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, 1998
Commission file number 0-4714
United Parcel Service of America, Inc.
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(Exact name of registrant specified in its charter)
Delaware 95-1732075
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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 Exchange Act of 1934
during the preceding 12 months, and (2) has been subject to such filing
requirements of the past 90 days.
YES X NO
Common Stock, par value $.10 per share
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(Title of Class)
559,000,000 shares
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Outstanding as of November 12, 1998
<PAGE>
PART I. ITEM 1- FINANCIAL INFORMATION
UNITED PARCEL SERVICE OF AMERICA, INC., AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, 1998 (unaudited) and December 31, 1997
(In millions except share amounts)
ASSETS 1998 1997
- ------ ---- ----
CURRENT ASSETS:
Cash and cash equivalents $ 1,332 $ 460
Marketable securities 347 -
Accounts receivable 2,508 2,405
Prepaid employee benefit costs 519 669
Materials, supplies and other prepaid expenses 431 417
Common stock held for stock plans 539 526
------ ------
TOTAL CURRENT ASSETS 5,676 4,477
PROPERTY, PLANT AND EQUIPMENT (including aircraft
under capitalized lease obligations)- at
cost, net of accumulated depreciation and
amortization of $8,091 in 1998 and $7,495 in
1997 11,094 11,007
OTHER ASSETS 270 428
------ ------
$17,040 $15,912
LIABILITIES AND SHAREOWNERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,217 $ 1,207
Accrued wages and withholdings 1,412 1,194
Dividends payable - 191
Deferred income taxes 143 140
Current maturities of long-term debt 244 41
Other current liabilities 595 625
------ ------
TOTAL CURRENT LIABILITIES 3,611 3,398
LONG-TERM DEBT (including capitalized lease
obligations) 2,371 2,583
------ ------
ACCUMULATED POSTRETIREMENT BENEFIT
OBLIGATION, NET 986 911
------ ------
DEFERRED TAXES, CREDITS AND OTHER LIABILITIES 3,020 2,933
------ ------
SHAREOWNERS' EQUITY:
Preferred stock, no par value,
Authorized 200,000,000 shares, none issued - -
Common stock, par value $.10 per share,
Authorized 900,000,000 shares, issued
559,000,000 and 562,000,000, net of
21,000,000 and 18,000,000 in treasury, at
September 30, 1998 and December 31, 1997 56 56
Additional paid-in capital 14 -
Retained earnings 7,045 6,112
Cumulative foreign currency adjustments (63) (81)
------ ------
7,052 6,087
$17,040 $15,912
See notes to consolidated financial statements.
<PAGE>
UNITED PARCEL SERVICE OF AMERICA, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Three Months and Nine Months Ended September 30, 1998 and 1997
(In millions except per share amounts)
(unaudited)
Three Months Ended Nine Months Ended
1998 1997 1998 1997
Revenue $ 6,158 $ 4,810 $18,124 $16,320
------ ------ ------ ------
Operating Expenses:
Compensation and
benefits 3,585 2,979 10,587 9,776
Other 1,796 1,817 5,315 5,486
------ ------ ------ ------
5,381 4,796 15,902 15,262
------ ------ ------ ------
Operating profit 777 14 2,222 1,058
------ ------ ------ ------
Other income and
(expense):
Interest income 26 28 56 47
Interest expense (54) (57) (169) (135)
Miscellaneous, net (9) (1) (3) (16)
------- ------ ------- ------
(37) (30) (116) (104)
Income (loss) before
income taxes 740 (16) 2,106 954
Income taxes 291 (6) 847 396
------ ------- ------ ------
Net income (loss) $ 449 $ (10) $ 1,259 $ 558
====== ======= ====== ======
Basic earnings
(loss) per share $ 0.83 $ (0.02) $ 2.31 $ 1.01
====== ======= ====== ======
Diluted earnings
(loss) per share $ 0.81 $ (0.02) $ 2.28 $ 1.00
====== ======= ====== ======
See notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
UNITED PARCEL SERVICE OF AMERICA, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREOWNERS' EQUITY
Nine Months Ended September 30, 1998
(In millions)
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
Cumulative
Additional Foreign Total
Common Stock Paid-In Retained Currency Shareowners'
Shares Amount Capital Earnings Adjustments Equity
Balance, January 1, 1998 562 $56 $- $6,112 $ (81) $6,087
Comprehensive income:
Net income - - - 1,259 - 1,259
Foreign currency
adjustments - - - - 18 18
-----
Comprehensive income 1,277
Dividends
($.40 per share) - - - (219) - (219)
Gain on issuance of
common stock held
for stock plans - - 22 - - 22
Exercise of stock
options - - (8) (17) - (25)
Reclassification of
common stock (3) - - (90) - (90)
--- --- --- ------ ------ ------
Balance, September 30, 1998 559 $56 $14 $7,045 $ (63) $7,052
=== === === ====== ====== ======
</TABLE>
See notes to consolidated financial statements.
<PAGE>
UNITED PARCEL SERVICE OF AMERICA, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, 1998 and 1997
(In millions)
(unaudited)
1998 1997
Cash flows from operating activities:
Net income $1,259 $ 558
Adjustments to reconcile net income to net
cash provided from operating activities:
Depreciation and amortization 825 776
Postretirement benefits 75 56
Deferred taxes, credits and other 54 213
Changes in assets and liabilities:
Accounts receivable (38) 72
Prepaid employee benefit costs 150 (56)
Materials, supplies and other
prepaid expenses (10) 72
Common stock held for stock plans (13) (127)
Accounts payable 10 71
Accrued wages and withholdings 218 (24)
Dividends payable (191) (194)
Other current liabilities (30) 179
------ -----
Net cash from operating activities 2,309 1,596
----- -----
Cash flows from investing activities:
Capital expenditures (1,022) (1,480)
Disposals of property, plant and equipment 171 87
Purchases of marketable securities (347) -
Other asset receipts 91 46
----- -----
Net cash (used in) investing activities (1,107) (1,347)
----- ------
Cash flows from financing activities:
Proceeds from borrowings 227 1,949
Repayment of borrowings (237) (717)
Reclassification of common stock (90) -
Dividends (219) (194)
Other transactions (3) -
----- -----
Net cash from (used in) financing activities (322) 1,038
------ -----
Effect of exchange rate changes on cash (8) (16)
----- -----
Net increase in cash and cash equivalents 872 1,271
Cash and cash equivalents:
Beginning of period 460 392
----- -----
End of period $1,332 $1,663
===== =====
Cash paid during the period for:
Interest (net of amount capitalized) $ 199 $ 78
===== =====
Income taxes $ 803 $ 147
===== =====
See notes to consolidated financial statements.
<PAGE>
UNITED PARCEL SERVICE OF AMERICA, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Three Months and Nine Months Ended September 30, 1998 and 1997
(unaudited)
1. For interim consolidated financial statement purposes, UPS computes its tax
provision on the basis of its estimated annual effective income tax rate and
provides for accruals under its various employee benefit plans based on one
quarter of the estimated annual expense for each three month period. Effective
January 1, 1998, UPS adopted Statement of Financial Accounting Standards No. 130
("FAS 130"), "Reporting Comprehensive Income". FAS 130 requires comprehensive
income and its components to be separately displayed within the financial
statements. Comprehensive income, which totaled $1.277 billion for the nine
months ended September 30, 1998, includes net income and foreign currency
adjustments and is displayed in the Consolidated Statement of Shareowners'
Equity. Comprehensive income for the comparable nine months of 1997 totaled $476
million and was comprised of net income of $558 million less foreign currency
adjustments of $82 million.
2. In the opinion of management, the accompanying interim, unaudited,
consolidated financial statements contain all adjustments (consisting of normal
recurring accruals) necessary to present fairly the financial position as of
September 30, 1998, the results of operations for the three months and nine
months ended September 30, 1998 and 1997, and cash flows for the nine months
ended September 30, 1998 and 1997.
3. The following table sets forth the computation of basic and diluted earnings
(loss) per share (in millions except per share amounts):
Three Months Nine Months
Ended Ended
1998 1997 1998 1997
---- ---- ---- ----
Numerator:
Numerator for basic and diluted
earnings (loss) per share - net
income (loss) $ 449 $(10) $1,259 $ 558
===== ==== ====== =====
Denominator:
Weighted-average shares - denominator
for basic earnings (loss) per share 544 549 545 552
Effect of dilutive securities:
Additional contingent shares -
managers incentive plan 7 - 5 4
Stock option plans 3 - 3 3
------ ----- ------ -----
Denominator for diluted earnings (loss)
per share 554 549 553 559
====== ===== ====== =====
Basic earnings (loss) per share $0.83 $(0.02) $2.31 $1.01
===== ======= ===== =====
Diluted earnings (loss) per share $0.81 $(0.02) $2.28 $1.00
===== ======= ===== =====
<PAGE>
UNITED PARCEL SERVICE OF AMERICA, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Three Months and Nine Months Ended September 30, 1998 and 1997
(unaudited)
4. During the second quarter of 1995, the Company received a Notice of
Deficiency from the United States Internal Revenue Service ("IRS") asserting
that it is liable for additional tax for the 1983 and 1984 tax years. The Notice
of Deficiency is based in large part on the theory that UPS is liable for tax on
income of Overseas Partners Ltd., a Bermuda company, which has reinsured excess
value package insurance purchased by UPS's customers from unrelated insurers.
The deficiency sought by the IRS relating to package insurance is based on a
number of theories, which the Company believes are inconsistent, and ranges from
$8 million to $35 million of tax, plus penalties and interest for 1984.
Agents for the IRS have also asserted in reports that UPS is liable for
additional tax for the 1985 through 1990 tax years. The additional tax sought by
the agents relating to package insurance for these periods ranges from $89
million to $148 million for the 1985 through 1987 tax years and up to $174
million for the 1988 through 1990 tax years, plus penalties and interest. The
IRS has based their assertions on the same theories included in the above
described Notice of Deficiency.
In addition, the IRS and its agents have raised a number of other issues
relating to the timing of deductions; the characterization of expenses as
capital rather than ordinary; and UPS's entitlement to the Investment Tax Credit
and the Research Tax Credit in the 1983 through 1990 tax years. These issues
total $32 million in tax for the 1983 and 1984 tax years, $95 million in tax for
the 1985 through 1987 tax years, and $228 million in tax for the 1988 through
1990 tax years. Penalties and interest are in addition to these amounts. The
majority of these adjustments would reverse in future years.
In August 1995, the Company filed a petition in Tax Court in opposition to
the Notice of Deficiency related to the 1983 and 1984 tax years. The matter was
tried before the Tax Court in two sessions, from September 15 through September
30, 1997, and from November 6 through November 7, 1997. Even though the Tax
Court has no scheduled date for the opinion to be rendered, the Company does not
anticipate a decision until the beginning of 1999, at the earliest. Management
still believes that the eventual resolution of the matters raised by the IRS
will not result in a material adverse effect upon the financial condition of the
Company.
The Company has appealed with the IRS all material issues related to the
1985 through 1990 tax years. The IRS may take positions similar to those in the
reports described above for periods after 1990.
The Company is a defendant in various employment-related lawsuits. In one
of these actions, which alleges employment discrimination by the Company, class
action status has been granted, and the United States Equal Employment
Opportunity Commission has been granted the right to intervene. This lawsuit is
in its early stages, and the Company is presently unable to estimate its
exposure.
<PAGE>
UNITED PARCEL SERVICE OF AMERICA, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Three Months and Nine Months Ended September 30, 1998 and 1997
(unaudited)
In addition to the preceding, UPS is a defendant in various other lawsuits
which arose in the normal course of business. In the opinion of management, none
of these cases is expected to have a material adverse effect upon the financial
condition of the Company.
5. The Company experienced a strike from August 4, 1997 through August 19, 1997
by the International Brotherhood of Teamsters ("IBT"), which represents
approximately 200,000 UPS employees. During the strike, the Independent Pilot
Association ("IPA"), which represents the majority of the Company's pilots,
observed picket lines in support of the IBT strike. The strike severely limited
U.S. domestic air and ground operations during that period and also curtailed
international export operations. This resulted in a net loss of $211 million for
the month ended August 31, 1997, which affected results for the third quarter of
1997.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND THE RESULTS OF OPERATIONS
Three Months Ended September 30, 1998 and 1997
For the three months ended September 30, 1998, revenue increased by
$1.348 billion, or 28.0%, in comparison with the three months ended September
30, 1997. For the third quarter of 1998, domestic revenue totaled $5.377
billion, an increase of $1.239 billion, or 29.9%, over the third quarter
of 1997, and international revenue totaled $781 million, an increase of $109
million, or 16.2%.
The increase in domestic revenue was primarily driven by volume losses
during the third quarter of 1997, resulting from the International Brotherhood
of Teamsters ("IBT") strike, which occurred in August 1997. The IBT strike
severely limited U.S. domestic air and ground operations and also curtailed
international export operations. Excluding the period of the strike, average
daily domestic volume was slightly below prior year levels, in total, although
domestic express volume increased 3.5%. Despite the slight decline in volume,
domestic revenue continued to increase as a result of generally higher yields
along with continued improvement in product mix.
The majority of the increase in international revenue was attributable to
a $96 million, or 20.9%, increase in international export revenue. This
improvement reflects two factors: the continued growth of export volume, and the
IBT strike during the third quarter of 1997. Both of these factors contributed
to a 26.0% increase in volume during the third quarter. As the majority of
international operations were in full service during the strike, the effect of
the IBT strike on international results is not quantifiable. Excluding August
1998 and 1997, export volume increased 17.9% for the quarter. In addition,
international domestic revenue improved $13 million, or 6.3%, which was
primarily the result of a 7.7% increase in volume.
Consolidated operating expenses increased by $585 million, or 12.2%, while
the operating ratio improved from 99.7 during 1997 to 87.4 during 1998.
Operating expenses increased mainly due to additional labor costs incurred in
August 1998, which were not incurred during the IBT strike in August 1997. The
third quarter operating ratio of 87.4 is consistent with the improvements that
have been reported during the first two quarters of 1998. These improvements
result largely from the control of operating expense growth, along with the
effect of improved product yields.
Operating profit for the quarter increased $763 million, of which $566
million relates to the increase in August 1998 over August 1997, the period in
which the strike occurred. The remaining increase of $197 million results from
improved yields on U.S. domestic products and the overall containment of
operating expense growth.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND THE RESULTS OF OPERATIONS
Three Months Ended September 30, 1998 and 1997
Income before income taxes ("pre-tax income") increased $756 million.
Domestic pre-tax income amounted to $727 million, an increase of $713 million
over the corresponding quarter of the previous year. The increase was largely a
result of the negative impact that the August 1997 strike had on 1997 pre-tax
income. The increase in domestic pre-tax income in August 1998 over August 1997
was $543 million. The remaining increase of $170 million resulted from
improvements in U.S. domestic product yields and the overall containment of
operating expense growth.
International pre-tax income amounted to $13 million, an improvement of
$43 million over the loss of the corresponding quarter of the previous year.
Pre-tax income associated with international export operations improved by $46
million, while the pre-tax loss associated with international domestic
operations increased by $3 million. Of the $46 million increase in export
operations, $22 million relates to the increase in August 1998 over August 1997,
the period in which the strike occurred. The remaining increase of $24 million
results from higher volume, improved product mix, and better utilization of
existing capacity. Furthermore, despite the recent economic problems in Asia,
operating results associated with that region have continued to improve, and UPS
has been minimally affected by the decline in Asian currency values. This is
due, in part, to focusing on volume moving to and from Asia where rates are
generally denominated in or pegged to U.S. dollars. Excluding August 1998 and
1997, export volume for international and U.S. origin export shipments increased
by 27.3% and 1.1%, respectively during the third quarter.
Net income increased by $459 million over the corresponding quarter of the
prior year, again reflecting the negative impact from the IBT strike on August
1997 results. This resulted in a net loss of $211 million for the month ended
August 31, 1997, compared to net income of $125 million for the month ended
August 31, 1998, an improvement of $336 million. The remaining improvement in
net income of $123 million is primarily due to improved yields on U.S. domestic
products and the overall containment of operating expense growth.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND THE RESULTS OF OPERATIONS
Nine Months Ended September 30, 1998 and 1997
For the nine months ended September 30, 1998, revenue increased by $1.804
billion, or 11.1%, in comparison with the nine months ended September 30, 1997.
During the same period, domestic revenue totaled $15.782 billion, an increase of
$1.590 billion, or 11.2%, and international revenue totaled $2.342 billion, an
increase of $214 million, or 10.1%.
The increase in domestic revenue was primarily driven by volume losses
during the third quarter of 1997, resulting from the International Brotherhood
of Teamsters ("IBT") strike, which occurred in August 1997. The IBT strike
severely limited U.S. domestic air and ground operations and also curtailed
international export operations. Excluding the period of the strike, average
daily domestic volume was 3.0% below prior year levels, in total, although
domestic express volume increased 3.7%. Despite the decline in volume, domestic
revenue continued to increase as a result of generally higher yields along with
continued improvement in product mix.
During the first quarter of 1998, rates for standard ground shipments were
increased an average of 3.6% for commercial deliveries, and the ground
residential premium increased from $.80 to $1.00 over the commercial ground
rate. In addition, rates for UPS Next Day Air, UPS 2nd Day Air and 3 Day Select
each increased approximately 3.3%. Rates for international shipments originating
in the United States did not increase for UPS Worldwide Express, UPS Worldwide
Expedited and UPS Standard Service to Canada. Rate changes for shipments
originating outside the United States have been made throughout the past year
and vary by geographic market.
The increase in international revenue of $214 million was primarily
attributable to a $187 million, or 12.8%, increase in international export
revenue. This improvement reflects two factors: volume increases of 19.5% and
the IBT strike during the third quarter of 1997. Excluding August 1998 and 1997,
export volume increased 16.8% for the nine months. In addition, the revenue
increase was partially offset by the impact of a stronger U.S. dollar.
International domestic revenue improved $27 million, or 4.1%, which was
primarily the result of an 11.3% increase in volume and was also partially
offset by the stronger U.S. dollar.
Consolidated operating expenses increased by $640 million, or 4.2%, while
the operating ratio improved from 93.5 during 1997 to 87.7 during 1998.
Operating expenses increased mainly due to additional labor costs incurred in
August 1998, which were not incurred during the IBT strike in August 1997. Other
operating expenses decreased slightly due to lower fuel costs and the reduction
of overhead costs. Fuel prices during the first nine months of 1998 were
significantly less than in 1997, and are subject to general market fluctuations.
The year-to-date operating ratio of 87.7 is consistent with the improvements
that have been reported during the first two quarters of 1998. These
improvements result largely from the control of operating expense growth, along
with the effect of improved product yields. In addition, international
operations are continuing to improve as a result of higher volume, improved
product mix, and better utilization of existing capacity.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND THE RESULTS OF OPERATIONS
Nine Months Ended September 30, 1998 and 1997
Operating profit for the period increased $1.164 billion of which $566
million relates to the increase in August 1998 over August 1997, the period in
which the strike occurred. The remaining increase of $598 million results from
improved yields on U.S. domestic products, improved international operating
results, and the overall containment of operating expense growth.
Income before income taxes ("pre-tax income") increased $1.152 billion.
Domestic pre-tax income amounted to $2.018 billion, an increase of $1.013
billion over the corresponding period of the previous year. A portion of the
increase was due to the negative impact that the August 1997 strike had on 1997
pre-tax income. The increase in domestic pre-tax income in August 1998 over
August 1997 was $543 million. The additional increase of $470 million resulted
from improvements in U.S. domestic product yields and the overall containment of
operating expense growth.
International pre-tax income amounted to $88 million, an improvement of
$138 million over the loss of the corresponding period of the previous year.
Pre-tax income associated with international export and domestic operations
improved by $122 million and $16 million, respectively. The continuation of
these favorable trends in international export and domestic operations resulted
primarily from higher volume, improved product mix, lower fuel costs and better
utilization of existing capacity. In addition, of the $122 million improvement
in export operations, $22 million is the increase between August 1998 and August
1997, the period in which the strike occurred. Furthermore, despite the recent
economic problems in Asia, operating results associated with that region have
continued to improve, and UPS has been minimally affected by the decline in
Asian currency values. This is due, in part, to focusing on volume moving to and
from Asia where rates are generally denominated in or pegged to U.S. dollars.
Excluding August 1998 and 1997, export volume for international and U.S. origin
export shipments increased by 24.7% and 3.1%, respectively.
Net income increased by $701 million over the corresponding period of the
prior year. Of this improvement, $336 million resulted from the change in net
income between August 1998 and August 1997, the period in which the strike
occurred. The additional improvement in net income of $365 million is due
primarily to improved yields on U.S. domestic products, improved international
operating results and the overall containment of operating expense growth.
The results of operations for the three and nine months ended September
30, 1998, are not necessarily indicative of the results to be expected for the
full year.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND THE RESULTS OF OPERATIONS
Liquidity and Capital Resources
In April 1998, UPS renegotiated and extended its two credit agreements
with a consortium of banks. These agreements provide revolving credit facilities
of $1.25 billion each with one expiring April 29, 1999, and the other April 30,
2003.
Management believes that the resources described above, combined with the
Company's internally generated resources and other credit facilities, will
provide adequate sources of liquidity and capital resources to meet its expected
long-term needs for the operation of its business, including anticipated capital
expenditures and purchase commitments.
During 1995, the Company received a Notice of Deficiency from the United
States Internal Revenue Service ("IRS") asserting that it is liable for
additional tax for the 1983 and 1984 tax years. Agents for the IRS have also
asserted in reports that UPS is liable for additional tax for the 1985 through
1990 tax years. The Company is also a defendant in various employment-related
lawsuits. Reference is made here to Note 4 in the accompanying unaudited
consolidated financial statements for more information.
Future Accounting Changes
At the May 21, 1998, meeting of the FASB Emerging Issues Task Force, the
SEC observer indicated that the Commission would be nullifying its previously
stated position that asset classification of treasury stock may be appropriate
if the shares repurchased are expected to be reissued promptly (within one year)
under existing stock plans. In addition, the FASB issued an exposure draft on
October 13, 1998, that, if adopted, would make a technical correction to
Accounting Research Bulletin No. 43 which would reverse the position that it is
acceptable to account for the stock of a corporation held in its own treasury as
an asset under certain circumstances.
As a result, the Company intends to reclassify its Common Stock Held for
Stock Plans, presently recorded as a current asset, as Treasury Stock. This
change will be made for the Company's year-end financial statements and will not
have any impact on the results of operations. It is estimated that this change
will reduce both total assets and total equity at year-end by approximately $500
million to $600 million.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND THE RESULTS OF OPERATIONS
Impact of the Year 2000 Issue
Introduction
- -------------
The term "year 2000 issue" is a general term used to describe the various
problems that may result from the improper processing of dates and
date-sensitive calculations by computers and other machinery as the year 2000 is
approached and reached. These problems generally arise from the fact that most
of the world's computer hardware and software have historically used only two
digits to identify the year in a date, often meaning that the computer will fail
to distinguish dates in the "2000's" from dates in the "1900's." These problems
may also arise from other sources as well, such as the use of special codes and
conventions in software that make use of the date field.
State of Readiness
- ------------------
In 1995, UPS created a Year 2000 Committee tasked with evaluating the year
2000 issue and taking the appropriate actions. The Year 2000 Committee has
developed and is currently implementing a comprehensive initiative (the
"Initiative") to make its information technology assets ("IT assets") (including
embedded microprocessor systems included in computer hardware and related
software) and non-IT assets (e.g., vehicles, facilities, equipment and their
embedded microprocessor systems) year 2000 ready. The Initiative covers the
following eight phases: (i) inventory of business critical IT and non-IT assets,
(ii) assessment of repair requirements, (iii) repair of IT and non-IT assets,
(iv) unit and system integration testing of individual IT and non-IT assets to
determine correct manipulation of dates and date-related data, (v) certification
by users that IT and non-IT assets correctly handle dates and date-related data,
(vi) selected verification by UPS internal auditors that phases (i) through (v)
were properly completed for business critical IT and non-IT assets, (vii)
"end-to-end" testing of selected IT and non-IT assets, both internally developed
and vendor-provided, to determine correct manipulation of dates and date-related
data, and (viii) creation of contingency plans in the event of year 2000
failures.
Since UPS believes that the majority of its business critical IT assets
are controlled by UPS's Information Services Group ("IS Group"), implementation
of the Initiative for these IT assets was scheduled to occur first. Generally,
IT assets considered to be business critical by UPS include, among others,
assets whose failure would have a material adverse effect on package movement,
customer relations or UPS' financial condition, liquidity or results of
operations. Business critical IT assets include, but are not limited to, package
tracking, billing, customer telephone service center, and UPS OnLine(R)
Automation systems.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND THE RESULTS OF OPERATIONS
Impact of the Year 2000 Issue (continued)
As of October 30, 1998, the first six phases of the Initiative had been
completed for approximately 70% of such IT assets that have been internally
developed and the first six phases had been completed for nearly one-half of
such IT assets that were developed by third parties. The completion of the six
phases for the balance of these assets is expected by the end of the first
quarter of 1999. Implementation of the Initiative for non-IT assets and IT
assets controlled by all business functions other than the IS Group is in its
earlier phases, with nearly all functions having completed the inventory phase.
The completion of the first six phases for all such assets is scheduled by the
end of the second quarter of 1999, and management presently believes that this
target date will be met for substantially all such assets.
UPS is also contacting suppliers who provide both critical IT assets and
goods and services not related to information technology (e.g. vehicles, fuel,
packaging materials, and forms) to (1) evaluate their year 2000 compliance plans
and state of readiness and (2) determine whether a year 2000-related event will
impede the ability of such suppliers to continue to provide such goods and
services as the year 2000 is approached and reached. UPS has received assurances
from a vast majority of suppliers of IT assets controlled by the IS Group that
these assets will correctly manipulate dates and date-related data as the year
2000 is approached and reached. UPS is evaluating these assurances for their
accuracy and adequacy. UPS has not yet received a significant number of
responses from suppliers of non-IT and IT assets controlled by business
functions other than the IS Group. As a general matter, UPS is vulnerable to
significant suppliers' inability to remedy their own year 2000 issues.
UPS also relies, both domestically and internationally, upon government
agencies (particularly the Federal Aviation Administration), utility companies,
telecommunication service companies and other service providers outside of UPS's
control. As part of the Initiative, UPS is involved with several national and
international associations to pursue common year 2000 objectives. For example,
with respect to air traffic, UPS has been and remains involved, through its
participation in the International Air Transport Association (IATA) and the Air
Transport Association of America (ATA), in a global and industry-wide effort to
understand the year 2000 compliance status of airports, air traffic systems,
customs clearance and other U.S. and international government agencies, and
common vendors and suppliers. However, there is no assurance that suppliers,
governmental agencies, or other third parties will not suffer a year 2000
business disruption. Such failures could have a material adverse affect on UPS's
financial condition, liquidity or results of operations.
In addition, UPS has retained an independent consultant ("Consultant") to
assess (1) whether the Initiative, if appropriately administered, can result in
year 2000 readiness, and (2) UPS's progress with respect to the Initiative. If
the Consultant determines that the Initiative will not adequately lead to year
2000 readiness, the Consultant will provide recommendations for appropriately
adjusting the Initiative. The Consultant will periodically review UPS's progress
and recommend any necessary adjustments.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND THE RESULTS OF OPERATIONS
Impact of the Year 2000 Issue (continued)
Testing
- --------
As part of the Initiative, UPS maintains a testing program to determine
whether its IT and non-IT assets are year 2000 ready. UPS's testing program is
conducted in three stages. The initial stage ("unit testing") consists of
testing individual systems (units) for year 2000 readiness. Unit testing
includes, for example, testing a particular application to ensure it correctly
manipulates dates and date-related data and properly operates in a year 2000
ready environment. Following successful completion of unit testing, a system
will move into stage two ("integration testing"). This stage includes testing
between systems units to ensure that this interface will correctly send and
receive date-related data. Stages one and two are included in phase four of the
overall Initiative. All business critical IT and non-IT assets are subject to
the first two testing stages. After successful completion of phases four and
five of the Initiative, UPS's testing program is subject to independent review
and verification by UPS internal auditors in conjunction with phase six of the
Initiative. Certain business critical IT and non-IT assets are also subject to
the third stage ("end-to-end testing") of UPS's testing program. In addition,
UPS maintains a change control process to ensure that remediation efforts have
not adversely affected functionality and to retest units or systems after
changes where appropriate. Certain of these testing methodologies are also
applied to third party systems that interface with UPS systems. The Initiative
calls for end-to-end testing of IT and non-IT assets to begin no later than the
end of the first quarter of 1999. UPS currently plans for end-to-end testing to
continue throughout 1999.
Costs to Address the Year 2000 Issue
- ------------------------------------
To date, UPS estimates that it has spent approximately $37 million on
implementation of the Initiative with the majority of the work being performed
by UPS employees. A majority of these costs have been incurred in repairing
software components. UPS expects to spend an estimated additional $65 million to
complete the Initiative. These are management's best estimates and may be
revised as additional information becomes available. UPS believes such costs
will not have a material effect on UPS's financial condition, liquidity or
results of operations. UPS intends to fund from operations the costs of
implementing the Initiative. While UPS has incurred an opportunity cost for
implementing the Initiative, thus possibly deferring potentially beneficial
information technology projects, UPS has not deferred any specific information
technology project as a result of the implementation of the Initiative.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND THE RESULTS OF OPERATIONS
Impact of the Year 2000 Issue (continued)
Risks Presented by the Year 2000 Issue
- --------------------------------------
The failure by UPS to appropriately address a material year 2000 issue, or
the failure by any third parties who provide goods or services that are critical
to UPS's business activities to appropriately address their year 2000 issues,
could have a material adverse effect on UPS's financial condition, liquidity or
results of operations. To date, UPS has not identified any material IT or non-IT
assets critical to UPS operations that present a material risk of not being year
2000 ready or for which a suitable alternative cannot be implemented. However,
as the Initiative proceeds, it is possible that UPS may identify assets or third
party providers that do present a risk of a year 2000-related disruption.
Although there is inherent uncertainty in the year 2000 problem, UPS expects
that the Initiative will significantly reduce UPS's level of uncertainty about
its year 2000 issues. At this point, UPS believes that its most reasonably
likely worst case scenario will result from challenges presented by year 2000
disruptions experienced by third parties, such as suppliers, customers or
government agencies. For example, a significant disruption in services provided
by banking institutions, utility service providers, or certain government
agencies could have a material adverse impact on UPS's financial condition,
liquidity or results of operations.
Contingency Plans
- ------------------
The Initiative calls for the development of contingency plans for UPS's
at-risk business functions. UPS has established a Contingency Plan Committee to
monitor and address the development of contingency plans. The Initiative calls
for UPS to develop year 2000-specific contingency plans if the results of
testing identify a business function at risk of a year 2000 failure. In
addition, as a normal course of business, UPS maintains and deploys contingency
plans designed to address various other potential business interruptions. These
plans may be applicable to address the interruption of support provided by third
parties resulting from their failure to be year 2000 ready.
This Management's Discussion and Analysis of Financial Condition and
Results of Operations and Liquidity and Capital Resources, and other parts of
this Report, contain "forward-looking" statements about matters that are
inherently difficult to predict. Those statements include statements regarding
the intent, belief or current expectations of UPS and its management. Some of
the important factors that affect these statements have been described above as
each subject is discussed. Such forward-looking statements involve risks and
uncertainties that may affect future developments such as, for example, the
ability to deal with the year 2000 issue, including UPS's ability to discover
and correct potential year 2000 issues and the ability of third parties to
appropriately address their year 2000 issues. If the modifications and
conversions required to make UPS year 2000 ready are not made or are not
completed on a timely basis, the resulting problems could have a material
adverse effect on the Company's financial condition, liquidity or results of
operations.
<PAGE>
PART II
Item 6 - Exhibits and Reports on Form 8-K
A) Exhibits: none
B) Reports on Form 8-K: no reports on Form 8-K were filed during the quarter.
<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 OF AMERICA, INC.
(Registrant)
By:
Robert J. Clanin
Senior Vice President,
Treasurer and
Chief Financial Officer
Date: November 12, 1998
<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 OF AMERICA, INC.
(Registrant)
By: /S/ Robert J. Clanin
Robert J. Clanin
Senior Vice President,
Treasurer and
Chief Financial Officer
Date: November 12, 1998
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