(1,1) -1- UPS 2007 AR_COVER_30408.indd 3/8/08 1:52:38 PM moving ahead UPS ANNUAL REPORT 2007 (1,1) -2- UPS 2007 AR_COVER_30408.indd 3/8/08 1:53:41 PM 2007 HIGHLIGHTS Reached a fi ve-year labor agreement with the International Grew international export package volume over 10 percent. Brotherhood of Teamsters 10 months prior to the expiration of the current contract in July 2008. Increased profi ts by $276 million in our Supply Chain and Freight segment. Adopted a new fi nancial policy in early 2008 to enhance shareowner value by reducing the company’s cost of capital. Introduced several industry-fi rst product innovations, including UPS Delivery InterceptSM, UPS PaperlessSM Invoice Celebrated our 100th anniversary on August 28, 2007. and international UPS Returns®. moving more than packages At UPS, we pride ourselves on helping customers move ahead. Large or small, every customer benefi ts from the same integrated transportation network and the same can-do spirit that is a way of life at UPS. Today, more than ever, customers need a shipping and logistics company that they can count on for the fast, reliable service they need to grow their businesses. CONTENTS UPS FACTS 3 Chairman’s Message Founded: 1907 Employees: 425,300 7 Our Corporate Commitment Customers: 7.9 million 8 Products and Services Online tracking: 18.5 million daily requests Operating facilities: 3,000 worldwide 10 Customer Stories Jet aircraft: 268 (world’s ninth-largest airline) 12 Board of Directors Package delivery vehicles: 93,600 and Senior Management Freight vehicles: 6,300 tractors, 21,800 trailers 13 Annual Report Form 10-K Retail access: 64,000 D. SCOTT DAVIS Chairman and Chief Executive Offi cer In October 2007, the UPS Board of Directors named the company’s Chief Financial Offi cer, Scott Davis, as the successor to retiring Chair- man and Chief Executive Offi cer Mike Eskew, effective January 1, 2008. Davis, who joined UPS in 1986, was formerly CEO of II Morrow, a technology company acquired by UPS. 2 CHAIRMAN’S MESSAGE we’re moving ahead The year 2007 was particularly memorable for UPS. We celebrated 100 years of service, negotiated an historic labor contract, and developed a new fi nancial policy — announced in January 2008 — aimed at enhancing shareowner value. On August 28, we marked the centennial anniversary UPS has a long-standing commitment to a very strong of our founding. We celebrated our 100th year of service balance sheet and that will not change. We are putting in our birthplace, Seattle, Washington, by recognizing our balance sheet strength to work to deploy capital the people who made it possible — our founders, our more effi ciently for the benefi t of our shareowners, valued customers, and current and retired employees. while maintaining a great deal of fi nancial fl exibility. Shortly thereafter, we reached a labor agreement with INVESTING IN THE FUTURE the International Brotherhood of Teamsters, covering In addition to these noteworthy events, in 2007 UPS: more than 240,000 UPS employees, 10 months ahead • Delivered record revenue, operating profi t and diluted of the July 2008 expiration of our current contract. earnings per share, when adjusted for the impact of The new contract extends through July 2013, ensuring several one-time charges service continuity for our customers. • Maintained our industry-leading adjusted operating The labor agreement satisfactorily resolved the issues margin we identifi ed as signifi cant when negotiations began. • Invested in the company’s future through new services It does so at a manageable cost to UPS, while providing and technology, infrastructure expansion and aircraft us the fl exibilities we need to remain competitive in the • Returned signifi cant amounts of cash to our share- marketplace. In short, we believe this is a good contract owners: $1.7 billion in dividends and $2.6 billion for our employees, our customers and our shareowners. to repurchase 35.9 million shares of stock UPS’s new fi nancial policy will enable the company to migrate to a more effi cient capital structure. After GLOBAL SMALL PACKAGE NETWORK study ing our options for some time, we determined Worldwide, UPS delivered a record number of packages — we could signifi cantly increase the debt component 3.97 billion. In the United States, slower GDP growth of the balance sheet and enhance shareowner value in 2007 than in recent years restrained the pace of by reducing the company’s cost of capital. volume growth. Even so, we experienced the highest volume in history, and pricing remained fi rm. Revenue We intend to manage our balance sheet to a target ratio increased 1.7 percent to $31.0 billion. However, the within a range of 50 to 60 percent of funds from opera- U.S. Package segment reported a $1.5 billion loss for tions to total debt. At the end of 2007, we were at the year, as a result of a $6.1 billion pre-tax payment 75 percent. The new policy permits us to increase as part of the new labor agreement to withdraw investments in the business, undertake larger share approx imately 45,000 UPS Teamster employees from repurchases and pursue growth opportunities. their pension plan and set up a new, jointly trusteed In line with this new policy, the Board of Directors plan. Without this payment and other one-time charges, increased stock repurchase authorization to $10 billion. operating profi t for the U.S. domestic operation would We intend to complete the share repurchases by the end have been $4.8 billion. of 2009. Timing will depend on market conditions. 3 In a slow-growth economic environment, cost control Ocean freight forwarding will be a priority in 2008. is essential, and UPS people did an excellent job in this Logistics streamlined its operations and posted signifi - area. Workers’ compensation expense was down signif- cant profi t gains on moderate revenue growth. In 2008, icantly, a consequence of reducing work-related injuries its focus will be on developing solutions for the health- by almost 50 percent since 2002 to 1.6 per 100,000 care and technology sectors. hours, a win-win for our employees’ well-being and UPS Freight® experienced a very good year in 2007 with for the bottom line. revenue, profi t and shipment growth. This was especially Internationally, UPS experienced 10.4 percent export noteworthy given the U.S. trucking industry’s highly volume growth, more than twice the rate of overall competitive operating environment. The UPS brand economic expansion. Our international operations strengths of reliability and technology associated with reported the highest revenue and operating profi t ever. our small package business are attracting customers to Revenue was up 13.1 percent to $10.3 billion with our freight services. We intend to continue leveraging operating profi t improving 7.1 percent to $1.8 billion. our small package customer base through cross-selling Operating margin was very strong at 17.8 percent. the full complement of UPS services. In 2007, we laid the groundwork TRENDS AND GROWTH for future growth with invest- OPPORTUNITIES ments in our worldwide air oper- Worldwide, UPS is a major player in world ations. We began construction on commerce; we enable it and we our Shanghai air hub, scheduled UPS delivered a record benefi t from it. Long-term industry for completion in 2008, the fi rst number of packages — fundamentals are favorable for our in China to be operated by a U.S. business and, in fact, play to UPS carrier. It will link cities in China 3.97 billion. strengths. These include expanding to UPS’s international network, global trade, direct-to-consumer and provide direct service to the shipping, and outsourcing supply chain management. Americas, Europe and other countries in Asia. Additionally, we put in place another around-the-world Increasingly, supply chain strategy means that research fl ight to connect the fast-growing Asian and European and development, production, component-making, fi nal trade lanes to each other and to the United States. assembly, marketing and distribution are located where Lastly, UPS received the authority to operate six daily the best resources are available, and where the most fl ights between the United States and Nagoya, Japan, value can be added to the end product. Today’s supply in addition to our daily fl ights to Tokyo and Osaka. chain leaders are focused on “time-in-trade” — ensuring that each component of the value chain arrives at precisely SUPPLY CHAIN AND FREIGHT TURNAROUND the right location, at the right time, and at the most UPS’s supply chain and freight capabilities are integral competitive cost — in short, synchronized commerce. to our vision of synchronized, transportation-focused In today’s global environment, our market opportuni- solutions that help move our customers forward. To ties are signifi cant. UPS participates in a $225 billion that end, we were very encouraged by the signifi cant global arena that includes small package shipping, performance improvement of our Supply Chain and domestic less-than-truckload freight and global air Freight segment, which posted a 5.3 percent revenue freight. We have about a 20 percent share of this highly gain and a $276 million increase in operating profi t. competitive space, in which there is no leading player. The Supply Chain operations, namely Forwarding and Additionally, the ocean freight forwarding sector in Logistics, capitalized on initiatives that enhanced rev- which we compete is a $60 billion industry, and the enue management and customer service, while reducing outsourced logistics market is estimated at almost operating cost. In the Forwarding business, interna- $190 billion.