UPS 2007 Annual Report Download - page 42

Operating profit for the Supply Chain & Freight segment was $278 million in 2007, compared with a profit
of $2 million in 2006, resulting in a 330 basis point improvement in the operating margin. This improvement was
largely due to improved results in the forwarding and logistics business as a result of cost controls, a focus on
asset utilization, and revenue management initiatives. Cost improvements were realized as a result of the
restructuring program that began in 2006, which included a reduction of non-operating staff of approximately
1,400 people. Additionally, margin improvements are being realized by focusing on capacity utilization in the air
freight business, through better utilizing space available on our own aircraft. Finally, revenue management
initiatives put into place last year are producing better returns through reducing less profitable accounts, and
ensuring that new accounts meet specific criteria that allow us to better utilize our existing transportation assets.
Operating profit in 2007 for this segment was reduced by $46 million as a result of a charge for
restructuring and disposing of certain non-core business units in France, as well as by $8 million due to the
SVSO charge. These charges are discussed further in the “Operating Expenses” section. Currency fluctuations
positively affected the growth in operating profit by $18 million in 2007.
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.
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 was designed to generate efficiencies, resulting in improved operating profits, by further integrating all of
our transportation services to better serve our customers. This restructuring involved the reduction of
non-operating expenses by approximately 20%, including a reduction in non-operating staff of approximately
1,400 people. We incurred $12 million in expenses in 2006 related to employee severance.
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