SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
Quarterly Report Under Section 13 or 15 (d)
of the Securities Exchange Act of 1934
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For the Quarter Ended March 31, 2001
Commission file number 0-4714
United Parcel Service, Inc.
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(Exact name of registrant specified in its charter)
Delaware 58-2480149
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
55 Glenlake Parkway, NE
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Atlanta, Georgia 30328
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code (404) 828-6000
Not Applicable
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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 for the past 90 days.
YES X NO
Class A and B Common Stock, par value $.01 per share
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(Title of Class)
876,834,085 Class A shares, 247,367,532 Class B shares
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Outstanding as of May 9, 2001
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
UNITED PARCEL SERVICE, INC., AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, 2001 (unaudited) and December 31, 2000
(In millions except share and per share amounts)
March 31, December 31,
Assets 2001 2000
---------- ---------
Current Assets:
Cash & cash equivalents $ 1,318 $ 879
Marketable securities & short-term investments 1,307 1,073
Accounts receivable 3,716 4,140
Prepaid health and welfare benefit costs 201 408
Other current assets 730 624
---------- ---------
Total Current Assets 7,272 7,124
Property, Plant & Equipment - at cost, net of accumulated
depreciation & amortization of $9,911 in 2001 and
$9,665 in 2000 12,464 12,329
Prepaid pension costs 1,600 1,593
Other assets 667 616
---------- ---------
$22,003 $ 21,662
========== =========
Liabilities & Shareowners' Equity
Current Liabilities:
Commercial paper $ - $ 366
Accounts payable 1,559 1,674
Accrued wages & withholdings 1,398 1,134
Income taxes payable 329 132
Current maturities of long-term debt 249 257
Other current liabilities 770 938
---------- ---------
Total Current Liabilities 4,305 4,501
---------- ---------
Long-Term Debt 3,803 2,981
---------- ---------
Accumulated Postretirement Benefit Obligation, Net 1,082 1,049
---------- ---------
Deferred Taxes, Credits & Other Liabilities 3,419 3,396
---------- ---------
Shareowners' Equity:
Preferred stock, no par value, authorized 200,000,000
shares, none issued - -
Class A common stock, par value $.01 per share, authorized
4,600,000,000 shares, issued 893,948,566 and 935,873,745
in 2001 and 2000 9 9
Class B common stock, par value $.01 per share, authorized
5,600,000,000 shares, issued 230,771,083 and 198,819,384
in 2001 and 2000 2 2
Additional paid-in capital - 267
Retained earnings 9,705 9,684
Accumulated other comprehensive loss (322) (227)
---------- ---------
9,394 9,735
---------- ---------
$22,003 $ 21,662
========== =========
See notes to unaudited consolidated financial statements.
UNITED PARCEL SERVICE, INC., AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME
Three Months Ended March 31, 2001 and 2000
(In millions except per share amounts)
(unaudited)
Three Months Ended
March 31,
-----------------------
2001 2000
----------- -----------
Revenue $ 7,510 $ 7,220
----------- -----------
Operating Expenses:
Compensation and benefits 4,251 4,075
Other 2,315 2,078
----------- -----------
6,566 6,153
----------- -----------
Operating Profit 944 1,067
----------- -----------
Other Income and (Expenses):
Investment income 53 339
Interest expense (44) (52)
----------- -----------
9 287
----------- -----------
Income Before Income Taxes And
Cumulative Effect of Change
In Accounting Principle 953 1,354
Income Taxes 371 541
----------- -----------
Income Before Cumulative Effect
of Change In Accounting Principle 582 813
Cumulative Effect of Change In
The Method Of Accounting For
Derivatives, Net of Taxes (26) -
----------- -----------
Net Income $ 556 $ 813
=========== ===========
Basic Earnings Per Share Before
Cumulative Effect Of A Change
In Accounting Principle $0.52 $0.68
=========== ===========
Basic Earnings Per Share $0.49 $0.68
=========== ===========
Diluted Earnings Per Share Before
Cumulative Effect Of A Change
In Accounting Principle $0.51 $0.67
=========== ===========
Diluted Earnings Per Share $0.48 $0.67
=========== ===========
See notes to unaudited consolidated financial statements.
UNITED PARCEL SERVICE, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREOWNERS' EQUITY
Three Months Ended March 31, 2001
(In millions except per share amounts)
(unaudited)
Class A Class B Accumulated
Common Stock Common Stock Additional Other Total
---------------- --------------- Paid-In Retained Comprehensive Shareowners'
Shares Amount Shares Amount Capital Earnings Loss Equity
------- ------ ------ ------- ---------- -------- ------------- ------------
Balance, January 1, 2001 936 $9 199 $2 $ 267 $9,684 $ (227) $ 9,735
Comprehensive income:
Net income - - - - - 556 - 556
Foreign currency
adjustments - - - - - - (70) (70)
Unrealized loss on
marketable securities - - - - - - (18) (18)
Unrealized loss on
cash flow hedges - - - - - - (7) (7)
------------
Comprehensive income 461
------------
Dividends ($0.19 per share) - - - - - (215) - (215)
Stock award plans - - - - 17 - - 17
Common stock purchases (9) - (1) - (302) (320) - (622)
Common stock issuances - - - - 18 - - 18
Conversion of Class A Common
Stock to Class B Common
Stock (33) - 33 - - - - -
------- ------ ------ ------- ---------- -------- ------------- ------------
Balance, March 31, 2001 894 $9 231 $2 $ - $9,705 $ (322) $ 9,394
======= ====== ====== ======= ========== ======== ============= ============
See notes to unaudited consolidated financial statements.
UNITED PARCEL SERVICE, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31, 2001 and 2000
(In millions)
(unaudited)
Three Months Ended
March 31,
------------------
2001 2000
-------- --------
Cash flows from operating activities:
Net income $556 $813
Adjustments to reconcile net income
to net cash from operating activities:
Depreciation and amortization 318 283
Postretirement benefits 33 31
Deferred taxes, credits, and other 38 78
Stock award plans 143 144
Gain on investments and sale of business - (290)
Changes in assets and liabilities, net of
effect of acquisitions:
Accounts receivable 426 (124)
Prepaid health and welfare benefit costs 207 177
Other current assets (89) (93)
Prepaid pension costs (7) 15
Accounts payable (117) 272
Accrued wages and withholdings 137 208
Dividends payable (192) (361)
Income taxes payable 197 380
Tax assessment - (311)
Other current liabilities 56 149
-------- --------
Net cash from operating activities 1,706 1,371
-------- --------
Cash flows from investing activities:
Capital expenditures (515) (315)
Disposals of property, plant and equipment 11 193
Purchases of marketable securities and short-term investments (1,312) (766)
Sales and maturities of marketable securities and short-term
investments 1,048 1,385
Construction funds in escrow 21 (2)
Payments for acquisitions, net of cash acquired (72) (69)
Other asset receipts (payments) - 3
-------- --------
Net cash from (used in) investing activities (819) 429
-------- --------
Cash flows from financing activities:
Proceeds from borrowings 1,170 970
Repayments of borrowings (716) (196)
Purchases of common stock via tender - (4,070)
Other purchases of common stock (622) (54)
Issuances of common stock pursuant to stock awards and employee
stock purchase plans 18 24
Dividends (215) (206)
-------- --------
Net cash (used in) financing activities (365) (3,532)
-------- --------
Effect of exchange rate changes on cash (83) (1)
-------- --------
Net increase (decrease) in cash and cash equivalents 439 (1,733)
Cash and cash equivalents:
Beginning of period 879 4,204
-------- --------
End of period $1,318 $2,471
======== ========
Cash paid during the period for:
Interest (net of amount capitalized) $ 22 $130
======== ========
Income taxes $132 $ 67
======== ========
See notes to unaudited consolidated financial statements.
UNITED PARCEL SERVICE, INC., AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. For interim consolidated financial statement purposes, we compute our
tax provision on the basis of our estimated annual effective income tax rate,
and provide for accruals under our various employee benefit plans for each three
month period based on one quarter of the estimated annual expense.
2. In our opinion, 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,
2001, the results of operations for the three months ended March 31, 2001 and
2000, and cash flows for the three months ended March 31, 2001 and 2000. The
results reported in these consolidated financial statements should not be
regarded as necessarily indicative of results that may be expected for the
entire year.
3. The following table sets forth the computation of basic and diluted
earnings per share (in millions except per share amounts):
Three Months Ended
March 31,
--------------------
2001 2000
-------- --------
Numerator:
Numerator for basic and diluted
earnings per share -
Net income $ 556 $ 813
======== ========
Denominator:
Weighted-average shares -
Denominator for basic earnings
per share 1,129 1,189
Effect of dilutive securities:
Contingent shares -
Management incentive awards 4 4
Stock option plans 15 20
-------- --------
Denominator for diluted earnings
per share 1,148 1,213
======== ========
Basic Earnings Per Share $0.49 $0.68
======== ========
Diluted Earnings Per Share $0.48 $0.67
======== ========
UNITED PARCEL SERVICE, INC., AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
4. On August 9, 1999 the U.S. Tax Court issued an opinion unfavorable to
UPS regarding a Notice of Deficiency asserting that we are liable for additional
tax for the 1983 and 1984 tax years. The Court held that we are liable for tax
on income of Overseas Partners Ltd.("OPL"), a Bermuda company, which had
reinsured excess value package insurance purchased by our customers beginning in
1984. The Court held that for the 1984 tax year we are liable for taxes of $31
million on income reported by OPL, penalties and penalty interest of $93 million
and interest for a total after-tax exposure estimated at approximately $246
million. In February 2000, the U.S. Tax Court entered a decision in accord with
its opinion.
In addition, during the first quarter of 1999, the IRS issued two Notices
of Deficiency asserting that we are liable for additional tax for the 1985
through 1987 tax years, and the 1988 through 1990 tax years. The primary
assertions by the IRS relate to the reinsurance of excess value package
insurance, the issue raised for the 1984 tax year. The IRS based its assertions
on the same theories included in the 1983-1984 Notice of Deficiency.
The IRS, in an issued report, has taken similar positions for tax years
1991 through 1994. We expect the IRS to take similar positions for tax years
1995 through 1999. Based on the Tax Court opinion, we currently estimate that
our total after-tax exposure for the tax years 1984 through 1999 could be as
high as $2.353 billion. We believe that a number of aspects of the Tax Court
decision are incorrect, and we have appealed the decision to the U.S. Court of
Appeals for the Eleventh Circuit. The Eleventh Circuit has heard oral arguments.
We do not know when it will render a decision.
In our second quarter 1999 financial statements, we recorded a tax
assessment charge of $1.786 billion, which included an amount for related state
tax liabilities. The charge included taxes of $915 million and interest of $871
million. This assessment resulted in a tax benefit of $344 million related to
the interest component of the assessment. As a result, our net charge to net
income for the tax assessment was $1.442 billion, increasing our total after-tax
reserve at that time with respect to these matters to $1.672 billion. The tax
benefit of deductible interest is included in income taxes; however, since none
of the income on which this tax assessment is based is our income, we did not
classify the tax charge as income taxes.
We determined the size of our reserve with respect to these matters in
accordance with accounting principles generally accepted in the United States of
America based on our estimate of our most likely liability. In making this
determination, we concluded that it is more likely that we will be required to
pay taxes on income reported by OPL and interest, but that it is not probable
that we will be required to pay any penalties and penalty interest. If penalties
and penalty interest ultimately are determined to be payable, we would have to
record an additional charge of up to $681 million.
UNITED PARCEL SERVICE, INC., AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
On August 31, 1999, we deposited $1.349 billion, and on August 8, 2000, we
deposited an additional $91 million, with the IRS related to these matters for
the 1984 through 1994 tax years. We included the profit of the excess value
package insurance program, using the IRS's methodology for calculating these
amounts, for both 1998 and 1999 in filings we made with the IRS in 1999. In
February 2000, we deposited $339 million with the IRS related to these matters
for the 1995 through 1997 tax years. These deposits and filings were made in
order to stop the accrual of interest, where applicable, on that amount of the
IRS's claim, without conceding the IRS's positions or giving up our right to
appeal the Tax Court's decision.
After the Tax Court decision, National Union Fire Insurance Company, a
subsidiary of American International Group, Inc., notified OPL that effective
September 30, 1999, it would terminate the five underlying policies that
provided shippers' risk insurance for UPS customers. The termination of these
policies triggered the immediate termination of the reinsurance agreement
between National Union and OPL.
UPS, on behalf of our customers, and National Union agreed on a
restructuring of this program, which became effective October 1, 1999.
Commencing on October 1, 1999, National Union issued five new policies that
include coverage for UPS customers. Glenlake Insurance Agency, Inc., a licensed
insurance agency formed in 1998 and a wholly owned subsidiary of UPS Capital
Corporation, now offers excess value package insurance that is issued under the
five new polices.
UPS Re Ltd., a wholly owned subsidiary of UPS, has entered into a
reinsurance agreement under which it reinsures substantially all of the risks
underwritten by National Union in exchange for substantially all of the premiums
collected. UPS Re Ltd., is a licensed reinsurance company formed in 1999 to
reinsure risks related to UPS and its subsidiaries. UPS Re Ltd., which is
domiciled in Bermuda, has elected to be taxed on its income as part of UPS's
consolidated income tax return for federal income tax purposes. This revised
arrangement should eliminate the issues considered by the Tax Court in the
Notices of Deficiency relating to OPL for the periods after September 1999.
The IRS has proposed adjustments, unrelated to the OPL matters discussed
above, regarding the allowance of deductions and certain losses, the
characterization of expenses as capital rather than ordinary, the treatment of
certain income and our entitlement to the investment tax credit and the research
tax credit in the 1985 through 1990 tax years. The proposed adjustments would
result in $15 million in additional income tax expense. Also, the IRS has issued
a report taking a similar position with respect to some of these issues for each
of the years from 1991 through 1994. This report proposes adjustments that would
result in $155 million in additional income tax expense. For the 1985 through
1994 tax years, unpaid interest on these adjustments through March 31, 2001
could aggregate up to $385 million, after the benefit of related tax deductions.
We expect that we will prevail on substantially all of these
UNITED PARCEL SERVICE, INC., AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
issues. Specifically, we believe that our practice of expensing the items
that the IRS alleges should have been capitalized is consistent with the
practices of other industry participants. The IRS may take similar positions
with respect to some of these issues for each of the years 1995 through 2000.
The IRS's proposed adjustments include penalties and penalty interest. We
believe that the possibility that such penalties and penalty interest will be
sustained is remote. We believe the eventual resolution of these issues will not
result in a material adverse effect on our financial condition, results of
operations or liquidity.
We have been named as a defendant in 23 lawsuits that seek to hold us (and,
in certain cases, other defendants) liable for the collection of premiums for
excess value package insurance in connection with package shipments since 1984
(or, in some of the cases, for shorter time periods). These cases generally
claim that we acted as an insurer in violation of our shipping contract and
without complying with state insurance laws and regulations, and that the price
for excess value package insurance was excessive. Twenty-two of these cases have
been consolidated for pre-trial purposes in a multi-district litigation
proceeding ("MDL Proceeding") before the United States District Court for the
Southern District of New York. An amended consolidated complaint in the MDL
Proceeding also alleges a violation of the federal RICO statute. Another
complaint in the MDL Proceeding alleges violations of federal antitrust laws.
The other remaining case was remanded from federal court to state court in
Madison County, Illinois and is proceeding independent of the MDL Proceeding.
The Court in the MDL Proceeding is considering a stipulation between certain of
the plaintiffs and UPS providing for class certificaiton in certain of the cases
in that proceeding. The Illinois court has indicated its intention to enter an
order granting plaintiff's class certification motion. These actions all
developed after the August 9, 1999 Tax Court opinion was rendered. We believe
the allegations in these cases have no merit and intend to continue to defend
them vigorously. The ultimate resolution of these matters cannot presently be
determined.
In addition, we are a defendant in various other lawsuits that arose in the
normal course of business. We believe the eventual resolution of these cases
will not result in a material effect on our financial condition, results of
operations or liquidity.
5. We report our operations in three segments: U.S. domestic package
operations, international package operations and non-package operations. Package
operations represent our core business and are divided into regional operations
around the world. Regional operations managers are responsible for both domestic
and export operations within their geographic region. International package
operations include shipments wholly outside the U.S. as well as shipments with
either origin or distribution outside the U.S. Non-package operations, which
include the UPS Logistics Group, are distinct from package operations and are
thus managed and reported separately.
UNITED PARCEL SERVICE, INC., AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Segment information for the three months ended March 31 is as follows (in
millions):
Three Months Ended
March 31,
----------------------
2001 2000
---------- ---------
Revenue:
U.S. domestic package $5,976 $5,841
International package 1,099 1,023
Non-package 435 356
---------- ---------
Consolidated $7,510 $7,220
========== =========
Operating profit:
U.S. domestic package $845 $883
International package 37 58
Non-package 62 126
---------- ---------
Consolidated $944 $1,067
========== =========
Non-package operating profit included $27 and $28 million for the three
months ended March 31, 2001 and 2000, respectively, of intersegment profit, with
a corresponding amount of operating expense, which reduces operating profit,
included in the U.S. domestic package segment. Non-package operating profit also
included a $49 million gain for the three months ended March 31, 2000 from the
sale of our UPS Truck Leasing subsidiary.
6. The major components of other operating expenses for the three months
ended March 31 are as follows (in millions):
Three Months Ended
March 31,
------------------------
2001 2000
--------- ----------
Repairs and maintenance $262 $239
Depreciation and amortization 318 283
Purchased transportation 503 434
Fuel 247 238
Other occupancy 143 107
Other expenses 842 777
--------- ----------
Consolidated $2,315 $2,078
========= ==========
7. In the first quarter of 2001, we announced three business combination
transactions. First, we agreed to acquire substantially all of the assets of
Mail Boxes Etc. ("MBE") in a cash transaction valued at approximately $185
million. MBE is the world's largest franchisor of independently owned and
operated business, communication, and shipping centers worldwide. The
acquisition, which closed on April 30, 2001, was accounted for as a purchase.
UNITED PARCEL SERVICE, INC., AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
In addition, on January 10, 2001, we entered into an agreement to acquire
Fritz Companies, Inc. in a transaction valued at approximately $450 million
(excluding assumed liabilities). Fritz is a freight forwarding, customs
brokerage and logistics concern, with $619 million of net revenue for its most
recent fiscal year. In the acquisition, which will be accounted for as a
purchase, we will exchange approximately 7.4 million shares of UPS class B
common stock for all of the outstanding common shares of Fritz. We expect this
transaction to close during the second quarter of 2001.
Finally, on January 15, 2001, we entered into an agreement to acquire First
International Bancorp, Inc. in a transaction valued at approximately $78 million
(excluding assumed liabilities). First International, with a managed loan
portfolio of approximately $1.2 billion, offers a variety of structured trade
finance, commercial and government-backed lending products. First International
will be integrated with UPS Capital Corporation, the finance subsidiary of UPS,
following the closing of the transaction. In the acquisition, which will be
accounted for as a purchase, we will exchange approximately 1.3 million shares
of UPS class B common stock for all of the outstanding shares of First
International. We expect this transaction to close during the third quarter of
2001.
8. The Financial Accounting Standards Board (FASB) issued Statement No.
133, "Accounting for Derivative Instruments and Hedging Activities" ("FAS 133"),
as amended by Statements No. 137 and No. 138, which became effective for UPS on
January 1, 2001. Under FAS 133, as amended, all derivative instruments are
recognized on the balance sheet at fair value, and changes in the fair values of
such instruments are recognized in earnings unless the derivatives qualify as
hedges of future cash flows. For derivatives qualifying as hedges of future cash
flows, the effective portion of changes in fair value is recorded temporarily in
accumulated other comprehensive income (OCI), then recognized in earnings along
with the related effects of the hedged items. Any ineffective portion of hedges
is reported in earnings as it occurs.
The nature of our business activities necessarily involves the management
of various financial and market risks, including those related to changes in
commodity prices, foreign currency exchange rates, interest rates, and equity
prices. As discussed more fully in note 13 "Derivative Instruments and Risk
Management" to our consolidated financial statements contained in our Annual
Report on Form 10-K for the year ended December 31, 2000, we use derivative
financial instruments to mitigate or eliminate certain of those risks. The
January 1, 2001 accounting change described above affected only the pattern and
timing of non-cash accounting recognition.
UNITED PARCEL SERVICE, INC., AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
At January 1, 2001, our financial statements were adjusted to record a
cumulative effect of adopting this accounting pronouncement, as follows:
Earnings OCI
(in millions) ---------- ---------
Adjustment to fair value of derivatives (a) $(42) $ 37
Income tax effects 16 (14)
---------- ---------
Total $(26) $ 23
========== =========
Effect on diluted earnings per share (a) $(0.03)
==========
(a) For earnings effect, amount shown is net of adjustment to hedged items.
The cumulative effect on earnings was primarily comprised of marking to
market the time value of option contracts used in commodity and foreign currency
hedging. This accounting change did not involve cash, and we believe that it
will not have a material effect on our financial condition, results of
operations, or liquidity.
The cumulative effect on OCI was primarily attributable to marking to
market swap contracts used as hedges of anticipated foreign currency cash flows
and anticipated purchases of energy products.
A reconciliation of current period changes, net of applicable income taxes,
in OCI relating to unrealized gains (losses) on cash flow hedges is as follows:
(in millions)
Transition adjustment as of January 1, 2001 $ 23
Current period declines in fiar value-
net of income tax effect (10)
Reclassificaiton to earnings-
net of income tax effect (20)
-------
Balance at March 31, 2001 $ (7)
=======
Additional disclosures required by FAS 133, as amended, are provided in the
following paragraphs.
UNITED PARCEL SERVICE, INC., AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Hedges of anticipated cash flows
--------------------------------
The ineffective portion of changes in fair values of hedge positions,
reported in first quarter 2001 earnings, was immaterial. Amounts excluded from
the measure of effectiveness, also reported in first quarter 2001 earnings,
amounted to a $14 million gain, before income taxes. The effective portion of
gains and losses on cash flow hedges are reported in the income statement
category related to the hedged exposure. The amounts recorded in the income
statement related to ineffectiveness are reported in the same income statement
captions as the effective portion of hedging gains and losses.
Of the $23 million in net deferred gains recorded in OCI at January 1,
2001, $33 million in gains, before income taxes, were reclassified to earnings
during the first quarter of 2001. Of the $7 million in net deferred losses
recorded in OCI at March 31, 2001, $23 million in gains, before income taxes,
are expected to be reclassified to earnings over the 12 month period ending
March 31, 2002. The actual amounts that will be reclassified to earnings over
the next 12 months will vary from this amount as a result of changes in market
conditions. No amounts were reclassified to earnings during the first quarter of
2001 in connection with forecasted transactions that were no longer considered
probable of occurring.
At March 31, 2001, the maximum term of derivative instruments that hedge
forecasted transactions, except those related to cross-currency interest rate
swaps on existing financial instruments, was nine months. We maintain
cross-currency interest rate swaps that extend through 2009.
Hedges of recognized assets, liabilities, and firm commitments
--------------------------------------------------------------
The ineffective portion of changes in fair values of hedge positions,
reported in first quarter 2001 earnings, was immaterial. Amounts excluded from
the measure of effectiveness, also reported in first quarter 2001 earnings,
amounted to $2 million in gains before income taxes. The effective portion of
gains and losses on fair value hedges are reported in the income statement
category related to the hedged exposure. The amounts recorded in the income
statement related to ineffectiveness are reported in the same income statement
captions as the effective portion of hedging gains and losses.
Derivatives not designated as hedges
------------------------------------
Derivatives not designated as hedges primarily consist of interest rate
swaps that are used to hedge a portfolio of small debt instruments. Although
these instruments are effective as hedges from an economic perspective, they do
not qualify for hedge accounting under FAS 133, as amended. The income statement
impact from these interest rate swaps on our first quarter results 2001 was
immaterial.
9. Certain prior period amounts have been reclassified to conform to the
current period presentation.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Three Months Ended March 31, 2001 and 2000
------------------------------------------
The following tables set forth information showing the change in revenue,
average daily package volume and average revenue per piece, both in dollars or
amounts and in percentage terms:
Three Months Ended
March 31,
-------------------
2001 2000 $ %
-------- -------- --------- --------
Revenue (in millions):
U.S. domestic package:
Next Day Air $1,383 $1,381 $ 2 0.1 %
Deferred 716 694 22 3.2
Ground 3,877 3,766 111 2.9
-------- -------- ---------
Total U.S. domestic package 5,976 5,841 135 2.3
International package:
Domestic 232 233 (1) (0.4)
Export 756 685 71 10.4
Cargo 111 105 6 5.7
-------- -------- ---------
Total International package 1,099 1,023 76 7.4
Non-package:
UPS Logistics Group 304 209 95 45.5
Other 131 147 (16) (10.9)
-------- -------- ---------
Total non-package 435 356 79 22.2
-------- -------- ---------
Consolidated $7,510 $7,220 $290 4.0 %
======== ======== =========
Average Daily Package Volume
(in thousands): #
---------
U.S. domestic package:
Next Day Air 1,106 1,071 35 3.3 %
Deferred 888 856 32 3.7
Ground 10,192 10,102 90 0.9
-------- -------- ---------
Total U.S. domestic package 12,186 12,029 157 1.3
International package:
Domestic 804 754 50 6.6
Export 399 342 57 16.7
-------- -------- ---------
Total International package 1,203 1,096 107 9.8
-------- -------- ---------
Consolidated 13,389 13,125 264 2.0 %
======== ======== =========
Operating days in period 64 65
Average Revenue Per Piece:
U.S. domestic package: $
---------
Next Day Air $19.54 $19.84 $(0.30) (1.5)%
Deferred 12.60 12.47 0.13 1.0
Ground 5.94 5.74 0.20 3.5
Total U.S. domestic package 7.66 7.47 0.19 2.5
International:
Domestic 4.51 4.75 (0.24) (5.1)
Export 29.61 30.81 (1.20) (3.9)
Total International package 12.83 12.89 (0.06) (0.5)
Consolidated $ 8.13 $ 7.92 $ 0.21 2.7 %
======== ======== =========
Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
Despite the weakening of the U.S. economy, U.S. domestic package revenue
and average daily package volume increased across all product lines. Average
daily package volume for our Next Day Air and Deferred products both increased
in excess of 3%. Our Ground products were the primary contributor of the revenue
growth for this segment, primarily due to a 3.5% increase in average revenue per
piece. These revenue comparisons were impacted by one less operating day in the
first quarter of 2001 compared to the first quarter of 2000. The average revenue
increase for the U.S. domestic package segment on a per day basis was almost 4%.
During the first quarter of 2001, we increased rates for standard ground
shipments an average of 3.1% for commercial deliveries. The ground residential
charge increased $0.05 to $1.05 over the commercial ground rate, with an
additional delivery area surcharge of $1.50 added to certain less accessible
areas. In addition, we increased rates for UPS Next Day Air, UPS Next Day Air
Saver, UPS 2nd Day Air, and 3 Day Select an average of 3.7%. The surcharge for
UPS Next Day Air Early A.M. increased to $27.50. Rates for international
shipments originating in the United States (Worldwide Express, Worldwide Express
Plus, UPS Worldwide Expedited and UPS International Standard service) increased
by 2.9%. Rate changes for shipments originating outside the U.S. were made
throughout the past year and varied by geographic market. In addition, all
package rates during the quarter included a 1.25% fuel surcharge that was put in
place August 7, 2000.
The increase in international package revenue was due primarily to volume
growth for export products, offset by a decline in the revenue per piece for
these products. Overall, average daily package volume increased almost 10% for
international operations, with our export products continuing to increase at
double-digit rates. The average revenue increase for this segment on a per day
basis was over 9%.
The increase in non-package revenue resulted from continued growth of the
UPS Logistics Group and was led by our supply chain management and service parts
logistics offerings.
Operating expenses increased by $413 million, or 6.7%. Compensation and
benefits expenses accounted for $176 million of this increase. Other operating
expenses increased $237 million due to higher utility costs, increases in
depreciation and amortization expenses, higher purchased transportation costs
and the $49 million gain we recognized in the first quarter of 2000 from the
sale of our UPS Truck Leasing subsidiary, which reduced our operating expenses
last year. The increase in purchased transportation costs was primarily due to
increased business for the UPS Logistics Group.
Our operating margin decreased from 14.8% during the first quarter of 2000
to 12.6% during the first quarter of 2001. This decline resulted primarily from
revenue growth declining at a more rapid rate than our expense growth during the
quarter. We are addressing a variety of initiatives in an effort to moderate
future expense growth, given current, slower economic conditions, which are
adversely affecting volume and revenue growth.
Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
The following table sets forth information showing the change in operating
profit, both in dollars (in millions) and in percentage terms:
Three Months Ended
Operating Segment March 31, Change
----------------------- ------------------
2001 2000 $ %
---------- ---------- -------- --------
U.S. domestic package $845 $883 $ (38) (4.3)%
International package 37 58 (21) (36.2)
Non-package 62 126 (64) (50.8)
---------- ---------- --------
Consolidated Operating Profit $944 $1,067 $(123) (11.5)%
========== ========== ========
U.S. domestic package operating profit decreased $38 million due to the
overall weakening of the U.S. economy, along with the impact of one less
operating day.
The decline in operating profit for our international package operations
was caused by several different factors, including increases in aircraft
maintenance expenses and the leasing of aircraft to support our China routes
prior to the April 1, 2001 start up of that service.
The decrease in non-package operating profit is largely due to the $49
million gain we recognized in the first quarter of 2000 from the sale of our UPS
Truck Leasing subsidiary.
The decrease in investment income of $286 million for the first quarter of
2001 is due to two factors relating to the first quarter of 2000. First, we
recognized a $241 million gain last year on two investments held by our
Strategic Enterprise Fund that were acquired by other companies. In addition, we
earned income on the $5.3 billion in net IPO proceeds available for investment
prior to the tender offer that occurred in early March 2000, and the $1.2
billion in IPO proceeds that were not utilized for the tender offer and were
still available for investment during March 2000.
Net income for the first quarter of 2001 decreased by $257 million from the
first quarter of 2000, resulting in a decrease in diluted earnings per share
from $0.67 in 2000 to $0.48 in 2001. These results reflect non-recurring items
from both years: a FAS 133 cumulative expense adjustment, net of tax, of $26
million in 2001; and $139 million in net income in 2000 resulting from gains on
our Strategic Enterprise Fund investments and the sale of our Truck Leasing
subsidiary, offset partially by the charge for retroactive costs associated with
creating new full-time jobs from existing part-time Teamster jobs.
Excluding the net after-tax impact of these non-recurring items, our net
income for the first quarter of 2001 would have been $582 million, with an
associated diluted earnings per share of $0.51, compared to 2000, which would
have produced a net income of $674 million, with an associated diluted earnings
per share of $0.56.
Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
Liquidity and Capital Resources
-------------------------------
Our primary source of liquidity is our cash flow from operations. We
maintain significant cash, cash equivalents, marketable securities and
short-term investments, amounting to $2.6 billion at March 31, 2001.
We have used all of the remaining proceeds from our November 1999 initial
public offering for share repurchases. An additional $750 million has been
authorized for share repurchases, of which $222 million was still available as
of March 31, 2001.
We maintain two commercial paper programs under which we are authorized to
borrow up to $7.0 billion. Approximately $914 million was outstanding under
these programs as of March 31, 2001. This amount has been classified as
long-term debt in accordance with our intention and ability to refinance such
obligations on a long-term basis under our revolving credit facilities. The
average interest rate on the amount outstanding at March 31, 2001 was 5.07%.
We maintain two credit agreements with a consortium of banks. These
agreements provide revolving credit facilities of $1.25 billion each, with one
expiring on April 25, 2002 and the other expiring on April 27, 2005. Interest on
any amounts we borrow under these facilities would be charged at 90-day LIBOR
plus 15 basis points. There were no borrowings under either of these agreements
as of March 31, 2001.
We also maintain a $1.0 billion European medium-term note program. Under
this program, we may issue notes from time to time, denominated in a variety of
currencies. At March 31, 2001, $264 million was available under this program. At
March 31, 2001, there were two different debt issuances (originally issued at
$200 million and $736 million respectively) that had been made under this
program. The $200 million outstanding, which was issued under this program in
1997, bears interest at a stated interest rate of 6.625%, and was paid off on
April 25, 2001. The 500 million Pound Sterling denominated bonds (recorded at
$716 million at March 31, 2001), which were issued in February 2001, bear
interest at a stated rate of 5.50%.
We have filed a shelf registration statement with the SEC under which we
may issue debt securities in the U.S. of up to $2.0 billion. There was
approximately $607 million issued under this shelf registration statement at
March 31, 2001. As of March 31, 2001, $113 million in notes have been issued
under the UPS Notes program. These notes have various terms and maturities, all
with fixed interest rates. Also during 2001, we issued $89 million in floating
rate senior notes due December 2050 that bear interest at one-month LIBOR less
45 basis points.
On August 9, 1999 the U.S. Tax Court issued an opinion unfavorable to UPS
regarding a Notice of Deficiency asserting that we are liable for additional tax
for the 1983 and 1984 tax years. The Court held that we are liable for tax on
income of Overseas Partners Ltd. ("OPL"), a Bermuda company, which had reinsured
excess value package insurance purchased by our customers beginning in 1984. In
February 2000, the U.S. Tax Court entered a decision in accord with its opinion.
Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
In addition, during the first quarter of 1999, the IRS issued two Notices
of Deficiency asserting that we are liable for additional tax for the 1985
through 1987 tax years, and the 1988 through 1990 tax years. The primary
assertions by the IRS relate to the reinsurance of excess value package
insurance, the issue raised for the 1984 tax year. The IRS has based its
assertions on the same theories included in the 1983-1984 Notice of Deficiency.
The IRS, in an issued report, has taken similar positions for tax years 1991
through 1994. We expect the IRS to take similar positions for tax years 1995
through 1999. We believe that a number of aspects of the Tax Court decision are
incorrect, and we have appealed the decision to the U.S. Court of Appeals for
the Eleventh Circuit. Briefing has been completed. The Eleventh Circuit has
heard oral arguments. We do not know when it will render a decision.
We have been named as a defendant in 23 lawsuits that seek to hold us (and
in certain cases, other defendants) liable for the collection of premiums for
excess value package insurance in connection with package shipments since 1984
(or, in some of the cases, for shorter time periods). These cases generally
claim that we acted as an insurer in violation of our shipping contract and
without complying with state insurance laws and regulaitons, and that the price
for excess value package insurance was excessive. Twenty-two of these cases have
been consolidated for pre-trial purposes in a multi-district litigaiton
proceeding ("MDL Proceeding") before the United States District Court for the
Southern District of New York. An amended consolidated complaint in the MDL
Proceeding also alleges a violation of the federal RICO statute. Another
complaint in the MDL Proceeding alleges violations of federal antitrust laws.
The other remaining case was remanded from federal court to state court in
Madison County, Illinois and is proceeding independent of the MDL proceeding.
The Court in the MDL Proceeding is considering a stipulation between certian of
the plaintiffs and UPS providing for class certificaiton in certain of the cases
in that proceeding. The Illinois court has indicated its intention to enter an
order granting plaintiff's class certification motion. These actions all
developed after the August 9, 1999 Tax Court opinion was rendered. We believe
the allegations in these cases have no merit and intend to continue to defend
them vigorously. The ultimate resolution of these matters cannot presently be
determined.
In addition, we are a defendant in various other lawsuits that arose in the
normal course of business. In our opinion, none of these cases is expected to
have a material effect on our financial condition, results of operations or
liquidity.
Reference is made to Note 4 to the accompanying unaudited consolidated
financial statements for more information on each of the preceding matters.
Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Liquidity and Capital Resources" and other parts of this report
contain "forward-looking" statements about matters that are inherently difficult
to predict. These statements include statements regarding our intent, belief and
current expectations about our strategic direction, prospects and future
results. We have described some of the important factors that affect these
statements as we discussed each subject. Forward-looking statements involve
risks and uncertainties, and certain factors may cause actual results to differ
materially from those contained in the forward-looking statements. These factors
include, for example, economic and other conditions in the markets in which we
operate, our competitive environment, increases in avaition and motor fuel
prices, strikes, work stoppages and slowdowns, governmental regulation, and
cyclical and seasonal fluctuations in our operating results. Additional
information concerning these risks and uncertainties, and other factors you may
wish to consider, are provided in the "Risk Factors" discussed in our Annual
Report on Form 10-K for the year ended December 31, 2000 and other documents we
file from time to time with the SEC.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Market Risk
-----------
We are exposed to market risk from changes in foreign currency exchange
rates, interest rates, equity prices, and certain commodity prices. All of this
market risk arises in the normal course of business, as we do not engage in
speculative trading activities. In order to manage the risk arising from these
exposures, we utilize a variety of foreign exchange, interest rate, equity and
commodity forward contracts, options, and swaps.
Our market risks, hedging strategies, and financial instrument positions at
March 31, 2001 are similar to those disclosed in our Annual Report on Form 10-K
for the year ended December 31, 2000. However, during the first three months of
2001, we issued 500 million of Pound Sterling denominated bonds (recorded at
$716 million at March 31, 2001), at a fixed 5.50% interest rate. In addition, we
issued a total of $113 million of fixed rate notes with various maturities under
our UPS Notes program. All of these fixed rate notes were effectively converted
to floating interest rates using interest rate swaps.
The total fair value of our derivative financial instruments, including
derivatives added during the first three months of 2001, decreased from an asset
of $137 million at December 31, 2000 to an asset of $128 million at March 31,
2001. The information concerning market risk under the sub-caption "Market Risk"
of the caption "Management's Discussion and Analysis" on pages 29 and 30 of our
consolidated financial statements contained in our Annual Report on Form 10-K
for the year ended December 31, 2000, is hereby incorporated by reference in
this Quarterly Report on Form 10-Q.
Item 1. Legal Proceedings
We have been named as a defendant in 23 lawsuits that seek to hold us (and,
in certain cases, other defendants) liable for the collection of premiums for
excess value package insurance in connection with package shipments since 1984
(or, in some of the cases, for shorter time periods). These cases generally
claim that we acted as an insurer in violation of our shipping contract and
without complying with state insurance laws and regulations, and that the price
for excess value package insurance was excessive. Twenty-two of these cases have
been consolidated for pre-trial purposes in a multi-district litigation
proceeding ("MDL Proceeding") before the United States District Court for the
Southern District of New York. An amended consolidated complaint in the MDL
Proceeding also alleges a violation of the federal RICO statute. Another
complaint in the MDL Proceeding alleges violations of federal antitrust laws.
The other remaining case was remanded from federal court to state court in
Madison County, Illinois and is proceeding independent of the MDL Proceeding.
The Court in the MDL Proceeding in considering a stipulation between certain of
the plaintiffs and UPS providing for class certificaiton in certain of the cases
in that proceeding. The Illinois court has indicated its intention to enter an
order granting plaintiff's class certification motion. These actions all
developed after the August 9, 1999 Tax Court opinion was rendered. We believe
the allegations in these cases have no merit and intend to continue to defend
them vigorously. The ultimate resolution of these matters cannot presently be
determined.
Item 6. Exhibits and Reports on Form 8-K
A) Exhibits:
(10) Material Contracts
(a) Fifth Amended and Restated Credit Agreement (364-Day
Facility) dated April 26, 2001 among United Parcel Service,
Inc., the initial lenders named therein, Salomon Smith
Barney Inc. as Arranger and ABN AMRO Bank N.V., Bank of
America, N.A., Bank One, NA, and Chase Manhattan Bank, as
Co-Documentation Agents and Citibank, N.A. as Administrative
and Syndication Agent.
(b) Third Amended and Restated Credit Agreement (Five-Year
Facility) dated April 26, 2001 among United Parcel Service,
Inc., the initial lenders named therein, Salomon Smith
Barney Inc. as Co-Arranger and Bank of America Securities,
LLC, as Co-Arranger and Bank of America N.A. as
Documentation Agent and Citibank, N.A. as Administrative and
Syndication Agent.
(B) Reports on Form 8-K:
The Company filed a Form 8-K Current Report on January 29, 2001 (Date of
Earliest Event Reported: January 29, 2001), reporting the establishment of
a Medium-term Note program for its UPS Notes, and filing with the
Securities and Exchange Commission the Selling Agent Agreement and form of
UPS Note to be issued under the program.
EXHIBIT INDEX
(10) Material Contracts
(a) Fifth Amended and Restated Credit Agreement (364-Day
Facility) dated April 26, 2001 among United Parcel Service,
Inc., the initial lenders named therein, Salomon Smith
Barney Inc. as Arranger and ABN AMRO Bank N.V., Bank of
America, N.A., Bank One, NA, and Chase Manhattan Bank, as
Co-Documentation Agents and Citibank, N.A. as Administrative
and Syndication Agent.
(b) Third Amended and Restated Credit Agreement (Five-Year
Facility) dated April 26, 2001 among United Parcel Service,
Inc., the initial lenders named therein, Salomon Smith
Barney Inc. as Co-Arranger and Bank of America Securities,
LLC, as Co-Arranger and Bank of America N.A. as
Documentation Agent and Citibank, N.A. as Administrative and
Syndication 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, INC.
(Registrant)
Date: May 15, 2001 By: /S/ D. Scott Davis
D. Scott Davis
Senior Vice President,
Treasurer and
Chief Financial Officer