UPS 2012 Annual Report Download - page 47

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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Adjusted benefits expense increased $444 million in 2012 compared with 2011, primarily due to higher pension expense,
increased health and welfare costs and changes in the expense associated with our self-insurance for workers' compensation
claims, as follows:
• Adjusted pension expense increased $200 million in 2012 compared with 2011, due to higher union contribution rates
for multiemployer pension plans combined with increased service and interest costs for company-sponsored plans.
The increase in service and interest costs for company-sponsored plans was largely due to continued service accruals
and lower discount rates.
• Health and welfare costs increased $157 million in 2012 compared with 2011, largely due to higher medical claims
and the impact of several provisions of the Patient Protection and Affordable Care Act of 2010.
• The expense associated with our self-insurance programs for workers' compensation claims increased $60 million in
2012 compared with 2011. Insurance reserves are established for estimates of the loss that we will ultimately incur on
reported workers' compensation claims, as well as estimates of claims that have been incurred but not reported.
Insurance reserves also take into account a number of factors including our history of claim losses, payroll growth and
the impact of safety improvement initiatives. The increase in expense in 2012 was largely impacted by increased
payroll estimates, changes in state workers' compensation laws, and medical inflation.
2011 compared to 2010
Employee payroll costs increased $237 million in 2011 compared with 2010, largely due to contractual union wage rate
increases that took effect under our collective bargaining agreement with the Teamsters, but partially offset by a decline in
union labor hours. Management payroll costs declined slightly, primarily due to a lower management incentive award.
Adjusted benefits expense increased $164 million in 2011 compared with 2010, primarily due to higher employee health
and welfare costs and expense associated with our self-insurance for workers' compensation claims, but partially offset by a
decline in pension expense. These factors are discussed further as follows:
• Employee health and welfare program costs increased $132 million in 2011, and were impacted by higher required
union plan contribution rates and general health care inflation.
• The expense associated with our self-insurance programs for workers' compensation claims increased by $48 million
in 2011. In 2010, we experienced more favorable actuarial expense adjustments compared with 2011, thus leading to
the increase in expense in 2011.
• Adjusted pension expense decreased $50 million in 2011 due to several factors. Most significantly, contributions to the
company-sponsored pension plans in 2011 increased the expected return on assets used for expense calculation
purposes. The increase in the expected return on assets more than offset increased service and interest costs (due to a
decline in discount rates), resulting in a net reduction in pension expense. This was partially offset by higher
contribution rates for multiemployer pension plans, as well as the reinstatement of matching contributions to our
primary employee defined contribution savings plan.
Repairs and Maintenance
2012 compared to 2011
The decrease in repairs and maintenance expense was largely due to lower aircraft maintenance costs, which decreased
$77 million in 2012 compared with 2011. This decrease resulted primarily from a 0.8% reduction in average daily aircraft block
hours, and the conversion of an engine maintenance agreement with an outside vendor from a cost reimbursement approach to
a fixed rate per flight hour. Additionally, aircraft maintenance expense declined due to a reduction in the number of scheduled
maintenance checks for our Airbus A300-600F, Boeing 757-200F and Boeing MD-11F aircraft.
2011 compared to 2010
The increase in repairs and maintenance expense was largely due to aircraft maintenance costs, which increased $121
million in 2011 compared with 2010. This increase resulted from an increase in flight hours due to higher air volume,
additional scheduled maintenance checks and higher contractual maintenance rates. The remaining increase in repairs and
maintenance expense primarily relates to higher maintenance costs on our office buildings and operating facilities.