Securities and Exchange Commission
Washington, D.C. 20549

 

Form 10-Q

 

(Mark One)

 

ý                                 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2004, or

 

o                                 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from           to          

 

Commission file number 001-15451

 

United Parcel Service, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware		58-2480149
(State or Other Jurisdiction of Incorporation or Organization)		(IRS Employer Identification No.)
55 Glenlake Parkway, NEAtlanta, Georgia		30328
(Address of Principal Executive Offices)		(Zip Code)
(404) 828-6000
(Registrant’s telephone number, including area code)
Former name, former address and former 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 (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes ý   No o

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).      Yes ý   No o

 

There were 519,666,553 Class A shares, and 601,126,536 Class B shares, with a par value of $0.01 per share, outstanding at November 3, 2004.

 

 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

September 30, 2004 (unaudited) and December 31, 2003

(In millions, except per share amounts)

 

		September 30, 2004			December 31, 2003
Assets
Current Assets:
Cash & cash equivalents		$	2,823		$	2,951
Marketable securities & short-term investments		1,748			1,001
Accounts receivable, net		4,192			4,004
Finance receivables, net		574			840
Income tax receivable		756			—
Deferred income taxes		292			316
Other current assets		686			741
Total Current Assets		11,071			9,853
Property, Plant & Equipment - at cost, net of accumulated depreciation & amortization of $13,855 and $13,007 in 2004 and 2003		14,220			13,908
Prepaid Pension Costs		3,259			2,922
Goodwill and Intangible Assets, Net		1,309			1,273
Other Assets		1,110			953
		$	30,969		$	28,909
Liabilities & Shareowners' Equity
Current Liabilities:
Current maturities of long-term debt and commerical paper		$	616		$	674
Accounts payable		1,905			2,003
Accrued wages & withholdings		1,887			1,166
Dividends payable		—			282
Other current liabilities		1,347			1,393
Total Current Liabilities		5,755			5,518
Long-Term Debt		3,145			3,149
Accumulated Postretirement Benefit Obligation, Net		1,423			1,335
Deferred Taxes, Credits & Other Liabilities		5,159			4,055
Shareowners' Equity:
Preferred stock, no par value, authorized 200 shares, none issued		—			—
Class A common stock, par value $.01 per share, authorized 4,600 shares, issued 529 and 571 in 2004 and 2003		5			6
Class B common stock, par value $.01 per share, authorized 5,600 shares, issued 595 and 560 in 2004 and 2003		6			5
Additional paid-in capital		—			662
Retained earnings		15,713			14,356
Accumulated other comprehensive loss		(237		)	(177		)
Deferred compensation arrangements		169			136
		15,656			14,988
Less: Treasury stock (3 and 2 shares in 2004 and 2003)		(169		)	(136		)
		15,487			14,852
		$	30,969		$	28,909

 

See notes to unaudited consolidated financial statements.

 

2

 

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

STATEMENTS OF CONSOLIDATED INCOME

Three and Nine Months Ended September 30, 2004 and 2003

(In millions, except per share amounts)

(unaudited)

 

		Three Months Ended September 30,						Nine Months Ended September 30,
		2004			2003			2004			2003
Revenue		$	8,952		$	8,312		$	26,742		$	24,553
Operating Expenses:
Compensation and benefits		5,139			4,830			15,386			14,292
Other		2,555			2,335			7,571			7,089
		7,694			7,165			22,957			21,381
Operating Profit		1,258			1,147			3,785			3,172
Other Income and (Expense):
Investment income (loss)		26			23			57			(5		)
Interest expense		(38		)	(31		)	(112		)	(94		)
		(12		)	(8		)	(55		)	(99		)
Income before Income Taxes		1,246			1,139			3,730			3,073
Income Taxes		356			400			1,263			1,031
Net Income		$	890		$	739		$	2,467		$	2,042
Basic Earnings Per Share		$	0.79		$	0.66		$	2.19		$	1.81
Diluted Earnings Per Share		$	0.78		$	0.65		$	2.17		$	1.80

 

See notes to unaudited consolidated financial statements.

 

3

 

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF SHAREOWNERS’ EQUITY

Nine Months Ended September 30, 2004 and 2003

(In millions, except per share amounts)

(unaudited)

 

		2004					2003
		Shares		Dollars			Shares		Dollars
Class A Common Stock
Beginning balance		571		$	6		642		$	7
Common stock purchases		(10	)	—			(4	)	—
Stock award plans		6		—			6		—
Common stock issuances		2		—			2		—
Conversions of Class A to Class B common stock		(40	)	(1		)	(59	)	(1		)
Ending balance		529		5			587		6
Class B Common Stock
Beginning balance		560		5			482		4
Common stock purchases		(5	)	—			(2	)	—
Conversions of Class A to Class B common stock		40		1			59		1
Ending balance		595		6			539		5
Additional Paid-In Capital
Beginning balance				662					387
Stock award plans				152					117
Common stock purchases				(930		)			(356		)
Common stock issuances				116					94
Ending balance				—					242
Retained Earnings
Beginning balance				14,356					12,495
Net income				2,467					2,042
Common stock purchases				(162		)			—
Dividends ($0.84 and $0.67 per share)				(948		)			(754		)
Ending balance				15,713					13,783
Accumulated Other Comprehensive Income (Loss)
Foreign currency translation adjustment:
Beginning balance				(56		)			(328		)
Aggregate adjustment				(117		)			125
Ending balance				(173		)			(203		)
Unrealized gain (loss) on marketable securities:
Beginning balance				14					(34		)
Current period changes in fair value (net of tax effect of $(3) and $6)				(5		)			10
Reclassification to earnings (net of tax effect of $(1) and $17)				(1		)			28
Ending balance				8					4
Unrealized gain (loss) on cash flow hedges:
Beginning balance				(72		)			(26		)
Current period changes in fair value (net of tax effect of $37 and $0)				64					—
Reclassification to earnings (net of tax effect of $7 and $(18))				12					(30		)
Ending balance				4					(56		)
Additional minimum pension liability:
Beginning balance				(63		)			(50		)
Minimum pension liability adjustment (net of tax effect of $(8) and $0)				(13		)			—
Ending balance				(76		)			(50		)
Ending accumulated other comprehensive income (loss)				(237		)			(305		)
Deferred Compensation Obligations
Beginning balance				136					84
Common stock held for deferred compensation arrangements				33					51
Ending balance				169					135
Treasury Stock
Beginning balance		(2	)	(136		)	(1	)	(84		)
Common stock held for deferred compensation arrangements		(1	)	(33		)	(1	)	(51		)
Ending balance		(3	)	(169		)	(2	)	(135		)
Ending Total Shareowners' Equity				$	15,487				$	13,731
Comprehensive Income				$	2,407				$	2,175

 

See notes to unaudited consolidated financial statements.

 

4

 

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Nine Months Ended September 30, 2004 and 2003

(In millions)

(unaudited)

 

		Nine Months Ended September 30,
		2004			2003
Cash flows from operating activities:
Net income		$	2,467		$	2,042
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization		1,154			1,162
Postretirement benefits		88			60
Deferred taxes, credits and other		213			81
Stock award plans		459			394
Loss on disposal of assets		10			8
Loss (gain) on investments		(2		)	54
Provision for losses on finance receivables		9			11
Changes in assets and liabilities:
Accounts receivable, net		(188		)	12
Other current assets		188			(48		)
Prepaid pension costs		(337		)	(275		)
Accounts payable		(20		)	185
Accrued wages and withholdings		364			316
Dividends payable		(282		)	(212		)
Income taxes payable		(81		)	365
Other current liabilities		70			5
Net cash from operating activities		4,112			4,160
Cash flows from investing activities:
Capital expenditures		(1,513		)	(1,515		)
Disposals of property, plant and equipment		75			101
Purchases of marketable securities and short-term investments		(4,053		)	(4,971		)
Sales and maturities of marketable securities and short-term investments		3,298			4,762
Net (increase) decrease in finance receivables		242			(16		)
Cash (paid) received for business acquisitions / dispositions		(78		)	8
Other asset receipts (payments)		(52		)	(108		)
Net cash used in investing activities		(2,081		)	(1,739		)
Cash flows from financing activities:
Proceeds from borrowings		82			285
Repayments of borrowings		(236		)	(884		)
Purchases of common stock		(1,092		)	(356		)
Issuances of common stock		139			120
Dividends		(927		)	(743		)
Other transactions		(29		)	(26		)
Net cash used in financing activities		(2,063		)	(1,604		)
Effect of exchange rate changes on cash		(96		)	80
Net increase (decrease) in cash and cash equivalents		(128		)	897
Cash and cash equivalents:
Beginning of period		2,951			2,211
End of period		$	2,823		$	3,108
Cash paid during the period for:
Interest (net of amount capitalized)		$	95		$	102
Income taxes		$	1,386		$	618

 

See notes to unaudited consolidated financial statements.

 

5

 

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

Note 1.  Basis of Presentation

 

In our opinion, the accompanying interim, unaudited, consolidated financial statements contain all adjustments (consisting of normal recurring accruals) necessary to present fairly our financial position as of September 30, 2004, our results of operations for the three and nine months ended September 30, 2004 and 2003, and cash flows for the nine months ended September 30, 2004 and 2003.  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.  The interim financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2003.

 

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.

 

Certain prior period amounts have been reclassified to conform to the current period presentation.

 

Note 2.  Stock-Based Compensation

 

Effective January 1, 2003, we adopted the fair value measurement provisions of Financial Accounting Standards Board (“FASB”) Statement No. 123 “Accounting for Stock-Based Compensation” (“FAS 123”).  Under the provisions of FASB Statement No. 148 “Accounting for Stock-Based Compensation – Transition and Disclosure,” we have elected to adopt the measurement provisions of FAS 123 using the prospective method.  Under this approach, all stock-based compensation granted subsequent to January 1, 2003 has been expensed to compensation and benefits over the vesting period based on the fair value at the date the stock-based compensation is granted.  Stock compensation awards include stock options, management incentive awards, restricted performance units, and employer matching contributions (in shares of UPS stock) for a defined contribution benefit plan.

 

The following provides pro forma information as to the impact on net income and earnings per share if we had used the fair value measurement provisions of FAS 123 to account for all stock-based compensation awards granted prior to January 1, 2003 (in millions, except per share amounts).

			Three Months Ended September 30,						Nine Months Ended September 30,
			2004			2003			2004			2003
Net income			$	890		$	739		$	2,467		$	2,042
Add:	Stock-based employee compensation expense included in net income, net of tax effects		142			124			424			354
Less:	Total pro-forma stock-based employee compensation expense, net of tax effects		(148		)	(136		)	(448		)	(392		)
Pro-forma net income			$	884		$	727		$	2,443		$	2,004
Basic earnings per share
	As reported		$	0.79		$	0.66		$	2.19		$	1.81
	Pro forma		$	0.79		$	0.64		$	2.17		$	1.78
Diluted earnings per share
	As reported		$	0.78		$	0.65		$	2.17		$	1.80
	Pro forma		$	0.78		$	0.64		$	2.15		$	1.76

 

6

 

Note 3.  New Accounting Pronouncements

 

In January 2003, the FASB issued Interpretation No. 46 “Consolidation of Variable Interest Entities”, to address perceived weaknesses in accounting for entities commonly known as special purpose or off balance sheet.  In addition to numerous FASB Staff Positions written to clarify and improve the application of FIN 46, the FASB recently announced a deferral for certain entities, and an amendment to FIN 46 entitled FASB Interpretation No. 46 (revised December 2003) “Consolidation of Variable Interest Entities” (“FIN 46”).

 

FIN 46 provides guidance for identifying the party with a controlling financial interest resulting from arrangements or financial instruments rather than voting interests.  FIN 46 defines the term “variable interest entity” and is based on the premise that if a business enterprise absorbs a majority of such an entity’s expected losses and/or receives a majority of its expected residual returns, that enterprise has a controlling financial interest, and would thus require consolidation of the variable interest entity.  As of December 31, 2003, we adopted FIN 46, and the effects of adoption were not material to our results of operations or financial condition.

 

On July 1, 2003, we adopted FASB Statement No. 149 “Amendment of Statement 133 on Derivative Instruments and Hedging Activities” (“FAS 149”).  FAS 149 amends FAS 133 for certain decisions made by the FASB as part of the Derivatives Implementation Group process.  FAS 149 also amends FAS 133 to incorporate clarifications of the definition of a derivative.  The adoption of FAS 149 was not material to our results of operations or financial condition.

 

On July 1, 2003, we adopted FASB Statement No. 150 “Accounting for Certain Instruments with Characteristics of Both Liabilities and Equity” (“FAS 150”).  FAS 150 establishes how an issuer measures certain freestanding financial instruments with characteristics of both liabilities and equity, and requires that such instruments be classified as liabilities.  The adoption of FAS 150 was not material to our results of operations or financial condition.

 

In December 2003, the FASB revised Statement No. 132, “Employers’ Disclosures about Pensions and Other Postretirement Benefits” (“FAS 132”).  The revised standard requires new disclosures in addition to those required by the original standard about the assets, obligations, cash flows and net periodic benefit cost of defined benefit pension plans and other defined benefit postretirement plans.  As revised, FAS 132 is effective for financial statements with fiscal years ending after December 15, 2003.  We have included these disclosures in Note 5 – Employee Benefit Plans.

 

On December 8, 2003, the “Medicare Prescription Drug Improvement and Modernization Act of 2003” (“the Act”) was signed into law.  The provisions of the Act provide for a federal subsidy for plans that provide prescription drug benefits and meet certain qualifications.  In May 2004, the FASB issued FASB Staff Position (FSP) No. 106-2, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003”, which provides guidance on the accounting for the effects of the Act.  The impact of the Act and the adoption of this FSP were not material to our financial condition or results of operations.

 

7

 

Note 4.  Property, Plant and Equipment

 

Property plant and equipment as of September 30, 2004 and December 31, 2003 consists of the following (in millions):

 

		September 30, 2004			December 31, 2003
Vehicles		$	3,531		$	3,486
Aircraft (including aircraft under capitalized leases)		11,472			10,897
Land		726			721
Buildings		2,102			2,083
Leasehold improvements		2,262			2,219
Plant equipment		4,536			4,410
Technology equipment (including capitalized software)		2,637			2,366
Equipment under operating lease		59			53
Construction-in-progress		750			680
		28,075			26,915
Less: Accumulated depreciation and amortization		(13,855		)	(13,007		)
		$	14,220		$	13,908

 

Note 5.  Employee Benefit Plans

 

Information about net periodic benefit cost for the pension and postretirement benefit plans is as follows for the three and nine months ended September 30, 2004 and 2003 (in millions):

 

		Three Months Ended September 30,
		Pension Benefits						Postretirement Medical Benefits
		2004			2003			2004			2003
Service cost		$	85		$	71		$	22		$	19
Interest cost		132			116			41			37
Expected return on assets		(199		)	(167		)	(9		)	(7		)
Amortization of:
Transition obligation		1			2			—			—
Prior service cost		10			9			—			1
Actuarial (gain) loss		14			7			8			3
Net periodic benefit cost		$	43		$	38		$	62		$	53

 

		Nine Months Ended September 30,
		Pension Benefits						Postretirement Medical Benefits
		2004			2003			2004			2003
Service cost		$	255		$	212		$	68		$	59
Interest cost		395			349			123			111
Expected return on assets		(599		)	(502		)	(26		)	(22		)
Amortization of:
Transition obligation		4			6			—			—
Prior service cost		31			28			—			1
Actuarial (gain) loss		42			21			23			11
Net periodic benefit cost		$	128		$	114		$	188		$	160

 

During the first nine months of 2004, we contributed $448 and $104 million to our pension and postretirement medical benefit plans, respectively.  We expect to contribute $2 and $15 million over the remainder of the year to the pension and postretirement medical benefit plans, respectively.

 

8

 

Note 6.  Goodwill, Intangibles, and Other Assets

 

Other assets as of September 30, 2004 and December 31, 2003 consist of the following (in millions):

 

		September 30, 2004			December 31, 2003
Non-current finance receivables, net of allowance for credit losses		$	511		$	574
Other non-current assets		599			379
		$	1,110		$	953

 

The following table indicates the allocation of goodwill by reportable segment as of September 30, 2004 and December 31, 2003 (in millions):

 

		December 31, 2003			Goodwill Acquired			Currency/ Other			September 30, 2004
Goodwill by Segment:
U.S. domestic package		$	—		$	—		$	—		$	—
International package		100			44			(7		)	137
Non-package		1,073			10			(8		)	1,075
		$	1,173		$	54		$	(15	)	$	1,212

 

The goodwill added in the International segment resulted from the purchase of the remaining 49% minority interest in UPS Yamato Express Co., which was a joint venture with Yamato Transport Co. in Japan.  UPS Yamato Express Co. provides express package delivery services in Japan.  Upon close of the acquisition, UPS Yamato Express Co. became a wholly-owned subsidiary of UPS.  This acquisition had no material effect on our results of operations or financial condition.

 

The following is a summary of intangible assets as of September 30, 2004 and December 31, 2003 (in millions):

 

		Franchise Rights, Licenses, Patents, Trademarks, and Other			Intangible Pension Asset			Total Intangible Assets
September 30, 2004:
Gross carrying amount		$	122		$	5		$	127
Accumulated amortization		(30		)	—			(30		)
Net carrying value		$	92		$	5		$	97
December 31, 2003:
Gross carrying amount		$	118		$	5		$	123
Accumulated amortization		(23		)	—			(23		)
Net carrying value		$	95		$	5		$	100

 

9

 

 

Note 7.  Deferred Taxes, Credits and Other Liabilities

 

Deferred taxes, credits and other liabilities as of September 30, 2004 and December 31, 2003 consist of the following (in millions):

 

		September 30, 2004			December 31, 2003
Deferred federal and state income taxes		$	3,215		$	2,491
Insurance reserves		1,115			923
Other credits and non-current liabilities		829			641
		$	5,159		$	4,055

 

Note 8.  Legal Proceedings and Contingencies

 

On August 9, 1999 the United States Tax Court held that we were liable for tax on income of Overseas Partners Ltd., a Bermuda company that had reinsured excess value (“EV”) package insurance purchased by our customers beginning in 1984, and that we were liable for additional tax for the 1983 and 1984 tax years.  The IRS took similar positions to those advanced in the Tax Court decision for tax years subsequent to 1984 through 1998.  On June 20, 2001, the U.S. Court of Appeals for the Eleventh Circuit ruled in our favor and reversed the Tax Court decision.  In January 2003, we and the IRS finalized settlement of all outstanding tax issues related to EV package insurance.  Under the terms of settlement, we agreed to adjustments that will result in income tax due of approximately $562 million, additions to tax of $60 million and related interest.  The amount due to the IRS as a result of the settlement is less than amounts we previously had accrued, and less than amounts we had previously paid to the IRS.  As a result, we recorded income, before taxes, of $1.023 billion ($776 million after tax) during the fourth quarter of 2002.  In the first quarter of 2004, we received a refund of $185 million pertaining to the 1983 and 1984 tax years.

 

In the third quarter of 2004, we recorded a $99 million credit to tax expense related to the settlement of various tax matters with the IRS for the years 1991 through 1998, including such items as aircraft maintenance, and various state tax issues.  Upon this settlement, we reclassified $756 million from deferred taxes into current receivables.  We expect to receive this balance within the next six months.

 

We were named as a defendant in twenty-three now-dismissed lawsuits that sought to hold us liable for the collection of premiums for EV insurance in connection with package shipments since 1984.  Based on state and federal tort, contract and statutory claims, these cases generally claimed that we failed to remit collected EV premiums to an independent insurer; we failed to provide promised EV insurance; we acted as an insurer without complying with state insurance laws and regulations; and the price for EV insurance was excessive.  These actions were all filed after the August 9, 1999 U.S. Tax Court decision, discussed above, which the U.S. Court of Appeals for the Eleventh Circuit later reversed.

 

These twenty-three cases were consolidated for pre-trial purposes in a multi-district litigation proceeding (“MDL Proceeding”) in federal court in New York.  In addition to the cases in which UPS was named as a defendant, there also was an action, Smith v. Mail Boxes Etc., against Mail Boxes Etc. and its franchisees relating to UPS EV insurance and related services purchased through Mail Boxes Etc. centers.  That case also was consolidated into the MDL Proceeding.

 

In late 2003, the parties reached a global settlement resolving all claims and all cases in the MDL proceeding.  In reaching the settlement, we and the other defendants expressly denied any and all liability.  On July 30, 2004, the court issued an order granting final approval to the substantive terms of the settlement.  No appeals were filed and the settlement became effective on September 8, 2004.

 

Pursuant to the settlement, UPS will provide qualifying settlement class members with vouchers toward the purchase of specified UPS services and will pay the plaintiffs’ attorneys’ fees, the total amount of which still remains to be determined by the court.  Other defendants have contributed to the costs of the settlement, including the attorneys’ fees.  The ultimate cost to us of the proposed settlement will depend on a number of factors, including how many vouchers settlement class members actually request and use.  We do not believe that this proposed settlement will have a material effect on 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.  We believe that the eventual resolution of these cases will not have a material adverse effect on our financial condition, results of operations, or liquidity.

 

10

 

We participate in a number of trustee-managed multi-employer pension and health and welfare plans for employees covered under collective bargaining agreements.  Several factors could result in higher future contributions to these plans, including unfavorable investment performance, changes in demographics, and increased benefits to participants.  At this time, we are unable to determine the amount of additional future contributions, if any, or whether any material adverse effect on our financial condition, results of operations, or cash flows could result from our participation in these plans.

 

Note 9.  Segment Information

 

We report our operations in three segments: U.S. domestic package operations, international package operations and non-package operations, as follows:

 

U.S. Domestic Package – Domestic package operations include the time-definite delivery of letters, documents, and packages throughout the United States.

 

International Package – International package operations include delivery to more than 200 countries and territories worldwide, including shipments wholly outside the U.S. as well as shipments with either origin or distribution outside the U.S.  Our international package reporting segment includes the operations of our Europe, Asia-Pacific, Canada, and Americas operating segments.

 

Non-Package – Non-package operations include UPS Supply Chain Solutions, Mail Boxes Etc. (the franchisor of Mail Boxes Etc. and The UPS Store), UPS Capital Corp., our mail and consulting services, and our excess value package insurance business.  UPS Supply Chain Solutions, which is comprised of our former UPS Freight Services and UPS Logistics Group businesses, provides supply chain design and management, freight forwarding, and customs brokerage services.

 

Segment information for the three and nine months ended September 30, 2004 and 2003 is as follows (in millions):

 

		Three Months Ended September 30,						Nine Months Ended September 30,
		2004			2003			2004			2003
Revenue:
U.S. domestic package		$	6,494		$	6,219		$	19,514		$	18,363
International package		1,666			1,370			4,898			4,043
Non-package		792			723			2,330			2,147
Consolidated		$	8,952		$	8,312		$	26,742		$	24,553
Operating profit:
U.S. domestic package		$	857		$	825		$	2,580		$	2,361
International package		262			176			803			468
Non-package		139			146			402			343
Consolidated		$	1,258		$	1,147		$	3,785		$	3,172

 

Non-package operating profit included $27 and $26 million for the three months, and $85 and $80 million for the nine months ended September 30, 2004 and 2003, respectively, of intersegment profit, with a corresponding amount of operating expense, which reduces operating profit, included in the U.S. domestic package segment.

 

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Note 10.  Other Operating Expenses

 

The major components of other operating expenses for the three and nine months ended September 30, 2004 and 2003 are as follows (in millions):

 

		Three Months Ended September 30,						Nine Months Ended September 30,
		2004			2003			2004			2003
Repairs and maintenance		$	249		$	244		$	753		$	719
Depreciation and amortization		383			384			1,154			1,162
Purchased transportation		489			439			1,444			1,289
Fuel		350			254			970			767
Other occupancy		173			174			552			546
Other expenses		911			840			2,698			2,606
Consolidated		$	2,555		$	2,335		$	7,571		$	7,089

 

Note 11.  Earnings Per Share

 

The following table sets forth the computation of basic and diluted earnings per share (in millions, except per share amounts):

 

		Three Months Ended September 30,						Nine Months Ended September 30,
		2004			2003			2004			2003
Numerator:
Net income		$	890		$	739		$	2,467		$	2,042
Denominator:
Weighted-average shares		1,123			1,126			1,125			1,124
Deferred compensation arrangements		3			2			3			2
Denominator for basic earnings per share		1,126			1,128			1,128			1,126
Effect of dilutive securities:
Contingent shares -
Management incentive awards		6			7			5			5
Stock option plans		3			5			4			6
Denominator for diluted earnings per share		1,135			1,140			1,137			1,137
Basic Earnings Per Share		$	0.79		$	0.66		$	2.19		$	1.81
Diluted Earnings Per Share		$	0.78		$	0.65		$	2.17		$	1.80

 

Note 12.  Acquisitions and Dispositions

 

During the second quarter of 2003, we sold our Mail Technologies business unit in a transaction that increased net income by $14 million, or $0.01 per diluted share.  The gain consisted of a pre-tax loss of $24 million recorded in other operating expenses within the non-package segment, and a tax benefit of $38 million recognized in conjunction with the sale.  The tax benefit exceeds the pre-tax loss from this sale primarily because the goodwill impairment charge we previously recorded for the Mail Technologies business unit was not deductible for income tax purposes.  Consequently, our tax basis was greater than our book basis, thus producing the tax benefit described above.

 

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