1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15 (d)
of the Securities Exchange Act of 1934
For the Quarter Ended June 30, 1996
Commission file number 0-4714
United Parcel Service of America, Inc.
(Exact name of registrant specified in its charter)
Delaware 95-1732075
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
55 Glenlake Parkway, NE
Atlanta, Georgia 30328
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code (404) 828-6000
Not Applicable
Former name, address and fiscal year, if changed since last
report
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,
and (2) has been subject to such filing requirements of the past
90 days.
YES X NO
Common Stock, par value $.10 per share
(Title of Class)
570,000,000 shares
Outstanding as of August 13, 1996
2
PART I. FINANCIAL INFORMATION
UNITED PARCEL SERVICE OF AMERICA, INC., AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, 1996 (unaudited) and December 31, 1995
(In millions except share amounts)
ASSETS 1996 1995
------- --------
CURRENT ASSETS:
Cash and short-term investments $ 225 $ 211
Accounts receivable 2,162 1,925
Prepaid employee benefit costs 251 285
Materials, supplies and prepaid expenses 503 393
Common stock held for stock plans 471 413
------- -------
TOTAL CURRENT ASSETS 3,612 3,227
PROPERTY, PLANT AND EQUIPMENT - at cost, net
of accumulated depreciation of $6,428
in 1996 and $6,060 in 1995 9,212 8,998
OTHER ASSETS 395 420
------- -------
$13,219 $12,645
======= =======
LIABILITIES AND SHAREOWNERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,297 $ 1,137
Accrued wages and withholdings 1,069 1,127
Dividends payable - 178
Deferred income taxes 93 87
Other current liabilities 558 437
------- -------
TOTAL CURRENT LIABILITIES 3,017 2,966
------- -------
LONG-TERM DEBT, net of current maturities
of $1 in 1996 and 1995 1,744 1,729
------- -------
ACCUMULATED POSTRETIREMENT BENEFIT
OBLIGATION, NET 814 763
------- -------
DEFERRED TAXES, CREDITS AND OTHER LIABILITIES 2,141 2,036
------- -------
SHAREOWNERS' EQUITY:
Preferred stock, no par value,
Authorized 200,000,000 shares, none issued - -
Common stock, par value $.10 per share,
Authorized 900,000,000 shares, issued
570,000,000, net of 10,000,000 in treasury 57 57
Additional paid-in capital 89 76
Retained earnings 5,336 4,961
Cumulative foreign currency adjustments 21 57
------- -------
5,503 5,151
------- -------
$13,219 $12,645
======= =======
See notes to consolidated financial statements.
3
UNITED PARCEL SERVICE OF AMERICA, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Three Months and Six Months Ended June 30, 1996 and 1995
(In millions except per share amounts)
(unaudited)
Three Months Ended Six Months Ended
1996 1995 1996 1995
------- ------- ------- -------
Revenue $ 5,508 $ 5,158 $10,843 $10,260
------- ------- ------- -------
Operating Expenses:
Wages and employee benefits 3,165 3,015 6,343 6,046
Other 1,789 1,612 3,524 3,179
------- ------- ------- -------
4,954 4,627 9,867 9,225
------- ------- ------- -------
Operating Profit 554 531 976 1,035
------- ------- ------- -------
Other income and (expense):
Interest income 10 5 19 10
Interest expense (21) (18) (44) (38)
Miscellaneous, net (11) (13) (17) (18)
------- ------- ------- -------
(22) (26) (42) (46)
------- ------- ------- -------
Income before income taxes 532 505 934 989
Income taxes 213 194 374 388
------- ------- ------- -------
Net income $ 319 $ 311 $ 560 $ 601
------- ------- ------- -------
Net income per share $ 0.56 $ 0.54 $ 0.98 $ 1.04
------- ------- ------- -------
See notes to consolidated financial statements.
4
UNITED PARCEL SERVICE OF AMERICA, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREOWNERS' EQUITY
Six Months Ended June 30, 1996
(In millions)
(unaudited)
Cumulative
Additional Foreign Total
Common Stock Paid-In Retained Currency Shareowners'
Shares Amount Capital Earnings Adjustments Equity
------ ----- ------- -------- ----------- --------
Balance, January 1,
1996 570 $57 $76 $4,961 $57 $5,151
Net Income - - - 560 - 560
Gain on issuance of
common stock held
for stock plans - - 28 - - 28
Exercise of stock
options - - (15) - - (15)
Dividends
($.33 per share) - - - (185) - (185)
Foreign currency
adjustments - - - - (36) (36)
----- ---- ---- ------ ---- -------
Balance, June 30,
1996 570 $57 $89 $5,336 $21 $5,503
===== ==== ==== ====== ==== =======
See notes to consolidated financial statements.
5
UNITED PARCEL SERVICE OF AMERICA, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30, 1996 and 1995
(In millions)
(unaudited)
1996 1995
------ ------
Cash flows from operating activities:
Net income $ 560 $ 601
Adjustments to reconcile net income to net
cash provided from operating activities:
Depreciation and amortization 459 420
Postretirement benefits 51 52
Deferred taxes, credits, and other 101 76
Changes in assets and liabilities:
Accounts receivable (237) (82)
Prepaid employee benefit costs 34 88
Materials, supplies and prepaid
expenses (113) (168)
Common stock held for stock plans (58) (305)
Accounts payable 160 (8)
Accrued wages and withholdings (58) (32)
Dividends payable (178) (170)
Other current liabilities 120 73
------ ------
Net cash provided from operating activities 841 545
------ ------
Cash flows from investing activities:
Capital expenditures (722) (732)
Disposals of property, plant and equipment 26 32
Other asset receipts and payments 21 (134)
------ ------
Net cash (used in) investing activities (675) (834)
------ ------
Cash flows from financing activities:
Proceeds from borrowings 710 530
Repayment of borrowings (694) (110)
Dividends (185) (181)
Other transactions 13 8
------ ------
Net cash provided from (used in)
financing activities (156) 247
------ ------
Effect of exchange rate changes on cash 4 21
------ ------
Net increase (decrease) in cash and short-term
investments 14 (21)
Cash and short-term investments:
Beginning of period 211 261
------ ------
End of period $ 225 $ 240
====== ======
Cash paid during the period for:
Interest (net of amount capitalized) $ 31 $ 31
====== ======
Income taxes $ 193 $ 287
====== ======
See notes to consolidated financial statements.
6
UNITED PARCEL SERVICE OF AMERICA, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Three Months and Six Months Ended June 30, 1996 and 1995
(unaudited)
1. For interim consolidated financial statement purposes, UPS computes
its tax provision on the basis of its estimated annual effective income tax
rate, and provides for accruals under its various employee benefit plans
based on one quarter of the estimated annual expense for each three month
period.
Net income per share is based on 570,000,000 shares in 1996 and
580,000,000 in 1995, including common stock held for stock plans.
2. In the opinion of management, the accompanying interim, unaudited,
consolidated financial statements contain all adjustments (consisting of
normal recurring accruals) necessary to present fairly the financial
position as of June 30, 1996, the results of operations for the three
months and six months ended June 30, 1996 and 1995, and cash flows for the
six months ended June 30, 1996 and 1995.
3. During the second quarter of 1995, the Company received a Notice of
Deficiency from the United States Internal Revenue Service ("IRS")
asserting that it is liable for additional tax for the 1983 and 1984 tax
years. The Notice of Deficiency is based in large part on the theory that
UPS is liable for tax on income of Overseas Partners Ltd., a Bermuda
company, which has reinsured excess value package insurance purchased by
UPS's customers from unrelated insurers. The deficiency sought by the IRS
relating to package insurance is based on a number of inconsistent theories
and ranges from $8 million to $35 million of tax, plus penalties and
interest for 1984.
Agents for the IRS have also asserted in reports that UPS is liable
for additional tax for the 1985 through 1987 tax years. The additional tax
sought by the agents relating to package insurance for this period ranges
from $89 million to $148 million, plus penalties and interest, and is based
on the same theories included in the above described Notice of Deficiency.
In addition, the IRS and its agents have raised a number of other
issues relating to the timing of deductions; the characterization of
expenses as capital rather than ordinary; and UPS's entitlement to the
Investment Tax Credit in the 1983 through 1987 tax years. These issues
total $32 million in tax for the 1983 and 1984 tax years and $95 million in
tax for the 1985 through 1987 tax years. Penalties and interest are in
addition to these amounts. The majority of these adjustments would reverse
in future years.
7
UNITED PARCEL SERVICE OF AMERICA, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Three Months and Six Months Ended June 30, 1996 and 1995
(unaudited)
In August, 1995, the Company filed a petition in Tax Court in
opposition to the Notice of Deficiency related to the 1983 and 1984 tax
years. After consultation with tax legal experts, management believes
there is no merit to any material issues raised by the IRS and that the
eventual resolution of these matters will not have a material impact on the
Company. The Company has appealed with the IRS all issues related to the
1985 through 1987 tax years. The IRS may take positions similar to those
in the reports described above for periods after 1987.
4. As part of UPS's overall effort to lower operating expense, the
Company implemented a program of voluntary early retirement and severance
packages for certain, primarily management, employees during 1995. The
total charge to 1995 operating expense for this program was $372 million of
which $19 million was incurred during the quarter ended June 30, 1995, and
the balance in the quarter ended September 30, 1995.
8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND THE RESULTS OF OPERATIONS
Three Months Ended June 30, 1996 and 1995
- -----------------------------------------
Revenue increased by $350 million, or 6.8% for the three months ended
June 30, 1996 over the three months ended June 30, 1995. For the second
quarter of 1996, domestic revenue totaled $4.765 billion, an increase of
$303 million over the second quarter of 1995, and international revenue
totaled $743 million, an increase of $47 million.
Domestic revenue increased as a result of favorable changes in rates,
higher volume, which was up 3.1% over the second quarter of 1995, and a
continuing shift toward higher yielding packages.
The increase in international revenue was primarily attributable to a
15.5% revenue growth in export operations over the corresponding quarter of
the previous year. Export revenues increased primarily as a result of
higher volume, which was up 21.0%. Foreign domestic revenues decreased by
6.2% primarily due to changes in the currency exchange rates, and, to a
lesser extent, lower volume, which in turn resulted primarily from the
Company's efforts to improve profitability by increasing revenue yields on
these products.
Operating expenses increased by $327 million, or 7.1%, raising the
operating ratio from 89.7 during 1995 to 89.9 during 1996. The modest
deterioration of the operating ratio resulted primarily from increased
depreciation and amortization, higher fuel costs and labor expenses.
Operating profit for the period increased by $23 million, or 4.3%, as
a result of higher revenue.
Income before income taxes ("pre-tax income") increased $27 million,
or 5.3%. Domestic pre-tax income amounted to $558 million, a decrease of
$1 million, or 0.3%, with respect to the corresponding quarter of the
previous year.
The international pre-tax loss decreased by $28 million, or 52.2%, to
$26 million for the quarter. The international pre-tax loss attributable
to the foreign domestic operations increased by $1 million, or 2.5%.
Export operations improved by $29.0 million resulting in a moderate pre-tax
profit. The continuation of this favorable trend in export operations
resulted primarily from higher volume and improved operating margins on
European and U.S. exports. Export volume increased by 18.1% and 25.6% for
international and U.S. origin, export shipments, respectively. Despite the
continued improvement of the export operations, UPS expects that the cost
of operating its international business will continue to exceed revenue in
the near future.
Net income increased by $8 million, or 2.6%, over the corresponding
quarter of the prior year. The net increase resulted primarily from
improved operating profit.
9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND THE RESULTS OF OPERATIONS
Six Months Ended June 30, 1996 and 1995
- ---------------------------------------
Revenue increased by $583 million, or 5.7% for the six months ended
June 30, 1996 over the six months ended June 30, 1995. For the first six
months of 1996, domestic revenue totaled $9.356 billion, an increase of
$455 million over the first six months of 1995, and international revenue
totaled $1.487 billion, an increase of $128 million.
Domestic revenue increased as a result of higher volume, which was up
1.4%, first quarter rate increases and a continuing shift toward higher
yielding packages. During the first quarter of 1996, the Company
implemented distance-based pricing for its domestic air express services.
This new pricing structure is based on both weight and distance of packages
shipped. Under the revised structure, air express rates are geographically
defined by ZIP Code. The continental United States is divided into the
same seven zones used for UPS standard ground services. Previously,
express shipments were priced by weight only, the standard method in the
industry. The new structure means that prices for UPS Next Day Air have
been reduced by as much as 40% in short-distance zones, while prices in
longer zones have increased up to 28%.
In addition, rates for standard ground shipments were increased an
average of 2.9% for commercial deliveries and 3.9% for residential
deliveries. Rates for the newly-zoned UPS Next Day Air and UPS 2nd Day Air
services increased approximately 4.9%. Rates for UPS 3-Day Select, already
zoned, increased approximately 3.9%. Rates for international shipments
originating in the United States were increased 4.9% for UPS Worldwide
Express, 6.9% for UPS Worldwide Expedited and 3.9% for UPS Standard Service
to Canada. Rate changes for shipments originating outside the United
States have been made throughout the past year and vary by geographic
market.
The increase in international revenue was primarily attributable to an
18.0% revenue growth in export operations over the corresponding six months
of the previous year. Export revenues increased primarily as a result of
higher volume, which was up 22.1%. Foreign domestic revenues decreased by
3.0% primarily due to changes in the currency exchange rates and volume
reductions of 2.1%. The decreases in foreign domestic volume are a result
of the Company's efforts to improve profitability by increasing revenue
yields on these products.
Operating expenses increased by $642 million, or 7.0%, raising the
operating ratio from 89.9 during 1995 to 91.0 during 1996. The
deterioration of the operating ratio resulted primarily from increased
depreciation and amortization, increased labor costs, higher fuel costs,
and, severe weather conditions during the first quarter which disrupted
both air and ground operations. This is in contrast to the mild weather
conditions experienced in the comparable quarter in 1995.
Operating profit for the period decreased by $59 million, or 5.7%, as
a result of the proportionally higher operating costs.
10
MANAGEMENT,S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND THE RESULTS OF OPERATIONS
Income before income taxes ("pre-tax income") decreased $55 million,
or 5.6%. Domestic pre-tax income amounted to $1.0 billion, a decrease of
$89 million, or 8.2% over the corresponding period of the previous year.
The decrease was primarily a result of proportionally higher operating
costs as discussed above.
The international pre-tax loss decreased by $34 million, or 34.2%, to
$66 million for the first six months of 1996.
The international pre-tax loss attributable to the foreign domestic
operations increased by $2 million, or 2.2%. Export operations improved by
$36 million over 1995, resulting in a moderate pre-tax profit. The
continuation of this favorable trend in export operations resulted
primarily from higher volume and improved operating margins on European and
U.S. exports. Export volume increased by 18.3% and 28.1% for international
and U.S. origin, export shipments, respectively. As noted previously in
the discussion for the second quarter, UPS expects that the cost of
operating its international business will continue to exceed revenue in the
near future, despite the continued improvement of the export operations.
Net income decreased by $41 million, or 6.8%, over the corresponding
period of the prior year. The net decrease resulted primarily from higher
operating costs as discussed above.
The results of operations for the three months and six months ended
June 30, 1996 are not necessarily indicative of the results to be expected
for the full year.
11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND THE RESULTS OF OPERATIONS
Liquidity and Capital Resources
- -------------------------------
In March, 1996, the Board of Directors authorized an increase in the
Commercial Paper borrowing limits from $1.0 to $1.5 billion. In June, 1996,
UPS renegotiated and extended two credit agreements with a consortium of banks.
These agreements provide revolving credit facilities of $1.25 billion each,
with one expiring June 9, 1997 and the other June 8, 2001.
In recognition of a continuing need for borrowing over the near term,
and to take advantage of attractive borrowing costs in medium-term debt
markets, UPS has entered into two financiang transactions through the first
six months of 1996 and is continuing to examine other favorable alternatives.
In January, 1996, UPS issued $200 million of 5.5% Eurobond notes which are due
January 1999. In April, 1996, UPS issued $166 million of 3.25% Swiss Franc
notes which are due in October 1999.
In June, 1996, UPS established a $500 million European medium-term note
program. Under this program UPS may from time to time issue notes denominated
in any currency. In addition, the company filed a shelf registration in
July, 1996 which enables UPS to issue notes up to $300 million in the United
States. Under the combined programs, the Company currently does not plan to
exceed $500 million in borrowings.
Management believes that these funds and borrowing programs, combined
with the Company's internally generated resources and other credit facilities,
will provide adequate sources of liquidity and capital resources to meet its
expected future short-term and long-term needs for the operation of its
business, including anticipated capital expenditures and purchase commitments.
During 1995, the Company received a Notice of Deficiency from the
United States Internal Revenue Service ("IRS") asserting that it is liable
for additional tax for the 1983 and 1984 tax years. Agents for the IRS
have also asserted in reports that UPS is liable for additional tax for the
1985 through 1987 tax years. Reference is made here to Note 3 to the
accompanying unaudited consolidated financial statements for more
information.
12
PART II
Item 4 - Submission of Matters to a Vote of Security Holders
---------------------------------------------------
The annual meeting of shareowners of the Registrant was held on May 9,
1996.
Proxies for the meeting were solicited pursuant to Regulation 14A
under the Securities Exchange Act of 1934, there was no solicitation in
opposition to management's nominees as listed in Item No. 1 in the proxy
statement, and all of such nominees were elected.
The results of the voting by the shareowners for directors are
presented below.
Director Percent of
Number of Votes Total Voting
John W. Alden For 456,067,233 93.9%
Withheld 29,582,463 6.1%
William H. Brown, III For 459,146,205 94.5%
Withheld 26,503,491 5.5%
Robert J. Clanin For 459,561,546 94.6%
Withheld 26,088,150 5.4%
Carl Kaysen For 456,485,577 94.0%
Withheld 29,164,119 6.0%
James P. Kelly For 459,538,325 94.6%
Withheld 26,111,371 5.4%
Gary E. MacDougal For 458,209,401 94.3%
Withheld 27,440,295 5.7%
Joseph R. Moderow For 459,701,190 94.7%
Withheld 25,948,506 5.3%
Kent C. Nelson For 457,725,737 94.3%
Withheld 27,923,959 5.7%
Victor A. Pelson For 458,462,260 94.4%
Withheld 27,187,436 5.6%
John W. Rogers For 458,771,268 94.5%
Withheld 26,878,428 5.5%
Charles L. Schaffer For 459,686,469 94.7%
Withheld 25,963,227 5.3%
Robert M. Teeter For 459,121,254 94.5%
Withheld 26,528,442 5.5%
Calvin E. Tyler Jr. For 459,447,501 94.6%
Withheld 26,202,195 5.4%
13
PART II
Two proposals (designated Item Nos. 2 and 3) were submitted by the
Board of Directors. The proposals and the results of the voting by the
stockholders are presented below.
Percent of
Number of Votes Total Voting
2. To approve the UPS 1996 For 474,205,718 97.7%
Stock Option Plan Against 7,920,062 1.6%
Abstain 3,523,916 0.7%
3. To confirm the appointment For 480,793,656 99.0%
of Deloitte & Touche LLP, Against 3,625,138 0.7%
independent auditors, as auditors Abstain 1,230,902 0.3%
of UPS and its subsidiaries for
the year ending December 31, 1996
Item 6 - Exhibits and reports on Form 8-K
A) Exhibits:
10) Material contracts
a) Credit Agreement (364-Day Facility) dated June 10,
1996 among United Parcel Service of America, Inc.,
the initial lenders named therein, NationsBank of
Georgia, N.A., as Agent and Citibank, N.A., as
Agent.
b) Credit Agreement (Five-Year Facility) dated June
10, 1996 among United Parcel Service of America,
Inc., the initial lenders named therein,
NationsBank of Georgia, N.A., as Agent and
Citibank, N.A., as Agent.
B) Reports on Form 8-K: no reports on Form 8-K were filed during
the quarter.
14
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UNITED PARCEL SERVICE OF AMERICA, INC.
--------------------------------------
(Registrant)
By: /S/ Robert J. Clanin
Robert J. Clanin
Senior Vice President,
Treasurer and
Chief Financial Officer
Date: August 13, 1996