Synchronizing Global Commerce
UPS Annual Report
2006
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TABLE OF CONTENTS
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Chief Executive Offi cer Letter
UPS Products and Services
Chief Financial Offi cer Letter
UPS Business Philosophy
Board of Directors and Senior Management
Annual Report on Form 10-K
SYNCHRONIZING GLOBAL COMMERCE
At UPS, service excellence is a way of life. But performing a service
fl awlessly is not enough for customers today. As the world’s largest
package delivery company and a global leader in supply chain
services, we make it our business to know what customers need
to best serve their own customers, and then we offer a range of
solutions to meet those needs.
We operate in more than 200 countries and territories worldwide,
providing time-defi nite delivery of a single letter, small package,
and heavy freight via air or ground. And, the company provides
services to manage a customer’s supply chain, including air,
ocean, ground, and rail transportation; customs brokerage;
distribution; and post-sales support. By leveraging the capabilities
of our global transportation network, we help synchronize
commerce for our customers.
A global leader in providing transportation
solutions, UPS helps synchronize commerce
for its customers.
UPS FACTS
(cid:129) Founded:
(cid:129) Employees:
(cid:129) Customers:
(cid:129) ups.com average:
2006 HIGHLIGHTS
1907
428,000
7.9 million
15 million
on-line tracking
requests daily
(cid:129) Produced record revenue, operating profi t, and
earnings per share.
(cid:129) Delivered the most packages in UPS history,
almost four billion.
(cid:129) Expanded operations in Europe.
(cid:129) Incorporated heavy air freight acquisition into
(cid:129) Operating facilities:
3,000 worldwide
UPS air network.
(cid:129) Access points:
150,000 worldwide
(cid:129) Rebranded LTL freight acquisition to
(cid:129) Aircraft:
282 (Eighth-largest
airline in the world)
(cid:129) Package delivery vehicles: 94,500
(cid:129) Freight vehicles:
6,800 tractors;
22,800 trailers
UPS Freight.
(cid:129) Began a fi ve-year, $1 billion expansion of our
fl agship air hub in Louisville, KY, to increase
sorting capacity by 60 percent to 487,000
packages per hour.
FINANCIAL HIGHLIGHTS
(in millions, except for per-share amounts)
Revenue
Operating expenses
Net income
Diluted earnings per share
Dividends declared per share
Assets
Long-term debt
Shareowners’ equity
Capital expenditures
Cash and investments
2006
$47,547
40,912
4,202
3.86
1.52
33,210
3,133
15,482
3,085
1,983
2005
$42,581
36,438
3,870
3.47
1.32
34,947
3,159
16,884
2,187
3,041
% Change
11.7
12.3
8.6
11.2
15.2
(5.0)
(0.8)
(8.3)
41.1
(34.8)
1
Michael L. Eskew
Chairman and Chief Executive Offi cer
“Synchronizing this world of global commerce
is our vision ... a vision that supports current
products and services, as well as guides our
longer-term initiatives.”
DEAR FELLOW SHAREOWNERS,
World trade is growing at an unprecedented pace
Worldwide Forwarding and Overnite in the United
as goods move around the globe more quickly
States. While much of this activity was successful,
and more freely than ever. Companies of all sizes
some of the integrations presented challenges. We
are tapping new markets for their products.
are confi dent, however, that the expanded capa-
Consumers, empowered by technology, are seeking
bilities these acquisitions bring will help UPS better
more choices and more services. Businesses are
meet all our customers’ shipping needs.
becoming more responsive, more effective, and more
focused on satisfying the demands of customers
GLOBAL SMALL PACKAGE
for an increasingly personalized experience. Synchro-
nizing this world of global commerce is our vision ...
a vision that supports current products and services,
as well as guides our longer-term initiatives.
Our global small package operations performed
exceptionally well, delivering a record of nearly
4 billion packages and letters in 2006. We expand-
ed upon our industry-leading margins, attaining a
Before I talk about what lies ahead, let me put 2006
new high of 16.8 percent for the year. We will con-
into perspective. UPS reported the highest revenue,
tinue to invest in our small package business. For
profi t, and earnings per share in our history. More
example, in 2006 we began a fi ve-year, $1 billion
specifi cally, revenue increased 11.7 percent, reaching
expansion of UPS Worldport®, our fl agship global
$47.5 billion; operating profi t of $6.6 billion was
air hub in Louisville, KY. This effort will increase
up 8.0 percent; and diluted earnings per share were
sorting capacity by 60 percent to accommodate
$3.86, an increase of 11.2 percent. These results
the volume growth driven by the increase in
refl ect the strong performance of our small package
international trade.
operations around the world.
The U.S. small package business posted a 9.6 percent
It was also a year in which we continued to build
increase in operating profi ts to $4.9 billion. The year
a strong foundation for long-term growth, high-
was characterized by investments in service expan-
lighted by the integration of acquisitions across our
sions and visibility solutions for our customers. In
business units. These included LYNX Express in the
early 2006, we unveiled the most signifi cant upgrade
United Kingdom, Stolica S.A. in Poland, and Menlo
of our U.S. ground package delivery network ever,
2
2006 Revenue by Segment
(in billions)
$8.0
$9.1
$30.4
64% U.S. domestic package
19% International package
17% Supply chain and freight
4
.
2
3
.
9
Net Income (in billions)
$4.0
3
.
2
2
.
9
3
.
3
$3.2
$2.4
$1.6
$0.8
$0
02
03
04
05
06
slashing a day or more from transit time in 3 mil-
We also completed the extension of our international
lion ZIP code pairings. We also enhanced a variety
express service to 330 cities in China, which account for
of shipping technologies to provide more visibility
about 85 percent of China’s global trade. And we intro-
tools for both small package and freight deliveries.
duced our retail concept in Asia with the opening of two
Our international small package business contin-
ued to deliver outstanding results. Profi t increased
over 14 percent to $1.7 billion. Here, too, we
invested substantially to upgrade services and facili-
locations in China and two in India that are similar to
The UPS Store® in the United States and Canada.
SUPPLY CHAIN AND FREIGHT
ties in key markets around the globe. We extended
The Supply Chain and Freight segment produced
daily, time-defi nite delivery options in 30 countries,
disappointing results. This segment includes our
and enhanced a number of technology tools to sim-
heavy freight business (ground, air, and ocean),
plify the complexities of international trade. We
brokerage, and distribution operations. It experi-
also completed the expansion of our Cologne air
enced diffi culties integrating two large acquisitions
hub, an investment of $135 million, which nearly
in 2006. With these integrations now behind us, we
doubled package handling capacity and makes the
have signifi cant opportunity to optimize these net-
facility one of the most sophisticated in the world.
works, improve margins, and grow the top line.
The UPS integrated ground and air business model
In the air freight business we have achieved network
in Europe is performing extremely well. The in-
synergies by transitioning most of the acquired freight
tegrations of LYNX Express and Stolica S.A. are
business to UPS aircraft and by consolidating freight
proceeding smoothly. LYNX increases the density
handling facilities into the UPS network. Our goal
of our business in the United Kingdom, resulting
going forward is to maximize capacity utilization
in productivity and effi ciency gains. And Stolica
with the right mix of business on each airplane.
S.A. gives UPS a strong position in Poland, a key
European market with great potential for growth.
In the ground freight unit, 2006 was a building
year. We rebranded the Overnite acquisition as
Finally, in Asia we expanded our air network to 21
UPS FreightSM, deployed technology enhancements,
weekly fl ights to and from the United States and China.
cross-trained both the freight and small package sales
3
Operating Margin (in percent)
15%
12%
1
3
.
1
1
3
.
3
1
3
.
6
1
4
.
4
1
4
.
0
9%
6%
3%
0%
02
03
04
05
06
forces, and dramatically improved service levels.
It is even more exciting to think about all that
Many of our 1.8 million daily small package pickup
this company has yet to accomplish. The global
customers have shown great interest in our freight
trends I discussed earlier are creating compelling
offerings as we provide them with the same superior
growth opportunities for UPS—opportunities that
experience that they have come to expect from our
will leverage our core competency of optimizing
small package operations. In 2007, we anticipate
networks that support the effi cient movement of
increasing momentum in volume growth and prof-
goods, information, and funds.
itability improvement from our freight business as
the year unfolds.
With this in mind, we anticipate that our global
small package and supply chain and freight busi-
And fi nally, 2006 brought a sharper focus in our
nesses will continue to expand as we meet our
logistics business (distribution and post-sales).
customers’ growing global needs. The U.S. small
Simply, all supply chain solutions must meet two
package business is a mature market, but should
criteria. One, they must be linked to the transpor-
perform slightly better than GDP growth. With a
tation network and two, they must be repeatable,
slower-growth economy than in the last few years,
that is, able to be used by a number of customers
we anticipate about a 2.5-to-3 percent increase in
simultaneously. As a result, we shed some business
U.S. domestic volume in 2007, with moderating
relationships which slowed our top-line growth. But
operating profi t growth.
our focus on key vertical industries—particularly
healthcare, retail, and high tech—has produced
important successes for our customers and UPS.
WHAT THE FUTURE HOLDS
On the international front, world trade should
remain strong, supporting a robust international
small package market. We anticipate UPS export
volume growth will post about a 10 percent gain in
2007. Operating profi t growth is expected to be in
UPS will celebrate
its 100th anniversary on
the mid-teens.
August 28, 2007. It is remarkable to think about
all that this company has achieved in its fi rst
century of service, growing
from a small
messenger company in Seattle to a global enterprise
enabling millions of customer transactions a day.
And the Supply Chain and Freight segment should
achieve profi tability with steadily
improving
performance as the year progresses. We have targeted
2-to-3 percent margins for this segment in 2007.
4
Dividends Paid (in billions)
$2.0
Return on Equity (in percent)
30%
1
.
6
1
.
4
1
.
2
1
.
0
0
.
8
$1.6
$1.2
$0.8
$0.4
$0
2
8
.
0
2
6
.
0
2
3
.
3
2
1
.
2
2
1
.
3
25%
20%
15%
10%
5%
0%
02
03
04
05
06
02
03
04
05
06
For the total company, then, we anticipate earnings
and international operations. Replacing him is Alan
will improve in the range of 6-to-10 percent over
Gershenhorn, who has joined the Management
2006 results.
UPS is dedicated to building capabilities for prof-
itable, long-term growth to benefi t our customers,
our employees, and our shareowners. To achieve
this, we will:
• continuously evaluate the dynamics of the
marketplace to anticipate our customers’ needs.
• invest our capital in new ventures where the
Committee. Alan has broad experience in our do-
mestic and international small package business, as
well as in the international supply chain operations.
Lastly, Scott Davis assumed the additional respon-
sibilities of Vice Chairman in addition to his role as
Chief Financial Offi cer, a move that will allow me
to spend more time with customers and evolve our
strategy to meet their future needs.
return and risk profi le create shareowner value.
UPS’s founder, Jim Casey, was fond of saying,
• focus on UPS’s core competency—optimizing
“Our horizon is as distant as our mind’s eye wishes
networks, both physical and informational.
it to be.” As I scan today’s horizon and see what
• innovate to maintain our competitive advantages.
lies before us, I know that Jim would be proud of
• manage our fi nancial policies for total
the transformation of UPS into the world’s premier
shareowner returns.
enabler of global commerce.
As we conclude our fi rst century of service in 2007,
we will continue to hold fast to what has made us
successful. There are certain timeless values and
philosophies that defi ne our culture at UPS and
the most signifi cant, I believe, is the extraordinary
dedication of our people.
To that end, I want to recognize the contributions
of John Beystehner, who retired in January 2007
as Chief Operating Offi cer of the company after a
36-year career with UPS. David Abney succeeded
John and brings extensive experience across our
business, including small package, supply chain,
Michael L. Eskew
Chairman and Chief Executive Offi cer
5
UPS PRODUCTS AND SERVICES
Competing in the worldwide market is becoming
more of a necessity for companies large and small.
Through a broad portfolio of service offerings, UPS
helps its customers simplify global commerce.
GLOBAL PACKAGE DELIVERY
Today, UPS is the worldwide leader in package
Logistics Management, Distribution, and Post-Sales
delivery with 15.6 million packages delivered daily.
Support — UPS provides logistics and distribution
This includes guaranteed international express
services such as warehousing and order fulfi llment,
delivery to more than 200 countries and territories,
and post-sales support through returns, repairs,
along with three daily time-defi nite delivery options
recycling management, and same-day delivery of
for shipments between the United States and
critical parts.
major trading markets around the world. Within
the United States, UPS offers a variety of time- or
day-defi nite delivery options including guaranteed
ground delivery; next-day, second-day, and three-
day delivery; and same-day service.
GLOBAL FREIGHT
Supplier Management — Companies that need
help reaching overseas markets can rely on UPS
to manage vendors, products, orders, shipment
details, and customs documentation.
Brokerage Services — UPS offers international
trade consulting along with customs brokerage
By road, rail, ocean, or air, UPS can move goods
services in more than 60 countries, plus automated
of any size around the world. Our tracking and
import and export
tools
that assist with
visibility tools are tightly linked to our global
compliance, classifi cation, documentation, and
multimodal transportation network. Global air
other requirements of global trade.
freight services, combined with truckload and less-
than-truckload services, offer customers multiple
transportation modes and time- or day-defi nite
options to meet their needs.
BUSINESS SOLUTIONS
UPS’s portfolio also includes supply chain, fi nancial,
Technology Solutions — UPS has sophisticated tools
to help customers track their shipments, orders, and
inventory via the Web, wireless devices, or third-
party applications. Proactive e-mail notifi cation of
shipping events and online payment and visibility of
invoices are additional benefi ts of UPS technology.
retail, and mail solutions that allow customers of all
Retail Solutions — Accessing UPS is easy through
sizes to leverage our global transportation network
40,000 drop boxes and over 5,800 The UPS Store®
to improve their bottom line and customer service.
and Mail Boxes Etc.® locations worldwide.
6
UPS’sUPS’s Synchronized
Synchronized Solutions
Action
Solutions in in Action
PACKAGE PROFESSIONALS
CONSOLIDATED CLEARANCE
An online retailer of specialty seasonal lighting
A promotional products company uses UPS Trade
and décor had relied on suppliers to ship customer
Direct® Ocean to import items custom-made in
orders. To help build better, more direct relationships
China for use at events around the United States.
with their online customers, the retailer nearly
The service allows orders to be packed individually
doubled its warehouse space and turned to UPS for
but clear customs as one shipment. The shipment
reliable, predictable, professional delivery of orders.
is then deconsolidated at a UPS facility and
In addition to strengthening customer service, the
delivered via UPS small package or freight services.
company found UPS has the operational fl exibility
The result: the customer saves two weeks off the
to grow with the business, especially when holiday
industry standard for the order placement to fi nal
orders surge.
INTERNATIONAL EXPERTS
delivery process.
RAPID REPAIR
A U.S.-based textile supplier with a small staff
Through a combination of services, UPS offers an
relies on UPS’s Worldwide ExpressSM portfolio to
innovative repair solution for a large computer
provide just-in-time delivery of the latest fabrics
company. The UPS Store is authorized for laptop
and trims to its high-end fashion clients around the
drop-offs, and UPS’s critical parts capabilities
globe. UPS makes shipping easy and helps eliminate
provide the end-of-runway laptop repair services
the risk of customs delay because our brokerage
at UPS Worldport® operations
in Louisville.
services submit documents electronically and, in
UPS’s extensive air network is used for express
most cases, pre-clear shipments prior to landing.
package transport—delivering repaired laptops to
Other UPS technology solutions provide tracking,
customers as soon as the next day rather than days,
proof of delivery, comprehensive worldwide rate
or weeks, later.
calculation, and all rates and fees in U.S. currency to
simplify accounting.
7
D. Scott Davis
Vice Chairman and Chief Financial Offi cer
“Diligent, long-term thinking has led to
consistently strong fi nancial performance
by UPS, and we believe this approach
will continue to serve us well.”
DEAR FELLOW SHAREOWNERS,
One of the defi ning characteristics of UPS is our
almost 16 percent. We’re proud of these results,
fi nancial strength. Diligent, long-term thinking has
particularly since the growth in this period exceeded
led to consistently strong fi nancial performance by
our 30-year historical range of 10 to 15 percent.
UPS, and we believe this approach will continue to
serve us well. As we move forward, we embrace
long-standing values that have enabled us to run
this business in the best interests of our long-term
shareowners, generations of UPS partners, and of
course, our customers.
A TRACK RECORD OF SUCCESS ...
THE LAST FIVE YEARS
Since 2002, consolidated volume has increased at
a compound annual growth rate of 4 percent. This
resulted in the daily delivery of nearly 15.6 mil-
lion packages in 2006, an increase of more than
2.3 million each day compared with 2002.
Consolidated revenue
increased approximately
$16 billion since 2002, representing a compound
annual growth rate of 11 percent. While a portion
of this performance is due to the impact of acquisi-
Return on invested capital (ROIC)** is a key mea-
sure of fi nancial performance. ROIC is like a fi nan-
cial tuning fork used to check how well revenue
growth, operating margins, and capital investment
are playing together. ROIC has increased from 17.3
percent in 2002 to 22.1 percent in 2006, without any
benefi t yet from two recent signifi cant acquisitions.
Finally, cash generation, whether measured as free
cash fl ow or cash from operations, has been excep-
tional. For many years, this has been a hallmark
of our fi nancial strength. In the last fi ve years, cu-
mulative cash from operations was $27 billion.
These results offer compelling proof that our people
are focused exactly where they should be—increasing
the long-term value of the enterprise.
INVESTING FOR LONG-TERM GROWTH
tions, the primary driver of our revenue gains has
The fi rst priority for UPS is always reinvestment in
been organic growth.
Earnings per share (EPS), adjusted for non-recur-
ring items in 2002*, increased from $2.14 to $3.86
resulting in a compound annual growth rate of
the business, either through capital expenditures or
acquisitions. Typically, capital investment ranges
between 5 and 8 percent of revenue, and we have
been at the lower end of this range over the last
fi ve years.
* Excludes 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 li-
ability. The net effect of these items was to increase net income by $760 million, or $0.67 per share.
** Defi ned as (Operating Income x (1- tax rate)) / Average (Long-term Debt + Equity)
8
Revenue (in billions)
$50
Diluted EPS (in dollars)
$3.5
4
7
.
6
4
2
.
63
6
.
6
3
3
.
5
3
1
.
3
$40
$30
$20
$10
$0
2
.
8
1
2
.
9
32
.
5
5
$3.0
$2.5
$2.0
$1.5
$1.0
$0.5
$0
3
.
8
6
3
.
4
7
Return on Invested Capital
(in percent)
2
2
.
1
1
9
.
7
1
7
.
9
1
7
.
3
1
7
.
4
25%
20%
15%
10%
5%
0%
02
03
04
05
06
02
03
04
05
06
02
03
04
05
06
During this fi ve-year period, UPS completed
LOOKING TO THE FUTURE
11 acquisitions at a total investment of almost
$1.8 billion. These acquisitions have extended
the UPS presence in key geographies around the
world—notably China, Japan, and Europe. In
addition, acquisitions have broadened the breadth
of capabilities we offer, which now include freight
forwarding, time-defi nite delivery of heavy air
freight, and less-than-truckload services.
The second priority for our use of cash is
return to shareowners through dividends and
share repurchases.
We are on track to attain our 2010 performance goals
(which are based on 2005 results), despite the challenge
a slower-growth U.S. economy will bring in 2007.
With organic revenue growth between 6 and
8 percent, by 2010 UPS should realize revenue of
approximately $60 billion. Business unit contribu-
tion to operating profi t should evolve somewhat,
with the International segment contributing about
33 percent (compared with 26 percent in 2006). The
U.S. Small Package segment should remain strong
and post steady gains, while the Supply Chain
Dividend growth has been impressive in the last fi ve
and Freight segment is expected to be producing
years, with declared dividends doubling to $1.52
positive returns. Earnings per share compound
per share in 2006. The pay-out ratio has gradually
annual growth rate is expected to range between 9
increased to 39 percent in 2006. And dividend yield
and 14 percent.
at 2 percent is above the average yield of the S&P
500 Index.
By 2010, cash from operations should exceed
$9 billion, more than a 50 percent increase over
Share repurchases have played a signifi cant role in
2006 results. Our approach to the use of cash likely
returning value to shareowners. From 2002 through
will not change dramatically over the next several
2006, UPS repurchased almost 102 million shares
years. We are dedicated to reinvesting in the business,
at a total cost of over $7 billion.
The bottom line is that we have invested $26 billion
in the last fi ve years in capital expenditures,
acquisitions, dividends, and share repurchases—all
to enhance long-term value for shareowners.
and will be patient and careful with our investment
decisions. We also intend to continue returning
cash directly to shareowners in the form of in-
creased dividends and share repurchases. Decisions
on the magnitude and form of distributions will
9
Cash Flow from Operations (in billons)
$6
Dividends Declared (in dollars per share)
$1.50
Shares Repurchased
(number of shares – in millions)
5
.
8
5
.
6
5
.
7
5
.
3
4
.
6
$5
$4
$3
$2
$1
$0
1
.
5
2
1
.
3
2
1
.
1
20
.
9
20
.
7
6
$1.25
$1.00
$0.75
$0.50
$0.25
$0
02
03
04
05
06
02
03
04
05
06
40
30
20
10
0
3
3
.
9
3
2
.
6
1
8
.
1
1
0
.
3
02
6
.
6
03
04
05
06
be balanced against the fl exibility required to grow
our business over the longer term. And we
will pursue acquisitions opportunistically as they
present themselves.
We expect return on invested capital will remain
impressive over the next fi ve years. Our objective
is to generate consistently high ROIC on a
growing base of invested capital to maximize our
economic profi t.
There are a number of key points that I like to
review with investors whenever I speak with them:
• Our industry is critical to global commerce.
• UPS’s position in this industry is strong.
• We have a track record of delivering
exceptional fi nancial results over a long
period of time.
• Our prospects are excellent.
We believe that these
industry fundamentals,
combined with our disciplined approach to fi nancial
management, will continue to produce the type of
long-term returns that UPS has consistently achieved
throughout its history.
D. Scott Davis
Vice Chairman and Chief Financial Offi cer
10
UPSUPS BUSINESS
UPSUPS founder,
founder, Jim Jim Casey,
PHILOSOPHY
BUSINESS PHILOSOPHY
established principles
Casey, established
principles and
and values
values that
that are are part
part of
of the the fabric
fabric of
of our
business.
our business.
ForFor 100 100 years,
years, his his legacy
legacy of of honesty,
honesty, quality,
quality, and and integrity
integrity are are principles
principles and and values
values that
that have
remained
have remained
constant and and have
constant
have been
been integral
integral to to our
success.
our success.
EMPLOYEES:
We respect and value the individual.
OWNERSHIP PHILOSOPHY:
We encourage ownership of our company by
(cid:129) We encourage a spirit of teamwork.
our employees.
(cid:129) We promote from within.
(cid:129) Having a personal stake in the company causes
(cid:129) We help people to develop themselves.
employees to think like owners and work like
(cid:129) We place great value on diversity.
partners. Employee ownership creates a sense
CUSTOMERS:
We believe that enabling our customers to succeed
of teamwork, and strengthens and preserves
our values.
(cid:129) It is our goal to have employees share in the
and grow is central to the success of UPS.
success of the company through various
(cid:129) We treat each customer as our only customer.
plans to reward and encourage participation
(cid:129) We never promise more than we can deliver,
as shareowners.
and we deliver on our promises.
SHAREOWNERS:
We sustain a fi nancially strong company.
SUSTAINABILITY:
We operate our business by maintaining a balance
between economic success, social responsibility,
(cid:129) We manage assets wisely.
and environmental stewardship.
(cid:129) We emphasize the “long term” in strategy
(cid:129) We believe our economic well-being benefi ts
development and decision-making.
society by providing good wages, paying taxes,
(cid:129) We emphasize long-term returns to
and practicing philanthropy.
our shareowners.
(cid:129) We encourage community involvement and
volunteerism by our employees.
(cid:129) We proactively employ solutions that minimize
the impact of our business on the environment.
Our corporate sustainability report can be found at
www.sustainability.ups.com.
Our Code of Business Conduct is available at
www.shareholder.com/ups.
11
UPS BOARD OF DIRECTORS
John J. Beystehner*
Senior Vice President, Chief Operating Offi cer,
and President, UPS Airlines
Director since 2005
James P. Kelly
Former Chairman and
Chief Executive Offi cer, UPS
Director since 1991
Michael J. Burns
Chairman, President, and Chief
Executive Offi cer, Dana Corporation
Director since 2005
D. Scott Davis
Vice Chairman and
Chief Financial Offi cer, UPS
Director since 2006
Stuart E. Eizenstat
Partner, Covington & Burling LLP
Director since 2005
Michael L. Eskew
Chairman and Chief
Executive Offi cer, UPS
Director since 1998
Ann M. Livermore
Executive Vice President,
Hewlett-Packard Company
Director since 1997
Gary E. MacDougal**
Former Chairman and Chief Executive
Offi cer, Mark Controls Corporation
Director since 1973
Victor A. Pelson
Senior Advisor, UBS Securities LLC
Director since 1990
John W. Thompson
Chairman and Chief Executive Offi cer,
Symantec Corporation
Director since 2000
MANAGEMENT COMMITTEE
David P. Abney
Senior Vice President, Chief Operating Offi cer,
and President, UPS Airlines
Allen E. Hill
Senior Vice President,
Human Resources
David A. Barnes
Senior Vice President
and Chief Information Offi cer
D. Scott Davis
Vice Chairman and Chief Financial Offi cer
Michael L. Eskew
Chairman and Chief Executive Offi cer
Alan Gershenhorn
Senior Vice President and
President, UPS International
Kurt P. Kuehn
Senior Vice President,
Worldwide Sales and Marketing
Teri P. McClure
Senior Vice President, Legal,
Compliance, and Public Affairs;
General Counsel and Corporate Secretary
John J. McDevitt
Senior Vice President,
Global Transportation Services
SENIOR OPERATIONS MANAGEMENT
George W. Brooks, Jr.
Southeast Region
Dan Brutto
Air Freight
Wolfgang Flick
Europe Region
Stephen D. Flowers
Americas Region
Myron A. Gray
North Central Region
Robert L. Lekites
UPS Airlines
Gordon Mackenzie
UPS Ground Freight
Gerald R. Mattes
Pacifi c Region
Anthony Poselenzny
West Region
Glen Rice
Northeast Region
Carol B. Tomé
Chief Financial Offi cer and Executive
Vice President – Corporate Services,
The Home Depot, Inc.
Director since 2003
Ben Verwaayen
Chief Executive, BT Group plc
Director since 2005
*John J. Beystehner retired from the UPS Board of Directors and
as an active employee of UPS after 36 years of distinguished
service, effective January 2007.
**Gary E. MacDougal is not standing for re-election to the
UPS Board in May 2007.
Christine M. Owens
Senior Vice President, Communications
and Brand Management
Robert E. Stoffel
Senior Vice President, Engineering, Strategy,
and Supply Chain
James F. Winestock, Jr.
Senior Vice President, U.S. Operations
Rocky Romanella
East Central Region
Kenneth A. Torok
Asia Pacifi c Region
Carolyn J. Walsh
Southwest Region
In 2006, Northeast Region Manager Stephen R. Miele retired
after 34 years of dedicated service. Effective
12
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
Í ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
‘ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
For the fiscal year ended December 31, 2006
or
EXCHANGE ACT OF 1934
For the transition period from
to
Commission file number 001-15451
United Parcel Service, Inc.
(Exact Name of Registrant as Specified in Its Charter)
Delaware
(State or Other Jurisdiction of
Incorporation or Organization)
55 Glenlake Parkway, N.E. Atlanta, Georgia
(Address of Principal Executive Offices)
58-2480149
(I.R.S. Employer
Identification No.)
30328
(Zip Code)
(404) 828-6000
(Registrant’s telephone number, including area code)
Title of Each Class
Class B common stock, par value $.01 per share
Name of Each Exchange on Which Registered
New York Stock Exchange
Securities registered pursuant to Section 12(b) of the Act:
Securities registered pursuant to Section 12(g) of the Act:
Class A common stock, par value $.01 per share
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes Í No ‘
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange
Act. Yes ‘ No Í
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes Í No ‘
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and
will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference
in Part III of this Form 10-K or any amendment to this Form 10-K. ‘
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See
definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
Large accelerated filer Í
Non-accelerated filer ‘
Accelerated filer ‘
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act). Yes ‘ No Í
The aggregate market value of the class B common stock held by non-affiliates of the registrant was approximately
$54,302,158,108 as of June 30, 2006. The registrant’s 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 the registrant’s class A common stock is convertible into one
share of the registrant’s class B common stock.
As of February 26, 2007, there were 391,502,236 outstanding shares of class A common stock and 674,954,331 outstanding
shares of class B common stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive proxy statement for its annual meeting of shareowners scheduled for May 10, 2007 are
incorporated by reference into Part III of this report.
Item 1.
Business
Overview
PART I
United Parcel Service, Inc. (“UPS”) is the world’s largest package delivery company and a global leader in
supply chain management. We were founded in 1907 as a private messenger and delivery service in Seattle,
Washington. Today, we deliver packages each business day for 1.8 million shipping customers to 6.1 million
consignees in over 200 countries and territories. In 2006, we delivered an average of 15.6 million pieces per day
worldwide. In addition, our supply chain solutions capabilities are available to clients in over 175 countries and
territories.
Total revenue in 2006 was over $47.5 billion. Although our primary business is the time-definite delivery of
packages and documents, we have extended our capabilities in recent years to encompass the broader spectrum of
services known as supply chain solutions, such as freight forwarding, customs brokerage, fulfillment, returns,
financial transactions and even repairs. We are also a leading provider of less-than-truckload (“LTL”)
transportation services. We have established a global transportation infrastructure and a comprehensive portfolio
of services and integrated solutions. We support these services with advanced operational and customer-facing
technology. Our supply chain solutions provide visibility into moving inventory across the global supply chain.
We believe the future is bright for this industry, for the following reasons:
• Globalization of trade is a worldwide economic reality, which we believe will continue to expand as
trade barriers are eliminated and large consumer markets, in particular China, India and Europe,
experience economic expansion.
• We believe package shipments will continue to increase as a result of just-in-time inventory
management, the increased use of the Internet for ordering goods and direct-to-consumer business
models. UPS is enhancing its ability to be a “warehouse in motion” for inventory on the move. The
company is also an industry leader in the delivery of goods purchased over the Internet.
• We believe the drive toward outsourcing supply chain management will continue, as customers
increasingly view effective management of their supply chains as a strategic advantage rather than a cost
center.
Our vision for the future is to synchronize the world of commerce, managing the complexities of our
customers’ supply chain needs. Our goal is to develop business solutions that create value and competitive
advantages for any size customers through product differentiation, better customer service and improved cash
flow.
Competitive Strengths
Our competitive strengths include:
Global Reach and Scale. We believe that our integrated global ground and air network is the most
extensive in the industry. It is the only network that handles all levels of service (express, ground, domestic,
international, commercial, residential) through one integrated pickup and delivery service system.
We operate a ground fleet of approximately 101,000 vehicles, ranging from custom-built package cars to
large tractors and trailers, and utilize approximately 600 airplanes. In the contiguous U.S., we reach all business
and residential addresses. We are the eighth largest airline in the world. Our primary air hub is in Louisville, KY.
Regional air hubs are located in Columbia, SC; Dallas, TX; Hartford, CT; Ontario, CA; Philadelphia, PA; and
Rockford, IL. Our largest international air hub is in Cologne, Germany, with other regional hubs in Hong Kong,
Singapore, Taiwan, Miami, FL and Pampanga, Philippines.
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From the beginnings in Germany 30 years ago, our European network has grown significantly and now fully
supports air and ground shipments throughout the continent. We believe we have the most comprehensive
integrated delivery and information services portfolio of any carrier in Europe. In other regions of the world, we
rely on both our own and local service providers’ capabilities to meet our service commitments.
Through more than two dozen alliances with Asian delivery companies that supplement company-owned
operations, we currently serve more than 40 Asia Pacific countries and territories. Two of the fastest growing
economies in the world, China and India, are among our most promising opportunities.
Our Canadian operations include both intra-Canada and import/export capabilities. We deliver to all
addresses throughout Canada. We are also the largest air cargo carrier and a leading logistics provider in Latin
America and the Caribbean.
Technology. We are a global leader in developing technology that helps our customers optimize their
business processes to lower costs, improve service and increase efficiency. We have a strong global capability as
a mover of electronic information. We currently collect electronic data on 97% of the packages that move
through our U.S. system each day – more than any of our competitors.
In 2003, we announced plans to re-engineer our package pickup and delivery processes, which we believe
will result in gains in efficiency, reliability and flexibility. Once the new technology is deployed in our package
sorting facilities, we anticipate achieving savings through productivity improvements as well as in reduced fuel
usage. By the end of 2006 we had deployed this technology for use by almost 74% of our drivers.
Technology powers virtually every service we offer and every operation we perform. Our technology
initiatives are driven by our customers’ needs. We offer a variety of on-line service options that enable our
customers to integrate UPS functionality into their own businesses not only to conveniently send, manage and
track their shipments, but to provide their customers with better information services. We provide the
infrastructure for an Internet presence that extends to tens of thousands of customers who have integrated UPS
tools directly into their own web sites.
Broad, Flexible Range of Services and Integrated Solutions. Our portfolio of services enables customers to
choose the delivery option that is most appropriate for their requirements. Substantially all of our U.S. small
package delivery services are guaranteed.
Our express air services are integrated with our vast ground delivery system – one system handling all
products. This integrated air and ground network enhances efficiency, improves productivity and asset
utilization, and provides us with the flexibility to transport packages using the most reliable and cost-effective
transportation mode or combination of modes. Our sophisticated engineering systems allow us to optimize our
network efficiency and asset utilization on a daily basis. This unique, integrated global business model creates
consistent and superior returns – by far the best in our industry.
Increasingly, our customers benefit from business solutions that integrate many UPS services in addition to
package delivery. We offer over 60 supply chain services – such as freight forwarding, customs brokerage, order
fulfillment, and returns management – that help improve efficiency of the supply chain management process.
Customer Relationships. We focus on building and maintaining long-term customer relationships.
Thousands of customers access us daily through UPS On-Call PickupSM for air and ground delivery services. In
addition, there are approximately 150,000 domestic and international access points to UPS. These include: nearly
40,000 branded drop-boxes, more than 1,000 UPS Customer Centers, over 5,800 independently owned and
operated The UPS Store® and Mail Boxes Etc.® locations worldwide (over 4,400 in the U.S.), more than 2,400
Alliance partner locations, in excess of 15,000 Authorized Shipping Outlets and commercial counters – along
with more than 85,000 UPS drivers who can accept packages given to them.
2
We place significant value on the quality of our customer relationships, and we conduct comprehensive
research to monitor customer perceptions. Since 1993, we have conducted telephone interviews with shipping
decision-makers virtually every business day to determine their satisfaction with small package carriers and
perception of performance on 19 service factors. Results from this survey for 2006 continue to show high levels
of customer satisfaction.
Brand Equity. We have built a leading and trusted brand in our industry – a brand that stands for quality
service, reliability and product innovation. The distinctive appearance of our vehicles and the friendliness and
helpfulness of our drivers are major contributors to our brand equity.
Distinctive Culture. We believe that the dedication of our employees results in large part from our
distinctive “employee-owner” concept. Our employee stock ownership tradition dates from 1927, when our
founders, who believed that employee stock ownership was a vital foundation for successful business, first
offered stock to employees. To facilitate employee stock ownership, we maintain several stock-based
compensation programs.
Our long-standing policy of “promotion from within” complements our tradition of employee ownership,
and this policy makes it generally unnecessary for us to hire managers and executive officers from outside UPS.
The vast majority of our management team began their careers as full-time or part-time hourly UPS employees,
and has spent their entire careers with us. Our chief executive officer and many of our executive officers have
more than 30 years of service with UPS and have accumulated a meaningful ownership stake in our company.
Therefore, our executive officers have a strong incentive to effectively manage UPS, which benefits all our
shareowners.
Financial Strength. Our balance sheet reflects financial strength that few companies can match. As of
December 31, 2006, we had a balance of cash, cash equivalents, marketable securities and short-term investments
of approximately $1.983 billion and shareowners’ equity of $15.482 billion. Long-term debt was $3.133 billion.
We carry long-term debt ratings of AAA/Aaa from Standard & Poor’s and Moody’s, respectively, reflecting our
low use of debt and strong capacity to service our obligations. Our financial strength gives us the resources to
achieve global scale and to make investments in technology, transportation equipment and buildings as well as to
pursue strategic opportunities which will facilitate our growth.
Growth Strategy
Our growth strategy takes advantage of our competitive strengths while maintaining our focus on meeting or
exceeding our customers’ requirements. The principal components of our growth strategy are:
Build on Our Leadership Position in Our U.S. Business. We believe that our tradition of reliable package
delivery service, our experienced and dedicated employees and our unmatched integrated air and ground network
provide us with the advantages of reputation, service quality and economies of scale that differentiate us from our
competitors. Our strategy is to increase domestic revenue through cross-selling our existing and new services to
our large and diverse customer base, to limit the rate of expense growth and to employ technology-driven
efficiencies to increase operating profit.
Continued International Expansion. We have built a strong international presence through significant
investments over several decades. The international package delivery market continues to grow at a faster rate
than that of the U.S. We will use our worldwide infrastructure and broad product portfolio to grow high-margin
premium services and to implement cost, process and technology improvements in our international operations.
Both Europe and Asia offer significant opportunities for growth.
Europe is our largest region outside the United States – accounting for approximately half of our
international revenue.
3
In early 2006, to accommodate growth opportunities across the whole of Europe, we completed the
expansion of our automated package sorting hub at the Cologne / Bonn airport in Germany. The expansion
doubled the hub’s original sorting capacity to 110,000 packages per hour, largely through the deployment of new
automation technology.
Growth in Asia will be driven by global demand, leading to improved demographic and economic trends
throughout the region, with specific emphasis on China and India. We continue to invest in infrastructure and
technology in Asia. In 2002, we opened a new intra-Asia hub at Clark Air Force Base in Pampanga, Philippines
to enable future growth in the region. This hub allows us to compete more effectively in the Asian express
market and improve our service between Europe and Asia.
In 2003, we received from the U.S. Department of Transportation the authority to expand service to and
through Hong Kong, including permanent authority to fly from Hong Kong to other cities, specifically to our
Cologne hub in Europe. We continue our development efforts in the fast-growing China market.
In 2004, the U.S. Department of Transportation authorized us to significantly expand our air operations in
China with the award of 12 new frequencies, which tripled our access to China.
In 2005, we announced expansion plans to triple the intra-Asia hub’s sorting capacity from 2,500 packages
to 7,500 packages per hour. In the same year, UPS became the first U.S. airline to launch non-stop service
between the U.S. and Guangzhou, which lies strategically in one of China’s fastest growing manufacturing
regions. We also launched express delivery service for customers within China.
In 2006, we added another three daily flights between Shanghai, China and the U.S., and another new flight
between Qingdao, China and Incheon, Korea. We also began direct air service between Shanghai and Cologne
with five flights per week. Those flights are supporting international express volume into and out of China, which
has seen dramatic growth in recent quarters. To continue our expansion, we plan to develop a new air hub in
Shanghai. We also added two weekly flights between the U.S. and Australia.
Our Americas international gateway in Miami, Florida is the focal point for trade between Latin America
and the U.S. This gateway complements our operations in Florida and Latin America, and represents our
commitment to the Americas market. We believe that there is long-term potential for us to expand our service
offerings in Latin America and in 2006, UPS de Mexico enhanced territory coverage by expanding to nine
additional cities across Mexico. UPS de Mexico is now able to offer improved service and broader coverage to
our customers in Mexico.
Provide Comprehensive Supply Chain Solutions.
In today’s global economy, entire industries have
outsourced all or part of their supply chains to streamline and gain efficiencies, to strengthen their balance sheets,
to support new business models and to improve service. Companies’ global supply chains are growing
increasingly complex. This is creating further demand for a global service offering that incorporates
transportation, distribution and international trade services with financial and information services. We believe
that we are well positioned to capitalize on this growth for the following reasons:
• We manage supply chains for large and small companies in over 175 countries and territories, with
about 35 million square feet of distribution space and over 900 facilities worldwide.
• We focus on supply chain redesign, freight forwarding, international trade services and management-
based solutions for our customers rather than solely on more traditional asset-based logistics such as
warehouses and vehicle fleets.
4
• We provide a broad range of transportation solutions to customers worldwide, including air, ocean and
ground freight, as well as customs brokerage and trade and materials management. We provide
standardized service, information technology systems and specialized distribution facilities and services
adapted to the unique supply chains of specific industries such as healthcare, technology, and consumer/
retail.
• We offer a portfolio of financial services that provides customers with short-term and long-term
financing, secured lending, working capital, government guaranteed lending, letters of credit, global
trade financing, credit cards and equipment leasing.
Leverage Our Leading-Edge Technology. Our goal is to provide our customers with easy-to-use, flexible
technology offerings that streamline their shipment processing and integrate critical transportation information
into their business processes, helping them create supply chain efficiencies, improve their cash flows and better
serve their customers. Our leading-edge technology has enabled our e-commerce partners to utilize UPS
capabilities within their products by integrating UPS shipping and visibility functionality.
Pursue Strategic Acquisitions and Global Alliances. Strategic acquisitions and global alliances play a
significant role in spurring growth. We look for opportunities that:
•
•
•
•
•
complement our global package business;
build our global brand;
enhance our technological capabilities or service offerings;
lower our costs; or
expand our geographic presence.
Products and Services
Domestic Package Products and Services. Throughout our history, we have been engaged in the delivery
of packages traveling by ground transportation. We expanded this service gradually, and today our standard
ground service is available to every address in the 48 contiguous United States. With the addition of Hawaii and
Alaska, we were the first to reach every address in all 50 states. We handle packages that weigh up to 150 pounds
and are up to 165 inches in combined length and girth. We offer same-day pickup of air and ground packages. In
2006, we made the most significant upgrade ever to our U.S. ground package delivery network, accelerating the
transit times for more than a half-million packages nationwide by one day or more.
In addition to our standard ground delivery product, UPS Hundredweight Service® offers guaranteed, time-
definite service to customers sending multiple package shipments having a combined weight of 200 pounds or
more, or air shipments totaling 100 pounds or more, addressed to one recipient.
We provide domestic air delivery throughout the United States. UPS Next Day Air® offers guaranteed next
business day delivery by 10:30 a.m. to 75% of the United States population and delivery by noon to areas
covering an additional 15% of the population. We offer Saturday delivery for UPS Next Day Air shipments for
an additional fee. In 2006, we accelerated the guaranteed commit time for our UPS 2nd Day Air A.M.® delivery
service to 10:30 a.m. from 12 p.m. and added a Saturday delivery option for UPS 2nd Day Air®.
Additional products and services, such as UPS CampusShip, Consignee Billing, Quantum View Manage,
Delivery Confirmation and UPS ReturnsSM, are available to customers who require customized package
distribution solutions.
International Package Products and Services. We deliver international shipments to more than 200
countries and territories worldwide, and we provide delivery within one to two business days to the world’s
5
major business centers. We offer a complete portfolio of import, export and domestic services. This portfolio
includes guaranteed early morning, morning and noon delivery to major cities around the world, as well as
scheduled day-definite air and ground services. We offer worldwide customs clearance service for any mode of
transportation.
In January 2007, we had the largest service expansion of our international shipping portfolio in more than a
decade. UPS began offering customers three, rather than two, daily time-definite delivery options to and from the
world’s most active trading markets, giving customers the flexibility they need to manage their businesses. The
changes expand the number of early morning, morning and afternoon commit times UPS offers for urgent
deliveries to and from cities throughout the world.
We classify our service as export (packages that cross national borders) and domestic (packages that stay
within a single country’s boundaries). We have a portfolio of domestic services in 23 major countries throughout
the world.
The Trade Direct portfolio of ocean and air services integrates our small package and supply chain solutions
capabilities to provide additional value to our international customers. In essence, the Trade Direct service
consolidates individually labeled packages or pallets into one movement across borders. When the goods arrive
in the destination country, packages are deconsolidated and entered into the UPS system for delivery, often
eliminating the receiving, sorting and handling necessary in distribution centers. This service significantly cuts
the supply chain cycle from point of origin to consignee. It also provides our customers with faster time to
market, reduced costs, increased visibility and better management of their global supply chain. In 2006, we
completed the rollout of Trade Direct air and ocean services to facilitate export shipments from the U.S. and
Canada to Europe, and introduced Trade Direct service inbound to Japan. Previously in 2005, we had launched
Trade Direct services outbound from Europe to the U.S., as well as inbound from Asia to Europe.
Mexico and Canada are also important to our international business. We developed the UPS Trade DirectSM
Cross Border service to manage package movements between the U.S. and these countries. This service
combines our small package, freight and brokerage capabilities to create an integrated, streamlined and
economical door-to-door solution for customers with complex cross-border distribution needs. We are also the
only carrier to offer guaranteed 8:00 a.m. next day delivery to most major metropolitan cities in Canada.
Starting on January 2, 2007, UPS introduced UPS Standard service support for the shipping of dangerous
goods / hazardous materials, becoming the only carrier to offer a small package ground service for dangerous
goods between Canada and the United States.
Supply Chain & Freight Services. UPS Supply Chain Solutions, which comprises our freight forwarding
and logistics businesses, meets customers’ supply chain needs by selecting the most appropriate solution from a
portfolio of over 60 services. Among these are:
•
•
•
Transportation and Freight Forwarding: air, ocean, rail and ground freight for all size shipments
utilizing UPS and other carriers, and multimodal transportation network management.
Logistics and Distribution: supply chain management, distribution center design, planning and
management, order fulfillment, inventory management, receiving and shipping, service parts logistics,
reverse logistics and cross docking.
International Trade Management: freight forwarding, full-service customs brokerage and international
trade consulting.
• Consulting Services: strategic supply chain design and re-engineering.
Asset-based lending, global trade finance and export-import lending services are available through UPS
CapitalSM.
6
In 2005, we expanded our LTL transportation services with the acquisition of Overnite Corp., which offers a
full range of regional, inter-regional and long-haul LTL services in all 50 states, Canada, Puerto Rico, Guam, the
Virgin Islands and Mexico. Overnite Corp. was rebranded as UPS Freight in 2006. UPS Freight provides LTL
services through a network of owned and leased service centers and carrier partnerships. UPS Freight transports a
variety of products, including fabricated metal products, health care products, chemicals, textiles, machinery,
furniture and fixtures, electronics, paper products and general commodities, including consumer goods, packaged
food stuffs, industrial equipment and auto parts. UPS Freight also provides our customers with truckload and
dedicated truckload transportation solutions.
Visibility and Technology Solutions. Customers trust UPS with their goods and reputation. Our technology
strategy is to provide our customers with the convenience of tools right on their computer or at one of our
shipping outlets. We provide a variety of UPS technology solutions that support automated shipping and
tracking:
• UPS WorldShip® helps shippers streamline their shipping activities by processing shipments, printing
address labels, tracking packages and providing management reports, all from a desktop computer. Our
technology allows us to connect to a company’s order management and fulfillment software, eliminating
the need for the company to perform many time consuming tasks, such as re-keying orders.
• UPS CampusShip® is a Web-based, UPS-hosted distributed shipping solution that allows employees of
companies with multiple facilities and decentralized workforces to easily process and ship packages
with UPS from their computer desktops. At the same time, the system gives transportation and
mailroom decision-makers centralized control over shipping procedures and costs.
• UPS Internet Shipping is a quick and convenient way to ship packages using the web without installing
additional software.
• UPS OnLine® Host Access provides electronic connectivity between UPS and the shipper’s host
computer system, linking UPS shipping information directly to all parts of the customer’s organization.
• UPS Ready® encompasses electronic solutions provided by third-party vendors that benefit customers
who want to automate their small package shipping and tracking processes.
• Quantum View® is a suite of three visibility services (Quantum View Manage, Quantum View Data and
Quantum View Notify) that give businesses and their customers detailed, timely information about the
status of their UPS outbound and inbound shipments. The services can be used separately or together,
depending on customer needs.
•
Flex® Global View provides UPS Supply Chain Solutions customers supply chain visibility of
multimodal (air, ocean, ground and rail—freight or UPS small package) transportation, purchase order,
customer and inventory management data via the Internet. Like Quantum View, Flex Global View
provides customers proactive notification of events they deem important in their daily business
operations—from notification of an item held in Customs to confirmation that a critical shipment is en
route to their location.
• UPS TradeAbilitySM is a software tool that helps customers navigate the complex process of
international shipping by identifying harmonized tariff codes, generating landed cost estimates, and
locating up-to-date compliance information.
• UPS TradeSenseTM is a suite of trade management software (including TradeAbility) that provides a
neutral technology platform that customers can leverage to manage global trade data and requirements.
The software helps automate import-export transactions, enabling businesses to streamline their
operations, boost efficiencies, enhance compliance, and send and receive trade information in a
collaborative environment.
• UPS Billing Analysis Tool is downloadable technology that allows customers to manipulate UPS Billing
Data to analyze and allocate shipping costs. The tool is available in 36 countries and 21 languages, as
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well as the converted currencies of the customer’s choosing. It provides a variety of expense summaries
and subtotals, which can be arranged by the customer’s cost codes, by UPS service, shipping method,
and more.
UPS.com processes over 15 million package tracking transactions daily. A growing number of those
tracking requests now come from customers in those countries that have wireless access to UPS tracking
information. Package tracking, pickup requests, rate quotes, account opening, wireless registration, drop-off
locator, transit times and supply ordering services are all available at the customer’s desktop or laptop. The site
also displays full domestic and international service information and allows customers to process outbound
shipments as well as return labels for their customers.
Businesses in a number of countries also can download UPS OnLine ToolsSM, to their own websites for
direct use by their customers. This allows users to access the information they need without leaving our
customers’ websites.
Sales and Marketing
The UPS worldwide sales organization includes both our traditional U.S. domestic and international small
package delivery business and our Supply Chain & Freight business. This field sales organization consists
primarily of locally-based account executives assigned to our individual operating units. For our largest multi-
shipping site customers, we manage sales through an organization of regionally-based account managers,
reporting directly to our corporate office.
Our sales force also includes specialized groups that work together with our general sales organization to
support the sale of customer technology solutions, international package delivery, LTL and freight transportation,
and warehousing and distribution services.
Our worldwide marketing organization also supports both our traditional U.S. domestic and international
small package delivery business and our Supply Chain & Freight business. Our corporate marketing function is
engaged in market and customer research, brand management, rate-making and revenue management policy, new
product development, product portfolio management, marketing alliances and e-commerce, including the
non-technical aspects of our web presence. Advertising, public relations, and most formal marketing
communications are centrally developed and controlled.
In addition to our corporate marketing group, field-based marketing personnel are assigned to our individual
operating units, and are primarily engaged in business planning, bid preparation and revenue management
activities. These local marketing teams support the execution of corporate initiatives while also managing limited
promotional and public relations activities pertinent to their local markets.
Employees
As of December 31, 2006, we had approximately 428,000 employees.
We have received numerous awards and wide recognition as an employer-of-choice, including the
following:
•
•
•
In February 2006, we were rated “America’s Most Admired” company in our industry in a FORTUNE
magazine survey, as well as ranked in the Top 20 among all American companies. We achieved Top 10
rankings for “people management” and “management quality”.
In 2006, we were ranked in the Top 10 companies in The Wall Street Journal / Harris Interactive
Corporate Reputation Study.
In February 2007, we were ranked eighth overall among 25 companies recognized in Business Week’s
first-ever ranking of “Customer Service Champs”.
8
•
•
•
In 2006, UPS was recognized by Hispanic Business Magazine as one of the top companies in the world
for Hispanics in the workforce. Overall, 50 companies were chosen based on their efforts to hire and
retain those of Hispanic descent in their organization.
In August 2005, Black Professionals Magazine named UPS to its “Top 25 Companies for African
Americans” list, based on workforce diversity initiatives.
In September 2006, UPS ranked ninth in a survey of 152 brands ranked for corporate citizenship. Public
relations firm GolinHarris interviewed 5,000 Americans, who rated 152 brands for the GolinHarris
Corporate Citizenship Index (CCI).
• UPS was recognized in 2006 as one of America’s most supportive companies of both black and
Hispanic engineering students by two independent surveys. The fourth annual survey by U.S. Black
Engineer and Information Technology magazine named UPS as a private sector organization supportive
of historically black engineering schools in the United States. A second survey, conducted by Hispanic
Engineer and Information Technology magazine, ranked UPS in the top five private sector organizations
supportive of engineering schools at America’s Hispanic Serving Institutions.
As of December 31, 2006, we had approximately 246,000 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. In the third quarter of 2006, we began
formal negotiations with the Teamsters on a new agreement. We have approximately 2,800 pilots who are
employed under a collective bargaining agreement with the Independent Pilots Association (“IPA”). On June 30,
2006, UPS and the IPA announced a tentative agreement on a new labor contract, which was ratified in the third
quarter. This new contract becomes amendable at the end of 2011. Our airline mechanics are covered by a
collective bargaining agreement with Teamsters Local 2727, which became amendable on November 1, 2006.
We began formal negotiations with Teamsters Local 2727 on October 2, 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.
We believe that our relations with our employees are good. Every year we survey all our employees to
determine their level of job satisfaction. Areas of concern receive management attention as we strive to keep UPS
the employer of choice among our employees.
Competition
We are the largest package delivery company in the world, in terms of both revenue and volume. We offer a
broad array of services in the package delivery industry and, therefore, compete with many different companies
and services on a local, regional, national and international basis. Our competitors include the postal services of
the United States and other nations, various motor carriers, express companies, freight forwarders, air couriers
and others.
We believe one increasingly important element of competition is a carrier’s ability to integrate its
distribution and information systems with its customers’ systems to provide transportation solutions at
competitive prices. We rely on our vast infrastructure and service portfolio to attract and maintain customers. As
we expand our supply chain solutions service offerings, we compete with a number of participants in the supply
chain, financial services and information technology industries.
Government Regulation
The U.S. Department of Homeland Security, through the Transportation Security Administration (“TSA”),
the U.S. Department of Transportation (“DOT”) and the Federal Aviation Administration (“FAA”), regulates air
transportation services.
9
The TSA regulates various security aspects of air cargo transportation in a manner consistent with the TSA
mission statement to “protect[s] the Nation’s transportation systems to ensure freedom of movement for people
and commerce.”
The DOT’s authority primarily relates to economic aspects of air transportation, such as discriminatory
pricing, non-competitive practices, interlocking relations and cooperative agreements. The DOT also regulates,
subject to the authority of the President of the United States, international routes, fares, rates and practices, and is
authorized to investigate and take action against discriminatory treatment of U.S. air carriers abroad. We are
subject to U.S. customs laws and related DOT regulations regarding the import and export of shipments to and
from the U.S. In addition, our customs brokerage entities are subject to those same laws and regulations as they
relate to the filing of documents on behalf of client importers and exporters.
The FAA’s authority primarily relates to safety aspects of air transportation, including aircraft standards and
maintenance, personnel and ground facilities. In 1988, the FAA granted us an operating certificate, which
remains in effect so long as we meet the operational requirements of federal aviation regulations.
FAA regulations mandate an aircraft corrosion control program, and aircraft inspection and repair at
periodic intervals specified by approved programs and procedures, for all aircraft. Our total expenditures under
these programs for 2006 were $18 million. The future cost of repairs pursuant to these programs may fluctuate.
All mandated repairs have been completed, or are scheduled to be completed, within the timeframes specified by
the FAA.
Our ground transportation of packages in the U.S. is subject to the DOT’s jurisdiction with respect to the
regulation of routes and to both the DOT’s and the states’ jurisdiction with respect to the regulation of safety,
insurance and hazardous materials.
We are subject to similar regulation in many non-U.S. jurisdictions. In addition, we are subject to non-U.S.
government regulation of aviation rights to and beyond non-U.S. jurisdictions, and non-U.S. customs regulation.
The Postal Reorganization Act of 1970 created the U.S. Postal Service as an independent establishment of
the executive branch of the federal government, and vested the power to recommend domestic postal rates in a
regulatory body, the Postal Rate Commission. We participate in the proceedings before the Postal Rate
Commission in an attempt to secure fair postal rates for competitive services.
We are subject to numerous other laws and regulations in connection with our non-package businesses,
including customs regulations, Food and Drug Administration regulation of our transportation of pharmaceuticals
and state and federal lending regulations.
Where You Can Find More Information
We make our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K,
and all amendments to these reports available free of charge through the investor relations page of our website,
located at www.shareholder.com/ups, as soon as reasonably practicable after they are filed with or furnished to
the SEC.
We have adopted a written Code of Business Conduct that applies to all of our directors, officers and
employees, including our principal executive officer and senior financial officers. It is available in the
governance section of the investor relations page of our website, located at www.shareholder.com/ups. In the
event that we make changes in, or provide waivers from, the provisions of the Code of Business Conduct that the
SEC requires us to disclose, we intend to disclose these events in the governance section of our investor relations
website.
10
Our Corporate Governance Guidelines and the charters for our Audit Committee, Compensation Committee
and Nominating and Corporate Governance Committee are also available free of charge in the governance
section of the investor relations page of our website.
See Footnote 12 to our consolidated financial statements for financial information regarding our reporting
segments and geographic areas in which we operate.
Executive Officers of the Registrant
Name and Office
David P. Abney . . . . . . . . . . . . . . . . . . . . . . . . .
Senior Vice President, Chief Operating
Officer, and President – UPS Airlines
Age
51
Principal Occupation
and Employment For
the Last Five Years
Senior Vice President, Chief Operating Officer and
President, UPS Airlines (2007 – present), Senior Vice
President and President, UPS International (2003 –
2007), UPS/Fritz Companies Integration Manager
(2001 – 2002).
David A. Barnes . . . . . . . . . . . . . . . . . . . . . . . .
51
Senior Vice President and Chief
Information Officer
Senior Vice President and Chief Information Officer
(2005 – present), Corporate IS Portfolio Coordinator
(2001 – 2004).
D. Scott Davis . . . . . . . . . . . . . . . . . . . . . . . . . .
55 Vice Chairman (2007 – present), Senior Vice President
Vice Chairman and Chief
Financial Officer
(2001-2007), Chief Financial Officer and Treasurer (2001
– present), Director (2006 – present).
Michael L. Eskew . . . . . . . . . . . . . . . . . . . . . . .
Chairman and Chief Executive Officer
57 Chairman and Chief Executive Officer (2002 – present),
Vice Chairman (2000 – 2001), Executive Vice President
(1999 – 2001), Director (1998 – present).
Alan Gershenhorn . . . . . . . . . . . . . . . . . . . . . . .
Senior Vice President and President,
UPS International
48
Allen E. Hill
. . . . . . . . . . . . . . . . . . . . . . . . . . .
51
Senior Vice President
Senior Vice President and President, UPS International
(2007 – present), President, UPS Supply Chain Solutions
– Asia and Europe (2005 – 2007), President, UPS Supply
Chain Solutions – Shared Services (2004 – 2005),
President, United Parcel Service Canada, Ltd. (2001 –
2004).
Senior Vice President, Human Resources (2007 –
present), Senior Vice President, Human Resources and
Public Affairs (2006 – 2007), Senior Vice President,
General Counsel and Corporate Secretary (2004 – 2006),
Corporate Legal Department Manager (1995 – 2004).
Kurt P. Kuehn . . . . . . . . . . . . . . . . . . . . . . . . . .
52
Senior Vice President
Senior Vice President, Worldwide Sales and Marketing
(2004 – present), Vice President, Investor Relations
(1999 – 2003).
Teri P. McClure . . . . . . . . . . . . . . . . . . . . . . . .
Senior Vice President and Secretary
43
Senior Vice President, General Counsel and Corporate
Secretary (2006 – present), Corporate Legal Department
Manager (2005 – 2006), Compliance Department
Manager (2004 – 2005), District Manager (2003 – 2005),
and Vice President (1999 – 2003).
11
Name and Office
John J. McDevitt . . . . . . . . . . . . . . . . . . . . . . . .
Senior Vice President
Age
48
Christine M. Owens . . . . . . . . . . . . . . . . . . . . .
51
Senior Vice President
Robert E. Stoffel . . . . . . . . . . . . . . . . . . . . . . . .
51
Senior Vice President
Principal Occupation
and Employment For
the Last Five Years
Senior Vice President, Global Transportation Services
(2005 – present), Senior Vice President, Strategic
Integration (2003 – 2005), Air Region Manager (2000 –
2002).
Senior Vice President, Corporate Communications and
Brand Management (2005 – present), Corporate
Transportation Group Manager (2004 – 2005), Region
Manager (1997 – 2004).
Senior Vice President, Engineering, Strategy and Supply
Chain Distribution (2007 – present), Senior Vice
President of Supply Chain Group (2004 – 2007),
President, UPS Supply Chain Solutions, Inc. (2002 –
2003), Vice President, UPS Logistics Group, Inc. (2000 –
2002).
James F. Winestock . . . . . . . . . . . . . . . . . . . . .
55
Senior Vice President
Senior Vice President, U.S. Operations (2004 – present),
Region Manager (1998 – 2003).
Item 1A. Risk Factors
Information about risk factors can be found in Item 7 of this report under the caption “Risk Factors”.
Item 1B. Unresolved Staff Comments
Not applicable.
Item 2.
Properties
Operating Facilities
We own our headquarters, which are located in Atlanta, Georgia and consist of about 735,000 square feet of
office space on an office campus, and our UPS Supply Chain Solutions group’s headquarters, which are located
in Alpharetta, Georgia and consist of about 310,000 square feet of office space.
We also own our 27 principal U.S. package operating facilities, which have floor spaces that range from
about 310,000 to 693,000 square feet. In addition, we have a 1.9 million square foot operating facility near
Chicago, Illinois, which is designed to streamline shipments between East Coast and West Coast destinations,
and we own or lease over 1,600 additional smaller package operating facilities in the U.S. The smaller of these
facilities have vehicles and drivers stationed for the pickup of packages and facilities for the sorting, transfer and
delivery of packages. The larger of these facilities also service our vehicles and equipment and employ
specialized mechanical installations for the sorting and handling of packages.
We own or lease almost 600 facilities that support our international package operations and over 900
facilities that support our freight forwarding and logistics operations. Our freight forwarding and logistics
operations maintain facilities with about 35 million square feet of floor space. We own and operate a logistics
campus consisting of approximately 3.5 million square feet in Louisville, Kentucky.
UPS Freight operates over 200 service centers with a total of 5.5 million square feet of floor space. UPS
Freight owns 141 of these service centers, while the remainder are occupied under operating lease agreements.
The main offices of UPS Freight are located in Richmond, Virginia and consist of about 240,000 square feet of
office space.
Our aircraft are operated in a hub and spokes pattern in the U.S. Our principal air hub in the U.S., known as
Worldport, is located in Louisville, KY. The Worldport facility consists of over 3.5 million square feet and the
site includes approximately 596 acres. We are able to sort over 300,000 packages per hour in the Worldport
12
facility. We also have regional air hubs in Columbia, SC; Dallas, TX; Hartford, CT; Ontario, CA; Philadelphia,
PA; and Rockford, IL. These hubs house facilities for the sorting, transfer and delivery of packages. Our
European air hub is located in Cologne, Germany, and our Asia-Pacific air hub is located in Taipei, Taiwan. Our
intra-Asia air hub is located at Clark Air Force Base in Pampanga, Philippines, our regional air hub in Canada is
located in Hamilton, Ontario, and our regional air hub for Latin America and the Caribbean is in Miami, FL.
In 2006, we announced a major expansion to our Worldport facility that will increase the sorting capacity
over the next five years by 60 percent to 487,000 packages per hour. The expansion involves the addition of three
aircraft load / unload wings to the hub building, followed by the installation of high-speed conveyor and
computer control systems. The overall size of the Worldport facility will increase by 1.1 million square feet to
5.1 million square feet, and the facility will be able to accommodate the Airbus A380-800 and Boeing 747-400
aircraft currently on order. The expansion will cost over $1 billion and is expected to be completed by 2010.
In 2006, we closed the former Menlo Worldwide Forwarding air freight facility in Dayton, OH, and
integrated the former Menlo Worldwide Forwarding air freight business into other UPS facilities, including a
new facility in Louisville consisting of approximately 715,000 square feet and five new regional air freight
facilities in Ontario, CA; Rockford, IL; Dallas, TX; Philadelphia, PA; and Columbia, SC that have a combined
square footage of 269,000.
Our primary information technology operations are consolidated in a 435,000 square foot owned facility, the
Ramapo Ridge facility, which is located on a 39-acre site in Mahwah, New Jersey. We also own a 175,000 square
foot facility located on a 25-acre site in Alpharetta, Georgia, which serves as a backup to the main information
technology operations facility in New Jersey. This facility provides production functions and backup capacity in the
event that a power outage or other disaster incapacitates the main data center. It also helps us to meet our internal
communication needs.
We believe that our facilities are adequate to support our current operations.
Fleet
Aircraft
The following table shows information about our aircraft fleet as of December 31, 2006, including the
Boeing 767-300 order discussed further below:
Description
McDonnell-Douglas DC-8-71 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
McDonnell-Douglas DC-8-73 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Boeing 727-100 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Boeing 727-200 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Boeing 747-100 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Boeing 747-200 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Boeing 747-400F . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Boeing 747-400BCF . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Boeing 757-200 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Boeing 767-300 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Boeing 767-300ER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Boeing MD-11 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Airbus A300-600 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Airbus A380-800 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
13
Owned and
Capital
Leases
Short-term
Leased or
Chartered
From
Others
On
Order
Under
Option
20
26
29
2
7
4
—
—
75
32
—
34
53
—
—
282
—
—
—
—
—
—
—
—
—
—
—
—
—
—
325
325
—
—
—
—
—
—
—
—
—
—
—
—
8 —
2 —
—
—
—
—
27 —
4 —
—
10
—
—
10
—
51
10
We maintain an inventory of spare engines and parts for each aircraft.
All of the aircraft we own meet Stage III federal noise regulations and can operate at airports that have
aircraft noise restrictions. We became the first major airline to successfully operate a 100% Stage III fleet more
than three years in advance of the date required by federal regulations.
During 2006, we took delivery of 13 Boeing MD-11 aircraft and six Airbus A300-600 aircraft. We have
firm commitments to purchase four Boeing MD-11 aircraft, and we expect to take delivery of these aircraft
during 2007. In February 2007, we announced an order for 27 Boeing 767-300ER freighters to be delivered
between 2009 and 2012 (this order is reflected in the table above). We also have firm commitments to purchase
eight Boeing 747-400F aircraft scheduled for delivery during 2007 and 2008, and two Boeing 747-400BCF
aircraft scheduled for delivery during 2008.
In addition, we currently have a firm commitment to purchase 10 Airbus A380-800 freighter aircraft and
options to purchase 10 additional A380-800 aircraft. In February 2007, we announced that we had signed an
agreement with Airbus to set out a timetable for deciding the status of this previous order. The agreement
specifies changed delivery dates for the A380-800 and provides for possible termination of the original purchase
agreement by either party later in 2007. The revised delivery schedule specifies the delivery dates for the 10
Airbus A380-800’s on order as being between 2012 and 2013, whereas we were originally scheduled to take
delivery of the Airbus A380-800 aircraft between 2009 and 2012. The signing of this agreement will have no
material impact on our results of operations or financial condition.
Vehicles
We operate a ground fleet of approximately 101,000 package cars, vans, tractors and motorcycles. Our
ground support fleet consists of over 26,000 pieces of equipment designed specifically to support our aircraft
fleet, ranging from non-powered container dollies and racks to powered aircraft main deck loaders and cargo
tractors. We also have about 41,000 containers used to transport cargo in our aircraft.
Safety
We promote safety throughout our operations. Our Automotive Fleet Safety Program is built with the
following components:
•
•
•
•
Selection. Five out of every six drivers come from our part-time ranks. Therefore, many of our new
drivers are familiar with our philosophies, policies, practices and training programs.
Training. Training is the cornerstone of our Fleet Safety Program. Our approach starts with training the
trainer. All trainers are certified to ensure that they have the skills and motivation to effectively train
novice drivers. A new driver’s employment includes extensive classroom and on-line training as well as
on-road training, followed by three safety training rides integrated into his or her training cycle.
Responsibility. Our operations managers are responsible for their drivers’ safety records. We investigate
every accident. If we determine that an accident could have been prevented, we retrain the driver.
Preventive Maintenance. An integral part of our Fleet Safety Program is a comprehensive Preventive
Maintenance Program. Our fleet is tracked by computer to ensure that each vehicle is serviced before a
breakdown or accident is likely to occur.
• Honor Plan. A well-defined safe driver honor plan recognizes and rewards our drivers when they
achieve success. We have over 4,200 drivers who have driven for 25 years or more without an avoidable
accident.
Our workplace safety program is built upon a comprehensive health and safety process. The foundation of
this process is our employee-management health and safety committees. The workplace safety process focuses
14
on employee conditioning and safety-related habits. Our employee co-chaired health and safety committees
complete comprehensive facility audits and injury analyses, and recommend facility and work process changes.
Item 3.
Legal Proceedings
We are a defendant in a number of lawsuits filed in state and federal 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 a California federal court, plaintiffs allege that they improperly were denied overtime, and seek
penalties for missed meal and rest periods, and interest and attorneys’ fees. Plaintiffs purport to represent a class
of 1,200 full-time supervisors. The court granted summary judgment in favor of UPS on all claims and plaintiffs
have appealed. We have denied any liability with respect to these claims and intend to vigorously defend
ourselves in this case. At this time, we have not determined the amount of any liability that may result from this
matter or whether such liability, if any, would have a material adverse effect on our financial condition, results of
operations, or liquidity.
In another case, Cornn v. UPS, which has been certified as a class action in a California federal court,
plaintiffs allege that they were improperly denied wages and/or overtime and meal and rest periods. Plaintiffs
purport to represent a class of approximately 23,600 drivers and seek back wages, penalties, interest and
attorneys’ fees. UPS has agreed in principle to settle this matter in full for a total payment of $87 million. On
December 6, 2006, the court granted tentative approval of the settlement.
We are named as a defendant in four putative class action lawsuits filed in federal courts, alleging a
conspiracy relating to certain surcharges by a number of air cargo carriers. We are not named as a defendant in at
least eighty-six related cases that make similar allegations. These cases have been consolidated in a Multi-
District Litigation proceeding pending in the United States District Court for the Eastern District of New York.
UPS was not included as a defendant in the amended consolidated complaint on which the Multi-District
Litigation is proceeding. In addition, in July 2006, we were named as a defendant in a comparable lawsuit filed in
the Ontario (Canada) Superior Court of Justice. We intend to vigorously defend ourselves in these cases.
We are a defendant in various other lawsuits that arose in the normal course of business. We believe that the
eventual resolution of these cases will not have a material adverse effect on our financial condition, results of
operations, or liquidity.
Item 4.
Submission of Matters to a Vote of Security Holders
None
15
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
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 2006
and 2005. Our Class B common stock is listed on the New York Stock Exchange under the symbol “UPS.”
High
Low
Close
Dividends
Declared
2006:
First Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fourth Quarter
2005:
First Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fourth Quarter
$80.16
$83.99
$83.00
$79.72
$85.84
$75.88
$74.21
$79.97
$72.74
$77.55
$65.50
$71.95
$71.59
$66.80
$66.75
$66.90
$79.38
$82.33
$71.94
$74.98
$72.74
$69.16
$69.13
$75.15
$0.38
$0.38
$0.38
$0.38
$0.33
$0.33
$0.33
$0.33
As of January 31, 2007, there were 174,096 and 17,237 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 8, 2007, our Board declared a dividend of $0.42 per share, which is payable on March 6, 2007
to shareowners of record on February 20, 2007.
In February 2007, the Board of Directors approved an increase in our share repurchase authorization to $2.0
billion. This amount replaced the remaining authority available under the previously authorized $2.0 billion share
repurchase program approved in July 2006. Unless terminated earlier by the resolution of our Board, the program
will expire when we have purchased all shares authorized for repurchase under the program.
A summary of repurchases of our Class A and Class B common stock during the fourth quarter of 2006 is as
follows (in millions, except per share amounts):
Total Number
of Shares
Purchased(1)
Average
Price Paid
Per Share(1)
Total Number
of Shares Purchased
as Part of Publicly
Announced Program
Approximate Dollar
Value of Shares that
May Yet be Purchased
Under the Program
October 1 – October 31, 2006 . . . . . . . . . . . . . . .
November 1 – November 30, 2006 . . . . . . . . . . .
December 1 – December 31, 2006 . . . . . . . . . . .
Total October 1 – December 31, 2006 . . . .
2.1
2.1
2.1
6.3
$74.77
77.08
75.95
$75.94
2.0
2.0
2.1
6.1
$1,250
1,094
936
$ 936
(1)
Includes shares repurchased through our publicly announced share repurchase program and shares tendered
to pay the exercise price and tax withholding on employee stock options.
16
Shareowner Return Performance Graph
The following Performance Graph and related information shall not be deemed “soliciting material” or to
be “filed” with the Securities and Exchange Commission, nor shall such information be incorporated by
reference into any future filing under the Securities Act of 1933 or Securities Exchange Act of 1934, each as
amended, except to the extent that the Company specifically incorporates it by reference into such filing.
The following graph shows a five-year comparison of cumulative total shareowners’ returns for our class B
common stock, the S&P 500 Index, and the Dow Jones Transportation Average. The comparison of the total
cumulative return on investment, which is the change in the quarterly stock price plus reinvested dividends for
each of the quarterly periods, assumes that $100 was invested on December 31, 2001 in the S&P 500 Index, the
Dow Jones Transportation Average, and the class B common stock of United Parcel Service, Inc.
Comparison of Five Year Cumulative Total Return
$200.00
$180.00
$160.00
$140.00
$120.00
$100.00
$80.00
$60.00
$40.00
2001
2002
2003
2004
2005
2006
S&P 500
UPS
DJ Transport
. . . . . . . . . . . . . . . . . .
United Parcel Service, Inc.
S&P 500 Index . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dow Jones Transportation Average . . . . . . . . . . .
$100.00
$100.00
$100.00
$140.49
$117.19
$ 77.90 $100.24
$ 88.52 $116.70
$163.54
$111.15
$149.06
$146.35
$116.61
$166.42
$148.92
$135.02
$182.76
12/31/01
12/31/02
12/31/03
12/31/04
12/31/05
12/31/06
Securities Authorized for Issuance under Equity Compensation Plans
The following table provides information as of December 31, 2006 regarding compensation plans under
which our Class A common stock is authorized for issuance. These plans do not authorize the issuance of our
Class B common stock.
17
EQUITY COMPENSATION PLANS
Number of securities to be
issued upon exercise
of outstanding options,
warrants and rights
(a)
Weighted-average exercise
price of outstanding options,
warrants and rights
(b)
Number of securities remaining
available for future issuance
under equity compensation
plans (excluding securities
reflected in column (a))
(c)
29,108,486
$39.07
53,407,810
Plan category
Equity compensation plans
approved by security
holders . . . . . . . . . . . . . . . . . .
Equity compensation plans not
approved by security
holders . . . . . . . . . . . . . . . . . .
Total
. . . . . . . . . . . . . . . . . . . . .
29,108,486
—
N/A
$39.07
—
53,407,810
Our shareowners have approved the United Parcel Service, Inc. Incentive Compensation Plan and the
United Parcel Service, Inc. Discounted Employee Stock Purchase Plan. The material features of each of these
plans are described in Note 11 to our consolidated financial statements included in this Form 10-K.
18
Item 6.
Selected Financial Data
The following table sets forth selected financial data for each of the five years in the period ended
December 31, 2006 (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.
Selected Income Statement Data
Revenue:
2006
Years Ended December 31,
2004
2003
2005
2002
U.S. Domestic Package . . . . . . . . . . . . . . . . . . . . . . . . .
International Package . . . . . . . . . . . . . . . . . . . . . . . . . . .
Supply Chain & Freight . . . . . . . . . . . . . . . . . . . . . . . . .
$30,456
9,089
8,002
$28,610
7,977
5,994
$26,960
6,809
2,813
$25,362
5,609
2,514
$24,280
4,720
2,272
Total revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
47,547
42,581
36,582
33,485
31,272
Operating expenses:
Compensation and benefits . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
24,421
16,491
22,517
13,921
20,823
10,770
19,251
9,789
17,849
9,327
Total operating expenses . . . . . . . . . . . . . . . . . . . . . . . .
40,912
36,438
31,593
29,040
27,176
Operating profit (loss):
U.S. Domestic Package . . . . . . . . . . . . . . . . . . . . . . . . .
International Package . . . . . . . . . . . . . . . . . . . . . . . . . . .
Supply Chain and Freight . . . . . . . . . . . . . . . . . . . . . . . .
Total operating profit . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income (expense):
Investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain on redemption of long-term debt . . . . . . . . . . . . . .
Reversal of tax assessment . . . . . . . . . . . . . . . . . . . . . . .
4,923
1,710
2
6,635
86
(211)
—
—
4,493
1,494
156
6,143
104
(172)
—
—
3,702
1,149
138
4,989
82
(149)
—
—
3,657
732
56
4,445
18
(121)
28
—
Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . .
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cumulative effect of change in accounting principle . . . . . .
6,510
(2,308)
—
6,075
(2,205)
—
4,922
(1,589)
—
4,370
(1,472)
—
3,925
338
(167)
4,096
63
(173)
—
1,023
5,009
(1,755)
(72)
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 4,202
$ 3,870
$ 3,333
$ 2,898
$ 3,182
Per share amounts:
Basic earnings per share . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted earnings per share . . . . . . . . . . . . . . . . . . . . . . .
Dividends declared per share . . . . . . . . . . . . . . . . . . . . .
$
$
$
3.87
3.86
1.52
$
$
$
3.48
3.47
1.32
$
$
$
2.95
2.93
1.12
$
$
$
2.57
2.55
0.92
$
$
$
2.84
2.81
0.76
Weighted average shares outstanding:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,085
1,089
1,113
1,116
1,129
1,137
1,128
1,138
1,120
1,134
As of December 31,
2006
2005
2004
2003
2002
Selected Balance Sheet Data
Cash and marketable securities . . . . . . . . . . . . . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shareowners’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 1,983
33,210
3,133
15,482
$ 3,041
34,947
3,159
16,884
$ 5,197
32,847
3,261
16,378
$ 3,952
29,734
3,149
14,852
$ 3,014
26,868
3,495
12,455
19
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Operations
The following tables set forth information showing the change in revenue, average daily package volume,
and average revenue per piece, both in dollars or amounts and in percentage terms:
Year Ended
December 31,
Change
2006
2005
$
%
Revenue (in millions):
U.S. Domestic Package:
Next Day Air . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ground . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 6,778
3,424
20,254
$ 6,381
3,258
18,971
$ 397
166
1,283
6.2%
5.1
6.8
Total U.S. Domestic Package . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
International Package:
Domestic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Export
Cargo . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total International Package . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Supply Chain & Freight:
Forwarding and Logistics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Freight . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Supply Chain & Freight . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
30,456
28,610
1,846
6.5
1,950
6,554
585
9,089
5,681
1,952
369
8,002
1,588
5,856
533
7,977
4,859
797
338
5,994
362
698
52
1,112
822
1,155
31
2,008
22.8
11.9
9.8
13.9
16.9
144.9
9.2
33.5
Consolidated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$47,547
$42,581
$4,966
11.7%
Average Daily Package Volume (in thousands):
U.S. Domestic Package:
Next Day Air . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ground . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,267
993
11,537
1,228
946
11,044
Total U.S. Domestic Package . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
International Package:
Domestic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Export
Total International Package . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
13,797
13,218
1,108
689
1,797
916
616
1,532
Consolidated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
15,594
14,750
Operating days in period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
253
254
Average Revenue Per Piece:
U.S. Domestic Package:
#
39
47
493
579
192
73
265
844
$
Next Day Air . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ground . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total U.S. Domestic Package . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
International Package:
Domestic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Export
Total International Package . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 21.14
13.63
6.94
8.73
6.96
37.60
18.70
9.88
$
$ 20.46
13.56
6.76
8.52
6.83
37.43
19.13
9.62
$
$ 0.68
0.07
0.18
0.21
0.13
0.17
(0.43)
$ 0.26
3.2%
5.0
4.5
4.4
21.0
11.9
17.3
5.7%
3.3%
0.5
2.7
2.5
1.9
0.5
(2.2)
2.7%
20
Revenue (in millions):
U.S. Domestic Package:
Next Day Air . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ground . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 6,381
3,258
18,971
$ 6,084
3,193
17,683
$ 297
65
1,288
4.9%
2.0
7.3
Year Ended
December 31,
Change
2005
2004
$
%
Total U.S. Domestic Package . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
International Package:
Domestic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Export
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cargo . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total International Package . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Supply Chain & Freight:
Forwarding and Logistics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
UPS Freight . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Supply Chain & Freight . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
28,610
26,960
1,650
6.1
1,588
5,856
533
7,977
4,859
797
338
5,994
1,346
4,991
472
6,809
2,476
—
337
2,813
242
865
61
1,168
18.0
17.3
12.9
17.2
2,383
96.2
797 —
0.3
1
3,181
113.1
Consolidated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$42,581
$36,582
$5,999
16.4%
Average Daily Package Volume (in thousands):
U.S. Domestic Package:
Next Day Air . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ground . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,228
946
11,044
1,194
910
10,676
Total U.S. Domestic Package . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
International Package:
13,218
12,780
Domestic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Export
916
616
815
541
Total International Package . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,532
1,356
Consolidated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
14,750
14,136
Operating days in period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
254
254
Average Revenue Per Piece:
U.S. Domestic Package:
#
34
36
368
438
101
75
176
614
$
2.8%
4.0
3.4
3.4
12.4
13.9
13.0
4.3%
Next Day Air . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ground . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total U.S. Domestic Package . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
International Package:
Domestic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Export
Total International Package . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 20.46
13.56
6.76
8.52
6.83
37.43
19.13
9.62
$
$ 20.06
13.81
6.52
8.31
6.50
36.32
18.40
9.27
$
$ 0.40
(0.25)
0.24
0.21
0.33
1.11
0.73
$ 0.35
2.0%
(1.8)
3.7
2.5
5.1
3.1
4.0
3.8%
21
The following table sets forth information showing the change in UPS Freight’s less-than-truckload
revenue, shipments, and weight hauled, both in dollars or amounts and in percentage terms:
Year Ended
December 31,
Change
2006
2005
$
%
LTL revenue (in millions) . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . .
LTL revenue per LTL hundredweight
$ 1,831
$ 15.93
$ 754
$15.53
$1,077
$ 0.40
142.8%
2.6%
LTL shipments (in thousands) . . . . . . . . . . . . . . . . . . . . . . .
LTL shipments per day (in thousands) . . . . . . . . . . . . . . . . .
LTL gross weight hauled (in millions of pounds)
. . . . . . . .
LTL weight per shipment . . . . . . . . . . . . . . . . . . . . . . . . . . .
9,638
38
11,498
1,193
Operating days in period . . . . . . . . . . . . . . . . . . . . . . . . . . . .
252
4,113
41
4,855
1,180
101
5,525
(3)
134.3%
(7.3)%
6,643
13
136.8%
1.1%
Overnite Corp., now known as UPS Freight, was acquired on August 5, 2005. The information presented
above reflects the performance of UPS Freight for the period subsequent to the date of acquisition.
Operating Profit and Operating Margin
The following tables set forth information showing the change in operating profit, both in dollars (in
millions) and in percentage terms, as well as the operating margin for each reporting segment:
Year Ended
December 31,
Change
2006
2005
$
%
Reporting Segment
U.S. Domestic Package . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
International Package . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Supply Chain & Freight . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$4,923
1,710
2
$4,493
1,494
156
$ 430
216
(154)
9.6%
14.5
(98.7)
Consolidated Operating Profit . . . . . . . . . . . . . . . . . . . . . .
$6,635
$6,143
$ 492
8.0%
Year Ended
December 31,
Change
2005
2004
$
%
Reporting Segment
U.S. Domestic Package . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
International Package . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Supply Chain & Freight . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$4,493
1,494
156
$3,702
1,149
138
$ 791
345
18
Consolidated Operating Profit . . . . . . . . . . . . . . . . . . . . . .
$6,143
$4,989
$1,154
21.4%
30.0
13.0
23.1%
Reporting Segment
U.S. Domestic Package . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
International Package . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Supply Chain & Freight
Consolidated Operating Margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Year Ended December 31,
2006
2005
2004
16.2%
18.8%
0.0%
14.0%
15.7% 13.7%
18.7% 16.9%
2.6% 4.9%
14.4% 13.6%
22
U.S. Domestic Package Operations
2006 compared to 2005
U.S. Domestic Package revenue increased $1.846 billion, or 6.5%, for the year, with average daily package
volume up 4.4%. Volume gains were realized across all products primarily due to a solid U.S. economy, strong
small package market and continuing efforts to generate new volume. Overall domestic volume growth
moderated in the latter half of 2006 compared with 2005, due to slower overall economic growth in the U.S. and
a downturn in industrial production during the fourth quarter.
Pricing remained firm as overall revenue per piece was up 2.5% for the year. Ground revenue per piece
increased 2.7% and Next Day Air revenue per piece increased 3.3% for the year, primarily due to the impact of a
rate increase that took effect in 2006 and the impact of an increased fuel surcharge rate in 2006 compared to
2005. Deferred revenue per piece increased 0.5% for the year for the same reasons, but was adversely affected by
the growth in lighter weight, lower revenue packages.
On January 2, 2006, a rate increase took effect which was in line with previous years’ rate increases. We
increased rates 5.5% on UPS Next Day Air, UPS 2nd Day Air, and UPS 3 Day Select, and 3.9% on UPS Ground.
Other pricing changes included a new charge for undeliverable packages after three delivery attempts and an
increase in rates for proof of delivery features for our Delivery Required and Signature Confirmation services.
The residential surcharge increased $0.25 for UPS Ground services and $0.35 for UPS Next Day Air, UPS 2nd
Day Air and UPS 3 Day Select.
In January 2006, we modified the fuel surcharge on domestic air services by reducing the index used to
determine the fuel surcharge by 2%. The air fuel surcharge was subject to a maximum cap of 12.50% through
June 4, 2006. Effective June 5, 2006, we reduced the index by another 2% and no longer applied a cap to the air
fuel surcharge. This fuel surcharge continues to be 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 on domestic air
products was 14.02% in 2006, as compared with 10.23% in 2005. Additionally, the UPS Ground fuel surcharge
continues to fluctuate based on the U.S. Energy Department’s On-Highway Diesel Fuel Price. Based on
published rates, the average fuel surcharge on domestic ground products was 4.13% in 2006, as compared to
2.86% in 2005. Total domestic fuel surcharge revenue increased by $542 million in 2006, due to higher jet and
diesel fuel prices, volume growth, and the modifications to our fuel surcharges noted above. These fuel
surcharges are used to provide some protection against the increased fuel expense that we incur due to higher fuel
prices, as well as the increased purchased transportation expense which is also affected by higher fuel prices.
U.S. Domestic Package operating profit increased $430 million, or 9.6%, for the year, and the operating
margin increased by approximately 50 basis points to 16.2%. This increase was primarily a result of the revenue
growth described previously, combined with efficiencies from leveraging our integrated ground and air networks.
The 2006 operating profit for our U.S. Domestic Package segment was negatively impacted by a tentative
settlement of a class action litigation (see “Contingencies” section below), which resulted in an $87 million
charge to expense.
The expense associated with our self-insurance accruals for workers’ compensation claims, automotive
liability and general business liabilities was $83 million less in 2006 compared with 2005. 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 ultimate reserve levels
determined by outside actuaries, who incorporate historical loss experience and judgments about the present and
expected levels of cost per claim. The lower expense reflects favorable claims experience resulting from
company initiatives put into place over the last several years and other factors, including initiatives to decrease
accident frequencies, improved oversight and management of claims, improved trends in health care costs, and
favorable state legislative reforms, primarily in California.
23
2005 compared to 2004
U.S. Domestic Package revenue increased $1.650 billion, or 6.1%, for the year, primarily due to a 3.4%
increase in average daily package volume and a 2.5% increase in revenue per piece. Ground volume grew 3.4%,
and was positively impacted by a solid U.S. economy and our focus on middle market sales initiatives. Next Day
Air volume grew 2.8% and deferred volume increased 4.0%, with growth in the manufacturing, business
services, telecommunications and retail sectors. The growth in total U.S. Domestic Package volume strengthened
throughout the year.
Ground revenue per piece increased 3.7% for the year, primarily due to the impact of a rate increase that
took effect in 2005, as well as the implementation of a fuel surcharge on ground products. Next Day Air revenue
per piece increased 2.0% for the year, primarily due to the rate increase and an increased fuel surcharge rate in
2005 compared to 2004. Next Day Air revenue per piece was adversely affected by relatively higher growth in
our Saver product. Both Next Day Air and deferred revenue per piece were adversely affected by lighter average
package weights.
On January 3, 2005, a rate increase took effect which was in line with previous years’ rate increases. We
increased rates 2.9% on UPS Next Day Air, UPS 2nd Day Air, UPS 3 Day Select, and UPS Ground. Other
pricing changes included an increase of $0.25 for delivery area surcharge on both residential and commercial
services to certain ZIP codes. The residential surcharge increased $0.10 for UPS Ground services and $0.35 for
UPS Next Day Air, UPS 2nd Day Air and UPS 3 Day Select.
In January 2005, we modified the fuel surcharge on domestic air services by setting a maximum cap of
9.50%, which was increased to 12.50% effective in October 2005. This fuel surcharge continued to be 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 on domestic air products was 10.23% in 2005, as compared with 7.07% in 2004.
Additionally, an initial fuel surcharge of 2.00% was applied to UPS Ground services in January 2005, which
fluctuated based on the U.S. Energy Department’s On-Highway Diesel Fuel Price. Based on published rates, the
average fuel surcharge on domestic ground products was 2.86% in 2005. Total domestic fuel surcharge revenue
increased by $683 million for the year, due to higher jet and diesel fuel prices, volume increases, and the
modifications to our fuel surcharges noted above.
U.S. Domestic Package operating profit increased $791 million, or 21.4%, for the year, and domestic
operating margin increased by 200 basis points. Operating profit increased by $274 million due to a change in
our Management Incentive Awards program (discussed below in “Operating Expenses”), which also favorably
impacted the operating margin. The remaining increase in operating profit and margin resulted from the revenue
growth described previously, as well as controlled growth of operating expenses.
International Package Operations
2006 compared to 2005
International Package revenue improved $1.112 billion, or 13.9%, for the year, primarily due to the 11.9%
volume growth for our export products and the impact of acquisitions completed in 2005. Total international
revenue per piece declined slightly for the year due to changes in product mix, as lower-yielding domestic
products comprised a larger proportion of overall international volume. The change in revenue was positively
affected by $83 million during the year due to currency fluctuations, net of hedging activity. Revenue increased
by $247 million during the year due to business acquisitions completed previously.
In January 2006, we increased rates 5.5% for international shipments originating in the United States
(Worldwide Express, Worldwide Express Plus, UPS Worldwide Expedited and UPS International Standard
service). Rate changes for international shipments originating outside the United States varied by geographical
market and occurred throughout the year.
24
Also in January 2006, we modified the fuel surcharge on certain U.S.-related international air services by
reducing the index used to determine the fuel surcharge by 2%. The air fuel surcharge continued to remain
subject to a maximum cap of 12.5% through June 4, 2006. Effective June 5, 2006, we reduced the index by
another 2% and no longer applied a cap to the air fuel surcharge. The fuel surcharge for products originating
outside the United States continues to be indexed to fuel prices in our different international regions, depending
upon where the shipment takes place. Total international fuel surcharge revenue increased by $189 million
during the year due to higher jet fuel prices and increased international air volume.
Export volume increased throughout the world, with solid volume increases in Europe, Asia, and U.S.
export products. Asian export volume continues to benefit from geographic service expansion and strong
economic growth in Asia, while European export volume gains are impacted by our growing transborder
business and the expansion of the European Union. International domestic volume increased 21.0% for the year,
due to volume growth in Canada and Europe, which also benefited from the acquisition of Stolica in Poland
during the second quarter of 2005 and the acquisition of Lynx in the U.K. during the third quarter of 2005.
Excluding the impact of acquisitions, international domestic volume and revenue increased 6.9% and 8.3%,
respectively, for the year.
Export revenue per piece increased 0.5% for the year, largely due to the rate increases discussed previously,
the impact of the fuel surcharge, and currency fluctuations, partially offset by relatively higher growth in lower
revenue per piece transborder products. For the year, total international average daily package volume increased
17.3%, while average revenue per piece decreased 2.2% (decreased 3.3% currency-adjusted).
The improvement in operating profit for our International Package segment was $216 million for the year,
or 14.5%, and the operating margin increased 10 basis points to 18.8%. The increases in operating profit and
margin were driven by the volume and revenue growth described previously. The change in operating profit was
also positively affected by $26 million during the year due to currency fluctuations.
2005 compared to 2004
International Package revenue improved $1.168 billion, or 17.2%, for the year, primarily due to the 13.9%
volume growth for our export products and revenue per piece improvements. The improvements in revenue per
piece were impacted by rate changes, currency fluctuations, and the fuel surcharge applied to international
shipments. Revenue increased $121 million during the year due to currency fluctuations, net of hedging activity,
and also increased by $133 million during the year due to business acquisitions.
In January 2005, we increased rates 2.9% for international shipments originating in the United States, which
includes our Worldwide Express, Worldwide Express Plus, UPS Worldwide Expedited and UPS International
Standard services. Rate changes for international shipments originating outside the United States varied by
geographical market and occured throughout the year.
In January 2005, we modified the fuel surcharge on U.S. export products by setting a maximum cap of
9.50%, which was increased to 12.50% effective in October 2005. The fuel surcharge for products originating
outside the United States continued to be indexed to fuel prices in our different international regions, depending
upon where the shipment takes place. Total international fuel surcharge revenue increased by $246 million
during the year, due to higher jet fuel prices and increased international air volume.
Export volume increased throughout the world, with strong growth in Asia and Europe. Asian export
volume, which increased 29% for the year, was driven by export growth from China. Asian export volume
continues to benefit from our expanding international delivery network, including the additional flights from
Shanghai, China that were added in the fourth quarter of 2004, and express air service between the U.S. and
Guangzhou, China that began in the second quarter of 2005. European export volume increased 13% for the year,
while export volume from the U.S. and Americas also showed solid increases. International domestic volume
25
increased 12.4% for the year, due to volume growth in Canada and Europe, which also benefited from the
acquisition of Messenger Service Stolica S.A. in Poland during the second quarter of 2005 and Lynx Express
Ltd. in the United Kingdom in the third quarter of 2005. Excluding the impact of acquisitions, international
domestic volume increased 3.7%.
Export revenue per piece increased 3.1% for the year (1.4% currency-adjusted), due to the rate increases
discussed previously and the impact of the fuel surcharge, but was adversely affected by relatively higher growth
in lower revenue per piece transborder product. In total, international average daily package volume increased
13.0% and average revenue per piece increased 4.0% (2.4% currency-adjusted).
The improvement in operating profit for our International Package operations was $345 million for the year,
or 30.0%, with an increase in the operating margin of 180 basis points. This increase in operating profit and
margin was positively impacted by the strong volume growth described previously, as well as better network
utilization due to volume growth and geographic service expansion. The increase in operating profit was also
favorably affected by $78 million due to the impact of currency fluctuations on revenue and expense (net of
hedging activity), and by $45 million due to a change in our Management Incentive Awards program (discussed
below in “Operating Expenses”). Operating profit was negatively affected in 2005 by $23 million in currency
repatriation losses, as compared with repatriation gains of $32 million in 2004.
Supply Chain & Freight Operations
2006 compared to 2005
Supply Chain & Freight revenue increased $2.008 billion, or 33.5%, for the year. UPS Freight, formerly
known as Overnite Corp., provided $1.155 billion of the increase in revenue for the year. Excluding the impact of
the Overnite acquisition in August 2005, segment revenues grew 16.4% for the year. Total average daily LTL
shipments for UPS Freight in 2006 declined against the full year 2005 (both the pre and post-acquisition period)
due to service issues caused by the integration of the UPS Freight business, as well as a weakening in the overall
LTL market in the United States in the latter half of 2006. LTL revenue per LTL hundredweight increased as we
proactively reduced less profitable accounts and focused on higher yielding customer segments.
Forwarding and logistics revenue increased $822 million, or 16.9% for the year, largely due to continued
changes in the business model for this unit. The forwarding and logistics business is moving towards a model
that places more transactional ownership risk on UPS, including increased utilization of UPS-owned assets. This
has the effect of increasing revenue as well as purchased transportation expense. The increased revenue
associated with these forwarding transactions was somewhat offset by certain revenue management initiatives,
which involved reducing less profitable accounts. In addition, revenue increased by $29 million during the year
due to currency fluctuations.
The other businesses within Supply Chain & Freight, which include our retail franchising business and our
financial business, increased revenue by 9.2% during the year. This revenue growth was primarily due to
increased financial services revenue, as well as revenue earned from our previously-announced contract to
provide domestic air transportation for the U.S. Postal Service.
For the year, the Supply Chain & Freight segment reported $2 million in operating profit, as compared with
a $156 million in operating profit for 2005. These results were impacted by the integration of the acquired Menlo
Worldwide Forwarding business into our air network, and the integration of the Motor Cargo business unit within
the acquired Overnite Corp. operations into the UPS Freight network. The UPS Freight integration led to service
issues, which resulted in a loss of revenue, as well as productivity setbacks resulting in increased costs. The
integration of the Menlo Worldwide Forwarding business resulted in increased costs and some lost sales resulting
from customer turnover. The increase in operating profit was positively affected by $2 million during 2006 due
to the impact of currency fluctuations on revenue and expense.
26
In an effort to rationalize our cost structure and focus on profitable revenue growth, we initiated a
restructuring plan for our forwarding and logistics operations in the fourth quarter of 2006. This restructuring
plan is expected to generate efficiencies resulting in improved operating profits by further integrating all of our
transportation services to better serve our customers. This restructuring involves plans to reduce non-operating
expenses by approximately 20%, including a reduction in non-operating staff of approximately 1,400 people. As
of December 31, 2006, $12 million in costs have been accrued related to employee severance.
2005 compared to 2004
Supply Chain & Freight revenue increased $3.181 billion, or 113.1%, for the year. Forwarding services and
logistics revenue increased by $2.383 billion during the year, largely due to the acquisition of Menlo Worldwide
Forwarding in December 2004. The growth in our existing forwarding services and logistics businesses
(excluding Menlo Worldwide Forwarding) was driven by solid growth in our ocean and ground forwarding
operations. Revenue increased by $17 million during the year due to favorable currency fluctuations. Overall
growth continues to benefit from the expansion of our freight forwarding network throughout the world, as well
as the increase in global trade and the increased outsourcing of manufacturing and distribution.
During the third quarter of 2005, we completed our acquisition of Overnite Corp., now known as UPS
Freight, which offers a variety of LTL and truckload services to customers in North America. Overnite’s results
have been included in the Supply Chain & Freight reporting segment since the August 5, 2005 acquisition date.
Overnite generally reported improvements in its operating performance measures in the post-acquisition period
versus the same period a year ago when it was not a part of UPS, including improvements in average daily LTL
shipments and average LTL revenue per LTL hundredweight.
The other businesses within Supply Chain & Freight, which include our retail franchising business, our mail
and consulting services, and our financial business, increased revenue by 0.3% during the year. This revenue
growth was primarily due to increased revenue at our mail and financial services units.
Operating profit for the Supply Chain & Freight segment increased by $18 million, or 13.0%, for the year,
largely due to the operating profits generated by Overnite. Operating profit and margin were negatively affected
by operating losses incurred in the acquired Menlo Worldwide Forwarding operations, as well as costs incurred
in integrating this business into our existing forwarding services business. Currency fluctuations positively
affected operating profit by $4 million during the year. Operating profit also was favorably impacted by $15
million due to a change in our Management Incentive Awards program (discussed below in “Operating
Expenses”).
Operating Expenses
2006 compared to 2005
Consolidated operating expenses increased by $4.474 billion, or 12.3%, for the year, and were significantly
impacted by the acquisitions of Overnite, Stolica, and Lynx. Currency fluctuations in our International Package
and Supply Chain & Freight segments resulted in operating expenses increasing by $84 million for the year.
Compensation and benefits increased by $1.904 billion, or 8.5%, for the year, largely due to the acquisitions
mentioned above, as well as increased health and welfare benefit costs and higher pension expense. These
increases were partially offset by the decline in workers compensation expense, as previously discussed.
Excluding the effect of acquisitions, compensation and benefits expense increased 5.1% for the year. Stock-based
and other management incentive compensation expense increased $49 million, or 8.0% in 2006, due to the
expensing of restricted stock units granted in the fourth quarter of 2005, the impact of a new grant of stock
options and restricted performance units in the second quarter of 2006, and the impact of adopting the non-
substantive vesting period approach of FAS 123R (discussed further in Note 1 to the consolidated financial
statements). These grants were partially offset by lower accruals for our Management Incentive Awards program
in 2006.
27
Other operating expenses increased by $2.570 billion, or 18.5%, for the year, largely due to the acquisitions
mentioned above, as well as increases in fuel expense and purchased transportation. The table below indicates the
impact of business acquisitions completed in 2005 on the increase in operating expenses by category in 2006.
Other Operating Expenses:
Repairs and maintenance . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . . . .
Purchased transportation . . . . . . . . . . . . . . . . . . . . . . . .
Fuel
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other occupancy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total %
Increase
Acquisition
Impact
% Increase
without
Acquisitions
5.3%
6.3%
34.9%
27.3%
7.6%
8.5%
18.5%
3.0%
3.1%
4.8%
7.1%
4.2%
3.9%
4.5%
2.3%
3.2%
30.1%
20.2%
3.4%
4.6%
14.0%
Excluding the effect of acquisitions, the 20.2% increase in fuel expense for the year was impacted by higher
prices for jet-A, diesel and unleaded gasoline as well as higher usage, but was partially mitigated by hedging
gains. The 30.1% increase in purchased transportation was influenced by volume growth in our International
Package business, currency fluctuations, higher fuel prices, increased rail costs, and changes to the freight
forwarding business model described previously. The 2.3% increase in repairs and maintenance was largely due
to increased expense on airframe and engine repairs. The 3.2% increase in depreciation and amortization for the
year was caused primarily by higher depreciation expense on plant equipment, aircraft and engines, and higher
amortization expense on intangible assets. The 3.4% increase in other occupancy expense was largely due to
higher electricity and other utilities expenses. The increase in other expenses was impacted by several items,
including the $87 million tentative settlement of a class action litigation (see “Contingencies” section below).
2005 compared to 2004
Consolidated operating expenses increased by $4.845 billion, or 15.3%, for the year, and were significantly
impacted by the acquisitions of Menlo Worldwide Forwarding and Overnite. Operating expenses also increased
$56 million for the year due to the impact on revenue and expense of currency fluctuations (net of hedging
activity) in our International Package and Supply Chain & Freight segments, and increased $55 million for the
year due to currency repatriation losses in our International Package segment.
Compensation and benefits increased by $1.694 billion, or 8.1%, for the year, largely due to the acquisitions
of Menlo Worldwide Forwarding and Overnite, as well as increased health and welfare benefit costs and higher
pension expense for our union benefit plans. Stock-based and other management incentive compensation expense
decreased $297 million, or 33.4%, in the year, due to a change in our Management Incentive Awards program
implemented in 2005, described in the next paragraph, which was partially offset by the impact of prospectively
adopting the measurement provisions of FAS 123 beginning with 2003 stock-based compensation awards.
During the first quarter of 2005, we modified our Management Incentive Awards program under our
Incentive Compensation Plan to provide that half of the annual award be made in restricted stock units (“RSUs”).
The RSUs granted in November 2005 under this program have a five-year graded vesting period, with
approximately 20% of the total RSU award vesting at each anniversary date of the grant. The other half of the
award granted in November 2005 was in the form of cash and unrestricted shares of Class A common stock and
was fully vested at the time of grant. Previous awards under the Management Incentive Awards program were
made in common stock that was fully vested in the year of grant. This change had the effect of lowering 2005
expense. As a result, 2005 expense for our Management Incentive Awards program (reported in operating
expenses under “compensation and benefits”), including the RSUs, decreased $334 million ($213 million after-
tax, or $0.19 per diluted share) compared with 2004.
28
Other operating expenses increased by $3.151 billion, or 29.3%, for the year, largely due to the Menlo
Worldwide Forwarding and Overnite acquisitions, as well as increases in fuel expense and purchased
transportation. The 47.2% increase in fuel expense for the year was impacted by higher prices for jet-A, diesel
and unleaded gasoline, as well as higher fuel usage, but was partially mitigated with hedging gains. The 95.5%
increase in purchased transportation was primarily due to the Menlo Worldwide Forwarding acquisition, but was
also influenced by volume growth in our International Package business and higher fuel prices. The 9.2%
increase in repairs and maintenance was largely due to higher expense on vehicle parts (partially affected by the
Overnite acquisition), airframe and aircraft engine maintenance. The 6.5% increase in depreciation and
amortization for the year was impacted by higher depreciation expense on buildings (largely due to acquisitions),
aircraft, and capitalized software. The 16.0% increase in other occupancy expense was largely due to higher
facilities rent expense in our Supply Chain & Freight segment, which was impacted by the Menlo Worldwide
Forwarding acquisition, and increased utilities expense. The 4.5% increase in other expenses was primarily due
to the Overnite acquisition, but partially offset by the absence in 2005 of the $110 million aircraft impairment
charge that we incurred in 2004.
Investment Income and Interest Expense
2006 compared to 2005
The decrease in investment income of $18 million during the year was primarily due to a lower average
balance of interest-earning investments, due to the timing of cash payments for pension fundings, business
acquisitions, and capital expenditures. This was partially offset by a higher average interest rate earned on
investments, as well as the absence of any investment impairments during 2006 ($16 million of investment
impairments were recognized in 2005, as described below).
The $39 million increase in interest expense during the year was primarily due to higher average interest
rates on variable rate debt and interest rate swaps, as well as interest expense incurred on debt related to real
estate investment partnerships. This was partially offset by slightly lower average debt balances during 2006, as
well as higher capitalized interest due to large aircraft contract deposit payments made during the year.
2005 compared to 2004
The increase in investment income of $22 million during the year was primarily due to higher average
yields earned caused by the increasing short-term interest rates in the United States, but partially offset by a
lower average balance of interest-earning investments, increased equity-method losses on certain investment
partnerships, and an investment impairment charge on certain available-for-sale securities. 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. After considering these factors, we
recorded an impairment charge of $16 million in the fourth quarter of 2005 related to several variable rate
preferred securities issued by the Federal National Mortgage Association (FNMA) and the Federal Home Loan
Mortgage Corporation (FHLMC).
The $23 million increase in interest expense for the year was primarily due to higher floating interest rates
on variable rate debt and interest rate swaps, as well as higher imputed interest expense associated with real
estate investment partnerships.
Net Income and Earnings Per Share
2006 compared to 2005
Net income for 2006 was $4.202 billion, an 8.6% increase from the $3.870 billion achieved in 2005,
resulting in a 11.2% increase in diluted earnings per share to $3.86 in 2006 from $3.47 in 2005. Net income in
2006 benefited from a $52 million reduction in income tax expense ($0.05 impact to diluted earnings per share)
29
due to favorable developments with certain U.S. Federal tax contingency matters involving non-U.S. operations.
Diluted earnings per share has increased at a faster rate than the growth in net income due to the reduction in
shares outstanding as a result of our ongoing share repurchase program. The increase in net income for 2006 was
largely due to higher operating profits for both our U.S. Domestic and International Package segments.
2005 compared to 2004
Net income for 2005 was $3.870 billion, a 16.1% increase from the $3.333 billion achieved in 2004,
resulting in an 18.4% increase in diluted earnings per share to $3.47 in 2005 from $2.93 in 2004. The increase in
net income for 2005 was largely due to higher operating profit for both our U.S. Domestic and International
Package segments. Net income was adversely impacted by an increase in our effective tax rate to 36.3% in 2005
from 32.3% in 2004. The lower tax rate in 2004 was 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 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 data.
Liquidity and Capital Resources
Net Cash From Operating Activities
Net cash provided by operating activities was $5.589, $5.793, and $5.331 billion in 2006, 2005, and 2004,
respectively. The decrease in 2006 operating cash flows compared with 2005 was primarily due to higher pension
and retirement plan fundings, but partially offset by increased net income. In 2006, we funded $1.625 billion to
our pension and postretirement benefit plans as compared to $995 million in 2005. As discussed in Note 5 to the
consolidated financial statements, pension and postretirement health contributions to plan trusts in 2007 are
projected to be approximately $581 million. In 2005, we received a $374 million tax refund associated with the
1985-1990 settlement with the Internal Revenue Service (“IRS”) reached previously, primarily on tax matters
related to excess value package insurance. In 2004, we received $610 million from a tax settlement with the IRS
for tax years 1983-84 and 1991-98. Additionally, we expect to pay a total of $69 million between 2007 and 2008
related to employees who accepted a recently-announced special voluntary separation opportunity, which is
discussed further in Note 16 to the consolidated financial statements.
On November 17, 2006, we announced a rate increase and a change in the fuel surcharge that took effect on
January 1, 2007. We increased the base rates 6.9% on UPS Next Day Air, UPS 2nd Day Air, and UPS 3 Day
Select, and 4.9% on UPS Ground. We also increased the base rates 6.9% for international shipments originating
in the United States (Worldwide Express, Worldwide Express Plus, UPS Worldwide Expedited and UPS
International Standard service). We increased our Ground Hundredweight rates by an average of 5.9%. Other
pricing changes included a $0.10 increase in the residential surcharge, and a $0.75 increase in the charge for
undeliverable packages after three delivery attempts. These rate changes are customary, and are consistent with
previous years’ rate increases. Additionally, in January 2007 we will modify the fuel surcharge on domestic and
U.S.-origin international air services by reducing by 2% the index used to determine the fuel surcharge. The UPS
Ground fuel surcharge continues to fluctuate based on the U.S. Energy Department’s On-Highway Diesel Fuel
Price. Rate changes for shipments originating outside the U.S. are made throughout the year and vary by
geographic market.
Net Cash Used In Investing Activities
Net cash used in investing activities was $2.340 billion, $975 million, and $3.638 billion in 2006, 2005, and
2004, respectively. The increased cash used in 2006 compared with 2005 was primarily due to increased capital
expenditures and fewer net sales of marketable securities and short-term investments. During 2006, we
30
sold a net $482 million in marketable securities and short-term investments, primarily due to the pension and
postretirement medical benefit plan fundings in the third quarter. During 2005, we sold a net $2.752 billion in
marketable securities and short-term investments, largely to fund the acquisition of Overnite as well as to make
fundings to our pension and postretirement medical benefit plans. In 2005, we spent $1.488 billion on business
acquisitions, primarily Overnite Corp., Lynx Express Ltd. in the United Kingdom, Messenger Service Stolica
S.A. in Poland, and the express operations of Sinotrans Air Transportation Development Co. Ltd. in China (See
Note 7 to the consolidated financial statements). We generated cash of $68, $95, and $318 million in 2006, 2005,
and 2004 respectively, due to the sales and customer paydowns of finance receivables, primarily in our leasing,
asset-based lending, and receivable factoring businesses.
In the second quarter of 2006, we terminated several energy derivatives and received $229 million in cash,
which is reported in other investing activities in the statement of cash flows. These derivatives were designated
as hedges of forecasted cash outflows for purchases of fuel products. As these derivatives maintained their
effectiveness and qualified for hedge accounting, we anticipate that the gains associated with these hedges will
be recognized in income over the original term of the hedges through 2007.
Capital expenditures represent a primary use of cash in investing activities, as follows (in millions):
Buildings and facilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Aircraft and parts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vehicles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Information technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 720
1,150
831
384
$ 495
874
456
362
$ 547
829
393
358
2006
2005
2004
$3,085
$2,187
$2,127
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 $3.851, $4.175, and $2.014 billion in 2006, 2005, and 2004,
respectively. Our primary uses of cash in financing activities have been to repurchase stock, pay dividends, and
repay long-term debt. In July 2006, the Board of Directors authorized an additional $2.0 billion for future share
repurchases, in addition to the amount remaining under our August 2005 share repurchase authorization. We
repurchased a total of 32.6 million shares of Class A and Class B common stock for $2.455 billion in 2006
($2.460 billion reported on statement of cash flows due to timing of settlements), and 33.9 million shares for
$2.479 billion in 2005. As of December 31, 2006, we had $936 million of our share repurchase authorization
remaining; in February 2007, the Board of Directors approved an increase in our share repurchase authorization
to $2.0 billion, which replaced the remaining amounts available under our July 2006 authorization. On February
8, 2007, our Board declared a dividend of $0.42 per share, which is payable on March 6, 2007 to shareowners of
record on February 20, 2007.
We increased our quarterly cash dividend payment to $0.38 per share in 2006 from $0.33 per share in 2005,
resulting in an increase in total cash dividends paid to $1.577 billion from $1.391 billion. The declaration of
dividends is subject to the discretion of the Board of Directors and will depend on various factors, including our
net income, financial condition, cash requirements, future prospects, and other relevant factors. We expect to
continue the practice of paying regular cash dividends.
Issuances of debt during 2006 consisted primarily of issuances of commercial paper, UPS Notes, and facility
notes and bonds. Repayments of debt consisted primarily of scheduled principal payments on our capital lease
obligations and principal payments on debt related to our investment in certain equity-method partnerships. 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.
31
Sources of Credit
We maintain two commercial paper programs under which we are authorized to borrow up to $7.0 billion in
the United States. We had $791 million outstanding under these programs as of December 31, 2006, with an
average interest rate of 5.20%. The entire balance outstanding has been classified as a current liability in our
balance sheet. We also maintain a European commercial paper program under which we are authorized to borrow
up to €1.0 billion in a variety of currencies. There were no amounts outstanding under this program as of
December 31, 2006.
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 19, 2007 and the other on April 21, 2010. 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, 2006.
In August 2003, we filed a $2.0 billion shelf registration statement under which we may issue debt securities
in the United States. There was $136 million issued under this shelf registration statement at December 31, 2006,
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 satisfied as of December 31, 2006.
Commitments
We have contractual obligations and commitments in the form of capital leases, operating leases, debt
obligations, purchase commitments, and certain other liabilities. We intend to satisfy these obligations through
the use of cash flow from operations. The following table summarizes our contractual obligations and
commitments as of December 31, 2006 (in millions), including the Boeing 767-300ER order discussed further
below:
Year
Capital
Leases
Operating
Leases
Debt
Principal
Debt
Interest
Purchase
Commitments
Other
Liabilities
2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
After 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . —
$ 75
75
41
62
1
$ 404
335
243
168
119
505
$ 918
27
83
30
33
2,766
$ 196
170
169
165
164
2,849
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$254
$1,774
$3,857
$3,713
$1,072
988
499
1,022
1,184
1,636
$6,401
$ 67
78
74
71
69
270
$629
Our capital lease obligations relate primarily to leases on aircraft. These lease obligations and commitments,
as well as our debt principal obligations, are discussed further in Note 8 to our consolidated financial statements.
The amount of interest on our debt was calculated as the contractual interest payments due on our fixed-rate debt,
in addition to interest on variable rate debt that was calculated based on interest rates as of December 31, 2006.
The calculations of debt interest do not take into account the effect of interest rate swap agreements.
Purchase commitments represent contractual agreements to purchase goods or services that are legally
binding, the largest of which are orders for aircraft, engines, and parts. We have firm commitments to purchase
four Boeing MD-11 aircraft, and we expect to take delivery of these aircraft during 2007. In February 2007, we
announced an order for 27 Boeing 767-300ER freighters to be delivered between 2009 and 2012 (this order is
32
reflected in the purchase commitment numbers above). We also have firm commitments to purchase eight
Boeing 747-400F aircraft scheduled for delivery during 2007 and 2008, and two Boeing 747-400BCF aircraft
scheduled for delivery during 2008. These aircraft purchase orders will provide for the replacement of existing
capacity and anticipated future growth.
In addition, we currently have a firm commitment to purchase 10 Airbus A380-800 freighter aircraft and
options to purchase 10 additional A380-800 aircraft (this order is reflected in the purchase commitment numbers
above). In February 2007, we announced that we had signed an agreement with Airbus to set out a timetable for
deciding the status of this previous order. The agreement specifies changed delivery dates for the A380-800 and
provides for possible termination of the original purchase agreement by either party later in 2007. The revised
delivery schedule specifies the delivery dates for the 10 Airbus A380-800’s on order as being between 2012 and
2013, whereas we were originally scheduled to take delivery of the Airbus A380-800 aircraft between 2009 and
2012. The signing of this agreement will have no material impact on our results of operations or financial
condition.
The contractual payments due under the other liabilities column includes commitment payments related to
our investment in certain partnerships. The commitments above exclude our planned pension and postretirement
benefit plan contributions, as we do not have any material funding requirements for our UPS-sponsored pension
and postretirement plans as of December 31, 2006. In 2007, we plan to contribute $533 million to our U.S.
pension and postretirement benefit plans and $48 million to our international pension plans. Our funding policy
for U.S. plans is to contribute amounts annually that are at least equal to the amounts required by applicable laws
and regulations, or to directly fund payments to plan participants, as applicable. International pension plans will
be funded in accordance with local regulations. We have also guaranteed our obligations for certain international
pension plans up to a maximum amount of $118 million. See Note 5 to the consolidated financial statements for a
further discussion of our pension and postretirement benefit plans.
As of December 31, 2006, we had outstanding letters of credit totaling approximately $2.213 billion issued
in connection with routine business requirements. As of December 31, 2006, we had unfunded loan commitments
totaling $604 million associated with our financial business.
We believe that funds from operations and borrowing programs 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.
Contingencies
We are a defendant in a number of lawsuits filed in state and federal 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 a California federal court, plaintiffs allege that they improperly were denied overtime, and seek
penalties for missed meal and rest periods, and interest and attorneys’ fees. Plaintiffs purport to represent a class
of 1,200 full-time supervisors. The court granted summary judgment in favor of UPS on all claims and plaintiffs
have appealed. We have denied any liability with respect to these claims and intend to vigorously defend
ourselves in this case. At this time, we have not determined the amount of any liability that may result from this
matter or whether such liability, if any, would have a material adverse effect on our financial condition, results of
operations, or liquidity.
In another case, Cornn v. UPS, which has been certified as a class action in a California federal court,
plaintiffs allege that they were improperly denied wages and/or overtime and meal and rest periods. Plaintiffs
purport to represent a class of approximately 23,600 drivers and seek back wages, penalties, interest and
attorneys’ fees. UPS has agreed in principle to settle this matter in full for a total payment of $87 million. On
December 6, 2006, the court granted tentative approval of the settlement.
33
We are named as a defendant in four putative class action lawsuits filed in federal courts, alleging a
conspiracy relating to certain surcharges by a number of air cargo carriers. We are not named as a defendant in at
least eighty-six related cases that make similar allegations. These cases have been consolidated in a Multi-
District Litigation proceeding pending in the United States District Court for the Eastern District of New York.
UPS was not included as a defendant in the amended consolidated complaint on which the Multi-District
Litigation is proceeding. In addition, in July 2006, we were named as a defendant in a comparable lawsuit filed in
the Ontario (Canada) Superior Court of Justice. We intend to vigorously defend ourselves in these cases.
We are a defendant in various other lawsuits that arose in the normal course of business. We believe that the
eventual resolution of these cases will not have a material adverse effect on our financial condition, results of
operations, or liquidity.
We participate in a number of trustee-managed multi-employer pension and health and welfare plans for
employees covered under collective bargaining agreements. Several factors could result in 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 liquidity would result from our participation in these plans.
As of December 31, 2006, we had approximately 246,000 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. In the third quarter of 2006, we began
formal negotiations with the Teamsters on a new agreement. We have approximately 2,800 pilots who are
employed under a collective bargaining agreement with the Independent Pilots Association (“IPA”). On June 30,
2006, UPS and the IPA announced a tentative agreement on a new labor contract, which was ratified in the third
quarter. This new contract becomes amendable at the end of 2011. Our airline mechanics are covered by a
collective bargaining agreement with Teamsters Local 2727, which became amendable on November 1, 2006.
We began formal negotiations with Teamsters Local 2727 on October 2, 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.
Other Matters
On July 14, 2006, we received a grand jury subpoena from the Antitrust Division of the U.S. Department of
Justice (“DOJ”). The subpoena relates to the DOJ’s publicly-announced criminal investigation of the air cargo
pricing practices of a number of domestic and foreign airlines. We do not believe that we are a target of this
investigation and we intend to cooperate.
With the assistance of outside counsel, we investigated certain conduct within our Supply Chain
Solutions subsidiary in certain locations outside the United States. Our investigation determined that certain
conduct, which commenced prior to our subsidiary’s 2001 acquisition of a freight forwarding business that was
part of Fritz Companies Inc., may have violated the United States Foreign Corrupt Practices Act. The monetary
value involved in this conduct appears to be immaterial. We have implemented numerous remediation steps. We
informed the SEC and the DOJ of our investigation, and we intend to cooperate fully with any review by the
government of these issues. We do not believe that the results of this investigation, the remediation or related
penalties, if any, will have a material adverse effect on our financial condition, liquidity or results of operations,
nor do we believe that these matters will have a material adverse effect on our business and prospects.
Market Risk
We are exposed to market risk from changes in certain commodity prices, foreign currency exchange rates,
interest rates, and equity prices. All of these market risks arise in the normal course of business, as we do not
34
engage in speculative trading activities. In order to manage the risk arising from these exposures, we utilize a
variety of foreign exchange, interest rate, equity and commodity forward contracts, options, and swaps.
The following analysis provides quantitative information regarding our exposure to commodity price risk,
foreign currency exchange risk, interest rate risk, and equity price risk. We utilize 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.
A discussion of our accounting policies for derivative instruments and further disclosures are provided in
Note 15 to the consolidated financial statements.
Commodity Price Risk
We are exposed to an increase in the prices of refined fuels, principally 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, excluding the underlying
exposures, as of December 31, 2006 and 2005 was an asset of $10 and $192 million, respectively. The potential
loss in the fair value of these derivative contracts, assuming a hypothetical 10% adverse change in the underlying
commodity price, would be approximately $8 and $35 million at December 31, 2006 and 2005, respectively. This
amount excludes the offsetting impact of the price risk inherent in the physical purchase of the underlying
commodities.
In the second quarter of 2006, we terminated several energy derivatives and received $229 million in cash.
These derivatives were designated as hedges of forecasted cash outflows for purchases of fuel products. As these
derivatives maintained their effectiveness and qualified for hedge accounting, we anticipate that the gains
associated with these hedges will be recognized in income over the original term of the hedges through 2007.
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, 2006 and 2005, the net fair value of the hedging instruments
described above was an asset of $30 and $52 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 $183 and $65 million at December 31, 2006 and 2005, 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.
35
Interest Rate Risk
As described in Note 8 to the consolidated financial statements, we have issued debt instruments, including
debt associated with capital leases, that accrue expense at fixed and floating rates of interest. We use a
combination of derivative instruments, including interest rate swaps and cross-currency interest rate swaps, as
part of our program to manage the fixed and floating interest rate mix of our total debt portfolio and related
overall cost of borrowing. These swaps are generally entered into concurrently with the issuance of the debt that
they are intended to modify, and the notional amount, interest payment, and maturity dates of the swaps match
the terms of the associated debt.
Our floating rate debt and interest rate swaps subject us to risk resulting from changes in short-term
(primarily LIBOR) interest rates. The potential change in annual interest expense resulting from a hypothetical
100 basis point change in short-term interest rates applied to our floating rate debt and swap instruments at
December 31, 2006 and 2005 would be approximately $29 million each year.
We have investments in debt and preferred equity securities (including auction rate securities), as well as
cash-equivalent instruments, some of which 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, 2006 and 2005 would be approximately $12 and
$14 million, respectively.
Additionally, as described in Note 3 to the consolidated financial statements, we hold a portfolio of finance
receivables that accrue income at fixed and floating rates of interest. The potential change in the annual income
resulting from a hypothetical 100 basis point change in interest rates applied to our variable rate finance
receivables at December 31, 2006 and 2005 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, 2006 and 2005, the fair value of
such investments was $80 and $89 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 $9 million at December 31, 2006 and 2005.
Credit Risk
The forward contracts, swaps, and options previously discussed contain an element of risk that the
counterparties may be unable to meet the terms of the agreements. However, we minimize such risk exposures
for these instruments by limiting the counterparties to large banks and financial institutions that meet established
credit guidelines. We do not expect to incur any losses as a result of counterparty default.
New Accounting Pronouncements
In September 2006, the FASB issued Statement No. 158 “Employers’ Accounting for Defined Benefit
Pension and Other Postretirement Plans (an amendment of FASB Statements No. 87, 88, 106, and 132(R))”
(“FAS 158”). This statement requires the recognition of the funded status of defined benefit pension and other
postretirement plans as an asset or liability in the balance sheet for fiscal years ending after December 15, 2006.
36
FAS 158 also requires delayed recognition items, consisting of actuarial gains and losses and prior service costs
and credits, to be recognized in other comprehensive income and subsequently amortized to the income
statement. On December 31, 2006, we adopted the recognition and disclosure provisions of FAS 158. The effect
of adopting FAS 158 on our balance sheet as of December 31, 2006 has been included in Note 5 to the
consolidated financial statements, while there was no effect on our balance sheet for prior periods.
Additionally, we currently utilize the early measurement date option available under Statement No. 87
“Employers’ Accounting for Pensions”, and we measure the funded status of our plans as of September 30 each
year. Under the provisions of FAS 158, we will be required to use a December 31 measurement date for all of our
pension and postretirement benefit plans no later than 2008. We do not expect the impact of the change in
measurement date to have a material impact on our financial statements.
In June 2006, the FASB issued Interpretation No. 48 “Accounting for Uncertainty in Income Taxes (an
interpretation of FASB Statement No. 109)”. This interpretation was issued to clarify the accounting for
uncertainty in income taxes recognized in the financial statements by prescribing a recognition threshold and
measurement attribute for tax positions taken or expected to be taken in a tax return. The interpretation also
provides guidance on derecognition, financial statement classification, tax-related interest and penalties, and
additional disclosure requirements. We are required to adopt this interpretation effective January 1, 2007. We are
currently in the process of evaluating the impact of this standard on our financial statements. Any necessary
transition adjustments will not affect net income in the period of adoption and will be reported as a change in
accounting principle in our consolidated financial statements.
In September 2006, the FASB issued Statement No. 157 “Fair Value Measurements” (“FAS 157”), which is
effective for fiscal years beginning after November 15, 2007. FAS 157 was issued to define fair value, establish a
framework for measuring fair value, and expand disclosures about fair value measurements. FAS 157 is not
anticipated to have a material impact on our results of operations or financial condition.
The adoption of the following recent accounting pronouncements did not have a material impact on our
results of operations or financial condition:
•
•
•
FSP AUG AIR-1 “Accounting for Planned Major Maintenance Activities”;
FAS 156 “Accounting for Servicing of Financial Assets”; and
FSP FAS 13-2 “Accounting for a Change in the Timing of Cash Flows Related to Income Taxes
Generated by a Leveraged Lease Transaction”.
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 9 to our consolidated financial statements, we are involved in various
legal proceedings 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
estimate, a future charge to income would result. Likewise, if a contingency is settled for an amount that is less
than our estimate, a future credit to income would result.
37
The events that may impact our contingent liabilities are often unique and generally are not predictable. At
the time a contingency is identified, we consider all relevant facts as part of our FAS 5 evaluation. We record a
liability for a loss that meets the recognition criteria of FAS 5. These criteria require recognition of a liability
when the loss is probable of occurring and reasonably estimable. Events may arise that were not anticipated and
the outcome of a contingency may result in a loss to us that differs from our previously estimated liability. These
factors could result in a material difference between estimated and actual operating results. Contingent losses that
meet the recognition criteria under FAS 5, excluding those related to income taxes and self insurance which are
discussed further below, were not material to the Company’s financial position as of December 31, 2006. In
addition, we have certain contingent liabilities that have not been recognized as of December 31, 2006, because a
loss is not reasonably estimable.
Goodwill Impairment— We account for goodwill in accordance with Statement of Financial Accounting
Standards No. 142, “Goodwill and Other Intangible Assets” (“FAS 142”), which requires annual impairment
testing of goodwill for each of our reporting units. Goodwill impairment testing requires that we estimate the fair
value of our goodwill and compare that estimate to the amount of goodwill recorded on our balance sheet.
We use a discounted cash flow model (DCF model) to estimate the fair value of our goodwill. The
completion of the DCF model requires that we make a number of significant assumptions to produce an estimate
of future cash flows. These assumptions include projections of future revenue, costs and working capital changes.
In addition, we make assumptions about the estimated cost of capital and other relevant variables, as required, in
estimating the fair value of our reporting units. The projections that we use in our DCF model are updated
annually and will change over time based on the historical performance and changing business conditions for
each of our reporting units.
As of December 31, 2006, our recorded goodwill was $2.533 billion, of which $2.243 billion relates to our
Supply Chain and Freight segment. This segment of our business has experienced rapid growth over the last
several years, largely due to a number of acquisitions that we have made. Because of its growth, this segment
continues to experience significant change as we integrate the acquired companies, resulting in higher volatility
in our DCF model projections than for our other segments. Our annual impairment tests performed in 2006, 2005
and 2004 resulted in no goodwill impairment.
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. 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.
Workers’ compensation, automobile liability and general liability insurance claims may take several years to
completely settle. Consequently, actuarial estimates are required to project the ultimate cost that will be incurred
to fully resolve the claims. A number of factors can affect the actual cost of a claim, including the length of time
the claim remains open, trends in health care costs and the results of related litigation. Furthermore, claims may
emerge in future years for events that occurred in a prior year at a rate that differs from previous actuarial
projections. Changes in state legislation with respect to workers compensation can affect the adequacy of our
self-insurance accruals. All of these factors can result in revisions to prior actuarial projections and produce a
material difference between estimated and actual operating results.
We sponsor a number of health and welfare insurance plans for our employees. We use estimates from third
party actuaries to establish the liabilities for these plans. These liabilities and related expenses are based on
38
estimates of the number of employees and eligible dependents covered under the plans, anticipated medical usage
by participants and overall trends in medical costs and inflation. Actual results may differ from these estimates
and, therefore, produce a material difference between estimated and actual operating results.
Pension and Postretirement Medical Benefits—As discussed in Note 5 to our consolidated financial
statements, we maintain several defined benefit and postretirement benefit plans. Our pension and other
postretirement benefit costs are calculated using various actuarial assumptions and methodologies as prescribed
by Statement of Financial Accounting Standards No. 87, “Employers’ Accounting for Pensions” and Statement
of Financial Accounting Standards No. 106, “Employers’ Accounting for Postretirement Benefits Other than
Pensions.” These assumptions include discount rates, health care cost trend rates, inflation, rate of compensation
increases, expected return on plan assets, mortality rates, and other factors. Actual results that differ from our
assumptions are accumulated and amortized over future periods and, therefore, generally affect our recognized
expense and recorded obligation in such future periods. We believe that the assumptions utilized in recording the
obligations under our plans are reasonable based on input from our outside actuaries and other advisors and
information as to historical experience and performance. Differences in actual experience or changes in
assumptions may affect our pension and other postretirement obligations and future expense. A 25 basis point
change in the assumed discount rate, expected return on assets, and health care cost trend rate for the pension and
postretirement benefit plans would result in the following increases (decreases) on the Company’s costs and
obligations for the year 2006 (in millions):
25 Basis Point
Increase
25 Basis Point
Decrease
Pension Plans
Discount Rate:
Effect on net periodic benefit cost
. . . . . . . . . . . . . . . . . . . . . . . . . .
Effect on projected benefit obligation . . . . . . . . . . . . . . . . . . . . . . .
$ (67)
(571)
$ 68
595
Return on Assets:
Effect on net periodic benefit cost
. . . . . . . . . . . . . . . . . . . . . . . . . .
(31)
Postretirement Medical Plans
Discount Rate:
Effect on net periodic benefit cost
. . . . . . . . . . . . . . . . . . . . . . . . . .
Effect on projected benefit obligation . . . . . . . . . . . . . . . . . . . . . . .
Health Care Cost Trend Rate:
Effect on net periodic benefit cost
. . . . . . . . . . . . . . . . . . . . . . . . . .
Effect on projected benefit obligation . . . . . . . . . . . . . . . . . . . . . . .
(7)
(83)
3
17
31
7
86
(2)
(16)
Financial Instruments—As discussed in Notes 2, 3, 8, and 15 to our consolidated financial statements, and
in the “Market Risk” section of this report, we hold and issue financial instruments that contain elements of
market risk. Certain of these financial instruments are required to be recorded at fair value. Fair values are based
on listed market prices, when such prices are available. To the extent that listed market prices are not available,
fair value is determined based on other relevant factors, including dealer price quotations. Certain financial
instruments, including over-the-counter derivative instruments, are valued using pricing models that consider,
among other factors, 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. A quantitative sensitivity
analysis of our exposure to changes in commodity prices, foreign currency exchange rates, interest rates, and
equity prices is presented in the “Market Risk” section of this report.
Depreciation, Residual Value, and Impairment of Fixed Assets—As of December 31, 2006, we had $16.779
billion of net fixed assets, the most significant category of which is aircraft. In accounting for fixed assets, we
39
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 aircraft, 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 regulations on aging aircraft, and
changing market prices of new and used aircraft of the same or similar types. We periodically evaluate these
estimates and 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.
In accordance with the provisions of Statement of Financial Accounting Standards No. 144 “Accounting for
the Impairment or Disposal of Long-Lived Assets” (“FAS 144”), we review long-lived assets for impairment
when circumstances indicate the carrying amount of an asset may not be recoverable based on the undiscounted
future cash flows of the asset. If the carrying amount of the asset is determined not to be recoverable, a write-
down to fair value is recorded. Fair values are determined based on quoted market values, discounted cash flows,
or external appraisals, as applicable. We review long-lived assets for impairment at the individual asset or the
asset group level for which the lowest level of independent cash flows can be identified. The circumstances 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 estimating cash flows, we project future volume levels for our different air
express products in all geographic regions in which we do business. Adverse changes in these volume forecasts,
or a shortfall of our actual volume compared with our projections, could result in our current aircraft capacity
exceeding current or projected demand. This situation would lead to an excess of a particular aircraft type,
resulting in an aircraft impairment charge or a reduction of the expected life of an aircraft type (thus resulting in
increased depreciation expense).
During 2006, we reevaluated the anticipated service lives of our Boeing 757, Boeing 767, and Airbus A300
fleets, and as a result of this evaluation, increased the depreciable lives from 20 to 30 years and reduced the
residual values from 30% to 10% of original cost. This change did not have a material effect on our results of
operations.
In December 2004, we permanently removed from service a number of Boeing 727, 747 and McDonnell
Douglas DC-8 aircraft. 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 of 2004 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. This charge was classified in the
caption “other expenses” on the income statement. UPS continues to operate all of its other aircraft and continues
to experience positive cash flow, and no impairments of aircraft were recognized in 2006 or 2005.
Income Taxes—We operate in numerous countries around the world and are subject to income taxes in
many jurisdictions. We estimate our annual effective income tax rate based on statutory income tax rates in these
jurisdictions and take into consideration items that are treated differently for financial reporting and tax purposes.
The process of estimating our effective income tax rate involves judgments related to tax planning and
expectations regarding future events, including the impact of adjustments, if any, resulting from the resolution of
audits of open tax years by the Internal Revenue Service or other taxing authorities.
We recognize deferred tax assets for items that will generate tax deductions or credits in future years.
Realization of deferred tax assets requires sufficient 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 recognized if, based on the weight
of the available evidence, it is more likely than not (likelihood of more than 50 percent) that some portion, or all,
of the deferred tax asset will not be realized. Income tax related contingency 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.
40
During the third quarter of 2006, we recognized a $52 million reduction of income tax expense related to
favorable developments with certain U.S. Federal tax contingency matters involving non-U.S. operations.
During 2004, the resolution of tax matters with the Internal Revenue Service and other taxing authorities
produced reductions in income tax expense of $142 million.
Forward-Looking Statements
“Management’s Discussion and Analysis of Financial Condition and Results of Operations” and other parts
of this report contain “forward-looking” statements about matters that inherently are difficult to predict. The
words “believes,” “expects,” “anticipates,” “we see,” and similar expressions are intended to identify forward-
looking 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 factors that
affect these statements as we discussed each subject. Forward-looking statements involve risks and uncertainties,
and certain factors may cause actual results to differ materially from those contained in the forward-looking
statements.
Risk Factors
The following are some of the factors that could cause our actual results to differ materially from the
expected results described in our forward-looking statements:
•
•
•
•
•
The effect of general economic and other conditions in the markets in which we operate, both in the
United States and internationally. Our operations in international markets are also affected by currency
exchange and inflation risks.
The impact of competition on a local, regional, national, and international basis. Our competitors
include the postal services of the U.S. and other nations, various motor carriers, express companies,
freight forwarders, air couriers and others. Our industry is undergoing rapid consolidation, and the
combining entities are competing aggressively for business.
The impact of complex and stringent aviation, transportation, 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 regulations could result in substantial fines or possible revocation of
our authority to conduct our operations.
Strikes, work stoppages and slowdowns by our employees. Such actions may affect our ability to meet
our customers needs, and customers may do more business with competitors if they believe that such
actions may adversely affect our ability to provide service. We may face permanent loss of customers if
we are unable to provide uninterrupted service. The terms of future collective bargaining agreements
also may affect our competitive position and results of operations.
Possible disruption of supplies, or an increase in the prices, of gasoline, diesel and jet fuel for our
aircraft and delivery vehicles as a result of war or other factors. We require significant quantities of fuel
and are exposed to the commodity price risk associated with variations in the market price for petroleum
products.
• Cyclical and seasonal fluctuations in our operating results due to decreased demand for our services.
41
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Information about market risk can be found in Item 7 of this report under the caption “Market Risk.”
Item 8.
Financial Statements and Supplementary Data
Our financial statements are filed together with this report. See the Index to Financial Statements and
Financial Statement Schedules on page F-1 for a list of the financial statements filed together with this report.
Supplementary data appear in Note 17 to our financial statements.
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
As of the end of the period covered by this report, management, including our chief executive officer and
chief financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and
procedures and internal controls over financial reporting. Based upon, and as of the date of, the evaluation, our
chief executive officer and chief financial officer concluded that the disclosure controls and procedures and
internal controls over financial reporting were effective to ensure that information required to be disclosed in the
reports we file and submit under the Exchange Act is recorded, processed, summarized and reported as and when
required.
There were no changes in the Company’s internal controls over financial reporting during the year ended
December 31, 2006 that have materially affected, or are reasonably likely to materially affect, the Company’s
internal control over financial reporting.
See page F-2 for management’s report on internal control over financial reporting.
Item 9B. Other Information
None.
42
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Information about our directors is presented under the caption “Election of Directors” in our definitive
Proxy Statement for the Annual Meeting of Shareowners to be held on May 10, 2007 and is incorporated herein
by reference.
Information about our executive officers can be found in Part I of this report under the caption “Executive
Officers of the Registrant” in accordance with Instruction 3 of Item 401(b) of Regulation S-K and General
Instruction G(3) of Form 10-K.
Information about our Audit Committee is presented under the caption “Election of Directors —
Committees of the Board of Directors — Audit Committee” in our definitive Proxy Statement for the Annual
Meeting of Shareowners to be held on May 10, 2007 and is incorporated herein by reference.
Information about our Code of Business Conduct is presented under the caption “Where You Can Find
More Information” in Part I, Item 1 of this report.
Information about our compliance with Section 16 of the Exchange Act of 1934, as amended, is presented
under the caption “Section 16(a) Beneficial Ownership Reporting Compliance” in our definitive Proxy Statement
for the Annual Meeting of Shareowners to be held on May 10, 2007 and is incorporated herein by reference.
Item 11. Executive Compensation
Information about executive compensation is presented under the captions “Compensation to Executive
Officers,” “Compensation of Directors,” “Report of the Compensation Committee” and “Compensation
Committee Interlocks and Insider Participation” in our definitive Proxy Statement for the Annual Meeting of
Shareowners to be held on May 10, 2007 and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
Information about security ownership is presented under the caption “Beneficial Ownership of Common
Stock” in our definitive Proxy Statement for the Annual Meeting of Shareowners to be held on May 10, 2007 and
is incorporated herein by reference.
Information about our equity compensation plans is presented under the caption “Securities Authorized for
Issuance under Equity Compensation Plans” in Part II, Item 5 of this report.
Item 13. Certain Relationships and Related Transactions, and Director Independence
Information about transactions with related persons is presented under the caption “Related Person
Transactions” in our definitive Proxy Statement for the Annual Meeting of Shareowners to be held on May 10,
2007 and is incorporated herein by reference.
Information about director independence is presented under the caption “Election of Directors — Director
Independence” in our definitive Proxy Statement for the Annual Meeting of Shareowners to be held on May 10,
2007 and is incorporated herein by reference.
Item 14. Principal Accountant and Fees and Services
Information about aggregate fees billed to us by our principal accountant is presented under the caption
“Principal Accounting Firm Fees” in our definitive Proxy Statement for the Annual Meetings of Shareowners to
be held on May 10, 2007 and is incorporated herein by reference.
43
Item 15. Exhibits and Financial Statement Schedules
(a) 1. Financial Statements.
PART IV
See the Index to Financial Statements on page F-1 for a list of the financial statements filed with this report.
2. Financial Statement Schedules.
None.
3. List of Exhibits.
See the Exhibit Index for a list of the exhibits incorporated by reference into or filed with this report.
(b) Exhibits required by Item 601 of Regulation S-K.
See the Exhibit Index for a list of the exhibits incorporated by reference into or filed with this report.
(c) Financial Statement Schedules.
None.
44
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, United Parcel
Service, Inc. has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
UNITED PARCEL SERVICE, INC.
(REGISTRANT)
By:
/s/ Michael L. Eskew
Michael L. Eskew
Chairman and
Chief Executive Officer
Date: March 1, 2007
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by
the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature
/s/ Michael J. Burns
Michael J. Burns
/s/ D. Scott Davis
D. Scott Davis
/s/ Stuart E. Eizenstat
Stuart E. Eizenstat
/s/ Michael L. Eskew
Michael L. Eskew
/s/
James P. Kelly
James P. Kelly
/s/ Ann M. Livermore
Ann M. Livermore
/s/ Gary E. MacDougal
Gary E. MacDougal
/s/ Victor A. Pelson
Victor A. Pelson
John W. Thompson
/s/ Carol B. Tomé
Carol B. Tomé
/s/ Ben Verwaayen
Ben Verwaayen
Title
Director
Date
February 27, 2007
Vice Chairman, Chief Financial
March 1, 2007
Officer and Director
(Principal Financial and
Accounting Officer)
Director
February 28, 2007
Chairman, Chief Executive Officer and
Director (Principal Executive Officer)
March 1, 2007
March 1, 2007
February 28, 2007
February 28, 2007
February 27, 2007
February 28, 2007
February 28, 2007
Director
Director
Director
Director
Director
Director
Director
45
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
Item 8—Financial Statements
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—December 31, 2006 and 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Statements of consolidated income—Years ended December 31, 2006, 2005 and 2004 . . . . . . . . . . . . . .
Statements of consolidated comprehensive income—Years ended December 31, 2006, 2005
and 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Statements of consolidated cash flows—Years ended December 31, 2006, 2005 and 2004 . . . . . . . . . . .
Notes to consolidated financial statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Page
Number
F-2
F-3
F-5
F-6
F-7
F-7
F-8
F-9
F-1
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 its 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, 2006. The independent registered 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, 2006 and the related consolidated statements of income,
comprehensive income and cash flows for the year ended December 31, 2006, has issued an attestation report on
management’s assessment of the Company’s internal control over financial reporting.
United Parcel Service, Inc.
March 1, 2007
F-2
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, 2006, based on criteria
established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission. 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 management’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 control 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 unauthorized 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, 2006, 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, 2006, based on the criteria established in Internal
Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission.
F-3
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, 2006, and the related consolidated statements of income, comprehensive income, and cash flows
for the year ended December 31, 2006 of the Company and our report dated March 1, 2007 expressed an
unqualified opinion on those financial statements, and included an explanatory paragraph regarding the
Company’s changes in accounting for share-based payments and pensions and postretirement benefits.
Deloitte & Touche LLP
Atlanta, Georgia
March 1, 2007
F-4
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 (the “Company”) as of December 31, 2006 and 2005, and the related consolidated statements of
income, comprehensive income, and cash flows for each of the three years in the period ended December 31,
2006. These financial statements are the responsibility of the Company’s management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with 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, 2006 and 2005, and the results of
their operations and their cash flows for each of the three years in the period ended December 31, 2006, in
conformity with accounting principles generally accepted in the United States of America.
As described in Note 1 to the consolidated financial statements, on January 1, 2006 the Company adopted
the provisions of Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment,”
and on December 31, 2006, the Company adopted the recognition and disclosure provisions of Statement of
Financial Accounting Standards No. 158 “Employers’ Accounting for Defined Benefit Pension and Other
Postretirement Plans (an amendment of FASB Statements No. 87, 88, 106, and 132(R)).”
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,
2006, 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 1, 2007 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.
Deloitte & Touche LLP
Atlanta, Georgia
March 1, 2007
F-5
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In millions)
Current Assets:
ASSETS
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Marketable securities and short-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts receivable, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Finance receivables, net
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Current Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property, Plant and Equipment, Net
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pension and Postretirement Benefit Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill
Intangible Assets, Net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-Term Finance Receivables, Net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other Non-Current Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31,
2006
2005
$
794
1,189
5,794
426
414
760
9,377
16,779
2,044
2,533
688
374
1,415
$ 1,369
1,672
5,743
411
475
1,058
10,728
15,289
3,932
2,549
684
471
1,294
Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$33,210
$34,947
Current Liabilities:
LIABILITIES AND SHAREOWNERS’ EQUITY
Current maturities of long-term debt and commercial paper . . . . . . . . . . . . . . . . . . . . . .
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued wages and withholdings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Self-insurance reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
Total Current Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-Term Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pension and Postretirement Benefit Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred Income Tax Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Self-Insurance Reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other Non-Current Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shareowners’ Equity:
Class A common stock (401 and 454 shares issued in 2006 and 2005) . . . . . . . . . . . . . .
Class B common stock (672 and 646 shares issued in 2006 and 2005) . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additional paid-in capital
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred compensation obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Treasury stock (3 shares in 2006 and 2005) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
983
1,841
1,303
400
682
101
1,409
6,719
3,133
2,748
2,529
1,604
995
$
821
1,806
1,283
364
752
180
1,312
6,518
3,159
2,454
3,425
1,354
1,153
4
7
—
17,676
(2,205)
147
15,629
(147)
5
6
—
17,037
(164)
161
17,045
(161)
Total Shareowners’ Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
15,482
16,884
Total Liabilities and Shareowners’ Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$33,210
$34,947
See notes to consolidated financial statements.
F-6
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME
(In millions, except per share amounts)
Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating Expenses:
Years Ended December 31,
2006
2005
2004
$47,547
$42,581
$36,582
Compensation and benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repairs and maintenance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchased transportation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fuel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other occupancy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
24,421
1,155
1,748
5,496
2,655
938
4,499
22,517
1,097
1,644
4,075
2,085
872
4,148
20,823
1,005
1,543
2,084
1,416
752
3,970
Total Operating Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
40,912
36,438
31,593
Operating Profit
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6,635
6,143
4,989
Other Income and (Expense):
Investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Other Income and (Expense)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income Before Income Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
86
(211)
(125)
6,510
2,308
104
(172)
(68)
6,075
2,205
82
(149)
(67)
4,922
1,589
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 4,202
$ 3,870
$ 3,333
Basic Earnings Per Share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted Earnings Per Share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
3.87
3.86
$
$
3.48
3.47
$
$
2.95
2.93
STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME
(In millions)
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in foreign currency translation adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in unrealized gain (loss) on marketable securities, net of tax . . . . . . . . . . . . . .
Change in unrealized gain (loss) on cash flow hedges, net of tax . . . . . . . . . . . . . . . . .
Change in minimum pension liability, net of tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$4,202
54
1
(15)
16
$3,870
(36)
16
112
(14)
$3,333
(71)
(19)
43
(18)
Comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$4,258
$3,948
$3,268
Years Ended December 31,
2004
2005
2006
See notes to consolidated financial statements.
F-7
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
(In millions)
Years Ended December 31,
2006
2005
2004
Cash Flows From Operating Activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 4,202
$ 3,870
$ 3,333
Adjustments to reconcile net income to net cash from operating
activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pension and postretirement benefit expense . . . . . . . . . . . . . . . . . . .
Pension and postretirement benefit contributions . . . . . . . . . . . . . . .
Deferred taxes, credits and other . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock compensation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other (gains) losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in assets and liabilities, net of effect of acquisitions:
Accounts receivable, net
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued wages and withholdings . . . . . . . . . . . . . . . . . . . . . . .
Income taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,748
568
(1,625)
279
369
128
(77)
81
24
12
(58)
(62)
1,644
442
(995)
450
234
170
(789)
213
158
56
179
161
1,543
483
(586)
289
610
144
(686)
390
318
(73)
(399)
(35)
Net cash from operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5,589
5,793
5,331
Cash Flows From Investing Activities:
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from 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 decrease in finance receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash paid for business acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash (used in) investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash Flows From Financing Activities:
Net change in short-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from long-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repayments of long-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Issuances of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(3,085)
75
(9,056)
9,538
68
(50)
170
(2,340)
(513)
649
(90)
(2,460)
164
(1,577)
(24)
(2,187)
27
(7,623)
10,375
95
(1,488)
(174)
(975)
(287)
128
(302)
(2,479)
164
(1,391)
(8)
(2,127)
75
(6,322)
4,724
318
(238)
(68)
(3,638)
471
340
(468)
(1,310)
193
(1,208)
(32)
Net cash (used in) financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effect Of Exchange Rate Changes On Cash and Cash Equivalents . . . . . . . . . .
Net Increase (Decrease) In Cash And Cash Equivalents . . . . . . . . . . . . . . . . . . .
Cash And Cash Equivalents:
(3,851)
(4,175)
(2,014)
27
(575)
(13)
630
(4)
(325)
Beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,369
739
1,064
End of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash Paid During The Period For:
Interest (net of amount capitalized) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
794
$ 1,369
210
$
169
$
$
739
120
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 2,061
$ 1,465
$ 2,037
See notes to consolidated financial statements.
F-8
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
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 subsidiaries (collectively “UPS” or the “Company”). All intercompany balances and transactions
have been eliminated.
UPS concentrates its operations in the field of transportation services, primarily domestic and international
letter and package delivery. Through our Supply Chain & Freight 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 assumptions 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, in accordance with EITF 91-9 “Revenue and Expense Recognition for Freight Services in Process”.
Forwarding and Logistics—Freight forwarding revenue and the expense related to the transportation of
freight is recognized 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.
Freight—Revenue is recognized upon delivery of a less-than-truckload (“LTL”) or truckload (“TL”)
shipment, in accordance with EITF 91-9.
Financial Services—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.
During 2006, we began classifying deferred revenue and cost on our consolidated balance sheet as
reductions of accounts receivable, accounts payable, and accrued wages and withholdings. Previously, deferred
revenue and cost had been included in other current liabilities and other current assets in our consolidated
balance sheet. We reclassified 2005 balance sheet line items for consistent presentation. This reclassification had
the effect of reducing reported 2005 accounts receivable by $207 million, other current assets by $68 million,
accounts payable by $27 million, accrued wages and withholdings by $41 million, and other current liabilities by
$207 million.
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.
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 (“AOCI”), a separate
component of shareowners’ equity. The amortized cost of debt securities is adjusted for amortization of
F-9
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
premiums and accretion of discounts to maturity. Such amortization and accretion is included in investment
income, along with interest and dividends. The cost of securities sold is based on the specific identification
method; realized gains and losses resulting from such sales are included in investment income.
Investment securities are reviewed for impairment in accordance with FASB Statement No. 115
“Accounting for Certain Investments in Debt and Equity Securities” and FASB Staff Position (FSP) 115-1 “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 estimated useful lives of the assets, which are as follows: Vehicles—3 to 15 years;
Aircraft—12 to 30 years; Buildings—20 to 40 years; Leasehold Improvements—terms of leases; Plant
Equipment—6 to 10 years; Technology Equipment—3 to 5 years. The costs of major airframe and engine
overhauls, as well as routine maintenance and repairs, are charged to expense as incurred. During 2006, we
reevaluated the anticipated service lives of our Boeing 757, Boeing 767, and Airbus A300 fleets, and as a result
of this evaluation, increased the depreciable lives from 20 to 30 years and reduced the residual values from 30%
to 10% of original cost. This change did not have a material effect on our results of operations.
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 $48, $32, and $25 million for
2006, 2005, and 2004, 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 circumstances indicate the carrying
amount of an asset may not be recoverable based on the undiscounted future cash flows of the asset. If the
carrying amount of the asset is determined not to be recoverable, a write-down to fair value is recorded. Fair
values are determined based on quoted market values, discounted cash flows, or external appraisals, as
applicable. We review long-lived assets for impairment at the individual asset or the asset group level for which
the lowest level of independent cash flows can be identified.
In December 2004, we permanently removed from service a number of Boeing 727, 747 and McDonnell
Douglas DC-8 aircraft. 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.
This charge is included in the caption “Other expenses”. UPS continues to operate all of its other aircraft
and continues to experience positive cash flow, and no impairments of aircraft were recognized in 2006 or 2005.
F-10
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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”). Under FAS 142, we are required to test all goodwill for impairment at least annually, 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 businesses within that operating
segment, discrete financial information is prepared and regularly reviewed by management, in which case such a
component business is the reporting unit.
A fair value approach is used to test goodwill for impairment. An impairment charge is recognized for the
amount, if any, by which the carrying amount of goodwill exceeds its fair value. Fair values are established using
discounted cash flows. When available and as appropriate, comparative market multiples were used to
corroborate discounted cash flow results. Our annual impairment tests performed in 2006, 2005, and 2004
resulted in no goodwill impairment.
Finite-lived intangible assets, including trademarks, licenses, patents, customer lists, and franchise rights are
amortized over the estimated useful lives of the assets, which range from 2 to 20 years. Capitalized software is
amortized over periods ranging from 3 to 5 years.
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 financial
statements or tax returns. In estimating future tax consequences, FAS 109 generally considers all expected future
events other than proposed changes in the tax law or rates. Valuation allowances are provided if it is more likely
than not that a deferred tax asset will not be realized.
We record accruals for tax contingencies related to potential assessments by tax authorities. Such accruals
are based on management’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 balance sheet accounts are translated using exchange rates at the end of each period. Balance
sheet currency translation adjustments are recorded in OCI. Net currency transaction gains and losses included in
other operating expenses were pre-tax gains (losses) of $(5), $(22), and $44 million in 2006, 2005 and 2004,
respectively.
F-11
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Stock-Based Compensation
In December 2004, the FASB issued Statement No. 123 (revised 2004), “Share-Based Payment” (“FAS
123(R)”), which replaces FASB Statement No. 123 “Accounting for Stock-Based Compensation” and supercedes
Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees”. FAS 123(R) requires
all share-based awards to employees, including grants of employee stock options, to be measured based on their
fair values and expensed over the period during which an employee is required to provide service in exchange for
the award (the vesting period). We had previously adopted the fair value recognition provisions of the original
FAS 123, prospectively for all new stock compensation awards granted to employees subsequent to January 1,
2003. FAS 123(R) was effective beginning with the first interim or annual period after September 15, 2005; the
Securities and Exchange Commission (“SEC”) deferred the effective date, and as a result, we adopted
FAS 123(R) on January 1, 2006 using the modified prospective method. On that date, there were no unvested
stock options or other forms of employee stock compensation issued prior to January 1, 2003, and thus all
unvested stock-based awards were being expensed. A comparison of reported net income and pro-forma net
income (assuming all stock-based compensation was expensed in each year) for the years ended December 31,
2006, 2005, and 2004, is as follows (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
2006
2005
2004
$4,202
$3,870
$3,333
231
157
563
effects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(231)
(165)
(588)
Pro forma net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$4,202
$3,862
$3,308
Basic earnings per share
As reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pro forma . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 3.87
$ 3.87
$ 3.48
$ 3.47
$ 2.95
$ 2.93
Diluted earnings per share
As reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pro forma . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 3.86
$ 3.86
$ 3.47
$ 3.46
$ 2.93
$ 2.91
We issue employee share-based awards under the UPS Incentive Compensation Plan that are subject to
specific vesting conditions; generally, the awards cliff vest or vest ratably over a five year period, “the nominal
vesting period,” or at the date the employee retires (as defined by the plan), if earlier. For awards that specify an
employee vests in the award upon retirement, we account for the awards using the nominal vesting period
approach. Under this approach, we record compensation expense over the nominal vesting period. If the
employee retires before the end of the nominal vesting period, any remaining unrecognized compensation
expense is recorded at the date of retirement.
Upon our adoption of FAS 123(R), we revised our approach to apply the non-substantive vesting period
approach to all new share-based compensation awards. Under this approach, compensation cost is recognized
immediately for awards granted to retirement-eligible employees, or over the period from the grant date to the
date retirement eligibility is achieved, if that is expected to occur during the nominal vesting period. We continue
to apply the nominal vesting period approach for any awards granted prior to January 1, 2006, and for the
remaining portion of the then unvested outstanding awards.
If we had accounted for all share-based compensation awards granted prior to January 1, 2006 under the
non-substantive vesting period approach, the impact to our net income and earnings per share would have been
immaterial for all prior periods. The adoption of the non-substantive vesting period approach reduced 2006 net
income by $23 million, or $0.02 per diluted share.
F-12
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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 derivative is designated as a hedge, depending on the nature of the
hedge, changes in its fair value that are considered to be effective, as defined, either offset the change in fair
value of the hedged assets, liabilities, or firm commitments through income, or are recorded in OCI until the
hedged item is recorded in income. Any portion of a change in a derivative’s fair value that is considered to be
ineffective, or is excluded from the measurement of effectiveness, is recorded immediately in income.
New Accounting Pronouncements
In September 2006, the FASB issued Statement No. 158 “Employers’ Accounting for Defined Benefit
Pension and Other Postretirement Plans (an amendment of FASB Statements No. 87, 88, 106, and 132(R))”
(“FAS 158”). This statement requires the recognition of the funded status of defined benefit pension and other
postretirement plans as an asset or liability in the balance sheet for fiscal years ending after December 15, 2006.
FAS 158 also requires delayed recognition terms, consisting of actuarial gains and losses and prior service costs
and credits, to be recognized in other comprehensive income and subsequently amortized to the income
statement. On December 31, 2006, we adopted the recognition and disclosure provisions of FAS 158. The effect
of adopting FAS 158 on our balance sheet as of December 31, 2006 has been included in Note 5 to the
consolidated financial statements, while there was no effect on our balance sheet for prior periods.
Additionally, we currently utilize the early measurement date option available under Statement No. 87
“Employers’ Accounting for Pensions”, and we measure the funded status of our plans as of September 30 each
year. Under the provisions of FAS 158, we will be required to use a December 31 measurement date for all of our
pension and postretirement benefit plans no later than 2008. We do not expect the impact of the change in
measurement date to have a material impact on our financial statements.
In June 2006, the FASB issued Interpretation No. 48 “Accounting for Uncertainty in Income Taxes (an
interpretation of FASB Statement No. 109)”. This interpretation was issued to clarify the accounting for
uncertainty in income taxes recognized in the financial statements by prescribing a recognition threshold and
measurement attribute for tax positions taken or expected to be taken in a tax return. The interpretation also
provides guidance on derecognition, financial statement classification, tax-related interest and penalties, and
additional disclosure requirements. We are required to adopt this interpretation effective January 1, 2007. We are
currently in the process of evaluating the impact of this standard on our financial statements. Any necessary
transition adjustments will not affect net income in the period of adoption and will be reported as a change in
accounting principle in our consolidated financial statements.
In September 2006, the FASB issued Statement No. 157 “Fair Value Measurements” (“FAS 157”), which is
effective for fiscal years beginning after November 15, 2007. FAS 157 was issued to define fair value, establish a
framework for measuring fair value, and expand disclosures about fair value measurements. FAS 157 is not
anticipated to have a material impact on our results of operations or financial condition.
The adoption of the following recent accounting pronouncements did not have a material impact on our
results of operations or financial condition:
•
•
•
FSP AUG AIR-1 “Accounting for Planned Major Maintenance Activities”;
FAS 156 “Accounting for Servicing of Financial Assets”; and
FSP FAS 13-2 “Accounting for a Change in the Timing of Cash Flows Related to Income Taxes
Generated by a Leveraged Lease Transaction”.
Changes in Presentation
Certain prior year amounts have been reclassified to conform to the current year presentation.
F-13
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
NOTE 2. MARKETABLE SECURITIES AND SHORT-TERM INVESTMENTS
The following is a summary of marketable securities and short-term investments classified as available-for-
sale at December 31, 2006 and 2005 (in millions):
Cost
Unrealized
Gains
Unrealized
Losses
Estimated
Fair Value
2006
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Current marketable securities & short-term investments . . . . . . . . . .
Non-current common equity securities . . . . . . . . . . . . . . . . . . . . . . . .
$ 124
234
79
582
2
1,021
38
122
1,181
24
$—
1
—
—
—
1
10
—
11
8
$—
2
1
3
3
—
—
—
—
—
$ 124
233
78
582
2
1,019
48
122
1,189
32
Total marketable securities & short-term investments . . . . . . . . . . . .
$1,205
$ 19
$
3
$1,221
Cost
Unrealized
Gains
Unrealized
Losses
Estimated
Fair Value
2005
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Current marketable securities & short-term investments . . . . . . . . . .
Non-current common equity securities . . . . . . . . . . . . . . . . . . . . . . . .
$ 400
393
425
70
2
1,290
42
331
1,663
21
$
1
1
—
—
—
2
19
—
21
7
$
3
5
4
—
—
12
—
—
12
—
$ 398
389
421
70
2
1,280
61
331
1,672
28
Total marketable securities & short-term investments . . . . . . . . . . . .
$1,684
$ 28
$ 12
$1,700
The gross realized gains on sales of marketable securities totaled $12, $2, and $7 million in 2006, 2005, and
2004, respectively. The gross realized losses totaled $21, $12, and $5 million in 2006, 2005, and 2004,
respectively. Impairment losses recognized on marketable securities and short-term investments totaled $16
million during 2005, with no such losses recognized in 2006 or 2004.
F-14
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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, 2006 (in millions):
Less Than 12 Months
12 Months or More
Total
Fair
Value
Unrealized
Losses
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 . . . . . . . . . . . . . . . . . . . . . . . . . . —
$ 60
74
8
Total debt securities . . . . . . . . . . . . . . . . . . . . . . .
142
Common equity securities . . . . . . . . . . . . . . . . . . . . . . —
Preferred equity securities . . . . . . . . . . . . . . . . . . . . . . —
$—
—
—
—
—
—
—
—
Fair
Value
$ 20
76
50
—
—
146
—
1
Unrealized
Losses
$—
2
1
3
—
—
—
—
Fair
Value
$ 80
150
58
—
—
288
—
1
Unrealized
Losses
$—
2
1
3
—
—
—
—
$142
$—
$147
$
3
$289
$ 3
The unrealized losses in the U.S. government & agency securities, mortgage & asset-backed securities, and
corporate securities relate to various fixed income securities, and are primarily due to changes in market interest
rates. We have both the intent and ability to hold the securities contained in the previous table for a time
necessary to recover the cost basis.
The amortized cost and estimated fair value of marketable securities and short-term investments at
December 31, 2006, 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
32
140
22
827
1,021
184
Estimated
Fair Value
$
32
140
22
825
1,019
202
$1,205
$1,221
NOTE 3. FINANCE RECEIVABLES
The following is a summary of finance receivables at December 31, 2006 and 2005 (in millions):
Commercial term loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment in finance leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Asset-based lending . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Receivable factoring . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$280
138
273
131
$317
153
281
151
Gross finance receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Allowance for credit losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
822
(22)
902
(20)
Balance at December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$800
$882
2006
2005
F-15
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Outstanding receivable balances at December 31, 2006 and 2005 are net of unearned income of $29 and $34
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 balance sheet. The following is a reconciliation of receivable factoring balances at December 31,
2006 and 2005 (in millions):
Customer receivable balances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Amounts due to client . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$131
(77)
$ 151
(101)
Net funds employed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 54
$ 50
2006
2005
Non-earning finance receivables were $23 and $24 million at December 31, 2006 and 2005, respectively.
The following is a rollforward of the allowance for credit losses on finance receivables (in millions):
Balance at January 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provisions charged to operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Charge-offs, net of recoveries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2006
2005
$20
8
(6)
$22
$ 25
11
(16)
$ 20
The carrying value of finance receivables at December 31, 2006, by contractual maturity, is shown below
(in millions). Actual maturities may differ from contractual maturities because some borrowers have the right to
prepay these receivables without prepayment penalties.
Due in one year or less . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Due after one year through three years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Due after three years through five years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Due after five years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Carrying
Value
$435
60
53
274
$822
Based on interest rates for financial instruments with similar terms and maturities, the estimated fair value
of finance receivables is approximately $795 and $883 million as of December 31, 2006 and 2005, respectively.
At December 31, 2006, we had unfunded loan commitments totaling $604 million, consisting of standby letters
of credit of $63 million and other unfunded lending commitments of $541 million.
F-16
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
NOTE 4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment as of December 31 consists of the following (in millions):
2006
2005
Vehicles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Aircraft (including aircraft under capitalized leases) . . . . . . . . . . . . . . . . . . . . .
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Plant equipment
Technology equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equipment under operating leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction-in-progress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 4,970
13,162
1,026
2,667
2,496
5,230
1,673
142
715
$ 4,286
12,289
968
2,404
2,469
4,975
1,646
87
433
Less: Accumulated depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . .
32,081
(15,302)
29,557
(14,268)
$ 16,779
$ 15,289
NOTE 5. EMPLOYEE BENEFIT PLANS
We sponsor various retirement and pension plans, including defined benefit and defined contribution plans
which cover our employees worldwide. In the U.S. we maintain the following defined benefit pension plans: UPS
Retirement Plan, UPS Pension Plan, and several non-qualified plans including the UPS Excess Coordinating
Benefit Plan. Effective January 1, 2006, the qualified defined benefit plans covering Overnite and Motor Cargo
employees were merged with the UPS Retirement Plan and UPS Pension Plan.
We also sponsor various defined benefit plans covering certain of our International employees. The majority
of our International obligations are for defined benefit plans in Canada and the United Kingdom (including the
Lynx acquisition in 2005). In addition, many of our International employees are covered by government-
sponsored retirement and pension plans. We are not directly responsible for providing benefits to participants of
government-sponsored plans.
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. This plan generally
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 members of collective bargaining units that elect to participate in the plan. This plan provides for
retirement benefits based on service credits earned by employees prior to retirement.
We also sponsor postretirement medical plans in the U.S. that provide health care benefits to our retirees
who meet certain eligibility requirements and who are not otherwise covered by multi-employer plans. Generally,
this includes employees with at least 10 years of service who have reached age 55 and employees who are
eligible for postretirement medical benefits from a Company-sponsored plan pursuant to collective bargaining
F-17
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
agreements. We have the right to modify or terminate certain of these plans. These benefits have been provided
to certain retirees on a noncontributory basis; however, in many cases, retirees are required to contribute all or a
portion of the total cost of the coverage.
On December 31, 2006, we adopted the recognition and disclosure provisions of FAS 158. FAS 158
required us to recognize the funded status of our defined benefit pension and other postretirement plans in our
balance sheet with a corresponding adjustment to AOCI, net of tax. The adoption of FAS 158 did not affect our
operating results in the current period and will not have any effect in future periods. We have presented below
the incremental effects of adopting FAS 158 to our balance sheet for the individual line items impacted from this
adoption, as of December 31, 2006 (in millions).
Prior to Adopting
FAS 158
Effect of Adopting
FAS 158
As Reported under
FAS 158
Pension and Postretirement Benefit
Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intangible Assets, Net . . . . . . . . . . . . . . . . . .
Other Current Liabilities . . . . . . . . . . . . . . . .
Pension and Postretirement Benefit
Obligations . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred Income Tax Liabilities . . . . . . . . . .
Accumulated Other Comprehensive Loss . . .
$4,681
699
1,336
2,114
3,787
108
$(2,637)
(11)
73
634
(1,258)
2,097
$2,044
688
1,409
2,748
2,529
2,205
Net Periodic Benefit Cost
Information about net periodic benefit cost for the pension and postretirement benefit plans is as follows (in
millions):
U.S. Pension Benefits
U.S. Postretirement
Medical Benefits
International Pension
Benefits
2006
2005
2004
2006
2005
2004
2006
2005
2004
$
474
726
(1,106)
$ 374
612
(922)
$ 334
521
(800)
$102
170
(43)
$ 92
170
(38)
$ 91
164
(34)
$ 24
26
(22)
$ 14
16
(13)
$ 10
12
(9)
3
36
148
—
281
3
37
68
—
$ 172
6 —
37
118
—
$ 216
(8)
29
—
$250
—
—
(7) —
30
31
—
—
$251
$248
$
—
—
1
7
1 —
—
1 —
4
3
—
$ 16
$ 37
$ 22
Net Periodic Cost:
. . . . . . . . . . . . . . . . . . . . . . .
Service cost
Interest cost
. . . . . . . . . . . . . . . . . . . . . . .
Expected return on assets . . . . . . . . . . . . .
Amortization of:
Transition obligation . . . . . . . . . . . .
Prior service cost
. . . . . . . . . . . . . . .
Actuarial (gain) loss . . . . . . . . . . . . .
Settlements / curtailments . . . . . . . . . . . .
. . . . . . . . . . . . .
Net periodic benefit cost
Actuarial Assumptions
The table below provides the weighted-average actuarial assumptions used to determine the net periodic
benefit cost.
Discount rate . . . .
Rate of
compensation
increase . . . . . . .
Expected return on
assets . . . . . . . .
Pension Benefits
Postretirement
Medical Benefits
International
Pension Benefits
2005
2006
2005
5.75% 6.25% 6.25% 5.75% 6.25% 6.25% 4.93% 5.76% 5.92%
2004
2005
2004
2004
2006
2006
4.00% 4.00% 4.00% N/A
N/A
N/A
3.94% 3.46% 2.88%
8.96% 8.96% 8.96% 9.00% 9.00% 9.00% 7.67% 7.68% 7.90%
F-18
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The table below provides the weighted-average actuarial assumptions used to determine the benefit
obligations of our plans.
Pension Benefits
Postretirement
Medical Benefits
International
Pension Benefits
2006
2005
2006
2005
2006
2005
Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Rate of compensation increase . . . . . . . . . . . . . . . .
6.00% 5.75% 6.00% 5.75% 4.96% 4.93%
3.79% 3.94%
4.50% 4.00% N/A
N/A
Our pension and other postretirement benefit costs are calculated using various actuarial assumptions and
methodologies as prescribed by Statement of Financial Accounting Standards No. 87, “Employers’ Accounting
for Pensions” and Statement of Financial Accounting Standards No. 106, “Employers’ Accounting for
Postretirement Benefits Other than Pensions.” These assumptions include discount rates, expected return on plan
assets, health care cost trend rates, inflation, rate of compensation increases, mortality rates, and other factors.
Actuarial assumptions are reviewed on an annual basis.
A discount rate is used to determine the present value of our future benefit obligations. For U.S. plans, the
discount rate is determined by matching the expected cash flows to a yield curve based on long-term, high
quality fixed income debt instruments available as of the measurement date. For international plans, the discount
rate is selected based on high quality fixed income indices available in the country in which the plan is
domiciled. These assumptions are updated each year.
An assumption for return on plan assets is used to determine the expected return on asset component of net
periodic benefit cost for the fiscal year. This assumption for our U.S. plans was evaluated using input from third-
party consultants and various pension plan asset managers, including their long-term projection of returns for
each asset class and our target allocation. For our U.S. plans, the 10-year U.S. Treasury yield is the foundation
for all other asset class returns, and various risk premiums are added to determine the expected return for each
allocation.
For plans outside the U.S., consideration is given to local market expectations of long-term returns.
Strategic asset allocations are determined by country, based on the nature of liabilities and considering the
demographic composition of the plan participants.
Health care cost trends are used to project future postretirement benefits payable from our plans. For
year-end 2006 obligations, future postretirement medical benefit costs were forecasted assuming an initial annual
increase of 9.0%, decreasing to 5.0% by the year 2011 and with consistent annual increases at those ultimate
levels thereafter.
Assumed health care cost trends have a significant effect on the amounts reported for the U.S.
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
Effect on postretirement benefit obligation . . . . . . . . . . . . . . . . . . . . . . . . .
$ 7
70
$ (4)
(65)
1% Increase
1% Decrease
F-19
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Benefit Obligations and Fair Value of Plan Assets
The following table provides a reconciliation of the changes in the plans’ benefit obligations and fair value
of plan assets as of our measurement date on September 30 (in millions):
U.S. Pension Benefits
U.S. Postretirement
Medical Benefits
International
Pension Benefits
2006
2005
2006
2005
2006
2005
$238
14
16
(7)
1
13
149
74
(16)
(6)
$476
$132
26
22
1
(7)
104
(7)
(5)
$266
Benefit Obligations:
Net benefit obligation at October 1, prior year . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Service cost
Interest cost
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross benefits paid . . . . . . . . . . . . . . . . . . . . . . . . .
Plan participants’ contributions . . . . . . . . . . . . . . .
Plan amendments . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquired businesses . . . . . . . . . . . . . . . . . . . . . . . .
Actuarial (gain)/loss . . . . . . . . . . . . . . . . . . . . . . . .
Foreign currency exchange rate changes . . . . . . . .
Curtailments and settlements . . . . . . . . . . . . . . . . .
$12,299
474
726
(304)
—
309
—
54
—
—
$ 9,042
374
612
(242)
—
—
1,327
1,186
—
—
$2,927
102
170
(158)
13
—
—
(62)
—
—
$476
24
26
(13)
2
$2,648
92
170
(149)
10
(21) —
119
58
—
—
5
(5)
40
(4)
Net benefit obligation at September 30 . . . . . . . . .
$13,558
$12,299
$2,992
$2,927
$551
Fair Value of Plan Assets:
Fair value of plan assets at October 1, prior
year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Actual return on plan assets . . . . . . . . . . . . . . . . . .
Employer contributions . . . . . . . . . . . . . . . . . . . . .
Plan participants’ contributions . . . . . . . . . . . . . . .
Gross benefits paid . . . . . . . . . . . . . . . . . . . . . . . . .
Acquired businesses . . . . . . . . . . . . . . . . . . . . . . . .
Foreign currency exchange rate changes . . . . . . . .
Curtailments and settlements . . . . . . . . . . . . . . . . .
$12,943
1,310
1,425
—
(304)
—
—
—
$ 9,962
1,473
842
—
(242)
908
—
—
$ 509
50
137
13
(158)
—
—
—
$ 455
62
131
10
(149)
—
—
—
Fair value of plan assets at September 30 . . . . . . .
$15,374
$12,943
$ 551
$ 509
$266
36
35
2
(13)
3
23
(4)
$348
F-20
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Funded Status
The following table discloses the funded status of our plans as of our measurement date on September 30
and the amounts recognized in our balance sheet as of year-end, on a pre-tax basis (in millions):
U.S. Pension Benefits
U.S. Postretirement
Medical Benefits
International
Pension Benefits
2006
2005
2006
2005
2006
2005
Funded Status:
Fair value of plan assets at September 30 . . . . . . . . . .
Benefit obligation at September 30 . . . . . . . . . . . . . . .
$ 15,374
(13,558)
$ 12,943
(12,299)
$
551
(2,992)
$
509
(2,927)
$ 348
(551)
$ 266
(476)
Funded Status at September 30 . . . . . . . . . . . . . . . . . .
1,816
644
(2,441)
(2,418)
(203)
(210)
Amounts Not Yet Recognized in Net Periodic
Cost:
Unrecognized net transition obligation . . . . . . . . . . . .
Unrecognized net prior service cost / (benefit) . . . . . .
Unrecognized net actuarial loss . . . . . . . . . . . . . . . . .
Employer contributions . . . . . . . . . . . . . . . . . . . . . . . .
12
532
2,189
9
15
260
2,486
2
—
(106)
727
20
—
(118)
817
15
—
12
110
22
—
14
127
6
Net asset / (liability) at December 31 . . . . . . . . . . . . .
$ 4,558
$ 3,407
$(1,800) $(1,704) $ (59) $ (63)
Amounts Recognized in our Balance Sheet:
Pension and postretirement benefit assets . . . . . . . . . .
Intangible assets, net . . . . . . . . . . . . . . . . . . . . . . . . . .
Other current liabilities . . . . . . . . . . . . . . . . . . . . . . . .
Pension and postretirement benefit obligations . . . . .
Accumulated other comprehensive loss . . . . . . . . . . .
$ 2,043
—
(19)
(199)
2,733
$ 3,931
2
—
(619)
93
$ — $ — $
—
(52)
(2,369)
621
—
—
(1,704)
—
—
$
1
1
11
(2) —
(180)
122
(131)
56
Net asset / (liability) at December 31 . . . . . . . . . . . . .
$ 4,558
$ 3,407
$(1,800) $(1,704) $ (59) $ (63)
The accumulated benefit obligation for our pension plans as of September 30, 2006 and 2005 was $12.481
and $11.485 billion, respectively. In general, we use a measurement date of September 30 for our pension and
postretirement benefit plans.
Employer contributions and benefits paid under the pension plans include $24 and $9 million paid from
employer assets in 2006 and 2005, respectively. Employer contributions and benefits paid (net of participant
contributions) under the postretirement medical benefit plans include $72 and $69 million paid from employer
assets in 2006 and 2005, respectively.
F-21
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
At September 30, 2006 and 2005, 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):
As of September 30
U.S. Pension Benefits
Projected benefit obligation . . . . . . . . . . . . . . . . . . . .
Accumulated benefit obligation . . . . . . . . . . . . . . . . .
Fair value of plan assets . . . . . . . . . . . . . . . . . . . . . . .
International Pension Benefits
Projected benefit obligation . . . . . . . . . . . . . . . . . . . .
Accumulated benefit obligation . . . . . . . . . . . . . . . . .
Fair value of plan assets . . . . . . . . . . . . . . . . . . . . . . .
Projected Benefit Obligation
Exceeds the Fair Value of
Plan Assets
Accumulated Benefit Obligation
Exceeds the Fair Value of
Plan Assets
2006
2005
2006
2005
$227
176
—
$551
453
347
$229
192
—
$476
386
266
$227
176
—
$541
448
342
$229
192
—
$476
386
266
The accumulated postretirement benefit obligation exceeds plan assets for all of our U.S. postretirement
benefit plans.
Accumulated Other Comprehensive Income
The amounts recorded in AOCI (pre-tax), which have not yet been recognized as components of net periodic
cost, are as follows (in millions):
U.S. Pension Benefits
U.S. Postretirement
Medical Benefits
International
Pension Benefits
2006
2005
2006
2005
2006
2005
Accumulated Other Comprehensive Income:
Unrecognized transition obligation . . . . . . . . . . . .
Unrecognized prior service cost / (benefit) . . . . . .
Unrecognized actuarial loss . . . . . . . . . . . . . . . . . .
$
12
532
2,189
Net asset / (liability) at December 31 . . . . . . . . . . .
$2,733
$—
—
—
$—
$ —
(106)
727
$ 621
$—
—
—
$—
$—
12
110
$122
$—
—
—
$—
The amounts in AOCI expected to be amortized and recognized as a component of net periodic benefit cost
in 2007 are as follows (in millions):
Transition obligation . . . . . . . . . . . . . . . . . .
Prior service cost / (benefit) . . . . . . . . . . . .
Actuarial loss . . . . . . . . . . . . . . . . . . . . . . .
U.S. Pension Benefits
U.S. Postretirement
Medical Benefits
International
Pension Benefits
$
3
57
110
$170
$—
(8)
23
$ 15
$—
1
5
6
$
F-22
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Plan Asset Investment Policy
The asset allocation for our U.S. pension and other postretirement plans as of September 30, 2006 and 2005
and the target allocation as of September 30, 2006, by asset category, are as follows:
Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Real estate / other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
55% - 65%
20% - 30%
10% - 15%
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted Average
Target Allocation
2006
Percentage of
Plan Assets at
September 30,
2006
2005
61.5% 62.1%
26.5% 25.9%
12.0% 12.0%
100.0% 100.0%
Equity securities include UPS Class A shares of common stock in the amounts of $440 (2.8% of total plan
assets) and $423 million (3.4% of total plan assets), as of September 30, 2006 and 2005, respectively.
The applicable 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 applicable laws and regulations. The long-term primary objectives for our
pension assets are to (1) provide for a reasonable amount of long-term growth of capital, without undue exposure
to risk; and protect the assets from erosion of purchasing power, and (2) provide investment results that meet or
exceed the plans’ actuarially assumed long-term rate of return.
Expected Cash Flows
Information about expected cash flows for the pension and postretirement benefit plans is as follows (in
millions):
U.S.
Pension Benefits
U.S. Postretirement
Medical Benefits
International Pension
Benefits
Employer Contributions:
2007 (expected) to plan trusts . . . . . . . . . . . . . . . . . . . . .
2007 (expected) to plan participants . . . . . . . . . . . . . . . .
Expected Benefit Payments:
2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2012 - 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 461
19
$ 340
404
440
486
537
3,679
$
72
52
$ 138
148
160
174
189
1,175
$48
2
$ 9
10
11
12
14
93
Expected benefit payments for pensions will be primarily paid from plan trusts. Expected benefit payments
for postretirement benefits will be paid from plan trusts and corporate assets. Our funding policy for U.S. plans is
to contribute amounts annually that are at least equal to the amounts required by applicable laws and regulations,
or to directly fund payments to plan participants, as applicable. International plans will be funded in accordance
with local regulations. We have also guaranteed our obligations for certain international pension plans up to a
maximum amount of $118 million. Additional discretionary contributions will be made when deemed
appropriate to meet the long-term obligations of the plans.
F-23
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Other Plans
We also contribute to several multi-employer pension plans for which the previous disclosure information is
not determinable. Amounts charged to operations for pension contributions to these multi-employer plans were
$1.405, $1.234, and $1.111 billion during 2006, 2005, and 2004, 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 $862, $798, and $761 million during 2006, 2005,
and 2004, 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 $113, $105, and $94 million for 2006, 2005, and
2004, respectively.
Contributions are also made to defined contribution money purchase plans under certain collective
bargaining agreements. Amounts charged to expense were $62, $55, and $52 million for 2006, 2005, and 2004,
respectively.
NOTE 6. GOODWILL AND INTANGIBLE ASSETS
The following table indicates the allocation of goodwill by reportable segment (in millions):
U.S. Domestic
Package
International
Package
Supply Chain &
Freight
Consolidated
December 31, 2004 balance . . . . . . . . . . . . . . . . . . . . . .
Acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchase Accounting Adjustments . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . .
Currency / Other
December 31, 2005 balance . . . . . . . . . . . . . . . . . . . . . .
Acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchase Accounting Adjustments . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . .
Currency / Other
$—
—
—
—
—
—
—
—
December 31, 2006 balance . . . . . . . . . . . . . . . . . . . . . .
$—
141
134
11
4
$290
28
(39)
11
$290
1,114
836
335
(26)
$2,259
4
(60)
40
$2,243
1,255
970
346
(22)
$2,549
32
(99)
51
$2,533
The goodwill acquired in the International Package segment during 2006 resulted primarily from the
purchase of the express operations of Sinotrans Air Transportation Development Co. Ltd. in China, offset by
adjustments to the purchase price allocation of Lynx Express Delivery Ltd. The decrease in goodwill for the
Supply Chain & Freight segment during 2006 resulted primarily from finalizing the purchase price allocation of
Overnite Corp. The goodwill acquired in the International Package segment during 2005 resulted primarily from
the purchase of Lynx Express Delivery Ltd. in the United Kingdom, Messenger Service Stolica S.A. in Poland,
and the express operations of Sinotrans Air Transportation Development Co. Ltd. in China. The goodwill
acquired in the Supply Chain & Freight segment in 2005 resulted primarily from the purchase of Overnite Corp.,
as well as purchase accounting adjustments resulting from the restructuring costs incurred in exiting certain
activities from the Menlo Worldwide Forwarding operations acquired previously (See Note 16 for further
discussion of the restructuring). The currency / other balance includes the translation effect on goodwill from
fluctuations in currency exchange rates, as well as escrow reimbursements from acquisitions completed
previously. See Note 7 for further discussion of these business acquisition transactions.
F-24
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The following is a summary of intangible assets at December 31, 2006 and 2005 (in millions):
Gross Carrying
Amount
Accumulated
Amortization
Net Carrying
Value
Weighted-Average
Amortization
Period (in years)
December 31, 2006:
Trademarks, licenses, patents, and other . . . . .
Customer lists . . . . . . . . . . . . . . . . . . . . . . . . .
Franchise rights . . . . . . . . . . . . . . . . . . . . . . . .
Capitalized software . . . . . . . . . . . . . . . . . . . .
Total Intangible Assets, Net
. . . . . . . . . . . . . .
December 31, 2005:
Trademarks, licenses, patents, and other . . . . .
Customer lists . . . . . . . . . . . . . . . . . . . . . . . . .
Franchise rights . . . . . . . . . . . . . . . . . . . . . . . .
Capitalized software . . . . . . . . . . . . . . . . . . . .
Intangible pension asset . . . . . . . . . . . . . . . . . .
$
80
159
108
1,576
$1,923
$
43
78
108
1,409
13
$
(37)
(24)
(29)
(1,145)
$(1,235)
$
(20)
(5)
(23)
(919)
—
Total Intangible Assets, Net
. . . . . . . . . . . . . .
$1,651
$ (967)
$ 43
135
79
431
$688
$ 23
73
85
490
13
$684
4.2
10.5
20.0
3.2
4.8
Amortization of intangible assets was $255, $255, and $221 million during 2006, 2005 and 2004,
respectively. Expected amortization of finite-lived intangible assets recorded as of December 31, 2006 for the
next five years is as follows (in millions): 2007—$181; 2008—$131; 2009—$70; 2010—$24; 2011—$20.
Amortization expense in future periods will be affected by business acquisitions, software development, and
other factors.
NOTE 7. BUSINESS ACQUISITIONS AND DISPOSITIONS
We regularly explore opportunities to make acquisitions that would enhance our businesses. During the
three years ended December 31, 2006, we completed several acquisitions, including both domestic and
international transactions, which were accounted for under the purchase method of accounting. In connection
with these transactions, we paid cash (net of cash acquired) in the aggregate amount of $50 million, $1.488
billion, and $238 million in 2006, 2005, and 2004, 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
individual 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 allocations of acquired companies can be
modified up to one year after the date of acquisition.
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 million 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, and is included in our International Package reporting segment. The
acquisition had no material effect on our financial condition or results of operations.
In December 2004, we acquired Menlo Worldwide Forwarding, Inc. from CNF Inc. for $150 million in cash
(net of cash acquired) plus the assumption of $110 million in principal amount of debt and capital lease
obligations. Menlo Worldwide Forwarding, Inc. was a global freight forwarder that provided a full suite of heavy
air freight forwarding services, ocean services and international trade management, including customs brokerage.
The former operations of Menlo Worldwide Forwarding, Inc. are included as part of our Supply Chain & Freight
reporting segment.
F-25
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
In December 2004, we agreed with Sinotrans Air Transportation Development Co., Ltd. (“Sinotrans”) to
acquire direct control of the international express operations in 23 cities within China, and to purchase
Sintotrans’ interest in our current joint venture in China. As of December 31, 2006, we have made all cash
payments under the purchase agreement, a total of $114 million, and have taken direct control of operations in all
23 locations. The operations acquired are reported within our International Package reporting segment from the
dates of acquisition.
In May 2005, we acquired Messenger Service Stolica S.A. (“Stolica”), one of the leading parcel and express
delivery companies in Poland. Stolica’s operating results are included in our International Package reporting
segment from the date of acquisition.
In August 2005, we acquired Overnite Corporation (“Overnite”) for approximately $1.225 billion in cash.
Overnite offers a variety of LTL and TL services to more than 60,000 customers in North America. The
operating results of Overnite, which is now known as UPS Freight, are included in our Supply Chain & Freight
reporting segment from the date of acquisition.
In September 2005, we acquired Lynx Express Ltd. (“Lynx”) for approximately $68 million in cash. Lynx
Express was one of the largest independent parcel carriers in the United Kingdom. Lynx also offers customers a
broad suite of logistics and spare parts logistics services. The operating results of Lynx are included in our
International Package reporting segment from the date of acquisition.
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
8.38% debentures, due April 1, 2030 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial paper . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Floating rate senior notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capital lease obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Facility notes and bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
UPS Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pound Sterling notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other debt
$ 446
285
791
441
230
437
379
979
128
$ 457
293
739
441
278
397
377
863
135
2006
2005
Less current maturities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4,116
(983)
3,980
(821)
$3,133
$3,159
8.38% Debentures:
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
F-26
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
debentures are not subject to redemption prior to maturity. Interest is payable semiannually on the first of April
and October for both debentures and neither debenture is subject to sinking fund requirements. The fixed
obligations associated with the debentures are swapped to floating rates, based on six month LIBOR plus a
spread. Including the effect of the swaps, the average interest rate paid on the debentures for 2006 and 2005 was
8.00% and 7.39%, respectively.
Commercial Paper:
The weighted average interest rate on the commercial paper outstanding as of December 31, 2006 and 2005,
was 5.20% and 4.01%, respectively. At December 31, 2006 and 2005, the entire commercial paper balance has
been classified as a current liability. The amount of commercial paper outstanding in 2007 is expected to
fluctuate. We are authorized to borrow up to $7.0 billion under the two U.S. commercial paper programs we
maintain as of December 31, 2006. We also maintain a European commercial paper program under which we are
authorized to borrow up to €1.0 billion in a variety of currencies, however no amounts were outstanding under
this program as of December 31, 2006.
Floating Rate Senior Notes:
The floating rate senior notes bear interest at one-month LIBOR less 45 basis points. The average interest
rates for 2006 and 2005 were 4.66% and 2.87%, respectively. These notes are callable at various times after 30
years at a stated percentage of par value, and putable by the note holders at various times after 10 years at a
stated percentage of par value. The notes have maturities ranging from 2049 through 2053.
Capital Lease Obligations:
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$2,383
(390)
$2,054
(315)
2006
2005
$1,993
$1,739
These capital lease obligations have principal payments due at various dates from 2007 through 2010.
Facility Notes and Bonds:
We have entered into agreements with certain municipalities to finance the construction of, or
improvements to, facilities that support our U.S. Domestic Package and Supply Chain & Freight operations in the
United States. These facilities are located around airport properties in Louisville, KY; Dallas, TX; Philadelphia,
PA; and Dayton, OH. Under these arrangements, we enter into a lease or loan agreement that covers the debt
service obligations on the bonds issued by the municipalities, as follows:
• Bonds with a principal balance of $149 million issued by the Louisville Regional Airport Authority
associated with our Worldport facility in Louisville, KY. The bonds, which are due in January 2029,
bear interest at a variable rate, and the average interest rates for 2006 and 2005 were 3.43% and 2.41%,
respectively.
• Bonds with a principal balance of $43 million issued by the Louisville Regional Airport Authority
associated with our air freight facility in Louisville, KY. The bonds were issued in November 2006 and
are due in November 2036. The bonds bear interest at a variable rate, and the average interest rate from
the time of issuance in November 2006 was 3.77%.
F-27
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
• Bonds with a principal balance of $29 million issued by the Dallas / Forth Worth International Airport
Facility Improvement Corporation associated with our Dallas, TX airport facilities. The bonds are due in
May 2032 and bear interest at a variable rate, however the variable cash flows on the obligation have
been swapped to a fixed 5.11%.
• Bonds with a principal balance of $100 million issued by the Delaware County, Pennsylvania Industrial
Development Authority associated with our Philadelphia, PA airport facilities. The bonds, which are
due in December 2015, bear interest at a variable rate, and the average interest rates for 2006 and 2005
were 3.34% and 2.21%, respectively.
• Bonds with a principal balance of $108 million issued by the city of Dayton, OH associated with the
Dayton airport facility, $62 million of which is due in 2009 and the remaining $46 million is due in
2018. The balance due in 2018 is callable beginning in 2008. The bond principal due in 2018 bears
interest at a fixed rate of 5.63%, while the bond principal due in 2009 bears interest at fixed rates
ranging from 6.05% to 6.20%.
UPS Notes:
The UPS Notes program involves the periodic issuance of fixed rate notes in $1,000 increments with various
terms and maturities. At December 31, 2006, 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 2008 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 2006 and 2005 was 4.73% and 3.09%, respectively.
Pound Sterling Notes:
The Pound Sterling notes were issued in 2001 with a principal balance of £500 million, accrue interest at a
5.50% fixed rate, and are due on February 12, 2031.
Other Debt:
The other debt balance primarily relates to loans entered into in conjunction with our investment in various
partnerships. Substantially all of this debt is classified as a current liability. The implied interest rates on this debt
range from 3.2% to 6.4%.
Other Information
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 $4.391 and 4.327
billion as of December 31, 2006 and 2005, respectively.
We lease certain aircraft, facilities, equipment and vehicles under operating leases, which expire at various
dates through 2055. Certain of the leases contain escalation clauses and renewal or purchase options. Rent
expense related to our operating leases was $912, $843, and $759 million for 2006, 2005 and 2004, respectively.
F-28
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The following table sets forth the aggregate minimum lease payments under capital and operating leases, the
aggregate annual principal payments due under our long-term debt, and the aggregate amounts expected to be
spent for purchase commitments (in millions).
Year
Capital
Leases
Operating
Leases
Debt
Principal
Purchase
Commitments
2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
After 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . —
$ 75
75
41
62
1
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
254
$ 404
335
243
168
119
505
$1,774
$ 918
27
83
30
33
2,766
$3,857
$1,072
988
499
1,022
1,184
1,636
$6,401
Less: imputed interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Present value of minimum capitalized lease payments . . . . . . . . . . . .
Less: current portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term capitalized lease obligations . . . . . . . . . . . . . . . . . . . . . . .
(24)
230
(65)
$165
As described in Note 18, we placed orders for 27 Boeing 767-300ER freighter aircraft in February 2007,
which are scheduled to be delivered between 2009 and 2012. Additionally, also described in Note 18, we reached
an agreement with Airbus in February 2007 to set out a timetable for deciding the status of our previous order for
the freighter version of the Airbus A380-800. We have included the purchase commitments associated with both
the new Boeing 767-300ER order and the existing Airbus A380-800 order in the purchase commitments
information presented in the table above.
As of December 31, 2006, we had outstanding letters of credit totaling approximately $2.213 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 19, 2007 and the other April 21, 2010. Interest on any amounts we
borrow under these facilities would be charged at 90-day LIBOR plus 15 basis points. At December 31, 2006,
there were no outstanding borrowings under these facilities.
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 $136 million issued under this
shelf registration statement at December 31, 2006.
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, 2006.
NOTE 9. LEGAL PROCEEDINGS AND CONTINGENCIES
We are a defendant in a number of lawsuits filed in state and federal 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 a California federal court, plaintiffs allege that they improperly were denied overtime, and seek
penalties for missed meal and rest periods, and interest and attorneys’ fees. Plaintiffs purport to represent a class
F-29
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
of 1,200 full-time supervisors. The court granted summary judgment in favor of UPS on all claims and plaintiffs
have appealed. We have denied any liability with respect to these claims and intend to vigorously defend
ourselves in this case. At this time, we have not determined the amount of any liability that may result from this
matter or whether such liability, if any, would have a material adverse effect on our financial condition, results of
operations, or liquidity.
In another case, Cornn v. UPS, which has been certified as a class action in a California federal court,
plaintiffs allege that they were improperly denied wages and/or overtime and meal and rest periods. Plaintiffs
purport to represent a class of approximately 23,600 drivers and seek back wages, penalties, interest and
attorneys’ fees. UPS has agreed in principle to settle this matter in full for a total payment of $87 million. On
December 6, 2006, the court granted tentative approval of the settlement.
We are named as a defendant in four putative class action lawsuits filed in federal courts, alleging a
conspiracy relating to certain surcharges by a number of air cargo carriers. We are not named as a defendant in at
least eighty-six related cases that make similar allegations. These cases have been consolidated in a Multi-
District Litigation proceeding pending in the United States District Court for the Eastern District of New York.
UPS was not included as a defendant in the amended consolidated complaint on which the Multi-District
Litigation is proceeding. In addition, in July 2006, we were named as a defendant in a comparable lawsuit filed in
the Ontario (Canada) Superior Court of Justice. We intend to vigorously defend ourselves in these cases.
We are a defendant in various other lawsuits that arose in the normal course of business. We believe that the
eventual resolution of these cases will not have a material adverse effect on our financial condition, results of
operations, or liquidity.
We participate in a number of trustee-managed multi-employer pension and health and welfare plans for
employees covered under collective bargaining agreements. Several factors could result in 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 liquidity would result from our participation in
these plans.
As of December 31, 2006, we had approximately 246,000 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. In the third quarter of 2006, we began
formal negotiations with the Teamsters on a new agreement. We have approximately 2,800 pilots who are
employed under a collective bargaining agreement with the Independent Pilots Association (“IPA”). On June 30,
2006, UPS and the IPA announced a tentative agreement on a new labor contract, which was ratified in the third
quarter. This new contract becomes amendable at the end of 2011. Our airline mechanics are covered by a
collective bargaining agreement with Teamsters Local 2727, which became amendable on November 1, 2006.
We began formal negotiations with Teamsters Local 2727 on October 2, 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.
NOTE 10. SHAREOWNERS’ EQUITY
Capital Stock, Additional Paid-In Capital, and Retained Earnings
We maintain two classes of common stock, which are distinguished from each other by their respective
voting rights. Class A shares of UPS are entitled to 10 votes per share, whereas Class B shares are entitled to one
F-30
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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.” Class A and B shares both have a $0.01 par value, and as of December 31,
2006, there were 4.6 billion Class A shares and 5.6 billion Class B shares authorized to be issued. Additionally,
there are 200 million preferred shares, with no par value, authorized to be issued; as of December 31, 2006, no
preferred shares had been issued.
The following is a rollforward of our common stock, additional paid-in capital, and retained earnings
accounts (in millions, except per share amounts):
2006
2005
2004
Shares
Dollars
Shares
Dollars
Shares
Dollars
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
454
(17)
3
2
$
5
—
—
—
515
(16)
2
3
stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(41)
(1)
(50)
Class A shares issued at end of year . . . . . . . . . . . . .
401
Class B Common Stock
Balance at beginning of year . . . . . . . . . . . . . . . . . .
Common stock purchases . . . . . . . . . . . . . . . . . . . . .
Conversions of Class A to Class B common
stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Class B shares issued at end of year . . . . . . . . . . . . .
646
(15)
41
672
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 ($1.52, $1.32, and $1.12 per share) . . . . .
Common stock purchases . . . . . . . . . . . . . . . . . . . . .
Balance at end of year
. . . . . . . . . . . . . . . . . . . . . . .
$
$
$
—
4
6
1
7
$ —
371
(539)
168
$ —
$17,037
4,202
(1,647)
(1,916)
$17,676
454
614
(18)
50
646
$
$
$
$
$
5
571
(12)
12
3
(59)
515
560
(5)
59
614
$
6
—
—
—
(1)
—
5
5
1
6
662
677
(1,075)
153
$
$
$
$
—
—
—
—
—
—
5
6
6
417
335
(922)
170
$ —
$
417
$16,192
3,870
(1,468)
(1,557)
$17,037
$14,356
3,333
(1,262)
(235)
$16,192
We repurchased a total of 32.6 million shares of Class A and Class B common stock for $2.455 billion in
2006, and 33.9 million shares for $2.479 billion in 2005. As of December 31, 2006, we had $936 million of our
share repurchase authorization remaining. In February 2007, the Board of Directors approved an increase in our
share repurchase authorization to $2.0 billion, which replaces the remaining amount available under our July
2006 share repurchase authorization.
F-31
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Accumulated Other Comprehensive Income (Loss)
We incur activity in AOCI for unrealized holding gains and losses on available-for-sale securities, foreign
currency translation adjustments, unrealized gains and losses from derivatives that qualify as hedges of cash
flows, and unrecognized pension and postretirement benefit costs. The activity in AOCI is as follows (in
millions):
2006
2005
2004
Foreign currency translation adjustment:
Balance at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Aggregate adjustment for the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ (163) $(127) $ (56)
(71)
(36)
54
Balance at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(109)
(163)
(127)
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 $(3), $0, and $(10)) . . . .
Reclassification to earnings (net of tax effect of $3, $10, and $(1)) . . . . . . . . . . . .
(5)
11
(4) —
16
5
Balance at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
12
11
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 $(4), $81, and $21)
. . . .
Reclassification to earnings (net of tax effect of $(5), $(14), and $4) . . . . . . . . . . .
Balance at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
83
(7)
(8)
68
(29)
135
(23)
83
14
(18)
(1)
(5)
(72)
37
6
(29)
Unrecognized pension and postretirement benefit costs, net of tax:
Balance at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Minimum pension liability adjustment (net of tax effect of $11, $(8), and
(95)
(81)
(63)
$(10)) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adoption of FAS 158 (net of tax effect of $(1,258)) . . . . . . . . . . . . . . . . . . . . . . . .
16
(14)
(2,097) —
Balance at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(2,176)
(95)
(18)
—
(81)
Accumulated other comprehensive income (loss) at end of year
. . . . . . . . . . . . . .
$(2,205) $(164) $(242)
As discussed in Note 5, we adopted the recognition and disclosure provisions of FAS 158 on December 31,
2006. The adoption of FAS 158 required us to eliminate the previous minimum pension liability charge to AOCI,
and to record a charge, net of tax, to AOCI representing the unrecognized pension and postretirement benefit
costs as of December 31, 2006.
Deferred Compensation Obligations and Treasury Stock
We maintain a deferred compensation plan whereby certain employees were previously able to 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. Employees are generally no longer able to defer the gains
F-32
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
from stock options vesting subsequent to April 2004. Activity in the deferred compensation program for the
years ended December 31, 2006, 2005, and 2004 is as follows (in millions):
2006
2005
2004
Shares Dollars
Shares Dollars
Shares Dollars
Deferred Compensation Obligations
Balance at beginning of year . . . . . . . . . . . . . . . . . . . . . . .
Reinvested dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Option exercise deferrals . . . . . . . . . . . . . . . . . . . . . . . . . .
Benefit payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 161
4
—
(18)
$ 147
$ 169
4
—
(12)
$ 161
Treasury Stock
Balance at beginning of year . . . . . . . . . . . . . . . . . . . . . . .
Reinvested dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . —
Option exercise deferrals . . . . . . . . . . . . . . . . . . . . . . . . . . —
Benefit payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . —
(3)
$(161)
(3)
$(169)
(2)
(4) —
— —
18 —
(4) —
— —
12
(1)
$ 136
2
39
(8)
$ 169
$(136)
(2)
(39)
8
Balance at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(3)
$(147)
(3)
$(161)
(3)
$(169)
NOTE 11. STOCK-BASED COMPENSATION
Incentive Compensation Plan
The UPS Incentive Compensation Plan permits the grant of nonqualified stock options, incentive stock
options, stock appreciation rights, restricted stock, performance shares, performance units, and management
incentive awards to eligible employees. The number of shares reserved for issuance under the Plan is
112 million, with the number of shares reserved for issuance as restricted stock limited to 34 million. As of
December 31, 2006, management incentive awards, stock options, restricted performance units, and restricted
stock units had been granted under the Incentive Compensation Plan.
Management Incentive Awards & Restricted Stock Units
Persons earning the right to receive management incentive awards are determined annually by the
Compensation Committee of the UPS Board of Directors. Our management incentive awards program provides
that half of the annual management incentive award, with certain exceptions, be made in restricted stock units
(“RSUs”), which generally vest over a five-year period. The other half of the award is in the form of cash or
unrestricted shares of class A common stock and is fully vested at the time of grant. These management incentive
awards are generally granted in the fourth quarter of each year.
Upon vesting, RSUs result in the issuance of the equivalent number of UPS class A common shares after
required tax withholdings. Except in the case of death, disability, or retirement, RSUs granted for our
management incentive awards generally vest over a five year period with approximately 20% of the award
vesting at each anniversary date of the grant. The entire grant is expensed on a straight-line basis over the
requisite service period. All RSUs granted are subject to earlier cancellation or vesting under certain conditions.
Dividends earned on management incentive award RSUs are reinvested in additional RSUs at each dividend
payable date.
We also award RSUs in conjunction with our long-term incentive performance awards program to certain
eligible employees. The RSUs ultimately granted under the long-term incentive performance award will be based
upon the achievement of certain performance measures, including growth in consolidated revenue and operating
return on invested capital, each year during the performance award cycle, and other measures, including growth
in consolidated earnings, over the entire three year performance award cycle.
F-33
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
As of December 31, 2006, we had the following RSUs outstanding, including reinvested dividends:
Shares
(in thousands)
Weighted
Average
Grant Date
Fair Value
Weighted Average
Remaining Contractual
Term
(in years)
Aggregate
Intrinsic Value
(in millions)
Nonvested at January 1, 2006 . . .
Vested . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . .
Reinvested Dividends . . . . . . . . .
Forfeited / Expired . . . . . . . . . . . .
Nonvested at December 31,
2006 . . . . . . . . . . . . . . . . . . . . .
RSUs Expected to Vest . . . . . . . .
5,104
(1,115)
3,706
76
(210)
7,561
7,205
$72.82
72.83
74.87
N/A
72.90
73.82
73.82
2.58
2.54
$567
$540
The fair value of each RSU is the New York Stock Exchange (“NYSE”) closing price on the date of grant.
The weighted-average grant date fair value of RSUs granted during 2006 and 2005 was $74.87 and $72.82,
respectively. The total fair value of RSUs vested was $82 million in 2006, and zero in 2005 and 2004. As of
December 31, 2006, there was $437 million of total unrecognized compensation cost related to nonvested RSUs.
That cost is expected to be recognized over a weighted average period of 4 years and 5 months.
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 Plan must have an exercise price at least equal to
the NYSE closing price of UPS class B common stock on the date the option is granted.
Persons earning the right to receive stock options are determined each year by the Compensation
Committee. Except in the case of death, disability, or retirement, options granted under the 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 cancellation or exercise under certain conditions. Option
holders may exercise their options via the tender of cash or class A common stock, and new class A shares are
issued upon exercise. Options granted to eligible employees will generally be granted annually during the second
quarter of each year at the discretion of the Compensation Committee.
The following is an analysis of options to purchase shares of class A common stock issued and outstanding:
Shares
(in thousands)
Weighted
Average
Exercise
Price
Weighted Average
Remaining
Contractual Term
(in years)
Aggregate Intrinsic
Value (in millions)
Outstanding at January 1, 2006 . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited / Expired . . . . . . . . . . . . . . . . . . . . . . . . .
18,734
(1,993)
2,433
(292)
Outstanding at December 31, 2006 . . . . . . . . . . . . .
18,882
Exercisable at December 31, 2006 . . . . . . . . . . . . .
10,108
Options Expected to Vest . . . . . . . . . . . . . . . . . . . .
8,487
$61.84
56.55
80.88
68.14
$64.75
$58.63
$71.57
6.23
4.79
7.85
$208
$166
$ 42
F-34
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The fair value of each option grant is estimated using the Black-Scholes option pricing model. The weighted
average assumptions used, by year, and the calculated weighted average fair values of options are as follows:
2006
2005
2004
Expected dividend yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Risk-free interest rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected life in years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected volatility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted average fair value of options granted . . . . . . . . . . . . . . . . . . . . . . . . . . .
1.80%
5.13%
7
1.60%
4.18%
7
18.42% 18.21% 15.69%
$21.05
1.50%
4.31%
7
$16.24
$17.33
Expected volatilities are based on the historical returns on our stock and, due to our limited history of being
a publicly-traded company, an index of peer companies, as well as the implied volatility of our publicly-traded
options. The expected dividend yield is based on the recent historical dividend yields for our stock, taking into
account changes in dividend policy. The risk-free interest rate is based on the term structure of interest rates at
the time of the option grant. The expected life represents an estimate of the period of time options are expected to
remain outstanding, and we have relied upon a combination of the observed exercise behavior of our prior grants
with similar characteristics, the vesting schedule of the grants, and an index of peer companies with similar grant
characteristics.
We received cash of $30, $21, and $60 million during 2006, 2005, and 2004, respectively, from option
holders resulting from the exercise of stock options. We received a tax benefit of $12, $5, and $38 million during
2006, 2005, and 2004, respectively, from the exercise of stock options. The adoption of FAS 123(R) required us
to change the statement of cash flow classification of these tax benefits, and as a result, these tax benefits are
reported as cash from financing activities rather than cash from operating activities.
The total intrinsic value of options exercised during 2006, 2005, and 2004 was $45, $24, and $331 million,
respectively. As of December 31, 2006, there was $80 million of total unrecognized compensation cost related to
nonvested options. That cost is expected to be recognized over a weighted average period of 3 years and 4
months.
The following table summarizes information about stock options outstanding and exercisable at
December 31, 2006:
Exercise Price Range
$ 19.93 - $50.00 . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 50.37 - $56.90 . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 57.45 - $60.22 . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 60.38 - $70.70 . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 71.88 - $116.48 . . . . . . . . . . . . . . . . . . . . . . . . . . .
Options Outstanding
Options Exercisable
Shares
(in thousands)
Average Life
(in years)
1,581
3,161
4,078
5,096
4,966
18,882
2.86
4.23
5.26
6.81
8.79
6.23
Average
Exercise
Price
$49.94
56.85
60.19
66.45
76.41
$64.75
Shares
(in thousands)
1,581
3,161
4,078
936
352
10,108
Average
Exercise
Price
$49.94
56.85
60.19
65.88
76.23
$58.63
Restricted Performance Units
Beginning in 2003, we issued restricted performance units (“RPUs”) under the Plan. Upon vesting, RPUs
result in the issuance of the equivalent number of UPS class A common shares after required tax withholdings.
Persons earning the right to receive RPUs are determined each year by the Compensation Committee. Except in
the case of death, disability, or retirement, RPUs vest five years after the date of grant. All RPUs granted are
F-35
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
subject to earlier cancellation or vesting under certain conditions. Dividends earned on RPUs are reinvested in
additional restricted performance units at each dividend payable date. RPUs also allow for an additional award
equal to 10% of the outstanding RPUs to be issued if certain company-wide performance goals are attained in the
year of vesting. RPUs granted to eligible employees will generally be granted annually during the second quarter
of each year at the discretion of the Compensation Committee.
As of December 31, 2006, we had the following RPUs outstanding, including reinvested dividends:
Shares
(in thousands)
Weighted
Average
Grant Date
Fair Value
Weighted Average Remaining
Contractual Term
(in years)
Aggregate Intrinsic
Value (in millions)
Nonvested at January 1, 2006 . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . .
Reinvested Dividends . . . . . . . . . . . . . .
Forfeited / Expired . . . . . . . . . . . . . . . .
Nonvested at December 31, 2006 . . . . .
RPUs Expected to Vest . . . . . . . . . . . . .
2,886
(174)
990
74
(107)
3,669
3,534
$68.49
70.93
80.88
N/A
72.27
71.64
71.48
2.87
2.84
$275
$265
The fair value of each RPU is the NYSE closing price on the date of grant. The weighted-average grant date
fair value of RPUs granted during 2006, 2005, and 2004 was $80.88, $72.07, and $70.70, respectively. The total
fair value of RPUs vested during 2006, 2005, and 2004 was $13, $13, and $11 million, respectively. As of
December 31, 2006, there was $140 million of total unrecognized compensation cost related to nonvested RPUs.
That cost is expected to be recognized over a weighted average period of 3 years and 4 months.
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 of
UPS class B common stock on the first or the last day of each quarterly period. Employees purchased 1.9, 2.0,
and 1.8 million shares at average prices of $66.64, $64.54, and $62.75 per share during 2006, 2005, and 2004,
respectively. Compensation cost is measured for the fair value of employees’ purchase rights under our
discounted employee stock purchase plan using the Black-Scholes option pricing model.
The weighted average assumptions used and the calculated weighted average fair value of employees’
purchase rights granted, are as follows:
2006
2005
2004
Expected dividend yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Risk-free interest rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected life in years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected volatility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted average fair value of purchase rights* . . . . . . . . . . . . . . . . . . . . . . . . . . . .
* Includes the 10% discount from the market price.
1.79%
1.62%
4.59%
2.84%
0.25
0.25
15.92% 15.46% 16.83%
$10.30
1.42%
1.18%
0.25
$ 9.46
$ 9.56
Expected volatilities are based on the historical price volatility on our publicly-traded class B shares. The
expected dividend yield is based on the recent historical dividend yields for our stock, taking into account
changes in dividend policy. The risk-free interest rate is based on the term structure of interest rates on U.S.
Treasury securities at the time of the option grant. The expected life represents the three month option period
applicable to the purchase rights.
F-36
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
NOTE 12. SEGMENT AND GEOGRAPHIC INFORMATION
We report our operations in three segments: U.S. Domestic Package operations, International Package
operations, and Supply Chain & Freight operations. Package operations represent our most significant business
and are broken down into regional operations around the world. Regional operations managers are responsible
for both domestic and export operations within their geographic area.
U.S. Domestic Package
Domestic Package operations include the time-definite delivery of letters, documents, and packages
throughout the United States.
International Package
International Package operations include delivery to more than 200 countries and territories worldwide,
including shipments wholly outside the United States, as well as shipments with either origin or distribution
outside the United States. Our International Package reporting segment includes the operations of our Europe,
Asia, and Americas operating segments.
Supply Chain & Freight
Supply Chain & Freight includes our forwarding and logistics operations, UPS Freight, and other
aggregated business units. Our forwarding and logistics business provides services in more than 175 countries
and territories worldwide, and includes supply chain design and management, freight distribution, customs
brokerage, mail and consulting services. UPS Freight offers a variety of LTL and TL services to customers in
North America. Other aggregated business units within this segment include Mail Boxes, Etc. (the franchisor of
Mail Boxes, Etc. and The UPS Store) and UPS Capital.
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, short-term investments, and equity-method real estate
investments.
Segment information as of, and for the years ended, December 31 is as follows (in millions):
2006
2005
2004
Revenue:
U.S. Domestic Package . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
International Package . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Supply Chain & Freight . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$30,456
9,089
8,002
$28,610
7,977
5,994
$26,960
6,809
2,813
Consolidated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$47,547
$42,581
$36,582
Operating Profit:
U.S. Domestic Package . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
International Package . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Supply Chain & Freight . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 4,923
1,710
2
$ 4,493
1,494
156
$ 3,702
1,149
138
Consolidated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 6,635
$ 6,143
$ 4,989
F-37
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
2006
2005
2004
Assets:
U.S. Domestic Package . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
International Package . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Supply Chain & Freight . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unallocated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$19,274
5,496
7,150
1,290
$20,572
4,931
7,116
2,328
$18,749
4,682
4,878
4,538
Consolidated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$33,210
$34,947
$32,847
Depreciation and Amortization Expense:
U.S. Domestic Package . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
International Package . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Supply Chain & Freight . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
989
547
212
$ 1,005
491
148
$
971
465
107
Consolidated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 1,748
$ 1,644
$ 1,543
Revenue by product type for the years ended December 31 is as follows (in millions):
2006
2005
2004
U.S. Domestic Package:
Next Day Air . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ground . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 6,778
3,424
20,254
$ 6,381
3,258
18,971
$ 6,084
3,193
17,683
Total U.S. Domestic Package . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
International Package:
Domestic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Export . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cargo . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total International Package . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Supply Chain & Freight:
Forwarding and Logistics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Freight
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Supply Chain & Freight
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
30,456
28,610
26,960
1,950
6,554
585
9,089
5,681
1,952
369
8,002
1,588
5,856
533
7,977
4,859
797
338
5,994
1,346
4,991
472
6,809
2,476
—
337
2,813
Consolidated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$47,547
$42,581
$36,582
Geographic information as of, and for the years ended, December 31 is as follows (in millions):
2006
2005
2004
United States:
Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-lived assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$34,445
$18,659
$31,871
$19,704
$28,035
$16,033
International:
Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-lived assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$13,102
$ 4,800
$10,710
$ 4,044
$ 8,547
$ 3,975
Consolidated:
Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-lived assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$47,547
$23,459
$42,581
$23,748
$36,582
$20,008
F-38
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Revenue, for geographic disclosure, is based on the location in which service originates. Long-lived assets
include property, plant and equipment, pension and postretirement benefit assets, long-term investments,
goodwill, and intangible assets.
NOTE 13. INCOME TAXES
The income tax expense (benefit) for the years ended December 31 consists of the following (in millions):
2006
2005
2004
Current:
U.S. Federal
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. State & Local . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,674
217
129
$1,683
176
135
$1,675
71
98
Total Current
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,020
1,994
1,844
Deferred:
U.S. Federal
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. State & Local . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Deferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
291
33
(36)
288
211
6
(6)
211
(155)
(84)
(16)
(255)
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$2,308
$2,205
$1,589
Income before income taxes includes income of non-U.S. subsidiaries of $490, $337, and $270 million in
2006, 2005, and 2004, respectively.
A reconciliation of the statutory federal income tax rate to the effective income tax rate for the years ended
December 31 consists of the following:
Statutory U.S. federal income tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. state & local income taxes (net of federal benefit) . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
35.0% 35.0% 35.0%
2.0
2.2
(0.7)
(1.7)
1.2
(3.9)
Effective income tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
35.5% 36.3% 32.3%
2006
2005
2004
During the third quarter of 2006, we recognized a $52 million reduction of income tax expense related to
favorable developments with certain U.S. Federal tax contingency matters involving non-U.S. operations.
During the third quarter of 2004, we recognized a $99 million reduction of income tax expense related to the
favorable settlement 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 million 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 carryforwards due to sufficient positive evidence that the related
subsidiaries will be profitable and generate taxable income before such carryforwards expire.
F-39
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Deferred tax liabilities and assets are comprised of the following at December 31 (in millions):
2006
2005
Property, plant and equipment
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill and intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pension plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$2,802
578
579
343
$2,572
491
1,722
251
Gross deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4,302
5,036
Other postretirement benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss and credit carryforwards (non-U.S. and state) . . . . . . . . . . . . . . . . . . . . . . . . .
Insurance reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vacation pay accrual . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
789
130
586
171
659
681
113
543
154
649
Gross deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax assets valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,335
(43)
2,292
2,140
(54)
2,086
Net deferred tax liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$2,010
$2,950
Amounts recognized in the balance sheet:
Current deferred tax asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 414
$ 475
Non-current deferred tax asset
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 105
$ —
Non-current deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$2,529
$3,425
The valuation allowance decreased by $11, $32, and $31 million during the years ended December 31, 2006,
2005 and 2004, respectively.
As of December 31, 2006, we have U.S. state & local operating loss and credit carryforwards of
approximately $937 million and $54 million, respectively. The operating loss carryforwards expire at varying
dates through 2026. The majority of the credit carryforwards may be carried forward indefinitely. We also have
non-U.S. loss carryforwards of approximately $874 million as of December 31, 2006, the majority of which may
be carried forward 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 $1.225 billion at
December 31, 2006. Those earnings are considered to be indefinitely reinvested and, accordingly, 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 complexities associated with its
hypothetical calculation.
The American Jobs Creation Act of 2004, which provided for a temporary 85% dividends received
deduction on certain foreign earnings repatriated during a one-year period (expired in December 2005), did not
have an impact on UPS as we did not repatriate any earnings subject to the Act.
F-40
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
NOTE 14. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per share (in millions except per
share amounts):
Numerator:
2006
2005
2004
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$4,202
$3,870
$3,333
Denominator:
Weighted average shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Management incentive awards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred compensation obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,082
—
3
1,110
—
3
Denominator for basic earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,085
1,113
Effect of dilutive securities:
Management incentive awards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restricted performance units . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restricted stock units . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock option plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
1
1
2
—
—
1
2
1,125
1
3
1,129
—
—
4
4
Denominator for diluted earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,089
1,116
1,137
Basic earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 3.87
$ 3.48
$ 2.95
Diluted earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 3.86
$ 3.47
$ 2.93
Diluted earnings per share for the years ended December 31, 2006, 2005, and 2004 exclude the effect of 6.3,
5.9, and 4.1 million shares, respectively, of common stock that may be issued upon the exercise of employee
stock options because such effect would be antidilutive.
NOTE 15. DERIVATIVE INSTRUMENTS AND RISK MANAGEMENT
We are exposed to market risk, primarily related to foreign exchange rates, commodity prices, equity prices,
and interest rates. These exposures are actively monitored by management. To manage the volatility relating to
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 currency 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, principally 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 protection from
rising fuel and energy prices. The net fair value of such contracts subject to price risk, excluding the underlying
exposures, as of December 31, 2006 and 2005 was an asset of $10 and $192 million, respectively. We have
F-41
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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.
In the second quarter of 2006, we terminated several energy derivatives and received $229 million in cash,
which is reported in other investing activities in the statement of cash flows. These derivatives were designated
as hedges of forecasted cash outflows for purchases of fuel products. As these derivatives maintained their
effectiveness and qualified for hedge accounting, we anticipate that the gains associated with these hedges will
be recognized in income over the original term of the hedges through 2007.
Foreign Currency Exchange Risk Management
We have foreign currency risks related to our revenue, operating expenses, and financing transactions in
currencies other than the local currencies in which we operate. We are exposed to currency risk from the
potential changes in functional currency values of our foreign currency denominated assets, liabilities, and cash
flows. Our most significant foreign currency exposures relate to the Euro, 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, 2006 and 2005, the net fair value of the hedging instruments
described above was an asset of $30 and $52 million, respectively. We have designated and account for these
contracts as cash flow hedges of anticipated foreign currency denominated revenue and, therefore, the resulting
gains and losses from these hedges are recognized as a component of international package revenue when the
underlying sales occur.
Interest Rate Risk Management
Our indebtedness under our various financing arrangements creates interest rate risk. We use a combination
of derivative 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 material to net income.
The net fair value of our interest rate swaps at December 31, 2006 and 2005 was a liability of $79 and $47
million, respectively.
Credit Risk Management
The forward contracts, swaps, and options previously discussed contain an element of risk that the
counterparties may be unable to meet the terms of the agreements. However, we minimize such risk exposures
for these instruments by limiting the counterparties to large banks and financial institutions that meet established
credit guidelines. We do not expect to incur any losses as a result of counterparty default.
Derivatives Not Designated As Hedges
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 2006, 2005 and 2004.
F-42
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Income Effects of Derivatives
In the context of hedging relationships, “effectiveness” refers to the degree to which fair value changes in
the hedging instrument offset corresponding changes in the hedged item. Certain elements of hedge positions
cannot qualify for hedge accounting under FAS 133 whether effective or not, and must therefore be marked to
market through income. Both the effective and ineffective portions of gains and losses on hedges are reported in
the income statement category related to the hedged exposure. Both the ineffective portion of hedge positions
and the elements excluded from the measure of effectiveness were immaterial for 2006, 2005 and 2004.
As of December 31, 2006, $111 million in pre-tax gains 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, 2007.
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 2006 in connection with
forecasted transactions that were no longer considered probable of occurring.
At December 31, 2006, the maximum term of derivative instruments that hedge forecasted transactions,
except those related to cross-currency interest rate swaps on existing financial instruments, was 2 years. We
maintain cross-currency interest rate swaps that extend through 2009.
Fair Value of Financial Instruments
At December 31, 2006 and 2005, our financial instruments included cash and cash equivalents, marketable
securities and short-term investments, accounts receivable, finance receivables, accounts payable, short-term and
long-term borrowings, and commodity, interest rate, foreign currency, and equity options, forwards, and swaps.
The fair values of cash and cash equivalents, accounts receivable, and accounts payable approximate carrying
values because of the short-term nature of these instruments. The fair value of our marketable securities and
short-term investments is disclosed in Note 2, finance receivables in Note 3, and debt instruments in Note 8.
NOTE 16. RESTRUCTURING COSTS
In connection with recent acquisitions and integration initiatives, we have incurred restructuring costs
associated with the termination of employees, facility consolidations and other costs directly related to the
restructuring initiatives implemented. These costs have resulted from the integration of our Menlo Worldwide
Forwarding and Lynx acquisitions as well as restructuring activities associated with our Supply Chain Solutions
operations. For specific restructuring costs recognized in conjunction with the cost from acquisitions, we have
accounted for these costs in accordance with EITF 95-3, “Recognition of Liabilities Assumed in Connection with
a Purchase Business Combination.” All other restructuring costs have been accounted for in accordance with
SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” and SFAS No. 144,
“Accounting for the Impairment or Disposal of Long-Lived Assets.”
Menlo Worldwide Forwarding
In February 2005, we announced our intention to transfer the heavy air freight operations at our facility in
Dayton, Ohio (acquired with the operations of Menlo Worldwide Forwarding in December 2004) to other UPS
facilities over approximately 12 to 18 months. This action was taken to remove redundancies between the Dayton
air freight facility and existing UPS transportation networks, and thus provide efficiencies and better leverage the
current UPS infrastructure in the movement of air freight. During the third quarter of 2005, we finalized our
plans to exit the Dayton facility, as well as various other acquired facilities, and accrued certain costs related to
employee severance, lease terminations, and related items. As part of this restructuring program, the recorded
F-43
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
value of the Dayton facility was reduced to its fair market value as of the date of the acquisition. These accrued
costs, and related reductions in the fair value of recorded assets, resulted in an adjustment of $160 million to the
amount of goodwill initially recorded in the Menlo Worldwide Forwarding acquisition.
Additionally, we incurred costs related to integration activities, such as employee relocations, the moving of
inventory and fixed assets, and the consolidation of information systems, and these amounts were expensed as
incurred. We completed the majority of our integration activities for the air freight restructuring program in the
fourth quarter of 2006. The remaining restructuring liabilities existing as of December 31, 2006, primarily
represent costs that will continue to be incurred under various long-term contracts without any economic benefit
to our Company.
Set forth below is a summary of activity related to the air freight restructuring program and resulting
liability for the year ended December 31, 2006 (in millions):
Employee
Severance
Asset
Impairment
Facility
Consolidation Other
Total
Balance at January 1, 2005 . . . . . . . . . . . . . . . . . . . . . . . . . .
Costs accrued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash spent
Charges against assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at December 31, 2005 . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash spent
Charges against assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reversals, currency, and other . . . . . . . . . . . . . . . . . . . . . . . .
$—
31
(7)
—
24
(17)
—
(7)
$—
56
—
(56)
—
—
—
—
$—
48
(1)
—
47
(3)
—
(4)
$— $—
160
(8)
(56)
25
—
—
25
(10)
—
(2)
96
(30)
—
(13)
Balance at December 31, 2006 . . . . . . . . . . . . . . . . . . . . . . .
$—
$—
$ 40
$ 13
$ 53
Employee severance costs related to severance packages for approximately 550 people. These packages
were involuntary and were formula-driven based on salary levels and past service. The separations spanned the
entire business unit, including the operations, information technology, finance, and business development
functions.
Asset impairment charges resulted from establishing new carrying values for assets which were abandoned.
Impaired assets consisted primarily of the Menlo Worldwide Forwarding facility in Dayton, Ohio, which we
closed in June 2006.
Facility consolidation costs are associated with terminating operating leases on offices, warehouses, and
other acquired facilities as well as other maintenance costs associated with certain facilities.
Other costs consist primarily of costs associated with the termination of certain acquired legal entities and
joint ventures, as well as environmental remediation costs.
Lynx Express Ltd.
In conjunction with our integration of the Lynx business, we have implemented a series of initiatives to
reduce operating costs and maximize the efficiencies of the UPS network in the United Kingdom. These
initiatives include closing existing hubs and constructing a consolidated sorting facility as well as establishing a
European shared service center in Poland. As a result of these initiatives, we have accrued certain costs related to
employee severance, lease terminations and other facility costs as well as recorded a reduction in the fair value of
F-44
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
certain assets acquired. These restructuring costs impacting the acquired Lynx business have resulted in an
adjustment to goodwill of $7 million. The remaining integration costs for this restructuring program, including
facility costs associated with capacity expansion, will be recognized as incurred. We anticipate completing this
integration program by fiscal year 2008 at which time certain hubs will be closed and the new consolidated
sorting facility will be fully operational.
Supply Chain Solutions
In an effort to rationalize our cost structure and focus on profitable revenue growth, we initiated a
restructuring plan for our Supply Chain Solutions Forwarding & Logistics operations in the fourth quarter of
2006. This restructuring plan is expected to generate efficiencies resulting in improved revenues and operating
profits by further integrating all of our transportation services to better serve our customers. This restructuring
involves plans to reduce non-operating expenses by approximately 20%, including a reduction in non-operating
staff of approximately 1,400 people. As of December 31, 2006, $12 million in costs have been accrued related to
employee severance.
UPS Special Voluntary Separation Opportunity
In December 2006, we offered a special voluntary separation opportunity (“SVSO”) to approximately 640
employees who work in non-operating functions. This program is an effort to improve the efficiency of
non-operating processes by eliminating duplication and sharing expertise across the company. The SVSO ended
in February 2007, and approximately 30% of eligible employees accepted the offer. As a result, we will record a
charge to expense of approximately $80 million in the first quarter of 2007, to reflect the anticipated cash payout
and the acceleration of stock compensation and certain retiree healthcare benefits under the SVSO program.
NOTE 17. QUARTERLY INFORMATION (unaudited)
Revenue:
First Quarter
2006
2005
Second Quarter
2005
2006
Third Quarter
2005
2006
Fourth Quarter
2005
2006
U.S. Domestic Package . . . . . . . $ 7,463 $6,811 $ 7,462 $ 6,942 $ 7,402 $ 7,033 $ 8,129 $ 7,824
2,220
International Package . . . . . . . . .
1,910
Supply Chain & Freight . . . . . . .
2,251
2,009
2,161
1,897
1,997
1,252
2,233
2,041
1,842
1,233
2,444
2,055
1,918
1,599
Total revenue . . . . . . . . . . . $11,521 $9,886 $11,736 $10,191 $11,662 $10,550 $12,628 $11,954
Operating profit (loss):
U.S. Domestic Package . . . . . . .
International Package . . . . . . . . .
Supply Chain & Freight . . . . . . .
1,185
395
(25)
1,028
348
9
1,234
414
47
1,118
397
34
1,208
387
(19)
1,110
318
70
1,296
514
(1)
1,237
431
43
Total operating profit . . . . . $ 1,555 $1,385 $ 1,695 $ 1,549 $ 1,576 $ 1,498 $ 1,809 $ 1,711
Net income . . . . . . . . . . . . . . . . . . . . . $
975 $ 882 $ 1,061 $
986 $ 1,038 $
953 $ 1,128 $ 1,049
Earnings per share:
Basic . . . . . . . . . . . . . . . . . . . . . . $
Diluted . . . . . . . . . . . . . . . . . . . . $
0.89 $ 0.78 $
0.89 $ 0.78 $
0.98 $
0.97 $
0.88 $
0.88 $
0.96 $
0.96 $
0.86 $
0.86 $
1.05 $
1.04 $
0.95
0.95
F-45
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
NOTE 18. SUBSEQUENT EVENTS
In February 2007, we announced an order for 27 Boeing 767-300ER freighters to be delivered between 2009
and 2012. We anticipate using these 767-300ER aircraft primarily to support the growth in our International
Package business, and to improve the efficiency and speed of our air network as we eventually replace aging
aircraft.
In February 2007, we signed an agreement with Airbus to set out a timetable for deciding the status of our
previous order for the freighter version of the Airbus A380-800. The agreement specifies changed delivery dates
for the A380-800 and provides for possible termination of the original purchase agreement by either party later in
2007. The revised delivery schedule specifies the delivery dates for the 10 Airbus A380-800’s on order as being
between 2012 and 2013, whereas we were originally scheduled to take delivery of the Airbus A380-800 aircraft
between 2009 and 2012. The signing of this agreement will have no material impact on our results of operations
or financial condition.
In conjunction with these changes, we have initiated a re-evaluation process of our aircraft fleet types, to
ensure that we maintain the optimum mix of aircraft types to service our international and domestic package
businesses. This process might result in the planned retirement of certain less-efficient and older aircraft models
at dates earlier than originally anticipated. As a result, we will reassess our assumptions of the expected lives and
residual values on these aircraft. Any resulting adjustments would be accounted for on a prospective basis,
potentially resulting in increased depreciation expense in future periods. Additionally, this process could result in
circumstances that would indicate the net book value of the aircraft might not be recoverable, based on the
undiscounted future cash flows the aircraft are anticipated to generate. If the net book value of the aircraft is
determined not to be recoverable, we would be required to record an impairment based on the fair value of the
aircraft, in accordance with FAS 144. We anticipate completing this process by the end of the first quarter of
2007.
F-46
Exhibit
No.
Description
EXHIBIT INDEX
2.1 — Agreement and Plan of Merger, dated as of September 22, 1999, among United Parcel Service of
America, Inc., United Parcel Service, Inc. and UPS Merger Subsidiary, Inc. (incorporated by
reference to the registration statement on Form S-4 (No. 333-83349), filed on July 21, 1999, as
amended).
2.2 — Agreement and Plan of Merger, dated as of May 15, 2005, among United Parcel Service, Inc.,
Overnite Corporation, and Olympic Merger Sub, Inc. (incorporated by reference to the Form 8-K,
filed on May 18, 2005).
3.1 — Form of Restated Certificate of Incorporation of United Parcel Service, Inc. (incorporated by
reference to Exhibit 3.1 to Form 10-Q for the Quarter Ended June 30, 2002).
3.2 — Form of Bylaws of United Parcel Service, Inc. (incorporated by reference to Exhibit 3.2 to the
registration statement on Form S-4 (No. 333-83349), filed on July 21, 1999, as amended).
4.1 — Form of Class A Common Stock Certificate (incorporated by reference to Exhibit 4.1 to the
registration statement on Form S-4 (No. 333-83349), filed on July 21, 1999, as amended).
4.2 — Form of Class B Common Stock Certificate (incorporated by reference to Exhibit 4.2 to the
registration statement on Form S-4 (No. 333-83349), filed on July 21, 1999).
4.3 — Specimen Certificate of 8 3/8% Debentures due April 1, 2020 (incorporated by reference to
Exhibit 4(c) to Registration Statement No. 33-32481, filed December 7, 1989).
4.4 — Indenture relating to 8 3/8% Debentures due April 1, 2020 (incorporated by reference to Exhibit 4(c)
to Registration Statement No. 33-32481, filed December 7, 1989).
4.5 — Specimen Certificate of 8 3/8% Debentures due April 1, 2030 (incorporated by reference to
Exhibit T-3C to Form T-3 filed December 18, 1997).
4.6 — Indenture relating to Exchange Offer Notes Due 2030 (incorporated by reference to Exhibit T-3C to
Form T-3 filed December 18, 1997).
4.7 — Indenture relating to $2,000,000,000 of debt securities (incorporated by reference to Exhibit 4.1 to
Pre-Effective Amendment No. 1 to Registration Statement on Form S-3 (No. 333-08369), filed on
January 26, 1999).
4.8 — Form of Supplemental Indenture relating to $2,000,000,000 of debt securities (incorporated by
reference to Exhibit 4.2 to Post-Effective Amendment No. 1 to Registration Statement on Form S-3
(No. 333-08369-01), filed on March 15, 2000).
4.9 — Form of Second Supplemental Indenture relating to $2,000,000,000 of debt securities (incorporated
by reference to Exhibit 4 to Form 10-Q for the Quarter Ended September 30, 2001).
4.10 — Form of Indenture relating to $2,000,000,000 of debt securities (incorporated by reference to Exhibit
4.1 to Registration Statement on Form S-3 (No. 333-108272), filed on August 27, 2003).
4.11 — Underwriting Agreement relating to 1.75% Cash-Settled Convertible Senior Notes due
September 27, 2007 (incorporated by reference to Exhibit 1 to Form 10-Q for the Quarter Ended
September 30, 2000).
4.12 — Form of Underwriting Agreement relating to $2,000,000,000 of debt securities (incorporated by
reference to Exhibit 1.1 to Registration Statement on Form S-3 (No. 333-108272), filed on
August 27, 2003).
4.13 — Selling Agent Agreement relating to UPS Notes with maturities of 9 months or more from date of
issue (incorporated by reference to Exhibit 10.1 to Form 8-K filed November 21, 2006) and Form of
Note (incorporated by reference to Exhibit 4.1 to Form 8-K filed September 12, 2003).
Exhibit
No.
Description
10.1 — UPS Thrift Plan, as Amended and Restated, including Amendment Nos. 1 through 24 (incorporated
by reference to Exhibit 10.1 to 2001 Annual Report on Form 10-K).
(1) Amendment No. 25 to the UPS Thrift Plan (incorporated by reference to Exhibit 10.1(1) to
2002 Annual Report on Form 10-K).
†10.2 — UPS Retirement Plan, as Amended and Restated, including Amendment Nos. 1 through 34.
10.3 — UPS Savings Plan, as Amended and Restated, including Restatement Amendment Nos. 1 through 8
(incorporated by reference to Exhibit 10.3 to 2001 Annual Report on Form 10-K).
(1) Amendment No. 1 to the UPS Savings Plan (incorporated by reference to Exhibit 10.3(1) to
2004 Annual Report on Form 10-K).
(2) Amendment No. 2 to the UPS Savings Plan (incorporated by reference to Exhibit 10.3(2) to
2004 Annual Report on Form 10-K).
(3) Amendment No. 3 to the UPS Savings Plan (incorporated by reference to Exhibit 10.4 to
Quarterly Report on Form 10-Q for the Quarter Ended March 31, 2005).
10.4 — Credit Agreement (364-Day Facility) dated April 20, 2006 among United Parcel Service, Inc., the
initial lenders named therein, Citigroup Global Markets Inc. and J.P. Morgan Securities Inc. as joint
arrangers, Bank of America, N.A., Barclays Bank PLC, and BNP Paribas as co-documentation
agents, Citibank, N.A. as administrative agent, and JPMorgan Chase Bank, N.A., as syndication
agent. (incorporated by reference to Exhibit 10.1 to Quarterly Report on Form 10-Q for the Quarter
Ended March 31, 2006).
10.5 — Credit Agreement (Five-Year Facility) dated April 21, 2005 among United Parcel Service, Inc., the
initial lenders named therein, Citigroup Global Markets Inc. and J.P. Morgan Securities Inc. as Joint
Arrangers, Bank of America, N.A., Barclays Bank PLC, and BNP Paribas as Co-Documentation
Agents and Citibank, N.A. as Administrative Agent and JP Morgan Chase Bank, N.A., as
Syndication Agent (incorporated by reference to Exhibit 10.2 to Quarterly Report on Form 10-Q for
the Quarter Ended March 31, 2005).
10.6 — UPS Excess Coordinating Benefit Plan (incorporated by reference to Exhibit 10.8 to 2003 Annual
Report on Form 10-K).
10.7 — UPS 1996 Stock Option Plan, as amended and restated (incorporated by reference to Exhibit 10.9 to
2003 Annual Report on Form 10-K).
10.8 — UPS Qualified Stock Ownership Plan and Trust Agreement (incorporated by reference to Exhibit 4.1
to Registration Statement No. 333-67479, filed November 18, 1998).
(1) Amendment No. 1 to the UPS Qualified Stock Ownership Plan and Trust Agreement
(incorporated by reference to Exhibit 10.19(1) to 1999 Annual Report on Form 10-K).
(2) Amendment No. 2 to the UPS Qualified Stock Ownership Plan and Trust Agreement
(incorporated by reference to Exhibit 10.19(2) to 1999 Annual Report on Form 10-K).
(3) Amendment No. 3 to the UPS Qualified Stock Ownership Plan and Trust Agreement
(incorporated by reference to Exhibit 10.19(3) to 1999 Annual Report on Form 10-K).
(4) Amendment No. 4 to the UPS Qualified Stock Ownership Plan and Trust Agreement
(incorporated by reference to Exhibit 10.19(4) to 2000 Annual Report on Form 10-K).
(5) Amendment No. 5 to the UPS Qualified Stock Ownership Plan and Trust Agreement
(incorporated by reference to Exhibit 10.8(5) to 2001 Annual Report on Form 10-K).
(6) Amendment No. 6 to the UPS Qualified Stock Ownership Plan and Trust Agreement
(incorporated by reference to Exhibit 10.8(6) to 2001 Annual Report on Form 10-K).
Exhibit
No.
Description
(7) Amendment No. 7 to the UPS Qualified Stock Ownership Plan and Trust Agreement
(incorporated by reference to Exhibit 10.8(7) to 2002 Annual Report on Form 10-K).
(8) Amendment No. 8 to the UPS Qualified Stock Ownership Plan and Trust Agreement
(incorporated by reference to Exhibit 10.10(8) to 2003 Annual Report on Form 10-K).
(9) Amendment No. 9 to the UPS Qualified Stock Ownership Plan and Trust Agreement
(incorporated by reference to Exhibit 10.10(9) to 2003 Annual Report on Form 10-K).
(10) Amendment No. 10 to the UPS Qualified Stock Ownership Plan and Trust Agreement
(incorporated by reference to Exhibit 10.5 to Quarterly Report on Form 10-Q for the Quarter
Ended March 31, 2005).
10.9 — Form of United Parcel Service, Inc. Incentive Compensation Plan (incorporated by reference to the
registration statement on Form S-4 (No. 333-83349), filed on July 21, 1999, as amended).
(1) Form of Non-Qualified Stock Option Award Agreement and Restricted Performance Unit
Award Agreement (incorporated by reference to Exhibit 10.11(1) to 2004 Annual Report on
Form 10-K).
(2) Form of Restricted Stock Award Agreement (incorporated by reference to Exhibit 10.7 to
Quarterly Report on Form 10-Q for the Quarter Ended March 31, 2005).
(3) Form of Restricted Stock Unit Award Agreement for the 2006 Long-Term Incentive
Performance Awards (incorporated by reference to Exhibit 10.1 to the Current Report on Form
8-K, filed on March 7, 2006).
(4) Form of Nonqualified Stock Option Award Agreement (incorporated by reference to
Exhibit 10.1 to the Current Report on Form 8-K, filed on May 5, 2006).
(5) Form of Restricted Performance Unit Award Agreement (incorporated by reference to
Exhibit 10.2 to the Current Report on Form 8-K, filed on May 5, 2006).
10.10 — UPS Deferred Compensation Plan (incorporated by reference to Exhibit 10.10 to 2000 Annual
Report on Form 10-K).
(1) Amendment to the UPS Deferred Compensation Plan (incorporated by reference to Exhibit
10.12(1) to 2004 Annual Report on Form 10-K).
10.11 — United Parcel Service, Inc. Nonqualified Employee Stock Purchase Plan (incorporated by reference
to the registration statement on Form S-8 (No. 333-34054), filed on April 5, 2000.
10.12 — Form of United Parcel Service, Inc. Discounted Employee Stock Purchase Plan (incorporated by
reference to Appendix B to Definitive Proxy Statement for 2001 Annual Meeting of Shareowners).
(1) Amendment to the Discounted Employee Stock Purchase Plan (incorporated by reference to
Exhibit 10.12(1) to the 2005 Annual Report on Form 10-K).
†12 — Ratio of Earnings to Fixed Charges.
†21 — Subsidiaries of the Registrant.
†23 — Consent of Deloitte & Touche LLP.
†31.1 — Certificate of Chief Executive Officer Pursuant to Rule 13a-14(a), as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
†31.2 — Certificate of Chief Financial Officer Pursuant to Rule 13a-14(a), as adopted pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
†32.1 — Certification of the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
†32.2 — Certification of the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
† Filed herewith.
INVESTOR INFORMATION
ANNUAL MEETING
Our annual meeting of shareowners will be held
at 8:00 A.M. on May 10, 2007 at the Hotel du Pont,
11th and Market Streets, Wilmington, DE.
Shareowners of record as of March 12, 2007 are
entitled to vote at the meeting.
INVESTOR RELATIONS
You can contact our Investor Relations
Department at:
UPS
55 Glenlake Pkwy., N.E.
Atlanta, GA 30328-3474
800-877-1503
404-828-6059
www.shareholder.com/ups
CERTIFICATIONS
UPS has included as Exhibits 31.1, 31.2, 32.1, and
32.2 to its Annual Report on Form 10-K fi led with the
Securities and Exchange Commission certifi cates of the
Chief Executive Offi cer and Chief Financial Offi cer
attesting to the quality of UPS’s public disclosure. In ad-
dition, the Chief Executive Offi cer certifi ed to the New
York Stock Exchange on May 24, 2006 that he was not
aware of any violations by UPS of the New York Stock
Exchange corporate governance listing standards.
EXCHANGE LISTING
Our Class B common stock is listed on the New
York Stock Exchange under the symbol “UPS.”
TRANSFER AGENT AND REGISTRAR
Direct notices of address changes or questions
regarding account status, stock transfers, lost
certifi cates, or dividend payments to:
UPS
c/o Mellon Investor Services LLC
P.O. Box 3415
South Hackensack, NJ 07606-3415
or
480 Washington Boulevard
Jersey City, NJ 07310
FORM 10-K
Our Annual Report on Form 10-K for the year
ended December 31, 2006 forms part of the UPS
Annual Report 2006. If you would like an
additional copy of our Form 10-K, you can
access it through the Investor Relations Web site,
www.shareholder.com/ups, or at the Securities and
Exchange Commission Web site, www.sec.gov.
The Form 10-K also is available free of charge by
calling, contacting via the Web site, or writing the
Investor Relations Department.
UPS SHAREOWNER SERVICES
Convenient access 24 hours a day, seven 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: 201-680-6612
TDD for hearing impaired: 800-231-5469
TDD for non-U.S. shareowners: 201-680-6610
DIRECT STOCK PURCHASE PLAN
To make an initial purchase of Class B shares go to
www.melloninvestor.com and select “For Investors.”
Search for “Direct Investment Plans” and access the
“Enrollment Wizard.”
Current Class B shareowners can enroll in the
plan online by accessing their account through
www.melloninvestor.com/isd or calling
800-758-4674.
DIVIDEND REINVESTMENT PLAN
To reinvest dividends in the purchase of additional
UPS shares:
• Class A shareowners: follow instructions under
“UPS Shareowner Services”
• Class B shareowners: go to
www.melloninvestor.com/isd
ONLINE ACCESS TO SHAREOWNER MATERIALS
You may receive shareowner information
electronically. To enroll, follow the MLink®
enrollment instructions when you access your UPS
Class A or Class B shareowner account via the Web
addresses above.
55 Glenlake Parkway, NE
Atlanta, GA 30328-3474
www.ups.com
© Copyright 2007 United Parcel Service of America, Inc. UPS, the UPS brandmark, and the
color brown are trademarks of United Parcel Service of America, Inc. All rights reserved.
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