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 March 31, 1998
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)
562,000,000 shares
- --------------------------------------------------------------------------
Outstanding as of May 14, 1998
PART I. ITEM 1- FINANCIAL INFORMATION
UNITED PARCEL SERVICE OF AMERICA, INC., AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, 1998 (unaudited) and December 31, 1997
(In millions except share amounts)
ASSETS 1998 1997
- ------ ------ -----
CURRENT ASSETS:
Cash and short-term investments $ 624 $ 460
Accounts receivable 2,383 2,405
Prepaid employee benefit costs 941 669
Materials, supplies and other prepaid expenses 466 417
Common stock held for stock plans 565 526
------ ------
TOTAL CURRENT ASSETS 4,979 4,477
PROPERTY, PLANT AND EQUIPMENT (including
aircraft under capitalized lease
obligations)- at cost, net of accumulated
depreciation and amortization of
$7,644 in 1998 and $7,495 in 1997 10,939 11,007
OTHER ASSETS 344 428
------ ------
$16,262 $15,912
======= =======
LIABILITIES AND SHAREOWNERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,122 $ 1,207
Accrued wages and withholdings 1,100 1,194
Dividends payable - 191
Deferred income taxes 142 140
Current maturities of long-term debt 229 41
Other current liabilities 804 625
------ ------
TOTAL CURRENT LIABILITIES 3,397 3,398
LONG-TERM DEBT (including capitalized lease
obligations) 2,456 2,583
------ ------
ACCUMULATED POSTRETIREMENT BENEFIT
OBLIGATION, NET 936 911
------ ------
DEFERRED TAXES, CREDITS AND OTHER LIABILITIES 3,051 2,933
------ ------
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
562,000,000, net of 18,000,000 in treasury 56 56
Additional paid-in capital 2 -
Retained earnings 6,464 6,112
Cumulative foreign currency adjustments (100) (81)
------ ------
6,422 6,087
------ ------
$16,262 $15,912
======= =======
See notes to consolidated financial statements.
UNITED PARCEL SERVICE OF AMERICA, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended March 31, 1998 and 1997
(In millions except per share amounts)
(unaudited)
Three Months Ended
1998 1997
---- ----
Revenue $ 5,859 $ 5,664
----- -----
Operating Expenses:
Compensation and benefits 3,471 3,419
Other 1,748 1,819
----- -----
5,219 5,238
----- -----
Operating Profit 640 426
----- -----
Other income and (expense):
Interest income 14 10
Interest expense (58) (41)
Miscellaneous,net 5 (7)
----- -----
(39) (38)
Income before income taxes 601 388
Income taxes 249 160
----- -----
Net income $ 352 $ 228
===== =====
Basic Earnings Per Share $ 0.64 $ 0.41
===== =====
Diluted Earnings Per Share $ 0.64 $ 0.41
===== =====
See notes to consolidated financial statements.
UNITED PARCEL SERVICE OF AMERICA, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREOWNERS' EQUITY
Three Months Ended March 31, 1998
(In millions)
(unaudited)
Cumulative
Additional Foreign Total
Common Stock Paid-In Retained Currency Shareowners'
Shares Amount Capital Earnings Adjustments Equity
------ ------ ------- -------- ----------- --------
Balance, January 1, 1998 562 $56 $- $6,112 $(81) $6,087
Comprehensive income:
Net income - - - 352 - 352
Foreign currency
adjustments - - - - (19) (19)
------
Comprehensive income $333
------
Gain on issuance of
common stock held
for stock plans - - 2 - - 2
--- --- -- ------ ----- ------
Balance, March 31, 1998 562 $56 $2 $6,464 $(100) $6,422
=== === == ====== ===== ======
See notes to consolidated financial statements.
UNITED PARCEL SERVICE OF AMERICA, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31, 1998 and 1997
(In millions)
(unaudited)
1998 1997
---- ----
Cash flows from operating activities:
Net income $ 352 $ 228
Adjustments to reconcile net income to net
cash provided from operating activities:
Depreciation and amortization 265 249
Postretirement benefits 25 28
Deferred taxes, credits, and other 101 140
Changes in assets and liabilities:
Accounts receivable 48 (11)
Prepaid employee benefit costs (272) (256)
Materials, supplies and other
prepaid expenses (49) (28)
Common stock held for stock plans (39) 65
Accounts payable (85) (42)
Accrued wages and withholdings (94) (168)
Dividends payable (191) (194)
Other current liabilities 179 144
----- -----
Net cash provided from operating activities 240 155
----- -----
Cash flows from investing activities:
Capital expenditures (290) (322)
Disposals of property, plant and equipment 90 30
Other asset receipts 65 14
----- -----
Net cash (used in) investing activities (135) (278)
----- ----
Cash flows from financing activities:
Proceeds from borrowings 128 343
Repayment of borrowings (67) (148)
Other transactions 2 16
----- -----
Net cash provided by financing activities 63 211
----- -----
Effect of exchange rate changes on cash (4) (1)
----- -----
Net increase in cash and short-term investments 164 87
Cash and short-term investments:
Beginning of period 460 392
----- -----
End of period $ 624 $ 479
===== =====
Cash paid during the period for:
Interest (net of amount capitalized) $ 40 $ 21
===== =====
Income taxes $ 132 $ 5
===== =====
See notes to consolidated financial statements.
UNITED PARCEL SERVICE OF AMERICA, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Three Months Ended March 31, 1998 and 1997
(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. Effective
January 1, 1998, UPS adopted Statement of Financial Accounting Standards No. 130
("FAS 130"), "Reporting Comprehensive Income". FAS 130 requires comprehensive
income and its components to be separately displayed within the financial
statements. Comprehensive income, which totaled $333 million for the three
months ended March 31, 1998, includes net income and foreign currency
adjustments and is displayed in the Consolidated Statement of Shareowners'
Equity. Comprehensive income for the comparable quarter of 1997 totaled $180
million and was comprised of net income of $228 million net of foreign currency
adjustments of $48 million.
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, 1998, the results of operations for the three months ended March 31,
1998 and 1997, and cash flows for the three months ended March 31, 1998 and
1997.
3. The following table sets forth the computation of basic and diluted earnings
per share (in millions except per share amounts):
1998 1997
---- ----
Numerator:
Numerator for basic and diluted earnings per share -
net income $ 352 $ 228
====== ======
Denominator:
Weighted-average shares- denominator for
basic earnings per share 546 554
Effect of dilutive securities:
Additional contingent shares - managers incentive
plan 3 3
Stock option plans 3 3
------- ------
Denominator for diluted earnings per share 552 560
======= ======
Basic earnings per share $0.64 $0.41
======= ======
Diluted earnings per share $0.64 $0.41
======= ======
UNITED PARCEL SERVICE OF AMERICA, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Three Months Ended March 31, 1998 and 1997
(unaudited)
4. 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 theories, which the Company believes are inconsistent, 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 1990 tax years. The additional tax sought by
the agents relating to package insurance for these periods range from $89
million to $148 million for the 1985 through 1987 tax years and up to $174
million for the 1988 through 1990 tax years, plus penalties and interest. The
IRS has based their assertions 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
and the Research Tax Credit in the 1983 through 1990 tax years. These issues
total $32 million in tax for the 1983 and 1984 tax years, $95 million in tax for
the 1985 through 1987 tax years, and $228 million in tax for the 1988 through
1990 tax years. Penalties and interest are in addition to these amounts. The
majority of these adjustments would reverse in future years.
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 matter was
tried before the Tax Court in two sessions, from September 15 through September
30, 1997, and from November 6 through November 7, 1997. The Company does not
anticipate that the Tax Court will render its decision for at least six to
twelve months. Management still believes that the eventual resolution of the
matters raised by the IRS will not result in a material adverse effect upon the
financial condition of the Company.
The Company has appealed with the IRS all material issues related to the
1985 through 1990 tax years. The IRS may take positions similar to those in the
reports described above for periods after 1990.
The Company is a defendant in various employment-related lawsuits. In two
of these actions, which allege employment discrimination by the Company, class
action status has been sought by the plaintiffs. In one case, class action
status has been granted, and the United States Equal Employment Opportunity
Commission has been granted the right to intervene. In the other case,
plaintiff's motion for class action status is pending. Also, lawsuits have been
UNITED PARCEL SERVICE OF AMERICA, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Three Months Ended March 31, 1998 and 1997
(unaudited)
filed on behalf of more than 300 former contract pilots against the Company,
alleging, among other things, that in the late 1980's the Company did
not fulfill offers of employment to individuals to serve as pilots of
Company-operated aircraft. These cases generally do not allege specific amounts
of damages. However, one of these cases has been tried and resulted in a jury
verdict, which was affirmed on appeal. Though the compensatory and punitive
damages awarded were substantial, they were not material to the Company. Each of
the pending employment-related lawsuits is in its early stages, and the Company
is presently unable to estimate its exposure.
In addition to the preceding, UPS is a defendant in various other lawsuits
which arose in the normal course of business. In the opinion of management, none
of these cases are expected to have a material adverse effect upon the financial
condition of the Company.
5. Certain prior period amounts have been reclassified to conform to the current
period presentation.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND THE RESULTS OF OPERATIONS
Three Months Ended March 31, 1998 and 1997
For the three months ended March 31, 1998, revenue increased by $195
million, or 3.4%, in comparison with the three months ended March 31, 1997. For
the first quarter of 1998, domestic revenue totaled $5.039 billion, an increase
of $83 million, or 1.7%, over the first quarter of 1997, and international
revenue totaled $820 million, an increase of $112 million, or 15.8%.
Domestic revenue increased primarily as a result of generally higher
yields along with improved product mix. Volume for the Company's higher yielding
express packages was up 5.2% for the quarter. However, domestic ground volume
has not yet returned to levels which existed prior to the August 1997
International Brotherhood of Teamsters strike.
During the first quarter of 1998, rates for standard ground shipments were
increased an average of 3.6% for commercial deliveries, and the ground
residential premium increased from $.80 to $1.00 over the commercial ground
rate. In addition, rates for UPS Next Day Air, UPS 2nd Day Air and 3 Day Select
each increased approximately 3.3%. Rates for international shipments originating
in the United States did not increase for UPS Worldwide Express, UPS Worldwide
Expedited and 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 a $105
million increase in international export revenue, or 21.7%. In addition,
international domestic revenue improved $7 million, or 3.1%. Volume increased
18.5% and 16.4% for international export and domestic operations, respectively.
The continued strengthening of the U.S. dollar somewhat reduced the revenue
increases for both international export and domestic revenues.
Operating expenses decreased by $19 million, or 0.4%, which improved the
operating ratio from 92.5 during 1997 to 89.1 during 1998. This improvement
resulted primarily from lower fuel costs and the impact of cost containment
efforts. Fuel prices during the first quarter of 1998 were significantly less
than in 1997, and are subject to general market fluctuations.
Operating profit for the period increased $214 million, or 50.2%. The
increase is primarily attributable to the above mentioned increases in revenue
yields in conjunction with the decreases in operating expenses.
Income before income taxes ("pre-tax income") increased $213 million, or
54.9%. Domestic pre-tax income amounted to $567 million, an increase of $148
million, or 35.3% over the corresponding quarter of the previous year. The
increase was primarily a result of higher revenues and lower operating costs as
discussed above. International pre-tax income amounted to $34 million, an
improvement of $65 million over the loss of the corresponding quarter of the
previous year.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND THE RESULTS OF OPERATIONS
Three Months Ended March 31, 1998 and 1997
Pre-tax income associated with international export and domestic
operations improved by $49 million and $16 million, respectively. The
continuation of these favorable trends in international export and domestic
operations resulted primarily from higher volume and better utilization of
existing capacity. Contributing to this improvement is the pan-European product
relaunch, which took place in late 1996. This relaunch provides a uniform
portfolio of pan-European services including guaranteed next-day delivery for
transborder shipments, as well as comprehensive package tracking capabilities
for all levels of service. Export volume increased by 27.3% and 3.9% for
international and U.S. origin export shipments, respectively.
Net income increased by $124 million, or 54.4%, over the corresponding
quarter of the prior year. The net increase resulted primarily from higher
revenues and lower operating costs as discussed above.
The results of operations for the three months ended March 31, 1998, are
not necessarily indicative of the results to be expected for the full year.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND THE RESULTS OF OPERATIONS
Liquidity and Capital Resources
In April 1998, UPS renegotiated and extended its two credit agreements
with a consortium of banks. These agreements provide revolving credit facilities
of $1.25 billion each with one expiring April 29, 1999, and the other April 30,
2003.
Management believes that the resources described above, 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
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
1990 tax years. The Company is also a defendant in various employment-related
lawsuits. Each of the pending employment-related lawsuits is in its early
stages, and the Company is presently unable to estimate its exposure. Reference
is made here to Note 4 to the accompanying unaudited consolidated financial
statements for more information.
Future Accounting Changes
In March 1998, the Accounting Standards Executive Committee ("AcSEC")
issued Statement of Position No. 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use" ("SOP 98-1"), which requires
that certain costs to develop or obtain computer software for internal use be
capitalized. The new statement is effective for fiscal years beginning after
December 15, 1998, with earlier adoption encouraged but not required. The impact
of the new standard has not been fully determined, but the change will likely
result in lower expense for software costs in the initial year of adoption. The
Company currently intends to adopt SOP 98-1 beginning January 1, 1999.
PART II
Item 6 - Exhibits and Reports on Form 8-K
A) Exhibits:
(10) Material Contracts
(a) Credit Agreement (364-Day Facility) dated April 30, 1998 among
United Parcel Service of America, Inc., the initial lenders
named therein, CitiCorp Securities, Inc. as Co-Arranger and
BancAmerica Robertson Stephens as Co-Arranger and Bank of
America NT & SA as Agent and Citibank, N.A. as Agent.
(b) Credit Agreement (Five-Year Facility) dated April 30, 1998
among United Parcel Service of America, Inc., the initial
lenders named therein, CitiCorp Securities, Inc. as
Co-Arranger and BancAmerica Robertson Stephens as Co-Arranger
and Bank of America NT & SA as Agent and Citibank, N.A. as
Agent.
B) Reports on Form 8-K: The Company filed a report on Form 8-K on March 4,
1998 filing under cover of Item 7, an exhibit containing amendments to the
Company's by-laws.
EXHIBIT INDEX
(10) Material Contracts
(a) Credit Agreement (364-Day Facility) dated April 30, 1998 among
United Parcel Service of America, Inc., the initial lenders
named therein, CitiCorp Securities, Inc. as Co-Arranger and
BancAmerica Robertson Stephens as Co-Arranger and Bank of
America NT & SA as Agent and Citibank, N.A. as Agent.
(b) Credit Agreement (Five-Year Facility) dated April 30, 1998
among United Parcel Service of America, Inc., the initial
lenders named therein, CitiCorp Securities, Inc. as
Co-Arranger and BancAmerica Robertson Stephens as Co-Arranger
and Bank of America NT & SA as Agent and Citibank, N.A. as
Agent.
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: May 14, 1998