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 September 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
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Atlanta, Georgia 30328
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code (404) 828-6000
Not Applicable
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Former name, address and fiscal year, if changed since last report
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities and Exchange Act of 1934
during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
Class A and B Common Stock, par value $.01 per share
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(Title of Class)
967,128,260 Class A shares, 164,309,050 Class B shares
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Outstanding as of November 10, 2000
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
UNITED PARCEL SERVICE, INC., AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, 2000 (unaudited) and December 31, 1999 (In millions
except share and per share amounts)
<S> <C> <C>
September 30, December 31,
Assets 2000 1999
----------- -----------
Current Assets:
Cash & cash equivalents $ 1,670 $4,204
Marketable securities & short-term investments 1,922 2,074
Accounts receivable 3,383 3,167
Prepaid employee benefit costs 1,626 1,327
Materials, supplies & other prepaid expenses 506 366
----------- -----------
Total Current Assets 9,107 11,138
Property, Plant & Equipment (including aircraft under capitalized
lease obligations) - at cost, net of accumulated depreciation &
amortization of $9,442 in 2000 and $8,891 in 1999 11,721 11,579
Other Assets 584 326
----------- -----------
$21,412 $ 23,043
=========== ===========
Liabilities & Shareowners' Equity
Current Liabilities:
Commercial paper $ 955 $ -
Accounts payable 1,433 1,295
Accrued wages & withholdings 1,740 998
Dividends payable - 361
Tax assessment 146 457
Income taxes payable 396 50
Current maturities of long-term debt 263 512
Other current liabilities 686 525
----------- -----------
Total Current Liabilities 5,619 4,198
----------- -----------
Long-Term Debt (including capitalized lease obligations) 2,052 1,912
----------- -----------
Accumulated Postretirement Benefit Obligation, Net 1,049 990
----------- -----------
Deferred Taxes, Credits & Other Liabilities 3,426 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
988,395,928 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
146,553,441 and 109,400,000 in 2000 and 1999 1 1
Additional paid-in capital 345 5,096
Retained earnings 9,152 7,536
Accumulated other comprehensive loss (242) (170)
----------- -----------
9,266 12,474
----------- -----------
$21,412 $ 23,043
=========== ===========
</TABLE>
See notes to unaudited consolidated financial statements.
<PAGE>
UNITED PARCEL SERVICE, INC., AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME
Three Months and Nine Months Ended September 30, 2000 and 1999
(In millions except per share amounts)
(unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- -----------------------
2000 1999 2000 1999
--------- --------- ----------- -----------
Revenue $ 7,367 $ 6,715 $ 21,871 $ 19,606
--------- --------- ----------- -----------
Operating Expenses:
Compensation and benefits 4,072 3,849 12,189 11,226
Other 2,134 1,876 6,274 5,522
--------- --------- ----------- -----------
6,206 5,725 18,463 16,748
--------- --------- ----------- -----------
Operating Profit 1,161 990 3,408 2,858
--------- --------- ----------- -----------
Other Income and (Expense):
Investment income 71 45 466 115
Interest expense (41) (65) (158) (170)
Tax assessment - - - (1,786)
Miscellaneous, net (20) (8) (32) (30)
--------- --------- ----------- -----------
10 (28) 276 (1,871)
--------- --------- ----------- -----------
Income Before Income Taxes 1,171 962 3,684 987
Income Taxes 469 385 1,474 765
--------- --------- ----------- -----------
Net Income $ 702 $ 577 $2,210 $ 222
========= ========= =========== ===========
Basic Earnings Per Share $0.62 $0.53 $ 1.91 $ 0.20
========= ========= =========== ===========
Diluted Earnings Per Share $0.60 $0.52 $ 1.87 $ 0.20
========= ========= =========== ===========
See notes to unaudited consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
UNITED PARCEL SERVICE, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREOWNERS' EQUITY
Nine Months Ended September 30, 2000
(In millions except per share amounts)
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Class A Class B Accumulated
Common Stock Common Stock Additional Other Total
---------------- --------------- Paid-In Retained Comprehensive Shareowners'
Shares Amount Shares Amount Capital Earnings Loss Equity
------- ------ ------ ------ ---------- --------- ------------- ------------
Balance, January 1, 2000 1,101 $ 11 109 $1 $5,096 $7,536 $ (170) $ 12,474
Comprehensive income:
Net income - - - - - 2,210 - 2,210
Foreign currency
adjustments - - - - - - (77) (77)
Unrealized gain on
marketable securities - - - - - - 5 5
------------
Comprehensive income 2,138
------------
Dividends ($0.51 per share) - - - - - (594) - (594)
Stock award plans 5 - - - 113 - - 113
Common stock purchases:
Tender offer (68) (1) - - (4,069) - - (4,070)
Other (9) - (4) - (813) - - (813)
Common stock issuances 1 - - - 18 - - 18
Conversion of Class A Common
Stock to Class B Common
Stock (42) - 42 - - - - -
------- ------ ------ ------ ---------- --------- ------------- ------------
Balance, September 30, 2000 988 $ 10 147 $1 $ 345 $9,152 $ (242) $ 9,266
======= ====== ====== ====== ========== ========= ============= ============
</TABLE>
See notes to unaudited consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
UNITED PARCEL SERVICE, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, 2000 and 1999
(In millions)
(unaudited)
<S> <C> <C>
Nine Months Ended
September 30,
-------------------
2000 1999
-------- --------
Cash flows from operating activities:
Net income $2,210 $222
Adjustments to reconcile net income
to net cash from operating activities:
Depreciation and amortization 864 850
Postretirement benefits 59 18
Deferred taxes, credits, and other (9) (79)
Stock award plans 415 304
Gain on investments and sale of business (263) -
Changes in assets and liabilities:
Accounts receivable (216) (132)
Prepaid employee benefit costs (299) (294)
Materials, supplies and other prepaid expenses (140) (54)
Accounts payable 138 (9)
Accrued wages and withholdings 371 241
Dividends payable (361) (247)
Tax assessment (311) 621
Income taxes payable 481 55
Other current liabilities 98 45
-------- --------
Net cash from operating activities 3,037 1,541
-------- --------
Cash flows from investing activities:
Capital expenditures (1,247) (1,080)
Disposals of property, plant and equipment 204 155
Purchases of marketable securities and short-term investments (3,423) (2,089)
Sales and maturities of marketable securities and short-term
investments 3,806 1,785
Construction funds in escrow 59 (138)
Other asset receipts (payments) (272) 15
-------- --------
Net cash (used in) investing activities (873) (1,352)
-------- --------
Cash flows from financing activities:
Proceeds from borrowings 1,643 1,617
Repayments of borrowings (793) (246)
Purchases of common stock via tender (4,070) -
Other purchases of common stock (813) (1,196)
Issuances of common stock pursuant to stock awards and employee
stock purchase plans 70 684
Dividends (594) (311)
Other transactions (118) (10)
-------- --------
Net cash (used in) financing activities (4,675) 538
-------- --------
Effect of exchange rate changes on cash (23) (12)
-------- --------
Net increase (decrease) in cash and cash equivalents (2,534) 715
Cash and cash equivalents:
Beginning of period 4,204 1,240
-------- --------
End of period $1,670 $1,955
======== ========
Cash paid during the period for:
Interest (net of amount capitalized) $194 $927
======== ========
Income taxes $905 $660
======== ========
</TABLE>
See notes to unaudited consolidated financial statements
<PAGE>
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 September 30, 2000, the
results of operations for the three and nine months ended September 30, 2000 and
1999, and cash flows for the nine months ended September 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):
<TABLE>
<S> <C> <C> <C> <C>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ---------------------
2000 1999 2000 1999
-------- -------- --------- --------
Numerator:
Numerator for basic and diluted
earnings per share -
Net income $ 702 $ 577 $2,210 $ 222
======== ======== ========= ========
Denominator:
Weighted-average shares -
Denominator for basic earnings
per share 1,140 1,094 1,158 1,107
Effect of dilutive securities:
Contingent shares -
Management incentive awards 9 15 6 11
Stock option plans 15 9 17 8
-------- -------- --------- --------
Denominator for diluted earnings
per share 1,164 1,118 1,181 1,126
======= ======= ========= ========
Basic Earnings Per Share $0.62 $0.53 $ 1.91 $0.20
======== ======== ========= ========
Diluted Earnings Per Share $0.60 $0.52 $ 1.87 $0.20
======== ======== ========= ========
</TABLE>
<PAGE>
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.
<PAGE>
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 September 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 has
taken similar positions with respect to some of these issues for each of the
years from 1991 through 1994 and we expect the IRS to take similar positions for
the years 1995 through 1999. We believe the eventual resolution of these issues
will not result in a material adverse effect on our financial condition, results
of operations or liquidity.
We are a defendant in various employment-related lawsuits. In our opinion,
none of these cases is expected to have a material effect on our financial
condition, results of operations or liquidity.
<PAGE>
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; one case alleges violations of federal antitrust laws. An amended
consolidated complaint also alleges a violation of the federal RICO statute.
Seventeen 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 having the remaining
case 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 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.
<PAGE>
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 financial condition, results of operations or liquidity.
In addition, we are a defendant in various other lawsuits that arose in
the normal course of business. In our opinion, none of these cases is expected
to have a material effect on our financial condition, results of operations or
liquidity.
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 nine months ended September 30, 2000
and 1999, is as follows (in millions):
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- -----------------------
2000 1999 2000 1999
---------- ---------- ---------- -----------
Revenue:
U.S. domestic package $5,928 $5,574 $17,659 $16,239
International package 1,028 909 3,074 2,702
Non-package 411 232 1,138 665
---------- ---------- ---------- -----------
Consolidated $7,367 $6,715 $21,871 $19,606
========== ========== ========== ===========
Operating profit:
U.S. domestic package $1,043 $916 $ 2,954 $ 2,603
International package 58 47 207 170
Non-package 60 27 247 85
---------- ---------- ---------- -----------
Consolidated $1,161 $990 $ 3,408 $ 2,858
========== ========== ========== ===========
<PAGE>
UNITED PARCEL SERVICE, INC., AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Non-package operating profit included $24 and $28 million for the three
months ended September 30, 2000 and 1999, respectively, and $77 and $85 million
for the nine months ended September 30, 2000 and 1999, respectively, of
intersegment profit, with a corresponding amount of operating expense, which
reduces operating profit, included in the U.S. domestic package segment.
6. The major components of other operating expenses for the three months and
nine months ended September 30, 2000 and 1999, are as follows (in millions):
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ ------------------------
2000 1999 2000 1999
--------- ---------- --------- ----------
Repairs and maintenance $246 $231 $726 $674
Depreciation and amortization 294 287 864 850
Purchased transportation 478 407 1,378 1,168
Fuel 224 174 672 467
Other occupancy 99 89 297 278
Other expenses 793 688 2,337 2,085
-------- ---------- --------- ----------
Consolidated $2,134 $1,876 $6,274 $5,522
========= ========== ========= ==========
7. 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 us on January 1, 2001. Based on an evaluation
of our material derivative instruments held at September 30, 2000, the adoption
of FAS 133 at that date would not have had a material impact on our financial
position or results of operations.
8. Certain prior period amounts have been reclassified to conform to
the current period presentation.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Three Months Ended September 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
September 30,
-------------------
2000 1999 $ %
-------- -------- --------- --------
Revenue (in millions):
U.S. domestic package:
Next Day Air $1,420 $1,344 $ 76 5.7 %
Deferred 690 649 41 6.3
Ground 3,818 3,581 237 6.6
-------- -------- ---------
Total U.S. domestic package 5,928 5,574 354 6.4
International package:
Domestic 218 221 (3) (1.4)
Export 698 605 93 15.4
Cargo 112 83 29 34.9
-------- -------- ---------
Total international package 1,028 909 119 13.1
Non-package:
UPS Logistics Group 268 197 71 36.0
Other 143 35 108 308.6
-------- -------- ---------
Total non-package 411 232 179 77.2
-------- -------- ---------
Consolidated $7,367 $6,715 $652 9.7 %
======== ======== =========
Average Daily Package Volume
(in thousands): #
---------
U.S. domestic package:
Next Day Air 1,130 1,046 84 8.0 %
Deferred 845 789 56 7.1
Ground 10,345 9,849 496 5.0
-------- -------- ---------
Total U.S. domestic package 12,320 11,684 636 5.4
International package:
Domestic 770 691 79 11.4
Export 366 298 68 22.8
-------- -------- ---------
Total international package 1,136 989 147 14.9
-------- -------- ---------
Consolidated 13,456 12,673 783 6.2 %
======== ======== =========
Operating days in period 63 64
Average Revenue Per Piece:
U.S. domestic package: $
---------
Next Day Air $19.95 $20.08 $(0.13) (0.6)%
Deferred 12.96 12.85 0.11 0.9
Ground 5.86 5.68 0.18 3.2
Total U.S. domestic package 7.64 7.45 0.19 2.6
International:
Domestic 4.49 5.00 (0.51) (10.2)
Export 30.27 31.72 (1.45) (4.6)
Total international package 12.80 13.05 (0.25) (1.9)
Consolidated $ 8.07 $ 7.89 $ 0.18 2.3 %
======== ======== =========
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
U.S. domestic package revenue increased 6.4% primarily due to volume gains
across all product lines, continuing the trends reported during the first and
second quarters of 2000. Average daily package volume for our Ground products
increased 5.0%, or almost one-half million packages per day. This volume
increase, combined with a 3.2% increase in revenue per piece for our Ground
products, accounted for approximately two-thirds of the overall revenue increase
for this segment. The remaining increase in U.S. domestic package revenue was
due to continued volume growth for our Next Day Air and Deferred products.
The increase in international package revenue of 13.1% 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 a
decline in the value of the Euro relative to the U.S. dollar. Excluding the
impact of currency fluctuations, overall revenue per piece for our international
products would have increased 4.4%. The 22.8% increase in average daily volume
for our export products represents our third consecutive quarter with volume
increases in excess of 20%.
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. Revenue for the UPS
Logistics Group increased by $71 million, or 36.0%, from $197 million to $268
million.
Operating expenses increased by $481 million, or 8.4%, to $6.206 billion
during the third quarter of 2000. Compensation and benefits expenses increased
by $223 million while other operating expenses increased $258 million. The
increase in other operating expenses was primarily due to higher purchased
transportation costs, higher fuel costs and claims expense associated with the
new arrangement for providing excess value package insurance for our customers.
The increase in purchased transportation costs were primarily due to increased
business for our international and logistics operations, while the $50 million,
or 28.7%, 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. Approximately $50
million in revenue was recorded during the quarter as a result of the surcharge.
Our operating margin improved from 14.7% during the third quarter of 1999
to 15.8% during the third quarter of 2000. The 15.8% operating margin represents
our fourth consecutive quarter with an operating margin in excess of 15.0%. This
improvement continues our recently reported trends and is favorably impacted by
continued product mix improvements and our continued successful efforts in
obtaining profitable volume growth.
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
The following table sets forth information showing the change in operating
profit, both in dollars (in millions) and in percentage terms:
Three Months Ended
September 30, Change
---------------------- -----------------
Operating Segment 2000 1999 $ %
--------- --------- -------- -------
U.S. domestic package $1,043 $ 916 $127 13.9 %
International package 58 47 11 23.4
Non-package 60 27 33 122.2
--------- --------- ------
Consolidated Operating Profit $1,161 $ 990 $171 17.3 %
========= ========= ======
U.S. domestic package operating profit increased over $100 million due
to the volume and revenue improvements discussed previously.
International package operating profit increased over 23% due to increased
volume and revenue, and was realized despite significantly higher fuel costs.
Continuing the trends we have reported in previous quarters, this improvement
was well-balanced across our international regions. Excluding the impact of
currency fluctuations, this segment would have reported an additional $8 million
in operating profit during this period.
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 $60 million of operating profit for the quarter. This
improvement was offset in part by start-up costs associated with UPS Service
Parts Logistics, UPS Capital Corporation and other initiatives.
Our other income and expense improved $38 million, from expense of $28
million in the third quarter of 1999 to income of $10 million in the third
quarter of 2000. This improvement was primarily due to higher cash and
marketable securities balances that resulted in higher investment income, along
with lower debt balances outstanding which resulted in lower interest expense.
Net income for the third quarter of 2000 increased by $125 million from
the third quarter of 1999. This increase resulted in an improvement in diluted
earnings per share from $0.52 in the third quarter of 1999 to $0.60 in the third
quarter of 2000.
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Nine Months Ended September 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:
Nine Months Ended
September 30,
---------------------
2000 1999 $ %
---------- --------- --------- -------
Revenue (in millions):
U.S. domestic package:
Next Day Air $ 4,213 $ 3,834 $379 9.9 %
Deferred 2,074 1,897 177 9.3
Ground 11,372 10,508 864 8.2
---------- --------- ---------
Total U.S. domestic package 17,659 16,239 1,420 8.7
International package:
Domestic 673 680 (7) (1.0)
Export 2,094 1,785 309 17.3
Cargo 307 237 70 29.5
---------- --------- ---------
Total international package 3,074 2,702 372 13.8
Non-package:
UPS Logistics Group 696 566 130 23.0
Other 442 99 343 346.5
---------- --------- ---------
Total non-package 1,138 665 473 71.1
---------- --------- ---------
Consolidated $21,871 $19,606 $2,265 11.6 %
========== ========= =========
Average Daily Package Volume
(in thousands): #
---------
U.S. domestic package:
Next Day Air 1,104 1,012 92 9.1 %
Deferred 851 790 61 7.7
Ground 10,193 9,709 484 5.0
---------- --------- -------
Total U.S. domestic package 12,148 11,511 637 5.5
International package:
Domestic 758 686 72 10.5
Export 356 290 66 22.8
---------- --------- ---------
Total international package 1,114 976 138 14.1
---------- --------- ---------
Consolidated 13,262 12,487 775 6.2 %
========== ========= =========
Operating days in period 192 191
Average Revenue Per Piece:
U.S. domestic package: $
---------
Next Day Air $ 19.88 $ 19.84 $ 0.04 0.2 %
Deferred 12.69 12.57 0.12 1.0
Ground 5.81 5.67 0.14 2.5
Total U.S. domestic package 7.57 7.39 0.18 2.4
International:
Domestic 4.62 5.19 (0.57) (11.0)
Export 30.64 32.23 (1.59) (4.9)
Total international package 12.94 13.22 (0.28) (2.1)
Consolidated $8.02 $7.84 $ 0.18 2.3 %
========== ========= =========
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
U.S. domestic package revenue increased 8.7% primarily due to volume gains
across all product lines, continuing the trends reported during the first and
second quarters of 2000. All products contributed to this increase, with our
higher revenue per piece express (Next Day Air and Deferred) products accounting
for almost 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 484,000 packages
per day. Also contributing to the revenue increase was one extra operating day
in the first nine months of 2000 compared to the first nine months of 1999.
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 a decline in the
value of the Euro relative to the U.S. dollar. Overall average daily package
volume increased 14.1% for international operations, with our export products,
which had an average revenue per piece of $30.64, increasing at 22.8%.
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. Revenue for the UPS
Logistics Group increased by $130 million, or 23.0%, from $566 million to $696
million during this period.
Operating expenses increased by $1.715 billion, or 10.2%, which was less
than our revenue increase of 11.6%. Compensation and benefits expenses, the
largest component of this increase, accounted for $963 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 $752 million due to higher
purchased transportation costs, higher fuel costs and claims expense associated
with the new arrangement for providing excess value package insurance for our
customers. The increase in purchased transportation costs was primarily due to
increased business for our international and logistics operations. The 43.9%
increase in fuel costs from $467 million to $672 million was due to the increase
in fuel prices and the growth in our average daily volume, partially offset by
the cost reductions generated by our fuel hedging program. The increase in other
operating expenses was slightly offset by the $49 million gain we recognized in
the first quarter of this year from the sale of our UPS Truck Leasing
subsidiary. International operating expenses were favorably impacted by the
decline in the value of the Euro relative to the U.S. dollar.
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
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. Approximately $50
million in revenue has been recorded year-to-date as a result of the surcharge.
Our operating margin improved from 14.6% during the first nine months of
1999 to 15.6% during the same period in 2000. This improvement continues our
recently reported trends and is favorably impacted by continued product mix
improvements and our continued successful efforts in obtaining profitable volume
growth.
The following table sets forth information showing the change in operating
profit, both in dollars (in millions) and in percentage terms:
Nine Months Ended
September 30, Change
---------------------- -----------------
Operating Segment 2000 1999 $ %
--------- --------- -------- -------
U.S. domestic package $2,954 $2,603 $351 13.5 %
International package 207 170 37 21.8
Non-package 247 85 162 190.6
--------- --------- ------
Consolidated Operating Profit $3,408 $2,858 $550 19.2 %
========= ========= ======
U.S. domestic package operating profit increased over $351 million due
to the volume and revenue improvements discussed previously.
The improvement in the operating profit of our international package
operations of 21.8% resulted primarily from increased volume and revenue, and
was realized despite significantly higher fuel costs. This improvement occurred
throughout our international regions. Excluding the impact of currency
fluctuations, this segment would have reported an additional $20 million in
operating profit during this period.
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 $175 million of additional operating profit for the nine-month
period. Also contributing to the operating profit improvement was the $49
million gain we recognized during the first quarter of 2000 from the sale of our
UPS Truck Leasing subsidiary. These improvements were offset somewhat by
start-up costs associated with UPS Service Parts Logistics, UPS Capital
Corporation and other initiatives.
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
The increase in investment income of $351 million for the period is
primarily 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. Second, 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 under which we expect to utilize up
to the remaining $1.2 billion not used in the tender offer, of which
approximately $500 million remains available for share repurchases as of
September 30, 2000, and continues to generate investment income.
Net income for the nine months ended September 30, 2000 amounted to $2.210
billion, or $1.87 per diluted share, compared to net income of $222 million, or
$0.20 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 nine months ending September 30, 2000,
would have been $2.071 billion, an increase of $407 million over adjusted 1999
net income of $1.664 billion. Adjusted diluted earnings per share increased from
$1.48 in 1999 to $1.75 in 2000.
<PAGE>
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 $3.592 billion at September 30, 2000. Of
this amount, approximately $500 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 of approximately $500 million as of September
30, 2000, are available for a share repurchase program that was announced on
April 20, 2000. In addition, an additional $750 million has been authorized for
share repurchases.
We maintain a commercial paper program under which we are authorized to
borrow up to $2.0 billion. Approximately $1.055 billion was outstanding under
this program as of September 30, 2000. Since we do not intend to refinance the
full commercial paper balance outstanding at September 30, 2000, $955 million
has been classified as a current liability on our balance sheet. The average
interest rate on the amount outstanding at September 30, 2000 was 6.6%. On
October 25, 2000, we entered into a second commercial paper program under which
we are authorized to borrow up to $5.0 billion.
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
September 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 September 30, 2000, $800 million
was available under this program. The $200 million outstanding at September 30,
2000 bears interest at a stated interest rate of 6.625%.
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. In September
2000, we issued $300 million cash-settled convertible senior notes due September
27, 2007 pursuant to our shelf registration statement. The notes were sold at
par with a stated interest rate of 1.75% and are callable after three years. The
notes are convertible into cash, with the conversion price indexed to the
trading price of our Class B common stock. There was approximately $405 million
issued under this shelf registration statement at September 30, 2000.
<PAGE>
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 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 financial condition, results of operations or liquidity.
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
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.
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 us on January 1, 2001. We have
performed an evaluation of our current material derivative instruments,
including those items discussed in the Market Risk section set forth above.
Based on our evaluation of the material open derivative contracts we held at
September 30, 2000, the adoption of FAS 133 at that date would not have had a
material impact on our financial position or results of operations.
<PAGE>
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
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. This adoption will not have a material impact 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 about our strategic direction, prospects and future
results. We have described some of the important factors that affect these
statements as we discussed each subject. Forward-looking statements involve
risks and uncertainties, and certain factors may cause actual results to differ
materially from those contained in the forward-looking statements. These factors
include, for example, our competitive environment, economic and other conditions
in the markets in which we operate, strikes, work stoppages and slowdowns,
governmental regulation, increases in aviation and motor fuel prices, and
cyclical and seasonal fluctuations in our operating results. Additional
information concerning these risks and uncertainties, and other factors you may
wish to consider, are provided in the "Risk Factors" 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.
<PAGE>
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; one case alleges violations of federal antitrust laws. An amended
consolidated complaint also alleges a violation of the federal RICO statute.
Seventeen 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 having the remaining
case 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.
<PAGE>
Item 6. - Exhibits and Reports on Form 8-K
a) Exhibits:
(1) Underwriting Agreement dated September 21, 2000 between
United Parcel Service, Inc. and Merrill Lynch, Pierce,
Fenner & Smith Incorporated
(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.
<PAGE>
EXHIBIT INDEX
(1) Underwriting Agreement dated September 21, 2000 between
United Parcel Service, Inc. and Merrill Lynch, Pierce,
Fenner & Smith Incorporated
<PAGE>
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: November 14, 2000 By: /S/ Robert J. Clanin
Robert J. Clanin
Senior Vice President,
Treasurer and
Chief Financial Officer
