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 June 30, 2000
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
Atlanta, Georgia 30328
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(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)
996,779,940 Class A shares, 145,243,505 Class B shares
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Outstanding as of August 10, 2000
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
UNITED PARCEL SERVICE, INC., AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, 2000 (unaudited) and December 31, 1999
(In millions except share and per share amounts)
June 30, December 31,
Assets 2000 1999
----------- -------------
Current Assets:
Cash & cash equivalents $ 2,381 $ 4,204
Marketable securities & short-term investments 2,277 2,074
Accounts receivable 3,216 3,167
Prepaid employee benefit costs 976 1,327
Materials, supplies & other prepaid expenses 406 366
_____ ______
Total Current Assets 9,256 11,138
Property, Plant & Equipment (including aircraft
under capitalized lease obligations) - at cost,
net of accumulated depreciation & amortization
of $9,245 in 2000 and $8,891 in 1999 11,450 11,579
Other Assets 379 326
______ ______
$21,085 $23,043
====== ======
Liabilities & Shareowners' Equity
Current Liabilities:
Commercial paper $ 904 $ -
Accounts payable 1,267 1,295
Accrued wages & withholdings 1,586 998
Dividends payable - 361
Tax assessment 146 457
Income taxes payable 367 50
Current maturities of long-term debt 545 512
Other current liabilities 728 525
_____ _____
Total Current Liabilities 5,543 4,198
Long-Term Debt (including capitalized lease
obligations) 1,748 1,912
_____ _____
Accumulated Postretirement Benefit
Obligation, Net 1,052 990
_____ _____
Deferred Taxes, Credits & Other Liabilities 3,481 3,469
_____ _____
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
1,004,932,270 and 1,101,295,534 in 2000 and 1999 10 11
Class B common stock, par value $.01 per share,
authorized 5,600,000,000 shares, issued
138,159,361 and 109,400,000 in 2000 and 1999 1 1
Additional paid-in capital 811 5,096
Retained earnings 8,644 7,536
Accumulated other comprehensive loss (205) (170)
_____ _____
9,261 12,474
_____ ______
$21,085 $23,043
====== ======
See notes to unaudited consolidated financial statements.
UNITED PARCEL SERVICE, INC., AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME
Three Months and Six Months Ended June 30, 2000 and 1999
(In millions except per share amounts)
(unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
_____ _____ ______ ______
Revenue $7,284 $6,560 $14,504 $12,891
_____ _____ ______ ______
Operating Expenses:
Compensation and benefits 4,042 3,725 8,117 7,377
Other 2,078 1,833 4,140 3,646
_____ _____ ______ ______
6,120 5,558 12,257 11,023
_____ _____ ______ ______
Operating Profit 1,164 1,002 2,247 1,868
_____ _____ ______ ______
Other Income and (Expense):
Investment income 62 39 395 70
Interest expense (65) (56) (117) (105)
Tax assessment - (1,786) - (1,786)
Miscellaneous, net (2) (6) (12) (22)
_____ _____ _____ _____
(5) (1,809) 266 (1,843)
_____ _____ _____ _____
Income (Loss) Before
Income Taxes 1,159 (807) 2,513 25
Income Taxes 464 47 1,005 380
_____ _____ _____ _____
Net Income (Loss) $ 695 $ (854) $ 1,508 $ (355)
===== ===== ===== =====
Basic Earnings (Loss)
Per Share $ 0.61 $(0.77) $ 1.29 $ (0.32)
===== ===== ===== =====
Diluted Earnings (Loss)
Per Share $ 0.60 $(0.77) $ 1.27 $ (0.32)
===== ===== ===== =====
See notes to unaudited consolidated financial statements.
UNITED PARCEL SERVICE, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREOWNERS' EQUITY
Six Months Ended June 30, 2000
(In millions except per share amounts)
(unaudited)
Accumulated
Class A Class B Additional Other Total
Common Stock Common Stock Paid-In Retained Comprehensive Shareowners'
Shares Amount Shares Amount Capital Earnings Loss Equity
Balance, January 1, 2000 1,101 $11 109 $1 $5,096 $7,536 $(170) $12,474
Comprehensive income:
Net income - - - - - 1,508 - 1,508
Foreign currency
adjustments - - - - - - (51) (51)
Unrealized gain on
marketable securities - - - - - - 16 16
Comprehensive income 1,473
Dividends ($0.34 per share) - - - - - (400) - (400)
Stock award plans 5 - - - 92 - - 92
Common stock purchases:
Tender offer (68) (1) - - (4,069) - - (4,070)
Other (5) - - - (335) - - (335)
Common stock issuances 1 - - - 27 - - 27
Conversion of Class A Common
Stock to Class B Common
Stock (29) - 29 - - - - -
Balance, June 30, 2000 1,005 $10 138 $1 $ 811 $8,644 $(205) $ 9,261
See notes to unaudited consolidated financial statements.
UNITED PARCEL SERVICE, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30, 2000 and 1999
(In millions)
(unaudited)
Six Months Ended
June 30,
2000 1999
Cash flows from operating activities: _____ _____
Net income/(loss) $ 1,508 $ (355)
Adjustments to reconcile net income (loss)
to net cash from operating activities:
Depreciation and amortization 570 563
Postretirement benefits 62 48
Deferred taxes, credits, and other 60 38
Stock award plans 288 204
Gain on exchange of investments and sale
of business (290) -
Changes in assets and liabilities:
Accounts receivable (49) 85
Prepaid employee benefit costs 351 412
Materials, supplies and other
prepaid expenses (40) (62)
Accounts payable (28) (40)
Accrued wages and withholdings 329 140
Dividends payable (361) (247)
Tax assessment (311) 1,442
Income taxes payable 452 250
Other current liabilities 137 49
_____ _____
Net cash from operating activities 2,678 2,527
_____ _____
Cash flows from investing activities:
Capital expenditures (663) (597)
Disposals of property, plant and equipment 202 50
Purchases of marketable securities and
short-term investments (2,098) (1,753)
Sales and maturities of marketable securities
and short-term investments 2,167 674
Construction funds in escrow 51 (140)
Other asset receipts (payments) (69) 17
_____ _____
Net cash (used in) investing activities (410) (1,749)
_____ _____
Cash flows from financing activities:
Proceeds from borrowings 1,123 999
Repayments of borrowings (347) (367)
Purchases of common stock via tender (4,070) -
Other purchases of common stock (335) (1,140)
Issuances of common stock pursuant to stock
awards and employee stock purchase plans 77 620
Dividends (400) (311)
Other transactions (122) (21)
_____ _____
Net cash (used in) financing activities (4,074) (220)
_____ _____
Effect of exchange rate changes on cash (17) (20)
_____ _____
Net increase (decrease) in cash and cash equivalents (1,823) 538
Cash and cash equivalents:
Beginning of period 4,204 1,240
_____ _____
End of period $ 2,381 $1,778
====== =====
Cash paid during the period for:
Interest (net of amount capitalized) $ 162 $ 85
====== =====
Income taxes $ 444 $ 423
====== =====
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 June 30, 2000, the results of operations for the three and six
months ended June 30, 2000 and 1999, and cash flows for the six months
ended June 30, 2000 and 1999. 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 Six Months
Ended Ended
June 30, June 30,
2000 1999 2000 1999
Numerator: ____ ____ ____ ____
Numerator for basic and diluted
earnings (loss) per share -
Net income (loss) $ 695 $(854) $1,508 $(355)
==== ==== ===== ====
Denominator:
Weighted-average shares -
Denominator for basic earnings
(loss) per share 1,144 1,114 1,167 1,114
Effect of dilutive
securities:
Contingent shares -
Management incentive awards 7 - 5 -
Stock option plans 16 - 18 -
_____ _____ _____ _____
Denominator for diluted earnings
(loss) per share 1,167 1,114 1,190 1,114
===== ===== ===== =====
Basic Earnings (Loss) Per Share $0.61 $(0.77) $1.29 $(0.32)
==== ===== ==== =====
Diluted Earnings (Loss)Per Share $0.60 $(0.77) $1.27 $(0.32)
==== ===== ==== =====
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 has based its assertions on the same theories included in the
1983-1984 Notice of Deficiency.
The IRS has taken similar positions for tax years subsequent to
1990. 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.
In the 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 have
not classified the tax charge as income taxes.
We determined the size of our reserve with respect to these
matters in accordance with generally accepted accounting principles
based on our estimate of our most likely liability. In making this
determination, we concluded that it was more likely that we would be
required to pay taxes on income reported by OPL and interest, but that
it was not probable that we would 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 the fourth quarter of 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 position or
giving up our right to appeal the Tax Court's decision.
Effective October 1, 1999, we implemented a new arrangement for
providing excess value package insurance for our customers through UPS
subsidiaries. This new arrangement results in including in our
non-package operating segment the operations of the excess value package
insurance program offered to our customers. This revised arrangement
should eliminate the issues considered by the Tax Court in the Notices
of Deficiency relating to OPL for 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, and our entitlement to the investment tax credit and the
research tax credit in the 1985 through 1990 tax years. These proposed
adjustments, if sustained, would result in $82 million in additional
income tax expense.
We expect that we will prevail on substantially all of these
issues. 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. Should the IRS prevail,
however, unpaid interest on these adjustments through June 30,
2000, could aggregate up to $270 million, after the benefit of
related tax deductions. 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.
The IRS may take similar positions with respect to some of these
issues for each of the years from 1991 through 1999. We believe the
eventual resolution of these issues will not result in a material
adverse effect upon our financial condition, results of operations or
liquidity.
We are a defendant in various employment-related lawsuits. In our
opinion, none of these cases is expected to have a material effect upon
our financial condition, results of operations or liquidity.
UNITED PARCEL SERVICE, INC., AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
We have been named as a defendant in 18 lawsuits that seek to hold
us (and in three cases, other defendants) liable for the collection of
premiums for excess value package insurance in connection with package
shipments since 1984. 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. Twelve of these cases have been
consolidated for pre-trial purposes in a multi-district litigation
proceeding before the United States District Court for the Southern
District of New York. We are in the process of removing the remaining
cases to federal court and having them consolidated into the
multi-district litigation proceeding. These cases are in their initial
stages, no discovery has commenced, and no class has been certified.
These actions all developed after the August 9, 1999 Tax Court opinion
was rendered. We believe the allegations have no merit and intend to
defend them vigorously. The ultimate resolution of these matters cannot
presently be determined.
On November 22, 1999, the U.S. Occupational Safety and Health
Administration proposed regulations to mandate an ergonomics standard
that would require American industry to make significant changes in the
workplace in order to reduce the incidence of musculoskeletal complaints
such as low back pain. The exact changes in the workplace that might be
required to comply with these standards are not specified in the
proposal. If OSHA enforced these regulations by seeking the same
ergonomic measures it has advocated in the past under its general
authority to remedy "recognized hazards," however, it might demand
extensive changes in the physical layout of our distribution centers as
well as the hiring of significant numbers of additional full-time and
part-time employees. Our competitors, as well as the remainder of
American industry, also would incur proportionately comparable costs.
We, our competitors and other affected parties have filed comments
with OSHA challenging the medical support and economic and technical
feasibility of the proposed regulations. We do not believe that OSHA
has complied with the statutory mandate of establishing significant risk
of material health impairment or has properly analyzed the costs and
benefits of these proposed regulations. We and other affected parties
recently filed additional comments in opposition to the proposed
regulations and would have the right to appeal any final ergonomics
standard to an appropriate federal court of appeals. We anticipate that
such a standard would be rejected by the reviewing court. If ergonomic
regulations resembling the current proposal were sustained by a
reviewing court, we believe that we would prevail in an enforcement
proceeding based on substantial defenses including the vagueness of the
standards and the technological and economic feasibility of costly
abatement measures.
UNITED PARCEL SERVICE, INC., AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
OSHA has taken the position that the cost of compliance with the
proposed regulations will be only $4.2 billion per year over a ten-year
period for all of American industry. We believe that these estimates
are unrealistic. We have attempted to estimate the costs of compliance
if OSHA adopts the proposed regulations and applies them in the same way
as it sought to apply its prior unsuccessful attempts to impose
ergonomic measures under its general authority. Based on this
experience and assuming that, contrary to our expectations, OSHA were
able to obtain court orders applying to all of our facilities that
mandated compliance with these regulations, we estimate that the cost of
compliance could be approximately $20 billion in initial costs, which
would be incurred over a period of years, and approximately $5 billion
in incremental annual costs. Such expenditures, if required to be
incurred, would materially and adversely affect our results of
operations, liquidity and financial condition.
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 upon 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 delivery 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.
Segment information for the three and six months ended June 30, is
as follows (in millions):
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
Revenue:
U.S. domestic package $5,890 $5,434 $11,731 $10,665
International package 1,023 908 2,046 1,793
Non-package 371 218 727 433
_____ _____ ______ ______
Consolidated $7,284 $6,560 $14,504 $12,891
===== ===== ====== ======
Operating profit:
U.S. domestic package $1,018 $ 898 $ 1,911 $ 1,687
International package 85 71 149 123
Non-package 61 33 187 58
_____ _____ ______ ______
Consolidated $1,164 $1,002 $ 2,247 $ 1,868
===== ===== ====== ======
UNITED PARCEL SERVICE, INC., AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Non-package operating profit included $26 and $28 million for the
three months ended June 30, 2000 and 1999, respectively, and $53 and $58
million for the six months ended June 30, 2000 and 1999, respectively,
of intersegment profit, with a corresponding amount of operating
expense, which reduces operating profit of the U.S. domestic package
segment.
6. The major components of other operating expenses for the three
months and six months ended June 30, are as follows (in millions):
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
Repairs and maintenance $ 241 $ 226 $ 480 $ 443
Depreciation and amortization 287 280 570 563
Purchased transportation 466 385 900 761
Fuel 210 151 448 293
Other occupancy 91 88 198 189
Other expenses 783 703 1,544 1,397
____ ____ _____ _____
Consolidated $2,078 $1,833 $4,140 $3,646
===== ===== ===== =====
7. 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 June 30, 2000 and 1999
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
June 30, Change
2000 1999 $ %
Revenue (in millions): ____ ____ _ _
U.S. domestic package:
Next Day Air $1,412 $1,282 $130 10.1%
Deferred 690 637 53 8.3
Ground 3,788 3,515 273 7.8
----- ----- ---
Total U.S. domestic package 5,890 5,434 456 8.4
International package:
Domestic 222 224 (2) (0.9)
Export 711 606 105 17.3
Cargo 90 78 12 15.4
----- ----- ---
Total International package 1,023 908 115 12.7
Non-package 371 218 153 70.2
----- ----- ---
Consolidated $7,284 $6,560 $724 11.0%
===== ===== ===
Average Daily Package Volume #
-
(in thousands):
U.S. domestic package:
Next Day Air 1,113 1,013 100 9.9%
Deferred 852 792 60 7.6
Ground 10,135 9,614 521 5.4
------ ----- ---
Total U.S. domestic package 12,100 11,419 681 6.0
International package:
Domestic 749 669 80 12.0
Export 360 293 67 22.9
----- ----- ---
Total International package 1,109 962 147 15.3
----- ----- ---
Consolidated 13,209 12,381 828 6.7%
====== ====== ===
Operating days in period 64 64
Average Revenue Per Piece: $
-
U.S. domestic package:
Next Day Air $19.82 $19.77 $.05 0.3%
Deferred 12.65 12.57 .08 0.6
Ground 5.84 5.71 .13 2.3
Total U.S. domestic package 7.61 7.44 .17 2.3
International:
Domestic 4.63 5.23 (.60) (11.5)
Export 30.86 32.32 (1.46) (4.5)
Total International package 13.15 13.48 (.33) (2.4)
Consolidated $ 8.07 $ 7.91 $.16 2.0%
===== ===== ===
Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
U.S. domestic package revenue increased primarily due to volume
gains across all product lines, continuing the trends reported during
the first quarter of 2000. Average daily package volume for our higher
revenue per piece express (Next Day Air and Deferred) products increased
8.9%, while average daily package volume for our Ground products increased
5.4%.
The increase in international package revenue was due to volume
growth for both our domestic and export products, offset by a decline in
the revenue per piece for these products. This decline was primarily due
to currency fluctuations, particularly a decline in the value of the
Euro relative to the U.S. dollar. Overall average daily package volume
increased 15.3% for international operations, with our high revenue per
piece export products increasing at 22.9%.
The increase in non-package revenue resulted primarily from the
new arrangement for providing excess value package insurance for our
customers as well as continued growth of the UPS Logistics Group.
Excluding the excess value business, which was not included in the
segment during the same period last year, non-package revenue increased
over 25%, consistent with the trend we reported in the first quarter of
2000.
Operating expenses increased by $562 million, or 10.1%, to $6.120
billion during the second quarter of 2000. Compensation and benefits
expenses increased by $317 million, the largest component of the
change. Other operating expenses increased $245 million primarily due
to higher fuel costs, claims expense associated with the new arrangement
for providing excess value package insurance for our customers, and
higher purchased transportation costs. The increase in purchased
transportation costs was primarily due to increased business for our
international and logistics operations, while the $59 million, or 39.1%,
increase in fuel costs was due to the increase in fuel prices and the
growth in volume, partially offset by the cost reductions generated by
our fuel hedging program. International operating expenses were
favorably impacted by the decline in the value of the Euro relative to
the U.S. dollar.
To offset the increasing fuel costs we have experienced over the
last several quarters and that we expect to continue into the future, we
implemented a temporary 1.25% fuel surcharge effective August 7, 2000.
Our operating margin improved from 15.3% during the second quarter
of 1999 to 16.0% during the second quarter of 2000. This improvement
continues our recently reported trends and is favorably impacted by
continued product mix improvements.
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 and in percentage terms:
Three Months Ended
June 30, Change
------- ------
Operating Segment 2000 1999 $ %
----------------- ---- ---- - -
(dollars in millions)
U.S. domestic package $1,018 $ 898 $ 120 13.4%
International package 85 71 14 19.7
Non-package 61 33 28 84.8
----- ---- ----
Consolidated operating profit $1,164 $1,002 $ 162 16.2%
===== ===== ====
U.S. domestic package operating profit increased over 13% due to
the volume and revenue improvements discussed previously.
The improvement in the operating profit of our international
package operations of almost 20% resulted primarily from increased
volume and revenue, and was realized despite significantly higher fuel
costs for this segment. All international regions contributed to
these results.
The increase in non-package operating profit is largely due to the
new arrangement for providing excess value package insurance for our
customers, which contributed $57 million of additional operating profit
for the quarter. This improvement was offset in part by start-up costs
associated with Service Parts Logistics, UPS Capital Corporation and
other initiatives.
The increase in investment income of $23 million for the quarter
is due primarily to IPO proceeds that were not utilized for the tender
offer that occurred in March 2000 and have not been used for the
repurchase of UPS stock under our share repurchase program.
Net income for the second quarter of 2000 increased by $107
million from the second quarter of 1999, after adjusting the prior year
results to exclude a $1.442 billion tax assessment charge. This
increase resulted in an improvement in diluted earnings per share from
$0.52 in the second quarter of 1999, excluding the impact of the tax
assessment charge, to $0.60 in the second quarter of 2000.
Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Six Months Ended June 30, 2000 and 1999
The following table sets forth information showing the change in
revenue, average daily package volume and average revenue per piece,
both in dollars and in percentage terms:
Six Months Ended
June 30, Change
------- ------
2000 1999 $ %
---- ---- - -
Revenue (in millions):
U.S. domestic package:
Next Day Air $2,793 $2,490 $ 303 12.2%
Deferred 1,384 1,248 136 10.9
Ground 7,554 6,927 627 9.1
----- ----- ----
Total U.S. domestic package 11,731 10,665 1,066 10.0
International package:
Domestic 455 459 (4) (0.9)
Export 1,396 1,180 216 18.3
Cargo 195 154 41 26.6
----- ----- ----
Total International package 2,046 1,793 253 14.1
Non-package 727 433 294 67.9
----- ----- ----
Consolidated $14,504 $12,891 $1,613 12.5%
====== ====== =====
Average Daily Package Volume #
-
(in thousands):
U.S. domestic package:
Next Day Air 1,092 995 97 9.7%
Deferred 854 790 64 8.1
Ground 10,118 9,639 479 5.0
------ ------ ---
Total U.S. domestic package 12,064 11,424 640 5.6
International package:
Domestic 752 684 68 9.9
Export 351 286 65 22.7
----- ------ ---
Total International package 1,103 970 133 13.7
------ ------ ---
Consolidated 13,167 12,394 773 6.2%
====== ====== ===
Operating days in period 129 127
$
Average Revenue Per Piece: -
U.S. domestic package:
Next Day Air $19.83 $19.70 $.13 0.7%
Deferred 12.56 12.44 .12 1.0
Ground 5.79 5.66 .13 2.3
Total U.S. domestic package 7.54 7.35 .19 2.6
International:
Domestic 4.69 5.28 (.59) (11.2)
Export 30.83 32.49 (1.66) (5.1)
Total International package 13.01 13.30 (.29) (2.2)
Consolidated $ 8.00 $ 7.82 $.18 2.3%
===== ===== ===
Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
U.S. domestic package revenue increased 10.0% primarily due to
volume gains across all product lines, continuing the trends reported
during 1999. All products contributed to this increase, with our higher
revenue per piece express (Next Day Air and Deferred) products
accounting for over 40% of the overall revenue increase. Our average
daily Ground volume grew at a 5.0% rate for the period, increasing by an
average of 479,000 packages per day. Also contributing to the revenue
increase were two extra operating days in the first six months of 2000
compared to the first six months of 1999. The average revenue increase
for this segment on a per day basis was 8.3%.
During the first quarter of 2000, we increased rates for standard
ground shipments an average of 3.1% for commercial deliveries. The
ground residential charge continued to be $1.00 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 and UPS 2nd Day Air an average
of 3.5%. The surcharge for UPS Next Day Air Early A.M. did not change.
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.
The increase in international package revenue was due to volume
growth for both our domestic and export products, offset by a decline in
the revenue per piece for these products. This decline was primarily due
to currency fluctuations, particularly a decline in the value of the
Euro relative to the U.S. dollar. Overall average daily package volume
increased 13.7% for international operations, with our export products,
which had an average revenue per piece of $30.83, increasing at 22.7%.
The average revenue increase for this segment on a per day basis was
12.3%.
The increase in non-package revenue resulted primarily from the
new arrangement for providing excess value package insurance for our
customers as well as continued growth of the UPS Logistics Group.
Excluding the excess value business, which was not included in the
segment during the same period last year, non-package revenue increased
almost 25%.
Operating expenses increased by $1.234 billion, or 11.2%, which
was less than our revenue increase of 12.5%. Compensation and benefits
expenses, the largest component of this increase, accounted for $740
million and included a $59 million charge recorded in the first quarter
of this year relating to the creation of 4,000 new full-time hourly jobs
resulting from the 1997 Teamsters contract. Other operating expenses
increased $494 million due to higher fuel costs, claims expense
associated with the new arrangement for providing excess value package
insurance for our customers, and higher purchased transportation costs.
The increase in purchased transportation costs was primarily due to
increased business for our international and logistics operations. The
52.9% increase in fuel costs from $293 million to $448 million was due
to the increase in fuel prices, the growth in our average daily volume,
and the two extra operating days in the quarter, partially offset by the
cost
Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
reductions generated by our fuel hedging program. International
operating expenses were favorably impacted by the decline in the value
of the Euro relative to the U.S. dollar.
To offset the increasing fuel costs we have experienced over the
last several quarters and that we expect to continue into the future, we
implemented a temporary 1.25% fuel surcharge effective August 7, 2000.
Our operating margin improved from 14.5% during the first six
months of 1999 to 15.5% during the same period in 2000. This
improvement continues our recently reported trends and is favorably
impacted by continued product mix improvements.
The following table sets forth information showing the change in
operating profit, both in dollars and in percentage terms:
Six Months Ended
June 30, Change
------- ------
Operating Segment 2000 1999 $ %
---- ---- - -
(dollars in millions)
U.S. domestic package $1,911 $1,687 $ 224 13.3%
International package 149 123 26 21.1
Non-package 187 58 129 222.4
----- ----- ----
Consolidated operating profit $2,247 $1,868 $ 379 20.3%
===== ===== ====
U.S. domestic package operating profit increased by $224 million
due to the volume and revenue improvements discussed previously.
The improvement in the operating profit of our international
package operations of 21.1% resulted primarily from increased volume and
revenue, and was realized despite significantly higher fuel costs for
this segment. This improvement was spread throughout our international
regions.
The increase in non-package operating profit is largely due to the
new arrangement for providing excess value package insurance for our
customers, which contributed $115 million of additional operating profit
for the six month period. Also contributing to the operating profit
improvement was the $49 million gain we recognized from the sale of our
UPS Truck Leasing subsidiary. These improvements were offset somewhat
by start-up costs associated with Service Parts Logistics, UPS Capital
Corporation and other initiatives.
Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
The increase in investment income of $325 million for the period
is due to two factors. First, in the first quarter of 2000, two
companies in which our Strategic Enterprise Fund held investments were
acquired by other companies, which caused us to recognize a gain of $241
million. 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. We announced a share
repurchase program on April 20, 2000, that we expect to utilize up to
the remaining $1.2 billion not used in the tender offer, of which
approximately $950 million remains available for share repurchases as of
June 30, 2000, and continues to generate investment income.
Net income for the six months ended June 30, 2000 amounted to
$1.508 billion, or $1.27 per diluted share, compared to a loss of $355
million, $0.32 per diluted share, for the same period in the prior year.
Our fiscal 2000 results reflect the non-recurring items discussed above,
which include the gains on our Strategic Enterprise Fund investments and
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. Our fiscal 1999 results reflect a tax
assessment charge resulting from an unfavorable ruling of the U.S. Tax
Court. Excluding these non-recurring transactions for each of these
periods, net income for the six months ending June 30, 2000, would have
been $1.369 billion, an increase of $282 million over adjusted 1999 net
income of $1.087 billion. Adjusted diluted earnings per share increased
from $0.96 in 1999 to $1.15 in 2000.
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 $4.7 billion at June 30, 2000.
Of this amount, approximately $950 million represents the net proceeds
remaining from our initial public offering, which was completed in
November 1999. We used the majority of the IPO proceeds to fund a cash
tender offer to purchase Class A-1 shares from shareowners. The tender
offer, which was announced on February 4, 2000 and expired on March 3,
2000, was for up to 100,893,277 shares at a price of $60 per share. The
actual number of shares validly tendered and accepted for purchase by us
was 67,834,815, which resulted in a cash expenditure of approximately
$4.1 billion and reduced our outstanding Class A shares accordingly.
The remaining IPO proceeds are available for a share repurchase program
that was announced on April 20, 2000.
We maintain a commercial paper program under which we are
authorized to borrow up to $2.0 billion. Approximately $1.004 billion
was outstanding under this program as of June 30, 2000. Since we do not
intend to refinance the full commercial paper balance outstanding at
June 30, 2000, $904 million has been classified as a current liability
on our balance sheet. The average interest rate on the amount
outstanding at June 30, 2000 was 6.5%.
We maintain two credit agreements with a consortium of banks.
These agreements provide revolving credit facilities of $1.25 billion
each, with one expiring in April 2001 and the other expiring in April
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 June 30, 2000.
We also maintain a European medium-term note program with a
borrowing capacity of $1.0 billion. Under this program, we may issue
notes from time to time denominated in a variety of currencies. At June
30, 2000, $500 million was available under this program. Of the amount
outstanding at June 30, 2000, $200 million bears interest at a stated
interest rate of 6.625% and $300 million bears interest at a stated
interest rate of 6.25%. The $300 million notes were repaid on July 7,
2000.
In January 1999, we filed a shelf registration statement with the
SEC under which we may issue debt securities in the U.S. marketplace of
up to $2.0 billion. The debt may be denominated in a variety of
currencies. There was approximately $105 million issued under this
shelf registration statement at June 30, 2000.
Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
On November 22, 1999, the U.S. Occupational Safety and Health
Administration proposed regulations to mandate an ergonomics standard
that would require American industry to make significant changes in the
workplace in order to reduce the incidence of musculoskeletal complaints
such as low back pain. The exact changes in the workplace that might be
required to comply with these standards are not specified in the
proposal. If OSHA enforced these regulations by seeking the same
ergonomic measures it has advocated in the past under its general
authority to remedy "recognized hazards," however, it might demand
extensive changes in the physical layout of our distribution centers as
well as the hiring of significant numbers of additional full-time and
part-time employees. Our competitors, as well as the remainder of
American industry, also would incur proportionately comparable costs.
We, our competitors and other affected parties have filed comments
with OSHA challenging the medical support and economic and technical
feasibility of the proposed regulations. We do not believe that OSHA
has complied with the statutory mandate of establishing significant risk
of material health impairment or has properly analyzed the costs and
benefits of these proposed regulations. We and other affected parties
recently filed additional comments in opposition to the proposed
regulations and would have the right to appeal any final ergonomics
standard to an appropriate federal court of appeals. We anticipate that
such a standard would be rejected by the reviewing court. If ergonomic
regulations resembling the current proposal were sustained by a
reviewing court, we believe that we would prevail in an enforcement
proceeding based on substantial defenses including the vagueness of the
standards and the technological and economic feasibility of costly
abatement measures.
OSHA has taken the position that the cost of compliance with the
proposed regulations will be only $4.2 billion per year over a ten-year
period for all of American industry. We believe that these estimates
are unrealistic. We have attempted to estimate the costs of compliance
if OSHA adopts the proposed regulations and applies them in the same way
as it sought to apply its prior unsuccessful attempts to impose
ergonomic measures under its general authority. Based on this
experience and assuming that, contrary to our expectations, OSHA were
able to obtain court orders applying to all of our facilities that
mandated compliance with these regulations, we estimate that the cost of
compliance could be approximately $20 billion in initial costs, which
would be incurred over a period of years, and approximately $5 billion
in incremental annual costs. Such expenditures, if required to be
incurred, would materially and adversely affect our results of
operations, liquidity and financial condition.
Market Risk
We are exposed to a number of market risks in the ordinary course
of business. These risks, which include interest rate risk, foreign
currency exchange risk and commodity price risk, arise in the normal
course of business rather than from trading. We have examined our
exposures to these risks and concluded that none of our exposures in
these areas is material to fair values, cash flows or earnings. We have
engaged in several strategies to manage these market risks.
Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Our indebtedness under our various financing arrangements creates
interest rate risk. In connection with each debt issuance and as a
result of continual monitoring of interest rates, we may enter into
interest rate swap agreements for purposes of managing our borrowing
costs.
For all foreign currency-denominated borrowing and certain lease
transactions, we simultaneously entered into currency exchange
agreements to lock in the price of the currency needed to pay the
obligations and to hedge the foreign currency exchange risk associated
with such transactions. We are exposed to other foreign currency
exchange risks in the ordinary course of our business operations due to
the fact that we provide our services in more than 200 countries and
territories and collection of revenues and payment of certain expenses
may give rise to currency exposure.
We require significant quantities of gasoline, diesel fuel and jet
fuel for our aircraft and delivery vehicles. We therefore are exposed to
commodity price risk associated with variations in the market price for
energy products. We manage this risk with a hedging strategy designed
to minimize the impact of sudden, catastrophic increases in the prices
of energy products, while allowing us to benefit if fuel prices decline.
Our hedging program is designed to moderate the impact of fluctuating
crude oil prices and maintain our competitive position relative to our
industry peers.
Future Accounting Changes
In June 1998, the FASB issued Statement No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("FAS 133"), as amended
by Statement No. 137 and No. 138, which provides a comprehensive and
consistent standard for the recognition and measurement of derivatives
and hedging activities. Upon adoption, all derivative instruments will
be recognized on the balance sheet at fair value, and changes in the
fair values of such instruments must be recognized currently in earnings
unless specific hedge accounting criteria are met. FAS 133 will be
effective for the Company on January 1, 2001. We are currently
evaluating this Statement and expect to provide an estimate of the
probable effects of adoption on the financial statements when we file
our third quarter 10-Q.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101
"Revenue Recognition in Financial Statements" ("SAB 101"). SAB 101
provides guidance on applying generally accepted accounting principles
to revenue recognition issues in financial statements. We will adopt
SAB 101 as required in the fourth quarter of 2000. We are currently
evaluating the effect that such adoption might have on our financial
position and results of operations.
Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
In March 2000, the FASB issued Interpretation No. 44 "Accounting
of Certain Transactions involving Stock Compensation - an Interpretation
of APB No. 25" ("FIN 44"). FIN 44 clarifies the application of APB No.
25 for (a) the definition of employee for purposes of applying APB No.
25, (b) the criteria for determining whether a plan qualifies as a
noncompensatory plan, (c) the accounting consequence of various
modifications to the terms of a previously fixed stock option or award,
and (d) the accounting for an exchange of stock compensation awards in a
business combination. The application of FIN 44 did not have a material
effect on our financial position or results of operations.
"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. We
have described some of the important factors that affect these
statements as we discussed each subject. Forward-looking statements
involve risks and uncertainties that may affect future developments.
These risks include, for example, our continued ability to successfully
compete, especially with foreign competition, the reliability and
availability of rail transportation, the growth rate of e-commerce in
relation to our expectations, adverse weather conditions and changing
fuel prices. Additional information concerning these risks and
uncertainties, and other factors you may wish to consider, are provided
in the "Risk Factors" section of our prospectus dated November 9, 1999,
as filed with the Securities and Exchange Commission.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
See Item 2.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
We have been named as a defendant in 18 lawsuits that seek to hold
us (and in three cases, other defendants) liable for the collection of
premiums for excess value package insurance in connection with package
shipments since 1984. 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. Twelve of these cases have been
consolidated for pre-trial purposes in a multi-district litigation
proceeding before the United States District Court for the Southern
District of New York. We are in the process of removing the remaining
cases to federal court and having them consolidated into the
multi-district litigation proceeding. These cases are in their initial
stages, no discovery has commenced, and no class has been certified.
These actions all developed after the August 9, 1999 Tax Court opinion
was rendered. We believe the allegations have no merit and intend to
defend them vigorously. The ultimate resolution of these matters cannot
presently be determined.
Item 4. - Submission of Matters to a Vote of Security Holders
Our annual meeting of shareowners was held on May 12, 2000.
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.
1. The results of the voting by the shareowners for directors are
presented below.
Director Percent of
Number of Votes Total Voting
William H. Brown, III For 5,878,869,066 97.45%
Withheld 153,602,139 2.55%
Robert J. Clanin For 5,858,934,372 97.12%
Withheld 173,536,833 2.88%
Michael L. Eskew For 5,896,225,304 97.74%
Withheld 136,245,901 2.26%
James P. Kelly For 5,892,337,837 97.68%
Withheld 140,133,368 2.32%
Ann M. Livermore For 5,890,896,960 97.65%
Withheld 141,574,245 2.35%
Gary E. MacDougal For 5,865,319,075 97.23%
Withheld 167,152,130 2.77%
Joseph R. Moderow For 5,901,410,664 97.83%
Withheld 131,060,541 2.17%
Kent C. Nelson For 5,819,877,137 96.48%
Withheld 212,594,068 3.52%
Victor A. Pelson For 5,890,384,625 97.64%
Withheld 142,086,580 2.36%
Charles L. Schaffer For 5,907,749,169 97.93%
Withheld 124,722,036 2.07%
Lea N. Soupata For 5,780,646,143 95.83%
Withheld 251,825,062 4.17%
Robert M. Teeter For 5,889,265,124 97.63%
Withheld 143,206,081 2.37%
Thomas H. Weidemeyer For 5,888,827,690 97.62%
Withheld 143,643,515 2.38%
2. The proposal and the results of the voting by the shareowners for
ratification of our appointment of independent auditors are presented
below.
Percent of
Total
Number of Votes Voting
To ratify the appointment of Deloitte &
Touche LLP, independent auditors, as For 5,933,809,338 98.37%
auditors of UPS and its subsidiaries for Against 70,194,436 1.16%
the year ending December 31, 2000 Abstain 28,467,431 0.47%
3. The proposal and the results of the voting by the shareowners for
the amendment of our restated certificate of incorporation are presented
below.
Percent of
Total
Number of Votes Voting
To confirm the amendment of the restated
certificate of incorporation of UPS to For 5,912,191,486 98.01%
modify the definition of "permitted Against 32,743,781 0.54%
transferee" as it applies to lending Abstain 87,535,938 1.45%
institutions.
Item 6. - Exhibits and Reports on Form 8-K
a) Exhibits:
(3) Certificate of Amendment of Restated Certificate of
Incorporation
(27) Financial Data Schedule (for SEC filing purposes only)
b) Reports on Form 8-K: no reports on Form 8-K were filed during the
quarter.
EXHIBIT INDEX
(3) Certificate of Amendment of Restated Certificate of
Incorporation
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: August 14, 2000 By: /S/ Robert J. Clanin
----------------------
Robert J. Clanin
Senior Vice President,
Treasurer and
Chief Financial Officer