1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15 (d)
of the Securities and Exchange Act of 1934
For the Quarter Ended March 31, 1997
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 and 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 May 14, 1997
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PART I. FINANCIAL INFORMATION
UNITED PARCEL SERVICE OF AMERICA, INC., AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, 1997 (unaudited) and December 31, 1996
(In millions except share amounts)
ASSETS 1997 1996
CURRENT ASSETS:
Cash and short-term investments $ 479 $ 392
Accounts receivable 2,352 2,341
Prepaid employee benefit costs 657 401
Materials, supplies and prepaid expenses 607 581
Common stock held for stock plans 475 540
------ ------
TOTAL CURRENT ASSETS 4,570 4,255
PROPERTY, PLANT AND EQUIPMENT (including aircraft
under capitalized lease obligations)- at
cost, net of accumulated depreciation and
amortization of $6,944 in 1997 and $6,778 in
1996 10,239 10,230
OTHER ASSETS 452 469
------ ------
$15,261 $14,954
LIABILITIES AND SHAREOWNERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,113 $ 1,155
Accrued wages and withholdings 1,033 1,201
Dividends payable - 194
Deferred income taxes 149 149
Other current liabilities 605 459
------ ------
TOTAL CURRENT LIABILITIES 2,900 3,158
LONG-TERM DEBT (including capitalized lease
obligations), net of current maturities
of $20 in 1997 and $18 in 1996 2,766 2,573
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ACCUMULATED POSTRETIREMENT BENEFIT
OBLIGATION, NET 869 841
------ ------
DEFERRED TAXES, CREDITS AND OTHER LIABILITIES 2,629 2,481
------ ------
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 111 95
Retained earnings 5,956 5,728
Cumulative foreign currency adjustments (27) 21
------ ------
6,097 5,901
------ ------
$15,261 $14,954
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See notes to consolidated financial statements.
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UNITED PARCEL SERVICE OF AMERICA, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended March 31, 1997 and 1996
(in millions except per share amounts)
(unaudited)
Three Months Ended
------------------
1997 1996
---- ----
Revenue $ 5,664 $ 5,335
------ ------
Operating Expenses:
Compensation and benefits 3,405 3,259
Other 1,833 1,651
------ ------
5,238 4,910
------ ------
Operating Profit 426 425
------ ------
Other income and (expense):
Interest income 10 9
Interest expense (41) (23)
Miscellaneous, net (7) (9)
------ ------
(38) (23)
Income before income taxes 388 402
Income taxes 160 161
------ ------
Net income $ 228 $ 241
------ ------
Net income per share $ 0.40 $ 0.42
------ ------
See notes to consolidated financial statements.
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UNITED PARCEL SERVICE OF AMERICA, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREOWNERS' EQUITY
Three Months Ended March 31, 1997
(In millions)
(unaudited)
Cumulative
Additional Foreign Total
Common Stock Paid-In Retained Currency Shareowners'
Shares Amount Capital Earnings Adjustments Equity
Balance, January 1,
1997 570 $57 $95 $5,728 $21 $5,901
Net income - - - 228 - 228
Gain on issuance
of common stock
held for stock
plans - - 16 - - 16
Foreign currency
adjustments - - - - (48) (48)
---- ---- ---- ------ ---- ------
Balance, March 31,
1997 570 $57 $111 $5,956 $(27) $6,097
==== ==== ==== ====== ==== ======
See notes to consolidated financial statements.
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UNITED PARCEL SERVICE OF AMERICA, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31, 1997 and 1996
(In millions)
(unaudited)
1997 1996
Cash flows from operating activities: -------- --------
Net income $ 228 $ 241
Adjustments to reconcile net income to net
cash provided from operating activities:
Depreciation and amortization 249 228
Postretirement benefits 28 26
Deferred taxes, credits, and other 140 74
Changes in assets and liabilities:
Accounts receivable (11) (129)
Prepaid employee benefit costs (256) (127)
Materials, supplies and prepaid
expenses (28) (92)
Common stock held for stock plans 65 24
Accounts payable (42) 87
Accrued wages and withholdings (168) (148)
Dividends payable (194) (178)
Other current liabilities 144 170
------ ------
Net cash provided from operating activities 155 176
------ ------
Cash flows from investing activities:
Capital expenditures (322) (318)
Disposals of property, plant and equipment 30 18
Other asset receipts 14 20
------ ------
Net cash (used in) investing activities (278) (280)
------ ------
Cash flows from financing activities:
Proceeds from borrowings 343 293
Repayment of borrowings (148) (56)
Other transactions 16 16
------ ------
Net cash provided from financing activities 211 253
------ ------
Effect of exchange rate changes on cash (1) (5)
------ ------
Net increase in cash and short-term investments 87 144
Cash and short-term investments:
Beginning of period 392 211
------ ------
End of period $ 479 $ 355
====== ======
Cash paid during the period for:
Interest (net of amount capitalized) $ 21 $ 4
====== ======
Income taxes $ 5 $ 30
====== ======
See notes to consolidated financial statements.
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UNITED PARCEL SERVICE OF AMERICA, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Three Months Ended March 31, 1997 and 1996
(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 1997 and 1996, 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
March 31, 1997, the results of operations for the three months ended March 31,
1997 and 1996, and cash flows for the three months ended March 31, 1997 and
1996.
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 are 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.
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UNITED PARCEL SERVICE OF AMERICA, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Three Months Ended March 31, 1997 and 1996
(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. The trial date is
set for September 8, 1997. 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 material
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. Certain prior period amounts have been reclassified to conform to the
current period presentation.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND THE RESULTS OF OPERATIONS
Three Months Ended March 31, 1997 and 1996
Revenue increased by $329 million, or 6.2%, for the three months ended March 31,
1997 over the three months ended March 31, 1996. For the first quarter of 1997,
domestic revenue totaled $4.955 billion, an increase of $364 million, or 7.9%,
over the first quarter of 1996, and international revenue totaled $709 million,
a decrease of $35 million, or 4.7%.
Domestic revenue increased as a result of rate increases and higher volume,
which was up 3.4%, and is inclusive of a 9.8% volume increase in higher yielding
express packages.
During the first quarter of 1997, rates for standard ground shipments were
increased an average of 3.4% for commercial deliveries and 4.3% for residential
deliveries. Rates for UPS Next Day Air, UPS 2nd Day Air, and UPS 3-Day Select
each increased approximately 3.9%.
Rates for international shipments originating in the United States were
increased 2.6% for UPS Worldwide Express and 4.9% for UPS Worldwide Expedited.
Rate changes for shipments originating outside the United States have been made
throughout the past year and vary by geographic market. Rates for UPS Standard
service to Canada did not change.
The decrease in international revenue was primarily attributable to a $55
million decrease in foreign domestic revenue, or 19.9%, and results from a
combination of a stronger U.S. dollar and an 11.8% decrease in volume. The
Company has focused attention on higher margin volume which is intended to
improve operating results in the long run but is resulting in revenue shortfalls
in the short term. A $20 million, or 4.3%, increase in export revenues helped
to offset the overall decrease in international revenue. Export revenues
increased primarily as a result of higher volume, which was up 8.7%, offset by a
stronger U.S. dollar.
Operating expenses increased by $328 million, or 6.7%, raising the operating
ratio from 92.0 during 1996 to 92.5 during 1997. The deterioration of the
operating ratio resulted primarily from increased fuel costs, depreciation and
amortization, technology improvements for customer information needs, and higher
operating labor costs.
Operating profit for the period remained relatively flat as increased revenues
offset the increases in operating expenses.
Interest expense amounted to $41 million, an increase of $18 million over the
corresponding quarter of the previous year. This increase is primarily
attributable to interest costs incurred on higher debt levels outstanding during
the current quarter in comparison to the corresponding quarter of the previous
year.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND THE RESULTS OF OPERATIONS
Three Months Ended March 31, 1997 and 1996
Income before income taxes ("pre-tax income") decreased $14 million, or 3.5%.
Domestic pre-tax income amounted to $419 million, a decrease of $23 million, or
5.5% over the corresponding quarter of the previous year. The decrease was
primarily a result of proportionally higher operating costs as discussed above.
The international pre-tax loss improved by $9 million, or 23.1%, to $31 million
for the quarter.
The international pre-tax loss attributable to the foreign domestic operations
increased by $4 million, or 11.5%. The pre-tax loss associated with export
operations in 1996 improved by $13 million, and resulted in a modest gain for
1997. Export volume increased by 12.1% and 3.3% 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 decreased by $13 million, or 5.4%, over the corresponding quarter of
the prior year. The net decrease resulted primarily from the proportionally
higher operating costs as discussed above along with higher interest expense.
The results of operations for the three months ended March 31, 1997 are not
necessarily indicative of the results to be expected for the full year.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND THE RESULTS OF OPERATIONS
Liquidity and Capital Resources
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 financing transactions during 1997 and is continuing to
examine other favorable alternatives. In February 1997, UPS issued $165 million
of 6.875% Pound Sterling notes which are due in February 2000. In April 1997,
UPS issued $200 million of 6.625% Euro Notes which are due April 2001. These
Euro Notes were issued through the European medium-term note program established
in 1996.
In April of 1997, the UPS Board of Directors agreed to increase the Company's
Commercial Paper borrowing limits from $1.5 billion to $2.5 billion. In May
1997, UPS renegotiated and extended a credit agreement with a consortium of
banks increasing the revolving credit facility that would have otherwise expired
on June 9, 1997, from $1.25 billion to $3.25 billion. This new agreement
expires May 6, 1998.
Management believes that these funds, 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.
Future Accounting Changes
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share". This
statement simplifies the rules for computing earnings per share. Management
does not anticipate that adoption of this standard will have a material effect
on earnings per share. The statement must be adopted for periods ending after
December 15, 1997. Earlier application is not permitted. UPS will adopt the
statement for its fiscal year ended December 31, 1997.
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PART II
Item 6 - Exhibits and Reports on Form 8-K
a) Exhibits:
(4) Instruments defining the rights of security
holders, including indentures
(a) Specimen Certificate of Available to the
$200,000,000 of 6.625% Euro Notes Commission upon
Notes due April 25, 2001 request
(b) Indenture relating to Available to the
$200,000,000 of 6.625% Euro Notes Commission upon
Notes due April 25, 2001 request
(10) Material Contracts
(a) Credit Agreement (364-Day Facility) dated May 7,
1997 among United Parcel Service of America,
Inc., the initial lenders named therein, CitiCorp
Securities, Inc. as Co-Arranger and Nations Banc
Capital Markets, Inc. as Co-Arranger and NationsBank,
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.
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EXHIBIT INDEX
(4) Instruments defining the rights of security
holders, including indentures
(a) Specimen Certificate of Available to the
$200,000,000 of 6.625% Euro Notes Commission upon
Notes due April 25, 2001 request
(b) Indenture relating to Available to the
$200,000,000 of 6.625% Euro Notes Commission upon
Notes due April 25, 2001 request
(10) Material Contracts
(a) Credit Agreement (364-Day Facility) dated May 7,
1997 among United Parcel Service of America, Inc.,
the initial lenders named therein, CitiCorp Securities,
Inc. as Co-Arranger and Nations Banc Capital Markets,
Inc. as Co-Arranger and NationsBank, N.A. as Agent and
CitiBank, N.A. as Agent.
E-1
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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: --------------------------------
Robert J. Clanin
Senior Vice President,
Treasurer and
Chief Financial Officer
Date: May 14, 1997