,620 3,929 3,506
International package 709 322 125 277 230
Non-package 464 198 217 306 169
Total operating profit 4,445 4,096 3,962 4,512 3,905
Other income (expense):
Investment income 18 63 159 527 197
Interest expense (121) (173) (184) (205) (228)
Gain on redemption of long-term debt 28 — — — —
Tax assessment — 1,023 — — (1,786)
Income before income taxes 4,370 5,009 3,937 4,834 2,088
Income taxes (1,472) (1,755) (1,512) (1,900) (1,205)
Cumulative effect of changes in accounting principles — (72) (26) — —
Net income $ 2,898 $ 3,182 $ 2,399 $ 2,934 $ 883
Per share amounts:
Basic earnings per share $ 2.57 $ 2.84 $ 2.13 $ 2.54 $ 0.79
Diluted earnings per share $ 2.55 $ 2.81 $ 2.10 $ 2.50 $ 0.77
Dividends declared per share $ 0.92 $ 0.76 $ 0.76 $ 0.68 $ 0.58
Weighted average shares outstanding
Basic 1,128 1,120 1,126 1,153 1,121
Diluted 1,138 1,134 1,144 1,175 1,141
As adjusted net income data:
Net income $ 2,772(1) $ 2,422(2) $ 2,425(3) $ 2,795(4) $ 2,325(5)
Basic earnings per share $ 2.46 $ 2.16 $ 2.15 $ 2.42 $ 2.07
Diluted earnings per share $ 2.44 $ 2.14 $ 2.12 $ 2.38 $ 2.04
Selected Balance Sheet Data As of December 31,
2003 2002 2001 2000 1999
Working capital $ 4,335 $ 3,183 $ 2,811 $ 2,623 $ 5,994
Long-term debt $ 3,149 $ 3,495 $ 4,648 $ 2,981 $ 1,912
Total assets $ 28,909 $ 26,357 $ 24,636 $ 21,662 $ 23,028
Shareowners’ equity $ 14,852 $ 12,455 $ 10,248 $ 9,735 $ 12,474
(1) Excludes (on an after-tax basis) the gain on sale of Mail Technologies ($14 million) and Aviation Technologies ($15 million), the gain on redemption of long-term debt ($18 million), the
loss on impairment of investments ($37 million), a reduction of income tax expense due to a lower effective tax rate from improvements in state income taxes ($39 million), a reduction
of income tax expense due to the resolution of various tax contingency matters ($55 million), and a reduction of income tax expense from a favorable ruling on the tax treatment for jet
engine maintenance costs ($22 million).
(2) Excludes (on an after-tax basis) $121 million gain related to change in vacation policy, $65 million restructuring charge and related expenses, $72 million charge related to the adoption
of FAS 142, and $776 million gain related to the settlement of a previously established tax assessment liability.
(3) Excludes $26 million after-tax charge related to the adoption of FAS 133.
(4) Excludes (on an after-tax basis) $145 million in investment gains, a $29 million gain on the sale of our UPS Truck Leasing subsidiary, and a $35 million charge related to an arbitration
ruling under our 1997 contract with the Teamsters.
(5) Excludes a $1.442 billion tax assessment charge.
Selected financial data 21
Financial table of contents
Independent auditors’ report 23
Consolidated balance sheets 24
Statements of consolidated income 25
Statements of consolidated shareowners’ equity 26
Statements of consolidated cash flows 27
Notes to consolidated financial statements 28
Management’s discussion and analysis 51
Price and dividend information 65
Investor information 66
22 UPS Annual Report 2003
Independent auditors’ report
Board of Directors and Shareowners
United Parcel Service, Inc.
Atlanta, Georgia
We have audited the accompanying consolidated balance sheets of United Parcel Service, Inc. and its subsidiaries as of
December 31, 2003 and 2002, and the related consolidated statements of income, shareowners’ equity, and cash flows for
each of the three years in the period ended December 31, 2003. These financial statements are the responsibility of the
Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of
United Parcel Service, Inc. and its subsidiaries at December 31, 2003 and 2002, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 2003 in conformity with accounting principles
generally accepted in the United States of America.
As described in Note 1 to the consolidated financial statements, the Company adopted Statement of Financial Accounting
Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities,” effective January 1, 2001; Statement
of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets,” effective January 1, 2002; and began
applying prospectively the provisions of Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based
Compensation,” effective January 1, 2003.
Deloitte & Touche LLP
Atlanta, Georgia
March 5, 2004
Independent auditors’ report 23
Consolidated balance sheets
As of December 31,
(in millions except per share amounts) 2003 2002
ASSETS
Current Assets:
Cash & cash equivalents $ 2,951 $ 2,211
Marketable securities & short-term investments 1,001 803
Accounts receivable, net 4,004 3,756
Finance receivables, net 840 868
Deferred income taxes 316 268
Other current assets 741 832
Total Current Assets 9,853 8,738
Property, Plant, and Equipment—at cost, net of accumulated depreciation
& amortization of $13,007 and $11,749 in 2003 and 2002 13,908 13,612
Prepaid Pension Costs 2,922 1,932
Goodwill and Intangible Assets, Net 1,273 1,180
Other Assets 953 895
$ 28,909 $ 26,357
LIABILITIES AND SHAREOWNERS’ EQUITY
Current Liabilities:
Current maturities of long-term debt and commercial paper $ 674 $ 1,107
Accounts payable 2,003 1,908
Accrued wages & withholdings 1,166 1,084
Dividends payable 282 212
Other current liabilities 1,393 1,244
Total Current Liabilities 5,518 5,555
Long-Term Debt 3,149 3,495
Accumulated Postretirement Benefit Obligation, Net 1,335 1,251
Deferred Taxes, Credits & Other Liabilities 4,055 3,601
Shareowners’ Equity:
Preferred stock, no par value, authorized 200 shares, none issued — —
Class A common stock, par value $.01 per share, authorized
4,600 shares, issued 571 and 642 in 2003 and 2002 6 7
Class B common stock, par value $.01 per share, authorized
5,600 shares, issued 560 and 482 in 2003 and 2002 5 4
Additional paid-in capital 662 387
Retained earnings 14,356 12,495
Accumulated other comprehensive loss (177) (438)
Deferred compensation arrangements 136 84
14,988 12,539
Less: Treasury stock (2 and 1 shares in 2003 and 2002) (136) (84)
14,852 12,455
$ 28,909 $ 26,357
See notes to consolidated financial statements.
24 UPS Annual Report 2003
Statements of consolidated income
Years Ended December 31,
(in millions except per share amounts) 2003 2002 2001
Revenue $ 33,485 $ 31,272 $ 30,321
Operating Expenses:
Compensation and benefits 19,328 17,940 17,397
Other 9,712 9,236 8,962
29,040 27,176 26,359
Operating Profit 4,445 4,096 3,962
Other Income and (Expense):
Investment income 18 63 159
Interest expense (121) (173) (184)
Gain on redemption of long-term debt 28 — —
Tax assessment reversal — 1,023 —
(75) 913 (25)
Income Before Income Taxes and Cumulative Effect of Changes
in Accounting Principles 4,370 5,009 3,937
Income Taxes 1,472 1,755 1,512
Income Before Cumulative Effect of Changes in Accounting Principles 2,898 3,254 2,425
Cumulative Effect of Changes in Accounting Principles, Net of Taxes — (72) (26)
Net Income $ 2,898 $ 3,182 $ 2,399
Basic Earnings Per Share Before Cumulative Effect of Changes
in Accounting Principles $ 2.57 $ 2.91 $ 2.15
Basic Earnings Per Share $ 2.57 $ 2.84 $ 2.13
Diluted Earnings Per Share Before Cumulative Effect of Changes
in Accounting Principles $ 2.55 $ 2.87 $ 2.12
Diluted Earnings Per Share $ 2.55 $ 2.81 $ 2.10
See notes to consolidated financial statements.
Consolidated financial statements 25
Statements of consolidated shareowners’ equity
Years Ended December 31,
2003 2002 2001
(in millions except per share amounts) Shares Dollars Shares Dollars Shares Dollars
Class A Common Stock
Balance at beginning of year 642 $ 7 772 $ 8 936 $ 9
Common stock purchases (5) — (10) — (26) —
Stock award plans 12 — 11 — 13 —
Common stock issuances 2 — 2 — 1 —
Conversions of Class A to Class B common stock (80) (1) (133) (1) (152) (1)
Balance at end of year 571 6 642 7 772 8
Class B Common Stock
Balance at beginning of year 482 4 349 3 199 2
Common stock purchases (2) — — — (10) —
Common stock issued for acquisitions — — — — 8 —
Conversions of Class A to Class B common stock 80 1 133 1 152 1
Balance at end of year 560 5 482 4 349 3
Additional Paid-In Capital
Balance at beginning of year 387 414 267
Stock award plans 545 477 521
Common stock issued for acquisitions — — 510
Common stock purchases (398) (604) (954)
Common stock issuances 128 100 70
Balance at end of year 662 387 414
Retained Earnings
Balance at beginning of year 12,495 10,162 9,684
Net income 2,898 3,182 2,399
Dividends ($0.92, $0.76, and $0.76 in 2003, 2002, and 2001, respectively) (1,037) (849) (856)
Common stock purchases — — (1,065)
Balance at end of year 14,356 12,495 10,162
Accumulated Other Comprehensive Income
Foreign currency translation adjustment:
Balance at beginning of year (328) (269) (223)
Aggregate adjustment for the year 272 (59) (46)
Balance at end of year (56) (328) (269)
Unrealized gain (loss) on marketable securities, net of tax:
Balance at beginning of year (34) (21) (4)
Current period changes in fair value (net of tax effect of $13, $(9), and $0) 21 (16) (1)
Reclassification to earnings (net of tax effect of $17, $1, and $(11)) 27 3 (16)
Balance at end of year 14 (34) (21)
Unrealized gain (loss) on cash flow hedges, net of tax:
Balance at beginning of year (26) (49) —
FAS 133 transition adjustment — — 23
Current period changes in fair value (net of tax effect of $(6), $6, and $(24)) (9) 10 (39)
Reclassification to earnings (net of tax effect of $(21), $9, and $(21)) (37) 13 (33)
Balance at end of year (72) (26) (49)
Additional minimum pension liability, net of tax:
Balance at beginning of year (50) — —
Minimum pension liability adjustment (net of tax effect of $(6), $(31), and $0) (13) (50) —
Balance at end of year (63) (50) —
Accumulated other comprehensive income at end of year (177) (438) (339)
Deferred Compensation Obligations
Balance at beginning of year 84 47 —
Common stock held for deferred compensation arrangements 52 37 47
Balance at end of year 136 84 47
Treasury Stock
Balance at beginning of year (1) (84) (1) (47) — —
Common stock held for deferred compensation arrangements (1) (52) — (37) (1) (47)
Balance at end of year (2) (136) (1) (84) (1) (47)
Total Shareowners’ Equity At End Of Year $14,852 $ 12,455 $ 10,248
Comprehensive Income $ 3,159 $ 3,083 $ 2,287
See notes to consolidated financial statements.
26 UPS Annual Report 2003
Statements of consolidated cash flows
Years Ended December 31,
(in millions) 2003 2002 2001
Cash Flows From Operating Activities:
Net income $ 2,898 $ 3,182 $ 2,399
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization 1,549 1,464 1,396
Postretirement benefits 84 121 81
Deferred taxes, credits, and other 317 162 481
Stock award plans 497 445 495
Loss (gain) on investments 57 16 4
Loss (gain) on impairment or disposal of assets 55 19 29
Provision for losses on finance receivables 39 26 7
Restructuring charge and related expenses — 85 —
Impairment of goodwill — 74 —
Vacation policy change — (121) —
Tax assessment reversal — (776) —
Changes in assets and liabilities, net of effect of acquisitions:
Accounts receivable, net (264) 312 415
Other current assets 13 403 (142)
Prepaid pension costs (990) (87) (252)
Accounts payable 66 (56) (313)
Accrued wages and withholdings 83 112 27
Dividends payable 70 — 20
Income taxes payable 204 16 35
Other current liabilities (32) 291 (112)
Net cash from operating activities 4,646 5,688 4,570
Cash Flows From Investing Activities:
Capital expenditures (1,947) (1,658) (2,372)
Disposals of property, plant, and equipment 118 89 136
Purchases of marketable securities and short-term investments (6,074) (2,303) (3,361)
Sales and maturities of marketable securities and short-term investments 5,909 2,211 3,686
Net (increase) decrease in finance receivables 50 (495) (637)
Cash received (paid) for business acquisitions/dispositions 8 (14) (466)
Other asset receipts (payments) (6) (24) (39)
Net cash (used in) investing activities (1,942) (2,194) (3,053)
Cash Flows From Financing Activities:
Proceeds from borrowings 361 419 2,312
Repayments of borrowings (1,245) (1,099) (1,089)
Purchases of common stock (398) (604) (2,019)
Issuances of common stock 154 116 219
Dividends (1,026) (840) (847)
Other transactions (26) (82) (69)
Net cash (used in) financing activities (2,180) (2,090) (1,493)
Effect Of Exchange Rate Changes On Cash 216 (51) (45)
Net Increase (Decrease) In Cash And Cash Equivalents 740 1,353 (21)
Cash And Cash Equivalents:
Beginning of period 2,211 858 879
End of period $ 2,951 $ 2,211 $ 858
Cash Paid During The Period For:
Interest (net of amount capitalized) $ 126 $ 190 $ 164
Income taxes $ 1,097 $ 1,416 $ 1,042
See notes to consolidated financial statements.
Consolidated financial statements 27
Notes to consolidated financial statements
Note 1. Summary of Accounting Policies
Marketable Securities and Short-Term Investments
Basis of Financial Statements and Business Activities
The accompanying financial statements include the accounts of
United Parcel Service, Inc., and all of its consolidated subsidiaries
(collectively “UPS” or the “Company”). All intercompany balances
and transactions have been eliminated.
UPS concentrates its operations in the field of transportation
services, primarily domestic and international letter and package
delivery. Through our non-package subsidiaries, we are also a
global provider of specialized transportation, logistics, and finan-
cial services.
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclo-
sure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from
those estimates.
Revenue Recognition
U.S. Domestic and International Package Operations — Revenue
is recognized upon delivery of a letter or package.
UPS Supply Chain Solutions — Freight forwarding revenue is rec-
ognized net of the expense related to the transportation of freight
at the time the services are performed. Material management and
distribution revenue is recognized upon performance of the service
provided. Customs brokerage revenue is recognized upon com-
pleting documents necessary for customs entry purposes.
UPS Capital — Income on loans and direct finance leases is
recognized on the interest method. Accrual of interest income is
suspended at the earlier of the time at which collection of an
account becomes doubtful or the account becomes 90 days delin-
quent. Income on operating leases is recognized on the straight-line
method over the terms of the underlying leases.
Cash and Cash Equivalents
Cash and cash equivalents consist of highly liquid investments
(including investments in debt, auction rate securities, and other
money market instruments of $2.493 and $1.780 billion at
December 31, 2003 and 2002, respectively) that are readily con-
vertible into cash. We consider securities with maturities of three
months or less, when purchased, to be cash equivalents. The car-
rying amount of these securities approximates fair value because
of the short-term maturity of these instruments.
Marketable securities are classified as available-for-sale and are car-
ried at fair value, with related unrealized gains and losses reported,
net of tax, as other comprehensive income (“OCI”), a separate
component of shareowners’ equity. The amortized cost of debt
securities is adjusted for amortization of premiums and accretion of
discounts to maturity. Such amortization and accretion is included
in investment income, along with interest and dividends. The cost
of securities sold is based on the specific identification method;
realized gains and losses resulting from such sales are included in
investment income.
Investment securities are reviewed for impairment in
accordance with Financial Accounting Standards Board Statement
No. 115 “Accounting for Certain Investments in Debt and Equity
Securities.” Impairment of investment securities results in a charge
to income when a market decline below cost is other than temporary.
Property, Plant, and Equipment
Property, plant, and equipment are carried at cost. Depreciation
and amortization are provided by the straight-line method over
the estimated useful lives of the assets, which are as follows:
Vehicles – 9 years; Aircraft – 12 to 20 years; Buildings – 20 to 40
years; Leasehold Improvements – lives of leases; Plant Equipment
– 5 to 8 1/3 years; Technology Equipment (including capitalized
software) – 3 to 5 years. The costs of major airframe and engine
overhauls, as well as routine maintenance and repairs, are charged
to expense as incurred.
Interest incurred during the construction period of certain prop-
erty, plant, and equipment is capitalized until the underlying assets
are placed in service, at which time amortization of the capitalized
interest begins, straight-line, over the estimated useful lives of the
related assets. Capitalized interest was $25, $25, and $47 million
for 2003, 2002, and 2001, respectively.
Impairment of Long-Lived Assets
In accordance with the provisions of FASB Statement No. 144
“Accounting for the Impairment or Disposal of Long-Lived
Assets,” we review long-lived assets for impairment when cir-
cumstances indicate the carrying amount of an asset may not be
recoverable based on the undiscounted future cash flows of the
asset. If the carrying amount of the asset is determined not to be
recoverable, a write-down to fair value is recorded. Fair values are
determined based on quoted market values, discounted cash flows,
or external appraisals, as applicable. We review long-lived assets
for impairment at the individual asset or the asset group level for
which the lowest level of independent cash flows can be identified.
In December 2003, we permanently removed from service a
number of Boeing 727 and DC-8 aircraft. As a result, we conducted
an impairment evaluation, which resulted in a $75 million impairment
28 UPS Annual Report 2003
charge during the fourth quarter for these aircraft, $69 million
of which impacted the U.S. domestic package segment and
$6 million of which impacted the international package seg-
ment. This charge is classified in the caption “other expenses”
within other operating expenses (see Note 13). UPS continues to
operate all of its other aircraft and continues to experience positive
cash flow.
Goodwill and Intangible Assets
Costs of purchased businesses in excess of net assets acquired
(goodwill) and intangible assets are accounted for under the
provisions of FASB Statement No. 142 “Goodwill and Other
Intangible Assets” (“FAS 142”). The amortization of goodwill
and indefinite-lived intangibles ceased upon the implementation
of FAS 142 on January 1, 2002. Had the non-amortization provi-
sions of FAS 142 been applied to 2001, then our net income would
have been increased by $59 million, or $0.05 per diluted share in
that year.
certain limits. 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 determined by
outside actuaries, who incorporate historical loss experience and
judgments about the present and expected levels of cost per claim.
Income Taxes
Income taxes are accounted for under FASB Statement No. 109,
“Accounting for Income Taxes” (“FAS 109’’). FAS 109 is an asset
and liability approach that requires the recognition of deferred tax
assets and liabilities for the expected future tax consequences of
events that have been recognized in our financial statements or tax
returns. In estimating future tax consequences, FAS 109 generally
considers all expected future events other than proposed changes in
the tax law or rates. Valuation allowances are provided if it is more
likely than not that a deferred tax asset will not be realized.
Also upon adoption of FAS 142, we were required to test all
Foreign Currency Translation
existing goodwill for impairment as of that date, and at least
annually thereafter, unless changes in circumstances indicate an
impairment may have occurred sooner. We are required to test
goodwill on a “reporting unit” basis. A reporting unit is the oper-
ating segment unless, for businesses within that operating segment,
discrete financial information is prepared and regularly reviewed
by management, in which case such a component business is the
reporting unit.
A fair value approach is used to test goodwill for impairment.
An impairment charge is recognized for the amount, if any, by
which the carrying amount of goodwill exceeds its fair value. Fair
values are established using discounted cash flows. When available
and as appropriate, comparative market multiples were used to
corroborate discounted cash flow results.
We recorded a non-cash goodwill impairment charge of $72
million ($0.06 per diluted share), as of January 1, 2002, related to
our Mail Technologies business. This charge is reported as a cumu-
lative effect of a change in accounting principle and resulted in a
restatement of our first quarter 2002 quarterly financial statements
(see Note 19). The primary factor resulting in the impairment
charge was the lower than anticipated growth experienced in the
expedited mail delivery business. In conjunction with our annual
test of goodwill in 2002, we recorded an additional impairment
charge of $2 million related to our Mail Technologies business,
resulting in total goodwill impairment of $74 million for 2002. We
sold the Mail Technologies business unit during the second quarter
of 2003 (see Note 7). Our annual impairment test performed in
2003 resulted in no goodwill impairment.
Self-Insurance Accruals
We self-insure costs associated with workers’ compensation
claims, automotive liability, and general business liabilities, up to
We translate the results of operations of our foreign subsidiaries
using average exchange rates during each period, whereas bal-
ance sheet accounts are translated using exchange rates at the end
of each period. Balance sheet currency translation adjustments
are recorded in OCI. Net currency transaction gains and losses
included in other operating expenses were pre-tax gains of $21,
$27, and $16 million in 2003, 2002, and 2001, respectively.
Stock-Based Compensation
Effective January 1, 2003, we adopted the fair value measurement
provisions of FASB Statement No. 123 “Accounting for Stock-Based
Compensation” (“FAS 123”). In years prior to 2003, we used the
intrinsic value method prescribed by Accounting Principles Board
Opinion No. 25, “Accounting for Stock Issued to Employees”
(“APB 25”). Under APB 25, we did not have to recognize compensa-
tion expense for our stock option grants and our discounted stock
purchase plan, however we did recognize compensation expense for
our management incentive awards and certain other stock awards
(see Note 11 for a description of these plans).
Under the provisions of FASB Statement No. 148 “Accounting
for Stock-Based Compensation — Transition and Disclosure,” we
have elected to adopt the measurement provisions of FAS 123 using
the prospective method. Under this approach, all stock-based com-
pensation granted subsequent to January 1, 2003 has been expensed
to compensation and benefits over the vesting period based on
the fair value at the date the stock-based compensation is granted.
Stock compensation awards granted in 2003 include stock options,
management incentive awards, restricted performance units, and
employer matching contributions (in shares of UPS stock) for a
defined contribution benefit plan. The adoption of the measurement
provisions of FAS 123 reduced 2003 net income by $20 million, or
$0.02 per diluted share.
Notes to consolidated financial statements 29
Notes to consolidated financial statements
The following provides pro forma information as to the impact on net income and earnings per share if we had used the fair
value measurement provisions of FAS 123 to account for all stock-based compensation awards granted prior to January 1, 2003
(in millions, except per share amounts).
2003 2002 2001
Net income $ 2,898 $ 3,182 $ 2,399
Add: Stock-based employee compensation expense
included in net income, net of tax effects 456 391 440
Less: Total pro forma stock-based employee
compensation expense, net of tax effects (507) (459) (491)
Pro forma net income $ 2,847 $ 3,114 $ 2,348
Basic earnings per share
As reported $ 2.57 $ 2.84 $ 2.13
Pro forma $ 2.52 $ 2.78 $ 2.08
Diluted earnings per share
As reported $ 2.55 $ 2.81 $ 2.10
Pro forma $ 2.50 $ 2.75 $ 2.05
The fair value of each option grant is estimated using the Black-Scholes option pricing model. Compensation cost is also mea-
sured for the fair value of employees’ purchase rights under our discounted stock purchase plan using the Black-Scholes option
pricing model. The weighted-average assumptions used, by year, and the calculated weighted-average fair value of options and
employees’ purchase rights granted, are as follows:
Stock options: 2003 2002 2001
Expected yield 1.22% 1.10% 1.10%
Risk-free interest rate 3.70% 4.67% 4.64%
Expected life in years 8 5 5
Expected volatility 19.55% 20.24% 32.40%
Weighted-average fair value of options granted $ 17.02 $ 21.27 $ 25.49
Discounted stock purchase plan: 2003 2002 2001
Expected yield 1.12% 1.10% 1.10%
Risk-free interest rate 1.06% 1.70% 2.36%
Expected life in years 0.25 0.25 0.25
Expected volatility 19.79% 20.45% 22.85%
Weighted-average fair value of purchase rights* $ 8.53 $ 8.20 $ 7.19
* Includes the 10% discount from the market price (see Note 11).
Derivative Instruments
Effective January 1, 2001, we adopted FASB Statement No. 133, “Accounting for Derivative Instruments and Hedging Activities”
(“FAS 133”), as amended by Statements No. 137 and No. 138. FAS 133, as amended, requires all financial derivative instruments
to be recorded on our balance sheet at fair value. Derivatives not designated as hedges must be adjusted to fair value through
income. If a derivative is designated as a hedge, depending on the nature of the hedge, changes in its fair value that are considered
to be effective, as defined, either offset the change in fair value of the hedged assets, liabilities, or firm commitments through
income, or are recorded in OCI until the hedged item is recorded in income. Any portion of a change in a derivative’s fair value that
is considered to be ineffective, or is excluded from the measurement of effectiveness, is recorded immediately in income.
30 UPS Annual Report 2003
At January 1, 2001, our financial statements were adjusted to record cumulative effect of adopting FAS 133, as follows (in millions,
except per share amounts):
Adjustment to fair value of derivative instruments $ (42) $
Income tax effects 16
Adjustment, net of tax $ (26) $
Effect on diluted earnings per share (a)
$ (0.02)
Income
OCI
37
(14)
23
(a) For income effect, amount shown is net of adjustment to hedged items.
The cumulative effect on income resulted primarily from
marking to market the time value of option contracts used in
commodity and foreign currency cash flow hedging. The cumula-
tive effect on OCI resulted primarily from marking to market
swap contracts used as cash flow hedges of anticipated foreign
currency cash flows and anticipated purchases of energy products.
New Accounting Pronouncements
In June 2002, the FASB issued Statement No. 146 “Accounting
for Costs Associated with Exit or Disposal Activities” (“FAS 146”).
FAS 146 provides guidance on the recognition and measurement of
liabilities associated with exit or disposal activities and requires
that such liabilities be recognized when incurred. This statement
was effective for exit or disposal activities initiated on or after
January 1, 2003.
As discussed in Note 17, we implemented a restructuring pro-
gram involving the business unit integration of our Freight Services
and Logistics Group operations in the fourth quarter of 2002. As
this restructuring program was initiated in 2002, we accounted for
this restructuring program using the existing guidance in EITF 94-3
“Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity (Including Certain Costs
Incurred in a Restructuring).” Therefore, the adoption of FAS 146
on January 1, 2003 had no effect on our results of operations or
financial condition. In the fourth quarter of 2002, we recorded a
pre-tax restructuring charge and related expenses in the amount
of $106 million, which is classified in other operating expenses.
In November 2002, the FASB issued Interpretation No. 45
“Guarantor’s Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of
Others” (“FIN 45”). FIN 45 requires that a liability be recognized
at fair value at the inception of certain guarantees for the obliga-
tions undertaken by the guarantor. FIN 45 also requires additional
disclosures for certain guarantee contracts. The disclosure provi-
sions of FIN 45 were effective for financial statements ending
after December 15, 2002, while the recognition and initial
measurement provisions were applicable on a prospective basis
to guarantees issued or modified after December 31, 2002. The
adoption of FIN 45 was not material to our results of operations
or financial condition.
In January 2003, the FASB issued Interpretation No. 46
“Consolidation of Variable Interest Entities,” to address perceived
weaknesses in accounting for entities commonly known as special
purpose or off balance sheet. In addition to numerous FASB Staff
Positions written to clarify and improve the application of FIN 46,
the FASB recently announced a deferral for certain entities, and an
amendment to FIN 46 entitled FASB Interpretation No. 46 (revised
December 2003) “Consolidation of Variable Interest Entities”
(“FIN 46”).
FIN 46 provides guidance for identifying the party with a
controlling financial interest resulting from arrangements or finan-
cial instruments rather than voting interests. FIN 46 defines the
term “variable interest entity” and is based on the premise that
if a business enterprise absorbs a majority of such an entity’s
expected losses and/or receives a majority of its expected residual
returns, that enterprise has a controlling financial interest, and
would thus require consolidation of the variable interest entity. As
of December 31, 2003, we have adopted FIN 46, and the effects
of adoption were not material to our results of operations or
financial condition.
On July 1, 2003, we adopted FASB Statement No. 149
“Amendment of Statement 133 on Derivative Instruments and
Hedging Activities” (“FAS 149”). FAS 149 amends FAS 133 for
certain decisions made by the FASB as part of the Derivatives
Implementation Group process. FAS 149 also amends FAS 133
to incorporate clarifications of the definition of a derivative. The
adoption of FAS 149 was not material to our results of operations
or financial condition.
On July 1, 2003, we adopted FASB Statement No. 150
“Accounting for Certain Instruments with Characteristics of Both
Liabilities and Equity” (“FAS 150”). FAS 150 establishes how an
issuer measures certain freestanding financial instruments with
characteristics of both liabilities and equity, and requires that such
instruments be classified as liabilities. The adoption of FAS 150
was not material to our results of operations or financial condition.
In December 2003, the FASB revised Statement No. 132,
“Employers’ Disclosures about Pensions and Other Postretirement
Benefits” (“FAS 132”). The revised standard requires new disclo-
sures in addition to those required by the original standard about
the assets, obligations, cash flows, and net periodic benefit cost of
defined benefit pension plans and other defined benefit postretire-
ment plans. As revised, FAS 132 is effective for financial statements
with fiscal years ending after December 15, 2003, and we have
included these disclosures in Note 5 – Employee Benefit Plans.
Changes in Presentation
Certain prior year amounts have been reclassified to conform to
the current year presentation.
Notes to consolidated financial statements 31
Notes to consolidated financial statements
NOTE 2. MARKETABLE SECURITIES AND SHORT-TERM INVESTMENTS
The following is a summary of marketable securities and short-term investments at December 31, 2003 and 2002 (in millions):
Unrealized Unrealized Estimated
2003 Cost Gains Losses Fair Value
U.S. government & agency securities $ 126 $ 1 $ — $ 127
U.S. mortgage & asset-backed securities 315 1 — 316
U.S. corporate securities 160 2 1 161
U.S. state and local municipal securities 158 — — 158
Other debt securities 5 — 1 4
Total debt securities 764 4 2 766
Common equity securities 66 29 — 95
Preferred equity securities 149 — 9 140
$ 979 $ 33 $ 11 $ 1,001
Unrealized Unrealized Estimated
2002 Cost Gains Losses Fair Value
U.S. government & agency securities $ 79 $ 3 $ — $ 82
U.S. mortgage & asset-backed securities 72 3 — 75
U.S. corporate securities 147 2 1 148
U.S. state and local municipal securities 53 — — 53
Other debt securities 4 — 1 3
Total debt securities 355 8 2 361
Common equity securities 379 5 62 322
Preferred equity securities 125 — 5 120
$ 859 $ 13 $ 69 $ 803
The gross realized gains on sales of marketable securities totaled $21, $11, and $34 million in 2003, 2002, and 2001, respectively. The
gross realized losses totaled $7, $10, and $7 million in 2003, 2002, and 2001, respectively. Impairment losses recognized on marketable
securities and short-term investments totaled $58, $5, and $0 million during 2003, 2002, and 2001, respectively.
The following table presents the age of gross unrealized losses and fair value by investment category for all securities in a loss position
as of December 31, 2003 (in millions):
Less Than 12 Months 12 Months or More Total
Fair Unrealized Fair Unrealized Fair Unrealized
Value Losses Value Losses Value Losses
U.S. government & agency securities $ 24 $ — $ 1
$ — $ 25 $ —
U.S. mortgage & asset-backed securities 9 — 1 — 10 —
U.S. corporate securities 38 1 10 — 48 1
U.S. state and local municipal securities 10 — — — 10 —
Other debt securities — 1 — — — 1
Total debt securities 81 2 12 — 93 2
Common equity securities — — — — — —
Preferred equity securities — — 91 9 91 9
$ 81 $ 2 $ 103 $ 9 $ 184 $ 11
32 UPS Annual Report 2003
The unrealized losses in the preferred equity securities relate
to securities issued by the Federal National Mortgage Association
(FNMA) and the Federal Home Loan Mortgage Corporation
(FHLMC), and are primarily due to changes in market interest
rates. Due to the periodic interest rate adjustment features on
these securities, we do not consider these losses to be other-than-
temporary. We have both the intent and ability to hold the securities
contained in the previous table for a time necessary to recover the
cost basis.
The amortized cost and estimated fair value of marketable
securities and short-term investments at December 31, 2003, by
contractual maturity, are shown below (in millions). Actual maturi-
ties may differ from contractual maturities because the issuers of
the securities may have the right to prepay obligations without
prepayment penalties.
Estimated
Fair Value
Cost
Due in one year or less $ 19 $ 19
Due after one year through three years 150 150
Due after three years through five years 19 19
Due after five years 576 578
764 766
Equity securities 215 235
$ 979 $ 1,001
NOTE 3. FINANCE RECEIVABLES
The following is a summary of finance receivables at
December 31, 2003 and 2002 (in millions):
2003 2002
Commercial term loans $ 438 $ 523
Investment in finance leases 270 218
Asset-based lending 290 381
Receivable factoring 468 400
Gross finance receivables 1,466 1,522
Less: Allowance for credit losses (52) (38)
Balance at December 31 $ 1,414 $ 1,484
Outstanding receivable balances at December 31, 2003 and
2002 are net of unearned income of $48 and $35 million, respec-
tively. When we “factor” (i.e., purchase) a customer invoice from
a client, we record the customer receivable as an asset and also
establish a liability for the funds due to the client, which is recorded
in accounts payable on the consolidated balance sheet.
The following is a reconciliation of receivable factoring
balances at December 31, 2003 and 2002 (in millions):
2003 2002
Customer receivable balances $ 468 $ 400
Less: Amounts due to client (195) (176)
Net funds employed $ 273 $ 224
Non-earning finance receivables were $67 and $41 million at
December 31, 2003 and 2002, respectively. The following is a roll-
forward of the allowance for credit losses on finance receivables
(in millions):
2003 2002
Balance at January 1 $ 38 $ 30
Provisions charged to operations 39 26
Charge-offs, net of recoveries (25) (18)
Balance at December 31 $ 52 $ 38
The carrying value of finance receivables at December 31, 2003,
by contractual maturity, is shown below (in millions). Actual
maturities may differ from contractual maturities because some
borrowers have the right to prepay these receivables without
prepayment penalties.
Carrying Value
Due in one year or less $ 872
Due after one year through three years 144
Due after three years through five years 107
Due after five years 343
$ 1,466
Based on interest rates for financial instruments with similar
terms and maturities, the fair value of finance receivables is approx-
imately $1.384 and $1.492 billion as of December 31, 2003 and
2002, respectively. At December 31, 2003, we had unfunded loan
commitments totaling $493 million, consisting of standby letters of
credit of $68 million and other unfunded lending commitments of
$425 million.
Notes to consolidated financial statements 33
Notes to consolidated financial statements
NOTE 4. PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment as of December 31 consists
of the following (in millions):
2003 2002
Vehicles $ 3,486 $ 3,467
Aircraft (including aircraft
under capitalized leases) 10,897 10,151
Land 721 704
Buildings 2,083 2,049
Leasehold improvements 2,219 2,159
Plant equipment 4,410 4,248
Technology equipment
(including capitalized software) 2,366 1,998
Equipment under operating lease 53 50
Construction-in-progress 680 535
26,915 25,361
Less: Accumulated
depreciation and amortization (13,007) (11,749)
$ 13,908 $ 13,612
NOTE 5. EMPLOYEE BENEFIT PLANS
We maintain the following defined benefit pension plans (the
“Plans’’): UPS Retirement Plan, UPS Excess Coordinating
Benefit Plan, and the UPS Pension Plan.
The UPS Retirement Plan is noncontributory and includes
substantially all eligible employees of participating domestic
subsidiaries who are not members of a collective bargaining
unit. The Plan provides for retirement benefits based on average
compensation levels earned by employees prior to retirement.
Benefits payable under this Plan are subject to maximum com-
pensation limits and the annual benefit limits for a tax qualified
defined benefit plan as prescribed by the Internal Revenue Service.
The UPS Excess Coordinating Benefit Plan is a non-qualified
plan that provides benefits to participants in the UPS Retirement
Plan for amounts that exceed the benefit limits described above.
The UPS Pension Plan is noncontributory and includes certain
eligible employees of participating domestic subsidiaries and
members of collective bargaining units that elect to participate in
the Plan. The Plan provides for retirement benefits based on service
credits earned by employees prior to retirement.
Our funding policy is consistent with relevant federal tax
regulations. Accordingly, our contributions are deductible for
federal income tax purposes. Because the UPS Excess Coordinating
Benefit Plan is non-qualified for federal income tax purposes, this
Plan is not funded.
We also sponsor postretirement medical plans that provide
health care benefits to our retirees who meet certain eligibility
requirements and who are not otherwise covered by multi-
employer plans. Generally, this includes employees with at least
10 years of service who have reached age 55 and employees who
are eligible for postretirement medical benefits from a Company-
sponsored plan pursuant to collective bargaining agreements. We
have the right to modify or terminate certain of these plans. In many
cases, these benefits have been provided to retirees on a noncontribu-
tory basis; however, in certain cases, retirees are required to contribute
toward the cost of the coverage.
Our accumulated postretirement benefit obligation and net
periodic cost for our postretirement medical benefits do not reflect
the effects of the Medicare Prescription Drug, Improvement, and
Modernization Act of 2003 (the “Act”). The provisions of the
Act provide for a federal subsidy for plans that provide prescription
drug benefits and meet certain qualifications. Specific authoritative
guidance on the accounting for the federal subsidy is pending, and
when that guidance is issued, it could require us to change information
related to our actuarially determined, accumulated postretirement
benefit obligation, and net periodic cost for our postretirement medical
benefit plans.
34 UPS Annual Report 2003
Benefit Obligations
The following table provides a reconciliation of the changes in the plans’ benefit obligations as of September 30 (in millions):
Postretirement
Pension Benefits Medical Benefits
2003 2002 2003 2002
Net benefit obligation at October 1, prior year $ 6,670 $ 5,347 $ 2,149 $ 1,759
Service cost 282 217 79 63
Interest cost 465 413 148 134
Plan participants’ contributions — — 6 3
Plan amendments 3 100 (22) 38
Actuarial (gain) loss 876 777 337 236
Gross benefits paid (204) (184) (105) (84)
Net benefit obligation at September 30 $ 8,092 $ 6,670 $ 2,592 $ 2,149
Postretirement
Weighted-average assumptions used to Pension Benefits Medical Benefits
determine benefit obligations: 2003 2002 2003 2002
Discount rate 6.25% 6.75% 6.25% 6.75%
Rate of annual increase in future compensation levels 4.00% 4.00% N/A N/A
The accumulated benefit obligation for our pension plans as
of September 30, 2003 and 2002 was $7.325 and $5.977 billion,
respectively. We use a measurement date of September 30 for
our pension and postretirement benefit plans.
Future postretirement medical benefit costs were forecasted
assuming an initial annual increase of 9.00%, decreasing to 5.00%
by the year 2013 and with consistent annual increases at those
ultimate levels thereafter.
Assumed health care cost trends have a significant effect on
the amounts reported for the postretirement medical plans. A
one-percent change in assumed health care cost trend rates
would have the following effects (in millions):
1% Increase 1% Decrease
Effect on postretirement
benefit obligation $ 78 $ (76)
Plan Assets
Because the UPS Excess Coordinating Plan is not funded,
the Company has recorded an additional minimum pension liability
for this plan of $105 and $88 million at December 31, 2003 and
2002, respectively. This liability is included in the other credits and
non-current liabilities portion of Note 9. As of December 31, 2003
and 2002, the Company has recorded an intangible asset of $5
and $7 million, respectively, representing the net unrecognized
prior service cost for this plan. A total of $63 and $50 million at
December 31, 2003 and 2002, respectively, was recorded as a
reduction of other comprehensive income in Shareowners’ Equity
(net of the tax effect of $37 and $31 million, respectively). The
unfunded accumulated benefit obligation of the UPS Excess
Coordinating Benefit Plan was $154 and $121 million as of
December 31, 2003 and 2002, respectively.
The following table provides a reconciliation of the changes in the plans’ assets as of September 30 (in millions):
Postretirement
Pension Benefits Medical Benefits
2003 2002 2003 2002
Fair value of plan assets at October 1, prior year $ 6,494 $ 6,496 $ 337 $ 372
Actual return on plan assets 1,143 77 47 3
Employer contributions 390 105 124 43
Plan participants’ contributions — — 6 3
Gross benefits paid (204) (184) (105) (84)
Fair value of plan assets at September 30 $ 7,823 $ 6,494 $ 409 $ 337
Notes to consolidated financial statements 35
Notes to consolidated financial statements
The asset allocation for our pension and other postretirement plans as of September 30, 2003 and 2002 and the target allocation for
2004, by asset category, are as follows:
Weighted Average Percentage of Plan Assets
Target Allocation at September 30,
2004 2003 2002
Equity securities 55% - 65% 60.2% 60.0%
Fixed income securities 20% - 30% 28.5% 25.4%
Real estate/other 10% - 15% 11.3% 14.6%
Total 100.0% 100.0%
Equity securities include UPS Class A shares of common stock in the amounts of $392 (4.8% of total plan assets) and $384 million
(5.6% of total plan assets), as of September 30, 2003 and 2002, respectively.
The UPS benefit plan committees establish investment guidelines and strategies, and regularly monitor the performance of the funds
and portfolio managers. Our investment strategy with respect to pension assets is to invest the assets in accordance with ERISA and
fiduciary standards. The long-term primary objectives for our pension assets are to (1) provide for a reasonable amount of long-term
growth of capital, without undue exposure to risk, and protect the assets from erosion of purchasing power, and (2) provide investment
results that meet or exceed the plans’ actuarially assumed long-term rate of return.
Funded Status
The funded status of the plans, reconciled to the amounts on the balance sheet, is as follows (in millions):
Postretirement
Pension Benefits Medical Benefits
2003 2002 2003 2002
Fair value of plan assets at September 30 $ 7,823 $ 6,494 $ 409 $ 337
Benefit obligation at September 30 (8,092) (6,670) (2,592) (2,149)
Funded status at September 30 (269) (176) (2,183) (1,812)
Amounts not yet recognized:
Unrecognized net actuarial (gain) loss 2,085 1,712 820 516
Unrecognized prior service cost 331 364 11 35
Unrecognized net transition obligation 23 31 — —
Employer contributions 752 1 17 10
Net asset (liability) recorded at December 31 $ 2,922 $ 1,932 $ (1,335) $ (1,251)
Prepaid pension cost $ 2,970 $ 1,964 $ — $ —
Accrued benefit cost (153) (120) (1,335) (1,251)
Intangible asset 5 7 — —
Accumulated other comprehensive income (pre-tax) 100 81 — —
Net asset (liability) recorded at December 31 $ 2,922 $ 1,932 $ (1,335) $ (1,251)
At September 30, 2003 and 2002, the projected benefit obligation, the accumulated benefit obligation, and the fair value of plan assets
for pension plans with a projected benefit obligation in excess of plan assets and for pension plans with an accumulated benefit obligation
in excess of plan assets were as follows (in millions):
Projected Benefit Obligation Accumulated Benefit Obligation
Exceeds the Fair Value of Exceeds the Fair Value of
Plan Assets Plan Assets
As of September 30 2003 2002 2003 2002
Projected benefit obligation $ 6,772 $ 5,640 $ 178 $ 141
Accumulated benefit obligation $ 6,004 $ 4,948 $ 154 $ 121
Fair value of plan assets $ 6,479 $ 5,461 $ — $ —
36 UPS Annual Report 2003
The accumulated postretirement benefit obligation exceeds plan assets for all of our other postretirement benefit plans.
Expected Cash Flows
Information about expected cash flows for the pension and postretirement benefit plans is as follows (in millions):
Employer Contributions: Pension Benefits Other Benefits
2004 (expected) to plan trusts
$ 426
$ 64
Net Periodic Benefit Cost
Information about net periodic benefit cost for the pension and postretirement benefit plans is as follows (in millions):
Pension Benefits Medical Benefits
Net Periodic Cost: 2003 2002 2001 2003 2002 2001
Service cost $ 282 $ 217 $ 192 $ 79 $ 63 $ 55
Interest cost 465 413 363 148 134 118
Expected return on assets (669) (654) (616) (29) (33) (42)
Amortization of:
Transition obligation 8 8 8 — — —
Prior service cost 37 30 30 1 (1) (1)
Actuarial (gain) loss 28 4 (7) 15 4 —
Net periodic benefit cost (benefit) $ 151 $ 18 $ (30) $ 214 $ 167 $ 130
Postretirement
Weighted-average assumptions used to determine net cost:
Discount rate 6.75% 7.50% 7.75% 6.75% 7.50% 7.75%
Rate of compensation increase 4.00% 4.00% 4.00% N/A N/A N/A
Expected return on plan assets 9.21% 9.42% 9.50% 9.25% 9.50% 9.50%
The expected return on plan assets assumption was developed using various market assumptions in combination with the plans’ asset
allocations and active investment management. These assumptions and allocations were evaluated using input from a third-party
consultant and various pension plan asset managers, including their review of asset class return expectations and long-term inflation
assumptions. The 10-year U.S. Treasury yield is the foundation for all other market assumptions, and various risk premiums are added
to determine the expected return for each allocation. As of our September 30, 2003 measurement date, it was projected that the funds
could achieve an 8.96% net return over time, using the plans’ asset allocations and active management strategy.
Assumed health care cost trends have a significant effect on the amounts reported for the postretirement medical plans. A one-percent
change in assumed health care cost trend rates would have the following effects (in millions):
1% Increase 1% Decrease
Effect on total of service
cost and interest cost $ 6 $
(6)
Notes to consolidated financial statements 37
Notes to consolidated financial statements
Other Plans
We also contribute to several multi-employer pension plans for
which the previous disclosure information is not determinable.
Amounts charged to operations for pension contributions to these
multi-employer plans were $1.066 and $1.028 billion, and $977
million during 2003, 2002, and 2001, respectively.
We also contribute to several multi-employer health and welfare
plans that cover both active and retired employees for which the
previous disclosure information is not determinable. Amounts
charged to operations for contributions to multi-employer health
and welfare plans were $691, $604, and $553 million during 2003,
2002, and 2001, respectively.
We also sponsor a defined contribution plan for all employees
not covered under collective bargaining agreements. The Company
matches, in shares of UPS common stock, a portion of the partici-
pating employees’ contributions. Matching contributions charged
to expense were $87, $79, and $71 million for 2003, 2002, and
2001, respectively.
In the fourth quarter of 2002, our vacation policy for
non-union employees was amended to require that vacation pay
be earned ratably throughout the year. Previously, an employee
became vested in the full year of vacation pay at the beginning of
each year. As a result of this policy change, a credit to compensation
and benefits of $197 million was taken in the fourth quarter to
reduce the vacation pay liability as of December 31, 2002.
NOTE 6. GOODWILL, INTANGIBLES, AND OTHER ASSETS
Other assets as of December 31 consist of the following (in millions):
2003 2002
Non-current finance receivables, net of allowance for credit losses $ 574 $ 616
Other non-current assets 379 279
$ 953 $ 895
The following table indicates the allocation of goodwill by reportable segment (in millions):
U.S. Domestic International
Package Package Non-Package Consolidated
December 31, 2001 balance $ — $ 102 $ 1,014 $ 1,116
Acquired — — — —
Impaired — — (74) (74)
Currency/Other — — 28 28
December 31, 2002 balance — 102 968 1,070
Acquired — — 30 30
Impaired — — — —
Currency/Other — (2) 75 73
December 31, 2003 balance $ — $ 100 $ 1,073 $ 1,173
The goodwill added in the non-package segment resulted from the purchase of the remaining minority interest in a previously
acquired company.
38 UPS Annual Report 2003
The following is a summary of intangible assets at December 31, 2003 and 2002 (in millions):
December 31, 2003:
Gross carrying amount
Accumulated amortization
Net carrying value
December 31, 2002:
Gross carrying amount
Accumulated amortization
Net carrying value
Trademarks,
Franchise Rights, Licenses,
Patents, and Other
Intangible
Pension
Asset
Total
Intangible
Assets
$
$
$
$
118
(23)
95
118
(15)
103
$ 5
—
$ 5
$ 7
—
$ 7
$
$
$
$
123
(23)
100
125
(15)
110
Amortization of intangible assets was $9, $8, and $7 million during 2003, 2002 and 2001, respectively. Expected amortization of
finite-lived intangibles for the next five years is as follows (in millions): 2004 - $9; 2005 - $9; 2006 - $9; 2007 - $9; 2008 - $6.
NOTE 7. BUSINESS ACQUISITIONS AND DISPOSITIONS
We regularly explore opportunities to make acquisitions that
would enhance our package delivery business and our various
non-package businesses. Our acquisitions include both domestic
and international transactions. During the three years ended
December 31, 2003, we completed 10 acquisitions that were
accounted for under the purchase method of accounting. In
connection with the foregoing transactions, we paid cash (net of
cash acquired) in the aggregate amount of $30, $14, and $466
million in 2003, 2002, and 2001, respectively, and issued aggregate
UPS Class B common shares of 8.4 million in 2001. Pro forma
results of operations have not been presented for any of the acquisi-
tions because the effects of these transactions were not material on
either an individual or aggregate basis. The results of operations
of each acquired company are included in our statements of con-
solidated income from the date of acquisition. The purchase price
allocations of acquired companies can be modified up to one year
after the date of acquisition, however we expect such adjustments
to the purchase price allocations to be immaterial.
During 2001, we completed several acquisitions that were
added to the non-package segment. We acquired Mail Boxes Etc.,
the world’s largest franchisor of independently owned and operated
business, communication, and shipping centers worldwide, for
cash of $185 million. We acquired Fritz Companies, Inc., a freight
forwarding, customs brokerage, and logistics company, for 7.3 mil-
lion Class B common shares valued at $456 million. Additionally,
we acquired First International Bancorp, Inc., a provider of
structured trade finance, commercial, and government-backed
lending products, for 1.1 million Class B common shares valued at
$54 million.
During the second quarter of 2003, we sold our Mail
Technologies business unit in a transaction that increased net
income by $14 million, or $0.01 per diluted share. The gain con-
sisted of a pre-tax loss of $24 million recorded in other operating
expenses within the non-package segment, and a tax benefit of $38
million recognized in conjunction with the sale. The tax benefit
exceeded the pre-tax loss from this sale primarily because the
goodwill impairment charge we previously recorded for the Mail
Technologies business unit was not deductible for income tax pur-
poses. Consequently, our tax basis was greater than our book basis,
thus producing the tax benefit described above.
During the third quarter of 2003, we sold our Aviation
Technologies business unit and recognized a pre-tax gain of $24 mil-
lion ($15 million after-tax, or $0.01 per diluted share), which
is recorded in other operating expenses within the non-package
segment. The operating results of both the Mail Technologies unit
and the Aviation Technologies unit were previously included in
our non-package segment, and were not material to our consoli-
dated operating results in any of the periods presented.
In January 2004, we announced the acquisition of the remaining
49% minority interest in UPS Yamato Express Co., which is cur-
rently a joint venture with Yamato Transport Co. in Japan. UPS
Yamato Express provides express package delivery services in Japan.
Upon the close of the acquisition, UPS Yamato Express will become
a wholly-owned subsidiary of UPS. The acquisition of UPS Yamato
Express Co. will not have a material effect on our financial condition
or results of operations.
Notes to consolidated financial statements 39
Notes to consolidated financial statements
NOTE 8. LONG-TERM DEBT AND COMMITMENTS
Long-term debt, as of December 31, consists of the following (in millions):
2003 2002
83/8% Debentures, due April 1, 2020 (i) $ 444 $ 424
83/8% Debentures, due April 1, 2030 (i) 276 276
Commercial paper (ii) 544 1,036
Industrial development bonds, Philadelphia Airport facilities, due December 1, 2015 (iii) 100 100
Special facilities revenue bonds, Louisville Airport facilities, due January 1, 2029 (iv) 149 149
Floating rate senior notes (v) 441 341
1.75% Cash-settled convertible senior notes, due September 27, 2007 (vi) — 323
Capitalized lease obligations (vii) 451 469
UPS Notes (viii) 419 568
5.50% Pound Sterling notes, due February 12, 2031 887 801
4.50% Singapore Dollar notes, due November 11, 2004 59 58
Installment notes, mortgages, and bonds at various rates 53 57
3,823 4,602
Less current maturities (674) (1,107)
$ 3,149 $ 3,495
(i) On January 22, 1998, we exchanged $276 million of an original $700 million in debentures for new debentures of equal principal with a maturity of April 1, 2030. The new debentures have the same interest rate
as the 8 3/8% debentures due 2020 until April 1, 2020, and, thereafter, the interest rate will be 7.62% for the final 10 years. The 2030 debentures are redeemable in whole or in part at our option at any time. The
redemption price is equal to the greater of 100% of the principal amount and accrued interest or the sum of the present values of the remaining scheduled payouts of principal and interest thereon discounted to
the date of redemption at a benchmark treasury yield plus five basis points plus accrued interest. The remaining $424 million of 2020 debentures are not subject to redemption prior to maturity. Interest is payable
semiannually on the first of April and October for both debentures and neither debenture is subject to sinking fund requirements.
(ii) The weighted average interest rate on the commercial paper outstanding as of December 31, 2003 and 2002, was 0.96% and 1.3%, respectively. At December 31, 2003 and 2002, the entire commercial paper
balance has been classified as a current liability. The amount of commercial paper outstanding in 2004 is expected to fluctuate. We are authorized to borrow up to $7.0 billion under the two commercial paper
programs we maintain as of December 31, 2003.
(iii) The industrial development bonds bear interest at a daily variable rate. The average interest rates for 2003 and 2002 were 0.9% and 1.3%, respectively.
(iv) The special facilities revenue bonds bear interest at a daily variable rate. The average interest rates for 2003 and 2002 were 1.0% and 1.4%, respectively.
(v) The floating rate senior notes bear interest at one-month LIBOR less 45 basis points. The average interest rates for 2003 and 2002 were 0.8% and 1.4%, respectively. These notes are callable at various times after
30 years at a stated percentage of par value, and putable by the note holders at various times after 10 years at a stated percentage of par value.
(vi) The cash-settled convertible senior notes have a par value of $300 million, accrued interest at a stated rate of 1.75% and were callable after three years. The notes were exchangeable for an amount of cash that was
indexed to the trading price of our Class B common stock. In conjunction with the debt offering, we entered into a swap transaction in which UPS paid 30 Day LIBOR less 38 basis points, and received the 1.75% cash
coupon plus any equity appreciation payable in cash on the notes. The average interest rate payable on the swap for 2003 and 2002 was 0.9% and 1.4%, respectively.
In December 2003, we redeemed the cash-settled convertible senior notes at a price of 102.703, and also terminated the swap transaction associated with the notes. The redemption amount paid was lower than the
amount recorded for the fair value of the notes at the time of redemption, which, along with the cash settlement received on the swap, resulted in a $28 million gain recorded in 2003 results.
(vii) We have capitalized lease obligations for certain aircraft, which are included in Property, Plant, and Equipment at December 31 as follows (in millions):
2003 2002
Aircraft $ 1,474 $ 1,169
Accumulated amortization (198) (149)
$ 1,276 $ 1,020
(viii) The UPS Notes program involves the periodic issuance of fixed rate notes in $1,000 increments with various terms and maturities. At December 31, 2003, the coupon rates of the outstanding notes varied between 3.00%
and 6.25%, and the interest payments are made either monthly, quarterly, or semiannually. The maturities of the notes range from 2006 to 2018. Substantially all of the fixed obligations associated with the notes were swapped to
floating rates, based on different LIBOR indices plus or minus a spread. The average interest rate payable on the swaps for 2003 and 2002 was 0.8% and 1.5%, respectively.
Based on the borrowing rates currently available to the Company for long-term debt with similar terms and maturities, the fair value
of long-term debt, including current maturities, is approximately $4.1 and $4.9 billion as of December 31, 2003 and 2002, respectively.
We lease certain aircraft, facilities, equipment, and vehicles under operating leases, which expire at various dates through 2054. Certain
of the leases contain escalation clauses and renewal or purchase options. Rent expense related to our operating leases was $678, $685, and
$747 million for 2003, 2002, and 2001, respectively.
40 UPS Annual Report 2003
The following table sets forth the aggregate minimum lease payments under capitalized and operating leases, the aggregate annual prin-
cipal payments due under our long-term debt, and the aggregate amounts expected to be spent for purchase commitments (in millions):
Capitalized Operating Debt Purchase
Year Leases Leases Principal Commitments
2004 $ 68 $ 314 $ 621 $ 858
2005 96 264 2 747
2006 69 187 2 833
2007 119 128 1 798
2008 128 99 27 697
After 2008 137 457 2,697 604
Total 617 $ 1,449 $ 3,350 $ 4,537
Less: Imputed interest (166)
Present value of minimum capitalized lease payments 451
Less: Current portion (56)
Long-term capitalized lease obligations $ 395
As of December 31, 2003, we had outstanding letters of credit
totaling approximately $1.667 billion issued in connection with
routine business requirements.
We maintain two credit agreements with a consortium of banks
that provide revolving credit facilities of $1.0 billion each, with one
expiring April 22, 2004 and the other April 24, 2008. Interest on
any amounts we borrow under these facilities would be charged at
90-day LIBOR plus 15 basis points. At December 31, 2003, there
were no outstanding borrowings under these facilities. In addition,
we maintain an extendible commercial notes program under which
we are authorized to borrow up to $500 million. No amounts were
outstanding under this program at December 31, 2003.
We have a $2.0 billion shelf registration statement under which
we may issue debt securities in the United States. The debt may be
denominated in a variety of currencies. There was approximately
$85 million issued under this shelf registration statement at
December 31, 2003. We also maintain a $1.0 billion European
medium-term note program. Under this program, we may issue
notes from time to time, denominated in a variety of currencies. At
December 31, 2003, $1.0 billion was available under this program.
NOTE 10. LEGAL PROCEEDINGS AND CONTINGENCIES
On August 9, 1999, the U. S.Tax Court held that we were
liable for tax on income of Overseas Partners Ltd., a Bermuda
company that had reinsured excess value (“EV”) package insur-
ance purchased by our customers beginning in 1984, and that we
were liable for additional tax for the 1983 and 1984 tax years.
The Internal Revenue Service (IRS) took similar positions to those
advanced in the Tax Court decision for tax years subsequent to
1984 through 1998. On June 20, 2001, the U. S. Court of Appeals
for the Eleventh Circuit ruled in our favor and reversed the Tax
Court’s decision. In January 2003, we and the IRS finalized settle-
ment of all outstanding tax issues related to EV package insurance.
Under the terms of settlement, we agreed to adjustments that will
result in income tax due of approximately $562 million, additions
to tax of $60 million, and related interest. The amount due to the
IRS as a result of the settlement is less than amounts we previously
had accrued. As a result, we recorded income, before taxes, of
$1.023 billion ($776 million after tax) during the fourth quarter of
2002. The refunds and credits associated with this settlement are
expected to occur over the next several years.
NOTE 9. DEFERRED TAXES, CREDITS, AND OTHER LIABILITIES
Deferred taxes, credits, and other liabilities as of December 31
consist of the following (in millions):
2003 2002
Deferred federal and state income taxes $ 2,491 $ 2,307
Insurance reserves 923 779
Other credits and non-current liabilities 641 515
$ 4,055 $ 3,601
Notes to consolidated financial statements 41
Notes to consolidated financial statements
The IRS has proposed adjustments, unrelated to the EV package
insurance matters discussed above, regarding the allowance of
deductions and certain losses, the characterization of expenses as
capital rather than ordinary, the treatment of certain income, and
our entitlement to the investment tax credit and the research tax
credit in the 1985 through 1990 tax years. The proposed adjust-
ments would result in $10 million of additional income tax. The
IRS has also issued a report taking a similar position with respect to
some of these issues for each of the years from 1991 through 1994.
That report proposes adjustments that would result in $42 million
in additional income tax. The IRS’s proposed adjustments include
penalties and penalty interest. We believe that the possibility that
such penalties and penalty interest will be sustained is remote. In
November 2002, the IRS issued a report taking a similar position
with respect to some of these issues for each of the years 1995
through 1998. That report proposes adjustments that would result
in $7 million in additional income tax. For the 1985 through
1998 tax years, unpaid interest on these adjustments through
December 31, 2003 could aggregate up to approximately $178
million, after the benefit of related tax deductions. We expect that
we will prevail on substantially all of these issues. Specifically, we
believe that our practice of expensing the items that the IRS alleges
should have been capitalized is consistent with the practices of
other industry participants. The IRS may take similar positions
with respect to some of these issues for each of the years 1999
through 2003. We believe that the eventual resolution of these
issues will not have a material adverse effect on our financial condi-
tion, results of operations, or liquidity.
We are named as a defendant in 23 pending lawsuits that seek
to hold us liable for the collection of premiums for EV insurance in
connection with package shipments since 1984. Based on state and
federal tort, contract, and statutory claims, these cases generally
claim that we failed to remit collected EV premiums to an indepen-
dent insurer; we failed to provide promised EV insurance; we acted
as an insurer without complying with state insurance laws and regu-
lations; and the price for EV insurance was excessive. These actions
were all filed after the August 9, 1999 U. S. Tax Court decision.
These 23 cases have been consolidated for pre-trial purposes
in a multi-district litigation proceeding (“MDL Proceeding”)
in federal court in New York. In addition to the cases in which UPS
is named as a defendant, there also is an action, Smith v. Mail
Boxes Etc., against Mail Boxes Etc. and its franchisees relating to
UPS EV insurance and related services purchased through Mail
Boxes Etc. centers. This case also has been consolidated into the
MDL Proceeding.
While expressly denying any and all liability, the parties have
obtained preliminary court approval of a global settlement
resolving all claims and all cases in the MDL Proceeding. The
proposed settlement requires several steps before it becomes final,
including notice to the settlement class, and obtaining final court
approval. If the proposed settlement becomes final, we would pro-
vide to qualifying settlement class members vouchers toward the
purchase of specified UPS services and pay a portion of the plain-
tiffs’ attorneys’ fees, the total amount of which will be determined
by the Court. The ultimate cost to us of the proposed settlement
will depend on a number of factors. We do not believe that this
proposed settlement will have a material effect on our financial
condition, results of operations, or liquidity.
In addition, we are a defendant in various other lawsuits that
arose in the normal course of business. We believe that the eventual
resolution of these cases will not have a material adverse effect on
our financial condition, results of operations, or liquidity.
We participate in a number of trustee-managed, multi-employer
pension and health and welfare plans for employees covered under
collective bargaining agreements. Several factors could result in
higher future contributions to these plans, including unfavorable
investment performance, changes in demographics, and increased
benefits to participants. At this time, we are unable to determine
the amount of additional future contributions, if any, or whether
any material adverse effect on our financial condition, results of
operations, or cash flows could result from our participation in
these plans.
42 UPS Annual Report 2003
NOTE 11. CAPITAL STOCK AND STOCK-BASED COMPENSATION
Capital Stock
We maintain two classes of common stock, which are distinguished
from each other by their respective voting rights. Class A shares of
UPS are entitled to 10 votes per share, whereas Class B shares are
entitled to one vote per share. Class A shares are primarily held by
UPS employees, and these shares are fully convertible into Class B
shares at any time. Class B shares are publicly traded on the New
York Stock Exchange (NYSE) under the symbol “UPS.”
Incentive Compensation Plan
The UPS Incentive Compensation Plan permits the grant of non-
qualified stock options, incentive stock options, stock appreciation
rights, restricted stock, performance shares, performance units, and
management incentive awards to eligible employees. The number
of shares reserved for issuance under the Plan is 112 million, with
the number of shares reserved for issuance as restricted stock lim-
ited to 34 million. As of December 31, 2003, management incentive
awards, stock options, and restricted stock performance units had
been granted under the Incentive Compensation Plan.
Management Incentive Awards
Persons earning the right to receive management incentive awards
are determined annually by the Compensation Committee of the
UPS Board of Directors. This Committee, in its sole discretion,
determines the total award, which consists of UPS Class A common
stock, given in any year. Amounts expensed for management incen-
tive awards were $606, $556, and $651 million during 2003, 2002,
and 2001, respectively.
Nonqualified Stock Options
We maintain fixed stock option plans, under which options are
granted to purchase shares of UPS Class A common stock. Prior to
adoption of the Incentive Compensation Plan, these options were
granted at the current price of UPS shares as determined by the
UPS Board of Directors on the date of option grant. Stock options
granted in connection with the Incentive Compensation Plan must
have an exercise price at least equal to the NYSE closing price of
UPS Class B common stock on the date the option was granted.
Persons earning the right to receive stock options are deter-
mined each year by the Compensation Committee and the UPS
Board of Directors. Except in the case of death, disability, or
retirement, options granted prior to the adoption of our Incentive
Compensation Plan are exercisable only during a limited period
after the expiration of five years from the date of grant, while
options granted under the Incentive Compensation Plan are gener-
ally exercisable three to five years from the date of grant and before
the expiration of the option 10 years after the date of grant. All
options granted are subject to earlier cancellation or exercise under
certain conditions.
The following is an analysis of options to purchase shares of Class A common stock issued and outstanding:
2003 2002 2001
Weighted Weighted Weighted
Average Shares Average Shares Average Shares
Price (in thousands) Price (in thousands) Price (in thousands)
Outstanding at beginning of year $ 38.73 27,745 $ 29.64 29,224 $ 20.57 29,312
Exercised 18.59 (7,297) 15.91 (6,434) 13.50 (5,918)
Granted 62.40 2,860 60.22 5,760 56.90 5,522
Assumed in acquisitions — — — — 58.41 727
Forfeited/expired 44.63 (563) 46.08 (805) 19.94 (419)
Outstanding at end of year $ 48.02 22,745 $ 38.73 27,745 $ 29.64 29,224
Notes to consolidated financial statements 43
Notes to consolidated financial statements
Options were granted to eligible employees under the 1996 Stock Option Plan in March 1999, but options will no longer be granted
under that plan. Beginning in November 1999, options were granted under the Incentive Compensation Plan, and a limited option grant to
certain employees under this plan occurred in 2000. Beginning in 2001 and in future years, options to eligible employees will generally be
granted annually during the first half of each year at the discretion of the Board of Directors.
During 2001, we assumed employee stock options in connection with our acquisitions of Fritz Companies, Inc. and First International
Bancorp, Inc. (see Note 7), which were converted into options to purchase UPS Class A common shares. Existing stock option plans at
Fritz Companies, Inc. were assumed by UPS; however, options will no longer be granted under these plans. Existing stock option plans at First
International Bancorp, Inc. were terminated upon the completion of the acquisition.
The following table summarizes information about stock options outstanding and exercisable at December 31, 2003:
Options Outstanding Options Exercisable
Shares Average Life Average Shares Average
Exercise Price Range (in thousands) (in years) Exercise Price (in thousands) Exercise Price
$13.94 - $21.50 6,197 0.33 $ 21.49 10 $ 17.85
$34.37 - $50.63 2,796 5.82 49.93 2,749 49.93
$56.25 - $59.45 5,265 7.21 56.97 153 59.02
$60.22 - $60.61 5,576 8.32 60.22 — —
$61.88 - $143.13 2,911 9.16 63.12 83 87.56
22,745 5.69 $ 48.02 2,995 $ 51.34
Restricted Performance Units
During 2003, we issued restricted performance units under the Incentive Compensation Plan. Upon vesting, restricted performance units
result in the issuance of the equivalent number of UPS Class A common shares. Persons earning the right to receive restricted performance
units are determined each year by the Compensation Committee and the UPS Board of Directors. Except in the case of death, disability, or
retirement, restricted performance units vest five years after the date of grant. All restricted performance units granted are subject to earlier
cancellation or exercise under certain conditions. During 2003, we issued 1.164 million restricted performance units with a weighted
average fair value of $62.40.
Discounted Employee Stock Purchase Plan
During 2001, we initiated an employee stock purchase plan for all eligible employees. Under the plan, shares of UPS Class A common stock
may be purchased at quarterly intervals at 90% of the lower of the NYSE closing price on the first or the last day of each quarterly period.
Employees purchased 1.9, 1.8, and 0.4 million shares at average prices of $54.08, $50.79, and $46.78 per share during 2003, 2002, and
2001, respectively.
44 UPS Annual Report 2003
Deferred Compensation Arrangements
Segment information as of, and for the years ended December 31
We maintain a deferred compensation plan whereby certain
employees may elect to defer the gains on stock option exercises
by deferring the shares received upon exercise into a rabbi trust.
The shares held in this trust are classified as treasury stock, and
the liability to participating employees is classified as “Deferred
Compensation Arrangements” in the shareowners’ equity section of
the balance sheet. The amount of shares needed to settle the liability
for deferred compensation arrangements is included in the denomi-
nator in both the basic and diluted earnings per share calculations.
NOTE 12. SEGMENT AND GEOGRAPHIC INFORMATION
We report our operations in three segments: U.S. domestic package
operations, international package operations, and non-package
operations. Package operations represent our most significant
business and are broken down into regional operations around
the world. Regional operations managers are responsible for both
domestic and export operations within their geographic area.
U.S. Domestic Package
Domestic package operations include the time-definite delivery of
letters, documents, and packages throughout the United States.
International Package
International package operations include delivery to more than 200
countries and territories worldwide, including shipments wholly
outside the United States, as well as shipments with either origin or
distribution outside the United States. Our international package
reporting segment includes the operations of our Europe, Asia-
Pacific, Canada, and Americas operating segments.
Non-Package
Non-package operations include UPS Supply Chain Solutions, Mail
Boxes Etc. (the franchisor of Mail Boxes Etc. and The UPS Store),
UPS Capital Corporation, our mail and consulting services, and
our excess value package insurance business. UPS Supply Chain
Solutions, which comprises our former UPS Freight Services and
UPS Logistics Group businesses, provides supply chain design and
management, freight forwarding, and customs brokerage services.
In evaluating financial performance, we focus on operating
profit as a segment’s measure of profit or loss. Operating profit is
before investment income, interest expense, and income taxes. The
accounting policies of the reportable segments are the same as those
described in the summary of accounting policies (see Note 1), with
certain expenses allocated between the segments using activity-
based costing methods. Unallocated assets are comprised primarily
of cash, marketable securities, and short-term investments.
is as follows (in millions):
2003 2002 2001
Revenue:
U.S. domestic package $ 25,022 $ 23,924 $ 23,997
International package 5,561 4,680 4,245
Non-package 2,902 2,668 2,079
Consolidated $ 33,485 $ 31,272 $ 30,321
Operating Profit:
U.S. domestic package $ 3,272 $ 3,576 $ 3,620
International package 709 322 125
Non-package 464 198 217
Consolidated $ 4,445 $ 4,096 $ 3,962
Assets:
U.S. domestic package $ 15,446 $ 14,662 $ 16,180
International package 4,287 3,271 2,969
Non-package 6,038 6,245 4,846
Unallocated 3,138 2,179 641
Consolidated $ 28,909 $ 26,357 $ 24,636
Non-package operating profit included $114, $112, and $113
million for 2003, 2002, and 2001, respectively, of intersegment
profit, with a corresponding amount of operating expense, which
reduces operating profit, included in the U.S. domestic package
segment.
Revenue by product type for the years ended December 31 is
as follows (in millions):
2003 2002 2001
U.S. domestic package:
Next Day Air $ 5,580 $ 5,349 $ 5,433
Deferred 2,982 2,868 2,893
Ground 16,460 15,707 15,671
Total U.S. domestic package 25,022 23,924 23,997
International package:
Domestic 1,134 943 907
Export 4,001 3,276 2,931
Cargo 426 461 407
Total International package 5,561 4,680 4,245
Non-package:
UPS Supply Chain Solutions 2,126 1,969 1,479
Other 776 699 600
Total Non-package 2,902 2,668 2,079
Consolidated $ 33,485 $ 31,272 $ 30,321
Notes to consolidated financial statements 45
Notes to consolidated financial statements
Geographic information as of, and for the years ended,
NOTE 14. INCOME TAXES
December 31 is as follows (in millions):
2003 2002 2001
U.S.:
Revenue $ 26,968 $ 26,284 $ 26,163
Long-lived assets $ 14,915 $ 14,129 $ 13,717
International:
Revenue $ 6,517 $ 4,988 $ 4,158
Long-lived assets $ 3,567 $ 2,874 $ 3,050
Consolidated:
Revenue $ 33,485 $ 31,272 $ 30,321
Long-lived assets $ 18,482 $ 17,003 $ 16,767
Revenue, for geographic disclosure, is based on the location
in which service originates. Long-lived assets include property,
plant and equipment, prepaid pension costs, long-term
investments, goodwill, and intangible assets.
NOTE 13. OTHER OPERATING EXPENSES
The major components of other operating expenses for the
years ended December 31 are as follows (in millions):
2003 2002 2001
Repairs and maintenance $ 1,109 $ 1,013 $ 1,050
Depreciation and amortization 1,549 1,464 1,396
Purchased transportation 1,828 1,665 1,652
Fuel 1,050 952 1,000
Other occupancy 576 513 524
Restructuring charge and
related expenses (Note 17) 9 106 —
Other expenses 3,591 3,523 3,340
$ 9,712 $ 9,236 $ 8,962
The income tax expense (benefit) for the years ended December 31
consists of the following (in millions):
2003 2002 2001
Current:
Federal $ 1,103 $ 1,208 $ 1,065
State 112 148 151
Foreign 87 62 38
Total Current 1,302 1,418 1,254
Deferred:
Federal 181 323 225
State (11) 14 33
Total Deferred 170 337 258
Total $ 1,472 $ 1,755 $ 1,512
Income before income taxes includes income of foreign
subsidiaries of $237, $16, and $8 million in 2003, 2002, and
2001, respectively.
A reconciliation of the statutory federal income tax rate to
the effective income tax rate for the years ended December 31
consists of the following:
2003 2002 2001
35.0% 35.0%
Statutory federal
income tax rate 35.0%
State income taxes
(net of federal benefit) 1.5 2.1 3.1
Tax assessment reversal
(tax portion) — (2.8) —
Other (2.8) 0.7 0.3
Effective income tax rate 33.7% 35.0% 38.4%
During the first quarter of 2003, we reduced deferred taxes by
$55 million due to the favorable resolution of several outstanding
contingency matters with the IRS. During the third quarter of 2003,
we reduced deferred taxes by $22 million as a result of a favorable
tax court ruling in relation to an outstanding contingency matter with
the IRS.
After filing our 2002 state tax returns during the fourth quarter
of 2003, we completed a review of the taxability of our operations
in various state taxing jurisdictions and the effects of available state
tax credits. As a result of this review, we recorded a decrease of
$39 million in the income tax provision in the fourth quarter of
2003. This decrease includes a reduction in our estimated state tax
liabilities and the effect of the estimated state income tax effective
rate applied to our temporary differences.
46 UPS Annual Report 2003
Deferred tax liabilities and assets comprise the following at
December 31 (in millions):
2003 2002
Excess of tax over book depreciation $ 2,802 $ 2,725
Pension plans 1,266 835
Other 473 550
Gross deferred tax liabilities 4,541 4,110
Other postretirement benefits 588 582
Loss carryforwards (foreign) 117 92
Insurance reserves 347 348
Vacation pay accrual 131 179
Excess deposits and interest to be refunded 627 619
Other 673 343
Gross deferred tax assets 2,483 2,163
Deferred tax assets valuation allowance (117) (92)
Net deferred tax assets 2,366 2,071
Net deferred tax liability 2,175 2,039
Current deferred tax (asset) liability (316) (268)
Long-term portion — see Note 9 $ 2,491 $ 2,307
The valuation allowance increased by $25 and $23, and
decreased by $32 million during the years ended December 31,
2003, 2002 and 2001, respectively.
We have foreign loss carryforwards of approximately $1.035
billion as of December 31, 2003, the majority of which may be
carried forward indefinitely. These foreign loss carryforwards have
been fully reserved in the deferred tax assets valuation allowance
due to the uncertainty resulting from a lack of previous foreign
taxable income within certain foreign tax jurisdictions.
Undistributed earnings of our foreign subsidiaries amounted
to approximately $727 million at December 31, 2003. Those
earnings are considered to be indefinitely reinvested and, accord-
ingly, no U.S. federal and state deferred income taxes have been
provided thereon. Upon distribution of those earnings in the
form of dividends or otherwise, we would be subject to both U.S.
income taxes (subject to an adjustment for foreign tax credits)
and withholding taxes payable to the various foreign countries.
Determination of the amount of unrecognized deferred U.S.
income tax liability is not practicable because of the complexities
associated with its hypothetical calculation.
NOTE 15. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per share (in millions except per share amounts):
2003 2002 2001
Numerator:
Net income before the cumulative effect of changes in accounting principles $ 2,898 $ 3,254 $ 2,425
Denominator:
Weighted-average shares 1,125 1,117 1,124
Management incentive awards 1 1 2
Deferred compensation arrangements 2 2 —
Denominator for basic earnings per share 1,128 1,120 1,126
Effect of dilutive securities:
Management incentive awards 4 4 5
Stock option plans 6 10 13
Denominator for diluted earnings per share 1,138 1,134 1,144
Basic Earnings Per Share Before Cumulative Effect of Changes in Accounting Principles $ 2.57 $ 2.91 $ 2.15
Diluted Earnings Per Share Before Cumulative Effect of Changes in Accounting Principles $ 2.55 $ 2.87 $ 2.12
Diluted earnings per share for the years ended December 31, 2003, 2002, and 2001 exclude the effect of 0.1, 0.1, and
6.6 million shares, respectively, of common stock that may be issued upon the exercise of employee stock options because such
effect would be antidilutive.
Notes to consolidated financial statements 47
Notes to consolidated financial statements
NOTE 16. DERIVATIVE INSTRUMENTS AND RISK
MANAGEMENT
We are exposed to market risk, primarily related to foreign
exchange rates, commodity prices, equity prices, and interest
rates. These exposures are actively monitored by management.
To manage the volatility relating to these exposures, we enter into
a variety of derivative financial instruments. Our objective is to
reduce, where it is deemed appropriate to do so, fluctuations in
earnings and cash flows associated with changes in foreign cur-
rency rates, commodity prices, equity prices, and interest rates. It
is our policy and practice to use derivative financial instruments
only to the extent necessary to manage exposures. As we use price
sensitive instruments to hedge a certain portion of our existing and
anticipated transactions, we expect that any loss in value for those
instruments generally would be offset by increases in the value of
those hedged transactions.
We do not hold or issue derivative financial instruments for
trading or speculative purposes.
Commodity Price Risk Management
We are exposed to an increase in the prices of refined fuels, prin-
cipally jet-A, diesel, and unleaded gasoline. Additionally, we are
exposed to an increase in the prices of other energy products, prin-
cipally natural gas and electricity. We use a combination of options,
swaps, and futures contracts to provide partial protection from
rising fuel and energy prices. The net fair value of such contracts
subject to price risk, excluding the underlying exposures, as of
December 31, 2003 and 2002 was an asset (liability) of approxi-
mately $30 and $34 million, respectively. We have designated and
account for these contracts as cash flow hedges, and, therefore, the
resulting gains and losses from these hedges are recognized as a
component of fuel expense or other occupancy expense when the
underlying fuel or energy product being hedged is consumed.
Foreign Currency Exchange Risk Management
We have foreign currency risks related to our revenue, operating
expenses, and financing transactions in currencies other than the
local currencies in which we operate. We are exposed to currency
risk from the potential changes in functional currency values of
our foreign currency denominated assets, liabilities, and cash flows.
Our most significant foreign currency exposures relate to the Euro
and the British Pound Sterling. We use a combination of purchased
and written options and forward contracts to hedge currency cash
flow exposures. As of December 31, 2003 and 2002, the net fair
value of the hedging instruments described above was an asset
(liability) of approximately $(48) and $(3) million, respectively.
We have designated and account for these contracts as cash flow
hedges of anticipated foreign currency denominated revenue and,
48 UPS Annual Report 2003
therefore, the resulting gains and losses from these hedges are
recognized as a component of international revenue when the
underlying sales occur.
Interest Rate Risk Management
Our indebtedness under our various financing arrangements
creates interest rate risk. We use a combination of derivative instru-
ments, including interest rate swaps and cross-currency interest
rate swaps, as part of our program to manage the fixed and floating
interest rate mix of our total debt portfolio and related overall
cost of borrowing. These swaps are entered into concurrently with
the issuance of the debt that they are intended to modify, and the
notional amount, interest payment, and maturity dates of the swaps
match the terms of the associated debt. Interest rate swaps allow us
to maintain a target range of floating rate debt.
We have designated and account for these contracts as either
hedges of the fair value of the associated debt instruments, or as
hedges of the variability in expected future interest payments.
Any periodic settlement payments are accrued monthly, as either
a charge or credit to interest expense, and are not material to net
income. The net fair value of our interest rate swaps at December
31, 2003 and 2002 was an asset (liability) of approximately $(27)
and $(62) million, respectively.
Equity Price Risk Management
We hold investments in various available-for-sale equity securities
that are subject to price risk. We use combinations of options to
hedge the price risk exposure inherent in these securities. The
fair value of such options contracts designated as hedges, as of
December 31, 2003 and 2002, was an asset of approximately $0
and $219 million, respectively, which is classified in marketable
securities and short-term investments. A large investment derivative
used to hedge equity price risk settled in 2003 (which resulted in
UPS receiving cash of $222 million) resulting in the decline in value
of our investment derivatives since December 31, 2002.
Credit Risk
The forward contracts, swaps, and options previously discussed
contain an element of risk that the counterparties may be unable to
meet the terms of the agreements. However, we minimize such risk
exposures for these instruments by limiting the counterparties to
large banks and financial institutions that meet established credit
guidelines. We do not expect to incur any losses as a result
of counterparty default.
Derivatives Not Designated As Hedges
NOTE 17. RESTRUCTURING CHARGE AND RELATED EXPENSES
In the fourth quarter of 2002, we initiated a restructuring
program to combine UPS Freight Services and the UPS Logistics
Group into a single business unit (“UPS Supply Chain Solutions”).
In connection with this restructuring program, we also recorded
certain costs related to the integration of activities between UPS
Capital and First International Bank. The program was designed
to facilitate business growth, streamline management decision-
making, reduce the cost structure, and provide higher levels of
service to our customers. Costs of the program included employee
severance costs, asset impairments, costs associated with the
consolidation of facilities, and other costs directly related to the
restructuring program. As of December 31, 2003, the restructuring
program was substantially complete.
A summary of the amounts expensed under the restructuring
program follows below. The costs incurred in connection with this
program are classified in other operating expenses in the income
statement (see Note 13) (amounts in millions):
2003 2002
Employee severance $ — $ 19
Asset impairment 1 42
Facility consolidation 2 25
Other 6 20
$ 9 $ 106
Employee severance costs relate to severance packages for
approximately 800 people. The packages are involuntary and
are formula-driven based on salary levels and past service. Asset
impairment charges consist primarily of capitalized software
that is no longer used as a result of changes in business strategy
due to the restructuring. Facility consolidation costs are associated
with terminating operating leases on offices, warehouses, and
other facilities. Other costs consist primarily of employee
relocations; legal costs associated with establishing the new
organizational structure; costs associated with moving equipment,
records, and inventories between locations; and conforming
accounting policies among recently acquired entities within
UPS Supply Chain Solutions.
Derivatives not designated as hedges primarily consist of interest
rate swaps that are used to hedge a portfolio of small debt instru-
ments. Although these instruments are effective as hedges from an
economic perspective, they do not qualify for hedge accounting
under FAS 133, as amended. The impact from these interest rate
swaps on our results was immaterial. Additionally, we have a small
portfolio of stock warrants in public and private companies that are
held for investment purposes. These warrants are recorded at fair
value, and the impact of these warrants on our results was immate-
rial for each of the three years ending December 31, 2003.
Income Effects of Derivatives
In the context of hedging relationships, “effectiveness” refers to
the degree to which fair value changes in the hedging instrument
offset corresponding changes in the hedged item. Certain elements
of hedge positions cannot qualify for hedge accounting under FAS
133 whether effective or not, and must therefore be marked to
market through income. Both the effective and ineffective portions
of gains and losses on hedges are reported in the income statement
category related to the hedged exposure. Both the ineffective por-
tion of hedge positions and the elements excluded from the measure
of effectiveness were immaterial for each of the three years ending
December 31, 2003.
As of December 31, 2003, $37 million in losses related to cash
flow hedges that are currently deferred in OCI are expected to be
reclassified to income over the 12-month period ending December
31, 2004. The actual amounts that will be reclassified to income
over the next 12 months will vary from this amount as a result of
changes in market conditions. No amounts were reclassified to
income during 2003 in connection with forecasted transactions
that were no longer considered probable of occurring.
At December 31, 2003, the maximum term of derivative instru-
ments that hedge forecasted transactions, except those related to
cross-currency interest rate swaps on existing financial instruments,
was four years. We maintain cross-currency interest rate swaps that
extend through 2009.
Fair Value of Financial Instruments
At December 31, 2003 and 2002, our financial instruments
included cash and cash equivalents, marketable securities and
short-term investments, accounts receivable, finance receivables,
accounts payable, short-term and long-term borrowings, and
commodity, interest rate, foreign currency, and equity options,
forwards, and swaps. The fair values of cash and cash equivalents,
accounts receivable, and accounts payable approximate carrying
values because of the short-term nature of these instruments. The
fair value of our marketable securities and short-term investments
is disclosed in Note 2, finance receivables in Note 3, and debt
instruments in Note 8.
Notes to consolidated financial statements 49
Notes to consolidated financial statements
NOTE 18. SEPTEMBER 11, 2001 EVENTS
In response to the September 11, 2001 terrorist attacks, the FAA
issued a federal ground stop order prohibiting all flights to, from,
and within the United States. Due to this order, all domestic UPS
aircraft were grounded, and international flights into the United
States were diverted on September 11 and 12. We were able to
transport many of our express shipments through our extensive
ground network until the FAA order was lifted and our air opera-
tions resumed on the evening of September 13. Due to the economic
disruption caused by these events, we sustained significant declines
in our U.S. origin package volume during the weeks following
the attacks.
On September 22, 2001, President George W. Bush signed into
law the Air Transportation Safety and System Stabilization Act
(the “Act”), a $15 billion emergency economic assistance package
to mitigate the dramatic financial losses experienced by the nation’s
air carriers. The Act, among other things, provides for the
following: (1) $5 billion in compensation for direct losses incurred
as a result of the federal ground stop order, and for incremental
losses incurred through December 31 as a result of the attacks,
(2) $10 billion in federal loan guarantees and credits, (3) expanded
war risk insurance coverage for air carriers, and (4) govern-
ment assistance for short-term increases in insurance premiums.
We submitted a claim for compensation to the Department of
Transportation and recognized a pre-tax amount of $74 million
related to this reimbursement as a credit to the other expenses line
item of other operating expenses (see Note 13) in 2001 under the
provisions of EITF 01-10 “Accounting for the Impact of Terrorist
Attacks of September 11, 2001.”
NOTE 19. QUARTERLY INFORMATION (unaudited)
First Quarter Second Quarter Third Quarter Fourth Quarter
2003 2002 2003 2002 2003 2002 2003 2002
Revenue:
U.S. domestic package $ 6,020 $ 5,903 $ 6,124 $ 5,908 $ 6,219 $ 5,889 $ 6,659 $ 6,224
International package 1,302 1,054 1,371 1,144 1,370 1,184 1,518 1,298
Non-package 693 622 731 630 723 681 755 735
Total revenue 8,015 7,579 8,226 7,682 8,312 7,754 8,932 8,257
Operating profit:
U.S. domestic package 704 862 832 899 825 809 911 1,006
International package 134 30 158 62 176 65 241 165
Non-package 107 55 90 67 146 76 121 —
Total operating profit 945 947 1,080 1,028 1,147 950 1,273 1,171
Net income $ 611 $ 491 $ 692 $ 611 $ 739 $ 578 $ 856 $ 1,502
Earnings per share:
Basic $ 0.54 $ 0.44 $ 0.61 $ 0.55 $ 0.66 $ 0.52 $ 0.76 $ 1.34
Diluted $ 0.54 $ 0.43 $ 0.61 $ 0.54 $ 0.65 $ 0.51 $ 0.75 $ 1.32
Fourth quarter 2002 net income was affected by the impact of the tax assessment reversal ($776 million after-tax, $0.68 per diluted
share), the credit from our vacation policy change ($121 million after-tax, $0.11 per diluted share), and the restructuring charge and
related expenses ($65 million after-tax, $0.06 per diluted share). First quarter 2002 net income reflects the charge upon adoption of FAS
142 ($72 million after-tax, $0.06 per diluted share).
First quarter 2003 net income reflects a charge for an impairment of investments ($37 million after-tax, $0.03 per diluted share) and
a credit to tax expense upon the resolution of various tax contingencies ($55 million, $0.05 per diluted share). Second quarter 2003 net
income was impacted by the gain on the sale of Mail Technologies ($14 million after-tax, $0.01 per diluted share). Third quarter 2003 net
income reflects the gain on sale of Aviation Technologies ($15 million after-tax, $0.01 per diluted share) and the credit to tax expense from
a favorable ruling on the tax treatment of jet engine maintenance costs ($22 million, $0.02 per diluted share). Fourth qurater 2003 net
income was impacted by a gain on the redemption of long-term debt ($18 million after-tax, $0.02 per diluted share) and a credit to income
tax expense for a lower effective state tax rate ($39 million, $0.03 per diluted share).
50 UPS Annual Report 2003
Management’s discussion and analysis of financial condition and results of operations
Operations
The following tables set forth information showing the change in revenue, average daily package volume, and average revenue per piece,
both in dollars or amounts and in percentage terms:
Year Ended December 31, Change
2003 2002 $ %
Revenue (in millions):
U.S. domestic package:
Next Day Air $ 5,580 $ 5,349 $ 231 4.3%
Deferred 2,982 2,868 114 4.0
Ground 16,460 15,707 753 4.8
Total U.S. domestic package 25,022 23,924 1,098 4.6
International package:
Domestic 1,134 943 191 20.3
Export 4,001 3,276 725 22.1
Cargo 426 461 (35) (7.6)
Total International package 5,561 4,680 881 18.8
Non-package:
UPS Supply Chain Solutions 2,126 1,969 157 8.0
Other 776 699 77 11.0
Total Non-package 2,902 2,668 234 8.8
Consolidated $ 33,485 $ 31,272 $ 2,213 7.1%
Average Daily Package Volume (in thousands): #
U.S. domestic package:
Next Day Air 1,185 1,111 74 6.7%
Deferred 918 895 23 2.6
Ground 10,268 10,112 156 1.5
Total U.S. domestic package 12,371 12,118 253 2.1
International package:
Domestic 786 779 7 0.9
Export 481 443 38 8.6
Total International package 1,267 1,222 45 3.7
Consolidated 13,638 13,340 298 2.2%
Operating days in period 252 252
Average Revenue Per Piece: $
U.S. domestic package:
Next Day Air $ 18.69 $ 19.11 $ (0.42) (2.2)%
Deferred 12.89 12.72 0.17 1.3
Ground 6.36 6.16 0.20 3.2
Total U.S. domestic package 8.03 7.83 0.20 2.6
International package:
Domestic 5.73 4.80 0.93 19.4
Export 33.01 29.35 3.66 12.5
Total International package 16.08 13.70 2.38 17.4
Consolidated $ 8.77 $ 8.37 $ 0.40 4.8%
Management’s discussion and analysis 51
Management’s discussion and analysis of financial condition and results of operations
Year Ended December 31, Change
2002 2001 $ %
Revenue (in millions):
U.S. domestic package:
Next Day Air $ 5,349 $ 5,433 $ (84) (1.5)%
Deferred 2,868 2,893 (25) (0.9)
Ground 15,707 15,671 36 0.2
Total U.S. domestic package 23,924 23,997 (73) (0.3)
International package:
Domestic 943 907 36 4.0
Export 3,276 2,931 345 11.8
Cargo 461 407 54 13.3
Total International package 4,680 4,245 435 10.2
Non-package:
UPS Supply Chain Solutions 1,969 1,479 490 33.1
Other 699 600 99 16.5
Total Non-package 2,668 2,079 589 28.3
Consolidated $ 31,272 $ 30,321 $ 951 3.1%
Average Daily Package Volume (in thousands): #
U.S. domestic package:
Next Day Air 1,111 1,116 (5) (0.4)%
Deferred 895 917 (22) (2.4)
Ground 10,112 10,317 (205) (2.0)
Total U.S. domestic package 12,118 12,350 (232) (1.9)
International package:
Domestic 779 805 (26) (3.2)
Export 443 408 35 8.6
Total International package 1,222 1,213 9 0.7
Consolidated 13,340 13,563 (223) (1.6)%
Operating days in period 252 252
Average Revenue Per Piece: $
U.S. domestic package:
Next Day Air $ 19.11 $ 19.32 $ (0.21) (1.1)%
Deferred 12.72 12.52 0.20 1.6
Ground 6.16 6.03 0.13 2.2
Total U.S. domestic package 7.83 7.71 0.12 1.6
International package:
Domestic 4.80 4.47 0.33 7.4
Export 29.35 28.51 0.84 2.9
Total International package 13.70 12.56 1.14 9.1
Consolidated $ 8.37 $ 8.14 $ 0.23 2.8%
52 UPS Annual Report 2003
Operating Profit
The following tables set forth information showing the change in operating profit, both in dollars (in millions) and in
percentage terms:
Year Ended December 31, Change
2003 2002 $ %
U.S. domestic package $ 3,272 $ 3,576 $ (304) (8.5)%
International package 709 322 387 120.2
Non-package 464 198 266 134.3
Consolidated Operating Profit $ 4,445 $ 4,096 $ 349 8.5%
Year Ended December 31, Change
2002 2001 $ %
U.S. domestic package $ 3,576 $ 3,620 $ (44) (1.2)%
International package 322 125 197 157.6
Non-package 198 217 (19) (8.8)
Consolidated Operating Profit $ 4,096 $ 3,962 $ 134
3.4%
Non-GAAP Financial Measures
In the discussion and analysis below, in “Selected Financial Data,”
and in other parts of this report, we sometimes refer to informa-
tion extracted from consolidated financial information but not
required by generally accepted accounting principles (GAAP) to
be presented in financial statements. Certain of this information is
considered “non-GAAP financial measures” under Securities and
Exchange Commission rules. Specifically, we refer to operating
profit, operating margin, net income and earnings per share on
an “as adjusted” basis, excluding certain transactions that we
believe are not indicative of future results. We have presented these
measures since we believe that meaningful analysis of our financial
performance requires an understanding of the factors underlying
that performance and our judgments about the likelihood that
particular factors will repeat. When these “non-GAAP financial
measures” have been used, we have provided reconciliations of
these adjusted measures to the appropriate GAAP measure for
comparability purposes.
U.S. Domestic Package Operations
2003 compared to 2002
U.S. domestic package revenue increased $1.098 billion, or 4.6%,
for the year, which was driven by a 2.1% increase in average daily
package volume and a 2.6% increase in revenue per piece. Ground
volume increased by 1.5% in 2003, reversing a 2.0% decline
in 2002, reflecting the improving U.S. economy and the impact
that labor negotiations had on lowering volume during portions
of 2002. The volume for our UPS Next Day Air products increased
by 6.7% during the year, driven by double-digit growth in over-
night letters, which was influenced by the strength in mortgage
refinancing activity during 2003. The increase in U.S. domestic
average daily package volume was more significant in the latter
half of the year. In the third and fourth quarters of 2003, total
U.S. domestic average daily package volume increased 3.2% and
4.9%, respectively.
The overall improvement in revenue per piece was primarily
due to the rate increase that became effective in January 2003, with
some additional benefit from the fuel surcharge as described below.
The decline in revenue per piece for the Next Day Air products,
and the relatively smaller increase for the deferred products, was
primarily due to the relatively higher growth in letter volume com-
pared with the growth in package volume for these products.
On January 6, 2003, we increased rates for standard ground
shipments an average of 3.9% for commercial deliveries. The
ground residential surcharge increased $0.05 to $1.15 over the
commercial ground rate. The additional delivery area surcharge
added to residential deliveries in certain ZIP codes increased $0.25
to $1.75. Rates for UPS Hundredweight increased 5.9%. In addi-
tion, we increased rates for UPS Next Day Air an average of 3.4%
and increased rates for deferred services by 4.5%.
Rates for international shipments originating in the United
States (UPS Worldwide Express, UPS Worldwide Express Plus, UPS
Worldwide Expedited, and UPS Standard service) increased an
average of 3.9%. Rate changes for shipments originating outside
the United States generally are made throughout the year and vary
by geographic market.
During 2003, the index-based fuel surcharge reset on a monthly
basis and was based on the National U.S. Average On-Highway
Diesel Fuel Prices as reported by the U.S. Department of Energy.
Management’s discussion and analysis 53
Management’s discussion and analysis of financial condition and results of operations
Based on published rates, the average fuel surcharge increased
to 1.47% in 2003 from 0.78% in 2002, resulting in an increase
in fuel surcharge revenue of $144 million. Effective in 2004, we
have discontinued the fuel surcharge on ground service, while a
new indexed surcharge is being applied to our Next Day Air and
deferred products. This new fuel surcharge for the domestic air
products is based on the U.S. Energy Department’s Gulf Coast
spot price for a gallon of kerosene-type jet fuel. This change will
have a negative impact on revenue for our ground products, while
having a beneficial impact on revenue for our Next Day Air and
deferred products.
U.S. domestic package operating profit declined $304 million,
or 8.5%, primarily due to the slow volume and revenue growth
combined with an increase in operating expenses (discussed further
under the section titled “Operating Expenses and Operating
Margin”). U.S. domestic package operating profit increased 2.0%
in the third quarter and decreased by 9.4% in the fourth quarter.
However, in the fourth quarter of 2002, U.S. domestic package
operating profit benefited from a $175 million credit due to a
change in our vacation policy for non-union employees. Without
the vacation-related credit in the 2002 results, fourth quarter oper-
ating profit would have increased 9.6% and the decline for the year
ending December 31, 2003 would have been $129 million, or 3.8%.
2002 compared to 2001
U.S. domestic package revenue decreased $73 million, or 0.3%, for
the year. This decrease was driven by a 1.9% decrease in average
daily package volume, and partially offset by a 1.6% increase in
revenue per piece. The decline in volume was a result of the impact
of volume diversion to competitors prior to the agreement reached
on a new six-year contract with the International Brotherhood
of Teamsters, combined with the continued weakness in the U.S.
economy. The decline in volume was most pronounced in the
period surrounding the July 31, 2002 expiration date of the
previous contract.
On January 7, 2002, we increased rates for standard ground
shipments an average of 3.5% for commercial deliveries. The
ground residential charge increased $0.05 to $1.10 over the com-
mercial ground rate, and this charge also was applied to express
deliveries in 2002. The additional delivery area surcharge added to
residential deliveries in certain ZIP codes, remained at $1.50, and also
was applied to express deliveries in 2002. Rates for UPS Hundredweight
increased 5.9%.
We also increased rates for UPS Next Day Air, UPS Next Day
Air Saver, UPS 2nd Day Air, and 3 Day Select an average of 4.0%.
The surcharge for UPS Next Day Air Early A.M. increased from
$27.50 to $28.50. Rates for international shipments originating
in the United States (Worldwide Express, Worldwide Express
Plus, UPS Worldwide Expedited and UPS International Standard
service) increased an average of 3.9%. Rate changes for shipments
originating outside the U.S. were made throughout 2002 and varied
by geographic market.
An index-based fuel surcharge, which began in February 2002
and reset on a monthly basis, replaced a fixed fuel surcharge of
1.25%. The indexed surcharge was based on the National U.S.
Average On-Highway Diesel Fuel Prices as reported by the U.S.
Department of Energy. Based on published rates, the average fuel
surcharge for the year ended December 31, 2002 was 0.78%.
Approximately $251 million in revenue was recorded in 2002 as
a result of our fuel surcharge, a decrease of $97 million from the
prior year.
U.S. domestic package operating profit decreased $44 million,
or 1.2%, for the year ended December 31, 2002, primarily due to
the decrease in average daily volume discussed previously and an
increase in operating expenses (discussed further under the section
titled “Operating Expenses and Operating Margin”). In 2002,
operating profit benefited from a credit to operating expense of
$175 million that occurred related to a change in our vacation
policy for non-union employees. In 2001, we recorded a credit
to expense related to the Air Transportation Safety and System
Stabilization Act, which benefited the U.S. domestic package
segment by $28 million.
International Package Operations
2003 compared to 2002
International package revenue improved $881 million, or 18.8%,
for the year due primarily to the 8.6% volume growth for our
export products and strong revenue per piece improvements,
a portion of which can be attributed to the impact of currency.
Revenue increased $443 million during the year due to currency
fluctuations. Export volume increased throughout the world, with
Asia-Pacific, Canada, and the Americas showing double-digit
export volume growth, and U.S. and European export volume
increasing slightly over 6%. European export volume growth
was adversely impacted by the strength of the Euro and the weak
European economy. Domestic volume increased 0.9% for the year,
which reversed a 3.2% decline from the previous year, and was also
negatively affected by the weak European economy.
Export revenue per piece increased 12.5% for the year (3.3%
currency-adjusted), due to improvements in product mix and con-
tinued focus on yield management. In total, international average
daily package volume increased 3.7% and average revenue per
piece increased 17.4% (6.2% currency-adjusted). The 7.6% decline
54 UPS Annual Report 2003
in cargo revenue during the year was largely due to a reduction of
flights in our air network in the Americas.
The improvement in operating profit for our international
package operations was $387 million for the year, $117 million of
which was due to favorable currency fluctuations. This increase
in operating profit was primarily due to the strong export volume
growth and revenue per piece increases described previously. In
2002, international operating profit benefited from an $11 million
credit to operating expense as a result of a change in our vacation
policy for non-union employees.
2002 compared to 2001
For the year ended December 31, 2002, international package rev-
enue improved $435 million, or 10.2% (8.1% currency-adjusted),
due primarily to volume growth for our export products and
strong revenue per piece improvements. This volume growth was
driven primarily by the Asia-Pacific region, which had an increase
in average daily export volume of 17.1%, and the Europe region,
which had an increase in average daily export volume of 13.6%.
In total, international average daily package volume increased
0.7% and average revenue per piece increased 9.1% (6.8% cur-
rency-adjusted)
The improvement in operating profit for our international pack-
age operations was $197 million for the year, $22 million of which
was due to currency fluctuations. The increase in operating profit
was primarily due to export volume growth of 8.6% and a strong
increase in revenue per piece. In addition, the shutdown of the U.S.
West Coast ports during the latter part of 2002 had a beneficial
impact on our international package results. In 2002, operating
profit benefited from an $11 million reduction to expense related to
the change in vacation policy. Operating profit in 2002 benefited,
compared with 2001, from an $11 million reduction of expense
due to the elimination of goodwill amortization. In 2001, operating
profit benefited from a $46 million credit to expense related to the
Air Transportation Safety and System Stabilization Act.
Non-Package Operations
2003 compared to 2002
Non-package revenue increased $234 million, or 8.8%, for the
year. UPS Supply Chain Solutions, which comprises our former
UPS Freight Services and UPS Logistics Group businesses, increased
revenue by 8.0% during the year. This increase was due to growth
in our supply chain management and other logistics businesses, with
international revenues growing faster than in the United States,
partially as a result of favorable currency fluctuations. Favorable
currency fluctuations accounted for $74 million of the increase in
revenue. Freight forwarding revenue increased at a slower rate,
which was influenced by global economic conditions and increased
air revenue in 2002 as a result of the work disruption at U.S. west
coast ports. The remainder of our non-package operations, which
includes Mail Boxes Etc. (the franchisor of Mail Boxes Etc. and The
UPS Store), UPS Capital Corp., our mail and consulting services,
and our excess value package insurance business, increased revenue
by 11.0% for the year, primarily due to increased franchise revenue
at Mail Boxes Etc. and strong results from our Mail Innovations unit.
Non-package operating profit increased $266 million, or
134.3%, for the year. This increase was primarily due to higher
operating profit from our Supply Chain Solutions unit, which
was driven by the increase in revenue as well as the cost savings
produced by our integration and restructuring program.
Non-package operating profit in 2002 was reduced by the
$106 million restructuring charge and related expenses, and was
increased by $11 million due to the change in our vacation policy
for non-union employees. Non-package operating profit includes
$114 million (compared to $112 million in 2002) of intersegment
profit, with a corresponding amount of operating expense, which
reduces operating profit, in the U.S. domestic package segment.
During 2003, we sold our Mail Technologies business unit in a
transaction that increased net income by $14 million, or $0.01 per
diluted share. The gain consisted of a pre-tax loss of $24 million
recorded in other operating expenses within the non-package seg-
ment, and a tax benefit of $38 million recognized in conjunction
with the sale. The tax benefit exceeds the pre-tax loss from this
sale primarily because the goodwill impairment charge we previ-
ously recorded for the Mail Technologies business unit was not
deductible for income tax purposes. Consequently, our tax basis
was greater than our book basis, thus producing the tax benefit
described above.
Also during 2003, we sold our Aviation Technologies business
unit and recognized a pre-tax gain of $24 million ($15 million
after-tax, or $0.01 per diluted share), which is recorded in other
operating expenses within the non-package segment. The oper-
ating results of both the Mail Technologies unit and the Aviation
Technologies unit were previously included in our non-package
segment, and were not material to non-package operating results
in any of the periods presented.
2002 compared to 2001
Non-package revenue increased $589 million, or 28.3% during
2002. Of this revenue growth, 20.4% was due to acquisitions and
the remaining 7.9% was due to organic growth.
Management’s discussion and analysis 55
Management’s discussion and analysis of financial condition and results of operations
UPS Supply Chain Solutions revenue was up $490 million or
33.1% for the year, much of which was due to having a full year
of revenue from Fritz Companies Inc., which we acquired in May
2001, and other acquisitions. Revenue growth at UPS Supply Chain
Solutions was hindered by the sale of the FedEx brokerage business
in March 2002. Excluding the impact of business acquisitions and
dispositions, UPS Supply Chain Solutions would have reported
revenue growth of approximately 8% during 2002.
Non-package operating profit decreased by $19 million, or
8.8%, for the year. In 2002, operating profit was affected by a
restructuring charge and related expenses of $106 million primarily
related to the integration of our Freight Services and Logistics
Group operations, and an $11 million reduction to expense related
to a change in our vacation policy for non-union employees.
Operating profit in 2002 benefited, compared with 2001, from a
$61 million reduction in goodwill expense as a result of the elimi-
nation of goodwill amortization. Non-package operating profit
includes $112 million in 2002 (compared to $113 million in 2001)
of intersegment profit, with a corresponding amount of operating
expense, which reduces operating profit, in the U.S. domestic
package segment.
Operating Expenses and Operating Margin
2003 compared to 2002
Consolidated operating expenses increased by $1.864 billion, or
6.9%, for the year, $398 million of which was due to currency fluc-
tuations in our international package and non-package segments.
Compensation and benefits increased by $1.388 billion, or 7.7%,
for the year, primarily due to increased health and welfare benefit
costs and higher pension expense. Stock-based compensation
expense totaled $724 million in 2003, a 14.0% increase over 2002,
primarily as a result of increased Management Incentive Awards
expense and adopting the measurement provisions of FAS 123 for
2003 stock-based compensation awards.
Other operating expenses increased by $476 million, or 5.2%,
for the year, largely due to a 12.3% increase in occupancy costs, a
10.3% increase in fuel expense, and smaller increases in purchased
transportation, repairs and maintenance, and depreciation and
amortization. Other operating expenses in 2002 were affected by
the $106 million restructuring charge and related expenses incurred
in the integration of our Freight Services and Logistics Group
operations into our UPS Supply Chain Solutions unit. The growth
in other occupancy expense was impacted by higher rent expense
on buildings and facilities, higher real estate taxes, and weather-
related increases in natural gas and utilities expense. The fuel
expense increase was due to higher fuel prices in 2003, somewhat
offset by hedging gains and lower fuel usage.
The increase in purchased transportation expense was influenced
by the impact of currency and growth in our international package
and Supply Chain Solutions businesses. The growth in depreciation
and amortization reflects the addition of new aircraft, the comple-
tion of facilities projects (including UPS Worldport), and increased
amortization of capitalized software. The increase in repairs and
maintenance was primarily due to higher vehicle, aircraft, and
equipment maintenance expense.
The increase in other expenses was due to a $75 million impair-
ment charge recorded in the fourth quarter of 2003, resulting
from an impairment evaluation performed when we permanently
removed a number of Boeing 727 and DC-8 aircraft from service.
Of the total $75 million impairment charge, $69 million impacted
the U.S. domestic package segment and $6 million impacted the
international package segment.
Our operating margin, defined as operating profit as a per-
centage of revenue, increased to 13.3% in 2003 from 13.1% in
2002. This increase is due to the growth in operating margin in our
international package and non-package segments, which benefited
from the revenue increases described previously.
The operating margin for our three business segments was
as follows:
Year Ended December 31,
Reported Adjusted
Operating Segment
2003
2002
2002
2001
U.S. domestic package 13.1% 14.9% 14.2% 15.1%
International package 12.7% 6.9% 6.6% 2.9%
11.0% 10.4%
Non-package 16.0%
7.4%
Adjusted operating margins for 2002 exclude the effects of the
vacation change, which increased operating profit (U.S. domestic
– $175 million, 0.7% effect on operating margin; international
package – $11 million, 0.3%; and non-package – $11 million,
0.4%), and the effects of the restructuring charge, which reduced
non-package operating profit by $106 million, and operating
margin by 4.0%.
2002 compared to 2001
Consolidated operating expenses increased by $817 million, or
3.1%, for the year ended December 31, 2002. Compensation
and benefits increased $543 million, or 3.1%, due primarily to
increased costs associated with health and retirement benefits. In
2002, compensation and benefits were reduced by the $197 million
credit to expense related to the change in our vacation policy for
non-union employees.
56 UPS Annual Report 2003
Other operating expenses increased by $274 million, or 3.1%,
for the year. In 2002, other operating expenses were affected by the
$106 million restructuring charge and related expenses. In 2002,
depreciation and amortization benefited from the absence of $72
million of expense related to the elimination of goodwill amortiza-
tion. In 2001, other operating expenses were reduced by $74
million for compensation under the Air Transportation Safety and
System Stabilization Act.
The non-package segment accounted for $513 million of
the $817 million total increase in operating expenses. This was
principally due to acquisitions that we completed during the first
nine months of 2001. Our consolidated operating margin, defined
as operating profit as a percentage of revenue, remained at 13.1%
during 2001 and 2002.
Investment Income/Interest Expense
2003 compared to 2002
The decrease in investment income of $45 million in 2003 is pri-
marily due to a $58 million impairment charge recognized during
the first quarter of 2003. We periodically review our investments
for indications of other than temporary impairment considering
many factors, including the extent and duration to which a
security’s fair value has been less than its cost, overall economic
and market conditions, and the financial condition and specific
prospects for the issuer. During the first quarter of 2003, after
considering the continued decline in the U.S. equity markets, we
recognized an impairment charge of $58 million, primarily related
to our investment in S&P 500 equity portfolios.
The $52 million decline in interest expense in 2003 was pri-
marily the result of lower commercial paper balances outstanding,
lower interest rates on variable rate debt, and lower floating rates
on interest rate swaps.
2002 compared to 2001
The decrease in investment income of $96 million for 2002 is
primarily due to a combination of lower interest rates and lower
balances available for investment in 2002.
Net Income and Earnings Per Share
2003 compared to 2002
Net income for 2003 was $2.898 billion, a decrease of $284 million
from the $3.182 billion achieved in 2002, resulting in a decrease
in diluted earnings per share from $2.81 in 2002 to $2.55 in 2003.
Net income in 2002 was favorably impacted by $776 million
after-tax ($0.68 per diluted share) resulting from the reversal of
a portion of the previously established tax assessment liability,
and by $121 million after-tax ($0.11 per diluted share) from the
credit to expense as a result of the change in our vacation policy
for non-union employees. Net income in 2002 was adversely
impacted by $65 million after-tax ($0.06 per diluted share) due to
the restructuring charge and related expenses and by $72 million
after-tax ($0.06 per diluted share) due to the FAS 142 cumulative
expense adjustment. Excluding the effect of the preceeding items,
net income for 2002 would have been $2.422 billion, or $2.14 per
diluted share.
Net income in 2003 benefited from the $14 million after-tax
gain ($0.01 per diluted share) on the sale of our Mail Technologies
unit in the second quarter of 2003, the $15 million after-tax gain
($0.01 per diluted share) on the sale of our Aviation Technologies
unit in the third quarter of 2003, and the $18 million after-tax gain
($0.02 per diluted share) due to the redemption of our $300 million
cash-settled convertible senior notes. In addition, 2003 income tax
expense was reduced by $55 million ($0.05 per diluted share) due
to the resolution of various tax issues with the Internal Revenue
Service during the first quarter, by $22 million ($0.02 per diluted
share) due to a tax contingency accrual adjustment resulting from
a favorable ruling on the tax treatment for jet engine maintenance
costs during the third quarter, and by $39 million ($0.03 per share)
due to a lower effective state tax rate in the fourth quarter. Net
income in 2003 was adversely affected by the $37 million after-tax
($0.03 per diluted share) investment impairment charge described
previously. Excluding the effect of the preceeding items, net income
for 2003 would have been $2.772 billion, or $2.44 per diluted
share. This would represent a 14.0% increase in diluted earnings
per share over the $2.14 achieved in 2002 (after taking into account
the items discussed previously).
2002 compared to 2001
Net income for 2002 was $3.182 billion, an increase of $783 mil-
lion from $2.399 billion in 2001, resulting in an increase in diluted
earnings per share to $2.81 in 2002 from $2.10 in 2001. Net
income in 2001 was adversely impacted by the FAS 133 cumulative
expense adjustment of $26 million after-tax ($0.02 per diluted
share), without which net income would have been $2.425 billion,
or $2.12 per diluted share. In 2002, our results were affected by
the fourth quarter restructuring charge and related expenses of $65
million after-tax ($0.06 per diluted share), the FAS 142 cumulative
expense adjustment of $72 million after-tax ($0.06 per diluted
share), the credit to compensation and benefits resulting from the
change in our vacation policy for non-union employees of $121
million after-tax ($0.11 per diluted share), and the credit related
to the reversal of a portion of the previously established tax assess-
ment liability of $776 million after-tax ($0.68 per diluted share).
Excluding the effect of the preceeding items, net income for 2002
would have been $2.422 billion, or $2.14 per diluted share.
Management’s discussion and analysis 57
Management’s discussion and analysis of financial condition and results of operations
Liquidity and Capital Resources
Net Cash From Operating Activities
Net cash provided by operating activities was $4.646, $5.688
and $4.570 billion in 2003, 2002 and 2001, respectively. The
decrease in 2003 operating cash flows from 2002 was primarily
the result of the funding of $1.1 billion into our pension plans
during 2003. As discussed in Note 5 to the consolidated financial
statements, projected pension contributions in 2004 are approxi-
mately $426 million.
In November 2003, we announced rate increases, which took
effect on January 5, 2004. The overall impact is in line with
previous years’ rate increases. We increased rates for standard
ground shipments an average of 1.9% for commercial deliveries.
The ground residential surcharge increased $0.25 to $1.40 over the
commercial ground rate. An additional delivery area surcharge of
$1.00 was implemented for commercial deliveries in certain ZIP
codes. Rates for UPS Hundredweight increased 5.9%. In addition,
we increased rates for UPS Next Day Air an average of 2.9% and
increased rates for deferred services by 2.9%. Rates for inter-
national shipments originating in the United States (Worldwide
Express, Worldwide Express Plus, UPS Worldwide Expedited, and
UPS International Standard service) increased an average of 3.5%.
Rate changes for shipments originating outside the U.S. were made
throughout the past year and varied by geographic market.
In addition, we discontinued the fuel surcharge on ground
service, while a new index is being applied to our Next Day Air,
deferred products, and international services. This new fuel sur-
charge for the domestic air products is based on the U.S. Energy
Department’s Gulf Coast spot price for a gallon of kerosene-type jet
fuel. The index for shipments originating in Europe will be based
on the Rotterdam ARA spot price of kerosene-type jet fuel.
Net Cash Used In Investing Activities
Net cash used in investing activities was $1.942, $2.194, and
$3.053 billion in 2003, 2002, and 2001, respectively. The primary
reason for these declines has been the slowing growth of our
finance receivables portfolio, and the lack of business acquisitions
during 2002 and 2003. Capital expenditures represent the primary
use of cash in investing activities as follows (in millions):
2003 2002 2001
Buildings and facilities $ 451 $ 528 $ 763
Aircraft and parts 1,019 638 932
Vehicles 161 41 303
Information technology 316 451 374
$ 1,947 $ 1,658 $ 2,372
We anticipate capital expenditures of approximately $2.2 bil-
lion in 2004. These expenditures will provide for replacement of
existing capacity and anticipated future growth and include the
projected cost of capitalized software. We fund our capital expendi-
tures with our cash from operations.
Net Cash Used In Financing Activities
Net cash used in financing activities was $2.180, $2.090 and
$1.493 billion in 2003, 2002 and 2001, respectively. Our primary
use of cash in financing activities has been to repay long-term debt,
repurchase stock and pay dividends. During 2003, we repaid over
$1.2 billion in debt, primarily consisting of $492 million of com-
mercial paper, $300 million in cash-convertible notes, and $411
million in repayments of UPS Notes. Issuances of debt primarily
consisted of UPS Notes. We consider the overall fixed and floating
interest rate mix of our portfolio and the related overall cost of
borrowing when planning for future issuances and non-scheduled
repayments of debt.
In August 2003, a total of $1.0 billion was authorized for share
repurchases as part of our continuing share repurchase program.
As of December 31, 2003, $858 million of this authorization was
available for future share repurchases. We repurchased a total of
$398 million of common stock in 2003.
We increased our cash dividends per share to $0.92 in 2003
from $0.76 in 2002, resulting in an increase in total cash dividends
paid to $1.026 billion from $840 million. The declaration of
dividends is subject to the discretion of the Board of Directors and
will depend on various factors, including our net income, financial
condition, cash requirements, future prospects, and other relevant
factors. We expect to continue the practice of paying regular cash
dividends. In February 2004, the Board of Directors declared a
$0.28 per share dividend, which represents a 12% increase over
the $0.25 previous quarterly dividend. The dividend is payable on
March 9, 2004 to shareowners of record on February 23, 2004.
Sources of Credit
We maintain two commercial paper programs under which we
are authorized to borrow up to $7.0 billion. Approximately $544
million was outstanding under these programs as of December 31,
2003, with an average interest rate of 0.96%. The entire balance
outstanding has been classified as a current liability on our balance
sheet. In addition, we maintain an extendible commercial notes
program under which we are authorized to borrow up to $500
million. No amounts were outstanding under this program at
December 31, 2003.
We maintain two credit agreements with a consortium of banks.
These agreements provide revolving credit facilities of $1.0 bil-
lion each, with one expiring on April 22, 2004 and the other on
58 UPS Annual Report 2003
April 24, 2008. Interest on any amounts we borrow under these
facilities would be charged at 90-day LIBOR plus 15 basis points.
There were no borrowings under either of these agreements as of
December 31, 2003.
We also maintain a $1.0 billion European medium-term note
program. Under this program, we may issue notes from time to
time, denominated in a variety of currencies. No amounts were
outstanding under this program at December 31, 2003.
In August 2003, we filed a $2.0 billion shelf registration state-
ment under which we may issue debt securities in the United States.
There was approximately $85 million issued under this shelf regis-
tration statement at December 31, 2003, all of which consists
of issuances under our UPS Notes program.
Commitments
We have contractual obligations and commitments in the form of
operating leases, capital leases, debt obligations and purchase com-
mitments. We intend to satisfy these obligations through the use
of cash flow from operations. The following table summarizes our
contractual obligations and commitments as of December 31, 2003
(in millions):
Capitalized Operating Debt Purchase
Year Leases Leases Principal Commitments
$ 314 $ 621 $ 858
2004 $ 68
2005 96 264 2 747
2006 69 187 2 833
2007 119 128 1 798
2008 128 99 27 697
After 2008 137 457 2,697 604
Total $ 617 $ 1,449 $ 3,350 $ 4,537
We believe that funds from operations and borrowing programs
will provide adequate sources of liquidity and capital resources
to met our expected long-term needs for the operation of our
business, including anticipated capital expenditures such as com-
mitments for aircraft purchases, through 2009.
Contingencies
On August 9, 1999, the U.S. Tax Court held that we were liable
for tax on income of Overseas Partners Ltd., a Bermuda com-
pany that had reinsured excess value (“EV”) package insurance
purchased by our customers beginning in 1984, and that we were
liable for additional tax for the 1983 and 1984 tax years. The IRS
took similar positions to those advanced in the Tax Court deci-
sion for tax years subsequent to 1984 through 1998. On June 20,
2001, the U.S. Court of Appeals for the Eleventh Circuit ruled in
our favor and reversed the Tax Court’s decision.
In January 2003, we and the IRS finalized settlement of all
outstanding tax issues related to EV package insurance. Under the
terms of settlement, we agreed to adjustments that will result in
income tax due of approximately $562 million, additions to tax
of $60 million and related interest. The amount due to the IRS as
a result of the settlement is less than amounts we previously had
accrued. As a result, we recorded income, before taxes, of $1.023
billion ($776 million after tax) during the fourth quarter of 2002.
The refunds and credits associated with this settlement are expected
to occur over the next several years.
The IRS has proposed adjustments, unrelated to the EV package
insurance matters discussed above, regarding the allowance of
deductions and certain losses, the characterization of expenses as
capital rather than ordinary, the treatment of certain income, and
our entitlement to the investment tax credit and the research tax
credit in the 1985 through 1990 tax years. The proposed adjust-
ments would result in $10 million of additional income tax. The
IRS has also issued a report taking a similar position with respect to
some of these issues for each of the years from 1991 through 1994.
That report proposes adjustments that would result in $42 million
in additional income tax. The IRS’s proposed adjustments include
penalties and penalty interest. We believe that the possibility that
such penalties and penalty interest will be sustained is remote. In
November 2002, the IRS issued a report taking a similar position
with respect to some of these issues for each of the years 1995
through 1998. That report proposes adjustments that would result
in $7 million in additional income tax. For the 1985 through 1998
tax years, unpaid interest on these adjustments through December
31, 2003 could aggregate up to approximately $178 million, after
the benefit of related tax deductions. We expect that we will prevail
on substantially all of these issues. Specifically, we believe that our
practice of expensing the items that the IRS alleges should have
been capitalized is consistent with the practices of other industry
participants. The IRS may take similar positions with respect to
some of these issues for each of the years 1999 through 2003. We
believe that the eventual resolution of these issues will not have a
material adverse effect on our financial condition, results of opera-
tions or liquidity.
We are named as a defendant in 23 pending lawsuits that seek
to hold us liable for the collection of premiums for EV insurance
in connection with package shipments since 1984. Based on state
and federal tort, contract and statutory claims, these cases gener-
ally claim that we failed to remit collected EV premiums to an
independent insurer; we failed to provide promised EV insurance;
we acted as an insurer without complying with state insurance
laws and regulations; and the price for EV insurance was excessive.
These actions were all filed after the August 9, 1999 United States
Tax Court decision.
Management’s discussion and analysis 59
Management’s discussion and analysis of financial condition and results of operations
These 23 cases have been consolidated for pre-trial purposes
in a multi-district litigation proceeding (“MDL Proceeding”)
in federal court in New York. In addition to the cases in which
UPS is named as a defendant, there is also an action, Smith v. Mail
Boxes Etc., against Mail Boxes Etc. and its franchisees relating to
UPS EV insurance and related services purchased through Mail
Boxes Etc. centers. This case has also been consolidated into the
MDL Proceeding.
While expressly denying any and all liability, the parties have
obtained preliminary court approval of a global settlement
resolving all claims and all cases in the MDL Proceeding. The
proposed settlement requires several steps before it becomes final,
including notice to the settlement class, and obtaining final court
approval. If the proposed settlement becomes final, we would pro-
vide to qualifying settlement class members vouchers toward the
purchase of specified UPS services and pay a portion of the plain-
tiffs’ attorneys’ fees, the total amount of which will be determined
by the Court. The ultimate cost to us of the proposed settlement
will depend on a number of factors. We do not believe that this
proposed settlement will have a material effect on our financial
condition, results of operations, or liquidity.
In addition, we are a defendant in various other lawsuits that
arose in the normal course of business. We believe that the eventual
resolution of these cases will not have a material adverse effect on
our financial condition, results of operations, or liquidity.
We participate in a number of trustee-managed multi-employer
pension and health and welfare plans for employees covered under
collective bargaining agreements. Several factors could result in
higher future contributions to these plans, including unfavorable
investment performance, changes in demographics, and increased
benefits to participants. At this time, we are unable to determine
the amount of additional future contributions, if any, or whether
any material adverse effect on our financial condition, results of
operations, or cash flows could result from our participation in
these plans.
Due to the events of September 11, 2001, increased security
requirements for air carriers may be forthcoming; however, we do
not anticipate that such measures will have a material adverse effect
on our financial condition, results of operations, or liquidity. In
addition, our insurance premiums have risen and we have taken
several actions, including self-insuring certain risks, to mitigate the
expense increase.
As of December 31, 2003, we had approximately 228,000
employees (64% of our total employees) employed under a national
master agreement and various supplemental agreements with local
unions affiliated with the International Brotherhood of Teamsters
(“Teamsters”). These agreements run through July 31, 2008. The
majority of our pilots are employed under a collective bargaining
agreement with the Independent Pilots Association, which became
amendable January 1, 2004. Negotiations are ongoing with the
assistance of the National Mediation Board. Our airline mechanics
are covered by a collective bargaining agreement with Teamsters
Local 2727, which becomes amendable on November 1, 2006.
In addition, the majority of our ground mechanics who are not
employed under agreements with the Teamsters are employed
under collective bargaining agreements with the International
Association of Machinists and Aerospace Workers. These agree-
ments run through July 31, 2009.
Market Risk
We are exposed to market risk from changes in certain commodity
prices, foreign currency exchange rates, interest rates, and equity
prices. All of these market risks arise in the normal course of busi-
ness, as we do not engage in speculative trading activities. In order
to manage the risk arising from these exposures, we utilize a variety
of foreign exchange, interest rate, equity and commodity forward
contracts, options, and swaps.
The following analysis provides quantitative information
regarding our exposure to commodity price risk, foreign currency
exchange risk, interest rate risk, and equity price risk. We utilize val-
uation models to evaluate the sensitivity of the fair value of financial
instruments with exposure to market risk that assume instanta-
neous, parallel shifts in exchange rates, interest rate yield curves,
and commodity and equity prices. For options and instruments
with non-linear returns, models appropriate to the instrument are
utilized to determine the impact of market shifts. There are certain
limitations inherent in the sensitivity analyses presented, primarily
due to the assumption that exchange rates change in a parallel
fashion and that interest rates change instantaneously. In addition,
the analyses are unable to reflect the complex market reactions that
normally would arise from the market shifts modeled.
A discussion of our accounting policies for derivative instru-
ments and further disclosures are provided in Note 16 to the
consolidated financial statements.
Commodity Price Risk
We are exposed to an increase in the prices of refined fuels, prin-
cipally jet-A, diesel, and unleaded gasoline, which are used in the
transportation of packages. Additionally, we are exposed to an
increase in the prices of other energy products, primarily natural
gas and electricity, used in our operating facilities throughout
the world. We use a combination of options, swaps, and futures
60 UPS Annual Report 2003
contracts to provide some protection from rising fuel and energy
prices. These derivative instruments generally cover forecasted
fuel and energy consumption for periods up to one year. The net
fair value of such contracts subject to price risk, excluding the
underlying exposures, as of December 31, 2003 and 2002 was an
asset (liability) of $30 and $34 million, respectively. The potential
loss in the fair value of these derivative contracts, assuming a
hypothetical 10% change in the underlying commodity price,
would be approximately $17 and $38 million at December 31,
2003 and 2002, respectively. This amount excludes the offsetting
impact of the price risk inherent in the physical purchase of the
underlying commodities.
Foreign Currency Exchange Risk
We have foreign currency risks related to our revenue, operating
expenses, and financing transactions in currencies other than the
local currencies in which we operate. We are exposed to currency
risk from the potential changes in functional currency values of our
foreign currency-denominated assets, liabilities, and cash flows.
Our most significant foreign currency exposures relate to the Euro
and the British Pound Sterling. We use a combination of purchased
and written options and forward contracts to hedge cash flow
currency exposures. As of December 31, 2003 and 2002, the net
fair value of the hedging instruments described above was an asset
(liability) of $(48) and $(3) million, respectively. The potential
loss in fair value for such instruments from a hypothetical 10%
adverse change in quoted foreign currency exchange rates would
be approximately $97 and $42 million at December 31, 2003 and
2002, respectively. This sensitivity analysis assumes a parallel shift
in the foreign currency exchange rates. Exchange rates rarely move
in the same direction. The assumption that exchange rates change
in a parallel fashion may overstate the impact of changing exchange
rates on assets and liabilities denominated in a foreign currency.
Interest Rate Risk
As described in Note 8 to the consolidated financial statements, we
have issued debt instruments, including debt associated with capital
leases, that accrue expense at fixed and floating rates of interest.
We use a combination of derivative instruments, including interest
rate swaps and cross-currency interest rate swaps, as part of our
program to manage the fixed and floating interest rate mix of our
total debt portfolio and related overall cost of borrowing. These
swaps are generally entered into concurrently with the issuance of
the debt that they are intended to modify, and the notional amount,
interest payment, and maturity dates of the swaps match the terms
of the associated debt.
Our floating rate debt and interest rate swaps subject us to risk
resulting from changes in short-term (primarily LIBOR) interest
rates. The potential change in annual interest expense resulting
from a hypothetical 100 basis point change in short-term interest
rates applied to our floating rate debt and swap instruments at
December 31, 2003 and 2002 would be approximately $25 and
$28 million, respectively.
As described in Note 1 and Note 2 to the consolidated finan-
cial statements, we have certain investments in debt, auction
rate, and preferred securities that accrue income at variable rates
of interest. The potential change in annual investment income
resulting from a hypothetical 100 basis point change in interest
rates applied to our investments exposed to variable interest rates
at December 31, 2003 and 2002 would be approximately $31
and $19 million, respectively.
Additionally, as described in Note 3 to the consolidated financial
statements, we hold a portfolio of finance receivables that accrue
income at fixed and floating rates of interest. The potential change
in the annual income resulting from a hypothetical 100 basis point
change in interest rates applied to our variable rate finance receiv-
ables at December 31, 2003 and 2002 would be immaterial.
This interest rate sensitivity analysis assumes interst rate changes
are instantaneous, parallel shifts in the yield curve. In reality,
interest rate changes are rarely instantaneous or parallel. While this
is our best estimate of the impact of the specified interest rate sce-
narios, these estimates should not be viewed as forecasts. We adjust
the fixed and floating interest rate mix of our interest rate sensitive
assets and liabilities in response to changes in market conditions.
Equity Price Risk
We hold investments in various common equity securities that are
subject to price risk, and for certain of these securities, we utilize
options to hedge this price risk. At December 31, 2003 and 2002,
the fair value of such investments was $95 and $322 million,
respectively. The potential change in the fair value of such invest-
ments, assuming a 10% change in equity prices net of the offsetting
impact of any hedges, would be approximately $10 million at both
December 31, 2003 and 2002.
Credit Risk
The forward contracts, swaps, and options previously discussed
contain an element of risk that the counterparties may be unable
to meet the terms of the agreements. However, we minimize such
risk exposures for these instruments by limiting the counterparties
to large banks and financial institutions that meet established
credit guidelines. We do not expect to incur any losses as a result
of counterparty default.
Management’s discussion and analysis 61
Management’s discussion and analysis of financial condition and results of operations
New Accounting Pronouncements
In June 2002, the FASB issued Statement No. 146 “Accounting for
Costs Associated with Exit or Disposal Activities” (“FAS 146”).
FAS 146 provides guidance on the recognition and measurement
of liabilities associated with exit or disposal activities and requires
that such liabilities be recognized when incurred. This statement
was effective for exit or disposal activities initiated on or after
January 1, 2003.
As discussed in Note 17, we implemented a restructuring pro-
gram involving the business unit integration of our Freight Services
and Logistics Group operations in the fourth quarter of 2002. As
this restructuring program was initiated in 2002, we accounted for
this restructuring program using the existing guidance in EITF 94-3
“Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity (Including Certain Costs
Incurred in a Restructuring).” Therefore, the adoption of FAS 146
on January 1, 2003 had no effect on our results of operations or
financial condition. In the fourth quarter of 2002, we recorded a
pre-tax restructuring charge and related expenses in the amount of
$106 million, which is classified in other operating expenses.
In November 2002, the FASB issued Interpretation No. 45
“Guarantor’s Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of
Others” (“FIN 45”). FIN 45 requires that a liability be recognized
at fair value at the inception of certain guarantees for the obliga-
tions undertaken by the guarantor. FIN 45 also requires additional
disclosures for certain guarantee contracts. The disclosure provi-
sions of FIN 45 were effective for financial statements ending after
December 15, 2002, while the recognition and initial measurement
provisions were applicable on a prospective basis to guarantees
issued or modified after December 31, 2002. The adoption
of FIN 45 was not material to our results of operations or
financial condition.
In January 2003, the FASB issued Interpretation No. 46
“Consolidation of Variable Interest Entities,” to address perceived
weaknesses in accounting for entities commonly known as special
purpose or off balance sheet. In addition to numerous FASB Staff
Positions written to clarify and improve the application of FIN
46, the FASB recently announced a deferral for certain entities,
and an amendment to FIN 46 entitled FASB Interpretation No.
46 (revised December 2003) “Consolidation of Variable Interest
Entities” (“FIN 46”).
FIN 46 provides guidance for identifying the party with a
controlling financial interest resulting from arrangements or
financial instruments rather than voting interests. FIN 46 defines
the term “variable interest entity” and is based on the premise
that if a business enterprise absorbs a majority of such an entity’s
expected losses and/or receives a majority of its expected residual
returns, that enterprise has a controlling financial interest, and
would thus require consolidation of the variable interest entity.
As of December 31, 2003, we have adopted FIN 46, and the effects
of adoption were not material to our results of operations or
financial condition.
On July 1, 2003, we adopted FASB Statement No. 149
“Amendment of Statement 133 on Derivative Instruments and
Hedging Activities” (“FAS 149”). FAS 149 amends FAS 133 for
certain decisions made by the FASB as part of the Derivatives
Implementation Group process. FAS 149 also amends FAS 133
to incorporate clarifications of the definition of a derivative. The
adoption of FAS 149 was not material to our results of operations
or financial condition.
On July 1, 2003, we adopted FASB Statement No. 150
“Accounting for Certain Instruments with Characteristics of Both
Liabilities and Equity” (“FAS 150”). FAS 150 establishes how an
issuer measures certain freestanding financial instruments with
characteristics of both liabilities and equity, and requires that such
instruments be classified as liabilities. The adoption of FAS 150 was
not material to our results of operations or financial condition.
In December 2003, the FASB revised Statement No. 132,
“Employers’ Disclosures about Pensions and Other Postretirement
Benefits” (“FAS 132”). The revised standard requires new disclo-
sures in addition to those required by the original standard about
the assets, obligations, cash flows and net periodic benefit cost of
defined benefit pension plans and other defined benefit postretire-
ment plans. As revised, FAS 132 is effective for financial statements
with fiscal years ending after December 15, 2003, and we have
included these disclosures in Note 5 - Employee Benefit Plans.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results
of operations are based on our consolidated financial statements,
which are prepared in accordance with accounting principles
generally accepted in the United States of America. As indicated in
Note 1 to our consolidated financial statements, the amounts of
assets, liabilities, revenue, and expenses reported in our financial
statements are affected by estimates and judgments that are neces-
sary to comply with generally accepted accounting principles. We
base our estimates on prior experience and other assumptions that
we consider reasonable to our circumstances. Actual results could
differ from our estimates, which would affect the related amounts
reported in our financial statements. While estimates and judg-
ments are applied in arriving at many reported amounts, we believe
that the following matters may involve a higher degree of judgment
and complexity.
Contingencies — As discussed in Note 10 to our consolidated
financial statements, we are involved in various legal proceedings
and contingencies. We have recorded liabilities for these matters
62 UPS Annual Report 2003
in accordance with Statement of Financial Accounting Standards
No. 5, “Accounting for Contingencies” (“FAS 5”). FAS 5 requires
a liability to be recorded based on our estimate of the probable cost
of the resolution of a contingency. The actual resolution of these
contingencies may differ from our estimates. If a contingency is
settled for an amount greater than our estimate, a future charge
to income would result. Likewise, if a contingency is settled for
an amount that is less than our estimate, a future credit to income
would result.
Goodwill Impairment — The Financial Accounting Standards
Board issued Statement No. 142, “Goodwill and Other Intangible
Assets” (“FAS 142”) in June 2001. As a result of the issuance
of this new standard, goodwill is no longer amortized, but is
subjected to annual impairment testing. Goodwill impairment
testing requires that we estimate the fair value of our goodwill and
compare that estimate to the amount of goodwill recorded on our
balance sheet. The estimation of fair value requires that we make
judgments concerning future cash flows and appropriate discount
rates. Our estimate of the fair value of goodwill could change over
time based on a variety of factors, including the actual operating
performance of the underlying reporting units. Upon adoption
of FAS 142, we recorded a non-cash impairment charge of $72
million ($0.06 per diluted share), as of January 1, 2002, related to
our Mail Technologies business. The primary factor resulting in the
impairment charge was the lower than anticipated growth experi-
enced in the expedited mail delivery business. In conjunction with
our annual test of goodwill in 2002, we recorded an additional
impairment charge of $2 million related to our Mail Technologies
business, resulting in total goodwill impairment of $74 million for
2002. Our annual impairment test performed in 2003 resulted in
no goodwill impairment. As of December 31, 2003, our recorded
goodwill was $1.173 billion.
Self-Insurance Accruals — We self-insure costs associated with
workers’ compensation claims, automotive liability, and general
business liabilities, up to certain limits. 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 determined by outside actuaries, who incorporate
historical loss experience and judgments about the present and
expected levels of cost per claim. Trends in actual experience are a
significant factor in the determination of such reserves. We believe
our estimated reserves for such claims are adequate, but actual
experience in claim frequency and/or severity could materially
differ from our estimates and affect our results of operations.
Pension and Postretirement Medical Benefits — The Company’s
pension and other postretirement benefit costs are calculated using
various actuarial assumptions and methodologies as prescribed by
Statement of Financial Accounting Standards No. 87, “Employers’
Accounting for Pensions” and Statement of Financial Accounting
Standards No. 106, “Employers’ Accounting for Postretirement
Benefits Other than Pensions.” These assumptions include discount
rates, health care cost trend rates, inflation, rate of compensation
increases, expected return on plan assets, mortality rates, and
other factors. Actual results that differ from our assumptions are
accumulated and amortized over future periods and, therefore,
generally affect our recognized expense and recorded obligation
in such future periods. We believe that the assumptions utilized in
recording the obligations under our plans are reasonable based on
input from our outside actuaries and other advisors and informa-
tion as to historical experience and performance. Differences in
actual experience or changes in assumptions may affect our pension
and other postretirement obligations and future expense. The
impact of decreasing the weighted-average expected long-term rate
of return on plan assets to 8.96% and the decrease in the discount
rate to 6.25%, combined with other factors, such as the additional
fundings which occurred during 2003, will increase our pension
plan expense by approximately $18 million in 2004.
Financial Instruments — As discussed in Notes 2, 3, 8, and 16 to
our consolidated financial statements, and in the “Market Risk”
section of this report, we hold and issue financial instruments
that contain elements of market risk. Certain of these financial
instruments are required to be recorded at fair value. Fair values
are based on listed market prices, when such prices are available.
To the extent that listed market prices are not available, fair value
is determined based on other relevant factors, including dealer
price quotations. Certain financial instruments, including over-the-
counter derivative instruments, are valued using pricing models
that consider, among other factors, such as the additional fundings
which occurred during 2003, contractual and market prices,
correlations, time value, credit spreads, and yield curve volatility
factors. Changes in the fixed income, equity, foreign exchange, and
commodity markets will impact our estimates of fair value in the
future, potentially affecting our results of operations.
Depreciation, Residual Value, and Impairment of Fixed Assets —
As of December 31, 2003, we had approximately $13.9 billion of
net fixed assets, the most significant category of which is aircraft. In
accounting for fixed assets, we make estimates about the expected
useful lives and the expected residual values of the assets, and the
potential for impairment based on the fair values of the assets and
the cash flows generated by these assets.
Management’s discussion and analysis 63
Management’s discussion and analysis of financial condition and results of operations
In estimating the lives and expected residual values of aircraft,
we have relied upon actual experience with the same or similar air-
craft types. Subsequent revisions to these estimates could be caused
by changes to our maintenance program, changes in the utilization
of the aircraft, governmental regulations on aging aircraft, and
changing market prices of new and used aircraft of the same or
similar types. We periodically evaluate these estimates and assump-
tions, and adjust the estimates and assumptions as necessary.
Adjustments to the expected lives and residual values are accounted
for on a prospective basis through depreciation expense.
When appropriate, we evaluate our fixed assets for impairment.
Factors that would indicate potential impairment may include,
but are not limited to, a significant change in the extent to which
an asset is utilized, a significant decrease in the market value of an
asset, and operating or cash flow losses associated with the use of
the asset.
In December 2003, we permanently removed from service a
number of Boeing 727 and DC-8 aircraft. As a result, we conducted
an impairment evaluation, which resulted in a $75 million impair-
ment charge during the fourth quarter for these aircraft. This
charge is classified in the caption “other expenses” within other
operating expenses (see Note 13). UPS continues to operate all of its
other aircraft and continues to experience positive cash flow.
Forward-Looking Statements
“Management’s Discussion and Analysis of Financial Condition
and Results of Operations,” “Liquidity and Capital Resources,”
“We see...” and other parts of this report, including statements
under the heading “2004 Outlook” contain “forward-looking”
statements about matters that inherently are difficult to predict.
The words “believes,” “expects,” “anticipates,” “we see,” and
similar expressions are intended to identify forward-looking state-
ments. These statements include statements regarding our intent,
belief and current expectations about our strategic direction, pros-
pects and future results. We have described some of the important
factors that affect these statements as we discussed each subject.
Forward-looking statements involve risks and uncertainties, and
certain factors may cause actual results to differ materially from
those contained in the forward-looking statements.
Risk Factors
The following are some of the factors that could cause our actual
results to differ materially from the expected results described in
our forward-looking statements:
• The effect of general economic and other conditions in the
markets in which we operate, both in the United States and
internationally. Our operations in international markets are also
affected by currency exchange and inflation risks.
• The impact of competition on a local, regional, national, and
international basis. Our competitors include the postal services
of the U.S. and other nations, various motor carriers, express
companies, freight forwarders, air couriers and others. Our
industry is undergoing rapid consolidation, and the combining
entities are competing aggresively for business at low rates.
• The impact of complex and stringent aviation, transportation,
environment, labor, employment and other governmental laws
and regulations, and the impact of new laws and regulations
that may result from increased security concerns following
the events of September 11, 2001. Our failure to comply with
applicable laws, ordinances or regulations could result in sub
stantial fines or possible revocation of our authority to conduct
our operations.
• Strikes, work stoppages and slowdowns by our employees. Such
actions may affect our ability to meet our customers needs,
and customers may do more business with competitors if they
believe that such actions may adversely affect our ability to
provide service. We may face permanent loss of customers if we
are unable to provide uninterrupted service. The terms of future
collective bargaining agreements also may affect our competitive
position and results of operations.
• Possible disruption of supplies, or an increase in the prices,
of gasoline and fuel and jet fuel for our aircraft and delivery
vehicles as a result of war or other factors.
We require significant quantities of gasoline and fuel and are
exposed to the commodity price risk associated with variations
in the market price for petroleum products.
• Cyclical and seasonal fluctuations in our operating results due to
decreased demand for our services.
64 UPS Annual Report 2003
Price and dividend information
Price and Dividend Information
The following is a summary of our Class B common stock price activity and dividend information for 2003 and 2002. Our Class B
common stock is listed on the New York Stock Exchange under the symbol “UPS”.
Dividends
2003: High Low Close Declared
First Quarter $ 64.48 $ 53.00 $ 57.00 $ 0.21
Second Quarter $ 64.32 $ 56.52 $ 63.70 $ 0.21
Third Quarter $ 64.99 $ 61.17 $ 63.80 $ 0.25
Fourth Quarter $ 74.86 $ 63.76 $ 74.55 $ 0.25
2002:
First Quarter $ 61.24 $ 54.25 $ 60.80 $ 0.19
Second Quarter $ 63.00 $ 57.75 $ 61.75 $ 0.19
Third Quarter $ 67.10 $ 58.80 $ 62.53 $ 0.19
Fourth Quarter $ 64.50 $ 58.50 $ 63.08 $ 0.19
As of February 28, 2004, there were 169,751 and 14,409 record holders of Class A and Class B stock, respectively.
The policy of our board of directors is to declare dividends each year out of current earnings. The declaration of future dividends is
subject to the discretion of the board of directors in light of all relevant facts, including earnings, general business conditions and working
capital requirements.
On February 12, 2004, our board declared a dividend of $0.28 per share, which is payable on March 9, 2004 to shareowners of record
on February 23, 2004.
Price and dividend information 65
Investor information
Annual Meeting
Direct Stock Purchase Plan
Our annual meeting of shareowners will be held at
8:00 a.m. on May 6, 2004, at the Hotel du Pont,
11th and Market Streets, Wilmington, DE 19801.
Shareowners of record as of March 8, 2004, are
entitled to vote at the meeting.
Exchange Listing
Our Class B common stock is listed on the New York
Stock Exchange under the symbol “UPS.”
Form 10-K
A copy of our Annual Report on Form 10-K may
be obtained without charge at www.ups.com or at
www.sec.gov, the Web site for the Securities and Exchange
Commission. It also is available by calling or writing to
our Investor Relations Department.
Investor information is available in the Investor Relations
section of the UPS Web site at www.ups.com.
The Mellon Direct Investment & Dividend Reinvestment
Plan provides comprehensive services designed to
make investing in UPS Class B common stock easy and
convenient. You can participate at no charge if you
currently own shares of UPS Class B common stock. If you
are not currently a UPS Class B common stock shareowner,
you can join the plan for an initial investment of $250 in
Class B common shares. The plan also provides a dividend
reinvestment feature for plan participants, which allows
you to reinvest your UPS Class B common stock dividends
in shares of UPS Class B common stock.
If you are a current UPS Class B common stock
shareowner, you can enroll in the plan online at
www.melloninvestor.com/isd or by calling toll-free
800-758-4674.
If you wish to make an initial purchase of UPS Class B
common stock online, visit www.melloninvestor.com and
select “For Investors.” Follow the instructions provided
to search for Direct Investment Plans and access the
Enrollment Wizard.
66 UPS Annual Report 2003
Dividend Reinvestment Plan
Online Access to Shareowner Materials through MLinkSM
UPS provides a dividend reinvestment plan for
shareowners of UPS Class A common stock.
To learn more about the dividend reinvestment
plan, Class A common shareowners can visit
www.melloninvestor.com/isd.
UPS Shareowner Services
Convenient access 24 hours a day, 7 days a week
Class A Common Shareowners
www.melloninvestor.com
select MellonOne
888-663-8325
Class B Common Shareowners
www.melloninvestor.com
select Investor ServiceDirect®
800-758-4674
Calls from outside the United States: 201-373-5334
TDD for hearing impaired: 800-231-5469
TDD for non-U.S. shareowners: 201-329-8354
Interested in receiving shareowner information
electronically? Enroll in MLink, a self-service program
that provides electronic notification and secure access
to shareowner communications. To enroll, follow the
MLink enrollment instructions when you access your
UPS Class A or UPS Class B common shareowner
account via the Web sites previously noted.
Transfer Agent and Registrar
Account information and transactions are managed by
Mellon Investor Services LLC. Please direct notices of
address changes or questions regarding account status,
stock transfers, lost certificates, or dividend payments to
the transfer agent at the address below.
United Parcel Service, Inc.
c/o Mellon Investor Services LLC
P.O. Box 3415
South Hackensack, NJ 07606-3415
or
85 Challenger Road
Ridgefield Park, NJ 07660
Investor Relations
UPS maintains a comprehensive Web site at www.ups.com and has
an active Investor Relations program. You can contact the Investor
Relations Department at:
UPS
55 Glenlake Parkway, NE
Atlanta, GA 30328
800-877-1503 or 404-828-6059
Investor information 67
68 UPS Annual Report 2003
…a world of opportunity.
We see a company with a strong vision and the agility to
execute that vision — synchronizing global commerce.
Letter to shareowners
We see growth
We see a world of opportunity
UPS senior leadership
Financial highlights
Selected financial data
Financial table of contents
Investor information
2
6
8
18
20
21
22
66
Copyright © 2004 United Parcel Service of America, Inc. All rights reserved.
We see…
55 Glenlake Parkway, NE
Atlanta, GA 30328
www.ups.com
UPS Annual Report 2003