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55 Glenlake Parkway, NE
Altanta, GA 30328
www.ups.com
Every Minute Around the World
UPS Annual Report 2004
1 1 1 0 9 8 7 6 5 4 3 2 1 0 1 2 3 4 5 6 7 8 9 1 0 1 1 1 2
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Copyright © 2005 United Parcel Service of America, Inc. All rights reserved.
Dear fellow shareowners,
Every minute around the world, UPS delivers another 9,800 packages. Every minute around the
world, UPS connects 4,900 buyers with 1,400 sellers. Every minute around the world, UPS is
entrusted with two percent of global gross domestic product.*
Most importantly, every minute around the world,
we see international trade surging forward at an
unprecedented pace, reaffirming what we’ve known
for quite some time. There’s no better time, no better
industry, and no better company to capitalize on a
world coming closer together through commerce.
Our Operating Environment
In last year’s annual report, we talked about
a world poised for economic growth and UPS as a
company that would help enable that growth.
A year later, the world is more than poised.
In 2004, global trade activity grew 10.2 percent,
well ahead of 2003’s jump of 4.5 percent, and even
surpassing the boom years of 1995 through 2000.**
A vibrant global economy creates new busi-
nesses and new jobs, as well as increased wealth,
consumer power, and a substantially better quality
of life for billions of people around the world — all
of which generates greater demand for UPS services.
The global small package delivery business is
growing along with the boom in international trade.
This trend won’t abate any time soon. Today, 20
percent of all manufactured goods cross borders.
By 2020, it’s estimated that 80 percent of these
goods will cross borders, much of it through small
package networks.***
At the same time, with markets opening and
economies growing, supply chains are becoming
increasingly global. These trends support UPS’s vision
of synchronizing the flow of goods, information, and
funds — the three flows of commerce.
In addition to providing new sources of revenue
and profit, our supply chain business complements
and strengthens the solid foundation of our small
package business. In fact, small package delivery is
perhaps the most integral part of the supply chain.
In many cases, it represents the coveted “last mile”
to the consumer.
Highlights of 2004
In 2004, UPS strengthened our industry-leading,
global small package position. We delivered a record
number of packages — almost 3.6 billion — an
increase of more than 150 million over 2003. Revenue
for the year increased 9 percent, and earnings were
up 15 percent.
Our international small package operation
exhibited particular strength, with revenue up
22 percent, profitability up 58 percent, and volume
up 7 percent. The export market (packages that
cross a national border) has been a focus of our
international efforts. Export volume increased
12 percent, led by both Europe and Asia,
particularly China.
In 2004, we were pleased to be awarded 12
new frequencies to fly to China. These frequencies
triple our access to this important trade market. In
addition, we concluded an agreement that will give
us control of our express operations in China by
the end of 2005.
Our U.S. domestic operations posted
improvements, too, with volume up 3.3 percent.
Revenue increased over 6 percent and profits
increased 2 percent. Pricing was firm in the United
States, but operating margin declined slightly. This
reflects, in part, investment in a new technology that
will re-engineer our U.S. domestic operations and a
slowing volume growth rate in the fourth quarter.
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1 1 1 0 9 8 7 6 5 4 3 2 1 0 1 2 3 4 5 6 7 8 9 1 0 1 1
UPS produces the best financial
returns in the industry
UPS’s financial strength is derived from its unique
business model, combined with a company culture
developed over 97 years.
The business model is based on an integrated
network where all systems work cohesively together.
One global network results in the most efficient use of
assets and the highest reliability levels. And it makes it
easier to bring products and services that are successful
in the United States to the global market.
A significant aspect of UPS’s culture that
contributes to the strength of the company is the
owner/management philosophy, in place since the
1920s. This means UPS is run by investors for
investors. As a result, the company brings a long-
term focus to investment decision-making, with a
keen eye on economic profit. n
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Net income has been improving due primarily to the impact
of strong international growth and improvements in non-package.
With a relatively constant number of shares outstanding, diluted
earnings per share have increased 17 percent since 2000.
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Introduction
Letter to shareowners
Financial highlights
Small package business
Supply chain business
How we run our business
Worldwide recognition
UPS senior leadership
Selected financial data
Financial table of contents
Investor information
1
3
6
8
16
20
21
22
24
25
72
UPS Annual Report 2004 3
6 UPS Annual Report 2004
Copyright © 2005 United Parcel Service of America, Inc. All rights reserved.
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One hundred dollars invested in UPS stock at the end of 2000, with
reinvested dividends, would have increased over 50 percent in
�������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������
value by the end of 2004.
Since 2000, revenue increased 24 percent
ATLANTA, GEORGIA 7:24 A.M.
UPS is the world’s largest
package delivery company
and a global leader in supply
chain services. At any given
moment, anywhere around
the globe, UPS people enable
the movement of goods,
information, and funds
through one integrated
network that operates in
more than 200 countries
and territories.
Our Growth Opportunities
We believe that prevailing global economic
conditions provide a framework for continued
growth in the United States and abroad for both
the small package and supply chain operations.
In fact, we expect to sustain the earnings growth
track record we’ve established over the last three
decades. Throughout that timeframe, earnings
have increased at a compounded annual rate of
over 15 percent.
Our unique, integrated global business model
is critical to our success. UPS is the only company
in our industry that has one operating network
for all types of shipments: domestic, international,
air, ground, commercial, residential. This makes
for economies of scope and scale that improve
operating efficiency as well as customer service.
In addition, the UPS culture is based on the
owner/management philosophy through which
over 30,000 active management employees have
significant investments in UPS stock. A large
percentage of our full-time nonmanagement
employees also maintain ownership positions in
UPS. This breeds a decision-making mentality
that’s long-term in focus, centered on achieving
strong returns on invested capital, and a work ethic
that’s characterized by dedication. Having “skin in
the game” is a great motivator to align employee
interests with public shareowners’ interests.
As a result, we generate consistent, superior
returns, and are in excellent financial condition.
UPS is one of only a handful of companies with a
AAA credit rating from both Standard & Poor’s
and Moody’s. At the end of 2004, we had cash
and investments of almost $5.2 billion.
Our strong financial position enables us to
reinvest in the business to enhance our operations,
improve service, add new products, and expand our
geographic presence. It also enables us to increase
shareowner value through an on-going share
repurchase program and regular dividend increases
— up 22 percent in 2004 and 65 percent since 2000.
Going forward here’s what you can expect
from UPS in 2005 and beyond. We will:
n Manage our entire business enterprise to
preserve the consistency in revenue and
earnings growth that we’ve established
over the years;
n Grow our market share in the global small
package business;
n Increase operating profit in each of our three
key businesses: U.S. domestic, international,
and supply chain;
n And do this while maintaining a sustainable
approach to running our business that
considers the social, environmental, and
economic consequences of our business practices.
As we enter 2005, business is moving to the
tempo of an expanding global economy. UPS is
ideally positioned to thrive in this environment
every minute around the world.
Michael L. Eskew
Chairman and
Chief Executive Officer
*International Monetary Fund World Outlook
**World Bank
*** McKinsey and Company
Michael L. Eskew
Chairman and
Chief Executive Officer
Selected Financial Results
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We made significant progress in deploying our
new package flow technology. Productivity and
service reliability improvements are apparent in
the majority of the sites where the new technology
is operational. However, we will retrain some of
the sites that are not achieving the improvements
that are possible. And, of course, we’ll continue
deploying the technology in new sites.
Slowing growth trends in the fourth quarter also
impacted U.S. domestic operating margin. We are
addressing this issue through growth initiatives and
cost control measures. Growth initiatives focus on
products, services, and technology geared to middle-
market customers. Prudent cost control measures
should enable the company to adjust to lower
volume growth trends and still achieve our targeted
earnings improvement.
Non-package revenue was up 10 percent, and
profits increased $59 million. The largest component
of this segment is UPS Supply Chain Solutions (SCS).
SCS achieved a 10 percent increase in revenue, with a
low-single-digit operating margin.
SCS enables us to move any type of freight, by
any mode, anywhere in the world. Through this
business we manage warehouses and distribution
networks, handle the complexities of customs
brokerage, and frequently rely on the capabilities
of our small package network for package delivery.
Since 1999, we’ve successfully integrated
over 15 acquisitions to develop our global supply
chain presence — now in 175 countries — and
added to its scope of service with the acquisition
of Menlo Worldwide Forwarding late in the fourth
quarter of last year.
UPS Annual Report 2004 5
4 UPS Annual Report 2004
UPS Annual Report 2004 5
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Dear fellow shareowners,
Every minute around the world, UPS delivers another 9,800 packages. Every minute around the
world, UPS connects 4,900 buyers with 1,400 sellers. Every minute around the world, UPS is
entrusted with two percent of global gross domestic product.*
Most importantly, every minute around the world,
we see international trade surging forward at an
unprecedented pace, reaffirming what we’ve known
for quite some time. There’s no better time, no better
industry, and no better company to capitalize on a
world coming closer together through commerce.
Our Operating Environment
In last year’s annual report, we talked about
a world poised for economic growth and UPS as a
company that would help enable that growth.
A year later, the world is more than poised.
In 2004, global trade activity grew 10.2 percent,
well ahead of 2003’s jump of 4.5 percent, and even
surpassing the boom years of 1995 through 2000.**
A vibrant global economy creates new busi-
nesses and new jobs, as well as increased wealth,
consumer power, and a substantially better quality
of life for billions of people around the world — all
of which generates greater demand for UPS services.
The global small package delivery business is
growing along with the boom in international trade.
This trend won’t abate any time soon. Today, 20
percent of all manufactured goods cross borders.
By 2020, it’s estimated that 80 percent of these
goods will cross borders, much of it through small
package networks.***
At the same time, with markets opening and
economies growing, supply chains are becoming
increasingly global. These trends support UPS’s vision
of synchronizing the flow of goods, information, and
funds — the three flows of commerce.
In addition to providing new sources of revenue
and profit, our supply chain business complements
and strengthens the solid foundation of our small
package business. In fact, small package delivery is
perhaps the most integral part of the supply chain.
In many cases, it represents the coveted “last mile”
to the consumer.
Highlights of 2004
In 2004, UPS strengthened our industry-leading,
global small package position. We delivered a record
number of packages — almost 3.6 billion — an
increase of more than 150 million over 2003. Revenue
for the year increased 9 percent, and earnings were
up 15 percent.
Our international small package operation
exhibited particular strength, with revenue up
22 percent, profitability up 58 percent, and volume
up 7 percent. The export market (packages that
cross a national border) has been a focus of our
international efforts. Export volume increased
12 percent, led by both Europe and Asia,
particularly China.
In 2004, we were pleased to be awarded 12
new frequencies to fly to China. These frequencies
triple our access to this important trade market. In
addition, we concluded an agreement that will give
us control of our express operations in China by
the end of 2005.
Our U.S. domestic operations posted
improvements, too, with volume up 3.3 percent.
Revenue increased over 6 percent and profits
increased 2 percent. Pricing was firm in the United
States, but operating margin declined slightly. This
reflects, in part, investment in a new technology that
will re-engineer our U.S. domestic operations and a
slowing volume growth rate in the fourth quarter.
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1 1 1 0 9 8 7 6 5 4 3 2 1 0 1 2 3 4 5 6 7 8 9 1 0 1 1
UPS produces the best financial
returns in the industry
UPS’s financial strength is derived from its unique
business model, combined with a company culture
developed over 97 years.
The business model is based on an integrated
network where all systems work cohesively together.
One global network results in the most efficient use of
assets and the highest reliability levels. And it makes it
easier to bring products and services that are successful
in the United States to the global market.
A significant aspect of UPS’s culture that
contributes to the strength of the company is the
owner/management philosophy, in place since the
1920s. This means UPS is run by investors for
investors. As a result, the company brings a long-
term focus to investment decision-making, with a
keen eye on economic profit. n
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Net income has been improving due primarily to the impact
of strong international growth and improvements in non-package.
With a relatively constant number of shares outstanding, diluted
earnings per share have increased 17 percent since 2000.
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Introduction
Letter to shareowners
Financial highlights
Small package business
Supply chain business
How we run our business
Worldwide recognition
UPS senior leadership
Selected financial data
Financial table of contents
Investor information
1
3
6
8
16
20
21
22
24
25
72
UPS Annual Report 2004 3
6 UPS Annual Report 2004
Copyright © 2005 United Parcel Service of America, Inc. All rights reserved.
��
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��
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One hundred dollars invested in UPS stock at the end of 2000, with
reinvested dividends, would have increased over 50 percent in
�������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������
value by the end of 2004.
Since 2000, revenue increased 24 percent
ATLANTA, GEORGIA 7:24 A.M.
UPS is the world’s largest
package delivery company
and a global leader in supply
chain services. At any given
moment, anywhere around
the globe, UPS people enable
the movement of goods,
information, and funds
through one integrated
network that operates in
more than 200 countries
and territories.
Our Growth Opportunities
We believe that prevailing global economic
conditions provide a framework for continued
growth in the United States and abroad for both
the small package and supply chain operations.
In fact, we expect to sustain the earnings growth
track record we’ve established over the last three
decades. Throughout that timeframe, earnings
have increased at a compounded annual rate of
over 15 percent.
Our unique, integrated global business model
is critical to our success. UPS is the only company
in our industry that has one operating network
for all types of shipments: domestic, international,
air, ground, commercial, residential. This makes
for economies of scope and scale that improve
operating efficiency as well as customer service.
In addition, the UPS culture is based on the
owner/management philosophy through which
over 30,000 active management employees have
significant investments in UPS stock. A large
percentage of our full-time nonmanagement
employees also maintain ownership positions in
UPS. This breeds a decision-making mentality
that’s long-term in focus, centered on achieving
strong returns on invested capital, and a work ethic
that’s characterized by dedication. Having “skin in
the game” is a great motivator to align employee
interests with public shareowners’ interests.
As a result, we generate consistent, superior
returns, and are in excellent financial condition.
UPS is one of only a handful of companies with a
AAA credit rating from both Standard & Poor’s
and Moody’s. At the end of 2004, we had cash
and investments of almost $5.2 billion.
Our strong financial position enables us to
reinvest in the business to enhance our operations,
improve service, add new products, and expand our
geographic presence. It also enables us to increase
shareowner value through an on-going share
repurchase program and regular dividend increases
— up 22 percent in 2004 and 65 percent since 2000.
Going forward here’s what you can expect
from UPS in 2005 and beyond. We will:
n Manage our entire business enterprise to
preserve the consistency in revenue and
earnings growth that we’ve established
over the years;
n Grow our market share in the global small
package business;
n Increase operating profit in each of our three
key businesses: U.S. domestic, international,
and supply chain;
n And do this while maintaining a sustainable
approach to running our business that
considers the social, environmental, and
economic consequences of our business practices.
As we enter 2005, business is moving to the
tempo of an expanding global economy. UPS is
ideally positioned to thrive in this environment
every minute around the world.
Michael L. Eskew
Chairman and
Chief Executive Officer
*International Monetary Fund World Outlook
**World Bank
*** McKinsey and Company
Michael L. Eskew
Chairman and
Chief Executive Officer
Selected Financial Results
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We made significant progress in deploying our
new package flow technology. Productivity and
service reliability improvements are apparent in
the majority of the sites where the new technology
is operational. However, we will retrain some of
the sites that are not achieving the improvements
that are possible. And, of course, we’ll continue
deploying the technology in new sites.
Slowing growth trends in the fourth quarter also
impacted U.S. domestic operating margin. We are
addressing this issue through growth initiatives and
cost control measures. Growth initiatives focus on
products, services, and technology geared to middle-
market customers. Prudent cost control measures
should enable the company to adjust to lower
volume growth trends and still achieve our targeted
earnings improvement.
Non-package revenue was up 10 percent, and
profits increased $59 million. The largest component
of this segment is UPS Supply Chain Solutions (SCS).
SCS achieved a 10 percent increase in revenue, with a
low-single-digit operating margin.
SCS enables us to move any type of freight, by
any mode, anywhere in the world. Through this
business we manage warehouses and distribution
networks, handle the complexities of customs
brokerage, and frequently rely on the capabilities
of our small package network for package delivery.
Since 1999, we’ve successfully integrated
over 15 acquisitions to develop our global supply
chain presence — now in 175 countries — and
added to its scope of service with the acquisition
of Menlo Worldwide Forwarding late in the fourth
quarter of last year.
UPS Annual Report 2004 5
4 UPS Annual Report 2004
UPS Annual Report 2004 5
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ATLANTA, GEORGIA 7:24 A.M.
UPS is the world’s largest
package delivery company
and a global leader in supply
chain services. At any given
moment, anywhere around
the globe, UPS people enable
the movement of goods,
information, and funds
through one integrated
network that operates in
more than 200 countries
and territories.
Our Growth Opportunities
We believe that prevailing global economic
conditions provide a framework for continued
growth in the United States and abroad for both
the small package and supply chain operations.
In fact, we expect to sustain the earnings growth
track record we’ve established over the last three
decades. Throughout that timeframe, earnings
have increased at a compounded annual rate of
over 15 percent.
Our unique, integrated global business model
is critical to our success. UPS is the only company
in our industry that has one operating network
for all types of shipments: domestic, international,
air, ground, commercial, residential. This makes
for economies of scope and scale that improve
operating efficiency as well as customer service.
In addition, the UPS culture is based on the
owner/management philosophy through which
over 30,000 active management employees have
significant investments in UPS stock. A large
percentage of our full-time nonmanagement
employees also maintain ownership positions in
UPS. This breeds a decision-making mentality
that’s long-term in focus, centered on achieving
strong returns on invested capital, and a work ethic
that’s characterized by dedication. Having “skin in
the game” is a great motivator to align employee
interests with public shareowners’ interests.
As a result, we generate consistent, superior
returns, and are in excellent financial condition.
UPS is one of only a handful of companies with a
AAA credit rating from both Standard & Poor’s
and Moody’s. At the end of 2004, we had cash
and investments of almost $5.2 billion.
Our strong financial position enables us to
reinvest in the business to enhance our operations,
improve service, add new products, and expand our
geographic presence. It also enables us to increase
shareowner value through an on-going share
repurchase program and regular dividend increases
— up 22 percent in 2004 and 65 percent since 2000.
Going forward here’s what you can expect
from UPS in 2005 and beyond. We will:
n Manage our entire business enterprise to
preserve the consistency in revenue and
earnings growth that we’ve established
over the years;
n Grow our market share in the global small
package business;
n Increase operating profit in each of our three
key businesses: U.S. domestic, international,
and supply chain;
n And do this while maintaining a sustainable
approach to running our business that
considers the social, environmental, and
economic consequences of our business practices.
As we enter 2005, business is moving to the
tempo of an expanding global economy. UPS is
ideally positioned to thrive in this environment
every minute around the world.
Michael L. Eskew
Chairman and
Chief Executive Officer
*International Monetary Fund World Outlook
**World Bank
*** McKinsey and Company
Michael L. Eskew
Chairman and
Chief Executive Officer
Selected Financial Results
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We made significant progress in deploying our
new package flow technology. Productivity and
service reliability improvements are apparent in
the majority of the sites where the new technology
is operational. However, we will retrain some of
the sites that are not achieving the improvements
that are possible. And, of course, we’ll continue
deploying the technology in new sites.
Slowing growth trends in the fourth quarter also
impacted U.S. domestic operating margin. We are
addressing this issue through growth initiatives and
cost control measures. Growth initiatives focus on
products, services, and technology geared to middle-
market customers. Prudent cost control measures
should enable the company to adjust to lower
volume growth trends and still achieve our targeted
earnings improvement.
Non-package revenue was up 10 percent, and
profits increased $59 million. The largest component
of this segment is UPS Supply Chain Solutions (SCS).
SCS achieved a 10 percent increase in revenue, with a
low-single-digit operating margin.
SCS enables us to move any type of freight, by
any mode, anywhere in the world. Through this
business we manage warehouses and distribution
networks, handle the complexities of customs
brokerage, and frequently rely on the capabilities
of our small package network for package delivery.
Since 1999, we’ve successfully integrated
over 15 acquisitions to develop our global supply
chain presence — now in 175 countries — and
added to its scope of service with the acquisition
of Menlo Worldwide Forwarding late in the fourth
quarter of last year.
UPS Annual Report 2004 5
4 UPS Annual Report 2004
UPS Annual Report 2004 5
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Dear fellow shareowners,
Every minute around the world, UPS delivers another 9,800 packages. Every minute around the
world, UPS connects 4,900 buyers with 1,400 sellers. Every minute around the world, UPS is
entrusted with two percent of global gross domestic product.*
Most importantly, every minute around the world,
we see international trade surging forward at an
unprecedented pace, reaffirming what we’ve known
for quite some time. There’s no better time, no better
industry, and no better company to capitalize on a
world coming closer together through commerce.
Our Operating Environment
In last year’s annual report, we talked about
a world poised for economic growth and UPS as a
company that would help enable that growth.
A year later, the world is more than poised.
In 2004, global trade activity grew 10.2 percent,
well ahead of 2003’s jump of 4.5 percent, and even
surpassing the boom years of 1995 through 2000.**
A vibrant global economy creates new busi-
nesses and new jobs, as well as increased wealth,
consumer power, and a substantially better quality
of life for billions of people around the world — all
of which generates greater demand for UPS services.
The global small package delivery business is
growing along with the boom in international trade.
This trend won’t abate any time soon. Today, 20
percent of all manufactured goods cross borders.
By 2020, it’s estimated that 80 percent of these
goods will cross borders, much of it through small
package networks.***
At the same time, with markets opening and
economies growing, supply chains are becoming
increasingly global. These trends support UPS’s vision
of synchronizing the flow of goods, information, and
funds — the three flows of commerce.
In addition to providing new sources of revenue
and profit, our supply chain business complements
and strengthens the solid foundation of our small
package business. In fact, small package delivery is
perhaps the most integral part of the supply chain.
In many cases, it represents the coveted “last mile”
to the consumer.
Highlights of 2004
In 2004, UPS strengthened our industry-leading,
global small package position. We delivered a record
number of packages — almost 3.6 billion — an
increase of more than 150 million over 2003. Revenue
for the year increased 9 percent, and earnings were
up 15 percent.
Our international small package operation
exhibited particular strength, with revenue up
22 percent, profitability up 58 percent, and volume
up 7 percent. The export market (packages that
cross a national border) has been a focus of our
international efforts. Export volume increased
12 percent, led by both Europe and Asia,
particularly China.
In 2004, we were pleased to be awarded 12
new frequencies to fly to China. These frequencies
triple our access to this important trade market. In
addition, we concluded an agreement that will give
us control of our express operations in China by
the end of 2005.
Our U.S. domestic operations posted
improvements, too, with volume up 3.3 percent.
Revenue increased over 6 percent and profits
increased 2 percent. Pricing was firm in the United
States, but operating margin declined slightly. This
reflects, in part, investment in a new technology that
will re-engineer our U.S. domestic operations and a
slowing volume growth rate in the fourth quarter.
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1 1 1 0 9 8 7 6 5 4 3 2 1 0 1 2 3 4 5 6 7 8 9 1 0 1 1
UPS produces the best financial
returns in the industry
UPS’s financial strength is derived from its unique
business model, combined with a company culture
developed over 97 years.
The business model is based on an integrated
network where all systems work cohesively together.
One global network results in the most efficient use of
assets and the highest reliability levels. And it makes it
easier to bring products and services that are successful
in the United States to the global market.
A significant aspect of UPS’s culture that
contributes to the strength of the company is the
owner/management philosophy, in place since the
1920s. This means UPS is run by investors for
investors. As a result, the company brings a long-
term focus to investment decision-making, with a
keen eye on economic profit. n
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Net income has been improving due primarily to the impact
of strong international growth and improvements in non-package.
With a relatively constant number of shares outstanding, diluted
earnings per share have increased 17 percent since 2000.
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Introduction
Letter to shareowners
Financial highlights
Small package business
Supply chain business
How we run our business
Worldwide recognition
UPS senior leadership
Selected financial data
Financial table of contents
Investor information
1
3
6
8
16
20
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24
25
72
UPS Annual Report 2004 3
6 UPS Annual Report 2004
Copyright © 2005 United Parcel Service of America, Inc. All rights reserved.
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One hundred dollars invested in UPS stock at the end of 2000, with
reinvested dividends, would have increased over 50 percent in
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value by the end of 2004.
Since 2000, revenue increased 24 percent
UPS’s global small package business
continued its vibrant growth
2004 operations review
In 2004, UPS strengthened its global small
package position; average daily volume increased
3.7 percent for the year. That’s the equivalent of
498,000 additional packages every day. Overall in
2004, UPS handled the most volume ever in its
97-year history.
International segment
International operations achieved dramatic
gains in 2004, as export volume increased 12.5
percent, operating profit was over $1 billion for the
first time, and operating margins increased to 16.6
percent — by far the best in the industry.
While favorable currency translation contributed
to profitability gains, it accounted for only $54
million of the $412 million increase in profits.
The strong profitability improvement was driven
by a number of factors, including excellent operations
and network management, improving economies of
scale that come with vibrant growth, an enhanced mix
of express packages and heavy cargo, higher yields
attributable to the value customers derive from our
service and technology solutions, and an extensive
product and service offering.
(continued on page 12)
In 2004, UPS
delivered 3.6 billion
packages —154 million
more than in 2003.
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UPS consistently generates the highest operating margin in the industry.
Dividends have increased 65 percent over the last five years.
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Capital expenditures typically range between 5 and 8
percent of revenue; in 2004 they were 5.8 percent.
Cash and investments have increased over 160 percent since 2000.
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10 UPS Annual Report 2004
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Return on equity has typically been above 20 percent for more than 20 years.
Declining debt has contributed to UPS’s exceptionally
strong financial position.
(1) Includes after-tax effects of a charge related to an arbitration ruling under the 1997 Teamster contract,
a gain recorded upon the sale of UPS Truck Leasing, and a gain from investments totalling $139 million or
$0.12 per share.
(2) Includes an after-tax charge upon adoption of FAS 133 of $26 million or $0.02 per share.
(3) Includes after-tax effects of a gain related to a change in vacation policy, a restructuring charge, a charge
upon adoption of FAS 142, and the settlement of a previously established tax assessment liability. The net
effect of these items was to increase net income by $760 million or $0.67 per share.
(4) Includes the after-tax effects of a gain on the sale of Mail Technologies, a gain on the sale of Aviation
Technologies, an investment impairment charge, and a gain on the redemption of long-term debt. Also
includes credits to income tax expense due to resolution of various tax contingencies, a favorable ruling on the
treatment of jet engine maintenance costs, and a lower effective state tax rate. The net effect of these items was
to increase net income by $126 million or $0.11 per share.
(5) Includes the after-tax effects of an impairment charge on Boeing 727, 747 and McDonnell Douglas DC-8
aircraft and related parts and engines and a charge to pension expense resulting from the consolidation of data
collection systems. Also includes credits to income tax expense related to the resolution of various tax matters,
the removal of a portion of the valuation allowance on certain deferred tax assets on net operating loss carry
forwards, and an adjustment for identified tax contingency matters. The net effect of these items was to increase
net income by $32 million or $0.03 per share.
UPS Annual Report 2004 7
TAIPEI, TAIWAN 10:24 A.M.
TAIPEI, TAIWAN 10:24 A.M.
Every minute of every day, UPS
delivers more packages around
the world than any other carrier.
Every minute of every day, UPS
delivers more packages around
the world than any other carrier.
UPS has an extensive
network across the globe.
As a result, the company
is the market leader in
the United States and has
a growing presence in all
major international markets.
In fact, every minute of
every day, UPS delivers
9,800 packages.
TAIPEI, TAIWAN 10:24 A.M.
TAIPEI, TAIWAN 10:24 A.M.
Every minute of every day, UPS
delivers more packages around
the world than any other carrier.
Every minute of every day, UPS
delivers more packages around
the world than any other carrier.
UPS has an extensive
network across the globe.
As a result, the company
is the market leader in
the United States and has
a growing presence in all
major international markets.
In fact, every minute of
every day, UPS delivers
9,800 packages.
UPS’s global small package business
continued its vibrant growth
2004 operations review
In 2004, UPS strengthened its global small
package position; average daily volume increased
3.7 percent for the year. That’s the equivalent of
498,000 additional packages every day. Overall in
2004, UPS handled the most volume ever in its
97-year history.
International segment
International operations achieved dramatic
gains in 2004, as export volume increased 12.5
percent, operating profit was over $1 billion for the
first time, and operating margins increased to 16.6
percent — by far the best in the industry.
While favorable currency translation contributed
to profitability gains, it accounted for only $54
million of the $412 million increase in profits.
The strong profitability improvement was driven
by a number of factors, including excellent operations
and network management, improving economies of
scale that come with vibrant growth, an enhanced mix
of express packages and heavy cargo, higher yields
attributable to the value customers derive from our
service and technology solutions, and an extensive
product and service offering.
(continued on page 12)
In 2004, UPS
delivered 3.6 billion
packages —154 million
more than in 2003.
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UPS consistently generates the highest operating margin in the industry.
Dividends have increased 65 percent over the last five years.
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Capital expenditures typically range between 5 and 8
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Return on equity has typically been above 20 percent for more than 20 years.
Declining debt has contributed to UPS’s exceptionally
strong financial position.
(1) Includes after-tax effects of a charge related to an arbitration ruling under the 1997 Teamster contract,
a gain recorded upon the sale of UPS Truck Leasing, and a gain from investments totalling $139 million or
$0.12 per share.
(2) Includes an after-tax charge upon adoption of FAS 133 of $26 million or $0.02 per share.
(3) Includes after-tax effects of a gain related to a change in vacation policy, a restructuring charge, a charge
upon adoption of FAS 142, and the settlement of a previously established tax assessment liability. The net
effect of these items was to increase net income by $760 million or $0.67 per share.
(4) Includes the after-tax effects of a gain on the sale of Mail Technologies, a gain on the sale of Aviation
Technologies, an investment impairment charge, and a gain on the redemption of long-term debt. Also
includes credits to income tax expense due to resolution of various tax contingencies, a favorable ruling on the
treatment of jet engine maintenance costs, and a lower effective state tax rate. The net effect of these items was
to increase net income by $126 million or $0.11 per share.
(5) Includes the after-tax effects of an impairment charge on Boeing 727, 747 and McDonnell Douglas DC-8
aircraft and related parts and engines and a charge to pension expense resulting from the consolidation of data
collection systems. Also includes credits to income tax expense related to the resolution of various tax matters,
the removal of a portion of the valuation allowance on certain deferred tax assets on net operating loss carry
forwards, and an adjustment for identified tax contingency matters. The net effect of these items was to increase
net income by $32 million or $0.03 per share.
UPS Annual Report 2004 7
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10 UPS Annual Report 2004
UPS Annual Report 2004 11
The U.S. domestic segment
The U.S. domestic package operations also
reported a strong year. Ground volume increased
4 percent or 408,000 packages per day. Next day
air volume was essentially flat in 2004 due to the
comparison with the prior year’s unusually high
volume resulting from the mortgage refinancing
boom. Eliminating that impact, air volume
would have increased in 2004. In fact, growth in
overnight package volume was strong, increasing
5.7 percent for the year.
Revenue per piece was up 2.1 percent, reflecting
a rational pricing environment and a strong value
proposition in the form of new products, technology
solutions, and delivery reliability.
U.S. domestic operating margin was slightly
lower in 2004, reflecting the roll-out of new
technology in our domestic operations and the
impact of slowing volume growth. Implemen-
tation of the technology had a negative impact
on profitability of about $150 million in 2004.
In 2005, it is expected to have a positive net
benefit of $50 to $100 million, even as some
retraining occurs in selected sites and new sites
are deployed. By the end of 2005, approximately
65 percent of UPS drivers are slated to be using
the technology.
Initiatives are in place to address U.S. domestic
volume and margin decline. Growth initiatives
focus on the middle-market customer, with
better alignment of our resources; cross-selling
of integrated solutions successfully used for large
customers; expansion of the product portfolio
with the addition of time-definite, guaranteed
heavy airfreight service; and doubling the rate of
technology integrations through which customers
electronically access UPS shipping systems. In
early 2005, prudent cost control measures were
implemented to adjust to slower volume growth
rates and help ensure achievement of earnings growth
targets. Cost controls are expected to produce about
$200 million in savings in 2005.
LISBON, PORTUGAL 5:24 P.M.
12 UPS Annual Report 2004
UPS Annual Report 2004 13
Small package growth
opportunities remain strong
We believe expanding global economies,
development of international markets by customers
large and small, and direct-to-consumer shipping
trends — driven by just-in-time inventory and online
purchasing — offer growth opportunities for the
small package business.
Going forward, look for UPS to continue
international volume, revenue, and profitability
growth, with an excellent operating margin. UPS
anticipates achieving 2 to 3 percent U.S. domestic
volume growth, along with an improving
operating margin.
To achieve growth objectives, UPS will rely
on well-developed strengths — leading-edge
technology, a broad portfolio of services and
integrated solutions, and the most efficient global
network in the industry.
Investment in the worldwide network
means constant improvement
UPS invests hundreds of millions of dollars in its
network annually for facilities, vehicles, and aircraft.
In Europe, construction continued on the expansion
of the company’s highly automated air hub in
Cologne, Germany — the company’s largest hub
outside the United States. In addition, UPS’s service
portfolio was broadened to, from, and within the 10
countries that joined the European Union in 2004.
UPS also is extending its presence in Asia — one of
the most important markets in the world. In addition
to gaining 12 additional air routes to more extensively
serve parts of China, Japan, and Hong Kong, UPS
concluded an agreement with its Chinese partner to
take full control of its international express operations
in more than 200 cities in China by the end of 2005.
These cities collectively account for about 80 percent
of China’s GDP. UPS concluded a similar agreement to
gain control of its express operation in Japan.
In addition, in early 2005 UPS announced
plans to expand its supply chain presence in China,
combining small package delivery with freight
forwarding, customs brokerage, and distribution.
Strengthening the logistical links between China
and global markets is critical to both China and
companies doing business in China.
In the United States, network improvements
reduced transit times by one day on UPS ground
service between 20 metropolitan areas, including
Atlanta, Baltimore/Washington, D.C., Chicago,
Dallas, Houston, Kansas City, Los Angeles,
Philadelphia, and Pittsburgh. The company will
continue enhancing transit times in the United States
in 2005 and beyond.
12 UPS Annual Report 2004
CLEVELAND, OHIO 9:24 A.M.
UPS Annual Report 2004 13
Leading-edge technology is
a mandate for success
At UPS, technology powers every service and
solution the company offers and every operation it
performs. In fact, UPS invests more than $1 billion
annually in technology to support both customer-
facing solutions and internal operational systems
and processes.
Much of UPS’s technology helps customers
solve business process problems, which, in turn,
allows them to manage their businesses better.
This includes solutions that:
n Enable businesses to manage multiple locations
through one shipping system,
n Provide full visibility of a customer’s goods in
the supply chain, including inbound shipments,
n Support complete connectivity between UPS
customers and their customers and vendors,
n Streamline billing, customer inquiry, and cost
allocation processes,
n Speed the transfer of funds from a package or
shipment recipient to the seller, and
n Ease the complexities and reduce the costs
involved in transborder shipping.
UPS partners with customers to provide
seamless integration between the company’s global
infrastructure and the customer’s business processes.
This integration could be achieved through one of
UPS’s shipping, billing, or visibility systems. It might
include connectivity through one of over 200 partners
— such as Best Software’s Peachtree products and
Yahoo! Merchant Solutions — who offer access to
UPS shipping capabilities from within their products.
Or, where a customized solution is necessary, UPS
helps customers integrate the company’s on-line
capabilities into their own business systems to build
a solution uniquely geared to their needs. Connecting
customers to UPS through technology is a critical
element in the company’s growth strategy.
Technology plays just as important a role in
UPS’s internal operations as it does in customer
applications. Systems integration is crucial to UPS’s
global network. It enables an information-rich
transportation system that supports all types of
service — ground, air, commercial, residential,
domestic, international — through one driver.
The result is an integrated, global network with
unsurpassed visibility and reach.
14 UPS Annual Report 2004
Moving boxes, bytes,
and bucks is the
essence of supply
chain management.
UPS Supply Chain Solutions continues to
expand its global presence and capabilities
These business units offer technology platforms
that give customers extensive visibility into their
global supply chain activities for better up-to-the-
minute management decisions.
All of these capabilities help UPS to design
unique solutions for customer needs on an
increasingly global scale. UPS has targeted several
industries where it sees substantial supply chain
management growth opportunities, including the
health care, automotive, high-tech, retail, consumer,
and government sectors.
2004 operations review
UPS Supply Chain Solutions is the largest
business unit within the non-package segment.
In 2004, net revenue increased 10 percent to $2.35
billion. Contributing to Supply Chain Solutions’
performance has been the on-going integration
of acquisitions that have expanded its reach,
capabilities, and customer base.
The latest acquisition, Menlo Worldwide
Forwarding, was completed at the end of 2004 and
added guaranteed, heavy air freight capabilities to
the UPS portfolio of solutions. With the addition of
Menlo, UPS can now offer expanded time-definite
products, such as overnight, two-day, and deferred
delivery of heavy air freight in North America.
Menlo also substantially increases UPS Supply Chain
Solutions’ ocean and customs brokerage volume.
Effective supply chain management is becoming
increasingly critical to virtually all businesses, large
and small. It helps these businesses expand their markets,
improve cash flow, deliver better customer service,
differentiate products, and improve productivity.
UPS has extended its value proposition to
customers by helping them synchronize the flows of
goods, information, and funds through its supply
chain offerings. The company’s expanding supply
chain portfolio leverages its international presence,
infrastructure, extensive customer base, and network
management expertise. When combined with package
delivery services, supply chain management capabilities
help UPS to deepen and extend customer relationships
around the globe.
UPS Supply Chain Solutions and other of our non-
package businesses offer more than 60 products and
services in transportation and freight management,
logistics and distribution, international trade, financial
services, and consulting. Its infrastructure includes
facilities that handle such diverse tasks as overseeing
global freight shipments, filling orders, performing
technical repair and deploying critical parts, and
managing customs brokerage.
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18 UPS Annual Report 2004
UPS standardizes key operational technology
on a global scale, such as the driver’s handheld data
recording device and the wireless global tracking
system. These technologies facilitate integration,
access, reliability, and availability of data through-
out the global network.
Internally, UPS is using proprietary technology
to re-engineer its package delivery processes. In 2004,
the new package flow technology was implemented
in 25 percent of the 1,000 centers in which it will
ultimately be operational and is being used by 45
percent of UPS drivers. We expect this $600 million
investment, when fully implemented, will reduce operat-
ing expenses by hundreds of millions of dollars annually
and also will provide a platform for development of
new services designed specifically for the consignee.
Investment in technology allows UPS to raise
the standard for customer service and reliability. In
addition, innovative technology solutions differenti-
ate UPS in the marketplace in terms of both service
offerings and operational efficiency.
Integrated solutions move goods
seamlessly from factory to final delivery
Many UPS solutions combine the scope of its
global small package transportation network with
supply chain services, allowing goods to move more
quickly across borders via air, ground, or sea. The
ability to tie together all modes of transportation
to move anything from a small package to heavy
freight enables UPS to develop the right solution
for each customer.
UPS’s suite of Trade DirectSM services, for example,
improves the efficiency of international shipping
for customers by moving multiple packages, going
to multiple consignees, as one shipment with one
customs clearance. The packages are then fed into the
UPS network and shipped directly to the recipients.
Whether it’s small packages moving between
NAFTA markets, air freight moving between
continents, or ocean-transported goods, UPS
provides customers with improved time-in-transit,
full visibility, and international trade services that
facilitate participation in the global marketplace. n
PARIS, FRANCE 6:24 P.M.
UPS Annual Report 2004 15
PRAGUE, CZECH REPUBLIC 9:24 P.M.
PRAGUE, CZECH REPUBLIC 9:24 P.M.
When it comes to managing global supply
When it comes to managing global supply
chains, timing is everything. UPS synchronizes
chains, timing is everything. UPS synchronizes
the world of commerce.
the world of commerce.
UPS is one of the world’s
largest providers of supply
chain management services,
operating more than 1,200
facilities in 175 countries.
PRAGUE, CZECH REPUBLIC 9:24 P.M.
PRAGUE, CZECH REPUBLIC 9:24 P.M.
When it comes to managing global supply
When it comes to managing global supply
chains, timing is everything. UPS synchronizes
chains, timing is everything. UPS synchronizes
the world of commerce.
the world of commerce.
UPS is one of the world’s
largest providers of supply
chain management services,
operating more than 1,200
facilities in 175 countries.
Moving boxes, bytes,
and bucks is the
essence of supply
chain management.
UPS Supply Chain Solutions continues to
expand its global presence and capabilities
These business units offer technology platforms
that give customers extensive visibility into their
global supply chain activities for better up-to-the-
minute management decisions.
All of these capabilities help UPS to design
unique solutions for customer needs on an
increasingly global scale. UPS has targeted several
industries where it sees substantial supply chain
management growth opportunities, including the
health care, automotive, high-tech, retail, consumer,
and government sectors.
2004 operations review
UPS Supply Chain Solutions is the largest
business unit within the non-package segment.
In 2004, net revenue increased 10 percent to $2.35
billion. Contributing to Supply Chain Solutions’
performance has been the on-going integration
of acquisitions that have expanded its reach,
capabilities, and customer base.
The latest acquisition, Menlo Worldwide
Forwarding, was completed at the end of 2004 and
added guaranteed, heavy air freight capabilities to
the UPS portfolio of solutions. With the addition of
Menlo, UPS can now offer expanded time-definite
products, such as overnight, two-day, and deferred
delivery of heavy air freight in North America.
Menlo also substantially increases UPS Supply Chain
Solutions’ ocean and customs brokerage volume.
Effective supply chain management is becoming
increasingly critical to virtually all businesses, large
and small. It helps these businesses expand their markets,
improve cash flow, deliver better customer service,
differentiate products, and improve productivity.
UPS has extended its value proposition to
customers by helping them synchronize the flows of
goods, information, and funds through its supply
chain offerings. The company’s expanding supply
chain portfolio leverages its international presence,
infrastructure, extensive customer base, and network
management expertise. When combined with package
delivery services, supply chain management capabilities
help UPS to deepen and extend customer relationships
around the globe.
UPS Supply Chain Solutions and other of our non-
package businesses offer more than 60 products and
services in transportation and freight management,
logistics and distribution, international trade, financial
services, and consulting. Its infrastructure includes
facilities that handle such diverse tasks as overseeing
global freight shipments, filling orders, performing
technical repair and deploying critical parts, and
managing customs brokerage.
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18 UPS Annual Report 2004
UPS standardizes key operational technology
on a global scale, such as the driver’s handheld data
recording device and the wireless global tracking
system. These technologies facilitate integration,
access, reliability, and availability of data through-
out the global network.
Internally, UPS is using proprietary technology
to re-engineer its package delivery processes. In 2004,
the new package flow technology was implemented
in 25 percent of the 1,000 centers in which it will
ultimately be operational and is being used by 45
percent of UPS drivers. We expect this $600 million
investment, when fully implemented, will reduce operat-
ing expenses by hundreds of millions of dollars annually
and also will provide a platform for development of
new services designed specifically for the consignee.
Investment in technology allows UPS to raise
the standard for customer service and reliability. In
addition, innovative technology solutions differenti-
ate UPS in the marketplace in terms of both service
offerings and operational efficiency.
Integrated solutions move goods
seamlessly from factory to final delivery
Many UPS solutions combine the scope of its
global small package transportation network with
supply chain services, allowing goods to move more
quickly across borders via air, ground, or sea. The
ability to tie together all modes of transportation
to move anything from a small package to heavy
freight enables UPS to develop the right solution
for each customer.
UPS’s suite of Trade DirectSM services, for example,
improves the efficiency of international shipping
for customers by moving multiple packages, going
to multiple consignees, as one shipment with one
customs clearance. The packages are then fed into the
UPS network and shipped directly to the recipients.
Whether it’s small packages moving between
NAFTA markets, air freight moving between
continents, or ocean-transported goods, UPS
provides customers with improved time-in-transit,
full visibility, and international trade services that
facilitate participation in the global marketplace. n
PARIS, FRANCE 6:24 P.M.
UPS Annual Report 2004 15
Supply chain management offers
substantial growth potential
UPS sees great promise as supply chain
management continues to take a more prominent
role in the strategic decisions of its customers.
Total supply chain spending around the world
is estimated to be over $3 trillion, of which only
about 10 percent is currently outsourced. The
outsourced market, however, is growing at a 12
percent compounded annual rate.* In addition to
this growth potential, UPS’s expanding supply chain
capabilities will continue to enhance long-term
relationships with customers and drive additional
package volume into the company’s network. n
Supply chain solutions improve
competitive position
UPS’s supply chain management capabilities have
helped customers be more successful by providing them
with innovative and effective services.
n The repair and return of laptop computers was cut
from 10 or more days to as little as 24 hours, helping
a computer manufacturer distinguish its repair service
from its competitors, save on repair costs, and provide
better customer service.
n When a camera maker aggressively entered the
digital market, it chose UPS to help improve service to
retailers and speed up orders. UPS created an integrated
system for managing inbound air and ocean freight,
repacking and kitting products to retailer specifications
for final distribution, and providing enhanced visibility
so retailers knew when their merchandise would arrive.
This solution provided customized products for each
retailer, which resulted in a competitive advantage for
the camera manufacturer.
n For a global medical technology company, UPS
developed a flexible order-to-cash solution that achieved
high performance rates for order accuracy and on-time
delivery of their products. The company improved its
customer service and achieved the added flexibility to
better address fluctuations in order volume.
n One of the world’s leading automotive companies
wanted to improve service and reduce costs involved in
the distribution of aftermarket parts. UPS designed a
parts distribution system that provided complete
visibility throughout the supply chain for dealers
ordering parts. The solution reduced the number
of shipments, improved on-time delivery and order
tracking, decreased inventory and transportation costs,
and raised dealer satisfaction to new heights.
n A Canadian cosmetics company used UPS Trade
DirectSM Cross Border service to consolidate multiple
orders into one shipment into the United States, and then
break it into individual orders for final delivery to U.S.
customers. This solution cut shipping costs by generating
a single customs fee. Products also arrived more quickly,
bypassing costly warehouse stops for repackaging.
18 UPS Annual Report 2004
* Cass Information Systems, Inc., 2001
UPS Annual Report 2004 19
How we run our business
UPS founder Jim Casey established principles and
values that are part of the fabric of our business.
For almost 100 years, these principles and values
have remained constant and have been integral to our
success. This legacy of honesty, quality, and integrity
is fundamental to our ability to attract and retain the
best people, gain and keep the trust of our customers,
create shareowner value, support the communities in
which we operate, and protect our reputation.
UPS BUSINESS PHILOSOPHY
Employees: We respect and value the individual.
n We encourage a spirit of teamwork.
n We promote from within.
n We help people to develop themselves.
n We place great value on diversity.
Customers: We believe that attention to our customers’
changing needs is central to the success of UPS.
n We treat each customer as our only customer.
n We never promise more than we can deliver,
and we deliver on every promise.
Shareowners: We sustain a financially strong company.
n We manage assets wisely.
n We emphasize the “long-term” in strategy
development and decision-making.
n We seek to provide long-term competitive
returns to our shareowners.
Ownership philosophy: We believe that employee
ownership in the company is important.
n The principle that has contributed a great deal
to building our business is the ownership of the
company by the people employed by it.
n Having a personal stake in the company
causes employees to think like owners and
work like partners. Employee ownership
creates a sense of teamwork and strengthens
and preserves our values.
Sustainability: We operate our business with a balance
between economic success, social responsibility,
and environmental stewardship.
n We believe our economic well-being benefits
society by providing good wages, paying taxes,
and practicing philanthropy.
n We encourage community involvement and
volunteerism by our employees.
n We proactively seek solutions that limit the
impact of our business on the environment. n
Our sustainability report can be found at
www.sustainability.ups.com.
20 UPS Annual Report 2004
UPS Annual Report 2004 21
Governance
“We have become known to all who deal with us as
people of integrity, and that priceless asset is more
valuable than anything else we possess.”
Integrity has been and will continue to be the basis of all we
do. It’s embedded in our culture. Therefore, the concept of
“corporate governance” is not new to UPS — running a fair,
honest business is what we’ve done for decades. A complete
description of our approach to governance is available at
www.shareholder.com/ups/corpgov.cfm.
The Board of Directors is entrusted with overseeing corporate
— JIM CASEY, UPS FOUNDER, 1955
performance in an honest, diligent, and thorough manner.
It is accountable to the shareowners, not to management.
While governance practices may evolve and are reviewed
regularly, the commitment to integrity in our dealings with all
stakeholders never changes. n
Worldwide recognition
The year 2004 brought more
accolades, awards, and recognition
for UPS. Some of the many awards
bestowed last year include:
DiversityInc magazine
Among Top 50 Companies for
Diversity and Top 10 Companies
for Latinos
Harris Interactive/
Reputation Institute
Number 2 among Top
Corporate Reputation
Intermec
UPS Logistics Technologies wins
2003 North American Outstanding
Partner Award
American Business Awards
Most Innovative Company
(second consecutive year)
American Jewish Committee
National Human Relations Award
Aviation Week and Space
Technology magazine
Top Performing Airlines Ranking
BtoB Magazine
CoreBrand survey’s Top 30 Most
Valuable Brands
ComputerWorld magazine
Among 100 Best Places to Work in
Information Technology
The Customer Respect Group
Number 1 for Online
Customer Respect
Financial Times/
PriceWaterHouseCoopers
Number one on World’s
Most Respected Transport
Companies survey
Forbes magazine
Most Valuable Corporate Brands
and Platinum 400 — the Best Big
Companies in America list
FORTUNE magazine
Among 50 Best Companies for
Minorities (sixth consecutive
year), America’s Most Admired
company in its industry (21st
consecutive year), Blue-Ribbon
company, FORTUNE 500, FORTUNE
Global 500, World’s Most Admired
company in its industry (sixth
consecutive year)
Gifts in Kind International
Light of Hope Award
Hispanic Magazine
Corporate 100, Top 25
Recruitment Programs, Top 25
Vendor Programs for Latinos
International Business Award
Best Marketing Organization for
the “UPS Delivers Synchronized
Commerce” campaign
Illinois National Guard
UPS Supply Chain Solutions
receives National Guard Team-
Employer Recognition Award
Inbound Logistics magazine
UPS Supply Chain Solutions
receives Top 100 3PL Providers
Award (second consecutive year)
Industry Week magazine
UPS Package Flow Technologies
among “Technologies of the Year
— Notable Innovations”
InformationWeek magazine
InformationWeek 500 list of
innovative companies
National Retail
Federation Foundation
The UPS Store included in Customer
Service Excellence 2004: Exemplary
Practices in Retail report
Parcel Shipping & Distribution
Best Practice Survey
Best-in-Class in Customer Service
United Way
Top in corporate donations in United
States (fourth consecutive year)
Women’s Business Enterprise
National Council
“Elite Eleven” America’s Top
Corporations for Women Business
Enterprises (fifth consecutive year)
UPS Annual Report 2004 21
20 UPS Annual Report 2004
UPS 2004 Board of Directors
Left to right: Ann M. Livermore, Victor A. Pelson, Lea N. Soupata, Gary E. MacDougal, Carol B. Tomé, John W. Thompson, Michael L. Eskew, Calvin Darden, James P. Kelly
*After many years of distinguished service, Calvin
Darden retired, effective March 31, 2005. At the
February 2005 Board meeting, John J. Beystehner
was appointed to replace Cal on the Board.
Gary E. MacDougal
Former Chairman and Chief Executive Officer,
Mark Controls Corporation
Chair, Nominating and Corporate
Governance Committee
Compensation Committee
Director since 1973
John W. Thompson
Chairman and Chief Executive Officer,
Symantec Corporation
Audit Committee
Compensation Committee
Director since 2000
Victor A. Pelson
Senior Advisor,
UBS Securities LLC
Chair, Compensation Committee
Nominating and Corporate
Governance Committee
Director since 1990
Lea N. Soupata
Senior Vice President, UPS
Executive Committee
Director since 1998
Carol B. Tomé
Chief Financial Officer,
The Home Depot
Audit Committee
Director since 2003
UPS recognizes the contributions of Director
Robert M. Teeter, who passed away in June
2004. Bob, who was President of Coldwater
Corporation, provided dedicated service to the
UPS Board since 1990. He will be remembered
for his integrity and leadership, as well as the
unique insights he brought to the Board.
UPS Board of Directors
Calvin Darden*
Senior Vice President, UPS
Executive Committee
Director since 2001
Michael L. Eskew
Chairman and Chief Executive Officer, UPS
Chair, Executive Committee
Director since 1998
James P. Kelly
Former UPS Chairman and Chief Executive
Officer
Director since 1991
Ann M. Livermore
Executive Vice President,
Hewlett-Packard Company
Chair, Audit Committee
Nominating and Corporate
Governance Committee
Director since 1997
22 UPS Annual Report 2004
UPS Annual Report 2004 23
After many years of dedicated service,
Ken Lacy retired, and Chris Mahoney will retire
effective March 31, 2005, from their positions
on the Management Committee.
Management
Committee
The committee is
responsible for
the day-to-day
management of
our business.
Michael L. Eskew
Chairman and
Chief Executive Officer
Allen E. Hill
Senior Vice President,
General Counsel, and
Corporate Secretary
Kurt Kuehn
Senior Vice President,
Worldwide Sales and
Marketing
David Abney
Senior Vice President and
President, UPS International
David Barnes
Senior Vice President and
Chief Information Officer
John J. Beystehner
Senior Vice President,
Chief Operating Officer and
President, UPS Airlines
D. Scott Davis
Senior Vice President,
Chief Financial Officer,
and Treasurer
John McDevitt
Senior Vice President,
Global Transportation Services
Lea N. Soupata
Senior Vice President,
Human Resources
Robert E. Stoffel
Senior Vice President,
UPS Supply Chain Group
James F. Winestock
Senior Vice President,
U.S. Operations
Senior Operations
Management
George W. Brooks, Jr.
Southeast Region
Jovita Carranza
Air Operations
Wolfgang Flick
Europe Region
Stephen D. Flowers
Americas Region
Myron A. Gray
North Central Region
Wayne C. Herring
East Central Region
Robert L. Lekites
UPS Airlines
Gerald R. Mattes
Pacific Region
Rocky Romanella
UPS Supply Chain Solutions
Anthony Poselenzny
West Region
Kenneth A. Torok
Asia Pacific Region
Carolyn J. Walsh
Southwest Region
Alan Gershenhorn
UPS Supply Chain Solutions
Stephen R. Miele
Northeast Region
22 UPS Annual Report 2004
UPS Annual Report 2004 23
Selected financial data
The following table sets forth selected financial data for each of the five years in the period ended December 31, 2004 (amounts in
millions, except per share amounts). This financial data should be read together with our consolidated financial statements and
related notes, Management’s Discussion and Analysis of Financial Condition and Results of Operations, and other financial data
appearing elsewhere in this report.
2004
2003
Years Ended December 31,
2002
2001
2000
Selected Income Statement Data
Revenue:
U.S. domestic package
International package
Non-package
Total revenue
Operating expenses:
Compensation and benefits
Other
Total operating expenses
Operating profit (loss):
U.S. domestic package
International package
Non-package
Total operating profit
Other income (expense):
Investment income
Interest expense
Gain on redemption of long-term debt
Tax assessment
Income before income taxes
Income taxes
Cumulative effect of changes in accounting principles
Net income
Per share amounts:
Basic earnings per share
Diluted earnings per share
Dividends declared per share
Weighted Average Shares Outstanding
Basic
Diluted
Selected Balance Sheet Data
Working capital
Long-term debt
Total assets
Shareowners’ equity
24
UPS Annual Report 2004
$ 26,610
6,762
3,210
36,582
20,916
10,677
31,593
3,345
1,121
523
4,989
82
(149)
—
—
4,922
(1,589)
—
3,333
2.95
2.93
1.12
1,129
1,137
2004
6,122
3,261
33,026
16,384
$
$
$
$
$
$
$
$
$
$
$
25,022
5,561
2,902
33,485
19,328
9,712
29,040
3,272
709
464
4,445
18
(121)
28
—
4,370
(1,472)
—
2,898
2.57
2.55
0.92
1,128
1,138
2003
4,335
3,149
29,734
14,852
$
$
$
$
$
23,924
4,680
2,668
31,272
17,940
9,236
27,176
3,576
322
198
4,096
63
(173)
—
1,023
5,009
(1,755)
(72)
3,182
2.84
2.81
0.76
1,120
1,134
As of December 31,
2002
$
3,183
3,495
26,868
12,455
$
$
$
$
$
$
23,997
4,245
2,079
30,321
17,397
8,962
26,359
3,620
125
217
3,962
159
(184)
—
—
3,937
(1,512)
(26)
2,399
2.13
2.10
0.76
1,126
1,144
2001
2,811
4,648
24,636
10,248
$
$
$
$
$
$
24,002
4,078
1,418
29,498
16,546
8,440
24,986
3,929
277
306
4,512
527
(205)
—
—
4,834
(1,900)
—
2,934
2.54
2.50
0.68
1,153
1,175
2000
2,623
2,981
21,662
9,735
Financial table of contents
Management’s discussion and analysis
Management’s Report on Internal Control Over Financial Reporting
Report of Independent Registered Public Accounting Firm on
Internal Control Over Financial Reporting
Report of Independent Registered Public Accounting Firm
Consolidated balance sheets
Statements of consolidated income
Statements of consolidated shareowners’ equity
Statements of consolidated cashflows
Notes to consolidated financial statements
Price and dividend information
Investor information
26
40
41
42
43
44
45
46
47
71
72
Certifications
UPS has included as Exhibit 31 to its Annual Report on Form 10-K filed with the Securities
and Exchange Commission certificates of the Chief Executive Officer and Chief Financial Officer
certifying the quality of UPS’s public disclosure. In addition, the Chief Executive Officer certified
to the New York Stock Exchange on June 28, 2004, that he was not aware of any violations by
UPS of New York Stock Exchange corporate governance listing standards.
Financial table of contents
25
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:
Revenue (in millions):
U.S. domestic package:
Next Day Air
Deferred
Ground
Total U.S. domestic package
International package:
Domestic
Export
Cargo
Total International package
Non-package:
UPS Supply Chain Solutions
Other
Total Non-package
Consolidated
Average Daily Package Volume (in thousands):
U.S. domestic package:
Next Day Air
Deferred
Ground
Total U.S. domestic package
International package:
Domestic
Export
Total International package
Consolidated
Operating days in period
Average Revenue Per Piece:
U.S. domestic package:
Next Day Air
Deferred
Ground
Total U.S. domestic package
International package:
Domestic
Export
Total International package
Consolidated
26
UPS Annual Report 2004
Year Ended December 31,
Change
2004
2003
$
$
6,040
3,161
17,409
26,610
$
5,580
2,982
16,460
25,022
1,346
4,944
472
6,762
1,134
4,001
426
5,561
2,346
864
3,210
$ 36,582
2,126
776
2,902
33,485
$
1,194
910
10,676
12,780
815
541
1,356
14,136
254
$
$
19.92
13.68
6.42
8.20
6.50
35.98
18.26
9.16
1,185
918
10,268
12,371
786
481
1,267
13,638
252
18.69
12.89
6.36
8.03
5.73
33.01
16.08
8.77
$
$
$
$
$
$
460
179
949
1,588
212
943
46
1,201
220
88
308
3,097
#
9
(8)
408
409
29
60
89
498
$
1.23
0.79
0.06
0.17
0.77
2.97
2.18
0.39
%
8.2%
6.0
5.8
6.3
18.7
23.6
10.8
21.6
10.3
11.3
10.6
9.2%
0.8%
(0.9)
4.0
3.3
3.7
12.5
7.0
3.7%
6.6%
6.1
0.9
2.1
13.4
9.0
13.6
4.4%
Revenue (in millions):
U.S. domestic package:
Next Day Air
Deferred
Ground
Total U.S. domestic package
International package:
Domestic
Export
Cargo
Total International package
Non-package:
UPS Supply Chain Solutions
Other
Total Non-package
Consolidated
Average Daily Package Volume (in thousands):
U.S. domestic package:
Next Day Air
Deferred
Ground
Total U.S. domestic package
International package:
Domestic
Export
Total International package
Consolidated
Operating days in period
Average Revenue Per Piece:
U.S. domestic package:
Next Day Air
Deferred
Ground
Total U.S. domestic package
International package:
Domestic
Export
Total International package
Consolidated
Year Ended December 31,
Change
2003
2002
$
$
5,580
2,982
16,460
25,022
$
5,349
2,868
15,707
23,924
1,134
4,001
426
5,561
943
3,276
461
4,680
2,126
776
2,902
$ 33,485
1,969
699
2,668
31,272
$
1,185
918
10,268
12,371
786
481
1,267
13,638
252
$
$
18.69
12.89
6.36
8.03
5.73
33.01
16.08
8.77
1,111
895
10,112
12,118
779
443
1,222
13,340
252
19.11
12.72
6.16
7.83
4.80
29.35
13.70
8.37
$
$
$
$
$
$
231
114
753
1,098
191
725
(35)
881
157
77
234
2,213
#
74
23
156
253
7
38
45
298
$
(0.42)
0.17
0.20
0.20
0.93
3.66
2.38
0.40
%
4.3%
4.0
4.8
4.6
20.3
22.1
(7.6)
18.8
8.0
11.0
8.8
7.1%
6.7%
2.6
1.5
2.1
0.9
8.6
3.7
2.2%
(2.2)%
1.3
3.2
2.6
19.4
12.5
17.4
4.8%
Management’s discussion and analysis
27
Management’s discussion and analysis of financial condition and results of operations
Operating Profit
The following tables set forth information showing the change in operating profit, both in dollars (in millions) and in percentage terms:
Operating Segment
U.S. domestic package
International package
Non-package
Consolidated Operating Profit
Operating Segment
U.S. domestic package
International package
Non-package
Consolidated Operating Profit
Year Ended December 31,
Change
2004
2003
$
%
$ 3,345
1,121
523
$ 4,989
$
$
3,272
709
464
4,445
Year Ended December 31,
2003
2002
$
$
3,272
709
464
4,445
$
$
3,576
322
198
4,096
$
$
$
$
73
412
59
544
2.2%
58.1
12.7
12.2%
Change
$
%
(304)
387
266
349
(8.5)%
120.2
134.3
8.5%
U.S. Domestic Package Operations
2004 compared to 2003
U.S. domestic package revenue increased $1.588 billion, or 6.3%,
for the year, which resulted from a 3.3% increase in average daily
package volume and a 2.1% increase in revenue per piece.
Ground volume increased 4.0% during the year, driven in part by
the improving U.S. economy, and reflects growth in both com-
mercial and residential deliveries. Ground volume increased 4.8%
during the first nine months of the year, but slowed to 1.5% dur-
ing the fourth quarter. Total Next Day Air volume (up 0.8%) and
total deferred volume (down 0.9%) were both significantly
affected by declines in letter volume, but offset by an increase in
Next Day Air package volume. The 2004 decline in Next Day Air
and deferred letter volume is largely due to the slowdown in
mortgage refinancing, which was notably strong in 2003.
Ground revenue per piece increased 0.9% for the year prima-
rily due to the impact of a rate increase that took effect in 2004,
but growth was adversely impacted by approximately 220 basis
points due to the removal of the fuel surcharge on ground prod-
ucts, as discussed below. Next Day Air revenue per piece
increased 6.6%, while deferred revenue per piece increased
6.1%, primarily due to the shift in product mix from letters to
packages, the rate increase, and the modified fuel surcharge on
domestic air products.
On January 5, 2004, a rate increase took effect which was 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 deliv-
eries 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%.
In addition, we discontinued the fuel surcharge on ground
products, while we began to apply a new indexed surcharge to
domestic air products. This indexed 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.
Based on published rates, the average fuel surcharge applied to
our air products during 2004 was 7.07%, compared with the
average surcharge of 1.47% applied to both air and ground
products in 2003, resulting in an increase in domestic fuel sur-
charge revenue of $290 million during the year.
U.S. domestic package operating profit increased $73 million,
or 2.2%, primarily due to the increase in volume and revenue
growth discussed previously, but somewhat offset by increased
aircraft impairment charges ($91 million in 2004 compared to
$69 million in 2003) and a $63 million pension charge related to
the consolidation of data systems used to collect and accumulate
plan participant data.
28
UPS Annual Report 2004
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 aver-
age 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 overnight 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 compared 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 addition, we increased rates for UPS Next Day Air an average
of 3.4% and increased rates for deferred services by 4.5%.
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. 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 discontinued the fuel surcharge on ground service,
while an indexed surcharge was applied to our Next Day Air and
deferred products. This indexed fuel surcharge for the domestic
air products was based on the U.S. Energy Department’s Gulf
Coast spot price for a gallon of kerosene-type jet fuel.
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 fur-
ther below 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. 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.
International Package Operations
2004 compared to 2003
International package revenue improved $1.201 billion, or
21.6%, for the year primarily due to the 12.5% volume growth
for our export products and strong revenue per piece improve-
ments. Revenue increased $295 million during the year due to
currency fluctuations. Revenue growth was also impacted by the
change to our fuel surcharge (discussed below) as well as rate
changes, which vary by geographical market and occur through-
out the year. 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 3.5%.
In January 2004, changes were made to the calculation of our
fuel surcharge on international products (including U.S. export
products). The surcharge is now indexed to fuel prices in our dif-
ferent international regions, depending on where the shipment
takes place. The current surcharge is only applied to our interna-
tional express products, while the previous surcharge was
applied to all international products. These changes, along with
higher fuel prices, had the effect of increasing international pack-
age revenue by $231 million during the year.
We experienced double-digit export volume growth in each
region throughout the world, with the Asia-Pacific region lead-
ing with 24% export volume growth, including a 101% increase
in China export volume. Export volume continues to benefit
from our expanding international network, such as the six addi-
tional flights to Shanghai, China that were added in the fourth
quarter. European export volume grew in excess of 10%, and
was positively influenced by the addition of 10 countries to the
European Union. Non-U.S. domestic volume increased 3.7% for
the year, and primarily reflects improvements in our European
and Canadian domestic delivery businesses.
Export revenue per piece increased 9.0% for the year (3.1%
currency-adjusted), benefiting from rate increases and the impact
of the fuel surcharge. In total, international average daily pack-
age volume increased 7.0% and average revenue per piece
increased 13.6% (6.7% currency-adjusted).
The improvement in operating profit for our international
package operations was $412 million, or 58.1%, for the year,
$54 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, and a strong increase in operating margin through
better network utilization. International operating profit was
Management’s discussion and analysis
29
Management’s discussion and analysis of financial condition and results of operations
adversely affected by aircraft impairment charges of $19 million
in 2004, compared to a $6 million charge in 2003.
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,
reversing a 3.2% decline from the previous year, which 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
continued focus on yield management. In total, international
average daily package volume increased 3.7% and average rev-
enue per piece increased 17.4% (6.2% currency-adjusted). The
7.6% decline in cargo revenue during the year was largely due
to a reduction of flights in our air network in the Americas.
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 out-
side the United States generally are made throughout the year
and vary by geographic market.
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.
Non-Package Operations
2004 compared to 2003
Non-package revenue increased $308 million, or 10.6%, for
the year. UPS Supply Chain Solutions increased revenue by
10.3% during the year, with strong growth in our air and
ground freight forwarding businesses, as well as our logistics
business. Favorable currency fluctuations provided $73 million
of the increase in revenue for the year. The remainder of our
non-package operations, which includes Mail Boxes Etc. (the
franchisor of Mail Boxes Etc. and The UPS Store), UPS Capital,
our mail and consulting services, and our excess value package
30
UPS Annual Report 2004
insurance business, increased revenue by 11.3% for the year,
largely due to strong double-digit franchise and royalty rev-
enue growth at Mail Boxes Etc. resulting from an expanding
store base, as well as higher excess value insurance revenue.
Menlo Worldwide Forwarding, which was acquired in
December 2004, added $33 million in revenue.
Non-package operating profit increased $59 million, or
12.7%, for the year, primarily due to improved results from our
UPS Capital, mail services, and excess value insurance business.
Mail Boxes Etc. experienced strong profit growth, due to the
increased franchise and royalty revenue noted previously. Non-
package operating profit includes $112 million (compared to
$114 million in 2003) of intersegment profit for the year, with
a corresponding amount of operating expense, which reduces
operating profit, in the U.S. domestic package segment.
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 ben-
efit 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
purposes. 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
million ($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 con-
solidated operating results in any of the periods presented.
2003 compared to 2002
Non-package revenue increased $234 million, or 8.8%, for the
year. UPS Supply Chain Solutions increased revenue by 8.0%
during the year. This increase was due to growth in our supply
chain management and other logistics businesses, with interna-
tional 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 rev-
enue. 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, our mail and
consulting services, and our excess value package insurance busi-
ness, increased revenue by 11.0% for the year, primarily due to
increased franchise revenue at Mail Boxes Etc. and improve-
ments 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 pro-
duced by our integration and restructuring program. Non-package
operating profit in 2002 was reduced by the $106 million restruc-
turing 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 oper-
ating profit, in the U.S. domestic package segment.
Operating Expenses and Operating Margin
2004 compared to 2003
Consolidated operating expenses increased by $2.553 billion, or
8.8%, for the year, $311 million of which was due to currency
fluctuations in our international package and non-package seg-
ments. Compensation and benefits increased by $1.588 billion,
or 8.2%, for the year, largely due to increased payroll costs,
increased health and welfare expense, and higher pension expense
for our union pension plans. Stock-based compensation expense
increased $167 million, or 23.2%, during the year, primarily as a
result of increased management incentive awards expense and
adopting the measurement provisions of FAS 123 prospectively
beginning with 2003 stock-based compensation awards.
Other operating expenses increased by $965 million, or 9.9%,
for the year, largely due to a 34.9% increase in fuel expense and a
12.6% increase in purchased transportation, but were somewhat
offset by a decline in depreciation and amortization expense. The
increase in fuel expense was primarily due to higher prices for Jet-
A, diesel, and unleaded gasoline, in addition to somewhat higher
fuel usage and lower hedging gains. The increase in purchased
transportation expense was influenced by the impact of currency,
higher fuel prices, and volume growth in our international pack-
age business. The decline in depreciation and amortization for the
year was impacted by lower depreciation expense on aircraft
engines, largely due to the retirement of some older aircraft. The
increase in repairs and maintenance expense was affected by
increased expense on vehicle parts and airframe and engine main-
tenance. The increase in other occupancy expense was largely
related to higher rent expense, but somewhat offset by lower real
estate taxes. The increase in other expenses was affected by the
$110 million impairment of aircraft, engines, and parts, as well
as the $63 million pension charge discussed previously, in addi-
tion to higher advertising costs.
Our consolidated operating margin, defined as operating
profit as a percentage of revenue, increased in 2004 compared
with 2003. The operating margins for our three business seg-
ments were as follows:
Operating Segment
U.S. domestic package
International package
Non-package
Consolidated
2004
Year Ended December 31,
2003
2002
12.6%
16.6%
16.3%
13.6%
13.1%
12.7%
16.0%
13.3%
14.9%
6.9%
7.4%
13.1%
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
fluctuations in our international package and non-package seg-
ments. 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 compensa-
tion 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 pur-
chased 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 pack-
age and Supply Chain Solutions businesses. The growth in
depreciation and amortization reflects the addition of new air-
craft, the completion 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 primarily due to a $75
million impairment 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.
Management’s discussion and analysis
31
Management’s discussion and analysis of financial condition and results of operations
Investment Income/Interest Expense
2004 compared to 2003
Investment income increased by $64 million during the year,
primarily due to a $58 million impairment charge recognized
during 2003. We periodically review our investments for indica-
tions 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 mar-
ket 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. Investment income
also increased in 2004 due to higher interest rates earned on
cash balances, but was somewhat offset by increased equity-
method losses on certain investment partnerships.
The $28 million increase in interest expense during 2004 was
primarily due to the impact of higher interest rates on variable
rate debt and certain interest rate swaps, as well as the impact of
currency exchange rates and imputed interest expense associated
with certain investment partnerships. The impact of higher inter-
est rates was somewhat offset by lower average debt balances
outstanding in 2004 compared to 2003.
In December 2003, we redeemed $300 million in cash-settled
convertible senior notes at a price of 102.703, and also termi-
nated 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 non-operating gain recorded in 2003 results.
2003 compared to 2002
The decrease in investment income of $45 million in 2003 is
primarily due to the $58 million impairment charge recognized
during the first quarter of 2003. The $52 million decline in inter-
est expense in 2003 was primarily the result of lower commercial
paper balances outstanding, lower interest rates on variable rate
debt, and lower floating rates on interest rate swaps.
Net Income and Earnings Per Share
2004 compared to 2003
2004 net income was $3.333 billion, a 15.0% increase from the
$2.898 billion in 2003, resulting in an increase in diluted earn-
ings per share to $2.93 in 2004 from $2.55 in 2003. Net income
in 2004 was adversely impacted by a $70 million after-tax
impairment charge ($0.06 per diluted share) on Boeing 727,
747, and McDonnell Douglas DC-8 aircraft, engines, and parts,
as well as a $40 million after-tax charge ($0.04 per diluted
share) to pension expense resulting from the consolidation of
data systems used to collect and accumulate plan participant
32
UPS Annual Report 2004
data. Net income was positively impacted by credits to income
tax expense totaling $142 million ($0.13 per diluted share)
related to various items, including the resolution of certain tax
matters, the removal of a portion of the valuation allowance on
certain deferred tax assets on net operating loss carryforwards,
and an adjustment for identified tax contingency items.
Net income in 2003 was favorably impacted by the $14 mil-
lion after-tax gain ($0.01 per diluted share) on the sale of Mail
Technologies, the $15 million after-tax gain ($0.01 per diluted
share) on the sale of Aviation Technologies, and the $18 million
after-tax gain ($0.02 per diluted share) recognized upon
redemption of our $300 million cash-settled senior convertible
notes. Net income in 2003 was adversely impacted by the $37
million after-tax investment impairment charge ($0.03 per
diluted share) described previously. Net income in 2003 was
also favorably impacted by reductions in income tax expense of
$116 million ($0.10 per diluted share) due to the resolution of
various tax issues with the IRS, a favorable court ruling on the
tax treatment of jet engine maintenance costs, and a lower
effective state tax rate.
2003 compared to 2002
Net income for 2003 was $2.898 billion, a decrease of $284 mil-
lion from the $3.182 billion achieved in 2002, resulting in a
decrease in diluted earnings per share to $2.55 in 2003 from
$2.81 in 2002. Net income in 2003 was affected by the items
noted above. Net income in 2002 was favorably impacted by a
$776 million after-tax ($0.68 per diluted share) benefit 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.
Liquidity and Capital Resources
Net Cash From Operating Activities
Net cash provided by operating activities was $5.331, $4.576,
and $5.688 billion in 2004, 2003 and 2002, respectively. The
increase in 2004 operating cash flows compared with 2003 was
primarily due to higher net income, decreased pension and retire-
ment plan fundings, and cash received upon the resolution of
various tax matters. In 2004, we funded $450 million to our pen-
sion plans as compared to $1.136 billion in 2003. As discussed in
Note 5 to the consolidated financial statements, projected pen-
sion contributions to plan trusts in 2005 are approximately $723
million. In 2004, we received $610 million from our previously
disclosed settlement with the Internal Revenue Service (IRS) pri-
marily on tax matters related to excess value package insurance
for tax years 1983-84 and 1991-98 (see “Contingencies” section
below). As of December 31, 2004, we had a $371 million receiv-
able recorded for the settlement related to tax years 1985-90.
On October 28, 2004, we announced a rate increase and a
change in the fuel surcharge that will take effect on January 3,
2005. We increased rates 2.9% on UPS Next Day Air, UPS 2nd
Day Air, UPS 3 Day Select, and UPS Ground. We also increased
rates 2.9% for international shipments originating in the United
States (Worldwide Express, Worldwide Express Plus, UPS
Worldwide Expedited and UPS International Standard service).
Other pricing changes include an increase of $0.25 for delivery
area surcharge on both residential and commercial services to
certain ZIP codes. The residential surcharge will increase $0.10
for UPS Ground services and $0.35 for UPS Next Day Air, UPS
2nd Day Air and UPS 3 Day Select. These rate changes are cus-
tomary, and are consistent with previous years’ rate increases.
Additionally, in January 2005 we will modify the fuel surcharge
on domestic and international air services by setting a maximum
cap of 9.5%. A fuel surcharge of 2% will be applied to UPS
Ground services that will fluctuate after January 2005 based on
the U.S. Energy Department’s On-Highway Diesel Fuel Price.
Rate changes for shipments originating outside the U.S. were
made throughout the past year and varied by geographic market.
Net Cash Used In Investing Activities
Net cash used in investing activities was $3.638, $2.742, and
$3.281 billion in 2004, 2003 and 2002, respectively. The pri-
mary reason for the increased cash used in investing activities
has been the increasing net purchases of marketable securities,
due to the excess of cash generated over our capital investment
needs. The increase in funds used for business acquisitions is
primarily due to the Menlo Worldwide Forwarding and UPS
Yamato Express Co. acquisitions in 2004 (see Note 7 to the con-
solidated financial statements). The cash generated from finance
receivables was primarily due to principal payments on finance
receivables and sales of portions of our portfolio, primarily in
the receivable factoring business.
Capital expenditures represent a primary use of cash in
investing activities, as follows (in millions):
Buildings and facilities
Aircraft and parts
Vehicles
Information technology
Total
2004
2003
2002
$
547
829
393
358
$ 2,127
$
451
1,019
161
316
$ 1,947
$
528
638
41
451
$ 1,658
As described in the “Commitments” section below, we have
commitments for the purchase of aircraft, vehicles, equipment
and other fixed assets to provide for the replacement of existing
capacity and anticipated future growth. We fund our capital
expenditures with our cash from operations.
Net Cash Used In Financing Activities
Net cash used in financing activities was $2.014, $2.110 and
$2.090 billion in 2004, 2003 and 2002, respectively. Our pri-
mary use of cash in financing activities has been to repurchase
stock, pay dividends, and repay long-term debt. In October
2004, a total of $2.0 billion was authorized for share repur-
chases as part of our continuing share repurchase program. As
of December 31, 2004, $1.817 billion of this authorization was
available for future share repurchases. We repurchased a total of
$1.310 billion of common stock in 2004.
We increased our cash dividends per share to $1.12 in 2004
from $0.92 in 2003, resulting in an increase in total cash divi-
dends paid to $1.208 billion from $956 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 pay-
ing regular cash dividends. In February 2005, the Board of
Directors declared a $0.33 per share dividend, which represents
a 17.9% increase over the $0.28 previous quarterly dividend.
The dividend is payable on March 9, 2005 to shareowners of
record on February 22, 2005.
During 2004, we repaid $468 million in debt, primarily con-
sisting of $264 million in commercial paper, $56 million in
redemptions of UPS Notes, $57 million in scheduled principal
payments on capital lease obligations, and $60 million for the
redemption of our Singapore Dollar notes issue. Issuances of
debt primarily consisted of $735 million in commercial paper
and $41 million in 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.
Sources of Credit
We maintain two commercial paper programs under which we
are authorized to borrow up to $7.0 billion. Approximately
$1.015 billion was outstanding under these programs as of
December 31, 2004, with an average interest rate of 2.10%.
The entire balance outstanding has been classified as a current
liability in our balance sheet. In addition, we maintain an
extendable commercial notes program under which we are
authorized to borrow up to $500 million. No amounts were
outstanding under this program at December 31, 2004.
We maintain two credit agreements with a consortium of
banks. These agreements provide revolving credit facilities of
$1.0 billion each, with one expiring on April 21, 2005 and the
other on 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, 2004.
Management’s discussion and analysis
33
Management’s discussion and analysis of financial condition and results of operations
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 $126 million issued under this
shelf registration statement at December 31, 2004, all of which
consists of issuances under our UPS Notes program.
Our existing debt instruments and credit facilities do not have
cross-default or ratings triggers, however these debt instruments
and credit facilities do subject us to certain financial covenants.
These covenants generally require us to maintain a $3.0 billion
minimum net worth and limit the amount of secured indebtedness
available to the company. These covenants are not considered
material to the overall financial condition of the company, and all
covenant tests were passed as of December 31, 2004.
Commitments
We have contractual obligations and commitments in the form
of operating leases, capital leases, debt obligations and purchase
commitments. We intend to satisfy these obligations through the
use of cash flow from operations. The following table summa-
rizes our contractual obligations and commitments as of
December 31, 2004 (in millions):
Year
2005
2006
2007
2008
2009
After 2009
Total
Capitalized
Leases
$
97
70
121
132
76
62
$ 558
Operating
Leases
$
370
327
242
169
128
590
$ 1,826
Debt
Purchase
Principal Commitments
$ 1,110
6
—
27
84
2,777
$ 4,004
$ 1,012
488
223
274
637
1,129
$ 3,763
In December 2004, we amended our existing aircraft purchase
agreement with Airbus Industries. The amended agreement will
reduce Airbus A300-600 aircraft on order from 50 to 13, and
the number of options on this aircraft from 37 to zero. These 13
aircraft remaining on order will be delivered to UPS by July
2006. Additionally, we placed a firm order for 10 Airbus A380
freighter aircraft, and obtained options to purchase 10 addi-
tional A380 aircraft. The Airbus A380 aircraft will be delivered
to UPS between 2009 and 2012. The purchase commitments
information above reflects the amended agreement.
In January 2005, we also announced an agreement to pur-
chase an additional 11 Boeing MD-11 pre-owned aircraft. These
aircraft will be delivered to UPS between 2005 and 2007.
We believe that funds from operations and borrowing pro-
grams will provide adequate sources of liquidity and capital
resources to meet our expected long-term needs for the operation
of our business, including anticipated capital expenditures, such
as commitments for aircraft purchases, for the foreseeable future.
34
UPS Annual Report 2004
Contingencies
On August 9, 1999 the United States Tax Court held that we
were liable for tax on income of Overseas Partners Ltd., a
Bermuda company that had reinsured excess value (“EV”) 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 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 decision. In
January 2003, we and the IRS finalized settlement of all out-
standing 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.
In the first quarter of 2004, we received a refund of $185 million
pertaining to the 1983 and 1984 tax years.
The IRS had proposed adjustments, unrelated to the EV pack-
age 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 tax credits in the 1985 through 1998 tax
years. In the third quarter of 2004, we settled all outstanding
issues related to each of the tax years 1991 through 1998. In the
fourth quarter of 2004, we received a refund of $425 million
pertaining to the 1991 through 1998 tax years. We expect to
receive the $371 million of refunds related to the 1985 through
1990 tax years within the next six months.
The IRS may take similar positions with respect to some of
the non-EV package insurance matters for each of the years
1999 through 2004. If challenged, 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. We believe that the eventual resolution of
these issues will not have a material adverse effect on our finan-
cial condition, results of operations or liquidity.
We were named as a defendant in twenty-three now-dismissed
lawsuits that sought 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 claimed that we failed to remit collected EV premi-
ums 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 U.S.
Tax Court decision, discussed above, which the U.S. Court of
Appeals for the Eleventh Circuit later reversed.
These twenty-three cases were consolidated for pre-trial pur-
poses in a multi-district litigation proceeding (“MDL
Proceeding”) in federal court in New York. In addition to the
cases in which UPS was named as a defendant, there also was 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. That case also was
consolidated into the MDL Proceeding.
In late 2003, the parties reached a global settlement resolving
all claims and all cases in the MDL proceeding. In reaching the
settlement, we and the other defendants expressly denied any
and all liability. On July 30, 2004, the court issued an order
granting final approval to the substantive terms of the settle-
ment. No appeals were filed and the settlement became effective
on September 8, 2004.
Pursuant to the settlement, UPS has provided qualifying settle-
ment class members with vouchers toward the purchase of
specified UPS services and will pay the plaintiffs’ attorneys’ fees,
the total amount of which still remains to be determined by the
court. Other defendants have contributed to the costs of the settle-
ment, including the attorneys’ fees. The ultimate cost to us of the
proposed settlement will depend on a number of factors, including
how many vouchers settlement class members actually use. We do
not believe that this proposed settlement will have a material effect
on our financial condition, results of operations, or liquidity.
We are a defendant in a number of lawsuits filed in state
courts containing various class-action allegations under state
wage-and-hour laws. In one of these cases, Marlo v. UPS, which
has been certified as a class action in California state court,
plaintiffs allege that they improperly were denied overtime,
penalties for missed meal and rest periods, interest and attor-
neys’ fees. Plaintiffs purport to represent a class of 1,200
full-time supervisors.
We have denied any liability with respect to these claims and
intend to vigorously defend ourselves in these cases. At this time,
we have not determined the amount of any liability that may
result from these matters or whether such liability, if any, would
have a material adverse 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 even-
tual 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 potential funding deficiencies which could cause
us to make significantly 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 liquid-
ity. In addition, our insurance premiums have risen and we have
taken several actions, including self-insuring certain risks, to mit-
igate the expense increase.
As of December 31, 2004, we had approximately 229,000
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 amend-
able 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 agreements run through July 31, 2009.
Market Risk
We are exposed to market risk from changes in certain commod-
ity prices, foreign currency exchange rates, interest rates, and
equity prices. All of these market risks arise in the normal course
of business, as we do not engage in speculative trading activities.
In order to manage the risk arising from these exposures, we uti-
lize 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 cur-
rency exchange risk, interest rate risk, and equity price risk.
We utilize valuation models to evaluate the sensitivity of the fair
value of financial instruments with exposure to market risk that
assume instantaneous, 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.
Management’s discussion and analysis
35
Management’s discussion and analysis of financial condition and results of operations
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
contracts to provide some protection from rising fuel and energy
prices. These derivative instruments generally cover forecasted
fuel and energy consumption for periods of one to three years.
The net fair value of such contracts subject to price risk, exclud-
ing the underlying exposures, as of December 31, 2004 and
2003 was an asset of $101 and $30 million, respectively. The
potential loss in the fair value of these derivative contracts,
assuming a hypothetical 10% change in the underlying commod-
ity price, would be approximately $32 and $17 million at
December 31, 2004 and 2003, 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, the British Pound Sterling and the Canadian Dollar. We
use a combination of purchased and written options and forward
contracts to hedge cash flow currency exposures. These derivative
instruments generally cover forecasted foreign currency exposures
for periods up to one year. As of December 31, 2004 and 2003,
the net fair value of the hedging instruments described above was
a liability of $(28) and $(48) 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 $117 and $97 million at December 31, 2004
and 2003, 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
36
UPS Annual Report 2004
capital leases, that accrue expense at fixed and floating rates of
interest. We use a combination of derivative instruments, includ-
ing 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, 2004 and 2003 would be approxi-
mately $29 and $25 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, 2004 and 2003 would be approximately
$45 and $31 million, respectively.
Additionally, as described in Note 3 to the consolidated finan-
cial statements, we hold a portfolio of finance receivables that
accrue income at fixed and floating rates of interest. The poten-
tial change in the annual income resulting from a hypothetical
100 basis point change in interest rates applied to our variable
rate finance receivables at December 31, 2004 and 2003 would
be immaterial.
This interest rate sensitivity analysis assumes interest 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 scenarios, 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, 2004
and 2003, the fair value of such investments was $77 and $95
million, respectively. The potential change in the fair value of
such investments, assuming a 10% change in equity prices net
of the offsetting impact of any hedges, would be approximately
$8 and $10 million at December 31, 2004 and 2003.
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 counterpar-
ties 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.
New Accounting Pronouncements
In December 2004, the FASB issued Statement No. 123 (revised
2004), “Share-Based Payment” (“FAS 123R”), which replaces
FAS 123 and supercedes APB 25. FAS 123R requires all share-
based payments to employees, including grants of employee
stock options, to be recognized in the financial statements based
on their fair values, beginning with the first interim or annual
period after June 15, 2005, with early adoption encouraged.
We will adopt FAS 123R in the third quarter of 2005, using the
prospective method of adoption. The prospective method
requires that compensation expense be recorded for all unvested
stock options and restricted stock at the beginning of the first
quarter of adoption of FAS 123R. There will be no impact upon
adoption, as we will already be expensing all unvested option
and restricted stock awards.
In December 2004, the FASB issued FASB Staff Position
(“FSP”) No. 109-2, “Accounting and Disclosure Guidance for
the Foreign Earnings Repatriation Provision within the
American Jobs Creation Act of 2004” (“FSP 109-2”). FSP 109-2
provides guidance under FAS 109 with respect to recording the
potential impact of the repatriation provisions of the American
Jobs Creation Act of 2004 (the “Jobs Act”) on enterprises’
income tax expense and deferred tax liability. The Jobs Act was
enacted on October 22, 2004. FSP 109-2 states that an enter-
prise is allowed time beyond the financial reporting period of
enactment to evaluate the effect of the Jobs Act on its plan for
reinvestment or repatriation of foreign earnings for purposes of
applying FAS 109. We have not yet completed our evaluation of
the impact of the repatriation provisions of the Jobs Act.
Accordingly, as provided for in FSP 109-2, we have not adjusted
our income tax provision or deferred tax liabilities to reflect the
repatriation provisions of the Jobs Act.
The adoption of the following recent accounting pronounce-
ments did not have a material impact on our results of
operations or financial condition:
n FASB Interpretation No. 45, “Guarantor’s Accounting and
Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others — An Interpretation
of FASB Statements No. 5, 57, and 107 and Rescission of
FASB Interpretation No. 34”;
n FASB Interpretation No. 46(R), “Consolidation of Variable
Interest Entities — An Interpretation of ARB No. 51”;
n FASB Statement No. 132(R) (revised 2003), “Employer’s
Disclosures about Pensions and Other Post-Retirement
Benefits — An Amendment of FASB Statements No. 87,
88, and 106”;
n FASB Statement No. 146, “Accounting for Costs Associated
with Exit or Disposal Activities”;
n FASB Statement No. 149, “Amendment of Statement 133
on Derivative Instruments and Hedging Activities”;
n FASB Statement No. 150, “Accounting for Certain
Instruments with Characteristics of Both Liabilities and
Equity”; and
n FSP 106-2, “Accounting and Disclosure Requirements
Related to the Medicare Prescription Drug, Improvement
and Modernization Act of 2003”.
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 necessary 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 judgments 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 proceed-
ings and contingencies. We have recorded liabilities for these
matters 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 esti-
mate, a future charge to income would result. Likewise, if a
contingency is settled for an amount that is less than our esti-
mate, 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 standard, goodwill is no longer amortized, but is subjected to
annual impairment testing. Goodwill impairment testing requires
Management’s discussion and analysis
37
Management’s discussion and analysis of financial condition and results of operations
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 judg-
ments 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 antici-
pated 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 mil-
lion related to our Mail Technologies business, resulting in total
goodwill impairment of $74 million for 2002. Our annual
impairment tests performed in 2003 and 2004 resulted in no
goodwill impairment. As of December 31, 2004, our recorded
goodwill was $1.255 billion.
Self-Insurance Accruals — We self-insure costs associated
with workers’ compensation claims, automotive liability, health
and welfare, 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 actu-
aries, 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 methodolo-
gies 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 information as to
historical experience and performance. Differences in actual
38
UPS Annual Report 2004
experience or changes in assumptions may affect our pension and
other postretirement obligations and future expense.
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 instru-
ments 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 fac-
tors, 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, 2004, we had approximately $14.0
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.
In estimating the lives and expected residual values of air-
craft, we have relied upon actual experience with the same or
similar aircraft types. Subsequent revisions to these estimates
could be caused by changes to our maintenance program,
changes in the utilization of the aircraft, governmental regula-
tions on aging aircraft, and changing market prices of new and
used aircraft of the same or similar types. We periodically evalu-
ate these estimates and assumptions, 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 impair-
ment. 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 McDonnell Douglas DC-8 aircraft.
As a result, we conducted an impairment evaluation, which
resulted in a $75 million impairment charge during the fourth
quarter for these aircraft (including the related engines), $69 mil-
lion of which impacted the U.S. domestic package segment and
$6 million of which impacted the international package segment.
In December 2004, we permanently removed from service a
number of Boeing 727, 747 and McDonnell Douglas DC-8 air-
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:
n 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.
n 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 oth-
ers. Our industry is undergoing rapid consolidation, and the
combining entities are competing aggressively for business.
n The impact of complex and stringent aviation, transporta-
tion, environmental, 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 regu-
lations could result in substantial fines or possible
revocation of our authority to conduct our operations.
n 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 competi-
tors 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 agree-
ments also may affect our competitive position and results
of operations.
n Possible disruption of supplies, or an increase in the prices,
of gasoline, diesel and jet fuel for our aircraft and delivery
vehicles as a result of war or other factors. We require sig-
nificant quantities of fuel and are exposed to the commodity
price risk associated with variations in the market price for
petroleum products.
n Cyclical and seasonal fluctuations in our operating results
due to decreased demand for our services.
craft. As a result of the actual and planned retirement of these
aircraft, we conducted an impairment evaluation, which
resulted in a $110 million impairment charge during the fourth
quarter for these aircraft (including the related engines and
parts), $91 million of which impacted the U.S. domestic pack-
age segment and $19 million of which impacted the
international package segment.
These charges are classified in the caption “other expenses”
within other operating expenses (see Note 13 to the consolidated
financial statements). UPS continues to operate all of its other
aircraft and continues to experience positive cash flow.
Income Taxes — We operate in numerous countries around
the world and are subject to income taxes in many jurisdic-
tions. We estimate our annual effective income tax rate based
on statutory income tax rates in these jurisdictions and taking
into consideration items that are treated differently for finan-
cial reporting and tax purposes. The process of estimating our
effective income tax rate involves judgments related to tax
planning and expectations regarding future events. The
increasing profitability of our International segment increases
the significance of our non-U.S. income tax provision to our
overall effective income tax rate. We recognize deferred tax
assets for items that will generate tax deductions or credits in
future years. Realization of deferred tax assets requires suffi-
cient future taxable income (subject to any carry-forward
limitations) in the applicable jurisdictions. We make judgments
regarding the realizability of deferred tax assets based, in part,
on estimates of future taxable income. A valuation allowance
is established for the portion, if any, of the deferred tax assets
that we conclude cannot be realized. Income tax related con-
tingency matters also affect our effective income tax rate. In
this regard, we make judgments related to the identification
and quantification of income tax related contingency matters.
Forward-Looking Statements
“Management’s Discussion and Analysis of Financial Condition
and Results of Operations,” “Liquidity and Capital Resources”
and other parts of this report contain “forward-looking” state-
ments about matters that inherently are difficult to predict. The
words “believes,” “expects,” “anticipates,” “we see,” and similar
expressions are intended to identify forward-looking statements.
These statements include statements regarding our intent, belief
and current expectations about our strategic direction, prospects
and future results. We have described some of the important fac-
tors 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.
Management’s discussion and analysis
39
Management’s Report on Internal Control Over Financial Reporting
UPS management is responsible for establishing and maintaining adequate internal controls over financial reporting for United Parcel
Service, Inc. and subsidiaries (“the Company”). Based on the criteria for effective internal control over financial reporting established
in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission,
management has assessed the Company’s internal control over financial reporting as effective as of December 31, 2004. The scope of
management’s assessment of the effectiveness of internal control over financial reporting includes all of the Company’s businesses
except for Menlo Worldwide Forwarding, a business acquired on December 20, 2004. Menlo constituted less than 3% of total assets as
of December 31, 2004 and less than 1% of total revenue and net income for the year then ended. Further discussion of this acquisi-
tion can be found in Note 7 to our consolidated financial statements. The registered independent public accounting firm of Deloitte &
Touche LLP, as auditors of the consolidated balance sheet of United Parcel Service, Inc. and its subsidiaries as of December 31, 2004
and the related consolidated statements of income, shareowners’ equity and cashflows for the year ended December 31, 2004, has
issued an attestation report on management’s assessment of the Company’s internal control over financial reporting.
United Parcel Service, Inc.
March 14, 2005
40
Management’s Report on Internal Control Over Financial Reporting
Report of Independent Registered Public Accounting Firm on
Internal Control Over Financial Reporting
Board of Directors and Shareowners
United Parcel Service, Inc.
Atlanta, Georgia
We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control Over Financial
Reporting, that United Parcel Service, Inc. and its subsidiaries (the “Company”) maintained effective internal control over financial
reporting as of December 31, 2004, based on criteria established in Internal Control — Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission. As described in Management’s Report on Internal Control
Over Financial Reporting, management excluded from their assessment the internal control over financial reporting at Menlo
Worldwide Forwarding, Inc., which was acquired on December 20, 2004 and whose financial statements reflect total assets and rev-
enues constituting less than 3% and 1%, respectively, of the related consolidated financial statement amounts as of and for the year
ended December 31, 2004. Accordingly, our audit did not include the internal control over financial reporting at Menlo Worldwide
Forwarding, Inc. The Company’s management is responsible for maintaining effective internal control over financial reporting and for
its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on manage-
ment’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control
over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control
over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal
control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a
reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal
executive and principal financial officers, or persons performing similar functions, and effected by the company’s Board of Directors,
management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal con-
trol over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance
that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of
management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of un-
authorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper
management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis.
Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to
the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies
or procedures may deteriorate.
In our opinion, management’s assessment that the Company maintained effective internal control over financial reporting as of
December 31, 2004, is fairly stated, in all material respects, based on the criteria established in Internal Control — Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission. Also in our opinion, the Company maintained, in
all material respects, effective internal control over financial reporting as of December 31, 2004, based on the criteria established in
Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
consolidated balance sheet of United Parcel Service, Inc. and its subsidiaries as of December 31, 2004, and the related consolidated
statements of income, shareowners equity, and cash flows for the year ended December 31, 2004 of the Company and our report
dated March 14, 2005 expressed an unqualified opinion on those financial statements.
Atlanta, Georgia
March 14, 2005
Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting
41
Report of Independent Registered Public Accounting Firm
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,
2004 and 2003, and the related consolidated statements of income, shareowners’ equity, and cash flows for each of the three years in
the period ended December 31, 2004. These financial statements are the responsibility of the Company’s management. Our responsi-
bility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).
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, 2004 and 2003, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 2004 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. 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.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
effectiveness of the Company’s internal control over financial reporting as of December 31, 2004, based on the criteria established in
Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and
our report dated March 14, 2005 expressed an unqualified opinion on management’s assessment of the effectiveness of the
Company’s internal control over financial reporting and an unqualified opinion on the effectiveness of the Company’s internal control
over financial reporting.
Atlanta, Georgia
March 14, 2005
42
Report of Independent Registered Public Accounting Firm
Consolidated balance sheets
As of December 31,
(In millions, except per share amounts)
ASSETS
Current Assets:
Cash & cash equivalents
Marketable securities & short-term investments
Accounts receivable, net
Finance receivables, net
Income tax receivable
Deferred income taxes
Other current assets
Total Current Assets
Property, Plant & Equipment — at cost, net of accumulated depreciation & amortization
of $13,505 and $12,516 in 2004 and 2003
Prepaid Pension Costs
Goodwill and Intangible Assets, Net
Other Assets
LIABILITIES AND SHAREOWNERS’ EQUITY
Current Liabilities:
Current maturities of long-term debt and commercial paper
Accounts payable
Accrued wages & withholdings
Dividends payable
Other current liabilities
Total Current Liabilities
Long-Term Debt
Accumulated Postretirement Benefit Obligation, Net
Deferred Taxes, Credits & Other Liabilities
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 515 and 571 in 2004 and 2003
Class B common stock, par value $.01 per share, authorized 5,600 shares,
issued 614 and 560 in 2004 and 2003
Additional paid-in capital
Retained earnings
Accumulated other comprehensive loss
Deferred compensation obligations
Less: Treasury stock (3 and 2 shares in 2004 and 2003)
See notes to consolidated financial statements.
2004
2003
$
$
$
$
739
4,458
5,156
524
371
392
965
12,605
13,973
3,160
1,924
1,364
33,026
1,187
2,266
1,197
315
1,518
6,483
3,261
1,516
5,382
—
5
6
417
16,192
(236)
169
16,553
(169)
16,384
33,026
$
$
$
$
1,064
2,888
4,004
840
—
316
847
9,959
13,298
2,922
1,883
1,672
29,734
674
2,003
1,166
282
1,499
5,624
3,149
1,335
4,774
—
6
5
662
14,356
(177)
136
14,988
(136)
14,852
29,734
Consolidated financial statements 43
Statements of consolidated income
Years Ended December 31,
(In millions, except per share amounts)
Revenue
Operating Expenses:
Compensation and benefits
Other
Operating Profit
Other Income and (Expense):
Investment income
Interest expense
Gain on redemption of long-term debt
Tax assessment reversal
Income Before Income Taxes And Cumulative Effect of Change
in Accounting Principle
Income Taxes
Income Before Cumulative Effect of Change in Accounting Principle
Cumulative Effect of Change in Accounting Principle, Net of Taxes
Net Income
Basic Earnings Per Share Before Cumulative Effect of Change
in Accounting Principle
Basic Earnings Per Share
Diluted Earnings Per Share Before Cumulative Effect of Change
in Accounting Principle
Diluted Earnings Per Share
See notes to consolidated financial statements.
2004
2003
2002
$
36,582
$
33,485
$
31,272
20,916
10,677
31,593
4,989
82
(149)
—
—
(67)
4,922
1,589
3,333
—
3,333
2.95
2.95
2.93
2.93
$
$
$
$
$
$
$
$
$
$
19,328
9,712
29,040
4,445
17,940
9,236
27,176
4,096
18
(121)
28
—
(75)
4,370
1,472
2,898
—
2,898
2.57
2.57
2.55
2.55
$
$
$
$
$
63
(173)
—
1,023
913
5,009
1,755
3,254
(72)
3,182
2.91
2.84
2.87
2.81
44
UPS Annual Report 2004
Statements of consolidated shareowners’ equity
Years Ended December 31,
(In millions, except per share amounts)
Class A Common Stock
Balance at beginning of year
Common stock purchases
Stock award plans
Common stock issuances
Conversions of Class A to Class B common stock
Balance at end of year
Class B Common Stock
Balance at beginning of year
Common stock purchases
Conversions of Class A to Class B common stock
Balance at end of year
Additional Paid-In Capital
Balance at beginning of year
Stock award plans
Common stock purchases
Common stock issuances
Balance at end of year
Retained Earnings
Balance at beginning of year
Net income
Dividends ($1.12, $0.92, and $0.76)
Common stock purchases
Balance at end of year
Accumulated Other Comprehensive Income
Foreign currency translation adjustment:
Balance at beginning of year
Aggregate adjustment for the year
Balance at end of year
Unrealized gain (loss) on marketable securities, net of tax:
Balance at beginning of year
Current period changes in fair value (net of tax effect of $(10), $13, and $(9))
Reclassification to earnings (net of tax effect of $(1), $17, and $1)
Balance at end of year
Unrealized gain (loss) on cash flow hedges, net of tax:
Balance at beginning of year
Current period changes in fair value (net of tax effect of $21, $(6), and $6)
Reclassification to earnings (net of tax effect of $4, $(21), and $9)
Balance at end of year
Additional minimum pension liability, net of tax:
Balance at beginning of year
Minimum pension liability adjustment (net of tax effect of $(5), $(6), and $(31))
Balance at end of year
Accumulated other comprehensive income at end of year
Deferred Compensation Obligations
Balance at beginning of year
Common stock held for deferred compensation obligations
Balance at end of year
Treasury Stock
Balance at beginning of year
Common stock held for deferred compensation obligations
Balance at end of year
Total Shareowners’ Equity at End of Year
Comprehensive Income
See notes to consolidated financial statements.
2004
2003
2002
Shares
Dollars
Shares
Dollars
Shares
Dollars
$
571
(12)
12
3
(59)
515
560
(5)
59
614
6
—
—
—
(1)
5
5
—
1
6
$
642
(5)
12
2
(80)
571
482
(2)
80
560
7
—
—
—
(1)
6
4
—
1
5
$
772
(10)
11
2
(133)
642
349
—
133
482
8
—
—
—
(1)
7
3
—
1
4
662
677
(1,075)
153
417
14,356
3,333
(1,262)
(235)
16,192
(56)
(71)
(127)
14
(18)
(1)
(5)
(72)
37
6
(29)
(63)
(12)
(75)
(236)
136
33
169
387
545
(398)
128
662
12,495
2,898
(1,037)
—
14,356
(328)
272
(56)
(34)
21
27
14
(26)
(9)
(37)
(72)
(50)
(13)
(63)
(177)
84
52
136
414
477
(604)
100
387
10,162
3,182
(849)
—
12,495
(269)
(59)
(328)
(21)
(16)
3
(34)
(49)
10
13
(26)
—
(50)
(50)
(438)
47
37
84
(2)
(1)
(3)
(136)
(33)
(169)
$16,384
$ 3,274
(1)
(1)
(2)
(84)
(52)
(136)
$ 14,852
$ 3,159
(1)
—
(1)
(47)
(37)
(84)
$ 12,455
$ 3,083
Consolidated financial statements 45
Statements of consolidated cash flows
Years Ended December 31,
(In millions)
Cash Flows From Operating Activities:
Net income
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization
Postretirement benefits
Deferred taxes, credits and other
Stock award plans
Tax assessment reversal
Vacation policy change
Restructuring charge and related expenses
Loss (gain) on impairment or disposal of assets
Other (gains) losses
Changes in assets and liabilities, net of effect of acquisitions:
Accounts receivable, net
Other assets
Prepaid pension costs
Accounts payable
Accrued wages and withholdings
Income taxes payable
Other current liabilities
Net cash from operating activities
Cash Flows From Investing Activities:
Capital expenditures
Disposals of property, plant and equipment
Purchases of marketable securities and short-term investments
Sales and maturities of marketable securities and short-term investments
Net (increase) decrease in finance receivables
Cash received (paid) for business acquisitions / dispositions
Other investing activities
Net cash (used in) investing activities
Cash Flows From Financing Activities:
Proceeds from borrowings
Repayments of borrowings
Purchases of common stock
Issuances of common stock
Dividends
Other financing activities
Net cash (used in) financing activities
Effect Of Exchange Rate Changes On Cash
Net Increase (Decrease) In Cash And Cash Equivalents
Cash And Cash Equivalents:
Beginning of period
End of period
Cash Paid During The Period For:
Interest (net of amount capitalized)
Income taxes
See notes to consolidated financial statements.
46
UPS Annual Report 2004
2004
2003
2002
$
3,333
$
2,898
$
3,182
1,543
135
289
610
—
—
—
129
15
(686)
390
(238)
318
(73)
(399)
(35)
5,331
(2,127)
75
(6,322)
4,724
318
(238)
(68)
(3,638)
811
(468)
(1,310)
193
(1,208)
(32)
(2,014)
(4)
(325)
1,064
739
120
2,037
$
$
$
1,549
84
317
497
—
—
—
55
96
(264)
13
(990)
66
83
204
(32)
4,576
(1,947)
118
(8,083)
7,118
50
8
(6)
(2,742)
361
(1,245)
(398)
154
(956)
(26)
(2,110)
216
(60)
1,124
1,064
126
1,097
$
$
$
1,464
121
162
445
(776)
(121)
85
19
116
312
403
(87)
(56)
112
16
291
5,688
(1,658)
89
(3,833)
2,654
(495)
(14)
(24)
(3,281)
419
(1,099)
(604)
116
(840)
(82)
(2,090)
(51)
266
858
1,124
190
1,416
$
$
$
Notes to consolidated financial statements
NOTE 1. SUMMARY OF ACCOUNTING POLICIES
Basis of Financial Statements and Business Activities
The accompanying financial statements include the accounts
of United Parcel Service, Inc., and all of its consolidated sub-
sidiaries (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
financial 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 assump-
tions that affect the reported amounts of assets and liabilities
and disclosure 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
and the expense related to the transportation of freight is recog-
nized at the time the services are performed in accordance with
EITF 99-19 “Reporting Revenue Gross as a Principal Versus Net
as an Agent”. Material management and distribution revenue is
recognized upon performance of the service provided. Customs
brokerage revenue is recognized upon completing documents
necessary for customs entry purposes.
UPS Capital — Income on loans and direct finance leases is
recognized on the effective 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
delinquent. 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 that
are readily convertible into cash. We consider securities with
maturities of three months or less, when purchased, to be cash
equivalents. The carrying amount of these securities approximates
fair value because of the short-term maturity of these instruments.
In 2004, we began classifying all auction rate preferred and
debt instruments as marketable securities. Previously, such secu-
rities were classified as cash equivalents if the auction reset
periods were three months or less. Auction rate securities held
at December 31, 2003 totaling $1.887 billion were reclassified
from cash equivalents into marketable securities for consistent
presentation on our consolidated balance sheet.
Marketable Securities and Short-Term Investments
Marketable securities are classified as available-for-sale and are
carried at fair value, with related unrealized gains and losses
reported, net of tax, as accumulated 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 amor-
tization 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 accor-
dance with FASB Statement No. 115 “Accounting for Certain
Investments in Debt and Equity Securities” and EITF 03-01
“The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments.” 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. 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 esti-
mated 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 —
8 1/3 years; Technology Equipment — 3 to 5 years. The costs of
major airframe and engine overhauls, as well as routine mainte-
nance and repairs, are charged to expense as incurred.
Interest incurred during the construction period of certain
property, 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 million
for each of the years 2004, 2003, and 2002, 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 circum-
stances indicate the carrying amount of an asset may not be
Notes to consolidated financial statements 47
Notes to consolidated financial statements
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 McDonnell Douglas DC-8 aircraft.
As a result, we conducted an impairment evaluation, which
resulted in a $75 million impairment charge during the fourth
quarter for these aircraft (including the related engines), $69 mil-
lion of which impacted the U.S. domestic package segment and
$6 million of which impacted the international package segment.
In December 2004, we permanently removed from service a
number of Boeing 727, 747 and McDonnell Douglas DC-8 air-
craft. As a result of the actual and planned retirement of these
aircraft, we conducted an impairment evaluation, which resulted
in a $110 million impairment charge during the fourth quarter for
these aircraft (including the related engines and parts), $91 million
of which impacted the U.S. domestic package segment and $19
million of which impacted the international package segment.
These charges are 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 posi-
tive 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”). Upon adoption of FAS 142, we
were required to test all existing goodwill for impairment as of
January 1, 2002, 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 operating segment unless, for busi-
nesses 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 was reported as
48
UPS Annual Report 2004
a cumulative effect of a change in accounting principle. The pri-
mary factor resulting in the impairment charge was the lower
than anticipated growth experienced in the expedited mail deliv-
ery business. In conjunction with our annual test of goodwill in
2002, we recorded an additional impairment charge of $2 mil-
lion 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 tests performed in 2004
and 2003 resulted in no goodwill impairment.
Finite-lived intangible assets, including trademarks, licenses,
patents, and franchise rights are amortized over the estimated
useful lives of the assets, which range from 5 to 20 years.
Capitalized software is amortized over periods ranging from 3 to
5 years. In 2004, we began classifying software as intangible
assets. Previously, capitalized software was classified within prop-
erty, plant and equipment. Capitalized software at December 31,
2003 totaling $610 million was reclassified from property, plant
and equipment into intangible assets for consistent presentation
on our consolidated balance sheet.
Self-Insurance Accruals
We self-insure costs associated with workers’ compensation
claims, automotive liability, health and welfare, 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.
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 finan-
cial 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.
We record accruals for tax contingencies related to potential
assessments by tax authorities. Such accruals are based on man-
agement’s judgment and best estimate as to the ultimate outcome
of any potential tax audits. Actual tax audit results could vary
from these estimates.
Foreign Currency Translation
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 adjust-
ments are recorded in OCI. Net currency transaction gains and
losses included in other operating expenses were pre-tax gains of
$44, $21, and $27 million in 2004, 2003 and 2002, respectively.
Stock-Based Compensation
Effective January 1, 2003, we adopted the fair value measure-
ment 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 compensation 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 provi-
sions of FAS 123 using the prospective method. Under this
approach, all stock-based compensation granted subsequent to
January 1, 2003 will be 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 to date 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 pro-
visions of FAS 123 reduced 2004 and 2003 net income by $35
million ($0.03 per diluted share) and $20 million ($0.02 per
diluted share), respectively.
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).
Net income
Add: Stock-based employee
compensation expense
included in net income,
net of tax effects
Less: Total pro forma
stock-based employee
compensation expense,
net of tax effects
Pro forma net income
Basic earnings per share
As reported
Pro forma
Diluted earnings per share
As reported
Pro forma
2004
2003
2002
$ 3,333
$ 2,898
$
3,182
563
456
391
(588)
$ 3,308
(507)
$ 2,847
(459)
$ 3,114
$
$
$
$
2.95
2.93
2.93
2.91
$
$
$
$
2.57
2.52
2.55
2.50
$
$
$
$
2.84
2.78
2.81
2.75
The fair value of each option grant is estimated using the
Black-Scholes option pricing model. Compensation cost is also
measured 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:
Expected dividend yield
Risk-free interest rate
Expected life in years
Expected volatility
Weighted average fair value
2004
2003
2002
1.50%
4.31%
7
15.69%
1.22%
3.70%
8
19.55%
1.10%
4.67%
5
20.24%
of options granted
$ 16.24
$ 17.02
$ 21.27
Discounted stock purchase plan:
Expected dividend yield
Risk-free interest rate
Expected life in years
Expected volatility
Weighted average fair value
1.42%
1.18%
0.25
16.83%
1.12%
1.06%
0.25
19.79%
1.10%
1.70%
0.25
20.45%
of purchase rights*
$
9.56
$
8.53
$
8.20
*Includes the 10% discount from the market price (see Note 11).
Notes to consolidated financial statements 49
Notes to consolidated financial statements
Derivative Instruments
Derivative instruments are accounted for in accordance
with FASB Statement No. 133, “Accounting for Derivative
Instruments and Hedging Activities” (“FAS 133”), as amended,
which 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 deriv-
ative is designated as a hedge, depending on the nature of the
hedge, changes in its fair value that are considered to be effec-
tive, 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 measure-
ment of effectiveness, is recorded immediately in income.
New Accounting Pronouncements
In December 2004, the FASB issued Statement No. 123 (revised
2004), “Share-Based Payment” (“FAS 123R”), which replaces
FAS 123 and supercedes APB 25. FAS 123R requires all share-
based payments to employees, including grants of employee
stock options, to be recognized in the financial statements based
on their fair values, beginning with the first interim or annual
period after June 15, 2005, with early adoption encouraged.
We will adopt FAS 123R in the third quarter of 2005, using the
prospective method of adoption. The prospective method
requires that compensation expense be recorded for all unvested
stock options and restricted stock at the beginning of the first
quarter of adoption of FAS 123R. There will be no impact upon
adoption, as we will already be expensing all unvested option
and restricted stock awards.
In December 2004, the FASB issued FASB Staff Position
(“FSP”) No. 109-2, “Accounting and Disclosure Guidance for
the Foreign Earnings Repatriation Provision within the
American Jobs Creation Act of 2004” (“FSP 109-2”). FSP 109-2
provides guidance under FAS 109 with respect to recording the
potential impact of the repatriation provisions of the American
Jobs Creation Act of 2004 (the “Jobs Act”) on enterprises’
income tax expense and deferred tax liability. The Jobs Act was
enacted on October 22, 2004. FSP 109-2 states that an enter-
prise is allowed time beyond the financial reporting period of
enactment to evaluate the effect of the Jobs Act on its plan for
reinvestment or repatriation of foreign earnings for purposes of
applying FAS 109. We have not yet completed our evaluation of
the impact of the repatriation provisions of the Jobs Act.
Accordingly, as provided for in FSP 109-2, we have not adjusted
our income tax provision or deferred tax liabilities to reflect the
repatriation provisions of the Jobs Act.
The adoption of the following recent accounting pronounce-
ments did not have a material impact on our results of
operations or financial condition:
n FASB Interpretation No. 45, “Guarantor’s Accounting and
Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others — An Interpretation
of FASB Statements No. 5, 57, and 107 and Rescission of
FASB Interpretation No. 34”;
n FASB Interpretation No. 46(R), “Consolidation of Variable
Interest Entities — An Interpretation of ARB No. 51”;
n FASB Statement No. 132(R) (revised 2003), “Employer’s
Disclosures about Pensions and Other Post-Retirement
Benefits — An Amendment of FASB Statements No. 87, 88,
and 106”;
n FASB Statement No. 146, “Accounting for Costs Associated
with Exit or Disposal Activities”;
n FASB Statement No. 149, “Amendment of Statement 133
on Derivative Instruments and Hedging Activities”;
n FASB Statement No. 150, “Accounting for Certain
Instruments with Characteristics of Both Liabilities and
Equity”; and
n FSP 106-2, “Accounting and Disclosure Requirements
Related to the Medicare Prescription Drug, Improvement
and Modernization Act of 2003”.
Changes in Presentation
Certain prior year amounts have been reclassified to conform to
the current year presentation.
50
UPS Annual Report 2004
NOTE 2. MARKETABLE SECURITIES AND SHORT-TERM INVESTMENTS
The following is a summary of marketable securities and short-term investments at December 31, 2004 and 2003 (in millions):
2004
U.S. government & agency securities
U.S. mortgage & asset-backed securities
U.S. corporate securities
U.S. state and local municipal securities
Other debt securities
Total debt securities
Common equity securities
Preferred equity securities
2003
U.S. government & agency securities
U.S. mortgage & asset-backed securities
U.S. corporate securities
U.S. state and local municipal securities
Other debt securities
Total debt securities
Common equity securities
Preferred equity securities
Cost
269
1,042
446
1,098
2
2,857
63
1,546
4,466
Cost
151
474
192
561
4
1,382
66
1,418
2,866
$
$
$
$
Unrealized
Gains
Unrealized
Losses
Estimated
Fair Value
$
$
1
1
1
—
—
3
14
—
17
$
$
1
1
1
—
—
3
—
22
25
Unrealized
Gains
Unrealized
Losses
$
$
1
1
2
—
—
4
29
—
33
$
$
—
—
1
—
1
2
—
9
11
$
$
$
$
269
1,042
446
1,098
2
2,857
77
1,524
4,458
Estimated
Fair Value
152
475
193
561
3
1,384
95
1,409
2,888
The gross realized gains on sales of marketable securities totaled $7, $21, and $11 million in 2004, 2003, and 2002, respectively.
The gross realized losses totaled $5, $7, and $10 million in 2004, 2003, and 2002, respectively. Impairment losses recognized on
marketable securities and short-term investments totaled $0, $58, and $5 million during 2004, 2003, and 2002, 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, 2004 (in millions):
U.S. government & agency securities
U.S. mortgage & asset-backed securities
U.S. corporate securities
U.S. state and local municipal securities
Other debt securities
Total debt securities
Common equity securities
Preferred equity securities
Less Than 12 Months
Fair
Value
189
111
197
—
—
497
—
10
507
$
$
Unrealized
Losses
$
$
1
1
1
—
—
3
—
—
3
12 Months or More
Fair
Value
Unrealized
Losses
$
$
5
2
22
—
—
29
—
98
127
$
$
—
—
—
—
—
—
—
22
22
Total
Unrealized
Losses
$
$
1
1
1
—
—
3
—
22
25
Fair
Value
$ 194
113
219
—
—
526
—
108
$ 634
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.
Notes to consolidated financial statements 51
Notes to consolidated financial statements
The amortized cost and estimated fair value of marketable
securities and short-term investments at December 31, 2004, by
contractual maturity, are shown below (in millions). Actual
maturities may differ from contractual maturities because the
issuers of the securities may have the right to prepay obligations
without prepayment penalties.
Due in one year or less
Due after one year through three years
Due after three years through five years
Due after five years
Equity securities
Cost
$
37
459
75
2,286
2,857
1,609
$ 4,466
Estimated
Fair Value
$
37
458
75
2,287
2,857
1,601
$ 4,458
NOTE 3. FINANCE RECEIVABLES
The following is a summary of finance receivables at December
31, 2004 and 2003 (in millions):
Commercial term loans
Investment in finance leases
Asset-based lending
Receivable factoring
Gross finance receivables
Less: Allowance for credit losses
Balance at December 31
2004
360
188
285
191
1,024
(25)
999
$
$
2003
$
438
270
290
468
1,466
(52)
$ 1,414
Outstanding receivable balances at December 31, 2004 and
2003 are net of unearned income of $35 and $48 million,
respectively. 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 bal-
ance sheet. The following is a reconciliation of receivable
factoring balances at December 31, 2004 and 2003 (in millions):
Customer receivable balances
Less: Amounts due to client
Net funds employed
2004
191
(112)
79
$
$
2003
468
(195)
273
$
$
52
UPS Annual Report 2004
Non-earning finance receivables were $38 and $67 million at
December 31, 2004 and 2003, respectively. The following is a
rollforward of the allowance for credit losses on finance receiv-
ables (in millions):
Balance at January 1
Provisions charged to operations
Charge-offs, net of recoveries
Balance at December 31
2004
52
14
(41)
25
$
$
2003
38
39
(25)
52
$
$
The carrying value of finance receivables at December 31,
2004, 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 with-
out prepayment penalties.
Carrying
Value
Due in one year or less
Due after one year through three years
Due after three years through five years
Due after five years
$
530
81
99
314
$ 1,024
Based on interest rates for financial instruments with similar
terms and maturities, the estimated fair value of finance receiv-
ables is approximately $991 million and $1.384 billion as of
December 31, 2004 and 2003, respectively. At December 31,
2004, we had unfunded loan commitments totaling $344 mil-
lion, consisting of standby letters of credit of $53 million and
other unfunded lending commitments of $291 million.
NOTE 4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment as of December 31 consists of the
following (in millions):
Vehicles
Aircraft (including aircraft under
capitalized leases)
Land
Buildings
Leasehold improvements
Plant equipment
Technology equipment
Equipment under operating lease
Construction-in-progress
Less: Accumulated depreciation
and amortization
2004
2003
$
3,784
$
3,486
11,590
760
2,164
2,347
4,641
1,596
57
539
27,478
10,897
721
2,083
2,219
4,410
1,495
53
450
25,814
(13,505)
$ 13,973
(12,516)
13,298
$
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 compensation 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 mem-
bers 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 require-
ments 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 pur-
suant 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 noncontributory basis; however, in certain cases, retirees are required to contribute
toward the cost of the coverage.
Benefit Obligations
The following table provides a reconciliation of the changes in the plans’ benefit obligations as of September 30 (in millions):
Net benefit obligation at October 1, prior year
Service cost
Interest cost
Plan participants’ contributions
Plan amendments
Acquired businesses
Actuarial (gain) loss
Gross benefits paid
Net benefit obligation at September 30
Pension Benefits
Postretirement
Medical Benefits
2004
8,092
332
521
—
3
—
290
(201)
9,037
$
$
2003
$ 6,670
282
465
—
3
—
876
(204)
$ 8,092
2004
$ 2,592
91
164
9
(115)
46
36
(129)
$ 2,694
2003
$ 2,149
79
148
6
(22)
—
337
(105)
$ 2,592
Weighted-average assumptions used to determine benefit obligations:
Discount rate
Rate of annual increase in future compensation levels
6.25%
4.00%
6.25%
4.00%
6.25%
N/A
6.25%
N/A
Notes to consolidated financial statements 53
Notes to consolidated financial statements
The accumulated benefit obligation for our pension plans as
of September 30, 2004 and 2003 was $8.113 and $7.325 billion,
respectively. We use a measurement date of September 30 for our
pension and postretirement benefit plans.
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):
In December 2003, the Medicare Prescription Drug,
Improvement and Modernization Act of 2003 (the “Act”) was
enacted. The Act established a prescription drug benefit under
Medicare, known as “Medicare Part D”, and a federal subsidy
to sponsors of retiree health care plans that provide a benefit
that is at least actuarially equivalent to Medicare Part D. We
believe that benefits provided to certain participants will be at
least actuarially equivalent to Medicare Part D, and, accordingly
may be entitled to a subsidy.
In May 2004, the FASB issued FSP 106-2, which requires (a)
that the effects of the federal subsidy be considered an actuarial
gain and recognized in the same manner as other actuarial gains
and losses and (b) certain disclosures for employers that sponsor
postretirement health care plans that provide prescription drug
benefits. We determined the effects of the Act were not a signifi-
cant event requiring an interim remeasurement under FAS 106.
Consequently, as permitted by FSP 106-2, net periodic benefit
cost for 2004 does not reflect the effects of the Act. The accumu-
lated postretirement benefit obligation (APBO) was remeasured
as of September 30, 2004 to reflect the effects of the Act, which
resulted in an immaterial reduction in the APBO and expected
net employer benefit payments.
Future postretirement medical benefit costs were forecasted
assuming an initial annual increase of 9.0%, decreasing to 5.0%
by the year 2009 and with consistent annual increases at those
ultimate levels thereafter.
Effect on postretirement benefit obligation
$
69
$
(75)
1% Increase
1% Decrease
Because the UPS Excess Coordinating Plan is not funded, the
Company has recorded an additional minimum pension liability
for this plan of $91 and $105 million at December 31, 2004 and
2003, respectively. This liability is included in the other credits
and non-current liabilities portion of Note 9. As of December
31, 2004 and 2003, the Company has recorded an intangible
asset of $4 and $5 million, respectively, representing the net
unrecognized prior service cost for this plan. A total of $55 and
$63 million at December 31, 2004 and 2003, respectively, were
recorded as a reduction of other comprehensive income in share-
owners’ equity (net of the tax effect of $32 and $37 million,
respectively). The unfunded accumulated benefit obligation of
the UPS Excess Coordinating Benefit Plan was $160 and $154
million as of December 31, 2004 and 2003, respectively.
Additionally, we maintain several non-U.S. defined benefit
pension plans. As of December 31, 2004, we have recorded a
prepaid pension asset of $5 million, an additional minimum pen-
sion liability of $30 million, and a $20 million (net of the tax
effect of $11 million) reduction of other comprehensive income
in shareowners’ equity. The impact of these non-U.S. plans is not
material to our operating results or financial position.
Plan Assets
The following table provides a reconciliation of the changes in the plans’ assets as of September 30 (in millions):
Fair value of plan assets at October 1, prior year
Actual return on plan assets
Employer contributions
Plan participants’ contributions
Gross benefits paid
Fair value of plan assets at September 30
Pension Benefits
Postretirement
Medical Benefits
2004
$ 7,823
1,140
1,200
—
(201)
$ 9,962
2003
6,494
1,143
390
—
(204)
7,823
$
$
2004
409
51
115
9
(129)
455
$
$
2003
337
47
124
6
(105)
409
$
$
Employer contributions and benefits paid under the pension plans include $6 million and $5 million paid from employer assets in
2004 and 2003, respectively. Employer contributions and benefits paid (net of participant contributions) under the postretirement
medical benefit plans include $57 and $45 million paid from employer assets in 2004 and 2003, respectively.
54
UPS Annual Report 2004
The asset allocation for our pension and other postretirement plans as of September 30, 2004 and 2003 and the target allocation
for 2005, by asset category, are as follows:
Equity securities
Fixed income securities
Real estate/other
Total
Weighted Average
Target Allocation
2005
55% - 65%
20% - 30%
10% - 15%
Percentage of
Plan Assets at
September 30,
2004
60.6%
28.0%
11.4%
100.0%
2003
60.2%
28.5%
11.3%
100.0%
Equity securities include UPS Class A shares of common stock in the amounts of $466 (4.5% of total plan assets) and $392 million
(4.8% of total plan assets), as of September 30, 2004 and 2003, 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 invest-
ment 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):
Fair value of plan assets at September 30
Benefit Obligation at September 30
Funded status at September 30
Amounts not yet recognized:
Unrecognized net actuarial loss
Unrecognized prior service cost
Unrecognized net transition obligation
Employer contributions
Net asset (liability) recorded at December 31
Prepaid pension cost
Accrued benefit cost
Intangible asset
Accumulated other comprehensive income (pre-tax)
Net asset (liability) recorded at December 31
Pension Benefits
Postretirement
Medical Benefits
2004
$ 9,962
(9,037)
925
1,918
297
18
2
$ 3,160
$ 3,227
(188)
4
117
$ 3,160
2003
7,823
(8,092)
(269)
2,085
331
23
752
2,922
2,970
(153)
5
100
2,922
$
$
$
$
$
2004
455
(2,694)
(2,239)
810
(104)
—
17
$ (1,516)
$
—
(1,516)
—
—
$ (1,516)
$
2003
409
(2,592)
(2,183)
820
11
—
17
$ (1,335)
$
—
(1,335)
—
—
$ (1,335)
At September 30, 2004 and 2003, 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
Exceeds the Fair Value of
Plan Assets
Accumulated Benefit Obligation
Exceeds the Fair Value of
Plan Assets
As of September 30
Projected benefit obligation
Accumulated benefit obligation
Fair value of plan assets
2004
2003
2004
2003
$
$
$
200
160
—
$
$
$
6,772
6,004
6,479
$
$
$
200
160
—
$
$
$
178
154
—
The accumulated postretirement benefit obligation exceeds plan assets for all of our other postretirement benefit plans.
Notes to consolidated financial statements 55
Notes to consolidated financial statements
Expected Cash Flows
Information about expected cash flows for the pension and postretirement benefit plans is as follows (in millions):
Employer Contributions:
2005 (expected) to plan trusts
2005 (expected) to plan participants
Expected Benefit Payments:
2005
2006
2007
2008
2009
2010 - 2014
Pension Benefits
Other Benefits
$
$
723
7
214
257
266
303
332
2,363
$
$
62
56
126
133
141
150
158
975
Expected benefit payments for pensions will be primarily paid from plan trusts. Expected benefit payments for postretirement bene-
fits will be paid from plan trusts and corporate assets.
Net Periodic Benefit Cost
Information about net periodic benefit cost for the pension and postretirement benefit plans is as follows (in millions):
Pension Benefits
Postretirement
Medical Benefits
2004
2003
2002
2004
2003
2002
Net Periodic Cost:
Service cost
Interest cost
Expected return on assets
Amortization of:
Transition obligation
Prior service cost
Actuarial (gain) loss
Net periodic benefit cost (benefit)
$
$
332
521
(800)
6
37
119
215
$
$
Weighted average assumptions used to determine net cost:
Discount rate
Rate of compensation increase
Expected return on plan assets
6.25%
4.00%
8.96%
282
465
(669)
8
37
28
151
6.75%
4.00%
9.21%
$
$
217
413
(654)
8
30
4
18
$
$
91
164
(34)
—
—
30
251
$
$
7.50%
4.00%
9.42%
6.25%
N/A
9.00%
79
148
(29)
—
1
15
214
6.75%
N/A
9.25%
$
$
63
134
(33)
—
(1)
4
167
7.50%
N/A
9.50%
56
UPS Annual Report 2004
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, 2004 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):
Effect on total of service cost and interest cost
Other Plans
1% Increase
$
5
1% Decrease
$
(5)
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 $1.163, $1.066, and $1.028 billion
during 2004, 2003, and 2002, 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 $761, $691, and $604 million during 2004, 2003, and 2002, 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 participating employees’ contributions. Matching contributions charged to
expense were $94, $87, and $79 million for 2004, 2003, and 2002, 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
The following table indicates the allocation of goodwill by reportable segment (in millions):
December 31, 2002 balance
Acquired
Impaired
Currency/Other
December 31, 2003 balance
Acquired
Impaired
Currency/Other
December 31, 2004 balance
U.S. Domestic
Package
International
Package
Non-Package
Consolidated
$
$
—
—
—
—
—
—
—
—
—
$
$
102
—
—
(2)
100
41
—
—
141
$
968
30
—
75
1,073
38
—
3
$ 1,114
$
$
1,070
30
—
73
1,173
79
—
3
1,255
The goodwill acquired in the Non-package segment during 2004 resulted primarily from the purchase of Menlo Worldwide
Forwarding. The purchase price allocation for this acquisition was not complete as of December 31, 2004, therefore we anticipate
that future purchase price adjustments may change the amount allocated to goodwill. The goodwill acquired in the International
package segment during 2004 resulted from the purchase of the remaining minority interest in UPS Yamato Express Co. (See Note 7
for further discussion of these acquisitions). The currency/other balance in the Non-package segment includes escrow reimbursements
and the resolution of other pre-acquisition contingencies from acquisitions completed prior to 2004.
Notes to consolidated financial statements 57
Notes to consolidated financial statements
The following is a summary of intangible assets at December 31, 2004 and 2003 (in millions):
December 31, 2004:
Gross carrying amount
Accumulated amortization
Net carrying value
December 31, 2003:
Gross carrying amount
Accumulated amortization
Net carrying value
Trademarks,
Licenses, Patents,
and Other
Franchise
Rights
Capitalized
Software
$
$
$
$
29
(16)
13
30
(10)
20
$
$
$
$
97
(18)
79
88
(13)
75
$ 1,249
(676)
573
$
$
$
1,101
(491)
610
Intangible
Pension
Asset
$
$
$
$
4
—
4
5
—
5
Total
Intangible
Assets
$ 1,379
(710)
669
$
$ 1,224
(514)
710
$
Amortization of intangible assets was $221, $196, and $129 million during 2004, 2003 and 2002, respectively. Expected amortiza-
tion of finite-lived intangible assets recorded as of December 31, 2004 for the next five years is as follows (in millions):
2005 — $198; 2006 — $198; 2007 — $198; 2008 — $12; 2009 — $11. Amortization expense in future periods will be affected by
business acquisitions, software development and other factors.
Other assets as of December 31 consist of the following (in millions):
Non-current finance receivables, net of allowance for credit losses
Other non-current assets
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. During the three years ended December
31, 2004, we completed several acquisitions, including both
domestic and international transactions, which 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 $238, $30, and $14 million in 2004,
2003, and 2002, respectively. Pro forma results of operations
have not been presented for any of the acquisitions because the
effects of these transactions were not material on either an indi-
vidual or aggregate basis. The results of operations of each
acquired company are included in our statements of consolidated
income from the date of acquisition. The purchase price alloca-
tions of acquired companies can be modified up to one year after
the date of acquisition, however we generally expect such adjust-
ments to the purchase price allocations to be immaterial.
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 ben-
efit exceeded the pre-tax loss from this sale primarily because the
goodwill impairment charge we previously recorded for the Mail
58
UPS Annual Report 2004
2004
475
889
1,364
$
$
2003
574
1,098
1,672
$
$
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.
During the third quarter of 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
was 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 March 2004, we acquired the remaining 49% minority
interest in UPS Yamato Express Co., which was previously a
joint venture with Yamato Transport Co. in Japan, for $65 mil-
lion in cash. UPS Yamato Express provides express package
delivery services in Japan. Upon the close of the acquisition, UPS
Yamato Express became a wholly-owned subsidiary of UPS. The
acquisition had no material effect on our financial condition or
results of operations.
In December 2004, we acquired the Menlo Worldwide
Forwarding unit from CNF Inc. for $150 million in cash (net of
cash acquired) plus the assumption of $110 million in par value
of debt and capital lease obligations. Menlo Worldwide
Forwarding is a global freight forwarder that provides a full
suite of heavy air freight forwarding services, ocean services and
international trade management, including customs brokerage.
The acquisition had no material effect on our results of opera-
tions in 2004.
We are in the process of finalizing the independent appraisals
for certain assets and liabilities to assist management in allocat-
ing the Menlo purchase price to the individual assets acquired
and liabilities assumed. This may result in adjustments to the
carrying values of Menlo’s recorded assets and liabilities, includ-
ing the amount of any residual value allocated to goodwill. We
are also completing our analysis of integration plans that may
result in additional purchase price adjustments. The preliminary
allocation of the purchase price included in the current period
balance sheet is based on the current best estimates of manage-
ment and is subject to revision based on final determination of
fair values of acquired assets and assumed liabilities. We antici-
pate the valuations and other studies will be completed prior to
the anniversary date of the acquisition.
In February 2005, we announced our intention to transfer
operations currently taking place at the Menlo facility in
Dayton, Ohio to other UPS facilities over approximately 12 to
18 months. This action is being taken to remove redundancies
between the Menlo and existing UPS transportation networks,
and thus provide efficiencies and better leverage the current UPS
facilities in the movement of air freight. We are currently evalu-
ating our plans for this facility, including potential alternate uses
or closure. As a result, we anticipate possibly incurring costs
related to employee severance, lease terminations, fixed asset
impairments, and related items. Depending upon the nature of
these costs, some of these items could result in charges to
expense, while other items could result in adjustments to the
purchase price allocation. We are in process of finalizing our
plan for this facility, and therefore the purchase price allocation
does not reflect liability accruals or fair value adjustments that
may result from this decision.
The preliminary allocation of the total purchase price of Menlo resulted in the following condensed balance sheet of assets acquired
and liabilities assumed as of December 31, 2004 (in millions):
Cash and cash equivalents
Accounts receivable
Other current assets
Property, plant, and equipment
Goodwill and intangible assets
Other assets
Assets
47
466
21
141
26
4
705
$
$
Accounts payable
Accrued wages and withholdings
Other current liabilities
Long-term debt
Deferred Taxes, Credits and Other Liabilities
Accumulated postretirement benefit obligation
Liabilities
$
$
28
104
161
124
45
46
508
In December 2004, we announced an agreement with Sinotrans to acquire direct control of the international express operations in
23 cities within China, and to purchase Sinotrans’ interest in our current joint venture in China. The agreement requires a payment of
$100 million to Sinotrans in 2005, which can be increased or decreased based on certain contingent factors. The acquisition will be
completed in stages throughout 2005. In February 2005, we took direct control of operations in five locations, while the additional
18 locations will be acquired by December 2005. The operations being acquired will be reported within our International package
reporting segment.
In February 2005, we announced an agreement to acquire Messenger Service Stolica S.A., one of the leading parcel and express
delivery companies in Poland. Stolica offers customers a full suite of domestic delivery services, and had 2004 revenue of approximately
$64 million. Upon completion of the transaction, which is expected in the second quarter of 2005, Stolica will be included in our
International package reporting segment.
Notes to consolidated financial statements 59
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):
8.38% debentures, due April 1, 2020 (i)
8.38% debentures, due April 1, 2030 (i)
Commercial paper (ii)
Industrial development bonds, Philadelphia Airport facilities, due December 1, 2015 (iii)
Special facilities revenue bonds, Louisville Airport facilities, due January 1, 2029 (iv)
Floating rate senior notes (v)
Capitalized lease obligations (vi)
UPS Notes (vii)
5.50% Pound Sterling notes, due February 12, 2031
4.50% Singapore Dollar notes, due November 11, 2004
Special facilities revenue bonds, Dayton, OH facilities (viii)
Installment notes, mortgages, and bonds at various rates
Less current maturities
2004
463
276
1,015
100
149
441
401
393
961
—
121
128
4,448
(1,187)
3,261
$
$
2003
444
276
544
100
149
441
451
419
887
59
—
53
3,823
(674)
3,149
$
$
(i)
(ii)
(iii)
(iv)
(v)
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 8.38% 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 payout 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 redemp-
tion 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.
The weighted average interest rate on the commercial paper outstanding as of December 31, 2004 and 2003, was 2.10% and 0.96%, respectively. At December 31, 2004 and 2003, the entire com-
mercial paper balance has been classified as a current liability. The amount of commercial paper outstanding in 2005 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, 2004.
The industrial development bonds bear interest at a daily variable rate. The average interest rates for 2004 and 2003 were 1.08% and 0.89%, respectively.
The special facilities revenue bonds bear interest at a daily variable rate. The average interest rates for 2004 and 2003 were 1.20% and 1.02%, respectively.
The floating rate senior notes bear interest at one-month LIBOR less 45 basis points. The average interest rates for 2004 and 2003 were 1.00% and 0.78%, respectively. These notes are callable at vari-
ous 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. The notes have maturities ranging from
2049 through 2053.
(vi) We have certain aircraft subject to capital leases. Some of the obligations associated with these capital leases have been legally defeased. The recorded value of aircraft subject to capital leases, which
are included in Property, Plant and Equipment is as follows as of December 31 (in millions):
Aircraft
Accumulated amortization
2004
1,795
(257)
1,538
$
$
2003
1,474
(198)
1,276
$
$
(vii)
The UPS Notes program involves the periodic issuance of fixed rate notes in $1,000 increments with various terms and maturities. At December 31, 2004, the coupon rates of the outstanding notes
varied between 3.00% and 6.20%, and the interest payments are made either monthly, quarterly or semiannually. The maturities of the notes range from 2006 to 2024. 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 2004 and 2003 was
1.13% and 0.81%, respectively.
(viii) The special facilities revenue bonds were assumed in the acquisition of Menlo Worldwide Forwarding in December 2004 (see Note 7). The bonds have a par value of $108 million, $62 million of which
is due in 2009, while the remaining $46 million is due in 2018. The bonds due in 2018 are callable beginning in 2008. The bonds due in 2018 bear interest at a fixed rate of 5.63%, while the bonds
due in 2009 bear interest at fixed rates ranging from 6.05% to 6.20%. The bonds were recorded at fair value on the date of acquisition.
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 $4.708 and $4.109 billion as of December 31, 2004 and 2003,
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
$693, $678 and $685 million for 2004, 2003 and 2002, respectively.
60
UPS Annual Report 2004
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
Leases
Operating
Leases
Debt
Principal
Purchase
Commitments
2005
2006
2007
2008
2009
After 2009
Total
Less: imputed interest
Present value of minimum capitalized lease payments
Less: current portion
Long-term capitalized lease obligations
$
$
370
327
242
169
128
590
1,826
$
$
1,110
6
—
27
84
2,777
4,004
$
$
1,012
488
223
274
637
1,129
3,763
$
$
97
70
121
132
76
62
558
(157)
401
(78)
323
As of December 31, 2004, we had outstanding letters of credit
totaling approximately $2.161 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 21, 2005 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, 2004, there were no outstanding borrowings under these
facilities. In addition, we maintain an extendable commercial
notes program under which we are authorized to borrow up to
$500 million. No amounts were outstanding under this program
at December 31, 2004.
We have a $2.0 billion shelf registration statement under
which we may issue debt securities in the U.S. The debt may be
denominated in a variety of currencies. There was approximately
$126 million issued under this shelf registration statement at
December 31, 2004.
Our existing debt instruments and credit facilities do not have
cross-default or ratings triggers, however these debt instruments
and credit facilities do subject us to certain financial covenants.
These covenants generally require us to maintain a $3.0 billion
minimum net worth and limit the amount of secured indebtedness
available to the company. These covenants are not considered
material to the overall financial condition of the company, and all
covenant tests were passed as of December 31, 2004.
In December 2003, we redeemed our $300 million 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 pre-tax gain recorded in 2003 results.
NOTE 9. DEFERRED TAXES, CREDITS, AND OTHER LIABILITIES
Deferred taxes, credits, and other liabilities as of December 31
consist of the following (in millions):
Deferred income taxes (see Note 14)
Insurance reserves
Other credits and non-current liabilities
2004
2003
$ 3,274
1,136
972
$ 5,382
$
$
3,118
923
733
4,774
NOTE 10. LEGAL PROCEEDINGS AND CONTINGENCIES
On August 9, 1999 the United States Tax Court held that we
were liable for tax on income of Overseas Partners Ltd., a
Bermuda company that had reinsured excess value (“EV”) 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 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
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. In the first quarter of 2004, we
received a refund of $185 million pertaining to the 1983 and
1984 tax years.
Notes to consolidated financial statements 61
Notes to consolidated financial statements
The IRS had proposed adjustments, unrelated to the EV pack-
age 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 tax credits in the 1985 through 1998 tax
years. In the third quarter of 2004, we settled all outstanding
issues related to each of the tax years 1991 through 1998. In the
fourth quarter of 2004, we received a refund of $425 million
pertaining to the 1991 through 1998 tax years. We expect to
receive the $371 million of refunds related to the 1985 through
1990 tax years within the next six months.
The IRS may take similar positions with respect to some of
the non-EV package insurance matters for each of the years
1999 through 2004. If challenged, 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. We believe that the eventual resolution of
these issues will not have a material adverse effect on our finan-
cial condition, results of operations or liquidity.
We were named as a defendant in twenty-three now-dis-
missed lawsuits that sought to hold us liable for the collection
of premiums for EV insurance in connection with package ship-
ments since 1984. Based on state and federal tort, contract and
statutory claims, these cases generally claimed 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 U.S. Tax Court decision,
discussed above, which the U.S. Court of Appeals for the
Eleventh Circuit later reversed.
These twenty-three cases were consolidated for pre-trial pur-
poses in a multi-district litigation proceeding (“MDL
Proceeding”) in federal court in New York. In addition to the
cases in which UPS was named as a defendant, there also was 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. That case also was
consolidated into the MDL Proceeding.
In late 2003, the parties reached a global settlement resolving
all claims and all cases in the MDL proceeding. In reaching the
settlement, we and the other defendants expressly denied any
and all liability. On July 30, 2004, the court issued an order
granting final approval to the substantive terms of the settle-
ment. No appeals were filed and the settlement became effective
on September 8, 2004.
Pursuant to the settlement, UPS has provided qualifying settle-
ment class members with vouchers toward the purchase of
62
UPS Annual Report 2004
specified UPS services and will pay the plaintiffs’ attorneys’ fees,
the total amount of which still remains to be determined by the
court. Other defendants have contributed to the costs of the settle-
ment, including the attorneys’ fees. The ultimate cost to us of the
proposed settlement will depend on a number of factors, including
how many vouchers settlement class members actually use. We do
not believe that this proposed settlement will have a material effect
on our financial condition, results of operations, or liquidity.
We are a defendant in a number of lawsuits filed in state
courts containing various class-action allegations under state
wage-and-hour laws. In one of these cases, Marlo v. UPS, which
has been certified as a class action in California state court,
plaintiffs allege that they improperly were denied overtime,
penalties for missed meal and rest periods, interest and attor-
neys’ fees. Plaintiffs purport to represent a class of 1,200
full-time supervisors.
We have denied any liability with respect to these claims and
intend to vigorously defend ourselves in these cases. At this time,
we have not determined the amount of any liability that may
result from these matters or whether such liability, if any, would
have a material adverse 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 even-
tual 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 potential funding deficiencies which could cause
us to make significantly 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.
NOTE 11. CAPITAL STOCK AND STOCK-BASED
COMPENSATION
Capital Stock
We maintain two classes of common stock, which are distin-
guished 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 retirees, 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.”
UPS Class A common stock, given in any year. Amounts
expensed for management incentive awards were $738, $606,
and $556 million during 2004, 2003, and 2002, respectively.
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, per-
formance 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 limited to 34 million. As of
December 31, 2004, management incentive awards, stock
options, and restricted 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
Nonqualified Stock Options
We maintain fixed stock option plans, under which options are
granted to purchase shares of UPS Class A common stock. Stock
options granted in connection with the Incentive Compensation
Plan must have an exercise price at least equal to the NYSE clos-
ing 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 of the UPS
Board of Directors. Except in the case of death, disability, or
retirement, options granted under the Incentive Compensation
Plan are generally 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 cancella-
tion or exercise under certain conditions.
The following is an analysis of options to purchase shares of Class A common stock issued and outstanding:
Outstanding at beginning of year
Exercised
Granted
Forfeited/expired
Outstanding at end of year
2004
2003
Weighted
Average
Price
$ 48.02
26.97
70.70
58.70
$ 59.96
Shares
(in thousands)
22,745
(7,351)
2,663
(356)
17,701
Weighted
Average
Price
$
$
38.73
18.59
62.40
44.63
48.02
Shares
(in thousands)
27,745
(7,297)
2,860
(563)
22,745
Weighted
Average
Price
$ 29.64
15.91
60.22
46.08
$ 38.73
2002
Shares
(in thousands)
29,224
(6,434)
5,760
(805)
27,745
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 Compensation Committee of the UPS Board of Directors.
The following table summarizes information about stock options outstanding and exercisable at December 31, 2004:
Exercise price range
$ 13.94 - $ 50.63
$ 56.25 - $ 57.50
$ 59.38 - $ 60.61
$ 61.88 - $ 65.00
$ 68.44 - $ 143.13
Options Outstanding
Options Exercisable
Shares
(in thousands)
Average Life
(in years)
2,424
4,467
5,381
2,757
2,672
17,701
4.82
6.24
7.27
8.32
9.23
7.13
Average
Exercise
Price
49.89
56.90
60.20
62.41
71.23
59.96
$
$
Shares
(in thousands)
2,397
4,467
141
11
48
7,064
Average
Exercise
Price
49.89
56.90
59.54
64.20
99.88
54.88
$
$
Notes to consolidated financial statements 63
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 opera-
tions 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, 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.
Notes to consolidated financial statements
Restricted Performance Units
Beginning in 2003, we issued restricted performance units under
the Incentive Compensation Plan. Upon vesting, restricted per-
formance units result in the issuance of the equivalent number of
UPS Class A common shares after required tax withholdings.
Persons earning the right to receive restricted performance units
are determined each year by the Compensation Committee of
the UPS Board of Directors. Except in the case of death, disabil-
ity, or retirement, restricted performance units vest five years
after the date of grant. All restricted performance units granted
are subject to earlier cancellation or vesting under certain condi-
tions. Dividends earned on restricted performance units are
reinvested in additional restricted performance units at each divi-
dend payable date. During 2004 and 2003, the Company issued
1.083 and 1.164 million restricted performance units with a
weighted average fair value of $70.70 and $62.40, respectively.
As of December 31, 2004, we had the following restricted
performance units outstanding:
Year of Award
2003
2004
Units Outstanding
(in thousands)
Remaining Vesting
Period (in years)
Avg. Fair Value
at Grant Date
1,140
1,074
2,214
3.33
4.33
3.82
$
$
62.40
70.70
66.43
Discounted Employee Stock Purchase Plan
We maintain 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 quar-
terly period. Employees purchased 1.8, 1.9, and 1.8 million
shares at average prices of $62.75, $54.08, and $50.79 per share
during 2004, 2003, and 2002, respectively.
Deferred Compensation Obligations
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 obligations” in the shareowners’ equity section
of the balance sheet. The amount of shares needed to settle
the liability for deferred compensation obligations is included
in the denominator in both the basic and diluted earnings per
share calculations.
64
UPS Annual Report 2004
Segment information as of, and for the years ended, December
Geographic information as of, and for the years ended,
31 is as follows (in millions):
December 31 is as follows (in millions):
2004
2003
2002
2004
2003
2002
Revenue:
U.S. domestic package
International package
Non-package
Consolidated
Operating Profit:
U.S. domestic package
International package
Non-package
Consolidated
Assets:
U.S. domestic package
International package
Non-package
Unallocated
Consolidated
$ 26,610
6,762
3,210
$ 36,582
$
$
3,345
1,121
523
4,989
$ 16,978
4,728
6,380
4,940
$ 33,026
$ 25,022
5,561
2,902
$ 33,485
$
$
3,272
709
464
4,445
$ 16,271
4,287
6,038
3,138
$ 29,734
$ 23,924
4,680
2,668
$ 31,272
$
$
3,576
322
198
4,096
$ 15,173
3,271
6,245
2,179
$ 26,868
Non-package operating profit included $112, $114, and $112
million for 2004, 2003, and 2002, 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):
U.S. domestic package:
Next Day Air
Deferred
Ground
Total U.S. domestic package
International package:
Domestic
Export
Cargo
Total International package
Non-package:
UPS Supply Chain Solutions
Other
Total Non-package
Consolidated
2004
2003
2002
$
6,040
3,161
17,409
26,610
$
5,580
2,982
16,460
25,022
$
5,349
2,868
15,707
23,924
1,346
4,944
472
6,762
1,134
4,001
426
5,561
943
3,276
461
4,680
2,346
864
3,210
$ 36,582
2,126
776
2,902
$ 33,485
1,969
699
2,668
$ 31,272
U.S.:
Revenue
Long-lived assets
International:
Revenue
Long-lived assets
Consolidated:
Revenue
Long-lived assets
$ 28,035
$ 15,971
$ 26,968
$ 15,634
$ 26,284
$ 14,640
$
$
8,547
3,975
$
$
6,517
3,567
$
$
4,988
2,874
$ 36,582
$ 19,946
$ 33,485
$ 19,201
$ 31,272
$ 17,514
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 invest-
ments, 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):
Repairs and maintenance
Depreciation and amortization
Purchased transportation
Fuel
Other occupancy
Restructuring charge and
related expenses
Other expenses
$
2004
1,005
1,543
2,059
1,416
752
—
3,902
$ 10,677
2003
955
1,549
1,828
1,050
730
9
3,591
9,712
$
$
2002
873
1,464
1,665
952
653
106
3,523
9,236
$
$
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.
Notes to consolidated financial statements 65
Notes to consolidated financial statements
NOTE 14. INCOME TAXES
The income tax expense (benefit) for the years ended December 31
consists of the following (in millions):
Current:
U.S. Federal
U.S. State & Local
Non-U.S.
Total Current
Deferred:
U.S. Federal
U.S. State & Local
Non-U.S.
Total Deferred
Total
2004
2003
2002
$
$
1,675
71
98
1,844
(155)
(84)
(16)
(255)
1,589
$
$
1,103
112
86
1,301
181
(11)
1
171
1,472
$
1,208
148
62
1,418
323
14
—
337
1,755
$
Income before income taxes includes income of foreign sub-
sidiaries of $270, $237, and $16 million in 2004, 2003, and
2002, respectively.
A reconciliation of the statutory federal income tax rate to the
effective income tax rate for the years ended December 31 con-
sists of the following:
Statutory U.S. federal
income tax rate
U.S. state & local income
2004
2003
2002
35.0%
35.0%
35.0%
taxes (net of federal benefit)
1.2
1.5
2.1
Tax assessment reversal
(tax portion)
Other
Effective income tax rate
—
(3.9)
32.3%
—
(2.8)
33.7%
(2.8)
0.7
35.0%
During the third quarter of 2004, we recognized a $99 million
reduction of income tax expense related to the favorable settle-
ment of various U.S. federal tax contingency matters with the
IRS pertaining to tax years 1985 through 1998, and various
state and non-U.S. tax contingency matters.
During the fourth quarter of 2004, we recognized a $109 mil-
lion reduction of income tax expense primarily related to the
favorable resolution of a U.S. state tax contingency matter,
improvements in U.S. state and non-U.S. effective tax rates, and
the reversal of valuation allowances associated with certain U.S.
state & local and non-U.S. net operating loss and credit carry-
forwards due to sufficient positive evidence that the related
subsidiaries will be profitable and generate taxable income
before such carryforwards expire.
66
UPS Annual Report 2004
During the first quarter of 2003, we recognized a $55 million
reduction of income tax expense due to the favorable resolution
of several outstanding contingency matters with the IRS. During
the third quarter of 2003, we recognized a $22 million credit to
income tax expense 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 U.S. 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 provi-
sion 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.
Deferred tax liabilities and assets are comprised of the follow-
ing at December 31 (in millions):
Property, plant and equipment
Goodwill and intangible assets
Pension plans
Other
Gross deferred tax liabilities
Other postretirement benefits
Loss carryforwards (non-U.S. and state)
Insurance reserves
Vacation pay accrual
Other
Gross deferred tax assets
Deferred tax assets valuation allowance
Net deferred tax assets
Net deferred tax liability
Current deferred tax asset
Long-term liability — see Note 9
2004
$ 2,624
428
1,481
167
4,700
684
113
469
145
471
1,882
(64)
1,818
2,882
(392)
$ 3,274
2003
2,453
349
1,266
473
4,541
588
117
347
131
673
1,856
(117)
1,739
2,802
(316)
3,118
$
$
The valuation allowance increased (decreased) by $(53), $25
and $23 million during the years ended December 31, 2004,
2003 and 2002, respectively. We reclassified $719 million from
deferred income taxes to other non-current assets as of
December 31, 2003. This amount represents various income tax
receivable items that had previously been netted against our
deferred tax liabilities.
As of December 31, 2004, we have U.S. state & local operating
loss and credit carryforwards of approximately $428 million and
$25 million, respectively. The operating loss carryforwards expire
at varying dates through 2024. The majority of the credit carry-
forwards may be carried forward indefinitely. We also have
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):
2004
2003
2002
Numerator:
Net income before the
cumulative effect of change
in accounting principle
Denominator:
Weighted average shares
Management incentive awards
Deferred compensation
obligations
Denominator for basic
earnings per share
Effect of dilutive securities:
Management incentive awards
Stock option plans
Denominator for diluted
earnings per share
Basic earnings per share before
cumulative effect of change
in accounting principle
Diluted earnings per share
before cumulative effect
of change in accounting
principle
$ 3,333
$ 2,898
$ 3,254
1,125
1
1,125
1
1,117
1
3
2
2
1,129
1,128
1,120
4
4
4
6
4
10
1,137
1,138
1,134
$ 2.95
$
2.57
$
2.91
$ 2.93
$
2.55
$
2.87
Diluted earnings per share for the years ended December 31,
2004, 2003, and 2002 exclude the effect of 2.7, 2.9, and 0.1 mil-
lion shares, respectively, of common stock that may be issued
upon the exercise of employee stock options because such effect
would be antidilutive.
non-U.S. loss carryforwards of approximately $874 million as of
December 31, 2004, the majority of which may be carried for-
ward indefinitely. As indicated in the table above, we have
established a valuation allowance for certain non-U.S. and state
loss carryforwards, due to the uncertainty resulting from a lack
of previous taxable income within the applicable tax jurisdictions.
Undistributed earnings of our non-U.S. subsidiaries amounted
to approximately $728 million at December 31, 2004. Those
earnings are considered to be indefinitely reinvested and, accord-
ingly, no U.S. federal or 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 U.S.
income taxes and withholding taxes payable in various non-U.S.
jurisdictions, which could potentially be offset by foreign tax
credits. Determination of the amount of unrecognized deferred
U.S. income tax liability is not practicable because of the com-
plexities associated with its hypothetical calculation.
We have not changed our position with respect to the indefi-
nite reinvestment of foreign earnings to take into account the
possible election of the repatriation provisions contained in the
American Jobs Creation Act of 2004. The American Jobs
Creation Act of 2004 (the “Jobs Act”), as enacted on October
22, 2004, provides for a temporary 85% dividends received
deduction on certain foreign earnings repatriated during a one-
year period. The deduction would result in an approximate
5.25% U.S. federal tax rate on any repatriated earnings. To
qualify for the deduction, the earnings must be reinvested in the
United States pursuant to a domestic reinvestment plan estab-
lished by the Company’s Chief Executive Officer and approved
by the Company’s Board of Directors. Certain other criteria in
the Jobs Act must be satisfied as well. The maximum amount of
our foreign earnings that qualify for the temporary deduction
under the Jobs Act is $500 million.
We are in the process of evaluating whether we will repatri-
ate foreign earnings under the repatriation provisions of the
Jobs Act, and if so, the amount that will be repatriated. We are
considering repatriating any amount up to $500 million under
the Jobs Act. We are awaiting the issuance of further regulatory
guidance and passage of statutory technical corrections with
respect to certain provisions in the Jobs Act prior to determin-
ing the amounts we could repatriate. We expect to determine
the amounts and sources of foreign earnings to be repatriated,
if any, during the fourth quarter of 2005. We cannot reasonably
estimate the impact of a qualifying repatriation, should we
choose to make one, on our income tax expense for 2005 at
this time.
Notes to consolidated financial statements 67
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 man-
age the volatility relating to certain of 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,
principally natural gas and electricity. We use a combination of
options, swaps, and futures contracts to provide partial protec-
tion from rising fuel and energy prices. The net fair value of such
contracts subject to price risk, excluding the underlying expo-
sures, as of December 31, 2004 and 2003 was an asset of $101
and $30 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.
relate to the Euro, the British Pound Sterling, and the Canadian
Dollar. We use a combination of purchased and written options
and forward contracts to hedge currency cash flow exposures.
As of December 31, 2004 and 2003, the net fair value of the
hedging instruments described above was a liability of $(28) and
$(48) million, respectively. We have designated and account for
these contracts as cash flow hedges of anticipated foreign cur-
rency denominated revenue and, 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 cre-
ates interest rate risk. 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 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 mate-
rial to net income. The net fair value of our interest rate swaps
at December 31, 2004 and 2003 was a liability of $(32) and
$(27) million, respectively.
Credit Risk Management
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 cur-
rency 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
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 counterpar-
ties 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.
68
UPS Annual Report 2004
Derivatives Not Designated As Hedges
Fair Value of Financial Instruments
At December 31, 2004 and 2003, 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 equiva-
lents, accounts receivable, and accounts payable approximate
carrying values because of the short-term nature of these instru-
ments. 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.
Derivatives not designated as hedges primarily consist of 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
immaterial for 2004, 2003 and 2002.
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 ele-
ments 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 inef-
fective portions of gains and losses on hedges are reported in the
income statement category related to the hedged exposure. Both
the ineffective portion of hedge positions and the elements
excluded from the measure of effectiveness were immaterial for
2004, 2003 and 2002.
As of December 31, 2004, $13 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, 2005. 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 2004 in connection with forecasted transactions
that were no longer considered probable of occurring.
At December 31, 2004, the maximum term of derivative
instruments that hedge forecasted transactions, except those
related to cross-currency interest rate swaps on existing financial
instruments, was three years. We maintain cross-currency inter-
est rate swaps that extend through 2009.
Notes to consolidated financial statements 69
Notes to consolidated financial statements
NOTE 17. QUARTERLY INFORMATION (UNAUDITED)
Revenue:
U.S. domestic package
International package
Non-package
Total revenue
Operating profit:
U.S. domestic package
International package
Non-package
Total operating profit
Net income
Earnings per share:
Basic
Diluted
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2004
2003
2004
2003
2004
2003
2004
2003
$ 6,540
1,619
760
8,919
$ 6,020
1,302
693
8,015
831
269
117
1,217
759
0.67
0.67
$
$
$
704
134
107
945
611
0.54
0.54
$
$
$
$ 6,480
1,613
778
8,871
892
272
146
1,310
$ 818
$ 0.73
$ 0.72
$ 6,124
1,371
731
8,226
832
158
90
1,080
692
0.61
0.61
$
$
$
$ 6,494
1,666
792
8,952
857
262
139
1,258
$ 890
$ 0.79
$ 0.78
$ 6,219
1,370
723
8,312
825
176
146
1,147
739
0.66
0.65
$
$
$
$ 7,096
1,864
880
9,840
765
318
121
1,204
866
$
$ 0.77
$ 0.76
$ 6,659
1,518
755
8,932
911
241
121
1,273
856
$
$ 0.76
$ 0.75
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 quarter 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).
Third quarter 2004 net income includes a credit to tax expense ($99 million, $0.09 per diluted share) related to the resolution of
various tax matters. Fourth quarter 2004 net income includes an impairment charge ($70 million after-tax, $0.06 per diluted share)
on Boeing 727, 747, and McDonnell Douglas DC-8 aircraft, and related engines and parts, and a charge to pension expense ($40 mil-
lion after-tax, $0.04 per diluted share) resulting from the consolidation of data collection systems. Fourth quarter 2004 net income
also includes credits to income tax expense ($43 million, $0.04 per diluted share) related to various items, including the resolution of
certain tax matters, the removal of a portion of the valuation allowances on certain deferred tax assets on net operating loss carryfor-
wards, and an adjustment for identified tax contingency items.
70
UPS Annual Report 2004
Price and dividend information
Our Class A common stock is not listed on a national securities exchange or traded in an organized over-the-counter market, but each
share of our Class A common stock is convertible into one share of our Class B common stock.
The following is a summary of our Class B common stock price activity and dividend information for 2004 and 2003. Our Class B
common stock is listed on the New York Stock Exchange under the symbol “UPS.”
2004:
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2003:
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
High
Low
Close
$ 74.46
$ 75.26
$ 76.00
$ 87.70
$
$
$
$
64.48
64.32
64.99
74.86
$ 67.51
$ 68.57
$ 69.15
$ 75.76
$
$
$
$
53.00
56.52
61.17
63.76
$ 69.84
$ 75.17
$ 75.92
$ 85.46
$
$
$
$
57.00
63.70
63.80
74.55
Dividends
Declared
$
$
$
$
$
$
$
$
0.28
0.28
0.28
0.28
0.21
0.21
0.25
0.25
As of February 28, 2005, there were 168,651 and 15,728 record holders of Class A and Class B common 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 9, 2005, our Board declared a dividend of $0.33 per share, which was payable on March 9, 2005 to shareowners of
record on February 22, 2005.
Price and dividend information 71
Investor information
Annual Meeting
Our annual meeting of shareowners will be held at
8 a.m. on May 5, 2005 at the Hotel Du Pont,
11th and Market Streets, Wilmington, DE 19801.
Shareowners of record as of March 7, 2005 are
entitled to vote at the meeting.
Investor Relations
UPS maintains a comprehensive Web site at
www.shareholder.com/ups 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
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 through the Internet
at www.shareholder.com/ups or at www.sec.gov,
the Web site for the Securities and Exchange
Commission. It also is available by calling or writing
to the Investor Relations Department. Additional
investor information is available on the Investor
Relations Web site, www.shareholder.com/ups.
Direct Stock Purchase and Dividend
Reinvestment Plan
The Mellon Direct Investment & Dividend
Reinvestment Plan enables UPS Class B common
shareowners to purchase additional Class B common
shares and/or to reinvest dividends paid on shares
of UPS Class B stock in additional UPS Class B
common shares. Current UPS Class B common stock
shareowners can enroll in the plan online by accessing
your account at www.melloninvestor.com/isd or 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.
The dividend reinvestment plan enables
shareholders of UPS Class A and Class B common
stock to purchase additional shares. To learn
more about the dividend reinvestment plan, Class
A common stock shareowners can visit www.
melloninvestor.com and select MellonOne. Class B
shareowners can visit www.melloninvestor.com/isd.
72 Investor information
1 1 1 0 9 8 7 6 5 4 3 2 1 0 1 2 3 4 5 6 7 8 9 1 0 1 1 1 2
Online Access to Shareowner Materials
through MLink®
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 ServiceDirect Enhancements
Mellon’s Investor ServiceDirect® application has
been redesigned. It now offers:
n Increased functionality and ease of use.
n A streamlined portfolio page that summarizes
your profile information and directs you
quickly and easily to your accounts and the
information you’re seeking.
n User-friendly navigation that enables you
to perform your transactions faster with easy
access to account history and forms
and materials.
n New helpful tips, shortcuts and related links
that give you the answers to the most
common questions.
n An expanded help center that features a new
user manual, FAQs and investor support.
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 for Investors and then
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
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Copyright © 2005 United Parcel Service of America, Inc. All rights reserved.
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55 Glenlake Parkway, NE
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www.ups.com
Every Minute Around the World
UPS Annual Report 2004