Synchronizing Global Commerce UPS Annual Report 2006 AR06 cover03_02.indd 1 3/13/07 11:42:58 AM TABLE OF CONTENTS 2 Chief Executive Offi cer Letter 6 UPS Products and Services 8 Chief Financial Offi cer Letter 11 UPS Business Philosophy 12 Board of Directors and Senior Management 13 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 2006 HIGHLIGHTS • Founded: 1907 • Produced record revenue, operating profi t, and • Employees: 428,000 earnings per share. • Customers: 7.9 million • Delivered the most packages in UPS history, • ups.com average: 15 million almost four billion. on-line tracking • Expanded operations in Europe. requests daily • Incorporated heavy air freight acquisition into • Operating facilities: 3,000 worldwide UPS air network. • Access points: 150,000 worldwide • Rebranded LTL freight acquisition to • Aircraft: 282 (Eighth-largest UPS Freight. airline in the world) • Began a fi ve-year, $1 billion expansion of our • Package delivery vehicles: 94,500 fl agship air hub in Louisville, KY, to increase • Freight vehicles: 6,800 tractors; sorting capacity by 60 percent to 487,000 22,800 trailers packages per hour. FINANCIAL HIGHLIGHTS (in millions, except for per-share amounts) 2006 2005 % Change Revenue $47,547 $42,581 11.7 Operating expenses 40,912 36,438 12.3 Net income 4,202 3,870 8.6 Diluted earnings per share 3.86 3.47 11.2 Dividends declared per share 1.52 1.32 15.2 Assets 33,210 34,947 (5.0) Long-term debt 3,133 3,159 (0.8) Shareowners’ equity 15,482 16,884 (8.3) Capital expenditures 3,085 2,187 41.1 Cash and investments 1,983 3,041 (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- Our global small package operations performed nizing this world of global commerce is our vision ... exceptionally well, delivering a record of nearly a vision that supports current products and services, 4 billion packages and letters in 2006. We expand- as well as guides our longer-term initiatives. 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 Net Income (in billions) (in billions) $4.0 4 . 2 3 . $8.0 9 $3.2 3 3 . 3 . 2 2 . $9.1 $2.4 9 $30.4 $1.6 $0.8 64% U.S. domestic package $0 19% International package 02 03 04 05 06 17% Supply chain and freight 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 locations in China and two in India that are similar to Our international small package business contin- The UPS Store® in the United States and Canada. 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- 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 In the ground freight unit, 2006 was a building European market with great potential for growth. 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% 14.4 14.0 13.6 13.3 12% 13.1 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 With this in mind, we anticipate that our global the year unfolds. 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.