Overview
The U.S. economic expansion continued at a moderate pace in the second quarter
of 2012, which provided for growth in the overall U.S. small package delivery
market compared with 2011. Additionally, continued growth in industrial
production and retail sales, particularly online retail sales, have expanded the
small package market in the U.S. These economic trends provided for a solid
increase in our U.S. Domestic Package volume in the second quarter and
year-to-date periods of 2012, and our products most aligned with
business-to-consumer shipments showed the strongest growth. In the second half
of 2012, we expect the U.S. economy to grow at a slower pace, the deceleration
of growth in our premium products and a further deterioration in the commercial
small package marketplace, compared with the first half of the year; however, we
do anticipate continued solid growth in our business-to-consumer product
offerings.
Outside of the U.S., economic growth has slowed considerably due to volatility
in world markets and fiscal austerity measures, particularly in Europe. This
slower economic growth has created an environment in which customers are more
likely to trade-down from premium express products to standard delivery
products. Additionally, the uneven nature of economic growth worldwide has led
to shifting trade patterns whereby transcontinental trade is being pressured,
but intra-regional trade is continuing to grow. These circumstances have led us
to adjust our air capacity and cost structure in our transportation network to
the prevailing volume mix levels; for example, in Asia, we are planning for a
10% capacity reduction in our air network for the third quarter of 2012. Our
broad portfolio of product offerings and the flexibilities inherent in our
transportation network have helped us adapt to these changing trends, which has
led to a continued overall solid performance in our International Package
business.
While the worldwide economic environment has been challenging in 2012, we have
continued to undertake initiatives to improve yield management, increase
operational efficiency and contain costs across all segments. This has directly
helped to improve the operating margin and profit in our U.S. Domestic Package
and Supply Chain & Freight segments. Continued deployment of technology
improvements should lead to further gains in our operational efficiency,
flexibility, and reliability, thus restraining cost increases and improving
margins. In our International Package segment, we have adjusted our air network
and utilized newly constructed or expanded operating facilities to improve
time-in-transit for shipments in each region. We have also continued to optimize
our aircraft network, to leverage the new route authority we have gained over
the last several years and to take full advantage of faster growing trade lanes.
Additionally, in the first quarter of 2012, we acquired Kiala S.A., which will
expand our service offerings for business-to-consumer deliveries in Europe.
Our consolidated results are presented in the table below:
Three Months Ended Six Months Ended
June 30, Change June 30, Change
2012 2011 % 2012 2011 %
Revenue (in millions) $ 13,349 $ 13,191 1.2 % $ 26,485 $ 25,773 2.8 %
Operating Expenses (in millions) 11,559 11,446 1.0 % 23,126 22,556 2.5 %
Operating Profit (in millions) $ 1,790 $ 1,745 2.6 % $ 3,359 $ 3,217 4.4 %
Operating Margin 13.4 % 13.2 % 12.7 % 12.5 %
Average Daily Package Volume (in
thousands) 15,356 14,946 2.7 % 15,474 14,951 3.5 %
Average Revenue Per Piece $ 11.12 $ 11.21 (0.8 )% $ 10.99 $ 10.99 - %
Net Income (in millions) $ 1,116 $ 1,092 2.2 % $ 2,086 $ 2,007 3.9 %
Basic Earnings Per Share $ 1.16 $ 1.11 4.5 % $ 2.17 $ 2.03 6.9 %
Diluted Earnings Per Share $ 1.15 $ 1.09 5.5 % $ 2.15 $ 2.01 7.0 %
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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Items Affecting Comparability
The year-over-year comparisons of our financial results were affected by the
following items (amounts in millions):
Three Months Ended Six Months Ended
June 30, June 30,
2012 2011 2012 2011
Operating Expenses:
Net gain on real estate transactions $ - $ (33 ) $ - $ (33 )
Income Tax Expense:
Income tax expense from the items above - 13 - 13
Net Gain on Real Estate Transactions
In the second quarter of 2011, we recognized a pre-tax loss from certain real
estate transactions within our U.S. Domestic Package segment of $15 million ($11
million after-tax) and a pre-tax gain from certain real estate transactions
within our Supply Chain & Freight segment of $48 million ($31 million
after-tax).
Results of Operations-Segment Review
The results and discussions that follow are reflective of how our executive
management monitors the performance of our reporting segments. From time to
time, we supplement the reporting of our financial information determined under
generally accepted accounting principles ("GAAP") with certain non-GAAP
financial measures, including operating profit, operating margin, pre-tax
income, effective tax rate, net income and earnings per share adjusted for the
non-comparable items. We believe that these adjusted measures provide meaningful
information to assist investors and analysts in understanding our financial
results and assessing our prospects for future performance. We believe these
adjusted financial measures are important indicators of our results of
operations because they exclude items that may not be indicative of, or are
unrelated to, our core operating results, and provide a better baseline for
analyzing trends in our underlying businesses.
Certain operating expenses are allocated between our reporting segments based on
activity-based costing methods. These activity-based costing methods require us
to make estimates that impact the amount of each expense category that is
attributed to each segment. Changes in these estimates will directly impact the
amount of expense allocated to each segment, and therefore the operating profit
of each reporting segment. There were no significant changes in our expense
allocation methodology during 2012 or 2011.
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U.S. Domestic Package Operations
Three Months Ended Six Months Ended
June 30, Change June 30, Change
2012 2011 % 2012 2011 %
Average Daily Package Volume
(in thousands):
Next Day Air 1,231 1,172 5.0 % 1,222 1,164 5.0 %
Deferred 924 851 8.6 % 954 873 9.3 %
Ground 10,920 10,604 3.0 % 10,981 10,611 3.5 %
Total Avg. Daily Package
Volume 13,075 12,627 3.5 % 13,157 12,648 4.0 %
Average Revenue Per Piece:
Next Day Air $ 20.42 $ 20.82 (1.9 )% $ 20.24 $ 20.52 (1.4 )%
Deferred 13.60 14.03 (3.1 )% 13.30 13.58 (2.1 )%
Ground 8.08 7.97 1.4 % 8.02 7.88 1.8 %
Total Avg. Revenue Per Piece $ 9.63 $ 9.57 0.6 % $ 9.54 $ 9.44 1.1 %
Operating Days in Period 64 64 128 128
Revenue (in millions):
Next Day Air $ 1,609 $ 1,562 3.0 % $ 3,166 $ 3,057 3.6 %
Deferred 804 764 5.2 % 1,624 1,517 7.1 %
Ground 5,645 5,411 4.3 % 11,272 10,706 5.3 %
Total Revenue $ 8,058 $ 7,737 4.1 % $ 16,062 $ 15,280 5.1 %
Operating Expenses (in
millions):
Operating Expenses $ 6,924 $ 6,740 2.7 % $ 13,933 $ 13,403 4.0 %
Gain (Loss) on Real Estate
Transactions - (15 ) - (15 )
Adjusted Operating Expenses $ 6,924 $ 6,725 3.0 % $ 13,933 $ 13,388 4.1 %
Operating Profit (in millions)
and Margin:
Operating Profit $ 1,134 $ 997 13.7 % $ 2,129 $ 1,877 13.4 %
Adjusted Operating Profit $ 1,134 $ 1,012 12.1 % $ 2,129 $ 1,892 12.5 %
Operating Margin 14.1 % 12.9 % 13.3 % 12.3 %
Adjusted Operating Margin 14.1 % 13.1 % 13.3 % 12.4 %
Revenue
The change in overall revenue was impacted by the following factors for the
second quarter and year-to-date periods of 2012 compared with the corresponding
periods of 2011:
Total
Rates / Fuel Revenue
Volume Product Mix Surcharge Change
Net Revenue Change Drivers:
Second quarter 2012 vs. 2011 3.5 % 0.4 % 0.2 % 4.1 %
Year-to-date 2012 vs. 2011 4.0 % 0.1 % 1.0 % 5.1 %
Volume
Our overall volume increased in the second quarter of 2012 compared with the
same period in 2011, largely due to continued solid growth in retail e-commerce
and strong customer demand for our lightweight products. Business-to-consumer
shipments, which represent approximately 40% of total U.S. Domestic Package
volume, grew rapidly and drove growth in both air and ground shipments.
Commercial volume declined slightly in the second quarter as the U.S. economy
weakened, after experiencing volume growth in the first quarter of 2012.
Among our air products, Next Day Air package volume increased 5.0% with
particular growth in our Next Day Air Saver product, while volume for our
deferred air products increased 8.6% for the quarter (5.0% and 9.3%,
respectively, year-to-date). This strong growth was driven by
business-to-consumer shipments from e-commerce retailers.
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The increase in ground volume was driven by our lightweight service offerings,
including SurePost, which target low-cost, non-urgent residential deliveries.
These lightweight products experienced volume growth of 25%, and accounted for
over half of the total increase in ground shipments in the second quarter.
Growth continues to be driven by business-to-consumer shipping activity from
e-commerce retailers.
Rates and Product Mix
Overall revenue per piece increased in the second quarter and year-to-date
periods of 2012 due to a combination of base price increases and a shift in
overall product mix from our ground products to our air products. Fuel surcharge
rate changes, which are discussed further below, adversely impacted revenue per
piece growth in the second quarter of 2012 compared with 2011, but positively
impacted the year-to-date comparison. The strong volume growth in Next Day Air
Saver and our lightweight products negatively impacted overall yield growth, as
these relatively lower-yielding products accounted for a greater portion of our
overall volume in the second quarter and year-to-date periods of 2012, compared
with the corresponding periods of 2011.
Revenue per piece for our ground and air products was also positively impacted
by an increase in base rates that took effect on January 2, 2012. We increased
the base rates 6.9% on UPS Next Day Air, UPS 2nd Day Air, and UPS 3 Day Select,
and 5.9% on UPS Ground, while reducing our fuel surcharge indices (discussed
further below). Other pricing changes included an increase in the residential
surcharge, and an increase in the delivery area surcharge on certain residential
and commercial services. These rate changes are customary and occur on an annual
basis.
Fuel Surcharges
UPS applies a fuel surcharge on our domestic air and ground services. The air
fuel surcharge is based on the U.S. Department of Energy's ("DOE") Gulf Coast
spot price for a gallon of kerosene-type jet fuel, while the ground fuel
surcharge is based on the DOE's On-Highway Diesel Fuel price. Based on published
rates, the average fuel surcharge for domestic air and ground products was as
follows:
Three Months Ended Six Months Ended
June 30, Change June 30, Change
2012 2011 % Point 2012 2011 % Point
Next Day Air / Deferred 14.3 % 14.7 % (0.4 )% 13.7 % 12.4 % 1.3 %
Ground 8.3 % 8.5 % (0.2 )% 8.2 % 7.2 % 1.0 %
On January 2, 2012, in connection with our base rate increase, we modified the
fuel surcharge on air and ground services by reducing the index used to
determine the fuel surcharge by 2% and 1%, respectively. Total domestic fuel
surcharge revenue increased by $13 million in the second quarter of 2012
compared with the same period of 2011, primarily due to the increase in volume,
but partially offset by the lower second quarter fuel surcharge rates. On a
year-to-date basis, total domestic fuel surcharge revenue increased $156 million
compared with 2011 due to increased volume and higher year-to-date fuel
surcharge rates. These increased fuel surcharge rates were driven by higher jet
and diesel fuel prices, but partially offset by the reduction in the index on
the air and ground surcharges.
Operating Expenses
Adjusted operating expenses for the segment increased $199 million for the
second quarter of 2012 compared with the same period of 2011 ($545 million
year-to-date). This increase was primarily due to pick-up and delivery costs,
which grew $175 million ($373 million year-to-date), as well as the cost of
operating our domestic integrated air and ground network, which increased $45
million for the second quarter ($183 million year-to-date). The growth in
pick-up and delivery and network costs were due largely to increased volume and
higher employee compensation costs, which were impacted by a union contractual
wage increase (package driver wage rates rose 2.2%), an increase in driver hours
(up 0.8%) and increased employee health care costs.
Cost increases have been mitigated as we adjust our air and ground networks to
better match higher volume levels and utilize technology to increase package
sorting efficiency. Improved delivery densities, particularly for our
residential products, have also contained increases in cost. These network
efficiency improvements allowed us to process increased volume at a faster rate
than the increase in direct labor hours (up 1.2%), aircraft block hours (down
1.2%) and miles driven (up 0.7%) in the second quarter of 2012 compared with the
same period of 2011, resulting in a reduction in the total cost per piece of
0.6% (no change year-to-date).
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Operating Profit and Margin
The increase in revenue per piece in excess of the growth in cost per piece
resulted in strong operating leverage, leading to a 100 basis point increase in
the adjusted operating margin during the second quarter of 2012 compared with
the same period of 2011 (90 basis points on a year-to-date basis). Additionally,
because fuel prices decreased rapidly during the second quarter of 2012,
operating profit benefited by approximately $60 million from the two month time
lag between the fuel price changes and when the monthly surcharge rates are
applied to package shipments. The operating margin improvement, combined with
volume growth and the fuel surcharge time lag, resulted in a solid operating
profit increase in the second quarter and year-to-date periods of 2012 compared
with the same periods of 2011.
International Package Operations
Three Months Ended Six Months Ended
June 30, Change June 30, Change
2012 2011 % 2012 2011 %
Average Daily Package Volume (in
thousands):
Domestic 1,358 1,403 (3.2 )% 1,384 1,398 (1.0 )%
Export 923 916 0.8 % 933 905 3.1 %
Total Avg. Daily Package Volume 2,281 2,319 (1.6 )% 2,317 2,303 0.6 %
Average Revenue Per Piece:
Domestic $ 7.08 $ 7.48 (5.3 )% $ 7.08 $ 7.27 (2.6 )%
Export 38.12 39.51 (3.5 )% 37.24 38.39 (3.0 )%
Total Avg. Revenue Per Piece $ 19.64 $ 20.13 (2.4 )% $ 19.23 $ 19.50 (1.4 )%
Operating Days in Period 64 64 128 128
Revenue (in millions):
Domestic $ 615 $ 672 (8.5 )% $ 1,255 $ 1,301 (3.5 )%
Export 2,252 2,316 (2.8 )% 4,447 4,447 - %
Cargo 147 151 (2.6 )% 278 291 (4.5 )%
Total Revenue $ 3,014 $ 3,139 (4.0 )% $ 5,980 $ 6,039 (1.0 )%
Operating Expenses (in millions) $ 2,560 $ 2,634 (2.8 )% $ 5,118 $ 5,081 0.7 %
Operating Profit (in millions) $ 454 $ 505 (10.1 )% $ 862 $ 958 (10.0 )%
Operating Margin 15.1 % 16.1 % 14.4 % 15.9 %
Currency Translation Benefit /
(Cost)-(in millions)*: $ $
Revenue $ (104 ) $ (160 )
Operating Expenses 106 145
Operating Profit $ 2 $ (15 )
___________________* Net of currency hedging; amount represents the change compared to the prior year.
Revenue
The change in overall revenue was impacted by the following factors for the
second quarter and year-to-date periods of 2012 compared with the corresponding
periods of 2011:
Total
Rates / Fuel Revenue
Volume Product Mix Surcharge Currency Change
Net Revenue Change Drivers:
Second quarter 2012 vs. 2011 (1.6 )% 1.0 % (0.1 )% (3.3 )% (4.0 )%
Year-to-date 2012 vs. 2011 0.6 % - % 1.0 % (2.6 )% (1.0 )%
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Volume
Export volume increased in the second quarter and year-to-date periods of 2012
compared to the corresponding periods of 2011; however, volume growth has been
significantly impacted by the worldwide economic slowdown. Export volume growth
was driven by intra-regional shipments, particularly intra-Europe and
intra-Asia, with our Transborder Standard product experiencing solid growth.
This growth in intra-regional shipments was largely offset by declines in
transcontinental volume, which was impacted by double-digit declines in exports
from Asia (particularly from China) to the U.S. and Europe. Additionally,
transcontinental volume into Europe declined, largely due to the economic
weakness within the European Union in the second quarter and year-to-date
periods of 2012.
Domestic volume decreased during the second quarter and year-to-date periods of
2012 compared to the same periods in 2011, and was negatively impacted by
economic weakness in southern Europe and revenue management initiatives in
Germany and Turkey. These declines were somewhat offset by domestic volume
growth in the Netherlands, the U.K., Mexico and Poland.
Rates and Product Mix
Total average revenue per piece increased 2.1% for the second quarter of 2012
(2.0% year-to-date) on a currency-adjusted basis. Currency-adjusted export
revenue per piece decreased 0.3% for the second quarter (0.6% year-to-date), as
the shift in product mix from our premium express products to our standard
products more than offset the increase in base rates. Additionally,
currency-adjusted export revenue per piece was adversely impacted by a
shortening of average trade lanes, as we experienced greater volume growth among
our lower-yielding Transborder and Trade Direct products relative to our
higher-yielding transcontinental volume.
Currency-adjusted domestic revenue per piece increased 3.5% for second quarter
(4.0% year-to-date), largely due to base rate increases.
On January 2, 2012, we increased the base rates 6.9% for international shipments
originating in the United States (Worldwide Express, Worldwide Express Plus, UPS
Worldwide Expedited and UPS International Standard service), while reducing fuel
surcharge indices. Rate changes for shipments originating outside the U.S. are
made throughout the year and vary by geographic market.
Fuel Surcharges
On January 2, 2012, in connection with our base rate increases, we modified the
fuel surcharge on certain U.S.-related international air services by reducing
the index used to determine the fuel surcharge by 2%. The fuel surcharges for
air products originating outside the United States are indexed to the DOE's Gulf
Coast spot price for a gallon of kerosene-type jet fuel, while the fuel
surcharges for ground products originating outside the United States are indexed
to fuel prices in the international region or country where the shipment takes
place. Total international fuel surcharge revenue decreased by $10 million for
the second quarter of 2012 when compared with 2011, primarily due to lower
package volume and reduced fuel surcharge rates caused by declining fuel prices.
On a year-to-date basis, fuel surcharge revenue increased by $50 million in 2012
compared to 2011, due to higher fuel surcharge rates and a year-to-date increase
in international air volume.
Operating Expenses
Overall operating expenses for the segment decreased $74 million for the second
quarter of 2012 compared with the same period in 2011. The largest component of
this decrease relates to the cost of operating our international integrated air
and ground network, which decreased $48 million for the second quarter due
largely to lower fuel costs, a 3.4% reduction in aircraft block hours and the
impact of currency exchange rate changes. Pick-up and delivery costs decreased
$35 million for the second quarter, primarily as a result of lower fuel prices,
decreased package volume and the impact of currency exchange rate movements.
On a year-to-date basis, operating expenses for the segment increased by $37
million in 2012 compared to 2011. This increase was impacted by the February
2012 acquisition of Kiala S.A., which added $26 million to operating expenses
for the segment in 2012. Additionally, our non-operating costs increased $31
million, primarily associated with our investment in enhanced security screening
for our international locations as well as business acquisition activities,
including our proposed acquisition of TNT Express N.V. These increases were
partially offset by a $14 million decrease in pick-up and delivery costs,
largely due to lower non-U.S. domestic volume and the impact of currency
exchange rate movements.
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Excluding the impact of currency exchange rate changes, the total cost per piece
for the segment increased 3.0% for the second quarter (3.1% year-to-date).
Operating Profit and Margin
The operating margin declined 100 basis points in the second quarter of 2012
(150 basis points year-to-date) compared with the same period of 2011. This
decline in operating margin was impacted by the volume declines in the key Asia
and U.S.-origin transcontinental trade lanes, as these routes have a larger cost
infrastructure (relative to the remainder of the International Package segment)
to support the air express volume in each region. Operating margin was also
adversely impacted by the product mix change from our premium express products
to our standard products. Additionally, we incurred approximately $15 million in
costs during the second quarter of 2012 related to business acquisition
activities, including our proposed acquisition of TNT Express N.V. These factors
combined to result in a 10% decline in operating profit for the second quarter
and year-to-date periods of 2012 compared with 2011.
Supply Chain & Freight Operations
Three Months Ended Six Months Ended
June 30, Change June 30, Change
2012 2011 % 2012 2011 %
Freight LTL Statistics:
Revenue (in millions) $ 597 $ 592 0.8 % $ 1,155 $ 1,138 1.5 %
Revenue Per Hundredweight $ 21.50 $ 20.91 2.8 % $ 21.48 $ 20.73 3.6 %
Shipments (in thousands) 2,583 2,660 (2.9 )% 5,051 5,186 (2.6 )%
Shipments Per Day (in thousands) 40.4 41.6 (2.9 )% 39.5 40.5 (2.6 )%
Gross Weight Hauled (in millions
of lbs) 2,778 2,833 (1.9 )% 5,375 5,489 (2.1 )%
Weight Per Shipment (in lbs) 1,076 1,065 1.0 % 1,064 1,059 0.5 %
Operating Days in Period 64 64 128 128
Revenue (in millions):
Forwarding and Logistics $ 1,485 $ 1,539 (3.5 )% $ 2,909 $ 2,968 (2.0 )%
Freight 660 660 - % 1,278 1,264 1.1 %
Other 132 116 13.8 % 256 222 15.3 %
Total Revenue $ 2,277 $ 2,315 (1.6 )% $ 4,443 $ 4,454 (0.2 )%
Operating Expenses (in
millions):
Operating Expenses $ 2,075 $ 2,072 0.1 % $ 4,075 $ 4,072 0.1 %
Gain (Loss) on Real Estate
Transactions - 48 - 48
Adjusted Operating Expenses $ 2,075 $ 2,120 (2.1 )% $ 4,075 $ 4,120 (1.1 )%
Operating Profit (in millions)
and Margin:
Operating Profit $ 202 $ 243 (16.9 )% $ 368 $ 382 (3.7 )%
Adjusted Operating Profit $ 202$ 195 3.6 % $
368 $ 334 10.2 %
Operating Margin 8.9 % 10.5 % 8.3 % 8.6 %
Adjusted Operating Margin 8.9 % 8.4 % 8.3 % 7.5 %
Currency Translation Benefit /
(Cost) - (in millions)*: $ $
Revenue $ (42 ) $ (52 )
Operating Expenses 40 49
Operating Profit $ (2 ) $ (3 )
___________________
* Amount represents the change compared to the prior year.
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Revenue
Forwarding and logistics revenue decreased $54 million in the second quarter of
2012 ($59 million year-to-date) compared with the corresponding period in 2011.
Forwarding revenue decreased in the second quarter and year-to-date periods of
2012 primarily due to lower rates in our international air forwarding business
and the adverse impact of foreign currency exchange rates; however, this was
partially offset by improved tonnage in both our air and ocean forwarding
businesses. In our logistics products, revenue increased in the second quarter
and year-to-date periods of 2012 as we experienced solid growth in our mail
services and healthcare solutions. The improved revenue in our healthcare
solutions business was driven by organic growth as well as the December 2011
acquisition of Pieffe Group.
Freight revenue was flat for the second quarter, as an increase in LTL revenue
per hundredweight was offset by a decline in overall LTL shipments. The decline
in average daily LTL shipments was impacted by increased competitiveness in the
LTL market and the slowdown in the U.S. economy. The increase in LTL revenue per
hundredweight was largely due to our focus on yield management and profitable
revenue growth. The increase in LTL revenue per hundredweight was also impacted
by a base rate increase that took effect on August 1, 2011, which increased
minimum charge, LTL and TL rates an average of 6.9%, covering non-contractual
shipments in the United States, Canada and Mexico. On a year-to-date basis,
freight revenue increased $14 million in 2012 compared with 2011, as the
increase in LTL revenue per hundredweight more than offset the decline in
overall LTL shipments. Fuel surcharge revenue declined in the second quarter by
$5 million, while increasing on a year-to-date basis by $6 million, in 2012
compared with 2011, due to changes in diesel fuel prices and overall LTL
shipment volume.
The other businesses within Supply Chain & Freight increased revenue by $16
million for the quarter ($34 million year-to-date), primarily due to growth at
UPS Capital, the UPS Store, UPS Customer Solutions and our contract to provide
domestic air transportation services for the U.S. Postal Service.
Operating Expenses
Forwarding and logistics adjusted operating expenses decreased $43 million for
the second quarter of 2012 compared with the same period of 2011 ($72 million
year-to-date), due to several factors. Compensation and benefits expense
declined by $10 million in the second quarter ($20 million year-to-date),
largely due to reduced payroll and lower pension costs. Purchased transportation
expense fell by $40 million in the second quarter ($61 million year-to-date),
primarily due to lower rates charged to us by third-party transportation
carriers. Operating expenses in the year-to-date period of 2012 were also
reduced by a $9 million gain realized upon the sale of an operating facility.
Freight adjusted operating expenses decreased $11 million in the second quarter
of 2012, due to several factors. The combined cost associated with pick-up and
delivery and operating our linehaul network declined by $4 million, largely due
to a slight decline in volume, lower fuel costs and decreased fuel surcharge
rates passed to us from outside transportation carriers. The combination of
these factors more than offset union contractual driver wage increases. Our
truckload division experienced a $7 million reduction in costs associated with
reduced volume, and was impacted by the loss of lower-margin customers. On a
year-to-date basis, freight adjusted operating expenses increased $4 million in
2012 compared with 2011, largely due to the impact of union contractual wage
increases on pick-up and delivery and linehaul costs.
Adjusted operating expenses for the other businesses within Supply Chain &
Freight increased $9 million in the second quarter of 2012 compared with 2011
($23 million year-to-date).
Operating Profit and Margin
Adjusted operating profit for the forwarding and logistics unit decreased by $11
million in the second quarter of 2012 compared to the same period in 2011. This
decrease was primarily due to reduced profitability in our international air
forwarding business, as European economic uncertainty, continued weakness in
China and a slowing U.S. economy all contributed to a reduction in overall air
freight market demand. On a year-to-date basis, adjusted operating profit for
the forwarding and logistics unit increased by $13 million in 2012 compared with
2011, as forwarding operating margins expanded due to cost reductions and growth
in our ocean freight, North American brokerage and transportation services
businesses. Our logistics business had a year-to-date 2012 increase in operating
profit, largely due to strong growth in our higher-margin mail services, as well
as a $9 million gain on the sale of an operating facility in the first quarter
of 2012.
Adjusted operating profit for our freight unit increased $11 million in the
second quarter of 2012 compared to the same period in 2011 ($10 million
year-to-date), as gains in pick-up and delivery stops per hour, dock bills per
hour and linehaul network utilization, as well as improved yields, more than
offset volume declines.
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The combined adjusted operating profit for all of our other businesses in this
segment increased $7 million during the second quarter ($11 million
year-to-date), largely due to growth from our contract to provide domestic air
transportation services for the U.S. Postal Service.
Consolidated Operating Expenses
Three Months Ended Six Months Ended
June 30, Change June 30, Change
2012 2011 % 2012 2011 %
Operating Expenses (in
millions):
Compensation and Benefits $ 6,747 $ 6,636 1.7 % $ 13,582 $ 13,198 2.9 %
Repairs and Maintenance 303 317 (4.4 )% 605 632 (4.3 )%
Depreciation and
Amortization 459 443 3.6 % 918 884 3.8 %
Purchased Transportation 1,733 1,762 (1.6 )% 3,450 3,410 1.2 %
Fuel 1,014 1,057 (4.1 )% 2,039 1,965 3.8 %
Other Occupancy 213 225 (5.3 )% 450 486 (7.4 )%
Other Expenses 1,090 1,006 8.3 % 2,082 1,981 5.1 %
Impact of Net Gain from Real
Estate Transactions - 33 - 33
Adjusted Other Expenses 1,090 1,039 4.9 % 2,082 2,014 3.4 %
Total Operating Expenses $ 11,559 $ 11,446 1.0 % $ 23,126 $ 22,556 2.5 %
Adjusted Total Operating
Expenses $ 11,559 $ 11,479 0.7 % 23,126 $ 22,589 2.4 %
$ $
Currency Translation
(Benefit) Cost $ (146 ) $ (194 )
Compensation and Benefits
Benefits expense increased $128 million for the second quarter of 2012 compared
with 2011 ($273 million year-to-date), primarily due to higher pension expense,
health and welfare costs, expense associated with our self-insurance for
worker's compensation claims and payroll taxes, as follows:
• Health and welfare costs increased $70 million for the second quarter of
2012 compared with 2011 ($53 million year-to-date), largely due to a
deterioration in our health claims experience.
• Pension expense increased $55 million for the second quarter of 2012 compared with 2011 ($118 million year-to-date), resulting from higher
union contribution rates for multiemployer pension plans, combined with
increased service and interest costs for company-sponsored plans. The
increase in service and interest costs for company-sponsored plans was
largely due to continued service accruals and lower discount rates.
• The expense associated with our self-insurance programs for worker's
compensation claims increased by $17 million for the second quarter of
2012 compared with 2011 ($72 million year-to-date). Insurance reserves are
established for estimates of the loss that we will ultimately incur on
reported claims, as well as estimates of claims that have been incurred
but not reported, and take into account a number of factors including our
history of claim losses, payroll growth and the impact of safety
improvement initiatives. In 2011, we experienced more favorable actuarial
expense adjustments on previous years' claims compared with 2012, thus
leading to most of the increase in expense.
• Company accruals for employee payroll taxes increased by $7 million for
the second quarter of 2012 compared with 2011 ($39 million year-to-date),
largely due to the change in timing of our management incentive
compensation awards.
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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Employee payroll costs decreased $17 million for the second quarter of 2012
compared with 2011, largely due to reductions in management incentive
compensation; however, this was partially offset by an increase in union and
other labor payroll, primarily resulting from a 0.7% increase in total union
labor hours for the quarter and contractual union wage rate increases that took
effect under our collective bargaining agreement with the Teamsters. For the
first six months of 2012 compared with the same period of 2011, employee payroll
costs increased $111 million, largely due to contractual union wage rate
increases, as well as a 0.5% increase in total union labor hours; however, this
was partially offset by a slight decline in management payroll costs due to a
reduction in incentive compensation expense.
Repairs and Maintenance
The decrease in repairs and maintenance expense was largely due to lower
aircraft maintenance costs, which decreased $21 million for the second quarter
of 2012 compared with 2011 ($40 million year-to-date). This decrease resulted
primarily from the conversion of an engine maintenance agreement with an outside
vendor from a cost reimbursement approach to a fixed rate per flight hour.
Additionally, aircraft maintenance expense declined due to a reduction in the
number of scheduled maintenance checks for our Airbus A300, Boeing 757 and
Boeing MD-11 aircraft.
Depreciation and Amortization
The increase in depreciation and amortization expense was primarily the result
of an increase in depreciation expense on vehicles of $14 million for the second
quarter of 2012 compared with 2011 ($31 million year-to-date), primarily
resulting from an overall increase in the size of our vehicle fleet in our U.S.
Domestic package operations.
Purchased Transportation
The decrease in purchased transportation expense charged to us by third-party
air, ocean and truck carriers for the second quarter of 2012 compared with the
same period of 2011 was impacted by several factors. In our international air
freight forwarding business, lower rates charged to us by third-party air
carriers resulted in a $46 million decline in expense for the second quarter.
Additionally, the impact of currency exchange rate fluctuations resulted in a
$25 million decline in expense when comparing the second quarter of 2012 with
the corresponding period of 2011. These factors were partially offset by a $32
million increase in expense due to higher fees paid to the U.S. Postal Service
associated with the strong volume growth in our SurePost product.
The increase in purchased transportation expense for the year-to-date period of
2012 compared with 2011 was largely due to higher fees paid to the U.S. Postal
Service related to our SurePost product (increase of $60 million), as well as
the expense associated with the use of rail carriers (increase of $9 million),
due to higher rates and increased volume in our U.S. Domestic Package business.
These factors were partially offset by the impact of currency exchange rate
fluctuations, which reduced the increase in expense by $39 million.
Fuel
The decrease in fuel expense for the second quarter of 2012 compared with the
same period of 2011 was primarily due to lower fuel prices for jet-A fuel and
diesel, which decreased expense by $13 million, as well as lower usage, which
decreased expense by $30 million. The year-to-date fuel expense increase was
largely due to higher fuel prices in 2012 compared with 2011 (which increased
expense $98 million); however, this was partially offset by lower usage of fuel
products, which decreased expense by $24 million.
Other Occupancy
Other occupancy expense decreased in the second quarter and year-to-date periods
of 2012, compared with the corresponding periods of 2011, primarily due to
reductions in personal property and real estate taxes combined with a decrease
in utilities expense. The relatively warm winter in the United States, combined
with lower natural gas prices, helped to reduce heating and snow removal costs
in our facilities in the early months of 2012.
Other Expenses
The second quarter and year-to-date 2012 increase in adjusted other expenses was
largely due to higher outside professional fees (part of which were due to the
proposed TNT Express N.V. acquisition), foreign currency remeasurement losses,
transportation equipment rentals and bad debt expense. These factors were
partially offset by decreases in employee relocation expenses in the second
quarter and year-to-date periods of 2012. Additionally, year-to-date 2012
adjusted other expenses were reduced by a $9 million gain on the sale of a
distribution facility in our Supply Chain & Freight segment.
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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Investment Income and Interest Expense
Three Months Ended Six Months Ended
June 30, Change June 30, Change
2012 2011 % 2012 2011 %
(in millions)
Investment Income $ 6 $ 9 (33.3 )% $ 12 $ 20 (40.0 )%
Interest Expense $ (92 ) $ (83 ) 10.8 % $ (186 ) $ (168 ) 10.7 %
Investment Income
The decrease in investment income in 2012 compared with 2011 was primarily
caused by a decline in investment mark-to-market and realized gains of $7
million for the quarter ($16 million year-to-date). This decline was impacted by
realized gains on sales of auction-rate and preferred securities and an S&P 500
index fund, as well as a mark-to-market gain on a variable life insurance
policy, that occurred in 2011. This decline was partially offset by an increase
in interest income, largely due to having a higher average balance of
interest-earning cash and investments in our portfolio in the second quarter and
year-to-date periods of 2012 compared with the corresponding periods of 2011.
Interest Expense
Interest expense increased in the second quarter and year-to-date periods of
2012 compared to 2011, largely due to a higher effective interest rate incurred
on our debt. The higher effective interest rate largely resulted from two
factors: (1) having a greater proportion of fixed-rate debt outstanding relative
to lower-yielding variable rate debt, and (2) an increase in the interest rate
indices underlying our variable-rate debt and swaps in 2012. The average balance
of debt outstanding in the second quarter and year-to-date periods of 2012
remained relatively stable compared with 2011.
Income Tax Expense
Three Months Ended Six Months Ended
June 30, Change June 30, Change
2012 2011 % 2012 2011 %
(in millions)
Income Tax Expense $ 588 $ 579 1.6 % $ 1,099 $ 1,062 3.5 %
Impact of Net Gain on Real
Estate Transactions - (13 ) - (13 )
Adjusted Income Tax Expense $ 588 $ 566 3.9 % $ 1,099 $ 1,049 4.8 %
Effective Tax Rate 34.5 % 34.6 % 34.5 % 34.6 %
Adjusted Effective Tax Rate 34.5 % 34.6 % 34.5 % 34.6 %
Income tax expense increased due to higher pre-tax income in the second quarter
and year-to-date periods of 2012 compared with 2011. Our effective tax rate
remained relatively constant at 34.5% in the second quarter and year-to-date
periods of 2012, compared with 34.6% in the corresponding periods of 2011.
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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Liquidity and Capital Resources
Net Cash From Operating Activities
The following is a summary of the significant sources (uses) of cash from
operating activities (amounts in millions):
Six Months Ended
June 30,
2012 2011
Net income $ 2,086 $ 2,007
Non-cash operating activities (a) 1,723 1,950
Pension and postretirement plan contributions
(UPS-sponsored plans) (450 ) (1,296 )
Income tax receivables and payables 259
380
Changes in working capital and other noncurrent assets and
liabilities
288
277
Other sources (uses) of cash from operating activities (56 ) (4 )
Net cash from operating activities $ 3,850
$ 3,314
___________________
(a) Represents depreciation and amortization, gains and losses on derivative
transactions and foreign exchange, deferred income taxes, provisions for
uncollectible accounts, pension and postretirement benefit expense, stock
compensation expense, impairment charges, and other non-cash items.
Contributions to our company-sponsored pension plans have varied based primarily
on whether any minimum funding requirements are present for individual pension
plans. In 2012, we contributed $450 million to our company-sponsored pension and
postretirement medical benefit plans, which included $355 million in
contributions to the UPS IBT Pension Plan. In the first six months of 2011, we
made a $1.2 billion contribution to the UPS IBT Pension Plan. As discussed in
Note 6 to the unaudited consolidated financial statements, we expect to
contribute $448 million to our company-sponsored pension and U.S. postretirement
medical benefit plans over the remainder of 2012.
Operating cash flow was favorably impacted in both 2012 and 2011 by higher net
income and seasonal changes in our working capital position. Changes in working
capital were largely a result of the timing of salary and wages payable and
related tax withholdings, as well as improved collections of receivables during
the first six months of 2012 compared with the same period of 2011.
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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Net Cash Used In Investing Activities
Our primary sources (uses) of cash for investing activities were as follows
(amounts in millions):
Six Months Ended
June 30,
2012 2011
Net cash used in investing activities $ (307 ) $ (1,069 )
Capital Expenditures:
Buildings and facilities $ (217 ) $ (159 )
Aircraft and parts (368 ) (486 )
Vehicles (147 ) (140 )
Information technology (217 ) (166 )
$ (949 ) $ (951 )
Capital Expenditures as a % of Revenue 3.6 % 3.7 %
Other Investing Activities:
Proceeds from disposals of property, plant and equipment $ 32 $ 22
Net decrease in finance receivables $ 42 $
81
Net sales (purchases) of marketable securities $ 664 $ (98 )
Cash paid for business acquisitions $ (100 ) $ -
Other sources (uses) of cash for investing activities $ 4 $ (123 )
We have commitments for the purchase of aircraft, vehicles, equipment and real
estate to provide for the replacement of existing capacity and anticipated
future growth. We generally fund our capital expenditures with our cash from
operations. Capital spending on aircraft is primarily related to contract
deposits on open aircraft orders, and final payments associated with the
delivery of six Boeing 767-300s in 2012 and two Boeing 747-400s and four Boeing
767-300s in 2011. Capital spending on buildings and facilities and information
technology increased in 2012 compared with 2011, largely due to our Cologne hub
expansion in Germany as well as various technology deployments. Future capital
spending for anticipated growth and replacement assets will depend on a variety
of factors, including economic and industry conditions.
The net change in finance receivables was primarily due to customer paydowns,
loan sales and new loan origination activity, primarily in our business credit
and asset-based lending portfolios. The purchases and sales of marketable
securities are largely determined by liquidity needs and the periodic
rebalancing of investment types, and will therefore fluctuate from period to
period. The cash paid for business acquisitions was related to our acquisition
of Kiala S.A., which closed in the first quarter of 2012. Other investing
activities include the cash settlement of derivative contracts used in our
currency hedging programs and the timing of aircraft purchase contract deposits
on our Boeing 767-300 aircraft order.
On March 19, 2012, we announced an agreement to purchase TNT Express N.V. ("TNT
Express") for €9.50 per ordinary share. The offer values the issued and
outstanding share capital of TNT Express at €5.16 billion (approximately $6.54
billion at the June 30, 2012 exchange rate). We anticipate the acquisition will
close during fourth quarter 2012, and intend to finance the offer by utilizing a
combination of available cash and debt backed by existing credit facilities.
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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Net Cash Provided by Financing Activities
Our primary sources (uses) of cash for financing activities are as follows
(amounts in millions, except per share data):
Six Months Ended
June 30,
2012 2011
Net cash provided by (used in) financing activities $ 158 $ (971 )
Share Repurchases:
Cash expended for shares repurchased $ (885 ) $ (1,052 )
Number of shares repurchased (11.3 ) (14.4 )
Shares outstanding at period end 958 981
Percent reduction in shares outstanding (0.5 )% (1.0 )%
Dividends:
Dividends declared per share $ 1.14 $
1.04
Cash expended for dividend payments $ (1,068 ) $ (1,007 )
Borrowings:
Net borrowings of debt principal $ 1,873 $
1,162
Other Financing Activities:
Cash received for common stock issuances $ 194 $
163
Other sources (uses) of cash for financing activities $ 44 $ (237 )
Capitalization (as of June 30 each year):
Total debt outstanding at period end $ 13,023 $
12,161
Total shareowners' equity at period end 7,725
8,329
Total capitalization $ 20,748 $
20,490
Debt to Total Capitalization % 62.8 %
59.4 %
We repurchased a total of 11.3 million shares of class A and class B common
stock for $870 million during the six months ended June 30, 2012, and
14.4 million shares for $1.055 billion for the six months ended June 30, 2011
($885 million and $1.052 billion in repurchases for 2012 and 2011, respectively,
are reported on the cash flow statement due to the timing of settlements). On
May 3, 2012, the Board of Directors approved a new share repurchase
authorization of $5.0 billion, which replaces an authorization previously
announced in 2008. The new share repurchase authorization has no expiration
date, and as of June 30, 2012, we had $4.738 billion of this share repurchase
authorization remaining. We anticipate repurchasing approximately $1.5 billion
in shares for all of 2012.
The declaration of dividends is subject to the discretion of the Board of
Directors and will depend on various factors, including our net income,
financial condition, cash requirements, future prospects and other relevant
factors. We increased our quarterly cash dividend payment to $0.57 per share in
2012, compared with the previous $0.52 quarterly dividend rate in 2011. We
expect to continue the practice of paying regular cash dividends.
Issuances of debt in 2012 and 2011 consisted primarily of commercial paper.
Repayments of debt in 2012 and 2011 consisted primarily of paydowns of
commercial paper and redemptions of certain floating rate notes. We consider the
overall fixed and floating interest rate mix of our portfolio and the related
overall cost of borrowing when planning for future issuances and non-scheduled
repayments of debt.
The cash outflows in other financing activities were primarily due to premiums
paid and received on capped call options for the purchase of UPS class B shares,
and tax withholdings on vested employee stock awards.
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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Sources of Credit
We are authorized to borrow up to $10.0 billion under the U.S. commercial paper
program we maintain. We had $1.775 billion outstanding under this program as of
June 30, 2012, with an average interest rate of 0.07%. We also maintain a
European commercial paper program under which we are authorized to borrow up to
€1.0 billion in a variety of currencies. As of June 30, 2012, we had CNY 630
million (equivalent to $99 million) outstanding under this program, with an
average interest rate of 2.17%.
We maintain two credit agreements with a consortium of banks. One of these
agreements provides revolving credit facilities of $1.5 billion, and expires on
April 11, 2013. Generally, amounts outstanding under this facility bear interest
at a periodic fixed rate equal to LIBOR for the applicable interest period and
currency denomination, plus an applicable margin. Alternatively, a fluctuating
rate of interest equal to Citibank's publicly announced base rate, plus an
applicable margin, may be used at our discretion. In each case, the applicable
margin for advances bearing interest based on LIBOR is a percentage determined
by quotations from Markit Group Ltd. for our 1-year credit default swap spread,
subject to a minimum rate of 0.10% and a maximum rate of 0.75%. The applicable
margin for advances bearing interest based on the base rate is 1.00% below the
applicable margin for LIBOR advances (but not lower than 0.00%). We are also
able to request advances under this facility based on competitive bids for the
applicable interest rate. There were no amounts outstanding under this facility
as of June 30, 2012.
The second agreement provides revolving credit facilities of $1.0 billion, and
expires on April 12, 2017. Generally, amounts outstanding under this facility
bear interest at a periodic fixed rate equal to LIBOR for the applicable
interest period and currency denomination, plus an applicable margin.
Alternatively, a fluctuating rate of interest equal to Citibank's publicly
announced base rate, plus an applicable margin, may be used at our discretion.
In each case, the applicable margin for advances bearing interest based on LIBOR
is a percentage determined by quotations from Markit Group Ltd. for our credit
default swap spread, interpolated for a period from the date of determination of
such credit default swap spread in connection with a new interest period until
the latest maturity date of this facility then in effect (but not less than a
period of one year). The applicable margin is subject to certain minimum rates
and maximum rates based on our public debt ratings from Standard & Poor's Rating
Service and Moody's Investors Service. The minimum applicable margin rates range
from 0.100% to 0.375%, and the maximum applicable margin rates range from 0.750%
to 1.250%. The applicable margin for advances bearing interest based on the base
rate is 1.00% below the applicable margin for LIBOR advances (but not less than
0.00%). We are also able to request advances under this facility based on
competitive bids. There were no amounts outstanding under this facility as of
June 30, 2012.
Our Moody's and Standard & Poor's short-term credit ratings are P-1 and A-1+,
respectively. Our Moody's and Standard & Poor's long-term credit ratings are Aa3
and AA-, respectively. We currently have a negative outlook from both Moody's
and Standard & Poor's.
Our existing debt instruments and credit facilities subject us to certain
financial covenants. As of June 30, 2012 and for all prior periods, we have
satisfied these financial covenants. These covenants limit the amount of secured
indebtedness that we may incur, and limit the amount of attributable debt in
sale-leaseback transactions, to 10% of net tangible assets. As of June 30, 2012,
10% of net tangible assets was equivalent to $2.601 billion; however, we have no
covered sale-leaseback transactions or secured indebtedness outstanding.
Additionally, we are required to maintain a minimum net worth, as defined, of
$5.0 billion on a quarterly basis. As of June 30, 2012, our net worth, as
defined, was equivalent to $10.837 billion. We do not expect these covenants to
have a material impact on our financial condition or liquidity.
Except as described in this quarterly report, the nature and amounts of our
payment obligations under our debt, capital and operating lease agreements,
purchase commitments, and other liabilities as of June 30, 2012 have not
materially changed from those described in our Annual Report on Form 10-K for
the year ended December 31, 2011.
We believe that funds from operations and borrowing programs will provide
adequate sources of liquidity and capital resources to meet our expected
long-term needs for the operation of our business, including anticipated capital
expenditures, such as commitments for aircraft purchases, for the foreseeable
future.
Guarantees and Other Off-Balance Sheet Arrangements
We do not have guarantees or other off-balance sheet financing arrangements,
including variable interest entities, which we believe could have a material
impact on our financial condition or liquidity.
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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Contingencies
We are involved in a number of judicial proceedings and other matters arising
from the conduct of our business activities.
Although there can be no assurance as to the ultimate outcome, we have generally
denied, or believe we have a meritorious defense and will deny, liability in all
litigation pending against us, including (except as otherwise noted herein) the
matters described below, and we intend to defend vigorously each case. We have
accrued for legal claims when, and to the extent that, amounts associated with
the claims become probable and can be reasonably estimated. The actual costs of
resolving legal claims may be substantially higher or lower than the amounts
accrued for those claims.
For those matters as to which we are not able to estimate a possible loss or
range of loss, we are not able to determine whether the loss will have a
material adverse effect on our business, financial condition or results of
operations or liquidity. For matters in this category, we have indicated in the
descriptions that follow the reasons that we are unable to estimate the possible
loss or range of loss.
Judicial Proceedings
We are a defendant in a number of lawsuits filed in state and federal courts
containing various class action allegations under state wage-and-hour laws. At
this time, we do not believe that any loss associated with these matters, would
have a material adverse effect on our financial condition, results of operations
or liquidity.
UPS and our subsidiary Mail Boxes Etc., Inc. are defendants in two lawsuits
about the rebranding or purchase of The UPS Store franchises-Morgate (California
Superior Court) and Samica (United States District Court).
• In Morgate, the plaintiffs are 125 individual franchisees who did not
rebrand to The UPS Store and a certified class of all franchisees who
did rebrand. The trial court entered judgment against a bellwether
individual plaintiff, which was affirmed in January 2012. The trial
court granted our motion for summary judgment against the certified
class, which was reversed in January 2012.
• In Samica, about half of the approximately 200 plaintiffs rebranded and
half purchased new The UPS Store franchises. Summary judgment for UPS
was affirmed by the United States Court of Appeals, Ninth Circuit, in
December 2011. Plaintiffs have filed a petition for certiorari with the
United States Supreme Court.
There are multiple factors that prevent us from being able to estimate the
amount of loss, if any, that may result from whatever remaining aspects of these
cases proceed including: (1) we are vigorously defending ourselves and believe
we have a number of meritorious legal defenses; and (2) it remains uncertain
what evidence of damages, if any, plaintiffs will be able to present.
Accordingly, at this time, we are not able to estimate a possible loss or range
of loss that may result from these matters or to determine whether such loss, if
any, would have a material adverse effect on our financial condition, results of
operations or liquidity.
In AFMS LLC v. UPS and FedEx Corporation, a lawsuit filed in federal court in
the Central District of California in August 2010, the plaintiff asserts that
UPS and FedEx violated U.S. antitrust law by conspiring to refuse to negotiate
with third party negotiators retained by shippers and by individually imposing
policies that prevent shippers from using such negotiators. The Antitrust
Division of the U.S. Department of Justice ("DOJ") has informed us that it has
opened a civil investigation of our policies and practices for dealing with
third party negotiators. We are cooperating with this investigation. We deny any
liability with respect to these matters and intend to vigorously defend
ourselves. There are multiple factors that prevent us from being able to
estimate the amount of loss, if any, that may result from these matters
including: (1) we believe that we have a number of meritorious defenses;
(2) discovery is ongoing; and (3) the DOJ investigation is ongoing. Accordingly,
at this time, we are not able to estimate a possible loss or range of loss that
may result from these matters or to determine whether such loss, if any, would
have a material adverse effect on our financial condition, results of operations
or liquidity.
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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
In Canada, three purported class-action cases were filed against us in British
Columbia (2006); Ontario (2007) and Québec (2006). The cases each allege
inadequate disclosure concerning the existence and cost of brokerage services
provided by us under applicable provincial consumer protection legislation and
infringement of interest restriction provisions under the Criminal Code of
Canada. The British Columbia class-action was declared inappropriate for
certification and dismissed by the trial judge. That decision was upheld by the
British Columbia Court of Appeal in March 2010, which ended the case in our
favor. The Ontario class action was certified in September 2011. Partial summary
judgment was granted to us and the plaintiffs by the Ontario motions court. The
complaint under the Criminal Code was dismissed. No appeal is being taken from
that decision. The allegations of inadequate disclosure were granted and we are
appealing that decision. The request to certify the case in Québec was heard in
February 2012. We have denied all liability and are vigorously defending the two
outstanding cases. There are multiple factors that prevent us from being able to
estimate the amount of loss, if any, that may result from these matters,
including: (1) we are vigorously defending ourselves and believe that we have a
number of meritorious legal defenses; and (2) there are unresolved questions of
law and fact that could be important to the ultimate resolution of these
matters. Accordingly, at this time, we are not able to estimate a possible loss
or range of loss that may result from these matters or to determine whether such
loss, if any, would have a material adverse effect on our financial condition,
results of operation or liquidity.
Other Matters
In May and December 2007 and August 2008 we received and responded to grand jury
subpoenas from the DOJ in the Northern District of California in connection with
an investigation by the Drug Enforcement Administration. We also have responded
to informal requests for information in connection with this investigation,
which relates to transportation of packages on behalf of on-line pharmacies that
may have operated illegally. We have been cooperating with this investigation
and are exploring the possibility of resolving this matter, which could include
our undertaking further enhancements to our compliance program and/or a payment.
Such a payment may exceed the amounts previously accrued with respect to this
matter, but we do not expect that the amount of such additional loss would have
a material adverse effect on our financial condition, results of operations or
liquidity.
We received a grand jury subpoena from the Antitrust Division of the DOJ
regarding the DOJ's investigation into certain pricing practices in the freight
forwarding industry in December 2007.
In August 2010, competition authorities in Brazil opened an administrative
proceeding to investigate alleged anticompetitive behavior in the freight
forwarding industry. Approximately 45 freight forwarding companies and
individuals are named in the proceeding, including UPS, UPS SCS Transportes
(Brasil) S.A., and a former employee in Brazil. UPS will have an opportunity to
respond to these allegations.
We are cooperating with each of these investigations, and intend to continue to
vigorously defend ourselves. There are multiple factors that prevent us from
being able to estimate the amount of loss, if any, that may result from these
matters including: (1) we are vigorously defending each matter and believe that
we have a number of meritorious legal defenses; (2) there are unresolved
questions of law that could be of importance to the ultimate resolutions of
these matters, including the calculation of any potential fine; and (3) there is
uncertainty about the time period that is the subject of the investigations.
Accordingly, at this time, we are not able to estimate a possible loss or range
of loss that may result from these matters or to determine whether such loss, if
any, would have a material adverse effect on our financial condition, results of
operations or liquidity.
On March 28, 2012, the European Commission ("Commission") announced a decision
finding that 14 freight forwarders, including UPS, had infringed EU competition
law. The Commission assessed a fine on UPS in the amount of €10 million. While
UPS does not consider the decision to be correct, it has elected to bring the
matter to a conclusion and paid the fine to the Commission.
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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
In January 2008, a class action complaint was filed in the United States
District Court for the Eastern District of New York alleging price-fixing
activities relating to the provision of freight forwarding services. UPS was not
named in this case. In July 2009, the plaintiffs filed a first amended complaint
naming numerous global freight forwarders as defendants. UPS and UPS Supply
Chain Solutions are among the 60 defendants named in the amended complaint. We
intend to vigorously defend ourselves in this case. There are multiple factors
that prevent us from being able to estimate the amount of loss, if any, that may
result from these matters including: (1) the magistrate judge recommended that
the district court grant our motion to dismiss, with leave to amend, and the
scope of the plaintiffs' claims is therefore unclear; (2) the scope and size of
the proposed class is ill-defined; (3) there are significant legal questions
about the adequacy and standing of the putative class representatives; and
(4) we believe that we have a number of meritorious legal defenses. Accordingly,
at this time, we are not able to estimate a possible loss or range of loss that
may result from these matters or to determine whether such loss, if any, would
have a material adverse effect on our financial condition, results of operations
or liquidity.
We are a defendant in various other lawsuits that arose in the normal course of
business. We do not believe that the eventual resolution of these other lawsuits
(either individually or in the aggregate), including any reasonably possible
losses in excess of current accruals, will have a material adverse effect on our
financial condition, results of operations or liquidity.
In June 2011, we received IRS reports covering income taxes and excise taxes for
tax years 2005 through 2007 and 2003 through 2007, respectively. The reports
propose assessments related to amounts paid for software, research credit
expenditures and deductibility of financing and post-acquisition integration
costs as well as taxes on amounts paid for air transportation. Receipt of the
reports represents only the conclusion of the examination process. We disagree
with the proposed assessments related to these matters. Therefore, we have filed
protests and protective tax refund claims. During the third quarter of 2011, the
IRS responded to our protests and forwarded the cases to IRS Appeals. There are
multiple factors that prevent us from being able to estimate the amount of loss,
if any, that may result from these matters including: (1) we are vigorously
defending these matters and believe that we have a number of meritorious legal
defenses; (2) we have filed refund claims in excess of the proposed assessments;
(3) there are unresolved questions of law and fact that could be of importance
to the ultimate resolutions of these matters, including the calculation of any
additional taxes and/or tax refunds; and (4) these matters are at the initial
stage of a multi-level administrative appeals process that may ultimately be
resolved by litigation. Accordingly, at this time, we are not able to estimate a
possible loss or range of loss that may result from these matters or to
determine whether such loss, if any, would have a material adverse effect on our
financial condition, results of operations or liquidity.
Collective Bargaining Agreements
As of December 31, 2011, we had approximately 245,000 employees employed under a
national master agreement and various supplemental agreements with local unions
affiliated with the International Brotherhood of Teamsters ("Teamsters"). These
agreements run through July 31, 2013. We have approximately 2,700 pilots who are
employed under a collective bargaining agreement with the Independent Pilots
Association, which became amendable at the end of 2011. Our airline mechanics
are covered by a collective bargaining agreement with Teamsters Local 2727,
which runs through November 1, 2013. In addition, approximately 3,200 of our
ground mechanics who are not employed under agreements with the Teamsters are
employed under collective bargaining agreements with the International
Association of Machinists and Aerospace Workers ("IAM"). Our agreement with the
IAM runs through July 31, 2014.
We contribute to a number of multiemployer defined benefit and health and
welfare plans under terms of collective bargaining agreements that cover our
union represented employees. Our current collective bargaining agreements set
forth the annual contribution increases allotted to the plans that we
participate in, and we are in compliance with these contribution rates. These
limitations will remain in effect throughout the terms of the existing
collective bargaining agreements.
Rate Adjustments
In June 2012, our UPS Freight unit announced a general rate increase averaging
5.9%, covering non-contractual shipments in the United States, Canada and
Mexico. The rate adjustment took effect on July 16, 2012, and applies to minimum
charge, LTL rates and accessorial charges.
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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Recent Accounting Pronouncements
Adoption of New Accounting Standards
In May 2011, the Financial Accounting Standards Board ("FASB") issued an
Accounting Standards Update to disclosure requirements for fair value
measurement. These amendments, which became effective for us in the first
quarter of 2012, result in a common definition of fair value and common
measurement and disclosure requirements between U.S. GAAP and IFRS.
Consequently, the amendments change some fair value measurement principles and
disclosure requirements. The implementation of this amended accounting guidance
had an immaterial impact on our consolidated financial position and results of
operations.
In June 2011, the FASB issued an Accounting Standards Update that increases the
prominence of items reported in other comprehensive income in the financial
statements. This update requires companies to present comprehensive income in a
single statement below net income or in a separate statement of comprehensive
income immediately following the income statement. This requirement became
effective for us beginning with the first quarter of 2012, and we have included
the required presentation in all applicable filings since that date.
Other accounting pronouncements adopted during the periods covered by the
consolidated financial statements had an immaterial impact on our consolidated
financial position and results of operations.
Accounting Standards Issued But Not Yet Effective
Accounting pronouncements issued, but not effective until after June 30, 2012,
are not expected to have a significant impact on our consolidated financial
position or results of operations.
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